Informatic Worldview

This post continues the one entitled “Roubini’s conceptual apparatus […]”.

1. Computational power as a kind of cognitive power

Had Adam Smith lived in our times,  instead of  “market’s invisible hand” he might have  preferred the phrase  “market’s invisible computer”.  For it is an axiom of classical economics that the free market  functions like a device to calculate an optimal state of economy.  Such an analogy has become popular due to the long Friedrich Hayek’s  dispute with Oskar Lange.  The latter was the Polish socialist economist,  who believed that the central socialist planning will  prove efficient owing to computer simulations of free market, while Hayek was aware  that  such a tricky virtual   market  could not match  the real one in its computational power.

Following  this metaphor, let us ask the question: does such computer need a programmer?  In Smith’s perspective, the answer would be, presumably: “yes it is  the  good Lord himself  who has programmed it”. If  you dislike  invoking God’s name in vain,  you may replace it with the phrase “self-organizing Universe”. In either case the question arises: does  the executing  of program need a human assistance?  There appears an illuminating analogy with automated reasoning: often it succeeds when being  executed by computer alone,  but in  most  complex cases  it needs prompting  or controlling  by a  human reasoner.

I resort here to the ideas of computational power and computability, though they belong to very sophisticated concepts of mathematical logic and theoretical computer science; hence their definitions, should they be duly precise, would require many preparatory steps.  However,  with  referring to our everyday experience with computers, we can approximate these ideas  to  some  extent  – to use them as useful metaphors, or models, also  in  the field of economy.

For instance, with successive upgradings of the softeware, my computer ever more knows how to  perform ever more complex tasks. In this sense,  there increases its  power which we call  computational,  for all  such  tasks are being performed by computing.  Since  my computer may be thereby said  to  “know more”,  its computational power turns out a kind of cognitive power.

There are other kinds of  cognitive power, not being computational.  To see the difference, let us compare two kinds of  mathematical cognition. If one computes the  circumference of a circle according to an algorithm (capable of being  rendered as a program), then he  uses his brain’s computational power. However,  when he accepts  intuitively,  as being obvious,  the axioms of arithmetic and geometry (from which there follows the algorithm in question),  he makes use of a cognitive power different from the ability of computation; this power is ofted called  intellectual intuition.

In economic matters, both  varieties of cognitive power come into play. There are calculations, and there are intuitive acts  of cognition. The latter  include seing  significance of  certain problems, accepting certain assumptions,  recognizing  some mathematical models as  useful for predictions, etc.

Cognitive power is enjoyed not  only by individual market agents but also by free market as an overall system of information processing. Its main job consists in computing  prices, each price as the function of  a set of variables,  especially  demand and supply.  In this sense Smith’s dictum may be paraphrased as “invisible action of a computer”.  However,  let  us return to the question posed above (see the second paragraph):  given the fact that complexity of some computations needs a support from an intuitively reasoning agent,  one may ask about the following analogy.  May it be so  that  the complexity of social life (which involves supply-demand relationship) needs deliberate state intervention to protect public interests, apart from  market’s mechanisms? In other words: are there any circumstances in which state control over prices would be a smart strategy to advance public interests? On this point there are divergent appoaches, one of Keynes, the other one of the Austrian Economic School,  brilliantly represented by Hayek.

2.  The interplay of spontaneous market and state’s economic control

To take a well considered  stance toward the  Hayek-Keynes disagreement, that concerning market’s and government’s  impact on  the demand-supply relations,  we should link this controversy with the idea of computability;  it is the latter which plays the key role in the Hayek-Lange dispute.  The free market is a reliable device to compute optimal prices, optimal strategies etc., provided  that all its agents are fully rational and fully honest. Any deviations from these ideal  conditions result in errors of computing.   The more complex  become economic  processes,  the  less  there  is likely  to attain a perfect rationality.  The grater gains are at stake, the more people happen to be drawn away from the virtue of honesty. To become free from such deviations,  the market needs a control by  competent authorities, smart enough to establish reasonable  rules of market game.

Moreover, such a control may be needed because of  interference of various social interests,  and of multiple government strategies,  as  to protect  the poorest parts of population,  to support  export and reduce import, etc.  These purposes may be attained with such instruments as subsidies, tariffs, loans, taxes etc. Such measures can be directed towards definite sections or sections,  e.g. subsidies for food production,  highly advantageous loans for housing,  tariffs on definite kinds of goods, etc.

There is the extreme view (sometimes called libertarian) which denies  governments any right to interfere with markets. To  support  such a contention, one should prove that market agents always  are fully rational, that is, doing correct computations, and  invariably respecting moral  claims. However,  neither is the case.  Market agents happen to commit various errors: sometimes they use false premisses in their predictions   (e.g. some years  ago  they superestimated the potential of Greek economy),  yield to the panic,  have a propensity to engage in speculative bubbles, etc. These are  intellectual errors,  to wit lapses in calculation.  Morever,  market agents happen to  transgress moral standards when their self-interest blinds them to public interest, when they tend to monopolistic power, when they do selfish lobbying, etc.

In such state of affairs there are at least three reasons for  the interaction  of political power with  market forces.  First  of all, there  is the absolute need of legal system to enable the very existence of free market in modern societies.  No economic  action would be possible,  if the state failed to create  a system of economic law  including  financial and banking law, law of companies etc.  This is  an essential state’s contribution to making economic processes predictable and transparent,  and thus obtaining the trait  of computability.

Another reason  amounts to the mentioned above vices, either moral or intellectual, of some free market agents. These diminish the computational power of free markets, hence should be remedied in order to restore a desired level of agents’  computational power and market’s  computability.

At last state, authorities,  mainly governments and central banks, in a period of acute crisis become the lenders of last resort,  necessary to prevent an irreversible economic disaster, as  there argues Roubini in his “Crisis Economics”; see post on Roubini’s conceptual apparatus. 

3. Economic crisis:  either a disaster  or a harsly challenging opportunity

This Section will be continued in more detail to inquire  into the  ideas of  Keynes and of Austrian School, and specially of  Joseph Schumpeter, as discussed by Roubini (see link above).  This issue is worth our careful  attention in  the debate on European integration strategy when  considered in a long run. To avoid economic desintegration, should Europe base on the Austrian or rather the Keynesian strategies? This appears as  the question of  the United Europe’s  to be or not to be.

To be continued.

By Witold Marciszewski

Once at my lecture on European Integrations,  a student expressed  his opinion  about an  European country (no matter which) that its government is undoubtedly stupid.  I did not object  the use of the word since  it has become fairly common in the political idiom (with Google you may find 80000 uses of the phrase “stupid politics” and almost half milion of “stupid politicians”). It was President Clinton who made the word  popular through the famous motto ot his governance: “It’s the economy, stupid“.  Hence, let us employ this expression freely, though with the obvious caution to use it for cognitive purposes, not for an angry emotional expression.

What would be the opposite to being stupid? Wise? Or rather smart? The latter proves  better in the present context, if you compare the following definitions.

wise =  marked by the exercise of good judgment or common sense in practical
matters;  smart = showing mental alertness and calculation and resourcefulness; stupid = neither wise nor smart, even unable to understand obvious truths.

It is not enough for a full-fledged politician to be  good in practical matters. He  is bound  as well  to be a person with wide theoretical perspectives, and those  need  alertness and a skill of calculation.  Simply,  he is bound to be smart.

Among the most  severe tests of a politician’s  intelligence, there is his capability of  responding to extreme situations, especially managing crises. As for the present global crisis, it needs an intelligent choice between two alternative and opposite sets of measures. Each of them results from a different economic worldview. One defended by John Maynard Keynes, the other one by a group of scholars called Austrian School; its  eminent representative was Friedrich Hayek who had entered a famed many years  debate with Keynes regarding relations between free market and government policies.

Now the question arises: whether  is it  smarter for a politician:  to follow Keynes advices  on economy, or those due to Hayek?  The  controversy of  these two intellectual leaders  is regarded  as a central debate in 20th-century economic thought.  The issue  gets most urgent in the time of global economic crisis. Some economists and politicians see  the way out in the Keynesian  strategy, while other ones claim the contrary. Which choise would be smarter?

Let me encourage  each from among this blog’s readers  to consider your choice: which part you take:, that of Keynes, or that of Hayek? Or else  – of both, depending on variable economic, social and political circumstances of the  time in which anti-crisis measures  should  be taken?

To assist your reflexions, two documents may prove helpful.  One of them is a film on the Keynes-Hayek controversy with some introducing comments. Another one is a comment on Nouriel Roubini’s consideration  regarding  circumstaces to be taken into account  when  deciding between Keynes and Hayek.

The core of Nouriel  Roubini’s  brilliant  book “Crisis Economics” (2011)  may be summed up to the effect:  an  important tip on how to rescue  the world economy (and thereby Europe’s economic integration)  may come from an unexpected source.  To wit, from  combining  two  approaches, so far regarded as antythetical  to each other: that of Hayek (with the whole Austrian School) and that of Keynes.  Roubini is the one who recognized that  they can and should be linked into a coherent  system of thought.

This is convincingly expounded  in Chapter 2,  Section “To Austria and back”  (p.28), of the said volume. The key to such a synthesis lies in distinguishing between long-term strategy and short-term strategy.  We read in that Section:  “Joseph Schumpeter  [a prominent Austrian economist] developed  a powerful  theory  of  entrepreneurship that  is often  distilled  down to  a pair of powerful  words: creative  destruction“; this   is a sharper  version of some views of  Hayek.  Roubini continues as follows.

In  Schumpeter’ worldview, capitalism consists of waves of innovation  in prosperous times, followed by a brutal  winnowing in times of depression.  This winnowing is to be neither avoided nor minimized: it is a painful but positive adjustment, whose survivors will create a new economic  order.

In principle, Roubini approves such  a harsh approach.  This  implies that no actions should be taken by governments or central banks   to rescue entrepreneurs who collapse for their recklessness; “in principle” means here “in long distance”. However, this position – claims Roubini – should be completed with the following consideration.

The  Austrian  approach  is  misguided  when  it  comes  to short-term  policies.  As Keynes recognized, in the absence  of  government  intervention,  a  crisis  caused  by  financial excesses can  become  an  outright  depression,  and  what  begins  as  a reasonable  retreat  from  risk  can  turn  into  a rout.   When   the  animal   spirits   [i.e.,  businessmen’  bold initiatives resulting in free market]  of   capitalism   vanish,   the    creative destruction    hailed   by   the Austrians   can   swiftly   turn   into   a   self-fulfilling   collapse   of   private   aggregate   demand.   As   a  consequence,  distressed  but  still-solvent  firms,  banks,  and households  can  no  longer  gain  access  to the  credit  necessary  for their  continued  survival.  It s  one  thing  if  truly  insolvent  banks,   firms,   and individual  households  go   under;   it s   another altogether   when   innocent   bystanders   to   an   economic crisis  are forced  into  bankruptcy  because  credit  dries  up.

In  order  to  prevent  this  kind  of  collateral  damage,  it  makes sense  to  follow  the  playbook  devised by  Keynes  in  the  short  term, even  when  the  underlying  fundamentals  suggest  that  significant portions of  the  economy  are  not  only  illiquid  but  insolvent.  In the  short  term,  it is  best  to  prevent  a  disorderly collapse   of  the   entire   financial   system   via   monetary   easing   and   the creation   of   bulwarks:   via lender-of-last-resort  support,  for example,  or  capital  injections  into  ailing   banks.   It is   also best   to prop  up  aggregate  demand  through  stimulus  spending  and tax  cuts.  Doing  so  will  prevent  a  financial crisis   from   turning into   something   comparable   to  the   Great Depression.

To sum up, Roubini’s conceptual project consists in reconciling  the both opposing theories by assigning each of them a different role in the fight with the global crisis. These theories  prove to complete each other, if reasonably applied in changing circumstances.  Hence, the lesson to be learnt is to the effect that  both  sets of  proposals  should be carefully considered,  not only by professionals alone, but by all responsible citizens as well.

Once more lesson is worth considering, namely the occurence of the word “reckoning” by the end of the section in the following context: “a necessary reckoning  must take place over the longer term in order to achieve  a return to prosperity”.  The term “reckoning”, which means computation, is crucial for economics, and for understading the mechanics of crises, as discussed in the post III on cognitive power of free market.

It would be nice to sum up such a solemn discourse in a more relaxed mood.  Fortunately, for this purpose we got a hilarious  piece of music and piece of verse in the best  rap style. One in which Keynes’ and Hayek’s eagerness in defending their points gets shown in a much funny way.  It is the video “Fear the Boom and Bust“.  The  title goes to the heart of  crisis economics, since excessive and euphoric  booms, called bubbles,  do lead to depressing busts.  After such a bust may come recovery, but the whole process is very costly.  The Austrians, and mostly Hayek,  have become classics in studying  such cycles. Thus that funny film deals with serious economic issues.

A note about the book and Nouriel Roubini. The book is co-authored by Stephen Mihm. It bears the subtitle “A crash course in the future of finance”. At the cover, the   name of Roubini is followed by the phrase “The seer who saw it coming”, taken from a review in “The New York Times”. In fact, Roubini was among those few, who have foreseen  the disaster, having been  much ahaed in spotting this event. This is why his opinion and his analysis weighs now so heavily.

§1. The impulse to include this question into the curriculum “European Integration” came from an unexpected result of Polish parliamentary elections in October 2011. I mean a splendid performance of the anti-clerical party that wants to cut down the influence of the Catholic Church in Poland – Janusz Polikot’s movement. This fact should be seriously considered to be a sign of times. The fact that Mr. Palikot in a few months managed to win one tenth of the electorate for his programme, appealing mainly to young people, and all that happened in the country seen as strongly catholic and conservative, gets thought-provoking, indeed.

This is the more remarkable that it complies with the trend towards secularization within Europe as a whole. Thus there arises for Poland the dilemma: whether to join this trend or to oppose it? The latter option would accord with Polish historical tradition, but then, in turn, the question arises of how would this tradition face challenges of modernisation. Should Polish people give up the quest for it in favour of being true to their traditions (as claimed by some politico-religious circles)? Or depart from these national and religious traditions in favour of modernisation? Or else, try to reconcile both values? The third option presupposes a possibility of such reconciliation. Is this supposition likely to be true? This is the question!

To address this question, we need, first, to get a clear insight into the idea of  modernization, and then to confront it with the Christian doctrine. I shall do the former, while the latter I expect to be answered by readers by themselves, owing to their own knowledge. In order to help answering, I suggest a list of questions to    encourage and guide a search for solutions.

§2. It is not by accident that in the title of this post I mention just the future. As for the past,  it is by no means controversial that Christianity was among the main factors in the process of forming Europe, having  remained  in harmony with the other potent factors, as the heritage of Greek and hellenistic intellectual achievements.  As well as the idea of universal empire due to the lasting historical memory of Roman empire, its legal order,  its power and its role for the world peace (Pax Romana).  This was a monumental  historical scenario which started with the baptism of Clovis (496?),  the first king of the Franks, and culminated with the crowning of Charlemagne as Holy Roman Emperor on Christmas of 800 by the Pope Leo III.

Within the thousand years  following Clovis’ baptism,  the Catholic Church was a leading force in intellectual and  political processes going on in Europe.  A decline of this domination started because of two new factors which appeared at the European stage. These were: the religious reformation, which was rather like a religious revolution, and the scientific revolution due to Copernicus and Galileo. The former subverted the religious foundatons,  the latter –  the intellectual foundations of the medieval order. Thus began the retreat of Catholic Churche from Europe’s historical stage. This process  is going on till to day, leaving ever less place for the Church’s leadership and influence.

This is the historical context in which  we are to try understanding the core of modernisation processes.  Religious reformers introduced (even if not intentionally) the pluralism of  theological doctrtines,  thus initiating the paradigm of pluralism which evolved towards the freedom of all beliefs including philosophical, political,  artistic, and so on.   Such a pluralism is found among the main points of post-medieval modernity. Then modernisation means tending to  pluralism wherever is it lacking.  [1] Does the Catholic Church approve of such a multiple pluralism?  (Bracketed numbers hint at the position of the given issue at  the list of questions at the end of this post.)

The answer  is to the effect that the Church does approve of pluralism after the Vatican Council II,  but she has done so under the pression of secular thought, not on the basis of her own  creed.  This observation is backed by an extensive evidence, in particular “The Syllabus of Errors Condemned by Pius IX” published in 1864.  It consists 0f 80 items, each of them being  a view which the Pope condemns, hence the contrary view is that  demanded by the Church.  Direct or indirect condemnation of pluralism is stated in items 11-17, 22, 24, 48, 57; items 77-80  express a strong rejection of any form of liberalism.  Let it be added that item 55 declares separation of state and Church as contrary to the Catholic faith, and item 63  forbids any opposition against crowned rulers.

If  the popes who  presided the Vatican Council II lived a century earlier,  they would be condemned as heretics by the Pope Pius IX for their being at variance with all the Syllabus points listed above, and many other ones.  However, the Catholic Church deserves  appreciation for her trying to match standards of modernity  created in the age of Enlightenment. Even if the steps toward such adjustment come late, delayed by natural  inertness of great institution,  they give hope that in a future the church may support the modernizing of society.