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.