Uncertain Causes

by on December 28, 2014 in Economics

When you throw a feather out of a tenth story window it eventually hits the ground, but only after fluttering about for a while and following an often circuitous route downwards. Throw a ten ton lump of lead out and the route tends to be a lot more direct. Gravity wins the day in both cases. It’s just that in one other forces and environmental effects play a much larger role.

In economics the role of gravity is played by uncertainty. It is the dominant force underlying all action. Most often its presence is best detected by the reaction of people to it: they make plans and seek other ways to offset it. Our institutions, for example, are a way to channel activity along more predictable lines and thus keep uncertainty at bay as long as possible.

Eventually uncertainty wins. It undoes our plans by throwing up an event entirely unexpected. We then have a choice: do we repeat one of our tried and true actions on the basis that it has worked – at least sort of – in the past? Or do we invent a brand new action and see if it works in these new circumstances. Whichever we choose we learn something: either we learn that our old trick has new application, or we learn a new trick.

So uncertainty is a driver of learning. Pushing back the boundaries of the unknown, wherein uncertainty lurks the most, is how we make progress.

I look at scarcity as a form of uncertainty. It is uncertain because we cannot be sure how we can counter it. Say we need a scarce resource, what will we do if, or when, it runs out? That’s a major uncertainty. It’s one that hovers over us today as we worry about our supplies of oil. How do we react? By trying to find alternatives to the scare resource? Or by being better at using what limited supplies we have?

We learn in the face of uncertainty.

Then there’s a more problematic form of uncertainty: things we have no clue about until they arrive to confront us. In these cases our learning is always retrospective. We figure out what we would have done had we known about the event ahead of time. We then add that new piece of learning to our bag of tricks and it becomes something we can use in future were a similar event to show up.

Like gravity, uncertainty is always in the background, but other forces may mitigate its presence such that we ignore it and focus on them instead. It never goes away, however.

Another way of looking at it is to compare order with disorder.

Our economy is a process that endlessly cycles disorderly stuff into orderly, and thus useful things, and then back into disorder via consumption, depreciation, depletion and other quasi-entropic channels. A totally disordered environment is full of uncertainty. A totally ordered environment is, on the contrary, full of certainty. Our experience of life is between the two because life itself is a form of order. This is the meaning behind Karl Popper’s comment that ‘all life is problem solving’. Not only does he mean that all life is a solution to a problem, he also means that when we observe problem solving we are observing life.

In our economy we establish order by using our creativity. We carve away an almost infinite number of possibilities and focus on one. A pile of iron ore has enormously many possible uses. It can take an enormously large number of forms, shapes and so on. But we force into just one. We establish a  particular order. One that has specific use to us. And through use we gradually erode that order: we depreciate the object, we expend it, we allow it to rust and gradually deform. Ultimately we abandon or recycle it. Either way we undo our creativity through consumption. The iron isn’t lost – it still exists – but it is now disordered and of no immediate value. Although it might be if we learn how to recapture it for future use.

All this means that our economy is a human response to the uncertainty we are faced with in our surroundings. It is a particular response to our need to supply ourselves with what we need to survive and thrive.

But our environment is not static. It is altered by our activity. That is to say our past creativity acts to shape the environment we now face. And our current creativity helps shape the environment we will face in future. The endless feedback loops between what we do and what we find around us provide another layer to our uncertainty. As do the feedback loops that connects what we each do with what our fellow economic actors do.

As actors we react to uncertainty. We invent projections of the future so we can create an appropriate order to match that future. Uncertainty, of course, means that our projection and the actual revealed future rarely match exactly, but we manage as long as the two don’t diverge radically.

Our economy is intentional. It is not simply the playing out of some preordained or clockwork-like response to an event or situation. It is more nuanced than that. Those feedback loops mean that there are causes for subsequent events that exist at various layers of activity and not just at the base layer of individual action. Those causes emerge from our interaction and our consequent constant exchange of ideas, thoughts, emotions and so on. This is why orthodox economics founders so easily. It dismisses or underutilizes those higher levels of causation and allows only the base layer to enter into its analytical process.

This is also the main source of unreality in orthodoxy: it disavows human intentionality inasmuch as it restricts our behavior to a highly limited and entirely  predictable set of actions. It assumes one set of reactions – an extreme form of rigorous rationality – to events, and, by so doing, it eliminates the possibility of change in the face of interaction. This is easy to do if you want to invent an entirely logical and internally consistent system. But it is not a reflection of reality, so it has no applicability in the real world.

An economy conceived as a reaction to uncertainty cannot be understood, or even modeled, axiomatically. For its very nature is to evolve and mutate through time. It is not necessarily internally consistent or even logical. It is idiosyncratic, path dependent, and liable to lurch occasionally in different directions. Its choice of solutions to uncertainty may not be optimal: all that it needs is viability. It may get locked into paths of activity that prove, longer term, be to highly suboptimal. All it needs to do is to provide for survival. It needs to subsist and persist.

Uncertainty prevents it, ever except by luck, from arriving at the sort of pristine optimal equilibrium that orthodox economists set as the desired consequence of the economic systems they study. Indeed, the notion of such a system actually existing is so bizarre that it seems pointless – to me – to bother with it at all. I suppose that within the entire set of all possible configurations of the economy, one such pristine example must exist, but the likelihood of it being the one we are living in is infinitesimally small.

So, I repeat, why bother studying it? Especially when we appear to know so little about the one we are living in.

But, that’s uncertainty for yo.

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