Friday, September 4, 2015

A Very Short Introduction to Economics

Partha Dasgupta's A Very Short Introduction to Economics packs a lot into a few pages. Though incomplete and selective, it does a great job of guiding the reader through the intersections of economics and history, development, sociology and ecology.

The book is framed by contrasting the lives and prospects of two children, one in the suburban US, the other in rural Ethiopia, analyzing the factors of economic development that make the difference between communal subsistence agriculture and highly-specialized developed markets. Touching on a bit of game theory, Dasgupta shows how trust arises from mutual benefit and breaks down in the presence of uncertainty. Communities help to stabilize and safeguard trust, but in developed economies institutions increasingly ensure trust between parties who never meet.

Institutions like markets, courts and governments come easily to mind, but science and technology are two institutions of primary importance to economic development, a fact that Dasgupta crystallizes: "What Europe achieved during the Age of Enlightenment was [...] It created institutions that enabled the production, dissemination, and use of knowledge – in effect, the entire knowledge industry – to be transferred from small elites to the public at large, a transfer that so sharpened the analytic-empirical mode of reasoning that it became routine." (p99)

Science and technology are examined as institutions and economic inputs. The book sketches the unusual landscape of incentives that animate science in which highly speculative bets placed by research funders reward the successful scientist in terms of primacy and honors rather than cash and pay off for society in terms of knowledge as a public good. Dasgupta captures the tense relationship between science and technology like so:

"Increasingly though, the taste for those social contrivances has to compete against the pecuniary rewards available in Technology. If the pecuniary rewards increase – and they have increased greatly in recent years – the taste for the mores in Science becomes more and more of a luxury to the research worker. Science embodies a set of cultural values in need of constant protection from the threat posed by its rival, Technology. That threat has proved to be so real, that in recent decades the two institutions have begun to blur into each other. Scientists increasingly behave like technologists, while technologists enjoy both the pecuniary rewards of Technology and the medals and scrolls that Science has to offer." (p98)

Patents are covered but without mention of their central conflict, which the Economist expressed recently this way: "Patents are protected by governments because they are held to promote innovation. But there is plenty of evidence that they do not."

Sustainability is one of the most intractable issues of our time. Natural resources serve as economic inputs. Moreover, ecosystems provide economic services whose value escapes conventional economic analysis. Going further still, one may consider the entire human economy as a subsidiary of the earth's ecosystem. It'll strike some as a bit on the fringe to think of economics as a subsystem of nature or dwell on their deep similarities in terms of competition, adaptation, and exchanges of material and energy, but there's a very rich intellectual history behind these ideas.

Robert Frank calls Charles Darwin the father of economics as well as evolution. Turning that the other direction, economic concepts such as pareto optimality can inform the study of evolution. The central role of competition is explored in Geerat Vermeij's book, Nature: An Economic History. Organisms or organizations compete for resources, especially energy - the energy to go capture more resources. Looking at energy as the primary economic input goes at least as far back as 1921 to an address given by Frederick Soddy called Cartesian Economics. In terms of thermodynamics, it's the flow of free energy from the sun that drives local increases in order on our little planet. This is true in living systems as well as economic ones. On this topic, I'm looking forward to diving into Why Information Grows By Cesar Hidalgo. On the other hand, Mark Sagoff's essay, The Rise and Fall of Ecological Economics is critical of this line of thinking.

Those expecting A Very Short Introduction to Economics to follow a traditional economics curriculum will be disappointed. Many key economic concepts - opportunity cost, comparative advantage, elasticity are mentioned in passing or merely alluded to without naming them. Even supply and demand curves are relegated to a middle chapter. If you don't like the social-science side of economics, this is not the book for you. Also, the book is not mathy, which should be apparent from the concept of the VSI series.

One of my personal favorite ideas only gets a paragraph (p78) - Hayek's beautiful insight into the role of markets and price signals as parsimonious integrators of distributed information. Distributed computing teaches us is that coordination - transferring information, reaching agreement - is hard and expensive. The nifty trick of markets is that they tend towards efficient resource allocations while keeping down the cost of coordination. Of course, technology is good at spreading information around:

Despite the selectivity, it might be inevitable that I would like this little book since it connects several of my obsessive interests - economics, science and specifically life science. Both economics and biology are, at heart, the study of complex adaptive systems. Or in Venkatesh Rao's view, they are "soft technologies". Rao says, "Software has the same relationship to any specific sort of computing hardware as money does to coins or credit cards or writing to clay tablets and paper books." Likewise, I'd add, DNA codes living systems that run on the substrate of the cell.

Dasgupta clearly gets the perspective of the economy as a complex system made up of densely interconnected parts - households, firms and institutions - deeply linked to social and political systems and embedded in the natural world. With this encompassing breadth, the reader is well prepared to pick up a more traditional economics text with the big picture firmly in mind.

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