Beware. The fixers have come to Washington. "Fix" because this one little word, in a close race with "run," is now the most dangerous word in the English language. Fix and run, you see, are words that betray the false metaphor upon which most of today's economic vernacular is built: economy as machine.
- A CNN headline reads: "Obama's priority: Fixing the economy."
- Paul Krugman says that what's interesting about the Bush Administration "is that there's no sign that anybody's actually thinking about 'well, how do we run this economy?'"
- Mark Ames of The Nation thinks hiring Larry Summers "to fix the economy makes as much sense as..."
With Google's help I could go on. But even in social studies we learned that FDR and a coven of interventionists -- channeling John Maynard Keynes -- messed with the monetary system and dropped largess from on high to fix the Depression. This was referred to as "priming the pump."
Whenever I hear such talk, I'm reminded of a passage by Larry Eliot of The Guardian that describes, quite literally, an economic model from postwar Britain:
"A sensation when it was unveiled at the London School of Economics in 1949, the Phillips machine used hydraulics to model the workings of the British economy but now looks, at first glance, like the brainchild of a nutty professor...The prototype was an odd assortment of tanks, pipes, sluices and valves, with water pumped around the machine by a motor cannibalised from the windscreen wiper of a Lancaster bomber. Bits of filed-down Perspex and fishing line were used to channel the coloured dyes that mimicked the flow of income round the economy into consumer spending, taxes, investment and exports."
Keynes, the grand old man of the machine metaphor, would have been either delighted or angered by such a contraption—delighted by the idea that economic inputs and outputs could be rendered in tubing and Easter-egg dye, angered, perhaps, that the various inputs and outputs were not represented as faithfully as they could have been by a more enlightened designer.
Deus ex Machina?
But the whole idea of fixing, running, regulating, designing, or modeling an economy rests on the notion that, if the right smart guys are at the rheostats, the economy can be ordered by intelligent design. But the economy is no mechanism. There is no mission control. Government cannot swoop down like a deus ex machina to explain the inexplicable and fix the unfixable. Why? Because the knowledge required to grasp each of the billions of actions, transactions and interconnections would fry the neural circuitry of a thousand Ben Bernankes. This is what F. A. Hayek called the knowledge problem. Knowledge, Hayek reminded us, is not concentrated among a few central authorities but is dispersed around society. That's why bad unintended consequences follow government interventions like black swans.
A few economists have not succumbed to the "fix it" fixation. They know that society is not like a machine at all, but an ecosystem. Faster than you can say market fundamentalism, a Keynesian will scoff at this metaphor. But his favorite trope has helped to stagnate many an economy; making Rube Goldberg apparatuses out of means-ends networks, perversion out of productivity. As Czech President Vaclav Klaus wisely notes: "The market is indivisible; it cannot be an instrument at the hands of central planners."
Society as Ecosystem
So if not the machine metaphor, why an ecosystem? Economies, like ecosystems are complex adaptive systems. Nature, including the economy, can experience episodes of wild wobbles, fluxes and flows. But it almost always returns to a steadier state known as "ordered chaos." That is, when it's left alone. In clumsier but perhaps more familiar language—ecosystems tend towards equilibrium.
Both ecosystems and economies are distributed systems. In the former, billions of interdependent means-ends activities are a reflection of a billion preferences and choices. In the latter, species are dynamic and interwoven in a web of relationships. For both, the whole system is an ever-evolving cascade of change that is unfathomable to a single mind. Data snapshots may be useful for some things, but should not be intended as blueprints for government planners. Even sophisticated computer models will, like the old Philips machine, eventually fail. There are no oracles.
Once we come to discover not only that the economy is an ecosystem -- but that the laws of ecosystems are very different from the laws of machines -- we'll resist our urge to fix things from the top down. We'll realize that economic growth is a holistic process that happens by virtue of countless adjustments and adaptations within the system itself. That's why economic planning is, and always has been, a form of hubris.
Keynesians on the left are eager to dismiss Intelligent Design (ID) as the creationist afterthought to evolution, but just as eager to embrace its analog in economics. Disciples of Adam Smith know better. Darwin, after all, read Smith. As the late naturalist Stephen Jay Gould wrote, "the theory of natural selection is a creative transfer to biology of Adam Smith's basic argument for a rational economy: the balance and order of nature does not arise from a higher, external (divine) control, or from the existence of laws operating directly upon the whole, but from struggle among individuals for their own benefits."
Today, those working at the frontiers of complexity science are beginning to apply Darwin's insights to the social sciences, too. "[Economics in light of complexity] is based on the emergent behavior of systems rather than on the reductive study of them," writes theorist Stuart Kaufmann. "It defies conventional mathematical treatments because it is not prestatable and is nonalgorithmic. Not surprisingly, most economists have so far resisted these ideas. Yet there can be little doubt that learning to apply these lessons from biology to technology will usher in a remarkable era of innovation and growth." (Lest cries of 'social darwinism' go up, remember that we're only talking about the functional aspects of an economic order, not whether a safety net is justified.)
Kaufmann's insights echo those of Hayek and Ludwig von Mises—largely banished as they have been from the ivory towers by economists wishing to play god. Perhaps once these wayward "stimulus" experiments run their course -- like a fix passing from the body of an addict -- those who believe not in market fundamentalism, but in market fundamentals, will be vindicated.
Complexity and Rules
By fundamentals I mean rules. Only rules can be the product of human design. These are the simple rules that lower "transaction costs," which is a fancy way of saying help us trade with each other easily, minimizing conflict. We call these rules "institutions" (property rights, contract enforcement, and so on) -- not legislation meant to regulate failure away, but to protect people from force, theft and fraud. For these are the rules that bring market discipline in a system of prices, profit and loss.
Many continue to blame "greed" for our current state of affairs. But greed is rather more like gravity. When you fall, you can either blame Isaac Newton or the banana peel on the sidewalk. Profit motive is a good thing when it operates in an environment where bad bets are punished with losses and good investments are rewarded. Only government can distort that healthy profit-and-loss system, giving people incentives to make bad decisions. It is in such an environment that greed becomes dangerous.
With the rules right, however, greed can help our economy stabilize faster than government ever could. As the lubricant of our economic system, self-interest leads a billion market participants to redirect resources to projects that create value in our society—all in a kind of large-scale recalibration. When profit and loss bring discipline, we'll behave more "rationally" in this process. But if government continues to change the rules ad hoc to bias the market in favor of corporatism and irrational behavior, the balance between order and chaos will be lost. Invariably, the fixers will continue to descend upon the economy with bad metaphors.
Max Borders is executive editor at Free To Choose Network. He blogs here.