Delusion of Agency

Going through the philosophical schools of thought in general, one can’t help but notice two things – the anthropo-centrism and the excessive assumption of agency of human beings for their destiny. The first of these I will deal with separately but the second merits some explanation here.

Our studies of matters concerning ourselves – i.e. ‘humanities’ and social studies – have been afflicted with this limitation since early days. Our notion of self is one of active decision making individual – who acts for better or worse and makes judgment calls, right or wrong, and assesses situations and decides. It is axiomatic and is rarely questioned. There is no doubt the discussion on free will – but that is one-zero. While it captures an important part of this delusion, it still misses the crux of this matter – even if we are free to decide, what we decide matters only so much.

What I am proposing is an alternate view of our selves. We are not the analytical, rational and in-control selves we think we are. We are organic machines that have skills to navigate the world to survive as long as possible and procreate. Our skills make several additional things possible – which eventually brought us wonderful things like language, technology, arts and so on. However our pre-programmed aspiration at the fundamental level is still the same as our ancestors. We of course infuse additional aspirations on the way – driven by our cultural context amongst other things. Nevertheless the end result is a much messier sum of several drives rather than the neat segregation that many psychological models have us believe (e.g. id, ego, superego or rational self and emotive self etc). No doubt such models help us understand ourselves a little better – with the hope that we can use that to advance our innate and acquired aspirations and to avoid pain. However, these are approximations. And given our tendency to long for clarity, we quickly fall in love with these models and start thinking of them as realities rather than the maps (territory and the map again! J)

In my messier formulation, human beings are a combination of constrained, guided and self-willed individuals who are still prone to internal randomness as well external one. They act within the roles partially bestowed/imposed on them by their context and partially conceived and built by themselves. The evolution is itself messy though. It does not progress in a linear manner of input leading to output – of whatever proportion. Instead the output is always a complex function of input from agent, context, and some random factors. The agent then evolves partially by its own will and partially without it. The without it portion need not be in accordance with the own will – it can be neutral or even against.

The evolution within is mirrored on the outside as well. In fact, briefly visiting the excessive anthropocentrism mentioned at the beginning of this article, one may conjecture that ‘outside’ and ‘inside’ is a human-centric view of the reality. In contrast to this, one may take an alien’s point of view and see the continuum which includes some organic life-forms – whose ‘insides’ are merely additional material for study in the continuum, without a special place.

Anyway, the evolution is mirrored on the outside in the sense that the output of an activity in general is a complex function of actors’ inputs and context. Thus over time, both the actor and the context evolve – in complex ways which are very hard to predict. The actor however has the reflective faculty – which models the reality on an ongoing basis. In this reflection the actor may choose to accord a disproportionate share of the outcome of internal evolution as well as evolution of the context to her own inputs. Owing to the complexities of both evolutions, it is quite hard to disprove such delusion. In any case, there is nobody that has an interest in doing so. Also the actor moves forward not so much by accurately describing reality but by surviving as long as possible. In physical matters, an accurate enough description is coincidental with survival – knowing where mountain ends and not trying to walk in air is a good choice for example. In matters more epistemological or philosophical, such urgency is missing. Believing that one controls one’s destiny – or at least one’s internal situation – is hardly a survival handicap. Given the vagaries of life, it may even confer an advantage (refer to Kahnemann’s Engine of Capitalism for a parallel – incorrectly overoptimistic entrepreneurs push forward innovation – thus benefitting the society but not necessarily themselves, at least in a material sense).

Am I saying anything non-trivial? Probably. If we allow for this worldview to create the (admittedly fluid) foundation of our representation of reality, we will probably not even ask many philosophical questions, answer many others differently (at the very least more tentatively) and in the domain of sociology, economics and psychology, frame our research in a manner very different than it is being done now.

Same holds for political science as well as active discourse on politics.

I am proposing combining behavioral school of thought with the awareness of the overwhelming important of context and with the recognition of randomness inherent in evolution within and without human actors.

At a personal level, I use this awareness to find peace and tranquility – although I am quite aware that these are aspirations and not foregone beliefs once I accept the foundation. That is because my inside is also not entirely under my active control and I can only hope to steer it towards this worldview over time as much as I can!

Economics with Fewer Equations

The theme that economics is less like physics and more like biology is not new. However it is more a fringe view than a mainstream one. Even now, I would guess that the general expectation of an economic journal in publishing a paper is what mathematical basis it has and how robust the Econometrics is. Several recent things have pointed to a better direction.

• The economist article on agent based models
• The book – growing artificial societies
• The book – origin of wealth, especially the early sections
• One recent article in Bloomberg by a theoretical physicist 

The essential argument is same. We can’t draw up pretty equations to predict people’s behavior. Generally it is argued that these equations are trying to predict the behavior of only the “model” or average individual or the behavior of the collective. The implicit assumption in the usefulness of this approach is that this “average” study is genuinely the median behavior and the deviation around this median is noisy but controlled. Also it is assumed that the noise is averaging to zero and has no impact on the overall behavior of the economy. 

It is not very different from saying that a ball of steel has electrons inside it moving in all directions. However, at no point is the ball moving anywhere on account of this movement. The diverse directions of movement of the electrons are random and thus cancel each other out at the aggregated level. Similarly it is argued implicitly that in equationalizing economics, individual differences of behavior around the “mean” are random and they cancel each other out. As it turns out, more often than not, they do not.

Some systems in economics may indeed be amenable to a linear model of this sort. However most useful phenomena are non-linear and dynamic and thus do not readily lend themselves to this approach. Imposing this approach on those systems then is bound to yield erroneous forecasts. I have elsewhere argued with the example of the billiards table where the physicist refuses to predict where each ball would be after the first strike. Physics concerns itself with questions like conservation of momentum in each interaction and the inertia and friction and so on. No physicist would try to build a model of the average ball and then hope that some contained linear variation around it would be a good way to explain how the strike leads to the evolution of the table.

Conventional economics is routinely trying to do this. I don’t know how it came to be here. The book 'Origin of Wealth' offers some explanations. Historically Walras and his contemporaries were quite enamoured by the success of physics with equations and tried to use the same in their work. Since then, almost as a historical accident, economics has continued to progress in that direction. The author of origin of wealth even goes ahead and calls this a century long detour. Audacious maybe? But most likely quite accurate description of what has gone on since.

The beer game example in origin of wealth is quite illuminating. (http://en.wikipedia.org/wiki/Beer_distribution_game)

A simple trigger at the customer demand end causes all sorts of fluctuations in the supply chain although after the initial reaction, the variation in customer demand is taken out. It goes to show that in absence of perfect information and strategic gameplay between transacting parties, the supply chain can exhibit very dynamic patterns – which are far from equilibrium. The Growing artificial societies authors call it far from equilibrium economics.

The opposition to the equationalizing of economics earlier was countered with TINA. What do you propose, the proponents would ask. Since the opponents never really had much of a proposal, the conventional equilibrium economics continued. Now in computational economics, complex adaptive systems and agent based modeling, there might be a genuine alternative.

This approach can open up new areas of dynamic modeling which were intractable for analytical solutions. This can also help learn emergent phenomena which are otherwise blackbox to top down modelers.

What are the limitations?

One needs to start somewhere. Where one starts can significantly impact the answers one gets. Hence the approach is somewhat prone to curve fitting. Some intellectual discipline and robustness inducing techniques are required in this case.

The micro leading to macro is an interesting theme and a long cherished dream of economists. However, conventionally the two have stayed separate. The agent based modeling with inclusion of complexity approach can start to make this reality.

Bitcoins and alternate currencies : some speculation

Greenspan seems to say that bitcoins are a bubble. Insofar as he is referring to them being prone to Tulip-Mania like irrationally high price rise and subsequent price fall, he is probably right. However, in claiming that they have no ‘basis’ and are hence a bubble is conceptually incorrect. This is because implicit in such a claim is another – that the ‘real’ currencies are not like this and have a more solid ‘basis’. In fact, they don’t. All modern currencies are fiat currencies. They do in fact have a stronger basis in the central bank, banking system and the home economy. However, conceptually they are no different than a widely accepted form of payment.

That is not to say that bitcoins are on their way to become an alternate currency anytime soon. However, that does bring forth an important question. How does something become a currency? Or less ambitiously, how can something like bitcoins in the modern world become a currency? (The former is too general a question and is very hard to answer. The latter is easier due to the particularization afforded by placing it in the current context.)

It boils down to development of a critical mass of individuals and organizations accepting something as a means of payment. Why they would do so is of course the next question. That has varied answers. Broadly though, I can think of the following three.

1. The (perception of) failure of the currently accepted currencies in some way – massive inflation worries is one possibility, difficulty in online payments is probably another, perception of over-regulation, lack of faith in banking system which backs most of the currency besides the central bank.

2. The opportunity to carry out some project not feasible in the current context.

3. Speculation over the wider acceptance of the new currency

The first and second motives are based in themselves. The third is a transient motive. However, the interplay among these has implications for whether something becomes a bubble and bursts or gets accepted as a real currency.

The question of critical mass is crucial. Currencies have tremendous network effect. If more and more people start accepting a currency, that in itself becomes a strong reason for even more to accept. The reverse also holds. One place where this is being played out even now is the status of Dollar as the reserve currency and the currency of choice for international trade, especially in oil. Below the critical mass, the people trading into the currency for the third motive above will quickly abandon it. With values falling, those in first two motives will also be forced to stop dealing in it.

This is where the institutional framework backing a currency and the economic interests served by it become crucial. If the currency manages to do something very useful for a sufficiently large group of people and organizations, they would try to find a way to make it work. In parallel, if the institutional framework for a currency is well developed and has a sponsor in a suitably empowered entity, it can grow.

Probably the most important element of the institutional set up is that of seigniorage. This is the privilege that comes to the ‘issuer’ of a currency, if there is one. In the gold standard currencies, there is no ‘issuer’ since everything is backed by equal value of gold. In the fiat currencies’ case, the central banks and hence their respective governments are the issuers. (Tangent: Rothbard describes brilliantly the evolution of the federal reserve in the US and the interaction between governments and central banks and monetization deficit etc.)

If the issuers get greedy, inflation ensues and can quickly become hyperinflation (Germany, Poland, Zimbabwe). I don’t know what the issuing mechanism for bitcoins is. I am sure something this obvious has already been dealt with and seigniorage hopefully taken out or made transparent. However, if and when the stature and acceptance of the currency grows, these worries might start haunting the users. It is interesting to draw a parallel with the growth of modern currencies and their convertibility into gold. Till as late as second world war, there was a constant tension between users and issuers of the currencies – the users routinely converting their currency holdings into ‘species’ (a term used for gold and silver) and issuers suspending ‘specie payment’ every now and then. 

For bitcoins, Dollar is the ‘specie’. As the users of bitcoins try to conduct transactions outside the regular users of bitcoins, they will need payment in ‘specie’. This is a crucial juncture. If the non-users of bitcoins keep insisting on payment in ‘specie’, the critical mass of bitcoin users may not grow much – although the legitimacy afforded by the notional acceptance of the bitcoins in the outside world is quite comforting for the present users to stay put. On the other hand if the non-users start to keep the bitcoins and postpone conversion, that could really provide a strong boost to the growth of bitcoins. The non-users thus become users or at least part-time users (they don’t actively transact but store bitcoins for speculative reasons.)

The case of a car dealership accepting bitcoins for payment is thus interesting. Equally interesting is the ban imposed by China onpayments using bitcoins.

The growth of capitalism and government spending in 19^th century and early 20^th century created the basis for the central banking and modern banking system that we know today – along with the fiat currencies that they support. The growth of internet in 21^st century might be able to support a new form of currency – which is as unlike the current currencies as these current currencies were to gold back then!