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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Free markets have played an important roleA NEW ECONOMIC PARADIGM AN ALTERNATIVE APPROACH Free markets have played an important role. They have provided incentives for innovation and for low-cost production of desirable products. They have enforced pragmatism at the expense of ideology. They have facilitated exchange and provided a working definition of fair price. Attempts made to replace them, typically by government management, have come to naught. But there is a wide gap between the practical efficacy of free markets and the claims that laissez faire necessarily maximizes the wealth of society and that interference is never warranted. It is these more ambitious claims that support the doctrine of government non-intervention. It is these claims that embody what John Kenneth Galbraith calls “theological laissez faire.” While classical economists may summarily dismiss “theological laissez faire” as a grotesque caricature, theologians have a better handle on the issue. Harvey Cox, a professor of divinity at Harvard, has fleshed out theological laissez faire in some detail: The lexicon of The Wall Street Journal and the business sections of Time and Newsweek turned out to bear a striking resemblance to Genesis, the Epistle to the Romans, and Saint Augustine’s City of God.… There were even sacraments to convey salvific power to the lost, a calendar of entrepreneurial saints, and what theologians call an “eschatology”… I saw that in fact there lies embedded in the business pages an entire theology, which is comparable in scope if not in profundity to that of Thomas Aquinas or Karl Barth... As I tried to follow the arguments and explanation of the economist-theologians who justify The Market’s ways to men, I spotted the same dialectics I have grown fond of in the many years I have pondered the Thomists, the Calvinists, and the various schools of modern religious thought. (“The Market as God,” The Atlantic Monthly, March 1999, p. 18f) In the spirit of ecumenism, it has become fashionable to cite the relevance of Zen to investing. One author claims, seriously, that day trading requires “… a certain wisdom, a Zen-like sense of … insignificance in the face of the Market.” (Millman, The Day Trader, p. 25.) The diversity of failures of the free market should suffice to reject theological laissez faire. Flaws are plentiful. Economists without blindfolds have ably addressed its preoccupation with the short term. “[I]n an era of man-made brainpower industries, capitalism is going to need some very long-run communal investments in research and development, education, and infrastructure. Yet when capitalism’s normal decision-making processes are used, capitalism never looks more than eight to ten years into the future and usually looks only three to four years ahead. The problem is simply put. Capitalism desperately needs what its own internal logic says it does not have to do.” (Lester Thurow, The Future of Capitalism, p. 16.) Although it has received the most attention, laissez faire’s propensity to imperil long-term prospects in order to satisfy the short term is not its only failing. The very structure of laissez faire is incompatible with wealth-maximizing institutions like patent protection. This structure renders laissez faire incapable in principle of achieving its own wealth-maximizing ends. Independently, the picture of economies and financial markets painted by laissez faire is far removed from any school of realism. Contrary to that picture, economies are not comprised of entrepreneurs competing against each other on a flat playing field. They are oligopolies in which powerful economic interests purchase and wield significant political power. Also contrary to that picture, prices do not tend to a stable unchanging equilibrium. And economic differences do not disappear. Once they reach a certain size, feed on themselves. The tendency of differences to feed on themselves is common and is not limited to economies. If neighboring countries have comparable military strengths there is little incentive for one to attack another. The cost of a war is too great, as is the risk of losing. But as military differences increase beyond a certain threshold the risk-reward ratio changes. It may now make sense for a stronger country to invade a weaker neighbor. By assimilating the resources of the weaker state the stronger can increase its own strength and can gobble up its neighbors one by one. This underlies the notion of balance of power. Military equilibrium is not stable. It requires deliberate action by governments to build alliances that maintain a military balance sufficiently close to equilibrium to deter aggression. Just as it may be appropriate to intervene to maintain a balance of military power, there may be reason to intervene to maintain a balance of economic power. Without the moderation of extreme economic disparity society has repeatedly inclined to increasing violence that triggered instability and led to a lower standard of living for all. Historically, such moderation has been achieved by massive disaster that decimated the non-wealthy and so increased their economic power. Government intervention to maintain a balance of economic power would be less painful. It would increase the long-term wealth of nations. Laissez faire misses all of this. No wonder it has underperformed. Yet despite its palpable flaws laissez faire is flourishing as if there were no conceivable alternative. Why? Widely accepted theories are truly the undead. Not even the most powerful contrary evidence can kill them. Even in physics the Rutherford model of the atom was universally accepted, despite its obvious flaws, until quantum theory. Only a better theory can dispatch an accepted theory. This is so in all sciences, including economics. To be effective, a criticism of laissez faire must present a realistic alternative. The ideal would be a theory that has already been successfully applied to structures as complex as economies. Enter nonlinear thermodynamics. This theory, a recent branch of physics, is the most general theory dealing with complex systems open to exchange matter and/or energy with their environment. It explains a variety of chemical and biological behaviors. Its significance has been enhanced by the awareness that ordinary dynamics is limited in the range of phenomena it can predict. In order to predict behavior in any science, it is necessary that the evolution of systems be insensitive to sufficiently small differences in initial conditions. Otherwise, apparently identical systems can evolve along different paths and we cannot predict how a system will evolve. Classical dynamics fails this test. Even simple systems that are virtually identical can quickly diverge in their behavior. “Richter kept clamped to his windowsill a well-oiled double pendulum.… From time to time he would set it spinning in chaotic nonrhythms that he could emulate on a computer as well. The dependence on initial conditions was so sensitive that the gravitational pull of a single raindrop a mile away mixed up the motion within fifty or sixty revolutions, about two minutes.” (James Gleick, Chaos, p. 230.) As systems become more complex, dynamic predictability, based on the positions and momenta of their component particles, breaks down completely. Near-infinite sensitivity to dynamic initial conditions precludes their use as a predictive tool. Because of this sensitivity, dynamics cannot directly predict the behavior of complex systems. But for certain kinds of systems this extreme sensitivity to dynamic variables is balanced by decreasing sensitivity to thermodynamic variables: temperature, pressure, chemical potential. This allows for successful prediction in terms of thermodynamic variables. That is the rationale for the autonomous science of thermodynamics. But there are limitations to even thermodynamic description. Life appears to transcend the laws of thermodynamics. The development of organisms and the evolution of species are characterized by increasing order. This cannot be explained within classical thermodynamics, for it appears to violate the second law of thermodynamics. That law identifies thermodynamic equilibrium as a state of maximum entropy (disorder). As a system approaches equilibrium its entropy increases, its internal disorder increases, its internal order dissipates. (A bathtub may start with hot water on one side and cold water on the other. After time the water will mix and it will all be lukewarm. The spatial hot-cold order will dissipate.) Increasing internal order, apparently forbidden by the second law, has long been a source of conflict between biology and physics. Biologists, especially embryologists, faced with the palpable reality of the development of finely-tuned organs, skeletons, and nervous systems in living organisms, saw a need to circumvent the second law of thermodynamics. This led to vitalism, theories that living systems are characterized by some unique quality, Driesch’s entelechy (a mysterious whole-making factor that drives biological organisms toward some predetermined end) or Bergson’s élan original de la vie. This enables them to evolve contrary to the second law of thermodynamics, to generate and sustain a natural internal order. In fact, mysterious qualities like entelechy are not necessary. Nonlinear thermodynamics can explain the development of order without the need to postulate anything new. Indeed, the ability to develop and sustain a natural order is not limited to living organisms. Even though they have not generated the attention associated with order-creating biological processes, a number of chemical and thermodynamic processes are characterized by the spontaneous generation and sustenance of macroscopic order. These processes occur in systems that are open to exchange energy with their environment, that are far from internal equilibrium, and whose evolution can be described by nonlinear differential equations with positive feedback. Simply, they occur in systems with characteristics similar to living organisms — and economies. While such systems produce entropy in accord with the second law of thermodynamics, they can export more entropy across their open boundaries than they produce. As their remaining entropy decreases, their internal order increases. At the microscopic level, these systems are characterized by the mutual interdependence of their components and, under certain conditions, by a high degree of sensitivity to internal fluctuations and to small changes in their environment. The order that evolves is typically cyclic. The simplest example is Bénard instability, in which a thin layer of liquid is heated from below. Up to a critical temperature gradient, the heat is dissipated by conduction. But at steeper temperature gradients, sufficiently far from the internal equilibrium of uniform temperature, a new phenomenon appears. The heat is dissipated more efficiently in hexagonal convection cells (boiling) in which large numbers of neighboring molecules no longer act independently but move in the same direction over macroscopic distances. Nonlinear thermodynamics explains not only Bénard instability, but also the generation of structures and cycles in a variety of chemical and biological processes. It shows that these processes are compatible with the laws of physics, indeed, that they can be explained by physics. Economies bear striking similarities to these systems. Economies, like chemical and biological structures, are open systems, often far from internal equilibrium. Their evolution can be described by nonlinear differential equations. Economies also have well-recognized positive feedback mechanisms. Not only is their underlying mathematical description similar to that of nonlinear chemical and biological systems, but their behavior is similar. Economies, like living organisms, are characterized by stable cycles and by occasional hypersensitivity to the smallest changes in their environment. Even though nonlinear thermodynamics has not yet been applied to economics, it could plausibly provide insight into economic structures and processes. In any case, its success in explaining the behavior of complex systems in other sciences dispels the Newtonian notion that it is always natural for the components of a system to be mutually independent. At least in thermodynamics, chemistry and biology there is a range of conditions under which a system’s components naturally exhibit mutual interdependence. In transcending the Newtonian paradigm of independent billiard balls, the success of nonlinear explanations undermines the starting point of Adam Smith, that economic behavior can be best understood in terms of individuals acting independently to secure their own immediate economic advantage. It reinforces elements of modern psychology and sociology, as well as common observation, that contradict the classical view. In fairness to Adam Smith, survival has always been an important motivator. In the early days of the Industrial Revolution when there was no social safety net, when many died of starvation and many more from malnutrition-related illness, economic success was a critical component of survival itself. The role of economic success was understood by everyone and naturally became central to people’s psyche. It is understandable that individuals engaged in such a battle for survival should focus on their immediate economic welfare. In the days since Adam Smith, however, modern industrialized countries have woven social safety nets — in defiance of the spirit of laissez faire. These have distanced economic performance from survival. Consequently, the role of economic success as a motivator has declined. Concerns with other matters have come to play a greater role. The desire to create value has led otherwise rational individuals to accept jobs that may not be in their best short-term economic interest (Médecins sans frontières). A sense of family has induced wives and mothers to accept less income in order to stay home and bring up their children. People have refused higherpaying jobs rather than relocating and leaving community and friends. Employees have chosen early retirement because they value leisure more than the economic benefit of continuing to work. Surveys show that a substantial majority of families would happily relinquish some income for more family time. These behaviors illustrate the unreality of the laissez faire picture of independent individuals working solely for their immediate economic gain. Of course, much of this would not have been true in the days of Adam Smith. But the world has changed since then. It is only our economic paradigm that has not changed Ironically, devotees of laissez faire fail to realize how marginal is the role played by the theory’s premises. The assumptions: • individuals naturally work only for their own immediate economic gain; and • under these conditions the invisible hand of the free market maximizes total wealth; rarely, if ever, enter into economic calculations. They could be dropped and few but ideologues would notice. Their replacement by nonlinear thermodynamics would be a boon, freeing us from the doctrinal orthodoxy of theological laissez faire. For while the nonlinear paradigm is compatible with free markets, it does not pretend that a pure free market economy will necessarily produce the best possible results. Also, because nonlinearity involves the mutual interdependence of a system’s micro-components, it is open to considerations of social responsibility that have been characteristic of democratic thought since ancient Greece. (This is not meant to attribute consciousness or responsibility to a system’s micro-components. It merely shows mutual independence is not necessarily natural, even in the world of physics.) |
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