Financial Sense Newshour - FS insider: 03.30.2016
Milan Zelený a Cris Sheridan
03.30.2016 | financialsense.com | Author: Financial Sense
Is the economy more like a machine or an organism? Are our political candidates well aware of the structural forces that are transforming our economy over time? Joining us on the program today is Milan Zelený. He is the professor of management systems at Fordham University.
Milan, I want to ask you about this device that was created, I believe it was in the 40’s and 50’s, it was a machine called the MONIAC. It’s kind of a combination of money and ENIAC, which was precursor to our modern computers. But the MONIAC stood for monetary national income analog computer. It was a way in which the economy was viewed as a mechanical device consisting of money flowing through bunch of tubes and tanks and they could all be adjusted through this dashboard of dials. And, many of these MONIAC machines were spread across the world at various economics and business departments. It was used as an illustrative method to show that the economy worked like this machine of money, flowing like water through different aspects, and you could control where it went. I know this relates closely to your work in terms of the machine/organism dichotomy and how we should view the economy. So, with that said, how would you place the MONIAC, in terms of how main stream economists view the economy today?
Machines are man-made. In other words, they are not natural constructs. They are not being self-produced, or autopoietic. All natural systems, living systems, societies, economies, they are not man-made, like machines. So, the question is: why do we use machine metaphor? We use it even now, we do not stress it, or economists don’t stress it, but the behavior shows that we still view the economy as an input >output machine. You provide input, you get output. You provide the same input, you get the same output. That’s the idea.
In Italy, there was a philosopher Giambattista Vico, and he said that man understands only his own creations, not creations of nature or God. The difference between what man has created, like machines, and what was created by nature or God, is profound. Machines are externally constructed by external agent. Living systems, societies, with the exception of concentration camps, are internally self-organized.
There was a key debate of F. Von Hayek, who is the proponent of organism, or organic view, versus J. M. Keynes, who is the proponent of mechanism, mechanistic view. Keynes even uses automobile metaphor, and he talks about magnetos and starting up the machinery and so on. So, machine requires human intervention and an economy, it turns out to be, the intervention of humans to the state, and that has grown and grown and unfortunately we are today still very deeply surrounded by the thinking of economy as a machine. Organism adores intervention. It creates its own environment. This was the free market economy thinking of Adam Smith. Adam Smith would never consider some fundamental intervention of the state in the free market process.
So, to summarize, organisms self-produce, learn, adapt, and evolve. Input - output model is an insufficient model, for economy, for politics, and for society. This is some of the manifestations of that today, that things do not work as expected and even what we expect is not probably the proper expectation.
As you say the MONIAC that display the thinking, the mechanical thinking of the time, but that way of viewing the economy is still very deeply entrenched into the main stream economic establishment, I would say. Of course, even central bankers today, you know, they think in terms of models that if they can twig this input, the amount of liquidity flowing into the economy, then this should have certain linear effect on inflation, so it’s sort of input > output thinking, that the mechanical model, the likes which as you have noted, largely came out of the work of Keynes, in terms of intervening the economy, which was in an opposition to more of Hayek’s’, more organic view of the economy, like you said that it achieves its own type of order from within. So, those are the sort of two opposing viewpoints that we see at work today between the free market and the state intervening into the economy, but it seems to me that there is a growing recognition that the economy is far too complex to control. That’s at the highest levels.
We have recently spoken to Bill White at the OECD, that’s the Organization for Economic Co-operation and Development in Europe. He was also the chief economist at the bank for international settlements before that, and he spoke to us at length about how the global economy is a complex system. I know that a lot of your work actually is related to this area as well. You have been talking and writing about this for years. But I thought it was very interesting, because here is someone with a high policy level, talking about complexity theory, talking about Hayek’s work and how there is a limit to central banking efforts, there is a limit to the government in their ability to stimulate the economy and the limits placed upon them, because of the complexity of the economy lead to all sorts of different unintended consequences and adaptations by the market. So I wanted to ask you: do you think that this way of thinking that you have espoused now for a long time, that Hayek espoused even earlier; do you think that this fundamental truth is finally starting to seat into the main stream economic establishment?
Well, I do not know whether one person, quoted Bill White, whether that means that something is changing. They certainly have problems in establishing some sort of tangible responses to their efforts. It is quite natural that you start using the notion of complexity, but complexity doesn’t really address the issue, because you can have very complex machines and you can have very complex organisms. Complexity itself is a sort of catch old term when you do not master or understand the system. It is not complexity, nor do I acknowledge that the systems appear to be very complex if you handle them improperly.
But the difference between mechanism and organism, that is the difference between learning, adaptation and evolution which makes organisms unpredictable and sometimes surprising, while machines by its very nature must be very predictable. You know, if you put some input into a machine, and then you repeat the same input and get something irrelative, that would not be a good machine. So, machines are predictable. That does not mean they are necessarily simple, they can be very complex. But they are essentially reflecting human ability to construct machines. So, as far as policy makers under these conditions, policy makers make policy. Nothing else! The effectiveness of the policy doesn’t seem to be their goal. They just make policy, and if it does not work, they persist, and if that does not work, they adjust a little, and if that does not work they persist again, repeat over and over the same input like 0 interest rate, or negative interest rates. Interest rates are the price of money. If they are zero, negative or we might say if they do not exist, how can you run economy without having the price of money? Interest rate fluctuation is a tremendous signaling system of an economic behavior. If you remove that, you really don’t have anything to judge what is happening, the interest rates go up, and you start saving, or they go down and you start investing, and if they are zero or negative you do neither. You adapt to it and you don’t do anything. So, I would say that these are the consequences, you know, like this example of moving the price of money from consideration.
Again, I summarize the fundamental truth, that it is not complexity itself, because that can be very difficult to define, machines and organisms can be complex. But the fundamental problem is the organic’ adaptability and unpredictability and machines’ fundamental predictability. You can witness policy makers; they have stopped explaining or even predicting what might happen in the future. They have so called data dependent policy, or monitoring the data; economic policy cannot be about the data. It cannot be about explaining the past; it cannot be about monitoring the data. Economic policy must fundamentally be about predicting the future. Not just explaining the past.
So, machines are fully predictable, organisms are not. It is a matter of paradigm shift from viewing systems of economy as organisms and not as machines where we either see them simple or complex. Simplicity or complexity is always there, but if you have even the simplest organism, it will behave differently than even the most complex machines. I would also add that repeating the same input in the hope of achieving different output; this is a statement from Einstein: he is saying that it is human folly. So, it is a very fundamental difference and I am afraid that the notion of complexity in itself does not address the machine/organism dilemma.
Yeah, I think that’s a really important point that you make about the organic adaptability on an unpredictability of such systems, and how the mechanical view point we do not see in the global economy the mechanical same output to the inputs that we put in. There is that element of unpredictability, of adaptability. I guess the main lesson from complexity theory is that such a system, complex systems, they exhibit self-organizing behavior, and that comes from bottom up interactions, not top down.
Bottom up self-organization is the sign of an organism.
Exactly! Yeah, and so I do think that that’s where those two, sort of concepts, tie into one another. But I want to ask you about some of your larger work. This is something we touched on in our last interview; I believe it was last year, where you explained this crucial difference between an economy and crisis, which is how a lot of central policy makers view the economy, as being in the state of crisis; particularly, after 2008-2009, and the responses to that, and that one, where we see an economy in the process of transformation. There are different implications depending on to which are which. So, would you mind going into that a little bit and explain our audience that crucial difference?
I would start with an example, because we talk about it a lot now. Industrial revolution is the shift from agricultural sector to an industrial sector. That was not a crisis. That was a transformation. In other words, the economy dynamics is not composed of normal and crisis stages. It also has transformation from one level of economic performance, like mainly agricultural, to another level, to another sector, mainly industrial. So, do you not call, and nobody would call, an industrial revolution a crisis. Of course, there are many crises taking place during the industrial revolution. Crisis is the man made cyclical and accompanying phenomena to the transformation. The same is true for all other transformations. So, transformations are always unidirectional. They are not cyclical. We will never return back to the agricultural society. United States can never return back to the industrial society of coal, and steel, and the early of the century. A key is that there is evolution taking place. Evolution is always unidirectional. So, the reasons why these things are taking place, like the transformation, is that the productivity growth, which is a key factor, productivity growth rate in automation are increasingly requiring smaller and smaller number of people to be employed in a given sector. Today, in the United States in the agricultural sector, we have one half of a percent of the overall work force. Two hundred years ago, it was 70 - 80 percent. It’s a tremendous drop. And it’s an evolutionary drop, unidirectional, we cannot reverse it, because you would have to stop productivity growth rate, and that would have terrible, terrible consequences in terms of standards of living and social peace and understanding.
So, the evolution in economics is a matter of competition and adaptation and improvement, not of some deal making or negotiation. As I said, we cannot return. We have unidirectional changes. The United States are the only transformation. There was transformation from the industry and after the war from industry to services. Now, the employment in the services is declining. So, the evolutionary economics can predict because it works with the causes of change, not just these correlations. Now the problem we are facing is that main stream economics cannot separate what phenomena belong to crisis and what phenomena belong to transformation. This I would like to stress a lot. In other words, if you have transformation going; let’s say industrial revolution is taking place, then there are different crises taking place too, man-made cyclical crises. We do not have to muse at how to separate them. If the employment is going up or down, we do not know whether it belongs to the transformation or whether it belongs to crisis and it will be simply blown away quickly. This is a great failure at the policy level, not being able to separate these two phenomena. If you are applying measures to transformation, as if it is just a cyclical crisis, then you do not get what you had, and you get mess and chaos and never before encountered phenomena, and so forth. I think that this unjustified belief to intervene with these policies without knowing the causes is not going to improve the understanding of our economy. There can be no treatment without diagnosis. Economy is evolving and social system in economics must reflect that. So, it is very fundamental and transformation is not just a verb which one makes up. Transformation is really the fundamental movement of the economy: from agriculture to industry, from industry to service and from services to state sector and so on.
You brought up a lot of really good points and I would like to touch upon a few of them. Let me start with perhaps the most relevant to what you just said and that would be, basically if you are applying measures to fix cyclical crisis, which is actually a transformation, then you are going to get bad results. I think we would definitively agree that we are seeing that today. What sort of responses do you think policymakers should be doing, if there are any that they can make, to address the transformation that we see underway currently?
First, they would have to make a diagnosis. In other words, they should say, are we going through a cyclical crisis or are we going through a transformation? You see, cyclical crisis, they don’t last usually next to 10 years. So already we are having problems that what has happened in 2008 is not cyclical crisis. Now you might point out back to great depression, right? The great depression we call crisis, and it was admittedly very long one. But I would submit that great depression itself was a transformation. It was a transformation from an industry, into service economy and it was not able to make that transition without some accompanying crisis and so we instead of understanding it as a transformation we treated it as a crisis. And so, it lasted in First or Second World War and the Second World War started industrializing for the war purposes. Then, when it ended, finally, the transformation to the services could take place. We had again mistaken the idea that the crisis was stopped because of the renewal of the worlds’ industrialization. That is not so, if there would be no war we would have transformed from industrial economy to service economy before the war time. So, these are the errors, or these are the problems that, you know, when you call everything crisis, then you neglect the most fundamental changes in the economy. The one thing I would admit: we do not have great ways how to take these apart. So, we have to go to the definitions, and the first thing is: is this a transformation, or is it a crisis.
In everything, if you study evolutionary economics, you see that these transformations are taking place and they are actually accelerating. We do not have much theory or literature on them because in the old days, transformation could take 200, 300 years, so there was nobody really to write it up, because nobody experienced it. Now, since the Second World War, we already have three transformations. From industry to services, from services to state sector and now the next one. Again, I would say, first you must have diagnosis. Then, you know that if the diagnosis is transformation, you cannot put all your efforts towards reversing it, because it is irreversible. It is natural phenomena. It’s based on growth of productivity. So, you feel you are fighting the crisis, but you are actually fighting a lost battle with transformation. Transformation is something which is above our policy makers. Transformation is something we have to adapt to. We have to diagnose it, we have to adapt to it, and if we understand it, and adapt to it, then it opens an infinite set of opportunities for business and entrepreneurship and anything which was unheard before. Look, going from agriculture to industry, what it opened for mankind. And after the war, going from industry to services, what it opened for mankind. We are accelerating the transformations, and we are taking their enormous opportunities. At this point, however, in United States, we seem to be fighting the transformation, even though we do not know about it, we think we are fighting the crisis.
Well I guess in that case in terms of measures that could be taken, rather than fighting against this transformation, I mean, would you say that it would be just a matter of policymakers making it easier for small businesses to operate, easier for entrepreneurs, what would be some of the things that you would advocate, that could be done, or is it just a matter of hands off?
Chris, first thing is that you must understand that you should not fight it because it’s a unidirectional, irreversible, conformation of the economy. Look, what happened in China. China was building the industrial bait, and suddenly, after 20 years, there is a huge decline and if they would view that as a crisis, they would take, and sometimes they do take, wrong measures. But finally, there are some voices in China, which are saying: well, we are not really losing the industrial bait, or an industrial system, we are transforming from the industrial to service economy. Once you understand that, then the policies changed. Now you are not fighting, but you are supporting. So, you are totally right, you should support, you should educate, you should create new technologies and allow them to function.
Just look, what we are doing to the young technological companies, how we are putting barriers, how we are putting political pressures on them. I am in New Jersey and we still do not have self-service gas stations in New Jersey, and so on. Yeah, it’s the opposite, we do not try to save companies which are on their way out, you open the space for companies which are on their way in, and you accelerate, and that way master the transformation. Crises, I agree, we have to fight against, make them less damaging, and make them short. Transformation we have to embrace, we have to adapt to, and we have to take full advantage of. If we don’t, and other nations do, then we have lost tremendous battle. If you lose battle for crisis, that’s not a big deal. But if you lose battle for transformation; just look at countries which lost battle for transformation to industry, Somalia, Egypt, what is happening there? You should never lose a battle for transformation.
One question I want to ask you and this came up at the recent interview we did with Dr. Cliff Drake. He had basically said that he thinks regarding economic productivity in this whole idea that we are seeing in the productivity problem, in the US, and other parts of the world, you know, we now see massive amounts of technology and the automation being applied, and yet, it’s not showing up in the productivity statistics, is how it was said. His way of explaining it is that we are underestimating the amount of productivity that is being generated in our modern digital society, because of our inability to account for lot of the enhancements that we have seen. I guess, the way I want to relate this back to what you said, is, and we have seen series of economic transformations in the past, from the agricultural era to the industrial revolution, to now the services based economy that we see. This is sort of predictable evolution of economies from a developing state to our modern developed economies like we have seen in the US and elsewhere.
With that being said, if we were using official statistics or methods for trying to calculate GDP during the time in which most people were employed on farms and through agriculture and the industrial revolution is taking place, as you would argue that we are in the middle of transformation right now, or some sort of revolution. Those official statistics are not going to be able to account for lot of those productivity enhancements that are taking place, because if they are measuring simply the amount of bushels of wheat or number of cows for example, then they are going to be missing whole new part of the economy. So, that’s basically what Dr. Cliff Drake and many others are arguing: that this massive transformation we are seeing and McKenzie had just pointed out recently that digital information flows are now more valuable in terms of global GDP, they have more economical value than physical flow of goods. So, that has now surpassed the physical transportation of goods around the globe, which is pretty interesting, I mean it’s a good sign that we have seen revolution take place. In that case, do you think that that’s true, that perhaps official government figures, you know, in terms of GDP statistics, have not accounted for this revolution that’s taking place and the low GDP we see is sort of hard getting back to the way when economy was working, you know, when we were measuring just an industrial output?
Chris, I am fully convinced that this is true. If you do not acknowledge that there is transformation taking place then clearly you will not adjust the way you measure things. So, I remember when I was a younger professor, there was a talk about paperless economy, because we had all these computers and everything. For 10 years, people say, where is the paperless economy, it was a hoax, where is the paperless economy? It took such a long time before we adjusted to internet, and to the digitalization, that suddenly we have paperless economy, but at the beginning we didn’t see it at all. So, this is very similar, our statistical measures, measure the states we are in, and not the states we are entering. There are a lot of biases and you do not get the right productivity at the time. They all comment about physical vs. digitized knowledge and information is all they can do.
Our children will say one day that we live in medieval ages because we are sending the products, various products through airplanes and machines, in ships all around the globe, when the algorithms, the recipes, and the programs to run the production on automated machines, can go around the globe in the speed of light. We just need local production systems. We do not have to produce in one place of the globe and ship it to another; we just make the production facilities as close to the customer as possible and then we send around the digitized algorithms and prescriptions. So, this is all part of the transformation I am talking about. What you have described I fully agree with. I am just going further with it, because I have spent probably more time on that. I have been promoting the local production, but global sharing and trade in digitized information and knowledge for 20 years now, because I have seen it through my studies that this kind of thing is coming.
I have a funny story to share along these lines. I am very lucky because my wife hates to shop. That may not be true for most husbands, but I am very fortunate. So, my wife, she hates shopping and it’s just because the difficulty of finding things that fit just right. I told her, I have said: imagine if you could just go onto our iPod, and instead of going to a store, you just find series of dresses or whatever it is you are looking for, or shoes and all the sellers, manufacturers, or whatever, designers, are selling their products there, and then by click of button, you just select, which dress or which shoes you want and then you go to some machine in your house and it scans your body, or perhaps you already have your scans available, and I do not need to do it that often, and then its automatically 3D printed. Your dress, your shoes, to the exact specifications, you know, of your dimensions. You know, and she said, that would be amazing. I am like, the technology is there. It’s already in place. It’s just a matter of catching up.
Well, there are people that are making shoes in Australia, at your specifications, and they print it. This is the production through printing. So, 3-dimensional printing is really added to production and is very small and its local and it doesn’t have so much consumption of material and energy, and all that stuff. So, we are just not exploiting these things fully, because you see it in politics, we are still fighting for some coal mines and for some metal shops and stuff like that. We are losing the sight, and as I see the political scene, we will not win this fight just by being tough on negotiations and dealing because people ultimately would say we do not have to deal with you, because we do it differently. There are countries which are fully using and taking advantage of the transformation. Cris Sheridan:
Well, that’s very interesting because I think you bring up an important point with regards to current presidential campaigns. As you noted, there are some candidates like Trump, who are putting themselves out there as being a negotiator or a dealer, and some worry about whether or not, if Trump became president, if that would spark a trade war. But, I guess, stepping back to the big picture, what do you think about the current presidential debates and some of the issues that are being discussed? And this obviously is not just for the republican side, but for the democratic side as well, Bernie Sanders and Hilary Clinton, do you think that they have any understanding of some of the issues that we discussed in terms of the economy in a transformation and what that means?Milan Zelený:
They cannot have that understanding, because, as you noticed, even you’re highly intelligent readers say, this is outside the box, which means it’s something interesting but it’s strange to that. So why would politicians be any better at this? Even the economists do not acknowledge this. These debates, they are remarkable, because they do not address the causes of economic transformation. When I was younger professor, we use to say it is the economist who is stupid. Now they got in depth of language and the human parts and deal making, treaties, saving world industries, religion, ideology, love and hate, all except economics. Economy has disappeared. It’s only complaints. But actually, the measures they use for running employment are pretty good. The only candidate I noticed who sort of got some understanding of it was Rubio. He stated we are not just facing an economic downturn; we are facing an economic transformation. That’s a quote, so finally that’s some sort of diagnosis. Marco Rubio got the pride into this matter with Trump, and whether he understood it or not, or whether somebody else understood it, we should never know, because they are paying an attention to these other things. So, in transformation, I would say traditional view and this common notion that we can improve economy by deal making, experienced ideology, money, and shouting becomes irrelevant. It does not really matter anymore. Because experience does not help you. Transformation by definition is something which you have not experienced before.
When agricultural societies faced industrialization, what kind of experience would help them to understand the industry? They had no experience. So, experience or ideology, it does not help you whether you are socialist or liberal or conservative. It does not help you. You have to understand the transformation. With ideological divisions, neither of them shows the understanding of transformation. So, we have to know what is going on and why. That is the premise. Then we have to adapt to it, and then exploit the new opportunities, which means, you have mentioned that already, massive entrepreneurship, not an entrepreneurship in a garage. Massive!! That means entrepreneurial education. Entrepreneurial universities, where we learn entrepreneurship, not by reading books on entrepreneurship but by establishing companies, are the answer; also innovation and I would add a community restoration and automation at local level. Because, ultimately, we shall be producing at local levels. I call it re-localization and de-globalization. Take Shared economy: jobs are not abroad, they are at local levels. From all politics is local, we should move to all economics is local. But, you cannot do these things, if you think we are undergoing cyclical financial crisis. You cannot even start doing any of these things.
Professor Zelený, I want to ask you one last question. If we were to accept this premise of evolutionary economics and in fact that we are in this massive transformation, how would our understanding of the current political and social phenomena be effected?Milan Zelený:
Well, there the key is that, you know, I have stressed that, weave to know what is happening and why. If people do not know what is happening and why, there is informational and knowledge vacuum, virtual economy becomes disassociated from the real economy. Political and media descriptions do not correspond to reality of local life. So, they feel uninformed, helpless and angry. Because on one hand they are hearing that everything is O.K. and actually, that it will be better, and at local level of local life they feel they are getting worse and worse, they do not have jobs and they don’t understand what is happening. So, they blame what they understand. They blame the government, they blame parties and whatever. In this informational vacuum, they become easy prey to opportunists, to host hunger experts, easy promises, hate money, and crowd dependents. Being crowd depended is not really a way towards that life. You have to be self-dependent. You have to have your own understanding.
In the USA, in western European Union, and in Japan: these are three main regions. There is now the end of the transformation series. Remember, we talked about sectors moving from agriculture, to industry, to services and then I mentioned to state sector. All these sectors in these three regions, the US, the EU, and in the Japan have depleted employment growth potential. So, there was no fifth sector to get into. All other parts of the world are undergoing transformations but these three regions, United States included. We are undergoing what I call metamorphosis, which means qualitative economic change and I already touched on it, from globalization to re-localization. Metamorphosis, you can use the metaphor, of let’s say a caterpillar, which is feeding and building its size and adding one part of its body to another, one section to another, like the sectors, and then at the end it cannot survive in this environment, so then it makes a cocoon and it turns into a butterfly. This is what is expecting these three regions, US, EU, and Japan. They undergo metamorphosis; they will change from the caterpillar to butterfly. They will undergo qualitative change from globalization to re-localization. This means, from central government to regional and local economies. From dependency to self-reliance through autonomy in the sense of belonging. From economic growth to economic flourishing. Technology for local economy and local productivity with the use of digitalization and automation. All of that already exists; we are just not using it. So, we are up to a much larger and much more promising changes than changing couple of trade agreements and thinking that we will make the core of the economy. Now, if it would be that simple, we could drive our economy through deal making. Everybody would be doing it. We have to understand that transformation and metamorphosis are the part of our future. Cris Sheridan:
Well, Professor Zelený, I want to note, that a lot of what we touched upon, you have elaborated upon in depth in various articles and research papers that you have been writing over the years, one of which is Machine/Organism Dichotomy of Free-Market Economics: Crisis or Transformation?, Crisis or Transformation: On the cursor and ricers of human systems, and you are also listed in Wikipedia under the transformation in economics section as well. I will list some of these links where this interview is located, for audience, if they would like to read them, and I would highly encourage them to do so. But with that said, what would be the best way that any of our listeners could follow some of your work, either on your site, or do you have a twitter handle, please feel free to share those.
Yeah, my site would be the best response, www.milanzeleny.com.
Lots of interesting thoughts from Milan, I do encourage you to read some of his papers, we will link out to those where this interview is located as well as the other interview that I referenced, which was with Bill White at the OECD, so you might want to listen to that one if you have not as well.
In our next broadcast we are going to be speaking to Odysseus Papadimitriou. He is the CEO of Card Hub, which is the largest credit card comparison company on the web and they did a fascinating 2015 study, so looking at the trends in credit card debt in consumer behavior all the way going back to the last financial crisis up to 2015 and what he has to say is very interesting, so we are going to get into a lot of fascinating points about how consumers are taking on more debt and what that means for the future of the US economy.
I am Cris Sheridan; you are listening to FS insider at financialsense.com