An Anthropic Principle for Economics

Another guest post for A Thousand Nations from Max Borders. You can see his previous posts here.–Editor

Full disclosure: I’m an Darwinian. I thinks the twin theories of evolution and self-organization suffice to explain life–specifically the transition from the primordial soup to people. But proponents of intelligent design make an interesting point when they invoke the Anthropic Principle.

The idea goes something like this: human beings and the complex ecosystems in which we find ourselves are enormously complex and diverse. The laws of nature seem to have been ‘set up’ in such a way that such complexity and diversity was possible at all. Even minor tweaks in cosmological constants and basic physical laws would have meant human beings – much less other complex forms of life – would not have arisen. The universe seems to be “tuned” to life, which proponents of intelligent design say require a tuner. Perhaps. We won’t get into that debate today. Instead, I think we can learn something important from this way of thinking and apply it to economics.

Today’s economics is a world of sophisticated maths, models and macro-economic wizardry. Sadly, these wizards are advising our leaders. “Sadly” because most economists are missing the important bits: the rules. The analogy is roughly: a given universe’s laws (rules) are either more or less hospitable to diversity and complexity (life); likewise, a given economy’s laws (rules) are more or less hospitable to economic diversity and complexity (entrepreneurship and growth). In economics, we don’t have to worry too much about the question of intelligent design — unless, of course, we’re talking about those wizards with their models who actually believe they can not only predict, but plan, a complex system. (Macro-economic modelers usually aren’t designing the rules, but rather scrambling them.) In any case, when it comes to the institutions of economics – those rules that give rise to the phenomena – we know they’re going to be an artifact of intelligence for better or worse. Even as some institutions and rules themselves evolve a la the common law, these rules co-evolve with the designs and decisions of intelligent agents in their environments, somewhere in time.

So what does all this mean for economics? I think it means most of the economics discipline is, like Waylon Jennings, “lookin’ for love in all the wrong places.” New institutional economics and Austrian Economics, though minority sub-disciplines, are moving things in the right direction. Even simple heuristics like Economic Freedom Indices are informed by data and track with some of our intuitions about institutions in something like “reflective equilibrium“. Otherwise, we might think about rules in terms of increasing the likelihood of throwing a stone into a population and hitting someone for whom transaction costs are low. In other words, what rules create dynamic, entrepreneurial environments for the maximum latitude in coordination and cooperation?

in his Nobel Prize lecture, Douglass North says:

“Institutions form the incentive structure of a society and the political and economic institutions, in consequence, are the underlying determinant of economic performance.”

And he’s right.

For some reason, I’m reminded of Adrian Bejan’s constructal law:

“For a finite-size system to persist in time (to live), it must evolve in such a way that it provides easier access to the imposed currents that flow through it.”

Bejan thinks that we see the constructal law operating everywhere in evolved ecosystems and that we can even mimic those properties in our mechanical designs. Still, I suspect Bejan would agree that large-scale economic ecosystems can’t be designed at all and that, left alone by would-be interventionists, they will evolve constructal propererties. Would a constructal law of economics be committed to localization and autonomy as a means of “providing easier access to the imposed currents that flow” through the economy? Mises, Hayek and the gang gave us that idea of flow a long time ago. I’ve offered some rules myself, elsewhere.

But back to something like an Anthropic Principle for Economics.

Let’s just put it out there: There is an optimum range for economic dynamism, diversity and complexity determined by rules. If our economic rule-sets are too complicated and cumbersome, we won’t get flourishing. There will be distortions and perversions at best. If our economic rulesets are underdeveloped or ambiguous, economic actors will not be able to regularize their behavior so as to lower transaction costs and focus on innovation. As with the laws of nature, there is a sweet spot in the set of all possible rulesets, which gives rise to maximum complexity and diversity. If we can agree that a complex, diverse economy is likely to result in concomitant opportunity and prosperity, then maybe we should turn our attention to those rules in the sweet spot that yield complexity and diversity.

Of course, most of the big struggles are between those who want complex and diverse economies and those who do not. One person’s economic rainforest is another’s “jungle.” Still, with something like an Anthropic Principle of Economics, my less ambitious objective would be to give greater attention to the rules of the game than to the epiphenomena at any give moment. In so doing, we’ll at least remove the distractions caused by all this modeling and aggregates thinking, and get back to underlying causes of prosperity.