Wednesday, September 28, 2016

Why markets are like gardens, not machines

In this article Nick Hanauer and Eric Liu discuss this metaphorical shift in how we conceive of markets. The implications in this shift are significant and certainly necessary, since the current system are not working for  most people or the planet. An excerpt:

Machine view: Markets are efficient, thus sacrosanct
Garden view: Markets are effective, if well tended

In the traditional view, markets are sacred because they are said to be the most efficient allocators of resources and wealth. Complexity science shows that markets are often quite inefficient—and that there is nothing sacred about today’s man-made economic arrangements. But complexity science also shows that markets are the most effective force for producing innovation, the source of all wealth creation. The question, then, is how to deploy that force to benefit the greatest number.

Machine view: Regulation destroys markets
Garden view: Markets need fertilizing and weeding, or else are destroyed

Traditionalists say any government interference distorts the “natural” and efficient allocation that markets want to achieve. Complexity economists show that markets, like gardens, get overrun by weeds or exhaust their nutrients (education, infrastructure, etc.) if left alone, and then die—and that the only way for markets to deliver broadbased wealth is for government to tend them: enforcing rules that curb anti-social behavior, promote pro-social behavior, and thus keep markets functioning.

Machine view: Income inequality reflects unequal effort and ability
Garden view: Inequality is what markets naturally create and compound, and requires correction

Traditionalists assert, in essence, that income inequality is the result of the rich being smarter and harder working than the poor. This justifies government neglect in theface of inequality. The markets-as-garden view would not deny that smarts and diligence are unequally distributed. But in their view, income inequality has much more to do with the inexorable nature of complex adaptive systems like markets to result in self-reinforcing concentrations of advantage and disadvantage. This necessitates government action to counter the unfairness and counterproductive effects of concentration.

Machine view: Wealth is created through competition and by the pursuit of narrow self-interest
Garden view: Wealth is created through trust and cooperation

Where traditionalists put individual selfishness on a moral pedestal, complexity economists show that norms of unchecked selfishness kill the one thing that determines whether a society can generate (let alone fairly allocate) wealth and opportunity: trust. Trust creates cooperation, and cooperation is what creates win-win outcomes. Hightrust networks thrive; low-trust ones fail. And when greed and self-interest are glorified above all, high-trust networks become low-trust. See: Afghanistan.

Machine view: Wealth = individuals accumulating money
Garden view: Wealth = society creating solutions

One of the simple and damning limitations of traditional economics is that it can’t really explain how wealth gets generated. It simply assumes wealth. And it treats money as the sole measure of wealth. Complexity economics, by contrast, says that wealth is solutions: knowledge applied to solve problems. Wealth is created when new ideas— inventing a wheel, say, or curing cancer—emerge from a competitive, evolutionary environment. In the same way, the greatness of a garden comes not just in the sheer volume but also in the diversity and usefulness of the plants it contains.

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