Macro Mistakes

Like any good dogmatist, Hayek recently disparaged Keynes. Yet he without sin casts the first stone: perhaps he should try and clean his own house first. It was precisely those qualities Hayek disparaged Keynes for that made Keynes a good economist.

The fact of the matter is that economics as a discipline has advanced little since Smith's The Wealth of Nations, and the person who singlehandedly offered the most advancement was, in fact, Keynes. This is not to say he was all right--indeed, as Jane Jacobs points out, Keynesianism's  principal quantitative instrument, the Phillips curve, had begun to fail as early as 1967,* and his economic corpus left no theory adequately explaining the onset of stagflation a decade thereafter. But when Keynes, a trained mathematician, turned his eye to economics, the field had already rotted away from a century or more of disciplinary decadence, laid bare by the Great Depression's onset. In short, Keynes was a talent in one field who turned his attention to an adjacent one--the paragon of an innovator.

This is not to defend post-1970s neo-Keynesians. Despite the volley between them, the Austrians, and the latter's successor neoclassicals, none of them have offered any real solutions, and all of them have offered a mix of rehashed masters' theories, bullshit, and (in very rare moments of clarity) insights. Nor has the neoclassical's fixation on mathematical modeling helped: many of their "sophisticated" models are actually very elementary, almost childish, applications of iterated operations. And anyway, a model is like a program, and as the programmers like to say, "Garbage in, garbage out".

Perhaps nuggets of wisdom can be found in neoclassicals' pesudomathematical clutter, but so much of the discipline is fundamentally deficient that no matter how mathematically accurate the models may be, they will never return anything more than garbage. Something is rotten in the state of Denmark. Stagflation laid this bare; it was papered over; 2008 laid it bare again. Jacobs offered the single most accurate critique of the economics of her day in 1984; for a generation, it has been ignored. But sooner or later, the reckoning must come, and when it does, I hope that the offer below does some good.

Some Major Fallacies and Other Rational Lapses

Hayek's Fallacy. This one is named after Friedrich Hayek, doyen of the Austrian School. Hayek is credited for several important insights--but this fallacy is closely tied to his realization that economics is both a complex and self-organizing system. More a philosopher at heart, Hayek found himself without the wherewithal to deal with the problems at hand, and much of his work is thus a demonstration of the limits of qualitative analysis in economics. But the real issue comes--and this is why the neoclassicals break from the Austrian School--when Hayek, whose work lies at the very edge of qualitative reasoning's capabilities, becomes suspicious of those attempting to find and apply mathematical instruments to the problems at hand.

Basically, Hayek's Fallacy amounts to an economist (or a scientist of any sort) doing one of two things: either (a) throwing one's hands up in the air and saying "I give up!" when faced with the understanding that a system is too complex to easily be soluble (or at least tamable), and/or (b) embracing that complexity as a thing-in-itself instead of further teasing it apart, finding the internal feedbacks, etc.

For example, a thinker, when faced with the realization that System A is a integrated dynamic agglutinated supersystem over System B, engages in Hayek's Fallacy if he fails to further attempt to find the underlying integrations and agglutinations, or tease apart its dynamics. In rhetoric, Hayek's Fallacy can function as a call-to-arms, a statement that a problem is too big for one mind to solve; it, however, has no place in academic literature.

Smith's Mistake, or, The Anthropological Fallacy. This is the fallacious conflation of nation and state in economic literature. Recall that the definition of a nation is "a people, race, or tribe; those having the same descent, language, and history," whereas a state, in all of its forms, is simply a statement of political sovereignty.

As Jacobs put it, "[Smith] accepted without comment the mercantilist tautology that nations are the salient entities for understanding the structure of economic life"**. But this very tautology is a confusion between "nation" and "state", brought about by a misreading of the special case of Enlightenment Europe. She herself sidesteps this issue: nation in Cities and the Wealth of Nations is actually used in contexts that imply "state" (as it is in Smith's work), and is indeed often paired with "sovereignty".

This confusion has never adequately been addressed in the literature, which is a shame really, because The Wealth of Nations is actually exactly what it says on the tin ... at least until Smith starts discussing issues that apply to the state, not the nation. But the sovereign macroeconomics*** it supports is thus, by definition, a very small subclass of sovereignties--nation-states.

How many of them can you name? In fact, even some of the strongest candidates for nation-statehood, like France, constitute cultural empires^: France includes France proper, Brittany, Languedoc except for the part of Savoy that ended up in Italy, about half the Basque Country, part of the Rhineland aka Alsace, and possibly a little tiny part of Catalonia that ended up on the wrong side of the Pyrenées. About half Germany's Länder are little tiny nation-statelets. Ignoring Northern Ireland, the UK has about half a dozen nations: Scotland, Wales, Cornwall, the Isle of Man, and at least two distinct Englands. Spain includes the nations of Aragon, Andalusia, Castile, Catalonia, Galicia (which is really a northern extension of Portugal), and the other half of Basque Country. Venice, Milan, Genoa, Florence, Rome, Naples, and Palermo are all culturally very different places, anchoring very different places. And so on. So even on a continent where the political boundaries come closest to matching nation-states, they rarely ever are. What do you think this implies for truly large states?

The Energy Golden Calf. A faulty premise underlying a great deal of modern macroeconomics. It is often claimed that, due to the advancement of our economy, energy inputs have decoupled. Not just utter bullshit--the fact that energy crises can be shown to underlie both the 1970s and 2008 recessions alone should tell us as much--but dangerously ethnocentric, to boot.

Funny Money. This is the idea that modern monetary theory (much of it based on fiat currency) has solved everything. In reality, it ignores the underlying problem--limits to growth, particularly viz. debt's role in demanding growth--and allows us to, instead of solving these very real problems, paper them over with nice-sounding bullshit like the Energy Golden Calf or the idea that Bakken and Eagle Ford will make us energy-independent.

While gold bugs are mistaken in holding a metal's value sacrosanct (the natural conclusion of this post is that there is a very real natural money base, and it ain't metal), the fact that they dare question Funny Money dogma--one that especially pervades finance--deserves some credit in and of itself.

Politics Overassignment. An outgrowth of the failure to fix Smith's Mistake, the belief that the sovereign state is the arbiter of macroeconomics often leads economists of all types to assign outsize roles to these entities' politics. But the point of Smith's Mistake is that the sovereign state is not macroeconomics' arbiter! Why, then, should its politics be anything but tangential to (if not a derivative of) its economic well-being?

I have a "razor", a corollary of this mistake. In any given explanation of an economic phenomenon, the one that utilizes politics the least is usually the correct one.

Major Unaddressed Problems

The Growth Problem. Nearly everything in economics is predicated on infinite growth. As any hard scientist will tell you, however, nothing is. This core problem, ignored in most schools of thought, and aggressively denied and papered over in the few that even consider it, refers to the need to reconcile economic health and well-being with an environment that is less than tolerant of infinite growth. This issue manifests in several tight-knit issues:

• The Debt Problem. A simple explanation of debt is a good advanced now, paid back later. It, in other words, adds a temporal element, a half a dimension, to the system. The problem is that, in the financial system that has supported the industrial economy, debt is advanced only with interest: Not just an advance in the now, but pay back with a little extra later. Growth is required to pay that little extra--or--Interest demands growth. But since it is precisely this interest which grows the money supply, this implies that Money demands growth. The inescapable conclusion of this is that due to its debt-and-interest foundation, money is not resilient to a lack of growth, and hence unsustainable. But debt is required in any healthy economy, growth or not! This in turn demands that (a) the money base be removed from the debt base, and (b) the debt base managed so that it does not overshoot its limits. Current economic theory is blind on the latter--infinite growth is orthodoxy--and hence fails to understand the underlying issues that enforce the former.
• The Energy Problem. Energy is the key economic input. Without energy, an economy can't function. While the Energy Golden Calf and Funny Money chronicle the fallacious attempt at decoupling it, it is a certainty that a world with limits is going to have to deal with the this issue sooner or later.
• The Economic Health Problem. If a healthy economy is predicated on infinite growth, how can one with no growth be achieved? And second, if it is possible to have a healthy economy without meaningful growth, how would it have the most equitable distribution of goods?

The Imperial Problem. Pursuant to Smith's Mistake and its attendant Politics Overassignment, the dominant issue in the branch of macroeconomics that focuses on states--sovereign macroeconomics***. While urban, regional, and national economics are relatively well explained, Smith's Mistake has left a key problem with moving from a national level to a state one unanswered. This problem is: How do imperial economies actually behave? For sovereign macroeconomics to have any real meaning, and any real policy input, answering this question is key, as nearly every sovereign entity is an empire^, and while Jacobs offers significant explanatory inroads, her city-and-region focus would need to be scaled up to find relevant causal and feedback relationships.

The National Problem. The second largest outstanding problem in sovereign macroeconomics. Briefly stated: Stripping away statist elements, Smith's is an excellent account of the economies of nations; Jacobs complements that with one of cities and regions. It appears fairly evident that a nation without economic centralization--that is, a single major economic hub aka a large city--is a bypassed place^^--but this demands the questions: If cities and regions, and nations are both well-described, then how exactly does a city and region economy give rise to a national one? And if bypassed places are nations that never developed cities, what causes the catalyzing feedback to fail?

The Markets Problem. The role of the market is paramount in economics. Economists of various schools assign various values to this role, but they all assign a value to it. But it can clearly be seen that, while the market provides for the optimal allocation of resources in most instances, it fails to in at least two types of (related) cases: the tragedy of the commons, and Braess's Paradox. Both of these involve optimal decisions at the individual level--the level of markets--resulting in suboptimal outcomes at the communal level--the level of government. Thus it can be seen that, contra certain schools of economic thought, markets can and often do fail as optimizing mechanisms. The problem is hence: Can we identify which venues markets fail to optimize for? If so, are optimal solutions understood? Can we implement optimal solutions (e.g. with policy)? and finally, Can we build an economic theory that accounts for both when markets are successful and when they are failures? Understanding markets limits is the heart of the Markets Problem^^^.

Conclusion

Between the plethora of lapses in thought and problems blinkered dogma leaves unpondered, is it any wonder that the field of economics is becoming ever more marginalized, much of its previous sway now being intruded on by mathematicians whose models are orders of magnitude more sophisticated, or by finance majors handling Wall Street administration? The field is a flailing colossus, its own extreme disciplinary decadence eating away at it from the inside, its fortified silos and walls refracting fresh innovations and insights from the outside like so much enemy artillery.

Despite its PR'd veneer, its inside has become laughable, worse than pseudoscience--a series of entrenched, never-changing dogmatic positions sniping away at each other and disregarding any fresh insight any Other has to offer. It calling itself the "hardest" soft science is worse than a bad joke: The tripe coming out of economics builds mental blocks against insights from other soft sciences (particularly history and anthropology) and plays an outsize role in the soft sciences' marginalization as a whole. Economics is a cancer in our midst.

And the blogosphere has laid it bare! Before, the walls of academia hid it; today, however, half the economics blogs consist of Keynesians sniping at Austrians, and the other half Austrians sniping at Keynesians, both sides regarding the other with the sort of undisguised contempt you rarely ever see outside of crusaders and jihadists (really the same thing). Then they prognosticate with pearls of wisdom from their masters, and when they invariably turn out, in some way, wrong, spin and backfill them. Blogs like Naked Capitalism and Zero Hedge are good for lots of things, but--just like their discipline--are failures in their stated purpose. It is hard to have any sort of productive discussion with economists, or even economics attachés, when the discipline's core is so riddled with errors, and the practitioners so inflexibly defensive, that gentle prodding only ever yields being shouted out.

Is it any wonder I find engineering more accessible?

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*Cities and the Wealth of Nations, Ch. 1, pp. 17-20.

**ibid., Ch. 2, p. 50.

***That is, macroeconomics at the sovereign-state level.

^Here I am using a very "tight" definition, where an empire means any state that encompasses two or more whole nations. States we often think of as empires can be thought of as large empires, with ten or more constituent nations. The United States, for example, has about a dozen major nations.

By the way, Europe isn't devoid of nation-states. Off the top of my head: Austria, Slovakia, Hungary, the Czech Republic, the Netherlands and Baltic States, Finland, Scandinavia, Iceland, Portugal, and Malta are all, for all intents and purposes, nation-states.

^^ibid., Ch. 9, pp. 124-34.

^^^I'd like to further note that solving the Markets Problem might be the single most important contribution economics has to adapting to a world without limits. Growth dogma assumes there is always more out there, but as is regularly pointed out, this is fallacy. Instead a real solution of the Markets Problem would (should) entail a solution to this question: How do we tap common resources in such a way that we always leave an adequate amount for those who follow? Back at the dawn of the Industrial Revolution, such a question would have been nonsensical; today, it's a requirement.

Complexification

One of my favorite blogs for thinkers is Gail Tverberg's Our Finite World--she is perhaps among the most perceptive people on the blogosphere for recognizing that peak oil's effects are economic, not geographic, and that they have far-ranging realizations, due to the nature of economies as complex adaptive systems.

Even so, her prediction that, if things continue as they're going, we will soon hit a state of collapse worries me. Part of it is something that the Germans call vorsicht--a sort of Malthusian prediction that one should be aware of, wary of, and work to avoid--and part of it is that her claim that the nature of economies--complex adaptive systems--is the problem, is bad metaphysics. Causation is, after all, an action--it is what Thing A does that causes Thing B; the nature of Thing A has no bearing on Thing B (although that nature makes certain suites of actions more appealing and others less appealing).

Think here on Jane Jacobs' The Economy of Cities. A trite summary of the work is that a city is a complexification machine. But, as she pointed out, certain elements within the machinery of a city work to make it more efficient--that is, less complex--and when this becomes the dominant factor in a city's economy, the city stagnates, then fails. The classic examples are Detroit and Manchester--actually, most examples have faded altogether from history, and are remembered only by the name applied to the product their economies centered around.

Something similar seems to have happened to the global economy. Complexification has broken down; seeds of decline marked city after city after city by the 1950s; work creation* has stalled and wages have remained (inflation-adjusted) stagnant since the 1970s. Jacobs herself called attention to this in Cities and the Wealth of Nations, published just when these trends were becoming apparent (c. 1980). The root problem that we face then isn't that the economy is a complex adaptive system--indeed, if it weren't, it wouldn't be the ecology of human enterprise--but rather that, in our efforts to understand and manipulate it, we have introduced an excessive amount of efficiency--the tendency towards simplification, don't forget--into the works. In other words, we are stripping the gears of their lube. Again, Jacobs realized this; her last title was the ominously-named Dark Age Ahead.

One of the reasons I like Tverberg is that she thinks along similar lines as Jacobs; often she realizes or brushes against one of the latter's points (though I doubt she's read her), but I suspect her misdiagnosis of the root problem is rooted in thinking about systems as things in themselves, rather than considering their elements...But then, this issue is partly due to the general failures of macroeconomics.
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* Not to be confused with "jobs creation", which is nothing more than a political talking point. What I'm talking about is the creation of new types of work. In a complexification machine operating full-bore, new types of work are being constantly phased in, and old ones phased out (for various reasons). What happens is that the new types of work are so much in excess of the loss of old types of work that the city becomes a magnet for the ambitious; this differential increases through iterations. By definition, stalling work creation doesn't mean that new types of work aren't being created; rather, it means that the difference between new types of work being phased in, and old types phased out, is close to zero, or worse, negative. Economies where this is the case are not healthy economies. (Of course, quantification of this is difficult, which is why it hasn't been pursued in lieu of easier monetized measurements.)

Quick Note on the History of Urban Planning

Nostalgia* has been behind almost every movement in urban planning.

1. City Beautiful. Nostalgia for the imperial center, as established in Mesopotamian, Greek, and Roman precedent, and retranslated in the Baroque period.
2. Decongestion (for lack of a better word). Nostalgia for the idealized medieval free city. We can see this in Ebenezer Howard's Garden Cities of Tomorrow and especially in Lewis Mumford's The Culture of Cities.
3. New Urbanism. Nostalgia for the settlement pattern nebulously called "Small Town America". Resultant reduplication of features common to this settlement pattern, with the sole exception of abandonment of the strong grid. Outgrowth of urban theory of Andrés Duany and James Howard Kunstler; informed greatly by Christopher Alexander's A Pattern Language.
4. Landscape Urbanism. Nostalgia for Modernism, primarily as an interbellum movement. Led by Charles Waldheim and James Corner. Nostalgia for Frederick Law Olmsted and Le Corbusier.
5. Traditional Urbanism. (Why is it even on here? Because it's the most cogent response to New Urbanism there is, despite its lack of attention in intellectual circles.) Nostalgia for castle towns (for lack of a better term). Nostalgia for density. Articulated best by Charles Gardner and Nathan Lewis. Informed by Jane Jacobs. Desire to harness urban forces operative in e.g. informal settlements.

There are only three major urban theorists who I can think of who are members of no movement--two of whom are Jane Jacobs and Christopher Alexander--and it's precisely their work that has stayed most relevant through the years. This is frankly because both of their work starts by correctly identifying the problem of the city (a precious rarity in urban theory) and works from there. The third theorist is, of course, Le Corbusier, whose ideas (the Radiant City) have been, by and large, discredited.
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* By nostalgia I mean the idea of a historical urban form as the ideal urban form. There's nothing wrong with that--humanity has experimented with a variety of urbanisms throughout its history, and relatively few have failed. Charlie Gardner pointed out that he's trying not to romanticize, and a laissez-faire approach to urbanism should theoretically lead to a variety of urbanisms; one of my larger points, both in agreement and in contrast with him, is that there are a variety of good urbanisms. Of the schools I pointed out, traditional urbanism comes closest to reflecting this--possibly due to its youth.

Emergent Urbanism

A new focus is, well, emerging in my thinking: the idea of emergent urbanism*--that is, the tying of models of how cities behave (urbanism) to a descriptive framework of complex phenomena called emergence.

The reason for this comes out of my rereading of Jane Jacobs, particularly Death and Life, for school. Jacobs' argument in this text is actually exceedingly simple: urban growth and urban decay both occur in self-reinforcing feedback loops, due to cities' organized complexity (as far as I'm aware, Jacobs' use on pg. 432 is one of the first uses of this phrase in scientific thinking)--whereas the planning profession up to her time persisted in attempting to analyze the city in two-variable (e.g. Newtonian) terms. Since planners are bringing entirely the wrong sort of methodology to the table, Jacobs says, their solutions are inadvertently catalyzing negative feedback cycles**, and as such, the entire enterprise of planning in her day is doomed on the face of it to failure***.

This critique has been such a powerful critique that it has resulted in a crisis of confidence among planners, and repeated attempts to re-analyze and re-think Jane Jacobs (usually presented as using new evidence to challenge her). Unfortunately for them, it's almost always easier to think of such new phenomena in Jacobean terms (gentrification, for example, as a particular subset of unslumming), and usually emergently. Once one begins to utilize a methodology based on feedback cycles, such emergent phenomena will crop up^.

So the question turns to: what is emergence? Emergence is most abstractly defined as "the way complex systems and patterns arise out of a multiplicity of simple interactions", as it is on Wikipedia. In other words: the perfect description of a city. It is the phenomenon that is colloquially referred to when someone references the "butterfly effect". It is the major outgrowth of the complexity theory that first arose in the information sciences, and repackaged via chaos theory into the overarching framework of non-linear dynamics (a phrase with two meanings: as a pure mathematical theory, and conversely as a way of describing complex systems, via the identification and analysis of feedback cycles and their catalysts and suppressants).

Jane Jacobs very definitely understands the structure of complexity, but since the technical language was in its infancy at the time Death and Life was written, she had no access to the language of complexity. As this language matured, however, it found its way into her later work; similarly, an early inflection of it influenced Alexander's Pattern Language--and it is due to this source in complexity theory that these two books retain their living vitality and intrinsic accuracy.

So what's the problem? Why are academic urban planners so desperate to disown Jacobs? Why do they always have to "rethink" her and attempt to frame more recently understood phenomenon in a way as detrimental as possible to her? Maybe it's because they don't like her theory? A great deal of urban planning--although not the type of planning literature I tend to read or think about--draws from sociology, and one of the things I've noticed about sociologists is the deep distrust they have of any ideas that didn't originate in their field^^--a distrust which seems to extend to adopting a confrontational stance when a good idea comes out (which should be relevant to them) they didn't think of. But ideas like complexity theory are good ideas which are now being studied and debated across a variety of fields--physics, meteorology, biology, information science, information theory, etc.--and are even being applied in very definitely sociological contexts, such as attempting to explain the architectures of Web 2.0. Yet there is undeniable resistance to applying them to the problem of the city: why? There is especially the dogmatic cant I hear in my school's sociological department: "Jacobs just has a collection of anecdotes: there is no theory". Bullshit. Anecdotes are the foundation of any good theory, and counter-anecdotal theory (like phlogiston) tends to be thrown out the window real fast. Jacobs has the evidence gathered from the street, and has the framework for explaining it. She has a theory in Death and Life--albeit one as basic as the field whose terms the theory would be best explained in at the time she wrote it; it is telling that the theory changed as she expanded on it and applied it to additional fields (although its structure did not) through later works like The Economy of Cities and Cities and the Wealth of Nations^^^, and her rather pessimistically-named last work The Fall of the West.

But the evidence of reality weights on her side. In my last post, I talked about the fallacy of naming all informal settlements "slums", and how there are in fact aspects of improving informal settlements (I talked about built form evidence; there is also (were the academics not so blind!) sociological evidence, economic*^ evidence, historical evidence**^, and so on) very different from those of true slums. This is a perfect example of emergent urbanism creating a community, and is part and parcel of emergent phenomenon referring to the redevelopment of already-settled areas, such as what Jacobs and most developed-world urban theorists concentrate on*^^. Today's urban phenomena, like yesterday's, like tomorrow's, are best explained in the framework of complexity theory and emergence Jacobs first showed us the way towards--someday I hope we as a whole can internalize this to the point where we can use her framework to supersede her, like biologists have done to Darwin; unfortunately, as long as the academic community stands in her way instead of embracing her, and the best ideas in urban thinking come from fields very definitely far afield of urban studies, this will not happen.
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* Yes, there was a blog dedicated to this sort of thing. I wasn't the first and I certainly won't be the last to discover and understand this reading. But do an academic search for "Jane Jacobs" and "emergence"  and you'll be lucky if you find one thing. A minorly famous (he'll certainly disagree with me on this) philosopher, Prof. Lewis Gordon, has a term for this sort of thing: disciplinary decadence, and it's frankly rife all over the social sciences.
** As already noted, the language of complexity theory was (at best) barely in a formative stage when Death and Life was written (much less published!); as such, Jacobs had no access to the terminology I'm using, and tended to use the terms virtuous circle and vicious circle for what we would today call positive and negative feedback loops (or cycles); virtuous and vicious being freighted, as they are, with unnecessary moral weight.
***I'd go a step further and say that the urban planning of the era, freighted by the prescriptive mentality of its intellectual heritage (Ebenezer Howard, Daniel Burnham, etc.)--grown out of the desire to reform cities more than describe them, and thusly (in e.g. Lewis Mumford's Culture of Cities--witness the extremes of what he calls "slums", and the way he attempts to rationalize what is on the face of it a reductio ad absurdum) morally weighting their descriptive elements of cities to an exorbitant degree. (Another way to look at it: urban planning is a nostalgic discipline; Howard, Mumford, and even Andrés Duany, the best urban thinker going, all look to the past for inspiration.)
^ This has particular relevance when parsing Glazer's Triumph of Cities. Glazer mentions therein he thinks Jacobs is in error, yet at the same time that  text's strongest argument, and major intellectual contribution, is the presentation of a solid case for the role of education in the feedback structure of cities! Disciplinary decadence at its finest, folks.
^^ Which is to say, most all of them.
^^^ ...They're on my to-read list (much like Proust and Pynchon).
*^ My chief grievance against economics is their devotion to the myth of symmetry. Economics models have to balance for no better reason than math has to balance, and thus a mathematical artifact has been elevated to a "basic premise" of economics models. The reality is, of course, much messier.*
* That said, I agree with the Keynesian concepts of the government as the employer of last resort and the need for government to generate stimulus and create jobs when the private sector is unwilling or unable to; particularly since the (non-Keynesian) way we're going about our recession today is clearly not working.
**^ In the form of the layout of premodern cities viz. that of informal communities. See, for example, the street network of Matera, Italy, Córdoba, Spain, Porto, Portugal, Frankfurt, Germany, or Manchester, England v. Rocinha, Rio de Janeiro, Brazil, Villa 31, Buenos Aires, Argentina, or Ankara, Turkey. Stable informal communities are little different than traditional urban cores in the developed world.
*^^ Mike Davis is the exception to this rule. Unfortunately, his Mumfordian style does just as much harm as good (much like Mumford himself).