Economics Of Chaos And Complexity: Economy As Evolving Ecosystem, Not A Machine

In a recent talk given by Sanjeev Sanyal, a Principal Economic Adviser to the Ministry of Finance, at the Thinker's Sandbox in New Delhi, he stressed the importance of feedback and adjustments in the economy, which is an ongoing process, reimagining the economy as an evolving eco-system, adapting and adjusting, rather than a Victorian-era machine with pulls and levers.
 
"You see most people don't realize, the extent to which the conceptual frameworks that people use, determine the conclusion that they come to. Far more than, for example, empirical observation, or logical reasoning. This is even true for natural sciences, but in social sciences, particularly economics, the background metanarrative, the conceptual frameworks sometimes overrides even what we can see all around us. So it's very important to think about the conceptual framework, that we use when we are talking about economics, governance, policy-making and so on" said Sanyal, adding that "Now one of the very important conceptual frameworks that underlie a lot of socialist planning, but also a lot of neoclassical economics, Keynesian economics, monetarist economics, is the idea that the economy is some sort of gigantic machine. Now, this is the reason, that this sort of Newtonian mechanics and hydraulics view of economics pervades a lot of the language that we use in economics." "This is why you have terms like equilibrium, liquidity, you care about fiscal and monetary levers. So underlying all of this is some sort of thought that the economy is some sort of Victorian steam engine running along fixed rails and that much of economic policymaking is making a decision about how much coal is shovelled into the engine when it slows down, or how hard to pull the brakes when it speeds up too much.", he added.

Reimagining the economy as an evolving eco system, he said, "This is the reason that when we talk about economic and policy problem-solving, we very often talk about designing or planning a policy or a solution and then implementing it as meticulously as possible. So this is all derived from the way we think about designing or implementing a solution. But what if the economy is not a machine? What if it is an evolving eco-system that is responding almost organically like a biological system to mutations, to shocks, maybe technological shocks, it may be geopolitical shocks, maybe domestic shocks, politics and so on."

Using an analogy of an economist's method of taking a dog out to play Frisbee, he said "If you happen to be an economist, particularly if you happen to be an eminent economist, then what will you do? Very likely, you will go to the park and first measure the wind speed. And then you will do a lot of research about the breed of the dog, and then you will look at the design of the Frisbee and then you will feed all this information into what is called a computational general equilibrium model. He further added, "Now for a lot of iterations, this general equilibrium model will give you a forecast. And if you are a policy maker, you will take that forecast and go to the Frisbee policy committee which meets once every two months, and deliberates on where that Frisbee is going to land. And it will then issue forward values. Now at this point, the economist will take all this information and then drag his dog where the Frisbee is supposed to land, drive a stick into the ground and then tie the dog to that place."  Adding to the complex dynamics which govern the park and the Frisbee throw, he added "Now as you all know that even something as every day as a park is a complex system. You could have a gust of breeze, there could be a small scratch on the surface of the Frisbee which could cause the Frisbee to swerve. There may be a small deviation in the angle at which the Frisbee was thrown. All of these or a combination of these factors will cause the Frisbee to fall somewhat different from where your model forecasted it to be. But of course, the dog is stuck with the stick and will more likely than not, fail to catch the Frisbee. Now the eminent economist will, of course, be entirely surprised by this, and will then form a committee that will write a very long report with lots of graphs and charts explaining why the dog didn't catch the Frisbee."

"Now meanwhile, most normal people are throwing the Frisbee and the dog is catching the Frisbee. The question is how the normal people catch the Frisbee. So what normal people do is the following- they indicate broadly to the dog by nothing more than body language for example, which is the general direction in which they will throw the Frisbee. And then they throw the Frisbee. And then what does the dog do? The dog looks at the Frisbee and runs after it. And when the Frisbee begins to come down, the dog looks at the Frisbee and adjusts itself flexible. Finally, as the Frisbee is coming down towards the ground, it adjusts itself, looks at it, jumps and catches the Frisbee. So what is the dog really doing? The entire cycle by which the dog is catching the Frisbee is based on flexibility and feedback loops. This is not about great general equilibrium models and trying to forecast where on earth the Frisbee is going to land", he said, speaking about the importance of feedback and adjustments during economic modelling, which should be flexible rather than static.

Sanjeev Sanyal was speaking at THINKERS Sandbox, an event held by THINKERS & Penguin Random House with YES BANK and the YES Global Institute as the Presenting Alliance Partner