First Stab at a New Book: The Matrix: The Conjunction of War, Economic Theory, and the Economy

Vincent Portillo, a colleague, will join me in putting a new book together.  We only have 10 paragraphs to show for our effort, but any comments will be very much appreciated.  Getting an introduction down is important, not only for communicating with readers, but for sorting out our own ideas.  Thanks.

 

This book is an exploration of the complex and fascinating interactions between war, the economy, and economic thinking.  Whether you realize it or not, a complex Matrix resulting from the interactions of war, economics, and economic thinking creates a powerful force field that affects almost everything you do.  This force field, not unlike gravity, is both pervasive and invisible.  However, the effects of the Matrix are unpredictable.  In a world vulnerable to the possibility of serious destruction as the result of both military and economic miscalculations, taking account of this Matrix is imperative.

 

The effects of the Matrix are far more complex than those of gravity.  Obviously, an engineer designing an airplane must take into account the force of gravity to avoid future calamities.  Complete command of the necessary scientific knowledge and care in the building of the plane is insufficient to guarantee future safety.  The human interface creates an ever-present risk once pilots, mechanics, and air traffic controllers take over responsibilities for the plane.

A far more intricate network of human behaviors interacting with the Matrix leads to pervasive uncertainty, making the challenges of responding to the Matrix are far more daunting than the straightforward responsibilities of those who are responsible for the plane’s safety.  The Matrix presents another dimension of complications.  If a pilot flies into a mountain, the immediacy of the consequences makes interpretation of the event fairly simple.

 

In the case of the Matrix, choices today may set off a chain of events that may have important consequences years or decades in the future.  Looking back to identify a single — or even a small set of events as the cause is very difficult.   After all, events occurring in previous millennia still remain the subject of ongoing debates among historians.  To make matters even more complex, the Matrix can cause contradictory outcomes.

 

Here again, the human element comes into play.  Any attempt at identifying causality comes up again the tendency to understand the sequence of events in light of pre-existing ideas or ideology.  Consequently, one must exercise extreme caution in any attempt to manipulate the Matrix.  Nonetheless, the risks of doing nothing are even more dangerous, considering the potential dangers or perhaps even likelihood of environmental, economic, or military disaster.  Actions to prevent cataclysmic outcomes require great care, backed up with a relatively holistic perspective.

 

Economics occupies a special place in this intricate Matrix with economics serving as a bridge between the other two principals of the Matrix: war and the economy.  Almost unintentionally, in the seventeenth century, modern economics developed to a large extent in response to questions raised by the needs and the consequences of warfare.

 

Three economic thinkers provide interesting perspectives into the sort of complexity and unpredictability that can plague efforts to respond to the matrix.  The first, Adam Ferguson, commonly credited with originating the concept of unintended consequences, wrote: “If Cromwell said, [t]hat man never mounts higher, than when he knows not whither he is going; it may with more reason affirmed of communities, that they admit of the greatest revolutions where not change is intended, and that the most refined politicians do not always know whither they are leading the state by their projects” (Ferguson 1773, p. 205).  Modern readers of Ferguson often his idea to suggest that governments are ineffectual in improving the economy; that everything should be left in the hands of business, which can presumably foresee the future.  Here, Ferguson’s insight will be put to wider use.

 

Joseph Schumpeter is famous for having popularized the concept of creative destruction — the idea that the most successful entrepreneurs pursuing their own interests can promote prosperity by disrupting an economy.  XXX will treat war as more than wholesale slaughter; that war can also have positive unintended consequences, adding a double meaning to the destruction in creative destruction.  The ancient Greek philosopher, Heraclitus, hinted at this double meaning, writing, “Thy name is life, thy work is death.”  (In Greek, the bow, an important weapon at the time, and life were synonymously called bios.).  Obviously, war involves more life than death, but war creates some good outcomes, although not for the right reasons.  For example, military considerations in the United States help to promote both racial integration and the school lunch program.  A Matrix-wide analysis calls out for taking account of those lesser positive effects.

 

Frank Knight offers a third insight into our exploration of the matrix.  Knight distinguished between what he called uncertainty and risk.  The latter can be measured, almost statistically, while the former defies rational calculation.  Risk is operative in flipping a coin or playing a game of dice, one knows in advance the chances of a particular result.  In many other ventures, nobody has a clue on what the outcome might be.  Overconfidence and hubris amplify the challenges posed by uncertainty.  Because the matrix is riddled with pervasive uncertainty,  Knightian modesty becomes an important virtue.

 

Another less mainstream economist introduced an important insight.  Karl Marx emphasized the centrality of social relations — not just the superficial relations between those who market goods and services and their customer, which constitute virtually the whole of economists’ concern, but rather the whole gamut of social relations.  This perspective offers important insight into the human relations, which constitute the most intractable dimension of the Matrix.

11 comments so far

  1. Aldo Matteucci on

    Michael,

    Welcome to the real world of complexity! Meeting up again, since we diverged intellectually 40 years ago. It is fun to visit the strange world – more difficult to find one’s way around.

    The first thing to do is shed luggage – especially certainties, and the consequent belief that one can either determine, or predict. You may check them in at the door. Don’t forget to lock them, or they may run loose and interfere.

    As when you want to have your cake and eat it too – thanks to the “Matrix” concept. Properly defined and carefully used – one may obtain victory over the “law of unintended consequences”. Challenging, generous and noble – it can’t be done.

    One core issue is whether you need large causes for large effects, or small causes suffice. Chaos theory indicates that small causes have large effects. The problem is that you cannot trace back the main cause to the originating small one, for there are so many of them, untraceable, and indistinguishable. If a butterfly in Ceylon caused the hurricane in NY, you cannot go back and identify WHICH butterfly did the dastardly deed.

    It can’t be done also because you still think in the framework of cause => consequences – a closed mechanical world. Living reality is based on enablers. Enablers (like the emergence of the eye among animals) are “open ended” and the result of adaptation = trial and error (aka creativity). When the eye first emerged in nature, the genes did not know what would happen as a consequence.

    War – you seem to put “war” and “economics” on the same level. Economics – the laws of scarcity for short – is ineluctable and eternal. War is a social phenomenon that was enabled by the domestication of the dog (don’t be afraid, dog folks, not your fault). Very roughly speaking the chain of enablers goes: dogs =>sheep =>horses, with metallurgy joining at some point.

    Economic thinking is ideology. As ideologies go, religion has precedence. Religion is first recorded 400’000 years ago, and has been closely tracked power ever since (Patricia Crone). It takes precedence over the jonny-come-lately economic thought – a mere 200 years, though there are precursors (Tom Sedlacek).

    Finally, you’ll have to address epistemological issues like: can we live free of ideologies; and you’ll need to dwell in the desert of cognitive thinking, with its quick-sands of social psychology, sand-traps of illusion, and the oceanic depths of “silent” culture.

    Beware: using metaphors, in particular from physics, is somewhat problematic: if indeed war, economy, and economic thinking are independent of each other – rather than a stable matrix you have here a “three body problem” http://www.wolframscience.com/reference/notes/972d , which as you said, is unpredictable. So they are inherently different from “gravity”, which has a very predictable direction – down and down.

    As I said, Michael, lots of fun, but you may stroke your beard for a while yet.

    Aldo

  2. Jurriaan Bendien on

    Interesting idea. The title reminds me of the book by Ron Meek and Ian Bradley called Matrices and society (Princeton, 1987) though it had a different subject. Basically what your intended book is about is the dialectics of competition and cooperation, which Marxism always failed to come to grips with. War is merely an extreme form of competition. I was watching the football match last night, and it was remarkable how violent and aggressive it was. All because of a bit of inflated plastic?!

    • mperelman on

      Thank you. You caught our drift, Jurriaan.

      • Jurriaan Bendien on

        I am studying it myself on and off. What is interesting is that there is almost nothing substantive on the topic, except in game theory, but because game theory is largely based on the assumption of self-interested actors, the game-theoretical models are rarely realistic. There was a brief interlude in American anthropology in the 1930s when “competition and cooperation” became a topic of inquiry, but after WW2 there was never again the same theoretical interest. From the 1970s onward, social theory stood under the sign of the “structure and agency” dualism, but the dialectical contradiction of competition and cooperation is vastly more relevant and substantive. The point is that in the real world, most people have to cooperate and compete at the same time, but the meaning of this reality is almost never acknowledged in the social sciences. Michael, you are scientifically wrong to think that risk can always be measured precisely. Fund managers along with Al Greenspan admitted that the mathematical models used to estimate the likelyhood of risks fail to provide adequate predictions on their own (see also Pablo Triana, The flawed maths of financial models, FT November 29 2010). According to Trichet, “The root cause of the crisis was a widespread undervaluation of risk. This included an underpricing of the unit of risk and an underassessment of the quantity of risk that financial operators took upon themselves.” (Jean-Claude Trichet, “Macroeconomic policy is essential to stability”, Financial Times, November 12, 2008). But a “unit of risk” does not exist, anymore than a “util” exists.

  3. mperelman on

    Jurriann, obviously they were not measuring risk, but treating uncertainty as if it were risk. In flipping a coin, we can talk about risk.

    • Jurriaan Bendien on

      The concept of risk is itself a vague concept I think. Risks can be defined according to type, number, size, frequency, severity, likelihood of occurrence, or consequence.

      In a financial context, risk actually means almost the opposite of what you think it does. It is basically the amount of money it costs to insure yourself against a possible loss of capital value, or the premium you can obtain for investing in a risky asset. When Trichet talked about valuing risk, this is basically what he meant.

      “When there is a risk, there must be something that is unknown or that has an unknown outcome. Therefore, knowledge about risk is knowledge about lack of knowledge. This combination of knowledge and lack thereof contributes to making issues of risk complicated from an epistemological point of view.” – Stanford Encyclopedia of Philosophy [http://plato.stanford.edu/entries/risk/].

      Since risk specifications require a definition of possible scenarios pertaining to an asset, risk-simulating models work well in situations where all possible scenarios can really be identified and quantified. But if that is not the case, then the assumptions are likely to cause error.

      • mperelman on

        I don’t know how philosophers use the term, but for statisticians and economists, risk formally means something in which probabilities can be known in advance.

      • Jurriaan Bendien on

        It’s best to read up a bit more critically on the concept of risks, I would think; that would refute a positivist concept of risk.

        I used to work as research statistician for a government statistics bureau, and in fact one day I had to vet through a Ministerial survey dealing with risk management on farms (sounds good, eh). In the end, my advice was to drop the whole survey, because the questionnaire, designed by a sociologist at considerable expense, could not yield meaningful and reliable data, even if the sampling method was OK. It saved the ministry from wasting a lot of money on a bogus survey.

        Confusingly, the term risk is used to denote many quite different constructs. Thus, K.R. MacCrimmon and D. A. Wehrung in their book Taking risks: the management of uncertainty (NY 1986) demonstrate that different measures of risk-taking gathered for the same individuals at the same time exhibit almost no association. Both psychological and organizational research indicates that risk-taking behaviours are highly sensitive to contextual factors, rendering any integrated approach to risk difficult. This, I might add, renders the notion of risk highly susceptible to ideological abuse.

        For statisticians and economists, risk formally does not necessarily mean that the probability of outcomes is fully known in advance. The identified risk may be that something quite unpredictable may happen (e.g. a “outlier”), especially if that something is a novel event for which likelihoods of occurrence cannot easily be extrapolated from previous data. That is just to say, that any probability or likelihood analysis assumes a prior categorization of risk variables, which itself is based on judgements of the most likely or most relevant influences at work. The model, in other words, is used to investigate likelihoods on the assumption that a certain description of possible effects is sufficient, or even exhaustive.

        From a Marxian perspective, the portfolio ideology of risk serves a specific function: to minimize the risks to the growth of capital via insurance techniques, and to shift the burden of risks as much as possible on to the workers – in other words, to create more security for capital and more insecurity for workers. But, in fact, intercapitalist competition means the gambling techniques invented to protect the growth of capital end up creating more insecurity all round, which means that people spend less and save more of their income – under conditions where even their savings are not guaranteed to hold their value anymore. The ideological inversion suggests that capitalists are entrepreneurial risk-takers and that workers seek the safety of regular employment, but that sort of picture assumes a highly biased interpretation of the risks people run in everyday life. In particular, risk can be converted into a quantity of money only by abstracting from all sources of risk which are not easily expressible in money terms.

      • Jurriaan Bendien on

        As regards flipping a coin: in this case there seem to be only two possibilities, heads or tails, which can be estimated assuredly with a probability of occurrence – we can say that, for a give distribution of results, a further distribution of results is most likely etc. But in a freak occurrence, the coin stands up on its edge (a bit like the egg of Columbus), and does not fall over to show heads or tails. The question then is, how you would estimate the chance of this possibility occurring? You would need to consider the dimensions of the coin, the flipping technique used, and the nature of the surface on which the coin lands, etc. Risk ideology means, that the person in charge defines what the limits of possibility are, framed as natural or logical inevitabilities. Breaking out of risk ideology means rejecting a logic of too few options.

      • Jurriaan Bendien on

        The ISO 31000 (2009) (ISO Guide 73:2002) definition of risk is the ‘effect of uncertainty on objectives’.

      • mperelman on

        The definition is a contradiction. Uncertainty defies measurement. You can define risk however you want for whatever purposes you have, but risk is something than can be measured, in contrast to uncertainty. I will leave it here.


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