Tuesday, March 10, 2009

Farmers' Markets and Philanthropy

It goes without saying that the financial services sector also has a lot to learn from a community farmers’ market. Mortgage-backed securities were far from transparent; the credit default swaps market was dominated by speculation, not value creation; and, of course, the Bernard Madoff scandal offers a case of outright fraud.
That is from Jacob Harold of the Hewlett Foundation writing in Alliance Magazine.  He notes that the financial crisis arose because of a failure to have well functioning markets - not because of their excesses.  He argues that philanthropy needs more, not less market dynamics: " In fact, the financial crisis makes it all the more urgent to build a smarter, more open infrastructure that enables donors to make good philanthropic choices."

I agree, and I urge you to read this nice article. 

Two features about markets I emphasize these days are learning and innovation.  Each farmer watches and listens and tries over time to adapt to what the market wants.  Some farmers will continue their “labors of love” (the new or unusual heirloom vegetable) that no one wants at the beginning and that is a money loser, but then one shopper will say to another the next week “Hey, you should try this strange thing; it goes really well with tomatoes.”  Demand builds beyond the farmer’s capacity to meet it, and he thinks to himself “I’ve got to find a way to produce more of these at a cheaper price.”  Meanwhile, other farmers start producing the same vegetable.  This dynamic process enhances quality, introduces a stream of valuable variations, and keeps a focus on efficiency.

The economic and environmental crises we are facing cannot be addressed with marginal changes or more of the same.  They require fundamental innovations and leaps forward in efficiency and cost.  These come from a well-tuned, properly functioning market system like the one Jacob describes.

Thursday, March 05, 2009

A new economics is being born

In my next life, I hope I will write an article like "Time and symmetry in models of economic markets."

Alas, in this life, I am no Lee Smolin.

This paper is about the need for a new framework for economics that acknowledges its "complex and dynamical emergent phenomena." In other words, economic systems are in dynamic states rather than equilibria.

This is a fundamental re-framing that is critical to understanding the nature of economic growth and development.

From the introduction:

"Economics is a unique subject in that it is about nothing but human behavior, but it is also highly mathematical. The economic theory that appears to be most widely in use by experts, called neoclassical economics or general equilibrium, is remarkably like physics, in that it is based on a few simple principles, which lead to a rigorous mathematical formulation.

This mathematical formulation leads to some basic theorems, which are taken to be a rough or approximate description of a well functioning economy. A large body of results and models is built up around this theory, and there is a community of experts that express confidence in its basic correctness.

At the very least, the neoclassical theory of general equilibrium establishes that eco- nomics is one of the mathematical sciences...

But if the evolution of the other mathematical sciences is any guide, one cannot expect that the first successful theory in a domain is the last word. Precisely because of its suc- cess, we should expect that sooner or later any mathematical theory of real phenomena is replaced by a deeper and even more successful theory.

There are reasons to think that the present is a perspicuous moment for seeking to improve economic theory..."

Thanks to my brother Patrick for pointing me to this paper after I told him I was reading Wolfram. And to Stuart Kauffman for giving me a grounding in autocatalytic systems ten years ago.