Complexity without purpose: evolution as a framework for economics

Mobile phone evolution (source)

While I don't have access to the numbers, this article at Evonomics by David Sloan Wilson appears to be doing well by an estimate of the number of times it has appeared in my Twitter feed. It's an interesting read; check it out. I especially liked this dig:

This places [economist Dani] Rodrik’s understanding of evolution just a shade above creationists.

I also completely agree with this:

For an evolutionist such as myself, the idea that big theory is dead or that big data can be analyzed without a big theory is wacky. ... Einstein observed that “It is the theory that decides what we can observe”. The world is so complex that we cannot possibly attend to everything, so a theory—broadly defined as a way of interpreting the world around us—is required to tell us what to pay attention to and what to ignore. Without a theory, we are literally blind.

I talk about this in the context of machine learning -- a particular way data scientists go about looking at "big data". A lack of an explicit big theory means you're using implicit theories.

However, this really needs some data to back it up:

I got excited when Richard Thaler and Cass Sunstein called for an economics based on Homo sapiens ... Then I searched my kindle edition for the word “evolution” and came up empty. How can economics be based on Homo sapiens without any discussion whatsoever of Homo sapiens as a product of genetic and cultural evolution?

How does Prof. Wilson know the genetic and cultural evolution of H. sapiens is a necessary ingredient (such that its inclusion excites him)? What specific stylized economic facts that are presently not understood by economists, but well enough understood by biologists to warrant a more complex evolutionary agent based model above and beyond the normal agent based models?

What, really, are any stylized facts of economics at all?

Equilibrium?

Economists actually have very concrete definitions of equilibrium. However, they don't have any handle on how one achieves equilibrium or travels from one equilibrium to another (see here and links therein). One could easily see evolution as guide to understanding the process for finding equilibria, but the word "equilibrium" doesn't appear in Prof. Wilson's article or the cited paper. 

This is the stylized fact of economics the information transfer model focuses on, attempting to answer the question: what values of macroeconomic aggregates should we expect to see?

Money?

Economists haven't really figured out what money actually is or what it does. I've proposed a cultural evolutionary mechanism (which is admittedly highly speculative), but it stands on an economic model of what money is and how money works. The economic content doesn't really depend on the specific evolutionary pathway, so evolution isn't really adding to economic understanding, but rather historical understanding.

Does Prof. Wilson think evolution will help solve the question of why money has value? That would be interesting!

Business cycles?

Economists haven't figured out what the business cycle is or does, or even if there is a "cycle" at all. There is no universal definition of "recession" or what is happening during one. Adding evolution isn't going to help understand things like the business cycle until we have an operational definition of what a business cycle is. Which macro aggregates are relevant? What distinguishes recession from non-recession? Compounding the problem, answering these questions requires a theory to support identifying the features of the data itself.

For example, suppose you propose a model where evolution tells us why humans are prone to panic when resources (e.g. stocks) become threatened, leading to an empirically accurate (after fitting a few parameters) description of financial crises. You propose this as an explanation of recessions. But are recessions caused by financial crises? We don't know the answer to that: some economists think so, but others think financial crises are a symptom of recessions. In the latter case, macroeconomics (e.g. central bank targets) is triggering humans' evolutionary behavior. Macro causes behavior.

Behavioral economics?

Richard Thaler says

The field of behavioral economics has been around for more than three decades, but the application of its findings to societal problems has only recently been catching on.

There would be two possible reasons for behavioral economics to take three decades (!) to make some headway: 1) there is a conspiracy blocking the research from getting into the mainstream, or 2) it doesn't work demonstrably better than run-of-the-mill utility maximization by H. economicus. Basically, it turns out the reason is mostly #2 for macroeconomics.

And since macro is the issue Prof. Wilson is thinking about (e.g. the reference to the 2008 financial crisis at the beginning of his article), if the H. sapiens behavioral econ Thaler is talking about doesn't add much understanding beyond the H. economicus understanding, why would even more complex behavioral econ based on evolution add more? Another way to say it is that econ has tried to add a bit of behavior, but econ data is uninformative given such complex models -- and therefore we can't tell the difference. It may be more theoretically satisfying, but if a behavioral model doesn't improve empirical results, all it's doing is raising your AIC.

Economic data?

Expanding on the previous part to make the point more forcefully: macro data is uninformative. Empirical data can't reject one theory in favor of another -- and that's when you have simple H. economicus models! Adding evolution to the theory would only make it more uninformative.

As George E. P. Box said (what he really meant by "all models are wrong" -- see here):

Since all models are wrong the scientist cannot obtain a "correct" one by excessive elaboration. On the contrary following William of Occam he should seek an economical description of natural phenomena. Just as the ability to devise simple but evocative models is the signature of the great scientist so overelaboration and overparameterization is often the mark of mediocrity.

Supply and demand?

I am planning on giving a talk this summer about this one. If the cultural and genetic evolution of H. sapiens matters, then 1) why do we get the same results as the utility maximizing framework with random behavior and 2) why do E. coli and C. capucinus exhibit the same results.

My view is that #1 and #2 together tell us humans don't really matter that much. In fact, that's also what the most successful empirical economic result of all time tells us (kidding, but Noah Smith seems to think so). It's based on random utility and has some overlap with the partition function approach this blog is into.

Evolution would answer #2 with either a) utility maximizing behavior was a property of the last common ancestor of E. coli and H. sapiens, or b) it is the result of convergent evolution. 

And both of these could be true in some general sense. The requirement for entropy maximization to be a good model is simply that agents fully explore their state space ... something that biological organisms have been doing ever since they evolved. And convergent evolution is sometimes a result of physics or other mathematical properties. So maybe that is what is happening. 

...

The thing is that in order to know if evolution is necessary to economics, we need to know what questions we are trying to resolve with evolution and how much of (or even if) economics can be understood without it. Which theoretical economic problems does evolution address?

I am of the opinion that humans' sense of their own agency has gotten in the way of understanding economics. I wrote a piece about biologists saying we needed really complex agents to understand economics based on no reason whatsoever other than gut feelings that economics is a "complex" system. It has to be complex, right? I mean, I'm a complex human with all kinds of thoughts and feelings about inflation and government debt, so that just has to matter ... right?

Maybe it does, but the information equilibrium model does pretty well with its predictions and it's based on humans as mindless atoms -- they're not even utility maximizing drones. We have H. atomicus, an even simpler being than H. economicus. Information equilibrium also addresses most of the questions above (it relegates the business cycle to a question of scope).

...

At the end of the article, Prof. Wilson cites a paper he wrote with economists John M. Gowdy and J. Barkley Rosser proposing evolution as a theoretical framework for economics. I love the idea of a framework for economics! It's one of my biggest complaints about the field and my own paper on information equilibrium proposes to be its own theoretical framework for economics.

In the abstract, they present a questionable argument for using evolution as a framework:

Then we consider four reasons why evolution might not need to be consulted for human-related subjects such as economics and public policy. We conclude that these reasons can be valid in particular cases, but they fail for any sizeable human-related subject area. Hence evolution can and should become a general theoretical framework for economics and public policy.

This is kind of a logic fail. Let's set up some variables:

e = evolution is a good framework for economics
p = reasons for evolution not being a good framework

The argument is then

p → ¬ e
¬ p
∴ e (invalid)

This is incorrect application of modus tollens/modus ponens. The valid arguments are

p → ¬ e
e
∴ ¬ p

p → ¬ e
p
∴ ¬ e

The only way the argument works is if p ⇔ ¬ e, which is only true if p represents every possible reason for evolution not being a good theoretical framework for economics. So what is the list of reasons? My paraphrasing:

Reason #1: Economists are smart and have been studying economics for a long time, therefore an evolution framework will come to the same conclusions. 

Reason #2: If markets are efficient from a theoretical standpoint, then the process matter by which they reached efficiency does not matter. 

Reason #3: The process by which something reached its extant state does not matter to the study of that extant state [Ed. note: I'm not entirely sure how this is different from reason #2.] 

Reason #4: Not all branches of knowledge are necessarily relevant other branches.

It seems fairly obvious this does not exhaust the list of reasons why evolution would not be a good theoretical framework for economics or not need to be consulted. I have one for macroeconomics that I mentioned above:

Reason #5: Macroeconomic data is already uninformative for simple models using H. economicus, and empirical data would only make it harder to reject competing theories using H. sapiens.

Macroeconomics is already too complex to sort out its own theories! What's needed is something radically simpler (or something with much broader scope). There are probably loads of others, including one big one that I got from the Wikipedia page on unsolved problems in biology:

At present there is no theoretical model for how adaptation occurs that is close to being complete. 

This appears to be the same problem economics has with equilibrium (listed above). We know one when we see one, but we don't know how new ones arise or how we get there. How does evolution propose to be a theoretical framework for economics when it's not even a complete theoretical framework for itself?

In any case, we need convincing reasons to use fully evolved H. sapiens in economics, not arguments against reasons not to use H. sapiens.

Actually, with the information transfer model (1) we do come to many of the same conclusions as economics, (2 and 3) if maximum entropy is a good approximation, then it doesn't matter how it came to that state (quite literally: maximum entropy means losing all possible information about the initial state), and (5) since it represents a much simpler theory, macro data becomes informative and can reject models and mechanisms.