11 July 2008

Bad Economics in Literature I: Isaac Asimov

I like to read fiction, including, at times, some really cheap crappy stuff that doesn't require me to think (Hello, Dean Koontz). But, of course, I can't help thinking anyway, especially when the author says something inane. For example, in one novel Tom Clancy has a Governor of some state running for the Senate to improve his chances at the presidency, when anyone who's paid even casual attention to U.S. politics should know that we normally elect governors, not senators (not this year will be the first time in 48 years we've put a senator in the executive seat).

So here I begin a short series on bad economics in well-known novels, choosing as my first target, the esteemed science fiction author Isaac Asimov's I, Robot, a book I have re-read several times, and whose quality should never be judged by the execrable movie of the same name.

As Asimov is universally considered to be a genius, he must know everything about everything, right? Unfortunately not.

In the last chapter of I, Robot, the Earth has been divided into 4 economic/political regions, and it is the "machines" (supercomputers) that are managing the Earth's economy. As Asimov develops the idea, the machines are perfect calculators with perfect information, and consequently they make perfect decisions that keeps the Earth's economy humming along smoothly and efficiently.

This information is developed only sketchily, in just a copule of sentences:
"The Earth's Economy is stable, and will remain stable, because it is based upon the decisions of calculating machines...The population of Earth knows that there will be no unemployment, no overproduction or shortages."
Given the era in which Asimov was writing (the book was published in 1950), this misunderstanding of economics as merely a technical process of avoiding surpluses and shortages--a process that could be handled by a central planner with sufficient information--is understandable. On the one hand, the Walrasian approach to economics focuses on a system in equilibrium, where the allocation of resources is merely a mathematical problem--that is, Asimov's concept is, at heart, consonant with the great tradition of neoclassical economics. But more practically, the industrial revolution led to much larger firms than had been seen in the preindustrial era, and it was not uncommon to interpret this as evidence that eventually all production would be brought under one central authority. [Francis, oops, I mean] Edward Bellamy's Looking Backward, 2000-1887 (published in 1888) contains perhaps the premier statement of this belief.
[T]he absorption of business by ever larger monopolies continued…The railroads had gone on combining till a few great syndicates controlled every rail in the land. In manufactories, every important staple was controlled by a syndicate…Then a struggle, resulting in a still greater consolidation, ensued…
…The movement toward the conduct of business by larger and larger aggregations of capital, the tendency toward monopolies, which had been so desperately and vainly resisted, was recognized at last, in its true significance, as a process which only needed to complete its logical evolution to open a golden future to humanity.
Early in the last century the evolution was completed by the final consolidation of the entire capital of the nation. The industry and commerce of the country…were intrusted to a single syndicate representing the people, to be conducted in the common interest for the common profit. The nation, that is to say, organized as the one great business corporation in which all other corporations were absorbed…the final monopoly in which all previous and lesser monopolies were swallowed up…
While Bellamy was a utopian (who didn't recognize the problem of linear projection) the most influential American economist of the mid-10th century, John Kenneth Galbraith, was only slightly less enthusiastic about the inevitability of central planning. In other words, despite being a futurist, Asimov was clearly a product of his times. But his static and purely technical view of economics as merely the planning of how to use resources misses both the reality and the beauty of markets.

So why is Asimov wrong? One argument we can eliminate is Hayek's claim that the information needed for such planning would be too great and the ability to analyize insufficient, because Hayek was assuming human efforts, whereas Asimov is assuming "thinking machines" nearly limitless in their capacity--as such a fair critique must assume, however unrealistically, the theoretical existence of such machines, able to efficiently organize an equilibrium system (even in the absence of prices although one take on Hayek is that they would have too much information, which would diminish the quality of their decision-making). Perhaps we should also eliminate the claim that no centrally planned system will operate efficiently because managers lack profit incentives. While that may be true of humans, who never do seem to reach the socialist ideal of "from everyone according to their abilities," Asimov's "Three Laws of Robotics" force the robots to take care of humans as well as they can, so perhaps the thinking machines built-in sense of purpose would satisfactorily eliminate the need for financial incentives.

Ultimately, Asimov's thinking machines will fail because their economic approach is too static, to reliant on a Walrasian general equilibrium. And while every microeconomics course still taught today instills in economists the usefulness of equilibrium analyses, we know that it is not an accurate model of markets, which are actually tremendously dynamic.

The dynamic view of markets is most strongly associated with the Austrian economists (von Mises, Hayek, etc.), who wholly rejected the equilibrium approach, believing that we need to focus on the actions of individuals rather than the state of systems. But by far the most famous explanation of market dynamism came from Joseph Schumpeter (not generally considered Austrian, but a student of noted Austrian Eugen von Bohm-Bawerk at the University of Vienna). Schumpeter, Capitalism, Socialism and Democracy, coined the phrase "creative destruction." Here is Schumpeter's explanation of the dynamic:
Capitalism, then, is by nature a form or method of economic change, (emphasis added) and not only never is but never can be stationary. And this evolutionary character of the capitalist process is not merely due to the fact that economic life goes on in a social and natural environment which changes and by its changes alters the data of economic action...The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers' goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.
This, then, is why Asimov is wrong: he missed the real driving factor of economic development; creativity. Every new product that takes the market by storm is the product of some creative person's vision. So are the 90% of new products that do not take the market by storm, and that is the key--nobody can predict what products people will want, until people reveal their preferences by buying those products.

The calculating machines would be no more capable of predicting what new products people would want because there is no available information that will tell us what they want! The world of Asimov's machines would be a world without fax machines, waffle-soled running shoes, ipods, cell phones, pet rocks, labradoodles, carbon fiber golf clubs, antilock brakes, transformers toys, McDonald's happy meals, and essentially anything else that was created after Asimov wrote.

Asimov may have preferred a future where perfect rational calculators made all our economic decisions, but I prefer a world in which shortages do occur, because suddenly everyone wants a Cabbage Patch doll for Christmas, and surpluses, because it turns out nobody did want Crystal Pepsi.


Scott Hanley said...

Edward Bellamy!

Interestingly, Bellamy envisioned a market-driven pricing system in his socialist economy. It just governed the cost of production, not the cost of consumption. If a job was difficult or unpleasant, the central planners would lower the hours in the work week until they had enough volunteers who wanted to do it. For easy jobs, they raised the hours until enough people decided they'd rather do something else. Not nearly as responsive and subtle as capitalist pricing, but interesting nonetheless.

Bellamy also anticipated using telephone lines to pipe music into the home, with a choice of several different studios, as well as a timing mechanism to allow you to wake up to music in the morning. He didn't anticipate radio or recorded music, but he did anticipate the functions of clock radios, as well as department stores and debit cards. A fascinating work of speculation.

James K said...

Well put James. No computer that exists or ever could exist can plan an economy, it would require information that is unobservable, like consumer preferences.

James Hanley said...

Good comments both. I couldn't find my copy of Bellamy, so I just read the particular chapter online, and I had forgotten about Bellamy's predictions. I hope I didn't inadvertantly portray him as an idiot, because I certainly don't think he was--and he was writing well before the Austrians and Schumpter.

JamesK caught my main point and stated it rather more clearly than I did--Asimov's computers depended on observed information, and much of the market is driven by unoberserved and a priori unobservable information.

But if you ran a business, the computers would do a great job telling you how to efficiently do what you'd already decided to do!