The Economy as an Emergent Order

For Jessi and Tim.

You both seem to enjoy studying economics this year. And I am sure you both know how happy this makes me. I'm not just excited because I think econ is cool and I will have more of an opportunity to talk with you guys about it. I'm excited—no, exhilarated—because you're discovering a beautiful field of study, as sublime as it is under-appreciated. But some parts of economics are boring, ugly, and crude. I want to shed some light on why some of it seems so crude, and the rest so elegant. 

The economy is an emergent order. What’s that? An emergent order happens when lots of individual elements cooperate and act in orderly ways, producing phenomena and patterns on a higher level that become realities in themselves, above and apart from the individual elements that comprise them.

We see emergent orders all over. In physics: atoms, motion, and gravity form stars. Stars radiate light, shape galaxies, and supply the energy that enables life to happen—atoms, gasses, and gravity don't. In neuroscience: our memories, emotions, and thoughts are to some extent the emergent order arising out of electricity, chemical reactions, and a finely-crafted architecture of about one quadrillion connections looping all over the brain.

As it relates to economics, one of the most important emergent orders is the market, the arena of buying and selling that determines how much stuff is made and what price it sells at. When millions of people and companies (I'll call them 'firms' from now on) compete for dollars and resources, these lines called supply and demand materialize. They aren't mere abstractions; these entities have real effects on society. The large-scale properties of this emergent order cannot be ascribed to any of its constituent parts (although it is their behaviors which give rise to it).

The economy can be seen as one big emergent order, comprised of smaller emergent orders (such as the market, supply chains, and financing channels). The economist's goal is to understand those properties, and to tease out sometimes nuanced and complicated cause-and-effect relationships between the constituent parts and the emergent whole. People are nuanced, weird, hard-to-understand things, so cause-and-effect relationships can be easily obscured by confusing and irrelevant variables.

Take the relationship between government stimulus spending and economic productivity: there are lots of related and opposing effects of stimulus spending. One is an increase in buying and selling behavior, so firms produce goods for which there wouldn't have been demand otherwise. The other is a diversion of resources away from firms, and toward the government. Firms only survive by extracting as much value as possible from given resources (so they can sell stuff at a profit); government has neither the incentives to be productive nor the mechanisms to know whether it is providing value or draining it (more on that later). These two effects are both real, and both go in opposite directions: one increases productivity while the other diminishes it. So does stimulus spending increase or decrease productivity? Good question. Economists aren't sure yet.

Now, a lot of the conversations you see on CNN and C-SPAN about the economy sound really dumb (to most people, that is; some, such as myself, aren't so disgusted). Pundits talk about inane things like prime rates, home-ownership, the labor participation rate—not the most sublime topics. That's just because the stuff on the news is a particularly tiny subsection of economics: usually the overlap between the financial industry, government policy, and controversial economic theories. Of course that subsection is going to be boring, ugly, and crude. But it's a very, very tiny subsection. The rest is awesome.