By Christopher Moore
The idea of capitalism has been criticized by more left-wing economists as being a quaint neo-classical theory. Principles like the Rational Actor Model are discarded as simplistic. The solution often advocated by the intellectual class is a technocratic, centrally planned economy to impose efficiencies upon the irrational proletariat, often in the form of regulation, or executive fiat. However, I believe these solutions are bound to fail because they reflect a fundamental misunderstanding of the nature of a system based on individual actions. Irrational actors are always rational: to themselves. We all have individual circumstances and motivations that cause us to make decisions which seem inefficient to an outside observer. For example, it seems ridiculous to rent an apartment for 40 percent of our income, unless that person has access to a larger job market or personal connections in that city. The hundreds of decisions we make every day are essentially each a computation that relies on millions of variables, including, but not limited to, the inputs of our culture, past experience, DNA, and the feedback from interactions with other people who are simultaneously making their own calculations in response to us. The aggregation of these computations comprises our society, and thus our economy can be considered a complex system. Complex systems are defined as those “where the collective behavior of their parts entails emergence of properties that can hardly, if not at all, be inferred from properties of the parts.” While this definition almost single-handedly nullifies the field of behavioral economics (which aggregates individual economic decisions), it also has significant implications for those advocating a larger role of government.
Humans, and by extension the interaction of humans in a society, remain constrained by nature. Miracles of nature are the emergent order that arises out of the chaos, such as: dendritic crystal growth, DNA replication of a living cell, ant colonies, and planetary climate. Although crudely articulated in the 18th century, the “invisible hand” in economics is merely another instance of emergent order in nature. By disrupting this order, governments’ central planning are bound to fail because of the “economic calculation problem” described by Austrian economists Ludwig von Mises and Friedrich Hayek nearly a century ago. The trillions of individual economic decisions made in a given hour across the country are essentially unknowable by the government, so any regulations or laws passed will distort the market in unintended ways, causing shortages of needed goods and surpluses of unneeded goods. In capitalist economies, the price signal solves this coordination and calculation problem by eliminating the need altogether to calculate the wants and needs of every individual, because each individual makes their own decision in a decentralized manner
50 years later, in the field of computing, scientist Stephen Wolfram unwittingly describes this same calculation problem as “computational irreducibility”: the idea that complex systems cannot be reduced to being described by a set of formulas, one must compute every step of the system from the initial state to the final state. If one views the economy as a series of successive steps of computations performed by billions of individuals since the beginning of time, to make an accurate economic prediction would be impossible, and thus impossible for the government to make any beneficial economic policy.
Managing complexity and randomness can be challenging for most people, but financial trader Nasim Taleb has articulated the idea of an antifragile system: a system that gains from disorder. By largely using heuristics and dispersing power into a decentralized framework of competing interests, we reduce catastrophic shocks to the system, or Black Swans. Because the decisions in capitalism are made at the lowest level possible, the cost of a bad decision is limited to one person, and the system survives intact to learn from its mistakes. In the reverse situation, errors in planned economies result in poverty, destitution, and deaths of millions. Perhaps the best example of an antifragile system is the U.S. Constitution.
In 1756, Adam Smith presciently wrestled with the duality of passion and reason: “Man naturally desires, not only to be loved, but to be lovely; or to be that thing which is the natural and proper object of love. He naturally dreads, not only to be hated, but to be hateful; or to be that thing which is the natural and proper object of hatred.” In other words, we all operate in a self-interested manner but are also motivated by our self-interest to be viewed favorably by others and ourselves. Informed by Adam Smith’s observations, and a millennia of history, classical art, and experience, Federalists like Alexander Hamilton and James Madison examined the chaotic failure of pure democracy in Athens and designed a government that was antifragile to human nature. Relying on a novel system of checks and balances to check ambition with ambition, they ensured power would never concentrate into the hands of any one flawed human. In Federalist 10, Madison argues precisely that the multitudinous diversity of competing interests would force negotiations, compromise, as well as respect for minorities. By decentralizing authority, we can incorporate human vice as a feature, rather than a bug in the system, thus minimizing the risk that any one individual may cause to our country. It is only when the government recognizes its limits, and designs itself to be antifragile to the complex behavior of its citizens, that real wealth, prosperity, and equality for the citizenry will result.
Christopher Moore is a chemical engineer, businessman, and combat veteran of the Afghan war. He is a 2020 Chapman University graduate with a B.S. in Chemistry.
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