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What Computer Science Can Teach Economics
eldavojohn writes "A new award-winning thesis from an MIT computer science assistant professor showed that the Nash equilibrium of complex games (like the economy or poker) belong to problems with non-deterministic polynomial (NP) complexity (more specifically PPAD complexity, a subset of TFNP problems which is a subset of FNP problems which is a subset of NP problems). More importantly there should be a single solution for one problem that can be adapted to fit all the other problems. Meaning if you can generalize the solution to poker, you have the ability to discover the Nash equilibrium of the economy. Some computer scientists are calling this the biggest development in game theory in a decade."
By showing that some common game-theoretical problems are so hard that they'd take the lifetime of the universe to solve, Daskalakis is suggesting that they can't accurately represent what happens in the real world.
Hayek showed that about 50 years ago:
"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." (The Fatal Conceit, p. 76)
Unfortunately, there is a lot of designing going on right now.
Economics involves people. So...
"To summarize the summary of the summary: people are a problem." - Douglas Adams
I was about to say the same thing. Unlike poker, the rules of the games are altered based on the current knowledge about the state of the game. This means that as soon as someone proclaims "We know the rules of Economics!", someone else is going to look at those rules and either game them to their benefit, or rewrite them to better suit their own purpose.
Computer Scientists - and Economists - have a habit of assuming that they just need to find the proper model for human behavior, and all the problems will be solved. That's because that's how it works in a science: you assume the rules don't change in an arbitrary fashion. Humans, however, do. This makes any prediction of human behavior a statistical undertaking at best. Your success will be measured by how much better you compared to a random decision making process. At worst, the statistical anomaly completely wrecks your model - see the Black Swan Theory in Economics.
Those who can, do. Those who can't, sue.
Once you factor debt and fractional reserves into the picture, the game changes quite a bit. The current crisis is that the players bet WAY more than they had, and they are all afraid to call, since they secretly know that EVERYBODY is bluffing. So the game (and the stock market) keeps going up as the players trying to outbluff each other with "I'll see your billion and raise you three more". And it will keep going up until somebody has to actually put something of value in the pot.
This argument echoes the exact same stupidity of the "perpetual growth" nuts that got us into this economic mess in the first place. You believe that infinite trades are possible, and that resource limitations don't apply. But even in your own example, you're talking about trading one limited resource (labor) for another (money). And yes, money is a limited resource - you can print all the money you want, but since doing so doesn't increase the amount of actual value that that money represents, all you're really doing is devaluing the existing money supply in order to redistribute the underlying value (i.e., stealing a little bit of value from everybody who's currently holding any of the existing bills, and giving the loot to someone else - usually a central bank).
Perpetual growth is nothing more than an illusion shared amongst fools. Value doesn't magically spring into existence by the mere act of trading something back and forth. Value can only be created by consuming resources. Whether that resource is energy, or some natural resource such as coal or iron, or human labor, etc, there is only a finite amount of that resource. Furthermore, many of these resource limits are things we are either already bumping into, or things that we will bump into in the foreseeable future, such as in the case of the various natural resources we've come to rely on.