Equilibrium in high esteem

My editorial

I am still at this point of defining my point in that article I am supposed to hatch on the topic of evolutionary modelling in studying technological change. Yes, it takes some time and some work to define my point but, man, that’s life. I think I know things, and then I think how to say what I know about things, and it brings me to thinking once again what is it that I know. If, hopefully, I come to any interesting conclusions about what I know, I start reading literature and I discover that other people know things, too, and so I start figuring out what’s so original in what I know and how to say it. You know those scenes from Jane-Austin-style movies, where people are gossiping in a party and they try to outgossip each other, just to have that momentary feeling of being the most popular gossiper in the ballroom? Well, this is the world of scientific publications. This is what I do for a living, very largely. I am lucky, mind you. I don’t have to wear one of those white wigs with a fake tress. This is a clear sign that mankind is going some interesting way forward.

Yesterday, as I was gossiping in French (see ‘Deux lions de montagne, un bison mort et moi’ ), I came to some conclusions about my point. I think I can demonstrate that the pace and intensity of technological change we have been experiencing for the last six or seven decades can be explained as a function of intelligent adaptation, in the human civilisation, to a growing population in the presence of scarce food. This is slightly different an angle of approach from those evolutionary models I have been presenting on my blog over the last few weeks, but what do you want: blog is blog, and scientific gossip is scientific gossip. This deep ontological distinction means I have to adapt my message to my audience and to my medium of communication. Anyway, why this? Well, because as I turned and returned all the data I have about technological change, I found only one absolutely unequivocal gain in all that stuff: between 1992 and 2016, the human population on the planet has doubled, but the average food deficit per person per day has been cut by half, period. This is it. Of course, other variables follow, of similar nature: longer life expectancy, better access to healthcare and sanitation etc. Still, the bottom line remains the same: technological change occurs at intensifying a pace, it costs more and more money, and it is correlated with improvements in the living conditions much more than with increased Total Factor Productivity.

There is a clan of evolutionary models, which, when prodded with the stick labelled ‘adaptation’, automatically reply with a question: ‘Adaptation to what?’. Wrong question, clan. Really. You, clan, you have to turn your kilts over, to the other side, and see that other tartan pattern. Adaptation is adaptation to anything. Otherwise, if we select just some stressors and say we want to adapt to those, it becomes optimization, not adaptation, not anymore. The right question is ‘How do we adapt?’. Oh, yes, at this point of stating my point I suddenly remember I have to do some review of literature. So I jump onto the first piece of writing about intelligent adaptation I can find. My victim’s name is Andrew W. Lo and his article about adaptive markets hypothesis (2005[1]).  Andrew W. Lo starts from the biological assumption that individuals are organisms, which, through generations of natural selection form so as to maximize the survival of their genetic material.

Moreover, Andrew Lo states that natural selection operates not only upon genetic material as such, but also upon functions this genetic heritage performs. It means that even if a genetic line gets successfully reproduced over many generations, so if it kind of goes intact and immutable through consecutive generational turns, the functions it performs can change through natural selection. In a given set of external conditions, a Borgia (ducal bloodline) with inclinations to uncontrolled homicide can get pushed off to the margin of the dynasty by a Borgia (ducal bloodline) with inclinations to peaceful manipulation and spying. If external conditions change, the vector of pushing off can change, and the peaceful sneaky kind may be replaced by the violent beast. At the end of the day, and this is a very important statement from Andrew W. Lo, social behaviour and cultural norms are also subject to natural selection. The question ‘how?’, according to Andrew Lo, is being answered mainly as ‘through trial and error’ (which is very much my own point, too). In other words, the patterns of satisfactory behaviour are being determined by experimentation, not analytically.

I found an interesting passage to quote in this article: ‘Individuals make choices based on experience and their best guesses as to what might be optimal, and they learn by receiving positive or negative reinforcement from the outcomes. If they receive no such reinforcement, they do not learn. In this fashion, individuals develop heuristics to solve various economic challenges, and as long as those challenges remain stable, the heuristics eventually will adapt to yield approximately optimal solutions’. From that, Andrew Lo derives a general thesis, which he calls ‘Adaptive Markets Hypothesis’ or AMH, which opposes the Efficient Market Hypothesis (EMH). The way it works in practice is being derived by close analogy to biology. Andrew Lo makes a parallel between the aggregate opportunities of making profit in a given market and the amount of resources available in an ecosystem: the more resources are there, the less fierce is the competition to get a grab of them. If the balance tilts unfavourably, between the population and the resources, competition becomes more ruthless, but ultimately the population gets checked at its base, and declines. Declining population makes competition milder, and the cycle either loops in a band of predictable variance, or it goes towards a corner solution, i.e. a disaster.

The economic analogy to that basic biological framework is that – according to AMH and contrarily to EMH – ‘convergence to economic equilibrium is neither guaranteed nor likely to occur at any point in time’. Andrew Lo states that economic equilibrium is rather a special case than a general one, and that any economic system can either converge towards equilibrium or loop in a cycle of adaptation, depending on the fundamental balance between resources and population. Interestingly, Andrew Lo manages to supply convincing empirical evidence to support that claim, when he assumes that profit opportunities in a market are the economic equivalent of food supplies in an ecosystem.

I find that line of thinking in Andrew Lo really interesting, and my own research, that you could have been following over the last weeks on this blog, aims at pinning down the ‘how?’ of natural selection. The concept is being used frequently: ‘The fittest survive; that’s natural selection!’. We know that, don’t we? Still, as I have that inquisitive ape inside of me, and as that ape is being backed by an austere monk equipped with the Ockham’s razor, questions abound. Natural selection? Splendid! Who selects and how? What do you mean by what do I mean by ‘who selects?’? (two question marks in one sentence is something I have never achieved before, by the way). Well, if we say ‘selection’, it is a choice. You throw a stone in the air and you let it fall on the ground, and you watch where it falls exactly. Has there been any selection? No, this is physics. Selection is a human concept and means choice. Thus, when we state something like ‘natural selection’, I temporarily leave aside the ‘natural’ part (can there be unnatural selection?) and I focus on the act of selecting, or picking up from a lot. Natural selection means that there is a lot of items, produced naturally, through biology (both the lot in its entirety and each item separately), and then an entity comes and chooses one item from the lot, and the choice has consequences regarding biological reproduction.

In other words, as long as we see that ‘natural selection’ as performed by some higher force (Mother Nature?), we are doing metaphysics. We are pumping smoke up our ass. Selection means someone choosing. This is why in my personal research I am looking for some really basic forms of selection with biological consequences. Sexual selection seems to fit the bill. Thus, when Andrew Lo states that natural selection creates some kind of economic cycle, and possibly makes the concept of economic equilibrium irrelevant, I intuitively try to identify those two types of organisms in the population – male and female – as well as a selection function between them. That could be the value I can add, with my model, to the research presented by Andrew Lo. Still, I would have to argue with him about the notion of economic equilibrium. He seems to discard it almost entirely, whilst I hold it in high esteem. I think that if we want to go biological and evolutionist in economics, the concept of equilibrium is really that elfish biscuit we should take with us on the journey. Equilibrium is deeply biological, and even physical. Sometimes, nature is in balance. This is more or less stationary a state. An atom is an equilibrium between forces. An ecosystem is an equilibrium between species and resources. Yes, equilibrium is something we more frequently crave for rather than have, and still it is a precious benchmark for modelling what we want and what kind of s*** we can possibly encounter on the way.

[1] Lo, A.,W., 2005, Reconciling Efficient Markets with Behavioral Finance: The Adaptive Markets Hypothesis, The Journal of Investment Consulting, Volume 7, no. 2, pp. 1 – 24

2 thoughts on “Equilibrium in high esteem

  1. What’s evolutionary modeling? People wrongly assume that evolution is progress-guided. It’s always been a crapshoot. 99% of fossils are extinct species today.


    1. For me, evolutionary modelling is the one based on a specific type of intelligent adaptation (to anything, i.e. to any set of stressors in the environment). This is adaptation based on producing consecutive generations of organisms, where each generation is an attempt to optimise the survival capacity. Female organisms select males, on the base of a set of characteristics, and this creates a hierarchy: traits the most frequently selected in one generation are in pole position for conceiving the next generation etc. Quite long and energy consuming, on the whole, but we can hardly find any better, at least for now, when it comes to complex adaptation.


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