Tuesday, February 1, 2011

Economics defines life

This is expanded from a comment I made here.

Economists have, quite unintentionally, come up with a defining characteristic of being alive. A living thing is something that has revealed preferences.

That is, a thing is alive if it acts to seek some states of affairs, is indifferent to some and avoids others. A living thing does not act merely according to outside causes operating on it but, within the wider causal framework, it seeks, ignores and avoids on its own volition and for reasons internal to it. It is thus an agent. It has preferences, it prefers one thing to another and acts accordingly. Anything that does that, is a living thing. Both the actions and the intent might be extremely rudimentary, but even a virus acts in a way a rock does not because the virus seeks things while a rock does not.

Computerised systems, for example, act according to reasons deliberately and specifically planted in them (though the deliberation is not always successfully executed). A computer or computerised system has functionality, but not intent, not purpose specific to itself. A computerised system is a product of revealed preferences it does not have revealed preferences. It is not alive. It has revealed function, but not revealed preference.

If a living thing does not get enough basic nutrients to consume and sustain it, it dies. This basic truth is one of great determining facts of the history of life on this planet, both human and non-human. It is a basic driver of revealed preferences, there being a general revealed preference to live. (Though even suicide is a manifestation of revealed preference.)

Getting enough to eat and drink typically involves eating other living beings. This complicates the existence of both eaters and eaten. If a living thing succeeds at breathing, eating and drinking long enough, it can have offspring. If they survive long enough to produce offspring, the process continues and whatever of their characteristics are inheritable get passed on. If they fail, they are not.

Which makes budget constraints useful for thinking about natural selection: because we are dealing with beings revealed preferences who require resources (typically by breathing, eating and drinking) to continue and so act according to, and are constrained by, available resources. A living thing seeks to occupy a sustainable ecological niche in a similar way that a firm seeks to occupy a sustainable commercial niche. Both engage in a process of action and discovery seeking to sustain themselves.

The existence of extinction events provides a dramatic example of why budget constraints are a useful way to think about natural selection. One can think of extinction events as being the most dramatic manifestation of an ecological equivalent of the business cycle.

An extinction event is when budget constraints shrink massively and suddenly such that whole species disappear because there are no available choices that will sustain their life. Their budget constraints become so constraining as to be unable to sustain life. (In economic jargon, extinction events are massive supply shocks.) After the event is over, budget constraints expand dramatically as available resources increase back towards what they were before the event. Many new "experiments in living" (known as 'species') evolve. So there is a surge in the number of species. This stabilises until one gets a fairly even pattern of extinctions and additions. Until the next extinction event, the next supply shock that massively reduces available resources.

So, any notion of 'adapted' or 'fitness' applies within some structure of budget constraints, within some pattern of available niches/resources. Something that was adapted just fine when resource levels were normal can prove to be insufficiently adaptive to survive the extinction event. This is all the brutal logic of natural selection cares about, but it does mean that ‘adapted’ or ‘fit’ applies according to a particular context, to a particular set of wider circumstances.

Moving from the sublime to something rather less, this is why I have problems with the Austrian economics notion of ‘malinvestment’. What’s a fine idea in downturn Houston may very much be “malinvestment” in Port-au-Prince. If firms go bust when economic activity drops significantly, what does that prove except the level of economic activity has dropped significantly?

Just as when species go extinct in a mass extinction event, that proves nothing about their adaptive fitness in general, merely that what worked fine in the previous circumstances does not work fine in the awful new ones.

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