RE: Fonseca on math and explanation

[GONZALO FONSECA <FONSECA@xxxxxxxxxxxxx>]

Greg Ransom put forth some interesting questions on the ability of formal
models to predict evolution of economic institutions.  The question is
whether there is, in fact, an "undesigned" social order which formal
models cannot hope to predict.  I would agree and disagree.
  	Firstly, I will agree that there is the perennial problem of what
Ulrich Witt calls "prerevelation": if you could predict today what
institutional innovations will arise tomorrow then the formal economist is
an enviable position of patenting that innovation and making a bundle.
	Postrevelation is simpler.  One can construct models where
particular institutions arise endogenously (e.g. Bob Townsend with
money and credit, Hesse with property rights, Arthur and David with
conventions).  But these, inevitably, only capture part of a totality and,
ultimately, are postrevelations - they explain how an institution or social
order came about which we know already exists.
	But you can, to follow part of Hayek's (1964) argument, do some
degree of prerevelation analysis by modelling complex economies in
such a manner that we can predict that certain developments will NOT
arise (e.g. no ice age next year, Hong Kong call options will not suddenly
become the accepted means of contract settlement among the Khoikhoi,
we will not revert to a pure credit system without a legal framework in
which to pursue contract disputes, private property rights will not
suddenly disappear in the service economy, the Spinning Jenny will not
be put back into use in industrial economies, Betamax will not reemerge
as the VCR standard).
	Social order is not necessarily completely open-ended beyond
"what we can imagine or construct".  We, as individuals in the economy,
DO construct that future social order but we may certainly not imagine it.
We, as economists, should be willing to spend some time figuring out
what types (though not exactly the precise character) of social order
that might arise or at least narrow down the options by trying to locate
what types will not arise.  We cannot do it precisely, but we can find out
a great deal about what may or may not emerge.

	"[E]conomic theory is confined to describing kinds of patterns
		which will appear if certain general conditions are
		satisfied, but can rarely if ever derive from this
		knowledge any prediction of specific phenomena."

		(Hayek, "The Theory of Complex Phenomena", 1964)

Our efforts at formal modelling are only to reveal (not necessarily
replicate exactly) general forces at work which tend to endogenously
lead to changes in institutions and social order.  We will probably not be
able to pin them all down at once to get the perfect picture (if you think
you can, then you should start making arrangements for your trip to
Stockholm).  But we cannot forget that complexity theory is still in its
infancy and there are limits to what we can demand of it at present.

Gonzalo Fonseca
New School for Social Research