Economic Models and their Deficiencies
On October 1st 2012, my class received a presentation from Tufts University Professor Amar Bhide based on his book, The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World. He imparted on me a better understanding of how limited the current economic models are in value to real world decisions.
Some have said that if countries like the USA allow other countries to “catch up” in certain fields, the standard of living here will go down. The proponents of this reasoning – called “techno-nationalists” – scream for increased government intervention in technology and education so that America can stay ahead of the pack. However, Bhide’s research suggests that this line of thinking is incorrect because it tries to simplify the complex global nature of the economy. He argues that prosperity is not mutually exclusive and that China or India’s advances in technology are actually a net benefit to America. This point does not imply that there shouldn’t be government investment in technology or science, rather it invalidates the specific techno-nationalist argument.
While examining the techno-nationalist argument, Bhide discussed how its proponents use economic models and calculations to justify their approach. However, he tempered this by saying, “a model is only as good as its assumptions.” With that, he introduced some of the aspects of global trade that the economic models don’t take into account. He suggests that the global coordination among the users, suppliers, and innovators in the field of technology is like a Massively Multi-player Innovation Game. He claimed that this phenomenon decentralizes the process of innovation such that the benefits are not confined to one specific region. Furthermore he pointed out that the major gains from any technological improvements are concentrated on the consumer’s and not on the producer’s end. Bhide argued that without taking these and other phenomena into account, the techno-nationalist model is invalid. Therefore he suggested that we should not worry about the relative rise of other countries in sectors like science and technology, because it only improves our standard of living. The success of other countries in those sectors give Americans access to cheaper gizmos and gadgets, allowing americans more luxuries.
This line of reasoning resonates with me. One of the basic tenets of economics is that free trade is beneficial for all involved parties. Each party has what is called a ‘competitive advantage’ where each one will be better off concentrating their efforts in one field and then trading with his partner. The techno-nationalist way of thinking suggests that we must interfere with this nature and impose obstacles in the way of free trade with other countries, so that we don’t lose our prosperity. In addition to the flaws in the model, it feels almost morally wrong to have that view.
As Professor Bhide pointed out, it is very difficult to accurately model a complex dynamic system like the global economy in any way that can lead to useful policy implications. This is because there is no easy way to do a controlled experiment on a single variable without a time machine since there are so many factors in play. One budding field of economic research that might be able to more easily address this is that of virtual in-game marketplaces. These completely electronic marketplaces exist in online computer games, where virtual goods have real value and are traded and used by millions of people. What is fascinating about these markets is that they contain all of the features of traditional markets but exists in a more easily controlled and monitored environment. While only a handful of economists are doing research in this field right now, the possibilities for addressing problems with economic theory and current models are endless. With the deficiencies of current economic models in mind, Bhide’s analysis and critique is necessary to allow us to move beyond this fear.
Bhide, Amar. “The Venturesome Economy.” The Cooper Union, 41 Cooper Square, New York, NY. 1 October 2012. Guest Presentation for the course S318: The Cooper Union World Forum.
Varoufakis, Yanis. “Valve Economics.” Valve Blogs. N.p., n.d. Web. 4 Nov. 2012. <http://blogs.valvesoftware.com/category/economics/>.