W. Brian Arthur joins the show to explore how economic policies are gamed. They discuss gaming systems, manipulation in the 2008 financial crash, and the vulnerability of economic systems. They also delve into the consequences of private control over financial systems and the need for understanding and addressing these issues.
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Quick takeaways
Complex systems exhibit emergent behaviors that are often unexpected and not designed into the system, highlighting the need for a forensic branch of economics to analyze and understand failures.
Economists can identify weaknesses, anticipate potential gaming strategies, and design more robust systems by stress-testing economic models and policies.
Deep dives
Difference between complex and complicated systems
In this podcast episode, the host discusses the distinction between complex systems and complicated systems. While complicated systems can be understood by breaking them down into their component parts, complex systems rely on the interactions between those parts. Complex systems exhibit emergent behaviors that are often unexpected and not designed into the system. A notable example is the tax system, which starts as a complicated system with rules but can turn into a complex system when people exploit loopholes and engage in tax avoidance.
Gaming economic policies
The podcast explores how individuals game economic policies and systems to their advantage. It highlights the ability of individuals to exploit and manipulate systems for personal gain. Examples include the exploitation of the rating system by Wall Street firms, the collapse of the Icelandic banking system due to entrepreneurs taking control and making risky investments, and even gaming the university ranking system. These instances demonstrate how systems can be gamed, leading to significant consequences and highlighting the need for a forensic branch of economics to analyze and understand failures.
The importance of understanding system vulnerabilities
The podcast emphasizes the importance of understanding system vulnerabilities and the need for a forensic approach in economics. It suggests that economists should adopt a mindset similar to that of engineers in failure mode analysis. By stress-testing economic models and policies, economists can identify weaknesses, anticipate potential gaming strategies, and design more robust systems. The podcast proposes the use of computer models and intelligent agents to simulate and explore the potential exploitation of economic systems. It also highlights the value of learning from history and analogies to enhance system resilience.
Economic policies are often gamed by individuals for personal benefit. In this episode, we explore how this gaming takes place and what economics can do about it. To do that, we're joined again by W. Brian Arthur, External Professor at the Santa Fe Institute, and Researcher at the Palo Alto Research Center, formerly Xerox PARC.