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On algorithms…

From The Advent of the Algorithm, David Berlinksi [emphasis added]:

“The digital is a machine and, like every material object, a captive in the end of various bleak laws of thermodynamics. Having run out of time, it runs out of steam. As does the computer programmer stabbing at the computer keyboard with the tips of two tense fingers. As do we all. An algorithm is otherwise. Occupying the space between the pinprick of desire and the resulting bubble of satisfaction, it is an abstract instrument of coordination, supplying procedural means to various ends. Contrived of signs and symbols, algorithms, like thoughts reside in a world beyond time.”

“What is a bureaucracy but a social organization that has since at least the time of the ancient Chinese patiently undertaken the execution of complicated algorithms?”

“An algorithm is a finite procedure, written in a fixed symbolic vocabulary, governed by precise instructions, moving in discrete steps, 1,2, 3…, whose execution requires no insight, cleverness, intuition, intelligence, or perspicuity, and that sooner or later comes to an end.”

is waiting, waiting, waiting

is back from holiday

is taking a few days’ off – bliss

Breaking the Climate Deadlock

Notes from ‘Breaking the Climate Deadlock‘ – Blair’s report for Japanese G8…

Financial meltdown: Building a shared platform

Extracts from an FT review of how a global response to the financial crisis was put together:

Start from discord: “It was becoming the worst financial crisis since the Great Depression and the industrial world’s political leaders were in cacophonous discord, singing from a variety of different hymn sheets while stock markets crashed loudly around them.”

Clear signs of defection: Germany and Ireland go it alone, Iceland on the brink of failure, creating pressure on other countries (who see money flowing out of their banks).

Role of UK leadership: “Initially it might have looked like panicked overreaction. So used were European countries to being lectured by – and to ignoring – Gordon Brown that when the UK invited others to follow, European finance ministers were initially reluctant.”

Implementation as an example:

“British officials noted with relief that, although interbank markets remained frozen and share prices continued to fall after their plan was announced, the price of credit default swaps on UK banks – insurance against them going bankrupt – had dropped. When the UK officials flew to Washington, they had some tangible evidence to wave at their counterparts to suggest that radical intervention could work – or at least, work better than anything else proposed so far.”

Creates shared awareness and leads to a common doctrine:

Despite the fiasco of the previous European economic summit, Mr Sarkozy started planning a second one for Sunday in Paris, this time of the 15 members of the eurozone together with the UK. François Pérol, his chief economic adviser, began drawing up a “common doctrine” for EU governments to follow, based on a blueprint provided by Jon Cunliffe, Mr Brown’s foreign policy adviser and a former Treasury official.

G7 meetings generally host little more than the final stages of a protracted technocratic negotiation over the precise verbal formulation of a carefully coded communiqué. This one was different. It had become geopolitical theatre. The political risk-reward calculation was shifting by the hour: the danger of being seen to use public money to bail out profligate bankers was rapidly being overtaken by the peril in standing aside while the global financial system melted down.

Ministers and central bank governors were aware that they had to do something to reassure bankers, investors and the public. Not only were interbank lending rates spiralling, they were becoming something of a fiction. Large banks were so scared of lending to each other that they were not even conducting overnight deals. “There was a very strong feeling that if we did not act then we could go over the abyss,” one official present says.

The atmosphere, however, was businesslike. “We knew we had the weekend to put it together,” says another participant. Still, the sense of crisis prompted the ministers to rip up the prepared G7 communiqué for the first time in recent memory. Shoichi Nakagawa, Japan’s finance minister, broke with his country’s usual reticence at G7 meetings, telling reporters in public and stressing passionately in private that Japan escaped its banking crisis only with public injections of capital. “What Japan can do at the G7 is share its experience of going through a tough time in the 1990s,” he said.

Hank Paulson, the US Treasury secretary, opened the discussion on Friday in a deliberately humble style, telling people to air their problems. This was partly, attendees say, to avoid the suggestion of heavy-handed leadership from Washington, but also because the US Treasury was determined to iron out differences and secure international co-ordination. The world’s leading economies, meeting in a grouping many outsiders had derided as being outdated and redundant, began to coalesce around a set of principles.

Jean-Claude Trichet, European Central Bank president, produced charts demonstrating how, in his view, the collapse of Lehman Brothers in mid-September had sent the crisis out of control. Mervyn King, the Bank of England governor, was eloquent in a call for action. The only sour note came with the intervention of Germany’s Mr Steinbrück who delivered his US and UK counterparts an I-told-you-so.

Then the urgent need for detail:

Several executives said investors would need more substantial fare than the bland reassurances the G7 had cooked up the previous night. Jacob Frenkel, vicechairman of AIG, the troubled US insurer, and former head of the Israeli central bank, was worried. “The markets are interpreting the lack of specificity as a manifestation of the lack of agreement,” he told the Financial Times on the way into the dinner. “Messages need to be extremely detailed, clear and specific. When it comes to mechanisms, they should indicate what mechanisms. When it comes to quantities, they should indicate the size. When it comes to timing, they should indicate the dates.”

Daniel Bouton, chairman of Société Générale, made an unusual public plea when introducing the evening’s speaker: Christine Lagarde, the French finance minister. “All of us are desperately waiting for details,” he said.

Pressure to follow the leaders: “The US Treasury also dropped its opposition to government guarantees for new debt issued by banks, realising that such guarantees were becoming the norm across Europe and that failing to follow suit would put their own banks at a competitive disadvantage.”

What could go wrong? In these circumstances, a pronounced risk of group think, lack of challenge etc.

Five big ideas

A table from The Origin of Wealth by Eric D. Beinhocker. .The Five ‘Big Ideas that Distinguish Complexity Economics from Traditional Economics.

	Complexity Economics	Traditional Economics
Dynamics	Open, dynamic, nonlinear systems, far from equilibrium	Closed, static, linear systems in equilibrium
Agents	Modelled individually; use inductive rules of thumb to make decisions; are subject to errors and biases; learn and adapt over time	Modelled collectively; use complex deductive calculations to make decisions; have complete information; make no errors and have no biases; have no need for learning or adaptation (are already perfect)
Networks	Explicitly model interactions between individual agents; networks of relationships change over time	Assume agents only interact indirectly through market mechanisms (e.g. actions)
Emergence	No disntinction between micro- and macroeconomics; macros patterns are emergent result of micro-level behaviours and interactions	Micro- and macroeconomics remain separate disciplines
Evolution	The evolutionary process of differentiation, selection, and amplification provides the system with novelty and is responsible for its growth in order and complexity	No mechanism for endogenously creating novelty, or growth in order and complexity

Sugarscape – a 1995 experiment by Joshua Epstein and Robert Axtell “to see if they could grow an economy from scratch.” The blurb to their book:

 

How do social structures and group behaviors arise from the interaction of individuals? In this groundbreaking study, Joshua M. Epstein and Robert L. Axtell approach this age-old question with cutting-edge computer simulation techniques. Such fundamental collective behaviors as group formation, cultural transmission, combat, and trade are seen to “emerge” from the interaction of individual agents following simple local rules.

In their computer model, Epstein and Axtell begin the development of a “bottom up” social science. Their program, named Sugarscape, simulates the behavior of artificial people (agents) located on a landscape of a generalized resource (sugar). Agents are born onto the Sugarscape with a vision, a metabolism, a speed, and other genetic attributes. Their movement is governed by a simple local rule: “look around as far as you can; find the spot with the most sugar; go there and eat the sugar.” Every time an agent moves, it burns sugar at an amount equal to its metabolic rate. Agents die if and when they burn up all their sugar. A remarkable range of social phenomena emerge. For example, when seasons are introduced, migration and hibernation can be observed. Agents are accumulating sugar at all times, so there is always a distribution of wealth.

 

Next, Epstein and Axtell attempt to grow a “proto-history” of civilization. It starts with agents scattered about a twin-peaked landscape; over time, there is self-organization into spatially segregated and culturally distinct “tribes” centered on the peaks of the Sugarscape. Population growth forces each tribe to disperse into the sugar lowlands between the mountains. There, the two tribes interact, engaging in combat and competing for cultural dominance, to produce complex social histories with violent expansionist phases, peaceful periods, and so on. The proto-history combines a number of ingredients, each of which generates insights of its own. One of these ingredients is sexual reproduction. In some runs, the population becomes thin, birth rates fall, and the population can crash. Alternatively, the agents may over-populate their environment, driving it into ecological collapse.

 

When Epstein and Axtell introduce a second resource (spice) to the Sugarscape and allow the agents to trade, an economic market emerges. The introduction of pollution resulting from resource-mining permits the study of economic markets in the presence of environmental factors.

From Beinhocker’s discussion: 

• Instead of starting with the assumption of a market, what are the “minimum conditions required to set off a chain reaction of economic activity. What would it take to get the system to start climbing the ladder of increasing economic order?”
• No simple cause-and-effect relationship between poverty and inequality. “The combination of the shape of the physical landscape, the genetic endowments of the agents, where they were born, the rules that they follow, the dynamics of their interactions with each other and with their environment, and, above all, luck all conspire to give the emergent result of skewed wealth.”
• Adding in sex leads to population swings, and widened gap between rich and poor. 
• Introduction of trade increases “the carrying capacity of the landscape, thus making everyone better off”, but also exacerbates inquality. Heavily trafficked trade routes emerge. But supply and demand does not reach equilibrium. “prices in Sugarscape move dynamically around an ‘attractor’.”
• Borrowing and lending leads to “a complex, hierarchical capital market”. “In some simulations, the hierarchical chain grew to five levels deep. The simulation not only evolved banks, but also evolved the Sugarscape equivalent of institutional investors, investment banks, merchant banks, and retail banks.

Origin of Wealth – complexity meets economics

More notes from The Origin of Wealth by Eric D. Beinhocker.

Meeting at the Santa Fe Institute in 1987 – between researchers working on complex adaptive systems and the economist establishment:

The meeting was set up like a rugby match. Squaring off on one side were ten leading economists captained by Nobel Prize winner Kenneth Arrrow… On the other side were arrayed ten physicists, biologists and computer scientists, captained by Phil Anderson…

Each side presented the current state of its field and spent ten days debating economic behaviour, technological innovation, business cycles, and the workings of capital markets. The economists were excited by the physical scientists’ ideas and techniques, but thought the scientists were naive and even a bit arrogant about economic porblems. On the other side, the physical scientists were impressed by the mathematical virtuosity of the economists and genuinely surprised by the difficulty of economic problems.

But what really shocked the physical scientists was how to their eyes, economics was a throwback to another era. One of the participants at the meeting later commented that looking at economics reminded him of his recent trip to Cuba. As he described it, in Cuba, you enter a place that has been almost completely shut off from the Western world for over forty years by the US trade embargo…

For the physicists, much of what they saw in economics had a similar ‘vintage’ feel to it. It looked to them as if economics had been locked in its own intellectual embargo, out of touch with several decades of scientific progress, but meanwhile ingeniously bending, stretching, and updating its theories to keep them running.