A Cybernetic Approach to Economics

Author: Robert Hoffman, Ottawa.

Since the meltdown of the global financial system in 2008 triggered by the sub-prime mortgage bubble in the United States, there is an emerging consensus, even among economists, that there is a need for new economic thinking2 (See Stiglitz, 2010 & Kaletsky, 2010). The economic thinking that has prevailed in postwar capitalist societies is based on the neo-classical – Keynesian synthesis, hereafter mainstream economics. Judged from within its own frame of reference, mainstream economics has been enormously successful. Over the postwar years in North America and Europe, economic growth measured in terms of GDP, has been sufficient to deliver increased prosperity and to maintain near full employment.

However, judged from outside of its own frame of reference, it is clear that mainstream economics has failed to address the following issues:

• Impending ecological limits exemplified by peak oil and climate change
• The conflict between the goals of economic growth and sustainability
• The inadequacy GDP per capita as an indicator of social well-being or prosperity
• The instabilities associated with financial bubbles
• The growing inequity in the distribution of income both within and between nations

New economic thinking must be capable of addressing all the issues above. Further, it is recognized that all five issues are interrelated. Actions taken to resolve one issue often have the consequence of aggravating other issues.

Why has mainstream economics been unable to address these issues? This is the question for the next section of this paper.

Mainstream Economics

The neo-classical – Keynesian synthesis frames economics as a constrained global optimization problem: maximize utility subject to the availability of labor and capital. Consumers and producers are utility and profit maximizers respectively. Production is the value added to freely available natural resources by the use of scarce labor and capital. This is the worldview articulated by Paul Samuelson in his Foundations (Samuelson, 1947). For this formulation to be valid, the following three conditions must be met.

1. Individual consumer utility functions must be separable and convex, therefore additive, giving rise to downward sloping demand curves.
2. The cost curves of individual producers must be U-shaped giving rise to upward sloping supply curves or supply curves that have the property increasing marginal costs.
3. The economy is not constrained by the availability of sources and sinks for materials and energy.

The full text of the paper is available here (in pdf format): Hoffman cybernetic approach

Reference:

A Cybernetic Approach to Economics

(Robert Hoffman, Imprint Academic, Jan. 1, 2010)

http://www.ingentaconnect.com/contentone/imp/chk/2010/00000017/00000004/art00005

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Bio: Robert Hoffman is one of the seven Canadian Members of the Club of Rome.  He is President of whatIf? Technologies Inc., a company that has modelled energy systems for Canada