The Real Economy

Function assignment options - Part 2
The implications of location state theory on economics

Hector McNeill¹
SEEL

In 1985, 10 years after initiating the development of RIO-Real Incomes Objective theory and practice, I initiated another line of enquiry which has become Locational State Theory (LST)². This short article reviews some interesting aspects of this work which relate to the importance of re-evaluating economic theories previously declared, by some "prominent" economists, to be defunct

How LST was initiated

LST was initiated as a result of my work as a Senior Scientific Officer with the Information Technology and Telecommunications Task Force at the European Commission managing an in house project. This project was to identify leading edge learning system applications for the European IT industry. This work had been initiated because of the Sputnik effect³ impact on Europe and the USA of Japan's declaration in their ICOT Report, that they intended to become the world leader in knowledge engineering; today referred to as Artificial Intelligence (AI).

The reason to pursue the enquiry that gave rise to LST was that it was self-evident that the trend was towards a global network which could carry most communications. Many suggested protocols to support learning for business and economic policy decision making all faced a common problem concerning the information content in terms of its reliability for decision making. How does a decision maker specify the information required? How can the supplier of that information understand the specification? How does the decision maker know if the information received is to specification? These are very simple and obvious questions but the practical procedures required are more complex and with fascinating but important ramifications. LST work has been carried out at SEEL since 1987 has continued to uncover new insights which touch on program logic and the notion of complete and incomplete data sets and object oriented logic for simulation.

What has this got to do with economics?

An unexpected, but I now see it should not have been unexpected, is that by adding LST elements to all information, the clarity of a space-time perspective, or relativity, enables a re-evaluation of critiques, made in the past, by leading economists of the work of others. This led, on several occasions, to the abandonment of theories which today are totally valid and applicable in practice. Alfred Korybski put his finger on the issue by stating that all experience or statements are time-bound. Each economic concept proposed is conditioned by the state of knowledge of the person expressing a concept or idea. Every time one economist takes concepts proposed by another an additional set of priors are added which will add another perspective. Priors are the collection of assessments of probabilities of events and relationships an individual possesses based on his experience of life, education, observation and reflection. In 1854, George Boole's book "The Laws of Thought", set out in a mathematical logic (Boolean Logic), how we deduce, based on information, probabilities of events and our knowledge of cause and effect (determinant relationships). Economics is all about this type of modeling.

The interesting point I wish to make is that much of the judgment of the practicality of economic theory is based on the evaluation of the access to information to measure relationships or gain oversight of policy progress. So where this is reckoned to be difficult the conclusion is that the theory, applied in practice, is unlikely to work as intended.

George Boole's contributions are used to this day to optimize the design of digital logic circuits and most computer programs. The operation of the W3 on the Internet run on Boolean Logic. The sheer power of this system now completely invalidates many of the past critiques that were leveled at economic theories which we need to admit, consist of theories and policies shaped in the eighteenth century (Adam Smith) and a host of economists working in the UK and Europe through the 19th century up to the present day.

An example

An example, which I only came across last week, was criticisms of Pigou's 1920 propositions concerning his Pigovian tax on those creating negative externalities such as pollution. Ronald Coase and Ludvig von Mises both criticised his propositions as either inefficient or impractical. Mises referred to the "calculation and knowledge problem". His reasoning was as follows:

1. Governments cannot issue the correct Pigovian tax without knowing in advance what the most efficient outcome is.

2. This would require knowing the precise amount of the externality cost imposed by the producer, as well as the correct price and output for the specific market.

3. If lawmakers overestimate the external costs involved, Pigovian taxes cause more harm than good.

As a result, there was a loss of interest in Pigou's contributions to Welfare Economics but, in particular, the Pigovian tax. However, today Pigovian tax is the basis of global Carbon trading and European surcharges on different types of products such as plastic bags. In the case of carbon trading modern IT and telecommunications systems, all operating, largely faultlessly, because they are based on Boolean Logic, made this feasible.

Time-bound comments

Coase made his critique in the 1960s and Mises died in the 1970s, so they both made their comments related to the limited function assignment options they considered to be available at the time in terms of information access. Therefore, they might have been correct at the time of their criticism given the then state of IT and communications. The selection of function assignment options always come with an opportunity cost. However, the opportunity cost changes over time. As changes in technology progress, the elaborate and well-meaning critiques, made in one period, can be invalidated in a following period. This is because the relevant content of the data sets to be applied to the logic of the argument (Boolean deduction) changes. The updated data set are the quality of the information, knowledge of probabilities and the determinate relationship between the economic proposition and current feasibility of its application. As a result the appropriate logic to be applied when assessing economic propositions changes to the degree of invalidating past time-bound critiques.

For the living, it is necessary to re-evaluate economic theories which have been declared at different times to be defunct and to have been abandoned. The digital revolution holds out a hand to help us and we should willingly grasp this opportunity while keeping an eye on the reliability of the information flowing through the system. It is on this latter point that LST has an evolving role.

All modern economic policy formulations are time-bound

In terms of RIO-Real Incomes Objective policies, most criticisms I have encountered come from feedback based on commitments to theories made over the last 100 years, and sometime more, to all conventional economic policies whose "operation in practice" is based on the Aggregate Demand Model. This commitment and its time-bound nature binds in Keynesianism, Monetarism, Government Revenue Seeking (fiscal policy), Supply Side Economics and the evolving Modern Monetary Theory into a time loop which started running many years ago. The probability that the twists and turns of the last century resulted in poor decisions on the models to be applied so as to render the resulting framework an ill-fit to today's challenges, is very high.

I am now reviewing these "models" to understand how this time-bound commitment affects their efficiency and effectiveness, and yes, their relevance to today's needs.

¹ Hector McNeill is the Director of SEEL-Systems Engineering Economics Lab.

² Locational State Theory links data elements to the location, in terms of time and geographic location (time-space), of the objects which the data elements represent as values of object properties.

³ The first Sputnik effect was the impact of the 1957 launch of the world's first artificial satellite by the USSR giving rise the reaction by the USA initiating the "space race".

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