Doyne Farmer
speaker
145 appearances
1 recordings
1 series
first heard Oct 2024
last heard Oct 2024
Doyne Farmer’s voice in public audio — every appearance, attributed to the second.
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It's like, Having the economy work is like having a square meal every day and having that energy allow you to walk around and do the tasks you need to do. Very fundamental to everything we do. And now the ecology analogy comes from the fact that ecology is really a theory about specialists. I mean, what is grass? Grass is an organism that takes sun and earth and water and makes grass with it.
A zebra is an organism that turns grass into zebras. A lion is an organism that turns zebras into lions. They're all specialized. But the interactions can be rather long range. Get rid of the lions, grass gets hammered.
So even though the lion might not interact with the grass except to roll around in it occasionally, because the lions are controlling the zebras and the zebras are controlling the grass, it's all connected. So economists sort of, I mean, Adam Smith already said something like that. But our models very explicitly do that in a bounded rational setting because why are we specializing?
We're specializing because we're only boundedly rational. We get good at doing very specific things. We can't do everything. And so we put that in from the start and our models because we can put in more institutional structure and so on, allow us to think about the ecological part of the story with more richness. Now, back to the metabolism part of the story.
The metabolism, it's a bit different from your body in that metabolism is maintained by an ecology that the metabolism is feeding. The metabolism feeds all of us, but we're making that happen by each of our specialized roles.
We're like the little cells inside your digestive system that are themselves being fed by the fact that we're digesting food, but those cells can be very specialized and doing very different things.
Yeah. We were inspired by ecology. One of the nice things about hanging out at SFI is you get to know a little about a lot of things. And we said, well, the same basic thing is going on in the economy because we have all these specialists. And in particular, in ecology, one of the central ideas is that of a trophic level.
with the grass, grass has a trophic level of one, zebras have a trophic level of two, lions have a trophic level of three. And the way you compute trophic levels is you say an organism is equal to one plus the average trophic level of the things it eats, right? So, so. And you can actually just write that statement down and derive a key equation about the economy.
Because in this case, what happens is industries, trophic level in industry is one plus the trophic levels of its inputs. And labor, we put as the foundation, that's trophic level zero. So an industry that purely has labor has trophic level one. It turns out this is very closely related
to a concept in economics called output multiplier, which is used in a different way, but defined in a similar way. The prediction then is that the deeper your supply chain is as an industry, the faster you'll improve. I go, wait a minute, that sounds weird. Well, first of all, the depth of the supply chain is the trophic level here. Why?
Because if let's suppose you don't take in very many labor inputs and all your inputs are things that already have high trophic levels, then you're going to have an even higher trophic level than your inputs. And you keep going back down until you get back to labor and
So, in fact, the trophic level is the average time it takes a dollar that an industry pays to its labor to get into somebody's pocket or get it, in other words, to get all the way back to all the labor that went into making the thing as you go down the chain.
So this allows you to compute these trophic levels for industries, which typically, as in biology, organisms eat more than one thing, their trophic levels aren't just integers, they're more complicated. Similarly, here you can compute trophic levels for industries. Now, suppose we assume that every industry is innovating at about the same rate. Bald assumption, but good place to get started.
We can let it be different, but let's start out by assuming they all innovate at the same rate. Well then, if you have a deep supply chain, there are many industries that innovate on the way up to your industry. So you experience the product of all those innovations coming up the supply chain. So, you know, if my laptop, if the titanium that
Apple is using, it's cheaper, that helps make my laptop cheaper. If the chips get cheaper, etc. You're inheriting all those improvements in addition to the improvements the laptop designers themselves make. And so then we just compute it that this means things with deep trophic levels, their products should improve faster, meaning they should get better or cheaper or some combination of the two.
And Sure enough, we looked at the data, and we took advantage of the fact that trophic levels change slowly through time. So you can, roughly speaking, assume they stay constant. And you can predict 14 years ahead which products are going to be cheaper or not just based on that assumption alone. The prediction is quite good. And amazingly, it gets better as you go further forward into the future.
As someone who does a lot of predicting, that's a pretty unusual prediction.
Yeah. Now, interestingly, in biology, competition is a key part of evolutionary theory. But evolutionary biologists view competition as what leads us to speciation. That's one of Darwin's key insights. Whereas in economics, the mainstream people like Milton Friedman say, no, competition means you quickly come to equilibrium, the state of rest.
So they arrive at a completely different conclusion, both using competition. Now, it's in part because economists start with rationality, they assume we're all really smart, so we figure everything out, and that gets us to this equilibrium quickly. Whereas in biology, you know, there is random variation that's being amplified as a result of the competition and actually causes species to diverge.
I would argue that's also happening in the economy. Because, well, in some cases, we may behave rationally. I'd say the cases where we behave rationally are the ones where things are really simple so we can figure them out. But most of the time, it's pretty complicated. So that's not such a good approximation. And we, you know, overshoot, undershoot, and differentiate.
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