I listened idly as two old friends hashed over the argument between Larry Summers and Biden administration officials about the inflationary potential of continuing low interest rates. This, I thought, was where I had come in. My mind drifted back nearly forty years, to the book I published in 1984, The Idea of Economic Complexity.
Its premise was what I took to be the similarity between the “price revolution” of the sixteenth century and that of the twentieth century. In the century and a half between 1500 and 1650, everyday prices across Europe had risen roughly six-fold, before settling on a new plateau. Theory usually ascribed these otherwise baffling developments to the importation of New World treasure and improvement in mining techniques: too much money chasing too few goods.
In the fifty years after World War II, costs of living grew as much as five- or ten-fold, depending on how which costs were measured, before leveling off again. This time opinions were divided. “Keynesians” emphasized political pressures, “cost-push” factors in some instances, “demand-pull” episodes in others. “Monetarists” insisted central bankers’ increases in the quantity of money were to blame.
In The Idea of Economic Complexity, I suggested picking up the other end of the stick. Perhaps changes in the world economy had been at the heart of both price explosions: the settlement of the New World, the development of the slave trade, and the rise of the middle class in the sixteenth and seventeenth centuries; democratization, urbanization, globalization and the growth of government in the twentieth century.
The book persuaded few. I gradually became interested in what economists seem to understand pretty well already: prices and quantities, trade policy, economic history, social welfare. In all the years since, I have made only one advance in speaking more clearly about what might be meant by “economic complexity.” Economic complexity is surely complexity of the division of labor.
At some point the acuity of Adam Smith’s dictum that the division of labor is limited by the extent of the market was borne in on me. There are other ways of maintaining the division of labor, chiefly taxes. Even in wartime, though, taxes, too, depend on the extent of the market.
How might the division of labor be described? One promising beginning employs network theory. An alternative, suggested by Eric Beinhocker, in The Origin of Wealth: The Radical Remaking of Economics and What It Means to Business and Society (2007) sought to apply the mechanisms of biological evolution. In that case, cladistics and other systems of phylogenetic nomenclature are worth exploring. For managers of a monetary system to efficiently control a global division of labor of evolving complexity, they must know something about complexity itself.
Economics has made great strides borrowing analytic techniques from pneumatics and celestial mechanics. There is probably something to be learned from evolutionary biology as well. It was here, and to Peter Blume’s painting. The Parade, on the jacket of The Idea of Economic Complexity, that my mind wandered while my friends debated fiscal pressures.
Economic journalism has plenty of first-rate reporters at work in financial capitals around the world, but the Covid pandemic has been hard on those of us interested in taking stock of longer trends. Get ready for a spate of books – some of them probably quite good – about the significance of digital and crypto-currencies for money. Complexity was a young man’s book. The next book here – the last – will be different altogether.