A Note on Co-Movement

14 January 2011

Friday


The most common definition one finds of “co-movement” in economics is, “the tendency for two variables to move in parallel.” Co-movement is descriptive rather than explanatory. The co-movement of prices downward in deflation or of consumption downward in a recession are phenomenalistic characterizations of deflation or recession.

This sort of thinking is consonant with the temper of contemporary economics, which focuses on measurable, quantifiable data and noting patterns that emerge. This is a purely inductive and empirical method, but at the same time economics has become among the most mathematicized of disciplines, and these two factors together — empiricism and mathematics — make economics more of a true science than at any time in its history and more of a science than many things that are today called science.

Yet the scientific character of contemporary economic thought does not guarantee the accuracy of the conclusions of such a science. The more mathematized a science becomes, the more it is a formal institution — an institution of thought, as it were — and, as I have attempted to show in several recent posts, though in a social and political context, formal institutions always exist in parallel with informal institutions. Thus the formal institutions of science — quantified data and the mathematics employed to systematize and manipulate this data — exists in parallel with the informal institutions of science — the insight, intuition, and instinct that makes it all work, and which makes it possible for the best scientists to focus on the most fertile questions.

It has become fashionable to focus only upon the formal institutions of science, and the high-water mark of this trend was mid-century (by which I mean the twentieth century) positivism. With the emergence of Benoît Mandelbrot’s strong advocacy of the role of intuition in mathematics, a countervailing current has emerged, but the overall trend of recent scientific thought (by which I mean the past hundred years or so) is toward the development of the formal institutions of science. This is a very interesting question that I have written about in great detail in some unpublished manuscripts, so I will not go further into it at this time. But I needed to give this little exposition in order to make sense of the scientific character of economic thought and why it goes wrong so often.

Scientific and mathematical economics goes wrong because its formal institutions have been developed at the expense of its informal institutions. We need to develop our economic intuitions and instincts in order to guide our formal concepts in a fruitful vein. We need not sacrifice the scientific spirit in order to do this. I suggest that the concept of integral ecology, of which I recently offered an initial sketch, can give us a nearly adequate conceptual orientation in order to place our most formalized economic thought in a context that will make it come alive to what Alfred Marshall memorably called the ordinary business of life.

I primarily developed the idea of integral ecology in a strategic context, suggesting that the contemporary idea of battlespace can be superseded by a more comprehensive idea of battle ecology. But I intended the idea of integral ecology in an absolutely abstract and general sense which ought to be equally applicable to any discipline. Therefore it is to be expected that integral ecology has applications in economics.

In battle ecology, the central actor or agent is the solider; in economic ecology, the central agent is economic man, homo economicus. While the very idea of homo economicus has been controversial, and I have written about it many times in this forum, I am not here trying to take any position on a controversial issue. I simply want to indicate that the individual as an economic agent is the figure that would appear in the center of a diagram of integral ecology focused on economics.

Co-movement in an integral context possesses a greater depth and detail than a merely phenomenalistic account of prices moving in tandem. There are both formal and informal factors, qualitative and quantitative factors, that enter into the co-movement that defines a recession or a period of inflation. In a recession, there is not only a co-movement of prices and demand and other economic measurements; there is also a co-movement of attitudes. In a severe recession, or a long-lasting recession, we see a downward movement of what Keynes called “animal spirits,” and, in a sufficiently comprehensive context, the movements of animal spirits and the movements of prices and inventories and factory orders are co-movements on a grand scale — they are integral co-movements.

With a sufficiently detailed account of the integral ecology of homo economicus, it might be possible to show not only a phenomenalistic coordination of co-movement, but an actual explanation of co-movement rooted in the concrete realities on the human condition.

I will not attempt to demonstrate this at the present time; it is too large a job for the moment. So I only suggest it, and depend upon the instincts and intuition of my reader to see the potential of this idea. The inter-connectedness of all things, which in biology is called the web of life, and which in mysticism is called the divine union of things, need not be relegated to pure empirical science or to pure intuitive mysticism. There is a middle ground of conceptual investigation that can enlighten even while remaining rational. The idea of integral ecology appeals to this intellectual middle ground and possibly gives us a conceptual framework in which the intuitively obvious relationship between low spirits and low economic performance can be unified in an explanatory context.

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