THE IDEA OF ECONOMIC COMPLEXITY: or Why Prices Won't Go Down

These days, many of the snappiest, most stimulating books are on economics. In this instance, the timing looks bad: explanation of ""why prices won't go down"" when the latest talk is of deflation? Moreover, Boston Globe economics reporter Warsh is rejoicing in the discovery of a phenomenon--the connection between complexity and price levels--familiar to anyone who's ever tried to replace a simple, inexpensive household gadget. But this is one of those ideas whose beauty lies in its obviousness. What Warsh is saying is that neither the General Equilibrium Theory, which presumes that prices balance supply-and-demand, nor the Quantity Theory of Money, positing that price levels reflect the relative proportion of money and goods (thus inflation is ""too much money chasing too few goods""), explains the recent price explosion: we are not paying more money for the same old things, ""we are buying a new and more complicated bundle of goods and services, often including many things that are apparently quite unrelated to the products for which we pay."" Take the notorious examples of health costs and defense costs: some say that methods of financing (health insurance, cost-plus contracts) cause complexity, that wasteful buyers or greedy sellers drive up prices. Warsh argues, rather, that the product--CAT scanner or atom bomb--is different; by analogy with the ecologist's ""food web,"" he proposes a ""cost web"" to represent the economic complexity of each system. He instances oil, the epitome of ""the same old thing""--except that we're now paying for ""everything from AWAC planes to gambling casinos through new oil-producing equipment."" Will prices therefore go on rising forever? No: looking backward, Warsh cites three earlier price explosions, each of which leveled off, with the diffusion of technology and costs, into a new balance, at a higher level. . . which Warsh equates with economic growth. Instead of ""inflation,"" then, we should speak of ""conflation."" There is more to the argument (adduced from other fields, tracing individual contributions, asking why economists shun complexity) and, finally, there are policy considerations--including ""who pays for progress?"" Warsh doesn't pretend to have found an all-purpose, allencompassing answer; but he has found a useful descriptive/analytical tool--and given it a dandy sendoff.