Is Money Itself a Ponzi Scheme?

Here’s an alternative view of economics that I heard in a talk, written up by Douglas Rushkoff. The most interesting point to me is this one:

Local currencies favored local transactions, and worked against the interests of large corporations working from far away. In order to secure their own position as well as that of their chartered monopolies, monarchs began to make local currencies illegal, and force locals to instead use “coin of the realm.” These centralized currencies worked the opposite way. They were not earned into existence, they were lent into existence by a central bank. This meant any money issued to a person or business had to be paid back to the central bank, with interest.

What does that do to an economy? It bankrupts it. Think of it this way: A business borrows 1000 dollars from the bank to get started. In ten years, say, it is supposed to pay back 2000 to the bank. Where does the other 1000 come from? Some other business that has borrowed 1000 from the bank. For one business to pay back what it owes, another must go bankrupt. That, or borrow yet another 1000, and so on.

An economy based on an interest-bearing centralized currency must grow to survive, and this means extracting more, producing more and consuming more. Interest-bearing currency favors the redistribution of wealth from the periphery (the people) to the center (the corporations and their owners). Just sitting on money—capital—is the most assured way of increasing wealth. By the very mechanics of the system, the rich get richer on an absolute and relative basis.

The biggest wealth generator of all was banking itself. By lending money at interest to people and businesses who had no other way to conduct transactions or make investments, banks put themselves at the center of the extraction equation. The longer the economy survived, the more money would have to be borrowed, and the more interest earned by the bank.

Does that make sense? Opinions please? Counterarguments?

Although Rushkoff has a substantial Google footprint I was unable to turn up a rebuttal. (This may be symptomatic of how thoroughly we talk past each other these days.)

To me it seemed compelling at first blush, but when I tried to convey it to others I was not altogether convincing. On further consideration, I conclude that it MUST be an oversimplification, because a Ponzi scheme can’t work for 400 years, and after all, the system DID succeed in increasing wealth vastly since medieval times.

But there’s a real question here for those of us (like me and Rushkoff) interested in economics, skeptical of it, and not especially well-versed. Is growth built in? Because if it is, we have a problem. Given that wealth has environmental impact, given that there is no particular constraint that causes environmental impact per unit wealth to fall as fast as aggregate wealth increases, we eventually hit a brick wall.

There is certainly a case to be made that eventually is now, and accordingly Obama’s efforts to reboot the economy are doomed to failure. But that’s not what I am trying to address here.

The question I would like to raise is whether unsustainability is built in; whether as Rushkoff suggests we are institutionally incapable of a steady state economy, or whether it might be workable.

The alternative, which I find very intriguing, is the idea that somehow we constrain environmental impact per unit wealth to fall slightly faster than wealth increases. This would be the least disruptive path to sustainability if it were possible. Admittedly this is a vague idea. I got the germ of it from Robert Rohde on a very interesting thread on the globalchange list a couple of years back, when he just calmly asserted that it could naturally emerge that way. Now with all respect to Robert I thought that was a bit, hmm, overoptimistic. But maybe there is a way to make something like that work with some careful design effort.

Maybe we can have a steady state impact constraint atop a nominally growth-based economy by design.

I don’t know of anyone (besides myself) trying to envision how such a thing might be constructed. The concept that sustainability could be constructed as a layer on top of an unsustainable system came to me almost two years ago under the influence of a (mostly very technical) Google talk, but I haven’t made much (OK, any) progress with it. I find it hard to communicate these sorts of ideas to the sorts of people who might be able to get a grip on the details. Maybe it’s just not feasible, but I’d like someone who knows why to acknowledge what I am saying and then reply with an explanation of why it couldn’t be practical.

I have a couple of grounds for skepticism myself.

It seems to me that eventually production is actually negatively correlated to wealth. First of all there is the lawnmower problem.

Then there is the fact that I, for one, measure my own wealth in social and artistic and intellectual experiences. This decreases my net impact but doesn’t really promote growth at all. If the society moves to an economic metric that values low impact wealth, that means information will be monetized (DRM and such). Recent trends are not indicative that this will work. What’s more, there are strong reasons to believe that they shouldn’t. In other words, the attention economy doesn’t map very well onto traditional economics.

Most economists treat these as aberrations, but both of them are core features of my experience, which may have something to do with why I regard economics with considerable skepticism. But maybe these things can be worked around too.

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Economists Trying to Control the Discourse

You would think the situation might call for a revisiting of conventional notions, a moment of introspection, an admission that perhaps past advice may have been not entirely of the finest caliber.

You might think so but, well, no.

David Leonhardt, in an unusually early preview of this week’s New York Times Magazine:

But while Washington has been preoccupied with stimulus and bailouts, another, equally important issue has received far less attention — and the resolution of it is far more uncertain. What will happen once the paddles have been applied and the economy’s heart starts beating again? How should the new American economy be remade? Above all, how fast will it grow?

That last question may sound abstract, even technical, compared with the current crisis. Yet the consequences of a country’s growth rate are not abstract at all. Slow growth makes almost all problems worse. Fast growth helps solve them. As Paul Romer, an economist at Stanford University, has said, the choices that determine a country’s growth rate “dwarf all other economic-policy concerns.”

(Note, the links pasted through from the Times, which continues to have a completely idiotic policy to automatically link irrelevant articles, but that’s a minor gripe compared to this one. Normally I just excise them but I’m too peeved at the moment to bother.)

I admit I haven’t screwed up the courage to read beyond that point as yet. I’m sorry but it appears that I am too feebleminded to be able to understand the point on which the whole lengthy article expands.

Will someone, please, very slowly and patiently, explain to me what it is that is should be growing forever, how it is possible that it can do that (when all other growth processes in nature eventually terminate), and why we need it to do that? Please also explain why that should dwarf all other “economic-policy” concerns, like, say, sustaining a viable planet. I and the other seven billion of us would be most appreciative. Thanks in advance.

Update: Reading on:

For centuries, people have worried that economic growth had limits — that the only way for one group to prosper was at the expense of another. The pessimists, from Malthus and the Luddites and on, have been proved wrong again and again. Growth is not finite.

Which raises another request for assistance. Can someone provide such a “proof”, please? Perhaps that word means something different to an economist.

The rest of the article is not too offensive though it seems a bit oblivious to, well, a lot of things. To be fair I did like this bit though:

He then told a story that John F. Kennedy liked to tell, about an early-20th-century French marshal named Hubert Lyautey. “The guy says to his gardener, ‘Could you plant a tree?’ ” Summers said. “The gardener says, ‘Come on, it’s going to take 50 years before you see anything out of that tree.’ The guy says, ‘It’s going to take 50 years? Really? Then plant it this morning.’ ”

The Lawnmower Problem

OK, never mind, for the moment, if lawns are a good idea. Let’s consider lawnmowers.

If you have a typical American house, you have a typical lawn in front of it, a lawn that is in need of occasional trimming. Unless you contract out for lawn services, you almost certainly own a lawnmower too. Most likely it has a cheesy, loud, polluting little engine.
You only use this for an hour every other week, or 1/336 of the time. OK, you don’t want people mowing lawns at night, so say 1/168 of the available daylight time. So you and your 167 nearest neighbors own 168 times too many lawnmowers. If you could coordinate your lawnmowing, you would need to spend 1/168 as much on a lawnmower. Similar calculations apply to every other household tool you own that you don’t use intensively in your work or your principal hobbies.
OK, it’s a slight exaggeration for various reasons, but there is no reason 50 people couldn’t share a really good lawnmower except for logistics. Less intensive tool sharing is already happening informally in more civilized neighborhoods on local mailing lists. (“Has anybody got one of those really tall pruning shears?”) Sure enough, people are trying to build web tools to facilitate more effective sharing. ( H/T @timoreilly )
Though it strikes me as possibly overkill, and that perhaps a local mailing list would be more fun, this sort of thing may move the process of substituting relationship for stuff forward.
Now consider that this would reduce the demand for lawnmowers by 98% over the long term, and create a vast oversupply in the short run.
This is part of the trend to substitution of information for materials. Knowing where to borrow a lawnmower is actually better than owning a lawnmower: it saves you some storage. Substituting information for materials decreases impact on the environment; the impact from the manufacture of 49 lawnmowers in this case.
It will also greatly reduce employment in the manufacture of nasty little two- four-stroke engines. According to almost all economists and almost all politicians, this is a bad thing. Obama has as his first priority re-employing all the people who until recently were diligently employed creating, servicing and financing a huge housing glut. The public agrees. They are wrong.
Economists would argue in theory that if a web site or more reliance on mailing lists or even old fashioned community “bulletin boards” (corkboards and thumbtacks) can replace 98% of lawnmowers with a few pennies worth of information exchange, this amounts to creating value.
But it’s value that’s very hard to capture: the people putting up the web site will invest a few hundred hours of effort but not much else, and will probably get by on advertising revenues. The vast bulk of the return goes to the people who don’t have to get new lawnmowers. So in practice, wealth is moved from the money economy back to the informal economy.
GDP goes down. Employment goes down. Collective well-being goes up a little bit but individual well-being of people who make and market little two-^H^H^H^H four-stroke engines goes down. Crisis is declared.
Yet this is exactly the opposite of the behavior that got us into trouble in the first place: the replacement of community with commerce. Isn’t this the sort of “decline” we should be encouraging?
Of course it is no pleasure to lose your main income stream, especially when your savings are crumbling too. The response to this shouldn’t be to “revive” the economy, especially the manufacturing sector which has obviously overproduced. The response should be to make it less of threat to be unemployed: public health care, decent housing and food standards provided for everybody. Losing income should not be an existential threat. Calm, underemployed people can be a huge source for creativity and restoration of the social fabric. Desperate underfed people can’t.
The answer to past overproduction can’t be to bring back the good old days of overproduction.
Don’t work too hard to keep your job. Apply your extra efforts to find out how you can contribute to the informal economy.
Don’t replace your lawnmower. Meet your neighbors.
Relaxation is progress. Take advantage of the Great Unwinding, and unwind.

Via @timoreilly, here’s a discussion of the very topic at hand.

Can Computation Help Solve the Economic Crisis?


Thanks to “Tidal” for pointing out the fascinating essay by a similar title, CAN SCIENCE HELP SOLVE THE ECONOMIC CRISIS? by Brown, Kauffman, Palmrose and Smolin. I mostly agree with their perspective (I have a few quibbles about what “equilibrium” means) enthusiastically, and I appreciate the kick it gave me to express what I have come up with so far myself.

As I admitted in the discussion on a recent thread here, I have come to the conclusion that a workable, resource-aware economic theory is absolutely indispensable in the current circumstances. Unfortunately, we don’t really have one, so in our new circumstances, coming up with one is about the most important thing to do.

One thing about complex systems is that you don’t ever completely understand them; you just get to know them. The way you get to know things about the economy is exactly the way you go about getting to know things about oceanography, glaciology, geophysics/planetary physics and astrophysics, and to some extent meteorology, among many other disciplines I don’t have much of a feel for.

That is, you build a complex artifact that behaves similarly to the complex system in nature that is of interest, and you study it as a proxy for the unique real system, constantly seeking to improve its resemblance to the real system.

In other words, you build a science around computer modeling.

Actually, the best thing to do is to build a whole lot of computer models, and have them compete to give you the best explanation.

Climatological aside: Note that nobody has created an otherwise useful dynamic model of the atmosphere that has the small sensitivity that many people are urging you to bank on. I don’t know if this is for want of trying. It seems, actually, like something very much worth trying, so it surprises me that nobody wants to take it on seriously.

So how do you build a useful computer model of economics?

Well, let’s consider how you build a useful model of climate.

Is there some code that says “here is the El Nino kicking in every few years?” “here is the PDO” “time to add a cold front”? No, you let the properties emerge from the low level description: here is what a parcel of air will do, in this environment, heated in this way, pushed that. Then you put all the parcels together and watch them behave. Once they settle down and act reasonably, the process couples back, and you start learning things from the modeling process. The 3 degrees C global warming stuff is a byproduct. It is not the main output of the system; the system is the partnership of minds and complex simulations; the output is understanding about the real system.

There are models of the atmosphere with much smaller numbers of parameters, and they can be didactically useful and useful in coming up with hypotheses. The general equilibrium models of conventional economics are similar to those. They are like the undergrad matlab exercises in meteorology classes. Except that they seem carefully designed to be anti-scalable; if I recall correctly, computation cost for economic equilibrium models actually scales exponentially with the number of free variables!

What we want is a huge system where the computational cost of each individual event is very small and the scaling is nearly linear. And we want huge amounts of observational data to calibrate against them. And we want to build lots of models. Lots and lots.

The analogy to a continuum model for economics is an agent model. The simulation thus needs make no assumptions of perfect information, price equilibrium, discount rates, anything. No approximation for the whole system is necessary and it seems likely that none is even possible. What we can model is how individuals make decisions in certain circumstances and see the large scale economic activities that emerge.

I’ve met a few people who both understand this much and indeed are pursuing it. Yet they are still hypnotized by the idiot passivity of the “neoclassicists” (H/T Erik Conway) and thus, think of economics as a branch of pure science,.

It is anything but. Economics is the most applied of sciences.

Of course, for almost thirty years we have been assured that everything would go just marvelously if we refrained from designing the economic marketplace at all. The result was, well, we’ll see. Everyone agrees that the times for hands off is over.

Nowadays, we don’t need to just understand economics as a matter of some urgency, we need to apply the understanding that we acquire. Computational science applied diligently and competently is the only tool that is up to the job.

I say this even though, of course, computation was at least an accelerating and exacerbating factor in the current mess.

The purpose of the computations is to represent how humans, acting individually and collectively as economic actors, make decisions, and to design the system to reward benign behaviors and increase the cost of behaviors that might be harmful, even sociopathic. Such experiments performed, appropriate incentives and disincentives can be written into law after they have been written into a particularly appealing model.

The idea of achieving such an option by the sort of deal-cutting and difference-splitting that normally is how laws are put into effect will fail. The entire package has to be designed coherently and implemented both urgently and fastidiously. The response of the real system has to be monitored carefully, and feed back to tune the system.

People need, essentially, the maximum freedom that is consistent with a sustainable totality. That is a hard problem.

It also has to get past the politicians intact. Also hard.

A lot of people want very much for it to be an easy problem, but it ain’t.

Economics is about to begin to undergo a transition very much like the one climatology is still struggling with. Suddenly, it is consequential, and as a consequence of its sudden consequence, it is not up to the task. It’s a matter that should engage whatever creativity and intelligence that can be mustered.

Computer generated glowing fossil Created by R Neil Marshman in 2003 – using a fractal generating program and then enhancing it with Paintshop to create a glowing fossil image. Released under GNU GFDL 1.2.
See Wikipedia for details.

Update: My enthusiasm for the Edge article has waned upon reading the commentary to the article, though I’m still glad of the incentive to state my beliefs about this.

Of course, different people have different ideas of what the “crisis” actually amounts to. They seem to be talking not about what I’d call the economic crisis but merely about the financial crisis that hastened the inevitable economic crisis.

I am looking at a longer term than these people are. In my view the economic crisis is about reconciling the creative power of the marketplace and the desire for prosperity with the constraints of sustaining the planet as a suitable habitat for life indefinitely.
Regarding the short run, I don’t know whether a theory of economics can properly regulate the financial sector without substantially diminishing it (my own preference). Anyway I very much doubt that such a theory could emerge in time to help with the present tangle. And in any case, finance is just the froth; I am interested in the cappuccino. The fact that some people like too much froth is neither here nor there. As far as I am concerned, the crisis is reconciling economic policy with sustainability with political viability.
Second, they refer to Eric Weinstein who in his comments and on his website refers to some advance in economic theory involving differential geometry. I don’t doubt that a better general model could emerge from some mathematical legerdemeain, but better is not necessarily good. Climatology teaches us the limits of general theories of messy systems. What I’m advocating here is a pragmatic approach that lets go of the idea that economics is a discipline that is subject to a eureka-style generalization at all.
Regarding the ambitions of this posting, I don’t really know on whose behalf I’m being ambitious. It’s hard for me to see a scenario where I actually end up working on such a project. I’d be willing to participate if I could see how, but I have shown no signs of developing the political skill or political capital to start such a huge ball rolling.
I am hoping someone else reads this who can pull it off. (Youth would be a tremendous advantage here.) This is also a long-term project, and its fruits probably won’t emerge for decades.
I have ideas sometimes. Some of them are good sometimes. I am not too fussy about taking credit for them either, so just go for it if you can. A hat tip in my direction along the way would please me but is in no way required.
What I am saying is that, at least in part, this is what a realistic science of economics would look like.

Economics as Begging the Question

I mean “begging the question” in the original sense, of constructing a complex but ultimately circular argument that depends on the result you intend to to prove, not the unfortunate sense that it inevitably developed in casual speech of “begging for, or raising another question”.

I think great swaths of economics are based on question-begging. In pursuing the blogospheric take on Tierney vs. Holdren, I came across this amazing essay by Dave Roth on a blog called Geryon: Obama’s science advisor and the theory of sustainability. (See also follow-up articles Response on Holdren and Tierney and The Holdren Pick on the same blog, the latter by co-author “Bosie”.)

For a more defensible quote, consider this from the latter:

I did not intend to question the ability of Holdren to be a useful and competent science adviser. I know nothing about his views other than in the Erhlich-Simon wager, so perhaps it is unfair to judge him on the basis of this incident.

Note, however, that Holdren can continue to maintain something (that we can run out of natural resources like oil) that is provably wrong on economics but that this does not make people question his fitness as a science adviser, while Larry Summers statements on genetics and intelligence (which may be wrong but are not universally agreed to be wrong) disqualified him in the eyes of many from being an economics adviser. I find this double standard interesting.

Now this sounds reasonable at first blush. I don’t propose to open the Summers can of worms here, but it is interesting that the claim is not just that “we are running out of oil” is taken as false nor even that the claim “we CAN run out of oil” is taken to be false, but that it is taken to be provably false ON ECONOMIC GROUNDS.

This is perfectly silly, isn’t it? Whether there is or isn’t an essentially infinite supply of a consumable resource is not a question that can be settled by economics, any more than the orbit of Jupiter can be settled by a plant taxonomist. If there is a result in economics (to the exclusion of geology) that shows that “it is impossible to run out of oil”, that result is false, and must be based on false reasoning or false assumptions.

Now let’s go back to the original article:

Now, of course, I might disagree with (to take just one example) the psychologist’s conclusions about what we should do in response to the agreed-upon fact that x percentage of child abusers were abused themselves. That is to say that it is generally considered acceptable for me to disagree with an expert on the ultimate implications of basic facts and theories in the sciences (such as, e.g., the best policy for preventing child abuse), but it is not considered acceptable (i.e., worthy of an educated, intelligent person) to disagree with them on what the basic facts and theories are.

When a biologist explains the theory of evolution, provides evidence for the theory, and then shows that the whole framework of biology is based on this theory, only a deeply unscientific person would dispute it. We might still fairly dispute whether this theory means that there is no god (for example) — so we could disagree on secondary matters — but on the primary matter itself there is no real tolerance for disagreement (and there shouldn’t be either).

And this rule holds for basically every hard and soft science I can think of except for one, and that one is economics. For some reason, it is considered completely acceptable for intelligent, educated people not only to disagree with economists on the secondary matters (i.e., the ultimate implications of economic theory and facts) but also on primary matters (i.e., on the facts and basic theory themselves).

People can, and do, routinely claim things like “trade makes everyone worse off,” “the earth will run out of natural resources,” “the rise of China and India will be bad for US standard of living,” and “the global prosperity of today is not sustainable.” All of these things are not only proven wrong by economic theory, but they are demonstrably wrong and can be shown to be demonstrably wrong with all sorts of empirical evidence. But for some reason, it’s entirely legitimate to ignore or disbelieve the most basic tenets of economics in a way that is not permissible in any other field.

Well, I don’t think that’s true at all. Climatology, for one, is constantly questioned as we can attest around here easily enough. Evolutionary biology is constantly called into question by fundamentalists. Even branches of pure physics are sometimes questioned for being unfalsifiable and fanciful. The claim that it should be otherwise
(“there is no real tolerance for disagreement (and there shouldn’t be either)”) is made without justification, and shows a real lack of understanding of human intellectual history. Disciplines really do go off the rails; disciplines really ought to be prepared to defend themselves.

If someone makes the claim that a theory of human resource allocation decisions is sufficient to prove the claim that physical reservoirs of a consumable resource are inexhaustible, they are making a remarkably extravagant, to my ears bizarre claim. I don’t believe them that this is “proven” by economics, and what is more, if it turns out that most economists believe such a thing, it reflects very badly on the credibility of the field as a whole.

The whole Tierney/Holdren thing is great in that it brings the question of the relative credibility of economics vs climatology into focus. I think it’s a very good idea to keep this question in people’s minds.

Roth’s position is easy and at first blush consistent: “trust all experts”. However, I will have no difficulty finding experts on oil recovery who believe that we are closing in on depletion of practically recoverable oil. This contradicts Roth’s claimed economics-based expertise, and thus resolves nothing. We have to determine whose “expertise” actually corresponds to reality.

Interestingly, one can make an economist-style argument by noting that oil companies hire many more seismologists and geologists than they do economists…

 

Another Sign of Dawning Realization

Dot Earth is running “Eleven Questions for Obama’s Science Team” and I would like to especially recommend they (and all of us) think long and hard on question eight, which is a nice statement of one of our themes here:

My request to the Obama transition team is to introduce the economy team to the science team. Economists like Daniel Tarullo would benefit from discussing the laws of thermodynamics with Steven Chu. I’m also sure that the science community would benefit from learning something of the complexity of economics theory and practice. New ideas might evolve!

I’m certain that physics has laws that must be obeyed at our peril, but I’m not convinced that economics has shown their ‘laws’ to be inviolate. In fact, just now to the contrary those principles are looking quite tarnished. And, I’d like to see a science-cum-economics dialogue continue and evolve throughout Obama’s tenure in the White House. It would greatly benefit our transition to a sustainable economy based on alternative energy, resource conservation, green jobs and creative partipation by all sectors of our society.

Thanks to the questioner, Wayne Hamilton of Springdale, Utah.

 

Post-Growth America

A surprising glimmer of recognition spotted in the major media:

“Look,” said the President, walking across the stage with a microphone in hand, “here’s what no one wants to tell you. Structural changes in our economy, and new competition from countries like China and India, mean that we’re in a different world now. That pattern we once took for granted, in which our incomes basically kept rising across the board, turns out to be something we can’t sustain. Many of you are earning less than your parents did, and the truth is, many of your children will earn less than you do.”

The President paused, watching as the words sank in. “I don’t think denial helps any of us. I know it won’t help us come together to do the things we need to do as a nation to thrive even amid these new realities.”

Don’t worry, you didn’t miss the news; the scene above has not happened yet. Few politicians would say those things even if they believed them to be true, because it would challenge a notion at the heart of the American dream: the idea that the kids will earn more than we do.

There’s a third worrisome attitude traceable to our faith that the kids will earn more than we do. This is the imprudent conviction that we can live beyond our means, because somehow we’ll earn enough later to deal with any problems. This outlook represents a dramatic shift from earlier American thinking, as the sociologist Daniel Bell noted in 1976. “Twentieth-century capitalism wrought a … startling sociological transformation,” he wrote, “the shift from production to consumption as the fulcrum of capitalism.” Both as individuals and as a society, we’ve been gambling on better days tomorrow to make good on unsustainable borrowing today.

Such is the toll of a Dead Idea.

This is from Matt Miller, editor at Fortune, raised in Greenwich CT and Rye Town NY, BA economics magna cum laude Brown, LLD Columbia Law School, member Council on Foreign Relations. In other words, to the extent that there’s still an “Establishment”, he’s in it. You heard it there second.