Black Box Economics

Apologies to whatever's left of my readers for this one. I'm contractually obligated by the anti-establishment (which is getting exactly what it paid for) to churn out an update of my general understanding of economics every few months. Call it part of an ongoing series if you want. More like, some stuff I read got the brain swirling around in its usual sorry circles, and now it needs to drain.

As someone who doesn't understand all of the fine details of economics so well, and is suspicious of them anyway, I often like to try to and look at them from a coarser level, from farther away, and see if it makes sense on that necessary approximation. I find this a rewarding exercise usually, and like any human being, I grow to believe that my comfortable way of looking at things is in fact the important one. Engineers have a habit of this sort of thing anyway, as I've blathered about in times past. Those subatomic details are distracting, and obviously this is why macroeconomics is different from microeconomics, and so far as I can glean (this is my sporadic recreational reading, god help me), addressing macroeconomics based on "microfoundations" is, a lot like resource economics, only a young field struggling against an increasingly inadequate paradigm. Better late than never, I guess.

[And it's fun to ask whether microfoundations are more like statistical thermodynamics, from which macro properties can be statistically derived, or more like quantum mechanics, in which they are consistent with macro properties, but produce negligible predictive value for problems of that scale. I never developed a good answer for that analogy, and I didn't like the handful of discussions I read, because it kept coming back to me that economics isn't fundamental enough to describe primate behavior, and is insufficient with respect to the physical laws it apes.]

I agree that the macroeconomy is necessarily a statistical average of all the busy-bee activity that can be called economic, and that there is feedback with macroeconomic policy and all, but this doesn't really cover enough ground. If we can look at the economy as a big black box, then "the economy" really is how we distribute what we collectively make the effort to produce or do. (This is definitionally true, which will only make the next fuckhead who talks about "redistribution" that much more irritating.) On some level, the redistribution is arbitrary, as is the level of effort (once we get past the point of keeping a critical fraction of us fed) we put in. In American capitalism, it's a great conceit that the divvying of effort and rewards is conducted according to some rules-based algorithms. These rules are a compromise between some pet philosophical justifications of ownership, baseline standards of living (that'd be the Socialism that crept in), and variously weighted assessments of the value of different types of contributions. People can get paid to do work or make stuff and people who own can manage the value of improving their property, or so the story goes.

I'm finding that black box viewpoint useful to help weed out the parts of the economy that are fake. The GDP, for instance, is somewhat real (even if it measures things in imaginary numbers), demarking the total amount of goods-n-services that are produced, more or less. In real life though, all this stuff is limited by resources – by population, energy, land and food (elementary stuff, I know, at least with respect to land, for which more patient students than me can describe how it turned into "capital"). Call it the first law: you can't get out more than you put in, and even if you quip about optimized non-zero-sum exchanges, you're still using many implicit assumptions about where the producion must come from. You're still only optimizing efficiency. Game theory does not obviate physics.

There are times when resources directly affect the volume of worldwide production. Oil shocks are, at a minimum, a common ad hoc reason thrown around to discuss disruptions. It's the conventional understanding of the stagnant 1970s economy, and I also remember it standing in as a cause of the 2008 recession, at least for a short time, until people finally started questioning the screwy financials. It's a running curiosity that a more fundamental connection isn't observed more routinely. Given its pretense as the only social science, economics has ironically done a very bad job of integrating that first law, as outlined in this entertaining excerpt. You can't assume stuff that doesn't exist (although I lose him when he dismisses the rebuttal that things are fine to a certain level of approximation—of course it's fine when the assumptions hold). If you like to think in terms of the second law (or if you pedantically want to call process dynamics, my preferred choice of technical metaphor, an analysis of the second law, as is done in this interesting article), then "production" is even better described as a dissipative process (which can have more or less stable dynamic states, mind you), that is, kinetics rather than equilibrium. Civilization is then a transient species, something that has happened in between turning carbon and sunlight into food into shit.

Although it is essential, count money among the things that are useful fabrications. Credit, even more so. In the macro world, I try to remember that money and credit is more of an indicator of the asset distribution than a driver. Money is really a mutual agreement to accept money as a medium of exchange, which definitely helps the process along. (This is true even of gold, which upon a time was useful for this role because it was durable and people liked it. But it's no more fundamentally valuable than other representative things, and since it's value represents a narrow slice of things people really value--notably you can't eat or burn it--it's probably less good.) I see debt as basically a bet on the short-term persistence of the status quo, the human reaction to gamble that things will soon regress back to the mean. When that's a reasonable bet, it facilitates activity, and when it's not, it does the opposite. Money and credit are super useful, but they are more like written laws than physical ones, and economists are more like lawyers than scientists. Which is fine, but consider that legal rules are also only followed in principle by the robotic force of algorithm, and given that we are really creating an economy on the basis of mutual agreements, and even through we specify the goal and the rules, it's also true that we try to constantly get around them.

American capitalism (at least as it is marketed) has a lot invested in the idea that the macroeconomy emerges from its microfoundations, but I keep coming back to the idea that it's a fundamentally flawed assumption. American capitalism has done a very shitty job, to my mind, of integrating the role of power, coercion, and security, which I think is safe to also classify as fundamental parts of our overall system of agreed-upon rules, but somehow economics gets away with dismissing to the arena of politics and sociology instead, unwisely imagining that some mutual agreements can be neatly separated from others. I would say that the rules instead evolve as a consequence of the status hierarchy, which exists at a more fundamental human level than "economics" does. And the powerful are (by definition) able to influence the rules (albeit without much collective intellect or finesse) until it reaches a distribution favorable to themselves. The iron rule of oligarchy gets it so much better, and is immensely more succinct.

Where the fake meets the real, then at least we can say it gets interesting. If the "real" economy is, although maybe fuzzily defined at the edges, the redistribution of all the stuff we produce, then it's worth noting where the idea of that distribution gets most deeply obfuscated. Dr. Leo Strauss (obvioulsy not the actual one) recently summed it up as well as anyone: we don't "make" nuthin but finance these days, a service that has managed to massively overvalue itself at the expense of every other service or product. (Doc Strauss also provided some awesome interviews with David Simon about The Wire, the guiding ethos of which, he says, is that human life is declining in value in the post-industrial age.) A bubble economy is a matter of pretending that we make more than we do, and that we can distribute more than we actually have. It works because the black box of American economy has some inputs and outputs into it. In comes goods and energy, and out goes what little extra we still produce. In and out also go complex systems of agreements and arguments on how we value it in paper, full of double negatives and hot air and backed by force. The world economy doesn't have inputs and outputs other than the heat balance, however, and if we consider stored resources, then it is in fact zero sum, according to the goddamn first law of thermodynamics.

We are propping up the value of the dollar (which contracts and verbage direct oil into this country more easily and help to let other people actually do the producing of things so long as we get to keep gambling), keeping up the value of real estate (which contracts keep people with more license to make that gamble), keeping our armies massive (enforcing all the wheeling and dealing), and keeps the level of inequality high as hell. I don't know, letting oil prices rise, un-developing arable land, bringing industry back to these shores, and letting the super-rich finally absorb a kick in the neck seems to be exactly what is necessary to bring the whole system into something resembling local reality, although it's likely to be painful for all of us, and I don't want that either. We can only impoverish everyone else for so long before we start going down with them (or until maybe we get weak enough and they get pissed enough).

If the current trend we are seeing in the world today is actual GDP shrinkage driven by first-law sorts of pressures, such as limits to oil and water, or even just bad bets on expansion, then expect that huge network of agreements to stretch and become rigid (that seems consistent with a serial bubble economy, increased indenture, and IMF-style forced austerity everywhere you look) in an effort to keep the head on top, and then falter in glorious financial collapse. It's a global behavior consistent with what you'd expect from shrinking fundamental resources, and that's worth pointing out (and it's also my suspicion), but it's inconclusive on its own. It also has happened sometimes in history when power concentrates too much in social and financial spheres and the loss is painful in the living memory of everyone else. Some collapses can be tied to extension beyond resource sustainability (Rome's slow decline probably fits this model), but others are just human behavior taken too far (more like the Great Depression maybe).

I don't really know where we are at now, but I'm not super optimistic about the future.