The Edge.org has recently published a piece by Eric Weinstein titled “Anthropic Capitalism and the new Gimmick Economy” that has that wonderful combination of being both insightful and failing in its analysis due to the wrong framing. The wrong framing is the very mathematical economics he’s both using and criticizing — and mistaking for the economy itself. It fails in no small part because so many mathematical economists think that the gap between their models and the real economy must be filled with government solutions. A real analysis of the economy as a messy, complex, emergent self-organizing network of complex agents gives us a very different understanding of what is going on in the economy now.
The first problem with his analysis is the assumption that technology can kill capitalism. In fact, technological innovation is the outcome of capitalism. Kill capitalism, and you kill technological innovation. The fact of the matter is that capitalism is a combination of catallaxy (mutually beneficial trade), technological innovation, and money/finance. Euel Elliott and I describe the kind of complex economy that emerges when we analyze the combination of the catallaxy and technological innovation in our article “ Innovation, Complex Systems and Computation:Technological Space and Speculations on the Future”. Criticisms of capitalism have historically hinged on the argument that technology was going to kill it off, directly or indirectly. We have heard since Marx that technology was going to replace workers, squeezing them into increasing unemployment, creating a gap between supply and demand that would collapse the economy, and it has never happened. Not only has it never happened, more and more employment opportunities have continually been created.
But perhaps this time is different. The critics always say this time is different, but maybe this time it really is. Or soon will be. Let’s analyze what Weinstein says, first taking a look at his “heuristics” he claims underlies current economic analysis.
Wages set to the marginal product of labor are roughly equal to the need to consume at a societally acceptable level.
There are a number of issues here. For one, what could one possibly mean by “societally acceptable level” when it comes to “the need to consume”? Let’s look at how incoherent this idea really is.
First, let’s assume that what he means by “the need to consume” is that the economy has produced a certain amount of goods that then need to be consumed. Wages are “set” (by whom?) such that all the goods will be consumed, meaning the market “clears.” This ignores the fact that if a good X is found by the producers to have been overproduced, the rational response will be to lower the price. This will mean a lower profit margin, though of course it could even erase the profit margin, or worse. In any of these cases, we have a signal for the producers to produce less in the future.
In the real economy, markets don’t actually clear, present-day actions for future sales are based on past sales, and different employers set different wages for different kinds of work (and are only restricted by minimum wage laws, mandates, and so on). No one is “setting” wages like they do in an economic model, so it makes no sense to state that wages are “set” so that supply and demand are kept in some sort of optimal balance. That’s a central planner fantasy at best, and it’s clear that’s the kind of thinking underlying such a claim.
Price is nearly equal to value except in rare edge cases of market failure.
This statement makes the assumption that there is some sort of objective “value” out there that price can nearly equal. There isn’t. Each individual person ranks innumerable things according to their own subjective valuations. What prices do is help to direct goods and services toward those goals where there is a large enough group of people place a high value on that goal are willing and able to pay that price to get the goods and services directed toward that goal.
The price of something is influenced by a combination of things. At the micro-level, you have marginal utility at play. It’s harder to sell the second unit of something than it is the first, at that particular time. If I buy one steak dinner, I’m not likely to buy another right then and there. This is a negative feedback loop. At the same time, there are phenomena such as fads where because other people are buying something, you are more likely to buy it. This is a positive feedback loop. Both are at play. Negative feedback loops will drive a system toward equilibrium (supply and demand are equal), while positive feedback loops will drive a system toward exponential growth (increasing demand drives increasing supply).
Classical economists see the economy as a system in equilibrium, or moving toward it. Keynesian economists see the economy as fad-driven, consumer-driven. Both are right, and both are wrong. And both tend to forget all about technological innovation providing new things for people to consume. The combination of all three creates a complex system wherein prices are not truly predictable or truly manipulable. It is difficult to predict the value of new things, and often new things are tried out on the wealthy, who are often more open to trying new things. Prices go down over time as the goods are improved and popularized and produced in larger quantities. At the same time, there is the fact that a good’s popularity will also increase the price. There are different forces at play, driving price.
Prices and outputs fluctuate coherently so that it is meaningful to talk of scalar rates of inflation and growth (rather than varying field concepts like temperature or humidity).
Anyone who believes this is clearly mistaking the map for the territory. Also, see my above explanation of prices. This makes no sense whatsoever in light of the varying forces involved in the establishment of prices.
Also, inflation is primarily a monetary phenomenon. The prices of many goods decrease as they become more prevalent and production costs decrease. Why, then, do we see the prices of goods and services increasing? The answer is that our central banks continually produce more money, and the more money that’s produced, the less valuable money is relative to goods, and prices increase. Some goods improve production costs so quickly that we still see prices decrease despite monetary pressures.
Monetary inflation causes prices to go up, which creates the false signal that there’s increased demand. The problem is that a decrease in monetary inflation then provides the false signal that the economy is constricting due to decreased demand, which can cause reduced production and layoffs, which then spreads through the economy. Monetary inflation can thus cause economic growth through the spreading of false information about the state of the economy. That creates the illusion that the two are related, which then drives more inflationary policies from the central bank.
In other words, the models result in policies that make the economy match the model.
Growth can be both high and stable with minimal interference by central banks.
This is in fact true. It would be much more true if there were no central banks at all and banking was much more local in structure, able to respond to local conditions. The problem, as noted above, is that central banks don’t engage in anything resembling “minimal interference” in order to create false information in order to trick people into believing the economy is better than it really is.
The problem is that we sacrifice truly high growth and stability — which is attainable only by allowing the economy to be much more locally unstable, with businesses continually going in and out of business — for a false sense of security that shows its falseness any time there is an economic downturn. If we had decentralized banking, the banks could respond to local conditions, provide locally relevant interest rates, and provide locally relevant loans. Money would enter and exit the economy as needed without having to go through a central planning committee whose economic models are less than accurate to reality, and which help to create reality rather than “fixing” it — until reality insists on itself and there’s a recession.
On Repetitive Tasks
Weinstein seems to lament the loss of repetitive tasks in the economy, but the economy has historically mechanized repetitive tasks to the benefit of consumers and employers alike. It’s not a new thing, as Weinstein seems to imply. Yet, despite a few centuries of mechanizing repetitive tasks, the economy has grown and employment has grown.
The same is true now. The problem, though, is precisely what Weinstein says: the governments keep turning dials in an attempt to keep things exactly how they are now. That protects currently-existing businesses, but at the expense of new businesses, which is where true economic growth always comes from.
However, the U.S. government is currently trying to eliminate as many repetitive tasks as possible by pricing them out of existence with increases in the minimum wage. If you want to increase automation, increase wages. That makes automation cheaper than hiring workers. Also, a minimum wage makes it too expensive for employers to teach employees, which then drives young people into colleges to get that training — which then drives up college prices and creates student loan debt, as I discuss here.
So Weinstein is right that out governments are trying to avoid the market’s verdict. Which really only delays the market’s verdict. A reckoning is coming, and it’s only going to get worse the more we delay it. That is because economies are ecosystems — and a buildup of overgrowth results in the creation of more deadwood, which will result in an out of control wildfire if and when it ever gets lit. The longer the buildup, the worst the fire, and the more destruction we’ll see.
It took a long time for ecologists to understand this about the ecosystem. If you have a math/physics-based understanding of the ecosystem combined with a romantic view of ecology, you are going to combat all forest fires — up until you have so much deadwood that there’s a wildfire that destroys the entire ecosystem. The same is true of the economy. We finally figured it out when it comes to ecology — how long before we apply that same understanding to the economy?