The Greatness of Ponzi

I read somewhere that towards the end of his life, Deleuze was working on a book about "The Greatness of Marx". He jumped out of a window before he finished it, and I don't exactly know in what sense he meant this, but my own fairly recent re-appraisal of Marx (I continue to mercilessly flog Kolakowski's book as the best thing ever written about Marx) has made me realize that a thinker can come at something deep and fundamental -- but from the wrong angle, or in a confused way that obscures the important novelty of the concept.

So this morning I'm eating my bagel and reflecting that someone should write a similar book about Ponzi. The structure of a Ponzi scheme is one of the greatest inventions of all time. In a nutshell it is just a faster version of the concept of trust -- we get together and cooperate today for some mutual benefit tomorrow. As long as the trust continues and expands, a Ponzi scheme is the surest and fastest route to progress. You can get rich along with everyone else.

I already hear some objections to my fevered praise of Ponzi. What, you might acidly ask, about when the trust breaks down and more people are leaving the system than coming in? That's a fair objection. But I never said that Ponzi's scheme didn't have flaws. All I was pointing out was that those flaws were the same as the flaws of our society. It's instructive to realize that some things we recognize as flat out Ponzi schemes can go on for 30 years. To call that unstable, or a scam, is to twist those words far beyond their usual definitions.

In fact, our society is modeled on a Ponzi scheme, and if trust in it were to break down, the results would be as spectacularly bad as Ponzi or Madoff or any of the other situations we recognize as "scams". You could argue that the US political system has gotten to a point where any attempt to shrink the government would cause the whole works to collapse. We already see how the government gets bigger and bigger every year, taking on more and more obligations both for the future and for the control of the present. Ask yourself for a moment what might happen to healthcare and social security and the housing market and ... if the government were to stop expanding in those areas, and even begin to contract. Caught a whiff of chaos ¿no?

And it's not just the government. Our entire productive apparatus (I am now extending this beyond just our financial "system") is based on the idea of a continual and continually expanding progress. If the trading of current consumption for future consumption down the road, if a system that depends inherently on the savings and investment leading to surplus leading to more savings and investment and ... if this concept of progress is not in essence isomorphic to a Ponzi scheme ... well ... then ... I'll have to re-think the title of my book about Ponzi.

Interfluidity has said it better than I could hope to, though he foolishly fails to mention Ponzi by name:

We, collectively, have not figured out a means of addressing an incompatibility between the incentives by which we encourage production and the means by which we distribute it. Human effort is driven by positional as much as material incentives: We measure ourselves against one another. Two centuries ago, a person could be rich with no running water, electricity, or internet person. But wealth was still wealth, and people worked just as hard to be rich then as now. But since wealth is positional, people's desire for wealth may far exceed their intention or ability to consume. When great wealth is earned by contributing to production, this leads to a surplus, which seems like a good thing, but creates the "problem" of excess capacity. The obvious solution is to redistribute claims on production, so that those with unmet wants make use of the excess. But doing so reduces the differences in station that inspire Herculean efforts to produce, and provokes conflicts over who gets what.

The macroeconomic stories of this decade have all been about squaring this circle: Rather than redistributing claims outright, we adopted the fiction of trading present goods for future claims. The ambitious grew wealthy by accumulating claims on the future of the less ambitious, in exchange for which the less ambitious (and sometimes very distant) consumed present production, and demanded more. Entrepreneurs could measure their position against their fellows by the quantity of their claims. Others could consume in proportion to their ability to manufacture claims that entrepreneurs would accept, that is, they could consume what they could borrow. But high quality claims on future wealth are in reality very scarce. An economic system that depends upon ever expanding claims on the future in order to provide current incentives to produce can not be stable. Once the "wealthy" learn that many of their claims are worthless, the system falls apart. The less-wealthy have no means of consuming, as new claims are shunned. Owners of capital gain nothing but bear costs for maintaining productive infrastructure. "Excess capacity" appears.