Closing in on the end of the S-Curve

Jim Hamilton is one of those very measured economists that you can always trust to have some actual data handy.  And one of the particular areas he always has handy data about is the long-term history of oil production.  We've probably all seen these charts before, but one particular phrase in a recent post caught my eye:

We like to think that the reason we enjoy our high standard of living is because we have been so clever at figuring out how to use the world's available resources. But we should not dismiss the possibility that there may also have been a nontrivial contribution of simply having been quite lucky to have found an incredibly valuable raw material that was relatively easy to obtain for about a century and a half.

 

My view is that stagnant world oil production and doubling in the real price of oil over 2005-2010 put significant burdens on the oil-consuming economies. Optimists may expect the next century and a half to look like the last. But we should also consider the possibility that it will be only the next decade that looks like the last.

I think I have developed a general prejudice to see a lot of what people take to be skill and intelligence as just plain luck.  This applies to people working in the markets and as well as people making predictions about the future of nearly anything complex.  Maybe it also applies to societies and technologies as a whole.  Perhaps all our self-congratulation at having built a machine for innovation and increasing standards of living is premature, and we simply blundered into a great source of energy.  

This is not an argument that such a self-sustaining machine does not now exist.  Just that it's not as smart as you thought it was.  

This sort of thing has cropped up before

Having humans drive cars is about as efficient as having chimps hand deliver internet packets.

Shared cars can be used as another example of the difference that I see between the generation of value and the appropriation of value. If you go outside, you will see a large number of vehicles. Many of these are parked, and when a vehicle is parked it's not being used. If we wanted to increase GDP, well, we might want to increase the number of vehicles that get sold, and the number of people that own vehicles, and the number of vehicles per person. But if you think about it now, when there are technologies that are starting to ripen, such as the technology that allows us to have self-driving cars, you can think that actually you can reduce the number of cars needed by having self-driving cars as shared vehicles. You can have a transportation system that is much more shared. That is going to reduce the amount of money that flows through the car industry, simply because you're going to need fewer cars because their use is more efficient when this are shared.

A stunning failure of empiricism

This Edge conversation with Daron Acemoglu is pretty interesting.  I haven't read his new book "Why Nations Fail", but I know it's down there somewhere.  I like the particular bit I put in bold.  I feel like ~95% of all political debates (both public and private) proceed at exactly the level of superficiality he describes.  

Another superficial answer is you can say, India is a democracy and China is an autocracy and that means India is better. But actually, this is where it becomes important to put more flesh on the concept of institutions. Institutions are not just what's in the constitution. There's a very naive view of institutions that says it's the parchment, it's what is written on the parchment, it's what is written on the paper. I write you have a Supreme Court, you have a presidential election, that makes you a democracy. I write something else, that makes you an autocracy. And of course, that's not what we mean by institutions. That would be a very naive view of institutions and one that would have very little empirical power to explain things.

 

There's a great example that comes from the comparison of two defining events in the United States and Argentina. Argentina, like many other Latin American countries has a constitution that has many similarities to that of the United States: a Senate, a Congress, a Supreme Court, a president, but these work very differently. In the United States, for example, though we sometimes complain about the Supreme Court, that it's just unelected people making political decisions, it's one of the important checks on the abuse of political power. It's not something that you can easily sideline.

 

For instance, in the middle of the New Deal controversy, FDR tried to sideline the Supreme Court and say, these guys are really slowing my New Deal legislation. He had majorities in both houses. He was a popular president. Many people were at least hopeful about the New Deal policies, but when he came up with his schemes to either fire new justices or add new justices to the Supreme Court so that they wouldn't block or slow down his legislation anymore, nobody supported him. The Senate didn't go along with him. The media took a pretty negative attitude toward it, and FDR gave up. He didn't mess with the Supreme Court although the Supreme Court became more accommodating to him.        

 

The same sort of thing happened in Argentina with Peron. When Peron came to power he also didn't like that the Supreme Court was blocking him in his program. There were a lot of things that he was trying to do. Then lo and behold, he came up with exactly the same scheme. He said, these Supreme Court justices are overworked and they're too old and we need new justices and nobody raised a peep. He was able to fire the Supreme Court justices, and appoint new justices. Ever since then whenever a new president comes in in Argentina, there's a whole turnover of the Supreme Court and the Supreme Court institution is a joke in terms of what it does to restrict the president, as we're seeing right now in Argentina.

 

You have these same things written in the constitutions, but they work extremely differently. Why is that? Well, the reason is twofold. One is that actually the details of how these institutions work is much more important than what is written in the constitution, than what's written on the parchment. Second, these institutions don't exist independently from how political power is distributed.

 

In particular in Argentina, political power was highly concentrated in Peron and Peron's party's hands. The media was nonexistent. There was really no within party opposition and between party opposition was largely silenced. So that means that huge monopolization of political power enabled him to sideline whatever he wanted. In the United States that was different.

Islamoeconomia

The Edge recently posted one of their conversations, this one featuring Joseph Henrich (he of WEIRD -- Western, Educated, Industrialized, Rich, and Democratic -- fame).  It's an interesting set of thoughts all around, and his basic thesis -- that it's not really possible to distinguish cultural from biological evolution because it's all part of one evolutionary process that of course has multiple levels working simultaneously -- is dear to my heart.  But there were two moments that stuck out.  

First, a point I mentioned just recently; from an ethnographic or ethological perspectives it is completely obvious that markets are fundamentally about cooperation, not competition.

One of the interesting things about the division of labor is that you're not going to specialize in a particular trade—maybe you make steel plows—unless you know that there are other people who are specializing in other kinds of trades which you need—say food or say materials for making housing, and you have to be confident that you can trade with them or exchange with them and get the other things you need. There's a lot of risk in developing specialization because you have to be confident that there's a market there that you can engage with. Whereas if you're a generalist and you do a little bit of farming, a little bit of manufacturing, then you're much less reliant on the market. Markets require a great deal of trust and a great deal of cooperation to work. Sometimes you get the impression from economics that markets are for self-interested individuals. They're actually the opposite. Self-interested individuals don't specialize, and they don't take it [to market], because there's all this trust and fairness that are required to make markets run with impersonal others.

Second, he tells a great story about Tasmanian history:

I began this investigation by looking at a case study in Tasmania. Tasmania's an island off the coast of Southern Victoria in Australia and the archeological record is really interesting in Tasmania. Up until about 10,000 years ago, 12,000 years ago, the archeology of Tasmania looks the same as Australia. It seems to be moving along together. It's getting a bit more complex over time, and then suddenly after 10,000 years ago, it takes a downturn. It becomes less complex. 

The ability to make fire is probably lost. Bone tools are lost. Fishing is lost. Boats are probably lost. Meanwhile, things move along just fine back on the continent, so there's this kind of divergence, and one thing nice about this experiment is that there's good reason to believe that peoples were genetically the same. 

You start out with two genetically well-intermixed peoples. Tasmania's actually connected to mainland Australia so it's just a peninsula. Then about 10,000 years ago, the environment changes, it gets warmer and the Bass Strait floods, so this cuts off Tasmania from the rest of Australia, and it's at that point that they begin to have this technological downturn. You can show that this is the kind of thing you'd expect if societies are like brains in the sense that they store information as a group and that when someone learns, they're learning from the most successful member, and that information is being passed from different communities, and the larger the population, the more different minds you have working on the problem. 

If your number of minds working on the problem gets small enough, you can actually begin to lose information. There's a steady state level of information that depends on the size of your population and the interconnectedness. It also depends on the innovativeness of your individuals, but that has a relatively small effect compared to the effect of being well interconnected and having a large population.

Apparently, you can start counting Neolithic Australia amongst the "things that are like a brain".

Procedures

If I've had a philosophical revelation in the last few years it has consisted in extending an earlier thought into a general procedure for thinking about things.  The familiar sci-fi theme of how does one recognize and communicate with an alien consciousness actually has much broader application than the tech-gnostics purport; once you begin thinking about the "big" consciousness-machine, you realize that there are innumerable little consciousness machines everywhere.

In fact, some of these consciousness-machines aren't so little at all.  Some of these machines would like to cancel Christmas:

Why bother? After all, we could raise GDP further by cancelling Christmas (though we would lose the expenditure on unwanted gifts), taking shorter vacations (though think of the impact on easyJet), and by working till we drop from exhaustion. But why would we want to? The idea that there is something called "the economy", which is separable from the welfare of society and its citizens, is silly. There isn't. What really matters is whether the holiday, and the celebration, makes us better off. That question answers itself without need of economic statistics.

This is John Kay in today's FT, commenting on the Band of England's kvetching about how too many bank holidays are fucking up their GDP numbers with things to do.  And he's right of course.  Except that he's wrong of course.  

There IS something called "the economy" which IS separable from, if dependent upon, the wealth of society and its citizens, just as their IS something called "my mind" which is separable from, if dependent upon, the machinations of my neurons.  

Once you start to look for these large scale assemblages that have taken on a life of their own, you find them everywhere.  And if you consider the question of when humans built the first "artificial" intelligence you are either going to have to pick whatever machine built the Ur-city, or perhaps the industrial-revolution/modern-Nation- State moment (aka Capitalism).  After considering the question for a while though, you realize that it is poorly posed, and that you really have no good definition of consciousness and that you are certainly not warranted in taking your own as somehow prototypical or class defining.  In fact, maybe yours is a means to an end -- how could it be an end in itself.

  

 

Frozen numbers

Yesterday I came across an interesting article about prime numbers (via a Naked Capitalism links post -- pretty much the only part of NC I still find worth reading, so long as you can skip over the inevitable kvetching about how little sleep she's gotten, how much traveling she's done, and how bad her internet connection is ... which and but does this belong even in every goddamn links collection too?).

But I digress.  

The basic idea is here:

The same freezing which is responsible for transforming liquids into glasses can help to predict some patterns observed in prime numbers, according to a team of scientists from Queen Mary, University of London and Bristol University.

 

At a low enough temperature, water freezes into ice by arranging its molecules into a very regular pattern called crystal. However many other liquids freeze not into crystals, but in much less regular structures called glasses—window glass being the most familiar example. Physicists have developed theories explaining the freezing phenomena, and built models for understanding the properties of glasses.

 

Now, a researcher from Queen Mary's School of Mathematical Sciences, together with his colleagues from Bristol have found that frozen glasses may have something common with prime numbers and the patterns behind them.

 

Dr Fyodorov explained: "The prime numbers are the elements, or building blocks, of arithmetic. Our work provides evidence for a surprising connection between the primes and freezing in certain complex materials in physics."

This is interesting because it tells you that some other physical system is running the generate-prime-numbers algorithm.  Up till now, pretty much the only physical systems we knew of that were running this algorithm directly were: 1) the human brain, and 2) my computer.  I think the fact that prime numbers are still used in cryptography indicates that neither is running an especially computationally efficient implementation of the algorithm.  Maybe the frozen stuff has found a shortcut.

I also found it interesting because the last comment in this quote is tellingly odd. It brings up one of my favorite questions: what is a number?  I mean, if you have this simple machine that spits out a remarkably complicated and interesting pattern (prime numbers) I can see how you might be tempted to conclude that you had found "the elements, or building blocks" of the universe.  But don't you have to re-evaluate how special and fundamental you think the building blocks are when you find them keeping your Coca-Cola in the bottle?  This seems like the reaction of someone who just found the world's best seashell -- it's pretty alright, but I'm not sure you can consider it fundamental.

Rather than seeing prime numbers as the building blocks, doesn't this discovery reinforce the thought that they are the outcome of an algorithmic process?  In some sense this is obvious -- they taught you the algorithm for generating these in grade school -- but it makes you start to wonder whether even the other things we take to be simple building blocks and obvious starting points are actually the endpoints of giant complicated systems.  

Along these lines, I started wondering a while back about the complexity of some of the basic shapes like circles, squares, etc ...  Naturally, we consider something like a grid to be a very simple form.  And yet, it doesn't seem to arrive in nature all that frequently; if you look around, all the grids that meet your naked eye will have been built by humans.  The same would be true of prefect circles or spheres.  If these shapes are so simple, why aren't there more of them?  I don't see quite to the end of this argument yet, but I have discovered the first objection only reinforces my sneaking suspicion that the circle is actually really complicated.  One of the places you can find prefect geometric forms that have nothing to do with humans are in the orbits of planets or the regularities of crystals.  Those aren't simple machines at all though!  If you need half the bloody cosmos to draw a circle, you can't very well call it simple.  Similarly, you need a lot of atoms to get a crystal formation.  The grid may be an apparently simple pattern that actually requires an enormous machine to produce it.  Humans may finally have been around long enough to truly become the salt of the earth.

Collective Inaction

Sorry I haven't posted.

I recently read Mancur Olson's totally brilliant Power and Prosperity.  

Olson is one of the few economists I have come across who has a broad enough conception of his discipline to realize that the strictly economic is always embedded in a political and social environment which it shapes it at the same time as it is shaped by it.  While that may seem obvious enough, it is remarkably overlooked in our age of specialization, and it would be valuable enough if that were the only insight in the book.  

But Olson goes much further than this and convincingly starts to apply the most basic tool of economics -- the realization that individuals respond to incentives -- to the analysis of political machines.  With some simple reasoning he is able to generate very parsimonious explanations for a whole bunch of things that are at first quite puzzling.  For example, he explains why a subjugated people might defend a warlord or mafia don.  He explains why the Soviet Union appeared for so long to be a serious economic rival to the United States despite suffering the supposed drawbacks of a command and control organization, as well as why it so suddenly collapsed.  He explains why some societies have been able to transition from authoritarian to democratic structures with remarkable success (post-imperial Japan, post-fascist Germany) while others seem unable to make this transition.  I won't bore you with a longer synopsis.  Suffice it to say that he basically explain just about everything, so go read the book.

Because my point here was something much simpler than expounding Olson's theory.  My point was the train of thought that the first sentence of the book set off.

These days, virtually all economists (and I think also most people in other fields) would agree that societies are most likely to prosper when there are clear incentives to produce and to reap the gains from social cooperation through specialization and trade.

This seems like an innocuous enough phrase, no?  "Most" of us would apparently agree with it, which may make you suspect that it is your standard neo-liberal drivel.  Adam Smith, Invisible hand, blah blah blah.

If you look carefully at the statement though, you find something else going on.  You'll notice first that it doesn't say anything at all about free markets or limited government regulations or light taxes.  In fact, the mention of "trade" only comes right at the end, and, along with its correlate "specialization", is merely a means to an end.  The avowed end is to have incentives to produce and to cooperate in that production.  Just to confirm this reading, let me copy out the rest of the first page of the book.

If a society is to achieve its highest possible income, the incentives must not only be clear but must induce firms and individuals in the economy to interact in a socially efficient way.  That is, they must be similar to the incentives in perfectly competitive industries; those where the market, in addition to having other virtues, is so large  -- or the firms in it are so small -- that no single firm has a monopoly power or a perceptible impact on price.

 

When we shift 'from what is best for prosperity to what is worst, the consensus would probably be that when there is a stronger incentive to take than to make -- more gain from predation than from productive and mutually advantageous activities -- societies fall to the bottom.  In a Hobbesian anarchy, where there is no restraint on individuals' incentives to take things from one another, or in a kleptocracy, where those in power seize most of the assets for themselves, there is not much production or many gains from social cooperation through specialization and trade.

For me, that first sentence crystallized a shift in perspective that is very simple but very powerful.  Markets are not an end in themselves, they are a means to an end.  The fundamental role of markets is to promote cooperation, not to allow for competition.  Markets are (one way) of solving a collective action problem.  They need to be designed to solve this problem.  The logic for their existence does not fundamentally begin with the individual and a defense of the individual's right to try and make a profit, and then proceed, by way of the invisible hand, to just happen to coincide with a happy, cooperative greater societal good.  The logic runs in reverse.  We are searching for a mechanism to promote cooperation.  To give people an incentive to cooperate we need to solve the basic problem inherent with any form of collective action -- how will the gains be distributed and how will we prevent free riders from overwhelming the system. Competition is just there to solve this secondary, though fundamental, problem, it is just one way to reap the gains from social cooperation.  Competition is a safeguard that is there just to keep the game honest and to try to convince as many people as possible to play.  The invisible hand isn't blind providence, it is intelligent design.

I think it's very powerful to realize that the deep goal of markets is to facilitate cooperation and create a mechanism that solves a problem of collective action.  Most simply, it allows you to do away with the absurd left-right fissure that has engulfed our politics which imagines the market and the state as sworn enemies.  This division is the great ideological red herring of our age.  And more abstractly, it also allows you to see markets as a stage in the evolution of a supra-human organism.  

I could go on and enumerate the many virtues of this new gestalt, but let me just mention something that David Graeber pointed out in Debt: The First 5000 Years -- I am hardly the first to come up with this idea.  In fact, it appears that the first serious free marketeers arose during the medieval Islamic age, andNasir al-Din al-Tusi had no illusion that the market was first and foremost about cooperation, even as far back as 1242:

Let us suppose that each individual were required to busy himself with providing his own sustenance, clothing, dwelling-place and weapons, first acquiring the tools of  carpentry and the smith's trade, then readying thereby tools and implements for sowing and reaping, grinding and kneading, spinning and weaving ... Clearly he would not be capable of doing justice to any one of them.  But when men render aid to each other, each one performing one of these important tasks that are beyond the measure of his own capacity, and observing the law of justice in transactions by giving greatly and receiving in exchange the labor of others, then the means of livelihood are realized and the succession of the individual and the survival of the species are assured.