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. 

I want to invest in lobbying

The Big Picture has a nice infographic today that lets you calculate the compound annual growth rate of lobbying expenditure for various industries.  The top spenders have grown at around 10% per annum for the last decade.  That's a pretty booming industry.

If you step back for a second and just look at government lobbying as any other industry, you can see that the basic laws of competitive advantage make this sort of growth inevitable.  Congress consists of only 535 members, which makes it a limited resource; the returns are high; and you can turn a first mover advantage into a durable competitive advantage by making a politician who may be around for many years beholden to you from the start.  In such circumstances, capital will find a way.  That is the magic of the market.  In fact, if I weren't deeply opposed to the very existence of this market, I would be looking to invest.  

If you want to read a well-crafted and very detailed tale about the rise of lobbying as an industry, I can wholeheartedly recommend Robert Kaiser's So Damn Much Money.  Reading about the history of post-war Washington is very illuminating and helps to understand why the system we have now is subtly different from the basic corruption that bedevils government everywhere and always; these days, we have learned to mass produce corruption.

And by the way, all hail a hedge fund manager brave enough to call for public financing of elections.

QB or not QB

I've been reading these guys' letters for almost 3 years now, ever since they came through our office trying to raise money for their fund.  Eventually, the Big Picture and a few of the other widely followed contrarians picked them up (dare I say syndicated them?).  I think they have many good points, and they have definitely helped me to develop my own thinking about the practical realties of monetary policy and monetary regimes.  Also, they give good (if long) letter.

Unfortunately, to borrow a phrase from somewhere I cannot remember, they manage their persona better than their portfolio; if they're so smart, why aren't they rich?  Last time I checked, these boys weren't even keeping up with the S&P500, let alone the price of gold, despite how much they yammer on about the bankruptcy of the modern monetary system and praise that barbaric yellow relic, and even despite the incredible run it has had over the last 2 years. 

I see two reasons why these guys are better off writing incendiary columns than managing money:

1. They have religion about their thesis.  Confident contrarianism is one thing, and probably a necessary thing for producing excellent returns.  Courage of your convictions is another thing, and is usually the kiss of fucking death.
2. They are wrong.  They simply haven't thought through this problem all the way, despite discussion of "war-gaming" their central thesis.  So, credit them for getting to second base when the vast majority of the world is still on first, but don't get too convinced that they have seen how the whole game develops.  It's long and complicated and contingent and they have stopped in the middle -- they outline one possible monetary future and call it inevitable.  It reminds me of Nozick's pithy phrase regarding a priori truths in philosophy, "Lack of invention is the mother of necessity".

Exasperation aside, let me address point 2 in a more substantive way.

US dollar are debt, technically (Federal Reserve Notes) and in practice.  Their ongoing value is supported by a system of government oversight that ultimately relies upon convincing private counterparties to use them in transactions.  As all modern global currencies are directly or indirectly benchmarked to the US dollar, they too are unreserved debt, literally and functionally owed by sponsoring sovereign governments and backed by the full faith and credit of their taxpayers.

The fundamental question all global commercial counterparties must answer upon each transaction is, "will my currency maintain its purchasing power until the next time I need it?"  If a quorum of economic counterparties begins to answer negatively, the currency in question will soon lose sponsorship and fail.

This may sound insightful to small children taking their first steps into the wide world of political economy.  Wow!  Money, like reality, is nothing but a collective hunch!  Let's throw off our clothes and run free through the fields of hard asset backed currency and pick daisies!  There's nothing to fear but everyone else fearing fear itself!  Revolution!  Mister T pities the fool who doesn't buy gold.

Good try, but this is NOT all there is to money, any more than all there is to the government in general is our collective decision to obey it.  Yes, sure, if we all woke up tomorrow and decided that cigarettes or leaves are money, then they would be.  And if we decided to have a revolution and throw off government oppression worldwide, we could.  While an valuable thought experiment, this is a lot easier said than done of course.

In the case of money, what is difficult is the fact that we cannot collectively decide what constitutes money independent from collective deciding what constitutes acceptable government.  You cannot ignore that money was invented by governments, for governments, in order to collect government taxes.  You cannot talk about money without talking about taxes and politics.  The bedrock reason we all primarily use government backed currency is because that is the only thing they accept as tax payments, and if you don't pay your taxes, guys with guns come and put you in a very unpleasant little cement floored cage opposite a shackled man in an orange jumpsuit.  This fact is not incidental to money.  It is the fucking DEFINITION of money.  It is the crystal out of which the money network condenses, as it were.  To write about what money supposedly is without mentioning taxes is not an oversight.  It is a fundamental error.  They are not just early.  They are wrong.

In short, money is inherently political, like everything else.  The change of monetary regimes is therefore also inherently political.  Economics and politics intersect, no doubt, but one does not determine the other.  If you want to predict the trajectory of either, you have to understand both. But if you really want to focus on something, I still think that politics precedes even being.

Am I paranoid?

Or is this the sort of chart that Google will one day employ to demonstrate that late model humans should be phased out in favor of more efficient forms of working memory that do not depend on clumsy mechano-magnetic mechanisms?

One of my favorite ideas in Accelerando was that the solution to the Fermi Paradox (if there's lots of other intelligent life in the universe, why haven't we seen it yet) could simply be lack of decent effective bandwidth.

To sketch out the concept a little ... 

1. Any brain is a distributed system.
2. No matter how big your brain gets, it still has to be instantiated in some physical form.
3. A big brain is going to have lots of individual parts, aka matter.
4. The individual parts have to communicate with one another and be tightly integrated to form an intelligence.

ERGO:

Even if you have the brain the size of a planet, it still has to be relatively dense or the speed of light constraint will introduce too much latency in the information transfer between the parts to do any really serious thinking.  Bandwidth is important to thinking.  Well, effective bandwidth.  The question is actually latency, but if you have to send lots of packets of information back and forth, the two are less different than you might think.

COROLLARY:

You cannot spread a brain out over cosmic distances (unless you are willing to have it think very slowly).

FURTHER:

Since most of the universe is not energy/matter dense, a very large brain will not want to leave the house because the effective bandwidth is going to suck.  It's a long way between planets.  Which means that a big brain is either going to bring the matter to itself, or accept shipping a much smaller version of itself around the cosmos if it wants to get away from home.  Big brains cannot travel light.

QED.