Unsustainability, History, and Fuck-You-Nomics: Part I

Once again I've been flagging on my promise to update this blog more, but I am actually hoping to put a stop to that. I was working on an entry a couple of weeks ago that just didn't make it into here; though I'll salvage some parts.

I wanted to take a brief digression here. My interests have turned away from heavy literary theory into a combination of hands-on game design and understanding the current economic crisis through integrated complex systems. The two of those has caused me to start working on a microeconomics simulation; still deciding whether the theme will be cheese/mice or colors--they could both lend themselves to very nice systems.

But what of this on the economic crisis? As my intellectual direction changes, I feel like talking solely about aesthetics and technology doesn't cover the whole of the lens through which I look at the world. With the world economy on the brink of a profound change and the utter uncertainty that that brings to the future, I'd like to dedicate some of my time on this blog to talking about the subject.

Part I: Liquidity

So, where to begin...

It begins in my fall 2008 class on the subprime crisis; a clueless junior who had the privilege of meeting Jim Rokakis, former treasurer of Coyahoga County (Cleveland and its surrounding area.) As we all know, Cleveland was pretty awesome and then became gutted as manufacturing left the city. Apparently it experienced some revival in the early 2000s, but I don't know this, nor is it important. What's important is that it got devastated by the wave of defaults and foreclosures that ripped through its housing market.

This is where I was first introduced to the virtuous/vicious circle hypothesis that underlies what people know as "Keynesian" economics (some claim that this is a perversion; once again, I don't know.) Before that, we have classical and austrian economics talking about how the market corrects itself with supply and demand. Keynes, from what it seems, had a keen intuition for nonlinearity. Remember that term; anyone who ignores it shouldn't have an opinion on this.

Now, the reason why non-linearity is so important, is that the effects of a negative event can be disruptive in unforeseen ways. If there is a bubble in say... housing, the effects of its bursting will go well beyond the simple market connection of houses coming back down to realistic prices. With that drop, many people's savings are evaporated, and so they can't buy goods. If that happens, then they can't go out with their family to their weekly-movie night, so the movie theaters and restaurants in the area take a hit. Without revenue, they fire people; people who already may be having trouble paying off their house's mortgage. That of course means that housing prices go down even further. And of course, the people who loaned the money get screwed too. But suffice it to say, there is a cycle, so that a simple market correction can turn into a disproportionate cycle of people losing money--people who were perfectly responsible but have lost economic opportunity thanks to being at the wrong place at the wrong time.

This phenomenon is called a deflationary spiral. Why deflationary? Because the result of this is that people have less money, prices and wages lower, and so on. So money, in a sense, becomes worth more. This sounds like it shouldn't be a big deal then, doesn't the drop in prices make up for the hit to people's wallets?

Well, not really; because it doesn't quite cancel out. Economic activity, the very thing that this whole complicated system of money represents, slows down. People lose jobs, business go out; and suddenly we have a scarcity of resources to go around. That only intensifies the spiral. Like they say, you need to spend money to make money. There is also one other major factor... debt!

Huh? Debt? Oh wait, right! You still owe the same amount in dollars if you have a mortgage, silly me! Silly, silly, me! Doesn't matter whether your dollar "buys" more; if you have less money, but you owe the same amount of it, you're getting screwed! And this was happening to a lot of people. This is no good, there's got to be some way out of this. It's like the whole body is slowing down, but if only we could get someone to start moving again, this might all be fixed. If only we could get enough people to start running together that they'll bring back the momentum. Wait, we could use... *fanfare* the government!

And that is what we did, we enacted economic stimulus. This was done in the great depression; first with the new deal, and then with World War II.* If we can act early and re-invigorate enough people and businesses, then we can start growing out of it. As for the debt the government has to take on; well, in many cases, the loss will be a lot less than what we'd lose from all of the economic downturn.

But let's take a step back. Here we're talking about goods and services, but we're forgetting about one actor involved in this whole crisis: the banks. We love them, we hate them; can't live with 'em, and certainly can't live without 'em. Because of that last clause, we bailed them out. But we didn't stop there--the federal reserve, the central bank of the united states, the ones who create all of the currency in the U.S. Economy (in other words: they have infinite money; their job is simply to maintain the system of exchange that keeps everyone working together. Whether this is good or bad is not part of the point I'm making), decided to lend money to these large financial institutions at virtually no interest rate.

Now, this can all be very very very jargony to those who are new to this stuff. I'm here to try my best to explain this all in very plain English--partially because I believe that the convoluted language of economics is actually responsible for creating a lot of the sophistry that I believe is at large. But anyway, for those who are confused, you might be asking what does any of that mean? Why are they lending money at lower interest rates, or even bailing them out?

And that brings us to the word in bold from the heading, liquidity. Its logic is actually very similar to that of stimulus if you look closely. Let's have a little thought experiment. Alex, John and Christina are all playing outside when they see Jimmy and Katie kissing on a bench. They have a debate about if they're going to become an item. Alex bets Christina that they certainly will not, and willingly bets $100. Christina, however, later realizes that Alex may very well be right, but she can't take back the bet she already made. She decides to hedge her bet by making a $100 bet with John, who believes that they will become an item. He agrees.

But wait, Alex realizes if he loses, he won't have the money to pay Christina. He'll need to offset the bet. When he talks to John, he finds himself in the same predicament, so they agree to make bets opposite to what they think. Now, it turns out that Jimmy and Katie don't get together (because Alex is always right, just saying), so the bets get triggered. There's just one problem--nobody can pay back anyone. Alex needs to pay John, but he can't get the money from Christina, who is trying to get the money that John owes her. But John hasn't gotten the money from Alex yet!

They're all stressing out, not realizing that this all balances out because they all talked in private. Just as they're about to burst into tears, their parents find out and get them all together. They decide they're going to show them how this is done in the adult world. They decide to loan Alex $100, with which he pays Christina. Christina pays John, and John pays Alex back. Then Alex pays John, and John finally pays Christina. The day is saved!

What was this we experienced? A crisis of liquidity. All the bets cancelled each other out, but without any initial money to pay, nobody could get the cycle going. This is what was happening with our banks--they made similar such bets in the form of leverage, the lifeblood of economic expansion (try getting a car or a house without some kind of loan.) Without sufficient money, banks can't lend money to get businesses operating again, and the deflationary spiral gets much, much worse. And that's why the government and the central bank acted in the way they did; they believed that the pipes were simply clogged, and a temporary burst of cash could clear them out.

And so both this liquidity crisis in the banks and the idea of a deflationary spiral are the same thing. Resources were (mis)allocated in such a way that suddenly, even though they were there, the un-coordinated behavior of the group caused them to stop being used, worsening people's standards of living in a catch-22.

And that's what I believed this was about for quite some time. The economy had misallocated its resources, and letting it correct itself would cause massive disruptions that are at the end of the day are fundamentally irrelevant to the problem that needed to be fixed. Some cash would prevent the cycle of disruption, and we'd pay the relatively small cost with the inevitable growth of a healthy economy.

But then why aren't we growing out of it? Is this just an extremely nasty version of a liquidity crisis, one that would require far more stimulus and patience, or is there something else impeding growth? And what is growth, anyway?

I will leave you with this video (not made by me) as a preview of my next post.

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*This itself is subject to debate in a way. Here is a link to a good counter-point article: http://www.atimes.com/atimes/global_economy/mh24dj01.html

The point of a simulation is not to quantify human behavior and complex systems. It is to set in motion a narrative from which people can take ideas and experiences.

Command and Control

Why do we overeat and refuse to burn it off? Why do we procrastinate; or even burn out despite our passion for a subject? What about the state of the world? Why are politicians so disappointing; what should we trust in when we vote for them—rigid rationalism, protocol; or the feeling deep within our gut? What about the problems that we just think are never going to end—is it willpower, self-experimentation or something else?

I've benefited a lot in recent months by letting go of reliance on two sides of the same coin—declarative knowledge and conscious "willpower." Both are important and play a role in many things, but they are the exception rather than the rule. The way I came to this was through, yes, some changes to how I ate and exercised. I've never had a weight problem, but I have some other reasons, such as asthma, to look after what goes in my body.

Upon investigating these ideas, I saw that there was a general flaw in the arguments about obesity. Moralizing self-help gurus have convinced us everyday laymen have taken the truism that people gain weight because they "consume more energy than they expend" and somehow used some discursive sleight of hand to translate this to the idea that obese people are being weak-willed by overeating and not exercising. To quote one great thinker: what horseshit!

Have we learned nothing from the mistakes of Descartes or the piles of research on the body's effect on the brain? I could even wager that thousands of years of wisdom would back this; but I really don't know and could be wrong about that. We are deeply connected to our bodies; they are the source of emotions, which are by extension the source of our decision making. Don't believe me? How about the fact that even with tons of analytic knowledge ("facts"), severing the connection between our brains and our bodily dispositions disables our ability to effectively make decisions. But I digress.

The reason why this "calories-in/calories-out" argument doesn't work is that our behavior is affected by all the biochemical reactions that are going on in our metabolism. When we eat too much junk food too regularly, our metabolism breaks down and our ability to efficiently process nutrients falls apart; insulin surges through the body at unhealthy rates, we store perfectly good nutrients as body fat and our brain does not get the glucose it needs to stop yelling "I'm hungry!" The result is that we find ourselves crashing and needing more food. So perhaps we just need to burn it off? Unlikely; where would you get all the energy needed if you can't even feel satiated?

Of course, all this could be wrong too; remember that bit about syllogistic knowledge. But I am convinced that these systems work something like this—the world is just too connected and nonlinear. And for this reason I've started to wonder, in light of just how embodied our decisions are; whether we need a whole new way of thinking about how to do things. When we procrastinate, it's likely that our mind is telling us that it doesn't approve of the plan. But couldn't that be irrational? Well, yes; we're not always cut out for the modern world that we've set up for ourselves—but the wisdom of emotions seems to be seriously underestimated. Our emotions really may be what's right when we're procrastinating; an unrealistic plan really can slow us down after all.

And how surprising is this when you look at something bigger like the markets? Sometimes we like to give credit to politicans for saving or ruining the economy; but how much say do they really have? What effect does the average tax policy or stimulus plan have? I'd argue that sometimes they work; sometimes they provide a big enough jolt to shift things into another equilibrium—but that's a big maybe; the fact is, we can't even seem to predict where the markets go.

What does that tell us? That yes, there are things we can do. We have some conscious control over our choices and we certainly have times where we just need to stop making excuses and apply elbow grease. But the parallels become even more striking when we hear about the limits to our willpower; how they can be increased through certain behaviors and states of health—but those behaviors and states must be brought about in some way to begin with. We have a very fragile modicum of control over a system that is highly belligerent and, on top of that (though somewhat related), quite random. We need to understand and appreciate these systems for what they are; not only economics and nutrition, but also our habits, the social interactions of people; and of course the very stochasticity of life.

To do that, we must let go of the command and control model but not think that this is some key to "hijacking" our behavior. We talk about tricks to fool ourselves, but it's hard to believe that we can really just "trick" ourselves into doing everything. Nothing is going gently nudge me to do 8 hours of nonstop work (if only...) No, not a chance. There's something more than that. We need to look at the equilibria of our life; on the harm of deterministic thinking and the benefits of random events; on the anti-fragility behind growth and discovery.

It's hard to say for sure what it all means, but a lot of things have helped me towards this path. Eating and exercising more stochastically, cutting out certain food groups but not worrying if I cheat once in a while; not pushing the serotonin buttons of e-mail and Facebook first thing in the morning (getting bad at that), finding peace and discovery in fiction, walking, meditation and unscheduled activities; not adhering to rules too tightly.

But I'd hardly say that I read fiction for "knowledge" or take walks for "exercise"—more accurately I exercise to learn and read for the sake of my body. Exercise has a specific scent of discovery to it, it resides at the core of so many things in our hunter-gatherer past; reading makes me feel more whole, my body relaxes into a new state—just as well that I run anaerobically and weight-lift aerobically.

Maybe you agree, maybe you disagree. If you agree, how have you applied this to your life? If you disagree, you can have a say too ;)