Understanding Economics: the power of "Ugh"

Submitted by murph on Fri, 09/21/2018 - 10:28

"Ugh"

That's the sound of human culture and civilization breaking free of its animal origins - because it's the sound one proto-human made to another to indicate a willingness to trade a fish for some bananas.

A modern economy consists entirely of ughs - but there are trillions of them, and while many sort of "live in the instant" many others are split over time and space, so it's a bit hard to understand just how it all comes together.

Consider a rough analogy to how computers like your smart phone work. Its internal workings are invisible to you, and even if you could see them, you'd find it hard to follow because it consists of nothing more than millions of "bits" (representing information as combinations of "on" and "off" switch positions) This, for example,

0010110 000100 111001 000000 111001 000000 111001 000000 0010100 011000 000000 010100 001000 000000 000000 000000

might represent roughly one hundred millionth of the binary instruction stream an iPhone executes when you first invoke Apple's Siri - ask her to to look up the Backyardigans Cave Party episode for you, and the processor in your device will do about ten times as many individual logical operations as there are people on earth - while the network and server processors it accesses on your behalf will do something like another fifty times more.

The economy is made up of trillions of "ugh"s - nothing more, but it's much less readable than binary computer code because humans are neither limited to considering only what happens the instant the trade is offered, nor to yes/no responses. As a result it's currently impossible to freeze frame an economy so you can review how the ughs fit together - but a short excursion into part of a more concrete seeming model may help.

Marx wanted to do away with property, but every uncoerced form of trade beyond an even swap of this for that needs some means of representing and owning the difference in value. Thus an offer like "two bananas and I'll owe you a favor for that fish" invents both money and property rights - because, a bit later on, that fisherman is going to trade some fish and a couple of the banana monger's obligations for a beer and a lapdance.

Once the traders move to some physical representation of what they owe each other they'll have invented coinage - and because coins aren't just portable but naturally last longer than fish, the astute fisherman will soon be handing over fish today, on the promise of coin tomorrow.

Once trade starts, specialization follows - and, barring social repression - so does innovation as some of the fishermen find a production advantage in spending some coins on spearheads made by a guy who's really good at it.

Specialization has social consequences as the guy who's significantly better than others at something discovers that having someone else do the mundane tasks of everyday living frees up time for his speciality - and those needs combine nicely with biology to evolve the family unit as the basic building block for larger tribal groupings with a dominance hierarchy instead of only one dominant male.

Once communities made up of multiple families become the norm, however, other social structures including morality, law, and mutual defense necessarily follow to protect and advance property rights beyond the fact of immediate possession.

Eventually it gets to be the 1940s in the United States and somebody like Wasily Leontief at Harvard realizes that Morgenstern's implacable gaming equations permit of a partial solution modeling industrial inputs and outputs in a modern economy.

Basically, the typical realization of a Leontief Input/Output (I/O)  model starts as a tabular listing with the names of industrial groupings as both row and column headers with estimates in each cell of the value of the row industry's output used directly by the column nominated industry.

Trade Values (in banana equivalents); sample of 4 (there are 130 living in this Congo village community); observed from 4 PM to 8PM; non feast, good weather, day
Producer User (Spear Maker) User (Fisherman) User (Banana Picker) User (Dancer)
Spear Maker 1 5 3 1
Fisherman 5 1 3 11
Banana Picker 3 9 2 3
Dancer 0 10 12 0

Notice that nothing shown make any more obvious sense than "01100100 10101000 0010100" does - to fix this, you'd need first to add rows and columns for other involved people, and then blocks to represent both preceding and succeeding trades.

In its more complete form the rows and columns of an I/O model list products and services and the estimates are themselves three dimensional tables describing the temporal and spatial distributions of expenditures for inputs, and receipts from outputs, for each combination.

Practicalities aside, an input/output model is conceptually just a record of trading patterns: who buys, and who sells, what; where it goes or comes from, and how and when it gets paid for - in the real world both the data and the definitions for these things are always both over-simplified and seriously corrupt so they're much less useful than you might imagine, but what the conceptual models illustrate is that a modern economy consists of many people saying "ugh" to each other in ways, at times, and for reasons, that make sense to them.

And that's all there is to understanding how an economy works - although making some corollaries explicit here may help in applying that understanding:

  1. Money is not a medium of or for exchange, it is a transferable representation of somebody's commitment to complete an exchange.

    Thus when governments print money in excess of the national (or transnational for some internationally important currencies) ability to produce value the new monies simply dilute (devalue) the old to produce, in the worst cases, run-away inflation.

  2. I/O tables only incidentally model the flows of products and services, at a more basic level they model behavior: who does what and for whom - it's the ugh that counts, not the product or service involved: that's why resource economies last until demand fades, the resource runs out, or politics intervenes, while trading economies grow until political action stops them.
  3. It is specialization, not the absence of property but its realization in skills, that drives toward an "all for one, and one for all" social organization.
  4. Trade develops, becomes self-sustaining, and drives both specialization and innovation when those involved are better off for it.

    If one of those involved uses force to shift the balance in its favor, the incentives for the others change, positive innovation stops, and the other actors eventually find a way to end the punishment.

    Thus when governments involve themselves in the economy and demand a share of the proceeds either directly through taxes or indirectly through regulation, traders initially go along, but over time develop ways to limit either, or both, the burden and/or the effects of these demands on their activities.

    This behavioral pattern predicts what happens when economies become socialist: regulation and control remove the incentives to non regulatory innovation, and thus stop new economic drivers from emerging while the pre-existing ones work themselves out - allowing the rich to get richer as those organizations with the biggest head starts achieve monopoly power, while the poor get poorer as choice, opportunity, and innovation disappear from the marketplace.

  5. humans are largely rational with respect to their own self interest - so sustained but apparently irrational economic behavior is almost always a rational response to regulation.

    Conversely, large scale social changes occur when the opportunity to improve on pre-existing technologies combines with an absence of government or religious restriction to allow the development of new and unregulated markets of sufficient size. Thus what the people driving the micro-electronics industries in the 1980s had in common with the free traders whose actions led to the industrial revolution was mainly the absence of regulation.

  6. trade is driven by the expectation of mutual benefit, not by the product or services traded. All intermediate products, services, and processes are, in other words, not only replaceable, but will naturally be replaced as cost conditions change. It's the "ugh" that counts, not the specific product or service.

The bottom line on all this is that the entire faux Malthusian vision of the world economy as about resources; and thus its consequences, including Marxism, five year production plans, and the whole fascist progressive schtick, is consistent with human behavior only within the pre-human tribal group with one leader, no families, no specialists, and no personal property - go beyond that, to a trading economy with differentiated individuals who can own and trade things or services and all of the political constructs built on the assumption that economies are about resources fail directly and simply because the benefits of trade: social, economic, and personal, don't come from the fish or the bananas, they come from the "ugh."