Montag, September 07, 2009

If You're Going To Say Economics Is Dead, Then Get Your Facts Right...

I sometimes peruse what is going on over at the Edge, which sometimes has some interesting stuff to read.

Not this time: now it's just being silly.

Douglas Rushkoff has simply reinvented reality to fit his needs, rather than to actually have done the research.

What annoyed me enough to write this was this:

The economy in which we operate is not a natural system, but a set of rules developed in the Late Middle Ages in order to prevent the unchecked rise of a merchant class that was creating and exchanging value with impunity. This was what we might today call a peer-to-peer economy, and did not depend on central employers or even central currency.

People brought grain in from the fields, had it weighed at a grain store, and left with a receipt — usually stamped into a thin piece of foil. The foil could be torn into smaller pieces and used as currency in town. Each piece represented a specific amount of grain. The money was quite literally earned into existence — and the total amount in circulation reflected the abundance of the crop.

Ummm: coinage, coins codified by a central authority using non-commodity means, dates back not to the Renaissance, but rather back to Egyptians and Sumerians, who developed standardized bars of gold and silver, with the first usage of stampage (marking the standardized bars of gold and silver) by the Lydians in 650 BC. That's over 2600 years ago: the Ancient Greeks were the society to adopt coinage with competing city-states, with standardized coinage developed by both Athens and Sparta. Paper currency was already in use in China in the 600s and the first generally circulating notes date from the Song Dynasty in 960. Fiat money, which is not backed by gold or other precious metals (except perhaps nominally) was an invention of the Romans.

This is not rocket science: this is 30 seconds of effort with Wikipedia. Really: go to Wikipedia and search on "History of Money" to find that Mr. Rushkoff's basic premise has nothing to do with reality.

In other words, the idyllic age that Rushkoff fantasizes about is just that: a fantasy world.

It never existed. Why should it? Who was running his magic "grain store" and why would anyone accept a thing piece of foil that could be torn into pieces? Why not just make the money yourself and not bother with working?

The title of Mr. Rushkoff's rambling and erroneous work is "Economics Is Not A Natural Science".

Well, duh: no one ever, ever said it was. Economics is, has always been, and will always be a social science. Only a learned outsider who fails to try to understand what he is writing about in order to preserve some ideologically pre-determined conclusion could even contemplate the idea that economists or others would claim the economics is a natural science.

Let's go further down this road:

That's why it's so amazing to me that scientists, and people calling themselves scientists, would propose to study the market as if it were some natural system — like the weather, or a coral reef.

It's not. It's a product not of nature but of engineering. And to treat the market as nature, as some product of purely evolutionary forces, is to deny ourselves access to its ongoing redesign. It's as if we woke up in a world where just one operating system was running on all our computers and, worse, we didn't realize that any other operating system ever did or could ever exist. We would simply accept Windows as a given circumstance, and look for ways to adjust our society to its needs rather than the other way around.

It is up to our most rigorous thinkers and writers not to base their work on widely accepted but largely artificial constructs. It is their job to differentiate between the map and the territory — to recognize when a series of false assumptions is corrupting their observations and conclusions.

What he fails to realize is that the study of markets start exactly there: the market place. Back when I did economics at the Albert-Ludwigs Universität zu Freiburg in Germany, we'd talk about how pricing worked at the daily market to the sides of the Freiburg Munster. Farmers come from the countryside (on the north side of the Munster, the south side was for vendors selling non-local produce) and set up their stands, setting their prices. You could time how long it took for prices to adjust: the farmers would first set a price that they wanted to get and then by simple process of looking around to see what others set their prices at, would either decide to lower or even occasionally raise their prices. The one farmer who came in with an extra big load of carrots would drop their price to clear them out: others would either match that price in order to be able to sell at all, or wouldn't, counting on later arrivals who would pay the normal price when that farmer ran out of carrots quickly as people bought not one kilo but two.

The thing is: it wasn't a product of engineering. It was the product of how humans interact with little or no interference. Sure, the market was established by the local government, set basic rules - weights had to be proper and the like - and no collusion was permitted between farmers to artificially set prices high and keep them that way despite a drop in demand at that price point.

But to call that a product of engineering is to reduce human interaction at all levels into a product of engineering, be it social engineering or otherwise: rather, the study of markets, the study of how scarce supply meets never-ending demand, is most certainly something that has evolved over time, just as human societies have evolved over time. It's tantamount to saying that people can only behave the way that their societies allow them to behave, reducing humans to mere products of their society, incapable of thinking and acting for themselves.

This is not a false assumption: if anything, Mr. Rushkoff's work is based on false assumptions, the most blatant and obvious one being the idea that money was a spontaneous invention of someone over at the "grain store" and that the modern role of money - fiat or otherwise -  was somehow the result of that terrible period of time, the Renaissance, where kings decided that they didn't want anyone making money besides themselves.

Perhaps more history would be appropriate for Mr. Rushkoff: cathedrals didn't get built because some towns had money.

Many towns became so prosperous that they invested in long-term projects, like cathedrals. The "Age of Cathedrals" of this pre-Renaissance period was not funded by the Vatican, but by the bottom-up activity of vibrant local economies.

Oh please: a reality that beggars the imagination. Cathedrals were built because the Church decided it was to be so: it wasn't funded by the Vatican because it was the duty of Christians to build a cathedral, more often than not impoverishing the workers of a region by tying up vast expenditures of time, energy and material into houses of worship, where workers provided their labor as part of their tithing. The "vibrant local economies" were run by local nobility, who, if they had abandoned serfdom, taxed their workers punishingly for the privilege of not being murdered and raped by the neighboring nobility or other bands of marauding thieves.

Feudal lords, early kings, and the aristocracy were not participating in this wealth creation. Their families hadn't created value in centuries, and they needed a mechanism through which to maintain their own stature in the face of a rising middle class. The two ideas they came up with are still with us today in essentially the same form, and have become so embedded in commerce that we mistake them for pre-existing laws of economic activity.

The feudal lords and kings were not participating in wealth creation because they controlled it: they kept the middle class under control because of the heresies involved in the non-noble having capital and doing things with it that the lords and kings did not control.

The first innovation was to centralize currency. What better way for the already rich to maintain their wealth than to make money scarce? Monarchs forcibly made abundant local currencies illegal, and required people to exchange value through artificially scarce central currencies, instead. Not only was centrally issued money easier to tax, but it gave central banks an easy way to extract value through debasement (removing gold content). The bias of scarce currency, however, was towards hording. Those with access to the treasury could accrue wealth by lending or investing passively in value creation by others. Prosperity on the periphery quickly diminished as value was drawn toward the center. Within a few decades of the establishment of central currency in France came local poverty, an end to subsistence farming, and the plague. (The economy we now celebrate as the happy result of these Renaissance innovations only took effect after Europe had lost half of its population.)


The second great innovation was the chartered monopoly, through which kings could grant exclusive control over a sector or region to a favored company in return for an investment in the enterprise. This gave rise to monopoly markets, such as the British East India Trading Company's exclusive right to trade in the American Colonies. Colonists who grew cotton were not permitted to sell it to other people or, worse, fabricate clothes. These activities would have generated value from the bottom up, in a way that could not have been extracted by a central authority. Instead, colonists were required to sell cotton to the Company, at fixed prices, who shipped it back to England where it was fabricated into clothes by another chartered monopoly, and then shipped to back to America for sale to the colonists. It was not more efficient; it was simply more extractive.

Sigh. Once again: neither of these is new, neither is innovative, but rather both have a long, long heritage that most certainly predates the fantasy past of Mr. Rushkoff.

Whether it's being done in honest ignorance, blind obedience, or cynical exploitation of the market, the result is the same: our ability to envision new solutions to the latest challenges is stunted by a dependence on market-driven and market-compatible answers. Instead, we are encouraged to apply the rules of genetics, neuroscience, or systems theory to the economy, and to do so in a dangerously determinist fashion.

In their ongoing effort to define and the defend the functioning of the market through science and systems theory, some of today's brightest thinkers have, perhaps inadvertently, promoted a mythology about commerce, culture, and competition. And it is a mythology as false, dangerous, and ultimately deadly as any religion.

The reason that we are "dependent" on market-driven and market-compatible answers is that markets work. Nothing else does. That is an empirical fact, about as hard a fact as is possible in the field of economics, underscored by the deaths of millions under alternatives (both fascism and communism) and the utter and complete collapse of any other system that has ever been tried.

That's not a myth. That is the cold, hard empirical reality. The one pushing a mythology is Mr. Rushkoff, and that mythology is that humans are by their very nature cooperative and can, once the evil construct of economics is removed, live in abundance and plenty.

That's a fundamentally romantic view of the world: the dismal science that is called economics doesn*t allow romantic notions:

These theories fail not because the math or science underlying them is false, but rather because it is being inappropriately applied. Yet too many theorists keep buying into them, desperate for some logical flourish through which the premise of scarcity can somehow fit in, and business audiences won. In the process, they ignore the genuinely relevant question: whether the economic model, the game rules set in place half a millennium ago by kings with armies, can continue to hold back the genuine market activity of people enabled by computers.

Sigh. Here we have Mr. Rushkoff spending all his time lambasting economics and the economics paradigms of our time, and then he inadvertently destroys his own thesis: that new markets are somehow different.

What is his "genuine" market activity?

People are beginning to create and exchange value again, and they are coming to realize the market they have taken for granted is not a condition of nature. This is the threat — and no amount of theoretical recontextualization is going to change that — or successfully prevent it.
Sorry: want to repeat that?

What he is talking about is nothing less than the fact - which no student of cliometry would have failed to have noticed - that markets change: take someone from the 19th century and put him into the 21st century market place and he will not understand what is being traded and how. He will, however, understand that the marketplace works.

We ended up with an economy based in scarcity and competition rather than abundance and collaboration; an economy that requires growth and eschews sustainable business models. It may or may not better reflect the laws of nature — and that it is a conversation we really should have — but it is certainly not the result of entirely natural set of principles in action. It is a system designed by certain people at a certain moment in history, with very specific interests.

I'd be interested in such a conversation: most calling for "sustainable business models" have no idea what these mean (statism and stagnation, for one, as growth is more often than not driven by innovation and productivity gains, rather than by mere material usage).

Abundance and collaboration is what exists in the Romantic concept of nature, and the past that Mr. Rushkoff here envisions is that of the noble savage. The problem? They never existed, and human history has been one of scarcity, deprivation and the general misery of peasants whose lords tax them and take their daughters, as any student of Chinese or Japanese history can tell you (let alone European history). Scarcity and competition is no the result of some deliberate conspiracy to keep you poor and ignorant, but rather, as ecologists should really know, the fact that resources are scarce and that human needs are endless.

It doesn't take a genius or a scientist to understand how the rules of the economic game as it is currently played reflect neither human values nor the laws of physics. The market cannot expand infinitely like the redshifts in Hubble's universe. How many other species attempt to store up enough fat during their productive years so that they can simply "retire" on their horded resources? How could a metric like the GNP accurately reflect the health of the real economy when toxic spills and disease epidemics alike actually count as short-term booms?

Sorry: other species don't store up fat in order to retire on horded resources, they do it in order not to starve to death. If you don't, you die. Simple.

Mr. Rushkoff also trots out the favorite of those who failed to understand national bookkeeping: that GDP - Mr, Rushkoff, GNP hasn't been in use for at least a decade as the mainstream indicator of economic development, since it fails to take into account financial flows - is somehow is supposed to reflect the health of the real economy. It doesn't and never has: it is merely the value added to the economy. While I know it is tempting (and most who couldn't list the components of how it is calculated misuse it this way) it's still wrong and shows, for us economists, the degree to which those who say economics is dead can't even get their facts right.

The net (whether we're talking Web 2.0, Wikipedia, social networks or laptops) offers people the opportunity to build economies based on different rules — commerce that exists outside the economic map we have mistaken for the territory of human interaction.

Oy vey is mir. The economies that Mr. Rushkoff is talking about don't exist except as part and parcel of what he is criticizing: he is talking of jump-starting new markets on the back of existing infrastructure as if the latter was simply there and didn't need to be paid for.

We can startup and even scale companies with little or no money, making the banks and investment capital on which business once depended obsolete. That's the real reason for the so-called economic crisis: there is less of a market for the debt on which the top-heavy game is based. We can develop local and complementary currencies, barter networks, and other exchange systems independently of a central bank, and carry out secure transactions with our cell phones.

Yikes! Companies with no money that pay no payrolls and create money out of nothing. Ummm: wasn't that what was the problem? Banks and investment capital are presto chango obsolete. "Complementary currencies" - whatever that is supposed to mean, I daresay some sort of alternative currency that requires you to consume what you invested, rather than to conserve capital and take in a return - barter, other exchange systems that are magically self-organizing and do not require a central authority. And with secure transactions with our cell phones.

Never mind that the cell phone system has to be paid for, that without enforcement fraud and abuse will necessarily appear and dominate (given human nature, but then again, that is something the romantics never figures out), ruining the system.

In doing so, we become capable of imagining a marketplace based in something other than scarcity — a requirement if we're ever going to find a way to employ an abundant energy supply. It's not that we don't have the technological means to source renewable energy; it's that we don't have a market concept capable of contending with abundance. As Buckminster Fuller would remind us: these are not problems of nature, they are problems of design.

The problem with designing society is that everyone who has tried has failed, miserably so. That is not a good track record, Mr. Rushkoff, and the last person I would want to give design competency to is someone who has made both what must be seen as embarrassing errors of commission and a failure to understand what economics really is all about, someone who is both a Romantic and a Social Utopianist.

We must stop perpetuating the fiction that existence itself is dictated by the immutable laws of economics. These so-called laws are, in actuality, the economic mechanisms of 13th Century monarchs. Some of us analyzing digital culture and its impact on business must reveal economics as the artificial construction it really is. Although it may be subjected to the scientific method and mathematical scrutiny, it is not a natural science; it is game theory, with a set of underlying assumptions that have little to do with anything resembling genetics, neurology, evolution, or natural systems.

As I've pointed out, the laws of economics weren't established by some conspiracy of 13th century monarchs. The laws of economics, the ones that deserve to be called such, are the laws of supply and demand. Economics is not an artificial construct: it has evolved naturally and continues to do so: what must be revealed, instead, is the abject lack of understanding of what economics really is amongst those who would dislodge it. Economics has never claimed to be a natural science: it is, perhaps, the most rigorous and mathematically obsessed of the human science, but really never has claimed to be anything but.

The scientific tradition exposed the unpopular astronomical fact that the earth was not at the center of the universe. This stance challenged the social order, and its proponents were met with less than a welcoming reception. Today, science has a similar opportunity: to expose the fallacies underlying our economic model instead of producing short-term strategies for mitigating the effects of inventions and discoveries that threaten this inherited market hallucination.

I fear the only hallucination here is that of Mr. Rushkoff: his Romantic notions of the noble savage is one.

The economic model has broken, for good. It's time to stop pretending it describes our world.


What has broken is the idea that governments can functionally interfere in markets and that they can manipulate the economy to do what the politicians want it to do. The economy, the markets, behaved as they should: governments manipulated markets to make housing cheap, and those who demanded that risk play no role in lending money are reaping their just rewards.

What is broken is the progressive, romantic notions of the world that people like Mr. Rushkoff earnestly believe. Economics describes the world: it's just not the world that Mr. Rushkoff thinks exists.

My apologies to Mr. Rushkoff in advance for changing some of the order of his work for my commentary here.

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