Tag Archives: economics

My Worldview in a Nutshell

I've never read this book, the cover just looks cool.

I've never read this book, the cover just looks cool.

Pretty much everything worth talking about, from global civilization to a human relationship to an individual thought, is an example of a complex system with emergent properties. [Oh noes! Math!]

These systems are driven by the evolutionary algorithm: differentiation, selection, and exploration. When differentiation, selection, and exploration happen you get thinking, relationships and cool civilizations, when they fail you don’t.

Exploration is about going down a path and discovering a punch of other paths. It requires the time, energy, and information to properly explore.

Differentiation is about understanding which options are worth pursuing. It involves looking at a bunch of options and saying “these few are the interesting ones.” It’s often about understanding, expressing, and absorbing emotion. If you don’t pay attention to emotion, you’ll go down a path that makes people cranky.

Selection is about making plans to explore an option or a set of options. It involves good planning, solid commitments, mobilizing resources, and having the necessary expertise. Selection requires tasklisters, trust and training.

The evolutionary algorithm tends to operate across scale. An evolving highschool is made up of evolving groups, which are made up of evolving relationships which are made up of evolving conversations which are made up of evolving thoughts. This creates a fractal-like structure. It also creates “Black Swan” uncertainty in which big, totally unexpected events happen out of nowhere.

Our brains are tribe machines. (If I’m reading Dunbar right.) We evolved them to think about relationships with other people, not to do abstract algebra. This means that we’re much, much better at thinking about the way that human relationships evolve than we are at thinking about anything else.

Unfortunately, the way that we talk about relationships fundamentally limits this power. The concepts that we use to describe relationships (“finding the one,” “just friends,” “networking,”) tend to prevent meaningful connections from forming. They get in the way of the evolutionary algorithm doing its thing. Someone could probably find a nifty way to blame this on something, but I don’t really care.

This means that in most human situations the evolutionary algorithm is somehow being suppressed. If you know how to identify and remove that suppression, you can create disruptive self-organization pretty much anywhere.

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A Hot Rock and a Classroom

Sometimes chaos can be complicated and beautiful.

  1. Relationships can be created and destroyed.
  2. All relationships tend toward empowerment.

I want to tell a few stories about complexity, which isn’t something that we understand that well. I studied physics in undergrad, and learned that really complicated things can be understood the way that we understand heat. When you leave a rock out in the sun, all of the molecules in that rock start vibrating in really complicated ways. In thermodynamics, the physics used to describe pretty much anything that’s really complicated, we use the word the word “entropy” to describe the process of the molecules in the rock going crazy. Entropy is disorder, entropy is chaos. The lecture bugged me because it was happening in a classroom which existed on a giant rock (the earth) that had spent several billion years out in the sun. The fact that the classroom existed meant that the molecules on the rock didn’t JUST get crazy, they also get complex.

In thermodynamics, we take matter and energy to be a unit of analysis. Thermodynamics looks at the way that stuff moves around closed systems like coffee cups. It has two big limitations. First: matter can’t be created or destroyed. If you want more stuff or more energy to move it around, you’ll need to get it from somewhere. Second: all systems tend towards entropy. In the long run everything everywhere gets more chaotic and jumbled. If you want to put milk into your cup of coffee, all you have to do is pour it in. The law of entropy will take over (facilitated by a little stirring), and you’ll get an even mix. Thermodynamics says that taking milk OUT of your cup of coffee is much harder. It’s technically possible, but it takes a lot of energy, way more energy than it takes to put the milk in. Things like to mix together, to become disordered and homogeneous. That’s just the way of the world.

What thermodynamics isn’t good at describing is the way that this tendency toward entropy can create elaborate, beautiful types of order. We know that things go from ordered (milk and coffee) to homogeneous (milk in coffee), but we don’t really get what happens in between. Those elaborate, beautiful swirls as it reaches out to the edge of your cup are an example of the fascinating complexity that happens as systems disorder themselves.

A coffee cup is one example, another is the planet. For eons, the planet earth has functioned a little like a radiator. Energy from fusion in the sun bombards the planet’s surface, and an equal amount of energy gets radiated out into space as heat. No energy is created or destroyed, we’re doing things by the book.

What’s interesting is what HAPPENS to that energy between hitting the planet’s surface in a focused beam and getting radiated off in all directions. This process used to be fairly simple: the earth was a big rock, and it radiated heat just like any other rock left in the sun. But something strange happened. The system which absorbs the sun’s energy and radiates it out again got LESS homogeneous and more intricate. Like the spirals in a coffee cup life shot up from the surface of the earth, steadily growing in complexity until it created all of the complicated problems that our complicated brains grapple with all day. This is the irony: in tending towards disorder, systems generate infinite complexity. That’s what I want to talk about.

In order to think about this complexity, we need to stop thinking about matter and energy. Following an imaginary photon from sun to sugar to lion and back out to space is an interesting exercise, but it doesn’t tell us much about how the lion got there or where the lion’s going. Instead, the only meaningful unit analysis is the FLOWS of matter and energy, the relationships that evolve to get energy from focused to dispersed. Thinking in terms of relationships lets us name and analyze things that are otherwise impossibly complicated. Technically, your relationships with your Aunt Gertrude is a flow of matter and energy- a few soundwaves here, a few electrons shooting through the internet there, but if all you do is track the electrons you’ll have a hard time understanding what’s going on. As a unit of analysis, relationships are a powerful way to understand complexity, and they turn the limitations of thermodynamics completely upside down.

Relationships can be created and destroyed.

The first big bummer of thermodynamics is that it’s zero sum. If I’ve got a system and you’ve got a system, the only way for me to get more stuff is to take it from you, since neither of us can create stuff out of nothing. But relationships are different. If I measure a system not by the amount of stuff but by the sophistication and complexity of its relationships then I CAN make something out of nothing. Without increasing the amount of matter and energy I’m using I can make my system better, and you can make your system better. Relationships allow for the notion of a win-win.

This idea that systems of relationships can get richer and more complicated over time is called emergence, and scientists are just beginning to wrap their heads around how it works. Emergence describes the evolution of life on earth, the creation of the internet, the birth of the civil rights movement and the way that people fall in love. Wherever relationships evolve and change, emergence tends to show up. Think about the difference between a pool table and a classroom. The pool table has plenty of interactions- between the eight ball and the five, between the cue and the table’s edge- but few real relationships. As the pool table busies itself getting played on year after year the eight ball and the five don’t get to know one another any better. They don’t evolve a more sophisticated connection or find new and unexpected ways to suddenly connect with the trimming, they just interact and wear out. A classroom is different. A classroom is greater than the sum of its parts. The kids and the teacher all get to know one another, their interactions evolve to get more sophisticated over time, and an emergent property called education happens as a result. Interactions are boring, they happen again and again until entropy breaks them down. Relationships are self-organizing, they get deeper and they spontaneously branch out to form new relationships.

Of course, there isn’t a binary distinction between interactions and relationships, between pool tables that degrade and classrooms that evolve. Most complex systems have properties of both. When things interact the laws of entropy wear them down, and when things relate the laws of emergence build them up. Thermodynamics has the wearing down part pretty well mapped, the trick to understanding the emergent part is understanding what those relationships are reaching for.

All relationships tend towards empowerment.

I know, I know, I just brought a new age social justice word into a discussion of thermodynamics, but bear with me.

As quickly as you can, please define the following words:

Square
Road
Muffin
Wheel
Hair

Nice work! Now define these words:

Love
Justice
Health
Intelligence
Life

Why are some definitions fairly straightforward, and others the cause of timeless philosophical debates? You can pick up a muffin. It’s got a certain shape, a certain smell, and other physical properties that distinguish it from a lug nut or a cupcake. But you can’t pick up love. I’d like to argue that that’s because the words in the second list are all emergent properties, concepts that relationships organize themselves around which have no tangible manifestation. These abstract concepts that relationships reach for all have similar properties. I like to call these sorts of emergent properties empowerment.

Let’s go back to our imaginary classroom and look at Tania, one of those fidgety kids in the second row. What determines how that particular node in the system will form relationships with the rest of the classroom? Since we’re analyzing things in terms of relationships we need to see her not as an object, but as a big knot of threads. Her relationship with her parents is telling her to sit still and do well, and also telling her to rebel and do poorly. Her relationship with her friends is telling her to act cool and seek respect, her relationship with her body is telling her to run around outside, and bat eyes at the girl in row three. Her job is to optimize across all of these relationships as best she can, to find a course of action that empowers all of these relationships as much as possible. The result is behavior that’s incredibly complicated, but remarkable for it’s ability to hit all the marks. She raises her hand eagerly, waving it back and forth to give her muscles a mini-workout. When the teacher calls on her, she demonstrates that she understands the civil war (to keep her parents happy), then asks a question to undermine the point that the teacher was making (to rebel against her parents), then sits back smugly (to impress her friends), and glances at the girl in row three. There isn’t a supercomputer in the world that could answer the question that well.

For Tania, something is empowering if it lets her optimize across the complicated web of relationships that define her life. If she sees a new relationship that let’s her optimize better than she was before, say a relationship with a new smartphone, she’ll focus on building that relationship. She’ll earn money to buy it, spend time learning how to use it, and otherwise increase the intricacy and complexity of her existence. Every waking hour of her life, she’s working to build new, empowering relationships and to maintain and deepen the ones that she’s already got. It’s this optimizing behavior that leads to the incredible complexity and beauty of emergent systems. When your body optimizes itself you get health. When your relationship with your spouse optimizes itself you get love. When your mind optimizes itself you get intelligence. When Tania optimizes herself she gets happiness. In order to understand the complex matter and energy reality that we live in, we need to understand how relationships reach for this type of empowerment, and why they sometimes fail.

I’ve got a nifty theory for how this “reaching” happens, but I’ll stop before going further out on this intellectual limb (going from thermodynamics to love is already a cardinal sin of physics!). If you’re reading this, I would love your thoughts. What holes exist in this idea? Does it work as an intellectual party trick? Could it be functionally useful to solve problems? If so what sort of problems?

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The Best at What They Do

..but what they do aint necessarily pretty.

..but what they do ain't necessarily pretty.

Like Wolverine market economies are the best at what they do, but what they do ain’t necessarily pretty. Got a bunch of grain to distribute? A market economy will make sure that that grain gets distributed efficiently and without political bias to people consider it valuable. From a purely functional perspective, it’s quite possibly the Best Way to distribute grain. What markets do (and do very well) is efficiently distribute ownable goods and services. This has two big implications:

1) If you can’t really own it, it doesn’t belong in a market. It’s pretty clear what it means to own a sack of grain, a parcel of land or a service contract. It’s less clear what it means to own, say, the ability of the oceans to replenish fish stocks, or the ability of an education system to contribute to a flourishing society.  Because these things can’t really be owned, it’s unclear what it means to buy them and it’s very hard for market mechanisms to give them a good price. You can always scour ecosystems and social systems for things that AREownable (ie , the right to harvest fish). That’s a great way to control how the market interacts with the global ecosystem, but it’s not enough to keep that ecosystem maintained.

2) If you don’t care about distributing it efficiently, it doesn’t belong in a market. We could have a free market for physical violence, and we don’t. Corporations and the extremely wealthy could hire private security forces to enforce whatever laws they saw fit, and the ability to violence would probably be created and distributed a lot more efficiently than it is now. We don’t have a market for physical violence because efficient distribution isn’t really a top priority. By distributingthe ability to do violence through national armies and regional police forces we can ensure that that ability is used for our collective benefit and minimize the amount of actual violence that takes place. We’ve learned frommillenia of experience that violence is best distributed through a rigid, publicly accountable command structure. When that command structure interacts with the market (buying badges and cosmetics and whatnot) it worries about prices, but it doesn’t run itself on them.

Both of these points need to be taken into account when thinking about ecosystem services. If we manage our ecosystem with the market we’ll wind up distributing it efficiently, but that may not be what we want. We need to find a nonmarket system, like the army’s rigid command structure or science’s free exchange of ideas, which allows our ecosystem and its services to flourish. When that nonmarket system interacts with the market (say, when commercial fish trawlers head out to sea) it may make sense to put a price on things, but often times it won’t. (We won’t control sexual harassment by putting a price on it and distributing it in a market.)

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Concentration of the Energy Generation Sector

For class I had to look at market concentration, which is a numerical expression of how much a few big players control a given market. I decided to look at energy generation. The utilities industry is categorized by huge economies of scale and huge barriers to entry. I figured I would drill down on electricity generation, since that is so relevant to carbon emissions.

Electric power generation:

2002:

Firms:
440

Revenue:
$ 79 431 678 000

4 Firm: 31.1%
8 Firm: 45.8%
20 Firm: 66.6%
50 Firm: 87.5%

1997:

(Strangely, they don’t like the total number of firms. I can’t seem to find it on the census website.)

Revenue:
$ 73 375 323 000

4 Firm: 23.8%
8 Firm: 35.7%
20 Firm: 57.0%
50 Firm: 79.7%

Will you look at that. Steady growth in revenue combined with almost a 10% growth in concentration across the sector. What’s interesting to me is the concentration based on the TYPE of power. Predictably, things like Large Hyrdo and Nuclear are the most concentrated, where the top 4 firms control 65.6% and 62.8% of the market respectively. Fossil fuels, with their lower capital costs and regulatory barriers, are a bit more democratic: the top 4 firms only control about 33.9% of the market. (I wonder how deregulation impacted this since 2002?)

Personally I pull my hair out every time I hear Obama and McCain tripping over themselves to tout nuclear as the solution. Nuclear takes a long time to ramp up and it’s never been economically feasible without massive subsidies. So why are people thrilled about nukes and making only hand-waving gestures towards renewables? Part of the answer might be in the numbers above. A nuclear energy infrastructure concentrates the industry, since only a few massive companies will be in a position to build and operate nukes. Renewables would probably have a drastically different effect. Things like wind and solar have much lower barriers to entry and are harder to concentrate (since both require land, and land is pretty broadly distributed.) Switching to nukes would mean more market share for the big players, while switching to renewables could mean drastically less. IMHO this is the one of the reasons why we shouldn’t necessarily trust big companies to maximize their renewable energy mix. It often takes government intervention to force big utilities into a green energy future where they own less of the pie. (*cough* Prop H *cough*)

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Resources on the economics of local food

Report on the San Francisco Foodshed
http://www.farmland.org/programs/states/ca/Feature%20Stories/San-Francisco-Foodshed-Report.asp


News Articles

Can SF Eat Locally?
http://www.marketwatch.com/news/story/can-san-francisco-feed-itself/story.aspx?guid={0DAEBE67-D1D4-4C5E-9A19-91DA6028A4EA}&dist=hppr

Do We Need a Few Billion Localvores?
http://freakonomics.blogs.nytimes.com/2008/06/09/do-we-really-need-a-few-billion-locavores/?scp=1&sq=local%20food%20economics&st=cse

Good Web Resources

The Local Food Economy Game
http://localfoodeconomygame.com/keyideas/Economics

Studies and Reports

Why Consumers Buy Local
http://www.hartman-group.com/hartbeat/2008-02-27

Famer’s market growth in the US
http://www.ams.usda.gov/AMSv1.0/ams.fetchTemplateData.do?template=TemplateS&navID=WholesaleandFarmersMarkets&leftNav=WholesaleandFarmersMarkets&page=WFMFarmersMarketGrowth&description=Farmers%20Market%20Growth&acct=frmrdirmkt

Report on the GHG Impact of Local Food, Saying that changes in diet matter more
http://pubs.acs.org/cgi-bin/abstract.cgi/esthag/2008/42/i10/abs/es702969f.html

Forecasting Consumer Price Indexes for Food
http://localfoodeconomygame.com/keyideas/Economics

Interesting study which shows how food economics is usually done.

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How did the consumer society come about historically?

There’s a fantastic movie, The Century of Self, which deals with the emergence of modern consumer society. You can check it out here:

http://video.google.com/videoplay?docid=8953172273825999151

It talks about the emergence of some consumer psychology out of the propoganda machines of World War 1, and does a great job of describing how modern marketing has evolved to get at our subconscious desires rather than our rational, utilitarian need for stuff. It talks about how Edward Bernaise, Freud’s Nephew, got women to smoke (thanks a lot, Ed). Rather than focusing on the utility of cigarettes (taste, relaxation, etc), he made them a symbol of female stength and independence. 

This gave cigarettes a bizarre kind of disfunctional utility. At first glance, you could say that cigarettes got more useful. Before they just made you relaxed, all of a sudden they made you relaxed AND gave you a semi-socially acceptable way to stick it to the man. This social utility of rebellion made cigarettes more appealing, which shifted indifference curves and drove sales. Except that “utility” is kind of a misnomer here, because cigarettes weren’t actually solving any problems. They weren’t helping women take on the patriarchy, they were giving women cancer. If anything they were a distraction, a false solution to a problem that they are useless to solve.

It seems to me like this model is a big part of how consumer society operates. Simply solving problems will eliminate the supply of problems, so marketing departments have had to learn (from folks like Bernaise) how to manufacture and maintain problems for their products to solve. It’s much more lucrative to create a problem, then offer a solution which solves the symptoms of that problem without solving the root cause. Say I struggle to respect myself. A clever marketer can identify that problem and offer a brand new cell phone to help solve it. In essence, he’s just manufactured my self respect problem into a new cell phone problem, one which I can solve temporarily by buying a new cell phone every year. Consumer society seems reliant on these sorts of manufactured problems, and to me that makes it vulnerable. The new cell phone problem and the extra consumption that it requires only exists if there is no better way to solve the self respect problem.

To me this creates a gigantic market opportunity, one which could help to move us away from a consumer society. If modern corporate culture is more about maintaining and manufacturing problems than actually solving them then actually solving them is a significant unrealized business opportunity. Say Boog starts a business that sells community garden kits. By setting up a community garden I find a new, better, and cheaper source of self respect, so my new cell phone problem shrivels and dies. Even though I’ll never be a repeat customer of Boog’s, she can still make a tidy profit anywhere the self respect problem is unsolved and she can effectively communicate her product as a solution.

Ok, so that model is incredibly utopian, but to me it raises a couple of interesting questions. Are there “root problems” that consumer society is afraid to solve? If so, how can we identify them? How can we create business models which actually solve them?How can we create new marketing tactics which communicate those solutions?

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How is a market a social institution?

Personally, I see relationships as the fundamental unit of economics, and have always been a little shocked that they don’t seem to seem to come up explicitly in economic theory.

Say I have some bacon (mmm…. bacon.) In order for anyone else to get access to my bacon, the two of us have to form a relationship. There are tons of ways that this could happen: a family member could have free access to my bacon, a friend could ask to borrow my bacon, I could invest my bacon in a corporation and use it for some project, I could sell my bacon or someone could use a gun as leverage to take my bacon. Though they generally aren’t talked about in economics (that I’ve seen) there are rules to how these sorts of relationships are formed. In order for a relationship (friend, business partner, buyer/seller) to form, there has to be a model for that relationship which is known by both parties. The two of them then have to negotiate the application of that model to the situation they’re in (if you’re figuring out how to be married this is hard, if you’re figuring out how to be a buyer and seller it is sometimes easy), then build trust, then finally start exchanging your bacon.

I like this model because it expands economics outside of the marketplace, and points out the ridiculousness of a free market system. A free market is really just saying that to keep things simple everyone should form the exact same kind of relationship. (A particular nuance of buyer/seller developed by some rich fuddy duddys.) This makes about as much sense as telling everyone to exchange goods exclusively through heterosexual nuclear families. Relationships are, by their very nature, diverse. They step in and out of marketplaces with ease, and insisting that they don’t requires extraordinary sacrifices in our relationships with our communities and our planet. 

This kind of relational economics also suggests a strategy for creating sustainable social change. Remember, in order to form a relationship there first has to be a model for that relationship known by both parties. That means that by constructing new, useful relationship models and making them widely known you can radically alter the way that economic activity takes place. 

(This model gets even crazier when you say that you don’t actually HAVE the bacon, you just have a relationship with the bacon, and that relationship is also subject to new models and change.)

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