Dismounting Our Tiger

In 2011, the US economy is seriously ill. It suffers from high unemployment, mounting debts, unbalanced budgets and growing class warfare. It doesn’t lack for well intentioned professional help to restore its health. Economists and politicians are eager and able to implement their traditional cures like tax cuts, budget cuts, easy money and free trade.  However, their solutions are based largely on economic theories that date back to the time of George Washington. A core thesis of this book is that these economic theories are as unscientific as the theory of “bad humors” and that blindly continuing these practices are as destructive to the economy as repeated bloodlettings were to George Washington.

Medicine became modern after the human body began to be understood and analyzed as an evolved, complex system and many of its diseases as attempts by pathogens and parasites to purloin its rich pools of resources for their own uses. The US economy and all other economies are also evolving systems with rich pools of resources. These systems have two primary functions: to produce the goods and services people need and want, and to provide a culturally agreed to means for individuals to acquire those goods and services. For example, businesses produce products and services for customers and they pay employees’ salaries, suppliers’ bills, and investors’ dividends thus enabling these people to acquire other goods and services. I will demonstrate that most of our current economic crisis comes from a 40 year untreated accumulation of people operating as parasites and pathogens rather than as healthy, functioning contributors to economic vigor. Don’t get me wrong, these people aren’t evil villains, they are us―whenever we game the economy rather than contribute to it. Parasites and pathogens drive development in complex biological systems like plants and animals, as they force them to develop ever more sophisticated immune responses. However, we’ve not only failed to develop adequate immune systems in our economies, we’ve been weakening them as they age. Consequently, loads of parasites and pathogens have reached debilitating levels in most of the older, advanced economies.

Over the coming year, I will post a series of essays―a serialized economics book― which develops a clear, quantifiable theory of economies as complex but comprehensible systems and answers these questions:  What are the essential requirements to produce and sustain a healthy economy?  What constitutes healthy economic growth? What does it look like? How should it be measured?  What must be done to restore the US economy to robust health? The essays will also demonstrate how popular solutions like tax cuts, abnormally low interest rates, easy money, deregulation, behemoth corporations and free trade have weakened, drugged, and infected the economy instead of providing it rest, nourishment and antibiotics.

Answering questions about health and growth are central to understanding and fixing economies. Traditional answers are woefully off base. For example, some pundits say that full employment is the measure of economic health, which is like saying that a normal temperature is an accurate measure of personal health. Others measure GDP (Gross Domestic Product) to define economic health and growth, which is like measuring our annual intake of food―without considering its nutritional value― to define personal health and growth. Some of those who espouse these overly simple answers have induced us to “take two tax cuts and elect them in the morning.”  Others have promoted free trade, subsidized industries and bailed out financial institutions to stimulate GDP. And yet, economic malaise lingers and worsens.

Primitive Myths

Our current understanding of economies is equivalent to 19^th century medical knowledge― a time when average life spans were about 30 years, disease was rampant and medicine was a collection of myths. We operate today with primitive economic myths. One myth, for example, is that tax cuts stimulate healthy economic growth. Tax cuts might do that if taxes are crippling business and governments are bloated with revenue. But repeated tax cuts, on the principle that “lower taxes are always better” are merely economic bloodlettings, which temporarily stimulate good feelings but ultimately weaken governments and the economies which they support. Specifically, the Bush tax cuts were economically ignorant, weakening both the Federal government and the US economy while accelerating the concentration of wealth into the hands of a few. And yet… those cuts have been extended in the name of economic recovery. If prior cuts didn’t prevent our economic recession, why should extending them bring about economic recovery when they are unambiguously draining the lifeblood from government? 

Other myths have become facile economic slogans: “free markets,” “free trade,” “invisible hand,” and “the law of supply and demand”. They were first proposed in the early 19^th century by thoughtful people like Adam Smith and David Ricardo as working hypotheses, not theories or axioms. They contain some elements of truth and were reasonable assumptions for their time. However, instead of being updated―like the practice of medicine has been―into modern, rational theories supported by bodies of evidence, they’ve become simplistic slogans of economic faith and political rallying cries tied to God, country and personal freedoms. Since none of these slogans correspond to reality, they mislead us about what we should do.

For example, the law of supply and demand requires us to believe that supply, demand and prices are directly and deterministically connected to eventually bring supply into balance with demand at an equilibrium price. That seems logical enough, and is still taught in first year micro-economics, even at MIT. Yet, in the real world, these three things actually display loosey-goosey relationships and are perpetually out of equilibrium. That’s because they are linked to one another only through mental systems in non-deterministic ways. Each of us buys, sells, builds and invests on what we think, hope and believe at the time, not because of facts about supply and demand. Average beliefs of individuals or of groups are always out of phase with reality and are further muddled by non-rational things like habits, status, herd thinking, skills, fear, greed and uncertainty.

Modern Medicine

Modern economic medicine requires updated concepts and new tools. To illustrate the challenges we face, consider these familiar systems: cars, houses, computers, people, cows and trees. We can answer health and growth questions about people, cows and trees, but have to torture language to connect ideas of health or growth houses, cars or computers. What is it about biological things like cows, trees and people which make for ready answers? What is it about constructed things like cars and computers which make concepts of health and growth so alien? How then can we apply concepts of health and growth to economies, which combine biological systems and constructed systems? For that matter, how do we evaluate the health and growth of other mixed and complex systems such as corporations, financial institutions, transportation systems, governments and cultures? [i]  What is a healthy relationship between a government and its economic system? What is a healthy relationship between an education system and its economic system? We will answer these questions as well with operational answers that enable us to practice modern economic medicine.

First, though, I must fess-up that the challenge is even hairier than it seems. An economy combines three classes of systems, not just the two mentioned earlier: constructed systems like cars and computers, biological systems like cows, trees and people, and mental systems like languages, skills, science, engineering, economics, religions and cultures. The Industrial Revolution marked the co-evolutionary takeoff and explosive growth of constructed systems and mental systems, each class stimulating, supporting and tailoring the growth and health of the other.

Thus, the bad news: to understand the economic system, we must also define and account for the growth and health of human mental systems, whose variety and magnitudes are at least comparable to those of constructed systems or living systems. It’s a task that will occupy several essays, in part because no one else has done it yet. The good news is that all complex systems, including companies, banks, athletic teams, communities, economies, money and governments can be understood as combinations of these three classes of systems; and we will be able to simplify their combinations and permutations to manageable levels.

Healthy economies

The economy is a comprehensible system. It is also manageable and adaptable, but only when it has adequate reserves of vital resources. The ability to manage or even to influence the behavior of any system requires that it have immediately available reserves. This is a characteristic of all systems from the simplest to the most complicated. A car needs a competent driver (appropriate mental reserves), tread on its tires, linings on its brakes, gas in its tank and time to travel from place to place. A competitive basketball team requires a coach on the sidelines, talented and conditioned players on the floor and on the bench, competent competitors, time to practice and time to eat. A competitive factory needs managers, and surpluses of skilled workers, raw materials, work in process, and finished goods. A supermarket needs enormous surpluses on its shelves and in its back room as well as access to distant warehouses storing even larger surpluses.

As we’ll explain in the book, the middle class is an irreplaceable reserve of essential mental systems. A large, educated, socially conditioned, gainfully employed middle class was an unintentional innovation of the Industrial Revolution. It is more crucial to economic health than the steam engine or printing press. Prior to the industrial revolution, educated middle classes were tiny. Consequently national economies were minuscule.

Throughout recorded history, inherited control of real property determined membership in tiny, wealthy and educated groups who controlled economic, political and religious power, and ruled over uneducated and impoverished populations. As the Middle Ages came to an end, an explosion of trade and exploration scooped new continents of real property into the economic systems of Spain, Portugal, Holland and England. In 17^th century Holland and shortly thereafter in England, trade dramatically changed the balance between real property and personal property, while expanding the distribution of both. The Industrial Revolution that followed marked an explosive growth personal property in the quantity and types of constructed systems and of relatively well educated middle classes to create, to produce and to service them. Governments established new kinds of property rights including corporations, banks, stocks, bonds, patents and copyrights. Universal education, risk taking, and hard work became the path to property rights and a personal share in prosperity, social status and political power. For the first time in human history, healthy meritocracies evolved to lead the economies and politics of nations.

However, over the last 40 years in the United States, the reserves of middle class resources have been substantially reduced by three factors: the re-centralizing of every kind of property into the hands of ever fewer people who pass it on by heredity instead of by merit, a degenerating educational system, a declining interest in technical, political, social and economic education, and free trade policies which have systematically drained middle class jobs offshore. The economic recession of 2008 and our difficulties in restoring prosperity are inevitable consequences of decay and destruction of those reserves of well educated and propertied people. Until they are replenished in number and quality, not a quick or easy task, neither this economy nor its national government will be healthier or more manageable. This is not a political or idealistic statement; it is a “medical” engineering prognosis.

An educated, risk taking and hard working middle class is the gasoline, engine, transmission, wheels and chassis of our economic vehicle. Those with inherited wealth are privileged passengers going along for the ride. The poor are hanging on to the outer fringes of society, painfully dragged along the road and hoping to become passengers. The economy has been losing speed because it’s overloaded, running out of gas, losing transmission fluid, leaking oil, losing compression, sagging in the middle and running on bald tires. We’ve been trying to speed it up by flooring the accelerator instead of by refueling and repairing it. The aptness of this metaphor will become blatantly obvious once we classify, quantify and measure vital middle class resources and show how they operate in the economic system.

Getting down to basics

First we have to develop and then use fundamental tools and concepts. Learning about tools and how to use them can be tedious, much like learning arithmetic and algebra. Consequently, some of the essays that follow will not be quick reads because they carefully build a mental system and connect it to the real world. However, let me assure you that study will be worth the effort.

I suggest a helpful trick for those steeped in current economic theory or educationally challenged by personal biases: build this new mental system on a metaphorical vacant lot in your brain by treating it as a hypothetical or fictional alternative to your current convictions rather than as a threat to them. After its finished, and you have a chance to see how it fits, then either tear it down or integrate it with your other mental systems.  Perhaps you could treat this as a science fiction story about a hypothetical world. Like our bodies, our minds have immune responses which vehemently reject alien ideas, unless we swaddle them in playful attitudes.

At the very least, learning how to view the economy in this new way should treat you to a series of Aha! moments .  An Aha! moment happens when something which was hazy or invisible, suddenly becomes crystal clear; like the first time we looked through microscopes and saw tiny creatures swimming in drops of water, or looked through telescopes and saw the rings of Saturn, or came up with a novel ideas.

I’ll do my best to keep the essays simple, clear and interesting. Let’s get started.