AMERICA'S ECONOMY AND OPEN DECISION MAKING

The global financial system is melting down. Our approach to decision making may have been the reason we are at this impasse today. This brief is a little bit of a departure for me, but I think it may be worth the effort. Feedback is appreciated.
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This gets us to the nexus of our current problem. The environment within which we make decisions is getting more complex, uncertain, and incomplete at a faster rate than the mental constructs we use to model it are being improved. To wit: ever greater amounts of novelty (for example: new technology) is being produced than ever before yet our strategies and methods are scarcely different than those we used half a century ago.

From the brief "Open Decision Making." Read the entire thing.

The 20th Century's central struggle was between the ideological systems that advocated governmental control of the economy and those that relied on market control. The market-based systems won. Why? In short, market-based systems made better investments, over the long term, than government managed systems. The lesson: systems with large numbers of decision makers, each with capital to invest, make better decisions.

As is often the case, the emerging victory of the market-based system created yet another problem/struggle. Specifically: is it better to trust that individuals empowered with growing salaries/wages will make the best investments for future economic success -- or -- is it better to grow corporate profits (at the expense of wages/salaries) and let capital markets invest the excess?

Between WW2 and 1974, while still engaged in a bitter struggle with Communism, the US hedged its bets on that question. Both individuals and the capital markets received an equal share of the benefits of productivity growth. Incomes rose mightily and we became broadly wealthy, mirrored by generous growth in the capital markets, relative to the start of the century. As a result of this shared decision-making system, smart investments in infrastructure, industry, education, and much more made America the economic powerhouse of the world. In short, we prospered.

However, the shared decision making system ended. From 1974 onwards, the rewards of productivity growth (economic expansion) went exclusively to the capital markets and not into income growth for individuals. This was likely done, although the mechanism is unclear, under the assumption that the discipline of capital markets produced better investment decisions than individuals. Regardless of the motive or the specific mechanism, where the flow of capital from American economic activity went, couldn't be clearer:

• Median per capita incomes in the US are the same as they were in 1974 -- there hasn't been any income growth at all.
  
• In contrast, we have seen torrential capital accumulation / concentration and the capital markets have enjoyed a nearly 30 year run of unbridled expansion.

So, what was the result of this concentration/narrowing of decision making power in the hands of the capital markets? How did they invest thirty-four years of American productivity growth for the future?

As of this year, the final results of this American experiment in financial decision making are in. The allocation of this capacity exclusively to capital markets, rather than sharing that decision making with hundreds of millions of Americans, has produced a horrible result. Instead of investing the accumulated wealth of America in productive assets that yielded long term benefits, the money was invested in derivatives (illusory financial products) that yielded nothing of tangible value. In short, the narrow group of actors that operate within the capital markets made the decision to forgo the long and difficult process of growing investments in the tangible world in favor of the outsized returns available through investments in virtual products. That investment is now evaporating.

What it Means

Even under the most ideal conditions, its dubious whether the capital market's decision making loop (the sum total of the intellectual product of all capital market participants) can even closely approximate the requirements of the rapidly evolving global environment we currently find ourselves in. In short, we are falling behind ever more every day. Given a situation where decision making is falling behind the requirements of the environmental reality, we can expect inevitable catastrophic failure at some point in the future.

From the brief "Open Decision Making"

Would we have been better off if the benefits of massive productivity growth over the last three decades had been shared with hundreds of millions of Americans? Of course. In fact, it is hard to see any other way, other than an open decision making process, which would be able to deal with the growing complexity of the modern world -- from globalization to technological change to growing instability.

Can this be error be corrected? Probably not. Most Americans have fallen deeply into debt (mirrored by the US government) in an attempt to maintain lifestyles (or an illusion of progress). They don't have the financial resources for any meaningful decision making power left and worse, there isn't any recognition that a concentration of decision making was even a problem in the first place. In fact, given that most of the last 30 years of American economic investment is now vapor, it's hard to imagine us avoiding economic catastrophe.

Comments

[shloky]

Lots of people flailing on this particular topic, but this analysis is right on. Brilliant. This brief's getting printed for distribution at work.

[SWIMMER21]

John, great post. I found the article from Nassim Nicholas Taleb on Edge ( http://www.edge.org/3rd_culture/taleb08/taleb08_index.html ) gives a fresh look at the on going turmoil.
I can see very productive outputs by crossing, hybridating together Taleb's black swan, resilience and Boyd's OODA loop. Let's call it "resilient economic environment" in a first effort to name things.

[Robert Paterson]

Bang on John

I agree with you that our financial markets shifted from a process of mobilizing capital into productive assets became instead a casino and a Ponzi scheme.

This is why I fear that we are not going to see a soft landing - for isn't it a house of cards? - not just on Wall street but in all our lives. Have we not been living in a lottery culture where you get stuff for no effort? In so doing my observation is that we have all become largely helpless - we don't know how to do important things such as raise our kids, feed ourselves and use energy to do things. We have given all of this up to earn lottery money. What we thought was wealth was Monopoly money.

I think that this is now the "asteroid event" that will take out the system as it is.

So what happens now? Back to local resiliency John. On PEI we can grow our own food, produce our own energy. We do not need a lot of outside capital to do this - Provided we use a network model.

Being an Island - this might be easier than for other places.

A historic reminder for your readers - 400AD Romes had about 700,000 inhabitants. By 500AD it had 30,000.

If you have a local food system and only human and animal energy - it is very hard to have a city larger than 30,000. Living in a big city could be very hard.

I am not smug either about being in cash right now - for what might be the value in money?

In Britain there were coins from before Caesar's invasion around 43 bc. The last of the legions left around 410 ad. By 500 ad there is no evidence of coinage.

Money itself may not be trusted soon - with a Fed printing it - John what do you think is the risk of it becoming worthless?

Where is the haven for money now?

[RanDomino]

Sure, but you always miss the punch line! I don't blame you personally; it's the opposite of what you've been taught and told your entire life.

Capitalism says, "Acquire as much wealth as possible". Capitalists think that the world works by invest money for a profit- if a profit is being made, surely something productive is happening (I won't dispute that at this moment)- to put it another way, "Take money and turn it into more money".

After World War II, the economy was a blank slate. Capitalism went to work, and by 1974 enough people had enough money to start to shift the operation of the economy away from producing things and into making them more money.

Isn't the point of capitalism to make more money, with no regard for anything else? So how could it not be true that those with the most money, those who are the best at playing the game, will do everything in their power to continue along their successful course?

This month we are seeing that the government also primarily protects the 'integrity of the market', by which it really means the ability for people to acquire money without producing anything themselves. And if you're relying on your 401(k) or fixed income or there's no way you're getting a raise that'll keep up with inflation, too bad for you! You're not important!

So lots of people will suffer, which is what happens under an unstable system that demands that everything that does not submit is destroyed. Every few decades this happens, and the system learns new tricks; but we learn, too. This is our only opportunity the reshape the world in a way that treats human beings as human beings instead of as machines in a factory.

Are you going to continue to save what consumes you? Any slave knows to escape when a harsh master is imperiled, not save him!

[Reinout van Rees]

One clarification request. The median income has remained stagnant for some 30 years: I assume that that's corrected for inflation?

[Duncan Kinder]

Reinout:

Eizabeth Warren gives an inflation adjusted presentation of how economies have fared since about 1970:

http://www.youtube.com/watch?v=akVL7QY0S8A

Male income has actually declined, but now families are two income.

However, even with two incomes rather than one income, families nevertheless have been falling behind since about 1990.

[John Robb]

Reinout, it is inflation adjusted. Unfortunately, the CPI is a bad measure of real inflation. For example, the educational component only gets a 3% rate. Which means, that if you are a family sending your kids to college, the inflation rate you are experiencing is MUCH higher (which means your income has actually fallen behind the levels of 1974).

Inflation within the educational sector is 2.5 times the CPI:

http://inflationdata.com/inflation/Inflation_Articles/Education_Inflation.asp

Same is true with medical care (weighted at 6%).

[sellCivilizationShort]

Mr. Kinder and Mr. Robb make good points regarding the decline of American income.

Note that this produces stress which erodes social capital and hollows out any sense of "primary loyalty" to the community.

Divorce, latchkey kids, hookup culture, and bowling alone are the familiar consequences of this loss of social capital.

[Kevin Carson]

Excellent post. It seems to me that the old confrontation was between fake, state socialism and a fake market; the latter system actually amounted to state capitalism wrapped up in the rhetoric and symbolism of "the market," and was actually dominated by a few hundred corporations that were heavily subsidized and reliant on massive state protections from genuine market competition. The new confrontation is between the corporatist market and the real thing.

My hope is that we're approaching a singularity in the possibilities of small-scale production technologies, a further development of the possibilities that Kropotkin, Mumford and Bordodi envisioned, that will shift the balance of power from the corporate economy to the household-informal-barter economy.

[moon]

From your Open Decision Making entry, you enumerated decentralized decision making within the current structure (B), and decentralized open decision making (C).

In your America's Economy entry, could you clarify what is shared decision making in the context of your ODM enumeration? Is the shared mode a hybrid B-C? Where individuals empowered with growing income == C, and narrow group of actors operating in capital
markets == B?

Finally, how would you frame your ODM (A) in the context of your America's Economy post, i.e. radical limitations on the environment within which the US economy operates? Would the radical limitations apply to just the public sector, or both public and private?