Michael Battalio


Friday, August 28, 2015

Discussions on Wealth (part 10): Chapter 5: summary

This discussion on wealth is an offshoot of  Serious Conversations parts 53 and 54.  We are considering the book  The Origin of Wealth by Eric D. Beinhocker.  (I do not profit from clicks).  (Ed.:  we will be taking the general format of outlining the major points of the chapter and then discussing what we believe to be important or intriguing points.) 

Chapter 5 is devoted to chaos and nonlinear dynamic systems.  A dynamic system inherently depends on initial conditions (i.e. on all the previous states).  In nonlinear systems this is particularly true as even small perturbations in the starting conditions can make large difference in the final solution.  Chapter 5 relates the mathematics of nonlinear systems to economies, including the concepts of stocks and flow, feedbacks and time delays.  Chaotic systems are a type of nonlinear dynamic system that does not repeat and is deterministic; they are difficult to model and predict.
Chapter 5 continues with a description of boom and bust cycles.  They are cyclical and a mix of random and periodic processes, meaning they are not entirely predictable.  A simple example is provided showing how the cycles work.  Imagine a product is experiencing increased demand.  The producer increases prices to stifle demand, but it continues to increase.  The inventory of the product can be a short-term reserve to meet changes in demand.  However, once the inventory of the product is running low, new capacity must be utilized.  Factories rarely run at 100%, so a middle-term solution is to increase the supply.  If demand continues, a decision is made to build a new factory to produce more of the product.  Unfortunately, as soon as the new factory comes online demand decreases as competitors also flood the market.  Prices drop, but because the new factory was build the product continues to be made.  The market is flooded, and prices crash.  The factories as shuttered, and the inventories decrease.  The cycle begins anew.

This cycle is not any different from traditional economic theory.  The difference is the time scale.  Inventory is short-term, tapping into existing but unused production capacity is the middle-term solution, and building new factories is the long-term solution.  There is a lag in the time between increased demand and increased supply.  If there was some way (as it is assumed in the traditional theory) for suppliers to perfectly predict demand with immediacy these cycles would not exist.  Lastly, companies would have to work with competitors to ensure that each was supplying a specific amount (i.e. each company would need to be omniscient).  Unfortunately competitors will not work together in the real world.  This lack of knowledge and competitions prevent the economy from functioning optimally and reaching equilibrium.  

Friday, August 07, 2015

Discussions on Wealth (part 9): Chapter 4: discussion

This discussion on wealth is an offshoot of  Serious Conversations parts 53 and 54.  We are considering the book  The Origin of Wealth by Eric D. Beinhocker.  (I do not profit from clicks).  (Ed.:  we will be taking the general format of outlining the major points of the chapter and then discussing what we believe to be important or intriguing points.)

The two previous entries summarize Ch. 4 which explained a simple model economy, Sugarscape.  The model replicated many behaviors of an economy including banking, trading, busts and booms.  (See parts 8 and 9 for a complete summary.)

I find the Sugarscape model to be an ingenious experiment, particularly the way that reproduction is implemented (Though it somewhat unrepresentative of the population at large, that is people don’t only procreate when they have enough wealth.  People aren’t necessarily good at planning.  This oversight is merely because the designers had to stop somewhere when defining model parameters).  It is remarkable that a model as simple as the Sugarscape could exhibit emergent properties of the economy – especially bankers – in my mind.   There is no prescribed behavior of the agents that would suggest that the behavior would develop.  This suggests that banking is a natural process in an economy and that people will rely on imperfect and varying exchange rates to generate profit that wouldn’t otherwise exist (or extract it from others).
With a single experiment, Sugarscape has solidified the idea in my mind that wealth has more to do with luck than anything else.  I have always intuitively known that to be the case, but this model has cemented my viewpoint.  This is a key argument for the intervention of governments in the redistribution of wealth.  If the wealth gap is an emergent property of economies, then there is no way to circumvent it naturally.  We must intervene in the system itself.  Perhaps if the wealth gap was due to the superiority (whether drive, intelligence, or ingenuity) of some agents over others, then I could be persuaded against intervention.  But since, as is demonstrated in the model, the wealth gap is due to the luck of some people over others, we must intercede on behalf of the unlucky to rectify the intrinsic unfairness of the economies.

While the model is limited, a conclusion to be drawn is that the liberal (the poor are poor because they are exploited by the rich) and conservative (the poor are poor because they are stupid/lazy) viewpoints on poverty are both wrong.  The wealthy don’t necessarily exploit the poor; they are merely the lucky ones.  The poor aren’t lazy or stupid; they simply are unlucky.  We increase the happiness of society by redistributing from the wealthy and giving to the poor.  The increase in happiness of the larger number of poor far outweighs the decrease in happiness of the few wealthy, and the increase of quality of life possible of the poor is much larger than some minute decrease in standard of living by taking some of the money from the rich.
 
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