My unpublished (100,000 word) book “The Financial Jigsaw”, is being serialised here weekly in 100 Issues by Peter J Underwood, author
Quote of the Week: “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” – Buckminster Fuller
This week we are talking about types of systems generally and how they relate to our present dysfunctional, centrally controlled systems which appear to be failing. In this respect Duino Schiappapietra has a great article this week which describes the journey our economic and financial systems have taken since the turning point of 1971 when Nixon took the US dollar off the gold standard and fiat currencies were established world-wide. Worth a read if only for the historical information as to why we are where we are:
“The monetary system is a major component of the whole economic system. Despite that, today we take it for granted and don’t even ask ourselves how it works and if it is the best solution available or the correct way to manage things.” Read on:
https://medium.com/swlh/from-gold-to-nothing-5bd86c0231be
Here is the link to last week: Issue 55
Now that Brexit will not be coming to a conclusion for months yet after three years, I will continue to provide weekly updates as events progress:
Brexit Update – 14th June 2019
The Brexit deadline remains 31st October 2019 and stays in place unless the next PM can get Parliament to agree a new exit plan. And Parliament voted this week rejecting the motion to stop a No-deal Brexit which sets the ground for one in October.
The coming weeks will see the Brexit saga put on the back-burner while our illustrious leaders in the Tory party fight among themselves to find a new PM which is due to happen during week commencing 22nd July. In the meantime I will track their progress if only to amuse you, in a masochistic sort of way, and I don’t blame you if you give this bit a miss.
For this week we have had a first-pass voting for the ten candidates aspiring to carry the UK through to its final gyrations with the EU before the October deadline. Thursday saw four candidates drop out, so next week will be the runoff to the final two with Boris Johnson (BoJo to his friends) leading significantly.
“The EU played Theresa May like a fool, which of course she was. There was just one little problem: The UK parliament refused to go along. The EU is nothing but a brazen pack of liars. And Theresa May was in bed with the lot of them.” So says ‘Mish’ noted here:
“To get [Brexit] and avoid falling into the numerous traps the left and the media will set, Brexiteers need to understand how the British electoral system works and examine the precedents of 1886 and 1918”:
Here is a complete summary of the recent EU elections which concludes with:
“In the first paragraph of: ‘The Strange Death of Europe’, Douglas Murray stated: “By the end of the lifespan of most people currently alive, Europe will not be Europe”.
Despite the enthusiasm of some commentators on the results of “populist” movements, signs seem to show that European elections have not stopped Europe’s barrelling towards decline. If nothing changes, in a few decades Europe truly could no longer be Europe.”
https://www.gatestoneinstitute.org/14353/europe-will-not-be-europe
Details of Parliament’s deliberations can be found here:
CHAPTER 11
MACROECONOMICS 101
“I think the person who takes a job in order to live – that is to say, for the money – has turned himself into a slave”. – Joseph Campbell
“Gold and silver are not by nature money, but money is by nature gold and silver.” – Karl Marx
“When people find they can vote themselves money; that will herald the end of the republic” – Benjamin Franklin
Different classes of systems
The first type is a simple system which is characterized by only a few variables or agents, and which can be described by perhaps a handful of equations, or even just one. An example might be a motor car or a house heating system. These systems degrade of their own accord and require maintenance (energy inputs) to keep them going; they are said to be entropic; that is, in thermodynamics, a quantity representing the amount of energy in a system that is no longer available for doing mechanical work.
The ratio of energy returned on energy invested to keep the system going (EROEI) may be exemplified by looking at fossil fuel in the form of oil: To get usable energy we must first expend energy to access and transport primary resources and convert them into a usable form:
EROEI ratios:
1:1 – we can pump oil, refine to diesel and despatch to the fuel station
3:1 – we can run trucks, build and maintain the trucks, roads and bridges
5:1 – we can load the truck and deliver it
8:1 – we can provide a living for the oil worker, refinery worker, truck driver and farmer
10:1 – you can have minimal health care, some education and little else
20:1 – you have a basic set of consumer items and general trappings of a normal lifestyle
30:1 – above this ratio a prosperous lifestyle is possible with spare energy to grow society, deal with environmental issues and invest in a secure energy future
The second type is a system which is characterized by disorganized complexity. These may consist of huge numbers of agents or variables, but their interactions cannot be described by simple equations; yet the overall system is well-described statistically through averages and can be depicted in statistics as stochastic: (being or having random variables).
Such systems are typically characterized by a stable equilibrium, provided there are no external shocks to the system. They are incapable of generating internal shocks or surprises. For example, you might consider the distribution of air molecules in a room. You may not be able to predict the motion of any one particular air molecule, but you can be reasonably certain that the global population won’t do anything unexpected such as all moving to one side of the room leaving a vacuum on the other side.
The third type of system is characterized by organized complexity. As in the foregoing system one may consist of many variables or agents, each of which is simple, but the system’s behaviour does not lend itself to statistical description because, instead of the activities of each component dissolving into background equilibrium, large-scale (even global scale) organised structure “emerges” instead of seething chaos.
Along with these “emergent properties”, common features of such a system include multiple equilibria, adaptive behaviour, and feedbacks. There is no simple way to describe its behaviour, as much of the system’s history is bound up in its behaviour and what scientists call “long memory”. These types of systems are referred to generally as complex adaptive systems and comprise almost all systems found in nature such as weather systems or just like the anthill.
Complex adaptive systems, for all their unpredictability are remarkably resilient. The resilience comes from the way in which this type of system interacts with its environment by the individual actions of its simple components; the system is able to gather information about its environment and modify its operations to adapt.
Yet this adaptation and evolution all occur in the absence of central control. All this was known soon after the Second World War although we have made limited improvements in our understanding of such systems. One such system is that of our now debt-based, global fiat currency regime as discussed in Chapter 1 about money. Some questions arise about how far interference in the system should go:
- Should we actively stabilise currency both wisely and effectively through policy?
- To what extent is it safe to depend on the free interplay of such forces as supply and demand in free markets?
- To what extent must systems of economic control be employed to prevent the wide swings from prosperity to depression (our ‘boom’ and ‘bust’ scenarios of these many decades past)?
These are obviously complex problems and they too involve analysing organic complex adaptive systems. We will try to answer these questions by looking again, from a different angle, at the money and banking systems of the globe.
Reviewing money and banking
Back in the 1970s economists recognised that economic systems were known to be complex and organized. However, central banks continued to set policy as if the economy were a stochastic system that could be controlled into an equilibrium state and this was deemed to be politically expedient.
Central banks have not managed to succeed even controlling the economy but rather have mastered the ability to create artificial statistics to “justify” their actions and especially by recently, experimentally introducing two very significant inputs: One is Quantitative Easing (QE) and the other is Zero Interest Rates Policy (ZIRP) which have been imposed for the last ten years following the ‘Great Financial Crisis’ of 2007/8.
This approach is doomed to fail eventually because the resilience of natural complex adaptive systems requires freedom of action for its individual components to interact and allow ‘emergent equilibria’ to occur. Economists refer to this as a free market combined with sound money.
We do not observe resilient complex adaptive systems combining with central controls; this is a contradiction as each part is self-excluding. Yet central control is the dominant ideology of our present political and economic masters. They attempt to exercise total control combined with a vanishingly thin veneer of ‘democracy’.
Karl Marx claimed that a centrally controlled and planned economy (socialism) would be self-sustaining to the benefit of all concerned, otherwise known as a form of Communism. But we know what happened to that when the USSR collapsed in 1991. So what are the solutions for future generations? Here are some principles which might summarise the potential outcome of our current policies:
- All natural systems are self-sustaining; man-made systems eventually fail, given enough time. In physics this is known as entropy.
- Complex Adaptive Systems contain individual parts which cooperate rather than compete.
- These parts form alliances by working together for the good of the community as a whole.
- The community is self-sustaining because it is a closed system using positive feedback.
- Nature tells us how to plan and organise a community to be self-sustaining
- Capitalist systems grow though competition but cause inequality of wealth accumulation eventually causing the total destruction of the community.
These principles can be applied in our personal lives and which we will explore in Part 2. In the meantime, surely Marx’s proposition is exemplified by our thought experiment about a capitalist ant and, because our planet has a limited amount of resources, it is inevitable that our eventual fate will be no different from that of the anthill unless something radically changes.
The supreme task, therefore, for future generations is to devise or allow an economic system to evolve which will emulate nature’s ability to continually renew its resources indefinitely.
To be continued next Saturday
