Monday, October 13, 2008

Abstract description of the basic building block

Before I get started on exploring the various sub-systems (environment, ecology, society and markets) that make up our economy I'd like to mention something I saw the other day - the triple bottom line.

Very briefly - this interesting little accounting device is an attempt to integrate the ecological/environmental and social impacts of a business into its financial statement by providing some sort of assessment in those areas and presenting them as additional "bottom lines" on the financial statement (profit/loss) of a business - hence "the triple bottom line".

The only problem with this is that - as yet - the additional bottom lines (social & environmental) have no method for measuring in dollars the impact of a business on its society and environment. Because the impacts aren't measured in dollars, they can't be integrated into the financial bottom line and this unfortunately this makes the two additional bottom lines absolutely useless. If a business cannot be forced into bankruptcy because of the damage it is doing to its society or environment, then it isn't really a bottom line is it?

Now the person who created this device was probably quite sincere, but it's really just a bit of a "squirm" so that businesses can say "hey look at us - we are trying to do the right thing" without actually having to do the right thing.

No - we need one bottom line that correctly costs the social and environmental impacts of business and integrates it into the financial bottom line so that a business is forced out of operation if it trashes the place.

Correctly calculating the cost of these impacts is one of the main aims of my model of economics...

Ok - on with the sub-systems and the overall structure.

As mentioned in the last post, the overall structure can be described thus:

the environment contains the ecology, which contains society, which contains our market economy

Each sub-system is a product of its host i.e. the ecology is a product of the energy available in the environment, our society is a product of the energy available in the ecology and so on. Because each sub-system is a product of the system before it - in fact has been created by the system before it - then each sub-system can be considered an extension of its host system and therefore has the same basic structure, albeit in its own way. The exception here of course is the environment sub-system which is the container for the whole lot and so has its own unique structure, which conforms to the laws of physics and chemistry rather than the laws of DNA [sic].

So what does all that mean?

Well basically it means that the oft touted "law of the jungle" claims regarding how society and economy work actually have some basis in truth. Society and economy do have the same underlying structure as the ecology. All three systems are complex hierachies of energy of some form. Energy enters the sub-system at the base of the hierachy and is collected and stored by the layers above, until eventually, the energy is either used or returned to the base of the hierachy.

The classic "food chain" illustrates this best. Energy enters the food chain as plants use both radiated energy (from the sun) and, what I'll term, "matter energy" (minerals etc) to grow and develop a store of energy. This energy is consumed (collected and stored) by plant-eating animals, which in turn are consumed by animal-eating animals. This is how energy in the environment (both sunlight and minerals/chemicals) moves up the hierarchy of the food chain until that energy is either used (for movement etc) or returned to the base of the system when the animal or plant dies.

Most people should be familiar with the above description of the ecology - what is less well known is the horizontal plane

The energy flow from bottom to top (the vertical plane) is affected by the flow of energy within each layer of the hierachy (the horizontal plane). The term "energy" here is a pretty loose one that simply means "a force which causes change" and can include things such as DNA, psychological, social etc.

For the sake of clarity I'd label the vertical energy flows TRANSACTIONS and the horizontal energy flows RELATIONSHIPS. Basically transactions involve a movement or transference of energy, whilst relationships involve a sharing or dissemination of energy.

So the basic structure of each sub-system can be abstractly depicted as a pyramid of energy storage/usage entities with energy flowing, through a series of transactions, from bottom to top and back again, with the rate at which this energy flows being determined by the energy flows in the network of relationships which happen between the energy entities in the horizontal plane.

Now all of this is probably about as clear as mud so a diagram might help in understanding it...

or maybe not;-)

Anyway - The key to the diagram:

The orange/red globes represent the various energy entities (using the garden analogy, these are the plants and animals)
The yellow arrowed pipes are the transactions by which energy moves from bottom to top, and back again.
The blue arrowed pipes are the relationships between entities which affect their energy usage and storage over time.

Explanation of the diagram:

Energy flows from bottom to top and back again.

Each entity in the system uses, stores and converts that energy.

Energy transactions (yellow) and relationships (blue) both have an evolutionary effect on the rate by which entities use, store and convert that energy.

So the equation is one that operates on 2 planes (vertical and horizontal) within a 3 dimensional hierachical matrix...

Each plane has its own rules and affects different aspects of the system. A very simple explantion of the effects of the 2 planes is that the vertical plane affects the entities ability to survive in the system today, the horizontal plane affects the entities ability to survive over the long term.

For the ecology to exhibit the "positve bouyancy" that has produced the fantastic wealth that is life on earth, these 2 planes must work in harmony (in the objective sense) otherwise one plane would overcome the effects of the other and the system would be incapable of building up its store of energy.

The total economic system is 3 such sub-systems linked together and contained within an environment.

Now there are a couple of points I'd like to make.

First up, I'd be wary of people who proclaim the "law of the jungle" stuff about society and economy. People usually do this when they want to excuse predatory or disruptive behaviour. Both society and economy are complete systems in their own right and one of the properties of these systems is that the energy (wealth) enters the system at the bottom. Predation doesn't create wealth - it simply transfers it to a higher level. Disruption doesn't produce wealth either - it simply creates opportunities for a re-organisation of the system and exposes the lower levels (which take up and convert the wealth available in the host system) to undue predation.

Which leads me nicely to the second point. Using the "economy as ecology" analogy (or more simply put "if our economy is a garden"), then over the last 30 years we have done three very harmful things.

1. We have pretended that everything in the garden should be the largest predator it can.

2. We have constantly dug over the garden beds in search of new wealth.

3. We have given up weeding it and managing the pests.

Let me explain that with a couple of examples:

Point 1.

By making universities use the competitive business model as the basis of their operation, they have become focussed on what they can make for themselves (ie they have become predators) instead of focussing on what they can produce for all of us. This is why the underlying rate of innovation has slowed to a trickle - you haven't noticed it yet because the rate of refinement and the commercial application of existing technology hasn't changed - but there has been astonishingly little actually invented in the last 30 years. If you look closely at the things you own you will find they are all based on technology invented over 30 years ago eg DVDs are based on laser technology, which was invented in the early 70s. Microwave technology was invented about 60 years ago (microwave was used as an early form of radar in World War 2).

And that's just universities which, let's face it, aren't really that important. When it comes to the really important things like government, it's the same sort of story. Governments now focus on what they can make for themselves, instead of focussing on what they can do for their citizens. In fact our entire society is now based on this "everyone as predator" philosophy, which has directly led to an ever-increasing transference of energy up the hierarchy, and the consequent depletion of energy in the supporting levels (yes the rich get richer the poor get poorer). Now there are 2 issues to be considered here.

1. Society and economy are energised by the ecology.

2. The amount of energy the system can store in the higher levels is determined by the amount of energy in the lower levels (a billion very poor people support fewer wealthy people than a billion moderately wealthy people)

What this means, is that supporting and sustaining people and corporations that are the energy equivalent of an 3000000 ton super predator leads to great ecological damage.

Point 2.

Constantly "reforming" society and economy (at the lower levels anyway) is the equivalent of always digging over your garden beds. This constant re-organisation has a couple of things that make it appear attractive to governments and corporations. From their point of view as the larger predators, it produces the appearance of wealth (think of the feeding spree that birds enjoy when you dig your garden over) and it has the added benefit of keeping the lower levels too busy just surviving in the chaos to challenge the re-organisation.

The downside to it though is that this is an energy depletion system, not an energy creation system. Using the garden analogy again - you don't plant carrots and then dig them up the next day and expect to have carrots in the future. But this is exactly what has happened - we have re-organised ourselves into a state of poverty.

The end game to this comes when the lower levels are picked so clean of energy that nothing can grow and then the whole system collapses, leaving only fragments of the lowest level. When you've picked the soil clean of all energy, your garden dies. This, in a sense, is what the current financial crisis is all about.

Our societies are no longer capable of creating the wealth (energy) they once could due to this constant predation and re-organisation.

Point 3.

Back to the garden analogy again. Weeding and pest management is the equivalent of social and financial regulation. Now it could be argued that weeds and pests are needed in a garden, and to a certain extent they are, but if you want your garden to create the maximum energy for you then you need to take out those weeds which are harmful to the ecology of your garden. Weeds certainly have their place - they are great pioneers and can thrive in poor soil, slowly building that soil up so that more productive plants can eventually grow. The can also provide unseen benefits by provding added diversity to the ecology and (say) attracting beneficial predators that come for the weed and stay for the bugs that are eating your lettuce.

The bottom line with weeds and pests though is that they don't produce wealth, they inhibit it.

Simply abandoning regulation, combined with constant re-organisation of the lower levels, has certainly lead to an explosion of growth, but it's been an explosion of social & econmic weeds and pests. This has lead directly to a state in which the real producers of wealth are so busy dealing with these weeds and pests, that their ability to produce that wealth is greatly diminished.

Or, getting back to planet earth, if the workers (who transfer and convert energy from the ecology) are kept too poor to properly transfer and convert that energy, then eventually the entire system has less energy in total.

Now all of this probably sounds pretty fuzzy and I admit that the analogies I've used are, by and large, gross simplifications of highly complex systems and therefore require intelligent interpretation if the truth is to be divined from them. However underneath it all is the most amazing energy storage system you've ever seen - and yes, the analogies work just like I've outlined. The devil, as always, is in the detail.

In the next post I shall move up a gear and start constructing an abstract logical model from which a computer model can be developed.

Wednesday, September 10, 2008



Welcome to my blog on economics.

By now it should be pretty obvious that our global economy is going down for a reboot a'la 1929.

It should be just as obvious that our political masters and their experts don't really have a clue about why or how this is happening. I'm sure that many of us now suspect that their clue-less-ness is a major factor in the build-up and collapse of the system.

So what exactly is happening?

Whilst the economy is a mind-bendingly complex system that spans humanity and even simple descriptions of it are complex,
the simplest analogy to demonstrate what's happening is that of an avalanche. Some economic event has triggered a collapse of confidence and this is now cascading down. Right at the moment everyone is focussing on the event(s) that are triggering this avalanche, without understanding the underlying forces at work.

However it is the underlying forces that are the problem, not the triggers. It's sort of like blaming the avalanche on the one particular loud noise that set it off rather than acknowledging that the snow had built up to the point where it was going to collapse from any loud noise.

"Yeah yeah so what" I hear you all saying - but it's this reverse way of thinking, in which we mistake the effect for the cause, that is actually at the heart of the problem. Our whole view of the economy is based on this way of thinking and the connection with reality is that confidence has collapsed because we are starting to realise that what we thought was the cause was actually just a symptom of many deeper underlying problems.

You will see what I mean over the next few weeks as our economy collapses regardless of government/business intervention. If my understanding of the system is correct, then I would say that our economy has already collapsed - don't forget avalanches don't start at the top of the mountain, they start nearer the bottom. By the time you see the snow moving it's too late.

However, as if this weren't enough, our environment is also close to a point of collapse too. Over the last 500 years we have done immense damage to this planet. Just in the 40 years I've been on it, it has changed beyond recognition. I won't go into the litany of destruction we have visited upon our planet - by now it should be well known. What is less well known is the connection between the economy and environmental destruction. This connection can be simply stated as "when you have an economic system in which every transaction destroys some aspect of the environment, then you have an economic system that will eventually kill all life on this planet" - no ifs, no buts, no maybes - it is actually pretty simple math...

Before you disagree with that statement, I'd ask you to try and think of any economic transaction that does not negatively impact on the environment. Every dollar you spend, in some way, destroys a bit of your environment. So using economics to repair the environment is a bit like trying to trade your way out of insolvency by selling lots of things, but making a loss on each thing you sell.

So how do we fix this horrible mess we have created?

The first thing is to realise the true nature of our economy and to create a science that reflects that reality - after all you cannot fix a problem you don't understand.

And that is what this blog's all about - discovering the Science of Integrated Economics and creating a computer model that is capable of simulating social and economic theories and measuring their impact on the system as a whole. A lot of our problems stem from the fact that we do not have a credible science of economics and thus we cannot refute idealogues and their half-baked faith-based theories (like economic rationalism).

Now most people think that the economy is about share-markets, industry. products and such, however its' roots go much deeper and in reality it is intimately connected to society and the environment/ecology.

In reality, the economy is not so much the tip of the iceberg as the inner most system of a host of similarly nested systems, with each system being a product of its host system.

To be more precise:

The environment contains the ecology.
The ecology contains human society.
Human society contains market economics.

Now each of these systems (environment, ecology, society and economics) are highly complex systems in their own right, with their own rules, behaviours and properties. They can be unified and nested into one model by the simple expedient of realising that the complete system is essentially an energy storage system.

Energy radiated by the sun is absorbed, converted and stored by plants, which is then absorbed, converted and stored by animals, including us, and we in turn convert and store this energy into a symoblic form of energy called money and create another energy system using this symbolic energy.

These 2 concepts (nesting and energy) allow a model to be constructed in which the correct relationships and transactions can occur.

In the next instalment I shall explore the sub-systems and the various relationships and transactions both within and between them.