By Guest Author Roger Erickson
While exploring how and why we have market meltdowns, it's natural to ask whether any economic ideology comes close to mapping to the vast literature about known, biological model market systems, i.e. species and ecosystems. Looking for consistent parallels is of paramount utility to investors able to swing between hyper-local and systemic views in the endless pursuit of adequately managing both known, immediate risks and long-term uncertainties. My conclusion, up front, is that investors need to invest as much or more time & resources in upgrading operations at the SEC, US Treasury, Federal Reserve and US Congress as they do in choosing winning stocks. Market platforms, like all other systems, must be created and maintained, and the highest cost in all systems is eventually the cost of maintenance, alternately known as the cost of coordination. Follow up:
Follow up:To broaden perspectives, let's start comparing examples, by looking at a particular biology model, the social amoeba Dictyostelium discoideum. It's an easy choice, since "dicty" carries so very many parallels to human market systems. From there we'll proceed to the only economic paradigm that I've found to be anything remotely resembling biology - the operational, non-theoretical observations erroneously called MMT (modern monetary theory). Comparing diverse market models provides quick, powerful methods for seeking logical consistency and spotting inconstancies. There are far too many useful parallels to mention in one column, but dicty will be introduced as a fantastically useful model which fiscal policy staff should consistently review.
Let's build the argument for analogous contexts, starting with one, useful comparison useful for reducing confusion over the nature of currency, and of currency creation. The USA is a social collection of over 300 million agents now. In comparison, every amoeba is a collection of well over 300 million molecules. Usefully, each sovereign market, a human nation and a single-cell amoeba, utilizes a sovereign currency system to denominate transactions and translate value between unpredictably distributed transaction chains. Notably, dicty goes even further, and scales up it's cells at will into multi-cellular aggregates, remarkably analogous - if not in scale - to the many steps in evolution between amoebas and humans, and their respective markets. It's like Libertarians periodically choosing to practice Congregationism! We'll leave most of those analogies for later review.
What PRIMARY internal currency system do amoebas, and all known cells use? A molecule called adenosine. Adenosine can be loaded with energy value by attaching one, two or three phosphate bonds, making adenosine mono-, di- or tri-phosphate, respectively AMP, ADP or ATP.
The question most orthodox economists would ask is, "how much adenosine does every cell make?" The answer is, "as much as it needs." What's the mystery?
Does any cell "borrow" adenosine? What a silly question. No system borrows its internal bookkeeping methodology.
What entity in cells manages adenosine production? There are multiple synthesis & degradation paths all capable of recycling adenosine, and they are all kept in dynamic equilibrium by universal feedback. The self-reporting system becomes it's own Federal Reserve.
Can a cell ever "run out of" it's adenosine bookkeeping currency? Don't be ridiculous. As a bookkeeping "issuer", cells are tasked with managing real-goods budgets. Short of absolute death or damage, cells can always synthesize as much adenosine bookkeeping currency as is needed in order to translate bookkeeping requirements between transactions waiting to happen. Bookkeeping in any organized system is infinitely self-generating. It is an incidental byproduct of the system itself.
Another odd question that orthodox economists ask is "how do cells manage the thorny issue of 'price stability'?" What? The question has no logical base in either context. The cell or nation must survive, by maintaining all needed components. No secondary framework for determining price stability has any relevance. The actual value of any given transaction has no consistent frame of reference other than survival of both needed components PLUS the aggregate. Local measures of value relevant to that framework are ephemeral, change every picosecond or faster, and are constantly re-established so randomly that there is no aggregate purpose in tracking them other than in assuring "adequate" co-maintenance of components & aggregate. Endless details not worth tracking get buried in that term, "adequate."
Now you can see why a biologist first addressing economics would ask, "in human economics, what is the equivalent of the adenosine molecule"? That's looking for consistency across contexts, where one context obviously grew from & must be consistent with, the other.
The human social equivalent of the adenosine molecule? Surprisingly, there is no consensus on that definition, and the history of human market bookkeeping systems is comically convoluted, understood by few, yet vociferously argued over by many. That's to be expected in still-emerging systems. What's especially comical is the certainty of so many people in claiming permanent definitions for an obviously still-forming operational system. Personally, I'm leaning towards person<->person and person<->group bonds termed affinity, trust & credit to be the more universal human equivalent to adenosine, while our formal "currency" bookkeeping system is selectively used for only some transactions which actually require calculable precision.
As a graphical reminder, compare two lists yourself, Ben Franklin style. On one side, make a list of things you can put a $US price on. On the other side, make a list we're not [normally] comfortable putting a price on. Starting at the beginning, does a human egg cell put an exact price on union with a human sperm? [Okay, let's chalk that one up to statistical variance.] Does a mother expect cash payment from the embryo growing in her uterus? Do mom's keep an accounting record accurately charging for breast milk? Do fathers or moms charge by the hour for diaper changes, counseling, consoling, bandaids, encouragement & training? Do [sane] partners put a price on affinity bonds & vows? Carry on through neighbor potlucks, churches, and any other examples, on up to willingly giving one life to preserve others, and refusing [except by banksters] to put a price on the lives of your co-patriots. It would be interesting to see an attempted tally of the statistical proportions, nationwide, of the American value system that can & can't be financially quantified.
Without consistent axioms defining all components, it is very difficult to make a self-consistent system capable of smoothly scaling up markets to any size. A lowly "market-amoeba" such as dictyostelium can routinely scale up from small to large size. It can aggregate and dis-aggregate "international" markets, and emigrate and colonize - all without EVER having a "depression" caused by currency mismanagement.
In contrast, what are we struggling with? It's clear that emerging human aggregates, our nations, constantly confuse affinity, credit, currency, patriotism and other measures, to our detriment. Loss of operational coherence is always the most costly result of maintenance mistakes. Upon review, many of our self-imposed difficulties stem directly from confusion due to scale. We're generating such large numbers of people, and so many transactions, at such accelerating rates, that we inevitably end up trying to attach exact currency bookkeeping to practices, interactions and products that others are not sure we should try to attach a formal price to! And we have less time to think through every decision we make. That is exactly why Walter Shewhart coined his famous phrase. "In any complex system, the highest cost, by far, is the cost of coordination." While Walter was thinking mostly of industrial systems, he did, in retirement, realize the implications of his insight. Today, a corollary should be obvious to all. The return-on-coordination is always the highest return. Furthermore, loss of operational coherence is the greatest danger for a complex aggregate. Ironically, return on market coherence, across mixtures involving non-precise & precise transaction bookkeeping, is something we can't put an accurate price on! Nevertheless, a simple answer is clear, across molecular, cellular and human markets. As long as we scale aggregate coherence, our aggregate options will continue to scale infinitely. So why do we sweat those local gains & losses that are negligible in comparison? Lack of coherent perspective, obviously.
To simplify things, let's carry on anyway, and begin to parse just the formal currency operations in human markets - recognizing that that approach alone is inadequate for managing national operations. Let's start by digging through the history of currency, to arrive at MMT, which is not a theory at all, but rather just a description of how a SUBSET of human bookkeeping - which we call monetary operations - is actually managed in current market systems. It is the only economic data base I've come across that, like molecules & adenosine in cells, deals only with operational facts, and can scale up smoothly to handle any contingency, on demand. In short, it is geared to the scalable operations of aggregates, not encumbered by the non-scalable, uniquely local perspectives of diverse components, nor the limiting ideology of any market or sub-aggregate. To a biologist, that sounds promising, and it sounds like a tool that an aggregate can successfully work with, and on.
There are useful reviews of early decisions on currency matters mentioned in the Constitutional Proceedings of 1776, see Public initiative and the beginning of US currency - How a confused electorate can end up pretending to borrow it's own currency, instead of creating it, and "Understanding Modern Money. Such links make it clear that currencies, as a "tally method" are initially created, on demand, by aggregate entities, whether nation states or market-amoebas - but ONLY for specific types of transactions, where precision is thought to be required. So far, so good.
However, what happened next? Why so much historical confusion over currency creation and management of currency supply? A biologist would simply conclude that we have an incompletely formed aggregate, not coordinated to the degree required to ensure coherent actions and guarantee national survival. In short, we simply aren't thinking this through clearly enough. It's not rocket science, and actually doesn't need to be precise.
When an emerging aggregate is incompletely organized, some mass confusion remains and the bulk of relevant feedback is not yet adequately parsed. The result is that key aggregate options go unexplored. That certainly seems to be the case when reviewing current monetary policy. See Robert Eisner, The Misunderstood Economy, p.90;
Almost everybody talks about budget deficits. Almost everybody seems in principle to be against them. And almost no one, literally, knows what [they are] talking about.
Given this degree of ideological confusion, it is not surprising that so many residents, even financial professionals, know so little about our fiscal history, and possess even less systemic perspective from outside their narrow profession. Here are just a few essays on the many fiscal and financial misbeliefs blatantly muddying our current financial outlooks:
One of my favorite exchanges on fiscal policy occurred in 1941, after we'd had to jettison the cumbersome gold-std in order to gain the focused speed, flexibility & aggregate coherence needed to successfully wage WWII, an example of a nation acting like a market-amoeba.
ECCLES: We [the Federal Reserve] created it.
PATMAN: Out of what?
ECCLES: Out of the right to issue credit money.
PATMAN: And there is nothing behind it, is there, except our government's credit?ECCLES: That is what our money system is.
- Federal Reserve Board Governor Marriner Eccles in testimony before the House Committee on Banking and Currency in 1941, during questioning by Congressman Wright Patman about how the Fed got the money to purchase two billion dollars of government bonds in 1933.
For more on Marriner Eccles, see:
This exchange drives home points that make consistent sense to a biologist. First, any sovereign currency system is, by definition, always tied to a "public initiative" standard, and nothing else. Second, there is a distinct, operational difference between the real-budget metrics used by the bookkeeping issuer and the proxy-budget metrics employed by the users of that bookkeeping currency. Government credit = a population crediting the group with the right to create as much bookkeeping as needed, no more and no less. Third, momentary tactics are not written in stone. Only our enduring national goals and policies are steadfast principles. If we can direct our Central Bank to arbitrarily create the currency to "buy" bonds, in order to quickly force innovation through outdated methodology, then it's also immediately obvious that we don't even need to "buy" the bonds, and may bypass them as well. If Treasury-bonds were irrelevant & obsolete in 1941, then there is no reason for US citizens to be limiting their ability to think creatively in 2011!
Warren Mosler, seemingly the reincarnation of Marriner Eccles, has a simplified essay driving home many of the diverse inconsistencies in how most people - even banking and economic policy exerts - view monetary operations: The 7 Deadly, Innocent Frauds of Economic Policy.
In summary, will our national market system eventually have to act more like a self-consistent market-amoeba? If we are to survive, that seems to be an inevitable conclusion. How will we continue to evolve successful operations? Answer, by exploring, on demand, whatever group options appear. We certainly won't thrive by refusing to go where context is forcing us to go. Our last great depression was both the result and cause of a confluence of factors, yet we traversed it by aggressively exploring options. The rate of bold activities explored during the 1930s rivals in scope those explored during the 1860s and 1770s-1780s. See a calendar of some of the notable events and dates during the 1930s.
How should an investor leverage these sweeping insights to shepherd short and long term returns? As a component in one, particular market-amoeba, the obvious lesson is to continuously invest in your market platform, not just your isolated trades. The surest way to lose market value is to degrade the market platform which allows value creation.
Rather than endorsing MMT as an ideology, I've specifically only provided links revealing operational facts. The biological approach is that any and all methodologies are incessant works in progress, and that survival comes ONLY with continuous, full re-integration of all emerging approaches, followed by relaxation to the leanest subset fitting a fleeting context. Our only hope, as both Ben Franklin & FDR cautioned, is for ideologues of all stripes to fully engage, openly share, and honestly compromise views in light of rapidly unfolding operational reality. There is always less time than we believe.
But while they prate of economic laws, men and women are starving. We must lay hold of the fact that economic laws are not made by nature. They are made by human beings.
- Franklin D. Roosevelt
For those further interested in MMT, here is an early attempt to enclose most of the operational insights that have come to be loosely described as Modern Monetary Theory. It's an unfortunate name. A more descriptive term like "A Listing of Current Monetary Operations" would be more accurate, but as usual, mobs and markets and acronyms come to be ruled by logic only after the fact, if ever. Another useful review of current participants has also appeared, although there are even more. See: "Modern Monetary Operations"
It's clear that the logic & concepts reviewed by current MMT authors is quite old, not new. Rather, inter-twined questions about the inseparable concepts of credit-currency-criminology-policy have simply taken time to be discussed more widely. The topics are still not adequately re-integrated at the scale demanded by our growing operations. We need to accelerate propagation of useful ideas widely, not just refine them in small circles. Here are a few more historical references that I've found to be particularly useful for enlarging group perspective on these topics.
Henry Charles Carey, (argued for building on the precedent of non-debt-based fiat money and making the greenback system permanent).
Money and the Price System - CH Douglas
The Monopoly of Credit - CH Douglas
The Conquest of Poverty - Gerald Gratten McGeer
Fifteen Fatal Fallacies of Financial Fundamentalism - William Vickrey, Nobel Prize winner, 1996
Wynne Godley (popularized the "sectoral balances" concept)
Tom Eliot (drafted the social security bill)
About the Author
Roger Erickson is a systems entrepreneur based in Maryland. He worked for years in neurophysiology system research, at the Humboldt Stiftung, MIT, Yale, and NIMH before becoming more interested in community, business and market systems. Roger's newest interests are being pursued through several startups, as well as pilot agriculture commercialization projects with the USDA.