The Economy: An Ecosystem

Much of economic thought seems based on an almost unconscious fundamental analogy: The economic system is thought of as if it were a huge, complicated machine; at its center is a sort of reciprocating engine in which enterprises on one side and households on the other exchange money, goods, services and labor back and forth. Since economics as a science developed largely during the industrial era, it was perhaps natural to adopt this analogy. Machines, from bicycles to locomotives to blast furnaces, and by extension machine-like institutions like assembly lines, in which humans served as essential working parts, were awesome both in potential and in reality, utterly transforming society and the quality of life and daily existence. That would get anyone's attention.

That analogy has proved serviceable to some degree, but it is far from perfect. It  encourages an expectation of predictability that is frequently disappointed. It implies a degree of precision in the system's operation that does not exist. It predisposes toward assuming there is some grand design. It also predisposes subordinating the parts of this "machine" to the whole, when the "parts" are in fact the human beings the economy exists to serve. Worst of all, it leads one to think that there is some set of controls that one can seize to operate the machine, and even to "fine-tune" it, and that it therefore is in need of an Operator. Naturally, government is often looked to as that potential or actual Operator.

Basically, this analogy is fundamentally incorrect.

A better analogy would be to look at the economy as like an ecology. In a natural ecosystem, all the plants and animals in it act independently, albeit sometimes in symbiosis and sometimes as antagonists, seeking to survive and flourish, and they evolve together in light of each others' behaviors and nature and the resources available to the ecosystem, and the conditions under which it exists. The result rising out of apparent chaos is an ad hoc order that increasingly serves its components and that is simply the result of Darwinian natural selection - that which works tends to persist and increase and that which does not tends to decrease and die out. It is constantly evolving. The interrelationships among its components are sometimes extremely complex, and alterations of the ecology can therefore produce unexpected, even counterintuitive, results.

Similarly, the economy is the evolved product of the independent actions and decisions of everyone who comprises it and has comprised it, together with the resources they have available to act with. Everything said above about natural ecosystems is true of human economies.

In the United States, for instance, that means there are 320 million "operators," the vast majority of them making decisions for themselves under continually varying circumstances that affect the system in which they are acting to greater or lesser degrees. It is true there is often some degree of predictability to people's actions, which enables economists to make predictions about future results that prove close enough to actual outcomes to be of some use. Most often, these predictions are made by observing past trends and projecting them forward, as if anticipating machine-like predictable behavior, with some tweaks to adjust for known current circumstances. It is famously also true that most economic predictions and models fail at the times when they are most needed - at "points of inflection," moments when the performance of an economy departs significantly from trend or even reverses. That is because the economy is not actually a machine. Human behavior changes, sometimes on a large scale, and the overall economy inevitbly changes with it.

An example is the financial crisis of 2008-09. While a few warned of a possible recession (mostly people with reputations as "perma-bears"), no serious economist saw anything like this crisis coming, nor did virtually anyone who relied heavily on economists' analyses - including commercial bankers, stockbrokers, central banks, all of whom had an obvious institutional need to anticipate such an event if it were in the offing.

There were a small handful of speculators who did anticipate a collapse of some sort, and who profited almost beyond imagining by acting on that anticipation. The motion picture The Big Short entertainingly sets out how one such speculator foresaw and acted, to his vast profit. And how was this remarkable feat accomplished? By setting aside the equations and "econometrics" of economists and by adopting the methodology of those who seriously study the ecology - going out into the field and finding out what people were actually doing and what was going on. They discovered a deranged housing sector, full of "liar loans" to manifestly unqualified mortgagees being made by utterly irresponsible banks and other lenders banks and sold immediately to Wall Street "aggregators," who made no effort to verify the soundness of the loans before packaging them in mortgage-backed securities being held as assets amounting to many,  many billions of dollars on the assumption that their income streams would continue when in fact they would not. In short, the rise of packaged mortgages had short-circuited the traditional moral and practical constraints on mortgage lenders that had forced due diligence and accountability. As a resut, much of the mortgage and investment industry went haywire. Key motivations to ethical behavior were gone, and economists did not pick that up from their statistics and equations because they made no such investigation.

Perhaps it would be wiser for economists to augment the methodologies of mathematicians and engineers to the methodologies of those who study natural ecologies, with their enormously complex interrelationships and their sometimes surprising reactions to changed circumstances. Perhaps they should recognize that they are dealing with an economic ecology of independently acting organisms that can change in unanticipated ways and not with a basically predictable machine.

The Trust Fund Illusion

One assertion of collective-oriented commenters is that individuals "should" share equally, or nearly so, in the fruits of the society's economy. Underlying this assertion is the presumption that the economy and its srock of goods and services are a product of the collective that exist independently of the people and therefore belong to all. Those that would permit unequal distributions insist that government decide who is more deserving and who is not. It is analogous to maintaining a legacy trust fund, of which everyone is supposed to be a beneficiary, with the government acting as trustee.

This way of thinking is false, but gets some support from the apparent permanence of much that surrounds us. Landmark buildings, street maps of cities, bridges, and tunnels, and much else persist decade after decade. Some cathedrals date back many hundreds of years. Even something so evanescent as a daily newspaper is often published by a business enterprise that is generations old - The New York Times, to cite just one highly visible example, has been published by the same family in substantially similar form for the whole of the 20th Century and on into the 21st. Such things certainly seem permanent and created virtually independently of current population.

But such permanence amounts to, at best, to borrow a Shakespearean expression, only a hemi-demi-semi truth. In fact, such material goods are the product of human endeavor, and their continued existence is also the product of continuing human endeavor ensuring that they be preserved.

Consider a house, that cultural symbol of permanence, one built long ago by people no longer living. Imagine it abandoned and left untended and unrepaired. If it is well made, at first little will change. But over time, weather will affect it. Insects and rodents will find their way in.  Perhaps ground water will seep into the foundation. Wood rot is a risk. The roof will erode, as all things exposed to weathering do, and eventually leak. If lightning strikes and sparks a fire, the end can come very quickly. Even without that, eventually the house will become uninhabitable, and finally reduced to ruin of interest only to future archeologists, or disappear altogether.

Those things that are valuable and most nearly permanent legacies are intangibles, things like a common language, transmitted values, knowledge and technology most noticeably. These can be seen as like a trust fund, and they can and should be distributed or at least made available equally to all. To a great extent they are, at least in developed countries: That process is called education. But even they owe their continued existence to the efforts of living people to maintain and disseminate them.

Obviously, such efforts need to be compensated if they are going to be continued for long, and since some efforts are more highly valued than others, and are done by some people and not other people, clearly that compensation will and should be variable from person to person. Equally obviously, such compensation must coexist in a world with other, non-permanent goods and services that require compensation, like preparing meals and prescribing medications. All of these are the results of individual human endeavor, usually voluntary, usually acting in concert with others, but individual nevertheless. It is not that abstraction Society that made the car you drive, or supplies the gasoline it uses, or keeps it in good repair; it is individuals. The existence, or the continued existence, of these goods, legacy or nonlegacy, cannot be reasonably counted as independent of the people who provide them.

So the question really is, how shall such compensation be determined, which therefore largely determines how goods will be produced, preserved and distributed, and by whom? The best answer, in nearly every case, is that they be worked out freely among the people directly involved, because it is they who are best informed about the value they place on what good or service is sold or bought and on the labor and resources required, and what prices they are willing to pay or accept, and whether they can come freely to an agreement. Anything else consists of using power to determine distribution. That places a priority on getting and holding power, meaning the ability to coerce people to act differently from what they would do if left to act freely, or on influencing those who have it, rather than on producing value. It should be self-evident that is a poor priority to have as the main driver of who gets what portion of the wealth created. It drives people to expend time, effort and resources on getting and holding power, or on getting the favor of or nfluencing powerholders, instead of on producing goods and services of value.

The trust-fund illusion is not only wrong, it is harmful.

How Free Should People Be?

Human beings are unique individuals with separate, unique intellects and minds, and separate, individual perceptions of reality, interests, aims, desires, goals and purposes. 

It seems obvious then, that the greater the proportion of people in the human population who have freedom of thought and action, and the greater the scope of those freedoms, the larger the likelihood that some, perhaps many, individuals will discover or create new and better ways of thinking and acting, and develop wider knowledge, from which all individuals stand to benefit. That is called progress.

It should also then be obvious that the less freedom individuals have, the less scope of freedom to think and act, and the fewer the individuals who are able to act freely, the less opportunity there can be for creating improvement.

 It should therefore follow that if one wishes the human condition to get better, then normal, mentally competent, adult individuals should have maximum scope and freedom to act as they wish, each in their own way, and to communicate freely.

The obvious limitation: that their actions should not  injure or prey upon other individuals or encroach on their similar freedoms, for otherwise everyone’s actions and freedom would be seriously limited or contravened by the need to protect themselves or even to survive attacks or encroachment by others.

The historical record and current experience support this idea of maximizing freedom: We find that in general, the freer the society, the more successful it tends to be.The less free, the less successful. In the West, we look back on the great burst of progress created by ancient Athens, for example, or the flowering of intellect and culture of the Renaissance. They pale in comparison to the greatest flowering of human development of all time: It started with the Reformation, which introduced the concept of freedom of religious thought, combined with the development of systematic scientific inquiry, the development of the printing press and the drive to spread literacy, throughout the population, and continued with the consequent development of first religious and then political and economic freedom, all providing the foundation for an enormous leap in human progress and quality of human life that continues to this day. 

In general, the correlation today between relative freedom and the economic success and general happiness of the world’s nations is unmistakeable: The freer the nation, the better off it tends to be. The correlation is not perfect - there are other factors at work - but it is very strong.

So, considering both theory and practice, this conclusion seems inescapable: Individuals should be as free as is feasible, and societies should be designed to incorporate and reflect that conclusion.

No Man Is an Island…

While people are autonomous intelligences, they do not exist in isolation. People normally live together in groups of various sizes and kinds - families, local communities, affinity groups, and so forth, up to nations comprising millions of people. There are very few hermits.

In fact, people very likely lived together in groups long before they were people: Other primates largely live in groups, as do many other mammals, and even birds. So did other humanoid species, like the Neanderthals. And so, in all probability, did our biological ancestors. People therefore have a widespread inclination to ally themselves with one or more groups, and to establish quite powerful emotional ties to them, occasionally even to the extreme of sacrificing their own lives; we seem to be programed that way.

Many of these groups exist before, during and after the memberships of individuals in them, and often their entire lifespans. Groups have identities, and often purposes, beyond those of the individuals composing them. 

So it is reasonable to raise the question of which takes precedence, the groups, or the individuals that compose them? There are many assertions, even entire philosophies and systems of law,  based on the premise that the groups come first. Wars, some of which have killed millions of individual people, have been fought over group primacy. In fact, one could argue that all wars have been fought over which group will rule, and over whom and what they would have dominion.

So, which has pride of place? The individual, or the group, granting that both occur together and are intertwined? Which is figure and which is ground?

Here is a simple thought experiment: If all groups in existence magically disappeared, what would happen to the individuals; and if instead all individuals disappeared, what would happen to the groups? 

Quite obviously, if the groups disappeared, individuals would immediately set about creating new ones, which might or might not be reconstitutions of those that disappeared. Equally obviously, if it were the individuals who disappeared, there would be no groups, for there would be no one to replace them. Groups cannot exist independently of the individuals comprising them. In reality, only the individuals physically exist; their groups are mental constructs in people’s minds. A mathematician would say that the individual is the independent variable, and the group is the dependent variable.

Put as plainly as possible: groups exist for the benefit of the people comprising them, not the other way around. 

The Power of the Group

There is a good reason for the existence of human groups of all kinds, and for the human propensity to join, support, and be intensely loyal to them. It is called survival.

For nearly all of our species’ existence, humans lived as hunter-gatherers, roaming the earth in small groups limited in size by what their ability to get food and other resources would allow, so they were necessarily small. 

This is key: Everyone in those groups knew each other intimately and were bonded by ties of love and blood. And they depended utterly on each other for their existence. Women needed men for protection and as providers of needed protein, and for procreation. Men needed women to bear and raise children, and as patient gatherers of fruit and edible vegetation and tenders of children in camps while the men were hunting or fighting other groups for survival, or exploring. Children needed the adults, and adults needed the children to be there for them later, when age or injury imposed disabilities on the adults. And the old were needed to help with the children and to keep and pass on the wisdom they had acquired over a lifetime and the group memory and traditions and customs of the group that helped it define itself and survive.

Of course, human nature being what it is, there were surely struggles for dominance within groups, a fact of life among nearly all social mammals that carries down among humans to this day. Groups that resolved them without disruption and found a leader they could follow were the ones that survived, hence the tendency to rally around a leader today.

Humans lived like this for, it is now believed, as long as 400,000 years, and predecessor species even longer. Society, and the ability to form bonds of affinity, loyalty and even devotion, sometimes to the extreme of giving up one’s own life for one’s fellows, is ingrained in us, deeply. It is in our DNA.

Why Size Matters

Whatever caused homo sapiens to evolve for higher intelligence and innovative thinking, those qualities were necessarily invested in individuals not in groups. Eventually, some individual geniuses invented agriculture and animal husbandry. That resulted in populations exploding; the same fertile land that could support only a handful of hunter-gatherers could support hundreds if not thousands of people when put under cultivation. 

But that led to a social revolution from which there is no going back. People were no longer living solely in intimately small, continuing groups of individuals to whom they were bonded by ties of blood and love (or at least marriage). They found themselves living in settlements, then towns, then cities, in which many or most of the people they encountered and related to were not close relations, but people whom they merely knew, or total strangers. As populations grew, the proportion of strangers or near-strangers in people’s lives grew larger and even predominant. New ways of organizing groups for the common good had to be developed.

Agriculturalization occurred 5,000-10,000 years ago, a small amount of time compared to the hundreds of thousands of years of hunting-gathering life that preceded. Humanity has been struggling to reconcile their long-evolved mode of being with their relatively new way of living ever since. There has been a huge variety of groups of various kinds - family, geography-oriented, religious, social, commercial, and many more, up to and including the establishment of nation-states. Today, two such states, India and China, have well over one and a quarter billion citizens each, and sustain their identities despite manifest divisions and conflicts within them. So far there has not been any upward limit on how large a functional human group can be. 

Yet the size of intimately bonded groups can form is necessarily limited to, at most, a few hundreds: How many people is it possible to be that intimately bound up with? Human relations to and within groups significantly beyond the size of a hunter-gatherer clan must necessarily be different in character. Size changes everything, but the emotional makeup of humans does not change.

This becomes a problem when a group essential to individuals’ needs grows too large for those making decisions affecting the group to get feedback necessary for good decisions because they do not know everyone in the group, and especially when they do not share everyone’s needs and interests.

The Weakness of Large Groups - and Governments

As groups of people grow too large for the members to know all the other members, a problem arises: The people a member does not know necessarily become abstractions to him. When the group is large enough that members not only don’t all know each other, but also don’t even know of each other, the unknown members become more abstract still.

This can become a big problem when decisions are made by people that affect the well-being of people they do not know. It is especially true of those who rise to positions of leadership or authority in a group, because their decisions affect many more members of the group and the group as a whole. The farther removed they are from the individuals their decisions affect, the worse those decisions are likely to be for the persons affected. 

In part this is because the decisionmaker cannot fully know the needs, interests or wishes of people he does not know. In part, it is because communication passed among persons who are strangers to one another and not in direct contact is unavoidably imperfect. The process of communication itself necessarily slows the decision process, and the longer the chain of persons through which communications flow, the slower and more cumbersome the overall process becomes. Such communication is also subject to omissions both deliberate and unintentional; to incompleteness; to becoming garbled, misunderstood or lost while being transmitted; and to deceit - the parlor game known as “Telephone” illustrates the effect perfectly. In part it is because the decisionmaker will inevitably have a bias, unintentional or not, in favor of his own interests, values and perceptions over those of people he does not know. And in part, the likelihood increases with numbers and degrees of separation that the interests of leaders and other decisionmakers may come into conflict with the interests of people affected by them. When such conflict happens, many bad things can occur.

All of this assumes that those in control of such groups are well-intended, and their choices wise. As history has sadly shown, those assumptions are all too often not the case.

If the decisions are bad enough, individuals may suffer or die, and the group may destabilize or become disrupted altogether. The problem is potentially at its worst in the case of governments, where it is accepted that the government can use the rule of law and the use of force, including armed force, to impose decisions on people the leaders do not know, some of whom may have wishes or interests the leaders may dislike or oppose. 

Is Economic Inequality Equal or Unequal, Just or Unjust?

Numerous observers point to great disparity in incomes and assets of individuals, groups, and nations and take it for granted that this is a serious problem. They assert such disparity constitutes a great injustice, and that revolt or revolution or at least widespread alienation must follow in its wake, and that assets and income should be distributed in equal or more equal amounts, or at least in a way that is judged by them to be “fair” or “just.”

Yet the United States, in 2016, elected a multibillionaire president at a time when dissatisfaction with the distribution of income and wealth was widespread. Few people begrudged that president his billions, or Warren Buffett and Bill Gates, counted as two of the richest men in the world, their many tens of billions. Evidently those assumptions about economic inequality and how people respond to it need to be examined.

The fundamental problem is squaring the concept of “equality” with the fact that humans are diverse, and except for identical twins, individually unique. They vary, and therefore are, in some sense, inherently “unequal”: Some are tall, some are short; some have high IQs, some have low ones. A few have remarkable individual talents, like Einstein and Caruso and Toscanini; most do not. Some of these individual differences matter greatly in regard to the productivity or perceived or actual value to society of individuals, who often profit accordingly.

In addition, there are individual differences in the choices people make, in their degree of ambition, in their character. If different people exert themselves in different ways and to different ends, for whatever reason, it is reasonable to expect different results. Some of these differences have positive results; some negative. 

So the inescapable fact of individual differences makes economic inequality inevitable bar forced redistribution.

It would seem most people intuitively understand all this, and respond accordingly: They do not seem to mind different results as such.

And what would one have to do if one did mind?

Should those who work harder or smarter or toward more productive goals have the fruits of their labors denied them and given to people who worked less, or worked less ably, or in some cases did not work at all, or even worked in ways that are harmful? That most people would agree would be unjust, particularly those who do the earning and achieving. But even beyond the question of justice, it would fall short as a practical matter.

It is an axiom of human behavior that rewarding something tends to produce more of it, and penalizing something tends to produce less of it. It is therefore obvious such an  “equalization” would diminish the overall stock of wealth from what it would be if left alone: The penalized will often elect to produce less, and the rewarded will not produce more and indeed will likely also produce less, because why should they exert themselves as much in productive work when they can get at least some things they want for free? Sharing the wealth is likely to become an exercise in sharing the poverty.

Most people would laud remedies that improve the productivity of people at the lower end of the range of achievement - education, for example. But such remedies are inevitably limited, both by their efficacy and by the inherent limitations of individuals. What next after that? Does anyone want to create a modern Bed of Procrustes to “equalize” inherently different people? Induce brain damage in high-IQ individuals so they are rendered “equal” to low-IQ individuals?

We are left with the conclusion that we are dealing with a misuse of the concept of “equality.”

Perhaps what is more important and a better way to look at disparities in wealth and income is to ask whether the disparities were achieved in legitimate or illegitimate ways, or whether they are being used in ways damaging to others. Then the issues become the method of getting and using rather than the having. It is that distinction, and the blocking of bad uses, which need to be the focus of attention, not the material differences.

Few if any would disagree that some forms of getting are antisocial and need to be prevented or punished: armed robbery, for example; or extortion; theft in general; or fraud. Establishing a monopoly on a good or service deemed essential and using the threat of withholding it to raise prices or exercise power over others is defended by virtually no-one but the monopolist, and even he would object if someone else did that to him. All these are illegal to some degree in most advanced societies (although some temporary monopolies are granted via patents or copyright to encourage creation of new things of value).

One method of getting and using that is often not illegal and nevertheless objectionable is what economists call “rent-seeking:” manipulating legal, regulatory, or similar conditions to increase one’s profits or power, or to hinder competition. Bribery of legislators, officials, or other important decision makers is rightly condemned and criminalized, of course, though enforcement varies greatly by time and place. But there are means of persuasion or inducement  - or subornation - that do not constitute bribery or successfully skirt applicable legal definitions of crimes. Such methods are in wide use. People often complain that “the system is rigged,” and when they do it is usually this sort of manipulation they seem to be thinking of. It is that which needs to be addressed. 

It is certainly worth while to keep an eye on people or groups who have amassed enough wealth to throw their weight around, and take action if and when their behavior becomes harmful to the general good. But it is reform, legal and social, that is needed, not redistribution as such.