Something that has been brought to the surface by the recent economic shutdown is that classical economics seems to have run out of answers. More precisely, we are seeing things today that classical and neoclassical economics said were not possible, at least not in the long term. All over the West, but particularly in the United States, we are seeing contradictions for which there are no explanations. It’s as if we have crossed into a new world that operates by different economic rules.
The best example of this is the debt carried by governments. For a long time, it was assumed that debt levels approaching GDP were unsustainable. In war time or a national crisis, a nation could run up huge debts, but must immediately address those debts after the crisis had passed. This meant austerity or inflation. Today, Japan has debt over 200% of GDP. Greece is at 170% and Italy at 130%. The United States was at 110% before the recent economic calamity.
Those who cling to the old economics keep predicting that sovereign debt will be the downfall of the West, but that’s like predicting rain in Arizona. Eventually, the prediction comes true, but when is what matters. As the John Maynard Keynes famously said, “In the long run we’re all dead.” Maybe there is some point where these debt levels have to be addressed, but everyone used to know this was not possible. Within living memory, trillion-dollar Federal deficits were said to be impossible.
All around the modern economy we see things that should not be happening. America has seen 50 million people file for unemployment. The streets are empty during work days in most cities. It has been an article of faith that wide-scale unemployment would lead to unrest. Instead of marches by unemployed workers, we have riots by the delinquent children of the ruling class. They are not demanding jobs. Instead, the jobless are watching the shenanigans on television.
Similarly, the stock markets are doing the opposite of what economics has said should happen on the cusp of a long depression. Apple became the world’s first trillion-dollar public company on Thursday, as a rise in its share price pushed it past the previously unthinkable valuation. This is a company that makes luxury goods financed on retail debt. Their core market is now unemployed. How is it possible for a “Good Time Charlie” business to boom in a depression?
There may be ways to explain these and other phenomena within the old rules of economics, but those patches to the old theory just create new contradictions that have to be addressed with new patches. It may simply be that the West, having moved past scarcity, has entered into a new world of economics. Just as quantum physics takes over for classical physics at the atomic level, the new economics takes over for the old economics at the post-scarcity barrier.
An example brought up in this brilliant discussion (Video and MP3) on modern finance is the elevation of transaction-creation over capital formation. A company like Tesla has a ridiculously high valuation, despite its many problems, because it creates lots of transactions and creates potential transactions. Everything from government credits to complex financial instruments are spun off by the activity of the firm. As a result, it creates lots of downstream financial activity.
Compared to an old school car maker, Tesla makes little sense. The old school car maker was focused on building cars, which meant they focused on all of the processes to building a car, like supply chains and managing factories. As a result, they had massive balance sheets. The real value of the company was the massive array of assets it owned to build and sell cars. Tesla, in contrast, has a tiny balance sheet, as it is focused on generating economic activity.
The elevation of the transaction over capital formation is one of the unremarked aspects of the new economy. Wealth is now generated by either creating new ways to move information around the system or maintaining a gate through which information must flow to some other part of the system. In the new economy, information can be knowledge about some future transaction or the store of old information in a wealth containment vehicle, like money, assets, credit and so forth.
In the new economics, the demand for genuine innovation, the overcoming of scarcity in some way, is in low demand. Instead, the economy is dominated by middlemen who benefit from each transaction. Therefore, the innovator is one who comes up with a new way to accelerate the movement of information in the system, thus increasing the number of transactions. Facebook is worth billions not because it has a great product or service. Its value is in its ability to generate transactions.
Another aspect of the new economics that seems to contradict the old rules is the rise of credit as an asset. All over the global financial system credit sits on the books of banks, hedge funds and companies as an asset. The asset is taken at face value and often the nature of it is unknown. This was obvious in the mortgage crisis when debt holders had no idea what was in those mortgage pools. Credit is now just another store of information in the financial system.
In fact, certain types of debt are the preferred store of information. The financial system has an unquenchable thirst for US treasuries. Federal debt is now over 26 trillion, a number thought unimaginable just a few decades ago. When you add in unfunded Social Security and Medicare liability, the debt is multiples of that total. Despite this staggering debt load, United States treasuries remain the preferred collateral in the financial system. They are better than actual money.
An irony of this new post-scarcity economic order is that it seems to be evolving toward something closer to the old palace economies of the Bronze Age. All over the economy we see a great consolidation. Amazon is close to half the retail economy now. Five big banks control more than 90% of the financial system. The tech oligarchs are close to having a monopoly on the public square. In their respected spheres, everything flows into them and is distributed out as they see fit.
We have quickly moved from a situation where these new economic models were too fragile to regulate to a situation where they are too big to regulate. In fact, the phrase “too big to fail” is now just an accepted truth of the current age. Like the palace economies, these institutions are not here to serve society. American society now exists to serve these new institutions. As a result, these institutions are actively shaping our behavior to create transactions that serve their needs.
Whether or not this is sustainable is unknown. People who want to the think it cannot go on will find reasons to believe that. The answer though lies in whether this model can last in a world of informational symmetry. As automation takes over the economic system, will there be a way to create more transactions. After all, the robots will reach a point where they know the market value of all items before the market is set. No robot will be able to fool the other robots.
That is another aspect of the new economy that goes unexamined. It is just assumed that automation will idle the human assets the ruling class does not like. In realty, it will be the information class that suffers the most. In a world where financial transactions are conducted among algorithms on the block-chain, what is the need for guys working the phones in a brokerage? How would trades even happen if both sides know the future price of the item being traded?
As with anything new, there are more unknown things than known things. The new field of quantum economics is an effort to take methods and ideas from quantum physics to model economic activity. It starts from the observation that something like the efficient market theory contradicts the assumption that humans are rational and will attempt to maximize their utility. People know the odds, but they keep going to the casino anyway, buying sports cars and following new trends.
There’s also the possibility that reality has simply gone on holiday and will return to put all of this back in order. Some unknown crisis will reveal the massive cracks in the foundation of the current economic model. Everyone will suddenly snap out of the fog of plenty and rush for the exits. After all, the Bronze Age economic model was unable to hold up under the pressure of the Sea People. The current economic model may simply collapse under the weight of a billion Africans.
Media Update: The guys at Myth of the 20th Century had me on as a guest to talk about various things related to economics. I appreciate them having me on. They do a lot of interesting stuff, so I hope everyone will check out their material. Like so many, they have been condemned to the valley of the damned. That means no YouTube of Twitter, but you can download the latest episode here. They also have a Bitchute channel and a D-Tube channel.
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