international discussion of world economy crisis

Thanks very much, Rosa!

Your two recent messages both create great positive warm feelings...

2011/7/3 Rosa @ Brazil:
> Look at that
>
> http://www.youtube.com/watch?v=qOP2V_np2c0

My computer would not let me play the video here, but the current
crisis of the world economy
is easy enough to see directly now for anyone with open eyes and full
media access.

There is a lot of urgent economic firefighting going on in the White
House today, in the debate on the debt ceiling,
and in European banking circles, on the crisis of Greece. But we also
could use some bigger, more foresighted dialogue
on the question: do we need to be in this situation at all? Is there
some other way to think about the global economy which would
make the present recession unnecessary?

When I saw your announcement about a session on media and positive
visualization in the Catskills,
I felt very wistful that I don't see a way to connect to that event.
Email and meditation are as come as I come to
media. And the world economic situation makes it hard for me to
project positive thinking at this time.
Perhaps we need to create the vivid credible positive image first
before we can project it effectively.

So -- this all leads to the question: can we imagine a way of doing
things which makes
the world recession unnecessary?

President Obama said something like this a few months ago, roughly
like "Something isn't making sense here.
How can it be that we have the same resources we did before September
2008, we have people more willing to save for the future than before,
and people eager to work just as much as before... why can't we have
the same standard of living as we had just a few months ago, with the
same jobs for the same people doing the same things?" Are people
dying out there because we don't
have a good enough "dating service" between people who want to work
and people who want the stuff?

The Financial Times had a nice op-ed just a few days ago, by one of
their regular people, under a big picture of two sinking ships,
stressing how similar the problems are in the US and the EU.

Common sense suggests that the whole recession is unnecessary, if only
we were clear minded enough about how to
think out of the box. But how? We can't just say we want the recession
to be over. We can't just radiate
light and love, and leave it at that. We have to channel that energy
into very hard, clear thinking about a new alternative.

In essence -- the current major debates in Washington and Brussels
focus on how to prevent the present
severe recession from turning into a new Great Depression. That is a
worthwhile set of near-term activities. But some
of us should be thinking about what it takes to get out of the
recession altogether, as soon as possible.
What kind of structural changes are needed? For example, if we "move
beyond capitalism," what do those
words even mean? What kind of alternative can we really implement and imagine?

One thing seems clear: simply getting rid of money is not the
solution, no matter how bold we are, if we are realistic
about this century. (This email is not the right place to speculate
about future centuries.) We absolutely need market mechanisms.

It was a great pleasure to have a three hour discussion on the
organization of electric power markets in May at Tsinghua
University, which some see as the real intellectual base of the
government of China. In a more detailed talk there,
I argued that we cannot maintain progress in these areas if we fall
into either of two extremes:

(1) The old idea of command allocations of goods, not based on
feedback or consumer choices, without prices;

(2) market fundamentalism, which makes the crazy error of imagining
that ANY Nash equilibrium (outcome of a market process)
is a Pareto optimum (win-win, most efficient overall possibility).

We had intense critical and self-critical discussions of many points
in those three hours, but I did not see any discussion
or debate at all about this basic point. The need for RATIONAL MARKET
DESIGN, to make outcomes
more Pareto optimal, was a common basis.

Of course, it helped that the people at Tsinghua University were all
sophisticated in mathematics.

For example, they all knew that the ancient input-output methods used
in the Soviet Union
years ago are totally obsolete. They were bad linear approximations,
caused in part by primitive computers.
Electric power - one of the leading sectors for economic progress --
has turned many old ideas on their head,
and teaches us many lessons about how to think, when building real new
systems that actually work.
H.G. Wells would be delighted.

In most of the US, the choice of electric power generators and
consumers and transmission is decided,
hour by hour, by a central regional authority, based on a central
computer program. Instead of input-output analysis, they use mixed
integer linear programming (MILP). From one viewpoint, this is far
more socialistic (and scientific) than anything the Soviet Union ever
did: commands go out to all producers of power all over a huge region,
instructing them every five minutes exactly how much electricity to
produce in that five minute interval, all computed by a gigantic
computer program running in a central location, linked
to the planning system for multiyear investments in generation and
transmission as well. Yet the inputs to that computer program are
the bids and preferences of generators and consumers; in essence, the
computer program IS the market. Careful studies
of auctions and gaming and how to avoid monopoly conspiracies were key
parts of the design of the computer program,
integrated with the analysis of optimization algorithms. And there are
efforts to improve and upgrade these kinds of computer algorithms, to
support better and more rational investment decisions in this sector.
There are even some "virtual bids"
which allow financial people to act in this sector, but carefully
designed to make the impacts beneficial.
(There are a few wrinkles still present here and there, like the
California hour-ahead market, but they are working to iron them out.)

One crucial lesson: "price signals" -- duality measures -- are
essential to such optimization programs. From the mathematics,
we cannot escape prices. That part of capitalism we cannot escape in
this century (and again, I will not speculate beyond that here).
The question about prices is how to get them right, and how to develop
better algorithms.

===================================

But: what about the current global recession (at least in OECD and
many other nations)?

For example, could we do with money and interest rates what we have
already done with electricity,
by finding a way to use computer algorithms to avoid "Nash losses" and
"monopoly losses" and "gaming losses" in international transactions,
with inputs from independent players which still respect their
independence and solve the multiplayer Pareto
optimization problem? The MILP computer tools are not powerful enough,
since they do not have a way to
represent risk/uncertainty, but new algorithms are becoming available
which do. This is an interesting subquestion to keep in mind.
Perhaps it could even be a distinct thread, for those who want to set
up a separate thread.

BUT -- I think we are called now to focus on developing a more
concrete (yet more complete and holistic) understanding
of the current recession. We need to grope towards the kind of
understanding which better supports concrete hopes and visualization.

The financial crisis today reminds me a lot of the global energy
problems, which I claim to understand quite clearly now -- after
40 years of working hard to see them more clearly, with jobs which
made it possible to focus very deeply on all aspects,
all the way from quantum physics to legislation and politics (even
though no one on earth has "solved" the last two).
It is hard for me to remember what it is like not to see the issues
clearly... on energy... but for the world
recession, it is easy enough, since it is clear that neither I nor
anyone else really sees the full challenge clearly.
Again -- I am talking about the challenge of what changes we would
need, in the shortest time at minimum pain, to get out of the
recession altogether, and not just solve the firefighting problem
which the President is discussing today ten minutes from here.

A key part of developing that understanding is to partition the
problem into manageable pieces... at least to begin... and
to learn which variables to focus on and how, to get at least a
first-order understanding of the dynamics.

For the recession, I would propose that we decompose the problems as
follows, in our early thinking:

(1) What would be the "perfect" solution, say, for the US or EU alone,
if they did not have to worry at all about capital inflows
and the supply of oil and things like that? What is the "one player
optimal solution/structure"?
(Many of the discussions in Washington and Brussels tend to assume
that implicitly, or represent the rest of the world
as a few gross constraints.)

(2) How can we address the crucial and unpleasant fact that the
nations of the world are stuck in a situation
where the "Nash equilibrium" -- the outcome if we each optimize
separately -- is far inferior to the "Pareto optimum,"
what we could get to if we truly cooperated at the highest possible level?

Crudely -- it seems to me that the global Pareto optimum probably
would involve "escaping from the recession overnight."
As per Obama's statement -- this pain is probably unnecessary, in my
view. But it also seems to me that every nation
on earth is heavily constrained by international factors (the kind of
pain which Latin America has a great of experience with,
studied by first-rate economists the rest of the world needs to study
more), such that the Nash equilibrium today
most likely IS what Obama may be hoping for today... a return to the
safe 10% unemployment of a few months ago,
without a new Great Depression, without a vast liquidation of public
schools, with a gradual return to earlier conditions
over 4-12 years.

I would expect Rosa to ask - what about the human and cultural
dimensions? They are hugely important too, but
this email is already long enough... I certainly would day that
aberrated thinking encouraged by people like Rupert Murdoch and
excessive concentrations of power in general are major reasons why
Obama is in danger of ending up with much worse than what he hopes for
today... I did notice Arnoldo's recent mention of Hobbes, whom I have
been thinking about a lot myself this past year
(or 3 years?). I do want to discuss some mathematical aspects of the
cultural side... but not in this email.

A new out of the box international approach would mainly involve (2).

The European Union has actually faced the same issues as (2), inside
its borders -- as in Greece versus Germany.
In the Financial Times, Jeffrey Sachs had a very important article on
Greece which I mentioned before to a few of you,
which is a crucial piece of the puzzle. But let me briefer here...

Both for Greece and for the US, the key question is: "Can we count on
interest rates staying low enough that
they have the ability to get out of the recession, at least eventually?"

Complex as the world economy is, we could do a decent first-order
mathematical analysis (by computer or in our heads,
especially if we can implement algorithms in our heads) ... by
modeling the global economy
as a system made up of very complex "nation" components, with only
four variables connecting them --
state bond interest rates, currency exchange rates, money flows, and
aggregate trade flows.
What is the minimal system to keep those 4 from going nuts? Four
numbers by a few hundred nations sounds
much smaller than what we do with electricity every five minutes now...

If the international system could somehow must keep these four
variables (especially interest rates) from "going nuts" and
from forcing us into accepting recession within each nation, and if we
all could really trust the system to do this,
then ... it may be that each nation would have more out-of-the-box
options available to get out
of the recession in a mere year or two, without waiting 4-12, and
without risk of a true new Great Depression II.

In sum: that's a slightly more focused version of task (2). But of
course, task (1) also takes some
real thought as well. Balances BETWEEN groups in a nation can be
similar in a way to balances
across them.

The Financial Times has reported some new thinking about Greece, which
begins to reflect Sachs's crucial insights,
but have they gone deep enough here into what it takes to do the best
one can do with the Greece situation, on its own
and to conceive the more general principles to use here which could be
generalized and perhaps even mathematicized
for the global system?

It is so ironic that we heard so much enthusiasm about the coming
crisis of capitalism in Rhodos a few years ago --
right in Greece!

And so many concrete factors need to be assimilated here... for
example, some Greeks tell me that it is not the tax rates but
the degree of tax compliance that would be most effective to address
right now...

=======

All for now.

Please forgive the length of this ... and the gross incompleteness,
which I freely admit...
but the questions are important. I hope that others will be able to do
more justice to them than I have.

Best of luck,

Paul

========================================================================
==============================================================

Since avoiding crazy interest rates is a key requirement for a
new, less depression-prone world system, the question naturally arises --
what SHOULD interest rates be, in a sustainable world?

Of course, there is the prime guaranteed interest rate (which state
borrowing should
be based on if possible), the interest rate for cases with zero
probability of default,
and the many other cases which can be more local and low-level.

In the Journal Energy, back in 1990 or so, I argued for an "ethical
interest rate."
In a sustainable equilibrium economy, a real interest rate of ZERO is
the interest rate
which would express an ethical decision that future lives are just as
important as present lives,
and should not be discounted. Thus it is perfectly reasonable to think
about zero real interest rates
for a long-term situation, not only for the period of recovery from
recession, as now.

But when there is growth in real income per capita, linked to new
investment opportunities,
an ethical interest rate (as discussed more in that paper) would at
times call for more, and the system should accommodate these kinds of
variations. (The idea was roughly to assume something like utility
functions
of the form ((1-r)**t)*log(Y), where the underlying interest rate r is
pushed to zero, but the logarithmic relation between income and
utility can justify some borrowing from the future WHEN THE FUTURE IS
RICHER. )

While my email mainly addressed OECD and others in recession in the
shadow of OECD, Brazil and China
also face major economic challenges. The President of Brazil has
laudably supported a goal of lower interest rates,
which would hopefully help people looking for better housing in
Brazil, but faces challenges in how to achieve that goal
in the complex world we are now in. China's new economic challenges
are entangled with other challenges,
in a complex way I have yet to meditate on enough to see simple
structure... though the energy aspects are clear enough.


==========================================
===========================================

Technical addendum:

Economists have known for years that market efficiency theorems like Arrow's
make many key simplifying assumptions. To come to terms with reality, we need to understand
these assumptions, how they are violated, and how to move on.
Long ago, Joan Robinson told us the basics about imperfect competition and monopoly sorts of effects. In another email on Greece, discussing the true meaning of Sachs' observations, I talked about reflexive phenomena, particularly as we find there are multiple solutions to the equations across time. (Hey, people like Feinberg have worried about the same thing in quantum field theory!)

One other thing is increasingly important. It is important that "information does not obey the assumptions for private goods." As we enter an information economy, that's important -- but how?

The designs for even the most basic (spatially complex, temporally unstructured) adaptive critic system involve feedback signals which are like price signals, as I just noted. BUT... even the simplest require TWO flows, one for derivatives of value and one for derivatives of error. When humans and an economy MIX the two, we end up
with a kind of conflict of interest situation which... blows it...
and the really nasty problems in Washington DC this very day are in some ways just a reflection of this larger, subtler and relatively stubborn problem.
Traditional conflict of interest laws -- like feeble campaign finance reforms,
watered down by courts "living in another world" under pressure of well-heeled corporate lawyers... don't begin to restabilize the system.

... BUt... all for now...