In the last chapter, we looked at the current state of the system in the last thread and today we'll do a causal analysis of this current state and try to define the problem in a manageable way.
In the current state, there're a few issues we all agree on irrespective of which side of the political spectrum you're on. viz. Wealth gap, Environmental degradation, and personal wellbeing degradation. Let's start with the most obvious - wealth gap i.e. capital accumulation.
Causal factors of Capital Accumulation
can be analyzed at macro, micro, and behavioral levels
Macro:
The expenditure account and the income accounts of measuring the GDP gives a mathematical base to look at causal parameters. GDP identified as “Y” in equation form, include Consumption (C), Investment (I), Government Spending (G) and Net Exports (X – M).
Y = C + I + G + (X − M) is the standard equational (expenditure) representation of GDP.
In the circular flow model, the household sector, provides various factors of production such as labor and capital, to producers who in turn produce goods and services. Firms compensate households for resource utilized and households pay for goods and services purchased from firms. This portion of the circular flow contributes to expenditures on consumption, C and generates income, which is the basis for savings (equal to investment) and government spending (tax revenue generated from income).
Investment, I, is equal to savings and is the income not spent but available to both consumers and firms for the purchase of capital investments, such as buildings, factories and homes. I represents an expenditure on investment capital.
Income generated in the relationship between firms and households is taxed and the remaining is either consumed and or saved. Government spending, G, is based on the tax revenue, T. G can be equal to taxes, less than or more than the tax revenue and represents government expenditure in the economy.
Finally, exports minus imports, X – M, references whether an economy is a net importer or exporter (or potentially trade neutral (X – M = 0)) and the impact of this component on overall GDP. Note that if the country is a net importer the value of X – M will be negative and will have a downward impact to overall GDP; if the country is a net exporter, the opposite will be true.
But the system has too many stakeholders and parameters that it becomes unmanageable hence people like @naval call Macroecon as BS
From a system dynamics standpoint, each additional parameter adds to the complexity exponentially so we will go one level deeper - micro Also, there are enough "alternate" methods being explored.
Micro
so where do we start? the macro value of an economy is an aggregate of the micro value creation organizations. And a "productive" organization (firm)'s output is
Output ~ f (capital, labor and productivity)
Now, the first-factor capital is what the current system is built on and hence "capitalism". We've overleveraged this and that's one of the reasons behind wealth inequality as there Is only a very small fraction of the world who understands and exploits finance. The ethical issues of the economic crisis are related to a relatively new form of capitalism, high-leverage finance capitalism as documented and analyzed by Richard Nielsen for 2007-2009 economic crisis. source
4 types have been considered
- hedge funds
- private equity leveraged buyouts
- subprime mortgage banking
- high-leverage banking
Structurally related problems with the 4 types of high-leverage finance capitalism converged in a perfect storm of economic conditions. Leverage ratios of many financial institutions from 1980 to 2008 rose from traditional levels of 1:10-to-15 to over 1:30 & even 1:50 i.e., in traditional banking and finance, a 1:10 ratio meant that for every $1 of secure, invested capital, a bank would borrow and lend $10. With a leverage ratio of 1:30 or 1:50, for every $1 of secure, invested capital, financial institutions would borrow and lend $30 or $50. This exponentially increased both the potential for up-side gains and down-side losses. E.g., with a leverage ratio of 1:30, a 10% positive return would represent a $3 return on the $1 of capital before expenses, such as interest charges.
Now the #Crypto world has created an even better (productive) system that's open 24*7 & increased leverage to 100x. #DeFi For eg: 100x futures on #KuCoin. The highest leverage KuCoin Futures offers is up to 100x. If a trader uses 100x leverage to long 5 BTC at 5000USD, he'll need 0.05 BTC (fees not included) as margins to open the position. If the price of the contract goes up by 1%, the trader will profit 100% of his margin.
Add to this the power of quantum computing's processing power and the quantum machine learning optimization algorithms which will eventually make this an algorithmic war with no real link to the "real world"
Enough has been talked about how the stock market is not a real barometer to measure the wellbeing of an economy. The main reason behind #cryptocrash is the way we "value" things. We've built a price-based frictionless capital movement system. Over-leveraging of trading and investments by financial institutions and, too much subprime consumer and subprime corporate debt are key causes of the 2008 worldwide economic crisis. Doesn't the current state seem very similar except the blow can be devastating.
If we've over-leveraged capital and built a highly productive capital movement system isn't it imperative to start with the next factor in the output function - labor? So the problem with the movement of labor lies in measuring the frictions in the labor market. So that would be the next logical step in balancing the labor component of the output function.
The next factor is productivity. The problem with this is the measure of productivity. What are modes of value creation? Finance? innovation? Creativity? How do we differentiate between value creation and value extraction; productive and unproductive activities? Economists like @Mazzucato are looking to arrive at a theory of value that will help resolve some dilemmas. But it was first described by French economist François Quesnay in 1758, who laid the foundation of the Physiocratic school of economics.
"Quesnay believed that trade and industry were not sources of wealth, and instead in his 1758 manuscript Tableau économique (Economic Table) argued that agricultural surpluses, by flowing through the economy in the form of rent, wages, & purchases were the real economic movers.”
This model is deemed as probably the first spreadsheet and system model for en economy. They tried to simulate permutation of various scenarios only because they cared about the “source” of value. In classical economics, value usually refers to the value of exchange which is separate from the price, which William Petty classified into the market price and natural price. Market price is momentary with transient influences, while natural price captures systemic and persistent forces operating at a point in time.
So that covers all the factors from the output function. We know where to start when we start looking for solutions.
Labor frictions and rethinking value. This eventually leads to relooking at the way firms are measured in value.
Unit Level
The next level to understand capital accumulation is at the unit / personal level. The unit, in this case, is the individual/person. The credit score is the only way to measure the value of an individual & a company is a way to measure the value of an organization.
Is there a better way to measure? China is testing out SocialCredit scores and the #Crypto world is exploring reputation scores.
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(MANA): Decentraland is a virtual world where users can create avatars to interact with other users. These avatars can buy LAND and other resources through Decentraland’s native token, MANA, and trade in them. While it is essentially a game, Decentraland combines cryptocurrencies, NFTs and a free market economy to create a virtual world accessible to everybody, no matter where they are. One of the most prominent players in the metaverse revolution.
The great attrition is an indicator of the search for wellbeing as a society with abundance is really the problem with a larger part of the developed world.
Can we move from credit scores to well-being scores as a measure of value & organize people around their wellbeing optimizing parameters in better organizations structures? is a logical path to continue this research.
Summary: In this thread, we've arrived at a framework to tackle the problem of "Wealth Gap" & Search for wellbeing and meaning.
Next up, we shall explore the past solutions we've explored as a society to learn the best practices and skip the pitfalls by being aware of them.