Economic Behavior as a Function of Information Theory

Serendipity. I was reading James Gleick's 'The Information' which goes into impressive depth and breadth on the nature of information while working up an essay for publication involving intellectualism as economic behavior and all the pieces of a puzzle came together.
Mr. Seller has a car. Mr. Buyer wants a car. They negotiate a price and complete a transaction. According to current economic theory they are 'setting' a relative value which can mean no more or less than that they are generating a value. Now let me recast the situation in Information Theory modalities, borrowing from physics.
Mr. Seller and Mr. Buyer are incommensurate systems of different histories, information, and value systems who are entangled by language, monetary system, and quantifying methodology. These entanglements then become the instruments, according to the auction price model, that 'generate' the value of the car. That is not the case.
Given, as Keynes said of the stock market, that 'a stock is worth whatever someone will pay for it', the car is worth whatever Mr. Buyer will pay. However, the relative value of the car as information preexists the transaction or entanglement. It is not 'generated'. It is 'discovered', thereby conserving information.
Auction price is, under these terms, not 'set' but 'discovered'. I think if equilibrium theory practitioners were to mathematically recast their arguments into information theory modalities, they would themselves 'discover' logical errors.
There are only a few books that are timely, important, and good reads. That sort of intellectualism is the subject of my essay in progress. Information Theory is a paradigm shifting discipline and if you know Thomas S. Kuhn's work and have resisted the efforts to trivialize and misuse that phrase, then you will appreciate the impressive nature of Mr. Gleick's tour de force.
Thank you for a wonderful book.
Do good and be well.

The Games People Play -

As we move steadily into the era of Game Theory, a number of observations are apparent. The first is that 'game' cannot be defined, as Wittgenstein proved. It is a form known from before in the Kantian sense. That intrigues me. The second is that a proper game properly played is a moral exercise. In the area most popularized in Game Theory study, it is a moral and economic exercise. That pleases and surprises me.
During the golden age of Liberalism in the postwar period, there was much talk of man's inhumanity to man. Today we would say human beings' inhumanity to human beings. We have improved our language but vicious exploitation described in a PC vocabulary is still vicious exploitation. If a game is properly played to a moral precept then only in a failed game would inhumanity occur since no economic game could be inhumane by design or logic. It would make no sense and only make cents for a limited time.
We have apparent games going now that exploit human beings for the benefit of other human beings. There exists no morality of game play that permits this. These are failed games eating away at the fabric of society. Anytime you are cruel to another human being it is an aberration. It is not a game. It is not moral and it will not stand the test of economic success.
Be well and do good.

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Economics, Love and Morality

First the obvious, those are three different things. Economics we have all come to agree is a risk and reward market game played with money. Morality, as Game Theory is discovering, is a strategy in game play. Love, however, is an incommensurate universe to those two. Money influences people and there is such a thing as dominance and submission. Morality is supposed to constrain behavior and there is such a thing as moral authority, but Love is outside both of those conceptual realms.
Love is hormonal and beyond comprehension. Communication is dependent on some degree of hormonal synchrony and, as anyone who has had a pillow talk will tell you, communication there is at maximum and as cerebral as one cares to make it. Love is not economic and not moral. The heart goes where it will when it will and that is that.
Be well and do good.

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Derivatives as Deficit Spending

There is much talk in Washington these days about reducing deficits in order to manage the public debt. However, there has been insufficient processing of the recent recession and no mention of derivatives increasing the marketability of questionable loans and therefore the liquidity of the credit markets has been made. Essentially, taking a junk mortgage and tranching it at AAA is printing money. The underlying economic conditions that would normally be reflected in a AAA instrument do not exist so essentially the difference in marketing the AAA from the junk is new money. Nobody has noticed that.
It is, in fact, borrowed new money since the consequences of mortgage default are amplified and must require extra reserves and possibly public financing. We learned that lesson in the last five years. We just haven't managed to adequately characterize the phenomenon. It is a form of deficit spending.
Now, the Federal Housing Agencies, which effectively are what Fannie Mae and Freddy Mac represent have proposed a derivative for multiunit housing to shore up demand. If it bubbles and bursts we'll all be liable for it and it's completely off ledger. When Pandora's Box was opened, derivatives were found inside.
Driving this insanity is the postindustrial concept of magic money. Everybody should have a nice house in a gated community. Therefore, everybody will have a nice house in a gated community. This is Disneyland after all, isn't it? We do, as a nation, prefer trial and error to doctinaire approaches and we are in the process of proving absolutely that Disneyland is a nice place to visit, but you wouldn't want to live there. You have to pay for those rides and, as the old saying goes, money doesn't grow on trees.
Be well and do good.

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American Postmodernism and the Consumerism Ethic

Consumerism is a household god in America and increasingly the world, the more money you spend the more money you have to spend. It's a simple ethic. However, like the economics of Keynes, it only operates in certain phases of the economic cycle. If you throw money at a recession, it improves. If you throw money at an innovation cycle, a rolling recession, it lasts longer and cuts deeper.
This is the conundrum facing postmodernism everywhere but especially in America. We are not doctrinaire and we are not socialist and we have clearly reached the limits of the transfer of wealth that drives Keynes, postindustrialism, and consumerism. We are pragmatists and we are, economically, at our wit's end as to what to do next.
I have no answer. The answer fairly clearly lies in Game Theory and Schumpeter but the one is embryonic and Schumpeter is at least two different people, Mark I and Mark II. That leaves us with a trial and error best guess problem solving process. We will undoubtedly make huge mistakes and pay huge prices. That is not an unusual scenario in the American dynamic. We must be as humane as possible. We are all a lost paycheck or a bad investment away from needing some comfort.
Be well and do good.

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Markets and Intervention

First off, I want to be emphatically and absolutely clear about my personal, philosophical, and analytical position that the invisible hand of the market is NOT the hand of God. In the long run, and never ever forget Keynes' 'In the long run, we are all dead', markets are efficient but they are given to episodic insanity. A market is a lot like a pit bull, a magnificent animal but sooner or later it bites you.
There is no such thing as an efficient and friendly market. It one intervenes to make a market friendlier, less unstable, one reduces the efficiency of that market. Making a market really friendly puts it in Fantasyland and in Fantasyland markets fail massively as we have recently seen. There is no nice solution to the instability of markets. It is just the way it is. If we ever get a Game Theory model powerful and sophisticated enough to handle the stock market then rational adjustments can be made. If. And when.
Be well and do good.

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Postindustrialism and Postmodernism

A tremendous number of movers and shakers in this culture of youth have never heard the word postindustrialism and have no idea what it entails, yet it informs the very nature of our existence. Having its roots in the 1950's phenomena of Levittown and Disneyland, of freeways and shopping centers, of computers and television, it is an ill formed vision of the possible that is a Keynesian, oversimplified, and ill thought nightmare of economically unsupportable infrastructure, commercial, and residential blunders that constitute a Grand Design for life in the Future. It is not a workable concept.
Postmodernism has its roots in the liberal vision of a polycultural society of tolerance and participation. It is the wellspring of consumerism, the notion of a shift from production to consumption, formalized in market socialism. While it is European in style and socialist in practice, postmodernism has no necessity of any Marxist influence. I am a postmodernist and I am not by any measure a socialist. I am a pragmatist who sees the hope of the world in Game Theory and Schumpeter.
The critical limit of both postindustrialism and postmodernism is transfer of wealth whether the magic hand of postindustrialism, incidental Keynesian transfer, or the programmatic transfer of postmodernism, socialism. What we are finding is that participation is the limit of transfer of wealt. A socioeconomy generates only so much wealth and so much meaning and they are both zero sum games. We are desperately in need of a new economic model and desolately without one and twenty years away from a Game Theory/Schumpeter synthesis that could provide one. So we stumble on into the 21st century.
Be well and do good.

Unemployment and Real Estate

Unemployment is at 9% and has been high for years. The housing market is being made on oversupply of existing homes and decreasing prices. The relationship is clear. The situation, as a monolithic market, will remain in this dynamic until unemployment drops into the 5% range.
Anything over 6% unemployment constitutes a rolling recession. The term has been used before. A rolling recession is no more than creative destruction at work. So the net effect of the last 4 years is a severe general recession followed by a rolling recession. This, given the technology being implemented, could last the next ten years.
While the pattern is a natural innovation cycle, I cannot help but think that it is being made worse by the pyramidal effect of the machinations of Fannie Mae and Freddy Mac in the housing market. I cannot prove that but I have a sneaking hunch that it's true.
Be well and do good.

Real Estate Deconstructed

In an earlier blog I said that the real estate market was like an art auction. What did I mean by this? The driving force behind real estate is that everybody's got to live somewhere, but we often forget that there are three socioeconomic systems at work in this society, the value added socioeconomy, the found money economy, and pure transfer of wealth.
We have to account for where the money is coming from that buys the property. Like bonds, that money can be rated. The value added socioeconomy, business as we normally think of it, is AAA. That socioeconomy is growing steadily but wages are stagnant and productivity increases promise fewer people with more money. Disposable income is static. The found money socioeconomy, what I call Macau culture, is BBB. That socioeconomy is not doing well as participants in the value added socioeconomy are being more careful with their disposable income. Pure transfer of wealth is BBB-, junk. The limits of how much wealth can be transferred have been reached and the mood of the country is hovering near 'Devil take the hindmost'.
Art is dear and is promoted, not sold, to bidders. As the real estate market resolves the excesses of Fannie Mae and Freddy Mac, this will be exactly the same scenario in that market, custom homes of some aesthetic value in value added, tract homes of some personality in found money, and various forms of homeless shelters in transfer of wealth.
Be well and do good.

The Innovation Cycle

The Schumpeterian cycle, the innovation cycle, consists of innovative industrial processes that in simple terms destroy jobs and occupations and replace those jobs and occupations with different ones.
The fundamental failure of interpretation of Schumpeter's work as documented in the historical record of industrialism is the notion that pervades theories of entrepreneurship that innovation creates more jobs. There is no theoretical basis for this idea. Innovation creates different jobs not necessarily more jobs. We may actually find this out over the next ten years.
Certainly increased productivity means more profits which imply more discretionary income which can lead to increased consumption and more jobs. The question possibly being answered is whether there is a direct correlation between increased profits, discretionary spending, consumption, and jobs. The contraindications are reinvestment as indicated in a very robust stock market, a slightly lagging retail market which is tending to move upscale, and online retailing which is technologically, not labor, intensive.
If we are at a tipping point in the innovation cycle, jobs and occupations will not be replaced. This question and its answer should be the focus of of our attention over the next ten years and if a tipping point is indicated then our focus must be on the kind of society in which we wish to live.
Be well and do good.

Real Estate, Post-Industrialism, and the Schumpeterian Cycle

First of all, real estate is not an 'industry' as the word is understood in the value-added socioeconomy. Real estate is an art auction where true art is dear and bids entertained and no more an industry than Dali at his marketing best. It is, simply put, how industrialism shares the wealth and that is all it is.
People who are participating in the value-added socioeconomy need a roof over their heads certainly. That is a part of Maslow's hierarchy of needs, but the real estate market, for all its fundamental neccessity, is derivative of and incidental to the operations of that economy. Real estate is how industrialism shares the wealth and that is that.
Post-Industrialism, the most ill-thought and technologically delirious philosophy ever created, is the model that informs these late stages of modernism and affects, or infects, current models of postmodernism. It is no more than an abstract conservation of a theme park society without a thought given, at all, absolutely, to where one gets the money to pay for all those wonderful rides.The Schumpeterian cycle is the cycle of innovation and creative destruction that has been well documented in the history of industrialism. We are in a massive one of those cycles which promises productivity increases of 6% to 7%. We are also at the limits of incidental transfer of wealth, the magic hand of Post-Industrialism. There is a natural Schumpeterian limit on how much wealth can be transferred without impeding innovation.
We are going to learn some very hard lessons over the next ten years as unemployment hovers near 7%, the housing market remains moribund, and productivity soars. It is in the American character to learn hard lessons. It is the way of pragmatism. At some point we are going to have to recognize that society can only endure so much innovation without serious damage to the social fabric, that the innocent number used to represent the unemployment rate also represents human beings' lives being destroyed, that Post-Industrialism is no more than a blinding visit from Prometheus, filling our hearts with blind, and groundless, hope and that speculating in real estate is like speculating in art.
Be well and do good.

Psychological Spaces, Self-Realization, and Self-Esteem

A psychological space is the cognitive and emotional space which generates and is generated by our behavior. It is the abstract context of our lives much as the corresponding physical space we behave in is the 'real' context of our lives. The object of the behavioral exercise can be summed up in a nice dinner with friends. One eats, one talks, and one gains a sense of oneself. Certainly we do vastly different things, but they serve absolutely the end of a dinner with friends. To this point, within the context of postmodernism, there is no problem with this radical characterization of the problem of existence. However, human beings, being insecure in a hostile universe, must ask the question - what about legitimacy? That question jumps from postmodernism to pragmatism. Pragmatism says your psychological space is legitimate if your behavior is successful. What determines success? In America, from the beginning, success is understood as serving an enduring Interest as a market function to the benefit of oneself and one's society, which is no more than a socially valuable exercise in self-realization. That brings us to self-esteem. Can one be successful and have low self-esteem? I have known many such people and in every instance the low self-esteem was externally driven by conditioning, both incidental and deliberate. It is much easier to persuade someone to act against their interests if their self-esteem is low. Be well and do good.

Postmodernism and Romanticism

What is Romanicism? It is quite simply the denial of the superiority of Reason. I am a NeoKantian postmodernist. That makes me by definition, a Romantic. I believe that there are defining conceptual arguments contained in the brain at birth. Kant called these arguments, forms. These forms define our existence. To my mind, there are definitely three of these: God, game, and language. All of these preexist experience. I would entertain the notion that Love is a form but I'm not certain of it. The key to a form is that one cannot 'know' it. Therefore, if I am correct, one cannot know God, but one still must behave to His standards. That's difficult. Perhaps occult phenomena are simply a manifestation of God and a confirmation that one's brain is wired correctly. I would also entertain that notion. Be well and do good.

Pragmatism and Postmodernism

Americans are pragmatic, not as devout practitioners of a philosophy, but rather as an aspect of a national personality. We do not love idea for the sake of idea. We love idea for the sake of utility. Plato might have written, 'The Republic'. We created one. We are pragmatists. Pragmatism does not hold dogmatic Truths, only tentative truth. What is is what works. It is a perfect fit for postmodernism. It is a fit so perfect that cultural postmodernism could be said to be an occult codification of pragmatism. There are many manifestations of postmodernism, philosophical, cultural, economic, and political. They differ from each other and internally are not the same for all people. There is no large Truth to them. We all have our personal myths, our truths, that drive our psychological spaces and so our behavior. Do occult phenomena exist? Postmodernism answers, if they do for you. Pragmatism answers, if they do for you and your behavior is successful for you. We cannot ask more of a philosophy than personal success. Be well and do good.