In the real world, we have an equation the cracking of which could save mankind.
*This text contains very minor spoilers regarding the movie Interstellar. Ones that should not destroy the movie experience.*
After not having gone to the movies in ages, I recently watched Interstellar with a bunch of friends. It sparked a lot of deep discussion, from physics and evolutionary biology to psychology and ethics.
But personally, the scene that touched me the most was the one where Murph, the daughter of the main character, visits the office of the theoretical physicist trying to crack the gravitation equation that would allow saving Earth’s current population.
Murph points out that the professor hasn’t questioned some very basic assumptions about a key variable: time. She describes it as trying to solve the equation with both hands tied behind his back.
The reason this struck me is that, in the real world, we have an equation the cracking of which could save mankind — and which academics can’t seem to be able to crack. And similarly, they are hamstrung by sticky assumptions related to time.
And it’s not an equation of physics but the equation of macroeconomic balance.
There are at least two time-related, restrictive assumptions:
- That the amount of work done by an employed individual (his work-time) is a constant.
- That people’s “time preference”, impatience, cannot be negative in the long run — and hence the possibility of negative real interest rates is not needed.
Ok. Quite a few concepts there to explain. But economics is not rocket science, nor theoretical physics (although it involves a lot of “relativity”).
At the end of this post, we’ll explain how these assumptions are destroying humanity.
1. Assuming a human being to be the unit of labor
The first assumption is the root of the whole “job creation paradigm” governing public economic discussion. It is taken for granted that a reduced need for work will result in unemployment — in less people being able to participate in work at all. This is a logical conclusion only if one assumes that a person is always either full-time employed or unemployed. If one assumes that the unit of labor is a human being.
If instead, we considered a labor market where people actually had a realistic option of also working less (in the medium term) when they don’t want to spend or invest any more, the idea of creating work to prevent unemployment would seem ridiculous. We’d understand that unemployment essentially is a mismatch in supply and demand — that it simply means that earning opportunities aren’t given to those most willing to spend and invest. That those who would like to buy work from others don’t have the chance to work themselves.
This quantization of work into “jobs” and the game theoretical setting that causes it are explained briefly in this video:
More on the tyranny of job creation and preservation in this “A four-letter word” intro video:
(Of course, not all work is sensibly measurable in hours or other time units. This includes sales, managerial positions and more creative work. This and the idea that “sharing work” requires “restricting work time” are two other time-related assumptions regarding work that we need to question.)
2. Assuming people always to be impatient (to spend) — against empirical evidence.
To understand the second assumption, we need to understand the function of interest. No, interest is not “rent for borrowed money”. Debt is not borrowed money.
The risk-free market interest rates is the “time price” of everything: how much more/less you get with your savings by postponing your spending further into the future. It essentially determines how much of next year’s goods you get with this year’s work.
And the function of this interest rate is to keep the momentary supply and demand for labor in balance. One cannot sell if no one buys. We can only “store work” by making real investments that help production in the future, such as R&D, training and installing new production capacity (incl. machinery). And technology strongly limits the profitable investment opportunities available.
The only need to reward people for saving is to ensure that we have enough labor available today to be able to make the currently needed, profitable real investments.
This “impatience” is the other cost of capital in addition to the risks involved in the real investments. The profit required for investments is essentially the return one can get for risk-free deposits plus a risk premium that depends on the perceived riskiness of the investment.
If people are willing to save more than is needed for available profitable investment opportunities, that means that people are rewarded too much for saving — that the interest rate is too high.
Many economic schools try to justify constantly positive interest rates with the assumption that people are chronically impatient. Essentially they assume that people would always postpone their work for the future and recklessly spend on debt unless they are penalized for being in debt and rewarded for saving. (For example Austrian economists Friedrich Hayek and Ludwig von Mises jump to this conclusion — a conclusion debunked by e.g. the later Austrian economist Robert Murphy)
It does not take much introspection or empirical observation to question the universal validity of this assumption.
For the past 5 years, the indisputable evidence have been right in front of our eyes: people have been willing to save in net even at a real loss. The real interest rate (the nominal interest minus inflation) on deposits has been negative for a while — and still aggregate demand has fallen far behind the supply of labor. The need for the government to fiscally stimulate the economy to avoid deflationary pressures is a clear sign of this.
It is of course possible that a lot of this saving is caused by economic uncertainty and is not a matter of “intrinsic” time preference. It is also probable that most of that saving is done by “the 1%” who have too much income in any case and other people who accumulate wealth for the sake of accumulation — as a game in itself. But that is irrelevant. If people overall would want to save too much and that leaves some without earning opportunities, the return for saving is too high. Period.
However, preserving savers’ purchasing power and this minimum wage of capital seem to be unquestionable objectives. Or, rather, they are considered laws of nature or natural constants.
We only have one Earth
This is probably the most central lesson in the film. If we don’t make sure that our Earth remains in a condition to sustain life and ourselves, our chance of survival are slim.
What do the assumptions of full-time work and “positive time preference” have to do with saving the Earth and mankind? Everything. They are the main factors sustaining our economies’ severe dependence on constant growth.
- The need to keep people fully employed by any means is the main reason why we need to stimulate growth so desperately.
- But also, if the economy does not grow, we won’t have enough investment opportunities available to meet people’s desire to save at chronically too high interest rates.
With labor quantized into jobs and with the minimum wage of capital set in stone, even a slight decline in growth risks causing an economic collapse.
Now, there’s nothing wrong with growth as such. The problem is the dependence on growth. It is what prevents us from setting proper prices on environmental externality effects and preserving irreplaceable natural resources for future generations. Our impotence to counter these threats risks making Earth uninhabitable for us, as had happened in the afore-mentioned film.
Ironically, the dependence is also the main obstacle to desired growth.
If supply really met demand — in aggregate and on the individual level — we’d have a growth independent economic system that facilitates all desired economic growth. There would be no obstacles to for example taxing fossil fuels out of use and to strictly preserving endangered habitats and the invaluable biodiversity they hold.
Read more at rootbug.org .
And check out the brief Root Bug in a Nutshell videos: