Funny Thing about Money and Machines

Of mice and men

Despite what most think, biology — reproductive success and predator-prey relationships in Darwinian survival of the fittest — is an economic system. Conversely, Adam Smith’s “invisible hand” is actually evolutionary process. This is a bit ironic because both liberal and conservative schools of economic thought obsessively seek an equilibrium formulation for supply and demand relationships as a basis of predictive econometric models. But it is a fool’s errand. Equilibrium in evolution is an aberration. It does not exist. The only constant in the universe is change.

Like all evolving systems the capitalist economic system moves from self-organization, to growing complexity, to instability, and finally nonlinear change. The real source of predictability lies in this sequence, which means there are only trends and nonlinear events. In the latter case, it means the prevalence of seemingly rare but consequential nonlinear “black swan” events is really not a rare phenomenon. Thus, as Kahneman, Taleb, Cassidy and others have noted, beyond following trends and luck there is no sense economists actually know how capitalism evolves or can recognize nonlinear change events.

That said, it now seems obvious that we are living through a period of profound systemic economic change. Yet, the only economists with post 2008 credibility, behaviorists, see the situation as a trend analysis issue. Specifically, a collective “free will” trend, which is too complex to model and thereby confounds and precludes any predictability. So, unfortunately, this, too, misses the proverbial forest for the trees. It is like trying to analyze a survival of the fittest scenario in a biological ecosystem solely on the behavior of a single species (think human hubris).

Money, get away — Get a good job with more pay and you’re okay*

As noted above, all evolving systems exhibit the trend of growing complexity that generates systemic instability and eventually leads to nonlinear change. This trend in biology, for example, reflects an ecosystem’s survival of the fittest struggle, which acts as an invisible hand steadily increasing the complexity of survival for each species in it. For any species this trend is played out as a dialectical dance between what Richard Dawkins calls the selfish gene on the individual level, and the extended phenotype on the species level.

Historically nonlinear biology change events are readily apparent, with dinosaurs being the classic case. Aside from dinosaurs, fact is the average lifespan of all species is ~ 3–5 million years. Again, the invisible hand of sequential trends and nonlinear events is exhibited in all evolving systems.
Thus, what is absent, yet crucial to understand and appreciate in any discussions about capitalism is that it is an evolving system. Thus, akin to the interplay between genes and phenotypes in biology, we can view capitalism in terms of an interplay between creative destruction and wealth creation respectively. With creative destruction there are really only four key variables:

• Capital — now abundant globally, invariably leads to chasing ever better returns (i.e., yield).
• Resources (i.e., food and commodities) — a growing global population consumes ever more, invariably leading to price increases and technological innovation to stabilize costs.
• Labor — rising resource costs and investor pursuit of better yields invariably leads to cheaper foreign labor markets and technological augmentation.
• Technology — labor augmentation shows investors a path toward better yields, invariably leading to technological substitution for labor.

Next, as for wealth creation, there are really only three approaches to creating wealth:

• Cash flow — This is about baseline productivity — doing something faster, better or cheaper than competitors — which invariably compresses margins and profits and makes scale critical.
• Transactional — This is about a large income spike from technological or service innovation, which invariably leads to converting the innovation into a commodity for cash-flow businesses.
• Casino — This is about financial indexes and high frequency trading algorithms, which invariably leads to momentum and options strategies but, ultimately, primarily benefits algorithmic scale.

As is readily apparent the most common element — trend toward increasing complexity — in both creative destruction and wealth creation, is technology. This should hardly come as a surprise. As George Gilder notes, capitalism per se is an information system whereby the accelerating velocity of shared global information flows increasingly corresponds to money flows. Indeed, as Simonson and Rosen note in a civilizational context, the Internet is not simply disintermediating price and middlemen. Rather it is disintermediating virtually all domains of asymmetrical knowledge. The result is a cascading of volatility — growing complexity leading to instability — throughout all markets and capitalism itself.

Money, it’s a gas — Grab that cash with both hands and make a stash*

As in all evolving systems, capitalism’s invisible hand reflects an inherently obsessive, single-minded orientation to optimize the system itself. Akin to prior economic depressions, the instability created by the 2008 financial crisis destabilized the entire global economy, taking capitalism to the edge of a nonlinear abyss. Only the beneficent alchemy of central bankers — pulling bad debt onto their balance sheets and pushing (i.e., flooding) the global economy with new money (i.e., quantitative easing) to pull economic demand forward in time — saved the day. However, two systemic ecological changes are noteworthy.

The first ecological change was an ironic consequence of central bank alchemy. Specifically, they pushed all investable capital toward riskier activities, most notably technology. This has added fuel to an already breathtaking rate of technological innovation. The other ecological change reflects Adam Smith notation that capitalism had a bias toward monopolistic practices. In this respect, while nation-state antitrust regulations worked reasonably well there is no global corollary. As a result huge global pools of money — state enterprises, sovereign wealth funds, and various black/grey/shadow markets — breathed new life into monopolies at unprecedented scales.

Problem for these huge funds is that it is hard to find opportunities without impacting them negatively. So, like parking money in bonds for a consistent nominal return, these global funds seek to dominate commoditized cash-flow industries with sufficient scale and market share to withstand serious margin compression. Ultimately, accomplishing this requires autonomous systems effectively devoid of labor.

Money, it’s a hit — Don’t give me that do goody good bullshit*

A key point to realize about technology is that our civilizational success as a species has been a reflection of our intentional and systematic storage of knowledge in technology. In the context of capitalism — as reflected in both cash flow and transactional forms wealth creation — the end result is the same as with casino wealth creation and global monopolies. That is, autonomous systems (i.e., algorithms) must come to dominate capitalist economics.

Said differently, primary source of wealth creation in capitalism — the trend accelerating complexity toward systemic instability — has become an arms-race whereby technological innovation must increase in scale without increasing the labor used. So, optimizing capitalism requires ever more technological innovation, which will invariably lead to a nonlinear event — for good or ill — without the need for labor.

Today, while in absolute number of people in the global labor market is larger than any time in history, we have probably reached peak employment. While inequities inherent in capitalism are already controversial they are likely to grow in intensity. While reputation based, shared or gig economies makes sense in a low or post scarcity economy it is likely to further concentrate political power. While income inequality is the norm in history, the end result of more autonomous systems is likely to be widespread income dislocation that will be more disorienting, rocky and painful than anyone imagines. Thus it’s reasonable to expect the sociopolitical system will become highly destabilized as capitalism evolves further toward a nonlinear event.

Money, it’s a crime — Share it fairly but don’t take a slice of my pie*

Contrary to human hubris, economic evolution is not about supply and demand, buyers versus sellers as traditionally framed. Rather, as an evolving system it is what Kevin Kelly describes as an “infinite game,” or, as I prefer, “maximizing evolvability.” This means ever more capital chasing ever more technological innovation toward an epic nonlinear event of historic proportions. Numerous luminaries — Peter Drucker, Milton Friedman, Eric Drexler, Murray Bookchin, Diamandis and Kotler, among others — long ago saw capitalism’s optimizing obsession ultimately leading to some form of “Post-Capitalist” and or “Post-Scarcity” society.

Look at the situation this way. Capitalism and technology were always really two sides of the same coin. They exist in a symbiotic relationship, which reflects the invisible hand of evolution itself. It is a single self-actualizing evolving system that is becoming ever more tightly coupled and evolving faster than any other evolving human system. Together, like the co-evolutionary interplay between genetics and phenotypes in biology, their co-evolution is now a force of nature enabling humanity to focus on ever more complex — higher-level — self-actualizing tasks.

While masked by steroidal global central bank stimuli, it appears humanity is rounding the final economic turn and is coming down the home stretch of capitalism as an evolving system. Increasingly technological innovation is the now the central source of wealth creation. The irony is, of course, that this race simultaneously accelerates margin and profit compression that inevitably acts as a deflationary force.

Thus, the movement toward autonomous systems points to the final stage in the capitalist economic system’s evolution. Hope is that this post-scarcity, post capitalist world provides sufficient abundance for a self-actualizing avocational existence free of traditional “career” work. Problem is that in terms of the evolving governing sociopolitical system there is no applicable precedent for understanding this situation adequately — let alone the leadership vision or wisdom — to envision and take advantage of its potential. That, more than anything, is what will make the journey painful.

*Lyrics by Roger Waters, Pink Floyd, 1973

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