The Society That Binds Us

Humans don't have particularly imposing physical attributes in comparison with a lot of other organisms, even those within our own mammalian class. Yet our population has grown from just a few million to nearly 7 BILLION in the last 12,000 years or so. Chimps have over 98% of their SNPs (considered the functional part of DNA) in common with us humans, yet they haven't exhibited the same level of explosive population growth and control of their surroundings. Some theorize that our social nature has been a key contributor of our ascent. Matt Ridley, in chapter 2 of his book "The Rational Optimist", makes the case that specialization and trade were the uniquely human construct that became the driving force behind our rise. Not large brains, opposable thumbs, cooking, toolmaking, communication, or unique genetics, all of which can be exhibited by other species. Granted these were also advantages that could have contributed, but Ridley believes these things alone were not enough to explain our meteoric rise.

Regardless of whether Ridley is right or not, it seems clear that humans are social beings with a long history of associating together and with generally positive outcomes for doing so over the long term. But our interdependence has even deeper implications, particularly economic ones, that I want to explore.

Today there is virtually no land in the world that is unclaimed by a sovereign state. There are very few anarchist settlements that are allowed to exist by these states. When a person is born today, they are born into a society with certain preexisting governing rules. Even those who live "off grid" are likely to come into contact with other people and in some time frame will be affected by the actions of other humans. Further, a person today is born into a preexisting set of economic and ecological conditions. Because of sheer population, private land and resource ownership, wealth and neighborhood disparity, high likelihood of an urban birth (where people are less likely to produce agricultural goods or be self sufficient), and other factors, every person's economic starting point is dictated by the structure of society. No one's economic fortune is independent from all other humans. There are individuals and agglomerations of individuals (corporations and other organizations such as governments) that control access to water, food, materials used for building, etc. All the things you need to survive in this world, and all the things you desire as you move up the rungs of Maslow's hierarchy of needs, must be earned by providing something of value to other humans (or given access to, by other humans). The human condition, now more than ever, is dependent on others. Dependent on others' wants, work, planning, charity, and connectivity. Currencies, governments, and central banks could fall but it likely wouldn't change this fact.

My observations suggest that most people's economic perspectives (and thus actions) are individualistic. We think a majority of transactions in society are zero sum, we're either a winner or a loser based on the most observable and immediate impact on us. We're focused on building our own wealth and usually don't think about how to enrich/improve collective well being. This is a pervasive and unfortunate mindset because the human race has the potential to eliminate much of the suffering that large parts of our population still experience. It is impossible to eliminate economic inequality (something I will write at length about in a later post), but that doesn't mean we can't elevate living standards just about everywhere.

Let me elaborate on this a little further. If my observations are correct, the average person makes their economic decisions in a fashion that leads to a "Nash Equilibrium". (You may remember Russell Crowe playing the mathematician who coined the concept, John Nash, in the movie "A Beautiful Mind"). In a non zero game/situation such as in a Prisoner's Dilemma or the general economy, a Nash Equilibrium will lead to a sub optimal outcome where the cumulative well being/payout is not maximized. Basically, with each player considering the options that the other players have, they come to the understanding that acting in their own self interest will benefit them to the detriment of other players. Instead of cooperating with other players to maximize the entire pie, each player assumes every other player will act in their own self interest and thus no one cooperates. The outcome is thus said to be pareto suboptimal. This fundamental problem has massive implications in many areas that touch your life. One of the subheadings for the Wikipedia entry for "Prisoners Dilemma" mentions Douglas Hofstadter's concept of superrationality, which in theory would provide an optimal AND maximizing (pareto efficient) solution to these types of problems. The answer lies in all participants understanding what choices maximize the benefits for everyone and believing that everyone will make these choices. That is the goal of this entire post, to try and spread the idea that the economy is not zero sum and thus every participant should try to maximize their well being by acting in concert with everyone else.

An economic blogger and professor named Gavin Kennedy squares this idea with that of Adam Smith's ideas that rational self interests and free markets push economies towards efficient allocations of resources in this blog entry. The particular quote I gravitate towards is this one: "The 'optimal joint result' requires us both to do that which is best for both of us, not what is best for us alone." Indeed, this seems like the most important caveat (or nuance, as Kennedy believes this is what Smith was actually trying to get across) to Smith's widely disseminated work.

Moving on. You probably hear a lot of references to the tough/bad/declining economy out in the world. Even Lil Wayne says he's "down like the economy" in his verse on Jay Sean's pop/R&B hit "Down". People like to refer to the economy as some nebulous external entity that drives our fortunes. In fact, it's just the opposite. The "economy" is driven by our collective wants, our work output, our trading. It's not impersonal. We are the economic agents and we control the strength or weakness of the economy. Everyone has a role to play. No one group controls its direction, even government. There is a limit to any one group's influence, even in socialist countries run by dictators. If someone tries to restrict production and trade, then a black market will flourish, people will emigrate heavily, or eventually enough people will revolt (peaceful or otherwise). Economies rise and fall sharply at times because of changes in human attitudes. In some sense it is a confidence game. If everyone becomes pessimistic and thinks our collective demand for goods and services will decline, it will create a vicious cycle of cutbacks. This is essentially what economists call the "Paradox of Thrift". Collective wants and needs can fall for other reasons, such as a huge natural disaster that incapacitates out ability to produce for one another, but more often it is our own collective psychological mood that dictates the trend of society's living standards.

That's why it's imperative that we think about our own economic well being as part of a larger collective well being. We need to focus energy on enlarging the overall pie, which may in fact enlarge our own little slice of that pie. The human population is still growing. And there has NEVER been a shortage of human desire to consume and attain better living standards. Yet we still have massive poverty in this world, even in developed countries! How crazy is that? Think about all the potential demand for products and services waiting to be unleashed in the world. Of course there are resource constraints, but perhaps all that means is that we need better problem solving and better planning. We may not have enough land and petroleum to have 25 billion people driving Hummers across town to pick up grass fed steaks every day, but we should certainly be able to keep a sustainable population of a few billion humans well fed. Americans certainly have some caloric energy to spare, but we'll leave that for another time! Don't forget the human population has enlarged our collective pie over the last several hundred years dramatically. This has been our track record, albeit at a pace that was held back by conflicts and misinformed ideologies. Optimism has proved beneficial in the medium to long term. Until the sun stops delivering a surplus of energy to our planet everyday, I don't see why this can't continue at some level.

Rising nationalism and isolationist tendencies appear to be brewing here in the US. It's ignorant, and it worries me. I agree that China's exchange rate policy needs to be addressed (although we have already been countering the imbalance by issuing so much debt to them). However, there is no reason a person in China (or anywhere else for that matter) shouldn't have the opportunity to create goods or services for people living in the US. By bringing their work into the system, they in turn become a potential consumer of goods and services delivered by Americans and other citizens throughout the world. Did you know that Chinese retail sales are growing at about 20% (year on year) currently? Chinese consumption is growing like mad, as we should expect! We must remember that nation borders are just a social construct anyway. Texans trade with Californians because of mutual benefit. The same is true for Texans and Chinese. The same was true for early settlers in the colonies. Trade balance statistics, currencies, government borrowing, and differing consumption/saving preferences obfuscate this mutual benefit, but I assure you that it exists. Here are two of my all time favorite quotes that nail the idea I am desperately trying to get across here:

"The advantage of trade with other countries is not that we can create domestic jobs by selling more to foreigners than they sell to us. Simply creating more jobs isn’t the key to a successful economy. Since our desire to consume will always exceed our ability to produce, there will never be a lack of work. A successful economy redirects people into the jobs that make best use of their productive abilities—that is, into the jobs that create the most value for consumers. This is the real advantage of international trade" (Dwight Lee in the Economic Insights publication from the Federal Reserve Bank of Dallas)

"...the "game" of international competition between countries, unlike between firms, cannot really be won. Any victory is only temporary, until its financial consequences become overwhelming. This is why no country ought to seek to outcompete the others. Raising productivity, innovating, and the rest is very good, of course, and should not be discouraged. But if a country is very successful at these things, it has a responsibility to the system as a whole to allow its costs to rise to the point that other countries are not crushed. Here is a different way to say the same thing, from the other side of the ledger. Germans want to save. Good! But if they save quite a lot, and if their government borrows relatively little, then the only thing they can do with these savings is buy foreign debt. This means that the value of German accounts depends on the financial health of these foreign borrowers. But there we are again: we are seeing what happens to the chronic borrowers when their credit runs out. In the end, what the surplus countries have to see is nothing more than the laws of accounting, that someone's surplus and savings is necessarily someone else's deficit. Firms do not have to worry about this, but societies do." (Peter Dorman from the EconoSpeak blog)

It's worth saying again: there has NEVER been a shortage of human desire to consume and attain better living standards. That will likely always be the case. So let's go forth with that knowledge and become superrational economic beings. Let's focus our attention on working together to increase the overall economic pie, on trade and cooperation. That is the way forward my friends.