Economic Tehcnology

Nine months ago I wrote a post trying to understand how economies work from an engineering perspective. The basic idea was that an economy is a technology (hereinafter “The Technology,” for theatrical effect, alternatively “Tehcnology”) for turning raw materials, energy, and labor into stuff that people want. Crudely speaking, we have built a global machine that inputs dirt, oil, and human effort and outputs toasters etc. Three classes of potential failure modes (where failure is defined hypothetically as fewer toasters, or fewer toasters per unit input) are then apparent – first, running short of raw materials or energy; second, a decrease in demand for stuff, and third, technical difficulties within The Technology itself, e.g sand (or sabot) in the works of the economic machinery.

I proposed at the time that the first failure mode was in the offing but not yet squarely upon us, that the second was unlikely given human nature, and that the third was annoyingly opaque from an engineer’s perspective. Unlike, say, a pedal-powered apple grinder, the dominant mechanisms and feedback linkages of The Technology are not immediately apparent on observation, and might well bollix things up even in the absence of “fundamental” limitations. I concluded:

Rather, it seems that the economic technology is in the process of throwing a rod… All in all, it seems that while we are in no way doomed to privation by energy scarcity, there’s no guarantee that the economic technology will respond well to to the stresses that it is just beginning to feel. Maybe we’ll get electric trains, plugin hybrids, and virtual reality telecommuting, or maybe we’ll get to experience the 1930s all over again, only this time with rising seas, monster hurricanes, and religious fanatics holding the world’s energy lifeblood. I’m hoping (and working) for the former, but sadly it’s not really in the hands of the engineers, and if it comes to the latter, I hope I’ll at least have some cider to drink…

At the time oil was $90 and the Dow was 12,500. Since then oil has been up to $140 and down to $50, and the Dow has fallen steadily to ~8000, providing plenty of food for thought on resources and economics.

First of all in translating from the economics mindset to engineering we face the conundrum of debt. The concept is pretty straightforward seen from the home economics perspective – if Joe the Plumber buys a brand new speedboat on credit and can’t make the payments, the repo man takes it away and puts a black mark next to Joe’s name. But seen from an engineering perspective at the macro scale, the story goes as follows: “The Technology successfully marshaled materials and labor and produced a working speedboat. In fact, It produced millions of working speedboats. There were subsequently a handful of minor disputes regarding rightful possession of the same.” The point is, from a standpoint of technical achievement, the prize gets awarded when the speedboat (or toaster) comes off the end of the assembly line. That is not to make any claims about sustainability (whether we can continue making speedboats indefinitely), nor about distribution (whether that particular plumber deserved that particular speedboat), nor social justice (whether a bunch of Chinese kids were abused in the production of said speedboat), it’s just to say that claims like “It’s all built on a mountain of debt!” however factually accurate, do not detract from the purely technological achievement – The toasters and speedboats were in fact produced, fair and square.

So, an engineering characterization of the recent debt-fueled housing and consumer bubble might be: “The Technology got overheated and spewed forth a huge quantity of toasters, speedboats, and large vinyl-clad single-family houses. In the process a bunch of dubious promises got made, which are likely to result in disputes over rightful possession. The possibility exists that toaster production rates may decrease significantly in the ensuing confusion.”

The question of demand is also a bit more complicated than proposed in the first-order model. While it is unlikely that the acquisitive and status-seeking nature of the human social animal will be repealed in this lifetime, recent events remind us that it can be driven by fear into a temporary hiatus, and this has important consequences. It turns out that consumer spending accounts for 2/3 of the economy in the US, and much of this spending is discretionary. This brings up an interesting problem. If people start worrying about their jobs, they may (sensibly) decide to cut back on buying toasters and speedboats in order to save their money, against a time when they are laid off and want something to eat. But on aggregate this has the unfortunate consequence of shuttering the toaster factory, whereupon the former toaster workers have plenty of time to do their own plumbing, and so on. Everybody loses. This is an example of an annoying internal problem with The Technology; it has nothing to do with the supply of dirt, or oil, or the toaster-making machinery, but rather an imperfection in teh intricate mechanisms. It reminds me of an underdamped mechanical system – basically any time you have a system with inertia and a restoring mechanism, there’s the chance that rather than smoothly settling at a stable value it will oscillate wildly about the equilibrium point. This seems to have been the basic contribution of the economist Robert Shiller – he pointed out that markets can act as underdamped systems, with mob thinking acting as the inertia and reality acting (belatedly) as the restoring force. (Apparently the prevailing economic view was that the market always perfectly reflected the underlying value of whatever was being traded. Any real engineer who has ever built a dynamic control system knows how hard it is to get zeta [the damping ratio] to be exactly 1.) Economists are funny critters – they call what they do science, but a guy at work made the point the other day that in economics a bunch of people with diametrically opposed views can all win Nobel prizes, and even decades later nobody knows who is right…

The conventional answer to the predicament of undershoot in consumption is for the government to step in and spend piles of money, by printing it if need be.  Joe gets a job fitting pipe for the new government stadium, so he feels flush and goes out and buys another speedboat. So far so good. But what if what’s lurking at the other end of the current slowdown (or perhaps even part of what triggered it) is actual honest-to-god resource constraints? Based on my understanding of the global energy system I think there’s a pretty good chance that this is the case. Then, rather than buying a speedboat, Joe should be encouraged to get a smaller, lighter truck, insulate his house, get some solar panels for his roof, etc. These things can also be mechanisms to drive near-term economic growth, but they require a lot more insight, focus, and discipline than just sending everybody a check. It’s not at all clear that our political system and economic tehcnology are up to the job.

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