All good plans fall in battle. Economic crises may be following each other in rapid order, yet none of this is stopping technological progress. As a matter of fact, due to a growing use of general-purpose tools several domains of basic and applied science are not only gradually converging but each of these domains is also speeding up as their mutual scope overlaps and facilitates a cross-fertilization of nanotechnology, biotechnology, information technology and cognitive sciences.
These technologies don’t just add to each other’s breadth of applications, but they multiply it. The impact is not linear, but exponential. This is all very exciting, but also scary, especially because many of our other ‘tools’ have grown outdated and we still use them. As tools gradually become optimized by artificial and natural selection some reach an irreducible state of simplicity which makes them ‘general purpose’ and when such a tool is widely accessible and widely accepted it can facilitate an enormous variety of usage patterns. Models concerning long-term economic super cycles such as Kondratiev waves assume that steam, steal, electricity, chemistry, oil, mass production and information technology create waves of changing activities with a 50 year interval as these capabilities spread out and enable shifts all over the globe, by doing so create a local competitive advantage or simply more diversity in its application, until the added benefit diminishes while adoption saturates and it turns ‘normal’. Unless replaced though, the older applications don’t just disappear but are enveloped by novelty.
Much of our industrial era leans on so-called “interchangeable parts” which support a certain degree of standardization to allow for better interoperability and exchangeability while making products, building things. Standardized interoperability ranges from power plugs, split pins, low-alloy steel bolts, hexagon head screws, paper size, type fonts, packaging, and maintenance of portable fire extinguishers to the April Fools’ Request for Comments such as the “Infinite Monkey Protocol Suite (IMPS)”, the “Transmission of IP Datagrams over the Semaphore Flag Signaling System” or “Electricity over IP”. Standardization emerged in the Harappa culture in India, even before Sumer or Egypt, where people started using standardized bricks for building, standard units of measure for weight, length, volume, and even a reusable alphabet with a place-value system instead of little drawings like the ideograms. China’s empire as it emerged 2200 years ago was also mostly a standardization infrastructure in support of vast trade networks, as was the Medici bank in Italy some 700 years ago.
The Medici bank may bring something under our attention that is closer to home, bookkeeping and payment schedules. The Medici bank wasn’t so much a bank as we understand it nowadays, but it was much more like a large conglomerate and holding company, spanning different industries and a large network of small companies, but also the payment infrastructure dealing with foreign trade and merchant banking. Standardized agreements on savings accounts, transactional accounts, credit, promissory notes, checks, loans, debts and deposits, all were wrapped in a web of administration and bookkeeping. Apart from the element of space and time though, bookkeeping is mainly based on balance scales and counting tables, tools which date back to possibly before the Sumerian abacus of some 4500 years ago. One of the tokens used eventually became the number zero was likely an early ‘enter’ instruction, indicating a “carriage return” as today’s computers have inherited from typewriters, but which gesture likely was taken from weaving where at the end the weft thread would make a U-turn and go “back to square one”. Tools become analogies and the corresponding procedural enactment become tools again. Just like software or a cooking recipe.
Before about a century ago, when early management consultants started applying engineering concepts on organized activities for commerce and the public sector, bookkeeping focused on balancing tables, and a little on fluid dynamics. For at least 10.000 years dugout canoes have been used for transportation via waterways and since the Roman Empire waterwheel mills advanced early exploits in mechanical engineering, some 1800 years before the steam engine took over and jumpstarted the industrial revolution. As analogues tools in financial accounting we have all sorts of indicators expressing some sort of continuous or discrete flow, such as variable costs, throughput, solvability, liquidity and cashflow ratios. As long as we’re looking back into history via anthropological glasses, these larger classes of tools are nearly starting to look like the four classical elements of earth, water, air and fire, which make up the fundaments of anything, or at least they did in ancient Greece. And even similar to the elusive quintessential aether we have on the balance sheet so-called “Intangible Assets” such as Copyright, Trademarks, Patents, Brand and Intellectual Property, and “Goodwill” which is something like reputation, credibility or trust.
Now, here we have these administration and accounting rules which follow a prototypical machine analogy which in a rather crude way chart out the history of tools of balance scales, counting tables and water mills. But something really odd becomes apparent when looking at these classical elements and try do so some simple bookkeeping on that. Ok, one rock plus one rock equals two rocks. But, one water plus one water equals one water. Well, ok, if we look at plasticity and deformability then water indeed adapt to whatever encloses it, but water has an unchanging volume so we can try use size as an invariant measure. But air doesn’t even stick to this rule, it both changes form and volume, if you add air to air it multiplies. And fire is even stranger, if you have one fire and divide it by two you get two fires. It doesn’t split fifty-fifty, but it doubles. And that is the exact opposite of dividing a rock in two. So, how can we express the dynamics of an idea-based economy with the tools of a thing-based economy? Well, there is an overlapping approach in the service-based economy where embodiment and enactment join and some attempts have been made on expressing modern business on a ‘service-goods continuum’ from thing via activity to knowledge transfer, but it is still a feat to quantify qualities. Where do we draw the line? As science and technology rush forward, so too do our administrative tools enter a stage they are best described as biomimetic artifacts. We may think that “capital expenditure” is much easier to deal with than “operating expenses” but that may only be so for a certain kind of product-service combination at a certain stage of development of the overall market.
How does that compare to software companies, event management and other forms of entertainment such as the music industry, or ritualized behaviorisms like corporate legal services, audits and advisory? A widely used shortcut is to “let the market decide” by just gradually tuning the asking price up or down to find an optimal balance of sales volume and what customers are willing to pay for some service. This is however a risky bet, as law firms have been experiencing the last few years as their added value is gradually being commoditized and for most of these firms both demand and rates have gone down with some 30 to 40%. But it is even more basic, also supermarkets tend to have a localized pricing policy based on averaging out margins over lifestyle profile densities with earning targets, and if their geographical exclusivity is threatened by a competitor with pricefighter tactics moving in and disturbing the delicate balance of regional isolation and mutual price-locking. Until another pricefighter moves in, at which moment the rather unexceptional competitive rarity of these two competitors will likely interlock in a joint race for grabbing the largest share of local consumers while circling the drain as their margins shrink below the breakeven point for either one individual store to survive this ordeal. There’s a certain need for competitors to cooperate to not compete too fiercely as these serial dynamics of overshoot and collapse expose economics as a black art, one with a real risk of ending up like Wile E. Coyote while running over the edge of a cliff, realizing the ground beneath is gone and as gravity takes over turn a once near-horizontal climb into a vertical free-fall.
High finance is a domain where reliance and dependence is just as important as it is for one soldier to trust another. Trustworthiness, including truthfulness and fidelity, is precious, enabling one to reduce risk, or at least sufficiently control it. But still, we express trust in rather absolute terms, a gradual buildup of an enduring uniformity which can be lost in an instant. At least that is what we would like to believe. As scandals in the City of London stack up concerning highly paid lunch dates as a cover for trading confidential information, anyone at the marketing department that knows something about impression management can tell you that the vast majority of people are a combination of “conditional cooperators”, who prefer to sacrifice personally on behalf of other group members, and “altruistic punishers”, who prefer to punish other group members who violate the group’s cooperative norms. Ok, we would like to think of trust as something more permanent and hard as a rock, to be experienced without any of the worldly features such as elasticity or tensional integrity, but that is not so. As the U.S. subprime mortgage crisis shows, trust may even have the substance of a hot air balloon, or three rubber ducks in bubbly foam bath. Who knows? Surely it seems like nobody did any solid predictive modeling or event simulation, or at least they didn’t share it.
But finance is an information industry too, not only do banks need to have a thoroughly reliable and secure infrastructure to deal with payments and savings, but they rely heavily on ‘business intelligence’. The better their quantitative models, the better they can choose their investments, allowing in turn for retaining and increasing the money they host. This has two major weaknesses, first of all, when looking at algorithmic trading there is no clear distinction whether the model was good because of its predictive power of something that it anticipated, or that it was actually made to happen in a self-fulfilling prophecy due to the indirect feedback loops of the observer effect. Second, full frontal omniscience says nothing about the perception of other market participants, and eventhough the old-fashioned idea of “the market” assumes complete, maybe even perfect, information, again the U.S. subprime mortgage crisis shows how an attempt to deregulate the housing market and let private lenders in on the mortgage market got caught in Wild West shootout. And now we’re facing these four domains of nano, bio, info and cogno where the technological tools are becoming so versatile that they are turning into an information industry as well. Now, as in now. Three years ago Craig Venter and his team were able to print a strand of DNA code of a custom-designed bacterium which made this the first synthetic organism. Not only will these capabilities quickly translate to breakthroughs in medical treatment but Venter and his team are already working on bacteria and algae which produce diesel and methane by eating up coal.
Business Intelligence does not need to be complex though; it can also translate to having a simple but powerful overview such as the “Balanced Scorecard”, which offers four perspectives for vision and strategy; financial, customer-oriented, business process view and learning and growth. These, however, introduce another problem, one of “false equivalency”. Eventhough we may be very apt in using such a mental tool, we are really not all that good at conceptualizing. In particular psychophysical power laws, as to the relationship between the magnitude of a physical stimulus and its perceived intensity, may provide us with a much more different internal representation than we may initially think. The pragnanz, the Gestalt principles of grouping based on proximity, similarity and closure have been supported by research on the structural reasoning of sensory awareness, encompassing symmetries in both time and space which indicate both error correction mechanism as well as basic forms of signaling. These internal ways of conceptualization go a long way, even with simple numbers. In fact, we have a mental number line with a “logarithmic-to-linear shift” where our experience of a numerical quantity initially increase as a logarithmic function of actual numeric value before later increasing as a linear function of numeric value. Our inner idea of “small,” “medium,” and “large” is not as consistent as the numbers we use and this extends to estimation of measurements and set sizes and even to estimating magnitudes of fractions, arithmetic learning and memory for numbers. What if Picasso had been an accountant? Well, maybe there’s no need…
Costs do not equal value. Maybe the simplest example is taking a “fire tool”. After nearly a million years of knowing how to control and make fire we humans finally came up with the modern lighter about a century ago, and although domestic climate control combining heating and air-conditioning may cost a buck or two, for a lighter the economic value is expressed to its innate constraints, not the facilitated capacities, the possible uses. Despite the incredible value the economics of a lighter depend on its limitations and not its unbounded infinitude. We see this duality again in the different approaches in the crises if we compare the USA with Europe. Besides the pseudo-nationalistic backfiring where local politicians try to preserve their own interests by holding on to their “big fish in a small pond” significance while shunning away from drowning in the greater dynamics of the EU, where their importance may be second rate at best, we see an equally unoriginal monetary policy focused on savings, treating money as rocks, whereas the USA prints extra money and juggles around with debt to stimulate investments and hopefully some trickle down effects, treating money as fire. Is money a treasurable substance that needs to be safeguarded, or is it a performance act obeying the inverse square law as it allows our inner fire to resonate along the connection threads of small-world networks? Money is both. Money is whatever you want it to be. We don’t know the limits of what money is, as its reach grows along with our grasp.
That gets us to something painful to accept. The crisis is partly real and partly fiction. And if we look closer and closer the clear division between these two becomes more and more difficult to maintain. Do we have the bookkeeping tools to express the sort of business intelligence that modern companies use internally? Such as “online analytical processing” cubes for multidimensional views or game-theoretical simulations for decision support systems? These tools aren’t just for analyzing one’s business anymore, there are becoming increasingly important in the sense that they become the business itself. During the last thirty years the game-theoretical ‘public choice theory’ approach has been applied to “political organization of a free society” in many Western countries to reform public administration and its managerial organization structures but in an unfortunate self-fulfilling twist promoted the “rational self-interest” which game theory assumed lay at the root of human motivation. It would be funny if it wasn’t so disastrous. Yet, complexity, cybernetics, autopoietic networks, chaotic systems, self-organized criticality, fuzzy logic, fractals, swarm intelligence, neural networks, cellular automata, artificial life. What if, technically spoken, your model is “alive”?
The ongoing crisis appears to be when our ‘models’ are moving out of sync. Crossover approaches such as Complex Adaptive Systems of Systems make a lot of sense for the people involved, but it seems to be from a different era if we look at other forms of organization, such as bookkeeping and legalities. While companies are basing policies on quasi-organic models, they are still reporting their results with methods based on abacus and balance scales. No company is using “network-centric service oriented accounting” eventhough increasingly many businesses have their activities organized in such a way as it proved so incredibly useful for their ICT infrastructure. As more and more accountants and financial analysts are being replaced by ERP systems making the switch towards a more intelligent and realistic way of representing company activities and it’s resulting valorization is becoming a lot easier than it used to. Like the “cube view” in business intelligence applications, it is relatively simple to have different ways of representing the same information. Even more so as with standardized reporting it gets easier to automate, especially with self-learning systems which can do event simulation to optimize any preferred results. Again this touches on a painful realization; what happens when a business strategy has complex elements to it that cannot be expressed in a simpler model anymore? It seems that today’s “short-termism” is a result of sticking to an outdated mode of valuation and reporting on company performance. For the stock market it may not make a big difference if accounting frameworks becomes ‘smart’ but for private equity investors dealing with mergers, acquisitions, cooperatives and such, it may help a lot there.
Some people think technological progress is slowing down, that technological dynamism is fizzling out and we’ve maxed out on the easy improvements that characterized the 20th century. Our living standards have peaked and it’s a deteriorating trend from here on. This is primarily a belief based on fear, not even a best guess, fed by the concern that if technology replaces workers, what will the role of people become? Is there a need for humans in a robotized world? Will Marx’s historical materialism saturate at a phase where ever-growing leisure time and abundance frightening people because “we have been trained too long to strive and not to enjoy” as Keynes once thought. Yet history makes clear that as tools evolve, these form the instruments of scientific advancement. As recent research states; “technological progress is fundamentally a dis-equilibrating process”. Technology evolves and helps open up new horizons that we simply cannot think of now as they are beyond the current edge of our imagination. But it is clear that the static idea of a “silver bullet” that solves a problem is a grotesque simplification and gives a distorted view on what is actually going on. Instead we have a “silver” armory with which we can build as many silver bullets as we may need. As the same research report states “we ain’t seen nothin’ yet, the best is still to come.”
As humans we need to be very careful to grow awareness that we by excessive focus on economics we are causing scarcity. Economics is the study of scarcity. There is no economics of abundance.