Thursday, October 11, 2012

When Economists Drink Tea - III

Forward projection of mega-economic trends proceeds in the reverse fashion – creating a model with the Nash disequilibrium as the output, and then casting that as a trendline. This is superior to simple minded extension of trendlines, because the simple extension does not show where the trend will break down. At what point will those getting out more than they put in be stopped? That which can't go on, won't – but when?

For most of human history, much of human activity has been devoted to subsistence, with almost all of the excess going to population growth. This is the Malthusian equilibrium: reproduction can unilaterally improve its position. Because of this "cereal equivalent" is often used as the measure, and then this is converted into some real dollar equivalent. Since the LCA of human activity is about 1 - that is you get one calorie of work out of people for every calorie you put in, and the LCA of animals is about 2, that is you get 2 calories of work out, this means that historically:'

1. The maximum GDP/capita is twice subsistence.
2. There is very little capital, except to convert work from one form to another, which is frictional capital.

However this creates a problem in searching for the capitalist moment, because the definition of it is the break down of these two long standing results: people value other things rather than the chance to have another child, and there is capital which has an output larger than 2. In otherwords, until the capitalist moment arrives, people value the good of leaving descendants, or leaving them in a better position, more than they value everything else, or, conversely, if they value other things more, they do not leave behind descendants.

What economists refer to as the "Malthusian equilibrium" is this: all of the wages of labor, and any gains in technology, are used for subsistence and population increase, meaning that wages exist under an iron law, where by the fall back to subsistence, and per capita living standards stay very close to flat. This observation is credited to Malthus, from his "An Essay on the Principle of Population." When looked at at very broad aggregate, it might seem as if per capita GDP started to take off in 1820, but this is an illusion created by the extremely uneven period of disequilibrium at the end of the 18th century, and the long depression which characterized the mid-18th century in many areas. There were booms, often driven by war spending, or the reverse, long peaces in certain areas. However, there were extreme climatic events against which the peple of that time.

The breaking of this equilibrium, which with local exceptions had been the human norm, and those local exceptions become the rule when the local exception is sacked and looted, for all of human history. In fact, in Europe, the expansion of per capita GDP has followed two great waves. The first when the Renaissance economy takes hold. European Capitalism 1.0 begins with the trading, exploration, colonization, and conquest era, combined with the internal change brought on by early metallurgy, the printing press, and the growth of civil institutions, including law. These fed each other, contracts to spread the risk of the costs of a voyage or privateering expedition needed lawyers, banking to fund conquest and construction of military capital, then going through a revolution in military affairs. One can see skilled workers with rising real income closest to the ship building areas – for example in London real wages of guild members double 1530-1580, it would take over 200 years to double again. These gains did not translate into higher real wages for day workers or unskilled labor, nor general increases.

But one also has to take into account risk, real wages were rising, but so were outbreaks of disease, which took skilled workers more often in cities than in the country-side. Weighing in risk, city skilled workers were compensated for risk and scarcity – they could choose to work in the cities, and be paid more, but risk dying, or they could work in the country side, be paid less. Unskilled laborers were not compensated for risk – the made similar real wages in both places, and lived much worse in the city. Thus among unskilled workers it feel to those detached from land right or work to move into the cities, or those unusually risk taking.

This tells us where to look, not in the trendline, which will be the result of the change, but at that point where, at a lower level, the consequences of choosing capital goods shifts. Since this is the result of a strategic choice, we can model it by the formalism of the theory of games. However, the simple discrete set of choices does not work, instead, there must be a way of showing the results of actors making distributed choices of options, choosing say 50% reproduction and 50% capital.