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Banbury Cross

a pillow for lost thoughts...

Archives for: January 2014

Principle of Localization

The more complex a given system is, the more susceptible to unforeseen circumstances it is. The runaway proliferation of feedback loops breeds instability and that eventually turns into malfunction. Whether it is a modern software riddled with obscure functions or the whole economy with its myriad interconnections makes little difference. Complex systems are inherently prone to unpredictable behavior.

Any time you build a new function into your software or create a new company in the given economic system, you have introduced a number of new relationships with existing components and not all of them can be sufficiently debugged and understood. There are simply too many combinations of them. What with the lack of testing, something unexpected is simply bound to happen. Something no engineer has thought of before.

Our society is approaching a similar point where its hierarchical structure reaches its inherent limits and morphs into a maze of diminished control. The large swaths of electorate are disenfranchized, the income inequality is increasing and no one in the world governments has any idea of how they actually function. Behemoth agencies are sprawling across the public space without a hint of transparency and accountability. Intertwined in a jungle of multiply redundant limbs, they are becoming a breeding ground for all kinds of foul play and corruption.

In a simple system, say a medieval village, it is fairly clear who produces what at what cost and who owes what to whom. The production is completely localized and transparent. To extract value from such system using fraud and trickery is virtually impossible as everybody knows everybody and any "value leak" will very soon be obvious to all the players and easily fixed.

However, in a modern economy, where producers are linked in an intricate network of supply chains, where central banks are "flexing" the relative strength of the currency at will and governments are controlling most aspects of production, the true value is a much more opaque concept. Consequently, the opportunities for bilking are plentiful. The further away the money has to travel from where it was produced, the harder it is to control. Even without "parasites" such system would be vulnerable to unforeseen disasters. When governments are borrowing hand over fist, it is hard to determine the optimal fiscal regime for the society, because the thick smokescreen of debt makes it nearly impossible to balance things out and properly match the needs with the means.

Centralization presents one more danger, which I am only too aware of as I grew up in a centrally planned economy. To comprehend the behavior of the economic system is beyond capabilities of a single person or even a small group of individuals. Only the market - a collection of thousands of participants - has a chance of understanding and appreciating all its intricacies. And that is why the recent tinkering of central banks makes me nervous.

It is no wonder that in the era of global economy the share of wealth going to the top 0.1% is steadily increasing. In a centralized system, money flows where the control is - to the top.

And there are other nefarious mechanisms. Imagine two companies. They have two CEOs, two COOs, two sets of upper managers. That represents a good number of good incomes. Then a merger happens and all of a sudden, there is only one CEO and one set of top managers.

The money printing does not help either. The ones closest to the large liquidity flows are better positioned to profit from the knowledge of all its undertows. And that is assuming that they play fair, which is not always the case.

The complex world presents opportunity for economic mischief and the centrally planned economy is a convenient tool to achieve that. We need to decentralize the world and make it more local. And that means more transparent and fairer to everyone.

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