[FRIAM] Strawman/Steelman

[David Eric Smith]

On Jan 30, 2021, at 1:48 PM, Marcus Daniels <marcus at snoutfarm.com> wrote:
> 
> What if the Ratchet is, overall, a good thing?  Harnessing and controlling volatile individual passions into larger self-interested collectives that are, in general, behaving in more intelligent ways?     Some or even many of these ratchets are corrupt, like in the case of Putin.   But that forces the population under him to create better ratcheting systems; market forces create inequities which are inefficiencies for the society to sort out, but some of them are unavoidable and even good.

I think I would separate, here, a mechanism that indefinitely concentrates wealth, from mechanisms that overall produce a non-flat distribution of wealth.  The former being inherently destabilizing, the latter being perhaps compatible with steady states that are to some degree smooth.

(It is an aside to the few lines I will write below, but (perhaps in a side-reply to Steve’s post)  the thing I mean by Minsky’s Ratchet is actually not the same as the wealth-concentrating effects of unequal capital constraints.  There is a wonderful precise institutional instantiation of the Minsky Ratchet that one could build from the interaction of CDOs (Collateralized Debt Obligations) working together with Mark-to-market collateral pricing, as functioned in the 2007 mortgage-backed securities unwinding, but since nobody will ever care I have no way to justify the time writing it up.  It interests me because there is an economic entropy effect behind it that I would enjoy making explicit.  But its role is somewhat different from a sort of python-squeeze of capital concentration, which I take to be the focus of work like Piketty’s Capital in the 21st Century.  The Minsky Ratchet could be a mechanism in the python squeeze, but I think the latter involves further dimensions of social structure.)

This is a good time (historically speaking) to discuss the role of wealth concentration, because we can see its effects both for risk-taking and for the exercise of power in this pandemic year.  These days development of a new drug costs a capital outlay of about 2 billion dollars (a number I got from an insider maybe 4 years ago, but have seen in print somewhere since then).  When Pfizer didn’t feel like being on a leash to the corrupt trump government, they declined its money and went into development of a CoV-2 vaccine on their own capital.  If they did not have that enormous cash pile, they might have been unwilling to undergo the venture.  That is not to say that they will lose that money this time — it looks like they will profit very well over time — but rather that if they couldn’t have afforded to lose it, they might not have entered the effort at all.  I do tend to think that these very long-tailed wealth distributions have a role in enabling _somebody_ in a society to take risks that otherwise would be off-limits to the society at all.  There probably are other examples that are current just now: Google’s large investments in quantum computing, certain aspects of the implementation of AI, and things of that sort.  On the other side of it, one has the power problems of Amazon, Facebook, and the others, coupled to their providing services that people are choosing to use notwithstanding the side-effects.

The mechanics by which wealth skews place a spectrum of bets within or out of reach, and then the value judgments of the specific bets particular actors take, are both things to be understood.  I find arguments frustrating in which one tries to get a clear picture of the mechanics, and suddenly the conversation gets overwrought about valuations, as if the two were the same topic.  Of course they must both be seen, and together they inform what one might want from the society, but it seems to me necessary to recognize that they are distinct questions to be able to think in an orderly way about either of them.  Related to that distinction, there is a distinction between the _actions_ that wealth concentration enables, and the notion of how wealth concentration is expressed as power in the hands of one or another decision-maker (which could be an agent of many different possible types).

I can imagine trying to retain the capacity for big projects, but to contain abuses of power, by limiting wealth concentration under conventional “private property” conventions.  However, that would seem to require some notion of “nimble capital” that could rapidly aggregate around risky bets like quick development of an mRNA vaccine, or an initiative in quantum computing, or whatever.  We can certainly see instances in which governments have done versions of that, on fairly large scale (space programs, the US nuclear weapons push, in which Richard Rhodes argues that showing one could get past the economic/engineering threshold was a more important opening of the door than any difficulty of science), and others in which it was thwarted on much smaller scales (Obama administration efforts to invest in renewables, a strategy that our colleague Jessika Trancik argues from data about “cost-learning-curves” is very beneficial in the long term).  The willingness to risk big losses seems more common for rich individuals or even firms, than for social institutions, so nimble capital looks challenging to realize as a persistent capability.  There are precedents, at the level of analogy, to this sort of organization in biological phenomena like immune-system function, but it is not clear how well that analogy ports to the social realm.


I realize, too, that yesterday I broke our posting-hygiene rule.  So to fill in:

AOC = Alexandria Ocasio-Cortez

Eric




>  
> From: Friam <friam-bounces at redfish.com <mailto:friam-bounces at redfish.com>> On Behalf Of Merle Lefkoff
> Sent: Saturday, January 30, 2021 10:37 AM
> To: The Friday Morning Applied Complexity Coffee Group <friam at redfish.com <mailto:friam at redfish.com>>
> Subject: Re: [FRIAM] Strawman/Steelman
>  
> Thank you Steve, and especially Eric.  As I study new economic models for the real economy, such as the "circular economy" and the "doughnut economy", I am also paying more attention to the financial economy and especially the wild and wooly stock market.  I know it's unsustainable, but my hopes are constantly dashed every time I think it's going to crash and it demonstrates its robustness once more.
>  
> On Sat, Jan 30, 2021 at 10:56 AM Steve Smith <sasmyth at swcp.com <mailto:sasmyth at swcp.com>> wrote:
> Eric -
> 
> You lay this out so well.  
> 
> Some random observations.
> 
> Minsky's Ratchet is very compelling as an explanation.  As we know I'm a sucker for understanding by analogy with mechanical technology as a common source domain.  I *think* Minsky's Ratchet is a correlate of what you later call game-of-chicken gambling?   It was the first applied (discrete) math problem I remember being offered at college...   that among the myriad "rich-get-richer" mechanisms, the "empty pockets ratchet" is a big one...  a fair game generates a random walk which ultimately ends when one players pockets are empty... the smaller pockets (esp. by orders of magnitude) almost always go empty first.  "It's ratchets, levers, wheels, and connecting rods all the way down?"  
> I was caught off guard by your coining "an oligopoly of little fish", my usual binding of oligopoly to "a small number", but your point of course, and the crux of the event, is that the "little fish" schooled effectively, as if an apex predator-shark wandered too far up the Amazon and encountered a school of pirahna.  The culture-war story, of course is a combination of the "underdog" and the caution of the potential of "collective action"...   as you point out, this one encounter may indicate that a few sharks may yet get stripped of flesh by schools of tiny fish, but there is no indication that they will lose their niche in the oceans and reefs to such.
> Your tentative analysis of EW and AOC also really struck me as I (contingently) hold them both up as culture-war heroes to the underdogs I regularly cheer for.  I don't feel I have my own dog in either of their fights, but the larger culture I want to live within (with various forms of assertive equality and equanimity) is the one I try to support as best I can.  I am more implicated as a cause of their causes than a victim.  Understanding EW and AOC more better seems to me to be important in pursuing my aspirations to undermine my own undue advantages.   I suppose I "expect more" of EW as a veteran, as a scholar, as a senior statesperson, and I accept AOC's decision to play to her strengths (emotional appeals in the culture war) but also appreciate her having a little deeper intellectual stake (BA in Econ?) than her affect/appearance suggests.   I understand (but do not sympathize with) the olde guarde in congress being acutely skeered of getting double teamed by AOC and Katy Porter.   I look forward to more of those "wild kingdom" takedowns on CSPAN.   I don't think badly of EW's role/position, just disappointed that she might not be achieving her full potential?
> Your practical description of the "pyramid scheme" and "exhaustion" are a very good thumbnail for where I think this is going myself.   I suppose there IS a chance that a new species of oligopolist will emerge in the form of swarms (school, flock, pack, ...), but I don't think we are at the edge of a phase change yet.  I'm not sure if all significant radiation events are paired with extinction events?  
> Someone made a slightly different correlation than the COVID stay-at-home free-time-to-conspire on Reddit with a COVID stimulus-check-in-hand free energy(cash) one.   Anecdotal at best I'd guess.
> 'nuff for now,
> 
>  -Steve
> 
> On 1/30/21 4:19 AM, David Eric Smith wrote:
> So I have been watching this, and it looks just like one more wealth-concentrator on the long term, with smaller shifts in the short term that people get caught up looking at because they involve personality conflicts.
>  
> Will somebody tell me where I am wrong in the following?
>  
> 1. We start with the usual state of affairs, in which hedge funds of various sizes take short positions; in what and how much depends on the capital they hold to cover the short, relative to their other options.  They are “big” actors, in the sense that decisions of individual firms can involve moderately large amounts of money.  They assume they are the full landscape of big actors, and although they act with cognizance of each other, since they are all using similar research, they do much the same thing.
>  
> 2. A new “oligopolistic actor” comes in that changes the landscape of participants, which is a group of Reddit-coordinated little fish.  They can put a short squeeze on the hedge funds.  Those that took too large a position either with too little capital to cover the squeeze until it bursts, or with too little interest in this stock to be willing to take much of a loss on it, will sell off at a loss, and the various little fish will make a little money each, but it will look like a decent chunk when you take them together.  The smaller or medium-sized hedge funds that can’t wait this out could be forced into low enough overall returns that their clients will want to withdraw from them, putting them in further trouble, perhaps driving some of them out of business.
>  
> 3. Meanwhile: the oligopoly move is an ordinary pyramid scheme, and it only works as long as the pool of new buyers remains large enough to pay off the earlier buyers surfing the bubble.  Considering that relief and unemployment checks amounted to many hundreds of billions of dollars, if even a modest amount of this is in the hands of the young men who were gamers and are now stuck at home, it can look as if that bubble can continue to inflate for a while.  We might even be able to estimate, however, from the overall amount of free money spent into the system, and the part of the public that this young-male demographic accounts for, what the potential size of total gambling capital is for this thing.
>  
> 4. While attention is on the oligopoly of small fish, and the unprepared mid-sized or small hedge funds that might go bankrupt, there are always larger actors who are well capitalized and can wait out bubbles.  They may not have taken positions in this before, when it wasn’t all that interesting, but now seeing that there is a bubble afoot, they had a reason to get in and go short early.  They can outlast the short squeeze, and have a reason to do so because of point 5 (next):
>  
> 5. The pyramid will end when the new buyers are exhausted, and that will be the end of any power for the little-fish oligopoly.  At that point everybody who is leveraged will be underwater.  Because a lot of this money was in options, the unwinding will be very fast, much faster than if it were just driven by a sell-off of the underlying.  The last wave of buyers in will lose essentially whatever they spent.  Whichever little fish happened to get out of the bubble before that will collect some of the money from that last wave, and the larger hedge funds who were waiting out the short squeeze will then collect the rest.
>  
>  
> So, when the dust settles, the net effect?  Some money will have changed hands in a quasi-random way, from many small fish who gambled the rent and couldn’t afford to lose it, to a smaller number of other small fish who will collect at varying multiples, but still not enough to meaningfully alter their life trajectories.  The Reddit board-makers might collect enough to happily go on to the next scam, but they will not be breaking into any Forbes lists.  However, in the net, there will have been a flow of money out of both the oligopoly of small fish and the small or mid-sized hedge funds that didn’t see it coming, and into the wealth of the large funds.  In addition to the direct winnings of the large players, because their returns to their clients will go up, they will collect new clients that jumped ship from the hedge funds that bought back out of the short squeeze at a loss.  
>  
> So the macro-thing that will happen is the macro-thing that happens through every other mechanism: whoever has the most capital can wait out the largest spectrum of risks, and will on average gain more capital.  This is the ratchet that works through everything.  It is not a Fama-French efficient market mechanism, because it works through differential action of constraints, not through Arrow-Debreu “complete” price systems.  It is not quite the same, but still related to, the bubble-bailout cycles that I have termed Minsky’s Ratchet, from the arguments made by Hyman Minsky in Stabilizing an Unstable Economy.
> https://www.amazon.com/Stabilizing-Unstable-Economy-Hyman-Minsky/dp/0071592997 <https://www.amazon.com/Stabilizing-Unstable-Economy-Hyman-Minsky/dp/0071592997>
>  
>  
> For AOC to be seeking media attention, when there was an early trading freeze, to criticize the hedge funds for looking for protection against the oligopoly doesn’t surprise me, because this is a culture-war thing and responding in the moment to that is what she does.  But for Warren (Elizabeth, not Buffett) to allow that to be her caught-on-camera moment surprises me, and seems regrettable.  Yes, EW is as motivated as AOC to criticize the use of access by the hedge funds to seek protection when they get beat at their own game, and both are right to mock them and welcome them to go under.  But EW’s career has been about how the ratchet of unequal capital constraints moves capital from the small to the large, and if what I said above is correct, I would assume this would be the biggest picture in her view.  In the long term, the people who will get hurt mainly are just the people she has made a profession of trying to protect.  I would think she would want her on-camera moment to be about not getting distracted from that, and worrying that, yes, market regulations and taxation that encourage game-of-chicken gambling are The Urgent — and structural — Problem.  Whether some gambling hedge funds get caught and go under is a sideshow.  AOC, too, of course is plenty smart to understand all this (if what I have said above is not wrong), and I expect she probably does.  (She was an econ major in college, right?). But her media incentives are a bit different, so for her to mostly emphasize the culture-war thing doesn’t seem strange.
>  
> So is the above roughly correct?  Or do I misunderstand the structure badly enough that I am drawing the wrong macro-conclusion?
>  
> Eric
>  
>  
> On Jan 29, 2021, at 6:45 PM, uǝlƃ ↙↙↙ <gepropella at gmail.com> <mailto:gepropella at gmail.com> wrote:
>  
> Yep. I've logged into my TD Ameritrade account several times to see if they've limited purchases of GME. Supposedly Robinhood did limit purchases. It looked like I could always buy on TDA... but I'm not sure. I would never actually buy GME, *except* to screw The Man. 8^D
>  
> On 1/29/21 3:41 PM, Merle Lefkoff wrote:
> Has anyone been watching what's happening in the stock market with GameStop?
> -- 
> ↙↙↙ uǝlƃ
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> Merle Lefkoff, Ph.D.
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