Form: Quote Commentary

**POSNER VS. SHILLER: ON BUBBLES AND SHILLER’S NEW BOOK, “ANIMAL SPIRITS”**

April 5th, 2009

Posner has written an exceptional review of Shiller’s book Animal Spirits for The New Republic.

But I want to take a very different approach that looks at the problem from the point of view of Capitalism v3: the Credit and Interest Society.

We cannot predict bubbles. We can avoid bubbles if we see them coming, early enough anyway.

But a bubble is a necessary symptom of collective alignment and forecasting. If bubbles fail to form, that would be a greater problem than living through their correction. This may be counter-intuitive, but a bubble is an alignment of people behind an opportunity. To some not insignificant degree a culture is a bubble. A civilization is a bubble. If we don’t have bubbles we can’t organize people for good, either.

Bubbles are caused by a tragedy of the commons: each participant hopes to exploit opportunity quickly lest one miss out on the opportunity and be left behind by others. I am not sure if the literature of behavioral economics makes this association, but I assume so. (I’ll check later this week). However, this group, or pack behavior, is also related to the behavior of privatizing wins and socializing losses. In other words, the general behavior of individuals in economies is pack behavior: we follow our networks, and networks – both the individuals in them and the behavior demonstrated by a collection of individuals – demonstrate a fairly constant set of behaviors. They attempt to privatize wins and socialize losses when opportunities slowly emerge, and to bubble, or follow an exploitation strategy, as opportunities more quickly emerge. The difference between these two theories is the participant’s time frame when considering his actions. In a bubble, he works with very little information and must follow the herd or be left behind. The same is true of the commons. They are the same problem.

Bubbles are a natural result of credit and anticipation. They are an exaggeration of alignment by a populace behind a narrow set of opportunities. Bubbles, because of the general increase in money, fiat money, credit money, are made possible because money is misdirected from localized opportunities.

Our objective is to become better at popping bubbles, rather than preventing them. In fact, I think – and I am pretty sure I’m right – that we may want to intentionally create a world of bubbles that we constructively pop. And I’m actually very sure that this is the answer we seek. We are using credit and money to attempt to create an equilibrium that cannot exist, and does not exist, and is at any point only an aberration, an over-generalization, or, in most simple terms, just noise. An equilibrium describes the process of adoption and consumption of ideas and resources so that the population makes the best use at the lowest cost of MOVING IN SOME DIRECTION, not in ACHIEVING AN EQUILIBRIUM.

Civilization is directional. Civilizations evolve. They become larger and more complex or they die. Period. End of story. End of the mathematical model based upon equilibria.

WE HAVE BEEN SEEKING THE WRONG ANSWER: how to efficiently seek equilibrium, instead of how to maximize our expansion. We are attempting to moderate human activity rather than give it its full opportunity. The fact that we’ve done this for so may centuries kind of surprises me.

I need to work very hard to kill this idea of natural equilibrium. It is a form of madness incompatible with the credit-and-interest state.

Conservatism, the Friedman approach, is clearly wrong; monetarism is a failure. It is a banker’s philosophy. General liquidity – increases in the money supply rather than loans – is a failed philosophy. Inflating the money supply creates disinformation and bubbles that we have no control over. Keynesianism, in the sense that people have developed a mathematical rigor that they attempt to apply either toward unemployment or toward government spending and the anticipated rise in demand because of it, is a failed hypothesis. Anarchism, while showing us how unimportant government is, fails to show how important government is in the translation of violence into economic activity and the necessity of providing a means of conflict resolution between groups who do not have the same interests.

We can make loans with credit money, but we cannot increase the general stock of money without creating “turbulence” everywhere. Turbulence is the enemy of coordination and cooperation. It causes unnecessary calculation of fruitless activity. It’s digging a hole and filling it. It’s not that we need a gold standard. We can use credit money, but it has to be in the form of loans. We should only use credit to seek solutions, and interest to inform our government as to the good or ill of their judgments.

We should not levy taxes, except in extraordinarily rare circumstances that are profoundly local. We should instead collect interest. This creates a positive rather than negative government.

We should both issue credit and buy back bad loans. This creates responsibility and allows us to clean up errors faster than the market corrects. This prevents crashes.

We should not fear creating a negative account, because this negative account can be traded with other nations instead of playing currency speculation games. And that account makes such currency speculation very dangerous and less exaggerated.

Our problem is to seize the maximum number of opportunities, not to make the most efficient use of money. In that light it’s almost ridiculous. I mean, is the way we do things today something we’re actually going to say OUT LOUD without feeling very silly about it?