The wayward rise of machina-economicus
from Gregory Danake and RWER issue 93
The nexus of mainstream (or neoclassical) economic theory is “homo-economicus” (or economic person). It is a super being who dwells in a fairy tale land with complete information and is obligated to act hedonistically (maximizing their individual utility at the margin). Neoclassic economists merely stamp out this little cookie person, and then chuck out all the inconvenient dough, including: altruism, reciprocation, and “moral sentiments” (as Adam Smith suggested in his virtually unknown first volume), not to mention behavioral proclivities and a modicum of concern for the natural environment. Their poor little cookie person has been bludgeoned to crumbs on empirical as well as philosophical grounds for decades (see, Fleming, 2017), and yet its specter lives on. Many ideas and actions of the mainstream have been widely condemned and disconfirmed, yet they persist, suggesting an inordinate level of scientific lassitude.
Some of the more potentially troubling aspects mainstream economics could receive a renewed lease on life, via selective applications of Artificial Intelligence. This is particularly relevant if it is merely used to shore up faulty theories regarding the dog-eat-dog nature of our society. MACHINA-EONOMICUS could be even more impenetrable and strengthen the illusion that the prevailing ideology is unassailable logic. Just when it began to look like the beleaguered cookie person was finally going to yield to the often befuddled (yet authentic) sense of our common humanity, s/he is being refurbished with even more mechanical workings. As AI further penetrates the raison d’état of the clandestine political economy, neoliberalism might be a reinvigorated.
What was to become a patch work of contradictory notions we now call “mainstream” or “orthodox” economics began during the industrial revolution with the highly selective extraction of a few classical ideas (e.g. the “invisible hand”, “comparative advantage”, “the barter myth”, the efficacy of inequality, and the sanctity of accumulation). It did not acquire its mathematical veneer until the Victorian Era (1830s to the early 1900s), via the work of William Stanley Jevons, Leon Walras, and Carl Menger and their Marginal Revolution (e.g. individual utility, diminishing returns, general equilibrium, etc.). What famed American non-orthodox (institutional & evolutionary) economist, Thorstein Veblen, would label “Neoclassical”, adopted the Newtonian mechanical worldview. Prominent economic historian, Phillip Mirowski (1989) describes how neoclassical formulas were simply lifted, whole cloth, from outdated physics textbooks, and hence lacked an awareness of thermodynamics (e.g. entropy), or any dynamics for that matter. Their notions of a static equilibrium left them stranded on a cold, dead planet, yet their insistence on perpetual growth and increased consumption, magically endowed it with infinite resources (or technical substitutes). In another prescient book, Mirowski (2002) contends that mainstream economics has also been hell-bent on becoming a “cyborg science” well before the advent of AI. In the process Mirowski chronicles how elements of economics have remained close to the machinations of the Military Industrial Complex (e.g. the Rand Corporation) since the days when operation researchers worked alongside the code breakers and other progenitors of AI, during WWII. As the cold war proceeded, much the prevailing ideology of mainstream economics was also honed, beginning with a small group that met in a Swiss village in 1947.
What is so intriguing about the influence of the Mont Pelerin Society (or Pelerins for short), is that their hidden political pronouncements (now known as neoliberalism) became so easily interwoven with neoclassical methods, which specifically excluded political concerns. Some conflate the radical libertarianism and “market fundamentalism” of neoliberalism with neoclassical theory in economics, but they are not same. The complete capture of economics by a cult of ideologies did not emerge with a vengeance until the 1970s, after a few decades of lavish corporate funding of dedicated think tanks, foundations, and entire university departments, as well as law and business schools. The fake Nobel prizes (actually the Riksbank Prize) that economists award themselves at the same time as the authentic science and peace prizes did not begin until 1969, with a significant number going to Pelerin purists in perpetuity. With the elections of Ronald Reagan in the US and Margaret Thatcher in the UK, neoliberalism arrived at the pinnacles of power, and has maintained its hold, irrespective of political party. The durability of its power is also found in the lifetime appointment of neoliberal judges (Baby Borks), particularly to the US Supreme Court.
Neoliberalism was surreptitiously welded into neoclassicism in order to sustain certain policy prerogatives, and pass them off as scientific truths. read more
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Real-World Economics Review Blog 
Capitalism is already an algorithmically determined system on the financial economy / financial accounts side and it has been so at least since the 1850s. The axioms and algorithms of private property, income, finance and national accounting determine the vectors of wealth/money flows and the depositories of wealth/money stocks, all as denominated in the numéraire. This is not to devalue the thesis of machina-economicus. Indeed it magnifies the importance of the thesis.
Humans are and can become many things. One thing they can become is rational (and heartless) calculators and here I mean NOT the consumers at all, who are existentially and hedonistically motivated, but the producers and purveyors of capitalism. It is this group which implements the algorithms of wealth accumulation for themselves and the blandishments and enticements for (over) consumption by the consumers.
The human brain can be inculcated into being a calculator employing instruments of calculation. Those with the wealth, leisure and developed intelligence – often from inherited wealth but not always – to become educated and sit, research, think and calculate are those who can run and benefit from the algorithmically determined financial system. The advent of AI, as their machina-economicus proxies, will simply multiply their power. As Marx pointed out, remember that capitalists engage in intra-class competition as well. Expect the rise of new styles of capitalist. We have already seen this with the rise of hi-tech capitalists but this process will intensify. The field of competition will become more and more “cyber” for want of a better word.
Without human revolutionary change coming up from the base of the system, the concentration of capital will accelerate, ultimately producing cyber- and crypto- trillionaires who will need few, if any, human functionaries but will rather employ and deploy, bots, drones and ai “crawlers” in system nets. Imagine “1984” blended with “The Matrix”. The physical world will look like 1984, vast slums, ruined hinterlands and sacrifice zones governed from gated secure-wealth communities in metropoles and trillionaire tech-hermit bunker-bug-out mansion complexes in remote areas. The control systems will “look like” the matrix, albeit not with human consciouness but with machine pseudo-consciousness used to manipulate and control the real humans proles left in the “1984”-like catabolic and collapsing landscape of decaying built environment and collapsing climate and ecosystems.
It’s worth looking at this very interesting document in this context.
“Upside-Down Markets: Profits, Inflation and Equity Valuation in Fiscal Policy Regimes” by JESSE LIVERMORE” (pseudonym).
https://www.philosophicaleconomics.com/
It deals with what could transpire from nominal growth targeting. Here is an excerpt.
QUOTE
“Unfortunately, monetary policy is limited in what it can accomplish as a form of stimulus. It therefore offers a weak foundation for upside-down markets. We can celebrate economic problems (sic) as catalysts for interest rate cuts, but the cuts won’t usually avert the problems, at least not in full. They may buoy stock prices through portfolio preference channels, but the damage to fundamentals will tend to outweigh the buoyancy.
Fiscal policy is an entirely different matter. If deployed in sufficient quantities, it can achieve any nominal level of spending or income that it wants. When policymakers commit to using it alongside monetary policy to achieve desired economic outcomes, markets have solid reasons to turn upside-down.
To illustrate with a concrete example, imagine a policy regime in which U.S. congressional lawmakers, acting with the support of the Federal Reserve (“Fed”), set a 5% nominal growth target for the U.S. economy. They pledge to do “whatever it takes” from a fiscal perspective to reach that target, including driving up the inflation rate, if the economy’s real growth rate fails to keep up. Suppose that under this policy regime, the economy gets hit with a contagious, lethal, incurable virus that forces everyone to aggressively socially distance, not just for several months, but forever. The emergence of such a virus would obviously be terrible news for humanity. But would it be terrible news for stock prices?
The virus would force the economy to undertake a permanent reorganization away from activities that involve close human contact and towards activities that are compatible with social distancing. Economically, the reorganization would be excruciating, bringing about enormous levels of unemployment and bankruptcy. But remember that Congress is in-play. To reach its promised 5% nominal growth target, it would inject massive amounts of fiscal stimulus into the economy—whatever amount is needed to ensure that this year’s spending exceeds last year’s spending by the targeted 5%. To support the effort, the Fed would cut interest rates to zero, or maybe even below zero, provoking a buying frenzy among investors seeking to escape the guaranteed losses of cash positions.
The interest rate cuts, possibly into negative territory, would make stocks more attractive relative to cash and bonds. Additionally, the massive issuance of new government securities to fund the spending would shrink the relative supply of equity in the system, making stocks more scarce as growth-linked assets. Finally, the virus would give corporations financial cover to cut unnecessary labor expenses, allowing them to capitalize on any untapped sources of productivity that might be embedded in their operations. This action, which takes income away from households, would normally come back to hurt the corporate sector in the form of declining demand and declining revenue. But if the government is using fiscal policy to achieve a nominal growth target, then there won’t be any income or revenue declines in aggregate. The government will inject whatever amount of fiscal stimulus it needs to inject in order to keep aggregate incomes and revenues growing on target, accepting inflation as a substitute for real growth where necessary.
If you are a diversified equity investor in this scenario, you will end up with a windfall on all fronts. Your equity holdings will be more attractive from a relative yield perspective, more scarce from a supply perspective, and more profitable from an earnings perspective. The bad news won’t just be good news, it will be fantastic news, as twisted as that might sound.
It may seem strange to think that stocks could benefit from bad news, but other asset classes that offer insured income streams, such as government bonds, behave that way. If the government is effectively insuring the income streams of the aggregate corporate sector, why shouldn’t a diversified portfolio of stocks behave in the same way?
To be clear, the upside-down situation that I’ve described here is not the situation that we’re currently in. From a policy perspective, legislators and central bankers have not implemented a nominal growth targeting regime, and the policy hawks that would normally serve as obstacles to such a regime have not yet been run out of town. But people on both sides of the aisle are increasingly coming to realize that fiscal policy is the “cheat code” of economics. If you’re willing to tolerate inflation risk, you can use it to achieve any nominal outcome that you want.
As people become more aware of this fact, they’re going to increasingly challenge traditional approaches, demanding that fiscal policy be used to safeguard expansions and eliminate downturns. Upside-down markets will then become the norm.”
END QUOTE.
My comment is that if nations go down this path, without other changes, it will strengthen the position of shareholding capitalists even further and aid the rise of the techno-cyber-crypto capitalists. Yet, like many on the left, I advocate this very fiscal stimulus. The document goes on to explain how the flows of fiscal stimulus, in the current system, will always end up in the mega-capitalists’ pockets, expanding their balance sheets, increasing their wealth ad infinitum except for planetary limits. It’s a “trickle up” system in its current conformation. Without other measures, the concentration of the ownership of capital will increase continuously. Without a revolutionary expunging of capitalists and capitalist power, this future cannot be avoided. It’s already programmed for this destination. New modules of more and more effective AI guidance towards this destination are being added continually. The masses have to take over the system or crash it. That’s what kidnapped captives have to do.
What ‘Jesse Livermore’ is advocating requires the value of money to be inverted, so the more you have, the more you owe to the rest of us. What ‘Iconoclast’ needs to understand about AI is the mindset of those now using AI without understanding it, and how the privatisation of government has made the UK’s Fulton Report of 1964 generally true of business directorship.
“Despite the constraints, Fulton and his colleagues identified the following weaknesses in the Civil Service:
“It was too much based on the philosophy of the ‘generalist’ or ‘all-rounder’.
Scientists, engineers and other specialists were not being given the responsibilities, opportunities and authority they should have. …
Writing many years later (in 1999) John Garrett (a consultant in the Fulton team) said that:
“The mandarins were rattled by the proposals. … A social survey revealed that 85% of the mandarins were from a middle-class background (compared with 51% ten years previously); 71% had arts degrees, mainly in history and classics; and 73% were from Oxbridge (also a recent increase). An already rigid class system was intensifying …
“The mandarins rarely had experience of managing anything. … Their overweening arrogance made them dreadful managers of people, but then management was anyway thought an inferior occupation to be carried out by the lower classes. Specialists were kept to advise them, a principle cynically known as “the expert on tap, but not on top”.
See https://www.civilservant.org.uk/csr-fulton_report-background.html
Writing as one of the “lower class” scientists whose advice was ignored, I found the theory of AI to be problematic in that it told you what NOT to do, and WHY (building on Shannon’s theory of communication). So our “leaders” have blindly followed the path of using AI rather than learning from it. I learned the ‘macro’ as well as the ‘micro’ version of this (i.e. its architecture as well as its detailed programming), starting from analog computing, the PID theory of navigation and control, and the effects of too much D (positive feedback), physically evident in economics and mathematically in chaos theory. Put simply, if a navigator changes course to avoid problems but neglects to resume his course, he will soon get lost.
PS. a couple of howlers! The Fulton Commission was 1964, the Report 1968. Third line from the bottom I had meant to type electronics, not economics. (Specifically, that was about the use of ‘reaction’ to increase amplification in early radio).
Please allow me to reverse the starting point of this discussion. All this is premised on the caution, “On the evidence available today the balance of probability favors the view that.” I do this through the 1951 book by the anthropologist-archaeologist V. Gordon Childe, ‘Man Makes Himself.’
Concluding this book, Childe writes, “…logic and undemonstrable postulates have alike been avoided here. We have instead tried to show how certain societies in the process of adjusting themselves to their environments were led to create States and mathematical sciences by applying distinctively human faculties, common to all men. Under certain conditions, a State and mathematics were necessary to enable men to live, prosper, and multiply. No change in germ plasm, introduced by unknown non-human agencies, had to be assumed.
At the same time, the achievements we have sought to explain were not automatic responses to an environment, not adjustments imposed indiscriminately on all societies by forces outside them. All the adjustments we have considered in detail were made by specific societies, each with its own distinctive history. In the course of its history, the society had built up traditional rules of behavior and a stock of craft lore or practical sciences. It was the application of these rules and sciences to the particular environment that determined the form of the adjustment under examination.
The differences between Egyptian and Sumerian political organizations and mathematical techniques are explicable by the divergent histories of the two societies, not simply by the contrast between the Nile Valley and the Tigris-Euphrates plain, still less by hereditary disparities in nervous mechanisms. Now it is the social traditions, shaped by the community’s history, that determine the general behavior of the society’s members. The differences in behavior exhibited by members of two societies, viewed collectively, are due to the divergent histories of the two societies. But it is just this average behavior that a science of racial psychology might study; only by a perversion from its scientific aims could it deduce therefrom “innate faculties.”
Actually, we have seen (p. 117 ff.) that this behavior is not innate. It is not even immutably fixed by the environment. It is conditioned by social tradition. But just because tradition is created by societies of men and transmitted in distinctively human and rational ways, it is not fixed and immutable: it is constantly changing as society deals with ever new circumstances. Tradition makes the man, by circumscribing his behavior within certain bounds; but it is equally true that man makes the traditions. And so, we can repeat with deeper insight, ‘Man makes himself.’”
Scientists of every sort, including economists if they use that term to describe themselves certainly contribute to this ‘making.’ They stray into areas of impossibility, however when they claim their theories or research supplant or ‘correct’ the work of ordinary people (non-economists). Among the social sciences economists are particularly afflicted with this malady.