Using money and power to expand your money and power, naturally pushes all the relationships you know about and lots you don't,
to their very limits, unless you're aware and respond by using your resources to make peace instead...

There are 3 versions, from simple to complex (and from new to older)

1.      Why finance has a bigger appetite than the earth

11/26/10 2/5/11	The ideal investment
	.... for people think of investment only for the money is one that assures that putting money in will let you take more out, and let you add that gain to your investments over and over and over.   One can only imagine that to be sustainable, though, when considering nature as a concept rather than an environment.   It results, of course, in an eruption of complications when the complexly coordinated physical processes that had been trusted to multiply without consequences become uncoordinated and collapse.   Why people have repeated that experiment with it's naturally certain result over and over, at large and larger scale, to the point of running their societies by it, is more the mystery because we so clearly understand the consequences in our personal and community affairs.   So it appears to be the central feature of all great financial panics, and at the heart of all "tragedies of the commons" like the numerous collapses of otherwise magnificent complex societies, is that it besets us for physical systems we think of as capable of behaving like mental concepts, without environments or limits.    The linked PDF [that needs edit] has a slightly more complete diagram and 1 page discussion.   The endless spiral of finance relies on a guarantee that putting money into things will let you take ever more out.  That is only possible for the information side of the economy, and not for the physical side.  So conflict between our information and reality develops.   On the physical side, the profits of ever greater scale being accumulated rely on ever growing creativity in making things work, by people unknown to fund owners, money managers, and even the officers of businesses organizing the uses of investment funds.   What physically generates profits is the active learning of all the participants that causes the system as a whole to organize itself to produce more value than the costs of the parts.   It also wouldn't happen without the ability of the economy as a whole to transfer surplus resources from one place to another for the purpose, the investment function.   Using those profits to the system's the point of disruption or exhaustion, though, is not productive.   We seem do it over and over creating great eruptions of wealth that collapse the environment they developed in, thinking of finance as a concept rather than steering the main self-control mechanism of our economic environment.

2. Why ownership grows even when wealth doesn't,
.... the true market system correction

Simple Statements of the concept: 2/28/10 4/29 6/15/11

2/28/10             Comment to "To the Point" - excellent

For the political view to make sense requires people to see that keeping our economic system profitable is a necessity for every individual's survival.    Still, it sounds crazy for creditors to spend their money instead of compound  their wealth, as a matter of survival, but from a natural science view it's quite clearly the only choice.  

It may "sound funny" but for a growth system to switch from taking more and more control of its environment, as every growth system does during that phase, to establishing a stable niche for itself and maturing to become resilient to change, is actually the quite practical solution to natural limits.   All natural systems that survive their growth seem to demonstrate the principle, and provide ample diverse examples to study for ideas.   It's a big task, though, and at this late date with so much lost of our natural heritage already, all we actually do is commit to learning and try to bring others along.

2/8/02 11/18/09 2/8/02 We have made promises for a future that are not materializing.  By far the cheaper solution is correcting the error in the promises, adjusting what creditors hoped others could earn for them, rather than shutting down all the businesses that are failing to perform according to the misinformation they bet on.

Which would you choose?  Would it be a casino, like Wall Street, where you hope you're guaranteed to win, on average, or one where you're guaranteed to loose, on average, like Las Vegas? ...The odd answer is "it depends".   It depends on whether the casino, in either case, spends its own winnings so you can earn them back with labor if you happen to lose... or not.   If the casino doesn't spend its own winnings from your bets, everyone always loses.

Our present effort to stabilize the economies and the earth is mostly aimed at the stabilizing the completely wrong thing, stabilizing the money pumps for making and keeping ever multiplying bets.   It creates bubbles of unreal expectation that no containment could be devise to prevent from popping...!   Why?  Because the casinos we are betting in are not spending their own earnings.  Stabilizing multiplying bets WAS the appropriate strategy once, back before nature stopped responding ever more to our investments in her limited spaces and materials and delicate living systems.

Complex systems in which everything interacts can be difficult to understand, and difficult to explain.  

Ask questions.  I'm learning all the time. Note the dates for when sections were written.  The foundation of my work is a universal certainty, the physics that points to why "all things come and go" and that for physical continuity events need continuity of change to get there, following a succession changing directions of accumulation.

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7/22/09 9/19 Growth stimulus continues to grow in good times and bad, until the inflated expectations is creates collapse.  The reason is our "odd" primary purpose of regulation, stabilizing financial rates of return to help investors steadily add their returns to their investments and have them continually multiply.   That ever multiplying "good" turns explosively bad is an absolute law of nature.   Any way you do it, trying to continually multiply the scale, complexity and natural impacts of the economy is a problem.   The equations won't break, but all our relationships between things on the earth will.    There's only one way to have stable interest rates and a stable economy.    That's to do something about the other part of that first sentence... the continual compounding of returns.   It pumps up bubbles of obligations and expectorations that can't be fulfilled, allowing investors to continually multiply their ownership of other people's future work, as if that was a way everyone could have ever growing earnings.    Economies that grow to become part of nature,  rather than just blow themselves up, provide an alternate model.  This page is more about our particular problem and options.  It might all be "thinking to sleep on" though, because it's about opportunistic (uncontrolled) systems and how they are able to take very good care of themselves.   People are generally trained to think only in terms of deterministic causes.   It's the opportunistic chains of events, both within and around natural systems, that steer them into the future, though.

The need is to find a strategy for changing a machine designed for automatic multiplication into a stable and responsive organism, so it can take care of itself and its world instead of blowing up in conflict and confusion.   The surpluses of the system and what opportunities they are used for that are the natural "steering mechanism" of all natural systems.   The surpluses first used to multiply the system then need to be redirected to making it sustainable.   Our whole economic "project" is to build a comfortable new home on earth.  That's the real purpose of growth.   What could prevent us from finishing it, and leave it generally uninhabitable, is our failing to switch to completing it, as if a home builder used up all the lumber on building walls, and didn't have enough wood left to build a roof.    Failing to complete any kind of design causes it to be abandoned.    Switching our purpose from starting up ever more to completing the economy is a broad but extremely firm boundary condition for any possible solution to our deep global system problems.    The returns on investment need to be used by investors for stewardship rather than multiplying.   How to assure everyone does, and sees how, starts with a few people seeing the real necessity.

Why we need to do it now has to do with the whole system going past it's point of diminishing returns probably 50 or more years ago, and increasingly "profiting from scarcity".   Real earnings growth is failing because we're pressing the limits of the earth and bidding up the global cost of resources as we accelerate their depletion, with every expansion of the system .  What happened is that getting ever bigger caused the system to become "big", and all the relationships of relative scale reversed!!   We just didn't change out economic theory...    It's a dead end, and we need to stop expanding and as quickly as possible begin to carefully contract.    We've crossed a dangerous tipping point in our relation to the earth.   It's also one that has been clearly approaching for decades, of course, but we've been treating it as a dream and it isn't.  We're continuing to run up the whole economic system's overhead costs as it runs down its resources, at accelerating rates.  

Like musical chairs,  promoting the growth of more productive parts of a system in a zero sum game removes access to resources for all others, and pushes the system through successive waves of unsustainability.  We noticed the one that happened in 2008 and continues, but don't notice lots of the others.    High productivity growth beat out less productive struggles for survival, causing the economy to shed whole webs of previously stable 'necessary' parts.   The present global contraction demonstrates that well, and is an example of what will surely get ever worse along our present course of accelerating our use of every usable.    If you think of the financial definition of "optimal growth" and you see the real problem.   Optimal growth is greatest steady rate using up the affordable resources on earth at as fast an accelerating  rate as humanly achievable.   That's what the "profiting from profit" rule physically means, and always did.    In the past, though, the more we used the more we found.    That reversed about 50 years ago...   To preserve the capital of the world system we built, and discover how to complete it to make the earth a good home, growth needs to become responsive to its environment and our future, planning for a long and stable vitality living within its limits on earth.

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3/20/09 5/25 Debt and ownership keep growing even when wealth does not because stabilizing the investment markets assures a positive financial return and the compounding of returns.  The responsiveness of the earth to our investments is not in as direct control of our regulations as the money system is, that's the problem.    Physical growth has not kept up from the 1970's to the present, has been in a condition of *over-stimulus* since then and unable to produce earned incomes to match, so what the financial markets kept growing on was transferring ever more ownership from the product market to the financial market and creating debt.   That created misinformation throughout the economic system.   Financial obligations kept growing when the physical system didn't, creating false expectations and a major information error about the reality of the economy's real products.

When information and reality drift apart the choice is whether to change the information or to change the physical system.   In this case the problem occurred because we had been trying to change the physical system and found it unresponsive.    The US and G20 policy appears consistently to protect the misinformation as much as possible and prevent the further collapse of bad debt instead of find as smooth a way as possible to reduce it to match the reality of the physical system.

The source of the distortion not being corrected is that the rules allow the growth of financial obligations and the growth of physical economies to diverge( ), except constrained by overshoot and collapse.  It's a design flaw in the rules.     Maintaining a positive interest rate as is needed to make markets work, allows people to have guaranteed multiplying financial winnings on their economic bets, even when the physical economies are not multiplying.  It's a globally institutionalized promise too good to be true.  

Why didn't the scientists connect the two kinds of models before?    It's both because of the natural academic self-isolation of professions, which our professional academics are then very responsible for, and that connecting different modes of description for complex systems takes breakthroughs.   A complex systems principle is that it generally takes a different mode of explanation to describe different aspects of the same complex system.  That is one of the core reasons they're called "complex".   Here I'm using a legitimate way to connect physical and information models.   It models the freedoms of physical systems guided by choices made in information systems, connecting the physical and perceptual worlds as we use them in parallel.    The information model gets out of synch with the physical model after the point of diminishing returns as the physical system responds to getting big, but the financial information about it doesn't. 

The explanatory principle of natural systems physics is that: As things get larger they eventually get big, so changes in scale become changes in kind, as new kinds of organization in their internal and external physical relationships require new kinds of information for how they're explained.    The meaning of the proof is that if, as it seems, the limitless growth assumption for the responsiveness of the physical system no longer applies, but we keep using it, then collapses of the kind we just experienced then necessarily become the rule rather than the exception.

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3. Physical systems have limits of elasticity
... and financial calculations don’t.      

4/16/09 - Because it’s necessary to have a positive interest rate to maintain working markets, compound returns and other credit expansion need to be limited to the comfortable ability of the physical and environmental systems to respond.   As Soddy, Keynes and Boulding, all said before, there needs to be a natural limit to credit.   Here the proof is that that limit must be a limit of compounding, the choice to not spend returns.   At present the economic assumption is effectively (if unintentionally) the reverse, to increasingly stimulate a naturally overstressed physical system in an attempt to restore automatically multiplying financial returns.   What's missing is understanding what nature uses growth for, to begin things, and how living systems need to switch to completing directions of development by maturing to solidify gains and assure lasting vitality (5).  That seems to provide the one model available for economies to climax without collapsing their environments.  

When Ownership Grows and Wealth Doesn't This diagram represents a map of all ownership transfers for an exchange of money: Goods & Services consuming energy are exchanged for money in the product market A (the real wealth), Money for Promises to return more money are exchanged in the money market B (ownership), and ownership of unchanging property is exchanged in the artifact market C (artifacts).   $-Holding (in the center) represents each individual's separate money and their choices to pass it through markets A, B, & C representing their individual interactions with each other. If "Holdings" was a stack of disks, one for each individual, the model in time would represent each and every individual exchange of money for materials.  Ownership collects earnings from wealth as a guaranteed growth of debt, and in nature the real growth of wealth is not guaranteed.

Even when people are not "gaming" the system, distortion can develop between the money market (trading financial instruments), and the product market (trading physical goods and services).     Physical products can't be created by imagination alone, but information products can, so things like circular price inflation for artifacts not changing in value (like real-estate) can take the two markets in different directions as a whole.   That creates falsely inflated information about the future value of both artifacts and business investments.  It's not that individual deals could be somehow judged for how much "misinformation" they contain, but that a disconnect can develop between the real scale of the product market and the real scale of the money market as a whole, even when both are operating "properly".   

There have been many technology transitions in the past that matured and then gave way to another in a continuous succession of compound real growth.  It used to be that the more we used the cheaper and more available it got.  What's different now is that most resources are showing signs of exhaustion, increasing price and decreasing availability as we increase investment, requiring successively increasing investment to not decline in availability.   We formed our cultural expectations and economic institutions for the reverse, what was always the case before, but isn't now.  What's different in particular from the 1930's recovery is that we can't pump investment as our way out of it, since we burned up all the cheap resources we used to do that before, and now they're gone.  We need a new strategy.   The one available seems to be the one that nature demonstrates with every individual system she builds that has a long period of mature vitality after it's initial growth spurt, using a period of maturation to complete and perfect things that growth begins(5).

 

In the market economy we designed during our long growth period distortion naturally develops when goods and services traded in the product market A stop multiplying for any natural cause.   Then obligations for monetary returns for the money market  B continue to multiply because of compound investment, since even a non-growing physical economy needs a positive interest rate.  So exponential growth in financial instruments continues by exploiting the necessary system liquidity even when the physical system is not growing.   It creates an illusion of "making money" while making nothing but false expectations.  It's done by compounding returns at a time when wealth isn't similarly growing.    The distortion that causes develops to a limit of the physical system's elasticity, overextending  to a point of failure unless it is stopped some other way.    One of the frequent signs of this developing is inflation in the price of artifacts of no changing real value C such as the housing bubble.   Physically diminishing returns on investment for the system as a whole have been evident in the divergence of total US GDP and US median income since 1970 (1).

The main "inelasticity" in economies of both natural and human design is the learning responses of their parts.  Economies are learning systems, and learning takes time. (2, 3).   Human learning about complex systems we depend on and are part of is notably slow for many reasons thought can be somewhat improved by new kinds of thinking (4).

(reference links below)

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the Letter to Bernanke

This page began, as much of my work, with a letter.    I posted this page for references in a letter to Ben Bernanke, Chairman of the US Federal Reserve Bank on 3/20/09 as follows:

Chairman Bernanke,

There is a violation of physics built into our standard model of investment.    I respectfully request that you let me answer the questions that should raise for you.     Our financial model is what is failing, and I believe our present actions are pushing the bottom lower.   

I discovered how investment incorporates a critical error in treating physical systems as being information systems 30 years ago.    The physics is simple and unequivocal.    Physical systems have limits of elasticity and financial calculations don’t.    I have always been able to walk people through it, but instead of asking for that help they have generally just offered their uninformed judgments.    You should not do that if you are sincere about fixing the economy.     I have also been improving my methods and my understanding of the broader issues ever since too, of course.   For a diagram & notes on how the problem develops see  www.synapse9.com/issues/concept$.htm  .

To fix it there is more than one way to begin, but the end is a sustainable economy.    The main feature is an investment sector using savings from earned income rather than from compounding unearned income as its resource.    In the interests of preserving both present physical and financial capital, and make the best of our shrinking physical options for a sustainable economy in the long term, now is the time to switch.

-----  fyi  (to put it in context)

To fix it there is more than one way to begin, but the end is a sustainable economy.    The main feature is an investment sector using savings from earned income rather than from compounding unearned income as its resource.    In the interests of preserving both present physical and financial capital, and make the best of our shrinking physical options for a sustainable economy in the long term, now is the time to switch.

The breaking point of our economic system has been visibly approaching for 30+ years, in the divergence between our multiplying financial obligations and the diminishing responsiveness of our goods & services economy and environments.    The correction is to correct the misinformation that accumulated in the growing financial obligations, i.e. mark down the financial obligations in proportion to their distortion, to rebalance  them with the capabilities of the physical system to keep up.    That would relieve debtors of the falsely accumulated obligations and end the contraction.    To relieve the strains of that dislocation, and to respect the interests of non-debtors, a measured amount of non-debt created money should be printed and distributed to people in proportion to their average earnings, and as a way to start the new stable financial system.

Continuing to protect the financial misinformation and its excess obligations for the physical system, rather than correct the balance, will force the current contraction to continue, just as if a doctor was trying to save a patient by applying more leaches.   Medicine actually began that way, you know.     There are a number of ways we misunderstand the systems of nature as if we were applying leaches to drain “bad blood”, thinking it’s the best way of healing them.

It’s simply not physically possible to maintain a positive interest rate and have stable compounding returns on investment.   It constitutes a promise too good to be true.    The lag times between demands and needed responses multiply, to where the tolerance for that is exceeded and  the elasticity snaps.     Because it’s necessary to have a positive interest rate to maintain markets at all, compound returns and other credit expansion need to be responsive to the responsiveness of our physical systems,  environments and our own rates of learning.

Best regards,    Phil Henshaw      ¸¸¸¸.·´ ¯ `·.¸¸¸¸  

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Background

• 1979-1 An Unhidden Pattern of Events - a general theory of natural system economies
• 1979-1 The Infinite Society - the problem of limiting responsiveness of physical systems
• 1983-1 General Allocation Theory - a model of where all money goes (sim 3 Bubble Econ. abv.)
• 2009-1 Complex Systems - History & open Issues re: the "physics of nature" - for EoE Wiki
• 2008-1 A Continuity and Divergence Principle - The complete physics of continuity from a 1995 paper
• 2008-2 Life’s Hidden Resources for Learning - Cosmos & History issue on "What is Life"

References

• 1)  US GDP and US median incomes - one of many measures of physical & financial system divergence.
• 2)  Neoclassical Economic Theory - History and error of basing economics on physics
• 3)  Complex Systems - History & open Issues - draft for Encyclopedia of the Earth
• 4)  Bump on a curve notepad - a set of general exercises for those discovering systems thinking 
• 5)  Chapters of a whole event - Growth to maturation appears to be how nature makes so much durable diversity seeming to efficiently resist the laws of decay, by first beginning things with a local growth process and then finishing them with a local maturation process.  It uses the system itself as it's own information storage location, explaining the mystery of where the 'rules' for them are, using independent behavior within the laws, not imposed by the laws but just made possible for individual systems that develop on their own.

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