Sunday, December 1, 2013

Sustainable Growth and a Synthetic Economy

Unlimited  population growth is unsustainable.  We cannot sustain an infinite population on a planet with finite resources.  Some countries are already facing a population decline as the birthrate drops.  People are manifesting an instinct to dampen population growth, but governments are trying to counter this natural decline in population growth.  Governments either provide incentives like the French to make child rearing less expensive for parents, or use immigration like the USA and England to boost population growth.  Our economies at present depend on a growing population to fuel economic growth.  Based on current economic understanding, a stable, sustainable population would lead to economic stagnation.

When you hear about sustainability, usually it is in the context of reducing consumption to compensate for a growing population  What we need instead of conservation is to let population growth flatten and then stop, but we do not know how to run national economies with zero population growth.  I started thinking about economic growth without population growth back in 2008.  In 2012 I suggested a simulated economy consisting of simulated consumers and producers, simulated goods and currency could grow without the constraints of limited population and resources.  I suggested in 2012 that it would be tricky to transfer simulated (synthetic) money into the real world.  I also suggested that financial derivatives were actually instruments of a simulated economy, with the wealth from derivatives being treated as though it is real wealth instead of synthetic wealth, potentially debasing our currency.

In 2013 we can see more confusion between real and simulated economies as virtual currencies like Bitcoin receive increased attention. There are newspaper articles asking if you should have some Bitcoins in your investment portfolio.  Let us remember auction rate securities.  They were used for decades by investors, then failed in the 2008 banking crisis.  Auction rate securities were more real than virtual currencies like Bitcoin, but eventually fell apart as investments.  There will probably be a speculative bubble for Bitcoin, but it will turn to tears.

If we developed synthetic, simulated economies rationally we could debate the transition of synthetic wealth into real currency and plan the move of simulated money into the real world.  Instead, some players in the economy are going straight to the fabrication of simulated wealth and are attempting to move this simulated wealth into our economy behind our backs.

I had envisioned algorithms that created music through artificial intelligence.  I envisioned simulated musicians selling algorithmically developed music to simulated consumers.  We would own crowds of simulated consumers that would vote on the music they liked.  Real people would sample the outputs occasionally and select algorithmically developed music to move into the real world to sell to real people.  A synthetic economy can be created rationally.  I have heard that marketing firms will provide an artist with a crowd of artificial followers on Twitter.  Elements of a simulated economy are forming.

However, instead of a rationally developed new economy of simulated or synthetic growth, we have clever people manipulating our economic system to fabricate money out of thin air.  Besides Bitcoin and derivatives, consider the Quantitative Easing program.  Here is a brief explanation of quantitative easing (QE) from the Financial Times:  "...the most important step in QE is that the central bank creates new money for use in an economy. Only a central bank can do this because its money is accepted as payment by everybody.  Sometimes dubbed incorrectly "printing money" a central bank simply creates new money at the stroke of a computer key, in effect increasing the credit in its own bank account."

If we are not careful, the mixing of synthetic wealth with real wealth can dilute the value of the dollar and diminish our savings and investments. The pressures of a simulated economy are building and wanting to spring into creation, but the best parts are being over-looked while the most dangerous parts of synthetic wealth creation are being introduced into our economy without adequate public debate.  You might think a simulated economy is science fiction.  I think that synthetic wealth creation is a Frankenstein's monster.

We need to pay attention before it is too late.