Would the Real Economy Please Stand Up

More-or-less an exegesis of The Manual Economy. Warning: I am not an economist; this is speculative.

I.

What does “the economy” mean to you? What do those words point to in the world? If I say instead “the banana”, that’s a pretty well-defined concrete object. If I say “the marriage”, that’s way less concrete but still has pretty well-defined boundaries in a lot of ways. But when I say “the economy”… well. Isn’t everything kinda part of the economy? It starts to involve a lot of hand-waving and ambiguity.

Just as the idea of “marriage” is made up of roughly three distinct pieces in reality (a legal piece, a social piece, and a now-optional religious piece), I like to think of the “economy” as really made up of a few fairly distinct pieces. Like two kids in a trench-coat, every economy is really two economies trying to sneak into a movie theatre together: a concrete economy made of goods and services, and a virtual economic coordination mechanism. These two economies usually stay approximately isomorphic to each other; when I buy a banana there are two parallel exchanges, one in money and one in bananas. Think of it like double-entry bookkeeping.

To draw out this distinction, imagine two alternative worlds. Imagine first the world vaguely hinted at in The Manual Economy, the world where money and all other coordination mechanisms have completely disappeared, but life carries on completely normally. In this world people still work, and receive goods. There are still “rich” and “poor” lifestyles, and poverty traps, and all the rest. It’s just that there’s no terrestrial coordination mechanism anymore; the economy stays coordinated because some twisted god wills it to be so. In this world you don’t go buy a banana. You go take a banana from the store without giving anything in return. The twisted god controlling us all merely wills it so that poor people don’t go take all the bananas.

For our second imaginary world, take the mirror image of the first. In this world money, and banks, and mortgages and all the rest still exist. People get paycheques, and try to make their rent each month, and get punished when they’re late paying their bills. But also it’s basically The Matrix; everybody eats and sleeps and lives in a permanent tube with no actual goods or services being exchanged. In our first imaginary world, we had a concrete economy running somehow with no coordination. In our second, we have a coordination mechanism running somehow with no concrete economy to coordinate.

Neither of these imaginary worlds are intended to be realistic or “stable” realities in any sense. They’re designed to provide a sense of what these two economies look like when completely isolated from each other. In reality, they depend on each other to stay standing, just as both kids depend on each other to successfully purchase that movie ticket.

II.

I said before that these two economies, the concrete and the coordination, are generally isomorphic. But they aren’t always isomorphic to each other, and unsurprisingly, all the interesting stuff (bubbles, crashes, government stimulus, most white-collar crime, etc.) happens in the gaps where they diverge.

Let’s start with the dual-economy view of an economic crash. In fact, like “the economy” itself, the dual-economy view implies that there are actually two main types of economic crash, depending on which piece of the economy has actually crashed. The easy one to talk about is a concrete economic crash, which can happen when there’s a shock to actual production somewhere. Say that a new disease destroys all of the food crops in North America in the span of a few weeks; this is a real economic crash because all of a sudden the real economic capacity of the continent has drastically shrunk. The problem isn’t one of coordination; even if you coordinate everything perfectly, there just isn’t enough food.

This sounds bad, but the other kind of crash is in some ways worse. When the coordination mechanism crashes instead, there’s generally still enough real economic capacity for everybody to get what they want, it’s just wildly misallocated. This is what happens when for example speculation drives up the price of a particular good until the bubble finally bursts. That can happen even though production and consumption of the good in question stayed perfectly even throughout the entire run. There were no shifts in real supply or demand to justify the bubble. The bubble wasn’t created by a shortage, and didn’t burst because of a surplus in the market. The coordination mechanism simply failed. This kind of crash is what we’ve seen the most of recently: entire neighbourhoods evicted from their subprime mortgages while the homeless crowd the streets; people going hungry while food rots in a warehouse a few blocks away.

The virtual economy can crash because of a bug in the “software” of the coordination mechanism, without affecting the fundamentals of there being enough real capacity to produce all the food, shelter, goods, services, etc. that people actually want. Conversely, the concrete economy can crash (say because of a global pandemic that forces most real economic activity to grind to a halt) but as long as the software is resilient the coordinating mechanism will keep chugging along, coordinating whatever economic activity is left. It’s arguable whether this is a bug or a feature.

III.

Another interesting place where this dual-economy view comes in handy is getting a possible sense of why national debts are so weird. As far as I can tell, the consensus among professional economists is something along the lines of “you don’t want it to get too high relative to GDP, but an increasing absolute national debt isn’t a problem the way it would be for an individual”. This has always struck me as counter-intuitive, and I think a dual-economy model makes it a little clearer.

Debt is an abstract concept, which puts it firmly into the coordination side of the economy. It’s a promise of real economic activity in the future, which allows economic coordination across time. Importantly, there is no real economic “lack” behind debt; you can’t have a physically negative number of bananas. Debt is always just a number on a balance sheet. Just like personal debt can be a useful tool in the form of a credit card – assuming you hold up “both sides” of the temporal bargain by paying it off promptly in the future – so too can national debt. But whereas a personal debt is tied to your personal ability to pay it off, which is finite and limited, national debt is tied to the theoretically-infinite national future.

Now obviously we don’t expect any country to last forever. There’s the heat death of the universe to worry about after all. But the timescales are so wildly different that it’s hard to reason about. It seems plausibly reasonable to sell a twenty-year mortgage to a thirty-year-old human, even if they’re already in debt, but rather less reasonable to sell it to somebody already pushing one hundred. The earnings potential and lifespan just don’t seem to be there to support the future end of the bargain. But it’s entirely reasonable to believe that major economic powers might continue to exist in some form for hundreds more years, and even continue to grow economically through that time. Today’s national debt is an attempt to coordinate real economic activity across time with our future, much larger, national economic future.

Interestingly, a similar kind of analysis can be applied to fractional-reserve banking (with deposits viewed as individual loans to the bank).

IV.

I am not very confident in the above analysis, but even if it’s mostly garbage I think that treating the virtual and the concrete economies as separate entities has helped me. “The economy” has always seemed like a big ball of spaghetti with a bunch of arbitrary rules, and I feel like this is a good step towards drawing out a gears-level understanding, even if a lot of the details are wrong.

Hopefully it helps you, too.

The Manual Economy

[An attempt at fiction in the style of Scott Alexander. With bits of Lewis Carroll and Douglas Adams thrown in for good measure.]

The hallucination started out so normally, I completely forgot that I was tripping.

I was at the dentist, and I had just had my teeth cleaned. You know the drill, the hygienist goes through your teeth with this little spray nozzle that gets into all the cracks and cavities you pretend don’t exist when you’ve got a brush in there. Then they make you hold some disgusting not-quite-mint not-quite-water in your mouth, and swish, and spit. And spit. And spit. And after about the third blessed mouthful of real water, you can vaguely taste something other than not-quite-mint, until your salivary glands give up the ghost entirely and your mouth turns into the Sahara desert.

As I said, it was weirdly normal for a trip. I’d been expecting unicorns, or aliens, or a sky made up of funky colours and mystical cactus people who could factor large numbers. But I was at the dentist. If I’d wanted a trip to the dentist, I would have just gone to the dentist. It would have been cheaper, and probably better for my teeth.

The entire dental experience was so totally normal I completely forgot I was tripping until I went to pay, and I couldn’t find my credit card. Or any cash. My wallet had a driver’s license and various other identification cards, but no payment at all. The receptionist smiled at me politely.

“Is everything alright? Can I help you”?

I winced. “I’m sorry, I seem to have misplaced all my money, I’m not going to be able to pay my bill today”.

There was a confused pause. A giant hand walked past waving an umbrella and whistling show tunes. The receptionist winked at me with both eyes at once. I suddenly knew, somehow, that I didn’t need to pay, so I turned and walked out the door. Across the street was a bank, so I floated forward until I was inside.

The bank, like the dentist, seemed totally normal. There were no lines, but that was expected for mid-afternoon on a Tuesday. I rolled over to one of the tellers.

“Excuse me”, I said, “I seem to have lost my credit card, can you help me”?

There was another confused pause. The bank teller turned into a giant hand and flew away. The entire bank building sort of dissolved as the buildings on either side squeezed together to fill up the space. I ended up on the sidewalk outside a Starbucks.

I didn’t even like Starbucks.

Sitting outside the Starbucks was a homeless person whose baseball cap kept flickering as if it couldn’t make up its mind. First it was on their head, but then *pop*, it was on the sidewalk in front of them with a few coins in it, and then *pop*, it was gone entirely. And then it was suddenly on their head again. After a few seconds of this my own head started to hurt, so I stared at the sidewalk extra hard until the homeless person turned into a giant hand, and the baseball cap was arrested for multiplying entities beyond necessity.

The hand spoke to me. “Now look what you’ve done! It’s hard enough to coordinate this economy without some yokel trying to physically instantiate all of the mechanisms”!

There was a third confused pause, but this time the hand just sat there looking disgruntled until I finally echoed its statement back as a question. “You… coordinate the entire economy”?

“Yes of course I do”, the hand replied, “somebody has to do it or this whole place would fall apart. How else does food get to everyone who needs it, let alone all the other goods and services”!

I blinked. “So, you’re, literally, the invisible hand of the market”?

“Well I was“, the hand said waspishly. “But do I look invisible to you”?

“Oh, sorry about that”, I apologized. “So my money and credit card, and the bank and everything? They all disappeared because they’re… you? Or manifestations of you, or something”?

The hand glared at me. “I’m a hand”, it said, waving at itself sarcastically. “It seems awfully rude of you to talk to me about manifestations. Until you came along, I had no need of them at all”! It huffed. “Now here I am, trying to coordinate an economy the size of a planet, and instead of being a magical omniscient force I’m trapped in a giant disembodied appendage. What am even I supposed to do with all of these fingers”?

I giggled. “I dunno, you could say that the economy just went… digital“.

The hand rolled its eyes, but I had a lot more ready.

“Oh come on, you’ve got to hand me that one. No? You’re not going to clap back? Well come on then, let me give you a hand coming up with a response. I’m pretty handy with this sort of thing, in fact…”

Ten minutes later, I finally ran out of steam with a complicated pun about greased palms and coconut oil, that even I admitted was a stretch. At this point, the hand had finally had enough.

“Look”, it said, “maybe in your universe the economy is coordinated by these magical distributed pieces of paper and electronic numbers, and nobody has ultimate responsibility for the economy. But in this universe, none of that exists; the buck stops with me. I’ve been listening to you make hand puns for ten minutes, and in that time the entire economy has ground to a halt because I haven’t been there to ensure the right transactions occur at the right time. In some sense I don’t just coordinate the economy – I am the economy”.

I shook my head. “That can’t be right”, I said, “the economy isn’t made up of pieces of paper and numbers, the economy is all of the real things that get moved around because of that coordination. Just because you took a few minutes off to…”, I giggled again, “manifest, as a giant hand, farms are still growing food, factories are still producing goods, the economy is still going! Transport truck drivers didn’t all go on strike because you took a small break”!

“That’s exactly my point!” said the hand. “Truck drivers were on strike when you started your little game, but that strike required coordinated action which I provided. When I started slacking off all those truck drivers got bored and left the picket line to follow their individual inclinations, and now it’s chaos”!

At this point I could feel the drugs starting to wear off, but the hand was still going.

“They’re not striking, or trucking, or anything useful at all! The entire economy is crumbling like the twin towers after that so-called plane crash!”

The bank reappeared beside the Starbucks, and the entire row of buildings shifted down to accommodate.

“It’s all the governments fault, them and their secret mind control beams out to steal your thoughts!”

The not-invisible giant hand shrank in size until it was a normal hand, attached to a normal homeless person, still talking about the implications of omniscient economic coordination and various other conspiracy theories. My teeth started to hurt.

I’ve written this trip report in an attempt to jog my own memory. Something that the hand said during our conversation really resonated with me, and I just know the next Nobel prize in economics is mine if I can only remember what it was…

I just can’t put my finger on it.