We don’t readily understand our interconnectedness; social matrix algebra, which is a matrix algebra practical application, illustrates the problem.
Social Matrix Algebra. A network of some of my friends on a social website.
Matrix Algebra
In a former post, I talked about a high school teacher who hectored me constantly. In the post, I also mentioned one of my best friends who used to academically rip my butt in that teacher’s classes.
The one section from her class that I specifically recall was matrix algebra, solving several equations simultaneously. You need to know that this was before hand-held calculators were available. I can still remember the next year, one girl in our physics class had a 4-function calculator her dad had bought her for something like $100 — about $250 dollars today. She instantly became popular.
So solving matrices back then required hand calculations, and a lot of careful attention. One small mistake, and the whole thing fell apart. Most of the matrices were ‘neat’, i.e., the solutions resulted in whole numbers. But during the last part of the section, the teacher assigned us homework with a 5×5 matrix — they get much harder the bigger they get — and the results came out in 17ths. It took me three teeth-gritting attempts over a couple of hours to solve it. My friend told me the next day that he solved it on his first attempt.
Hmph.
A Matrix Algebra Practical Application
At the time, all we were told was that matrix algebra was good for solving equations. With the rise of technology, it turns out that computers can solve very large, highly complex matrices without much problem. Years later in graduate school I found out that a cell in a matrix can be not only a variable, it can also be another equation, even another matrix. With that approach, matrices can be used to model highly complex systems.
For instance, one matrix algebra practical application would be to represent a food/energy matrix. You can take a survey of a pond, calculating out the numbers of plants, animals, and microbes, estimate what they each consume and produce, and then include air, sun, and temperature. The whole system can be laid out in a giant social matrix, where each cell represents a factor in the system, with variables representing how they all relate to one another. Then you can play with it. What happens if the fish population drops? Rises? An invasive species is introduced? And so on.
The concept is powerful. In fact, Wassily Leontif won the 1973 Nobel Prize in economics, largely for producing a very accurate table (i.e., a solved matrix) showing what each sector of the economy contributes to every other. Today, economists and mathematicians apply the Leontief input-output analysis to a broad array of problems. It’s not hard to see how you could take Leontif’s tables, and simply insert more complex expressions into each cell, to produce a highly dynamic analysis of the economy, and get some idea of how one sector affects another in real time.
Oil Slump
For instance, I have noted that Lafayette is not an oil town but it has a thriving petroleum sector. Before the recent slump, oil accounted for about 10% of the jobs in the MSA. From what I can tell, the current oil slump cut that a couple of percentage points, to about 8%. A brief consideration would suggest that the local economy would only drop a couple of points. No big deal. If your boss said he was cutting your pay 2%, you wouldn’t like it but it would hardly affect your lifestyle.
It’s been much worse than that in Lafayette. First, the layoffs did not account for the total drop in revenues; any business with reserves is laying off as few people as possible, and tightening their belts until oil recovers. So a 2% drop in employees represents a much larger drop in revenues. Then there are non-petroleum suppliers that nevertheless cater to the oil patch: office supplies, janitorial, computing, helicopters, and boats. They were hit hard. Some of those businesses don’t have much in reserves, and they had to shutter their operations. Oil jobs provide the best-paying jobs of any major sector here, so a lot of high-end restaurants and stores also saw a drop in revenues, and they had to lay off people. I know of at least one upscale local restaurant that permanently closed early in the slump.
All of this creates a synergy. A 2% drop in the labor force turns into a very large local impact. And that’s in a town where the oil sector is not the largest industry; healthcare, retail, and manufacturing are all larger.
University Town
People don’t grasp this interconnectedness readily. Years ago, I was in grad school in a college town. The college had 10K students, the town had 10K residents, but the locals treated the students with a fair amount of disdain. One day I was talking to a nurse who was a supporter of the college, and complaining about how badly local businesses treated the kids. I noted that without the college, the town would not be there.
“Oh, I don’t know about that,” she replied. “My husband’s a lawyer here, and almost none of his clients work on the campus.”
Depression Spending
Our insensitivity to our interconnectedness also turned up some years ago, when a friend insisted that the New Deal did not pull the U.S. out of the Great Depression. WWII did.
I thought about that a moment, and then asked, “So let me get this straight. Moderate government spending to employ our men and women in rebuilding American infrastructure was ineffective for getting us out of the Depression, but massive deficit spending to kill our men and women in destroying European infrastructure, that was highly effective?”
Marshall Plan
Similarly when the Marshall Plan was first proposed, many in Congress opposed it. The U.S. had already funded two post-war aid packages to help Europe, and neither had produced any demonstrable effect.
The Marshall Plan was a much larger financial commitment on our part than those first two packages. But that larger investment worked, although part of the reason was that a large number of our best & brightest worked on the Plan, alongside some of the best and brightest from Europe.
Pennies from Heaven
It seems that any source of money will work. Sure, Detroit has done it with autos, New York does it with banking & finance, and Houston does it with oil. On the other hand, New Orleans does it with bars and restaurants, Hollywood does it with entertainment, North Carolina does it with tobacco, Reno does it with cathouses and gambling, and Denver’s trying to do it with pot. It’s social matrix algebra: pretty much anything that brings money into a local economy will move through the system, and grow that economy.
I have been wondering if it would even work with a kleptoplutocracy.
Continued after this important invitation:
If a dictator continued to run a corrupt government, taking foreign aid and investment and then spent it on ridiculous luxury — but he was forced to invest and spend all of his stealings in his own country — there is no reason that this would not grow his national economy. The first step would pay for ostentatious things, clothing, jewelry, high-end autos, expensive food and wine, etc. But as soon as that money is spent, it goes to people who spend more of it on the basics, food, clothing, shelter, education, and healthcare. That money continues through the econosystem, creating jobs and prosperity.
If that observation is valid, then the reason kleptoplutcracies do not work is not the dictator’s theft, but because the stolen money is spent and invested outside of the economy.
Economic Interconnectedness
It’s all connected. SimCity and its spinoffs may or may not include any formal matrix algebra in their software, but the game could certainly be represented as a matrix algebra practical application. Put money anywhere in the game, it flows throughout the economy. Take money out of the game, and depressive ripples flow out. A rising tide carries all ships.
But a lack of flow, either water or cash, grounds everyone.
In fact, one of the surprising capitalist insights from Karl Marx was that the problem in a depression is not a lack of capital, nor capacity. In a depression, the problem is simply that capital is withdrawn from the system. That, perhaps, might explain why the New Deal and the first aid packages to post-WWII Europe were not more successful. Perhaps they did not get enough money flowing, the contributions weren’t enough to get the capitalists to invest their capital.
And the opposite is also true, but also not immediately obvious. When Mitt Romney’s work at Bain Capital came under scrutiny, it all seemed a bit of a financial shell game. Buy assets, parse them out, shuffle them around, eliminate nonessential parts, then sell them and make a killing. A major part of the success of this strategy, however, is in eliminating those nonessential parts, i.e., those that send money out of the system, but don’t bring much back in. The noncontributing parts are much like the kleptocrat sending money outside of his country.
It’s a Wonderful Life
Which is fine for Bain and its investors. What the rest of us need to ask is, What do those activities do to our economy overall? One of the vulnerabilities of a free market is that it is possible to increasingly concentrate wealth in the hands of a few, which if not reinvested causes the overall economy to decline. We might argue, in fact, that this was one of the central Colonial problems that launched the United States: much more money was flowing out of the colonies than was coming back in. (I should note that there are arguments that the Colonies cost the English more than they made. But that was only from the Crown’s view. The private corporations and individuals who traded with the colonies, particularly those with a monopoly on their aspects of the trade (including many in the nobility who had no qualms about the obvious conflict of interest), were making a killing. I can say that without a jot of evidence, based on simple economics: if everyone had been losing money, the English would have given us our independence with their blessing.)
In the iconic film It’s a Wonderful Life, the local heavyweight Henry F. Potter makes a fortune, but he does it by strangling the town. In fact, we could argue that the whole impact of Jimmy Stewart’s character, George Bailey, was that he kept the community healthy, he kept the money flowing, at the expense of his bank’s larger profits. This point may or may not have been a conscious message in the film, but it was a pressing social concern at the time. When the movie was released in 1946, America was coming out of WWII, and the effects of the Great Depression were still present. To recover, Americans needed to get money flowing through the system again, rather than being held in a few miserly fists.
The economic & cultural importance of human connections is explored in my book, Kings, Conquerors, Psychopaths: From Alexander to Hitler to the Corporation, winner of 11 awards. (Click image for more information.)
Social Matrix Algebra
All of this brings us to social programs. The measure of a social program should, with very few exceptions, be the overall ROI on the community.[1]One exception would be social assistance for the permanently handicapped. It seems that this is pure charity, as it is an expense with no return on investment. We should always consider the long-term ROI: How many people are educated, and to what level? Do fewer people turn to crime, do jail populations shrink, and does violence decline? How much profit is lost from employee illness, illness of their family members, and in educating and training new employees to replace those lost to illness and death? Is the workforce strengthened, are they better-educated, and are they able to constantly re-train to deal with new technologies and strategies? Are there more inventors and entrepreneurs? Are there more volunteers for schools, charities, parks, and cultural events?
And there is always the short-term ROI: How does the money flow through the social matrix in the 3 months after it arrives?
It’s all a broad, highly interconnected web, and we need to learn how to consider different aspects simultaneously, to intuitively grasp several problems at once. When value flows in anywhere, or flows out anywhere, it will affect the whole system. If we wish to run government like a business, if we want to build prosperity, we need to set aside partisan concerns, and start analyzing government, just like we analyze business.
The idea of a capitalist framework with pockets of socialism are incorporated into my recently-published book, Kings, Conquerors, Psychopaths: From Alexander to Hitler to the Corporation, available from Amazon.
Social network graphic courtesy of Socilab.
Footnotes
| ↑1 | One exception would be social assistance for the permanently handicapped. It seems that this is pure charity, as it is an expense with no return on investment. |
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This assumes that all the eigenvalues are either positive real numbers, or (as in the footnote) zero.
I doubt that this applies even approximately in most cases.