Economics for Physicists and Ecologists

Economics for Physicists and Ecologists 

Carmine Gorga

This article was originally published in
Transactions on Advanced Research, Vol.4 (1) 6-9, January 2008
REPRINTED WITH PERMISSION

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Abstract: The lack of communication among physicists, ecologists, and economists can be mostly attributed to the type of mathematics economists use as well as their study of flows of money rather than stocks of real wealth. This paper presents the essential characteristics of a new framework of economic analysis, Concordian economics, which uses standard mathematics and geometry and observes stocks as well as flows of real and monetary wealth. This paper thus attempts to build bridges among the relative disciplines, because it is becoming increasingly clear that vexing problems of human and natural ecology can be solved only through collaboration among economists, physicists, and ecologists. Keywords: economics, stocks, monetary wealth

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1. INTRODUCTION There is a well-known lack of communication among physicists, ecologists, and  economists. Using a new framework of economic analysis, Concordian economics [1],  a system of thought that results from the relentless application of age-old tools of   logic and epistemology to mainstream economic theory, this paper attempts to b uild bridges among the various disciplines so that lines of communication can be  opened and solutions can be found to today’s vexing problems of economics and e cology. Physicists, being practical problem solvers, and ecologists, being deeply  concerned about the status quo, might join together in this mission to let economics r each the splendor of its full potential. 2. PROBLEM STATEMENT Lack of communication among physicists, ecologists, and economists is rooted in the  practice of economists, who have developed their own specialized form of mathematics  to analyze economic problems; and have reduced the number of admissible problems   to those that exist in the market at the moment of the exchange. Thus they analyze  only flows, not stocks of wealth; and they observe only money, not real resources. In  particular, physicists have long remarked that modern economic theory cannot possibly  be a fit description of the reality because, among other reasons, it is a closed system  without inlets and outlets [2]. Ecologists, on their part, never seem to engage  economists because, among other reasons, while they are mainly concerned with  stocks of real wealth, economists are mainly concerned with flows of money [3]. 3. FINDINGS Three essential findings of Concordian economics are reported here with the  assistance of modern mathematics and geometry: stocks are separated from flows of  wealth; the real economy is separated from the monetary economy; these two parts  of the economic process are then joined together through the introduction of the l egal and institutional economy into the equations. Through painstaking analysis  (Gorga 2002, 23-158) [4], real wealth (RW) is defined as stocks of consumer g oods (CG), plus capital goods (KG) and goods hoarded (GH). The fundamental  model of production (P) is formulated as follows (Ibid., 38, 313): P = CG + KG + GH IA = P – GH IA = (CG + KG) where IA = Investment Assets (until sold). Monetary wealth (MW) is defined as the  sum of all financial instruments used to purchase CG, KG, and GH as well as other   financial instruments: corresponding equations form the model of consumption   (Ibid., 318). The legal economy is defined as the value of all rights of ownership o ver real anmonetary wealth: corresponding equations form the model of distribution  (Ibid., 316). Since the structure of these models is selfsimilar, they are omitted here. The three systems of equations form an equivalence [5], the equivalence of  production to distribution and to consumption. They describe the same entity, the  economic process, from three strictly interconnected points of view. In more detail,  this equivalence refers to the production of all real wealth; the distribution of   ownership rights over both monetary and real wealth; and consumption (or   expenditure) of monetary instruments to purchase real wealth. This equivalence  can be more easily observed with the assistance of geometry. Thus, using established  protocols, it is possible to synthesize the above three systems of equations into  one unit represented by the following diagram: Figure 1 – The Economic Process Figure 1 represents the economic process at the moment of the exchange—as in mainstream economics, but with an enlarged focus. The unit of account can be the economy of an individual person, an individual firm, the local, the national, or the world economy. Figure 1 reads as follows: When goods and services pass from producers to consumers, monetary instruments of a corresponding value pass from consumers to producers. For the exchange to occur, the transactors must be the owners of both money and real wealth. Then, one cycle of the economic process is completed. As can be seen, Concordian economics is wholly relational and inherently dynamic. This second characteristic becomes more explicit if one sees each rectangle of Figure 1 as a Poincaré section. In Figure 1 the economic process is observed at one static moment in time. There are three approaches for a comprehensive study of the dynamics of the economic process. One is the analytical/mathematical approach. It yields the following generalized system of equations: p. = fp(p,d,c) d. = fd(p,d,c) c. = fc(p,d,c) where p. = rate of change in the production of real wealth, d. = rate of change in the pattern of distribution of ownership rights over real and monetary wealth, and c. = rate of change in the consumption or expenditure of monetary wealth. The second approach for the study of the dynamics of the economic process is the historical/latitudinal one. This study calls for following the dynamic transformation of the system, ideally from the beginning of time till today. Starting from flows of real and monetary wealth one obtains a result that is very familiar to modern physicists, a strange attractor or a Lorenz attractor, see, e.g., Thompson (1986, 228) [6]. A few cycles are reproduced here: Figure 2 – Flows of Values With Figure 2, we are not only within the economic process—an area that is a black box to mainstream economics [7]; we have also found the inlets and outlets requested by physicists. The inlets are flows of real and monetary wealth; the outlets are consumer goods, goods hoarded, and money hoarded. It is only capital goods and money to purchase real wealth that remain permanently within the system. The flows of the legal/institutional economy are fully inserted in this construction: They are invisibly present at the moment of the exchange. In order to buy and sell wealth one has forever had to have ownership of that wealth. Indeed, to think of the extreme complexity of the reactions that occur within the economic system, the reader is encouraged to mentally close the two halves of Figure 2 thus creating the image of a torus or a cyclotron. In the reality of daily life, stocks and flows of real and monetary values do not organize themselves into neat patterns, but tend to intermingle and interact with each other. The third approach is the longitudinal/programmatic one, through which one obtains an external view of the economic system as a whole. This is a new perspective that yields a simplified understanding of other characteristics of the economic system. This mode of analysis can be briefly described as follows: If the economic system were composed of three identical, synchronous, and compenetrating spheres (obtained by rotating each rectangle of Figure 1 at ever increasing speed and in all directions about their geometric center), the system would leave behind only one trajectory as an indication of its dynamics. This line—whatever its pattern—would indicate that the three spheres were in continuous equilibrium with each other. This is not the case in economics: As Mandelbrot (1983, 1) [8] is fond of saying, "Clouds are not spheres, mountains are not cones, coastlines are not circles, and bark is not smooth, nor does lightning travel in straight lines." Can economic systems be expected to be represented by perfect solids? To say the least, the trajectory of aggregate values of monetary wealth (MW) can be expected to soon leave the initial condition of equilibrium (0,0,0) and, spurred by the facility with which monetary instruments can be produced, grow at a faster rate than the trajectory of values of real wealth (RW). Also, the spheres representing the pattern of distribution of values of ownership rights over real and monetary wealth, which are known to remain rather static over time, can be conflated into two overlapping straight lines to be identified as DO. Then, over time, eliminating all short and long term, cyclical, random, or aperiodic loops, breaks, and turns, the system as a whole can be expected to leave behind idealized traces of motion as in the following figure:             Figure 3. Trajectories of the System as a Whole The distance between RW and MW will eventually yield the mathematical measurement of the “bubble”. Current efforts to identify the bubble are especially intense [9]; physicists adept at chaos theory have been investigating this issue for quite some time [10]. Area "a"—with its alternative subareas a' and a''—attempts to describe the condition of disequilibrium (the bubble) that so often develops between monetary and real wealth and suggests that the smaller this area, the smaller the loss of real income over time. How to close the gap between the real and the monetary economy in the shortest possible time is clearly a problem of control, namely, a problem of economic policy—the problem of creating a just and sustainable economy. 4. CONCLUSION There is much work to be done. As can be seen, the intellectual framework is mostly done; it is the practical work that is all to be done. This is the work of organizing the data in accordance with the categories of thought specified above; this is the work of analyzing the data with the assistance of modern tools of scientific research. The tempi for the performance of this work can be enormously speeded up if physicists, ecologists, and economists assiduously work together [11]. REFERENCES [1] Gorga, C. (forthcoming), “Concordian economics: Tools to return relevance to economics,” Forum on Social Economics. [2] Nadeau, R. L., The Environmental Endgame: Mainstream Economics, Ecological Disaster, And Human Survival, Piscataway, NJ: Rutgers University Press, 2006. [3] Daly, H. E., Bouckaert, L., Opdebeeck, H., and Zsolnai, L., Frugality: Rebalancing Material and Spiritual Values in Economic Life, Oxford, Bern, Berlin, Bruxelles, Frankfurt am Main, New York, Wien: Peter Lang; pp. 207-226, 2008. [4] Gorga, C., The Economic Process: An Instantaneous Non-Newtonian Picture, University Press of America, Lanham, Md., and Oxford, 2002. [5] Gorga, C., “On the Equivalence of Matter to Energy and to Spirit,” Transactions on Advanced Research Vol. 3, N. 2: 40-45, 2007. [6] Thompson, J. M. T., Nonlinear Dynamics and Chaos, Geometric Methods for Engineers and Scientists, New York: Wiley, 1986. [7] Petrongolo, B., Pissarides, C. A., “Looking into the Black Box: A Survey of the Matching Function,” Journal of Economic Literature, Vol. XXXIX: 424, 2001. [8] Mandelbrot, B. B., The Fractal Geometry of Nature, New York: W. H. Freeman, 1983. [9] Because of its guidance from Ben Bernanke, most notable these days is the work done at the Bendheim Center for Finance at Princeton (Princeton Weekly Bulletin, May 26, 1997 and ff.). [10] See much work done at the Santa Fe Institute. [11] Matthews, E., The Weight of Nations: Material Outflows from Industrial Economies,Washington, D.C.: World Resources Institute, 2000. ABOUT THE AUTHOR Carmine Gorga is president of The Somist Institute. The mission of the institute is to foster sensible moral leadership. He is a former Fulbright scholar and the recipient of a Council of Europe Scholarship for his dissertation on “The Political Thought of Louis D. Brandeis.” By inserting Hoarding into Keynes’ model of the economic system and using age-old principles of logic and epistemology, in a book and a series of papers Dr. Gorga has transformed the linear world of economic theory into a relational discipline in which everything is related to everything else—internally as well as externally. He was assisted in this endeavor by many people, notably for 27 years by Professor Franco Modigliani, a Nobel laureate in economics at MIT. The resulting work, The Economic Process: An Instantaneous Non-Newtonian Picture, was published in 2002 and has been reissued in a third edition in 2016. For reviews, click here. During the last few years, Dr. Gorga has concentrated his attention on the requirements for the unification of economic theory, policy, and practice calling this unity Concordian economics. He is also integrating this work into political science, which he calls Somism, and culture in general, which he calls Relationalism.

An overall view

Concordian Economics: An Overall View

January 2nd, 2017 

Econintersect
in history, macroeconomics

Written by Carmine Gorga, The Somist Institute

Einstein said:

"We cannot solve our problems with the same thinking we used when we created them."

Buckminster Fuller said:

"You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.”

At Proverbs 29:18 it is written:

"Where there is no vision, the people perish."

 Introduction

Concordian economics is an integration of theory, policy, and practice. The theory integrates Production of real goods and services; Consumption or expenditure of financial assets to acquire real goods and services; and the Distribution of ownership rights over goods as well as money. The policy integrates the right to participate in the economic process (participative justice); (in order to obtain) the right to a fair share of what one produces (distributive justice); and the right to receive an equivalent value of what one gives (commutative justice). The practice integrates economic rights and responsibilities in relation to the four modern factors of production.

 A Bit of History

Concordian economics was born in 1965, when, after a summer of intense intellectual struggle with the General Theory, the writer inserted Hoarding into Keynes’ model of the economic system and found himself in a different cultural universe. The procedure is reproducible. We will all obtain the same result.

Once Upon a Time 

Once upon a time economics was not a science; it was a practice. It was controlled by the principles of economic justice, principles that were enunciated by Aristotle and endorsed by Saint Thomas Aquinas. These principles remained undisputed for about two thousand years, basically until Adam Smith came along and gave us the “science” of economics. At the same time, from Moses, through Jesus of the Parable of the Talents, to the Doctors of the Church everyone knew about Hoarding.1

Today, without batting an eyelash, it is stated that “economics is what economists do.”

Trouble is economists do not seem able to agree what is that they do. A majority of them seem to be convinced that the science of economics is the study of the Market. Let us see.

The Behavior of the Market

Why do most mainstream economists believe, as Adam Smith did, that the Market is ruled by an invisible hand leading us gently to a condition of equilibrium and well-being?

The reason is that for most economists, as they openly admit, economics is a black box.

MANIPULATING the laws of demand (D) and supply (S), economists develop theories of what should go in… and observe what comes out:

When analyzed in depth, the results of any theory, on the one hand, plausibly lead to growth; on the other, they lead to stability; and on the other they lead to decline. Economists do not know what happens within the box.

Why?

The fundamental reason is that Saving was substituted for Hoarding by Adam Smith—and made “equal” to Investment. The proposition that Saving equals Investment is at the foundation of all modern economic theory.2

Trouble is Saving = Investment is a dogma. Neither Keynes nor any other economist has been able to explain why is Saving = Investment.3

And no one ever will because Saving in its incarnation as money deposited in a bank is Investment: It is the lowest form of investment.

We Need a New Paradigm

As a result of fifty years of in-depth analysis, which started with the (re)introduction of Hoarding in economic analysis, the writer has designed a set of tools that allow us to look inside the black box. Professor Franco Modigliani, a Nobel laureate in economics at MIT, and Professor M. L. Burstein, among many other experts in a variety of disciplines, have assisted this research, respectively for 27 and 23 years.

Inside the black box, one finds, not an economic theory but the operations of the Economic Process. 

The Economic Process

As pointed out in a book,4 which is now in its third edition, and in numerous papers published in peer-reviewed (albeit rather obscure) journals,5 the central understanding of the Economic Process results from the integration of Production of real goods and services, the Distribution of ownership rights over real and monetary wealth, and Consumption or expenditure of monetary wealth to acquire real wealth. Even in the sale of a car, we have these three items: car, money, and deed of ownership. This is true theory: It is an accurate description of facts. 

Logically, these elements are tied together in a relation of equivalence:

Production ↔ Distribution ↔ Consumption.

Production, Distribution, and Consumption are not single words. They are concepts. They form processes of their own. Their integration can be seen at a glance in the following figure—and its mirror image that represents economic policy:

Figure 3 catches the economic process at the moment of the exchange. It indicates that a cycle of the economic process is completed when the entire production of the period is sold. Then an exchange has occurred between money and goods. For the exchange to take place, both the producer and the buyer, in an ordered society, must be legal owners of the wealth they exchange.

Placing Figure 4 next to Figure 3, we realize that this construction of the economic process is nothing new! It is simply a return to the millenarian concern with economic justice, which from Aristotle to the present has been understood as composed of “distributive”” justice and “commutative” justice. Concordian economics allows us to put the capstone on this construction: “Participative” justice. The economic process is nothing but the mirror image of the complete description of three essential principles of economic justice.

• Participative Justice offers a one-to-one correspondence with the production process;
• Distributive Justice a one-to-one correspondence with the process of distribution of ownership rights over real and monetary wealth;
• Commutative Justice gives us a one-to-one correspondence with the consumption process or the process of expenditure of monetary wealth to acquire real wealth.

Economic justice keeps the economic process in equilibrium to the benefit of all. Economic injustice keeps the market in disequilibrium to the detriment of all. Short term benefits to the few from injustice are ephemeral. An overview of long term trends makes these relationships quite clear. 

A Geometric Representation of Economic Dynamics

Starting from an equilibrium condition at time zero, the geometric representation of economic dynamics of Production, Distribution, and Consumption—here represented respectively as values of real wealth (RW), values of distribution of ownership (DO) rights, and values of monetary wealth (MW)—is as follows:

    Fig. 5 The economic process over time

This figure suggests that, since they are relatively easier to create, the rate of growth of assets composing monetary wealth (MW) is faster than the rate of growth of assets composing the category of real wealth (RW). And then there is the problem of the accelerating pace of concentration of the distribution of ownership (DO) rights into a few hands—a phenomenon which at first cut is here assumed to be constant. Clearly, when monetary wealth is concentrated into a few hands, not enough money will be available to the majority of the population. The necessary equilibrium conditions implied in the P ↔ D ↔ C equivalence for the economic process as a whole, as represented in Figure 3, is broken and the process will not proceed organically forward.

Indeed, a bubble is created. The economic bubble is clearly visible from Figure 5: A bubble is a separation of monetary wealth from real wealth and is measured by the area between MW and RW. As pointed out elsewhere, in Concordian economics these values are kept separate and distinct from each other by defining them respectively as p-values (for values of the real economy), c-values (for values of the monetary economy), and d-values (for values of the legal economy or values of ownership rights). 

How can equilibrium be restored?

Let us Look at Market Governance—Again

Following the dynamics implicit in Figure 5, it is possible to see how the Market might not always be ruled by a benign invisible hand. On occasion, the Market, left to the natural inclinations of ordinary human beings, is governed by another dictum by Adam Smith that is also in the Wealth of Nations. This is a less famous observation, but more pertinent to our situation today:

"All for ourselves and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.”

If we are not misled by reductionist thinking of minds accustomed to analyzing linear trends only, we discover not one but four horses of inequality wandering all over the lot and leaving behind, instead of simple geometric patterns, a filigree of incredibly subtle interrelationships.

Four Horses of Inequality

Four horses of inequality raise their demanding heads as soon as one looks into the component elements of the Production Process. To produce anything, in a modern economy, one needs control over:

(1) Land and natural resources;

(2) Tools in the form of physical capital as in plants and equipment;

(3) Money in the form of financial capital; and,

(4) Labor in its variegated manifestations of manual labor, intellectual labor, and (spiritual?) labor as in entrepreneurial leadership.

These are the modern factors of production. It is only natural that human beings should attempt to get as much control as they can over each one of these factors. Inequality ensues.

Control over the factors of production has never been and never will be distributed equally among all human beings. That is a false, misleading, and dangerous ideal.

Within limits, inequality is natural. No two snow flakes are alike. Human beings, as well as specific plots of land, are endowed by our Creator with different measures of qualities and quantities. It is natural that we are going to get unequal results.

What we need, and what the world stands for, is equality of opportunity.

Rights vs. Privileges

Access to the factors of production today is acquired as a privilege and naturally leads to unbridled inequality. The four horses of inequality are these four unbridled privileges:

1. Privileged access to land and natural resources;
2. Privileged access to money;
3. Privileged access to the labor of others;
4. Privileged access to the wealth of others.

 Each one of these privileges—historically rooted mostly in plunder and conquest—has to be turned into a universal right for everyone, if we want to build a just and ordered society. We can then forget the past, and concentrate on the present and the future.

The opportunity is ours. We only need to realize that, while privileges divide, rights unite. Rights unite because they are born out of the exercise of corresponding responsibilities.

Four Economic Rights and Responsibilities

No other economic rights or responsibilities seem to be essential. The consistent assumption of these four responsibilities is all that can and ought to be ingrained into government policies—at various levels. These four policies, gradually pursued, will yield all the certainty and economic security that we need, because they foster structural changes that create conditions of economic freedom and justice for all. As an unearned consequence, the need for Hoarding will almost be rooted out of existence. A fringe of misers will always be with us. But when the majority of the population does not copy the miser, the damage will be minuscule.

Who Are the Opponents?

Who are the powerful people who would object to this program of action? Four presumed antagonists are supposed to be:

(1) landowners who do not want to pay their fair share of taxes on the value of their land;

(2) central bankers who do not want to serve the public interest;

(3) entrepreneurs who do not want to offer full compensation for services received; and

(4) business people who want to gobble up the fruit of other people’s effort.

Where are they? Apart from their miniscule apparitions, when measured against the billions of entrepreneurs who behave morally, they are four phantoms—but more dangerous for being ingrained in the imagination of people who, blinded by their institutional power, see neither economics nor morality clearly.  READ: tax assessors, politicians, and academicians who, unable to speak truth to power, make themselves powerless and paralyze entire nations. 

Serving Four Masters

You might think that this writer is a lone ranger roaming these vast expanses of economic territory—all alone. Nothing could be farther from the truth. He has consistently been serving four Masters of Economics. Four great American Masters of Economics. Forget Keynes… Forget Hayek.

For the control of land and natural resources, we all ought to be devoted servants of Henry George. By the way, mirabile dictu, do you know that not one but eight Nobel laureates in economics endorsed Henry George’s prescription to tax the value of the land….…while reducing taxes on buildings and, eventually, income?

For the control of money, with its relevant inscription into Article 1, Section 8 of the US Constitution, we all ought to be devoted servants of Benjamin Franklin.

For the control over the fruits of one’s labor, we all ought to be devoted servants of Louis O. Kelso.

 For the control over such basic industrial tools as the corporations (physical capital), we all ought to be devoted servants of Louis D. Brandeis. The writer actually did his dissertation at the University of Naples on the political thought of Louis D. Brandeis; his work was awarded a Council of Europe Scholarship; and he entered the academic awards wind tunnel, in which he even caught a Fulbright Scholarship.

Conclusion

This is not "my" vision, says the writer. He does not claim originality. This is the vision that unfolds mathematically by inserting Hoarding, the core of the Parable of the Talents, into the structure of economic theory.

Once the root source of Concordian economics became clear to this writer in 2006 (!), to analyze what else did Jesus, Moses, and St. Thomas Aquinas thought about economics became an intellectual necessity.6  That is a train of thought, explored mainly on the pages of Mother Pelican, that has led to the conclusion that there is no such thing as religion without economics and ultimately to a book titled The Centrality of the Resurrection. Thus Concordian economics is on the cusp of some serious cultural developments.

Confucius and Orwell might say that perhaps the most important long-term contribution of Concordian economics is to bring the language of economics in line with the language of common mortals. Stated more directly, Concordian economics adds clarity and reduces possibilities of corruption in the daily interface between economics, politics, and culture.

True, the econometrics of Concordian economics are still missing. They will come as soon as official data are collected in accordance with the specific categories of thought of the new paradigm. For the time being, this lacuna is not too worrisome. Apart from overwhelming factual evidence about the dangerousness of decisions taken on the basis of econometric models, thanks to Philip Pilkington, the readers of Econintersect have been recently reminded that neither Keynes nor Hicks placed much trust in current mainstream econometrics.7

Perhaps, this is a worthwhile New Year resolution to make. Let us abandon the dangerous misconceptions of mainstream economics. Let us wholeheartedly plunge into the new/old world of Concordian economics.

Notes

1. Carmine Gorga, 2014. “Economics of Morality” at www.researchgate.net/publication/267569298_Economics_of_Morality.

2. John Maynard Keynes, 1936. The General Theory of Employment, Interest, and Money. NY: Harcourt, p. 36.

3. At p. 328, this is what Keynes (op. cit) said: A "view" which considers that saving is not equal to investment is "more usually supported by arguments which have no foundation at all apart from confusion of mind." This I took to be not a scientific explanation, but a dogma.

4. Carmine Gorga, 2002. The economic process: An instantaneous non-Newtonian Picture. Lanham, Md. and Oxford: University Press of America. Third expanded paperback edition 2016. For reviews, see http://www.carmine-gorga.us/id18.htm.

5. See, esp. Carmine Gorga, 2009. “Concordian Economics: Tools to Return Relevance to Economics.” Forum for Social Economics, vol. 38, issue 1, pages 53-69.

6. The economic profession is waking up to the need to analyze many aspects of the relationship between economics and religion. See, Shiya Iyer, “The New Economics of Religion.” Journal of Economic Literature 2016, 54(2), 395-441. Yet, because of ideology and political correctness perhaps, the analysis of the economic content of religions is still missing from academic investigations. 7. See, e.g., Daniel W. Drezner, “The state of macroeconomics is not good.” The Washington Post, September 15, 2016.

7. Philip Pilkington,  John Hicks’ Book on Non-Ergodicity: A Forgotten Post-Keynesian Classic, Global Economic Intersection, December 30, 2016