This is Part 9 of a series. Go back to Part 8.)
Different kinds of networks use different kinds of communications. For example, the neurons in the brain rely mostly on electrical impulses to communicate with each other. The proteins in a cell communicate primarily through chemical reactions.
In an economic network the primary communication is, of course, through money. It is money, and how it is used, purchased, sold, transferred, etc. that is the primary communications medium in an economic network.
And the same principles apply here as with any other naturally-arising network. First, it is self-organizing. For example, every day in the world one-third of the food in markets is bought and disappears. During the night and the next morning the markets all magically fill up again with food. There's is no-one "directing" this huge daily miracle—it happens by itself. An economy is a self-organizing network.
Or at least it is ideally. When the network is distorted, as in a centrally planned economy, accurate communication is impeded and therefore the overall network suffers. That is, prices do not accurately reflect the true costs of good and services—the price "signal" is distorted. And so the economic network tends to degrade over time, as the Soviet Union discovered.
On the other hand, a free-market economy may have more or less accurate price signals in economic terms, to its benefit, but if prices do not accurately reflect the value of the "free" services that the ecology is providing—such as topsoil, rainwater, CO2 absorption by forests, to name only a few—then the ecology suffers.
And since the economy ultimately depends completely on the ecology, the economy must eventually degrade if ecological price "truth" is not established. This can be done through enlightened taxation of pollution, carbon deposits, etc. instead of income, so that everyday market decisions by everyone automatically support the overall ecological network without which the economic network cannot ultimately function.
The second feature of an economic network, which it shares with other naturally-occurring networks, is the "preferential attractor" or "the rich get richer" quality. Though these are scientific terms, it is literally true in the case of economic networks. Those nodes in the network with a slight advantage in wealth tend to become "attractors," attracting and concentrating more wealth and power over time.
At first, as with other networks, this actually confers an advantage to the network, as the large nodes act as the chief communication portals that connect disparate nodes of the network and thus foster the "small-world" quality—enabling any part of the network to influence any other in just a few steps. So far, so good; this enables the network's continuing self-maintaining process to be much more efficient.
The problem arises when these large and "popular" nodes accumulate even more wealth and power and concentrate even further. Now the network enters the domain of monopolies and oligarchies, in which power and wealth concentrate in the hands of fewer and fewer individuals and special interests.
As with other types of networks, when this happens the communications of the network begin to break down, as price "signals" in the marketplace become increasingly distorted by congestion and excess concentration. (Thus societies act from time to time to limit monopolies and/or undue concentrations of wealth, recognizing that such concentrations, taken beyond a certain point, endanger the efficiency of the overall network.)
In modern economic societies, since money is fundamentally created by new credit, this process of concentration, congestion and signal distortion can be called a "credit bubble," or, since all credit is also debt, a "debt bubble." As the credit bubble expands over a period of half a dozen decades or so, for a long while the economic activity in the network also increases.
This is equivalent to someone, in the bodily sphere, taking more and more animal proteins/fats and/or "stimulants" such as coffee, cocaine, etc. to "increase their energy and health." While the body provides a short-term boost in energy, inevitably the underlying energy potential of the overall network declines. (For more info, see The Law Of Opposite Effect.)
A similar phenomenon happens in economic networks. The underlying deterioration and distortion caused by the growing credit bubble and its concentrations of wealth and power, are masked for a while by what seems like greater "energy" in the economic society.
Stock markets are going up. Displays of wealth are everywhere and celebrated in the media. Glittering and unsustainable consumption is admired. Meanwhile, the underlying degradation of the network continues, as can be measured in economic statistics in the United States since about 1966.
Inevitably, the bill arrives for this party. The congested, bloated, distorted network begins to fragment and break down. Stock markets, which act as canaries in the mine, begin a steep descent, presaging a subsequent and similar decline in bond and real estate markets and economic activity in general. (For more info, see Economic cycles.)
This is the end of Part 9. Go to Part 10.)
—jim sloman, 12.11.02 for Feb 13
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