Wednesday, April 02, 2014

Current Economic Situation

IEX trading started a trend. Brad Katsuyama saw a difference between his expectations as a trader, and what he saw at the screen of his computer. There was another timescale he was not conscious about. He started a process to reconcile those expectations and what he saw. At the end, he discovered human agents using code, and electronics to legally take his money away. Mike Lewis just published a book about the experience. It is called Flash Boys a Wall Street Revolt.  This shows how greed can affect capitalism, both positively and negatively. But more important is the question: What next?
One can ask if Marx is still relevant?

The recent US presidential elections, with their rhetoric of the "1%" and the "47%" (the proportion of the population Mitt Romney claimed didn't pay taxes) are a good example, as is the debate about austerity politics in the UK and in the EU, phrased in terms of government debt, although really about which social groups will bear the costs of economic restructuring.

In 1867 Karl Marx published Das Kapital.

In Capital: Critique of Political Economy (1867), Karl Marx proposes that the motivating force of capitalism is in the exploitation of labour, whose unpaid work is the ultimate source of profit and surplus value. The employer can claim right to the profits (new output value), because he or she owns the productive capital assets (means of production), which are legally protected by the capitalist state through property rights. In producing capital (money) rather than commodities (goods and services), the workers continually reproduce the economic conditions by which they labour. Capital proposes an explanation of the "laws of motion" of the capitalist economic system, from its origins throughout its future, by describing the dynamics of the accumulation of capital, the growth of wage labour, the transformation of the workplace, the concentration of capital, commercial competition, the banking system, the decline of the profit rate, land-rents, et cetera.

The debate is current, as one can read in the new book by Thomas Piketty: Capital in the Twenty First Century.

One main difference, illustrated in Lewis’s book is that Engines have changed nature: In the eighteenth century they were steam powered, and now they are information powered. To apply Marx’s, or similar ideas, to the current world, we need a Theory of Information, to take the place of Thermodynamics. It is important to state that Entropy is a connecting concept.

The idea of "irreversibility" is central to the understanding of entropy. Everyone has an intuitive understanding of irreversibility (a dissipative process) - if one watches a movie of everyday life running forward and one of it running in reverse, it is easy to distinguish between the two. The movie running in reverse shows impossible things happening - water jumping out of a glass into a pitcher above it, smoke going down a chimney, water "unmelting" to form ice in a warm room, crashed cars reassembling themselves, and so on. The intuitive meaning of expressions such as "don't cry over spilled milk" or "you can't take the cream out of the coffee" is that these are irreversible processes. There is a direction in time by which spilled milk does not go back into the glass.

Claude Shannon, started the theory working at Bell Labs in New Jersey. It is interesting that New Jersey, is the current battleground of the story told by Mike Lewis. Here I give the theory to the extent I understand it.

Irreversibility describes the complex world we experience. The one Brad Katsuyama worked to understand, so he could start  his company: Investors Exchange. In both cases capitalism went to a change of state. One was defined, by the multiplication of muscle power which steam engines produced then, and the other, by the multiplication of brain power which information engines produce now.

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