Is technological growth inevitable irrespective of the economic macroenvironment?
In the mid-to-late aughts, Dubai’s political class was the darling of Davos and erected landmark creations including the Palm Islands and Burj Khalifa that ultimately bankrupted the emirate and led to it being bailed out by its northern cousin, Abu Dhabi.
Contemporaneously, in similar fashion, the political elite in notable areas such as Ireland, Iceland, Spain, Greece, and California enacted a series of social experiments (e.g., frothy benefits), which, on top of spurious real-estate bubbles, in retrospect amounted to little more than Menckenian hubris; the governments promised more guns and butter than was financially feasible. As a consequence of their extravagant splurging, taxpayers worldwide have become saddled with debt as both sovereign obligations and the financial industry across the globe have been bailed out and kept on life support.
Nearly four years ago, science fiction author Vernor Vinge was asked if the “future was cancelled” due to this financial crisis. At the time he said no and I said probably. Eighteen months ago, jack-of-all-trades Kevin Kelly suggested that “if in a counterfactual history, communism had won the cold war and microelectronics had been invented in a global Soviet-style society, my guess is that even that alternative policy apparatus could not stifle Moore’s Law.”
The problem with their reasoning is that both miss the fact that Moore’s Law and other innovation trend lines are in fact only descriptive behaviors of past manufacturing abilities.
Moore’s Law is not ironclad; it is not immutable and it is not science. It just so happens that semiconductor firms have been fortunate and currently are able to finance their insatiable appetite for plant expansion while at the same time increase the amount of transistors on a die. ((The entrepreneurial ability of Craig Barrett, Paul Otellini, Hector Ruiz, and other semiconductor executives should not be overlooked as they were able to effectively and efficiently mix various factors of production (quantities of land, labor, and capital) into a profitable product. See I, Pencil by Leonard Read.)) What began as a mere observation about manufacturing and miniaturization has turned into rank historicism that can be seen in any industry that has been disrupted internally and externally. ((Gustav von Schmoller was considered the dean of the German historical school, a school of thought whose (erroneous) interpretation of economics led to the original Methodenstreit. In some ways “chartology” and Moore’s Law divination are not much different than “numerology” of the past. See als0 Schmoller revisited.))
For example, while Daimler, Benz, Diesel, and Ford were setting in motion the second Industrial Revolution, hundreds of firms still produced horse carriages at the turn of the 20th century. ((Gottlieb Daimler invented the internal-combustion engine, Karl Benz invented the gasoline-powered automobile, Rudolf Diesel invented the diesel engine, and Henry Ford used the assembly line to mass produce relatively cheap automobiles for mass consumption.)) Over a million horses and their carriages were left behind in France by the British army alone following World War I. ((The recent 2011 film Warhorse depicted one such horse.)) And despite coordinated image propaganda, the Wehrmacht ferried the bulk (~80%) of its Teutonic divisions across the Eastern and Western fronts of World War II on horseback. ((See also Horses of the German Army in World War II by Paul Louis Johnson and this superb wiki entry on horses used by all militaries in World War II.))
Yet trend lines for horse carriages at the time would be considered as anachronistic as Disco Stu’s promise of a continued increase in disco albums and bell-bottoms today. ((Disco Stu is a character in the television show The Simpsons whose mind is perpetually stuck in the disco era.))
While the world is arguably more peaceful than at any time in the past century, there is actually a two-front economic war on the development of the singularity.
National debt is cannibalizing and monopolizing funds that could otherwise be spent by individuals and enterprises on innovative products and services. This same debt further crowds out private competition and productive endeavors as government agencies continue to promote national taxpayer-financed initiatives. ((For a more detailed exposition as to how and why government funding of science crowds out private research see The Economic Laws of Scientific Research by Terence Kealey.)) This phenomenon creates a disincentive to compete with national agencies working on similar projects; after all, how can you convince a VC to privately invest in space flight when nearly a dozen government agencies worldwide already do that — you have to compete against what your taxes provide! ((In 2001 Andrew Beal attempted to break the monopoly power NASA held on space flight. If Scaled Composites could put a human in orbit on a shoe-string budget, what could taxpayers do with monies that were returned to them? The private sector would have billions to spend on research and development if tax funds were returned and used more efficiently through private finance.)) In addition, skilled human capital is tied up in national programs and they are apriori ducat-for-ducat less productive in government-managed projects than in private endeavors. ((See The Economic Laws of Scientific Research by Terence Kealey, in particular chapters 9–12.)) Imagine the innovations that could come from startups if this human capital was no longer tied up in impractical, unproductive Big Science projects.
The other attack is inadvertently from central banks, whose artificially low-interest rates, and sometimes zero-interest rates (ZIRP), creates a disincentive to save as well as inflationary conditions that drive up the price of commodities, rare-earth minerals, and other materials that are used in the construction of smartphones, telecom gear, computers, fab tools, and robots. ((Benchmark interest rates set the bar for every financial instrument; its impact is felt across the entire financial industry. The fight over capital did not end with the death of Marx, the breakup of the Soviets, or the dispersion of the professional protesting class in Seattle.)), ((
See Capital and Production by Richard von Strigl.)) In order to finance capital construction, in order to finance research, in order to finance an enterprise someone has to save. When interest rates are being systematically suppressed globally this distorts time preference; it will cause planned investment by entrepreneurs to exceed planned savings by consumers. Or in other words, ZIRP signals to entrepreneurs to consume capital (borrow credit) which ultimately leads to malinvestment in a particular asset class or classes. ((Malinvestment and asset bubbles can and do occur across the entire spectrum of industries (e.g. tulips, real estate) including notably the dotcom tech boom of the late ‘90s and early ‘00s. Beginning on February 1995 the Fed lowered rates from 6% to 4.75% in 1998. Malinvestment occurred in part because time preferences were distorted by artificially low benchmark interest rates — rates that signaled to entrepreneurs that credit (capital) should be consumed.)) As a consequence, because time preference is being distorted, market participants who would otherwise be saving or abstaining — and thus replenishing the stock of capital — take out loans to finance dubious projects that would otherwise not have been undertaken if interest rates were higher. This leads to an unsustainable boom and inevitably a bust. ((In economic literature this is called a boom-bust cycle and is an integral part of the Austrian Business Cycle theory. The Soviets and, in particular, Gorbachev recognized at the end that their capital stock was depleted — the planners had consumed so much capital that they could not maintain the very machines needed to make replacements for the machines, let alone advancements. The opposite of capital consumption is capital accumulation. See The Theory of Money and Credit by Ludwig von Mises and The Mystery of Banking by Murray Rothbard.))
The end result, on top of innovation stagnation, is that this environment hinders consumers from being able to purchase high-quality computronium, and higher commodity prices have an unseen effect on manufacturers who are pinched from being able to produce and sell relatively cheap devices into consumer markets. ((Computronium is a term used to describe programmable mass. It has been used in a number of science-fiction books to speculate the material future of post-singularity civilizations. With the advent of the Z3 from Konrad Zuse, humanity has slowly converted ‘dumb’ matter into digitally programmable matter. See Accelerando by Charles Stross.))
A Bear in Kurzweil’s Charts
Technocrats such as Timothy Geithner, Ben Bernanke, and their global counterparts are not taking the steps needed to restructure colossal imbalances, in fact their bailouts and ZIRP have arguably made things worse. It is a global misstep, not just in the United States or Europe but also China as well. As a consequence, for the foreseeable future, at least the next decade, technological productivity and research will stagnate and growth will be retarded compared to what it would be in a free market, i.e., a market that is able to set interest rates and in which government debt is no longer reissued but instead retired.
For example, Jim Von Ehr and Geordie Rose are leaders in their respective fields. At his Dallas-based firm Zyvex, Von Ehr is building a molecular assembler, a proto-nanofactory that can theoretically create whatever you can design by manipulating atoms and molecules and organizing them into finished consumer goods. Similarly, Rose has created the first commercially available quantum computer at his British Colombia-based firm, D-Wave.
Yet for every Zyvex and D-Wave there are countless agencies of dubious productive value that, despite being filled with thousands of skilled engineers and scientists, squander tremendous amounts of capital and resources creating few practical innovations. ((See also “Can (big) science survive without taxpayer funds?.” And, specifically regarding research of dubious merit, see the Ig Nobel Prize.)) The time and talents of these people would be more effectively and efficiently used in private enterprises. ((To counter the argument that abolishing government agencies would result in hundreds of thousands of unemployed laborers: Yes, there may be an increase in unemployment temporarily. But to say that they will not be able to find a job would be akin to someone saying there is no need for more than five computers in the world. Where did all the workers who made horse carriages go when automobile mass production bankrupted their firms? Not every job and not every company that will be created has been created. Entrepreneurship should not be abandoned or frowned upon during this period of government-induced stagnation.)), ((During the height of the space race, NASA employed approximately 36,000 people. It currently employs around18,000. According to then–National Inteligence director John Negroponte, approximately 100,000 contractors and government employees worked in the federal intelligence community as of 2006. According to the Washington Post there are roughly 1 million contractors and government workers with security clearances. If these government positions were defunded these skilled workers could work on productive software instead of building space pià±atas and snooping.)) Who knows, maybe the smartphone with an app-ecosystem would have been created 5 years earlier if $4 trillion in capital and resources had not been diverted into wars in Iraq and Afghanistan. ((At the conclusion of the Iraq War in December 2011, a detailed eport was released stating that the total funding for both wars has been nearly $4 trillion. In addition, a sizable contingent of 5,000 security contractors has stayed behind in Iraq operating under the auspices of the Department of State. This past April, President Obama and President Karzai signed an agreement to allow United States and allied troops to remain in Afghanistan for at least 10 more years through 2024. Thus the total costs number will continue to climb for many more years. Science fiction author Charle Stross, among others, has discussed other boondoggles and alternative uses for the monies spent financing the wars in Iraq and Afghanistan.)) Or maybe laptops and smartphones would be cheaper globally if the $700 billion TARP Act and other bailouts had been left on the drawing board instead of propping up bankrupt business models. ((Not only were ailing companies that should have gone bankrupt bailed out, but the US Treasury Department routinely (falsely) states that TARP and other bailouts have been profitable, yet they gloss over the fact that a lot of the “bad loans” were simply moved from private banks to government-managed lending companies such as Fannie Mae and Freddie Mac. Thus raising the question, “if TARP is so profitable, why not bail out everyone?“ See also “TARP: Billions in Loans in Doubt” in the Wall Street Journal. Furthermore,quantitative easing (QE) schemes amount to little more than inflating the money supply; ceteris paribus, the end result will be higher commodity prices and arguably more destabilization.)) Unfortunately, unlike in science fiction, we do not know the actual alternative timelines or what would be the opportunities, seen and unseen.
This is not to say that DARPA, NASA, NSF, and other agencies are doing horrible things or plotting to take over the world, but they are apriori less productive with the same unit of capital than private enterprises who can allocate resources, capital, and talent more efficiently and effectively. ((Nuclear tests such as Operation Plowshares were an attempt to put a positive spin on “atoms for peace,” or rather, figuring out peaceful uses for nuclear detonations (e.g., widening a canal, creating a new lake). In a slight twist, many of the uranium cores of Russia’s nuclear stockpile have been converted for peaceful energy usage in American power plants through the “Megatons to Megawatts” program.)) Individual entrepreneurs must be accountable, profitable, and satiate consumer demand, otherwise they go bankrupt. ((
If individuals must pay for products and services themselves, cost goes down, quality goes up.)), ((Political favoritism, cronyism, graft, corruption, bribery — all can and do occur in centrally managed, government projects. Notable recent cases have been Solyndra and GM.)) In contrast, what productive enterprises and innovations could have been made if that skilled labor had been used elsewhere? If we did not have DARPA, NASA, or other alphabet soup agencies, what could have the talent been used toward? ((Likewise, if governments demilitarized and stopped spying and snooping, government-paid linguists could transition elsewhere to develop translation software and interpretation AI.))
While the current financial model managed by central planners provides disincentives to save, it also creates perverse incentives for skilled human capital to work in certain industries. For example, in a world that used market-based interest rates we do not know how many engineers would transition toward financial-industry jobs because the financial instruments paying for the jobs might not exist in the first place. Maybe less would be gravitating toward Wall Street and more toward Silicon Valley.
If Econometrics Is Immutable Math, Then Alchemy Is Ironclad Chemistry
X basis points. 25 is the number that central bankers decided to set interest rates at in meetings in New York and Washington, DC more than three years ago. It is an arbitrary number, wholly inorganic; it is currently a subsidy to debtors and a tax on savers. It distorts time preferences, lowers peoples’ risk aversion, encourages them to embark on (overly) risky endeavors which in turn causes malinvestment and capital consumption instead of accumulation. ((With too much capital consumption (caused by artificially low interest rates) real capital markets (e.g., pool of capital stock) can actually shrink. Thus without continued maintenance (which requires savings) you could end up destroying the tools needed for capital production. See also The Theory of Money and Credit by Ludwig von Mises.))
Who knows what the actual rate should be or how big or small the financial industry would be. In fact, maybe in a free market there would be fewer scientists and engineers working at financial firms, freeing them to work on commercial, productive and socially useful projects like better water purification methods, pharmaceutical analysis, or better rechargeable batteries. Maybe there would be fewer mathematicians and programmers devising HFT algorithms because there would be no market demand for the instruments they are integrated into.
What we do know — or in Rumsfeldian parlance, known knowns — is that governments continue to misallocate resources and divert productive human capital to projects that do not lead to sustainable business models.
It cannot be said, ceteris parebus, that Moore’s Law will continue to hold into the future. Maybe technological advancement could stop, maybe it could slow down, maybe it could speed up. Maybe Tick-Tock, could be ramped up once every six months instead of every other year. If governments were not saturating capital markets with treasury bonds — with unproductive deficits and debt — and creating malinvestment booms through arbitrary interest rates, the capital could be freed up to work on new innovative technology. ((Tick Tock is the name of Intel’s architecture/manufacturing roadmap which involves large coordinated capital expenditures. See also Dennard Scaling from IEEESSCS (p. 11–50).)) You might have AMD, Nvidia, ARM, and other semiconductor designers pushing the envelope faster. There might be more entrants, more competitors, and ultimately more consumer choices.
Hogging Scarce Resources
In the United States alone, $700 billion is spent on annual interest payments for government-issued treasury debt each year. ((Each week the total payment becomes larger as debt is continually reissued and resold instead of retired. If and when benchmark interest rates are raised, the interest payments on US treasury notes alone could consume vast percentages of the federal budget, perhaps even eclipsing the outlays for the Department of Defense.)) Can you think of other productive science and technology projects that could be funded instead? New diverse classes of angel investors and entrepreneurs could create many different Y Combinator–like incubators and many more dev boot camps. Gigabit broadband could be a mainstay of all urban environments. Digital philanthropists might even donate one-laptop to every child. ((Angels are investors who typically invest more than friends and family, but less than a typical VC round. Notable examples are Ron Conway and Peter Thiel. Y Combinator is a startup funding company that has seeded approximately 350 companies since 2005. As part of its Google Fiber initiative, in February 2012 Google began constructing and rolling-out gigabit fiber service in Kansas City. One-Laptop Per Child is a philanthropic effort to help build and distribute laptops to students and schools in developing countries.)) A digital land of milk and honey, right?
Aside from interest payments there are other money pits that continue to siphon capital from productive industries.
How much money does a new CVN, a new nuclear aircraft carrier, cost? The USS George H.W. Bush cost $6.2 billion to construct and requires hundreds of millions a year in maintenance costs alone. Over its 40 year life it is expected to cost over $10 billion. The new USS Gerald R. Ford has already cost more than $5.1 billion and it has not even been commissioned. The construction of the USS Gerald R. Ford is expected to potentially cost more than $6.25 billion, including $1.1 billion in over-runs. Purchasing its Air Wing alone will cost another additional $3.5 billion. Altogether the US Navy maintains 11 aircraft carriers, each just as expensive as the Bush and Ford. ((This does not include the dozen Landing Helicopter Dock (LHD) amphibious assault ships the US Navy builds and maintains, each of which is roughly bigger than any World War II–era aircraft carrier. In fact the USS Wasp–class is larger than the aircraft carriers of other countries such as the UK, Spain, Brazil, and India. They also each cost several billion to build and maintain, excluding the purchase of an Air Wing (combination of helicopters, tiltrotors, Harriers) and crew costs.)) Yet the productive value of an aircraft carrier is nil. It diverts productive capital and skilled talent and chases imaginary Imperial battle fleets that have not existed in more than 60 years. ((Alfred Mahan’s blue navy dream does not make sense in an era with satellite surveillance, UCAVs, and speed boats. Aircraft carriers are anachronistic in this day and age. Why not build dozens of cheaper small submarines or littoral combat boats instead? Or demilitarize completely like Costa Rica. See also “Millennium Challenge 2002” on Wikipedia and “Iran Encounter Grimly Echoes ’02 War Game” in the NY Times.)) In essence, the US political class has not only propped up zombie financial institutions but it has erected floating pyramids, whose productive utility is equivalent to the Pharaonic tombs of yesteryear. ((The US Department of Defense has been the world’s largest oil consumer for several years in a row. As part of the flight operations on aircraft carriers, jet fighters routinely dump jet fuel prior to landing. Imagining all the alternative uses for the hundreds of barrels each Air Wing dumps each year, let alone the alternatives for 144 million barrels the US military consumes annually, is left for the readers imagination.))
These staggering fleet costs are dwarfed by yet another government program whose counter-productive task is mass destruction. According to a 1998 study from the Brookings Institute, approximately $5.8 trillion has been spent on the US nuclear weapons program since 1940. ((Based on current projections, the United States will spend about one-third of that $1 trillion global total for modernizing its nuclear program. For a perspective on how much the United States spent on other military programs, according to The Sixteen-Trillion Dollar Mistake, author Bruce Jansson states that, “In addition to the $2.4 trillion the United States spent on strategic forces in the Cold War, it spent $7.8 trillion on general purpose forces from 1951 through 1992.”)) Fast forward to today, GlobalZero estimates that current nuclear powers will spend at least another trillion this next decade to “modernize” their nuclear programs.
In contrast, how much does a new semiconductor fabrication plant cost? Large firms such as TSMC and Intel spend $4–5 billion per plant. And the next-generation manufacturing transition from 300mm wafers to 450mm wafers might not even occur because costs are so prohibitive and there are less than a handful of players who can self-fund fab construction. ((See “As chip plants get pricey, U.S. risks losing edge” from Reuters and “Intel Plans 450-capable Fab 42 in Arizona” from SemiMD an industry newsletter.)) Lithography manufacturers might not retool for 450mm because it is also prohibitively expensive, and some have not even recouped the costs from moving from 200mm to 300mm. Yet national governments around the world are taxing and building anachronistic aircraft carriers — the United Kingdom is building two but cannot afford to put planes on them, France one, China at least three. India, Brazil, and even Japan (again) are building and trying to maintain blue water navies to fight off foes hardly real and mostly imagined. ((
Despite having a constitution that forbids an offensive military buildup, the Japanese navy has recently built two 13,500 ton helicopter destroyers called the Hyuga-class and has begun building two more destroyers that are almost twice as large. Why are these being funded when the Japanese national government’s debt is now 210% of GDP? See also “Three Reasons Japan’s Economic Pain Is Getting Worse” from Bloomberg.)), ((Not to be left out of the global spending spree, the new Egyptian government last June made it a goal to increase funding toward scientific research from 0.2% of GDP in 2010 to 2% in 2013. This raises the questions: Do researchers in this country have a comparative advantage in conducting such experiments? And how can they measure what kind of return-on-investment their funds result in without profit/loss accounting?))
Thus every time we are shown an aircraft carrier or nuclear submarine, we should visualize the unseen opportunity costs, such as a fab plant that could have been built instead. ((The construction costs for a single Virginia Class submarine is approximately $1.8 billion. Ten have been built and at least eight more are planned to be built. In addition, 18 Ohio-class submarines are currently in service, they each cost approximately $3.1 billion.)) And as a consequence, more fab plants could potentially increase competition, drive down semiconductor costs, and spur consumer adoption.
In fact, defunding the $53 billion intelligence community including the NSA, CIA, and National Geospatial Agency would not only give us back our civil liberties, but would free up and release thousands of skilled engineers, scientists, programmers, and mathematicians who can start working on productive projects with real economic value instead of creating digital dragnets, honeypots, and entrapment schemes. ((The official 2010 intelligence budget is $53.1 billion. Snooping did not end when the TIA project was terminated. The mission goals were rolled into an ever-growing omnipotent NSA program and has been integral in creating what the Washington Post calls “Top Secret America.” The latest law legalizing further intrusions is CISPA.))
Hiding with Houdini
Keynesians such as Paul Krugman suggest that the easiest way out of the current economic stagnation is for governments to continue deficit spending; the problem in Krugman’s mind is we have not had enough stimulus.
Yet if governments are so good at transforming capital into productive uses, where is the return-on-investment? For example, on January 2001, US debt was $5.95 trillion:
Ten years and $8.35 trillion later, what do we have to show for this decade of deficit spending? A glut of unoccupied homes, unemployment exceeding 9 percent, a stalled economy and a huge mountain of debt. Real gross domestic product growth averaged 1.6 percent from the first quarter of 2001 through the second quarter of 2011. (Baum)
What does the government produce in exchange for the capital it has consumed in bond debt issuance? Again, with an estimated $1 trillion annual defense budget, alternative peacetime uses for aircraft carriers are poor as cargo transports or fishing boats. ((The 2011 US defense budget was officially $740 billion but if you include defense funding in other areas such as nuclear weapons development and testing by the Department of Energy, the various defense-related agencies and initiatives carried out by the Department of Homeland Security, Department of Veteran Affairs outlays, and so on, the sum total arguably is more than a $1 trillion a year and has been for at least five years.)) In fact, capital ships in modern surface fleets perhaps illustrate waste the best, as their designs consume vast swaths of natural resources that could have otherwise been used mechanizing agriculture, constructing factories, or building residential apartments. ((The Tokyo Tower was partially built from scrapped US tanks from the Korean War. A portion of the scuttled German fleet (at Scapa Flow) and French fleet (at Toulon) were later raised then scrapped.))
There are very few alternative uses for main battle tanks during peacetime, as both tractors and bulldozers adequately satisfy consumer demand. Similarly, submarines are comparatively less-than-optimal at crab and shrimp fishing than their non-military counterparts (e.g., trawlers and tugboats). And unless you plan on stowing away in the bomb bays, fighter jets are hardly the most effective mass transportation service and are arguably not efficient crop dusters. ((The fly-away costs for F-22s are now over $150 million each and continued maintenance and upgrades are projected to double the total costs in the future. The total cost for the US fleet of the new F-35 is estimated to be $1.5 trillion.))
Contra Krugman, we have had nonstop stimulus for decades; in the past 15 years alone federal spending has more than doubled from $1.56 trillion in 1996 to $3.6 trillion last year. That is just at the national level and does not include local or state debts. If that money had not been expropriated (taxed) from private individuals, what other productive enterprises could have been financed?
The fact of the matter is, the singularity is really a story of economic development — one small step in the path from the Thomsen’s Stone Age till the modern Internet-of-things era.
How to Stop the Singularity from Happening
If you want to slow down or prevent the singularity from occurring you could: ((There are other physically destructive and psychologically disturbing ways to prevent the singularity. For example, what if a WMD, a pandemic, a dirty bomb, or mass social unrest occurred in Silicon Valley; Hillsboro, Oregon; or Tel Aviv? These three locations are home to the vast majority of semiconductor designers and a large number of AI programmers. Their destruction or disarray would be a major setback not just for the singularity, but would be a huge loss to our collective scientific corpus that would take years if not longer to relearn. Large floods in Thailand last year dramatically impacted hard disk manufactures located in the region decreasing global supply and as a consequence hard drive prices rose 5–15%. The large earthquake-tsunami in Fukushima disrupted a wide range supplies for months, including batteries, LCD, and RAM. This supply chain disruption directly impacted Apple, Sony, and nearly every large consumer electronic firm.))
- destroy human capital, skilled laborers who can design chips and program AI; ((In addition to the tens of millions killed in the armed conflicts of the last century, some prominent physicists and mathematicians who died directly from war include Karl Schwarzschild, Georg Bernhard Riemann, and Henry Moseley. Contemporaneously, in addition to Stuxnet, over the past several years the CIA, MI6, and Mossad have been directing targeted assassinations of key Iranian scientists who work in the Iranian nuclear program, including those of Masoud Alimohammadi and Mostafa Ahmadi-Roshan.))
- destroy capital stock, manufacturing plants, knowledge repositories, and infrastructure; ((Hundreds of libraries were unintentionally bombed during World Wars I and II. In addition, various political factions, including the Nazis, gutted libraries, burning tens of thousands of books across the continent. In one such instance 230,000 books and ancient manuscripts from the University of Louvan — the oldest library in Belgium — were intentionally burned by the Nazis. In the chaos of the 2003 invasion of Iraq, “the National Archive lost about 60 percent of its archival materials,” including rare books and historical photographs. Following in the wake of the 2004 Indian ocean tsunami, “177 school libraries, 53 public libraries, and 68 religious libraries … were either destroyed or damaged.”))
- destroy currencies and financial markets through debasement and inflation. ((
According to Paper Money Collapse by Detlev Schlicter, the average duration of a fiat currency regime is 37 years. The Bretton Woods (BW) system began in 1945 and effectively ended on August 15, 1971 thus setting in motion several decades of subsequent dollar depreciation. BW was a managed gold standard (similar to managed trade agreements), in which one ounce was unilaterally pegged to $35. Today the price of gold is roughly $1,750 per ounce.)), ((Robert Mugabe attempted to print his way into prosperity, the ensuing hyperinflation effectively destroyed the wealth and savings of all classes and directly contributed to astronomically high asset prices in Zimbabwe. See also “On the Measurement of Zimbabwe’s Hyperinflation” by Hanke and Kwok.))
You could also (un)intentionally divert skilled human capital to work in the rice fields instead of figuring out new ways of smelting, new ways of mining, new ways to combine alloys and composites to create the Next Big Thing. ((During the Chinese Cultural revolution (1966 until Mao’s death), professors, researchers, and instructors were routinely removed from teaching positions by the Red Guard, taken from schools and universities, and forced to work in rice fields. Thousands more were sentenced in kangaroo courts and killed in public tribunals. Similarly, next door in Cambodia, Pol Pot and his followers depopulated all of the cities, then rounded up and killed nearly 25% of the population.)) You could direct dozens of engineers to build waste disposal systems on the ISS which will in turn be decommissioned and cast away to disintegrate over the Pacific in 10 years. ((Despite its $100 billion price tag, the International Space Station (ISS) has been a complete financial albatross. Physicist Robert Park says that “there is no meaningful research on the ISS to shut down,” and his remarks are similarly echoed by physicist Steven Weinberg who recently said, “Space-based astronomy has a special problem in the US. NASA, the government agency responsible for this work, has always devoted more of its resources to manned space flight, which contributes little to science. All of the space-based observatories that have contributed so much to astronomy in recent years have been unmanned. The International Space Station was sold in part as a scientific laboratory, but nothing of scientific importance has come from it. Last year a cosmic ray observatory was carried up to the Space Station (after NASA had tried to remove it from the schedule for shuttle flights), and for the first time significant science may be done on the Space Station, but astronauts will have no part in its operation, and it could have been developed more cheaply as an unmanned satellite.”))
Or you can do what plagued socialistic regimes like the Soviets; you could divert human capital to centrally planned projects, diverting skilled laborers who could have otherwise designed chips or programmed AI, and retask them onto pet political projects or ephemeral fads, like corn-based ethanol fuel. ((The Bush and Obama administrations made grants and loan guarantees to ethanol producers such as Range Fuels, Cello Energy, and E3 BioFuels. All three have gone bankrupt. And corn prices have tripled since 2005.))
You can emulate the Soviets, not physically destroy capital stock, but divert capital into subsidized industries, creating inefficient cars that weigh tons and satiate no consumer demands like their circa-1960s auto industry (e.g., Lada). ((DRM is a service that largely came into existence because of government granted monopolies in intellectual property (IP), not consumer demand. As a consequence multiple DRM initiatives were undertaken because the IP regimes could continue their rent-seeking behavior (funded by the unwitting taxpayers); the projects sucked up skilled labor and ultimately created little of productive value. As this IP regime has met resistance, several schemes including those of the music and now book industry have unraveled — thus releasing skilled programmers to work on productive software again. See also Against Intellectual Property by Stephan Kinsella.))
In the end, no matter what government scheme a clever politician or bureaucrat might devise, the result is always what Mises, Hayek, and others dubbed “planned chaos.” (( See Economic Calculation in the Socialist Commonwealth, Socialism, and Planned Chaos by Ludwig von Mises.))
Disconnected Digerati
As I mentioned above, individuals such as Kevin Kelly are wrong to suggest that
If in a counterfactual history, communism had won the cold war and microelectronics had been invented in a global Soviet-style society, my guess is that even that alternative policy apparatus could not stifle Moore’s Law.
in The Social Network
But why is it that in every instance and experiment with communism, the end result has been the creation of misallocation and misery on a grand scale? Or as Jesse Eisenberg might say, if communism could have created Moore’s Law, it would have created Moore’s Law. Or more to the point, if governments were the creators of Moore’s Law, they would have created Moore’s Law.
Instead, hundreds of private companies, entrepreneurs, venture capitalists, designers, and one relatively free market created a semiconductor industry that accounts for the number one export of the United States. ((Some pundits such as Orville Schell foolishly suggest that what America needs is to emulate the Five Year plans of China. Others suggest that the United States create yet another agency and cabinet member, something akin to Japan’s MITI. Yet Benjamin Powell succinctly details why this would be a myopic decision.)), ((According to the Semiconductor Industry Association, “three quarters” of all semiconductor design and manufacturing takes place in the United States and that 82% of semiconductor sales are outside the United States.))
Where Is the Beef?
There are nearly 200 countries currently recognized by the United Nations, all of which have tried different experiments in statism — yet only roughly 35 have become developed and relatively rich. ((
There are 31 countries in the OECD and the IMF lists 35 countries as “advanced economies.” There are other metrics measuring economic freedom as well including Economic Freedom of the World (EFW) and the Index of Economic Freedom (IEF), both of which list 30 countries in their top tier.)) More than 100 tried various strains of socialism and communism. Seventy years of socialist and communist experimenting by the Soviets and Eastern bloc ended in economic ruin. Throughout the 1980s the Soviets in fact did attempt to execute top-down “scientific development” in a specific attempt to create innovative microelectronics, it simply could not be done with the system they had. ((Throughout its existence the Soviet Union tried to incorporate technology in its Pyatiletka — Five Year Plans. They even tried to recreate Silicon Valley through the construction of numerous science and research parks called Naukograd. Numerous other countries have also tried to emulate the success of the Bay Area with little measurable return-on-investment; this includes Silicon Taiga in Novosibirsk. The Soviet Union was unable to incubate something akin to Moore’s Law for the same reason the Soviet Union ultimately failed: without prices, you cannot make efficient allocation decisions. Prices only arise from market interactions, through profit and loss — which signal to entrepreneurs when to buy, sell, trade, and invest capital. Without this organic knowledge Soviet planners were left using arbitrary coefficients to plug into their various economic models with the net result: planned chaos. See Planned Chaos by Ludwig von Mises.))
More to the point, the Soviets had spent decades and large budgets to overtake the West in computing innovations, yet failed at every turn. In fact, it was not just one or two half-hearted attempts, it was a concerted effort directed from up top. Gorbachev himself made advancements in microprocessor technology a cornerstone part of Perestroikain 1985 (encompassing the 14th Five Year Plan). ((See “The Soviet Machine-Building Complex: Perestroyka’s Sputtering Engine” from the Office of Soviet Analysis published by the Directorate of Intelligence.))
Just how much effort was put into their centrally planned machine industry? Consider what the USSR tech industry was like circa 1988:
Machine building is the sector of industry on which Gorbachev is relying to ensure the success of his [Perestroika] strategy. The hub of Soviet [computing] industry, this complex employs over 16 million workers at more than 9,000 research institutes, design bureaus, and production and enterprises, and is responsible for designing, developing, and producing over one-fourth of the country’s industrial output. Of the 17 industrial ministries that make up the machine-building complex (detailed in foldout at back of paper), nine — collectively referred to as the defense industry — specialize in military hardware. The other eight produce primarily consumer goods and equipment for investment in the civil sector.
Yet to give you a visualization on just how far behind the Soviets lagged, here are some statistical illustrations based on then-classified analysis from the Director of Intelligence Research:
Gorbachev recognized that “a high-investment, high-growth strategy must, at a minimum, continue through at least the first few years of the period to renew the sector’s capital stock.”
The various US intelligence agencies are hardly bastions of free-market propaganda, yet the analyst(s) who put together this report, recognized in 1988 that the Soviets will ultimately fail in their goal of creating “successive generations of increasingly productive equipment” because “Moscow would have to relinquish major elements of central planning and price setting.”
So much for a counterfactual. The Soviets tried, consumed their capital base, and failed. ((To counter claims that Japan was successful in its attempts to centrally plan scientific innovation, be sure to read The Fifth Generation Fallacy by J. Marshall Unger. In addition, Mark DeWeaver discusses this in length in chapter 9 of his upcoming book.)) In fact, another strike against their planning efforts was a lack of feasible commercialization, for example, “most important, civil machine building had little incentive to satisfy its consumers and produce the best or most advanced equipment possible.” Yet not a month goes by without a news report that admonishes the commercialization of scientific innovation. Where would we be if Steve Jobs had not visited PARC and commercialized what he saw? What if Mosaic’s development team had not been lured to Netscape by Jim Clark?
Even here in China, hard-core Marxism completely and utterly failed after 30 years of hellbent fury — the only saving grace for the Party was that it plugged itself in to world food and textile markets just as they ran out of hard currency. ((I have argued elsewhere, and Mark DeWeaver argues in his upcoming book, that one of the saving graces for the CCP was that the political class figured out — for the time being — how to bootstrap a backward, centrally planned pre-industrialized country into global markets. The Green Revolution saved the Party as did the United States, which provides 30% of the world’s calories on its private farms. For example, in 2010, China imported a quarter of US soybean production and nearly all 25% of US pork exports in 2010.))
Yet out of all the countries where the IT revolution germinated and spread, not one was from a socialist or communist country. In fact, until recently, there has been no lasting innovative technological legacy from the Iron and Bamboo curtains, aside from illustrating and serving as case studies of what not to do. ((Yuri Milner, founder of Digital Sky Technologies (DST), is the most prominent Russian entrepreneur and VC. Together with DST, he has led various seed and VC rounds for a variety of dotcom’s throughout the world, with particular interest in emerging markets. Similarly in China, individuals like Kai-Fu Lee and firms such as Tencent, Sina, and a few other domestic companies have also attempted to foster innovation through seed funding; however, it should be noted that the Chinese government has for at least three years explicitly protected domestic web firms from outside competition by blocking competitors like Facebook, Twitter, and YouTube. This has led to what analyst Bill Bishop calls, “one world, two internets,” and simply hurts the local consumer market and stunts the domestic development that competition would have fostered.))
Breaking the Camel’s Back
To give the reader a picture of how the capital markets are being dominated by government largesse, here is what is happening to the bond market:
$34 trillion in 2009. That is the amount governments worldwide have issued notes to cover debts they have incurred (e.g., spending, bailouts).
One year later, it hit $37.5 trillion and this trend has not reversed.
Again, this is not an argument regarding whether or not economic activity is taking place vis-à -vis government spending, but rather the argument should be whether or not the government directed activity is productive, profitable, and sustainable. The answer to that is no.
If you follow the Misean, or even Hayekian, apriori belief that socialist economies cannot inherently calculate — that because there is no organic pricing mechanism, central planners cannot effectively and efficiently allocate resources in a productive manner, then the answer to this question is alwaysno.
Central planning of the mortgage industry was disastrous in the United States and everywhere it has been tried, as illustrated most notably by Michael Lewis in Ireland, Spain, and Dubai. A century of central planning of interest rates throughout the East and West has resulted in a continuous series of deleterious boom-bust cycles that distort risk and misallocate resources on a massive scale, a fatal experiment that continues to this day. Similar attempts to governmentally coordinate and manage healthcare, education, and any other industry results in similar regulatory capture, cronyism, misallocations, and monetary sink holes.
If socialism and central planning do not work in theory or in practice — if you recognize the Soviet Union fell apart because, as Thatcher suggested, you eventually run out of other people’s money — then no incarnation can work.
Thus $37.5 trillion could potentially be retired and given back to taxpayers who in turn could save it to replenish global capital stock that has been greatly distorted through artificially low central-bank-controlled rates. Some individuals might even finance science and technology startups or endow institutions to conduct pure research. Determining the opportunity costs foregone is a task left to the reader’s imagination.
We Are Uplifting Ourselves
It does strike one somewhat odd that three years ago Vernor Vinge would suggest (above) that the future “has not been cancelled” yet pen an extremely detailed “uplift” saga such as his latest novel, Children of the Sky.
This novel was panned by nearly all corners of the literati, but I particularly related to it because it is a story of how economies grow and develop through trade and capital investment.
You see, the Tines’ world is arguably a microcosm of our own Earth 2012. Sure the vast majority of us do not live in castles and hamlets anymore, but we still have petty squabbles and political intrigue broadcast 24×7. The claims from both Vendacious and Tycoon toward the humans — that humans never invented anything but stole technology from other races — is the same one leveled today at the west by the Left and by some leaders of developing countries. The Choir could be China, a country I have spent nearly three-and-a-half years working in.
There are currently about 200 other factions and realms dragging themselves out of subsistence living; we call them nation-states. Some do better than others; those with free-trade, open markets, and property rights do measurably better than those that are autarchic, top-down, and communal.
When I was suffering through the worst of gastroparesis last fall, I was counting the drops in my IV when an elderly Chinese man with liver cancer — Mister Zhou — was rolled into our room of four. We began talking and he told me how he had grown up in Shanghai and following Deng’s reforms he became a business man and was finally allowed to travel abroad to sign contracts with foreign partners.
Mister Zhou told me how much Shanghai had changed and how many migrants were continually moving to the city, stretching the infrastructure to its limits. In his words, the brain drain into China’s largest city was a detriment to the rest of the provinces, because if the best and brightest stayed in Shanghai then 2nd- and 3rd-tier cities inland would fall behind.
The same claim has been made by Indian politicians, who complain that many Indian graduate students — the best and brightest — permanently matriculate to US institutions, yet all of their high school and undergraduate studies were financed by Indian taxpayers and all that knowledge and talent is not going back to help those who paid for it. ((In his book The World is Flat, Thomas Friedman details the Indian brain-drain. More than 100,000 Indians — most of whom are highly trained — immigrate to the United States each year. A UN Development Report found that the “average total cost to India of educating each one of them was between $15,000 and $20,000.” In turn, hundreds of these Indians create startups. In fact, immigrants from India founded “more tech startups from 1995 to 2005 than people from the four next biggest sources — United Kingdom, China, Taiwan and Japan — combined.”))
The truth of the matter is, there are both market and government incentives for each brain drain case study. ((Millions of people vote with their feet each year as theymove from one domicile to another, sometimes as refugees and sometimes looking for better working environments. See also my Brainsteading article as well as “Urban prosperity in the RED,” regarding charter cities, by Paul Romer.)) If you really wanted to prevent a brain drain you could take a page from the Soviets and build a wall right through a city, country, or continent. ((
One common misconception was that the Berlin Wall was the only part of the Iron Curtain. In reality, the Soviets forced the Eastern Bloc to construct border fortifications along the length of the East-West divide. One example was the Inner German Border, which does just as the name implies. Similarly the DMZ on the Korean peninsula serves a modern-day purpose: forcibly preventing those who would like to vote with their feet to permanently stay.))
Which leads us to this: I propose an additional rung in Robin Hanson’s Great Filter. As other sentient beings are assuredly faced with some degree of resource scarcity relative to opportunity costs, free markets are arguably more efficient (vis-à -vis organic price signals) than any other resource-allocation mechanism currently known. ((Economics is the study of human wants and needs relative to scarce resources. We cannot say apriori that any measurable human action or phenomenon is transferable to another sentience (ETI) in so much as all sentient beings in any corner of the galaxy are also faced with allocating scarce resources. Their (ETI) internal motivations and subjective valuations are an unquantifiable variable prior to first contact. In addition, an industrialized ETI prior to transcendence must also allocate, invest, and save capital to pursue any tech tree and are therefore faced with opportunity costs. See also Human Action by Ludwig von Mises.))
Hanson’s nine-steps are admittedly incomplete, yet if every country (except New Zealand of course) ((The joke in economics circles during the Cold War was that in the event communism conquered the whole world, its leaders and technocrats would still need an open market whose prices could be used as coefficients in state econometric plans. New Zealand was usually the country singled out.)) implemented socialism, not only would resources be squandered due to perpetual misallocation and malinvestment (perhaps even permanently like helium) but technological innovation and scientific breakthroughs may very well come to standstill — just as it almost did in East Germany, Cuba, and North Korea. ((While various groups contend that fossil fuels could potentially run out, if prices are allowed to reflect resource scarcity, then petroleum could conceivably never disappear as relatively high prices (e.g. $200 a barrel) would bring cheaper alternatives to the table. In contrast, helium is being rationed off by the federal government; the agency tasked with its management is arguably setting the price below market value and has raised concern that its scarcity is not being truly reflected in its price.)), ((Despite its autarchic stance, North Korea receives billions of dollars in charitable aid each year and conducts billions more in bilateral trade with countries such as China ($3.4 billion in 2010) and Russia ($110 million in 2010). Without markets and without charity from the outside world, North Korea would collapse like the Soviets did 20 years ago. What Kevin Kelly and others should use as a counterfactual is technological advancement in North Korea. Could you imagine if the rest of the world practiced a similar form of communism, without any hope of outside aid? We would be stuck in the Iron Age.)) Thus to answer Fermi’s Paradox, perhaps many industrialized civilizations collapse under the weight of some form of statism. Without efficient and timely resource allocation a civilization could conceivably succumb to both manmade and natural disasters before they transcend. ((For evidence of the antagonism toward private enterprise in technology and space ventures, one need only look at the vicious commentary following the Planetary Resources announcement or the Blueseed proposal. If private enterprises are not allowed to homestead and exploit natural resources, if governments continue to suffocate the capital markets with unproductive assets, how will the singularity be built?)) And in retrospect with all the various government interventions and misallocations, it is amazing that Moore’s Law has managed to prevail at all.
Can We Manipulate Our Way to a Singularity?
Low interest rates cause credit to flow into more speculative ventures and there is nothing more speculative than hi-tech wide-eyed whizbangery. If low interest rates incentivize investments, why not hold down rates forever?
It might also be argued that low interest rates encourage savers to buy stocks, thereby making funds available for companies to increase capital expenditures; thus perhaps a better-managed dotcom bubble could bring the singularity to us sooner rather than later.
The problem with both of these arguments is that they assume that the activities will increase the pool of real savings (e.g., increase capital) and ignore the organizational role that interest rates serve. Interest rates are supposed to reflect risks; if rates are artificially lowered by a government that means someone else has to pay for and subsidize the risks (i.e., there ain’t no such thing as a free lunch). It distorts time preference, incentivizing and signaling to market participants to take out loans and consume capital. As a consequence, it also means that riskier business activities are undertaken in conceivably any industry.
And because prices are also distorted through interest rate suppression, central planners cannot efficiently coordinate and approve of (or disapprove) the loan activity across the full spectrum of industries. Thus speculative bubbles inevitably form across all markets, not just the intended IT industry. ((Notable examples of this government induced boom-bust cycle include the 1990′s NASDAQ dotcom bubble, the 2003–2006 real estate bubble, and perhaps arguably a bond bubble today.)) Governments and banks would then be faced with arbitrarily picking the winners and losers, which, conversely, free markets determine organically through profit-and-loss.
These endeavors are also unsustainable because once interest rates rise, the credit used to finance the boom is removed and thus any project — even the most noble IT venture — may become insolvent.
But why not keep interest rates permanently lowered, with the understanding that malinvestment and speculative bubbles will take place? Interest rates must rise to stave off inflation and to replenish the pool of savings — to maintain wealth generating activities — that was used in the boom. ((“The boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances.” (Ludwig von Mises, Interventionism: An Economic Analysis, p.40))) Otherwise you risk permanently depleting the pool of capital stock and deindustrializing altogether. In other words, there is no get-rich quick scheme, no shortcut toward capital accumulation and ultimately toward a singularity.
When Does the Positive-Feedback Loop Begin?
It is impossible to say for sure what will happen in the future. Perhaps a lone programmer in his basement will singlehandedly code a friendly artificial general intelligence (AGI) tomorrow, in assembly. Maybe next year Honda will come out with a new ASIMO that can pass the Turing test, trump Ken Jennings in Jeopardy, and beat the pack in Dancing With the Stars. Perchance Hal could figure a way to front-run high-frequency-trading (HFT) bots, recycling profits into a neo-Holdeen Trust for widows and orphans.
If you want the singularity to be near — sooner rather than later — then you should necessarily want and demand to have free markets, free trade, and, above all, no government intervention in science and technology. ((AI researcher Hugo de Garis is the author of a speculative thought exercise The Artilect War: Cosmists vs. Terrans and holds a considerably bleak and bearish view on how androids, AI, and government will interact (e.g., wage war) into the future. In contrast science fiction author Neal Stephenson has recently admonished the science-fiction industry for what he sees as unwarranted pessimism.)) They only slow things down and make a mess of it all.
[Adapted from a presentation given on August 15, 2011 to the Shanghai Rationalist Society.]
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