Friday, February 4, 2011

Organic Vs Engineered Economies, Benford’s Law, and Lower GDP Growth Rates in the West Explained

2/4/2011 Portland, Oregon – Pop in your mints…
For anyone who read yesterday's Mint, you will be happy to know that we do not recall any of our dreams from last night.  We did, however, send inquiries to members of the Arkansas legislature to see if they could help us interpret our dream about them.  We do not anticipate any response but you never know.  If anyone can help to explain it we figure it would be them.  Please do not ask why we dreamt about the Arkansas Legislature, for we have no answer.
What we can do, however, is to continue to develop our current hypothesis.  As you may recall from yesterday's Mint, it is:
"As a predominantly Engineered (Socialist) economy becomes less Engineered and more Organic (Capitalist), it experiences exponentially increasing rates of economic growth.  Conversely as a predominantly Organic economy becomes more Engineered, it experiences exponentially decreasing rates of economic growth."
We will define economic growth as an increase in capital goods within an economy.  For lack of a better measure, we have looked at year over year GDP growth in the East and the West.  We say for lack of a better measure because in the current insane monetary system where debt is money and money is debt, it is arguable that what is measured as GDP growth is actually the rate at which the economy is cannibalizing itself.  But that is a subject for a different day.
For the sake of simplicity, we further postulate that the Eastern economies (China, Japan, etc.) more closely resemble "Engineered" or state controlled economies and that Western Economies (US, France, etc.) more closely resemble "Organic" or Capitalist economies.  These may not be perfect definitions on a country by country basis but the general distinction between East and West will give us a good starting point in trying to confirm or deny our hypothesis on a country by country basis.  Naturally, the US and China, the world's largest trade relationship, should be our first case study.
What complicates matters is that there does not exist, to our knowledge, a perfectly Organic nor a perfectly Engineered economy on the planet that would be available for study.  Rather, we will encounter a jumbled mix of qualities within a country that will make it seem at once Organic and Engineered.  What we are looking for, then, is evidence that and economy is becoming generally more Organic or generally less Engineered and vice versa.
If our hypothesis is correct, we would expect to see an Eastern economy, which is moving from a state of being Engineered to a state of being allowed to grow Organically, grow its GDP at a faster rate year over year than an economy that is moving from a state of Organic growth to a state of being Engineered.  We expect that Organic growth not only creates wealth faster but does a better job of maintaining the capital that has been previously accumulated.  On the other hand, any attempt to Engineer an economy has the consequence of destroying capital and reducing wealth on a net basis.
We must say up front that part of this growth has to do with an interesting statistical nuance that is known as "Benford's Law."  In summary, Benford's Law states that:
"in lists of numbers from many (but not all) real-life sources of data, the leading digit is distributed in a specific, non-uniform way."
Benford's Law appears to flay in the face of logic.  Why don't the leading digits (1-9) simply occur 10% of the time, as logic may suggest?  The reason is that, as something grows exponentially, as the GDP of an Organic Economy may, the data sets produced such as GDP measured in terms of dollars tend to take longer to double from 1 to 2, or from 1,000,000 to 2,000,000, than they do to double from say 2,000,000 to 4,000,0000, etc.  The tendency is so strong and widespread that it even applies to the measurement of natural phenomenon such as earthquakes, infectious diseases, and even pulsars!  Should it come as any surprise that it applies to a country's GDP measurement as well?
Can Bedford's Law Explain Higher GDP Growth Rates for Developing Countries?  Only Partially is our Guess!
What does this have to do with our hypothesis?  We are still wondering ourselves, but we think it has something to do with how the GDP growth percentage increase is measured.  For a rapidly increasing GDP number, as we would expect to see in a developing economy moving from an Engineered state to an Organic state, the percentage increases would appear greater for data points between 1,000,000 and 2,000,000, for example.  Since Bedford's Law says that roughly 30% of the readings will start with one, as a smaller economy doubles in size, its rates of GDP growth expressed as a percentage will be higher than those of an economy moving from, say, 2,000,000 to 3,000,000.  This rate of exponential growth would decrease and perhaps turn negative in an economy moving from an Organic state to an Engineered state.



To sum it up, the higher GDP growth percentage of an economy becoming less Engineered is because the Engineered economy is starting the GDP growth race from a very low GDP number.  Logic and Benford's Law dictate that it will outpace growth rates of the already high GDP Organic economies.
As an economy, once you've gone Organic, there is no turning back.  The longer you stay Organic, the more dangerous becomes any attempt to Engineer it.  The Dodd-Frank Financial Reform and Health Care Reform are large scale attempts to further Engineer the US's Organic economy.  Is it any wonder, then, that its growth rates should lag those of the East?
Stay Fresh!
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Key Indicators for Friday, February 4th, 2011

*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.