What is a Bubble? (Philosopher's Economics)

I've been thinking about economics a bit recently (I doubt I'm the only one), and a few things regularly creep back up into my mind. One of those is the question, "What is a bubble?" Now I'm not asking what people mean when they use the word - I know that much - I'm asking what it represents. In theory it's a disconnect between the perceived state of the market and its actual state, but I want to see what it is one level deeper than that. Where did the money lost go? Why is it that bad accounting results in our society being poorer?

Before we begin, full disclosure: I'm not an economist, and I'm not an expert on the intricacies of the market. In fact, I'm historically the kind of person that doesn't even like thinking about economics. In my defense, however, recent history has shown that many supposed experts on the market are nothing of the kind, and it's also forced many of us who would prefer to spend our time on other topics to think a bit harder about the economic system we live with. I'm also not going to try and explore the intricacies of the market here; we're going to be looking at fairly high-level concepts instead.

What I propose is a mental exercise: imagine, for the time being, that you do not know what "money" is, or quite what an "economy" is, and you are presented with our society ("our" meaning American society, here, but much of this will apply to other developed countries). You do know that the people in this society adhere to a complex codified system of behavior in order to allocate resources, which they refer to as "the economy".

So how does this system work? It seems to have a number of conditions and goals:

1) It seeks to produce value for the system as a whole. Unfortunately (very unfortunately, as we shall see), what qualifies as "value" is vague and isn't universally agreed upon.

2) The system needs to allocate resources so that they are spent on the projects best capable of adding value to the system (in order to fulfill the goal above). Note that just because a project contributes value today doesn't mean it will contribute value tomorrow, so this must be constantly re-evaluated.

3) The system motivates citizens to be productive by allowing those who create the most value to consume more of the value produced.

4) The system requires citizens to consume its products. This is for two reasons: first, the act of consumption is an expression of faith in and acceptance of the system. Second, and more importantly, it is a means of measuring the perceived value the system is producing.

So (4) ties back into (1) - it's how the system deals with the ambiguity of "value." If a citizen consumes or makes use of the products of the society, they are assumed to be getting value out of it (or else they would choose not to consume those products). Now you also have a way of measuring the productivity of projects - if their products are consumed, they are productive projects.

We have a basic idea of how this system likely works, now. When citizens produce value, they are rewarded by being able to claim or use up some of the value produced, and their consumption is an indicator that the producers of whatevever they consumed are contributing value, so these producers are also allowed to consume, etc. This is how it works once you "get the ball rolling", but how does the consumption chain start? Who is the prime mover, if you will?

In this case, it's financial institutions like banks that have the authority to declare that a citizen deserves to consume before they've proven that they're creating value. In theory this is because the bank has determined that the likelihood of this citizen producing future value is very high, and because the consumption chain needs to get started to keep the society as a whole productive. Since the objective is to have the rate at which value is created constantly increase, the rate at which value is consumed must also increase, so the purpose of these institutions is to bring the rate of consumption closer to the rate of production, so that the system gets more feedback.

At this point, things are starting to look pretty familiar, and we can see where the current crisis fits into this chain: bad predictions about how much value citizens are likely to contribute. However, let's step back and consider what that means.

In the case of a real estate bubble, we're talking about building houses. The financial institution is deciding that a citizen should have a house, but it turns out, eventually, that the citizen didn't create enough value to justify the consumption. In other words, the society has decided that the current house owner does not deserve the house. That's what the bubble means. The bubble popping is the large-scale recognition that house owners have not earned their houses, and the subsequent punishment enacted by the system.

Now you may not remember getting together with your fellow countrymen and having a vote where you decided to punish house owners. That's because there was no such vote - instead we have a tool in this system that automates the decision for us, called "money" (along with contracts and credit scores and such). If you remember, however, we agreed not to talk about money when describing the system, and there was a point: by giving ourselves a little distance we get a new view of the system. It is the same core system whether we vote to punish or not - money is just a means of implementation.

So back to the situation at hand: the system is punishing people, both house owners and financial institutions, but on a large enough scale that it has destructive consequences. When the financial institution loses sufficient authority in the system, it is no longer able to delegate resources, and the rate of consumption falls. This has a chain effect, or viewed another way, it interrupts the chain effect the system so carefully created. If you do not have consumption, you don't know where to allocate your resources (because you don't know who's contributing value), so resources will simply sit unallocated, and projects grind to a halt. In our society, this manifests in a rise in the rate of unemployment.

Now here's the weird part: at no point in this story was a problem caused by a decrease in the rate of value production. That's the result of the problem. The problem was actually too much value production, or rather, "unjustified" value production. Now we have nice houses, which carry a lot of value, just sitting around unused because we can't decide who should get to live in them.

From this perspective, our current situation is rather obviously absurd. As a society, we have the resources and infrastructure we need to be prosperous, but we're stuck in an extended period of indecision about how to allocate these resources. In order to fix the situation, you simply need to start allocating resources again (in fact, to a large extent it doesn't matter where you allocate them, as long as you enable consumption and get the chain effect restarted).

This makes recent proposals seem much more reasonable than they appear at face value to many Americans. Bailing out banks is, in this little model of ours, synonymous with "not punishing" those banks, so that they can continue to allocate resources. If (and this is a big if) you add well balanced regulations to the mix, you can force the bank to do a better job of allocating resources without interrupting its operation, and getting it to do a better job allocating resources was the whole point of the punishment feedback loop in the first place.

A stimulus package is an alternative of the same idea - but in this case you skip the institutions that performed poorly and have the government allocate resources directly. Again, as long as the policy enables consumption, we start getting feedback about value production, which allows the system to adjust resource allocation and slide back into an efficient state of operation.

Note that this doesn't say anything about how these policies are actually being implemented. Bailing out banks without adding regulation might reinforce their poor performance, and result in the chain effect starting back up, but at low efficiency. A stimulus might not allocate resources fast enough to effectively jumpstart the chain effect. Either way, the principles behind the policies clearly have some grounding.

We could go further, but I have to stop at some point, and going further into policy risks getting us too far away from the core concepts. So what's the takeaway? Well if you've gotten to this point and think that what I've said makes some kind of sense, I consider the post a success, but if there is one idea I want people to come away with, it's this: money is a means, not an end.

We were able to tell a perfectly coherent story about our economy without the concept of money being involved, and we can see where it fits in - it's the common unit of measure for the value of any product. Its purpose is to distribute the evaluation mechanism among all citizens in the system, which is important because, as mentioned before, our products need to be constantly evaluated to have efficiency in the system. In other words, dollar bills are evaluation tokens, or a mini-vote for a the value of things we consume. This is clearly not how citizens tend to think of them, however; since these tokens can be exchanged for items of value, we think of them as having inherent value, and treat them as property.

The first step to a more sane system might be recognizing what money actually is.

-Silent Ellipsis

Natural Funativity: The Rant

As part of Ian Schreiber's online course on game design this summer, I've just come from reading Natural Funativity, by Noah Falstein. I would like to preface this whole post by saying that the author seems like an intelligent person and that I agree with most of the general (rough, approximate, vague) points he wants to make about fun being related to skills that could be potentially useful (whether or not they in fact are).

Now that I've said that, I'll proceed with the short version of this post: ugh.

Longer version: Apparently the word "natural" means the same thing when applied to game design it does in all other contexts - from the African veldt! Falstein's argument is that what makes an activity fun today is that it was useful to our paleolithic ancestors. Not an absurd idea on its face, but Falstein proceeds as though this were a clear fact, despite providing next to zero evidence for it.

The evidence he does provide is generally in the form of hypothetical anecdotes or examples of analogies between common modern and supposedly common paleolithic activities. Now, as a student of philosophy, I'm all about hypothetical examples, but in philosophy we generally apply them to questions for which there is no way to gather empirical evidence, like "is determinism incompatible with free will?" or "how many people are on this chair, the one on which I'm sitting?" (if you think the answer is obviously one, you're probably not a philosopher or much of a party animal)*.

There are several reasons this bothers me. For one, I have a lot of respect for biologists and evolutionary theory, so when people start throwing around stories about our ancestors and pretending like they're facts and not fabrications of their imagination, it bugs me. Secondly, it creates some instant associations with evo-psych, which I'm not a fan of. Thirdly, I think it's wrong on some level. Fourthly, there's no real reason to go back to cavemen to explain these things.

Let's go back to thirdly - the part where Falstein is wrong. The hypothesis is that things are fun because they were useful to our ancestors, but not to us. Yet from early on in the article:

"So not surprisingly, when you really look at not only games, but all human entertainment, you see that at its heart it is all about learning about survival and reproduction and the necessary associated social rules and behaviors."

Yes, social rules. Falstein doesn't think we're operating with the same social rules we were x-thousand years ago**, does he? And yet this is immediately brought up as one of the first examples of things we learn from games and entertainment. Generally speaking, it seems that Falstein is completely forgetting that genetic evolution is only part of the explanation for our behavior. I'm ok with people leaning toward the nature side of the "nurture vs. nature" debate, but he seems to not even recognize that any such debate exists.

This brings me to fourthly again: we don't need the cavemen frame to understand what we're talking about. We just need the "human people" frame. For instance, Falstein attributes all collecting and gathering behaviors as being derived from the need to gather berries, as in:

"There are a huge number of popular entertainments that involve gathering. Casinos packed with slot machines recreate berry-picking, abstracted and refined into an RSS-related compulsion."

Why does it have to be about berries? I mean, isn't it just as easy to say, "people like collecting things because it results in them having more things"? It also lets me avoid the burden of having extra assertions to back up. I think this is an important point for anyone writing an essay, about anything. Examples are good, but each time you include one, you're also usually introducing a new assertion (at the very least, that your example is an instance of X). Thus, examples only help your cause when you can convincingly show that they support your main point. Otherwise, they're just one more thing for someone to object to (for instance, I think comparing casinos to berry-picking is a pretty bad analogy). Falstein seems to think that more assertions are always better.

On top of this "fun is about cavemen behavior" center there is an organizing strucural part of the essay, about how there's three kinds of fun activities: physical, mental, and social. My main objection here is, "doesn't that include the entirety of human activities?" I mean, it's presented as a practical tool for thinking about what kinds of activities might be fun, but if it includes the entire set of activities, I don't see what's practical about it. It's like saying "human beings tend to like the taste of just two things: organic things and inorganic things. For instance, they like both pig flesh and salt." Of course, not everyone eats pig flesh, but I'm pretty sure prehistoric people did, which is why we eat it today (see, I just used science)!

To conclude, I don't think I would have had any problem with this essay if it were framed as "I find that a useful thought experiment when designing a feature is thinking, what might a cavemen need to do?" Instead, Falstein feels the need to have his thought experiment carry the authority of fact, but without taking the time to convince us that it actually is fact.

And that's the rant (for now).

-Silent Ellipsis

*Or you're both an animal and an animalist. Shout out to all the animalists out there! By the way, I think your theory is ridiculous. Text me if you want a QED.

**The vagueness about timing also kind of bugs me. I mean, human societies have seen a lot of variety in a lot of places over the last 10,000+ years, but we're asked to imagine that there's modern man, and then before that we were all living on the African veldt since forever.

Why MMO?

Massively has an article up about the trend in MMOs to allow for easier and easier solo play. This hearkens back to a post I made a while back on the same topic, but it still seems like most of the other arguments I'm seeing on the topic travel in the opposite direction of mine. The Massively question is: Given an MMO, why make it more single-player? For me the question is: Given a game concept, why make it an MMO?

I'm not uniformly against MMOs or anything - I actually believe that they have a huge amount of untapped potential. The keyword, though, is "untapped." The kind of gameplay we see in existing MMOs is, by and large, very similar to what you can get in a single-player game (or a merely-multiplayer game, like Neverwinter Nights, Halo, Mario-Kart, or anything that has less than 100 people in the server at once). However, in an MMO the content is more strictly gated, the space between levels is artificially extended, and you can't have any effect on the game world. So I guess what I mean is they're watered-down versions of single-player games.

So what I see isn't an evolution of MMOs, but rather a presumption that MMOs are the standard, causing them to open up to audiences that weren't originally interested. So again, if the game is trying to appeal to people who want to play solo, then why is it an MMO? The actual answer seems obvious when I'm in a cynical mood: because MMOs are trendy and offer high profitability. The profitability portion comes from the fact that you can make more money from each committed user in an online game than you could by selling them a traditional game for a set price - if addicted they'll keep shelling out. Also, online games are relatively immune to piracy, because in addition to a working, hacked version of the client software, you need an actual server to play on.

That said, MMOs are a very risky investment, for several reasons (ooh, time for a list, I love this part):

1) Since standard MMOs rely on being addictive, it's not enough to convince someone to play it - you have to convince them to live your MMO.

2) Since MMOs rely on being addictive, most players won't play more than one at a time. That means that most of your potential audience is already occupied playing WoW, so you need to give them a reason to play your game instead of another (whereas a player who bought Halo 3 can, and probably will, also buy Gears of War 2).

3) They're friggin multiplayer. Even though many of the developers at this point have a lot of experience making multiplayer online games, it's still no easy feat to make the game work properly, and this fact makes both programming and designing the game harder, which is final nail in the coffin of anyone who dreams of making a low-budget MMO.

And since they're so high-risk, clearly the publisher is going to try and minimize risk by insisting that the title is as similar to existing MMOs as possible.

So is the tradeoff worthwhile? It certainly is if you're Activision-Blizzard, but given the sheer number of MMOs in development, I can't help thinking that many of these developers would have been better off with a different strategy.

-Silent Ellipsis