Thursday, February 18, 2010

Institutional Darwinism: Adapt or Perish

Technology and the financial firestorm have over-run institutions both public and private. They face a stark choice: adapt or perish.

Today we turn to two powerful concepts to help us understand the devolution of "advanced" neoliberal capitalism/State institutions. They are: institutional lag and punctuated equilibrium.

You may want to refill your coffee or tea cup because these concepts play out on multiple, interlocking levels of feedback.

My goal is to integrate these ideas into the Survival+ analysis of windfall exploitation, over-reach, profound political disunity, phase shifts, opting out,internecine conflict between protected fiefdoms, asymmetric stakes in the game,full spectrum defense of the status quo, structural stagnation and when belief in the system fades.

Correspondent Phillip H. introduced me to the concept of "institutional lag,"an idea developed by Clarence Ayres (1891–1972), author of The Theory of Economic Progress. Ayres propounded a theory of "institutional lag" between technology and social-economic institutions.

Phillip H. submitted this quote about Ayres' work:

"Ayres propounded a theory of "institutional lag" whereby technological changes inevitably kept economic technology one step ahead of inherited socio-cultural institutions.

The process of Veblenian "evolution" Ayres envisaged was that technological changes were generated by spurts of instinctive inventive activity to innovate in technological processes but that the relatively slow, inherited socio-economic structures would be maladapted to these changes. With glacier-like gradualness, institutions would eventually respond to the new technology, but by the time they adjusted, the next round of inventive activity would have been skipping along further ahead, thus maintaining a permanent lag and thus incogruity between social structures and economic technology."

I was immediately struck by the similarity of these concepts to the notion ofPunctuated Equilibrium in the study of natural selection and adaptation in Nature. Initially, naturalists reckoned that organisms adapted to changes in their environment at a slow, steady rate. Given the immense time frames being studied--millions of years of adaptation and species development--this was understandable.

But the fossil record revealed a less orderly reality: species remained more or less the same for long periods of time (in equilibrium with their environment) and then experienced brief periods of rapid, profound change: equilibrium punctuated by spikes of adaptation in response to abrupt changes in the environment.

In other words: adapt or perish. Punctuated equilibrium is a commonsensical idea; if a creature is already well adapted to its environment--say, the shark--then there is no selective pressure to change. But should some profound climate change occur, then the organism must adapt rapidly or the species will perish.

Perishing is normal. Evolutionary biologist Ernest Mayr estimated that perhaps as many as 50 billion species have evolved on Earth, and only a fraction remain alive today.

Is change "good"? That is a value judgment; all we can say is that change is necessary. The only other option is to perish.

There is no "one rate of change/adaptation" in punctuated equilibrium:

Richard Dawkins dedicated a chapter in The Blind Watchmaker to correcting, in his view, the wide confusion with rate of change, surrounding the theory of punctuated equilibrium. His first, and main point, is to argue that phyletic gradualism in the sense of uniformity of rates--what he refers to as "constant speedism"—is a "caricature of Darwinism" and "does not really exist."

His second argument, which follows from the first, is that once this caricature is dismissed, we are left with only one logical alternative, which Dawkins calls "variable speedism." Variable speedism may be distinguished in one of two ways: "discrete variable speedism" and "continuously variable speedism."

Eldredge and Gould, believing that evolution jumps between stability and relative rapidity, are described as "discrete variable speedists," and "in this respect they are genuinely radical." They believe that evolution generally proceeds in bursts, or not at all.

"Continuously variable speedists," on the other hand believe that "evolutionary rates fluctuate continuously from very fast to very slow and stop, with all intermediates. They see no particular reason to emphasize certain speeds more than others. In particular, stasis, to them, is just an extreme case of ultra-slow evolution. To a punctuationist, there is something very special about stasis.(emphasis added: CHS)

In other words, the stasis enjoyed by employees and fiefdoms of government and other large-scale institutions only appears "normal". In reality, the last 60 years of "stable growth" and "rising taxes/prosperity" were based on two historical accidents which are ending: abundant cheap oil and favorable demographics--an exploding population which enabled vastly expensive defense and social programs to be funded by ever-larger future generations.

There is an element of Losing the Red Queen's Race here as well. The protected fiefdoms of the State and other institutions are mounting a full spectrum defense of the status quo by borrowing trillions of dollars to maintain their salaries, benefits, pensions and perquisites, and by selling the notion that raising taxes is necessary to "protect the services you want."

But this is the Red Queen's Race writ large: the more the State fiefdoms succeed in raising taxes, the more businesses will fold and the more taxpayers will opt out. The State is already seeing tax revenues plummet as sales, transactional churn, wages and profits all drop precipitously. As the body of taxable income and transactions drops, then those dependent on State swag/taxes must raise taxes on the remaining Plantation Debt-Serfs to stay in the same place, i.e. keep their "guaranteed" incomes, benefits and pensions.

A peach tree provides an insightful example of how punctuated equilibrium works on a small scale. I have a peach tree as well as a citrus tree, so I have observed how each responds to stress (cold, drought, etc.) and abundance ("perfect" growing conditions).

In prime growing seasons, the peach tree will produce so many blossoms and then fruit that the weight of the fruit exceeds the carrying capacity of the branch, and the branch will snap off.

This is Nature's method of "pruning." Rather rough and ready, with unsightly results, but this is how the peach tree survives windfall exploitation: when conditions are good, the tree over-produces, exploiting the windfall of water, sun and soil fertility. In effect, it quite literally over-reaches and the overloaded branch breaks.

In the windfall of post-war cheap oil and expansion of credit, the State and its minions, fiefdoms and dependents (defense contractors, sickcare, etc.) expanded to exploit that windfall.

Now the State has over-reached; there is no way the non-State economy can fund the State's revenues without breaking. (That's the nature of debt-serfdom; most income goes to paying debt, so there is only so much left to fund State swag).

In response, the Federal government has borrowed $1.5 trillion a year, fully 40% of its entire revenues, to fill the gap between what the private sector can pay without breaking and what the State demands as "normal" (the fundamentally "abnormal" stasis it has come to believe is "equilibrium").

By throwing hundreds of billions of dollars into local government, the central State has put off the reality of this disequilibrium for a year. But now states, counties and cities are facing tens of billions of further reductions in revenues; they are losing the Red Queen's Race.

Government at all levels has a single adaptation strategy: raise taxes on the dwindling productive class. Here in California, the Democratic political machine has a single goal to adapt to changing financial realities: persuade the public to change the rules so the Democratic-dominated State Legistlature can raise taxes by a simple majority.

To re-establish equilibrium, the State seeks a spike in tax revenues.Unfortunately for the State's factotums, they are not a majority of citizens, and so their consensus "adaptation"--sharply higher taxes and junk fees, across the board--is creating a profound political disunity.

Since their income depends on maintaining State swag/tax revenues, they have anasymmetric stake in the game: to maintain their desired "equilibrium," they will throw every ounce of energy and political power into raising taxes. The only other "adaptation" they pursue is internecine conflict between protected fiefdoms, that is, political in-fighting to protect their share of the swag at the expense of some other protected fiefdom.

While the State's protected fiefdoms demand that taxes rise (in effect, running faster to stay in the same place), the non-State productive class sees only devolution: poor service from the bloated State which is completely at odds with the rising costs of supporting the State, and with declines in their own wealth and income.

Unfortunately for the institutions currently living on borrowed money, they are also living on borrowed time. At some point, a phase shift will occur and the Red Queen's Race will be lost: the branch will suddenly break. At some point, the world will awaken to find there isn't enough money in the Universe to fund all the government debt being sold to fund protected fiefdoms worldwide.

And the "adaptation" of simply printing money to buy its own debt has consequences: the destruction of the currency.

Both institutional lag and the State's defense of the status quo--are examples of structural stagnation. Nothing is really changing; simulacra are being presented as reality, accounting trickery is being deployed to mask the rot at the heart of the State's finances (Federal, state and local government), and those not dependent on State tax revenues have only one option when their belief in the system fades: opt out. Buy less (thus generating less sales and transaction tax), work less (generating less income tax), shutter their businesses (reducing junk fees, employment, etc.) and move to lower-tax climes (overseas or low-tax states).

The State is helpless to stem this rising tide of opting out. Technology and the implosion of credit/asset bubble economies has opened an institutional lag of unprecedented depth and width; raising junk fees and taxes to fill this Grand Canyon is The Red Queen's Race: the State demands everyone run faster to stay in the same place, but people can choose another adaptation: stop running.

Institutions, like all organisms faced with profound changes in their ecological niche, have a harsh choice: either make radical adaptations to align with reality, or perish.

I know it seems like I'm always pitching my own work, but the fact remains that this analysis stems from the 140,000-word Survival+ and Survival+ The Primer, the abridged 140-page version.

Note of apology: Due to the laziness of some clerks at the U.S. Post Office who did not process my packages properly, some books I mailed last week were returned and hence delayed. Not only do I have to stand in line because the books weigh more than 13 ounces, I must now select competent clerks lest the books be returned. My apologies for the unexpected delay.

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