Let me explicitly warn you now, I am obviously not an economist and so the speculation contained in this post may be completely naive.
In the current climate, this is a question I find myself asking more and more often. Initially, prior to the recent global economic downturn I had been playing with the idea of whether it would be possible to apply fault-tolerance ideas to investments, but I never really reached any firm conclusions. Applying such ideas to an entire economy might be much easier, since you could consider substantial changes to the regulatory apparatus which would be impossible for a single investor.
So what do I mean by this? Well, basically one way to look at the economy is as a computation. Every trade, every bailout, every lay-off or expansion constitutes a step in the computation, essentially a logic gate. So what are we computing? Well, the unemployment level is clearly a function of birthrate, emigration, hires and fires/redundancies. The Dow-Jones is a function of the stock price of 30 blue chip companies, which are themselves dependant on recent trades.
It seems to me that bail-outs and interest rate adjustments can be viewed as a rather crude attempt at error correction. So we translate the processes which constitute the economy (financial, employment, policy, external events, etc.) into gates within a computation, we can start to bring computer science results to bare on the problem. One question we can ask is whether error-correction is sufficient to stop the computation going off-track. The resounding answer to this question appears to be “no”, given that the cause of the recent economic crisis traces back to sub-prime mortgages. Indeed this is what we would expect viewing the process as a computation. Trades in mortgage derivatives spread throughout the system, and so when people started defaulting on their mortgages, the impact was felt throughout the economy. This is exactly the situation fault-tolerance is designed to avoid.
In a fault-tolerant computation the computation is performed in such a way that an error in one area does not propogate throughout the system. We can certainly data mine past transactions to determine a noise model for the computation (coming from external factors and our inability to predict exactly what anyone is going to do in any given circumstance), and so should be able to determine what noise factors are correlated, and which are independant. As an example, the stock price of companies within the same sector will likely be correlated in their reaction to external events. This noise model is fundamentally important to designing fault-tolerant operations.
So how could we apply fault-tolerance to the economy? Well, first we need to identify the subspace we wish the computation to remain within. Now, our initial state must be within the stabilized subspace. This means we can’t really use fault-tolerance to maintain low unemployment and high stock prices, since that is not the regime we are currently in, but we can certainly design the system so that noise will not significantly raise or lower certain economic indicators we have decided to protect, allowing only intentional actions to manipulate these indicators. Faortunately, almost any indicator we can choose will depent on a range of factors, essentially acting as an error correction code. Now, unfortunately we don’t get to choose our encoding, but it is fortunate that a fairly decent one already exists due to the complexity of the economy.
So if we have an error correction encoding (we essentially want a form of self correction), what else do we need? Well, one thing we need to do is to formulate a set of fundamental operations which does not lead to correlation in noise. One way to do this is to impose strict rules on how investment can be made in such a way that not only do we require investment be spread across many sectors, but also that individual investors be required to invest in a sense independently. I know that this requires a huge regulatory aparatus, but if it could free us from the fear o economic downturn, it would surely be worth while. Now I suspect that my libertarian friends are going to find this a horrifying prospect, if we can identify a universal set of operations for computation of the factors individual investors care about, then we haven’t asked anyone to give up any freedom in their goals, we would only have required them to go about them in a much more responsible way. The end results should not actually be much different. The way things are at the moment, we are actively propogating risk within the economy and the financial markets, and it seems that this can be halted relatively easily.
So what would we need to do if we wanted to take a more rigorous look at this problem? Well, a few things we would need to determine:
- What economic indicators do we really care about?
- What constitutes a universal set of operations for what governments want to accomplish?
- What constitutes a universal set of operatons for what investors want to accomplish?
- What is a reasonable noise model? What’s correlated and what’s not?
- How much this will piss off Peter?
Thoughts?