Disequilibrium Economics 101 (Part 2, Rev1)

This is to sum up and conclude what is floating around in my head and in this blog for quite some time. Prof. Steve Keen is one of the rare economists who is building a better understanding of what is going on in our economies by applying modern system dynamics methods and tools. In his models he acknowledges that banks with money creation capacity are an important element if not the core of a modern monetary economy, which needs to be carefully considered and can't be neglected when we want to understand the workings of such an economy. Prof. Richard Werner, a Professor of International Banking at the University Southampton in England, supports Keens view on the role of banking by his eye opening work about the way banks operate. Both refuse the loanable funds theory and Werner published several papers (1,2,3) showing strong evidence that it is justified to do so just recently. The loanable funds theory, which is an important part of neoclassical thinking, assumes banks to be pure intermediaries, who collect savings from people and companies with a money surplus on one side of their business and give loans on the other side to people and companies who demand a credit. This loanable funds theory ignores the fact, proven by Werner, that banks create money out of nothing, when they buy an asset like the credit contract with/of a debtor. So banks are not channeling flows from A to B but are sources and sinks for money, which is an very important difference when you want to understand the systems dynamics as Keen has always telling the world. In electronics the loanable funds theory assumes banks to be a simple wire but in reality they are batteries. You can guess how different the results are, when you want to start your car with a simple wire instead a little more complicated battery;-). So the loanable funds theory is a serious misleading theory, that must produce disastrous false results, when you analyse the workings of an economy based on it. An monetary economy without money sources in it will not start working like a modern car will not start without a battery.
Beside the disturbing fact that mainstream economists don't know or refuse to know how banks really work they are obsessed with an other misleading theory / assumption/ phantasm, which is the idea that an economy is a system that tends to equilibrium by itself. The opposite appears to be true and like in the case of loanable funds theory, mainstream economists insist to ignore all evidence of the fact, that real economies behave like and show clear symptoms of systems driven out of equilibrium by a flow (of energy). In a system that tends toward equilibrium, gradients are flattened out by distributing the energy, the heat, the what ever it is which is more or less concentrated somewhere. We call this diffusion and that can be visualized with an simple example.

But an real economy behaves more like this.

You find fat tail distributions = unequal concentrations = steep gradients which tend to grow steeper and steeper over time all over the place. Be it income and wealth, or the distribution of company sizes, landownership etc. Agglomerations and segregation are clear symptoms of out of equilibrium systems and the development of tremendous accumulated current account deficits on one side and the development of accumulated current account surpluses on the other side are clear results of out of equilibrium trade. So it is no surprise that equilibrium theories will lead economic analysis astray as loanable fund theories do. Both ignore observable evidence to a large extend and  therefore they need to be considered to be misleading fantasies. I mentioned to Keen last night, that I consider Leon Walras the culprit, because it looks to me as Walras tried to copy Boltzmann for economics. Boltzmann advanced physics a big deal by introducing statistical mechanics. He was lucky in that way, that he looked at ergodic or quasi ergodic systems. And Walras and company were stupid enough or not knowing what they were talking about, when they steered economic thinking into a direction that assumes the economy to be an ergodic system. It is certainly not, because it is not the same thing when you let one man work for ten hours or ten men for one hour. A cooperating team of people can accomplish other things compared to a single person even when the number of mystical man months = $ paid for the work is the same. But when you apply a thinking and methods that are appropriated to deal with ergodic or quasi ergodic systems towards an obvious non ergodic system you lead yourself astray. And that is what mainstream economics does. The powerful predictions of Boltzmann based theory collapse as soon as you deal with a system that is driven out of equilibrium by a flow of energy. See the Benard experiment. Boltzmann is not able to explain when and why molecules/particles which are dancing the rhythm of random brownian motion all of the sudden start to march in circles like square dancers on a dance floor. And that is known for quiet some time but ignored in a disturbing stubborn way by mainstream economists who insist that an economy behaves and can be treated like an ergodic system that tends towards equilibrium by itself. And the list goes on as Keen shows very well in his famous book "Debunking Economics".
I have personally experienced the severe effects of that false thinking in economics at least three times in just 10 years.

1.) As someone who had and has good and close relationships (business and private)  with people in South East Asia, during the so called Asian crisis in 1997/98.
2.) As an engineer working for Hewlett Packard in silicon valley from early 1997 to late 1999 during the build up of what was later called the Dotcom bubble in 2000.
3.) As a german and european citizen, who wants to live in peace and good neighborhood with other european citizens regardless of what nationality they have since 2007.

So I have been wondering for quite a while what is causing the devastating boom bust cycles and why are the root causes, which appear to be quite obvious to me, not understood/addressed/dealed with by mainstream economics. And I am really sick of their fruitless discussions which are going in endless circles leading to nowhere for almost 9 years now.

During my research I came across the work of I.Prigogine, R.W.Werner, S.Keen, S.L.Eichner, Fargione et. al. , S. Bogs to name just the most important ones. And then I started to connect the dots and tried to developed what I call an "Out of Equilibrium Theory" or "Disequilibrium Economics". And then things started to make much more sense to me.
When you look at our economic system as an out of equilibrium system, a dissipative structure, which is driven out of equilibrium by a flow of energy = human work (enabled and levered by a flow of sun energy (stored in foods and in fossil fuels)), where humans apply their success recipe of investing and reinvesting surpluses to enhance productivity and gain control over and over again (=stochastic multiplicative process) and by doing so they create a hierarchical structure (=lower local entropy=power law distribution) you get a picture that makes much more sense compared to what mainstream economics based on walrasian equilibrium bull shit has to offer. You see the economy as a process that creates power law distributed results. And then you recognize what money really is. A mighty communication tool steering the flow of human work towards what the money sources (banks) think needs to be done. Hijlmar Schacht knew that and steered together with the top brass of german society the flow of german work into the preparation of WW2 and ultimately into a war economy. He did so under the eyes of the winners of WW1 by using/creating so called Mefo Wechsel which the Reichsbank accepted like money but didn't show up in the books as money. And after WW2 the german bankers steered the flow of work into the creation of a consumer society following the US example. So the flow of human work, leveraged by technology and fossil energy, not only creates a flow of products, which are consumed/dissipated over time, but it also creates and maintains a hierarchical structure where the money sources are at the top and the working class at the very bottom, with lots of layers of different functions (see power structure research, Ringburg Model) in between.


Those structures appear to concentrate power at the top by feeding the most valuable work results towards the top, where they are used to control the entire thing. The important thing to note here is, that all economic activity is embedded into this structure and therefore exposed to the power gradient, which tends to get steeper and steeper over time. Free markets are not places where equal powers meet for a fair trade. Markets are places where the one who can put the most money on the table gets what he wants. And prices for goods and services are always set in a cost plus fashion because profit=monetary surplus is the ultimate goal. Product and service offerings which can't yield a profit disappear. Only profitable offerings survive. And one of the most profitable offerings is money itself, created out of nothing, offered as a loan which must be re payed plus interest. With the power to create this mighty communication and steering tool out of nothing and the power to decide free who gets how much for what purpose and with what conditions attached to it, banks steer the economy. It  can be said, that nowdays the highly concentrated bank business represents the central planning bureaus of capitalism.


And when the central planning bureaucrats at banks too big to fail are making serious mistakes and misallocations, it has devastating consequences. One of the most disastrous thing they do, is feeding speculative asset bubbles with money out of nothing just to let them burst by reversing the money flows. This is happening over and over again and the amplitude of the crashes caused by this is increasing.
In 2007/2008 Ben Bernanke almost crashed the entire thing (11,12) by stopping/reversing a flow that was going on since the early 80s and piled up US IOUs worth 6400 US$ (treasuries alone) in the hands of non US economies around the world.

 (billion US$ foreign US treasury holdings as of Oct 2015)

(billion US$ foreign US treasury holdings)

(billion US$ US treasuries hold by China, FED, Japan)

And I still don't know what to think about this. Did he do that intentionally or was he just victim of serious (self) deception by false economic theories?
When you stop or reverse the money flow, you stop the flow of human work going into the system and with that you stop not only production of goods and services for consumption but the work that is needed to maintain the system structure. At this point in time it looks like the Fed under Yellen is going to repeat that mistake once again. And I fear all the war and struggle around us has its roots in this not understood behaviour of an out of equilibrium system in the hand of bankers. Therefore I am writing this and hope it will get somehow into the brains of influential people. If not, I fear the greed heads at the helm will overstress the most valuable resources we have. Peace and cohesion in and between our societies. When these resources are depleted by stupid decisions based on evidence ignoring theories/fantasies nothing will save us this time.

Sapere Aude!

Georg Trappe


  1. Wenn ich dich richtig verstanden habe, dann ist die Wirtschaft nicht ergodisch, weil zufällige Prozesse (wie deine normalverteilten Renditen) dazu führen, dass der mittlere Besitz aller zu einem Zeitpunkt von dem mittleren Besitz eines einzelnen über alle Zeitpunkte abweicht. Habe bisher noch nicht so viel mit Ergodizität zu tun gehabt und muss da erst mal drauf rumdenken.

    Den Kunstgriff der Betrachtung von Wirtschaft als dissipative Struktur finde ich genial. Aus thermodynamischer Sicht ist jegliche menschliche Aktivität, egal ob technisch oder biologisch, eh dissipativ und findet entlang der Energiegradienten der Erdoberfläche statt.

    In diesem Zusammenhang bekomm meines Erachtens auch das permanente Inflationsziel von 2% eine ganz neue Bedeutung. in einer dissipativen Struktur wird permanent Exergie zugeführt und in Anergie umgewandelt. Der inflationsbedingte Kaufkraftverlust des Geldes ist ein bisschen wie diese Umwandlung. Mit jedem Kauf (und der damit verbundenen Umlaufzeit des Geldes) verliert das Geld an Kaufkraft. Kaufkraft ist hier sozusagen die Fähigkeit des Geldes, wirtschaftliche Aktivität zu initiieren. Diejenigen die an der Geldquelle sitzen (die Banken) haben damit am meisten "Exergie" zur Verfügung.

    Ein beliebtes Argument der Zinsvergabe ist ja, dass die Zinsen "Leihgebühren" für vorzeitig zur Verfügung stehendes Geld sind. Knüpft man aber die an diese Vorzeitigkeit den Kaufkraftverlust, so sind Zinsen das, was man der Bank zahlen muss, um an ihrer Exergie zu partizipieren.

  2. J a, ich betrachte Wirtschaft als nicht ergodisch. Mein plakatives Argument ist, dass Schar- und Zeitmittel nicht gleich sind, weil ein Mensch in zwoelf Monaten nicht das erreichen kann, was ein Team von zwoelf Menschen in einem Monat erreichen kann. Kooperation ermoeglicht eben Sachen, die isoliert agierende Modell Agenten a la Homo Oekonomikus, nicht hin bekommen. Die weitere Komponente, die zum Symmetriebruch fuehrt ist die Rolle des Zufalls, der bestimmte Sachen eben irreversible werden laesst. Die ganzen Theorien um Zinsen, etc. sind Bullshit hoch X. Alles Rechtfertigungsargumentationen, die im Grunde nichts erklaeren sondern nur in die Irre fuehren (sollen).

    Freut mich, dass doch einer mit dieser exotischen Betrachtungsweise etwas anfangen konnte