Thinkers
Alan Longley

Research and Essay (1998) on the Dispersion of Equity

COMMENTARY
dispersion
From alan longley
Attachments3:49 PM (22 hours ago)
to me

Peter,

My attached paper from 1998 contains this quote from Krugman's 'Geography of Trade':

The decision by international economists to ignore the fact that they are doing geography wouldn't matter so much if someone else were busy exploiting the facts and insights that can come from looking at the localization and trade within countries. Unfortunately, nobody is. That is, of course, an unfair statement. There are excellent economic geographers out there, as well as urban and regional economists … however, these people are almost uniformly peripheral to the economics profession.[1]

Peter, this is still true; Krugman himself, in MANY ways is now a perpetrator of this atrocity.

Alan
[1] Paul Krugman, Geography and Trade, The MIT Press, 1991, p. 3.
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TPB NOTE
I have been bothered for years about using an 'average' as a measure for management, yet it is routinely used almost everywhere. Surely the goal of management is to move the average in order to have better performance, and for this it is helpful if not essential to understand the content of the average. When you know the outliers that are good, then replicate them, and when you know the outliers that are bad, then fix them. Then, when the average is recomputed, it will be better!

Take this and combine it with the idea that every place is different, and think through relevant initiatives for each different location, and the performance of development will be improved significantly.

One key characteristic about place is the level of education and level of understanding from place to place. Most university level education about (socio-economic) develpment seems to assume that there is a foundational level of understanding of complex ideas that are being taught in international universities when in fact this characteristic of understanding does not exist in many places. Many people in remote locations have amazing experiential learning ... but this does not 'fit' and 'connect' with much of academic university level education ... and there is little abilityto make well meaning initiatives relevant and useful.

Peter

By Alan Longley

Who owns what, the distribution of equity, is a crucial and highly political issue in economics. Perhaps as part of an effort to be objective by avoiding politics economists have missed an opportunity to apply mathematics in the measurement and modeling of the dispersion of equity.

There is ample empirical evidence to justify new studies in the dispersion of equity in time, space, and among people. First, since the end of World War II, the Japanese have to great advantage implemented an equity distribution scheme unlike anything in Western economies. The Japanese offer equity incentives to trade partners – the result is a cross ownership system in which partners own shares in each other. About 60% of the equity held in Japan was distributed in this way. This engine of sharing is partly responsible for the radical growth of the Japanese economy.

The current weakness in the Japanese banking system is in good measure the end result of this systematic dispersion of equity; the Japanese banks made a large volume of loans with common stock as security. A declining stock market has eroded these assets. Any study of the Japanese equity network would have to account for this decline in equity value that occurred after the long period of increasing value. Perhaps this is a new case of a boom-bust cycle that should be studied to avoid future mishap.

We suggest below a solution to the problem faced by the Japanese banking system, one that articulates the Japanese technique of systematic sharing into the world of commerce. The Japanese systematically share equity with trade partners, we suggest sharing equity with customers.

Another piece of historical evidence that indicates a need to study the causes and effects of equity distribution are fully amortized real estate loans. Thirty-year fully amortized loans were invented in the United States during the 1930s. A principal payment is made each month with these loans; adding to the owner’s equity regularly, in small payments. Prior to the 1930s, only short-term loans with little or no amortization were available. This lending innovation has been credited with macroeconomic consequences, such as increasing construction spending and lifting real estate values. A study of the ownership dispersion that occurred with fully amortized loans might clarify the value of alternative equity distribution methods or algorithms.

Perhaps there are other impediments that keep economists from rationally studying the dynamics of equity. Economists have largely ignored the spatial dimension in trade - this blindness perhaps persists in the treatment given to equity movement.

The decision by international economists to ignore the fact that they are doing geography wouldn't matter so much if someone else were busy exploiting the facts and insights that can come from looking at the localization and trade within countries. Unfortunately, nobody is. That is, of course, an unfair statement. There are excellent economic geographers out there, as well as urban and regional economists … however, these people are almost uniformly peripheral to the economics profession. Paul Krugman, Geography and Trade, The MIT Press, 1991, p. 3.

The underprivileged studied by urban economists reside in the spatial blind spot of economists. This comment is intended to be descriptive and not judgmental - many professions that apply analytic techniques must avoid emotion to attain useful abstract results, such as medical practitioners confronting pain and disease. Doctors, however, sometimes do try to improve their bedside manners. Perhaps economists now have the tools to make the profession less dismal! Equity, the wealth from group effort, is thought of as something quite separate from the underprivileged. Equity has been idealized, abstracted to the point where it is now thought of as removed from origins in the sharing in the benefits of group effort. It also considered as spatially removed from the underprivileged - equity is a citizen of Wall Street. Bringing equity distribution within the compass of the underprivileged might revitalize notions of the value of group effort. The underprivileged purchase huge volumes of lottery tickets. Perhaps more financially sound speculative assets could find a home with them.

Discussing a redistribution of wealth will perhaps bring fear of a hidden Marxist agenda to the minds of some economists. But a reasonable assessment of the situation will hopefully result in the conclusion that the emotions concerning the distribution of wealth have prevented a mathematical description of the dynamics of equity. Similarly, the creation of normative models or models for prediction has perhaps been eclipsed. Equity is redistributed over time in some way - there is likely some distribution function, or set of functions, which may describe what is occurring. It is likely that there are some set of functions that describe the Japanese equity-sharing network. The real estate equity distribution produced by fully amortized loans could likewise be studied.

If the empirical distribution of equity may be in this way studied, the question then becomes how do we plan for the future; what is our objective function, our fitness function? It would be the job of politicians to determine these functions, to determine for which groups for whom we are attempting to incubate wealth. Yet there are other possibilities. There might be objective functions that would keep the relative distribution of equity the same as to which economic groups receive it, yet speed up the distribution in time. These would be politically neutral objective functions, or nearly so.

Without going through the work needed to answer these questions, we suggest an equity distribution scheme built upon natural selection, as represented by artificial natural selection algorithms developed and studied by David E. Goldberg and others. David E. Goldberg, Genetic Algorithms in Search, Optimization, and Machine Learning, Addison-Wesley Publishing Company Inc., 1989. The most fit groups within artificial natural selection are most likely to reproduce and be represented in the next generation. Within economies we observe that there is a tendency for the wealthy to get wealthier. The wealthy are more fit than those living at a subsistence in the pursuit of greater wealth. The rags to riches successes are perhaps similar to the random mutations of artificial natural selection.

We suggest a distribution method that we call cybershares. A cybershare is a share of common stock, or a tiny fraction of a share, that is sold to the public in conjunction with merchandise or services sales, or sold upon signing a contract to purchase goods or services in the future. Pairing equity purchases with payments for goods and services is identical to pairing principal payments with interest payments if money is a commodity like any other, as economists are fond of saying. Until the information age, the record keeping for tiny fractional interests was not feasible. Now this may be done at cash registers, on the World Wide Web, or over the telephone. There are two ways to sell shares in conjunction with services or merchandise. First, corporations may sell their own shares with the products they sell. The SEC created a safe harbor for firms to sell their own shares in 1985. Second, if licensed as a broker, firms may sell the shares of any firm along with any service or merchandise.

With this technique, the natural tendency of the rich to get richer is preserved as the rich have more money to spend and would therefore buy more shares in conjunction with merchandise. Yet at the same time, equity would be distributed to wider circles, just as in the Japanese technique, because more people at or above the subsistence level would absorb shares.

The current algorithm for distributing equity in group productivity is to save cash for years, until there is enough to buy shares in the group effort. Many never save enough cash and merely subsist, devoting only desultory effort to work. This stricture not only makes life difficult for the poor, it perhaps stunts the growth of the stock market. If those living at a subsistence level are able to absorb some of the supply of equity, the reduction in supply might raise the value of shares that trade, such as occurred with the Japanese equity distribution network.

The economics of cybershares are similar to the economics of other incentives such as frequent flyer miles, green stamps, and other premiums. The economics of premiums and incentives are another area where an analysis of ownership dispersion might be extended. Premiums and other gimmicks are assets that are distributed in pursuit of trade that do not have a direct impact on owner's equity. The Japanese equity network and fully amortized loans, however, do effect owner's equity. Perhaps there is a continuum between these extremes. Beware relegating premiums, coupons and other incentives to the realm of the trivial - perhaps this phenomenon would be significant in an empirical evaluation of equity distribution. One possibility is that premiums and coupons have a speculative quality that appeal to the public much like lottery tickets or gambling. The enjoyment the public gains from speculation is perhaps similar to the feeling of connection, of sharing a common fortune, with a work group. There might be emerging in the economy a second, or derivative, group of corporate structures, that are designed to secure rewards or hope for them. In this case, an effort to make these derivative structures financially sound might be rewarding. We think it likely that the use of cybershares could rapidly enhance the capital formation process in the United States and other countries.

China, for instance, currently has a shareholder population of only some 21 million people. If shares change hands as goods are bought and sold throughout the economy, the shareholder population might quickly reach into the hundreds of millions. More efficient capital markets in countries like China and India would help feed starving people, among other benefits such as gaining more wealth for those already wealthy. This would happen if economic growth emerges from cybershares, such as that which many believe occurred with the development of long-term fully amortized loans.

Another fruitful area for the study of equity dispersion is artificial life research. Artificial life modeling represents problems with artificial organisms whose behavior is determined by local interactions with other organisms and not at all determined by global rules, such as the systems of equations that are typical in economics. Corporations could be used as the units of the artificial life experiments. The local interactions we suggest studying would be different methods of distributing equity. One method would be to distribute shares as purchases are made within the economy, what we have called cybershares.

One of the useful discoveries of artificial life researchers is that there are often critical threshold levels for factors that produce artificial life or emergent behavior among populations of organisms. Applied to corporate economics, artificial life modeling might yield findings that reflect on the principles and politics of economics.

Dynamic systems may have three states order, complexity and chaos, which are similar to the states encountered in artificial life experiments conducted with cellular automata. M. Mitchell Waldrop, Complexity, Simon and Schuster, 1992, p. 228. Mr. Waldrop describes the work of Chris Langton. The center region, complexity, is the state where some believe life thrives – at the border between order and chaos. Ibid, p.231 We believe that spontaneous emergence of structured life-like behavior, action in the 'complexity' zone, in both the stock market and the economy may occur through the use of alternative algorithms of equity distribution. If this turns out to be true, then the barriers to healthy dispersion of equity should be analyzed. Perhaps some of the principles or traditions of the economic systems of developed nations provide barriers to the spread of wealth. Perhaps they keep systems within the 'order' portion of the scheme – too entrenched for emergent behavior. For example, the prevalent algorithm for distributing equity, saving cash for years until enough is hoarded to buy shares, might be a tradition that stultifies growth.

The hope of emergent behavior through the interaction of corporations experimenting with novel ways to distribute equity is that there could be a rapid crystallization of wealth in the developing world and among the most needy in developed countries. Emergent behavior could also bring broad avenues for the pursuit of wealth by those already wealthy

Corporations are artificial creations whose name implies a similarity to living organisms; they seem to constitute an artificial life experiment in themselves. The first large public corporations were formed by royal decrees, which were only sparingly granted for large-scale enterprise. The practicalities of industrial progress mandated a new form of ownership and control. Progress had raised the magnitude of ownership past the level where small partnerships and proprietorships could function. Our notion of equity therefore had its origins in the divine right of kings, which was articulated into the world of commerce – the common people could not organize into corporations whose common stock traded on exchanges. This feudal barrier to a rational distribution of equity market in work groups other than those sanctified by royalty perhaps persists. This barrier is perhaps evident in the blindness to location dynamics that afflicts economics.

The corporate scepter was passed to economists. The invisible hand that Adam Smith spoke of held an invisible scepter. Economists blindly accepted the corporate structure that erected the dark satanic mills of the early Industrial Revolution and paid little attention to equity dispersion. Inflicting terrible conditions and low wages on the populace seemed to all mainstream economists a necessary outcome of a rational division of labor. This is the state of alienation that Marx objected to and therefore suggested that the states own the equity and administer it. Marx picked a poor alternative algorithm for the distribution of equity, states are often not trustworthy fiduciaries! He sought to return people to an authentic association with their work by wresting the scepter from an uncontrollable invisible hand and placing the scepter in the hand of the state, always able to control, but also eager for power and frequently corrupt.

The information age is now rich with alternative algorithms and methods for equity distribution. Economists on the left, disappointed Marxists and scowling socialists, perhaps have not thought of cybershares-like concepts because the stock market – with its heavy market orientation – is not the traditional site of socialist or Marxist action. Traditional capitalist economists have a laissez faire attitude, and might sneer at selling common stock along with merchandise, or balk at an organic change in capitalization that proceeds with everyday business. Premiums, coupons and the like might indeed seem trivial. But they are perhaps evidence of dispersion of ownership that has not been fully studied. Some conservative economists might also irrationally fear that redistributing equity seems Marxist. But selling equity along with merchandise is little different than making a principal payment along with each interest payment on a mortgage. We hope that today's economists will not taint their objectivity with fears from years gone by.

Potential Applications

The creation of the Linux operating system is an example of organized group effort by people all over the world on a single Internet project. With no pay, computer programmers all over the world spent years laboring on an operating system that replicates the UNIX operating system. LINUX is free, and the source code for it is free. International workgroups similar to the one that created Linux could be used to develop cybershare projects. The computer world, including the pathways of communication within the Internet and the switched telephone network, is rich with alternative algorithms and methods that might provide healthy dispersion methods for equity. Different groups could develop their own rules for the exchange of equity. We may develop this representative list by following the pathways of communication:

1. Real time electronic - If connected to the Internet, or another network, equity could be purchased in proportion to the efficiency of code and or time of execution at all levels of transmission. More efficient systems could be rewarded with more equity. Businesses with more efficient servers are rewarded and errors are costly.

2. User Level - Education, reading, video games - As education is purchased, a portion of the tuition goes into an equity fund for the student. Institutions without real estate related expenses would perhaps be more able to apportion equity, or perhaps some of the real estate held by the educational institutions could be sold to the students in installments. In games, there are many opportunities to use equity as an incentive for levels reached, or in competition.

3. Transaction Level - the cybershare application that we discuss in the above analysis; as goods are bought and sold, equity accrues.

The benefit of rewarding efficiency or utility of software, operating systems, and networks is that the true functioning of the systems would compete, not only the marketing images. The competition that functions so well as a determinant of success in the transaction level economy could in this way reach down toward the bare wires of our systems, providing the most solid foundation possible for all levels above. Time of execution might provide an objective standard for levels beneath the transaction level.

Machine level inefficiencies in systems might well generate other problems at higher levels in the economy. What emerges is the possibility that equity could be dispersed among many different hyperplanes that might be defined in an analysis of the dispersion of equity. The current algorithm for distributing equity in group productivity on the transaction hyperplane involves hoarding cash for years until there is enough to buy shares in the group effort. This is the method that has persisted since medieval times. Now that the economy races ahead electronically, it is sensible to distribute equity in time frames that resemble execution speed. To do anything else potentially rewards planned obsolescence in the information infrastructure as herds of uninformed buyers make systems decisions and purchases - computer firms benefit from repeated new purchases and fees. Stopped and stalled systems could litter the economies of the future, systems built upon poorly structured operating systems developed with malfunctioning code at all levels.