Wednesday, September 07, 2011

deadlocks in the economy

The affliction of a specialist is the compulsion to redefine every discipline into that specialty. As someone in a software job, I see the economy exhibiting mishaps of coordination. Programs executing simultaneously, or one program whose several parts execute at once, might interfere and cause confusion. In an economy, legions of economic agents engage in transactions. Given the difference in scale, coordination issues probably are more, not less, applicable to the economy than to a computer. Some of the names, like producer-consumer, even invoke the comparison.

A fundamental topic in program coordination is the "deadlock". Put simply, a deadlock is whenever all collaborators end up waiting on counterparts to act. Say that there are two programs, each of which needs exclusive access to a pair of files to do some work (e.g. the second file might be a "summary" which needs to be updated to stay consistent with the first file after it changes). 1) The first program opens the first file. 2) The second program sees that the first file is already opened, so it naively opens the second file before the first program can. Voila! The first program waits for the second program to finish up and relinquish the second file, while the second program waits for the first program to finish up and relinquish the first file. Everything is "locked" without any way to proceed.

Back to economics. An economy is a massive set of roughly circular flows. Buyers send money (or liquid credit) to a seller, and the seller sends the desired item back. The seller then (possibly) reuses the money as a buyer, and the buyer then (possibly) reuses the item as a seller. If the buyer obtains money in the labor market, i.e. working a job to earn wages, then that's another flow which connects up to this one. These flows continually recirculate during normal functioning.

However, clearly a stoppage (or slippage) in one flow will also affect other flows. This is the economic form of a deadlock: economic agents that halt and in so doing motivate additional agents to halt. Until flows restart, or a newly created substitute flow starts, nobody progresses. No money or items are moving, so each is facing a shortage. Moreover, without the assurance of complementary flows in action, it's in an agent's selfish interest to wait rather than take risks. Therefore everyone waits for everyone to take the first step. Sounds like a deadlock condition to me.

Examined from a high level, deadlocks are clearer to spot. For instance, if the interest paid on a loan for a house is linked to a shifting rate and the rate and the interest both increase, then there could be a lack of funding to cover it. Unpaid interest implies a reduced flow in the money earned by the loan, as well as a corresponding reduced value for the loan itself (a loan without paid interest isn't worth much!). The current and projected reduction in the flow of interest disrupts "downstream" flows that otherwise would've relied on that interest. So the owner of the loan must reallocate money. That reallocated money isn't available for other lending flows. The intended recipients of the other lending flows are left unable to follow their own economic plans. And so forth. Eventually, the original cutoff may come full circle; due to the propagation of effects, larger numbers of loan-payers don't have the flow to pay their interest. The payers can't fulfill the interest payments when lenders have ceased usual risk-taking, and the lenders continue to cease usual risk-taking when payers can't fulfill interest payments. Money is in deadlock. Thus the economy's assorted flows of items (including jobs), which require the central flow of money (or liquid credit) to temporarily store and exchange value within transactions, are in deadlock too. The trillion-dollar question is which technique is most beneficial to dislodge specific deadlocks of money or to cajole activity in general. 

Unlike software, humans are improvisational. Confronted with deadlock, they don't wait forever for the deadlock to break. Instead, they adjust, although it could be uncomfortable. Economic flows that were formerly wide rivers might become brooks. Flows that started out as trickles might become streams. Over a long time period, deadlocks in an evolving economy are temporary. Circumstances change, forcing humans and their trading to change.

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