Instability of Capitalism

flow economics



The dynamics of an economy can be described as a flow of resources, similar to the flow of a physical fluid.
We discuss aspects of stability of a capitalistic economy based on a stability analysis of fluid flow with small
capital interest rate corresponding to highly unstable slightly viscous flow.

The forces in capitalist society, if left unchecked, tend to make the rich richer and the poor poorer. (Jawaharlal Nehru (1889-1964), Indian Premier Minister)

The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries. (Winston Churchill (1874-1965))

The importance of money flows from it being a link from the present to the future. (John Maynard Keynes)

Entrepreneurs and their small enterprises are responsible for almost all the economic growth in the United States. (Ronald Reagan)

                     Instability of Capitalism: I will restore confidence. Failure to act is worse. 

Capital Interest Defines the Direction of an Economy

In the knol The Direction of Time we show that the direction of time of life processes is defined by the irrecoverable destruction of information occuring in the catabolic processes necessary to sustain life: We eat structured biological material and deliver material with less structure. It is impossible to undigest a banana.
The destruction of information necessary for sustaining life can be seen as necessary cost in the form of destruction of information, which is characteristic of turbulent dissipation in fluid flow with large scale structured kinetic energy being transformed into small scale non-structured kinetic energy (heat), which is the essence of The Second Law of Thermodynamics
Similarly, market economy as a flow of resources moves forward in time, and what sets the direction is positive capital interest.
We are now in 2009 entering into a zero-interest economy, as a medication to restore the lost confidence in the financial system. This is like continuing eating without paying and digesting, which cannot be healthy. 
With zero interest the economy has no direction.
The present financial crisis is largely caused by a too low interest rate in the US 2001-2004 intended to cure the collapse of the IT bubble, and the crisis is now handled in the US by decreasing the rate even more, towards zero. The Czech prime minister Mirek Topolanek, the current holder of the EU presidency, has condemned US economic recovery plans as “a road to hell”  following the map of  The Perfect Storm by Johan Norberg. 

The Basic Force Driving Capitalism 

The basic mechanism in capitalism is 
  • difference in resource (knowledge, natural resources, capital, labor, people, social structure…)
  • tendency of difference to increase by migration in resource
  • profit feeding on difference
which has to be controled by 
  • mechanisms for decreasing difference through education, tax, capital interest…

To illustrate, consider a 100 meter dash with the runners lined up to the left according to their previous best 

results with the fastest runner on track 1 and the slowest on track 8, with a linear distribution in between with 0.1 seconds difference in best time between nearby runners. If the runners stay on their tracks, they will 

line up at the end with the same linear distribution of speed transversally with the fastest on track 1 et cet. 

But if the runners are no longer required to stay on their tracks, a slight displacement during the race
can change ordering at the end, so that the fastest runner may end up next to the slowest with a corresponding increase of the difference in speed between nearby runners from 0.1 to 0.7 seconds, as illustrated above.
The relative difference thus can increase by migration. The basic difference between a capitalistic economy and a socialistic, is that increasing difference is allowed in capitalism:

Capitalistic vs                                          Global difference.
Socialistic Economy
In a capitalistic economy individuals or groups of individuals can make money from a (more or less) unique product or service, by differentiation. This is Adam Smith’s free-market system with its invisible hand, through which the pursuit of private interest promotes the public good. In a socialistic economy nothing of this is possible, because everybody is equal and differentiation is not allowed, in principle at least.
Difference can feed difference: large scale difference opens the possibility of smaller scale difference which opens the possibility to smaller scale difference. A big company is surrounded by a range of smaller companies all the way down to one-person companies, with each company feeding on the next bigger company in the scale. 

            Small business                                                                     Big business.

A capitalistic economy can grow by differentiation through division of labor and  specialization, making some people very rich.  Differentiation results by increase over time initial small differences or fluctuations, typically by migration or mixing. But stability is an issue:

Instability of Capitalism

We can learn about the stability of capitalism as a flow of resources by studying the stability of fluid flow
with focus on the simplest of all flows: Couette flow of a viscous fluid between two parallel plates moving with respect to each other with a linear velocity profile:

Unstable Couette flow/economy.                              Turbulent boundary layer flow/economy.

If the viscosity is small, then Couette flow has very small viscous dissipation, which can be interpreted as small loss. However, Couette flow with small viscosity develops into turbulent flow, as a result of instability from migration with slow speed flow mixing with high speed flow by vertical motion, just as in 100 meter dash, which increases relative difference and eventually triggers substantial turbulent dissipation. The real flow is turbulent with strong relative differences and substantial dissipation as a cost, while Couette flow is a fictional flow with small relative difference and dissipation.
The transition to turbulence in Couette flow is described in detail in Chaper 36 of Computational Turbulent Incompressible Flow, see also The Secret of Turbulence
The perturbation growth in Couette flow reflects the profit a company of a certain size can make by feeding on a larger scale difference in some resource. Migration can increase large scale difference and thus increase profits.

How to Become a Billionaire

The smaller the viscosity is, the more unstable is Couette flow in the sense that perturbation growth increases. The interest rate acts like viscosity and if the interest rate is small the economy is unstable, just like Couette flow. If you can borrow money at no cost, you can quickly become a billionaire from any business with non-zero net profit. Now (March 2009)  the interest rate is almost zero, and the economy thus is very unstable and the opportunities for anybody are endless…
President Obama is in April 09 pumping in trilions of dollars into a US economy with zero interest, which in turbulent dissipation will be transformed into useless heat energy when the Summer anyway is approaching…
For more aspects of instability and turbulent dissipation in flow dynamics, see The Clock and The Arrow: A Brief Theory of Time. 

                                              Turbulence at the New York Stock Exchange.

                  Turbulent dissipation: Destruction of large scale money into small scale money.