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From Coordination to Collapse in Rigged Economies – Physics

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September 15, 2021• Physics 14, 129

A game-theoretical model of a rigged economy predicts the emergence of cartels followed by a risk of instability as the economy becomes more complex.

Hans Holbein (1543)

Figure 1: King Henry VIII and the Barber Surgeons by Hans Holbein the Younger. Medieval guilds played negative as well as positive roles by rigging the economy: They acted as cartels to privilege their members while at the same time working in concert to promote property rights and to prevent the arbitrary use of power by monarchs.King Henry VIII and the Barber Surgeons by Hans Holbein the Younger. Medieval guilds played negative as well as positive roles by rigging the economy: They acted as cartels to privilege their members while at the same time working in concert to promo… Show more

“The economy is rigged!” This claim, which was voiced by both Bernie Sanders and Donald Trump during their 2016 presidential campaigns, might be the only belief shared by people from opposite ends of the political spectrum. But what does “rigging” mean for the economy and its dynamics? Luís Seoane at the National Center for Biotechnology in Spain has now addressed this question by modeling the economy as a system of “games” that agents can rig—for a price [1]. The study reveals that the rigged economy undergoes a sequence of transitions as its complexity and size increase, with “cartels” forming and then dissolving. Although these transitions appear to imply that economic development will ultimately make the economy fairer, Seoane shows that if an economy’s size does not keep pace with its rising complexity, large fluctuations in wealth distribution can occur, causing inequality to rise steeply and making the economy liable to collapse.

The use of games to study economic phenomena dates back to the work of John von Neumann in the middle of the last century [2]. The theory quickly became the lingua franca for economists and subsequently emerged as an area of inquiry for the physics community. For example, statistical physicists have shown that versions of the “minority game”—in which several agents choose between two possibilities, with the option chosen by fewest agents becoming the winning choice—can be used to explore the rich emergent properties of simple adaptive systems [3].

Minority games can be used to model situations in which agents compete for scant resources—including financial markets. However, the economy is also marked by phenomena in which the advantage lies with those in the majority, for example, when positive feedback reinforces a particular choice, such as joining a boycott [4]. Seoane shows that rigged economies exhibit features of both minority and majority games [5, 6].

In Seoane’s model, multiple agents engage in a number of games simultaneously. Each game involves choosing one of two possible actions. An agent can also choose to pay to rig a game to favor its choice. The winning choice in each round is the action chosen by the majority of the agents who have paid to intervene. Increasing the number of games played in each round increases the degrees of freedom in the economy and is thus a measure of its complexity. After each round of a game, the winners share a fixed amount of money equally. The value of the winnings multiplied by the number of games played defines the total “wealth” that can be redistributed among the agents in each round. This wealth is thus a measure of the size of the economy and, along with complexity, is a key parameter of the model.

To observe how the optimal strategy for an agent changes as the economy develops, Seoane includes in the model an evolutionary process: Agents can replicate themselves after each round, such that each offspring has a high probability of adopting the same strategy as its parent. Since replication costs a fixed amount, more successful agents reproduce in greater numbers.

Seoane observes that, for a fixed level of complexity, a small economy yields agents with diverse strategies and a general preference to be in the minority when they win (to claim more of the prize pot in each round). As the economy increases in size, more wealth becomes available for agents to create progeny, as well as to pay the intervention costs required to rig games. Then, agents switch from playing minority games to majority games, meaning growing economies transition to coordination between agents (cartel formation), with an accompanying drop in strategic diversity. However, if the complexity (the number of games per round) increases faster than the economy grows, the relative returns per game are diminished, causing agents to seek minority positions across multiple games. This switch leads to the dissolution of cartels and a rise in the diversity of strategies employed by the agents.

Seoane also studies how an economy fares under other size-complexity relations. For example, he finds that when the amount disbursed in each game is constant, such that the size of the economy increases linearly with the number of games, there is a critical “complexity threshold” at which the distribution of agent-population size transitions from unimodal to bimodal. This transition gives rise to extremely large fluctuations in agent populations that threaten the stability of the economy. The distribution of agent wealth also exhibits a crossover at this point, becoming broad-tailed in the large-fluctuation regime, indicating rising inequality among agents. A reader familiar with the world’s economy today will likely see eerie parallels with this regime of the model.

It could be argued that some of the outcomes observed by Seoane come from the specific choices he makes in constructing the model. For example, the transition to coordinated action as the economy grows might result from the assumption that intervention costs are constant. In reality, intervention costs are related to the size of the economy and vary between players. Another important limitation of the model is that all agents are equally able to rig games—an assumption that misses the asymmetric influence of the wealthy in real economies [7].

Even with these limitations, Seoane’s model is significant in that it provides a framework for others to explore the ramifications of real-world rigged economies, such as those in which information is unevenly distributed among agents. Modifying the model might, for example, reveal how informationally disadvantaged agents can use the emergence of coordination to obtain advantage, as seen in other agent-based models [8]. Such counter-rigging of the system by less powerful players is shown by the history of the medieval merchant guilds. Those institutions used the threat of coordinated embargo to resist arbitrary expropriation by powerful local rulers [9], proving that a rigged economy does not necessarily imply that David doesn’t stand a chance against Goliath.

References

  1. L. F. Seoane, “Games in rigged economies,” Phys. Rev. X 11, 031058 (2021).
  2. J. von Neumann and O. Morgenstern, Theory of games and economic behavior (Princeton University Press, Princeton, 1944)[Amazon][WorldCat].
  3. D. Challet et al., Minority games: Interacting agents in financial markets (Oxford University Press, New York, 2005)[Amazon][WorldCat].
  4. T. C. Schelling, Micromotives and macrobehavior (W. W. Norton, New York, 1978)[Amazon][WorldCat].
  5. J. Vitting Andersen and D. Sornette, “The $-game,” Eur. Phys. J. B 31, 141 (2003).
  6. Y. Baek et al., “Market behavior and performance of different strategy evaluation schemes,” Phys. Rev. E 82, 026109 (2010).
  7. J. E. Stiglitz, “The American economy is rigged,” Sci. Am. 319, 56 (2018).
  8. V. Sasidevan et al., “When big data fails: Adaptive agents using coarse-grained information have competitive advantage,” Phys. Rev. E 98, 020301 (2018).
  9. A. Greif et al., “Coordination, commitment, and enforcement: The case of the merchant guild,” J. Polit. Econ. 102, 745 (1994).

About the Author

Image of Sitabhra Sinha

Sitabhra Sinha is a professor of theoretical physics and the dean of the Computational Biology Graduate Program at the Institute of Mathematical Sciences (IMSc) in India. He did his Ph.D. at the Indian Statistical Institute, Kolkata, and postdoctoral research at the Indian Institute of Science, Bangalore, and at the Weill Medical College of Cornell University, New York, joining the faculty of IMSc in 2002. His research falls broadly under complex systems, nonlinear dynamics, and statistical physics, with applications to systems biology, economic and social sciences, and computational linguistics.


Subject Areas

Complex Systems

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Germany is the biggest economy in Europe. What if it shifts left? – CNN

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London (CNN Business)Angela Merkel is about to bow out as chancellor of Germany after 16 years, marking the start of a new era for Europe’s largest economy.

The results of Sunday’s election are hard to predict, and the formation of a government could take weeks or months to play out. But when the dust settles, polls indicate that the new chancellor could be the left-leaning Social Democratic Party’s Olaf Scholz, who steered Germany’s economy through the pandemic as finance minister in a coalition with Merkel. Meanwhile, the Greens could more than double their number of seats in parliament.
Scholz’s SPD and the Greens could partner with the pro-business Free Democratic Party, gaining enough power to shift the country’s economic agenda to the left. Taxation and spending could increase as political leaders double down on digitization and climate policy, while wariness about rising government debt may take a back seat.
“Greens and liberals in a coalition would bring the freshest innovative forces that we have had in a while in a German government,” said Carsten Brzeski, ING’s global head of macro research.

Spend more, worry later?

Global banks say that the eventual outcome of post-election jockeying among the parties is far from certain, while advising investors to prepare for two potential results: a coalition of the SPD, Green Party and the FDP, or a narrow victory for Merkel’s center-right Christian Democratic Union, led by Armin Laschet, which would also likely need to team up with the Greens and FDP.
The former option would mark a move to the left, but would be less dramatic than an alliance between the SPD, Greens and hard-left Die Linke. This result, which could produce much more ambitious efforts to redistribute wealth and levy taxes, has been downplayed by analysts, and would likely take investors by surprise.
Whichever combination takes charge will have to manage the ongoing recovery from the coronavirus pandemic. Germany’s economy is on track to grow by 2.9% this year and 4.6% next year after contracting by 4.9% in 2020, according to the latest projections from the Organization for Economic Cooperation and Development.
Yet recent data indicates momentum could be slipping. The Ifo index, which tracks the country’s business climate, fell for the third month in a row in September, according to data released Friday. Slower growth in China, snarled supply chains and surging gas prices are likely to be taking a toll.
This pullback could add to pressure on the country’s new leaders to scrap Germany’s notoriously strict fiscal rules so they can keep spending on the domestic economy.
The country enshrined a so-called “debt brake” in the constitution in 2009, severely limiting public borrowing after the financial crisis with few exceptions. Because of the pandemic, debt rules were suspended until 2023. That allowed German borrowing to jump, with the country’s debt-to-GDP ratio climbing sharply to 70% in 2020.
Though such a ratio pales in comparison with the United States, where debt is now projected to exceed annual GDP, Germany’s centrist parties have been eager to get the country’s public finances back under control. The Greens, meanwhile, want more permanent easing of debt rules.
UBS strategists Dean Turner and Maximilian Kunkel think the debt brake — which has become a key tenet of German fiscal conservatism — is likely to remain in place, since overturning it would require a two-thirds majority in parliament.
Still, they expect Germany’s new leaders will find other ways to increase spending to address the climate crisis, an issue that gained even greater prominence after devastating flooding hit the country in July.
“The one common area of agreement for all parties is the need to tackle climate change,” Turner and Kunkel wrote in a recent research note. Whatever coalition emerges, they continued, green investment “will rise.”

Tackling the climate crisis

Brzeski expects that the incoming governing coalition, no matter its makeup, will create a special investment vehicle to circumvent the debt brake, allowing money to flow to green initiatives.
With a more liberal coalition government, however, some timelines could be moved up.
“[The Greens] would likely push for an acceleration of the green transition of the German economy as a pre-condition for entering government,” Goldman Sachs said in a recent note to clients.
The Green Party has called for a 70% cut in greenhouse gas emissions from 1990 levels by 2030, compared to the current government goal of 65%. It also wants coal plants shuttered by the end of this decade, rather than by 2038, and for new cars to be emissions-free by that point, too.
This could set up a clash with Germany’s most powerful businesses. In its latest strategy update, Volkswagen (VLKAF) said it wanted 50% of sales to come from electric cars by 2030, rising to almost 100% in 2040.
How much the state should intervene could generate friction between coalition members.
“The biggest controversy will be: How do you change people’s behavior?” Brzeski said. “Do you do this by incentives, and by educating people, or do you do this by [increasing] prices and costs?”
A left-leaning government in Germany could also lead to an increase in taxes for the wealthiest Germans, with the SPD proposing a new wealth tax on the super-rich.
But banks are emphasizing that it remains hugely unclear how the election will play out — and the more conservative CDU could still prevail, keeping Germany more firmly on its current fiscal and economic path.

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Province Invests in Wellington County Businesses to Boost Local Economy – Government of Ontario News

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Province Invests in Wellington County Businesses to Boost Local Economy  Government of Ontario News



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Powell meets a changed economy: Fewer workers, higher prices – 95.7 News

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WASHINGTON (AP) — Restaurant and hotel owners struggling to fill jobs. Supply-chain delays forcing up prices for small businesses. Unemployed Americans unable to find work even with job openings at a record high.

Those and other disruptions to the U.S. economy — consequences of the viral pandemic that erupted 18 months ago — appear likely to endure, a group of business owners and nonprofit executives told Federal Reserve Chair Jerome Powell on Friday.

The business challenges, described during a “Fed Listens” virtual roundtable, underscore the ways that the COVID-19 outbreak and its delta variant are continuing to transform the U.S. economy. Some participants in the event said their business plans were still evolving. Others complained of sluggish sales and fluctuating fortunes after the pandemic eased this summer and then intensified in the past two months.

“We are really living in unique times,” Powell said at the end of the discussion. “I’ve never seen these kinds of supply-chain issues, never seen an economy that combines drastic labor shortages with lots of unemployed people. … So, it’s a very fast changing economy. It’s going to be quite different from the one (before).”

The Fed chair asked Cheetie Kumar, a restaurant owner in Raleigh, North Carolina, why she has had such trouble finding workers. Powell’s question goes to the heart of the Fed’s mandate of maximizing employment, because many people who were working before the pandemic lost jobs and are no longer looking for one. When — or whether — these people resume their job hunts will help determine when the Fed can conclude that the economy has achieved maximum employment.

Kumar told Powell that many of her former employees have decided to permanently leave the restaurant industry.

“I think a lot of people wanted to make life changes, and we lost a lot of people to different industries,” she said. “I think half of our folks decided to go back to school.”

Kumar said her restaurant now pays a minimum of $18 an hour, and she added that higher wages are likely a long-term change for the restaurant industry.

“We cannot get by and pay people $13 an hour and expect them to stay with us for years and years,” Kumar said. “It’s just not going to happen.”

Loren Nalewanski, a vice president at Marriott Select Brands, said his company is losing housekeepers to other jobs that have recently raised pay. Even the recent cutoff of a $300-a-week federal unemployment supplement, he said, hasn’t led to an increase in job applicants.

“People have left the industry and unfortunately they’re finding other things to do,” Nalewanski said. “Other industries that didn’t pay as much perhaps … are (now) paying a lot more.”

Christopher Rugaber, The Associated Press

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