MT201: Matrix Economics --
How Infocap powers Society
[Matrix Thinking, article MT201]
David Noel
<davidn@aoi.com.au>
Ben Franklin Centre for Theoretical Research
PO Box 27, Subiaco, WA 6008, Australia.
Quotation MT201-Q1
Economics as a science, not an art
Not everyone will be as subtly cynical about economics as Paul Feyerabend, but there is little doubt much of today's economic theory is woefully deficient when compared to the level of theories developed in the physical sciences.
Modern science as we think of it really developed in the years around 1700, when Isaac Newton developed theories of gravity and optics, and the concepts of atoms and molecules, the properties of materials, and the nature of gases, became established. These theories enabled accurate predictions of how things would behave -- in the case of eclipses, for example, these could be predicted centuries or millennia ahead.
In contrast, economics (or economic theory) has never, even now, reached the equivalent level of development of the physical sciences of 1700 AD. The basic constituents of economics, the equivalents of atoms or wavelengths, have never been defined. Perhaps now the time is ripe to set such work into motion.
The parlous status of economic theory is obvious from a simple observation. Not only are economic theories hopeless at any sort of prediction, there are many competing and contradictory theories floating about for the same set of circumstances. Compare that with the calculations involved in building a bridge, or measuring the distance to the Moon.
What is Economics?
These days, economics is generally thought of as applicable to money, national wealth, the costs of doing or making things, and the like. But the term used to have a much wider connotation, befitting its origin.
In the 1895 edition of Lloyd's Encyclopaedic Dictionary, two definitions of "Economics" are given. The first says: "The science of the management of a household or domestic concerns". The word "economics" is from the original Greek, "oikos", meaning a household.
The second definition is: "That branch of political economy which treats of exchangeable things, and of the laws which govern their exchange". This is closer to the modern idea of goods, services, and costs in a wider society.
In this suite of articles, a fundamental concept which is needed to explain economic factors in our society is that of INFOCAP. Infocap is a group word to include all value-concepts met with in society. Not only "information" and "capital", but also such things as received education, natural talents, established patterns of organization, and all the manifold items which may exist under the heading of infrastructure.
What is Infocap?
The concept of Infocap is explained in more detail in an earlier article in this suite, The Substance Of Society : Infocap [MT102]. Here are some extracts from MT102.
"This leads us to the first major element in our model of society, the concept of Infocap. The suggestion is that society contains, as a fundamental reactive part, a substance which influences and determines the operation of areas of that society.
In this suite of articles that substance has been assigned the name Infocap. At this stage, an exact definition will not be attempted -- it is purely a postulated mind-model element, and its clarification must depend on exercising the model to extract its properties and characteristics. But the concept is a very broad one, assumed to include all the commonly accepted thing-value items in society, such as capital invested, information resources such as libraries, computer databases, patent rights, buildings, roads, plant, and vehicles.
The concept also includes such people-value things as received education, gained expertise and experience, governmental infrastructures, laws, computer programs, and tennis ability, and further extends into more diffuse areas such as results of mineral exploration surveys, stable political systems, climates, and healthy ecosystems".
As a visual analogue can be useful in understanding an abstract concept, in some of the present articles Infocap may be represented as a green liquid, able to flow and exert pressure on its containers.
Figure MT201-F1. Infocap in a tank.
In this analogue, Infocap is represented as liquid in a large tank such as is used to store bulk petroleum. The scale to the left of the tank shows how full it is. The units of the scale are not specifically defined at this stage, but can be thought of as the percentage of the tank's total capacity.
In the second figure, two tanks are shown, with different percentage fullness. A hole has been made in the side of one tank, and liquid spurts out and falls into the lower tank, due to normal fluid pressure.
Figure MT201-F2. Flow of infocap from one tank to another.
In Matrix Economics, much of the explanation of the underlying forces of economics will use the analogy of Infocap as a liquid. Some of the established laws of fluid dynamics will apply, but it must be remembered that the analogy is used only as an aid to grasping the concepts involved.
What are the properties of Infocap?
Scattered throughout this suite of articles are a number of Propositions. These are not as strongly defined as Axioms or basic Assumptions, but are still put forward as the bases of later Propositions or scenarios. Here are some published earlier, in MT102.
Proposition 102A. Human societies contain an information- or capital-rich substance, assigned the name infocap, which exerts a major influence in the operation of those societies.
Proposition 102B. The infocap content of an advanced society generates, of itself, a growth element or dividend which provides the bulk of the running costs of that society.
The place of Infocap in Society
There is more on Propositions 102A-102B in the original MT102 article, but let us look briefly at what they saying, and then go on to try and expand their ambit a bit.
Proposition 102A is just a more formal definition of what is meant by Infocap, and as such should not be subject to dispute.
Proposition 102B is a little more contentious. It says that if you have an assembly of infocap, an interconnected matrix of value-stuff, it will, of itself, generate more infocap. It's not an outrageous idea, we are used to the concept that we put money into a business for it to make more money, and the bigger the business, the more annual income it should generate.
Look at the actual workings of society, and you will find examples of the Infocap Dividend everywhere. If you own a house, you will usually find that it increases in value over the years, without any special input. Buy shares in a company, lend your money to the government, and each year the value of the investment is expected to increase.
In more abstract areas, things like spending on education to obtain qualifications, or giving money to a micro-financing fund in a third-world country, are done because they are expected to have positive outcomes -- more subtle, but nonetheless real, increases in Infocap.
In MT102 the aim was to get an understanding of the concepts. But to get closer to modelling the real world, we need to start putting figures to things. Here is a new Proposition.
Proposition P01.
Here the term "Syston" is shorthand for the "assembly of infocap, or interconnected matrix of value-stuff" idea mentioned above. The Syston is the complete grouping. In the national economy, it will be the particular country involved. In business it will usually be an incorporated company.
There is more on Systons in The House On The Polish Border: About Systons [MT103]. It is suggested there that a Syston is any self-sustaining grouping in human society. There is a further hint that laws worked out for systons should apply across all of them, even non-human ones (such as ant colonies).
But back to the current Proposition P01. The figure used for Infocap Dividend, five percent, is just a working rule-of-thumb. We do not currently have the apparatus to define it more exactly, but clearly there are arguable aspects about it.
We have included the word 'average'. When looking at a set of Systons, such as modern Australian incorporated Companies, there will obviously be some which are doing well, and generating more than 5% on their capital worth, and others which are struggling and generating less. But the 5% is a conceptual figure.
For a specific case, we also need to consider what the Infocap Dividend includes. If you put money into stock or equipment for your own small business, your profit for the year will usually be much higher than 5% of the stock, because you are putting your own labour and management into the operation. The nominal 5% is the dividend on just the Infocap of the business.
Say you need to get a long trench dug to put a communications cable underground. You can hire Paddy and his shovel to do it, at say $25 an hour, but he will take a long, long time to complete it. Or you can hire Gerald and his ditch-digging equipment, he charges $250 an hour, but will have the job done in a couple of days. Gerald's ditch-digger is a major part of his Infocap, Paddy's shovel is insignificant by comparison.
Infocap units and Inflation
Another thing to bear in mind is that the Infocap Cache which you anticipate generating 5% is not a completely stable entity. You put $100,000 into a unit trust fund, at the end of a year you expect to have $100,000 plus your dividend. Does the $100,000 represent the same amount of Infocap as it did a year earlier?
Figure MT201-F3. Inflation. From [5]
Very often it does not, your capital has been reduced by Inflation. This also applies to things like houses and share portfolios -- inflation eats away at what you think of as your capital. At it can apply to other forms of Infocap too -- if you have a medical degree, you still need to spend more today to keep your expertise cache up to the standard level.
We'll look at Inflation, and what it really means in Society in a later article, MT204.
Are Infocap Dividends used sustainably?
Back in MT102, Proposition 102B suggested that the Infocap Dividend of an advanced society provides the bulk of the running costs of that society. That is, if a modern country has enough Infocap so its dividend from that is enough to continue to run that society, it can be expected to continue to operate --it is sustainable.
This is not really different to the usual words about Balancing the Budget, Budget Surpluses or Deficits, and such. Here the observation is, that the money content of a successful society, or its income in such terms as GDP, Gross Domestic Product, is only part of Infocap status. But there are some circumstances -- wars, great natural disasters, ingrown conservatism, general rejection of outside influences -- which can render conventional budgetting ideas inoperative. We are used to this.
Proposition 102B also suggested that poorer countries, with lower Infocap Dividends, can stumble if they have the spending ambitions of richer ones. Elsewhere we will have more about Infocap Cache and Dividend sizes. Where countries are concerned, the usual vocabulary here talks about national budgets and GDPs (Gross Domestic Products).
The power of R&D in Infocap Dividends
The 5 percent return on Infocap talked about in P01 is essentially that for a typical "arms-length" investment. As noted, there is no labour or management input by the investor here. The investor makes their selection, after that they have no individual control over the organization taking their money.
There are many other types of investment. One distinctive type of investment is that in R&D, Research and Development. Here the Infocap is leveraged with the aim of increasing an Infocap store. Infocap is injected specifically to produce more Infocap.
Figure MT201-F4. R&D, Research & Development. From [6]
While the average Infocap Dividend on an "arms-length" investment may be expected to be around 5%, for Infocap invested in R&D the average Dividend is typically much higher, around 25%. Let's state that as a new proposition, and then look at some of the evidence.
Proposition P02.
Why 25 percent? This is one figure produced from the University of California Division of Agriculture and Natural Resources, in evaluating the benefits of the division to California over a long period of years.
In fact, many evaluations putting a figure to the benefits of R&D end up with higher numbers than this. In [3] it says: "A number of studies ... indicate high societal rates of return to the community from agricultural research -- typically on the order of 30 percent to 70 percent yearly".
Similar figures have been quoted for other countries. In [2] it states "the modified internal rate of return was very stable, ranging from 23% per annum to 27% per annum. These results suggest that the revitalized investment in research spending under INIA has been very profitable for Uruguay, and that a greater rate of investment would have been justified".
Another study [4] quotes a figure of 20%, but says "However, this estimate is conservative compared with many studies indicating returns of 30 to 70% annually."
The above studies related to public investment in community-owned organizations. The question might well be asked, "If investment in R&D is so good, why isn't everybody doing it?".
The answer to this is, it's not always easy for the investor in R&D to capture most of the R&D Dividends themselves -- much of it, the new knowledge gained or whatever, may leak away outside the boundaries of their particular syston into the wider community.
For a syston such as the State of California, this is not a concern. It's just an expression of the ethos that the results of research and technical advances should be available to the World at large. Americans are particularly good at handing out information very freely. During the 1950s, 60s, and 70s, NASA did enormous amounts of new research and analysis of existing material on every sort of scientific and technical topic, and issued multiple volumes of printed material free of charge to libraries around the world.
It's hard to deny that this was very beneficial to the world at large. And generosity in spreading knowledge encourages the back-flow of additional information to the original source.
Many would say that these decades were a Golden Period for the USA, with America clearly the World's leading nation. At that time, 75 percent of all the research being done in the World was being done by Americans.
The outcome of this Golden Period was that the USA built up an Infocap Cache of proportions unparalleled elsewhere, a Cache with a Dividend level which continues to sustain it today, even while others continue to raise their own Caches to higher and higher levels. Elsewhere in these articles we will repeatedly see instances where competing Cache levels determine commercial and political outcomes.
But what about the commercial world, where much of the Development part of R&D is done? Here the leakage of infocap from the generating syston needs to have constraints. Let's look at the commercial world.
How to gather Infocap and get rich
Why have some computer and software companies risen to the top of the rich lists? What part does Infocap have in whether a company or an individual becomes financially very successful?
Almost always, notable wealth accumulation comes from situations where it is possible to harvest large amounts of Infocap, or to tap or tax large movements of Infocap. The choice of industry or occupation is not of prime importance, what matters is if the situation is capable of supporting large Infocap flows.
Going back into the past, Sir Walter Scott is said to have been the first author to have become rich in his own right from his work. In the Matrix Thinking view, this was not because he was a great writer (though this helped), it was because he lived in an age when it first became possible to produce and distribute books relatively cheaply, to an increasingly literate public.
On the technical side, methods were discovered to produce reels of paper cheaply by machines which ground up wood (older paper was made from cotton rags and used hand labour to form individual sheets). Printing became much easier with casting type slugs from liquid metal, rather than assembly from individual letters, and rotary presses were developed.
All these advances meant that a complete book could be produced and sold much more cheaply than before, opening up mass markets. An author's labour in writing a book could thus be recouped from a thousand or ten thousand copies made and sold. Contrast this with a portrait painter, whose labours resulted in a single copy which could not be easily reproduced in vast numbers.
The Industrial Age in Britain brought with it the ability to handle very large numbers of items involving complex machines, processes leading to mass production. These processes split the cost of the contained Infocap among huge numbers of items, so the individual item cost was quite small.
Figure MT201-F5. The Industrial Revolution -- Textile Factory Workers in England. From [7]
To develop a single CD (Compact Disc) player from scratch would cost tens of millions of dollars. You can buy one for a few dollars because your purchase is just one among millions. The key to low item cost is ease of reproducibility and dividing the cost of the Development Infocap among a large number of items sold.
Computers and software
Nowhere are these principals better illustrated than in the area of computers, or more broadly, in IT, information technology. With mass production, the cost of a computer integrated circuit board (a computer's heart or brain) may be as low as two or three dollars. The cost of reproducing the software apps to run the computer is negligible -- a few cents for material if issued on disc, even less (for electricity) if the app is downloaded over the Internet.
Here then is the reason why most of the really big, newly rich, companies of today are IT-based. Their Infocap Caches contain a substance which can be re-sold and distributed in huge volume, for close to nothing.
Figure MT201-F6. Computers and software. From [8]
This is not to imply that these Caches are small and trivial -- instead, computer software may be huge in extent, there may be thousands of man-years of work in a modern computer operating system. Yet it's sold to you for $8.95, or given away free with the hardware. And the complex procedures for letting all this happen, themselves add up to a vast amount of Infocap.
Keeping Infocap within the syston
When it comes to the commercial world, an organization may be highly concerned with some of its Infocap getting out from within its bounds. It will have available various mechanisms and strategies to stop its "Intellectual Property" being used by others. This is in sharp contrast to the usual position in the academic world, where the watch-cry is "Publish or Perish".
Companies will normally seek to gain Patents on things they are producing. A Patent is an agreement between the inventor of a new product or process and a national government, by which the government gives exclusive rights to use or license the item to the inventor, for a specific number of years.
In return, the inventor has to file a description of the patented item with the government, in a public file. Others can read the details, and try it themselves, but not gain profit from its sale, until the protection period ends. Then they can use it freely, as can their competitors.
Another commercial strategy may be to keep the details of a process a company is using secret. This may give them an advantage over their competitors, but they have no patent rights over their secrets, which may be stolen or discovered independently by competitors.
Figure MT201-F7. Trade Secrets. From [12]
There are many strategic and financial complexities to constraining the flow of Infocap. Those interested in this area may like to look at Plusses and Minuses of Trade Secrets and Patents [9], About Trade Secrets [10] and About Patents [11].
How Apple got to be super-rich
The histories of computer companies are rich with pointers on what could, might or should be done with Infocap constraint. Sometimes it may be best to "let it all hang out" and let your Infocap fight unencumbered in the commercial fray.
One of the first personal computers sold was the DEC Rainbow, made by Digital Equipment Corporation. DEC were very innovative in developing what might be described as "small mainframe" computers, institution-owned, but "time-shared", which meant that they could be used by several individual users simultaneously.
DEC were very good at sharing information on how their computers ran with their users, and welcomed interchange of information with them. Some of these users were quite brilliant wonks who certainly matched the calibre of DEC's own staff. The DEC software was not quite in the domain of "open-source code", where its workings were freely available in the public domain (as in the Linus operating system [13]), but they were pretty open.
Later DEC computers, like their PDP-8, were quite small and relatively cheap -- microcomputers, such as were to form the basis of the new personal computers, typified by the products of IBM, Microsoft, and Apple. DEC were in at the start, competing in a new customer arena, that of individual buyers.
In this arena, the customers were "Joe Public", people mostly without computer skills. These demanded rather different sales strategies. An unfortunate approach which DEC used with the Rainbow was to try to force users to use only floppy discs bought from them, by not providing formatting software which could be used with any manufacturer's floppies. This small matter may have been of relevance in the decline and demise of DEC as a company.
Of real relevance in the rise and rise of some IT (Information Technology) companies is the amounts they put into R&D. Even back in the 1980s, some companies were putting as much as 25% of their annual turnover into R&D. This is a huge percentage in business terms -- companies in established, conventional fields would be making around the usual 5% return on capital, and had no scope to re-invest in R&D.
In the first suite of articles in this area, as in Picture This : Tools of Matrix Thinking [MT121], the profit margin available to a commercial enterprise is referred to as "margin-slack". Typically, the first company starting up in a new area of commerce will have done their R&D and will enjoy a good level of margin-slack.
Then, as competitors move into their field, a company's margin-slack inevitably declines -- its relative level of profit on capital gets less. If the company's directors want to maintain their own payouts, or the level of shareholder dividends, the temptation is to withdraw from their Infocap cache, and often future re-investment in R&D is regarded as something of a luxury. Result, the company descends to the level of a stolid, 5% company.
The only escape from this is to continually re-invest in R&D, preferably massively. That is how companies like Apple, Google, and the Elon Musk enterprises have risen to the top. It has been suggested that of all the R&D work being done in the USA today, some 40% of it is done within Apple.
In [1] it says "You'll see that for every dollar that Apple spent on R&D in 2008, it generated $11.84 in 2009 gross profit." This calculation is on a different basis to that used earlier, but does illustrate the importance of R&D.
How you can get to be Infocap-rich
Obviously Apple, Google, and the like are truly massive enterprises, and their success is not to be easily matched. But they were once mere start-ups, perhaps operating on money borrowed from relatives, and working from a home garage.
So the formula is: find a new area, no matter how small, where you can apply R&D and stick with it until it starts to make a profit. Then, plough the profit back into more R&D, then more still. It worked with IT -- but that's now heavily populated, so find another area. And all the better if it involves something which can be duplicated easily and cheaply. Good luck!
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References and Links
[1] Ben McClure. R&D Spending And Profitability: What's The Link? http://www.investopedia.com/articles/fundamental-analysis/10/research-development-rorc.asp .
[2] The Economic Returns to Public Agricultural Research in Uruguay. http://vinecon.ucdavis.edu/publications/cwe1103.pdf .
[3] Valuing UC Agricultural Research And Extension. http://aic.ucdavis.edu/research/value_uc_ext.pdf .
[4] Research update: Economists calculate research payoff, effect of cuts. http://californiaagriculture.ucanr.org/landingpage.cfm?article=ca.v048n03p5b .
[5] What Causes Inflation? Video. https://www.youtube.com/watch?v=iiEiRZhfOl8 .
[6] R&D Management Software. http://myprojectmanagementsoftware.com/types-of-project-management-software/rd .
[7] Textile Factory Workers in England. https://infogr.am/Industrial-Revolution .
[8] Stock Image: Computer code. http://www.dreamstime.com/stock-image-computer-code-abstract-software-program-image33991391 .
[9] Plusses and Minuses of Trade Secrets and Patents. http://www.aoi.com.au/ideasbank/Explanation.htm .
[10] About Trade Secrets. http://www.aoi.com.au/ideasbank/TradeSecrets.htm .
[11] About Patents. http://www.aoi.com.au/ideasbank/Patents.htm .
[12] The Entrepreneur's 60-Second Guide to Trade Secrets. http://teach.ceoblognation.com/2015/01/04/entrepreneurs-60-second-guide-trade-secrets-infographic/ .
[13] What is Linux?. https://opensource.com/resources/what-is-linux .
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Draft Version 1.0, 2016 Apr 6-22. V. 1.1, First web version, 2016 Apr 23.
