The Rocket Science of Capitalism: A Systems View on Current Anxieties
By many accounts, 2021 feels like a hot start.
In aviation terms, a “hot start” involves starting an engine that has recently been running. It is not an ideal way to begin or continue a mission because an excess of combustible things usually tends to combust excessively. While residual gas vapor and material fracture risks can be a problem though, a properly-designed aircraft can handle this challenge by identifying safety threats before they happen and delay the start until things have cooled off enough. Such is a benefit of developing a system through linear, disciplined, documented, and well-communicated processes: one can catch the engine fire before it becomes the engine fire.
But our socioeconomic system was not designed like a jet engine. For one, it’s life cycle is infinite and it wasn’t built on a single contract for a single customer. Further though, as MIT’s John Sternman, one of the world’s most prominent thinkers on System Dynamics, identified in his seminal text, the human mind simply cannot comprehend the non-linearities, time delays, and complex relationships of near-infinite feedback mechanisms of the system that result from policy decisions. This system we live in is therefore bound to have unintended design flaws that have accumulated over generations that can create a suboptimal experience. As an aerospace engineer, I am here to say that rocket science is much more simple than capitalism, and so we need to be (extra)² careful with how we use our propellants.
I’m writing on January 30th, the first Saturday following volatility induced by arguments over, among other things, who has the right to be more irresponsible with financial markets. In trying to process all the anxieties I’ve absorbed and developed over the last week, I see that America and the global order that subconsciously follows are trying to restart the engine after the last 4 (or, in some opinions, 40) years of running on afterburners.
Before we can get back on our mission — that of a pursuing an optimal socioeconomic system for all — there is clearly still some gas in the fuel lines to be managed. This was made clear by the populist uprisings of both the January 6th Capitol Riot (ignited by internet silos of viral ideology with minimal objective backing) and the late January meme-driven rush on short sellers, fueled also by the same traits of siloed groupthink. Some have concluded that the latter it is simply an effect of late-stage Capitalism, identifying factions of the investing community working to dismantle the system from the inside to usher in a new one. Others, have taken both examples as offering that algorithms behind every virtual socialization platform take advantage of our human flaws. Taking those views and others like Sternman’s into account, my offering to the conversation is that we should fix the plane that we’re in instead of building a new one by being wary of the influence of social media and neurobiology on our systems’ operation.
In the context of financial market turmoil over the last week, we can pursue better health in our system by optimizing one of the easy-to-find fuel line weaknesses: Security derivatives, and more specifically, call and put Options. Warren Buffet calls them “weapons of financial mass destruction” and anybody with connection to the internet this last week should be able to understand why. They are at the root of this engine fire, where investors of any net worth have the ability to swing the price of a company (often forgotten to be a real-world entity) for nothing more than short term gamification and social entertainment. Less acknowledged, but recently felt in the fact that the major indices had their worst week in months, is the impact of stability in the market for those not in the game (unless grandma’s IRA really is heavily allocated in GameStop calls).
I have so far struggled to find an argument suggesting the derivatives market is anything more than a casino that runs on the intrinsic flaws of human pyschology. When designing a system, user responsibility is considered from the beginning to ensure that incentivizes lead to optimal mission outcomes, and what exists in the derivatives market is the antithesis of such incentive for responsibility.
So, as a first attempt at getting our jet back in the air, lets disincentivize (but not necessarily remove) runaway derivatives trading for all market players. Establishing a heavier capital gains tax (50–75%) on short-term derivative transactions could be one route, using the revenue to fund a public good (like bonuses for school teachers and public servants in healthcare, firefighting, and even law enforcement if it will get bi-partisan signatures) or to burn down our mind-numbing national debt. If such policy reduced the initiation and flow of options trading, then the missed revenue opportunity would be unfortunate, but we would then have a financial sector operating with significantly less impulse and ego-chasing. Intuition says that’s a good thing, and my hypothesis rests on the assumption that some market players will be unable to escape the promise of dopamine release that comes from options trading. School teachers would still get their bonuses.
In simpler terms, I’m saying: “Make Finance Boring Again”. Such thinking has many benefits as outlined in Necessary Evil by David Kinley, and I think this framework allows us to make progress in modernizing and reforming capitalism without giving into the rising pursuit of “socialism”, a term that — just like capitalism — no single person in the world is able to fully understand due to the challenges described by Sternman above. I recognize that I may be taking the unpopular view among my demographic that designing an entirely new system is not the optimal answer, and that is partly due to privileges I have in my current life. But it is also due to my desire to evaluate our system with the understanding that an overhaul re-design for any one stakeholder group’s desired outcome will do more harm than good due to clearly identifiable complexities.
There are many imperfections in American democracy and the socioeconomic system we live in. This essay is not ignorant of foundational issues and their manifestations (like the racial wealth gap, fossil fuel dependence, and toxic masculinity in the corporate workplace) but instead a means of getting towards more comprehensive system optimization. The reason I am passionate about this review of a root issue in the financial system is because other system progress can follow with the alleviation of the power and influence of the financial enterprise in both individual behavior and national politics.
The bigger point is that an opportunity exists, if we can stay mindful of the flaws of populism as well as the addictive nature of profit-chasing, to address a specific flaw in our system that can drive more widespread optimization. If we do not seek out the root issues in our metaphorical engine, and instead simply continue seeking out new mechanics, then I think we will fail the mission of pursuing a modern, rationally-managed system of prosperity and the equitable exchange of goods and services. Failure in that pursuit isn’t good for anyone, or everyone, onboard.
Let’s harness this moment of reflection before it gets further out of hand. At the end of the day, I’m really here to say one thing, and will sarcastically call upon the meme culture that got us here to deliver my final point.
I hope we never have to call upon the Senator from Naboo:
— Matt
