Gingrich, Asimov, and The Computer-Trading Monster!

Both Republican former House Speaker Newt Gingrich and Nobel prize winning Keynsian economist Paul Krugman have a trait in common.  They grew up fervent science fiction fans, especially transfixed by the future-historical speculations of Isaac Asimov.  Gingrich wrote about this influence that helped to shape his life.

“While Toynbee was impressing me with the history of civilizations, Isaac Asimov was shaping my view of the future in equally profound ways….For a high school student who loved history, Asimov’s most exhilarating invention was the ‘psychohistorian’ Hari Seldon.  The term does not refer to Freudian analysis but to a kind of probabilistic forecasting of the future of whole civilizations.  The premise was that, while you cannot predict individual behavior, you can develop a pretty accurate sense of mass behavior.  Pollsters and advertisers now make a good living off the same theory.”

Here’s an interesting essay comparing Gingrich’s obsession with Isaac’s Asimov’s compelling sci fi memes. Writes Ray Smock: “Edward Gibbon saw the decline of Rome, Hari Seldon saw the decline of the galactic empire, and Newt Gingrich saw the decline of America.” Further, Newt was attracted to the idea of one man shaping the destiny of an entire civilization. Smock adds, “History and fiction seem more exciting when there is decline.  This gives heroes, visionaries, demagogues, and politicians something to fix.”

As the similarly obsessed author of Foundation’s Triumph, who tied many of Isaac’s loose ends, I’d have a thing or two to say to Newt! Could be an interesting intellectual tussle.

Still, this aspect to his background speaks well for him. Ten points.  Out of….

== Why a Transaction Fee Might Save Us From The Terminator! ==

Here’s a vital issue under discussion (at last) on both sides of the Atlantic.  Governments, both rich and poor, urgently need two things: a way to calm speculation in the financial markets and also new ways to raise revenue. In late September 2011, the European Commission proposed a tax or fee on financial transactions. This appears to be part of the newly announced European Union plan, with Britain the sole dissenter.

“A levy of just 0.1 percent — or even just 0.05 percent — levied on each stock, bond, derivative or currency transaction would be aimed at financial institutions’ casino-style trading, which helped precipitate the economic crisis. Because these markets are so vast, the fee could raise hundreds of billions of dollars a year – from the sector of the economy that made towering profits while being directly responsible for our present depression, ” writes Philippe Doust-Blazey in the New York Times.

Read the article.  But note that it does not mention the top reason for such a tax!  That it might benefit real human investors by slowing finance and equity trading back down to the speed of human thought.

TransactionFeeTerminateWould that necessarily be a good thing? The concocted rationalization you will hear, in opposition to this proposal, is called “market efficiency.” According to what’s become a bona fide cult, any process or innovation that allows ever-smaller increments of trade to happen ever-faster is “efficiency,” and that will automatically lead to better allocation of society’s capital, and thus a skyrocketing economy.

This is wrong in many ways, starting with the pure fact that the flourishing of fast-cybernetic trading has directly correlated with the steepest decline in the health of capital markets in a century.

But absolute refutation comes from a different direction. From Physics, biology and thermodynamics.

== Computers and markets emulate life ==

Living creatures thrive by finding a steep gradient of usable energy. Green plants utilize the fact that incoming sunlight is thermodynamically clean and much less entropic than the surrounding environment.  (Greenhouse retention of Earth’s infrared radiation is thus intrinsically entropic.)

Some of this gradient is used by the plant to grow and reproduce, or else gets stored away, while some is lost as transaction cost.

Animals in turn consume plants for that stored useful energy, investing the time and effort to bite and chew and digest in order to benefit from some of the remaining gradient. Predators then pounce and bite and digest in the next stage. There are always losses with each transaction, hence the number of predators who can be supported at each scale gets smaller and smaller.

Along the way, each plant, herbivore and carnivore has parasites, intestinal worms and bacteria, etc., that grab some of that stored energy along the way. If they grab too much, the animal can’t get a steep enough or plentiful enough energy gradient and it dies.

Can you see it yet?  Beyond a certain level, increasing the total number of transactions does not make living systems more efficient.  It flattens all energy gradients and makes life unhealthy… even dead.

Returning to capitalism… yes, the existence of a stock market does create a habitat-ecology for living companies to compete, to form alliances, to prey on each other, to seek out the capital they need in order to grow.  Stock markets are vastly over-rated in the latter category, since the companies themselves benefit very little from wild swings in share price, except when offering NEW shares. (There should be substantial difference in the capital gains tax for new shares than for gains in the simple trading of old shares, an activity that only helps capitalism at very low efficiency.)

Still, you get synergies.  When a human investor looks at a company’s new product and bets “this new gizmo or service is gonna go big!” and orders 1000 shares on E-Trade, at low commission, then there’s a good chance that capital will flow to a place that can benefit and utilize it, all motivated by the hope of a nice profit “meal.”

Those pushing computerized trading… programs that dive in and pounce on any detected market trend, making millions of automatic trades, detecting or anticipating the decisions of human traders… these folks tout “efficiency.” But which efficiency?  For whom?

(Indeed, a whole new transatlantic fiber cable is being laid, just to enable a few brokerage firms to gain a couple milliseconds advantage; they’ll make billions. Do you see how that helps our market economy? I can’t.)

Want the exact parallel in nature for these systems? It is those gut parasites or e-coli or salmonella, or Typhus, who nibble away the gradient of potential profit that the human trader perceives, between the current asking price and what he or she feels the stock may soon be worth.  These programs can now detect people getting ready to buy a stock they like, and pounce to snap it up first, then offering it to you at just a little higher price. You lose a bit of that gradient, because someone – a program – who did none of your research simply pounced faster than you ever, possibly could.

Yes, there is a life- analog, but it is not the Lion King’s Circle of Life.  It is the core logic of parasitism. If you ever read Douglas Adams’s The Hitchhiker’s Guide to the Galaxy, these are the perfect passengers aboard the Golgafrincham B-Ark.

We need a small Transaction Fee not only because it will bring in revenue from the sector of the economy that made huge bonuses while wrecking our economy, restoring an emphasis on those providing new, competitively innovative goods and services.

The bigger reason is that human investors won’t care about – or even be aware of – a 0.1% trade fee.

But those computerized parasitical systems will howl in agony!  Thus, it will give you  a better chance to gain from your own savvy and insight, when you log into your E-Trade account.

== The Real Reason to Worry ==

So, what does all of this have to do with The Terminator?

Well, if you’ll recall the by-now cliched premise of that film – it supposes that (sometime in the future) the U.S. military would develope a super computer/program/system called “Skynet” that  gradually becomes self-aware through a process that theoreticians call “emergence from complexity.” This is actually taken very seriously by deep thinkers about artificial Intelligence. Indeed, our first encounter with AI may come exactly that way… by surprise.

Only… supposing that this malevolent AI comes from a military source is pure Hollywood.  Such systems are built with high priority to systematic reporting, accountability, multiple redundancies, fail-safes and obedience to chain of command.  No, there are other complex computer systems that seem far more likely to suddenly become self-aware in powerfully dangerous ways.

Take those high-speed trading systems we’ve been discussing. They are growing incredibly sophisticated, at a very rapid rate, absorbing and incorporating models of human psychology, with one goal in mind. To appraise and predict behavior patterns in order for the program to track and to pounce on opportunities for predatory trading.  Competitive ferocity is the only criterion for success. Indeed, if you were to even propose inserting balancing factors like ethics or morality or accountability into such a project, you’d at-minimum be laughed down and probably fired.

Moreover, these systems are receiving billions in funding (including their own new transatlantic fiber cable) entirely in secret.  There are no public agencies involved. No third party observers. No Congressional oversight committees.  No supervision whatsoever. Laboratories developing new genetic strains of wheat are under closer accountability than cryptic Wall Street think tanks that may unleash the first fully autonomous AI… programmed deliberately to have only the behavior patterns, goals, attitudes and morality of parasites.

And so we see the ultimate reason to demand the Transaction Fee. At a low level – say 0.1% – it would never bother a private citizen who is optimizing his portfolio on E-Trade. But it would remove the horrific incentives that Wall Street “geniuses” now feel compelled by, to invest in these monstrous, hyper-fast trading programs. The fee can be tuned to give that human a fighting chance and to discourage the very worst kind of artificial intelligence from leaping upon our necks out of the dark.

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30 Comments

Filed under economy, science fiction, society

30 responses to “Gingrich, Asimov, and The Computer-Trading Monster!

  1. peter honeyman

    Oh, dear, I picked a nasty link for that datum, regrets. Here is the source:

    http://www.marketplace.org/topics/business/why-we-dont-know-why-dow-fell

  2. sftheory1

    Excellent post.Hopefully, the tax passes.

  3. David, I think you are crazy sometimes, but you might have a point this time!

    I model economic value as a COMBINATION of both marginal utility and protection, or more specifically, expanding on de Soto, for cognitive psychology reasons I call the model “utility + irreversibility”. (See http://nicoletedesco.wordpress.com/) If human economic actors perceive that their utility might be robbed from them in any way, their sense of economic value falls. This may not make logic sense in any one situation, but in economics perception is everything! This is made particularly true if one considers the finite cognitive capacity of human economic actors: to your point, David, if a non-human economic actor is unable to conceptualize the trade for themselves, the automated trade can indeed be perceived as (I love the word you chose) “parasitic”. As utility is “robbed”, economic VALUE falls.

  4. Apparently AIs have already begun manipulating useful politicians to oppose “… balancing factors like ethics or morality or accountability…” or transaction fees. (Charles Stross’s “Accelerando” mentioned financial AIs dominating humanity.)

  5. Greg

    Setting aside whatever merits that your idea of impeding trading efficiency by sucking money out of the system may or may not have – by what right can you dictate when someone can sell a share and to whom? I thought you were some stripe of Libertarian – this idea of governmental intrusion is anything but that…

  6. David Brin believes in liberty for honest people, not corporations, computers, or criminals. To understand the current issue, people need definitions of “front running” and “high frequency trading” and to know who does it and how:

    http://www.investopedia.com/terms/f/frontrunning.asp#axzz1gFifGu9g

    http://www.investopedia.com/terms/h/high-frequency-trading.asp#axzz1gFifGu9g

    http://seekingalpha.com/article/150397-flash-trading-goldman-sachs-front-running-everyone-else

  7. alicia

    In “The Dosadi Experiment” Frank Herbert references a Bureau of Sabotage – a quasi governmental entity whose main purpose is to slow down governmental processes. Methinks the financial markets need a BuSab – and now!

  8. Greg… your very question implies that you are the type of libertarian who has destroyed the movement… a purist-idealist.

    That is not how the movement began, with Adam Smith, as a PRAGMATIC solution to several flaws in human nature. Like our genius at self-delusion, incantation, dogma and rationalization. And our ever-present tendency to drift into oligarchy. (99% of human societies were dominated by feudal lord-owners who repressed markets, freedom and competition; If you love those things, DEAL with that failure mode!)

    I want to maximize freedom and markets and competition (the great creative force in the universe) by continuing with Adam Smith’s enlightenment experiment. And that means, above all, preventing the return of competition’s greatest enemy…. owner oligarchy.

    Sure, government “bureaucrats are another problem. But each of them DIES (or retires) without leaving power to a blood heir. SO while I will fight for market solutions instead of statist ones (!!!!) I am simply less afraid of civil servants than I am of Rupert Murdoch and Goldman sachs.

  9. Greg

    ?
    I nether said nor implied I was a Libertarian. ‘Pragmatism’, to me, sounds like what one calls it when one’s actions contradict one’s stated philosophy.
    Maybe it’s not, though – maybe your post is just a superficial overview of your thoughts on the subject, that are more fully fleshed-out, with the philosophical angles covered.
    In your opinion, what are the conditions under which a government can refuse to allow people to enter into a voluntary contract – for goods that are perfectly legal?
    And would also add that an increasingly intrusive government, acting in its own interest using what it perceives as ‘pragmatism’, can be indistinguishable from an oligarchy… distorting markets, reducing competition and efficiency. And while they may not leave a ‘blood heir’ bureaucracies have their own heirs, institutionally. When was the last time a significant government bureaucracy was closed down (as opposed to merely renamed)?
    As is most likely pretty apparent – while I’m no Libertarian, I’m far more concerned with government encroachment on freedom than I am of Goldman Sachs or the dreaded Murdoch…

  10. Greg, if you really are curious… interested in seeing beyond the constraints of a silly, insipidly lobotomizing “left-right political axis” then I have a link for you.

    http://tinyurl.com/polimodels

    What it comes down to is that idealists who believe in platonic essences are often far ahead of the curve of where society has managed to be, along the long, arduous path from John Locke’s IMPLICIT social contract, toward the world of the EXPLICIT contracts between fully-empowered, fully sovereign individuals… which is what you seem to want. (And it sure sounds libertarian to me.)

    Your dissing of pragmatism… even when that pragmatism is MEASURED by how rapidly we are pragmatically increasing both market productivity and freedom… does seem very typically platonic and essentialist. You should be aware that most idealist essentialists are often engaging in an internally induced drug high called righteousness. Not a pleasant though, but backed by science.

    As for today’s fixation on bureaucrats as the end-all enemy of freedom, I have already invited you to prove that. Across 6000 years, almost EVERY betrayal of freedom and markets was perpetrated by owner-oligarchs and not by civil servants. You know this. You know this for a fact, yet you allow “news” media owned by rising oligarchs to get you angry at your own accountable government TO THE ABSOLUTE EXCLUSION of any scrutiny toward oligarchy.

    Funny how that works.

    I am not here for an extended conversation. IF you do read that essay at:

    http://tinyurl.com/polimodels

    then come down to comments under http://www.davidbrin.com some time and strike up an argument. Lots of bright guys there. Me included!

    You’ll be welcome.
    db

    • Greg

      Thanks. I’ll read the material you suggest, and wall check out your other site.

      • Greg

        I want to modify my last post, but I don’t know how to, or indeed, if I can. In an case – consider this a postscript… I am not a Libertarian – I think many of the positions LIbertarians hold are nonsensical. Some of them aren’t, though, and I understand and respect their views on the value of property… as well as their concern about governmental encroachment on their freedom in the matter.
        Finally, you imply that my opinions on this matter are due to the indoctrination of Rupert Murdoch. You don’t know me other than through a couple of posts at your site, but do you really believe me unable to make political judgments on my own, without being the puppet on someone else’s string? Or perhaps you consider anyone who holds different political views than you to be brainwashed by Murdoch’s foul media minions…
        This isn’t intended to be hostile, but more genuinely curious. You’re obviously a bright guy who seems to hold some beliefs that differ from mine, but who I assume believes what he writes and arrived at those beliefs through introspection, observation, and reason.

  11. Greg

    I find it curious that you don’t seem to be willing to extend me the same courtesy.
    But I do thank you for the links, and I’ll read up.

  12. Silly fellow, did I not invite you to my main discussion site? But only come if you bring a slightly thicker skin. You seem bright, but be more understanding of a fellow who answers far more messages than you have to.

    • Greg

      My skin’s fine – it was an observation, not a rant – but I see your point about your being bombarded with emails. I very much agree with your point about the conventional political axis being just about meaningless (as well as your point about laziness and subjectivity), but I think I’d address it a bit differently.
      Undoubtedly the heavens will part and angels will sing when I unveil my solution… but this ‘bright guy’ can’t figure out exactly which link under ‘Comments’ at your main site to click…
      Perhaps a brief tutorial wouldn’t go amiss for those among us who are cognitively impaired…

  13. greg byshenk

    Recently saw an interesting article relating to “efficiency”

    “http://www.voxeu.org/index.php?q=node%2F7376″

    A bit: “The cost of intermediation grows from 2% to 6% from 1870 to 1930. It shrinks to less than 4% in 1950, grows slowly to 5% in 1980, and then increases rapidly to almost 9% in 2010.”

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  15. nemo

    @greg @davidbrin

    I don’t really see a problem in “pragmatism”.

    IMHO slavish devotion ideologies is just intellectual laziness. A mental shortcut to spare one from having to think.

    Most ideologies propose “rules/principles” that are to be universally applied, but is no such thing as a “rule/principle” that will work in every situation – there will be times when they are a “bad idea”. [1]

    To be pragmatic is to analysis the current UNQIUE situation in detail and extrapolate based on current knowledge of what would happen if certain courses of action were taken, then selecting the one that has the “best” outcome.

    [1] Now there are “ideologies” that are universally applicable, like Physics. But political ideologies IMO are not among those, they are not formulated with the level of “rigor” that modern Physics uses – “soft science” vs “hard science”.

    • Greg

      I think those are good points. I believe it’s important to have an underlying philosophy consisting of broad principles, with political positions deriving from those. I would accept pragmatic solutions based on those principles, but pragmatism unmoored from a philosophy is incoherent at best, and dictatorial at worst. It is also true, as you suggest, that to mindlessly apply dogmatic solutions to problems is just… mindless. It’s intellectually lazy and inefficient at best. The best solution, to me, is the application of philosophical principles, using policies derived from those principles but tailored for the issue at hand. In a sense, it’s splitting the difference – you’re being ‘pragmatic’ enough to assess each problem individually and address it with a unique solution, but one that emanated from underlying principles.

  16. Excellent piece, David, and it’s sad that we are so intellectually blinded by false dichotomies (about markets, politics, etc.) that as a society, we are unable to see how we’re setting ourselves up for increasingly catastrophic outcomes.

    To your point, while the military has at least some threshold on the types of systems and life-forms that they will release into the wild, in the finance sector, the EDGE is both the justification and incentive to keep upping the ante wrapped.

    In absence of some friction mechanism along the lines that you suggest, it sure feels like we are allowing arsonists to play with fire.

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  18. Sigrid

    I’d like to suggest that if governments are not imposing taxes on securities transactions they are effectively subsidising short term trading.

    We have income taxes, capital gains taxes, property taxes, sales taxes, value added taxes, import taxes, et cetera, and they have the effect of changing the potential profitability of given economic activity. And government has to be accountable for the effect of its taxes and tax policy.

    Now, one can reasonably debate whether and to what extent the public interest is actually served by computerised high speed trading. But the basic fact is that not having transaction taxes at the least makes it more profitable than it would otherwise be and that it would possibly be unprofitable otherwise.

    And again, governments do tax other forms of economic activity, so it’s fair to ask why not tax securities transactions.

    Personally, I don’t believe that high speed computerised trading is particularly beneficial economically or socially. As long as there have been organised securities markets, there have been market makers and there have been speculators. And I know that some countries have had transfer taxes and still had functioning stock exchanges.

    I don’t know whether countries with transfer taxes had more or less liquid stock markets but I don’t think that Canada, the UK, or the Netherlands (just the 3 that I know had transfer taxes) were less prosperous or stable.

    I think that nano speed trading is self-limiting. There may be a few investment banks and/or hedge funds that developed strategies and algorithms to profit from a speed advantage, but it seems obvious to me that it can accommodate only a limited number of players and certainly a limited amount of capital before it stops being worthwhile. I’m thinking it’s like an arms race.

    But I am concerned about the possibility that nano speed trading can have a destabilising effect by piling on and accelerating price movements and amplifying extreme changes.

    I also wonder about the possibility that a clever algorithm somewhere can learn to manipulate markets by buying and selling in patterns that fake out other traders. And the likelihood that has already happened.

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