The picture compares an “exponential network: (on the left) which the authors say is “homogeneous: most nodes have approximately the same number of links” to a “scale-free network” on the right, which “is inhomogeneous: the majority of the nodes have one or two links but a few nodes have a large number of links, guaranteeing that the system is fully connected”.<\/p>\n
The importance of scale-free networks is that when “connectivity is maintained by a few highly connected nodes … whose removal drastically alters the network’s topology, and decreases the ability of the remaining nodes to communicate with each other.”<\/p>\n
This was a claim made by a structural physicist – one Albert-L\u00e1szl\u00f3 Barab\u00e1si (and his team) – in a series of scientific articles in 1999 and 2000. This CNN article (July 26, 2000) popularised their claims – Scientists spot Achilles heel of the Internet<\/a>.<\/p>\n Barab\u00e1si was quoted as saying that “Internet terrorists could cause great damage by targeting the most connected router”. Barab\u00e1si compared the Internet to the US airline network where thousands of flights to most destinations are channelled through 4 major hubs (Chicago, Atlanta, New York and Los Angeles).<\/p>\n A network researcher at Caltech – – attacked these ideas. He told the Discover Magazine in November 2007 – This Man Wants To Control the Internet<\/a> – that:<\/p>\n \nEverybody who knew how the Internet worked was puzzled by all this … [claim about the Achille’s Heel] …\n<\/p><\/blockquote>\n This article (February 18, 2005) – The “robust yet fragile” nature of the Internet<\/a> – published by PNAS and written by Doyle and his team, demonstrated the falsity in Barab\u00e1si’s claims.<\/p>\n Doyle and his team of network engineers developed an extremely detailed “map” of the Internet and (Source<\/a>):<\/p>\n \n… found no Achilles’ heel. The Internet does have a few large servers at its core, but those servers are actually not very well connected. Each one has only a few links, mainly to other large servers through high-bandwidth connections. Much of the activity that occurs on the Internet actually lies out on its edges, where computers are linked by relatively low-bandwidth connections to small servers; think about how many e-mails office workers send to people in their building compared with how many they send overseas. If one of the big links at the core of the Internet crashed … it would not take the Internet down with it. Traffic could simply be rerouted through other big links.\n<\/p><\/blockquote>\n In this more recent article (thanks Larry) (March 7, 2012) – A Contrarian Worth Listening To: Caltech Professor John Doyle Thinks “Complexity” is Over-Simplified<\/a> – the Achilles issue is rehearsed again.<\/p>\n It note that John Doyle considered Barab\u00e1si’s:<\/p>\n \n… analysis was not just wrong, but so “comically wrong”‘” to anyone who knew anything at all about Internet architecture that “most engineers thought it was a hoax.”\n<\/p><\/blockquote>\n And so what has that got to do with anything?<\/p>\n I get E-mails from those aggrieved by my representation of mainstream economists. The argument I am presented with goes that the economists I criticize are very intelligent men and women and accusations that they are dumb cannot be sustained. I am asked why would I be so arrogant to claim these characters are dumb and should be disregarded when they have PhDs in economics like me, have published in the journals and written books like me. How can I claim some sort of superiority and ask people to dismiss the views of my colleagues?<\/p>\n The point is that most of us are dumb in different ways. Professor John Doyle was the first to acknowledge that the physicist Albert-L\u00e1szl\u00f3 Barab\u00e1si is “a maestro, he is brilliant”. And as we noted it is that realisation that “scares Doyle the most” (Source<\/a>).<\/p>\n The erroneous claims by Barab\u00e1si and his colleagues were “not a one-off mistake by a well-intended theorist ignorant of how the Internet actually works, but a symptom of how some of the smartest members of the research community have fallen in love with, and misapplied, what has been dubbed the ‘Science of Complexity'”.<\/p>\n The networks dispute is about bright people who have developed clever analytical frameworks. These researchers are obviously “bright” in some specific meaning of the word.<\/p>\n But in a most important way they are dead dumb because they attempt to apply highly complex tools and thoughts to areas which the concepts are not applicable and where it is obvious they do understand the basic operational characteristics of the systems they are analysing. The work of John Doyle and his team has demonstrated that point beyond doubt.<\/p>\n The article cited above – A Contrarian Worth Listening To: Caltech Professor John Doyle Thinks “Complexity” is Over-Simplified<\/a> – notes that the “Science of Complexity” is a new approach where:<\/p>\n \n… theorists (often physicists) apply statistical physics to problems in fields like engineering and biology. After reading through many such papers, Doyle says it’s a recipe: Authors combine the same physics theories in the same definable steps to reach sometimes far-fetched conclusions. “What they’ve done is standard operating procedure in the physics literature, but now they’ve stretched it into a regime where we can check the answers,” says Doyle, “If you’re not a particle physicist, it’s hard to check a measurement in quantum mechanics; but if you’re an engineer or a biologist, you know they make claims about how things work in engineering and biology that are obviously absurd.”\n<\/p><\/blockquote>\n Mainstream economics shares this tendency. If you went to graduate classes in macroeconomics (and micro for that matter) you will realise how technically complicated the mainstream economists have made the discipline. Graduate students are imbued with a sense of self-importance because they can parade over others with the jargon-laden claims about the economy – appearing as deep thinkers who combine a complex understanding of human psychology with sophisticated analytical mathematics to solve intertemporal maximisation problems that have no real limits.<\/p>\n The problem is that when it comes down to it there are several problems. The mathematics uses is not so complex relative to what actual mathematicians do. The understanding of human psychology is deeply remiss and my colleagues think they can get away with a few glib and untested assumptions such that we are all greedy, very clever (capable of complex optimisation), and competitive – when the empirical tests from real psychologists refute these basic starting points.<\/p>\n Further, the models are so deeply flawed in terms of the way they construct the analytical framework that they are not applicable to the real world that these economists wish to make statements about.<\/p>\n As I have noted often, we get a ridiculous version of the monetary system offered where, apparently central banks control the money supply, via a non-existent concept they call the money multiplier. We are told that budget deficits drive interest rates up when in fact they tend to put downward pressure on rates given certain central bank behaviour.<\/p>\n The mainstream conception of the economy is as irrelevant as the work by Barab\u00e1si and his team is to understanding the way networks such as the Internet operates.<\/p>\n In our case, the network engineers are those operators in the central banks who deal with liquidity management every day and who know that the mainstream monetary economics is false.<\/p>\n Please review my blog last week – When central bankers debunk mainstream monetary theory<\/a> – as an example.<\/p>\n It is already obvious that none of the key macroeconomics text books can remotely explain the current crisis and the mainstream profession has been in a state of confusion, hastily trying to add financial sectors to their New Keynesian frameworks because they discovered they were absent yet seemingly important in understanding what has been going on.<\/p>\n I have noted this observation by American (Marxist) economist Paul Sweezy<\/a> before. In 1972, he wrote in the Monthly Review Press<\/a> an article entitled Towards a Critique of Economics<\/em> that orthodox (mainstream) economics:<\/p>\n \n… remained within the same fundamental limits … of the C19th century free market economist … they had … therefore tended … to yield diminishing returns. It has concerned itself with smaller and decreasingly significant questions … To compensate for this trivialisation of content, it has paid increasing attention to elaborating and refining its techniques. The consequence is that today we often find a truly stupefying gap between the questions posed and the techniques employed to answer them.\n<\/p><\/blockquote>\n So when I was in graduate school the rage at the time was the “Economics of Marriage”, the “Economics of Slavery”, the “Economics of Sex” and we had to sit through highly mathematical derivations of when a person went from petting to heavy petting to intercourse – each step being the result of a complicated evaluation of the marginal costs and benefits (optimised over a life-time) that moving from one state to the next would involve.<\/p>\n For any one who had studied mathematics previously (such as me) the classes were a joke. But the lecturers were able to beguile most of the students into thinking the material was complex and meaningful. In fact, it failed at the first hurdle to understand any of the essential characteristics of human behaviour as subsequent studies in experimental behavioral economics have revealed.<\/p>\n I have also referred to the following quote before which resonates strongly in this context. Post Keynesian economist Paul Davidson [in the book by Bell and Kristol The Crisis in Economic Theory<\/em>, Basic Books, 1981, p.157] describes how mainstream economics uses methods and approaches that renders it unable to embrace real world problems:<\/p>\n \nThere are certain purely imaginary intellectual problems for which general equilibrium models are well designed to provide precise answers (if anything really could). But this is much the same as saying that if one insists on analyzing a problem which has no real world equivalent or solution, it may be appropriate to use a model which has no real-world application. By the same token, if a model is designed specifically to deal with real-world situations it may not be able to handle purely imaginary problems.<\/p>\n Post Keynesian models are designed specifically to deal with real-world problems. Hence they may not be very useful in resolving imaginary problems that are often raised by general equilibrium theorists. Post Keynesians cannot specify in advance<\/em> the optimal allocation of resources over time into the uncertain, unpredictable future; nor are they able to determine how many angels can dance on the head of a pin. On the other hand, models designed to provide answers to questions of the angel-pinhead variety, or imaginary problems involving specifying in advance the optional-allocation path over time, will be unsuitable for resolving practical, real-world economic problems.\n<\/p><\/blockquote>\n Note that I am not against simplified (abstract) modelling. Clearly, it is essential if you want to gain some traction on a real-world problem that is complex. But the models have to be capable of capturing real-world dynamics. A model that claims central banks control the money supply via the money multiplier will always be false and provides no relevant information to the user.<\/p>\n So economists who develop the highly technical models of the economy which are internally elegant (sometimes) and which allow them to conduct very complicated exercises all aimed at counting “how many angels can dance on the head of a pin”, with all sorts of variations on how large the pinhead might be or the constraints the angels might be facing at any point in time – may exhibit a highly advanced intelligence and creativity.<\/p>\n But once they think that these models are capable of saying anything about the monetary system we live within – then they immediately demonstrate how dumb (or venal) they are.<\/p>\n It is in that context that I argue that my profession largely has failed to be clever.<\/p>\n Which brings me to Erskine Bowles, a former cabinet member in the Clinton Administration, who most recently co-chaired the National Commission on Fiscal Responsibilities and Reform with Alan Simpson and then started the “Fix the debt”<\/p>\n In Newcastle (NSW) where I currently live (mostly), there has been a campaign run by property developers under the title “Fix the City”, which is just a smokescreen to allow them to get their hands on more of the city’s property assets, rip up the train line to get more land for to make profit from and generally transfer public wealth and commons into their own hands.<\/p>\n Unfortunately for Newcastle, the recently elected mayor is one of the key proponents of fix the city and thinks markets should be left free to solve allocation problems (including the creation of tasteless developments which ruin public amenities and rip up public transport systems).<\/p>\n On a grander scale, there is a Fix the Debt<\/a> campaign, which is run by Erskine Bowles and Alan Simpson, two US business and political types and supported by a host of conservative organisations that demonstrate an advanced lack of understanding of how the economic system operates.<\/p>\n The comments that emanate from this campaign are so flawed that no one should seriously given them any credibility at all. They are dumb with a capital D.<\/p>\n In a recent article – Erskine Bowles, Former Clinton Cabinet Member, Tells ISU That Congress Must Fix the Debt Now<\/a> – the former Clinton cabinet member showed us how dumb he was.<\/p>\n The article notes that the Bowles-Simpson plan “came up with would reduce the nation’s debt by $4 trillion over the next 10 years and hopefully do a minimum amount of damage to the fragile economy”. The “hopefully” is telling.<\/p>\n The Plan, in fact, if implemented would have driven the US economy back into recession and damaged the prospects of millions of Americans in their search for work.<\/p>\n The Plan was based on a deeply flawed understanding of what the problems facing the US economy were and remain. It was predicated on the idea that the social security and health care systems would become insolvent in the not too distant future.<\/p>\n A simple question – so the US government will run out of dollars? If you believe that it will then you have no understanding of how the monetary system you are commenting about works. The US government can never<\/strong> run out of dollars.<\/p>\n That is not the same thing as saying that at any point in time – the dollars it always can create will translate into the equivalent real basket of goods and services. The US government will always be able to pay the $US nominal pensions that are legally binding at any point in time.<\/p>\n Will those $US pensions provide the same real living standards in 2020 as they do today (or better)? We don’t know. It depends on what real goods and services are available in 2020 and the price they are available at.<\/p>\n Therefore, the issue is not whether the US government will be able to afford to maintain its medical care and pension systems. Of-course it will be able to. The term “afford” is not applicable to a currency-issuing government.<\/p>\n Rather, the issue is what real goods and services will be available in the future and what political constraints the electorate will place on governments.<\/p>\n It might be that the younger generations – sick to death of their parents pressuring governments to run budget surpluses which have undermined job opportunities now and degraded public schooling and higher education systems etc – will retaliate upon the age of majority and force governments to reduce pensions and health care benefits for their ageing parents.<\/p>\n There would be some justice in that political shift from a macro perspective (ignoring whether an individual would want to punish their own parents in that way).<\/p>\n Erskine Bowles is one such adult that is using his influence to undermine the current and future prospects of our children.<\/p>\n In relation to the claim that “100 percent of the nation’s revenue in 2011 went to mandatory spending programs – Medicare, Medicaid and Social Security — and interest on the debt”, he was quoted as saying:<\/p>\n \nThat means every single dollar we spent last year on two wars, national security, homeland security, education, infrastructure, high-value added research – every single dollar – was borrowed and half of it was borrowed from foreign countries. That is crazy. That is a formula for failure in anybody’s book …\n<\/p><\/blockquote>\n Whether it is even accurate accounting is one point – largely irrelevant.<\/p>\n But in what way is this accounting a “formula for failure”?<\/p>\n The borrowing he notes is really just a portfolio swap where the government borrows funds that are sourced from its own spending and would otherwise have been sitting in bank reserves earning an inferior yield.<\/p>\n If the US government announced it was suspending all private bond market issues would it still be able to prosecute the two wars and all the rest of the items of expenditure noted by Bowles?<\/p>\n Answer: of-course, it issues the currency?<\/p>\n Would that decision be inflationary? Answer: no more than the spending currently is. The inflationary consequences of government spending (or any spending) relates to the capacity of the economy to absorb the nominal spending growth by increasing real output. The fact that inflation has been falling in the US means that the economy has had more than enough capacity to respond to the spending by increasing output.<\/p>\n Is the fact that the “Chinese” are buying US government bonds important? Answer: it is totally irrelevant.<\/p>\n There is general alarm that somehow China is keeping the US government from insolvency and if they stop purchasing US treasury securities then the US government will go broke.<\/p>\n We always have to go back to first principles to understand what is going on. Even though Chinese interests currently hold billions of $US worth of US government securities, the fact remains that the US government really only owes the Chinese holders of these instruments the regular interest payments that are associated with the particular security.<\/p>\n What do I mean by that? If you think about it, these bond holders purchased the bonds with US dollars that they had gained from trade surpluses with the US (and elsewhere). The Chinese preferred to have the US dollars than the real goods and services they shipped to US consumers and firms in exchange for them.<\/p>\n Which side of the deal got the better outcome? It depends on whether you value real goods and services or bits of paper more!<\/p>\n The point is that the US dollars earned by the Chinese as exporters were sitting in US bank accounts and the holders of the deposits decided to convert them into interest-earning assets by buying bonds. One US-dollar bank account was reduced (as the withdrawals to pay for the bonds occurred) and another US-dollar bank account (at the Federal Reserve) was opened – the payment for the bonds.<\/p>\n The Federal Reserve at some point will instruct some accounts operative to transfer funds from the “Public Debt Account” to the holders private account once the bond matures and add some interest.<\/p>\n The main research question of a US Federal Reserve Bank research paper (published earlier in 2012) – Foreign Holdings of U.S. Treasuries and U.S. Treasury Yields<\/a> – was:<\/p>\n \nWould a slowing of foreign official purchases of Treasury notes and bonds affect long-term Treasury yields?\n<\/p><\/blockquote>\n The paper said that most of the growth in foreign holdings of US treasuries came from nations “running large current account surpluses” as I have noted above.<\/p>\n The question is whether a marked slowdown in these purchases would have a major impact on US Treasury Security yields. They concluded that if the foreign holdings fell by $US100 billion in a month (about a 2 per cent decline – which would be a major shift by historical standards) then the yields on 5-year bonds would rise in the long-run by “about 20 basis points”.<\/p>\n In other words, hardly at all. I wonder if Mr Erskine Bowles has read (and understood) that paper and absorbed its findings.<\/p>\n The US Federal Reserve held 10.9 per cent of total US public debt in December 2011 – that is, more than China (at 7.6 per cent). The total holdings were around $US 1,274,274 million.<\/p>\n According to the US Treasury<\/a> the total outstanding US public debt on March 26, 2012 was $US15,586,074.5 million, which means the US Federal Reserve holdings (latest data March 22, 2012 – $US1,662,477 millions) represent around 10.6 per cent of the total outstanding US public debt.<\/p>\n Since January 7, 2010 the US Federal Reserve has increased its public debt holdings from $US 776,591 million to $US1,662,477 million (as at March 22, 2012) a change of $US885,886 million, whereas total US public debt has risen from $US12,280,845 million to $US15,584,905.8 million – a change of $US 3,304,060.8 million).<\/p>\n In other words, the US central bank has accounted for 27 per cent of the rise in US public debt – the dominant source.<\/p>\n However, the data for 2011 is even more stark. The following Table shows the proportions of the total change in US federal government debt for the calendar years 2005 to 2011 accounted for by the main holders – Other Federal Government Agencies, Total non-government (public), which is, in turn, split between Federal Reserve holdings and other non-government.<\/p>\n In 2011, the increases in the US Federal Reserve’s holdings accounted for 69 per cent of the total increase in US federal government debt.<\/p>\n There was a dramatic shift in the mix of debt holders other than Federal Government accounts in 2011.<\/p>\n Given the change in US Federal Reserve holdings over the last year or more one might easily conclude that the US government (consolidated Treasury and central bank) is its largest lender. That is, the Government borrowing from itself!<\/p>\n While the US public debt ratio has risen beyond what the mainstream claim is the danger point (80 per cent) – the point where they claim governments become insolvent (Rogoff and co), the private demand for US public debt has risen. Private markets know that there is no substantive default risk involved in holding the US Treasury debt.<\/p>\n The other point, in relation to the rising foreign share is that you cannot conclude that the foreigners (China, Japan etc) are “funding” the US government. The US government is the only government that issues US currency so it is impossible for the Chinese to “fund” US government spending. <\/p>\n The rising proportion of foreign-held US public debt is a direct result of the trade patterns between the countries involved (and cross trade positions) – as explained above.<\/p>\n For example, China will automatically accumulate US-dollar denominated claims as a result of it running a current account surplus against the US. <\/p>\n These claims are held within the US banking system somewhere and can manifest as US-dollar deposits or interest-bearing bonds. The difference is really immaterial to US government spending and in an accounting sense just involves adjustments in the banking system.<\/p>\n The accumulation of these US-dollar denominated assets is the “reward” that the Chinese (or other foreigners) get for shipping real goods and services to the US (principally) in exchange for less real goods and services from the US. Given real living standards are based on access to real goods and services, you can work out who is on top (from a macroeconomic perspective).<\/p>\n Note that a worker in Detroit who is suffering from unemployment as a result of cheaper imports coming from nations with lower labour standards (pay and conditions) than the US is unlikely to agree with me. In his\/her case I wouldn’t agree with me either. But I am writing as a macroeconomist here without regard to equity which isn’t to say that equity isn’t a crucial policy aim as well.<\/p>\n Once we take into account that reality (rather than dumb ideology) then there is clearly nearly infinite demand for the US government debt. The US Federal Reserve has no effective limits on its holdings or purchasing capacity.<\/p>\n I conclude that Mr Erskine Bowles is dumb – in relation to his comments about the US economy. He might otherwise be highly educated and intelligent.<\/p>\n Erskine Bowles claims that the US faces “five challenges” that should be at the centre of the current Presidential election.<\/p>\n 1. “The biggest challenge is health care”. In this blog – The US should have universal public health care<\/a> – I discussed the US health care system.<\/p>\n![\"\"](\"https:\/\/billmitchell.org\/blog\/wp-content\/uploads\/2012\/09\/networks.jpg\" "\\"networks\\"")
<\/a><\/p>\n![\"\"](\"https:\/\/billmitchell.org\/blog\/wp-content\/uploads\/2012\/03\/US_federal_debt_change_2011_proportions.jpg\" "\\"US_federal_debt_change_2011_proportions\\"")
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