I’ve been having an interesting conversation with readers on Linked In on the nature of trends. I suppose that this falls into the realm of data science, or perhaps futurism, but from my perspective, it’s simply a set of tools that I use to help me ground myself in the “time stream”, when trying to figure out where a particular trend is going.
The argument that we’re having has to do with the nature of cycles. Cycles are seemingly everywhere – day/night, months of the lunar cycle, the change in seasons over the course of a year, and climatic cycles that can stretch several years. Longer-term cycles include the cycle of generations, the 22-year sunspot cycle, as well as longer-term cycles that can stretch thousands or even millions of years.
These cycles, in turn, force other, more human-oriented cycles. Annual cycles drive commodity cycles; we have business cycles of boom and bust, quarterly taxes drive reporting cycles, and so forth and so on, ad infinitum. Right?
Well, not exactly. Humans are predisposed to finding patterns because patterns make the world predictable and easy to measure, and cycles are one of the most obvious patterns. Yet I’d argue (okay, I have argued) that cycles can make for very sloppy analysis because what seemingly makes for a cycle can get very confusing when the cycle breaks.
Let me give you a stellar example of a cycle: the year. We know that the Earth takes a year to go around the Sun. A convenient measure of such a year is the time it takes for the Earth to reach Perihelion, which, for those of us in the Northern Hemisphere, is around the 21st of December. That’s the day that the Earth is closest to the Sun. Now that may not seem even remotely intuitive – that’s the middle of Winter. Still, because the Earth has a fairly significant axial tilt (about 23.5 degrees), we’re at Perihelion at the height of Australian summer, which is consequently a few degrees hotter than it is north of the equator on average.
However, the Perihelion cycle (also known as the Solar year) is not quite a cycle because Jupiter and Saturn are both large enough to affect the orbit of the Earth, both gravitationally as well as due to the impedance effect of both planets’ magnetic fields on the sun, which in turn can retard the movement of the Earth. These are all subtle effects, but these perturbations impact something which can be seen as cyclic. For that matter, the Sun is moving through the Galaxy in an orbit that takes it above and below the ecliptic plane, which in turn also impacts the magnetic field of the Sun and may also impact the presence of cosmic radiation from the black hole at the center of the Milky Way (which may, in turn, determine rainfall production, among other things).
One of the things that mark cycles is that they repeat regularly. The seasons are clearly cyclic (barring minor perturbations, as discussed in the last chapter). You know that in the Winter in the Northern Hemisphere that it will usually be cold, and in those latitudes that are high enough, you may even see snow. But wait a second … or, more appropriately, wait for about 13,000 years. The Earth is a slightly lopsided top, and in addition to the axial tilt, there’s a very subtle cycle that lasts about 26,000 years due to procession. The North Pole currently points to Polaris, also known as the Pole Start. About 14,000 years from now, it will point to Vega in the constellation Lyra. This means that the Perihelion will occur around the 25th of June, and Aphelion (when we are furthest from the sun) will occur around Christmas. Since most of the land mass on Earth is in the Northern Hemisphere, and land has a higher albedo than water, this means that we will almost certainly be in another Ice Age (the Upper Dryas was 14,000 years ago, the Lower Dryas about 12,000, with a brief interglacial period between the two).
What’s interesting here is that even these cycles are complex, as there were mini-ice ages around 3300 years ago, as well as the 5th century AD, 1300 AD, and the 18th century AD (the last, the Maunder Minimum, froze the Thames and left icebergs in the Potomac). There are compelling arguments that these may have been due to volcanic activity.
Impulsive Behaviors
This establishes a key point. The same type of event may have different causes, and not all causes are even quasi-periodic. So what do I mean by that term? Truly periodic events follow a sinusoidal path, repeating regularly. These are considered linear because such events can be considered like plucking a string on a guitar or piano. Depending upon the length of the string, the vibrations on that string will play on a primary note as well as on various harmonics of that note. These form standing waves, and depending upon the instrument, the harmonics reinforce those standing waves. Cacophony occurs when standing waves collide with one another.
A drum works a little differently. When you have a two-dimensional surface that is more or less circular and all points are constrained, what you get are Bessel functions. They are quasi-periodic because their zeroes are not equidistant from one another. If you strike sand or salt on a drumhead, the salt will settle into standing trajectories that can appear quite complex (if usually symmetrical). These are known as quasi-periodic because they are predictable but not regular. Bessel’s are worth bringing up because Bessel functions often show up in partial differential equations where you have a heat or resistance component, typically denoting the decay of an impulse.
Impulses are like photon torpedoes in Star Trek being shot by the Enterprise in defense. The torpedoes usually have very little effect, even as the Enterprise gets the snot beat out of it by the Klingon Empire Bird of Prey. Then, seemingly magically, the young farm kid who stepped in when the Captain got hit by an airborne tricorder closes his eyes, hears Patrick Stewart intone, “Use the Force, Kirk,” and scores that one-in-a-billion shot up the unguarded ventilation shaft that some idiot Klingon in a black opera cape left unguarded. At that point, everything goes catastrophic.
Impulses change the rules of the game. Covid-19 was an impulse. Before, a very small number of people, mainly writers, artists, and the occasional programmer, worked from home. Today, that number is above 50%, and is remarkably persistent. Before, labor shortages were rare. Afterward, they put a stake in the heart of many a chain restaurant and big box outlet. Before, AI seemed a distant and elusive dream. Today, we’re suddenly dealing with massive AGI at our doorstep and the potential that it could very well wipe out capitalism.
For many reasons, I believe that we would best be served by tossing out the old economic textbooks and flying by the seat of our pants for a little while because the old models no longer work. In truth, they haven’t for a while, but it took restarting the economy after the pandemic to become obvious.
Non-Generational Notions
Just as Covid-19 was largely invisible, impulses are not always obvious at first or even in hindsidght. In the late 1980s, William Strauss and Robert (?) Howe published an interesting book in which they asserted that a clear cyclical pattern emerged when exploring generations, where each generation impacted the succeeding generation in certain ways, going back more than 400 years. This was cyclic sociology at its most grand. It was S&H that introduced the notion of Generation X and the subsequent generations, making a cottage industry for sociologists for the next few decades.
At the time, I was very intrigued by the idea, but I have since come to the conclusion that they were wrong. GenX clearly followed the pattern, but everything afterward did not. If it had, Millenials would have been almost 100% larger, and Millennials, GenZ, and GenAlpha would not have all been about the same size. The impulse in question was seemingly quiet – the introduction of birth control pills in the 1950s, but it may be the most momentous one in history.
Birth control meant that women could complete college, which at the time was one of the major factors in moving into management. It meant they were, as a group, better educated than ever before and that they became a potent political force rather than just a curiosity. While other factors may also have been involved, the correlation here is strong enough to see it as a powerful impulse that likely will keep the global population under 10 billion (and shrinking), rather than closer to 13 billion by the end of the century as many demographers had originally estimates.
As to the difference this makes: By 2023, the family size of nearly every country north of the Tropic of Cancer has fallen below the replacement rate of 2.1 children per family. India has just replaced China as the world’s most populous country, China is now officially shrinking, and India will also be shrinking by 2030. The US (the 3rd largest by population) is still growing, but only due to migration. Take the latter factor out; the US would be shrinking as well, and by 2035, the US will be shrinking even with immigration.
Moreover, the US labor force is already shrinking, with all Boomers moving past the age of retirement (65) by 2027. Within the next decade, the labor force participation rate is anticipated to drop by about 8% from current levels, with the trend accelerating as the youngest enter the labor market in smaller and smaller numbers. This will continue until at least 2050 and possibly beyond (demographic pyramids are inverted almost everywhere and becoming more so).
Note that population decline will not (more than likely) be due to some kind of calamity but simply due to attrition. This is likely a good thing; there are strong indications that the current global carrying capacity is around 6 billion people (taking into account technology), and while a few decades above that number is not likely to make that much of a difference, it’s not sustainable. My suspicion is that in the very long term (a couple of centuries) we will undershoot that amount, going down to about 4.5 billion people, then will see a new equilibrium establish itself around the beginning of the 23rd century. Demographic trends are VERY long scale.
Business Cycles With Square Wheels
The business cycle isn’t really cyclical. The shortest boom-to-bust “cycle” in the US took about four years, the longest was about twelve. In general, such cycles start out with a set of discoveries or innovations (frequently in the previous cycle), and go through a period where you may have small numbers of investors, but for the most part, are skunkworks projects being done by individuals or independent teams with universities (outside of tech, this may be people beginning to repair and sell old houses, or
In the early years of the business cycle, goods were produced until the market was saturated with the goods, creating an excess that couldn’t be sold off immediately upon production. Production would slow, typically by firing labor until such time as inventory levels dropped to below demand, and production would restart. This process was somewhat iterative in that it took a while to discover an equilibrium where people could keep the market from getting oversaturated, as it determined who would be part of the cabal in controlling that production.
As particular industries gained transaction, specialization occurred, with people going into business to build parts and components for growing supply chains, selling accessories that increased the value of the core investment (such as wax for automobiles), and ultimately providing services to make obtaining specific models easier (the rise of dealerships and agents). In time this process built out. to the extent that when slowdowns in business occurred, they didn’t usually hit the entire supply chain simultaneously. Companies also started to protect themselves by selling their shares to investors for dividends when times were good. This could be relied upon to bring infusions of cash that were no longer dependent upon consumer demand to the extent that the company’s value on the stock market overshadowed reliance upon sales profitability.
By the 1970s, companies began paying their senior officers in stock options, bypassing constraints on salaries and creating a whole new class of investors while simultaneously locking the salaries of remaining employees below the inflation rate. At the same time, the DJIA has increased 40-fold in that time. Overall, this has broadened the spread of stock ownership – 60% of households currently hold some stock in the US – but the top 10% of the population holds 90% of that stock as of 2023.
Virtualization and the End of 20th-Century Capitalism
The other major factor in the economy is the increasing role of virtualization, which most recently includes the AI “revolution.” Virtualization covers a number of different areas, but most notably, the virtualization of the corporation has effectively imperiled multiple trillions of dollars of commercial real estate, as office buildings, brick-and-mortar retail outlets, office parks, educational facilities, and non-services related buildings are no longer required for business. Manufacturing is undergoing virtualization on several fronts, including consolidation of multiple single-use functions into hand-held computers (our mobile “phones”), the rise of 3D printing dramatically reducing the overall complexity of supply chains, and the virtualization of entertainment and media eliminating the need for paper (or as I put it at one point, “who knew that the way to reduce the need for paper in the office was to eliminate the office?”).
Professional services are similarly being virtualized, and generational AI is effectively capturing the knowledge that had once been brokered by doctors, lawyers, and creatives of various sorts, to the extent that technical businesses cannot reduce staff fast enough after gorging on data scientists and machine learning specialists during the pandemic.
We are fast approaching the end state of 20th-century capitalism, which generally has worked well precisely because, for the last couple of centuries, the world’s economies have been mostly expanding as a direct corollary to their populations expanding. As populations peak and begin to contract, so too will their economies, and things that worked well in 1960 worked somewhat poorly in 1990 and are increasingly failing in the 2020s.
In many respects, the solution is theoretically simple but enormously complicated in practice. It involves three steps:
- Stop taxing labor,
- Progressively tax the wealth of multimillionaires and above.
- Put the onus of taxation on the seller, not the buyer,
Now, before I earn the ire of my conservative friends and associates, let me explain why I believe these will make a difference (and no, it has nothing to do with fairness).
In 1918 (?), the Income Tax was created primarily to help pay off the cost of World War I. At the time, wage income was taxed because it was, for the most part, the only recognized form of payment save for a handful of investors that had largely helped the US pay for the war effort. Once that happened, the dividend class through the 1930s and 40s fought hard to keep dividend income (the payment from investments) from being taxed similarly. When the capital was expensive, this made sense. However, capital today is comparatively cheap, but the barrier to entry for business success is far lower than at any time in the past. Investors struggle to find anything that will give them what they perceive as a decent return on investment.
Labor historically, has been very cheap because many jobs were interchangeable. Today, the labor force is shrinking, not growing, many jobs require advanced skills and training (and no, AI is not ready yet to replace them, and likely won’t be for decades), and the workforce is no longer geo-fenced by the need of staying physically close to an employer, giving them far more mobility than has traditionally been the case.
The second and third points are straightforward. Money is pushed into the economy to be spent. In the 1910s, most people were savers – they were keeping their money in mattresses and shoeboxes in preparation for a rainy day, and the velocity of money had stalled, which meant that the economy had slowed. One of the intents of the income tax was to shift the economy from an agrarian one to an industrial one and to do that, and people needed to spend money faster to get more money into the hands of more people.
Today, many people are being forced into taking two or even three jobs because the velocity of money is once again slowing, but it is slowing primarily because most of it has been concentrated at the top. Several corporations are now valued at $1 Trillion dollar companies, and several individuals have net worths of more than $100 billion dollars. In comparison, at no point in his career did Bill Gates break that barrier, and he was, briefly, one of the richest men in the world.
At a certain point, you cannot give away money fast enough to keep it from accumulating unless you spend it on completely unprofitable ventures, and even there, the money usually tends to stay within a very tight orbit. The government can print more money, but most of it ends up in the black hole at the top of the economic chain, never to see the light of day again.
At the flipside, investors are finding fewer and fewer profitable places to invest. Many places need money to get off the ground, but they will not generate the revenue to repay the investment, let alone make a profit. In agricultural terms, the fields have not been allowed to go fallow, and as a consequence, there’s not enough of value to extract. A progressive tax scheme on capital holdings, even over the short term, would do what needs to be done: to get the capital moving again within society.
The final point is perhaps the most important one. If you tax the seller rather than the buyer of the transaction, you disincentivize selling while incentivizing buying. This by itself would not make much difference, but if you do not tax labor, this changes the economy’s dynamic considerably. People can sell tax-free goods and services that are part of their own labor. Tax essential goods – groceries and energy, at the lowest possible levels, then create a schedule for taxation of other goods at higher levels, including cars, houses, etc. Tax the selling of stocks.
The effect of this will be that the undue wealth accumulation that has taken place over the last seventy years will put more money into the hands of people who need it immediately and will create a strong society. Help fund young people and families when their capital needs are greatest, and rebalance the imbalance in which one worker is now paying for three retirees.
Now, do I think this will happen voluntarily? Not bloody likely, and not without a revolution or two, though I wouldn’t be surprised to see it tried in various states, especially those on the West Coast. It is far too easy for capital to move, and I fully expect any attempt at capital controls to be an abject failure, at least at first.
At some point, I expect that the realization will hit home that AI has collapsed the advertising model and that the actual valuation of most companies in the face of diminishing customer bases (as fewer and fewer people have the money to buy fewer and fewer goods) is so far below their current valuations that those valuations will never be realized. When software can program itself (it’s very close, by nearly any metric), software ceases to become a profit center. When cars become self-driving, car ownership drops in favor of car shares or subscriptions, and car sales collapse, and on and on …
When will this happen? I honestly do not know. This is no longer the end of a cycle – it’s a transition to a very different economic model, one which we do not understand much. As I’ve said in these notes – I don’t see the existing economic model able to sustain itself much longer. I’d say that we are approaching a singularity. However, I do not believe it to be the Post-humanists’ (and Kurzweil’s) Capital S Singularity or the Long Emergency Collapse of Kunstler and the Preppers. Physicists see singularities all the time, and they are usually just regions where mathematics changes in ways that cannot be seen from the outside.
Kurt Cagle maintains a free Calendly consultation site at https://calendly.com/semantical – if you have a question, want to suggest a story, or want to chat, set up a free consultation appointment with him there.
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