The Flawed Reliance on Interest Rates
Usually, central banks try to use a primary indicator to nudge the economy of a country toward stability. This indicator is called the “interest rate.”
- Higher growth and inflation expected, higher will be the interest rate.
- Lower growth and inflation expected, lower will be the interest rate.
This reactive mechanism has been particularly true since the 2008 financial crisis, which drove central banks to focus primarily on economic stability and risk minimization.
Interest rates are assumed to cause or at least correlate with the velocity of cash flows within the global economy.
- Increase the rate, and fewer people will borrow to consume, while more will keep money in savings to earn from interest.
- Decrease the rate, and more people will borrow or invest, preferring alternative solutions to traditional savings, driving to immediate consumption.
This is what traditional macroeconomics teaches us. Of course, in addition to monetary policies like interest rates, governments rely on fiscal policies, such as taxation and public spending, to manage economic stability. But within this overall framework, there are fundamental flaws in how economics is assumed to operate:
- Relationships are aggregated in traditional models and can’t be validated. Even when incorporating heterogeneous agent frameworks and microfoundations, these systems tend to be more descriptive than prescriptive, incapable of dynamically learning optimal policies.
- No marginal differences are observed in how cash flows are distributed or their cascading impact on the speed of money.
- Absence of information on deflationary impacts of increased productivity, particularly as cognitive technologies emerge—an advancement that is phenomenologically different from past technological growth that fueled new industries.
Practical Implications
Uncertainty in Economic Outcomes
- Lack of Predictability: If I offer Joe $2 to borrow $10 and spend it, I can’t know in advance, with current technology, how that money will be used.
- It could increase productivity or
- It could harm the economy or the environment.
- Policy Gamble: Economic policies often gamble that money will be spent on productive activities, but success can sometimes come down to luck, rather than sound economic strategy.
Risks of Restrictive Policies
- Stifling Innovation: Generalized restrictive policies may prevent significant projects from being developed.
- Such restrictions can distance the economy from its targeted future state.
- Historically important developments may be delayed or even missed, limiting real and non-inflationary growth in key areas of innovation.
Deflationary Pressures and Widening Inequality
- Automation and Deflation: If Joe develops AGI (Artificial General Intelligence) with $10 million, it could:
- Automate 50% of jobs, drastically lowering wages and reducing operating costs.
- Create strong deflationary pressures by cutting labor demand.
- Exacerbating Inequality: In such a scenario, lowering interest rates could lead to a self-perpetuating cycle where:
- The winners (those with access to capital) get more money to deflate the economy further.
- The losers (the “useless” class) are increasingly marginalized, losing access to credit and becoming further entrenched in inequality.
The Future: Particularized Economic Policies
How fast $1 circulates and multiplies within the economy depends on who receives the money. Current macroeconomic policies do not account for this difference, making it harder to relate cause and effect in decision-making.
We are fortunate to live in the digital and information age. We have access to an incredible amount of underutilized data. The future of economic policy must focus on the particular.
We need a new super-intelligence model of the economy, leveraging maximum computing power and data inference. These models should reflect the underlying physics and dynamics of the labor environment, evolving organically and synergistically with human and robotic actors.
A New Economic Model: Super-Intelligence
Each individual should be associated with a set of indexes representing their interests and characteristics, customized through a public system. Each person will also have a productivity score, based on their class, academic, professional, and other multi-factor indexes.
This platform would enable particularized policies, rather than generalized ones. We would have an economy that is:
- Continuously validated, identifying and applying consistent, effective policies at an individual level.
- Atomistic, allowing for experimentation with optimal economic policies for individuals or groups based on their responsiveness.
For example:
- If the super-intelligent agent identifies Joe’s optimal tax rate at 30%, it would be possible to validate its effectiveness within a given period and adjust the rate if his productivity doesn’t align.
- A group of individuals, classified as nationally synergistic, could be granted favorable credit or interest rates to foster economic development.
This level of targeted policy is impossible with current central bank decisions, which are general and occasional.
Bottom-Up Learning, Not Top-Down Policies
Policies should not be determined top-down. An effective policy must be learned bottom-up from particular cases. To achieve this, we need cognitive systems that can perceive vast environments, explore freely, make frequent mistakes, and iterate to discover optimal policies. Each new era should involve re-learning policies, as environments evolve.
Role of the Government
The government must play a crucial role in guaranteeing that population data is kept safe and not misused. Decentralized mechanisms within the government are essential to prevent monopolistic or oligarchical actors from influencing automated decision-making.
At the same time, data privacy policies must not stop this change. Data should be anonymized or pseudo-anonymized, but its use should not be prevented.
If supranational entities act as a bottleneck to growth, following tyrannical interests against the national entities that comprise them, the people must have the right to dismantle them.
The Right to Fair and Targeted Economic Policies
A general policy risks benefiting the largest economic actors, as cash inflows are distributed indiscriminately. It is the right of citizens to demand that governments leverage optimal technologies to target individual interests effectively.
- Citizens have the right to expect governments to minimize bias and assumptions in resource distribution.
- Any effort to prevent the use of particularized information should be viewed as a threat to democracy.
The government’s primary goal must be to render itself unnecessary, automating and objectifying as many decisions in economic and labor policies as possible. The driver of policy must come from the organic long-term interest of a nation, not intermediaries imposing decisions that fail to meet the needs of the people.
Conclusions
The future of economic policy lies in developing autonomous, particular, and scalable systems. We must remove human bias from the process and recognize that the current system is outdated and incapable of addressing the unique challenges of the future.
Many powerful decision-makers rely on biased assumptions that risk benefiting a select few rather than promoting the prosperity of humanity. Economic policies should be seen as technical problems, not arcane frameworks requiring financial “high priests” to make obscure decisions. If an individual is more capable and productive than others, we don’t need a decision-maker to label it. Instead, an objective framework that classifies and ranks potential based on observed reality would implicitly create a new “Algorithmic Hand,” using the nomenclature of Adam Smith.