George Dyson on the mortgage meltdown: are we on the surface of a balloon or in the saddle of a dynamic equilibrium?

In MAKE Vol. 15, George Dyson, who writes the Retrospect column, looked at the mortgage meltdown.

The roots of the current financial meltdown can be found in John von Neumann’s model of general economic equilibrium, first developed in 1932. Von Neumann elucidated the behavior of an expanding, autocatalytic economy where “goods are produced not only from ‘natural factors of production,’ but ... from each other,” and he proved the coexistence of equilibrium and expansion using the saddle-point topology of convex sets. Some of his assumptions – such as that “the natural factors of production, including labour, can be expanded in unlimited quantities” and that “all income in excess of necessities of life will be reinvested” – appeared unrealistic to others at the time, less so now that Moore’s Law and the zero-cost replication of information are driving the economy of today. Other assumptions, such as an invariant financial clock cycle, are conservative under the conditions now in play.

Von Neumann, who made seminal contributions to digital computing, left a number of distinct monuments to his abbreviated career, among them his Theory of Games and Economic Behavior (with Oskar Morgenstern) and his Theory of Self-Reproducing Automata (with Arthur Burks). Synthesis between these two regimes is now advancing so quickly that no unified theory of the economics of self-reproducing systems has been able to keep up. Periodic instability should come as no surprise. We may be on the surface of a balloon. Or in the saddle of a dynamic equilibrium – we hope.

Can you have your house and spend it too?

• [Jeff]

  Actually, I think we’re in the event horizon of a black hole, sort of the opposite of the surface of a balloon.

• [Antonio Lopez]

  The problem with this and most economic models is that they rarely factor in “externalized” costs, basically all the free stuff we take from the environment and people’s outsourced cheap labor. We are going to start paying for these things sooner than later, so now the bill is coming due to the so-called free world, and we’re all going to suffer from severe sticker shock. The materials we take for granted are materializing.

• [Ghede]

  Damn. I was hoping for a reference to the housing ‘bubble’ so I could make a bad (horrendous) Dyson sphere joke.

  I don’t know about you, but all of my income not spent on necessities is spent on investments. … What? Are you telling me my limited edition Fable 2 is not an investment?