“History never repeats itself but it rhymes.”

-Mark Twain

What is it like to live during a formative change in humanity? I think the answer is much like it is today. After a tip off to read Book III of Adam Smith’s The Wealth of Nations, and reflecting some upon Weingast’s interpretation of the role of violence in the historical development of modern Europe. The rhyme that I see is in the relative equilibrium we’ve had with modern governance to that of the equilibrium that existed in feudal Europe and the shocks that we are seeing with Bitcoin and the shocks of emergent trade in the coastal towns of Medieval Europe. I am not a historian, and have not read a great deal on this subject, and as such invite any comments and feedback that you may have.

To see the rhyme and see the similarities, we need to understand: the conditions of social equilibrium, the impact of social structure, and the role of trade in shaping society. I borrow heavily from Jaynes’ insights on the role of entropy in economics. I think this logical framework provides the clearest perspective on why/how society changes. I am not talking about the micro information or the specific structures that emerge, but rather the macro effects. We measure the complexity of various societies by using entropy. Entropy is not a measure of disorder as some refer to it. While this notion may be convenient, it does not provide the clarity we need and introduces linguistic prejudice that inhibits our perception. Complexity is a better word, IMHO, it can be construed as disorder, however, complexity does not convey a lack of structure as implied by disorder. When I think of something that is disordered, it lacks structure. However, when I think of entropy, I see increasing structure in the complexity of interactions between the component parts. As entropy increases, so too do the number of rules that describe the system. Entropy is a measure of freedom of action.The higher the entropy the larger the number of ways the system (and its components) is (are) configured consistent with our observed information. When we apply this to society, entropy provides a measure of specialization within that society. Adam Smith said that the “division of labor is limited by the extent of the market”. In this context the division of labor, complexity of the market, is measured by the entropy. The entropy is maximal limited only by the other constraints of the system. This limitation is due to the Principle of Maximum Entropy (PME). In Various Properties of the LogNormal Distribution, I show how we measure societal entropy, how we measure wealth, and discuss why PME should be used as a basis of logical induction. For more on this, I suggest Jaynes’ Probability Theory: The Logic of Science.

The factors that limit societal entropy are restricted naturally by the resources that we have available and our knowledge and ability to use those resources. These natural restrictions serve as an upper limit of what humanity or any other species can achieve. These are “absolute” restrictions, but change as our understanding of the world around us changes. As we acquire more knowledge, our ability to interact with our surroundings also improves. There are other restraints that limit our entropy that are not “absolute” these are societal limitations. These are the restrictions that inhibit our progression toward theoretical freedom. Please take note, I am not talking about libertine ideals as our ideal of freedom. It is not. Such wonton behavior limits the complexity of the system–restricting the number of types of interactions between individuals to only a certain set of base behavior.

Societal restrictions are a broad category. They range from unwritten laws–mores as the most complex and nuanced restrictions to legislation and regulation which are the crudest. Yes, a 5,000 page law and 4 meters of associated pages in the Federal Register is impossibly simplistic when compared to the process of price discovery. Hayek’s 1945, Use of Knowledge in Society, describes the process of price discovery a miracle. A miracle is something that exists but knowledge of why or how it exists is unknown.Figure 1 shows the entropy of the United States. I used the measured information entropy from the Social Security Administration’s Average Wage Index and corrected from nominal dollars using several different methods. The price corrections using the Energy Price Index and the Consumer Price Index, show the US in either declining or stable entropy for the last 20-years. I find interesting that the EPI tracks with the nominal economic entropy until 1999, and that in 1999 there was a fundamental shift in our society. Also as a note the last two indicies of the EPI are based on a model I made using spot market prices of Henry Hub and WTI crude. The model is extremely susceptible to spot prices and are not corrected by volume traded. Whereas the previous data points are obtained directly from data provided by the Energy Information Agency.

Figure 1 United States entropy from 1990–2012 using various deflators.

We see that depending on how we look at wages we either have an economy that is either in decline or has stagnated, reaching an equilibrium. Formally, equilibria are defined by:

I think there is a strong case here that based on the constraints that we have in the United States, our country is at an equilibrium. The same can be said for the countries that the United States trades with frequently. For one part of the system of economies to be in equilibrium, especially such a significant part of the global economy, that the remainder of our major trading partners are also in/near equilibrium, e.g. the OECD. We took constitutional democracy as far as we could. We expanded the role of government in our lives and we are where we are. This is the first similarity that I find with Adam Smith’s description of feudal Europe. That our modern era like feudal Europe reached social equilibrium. I posit that the entropy of our equilibrium state is far away from the “absolute” entropy. This divergence is creating societal stress. This is similar to the situation of feudal Europe up to the point of the Renaissance, when we saw an explosion in human thought.

The change as Smith saw it, began with increased trade with the coastal communities. Stated another way, feudal Europe was at a local entropy maxima, and that trade and the communication associated with trade provided the necessary dither for the state of Europe to change. As trade began, the traders needed to have surety to minimize counter-party risk. This evolved, as I understand it, to form contracts–an ex ante agreement to arbitrage. These contracts evolved and became more complex. These even in some cites evolved into actual social contracts for residence within that city. As the history of arbitrage grew, so too grew out of relatively lawless feudal Europe the modern corpus of common law. (If a legal historian can please check my reasoning on this and post a comment. I appreciate any feedback) This framework of trade and contract are what I think enabled the Renaissance.

Communication to a large extent democratized religion.[Bernstein] We see the Catholic Church (Benedictine monks reacting to this):

“They shamelessly print at negligible cost material which may, alas, inflame impressionable youths while a true writer dies of hunger and a young girl reads Ovid to learn centralness… Writing, indeed, which brings gold for us [so there’s the honesty–WB] should be respected and held to be nobler than all goods unless she has suffered degradation in the brothel of the printing presses. She is a maiden with a pen, a harlot in print.” From Bernstein on Communication, Power and the Masters of the Word quoting a letter from the Benedictine monks.

Sounds much like the critique of meme’s like “Doge” or the new media and reporting within the new realm of the internet. The communication and  the proliferation of ideas on the internet is the “dither” of today. The impact of the internet on our wealth as individuals is yet to be felt. We have since 1993 exploded our communication bandwidth. In 20-years our communication bandwidth to our homes increased over 4 orders of magnitude.

Out of the dither of the internet are fundamentally new technologies. The main development is the Bitcoin protocol, specifically the concept of the block chain. I posted how the block chain can be used to establish property rights and execute contracts. I think this will develop in a manner similar to what we saw in the Renaissance, where companies will use bitcerts (bitcoin contracts) to enforce international contracts and to establish trust through ex ante agreements. This will evolve into criminal law and create legal jurisdictions in competition with each other. The drawing of nations is purely an abstract notion. We are people living together in a society. We should have the ability to choose the social contract which we agree with. It should not be a birth right/curse, but rather a matter of conscious choice. There will be local contracts and covenants, but these will emerge as will everything else. It is only through voluntary participation in a social contract that the maintainers of that contract have the proper incentive to serve their customers. Customers are free to go where they choose without restriction. Citizens do not have that luxury.

We will see regulation, but not the command and control, one size fits all, because it is so inefficient.  We will see regulation based on common law and of demonstrated, not imagined harm. I am much of the mind of John Taylor on the topic of why we have no recovery. I think it is the regulation and the uncertainty in our legal environment that makes it difficult for us to act. Regulation is not nearly complex enough to account for the nuanced relationships between all members of society.  Thus regulation artificially restricts societal entropy. This entropic restriction is what I think bitcerts will fundamentally address allowing voluntary and nuanced relationships between individuals.

We live in the Second Renaissance. Welcome aboard!