What -- oh, I guess someone should publish some papers on that. It is obvious, but that doesn't excuse the lack of publication. :-)

A simple example is the money market funds which contained mortgage-backed securities. As long as people trusted that their contents were genuine, they "recycled" money from investors to mortgage lending. As soon as people stopped trusting them, boom, 2008 crash.

The economy consists entirely of trust. There is actually nothing in the economy *except* trust. (Well, theft & fraud I guess.) Money is only valuable because people trust that others will take it. Contracts are only meaningful because of trust. Nobody will buy anything if they don't trust the seller to some extent.

I think this should be obvious, but it is probably necessary to put a bunch of empirical evidence into print.

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My questions are too big. Like "How do we cause a more, rather than less, democratic outcome after the next governmental collapse?" Or "Since economies are based on trust, how do we prevent the powerful sociopaths who rise through the economy by betraying that trust from destroying the economy?"

Questions are lovely and all but if you don't have a place to start getting a handle on the answer, they're not helpful.

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"Economists say that speculation (arbitrage) is useful because it helps prices to track actual usage values."

Like I said, it gauges how profitable others think it is to speculate on the product, so that's a pretty circular argument for speculation economists have come up with it.

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Economists say that speculation (arbitrage) is useful because it helps prices to track actual usage values.

Unfortunately, from a control theory point of view, the issue isn't that simple: excessively strong or delayed feedback signals can cause overshooting and wide oscillations (that is, bubbles).

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Speculation (buying sellable stuff you don't really want for yourself), which often leads to bubbles, is pretty useless in itself. The only "value" it adds is gauging how profitable others think it is to speculate on the product, of course this might help sincere investors a tiny bit but then again speculation is often the reason a sincere investment fails even though there's nothing wrong with the product.

If all the speculators in the world had real jobs we could have more value and/or shorter workweeks.

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If you're thinking of there eventually being no one left with combat experience in a globalized peaceful world, then yes, that's something that could happen and it would represent a loss of practical knowledge. In most cases though the loss useful knowledge could be prevented: we should for example encourage groups of volunteers to live a hunter-gatherer lifestyle in several ecosystems for at least a part of their lives to make sure hunter-gatherer survival skills do not disappear (plus it could help people who have psychological problems in modern society) and we should encourage cataloging specialized knowledge of disappearing cultures, like the properties of medicinal plants in the rainforest.

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Practical knowledge (the most important kind) is not so easy to pass on or maintain or regain once lost.

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But they're analogous. From the last section of the article you cited:

"Bubbles are often said to be based on the "greater fool" theory. As with the Ponzi scheme, the price exceeds the intrinsic value of the item, but unlike the Ponzi scheme, there is no single person misrepresenting the intrinsic value."

Of course, if the criminality is what bothers someone about ponzi schemes, they wouldn't consider bubbles "morally" relevant.

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"I have been trying to think of some way to make it easier to trust or how reduce the need for trust."

Make the economy more robust (less boom-bust volatility) and have a decent safety net.

"I have also been trying to think of a way to convince young men to be more honest and to avoid crime."

Have a meritocratic society with equal (as much as possible) opportunity.

"That seems non obvious. Do you have any reference?"

Lack of trust causes economic opportunities to not be realized (when a plumber with a broken roof and a carpenter with a leaking pipes are both sitting at home, unemployed because they don't trust each other or a middleman).

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Humans can think in abstract concepts and pass knowledge to others (including the next generation) so we don't really need physical division to maintain specializations.

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Yeah and that's assuming the population even knows their country is losing the war (independent critical reporting doesn't exactly flourish in times of war).

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The question I've been thinking about recently is "Is there a better way for schools to come up with predicted grades?" In my own experience predicted grades are typically only about 50% accurate (and sometimes wildly off) yet they seem to have a huge impact on the whole secondary school experience as well as university entrance (and how teachers are viewed by educational administration). The whole process seems to be pretty much like casting of the runes (and as scientific!) I found this paper looking at predicted grades in the English system which reckons they are accurate around 50% of the time so I wonder if there is a way to improve accuracy:


The other factor to consider is that any solution will have to be be both a) clearly better than the status quo b) easy to implement as it's teachers that have to implement it.

My first hypothesis is that the solution will probably involve some combination of quantitative classroom grades and qualitative attitudes towards learning (resilience, motivation etc). I would also expect that we'd probably have to add some sort of weighting for students who cope well with test pressure (the big time charlies!) as they are typically the ones who tend to underperform in class but pull out all the stops in externally assessed examinations/end of year examinations.

Anyway, that's my question, any answers?

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Seeing that a lack of trust seems to keep economies form growing

That seems non obvious. Do you have any reference?

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Bubbles are not ponzi schemes. Ponzi schemes are fraudolent investment schemes where those running the system simply take money from newly recruited investors to pay off previous investors, after subtracting their own share, relying on exponential recruitment until no more investors can be recruited and the system collapses.


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I've been thinking about the most common mistakes that atheists make about theists vis a vis the extent to which Americans (need to) believe that new ideas will make them rich, famous and/or secure in their lives. (Or that the history of thought is useless).

I've also been wondering how long it will be before the laundry list of macabre side-effects for prescription drugs advertised on television really start to turn people off. Tangentially, what is the mean time between television advertisements for wonder drugs by pharma and class action lawsuit announcements.

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Hi JW. Interesting observation. Which brings up the question: how do you measure 'habitable'? My first draft would somehow involve the resources available per capita. Of course, we really care about how we use those resources, not the resources themselves. And we're constantly using them more efficiently to extend human lifetimes. Which supports your point. But I think we don't correctly account for certain 'commons', like keeping global temperature relatively constant. If we did, we might (repeat - might) find that we're not being more efficient at all. If true, we're on a bad path, regardless of the current decline in death rate. In any case, I like the observation and I think it gives us all more to think about. Pat.

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