Correspondent Kathy K. recently elucidated a powerful concept: social fractals. We typically think of fractals--structures that are scale-invariant--as features of Nature or finance. For example, a coastline has the same characteristically ragged appearance from 100 feet, 1,000 feet and 10,000 feet in altitude. It is scale-invariant, i.e. its characteristics remain constant whether it is viewed on a small, medium or large scale.

This is how Kathy described social fractals:

"This dishonest, self-serving individual behavior is a fractal of what is happening in our society at large: dishonest and self-serving people are extending and pretending, and their complicity keeps the system going."

The concept of social fractals can be illustrated with a simple example. If the individuals in a family unit are all healthy, thrifty, honest, caring and responsible, then how could that family be dysfunctional, spendthrift, venal and dishonest? It is not possible to aggregate individuals into a family unit and not have that family manifest the self-same characteristics of the individuals. This is the essence of fractals.

If we aggregate healthy, thrifty, honest, caring and responsible families into a community, how can that community not share these same characteristics?

And if we aggregate these communities into a nation, how can that nation not exhibit these same characteristics?

If this is so, then how do we explain the complete corruption of America's financial and political Elites? What else can you call a nation that passively accepts financial predation, looting, robosigning, etc. by protected cartels as the Status Quo but thoroughly corrupt?

There are three distinct but highly interactive dynamics in America's social and financial fractals that have led to the nation's corruption. We can think of these dynamics as feedback loops: positive feedback is self-reinforcing, negative feedback offers restraint and opposition. From Wikipedia:

Negative feedback is used to describe the act of reversing any discrepancy between desired and actual output. A simple and practical example is a thermostat. Biological examples include regulating body temperature and blood glucose levels.

Positive feedback is feedback in which the system responds so as to increase the magnitude of any particular perturbation, resulting in amplification of the original signal instead of stabilization. Any system where there is a net positive feedback will result in a runaway situation.

These dynamics also share certain characteristics of the dialectic method in philosophy, a system of reasoning through arguments and counter-arguments (thesis and antithesis) to reach a synthesis or new understanding. The Socratic method is to show that a given hypothesis leads to a contradiction that forces the withdrawal of the hypothesis as a candidate for truth.

The social fractal element is individual behavior: the actions we choose based on our internal values, emotions, worldview and goals, and our belief in social control myths. This is a powerful concept brought to my attention by correspondent Diemos, who cited these examples:

The untouchables in India are told that they deserve to be treated as outcasts because of their karma from bad deeds done in a previous life. Of course, in reality, they are no more or less deserving than any other human being of a good life but as long as they believe that they deserve their station in life they are less likely to agitate for changes that will impact the wealth of the ruling class.

In the US we're told that an all-powerful, all-seeing, perfectly impartial free market gives everyone the wealth they deserve due to their own efforts. So if you're poor it's because you deserve to be poor and if I'm rich it's because I deserve to be rich. So you're more likely to accept your place in the Status Quo than if you believed that the division of wealth was more a function of an individual's political power and ability to participate in various crony-capitalist schemes.

In all cases a social control myth is an idea designed to affect the behavior of the people who believe it to the benefit of the people who are promulgating that idea.

I had a devil of a time understanding economics until I understood that 95% of what gets said in the name of economics is a social control myth rather than science. Economics is actually pretty straightforward to understand once you strip out all the propaganda, self-serving rationalizations, wish-fulfillment and outright misinformation that passes for analysis these days.

There are two key social control myths in America: one, that everyone is equal before the law, and two, that similar fundamental opportunities are available to all.

Using the Socratic method, let's see if these hypotheses are true or false.

When a select class of people are given unique opportunities unavailable to others of different ethnicities, religion or social class, then we recognize this as bias. Since there are laws against bias, then this violates both our belief that "everyone is equal before the law" and also our belief that opportunities in America are fundamentally open to all based on merit.

Now let's consider the U.S. tax code. The 70,000 pages of tax regulations are legal, and since they are in the public record then presumably they are open to all. America's tax codes seem to fulfill both hypotheses.

In other words, everyone should be able to find perfectly legal provisions in the tax code to match Mitt Romney's tax rates: Romney paid a 13.9% tax rate on $21.7 million in 2010, paying about $3 million. His 2011 estimates show an income of $20.9 million and a tax rate of 15.4%.

Since a self-employed person pays 15.3% Social Security tax on 92.35% of his/her income up to about $106,000, (and 15% income tax on the first $34,500, 25% on everything up to about $83,600, and so on up to 35% on everything over $379,150), then it seems Mitt Romney is in effect paying .1% Federal income tax in 2011, since the self-employed person has to pay 15.3% right off the bat, even before income taxes are levied.

According to our hypotheses, the tax code is equally open to all. Does the average citizen have the time and expertise to plow through 70,000 pages of tax codes? Clearly, the answer is no, so it's simply not true that the tax code is equally available to all.

Let's imagine a different set of values and governance. Let's suppose the tax law stated that the entire tax code must meet two requirements: it must be able to be read and understood by the overwhelming majority of citizens with a high school education in one hour or less.

The national labs (or equivalent impartial bodies) would be tasked with conducting a randomized sampling of 100,000 citizens to test each year's tax code. If 80% of the adult citizenry with a high school education (or GED) were unable to put the tax code into practice after an hour of study, then the code would be rejected and sent back to Congress for revision until it passed this simple, transparent standard for equality before the law.

Clearly, the tax code is both legal and completely skewed to the very wealthy and politically powerful. $100,000 is still a fairly significant contribution in politics, and if that contribution ends up yielding a tax break that gains the donor $1 million in lower taxes, then that donation earned a 10-fold "return on investment."

Only the wealthy can afford to hire Panzer divisions of tax attorneys to pore over the 70,00 pages and game the system to pay less than self-employed citizens pay in Social Security and Medicare tax, never mind income tax.

The first hypothesis is still vaild--the tax code is legal--but the second--that fundamental opportunities are open to all--is demonstrably false. Equal opportunity is revealed as a social control myth promoted by those benefitting from opportunities that are not available to the citizenry at large.

This is the definition of an oligarchy.

Now consider the vast quantity of fraud and embezzlement that took place in the upper reaches of American finance in the past decade and then ask how many people have been indicted, tried and punished for these crimes. Just as in a totalitarian society, only a few unlucky fall-guys have been scapegoated in show trials. The vast majority of those who committed fraud or acted as accomplices or co-conspirators have not even been investigated, much less indicted and convicted.

Thus the first hypothesis is also demonstrably false: it is simply not true that everyone is equal before the law in America.

We can propose two new hypotheses to replace the false ones.

1. When the system enables fraud, collusion, misrepresentation of risk, moral hazard (the separation of risk and gain) and embezzlement, then it also rewards them. When breaking the rules in a systematic fashion garners huge rewards in wealth and power while playing by the rules dooms one to lower returns on the same investment of labor and capital, then the system itself is thoroughly, totally, completely, hopelessly corrupt.

Since America has enabled financial fraud, embezzlement etc. on a systemic basis, America itself is thoroughly, totally, completely, hopelessly corrupt. There is no other logical conclusion.

2. When the rule of law is routinely bypassed, flouted, negated or simply ignored without triggering uniformly applied consequences, then the system is thoroughly, totally, completely, hopelessly corrupt. Since America's financial and political Elites have routinely bypassed, flouted, negated or simply ignored the laws governing mortgages, finance, insider trading, etc., actions that would lead to an average citzen's arrest, indictment and routine conviction, then we must conclude that America itself is thoroughly, totally, completely, hopelessly corrupt. There is no other logical conclusion.

There are thus two distinct problems. The system, though nominally legal, is corrupt. The financial and political Elites (the Power Elites, or the Plutocracy) as a matter of course are not bound by the same laws that control the non-Elite citizenry.

Is it any wonder than the average citizen has surrendered their autonomy, independence and will to resist in such a pervasively corrupt society and economy? No wonder the average American is busy extending and pretending, remaining passive, quiet and complicit in the corruption. Why put my slice of the swag at risk when everyone else is getting away with perfectly legal looting, illegal but "enabled" predation and unparalleled financial parasitism enforced by the Central State?

But hey, there's going to be quite a battle of gladiators in the Coliseum tomorrow, and free bread will be distributed before the entertainment extravaganza.

If this recession strikes you as different from previous downturns, you might be interested in my new book An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One. The solution in one word: Localism.


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