Platt Perspective on Business and Technology

Reconsidering cause and effect assumptions in feedback-driven systems: implications for real-world business and economic systems planning

Posted in macroeconomics, reexamining the fundamentals by Timothy Platt on May 28, 2017

Feedback-driven systems fundamentally violate at least some of the basic underlying assumptions that underlie traditional cause and effect models. Or rather they tend to violate tacit assumptions that many and even most people tend to make concerning cause and effect and what those terms mean. The reason for that is very simple; in a truly causally connected linear once-through system, cause and effect are categorically distinguishable and both for their temporal order and for their respective fundamental natures. They are completely separate in nature and function then. And most of us at least occasionally, approach causality as if it routinely arose in a vacuum in this manner, and with a clearly definable starting-point causation and an end-point consequential effect. But causation almost always actually arises in the course of ongoing interactive processes where resultant effect leads to next-step cause and even in a tightly cyclical manner. It is rarer that causation per se can be simply and entirely viewed and understood outside of any possible pertinent context, and certainly when considered in complexly organized systems such as flows of business supporting operational processes.

Let’s consider such a linear once-through system as noted above, as a starting point for further discussion:

• If I hold a baseball out in front of me and let go of it, that action on my part coupled with the predicable action of gravity on the ball, as a complex of causal factors in play there, leads to the results of that ball falling and in time hitting whatever surface is immediately below it.
• Cause and effect are readily categorically distinguishable in this scenario, as each side to the cause and effect relationship described in it takes place in a particular temporal order, and right up to the point where that ball actually strikes the ground and the scenario ends.

But in a cyclical cause and effect-driven process, effect as arrived at in any one turn of that cycle becomes input for the next round of activity. And this brings up new types of functional relationships, and particularly as activity in one round in such a recurring process might have impact that continues past the end of that one cycle itself. This possibility in effect defines what feedback is, that effects achieved in any given cycle in a recurring process do not simply end there, but rather have longer term and recurring consequences that can be dampening overall, or additively expanding in cumulative influence (e.g. as negative and positive feedback respectively.)

Effect, in effect becomes cause or at the very least a parametric shaper of it in cyclically structured causally driven systems. And this has implications that are not always taken into account, and particularly in complex systems as arise in business operations and economic systems modeling.

Let’s consider this in the less abstract context of a specific working example, as drawn from economics: calibrating where a best tax rate would fall for maximizing revenue generated for a government, along a Laffer curve.

The basic concept of the Laffer curve seems to be relatively intuitively obvious. The maximum overall amount of revenue that a government can secure and bring in through taxation depends on the tax rate that it imposes as a percentage of revenue generated in the communities and society that it governs. If a government sets its tax rates at 0% it is not going to generate any revenue from that, and if it seeks to impose a 100% tax rate, it is unlikely to generate any revenue then either. In between it can generate a positive taxation-based revenue flow for itself. And the Laffer curve model seeks to predict at least categorically where as a matter of tax rate imposed, it can maximize the taxation-based revenue that it can receive. That percentage determination, of course depends on what assumptions are being made and both with regard to outside societal factors and with regard to government activity and its involvement in the overall economy as well.

Let’s at least begin to examine the assumptions made here with a brief and selective consideration of the high end of the curve for tax rate imposed. In a closed economic system where at least one crucial resource that is essential for day-to-day life, is monopolistically controlled by the state, and when that state can and would offer all goods and services that its citizens could or would access and use, then it would have the power to impose a 100% “tax” rate – in effect imposing a state-ownership form of servitude on one and all. And the wealth of that society as a whole and any “revenue” generated through its state-owned and controlled systems would go to and remain in the state and its hands.

• Money, as such would be more an accounting abstraction than anything else in such a dystopian, all government controlling society, but its movement would be entirely into government hands and coffers and would be maximized for that – not zero in value.

Now let’s consider less centrally controlling, but still significantly restrictive and controlling systems in which a government in effect skews the marketplace and its monetary value flows: its cumulative cash and monetizable value transfer flows. The more significantly a state controls and shapes availability of goods and services, and particularly for essential ones, the higher the tax rate it can impose and still receive greater overall revenue flow value from that.

Different economists arrive at very different understandings as to where a maximum revenue generation point would be for a conceptual model such as the Laffer curve. And the line of argument that I have just been offering here represents just one point of assumption that can lead to differences in what is concluded – and particularly when different people start out with different automatically assumed, axiomatic assumptions as to what would and would not arise in and shape a real-world marketplace. And I would argue that feedback and process cyclicity in general, drive the positioning of where a tax revenue generation maximum would fall, along any given proposed Laffer curve representation of an economy, as ongoing experience and feedback from it by members of the general public determines the overall levels of revenue generation that they will sustain that would be taxable.

The points that I make here apply to business systems too, and even in the extreme example form that I made note of above where a government controls and owns essential products and services, and taxes for access to them. Here and in a business systems context, consider the historical examples of geographically relatively isolated company towns, where a single business is both the major employer and economic driver of a community, and owner of essentially all stores and related businesses there that provide day-to-day essentials such as food and clothing. Members of such communities can all in effect become as if serfs to those community and region-dominating businesses, and in a manner that parallels the situation faced in my above-offered government controlling example. And I add that where money per se becomes essentially an in-government abstraction there, company towns and businesses that own them have commonly, historically paid their employees not in nationally minted currency but in their own company script – that only their company owned businesses would accept as if legal tender.

• Where that magic number maximum for tax revenue generated falls on a Laffer or similar curve, depends entirely on what political and politically-shaped economic assumptions are made, and particularly when they are simply assumed and axiomatically so.
• And where that magic number falls along such a curve, crucially depends on what feedback and societal response patterns are assumed and on how members of such a society calculate what is and is not in their own best interests to do.

And this conceptual gap in how a Laffer curve model is more usually formulated is at least partly informative as to why I see problems in the basic underlying model as whole in framing any given specific tax policy: it is presented as if it were a systematically analytical model but it leaves too much out, that is not going to be addressed and certainly in anything like partisan political debate, that would go into actually meaningfully applying it in setting taxation policy.

As a final thought here, I acknowledge one that I have been implicitly basing this posting on up to here on a number of unstated assumptions too, and on assumptions that I readily acknowledge are not always going to be valid. When you review the maximum personal income tax rates that nations impose upon their citizenries as of this writing, you find extreme ones for high percentage that would not fit all Laffer curve calculations and certainly as they would be arrived at for nations such as the United States (see List of Countries by Tax Rates.) Finland, for example, is listed as having income tax rates that go as high as 61.95% when combining maximum national and municipal tax rates and added-in social security taxes too.) Even this though, would actually fit the basic model if you consider the value of services provided by the state, as balancing competition to pressures that higher tax rates can impose on overall productivity levels in an economy. But on the other hand, there are low-end for income tax rate nations, that in effect have what amounts to negative tax rates for their own citizens. Some of the major oil producing nations have in effect subsidized their citizenries in this way. And if the Laffer curve breaks down for the occurrence of any circumstances where a 0% income tax rate would make sense financially for a government, it certainly does not address nation states making ongoing support payments of this type. This can only be addressed by changing the basic assumptions to allow for nation states that own significant means of value production: such as oil production, where they in effect share the wealth with their own citizens and even to a level that makes all of their citizens wealthy.

I add this final detail here to highlight that I have only begun to touch upon the types of assumptions that an economic paradigm model such as the Laffer curve rest upon. And differences in what is assumed behind it, can and do render the resulting calculated curves into what can amount to veritable Rorschach tests. This is all very important and certainly as it looks like partisan Laffer curve predictions and calculations as variously made by differing ideologs, are going to play an important role in any Congressional debates and actions taken in the United States and I add elsewhere as well, in the coming year and more as tax policies come under review. So this is not just an abstractly considered topic or posting.

You can find this and related postings at Macroeconomics and Business and its Page 2 continuation. And I also add this as a supplemental posting addition to Section VI: Some Thoughts Concerning a General Theory of Business, as can be found at Reexamining the Fundamentals.

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