The expression ‘signal to noise’ comes from the telecom and audio world. In the haydays of electronic transmission it was a battle to make it actually get data across transmission channels, morse code was invented to help in the beginning, and the history of long range communication is the history of how to keep data intact and comprehensible. As you transmit a signal over a line (initally a copper wire for example) the signal slowly gets weaker due to resistance in the wire and gets drowned out by thermal nois and radio signals picked up by the wire. To understand this required an entire field of engineering to evolve.
In the abstract the signal is a perturbation in the medium (so for example the local electron density in copper), and ideally you could easily notice it as it propagates outward. However, other influences also cause perturbations (heat moves electrons around and magnetic fields push them as well). At a certain point its no longer possible to distinguish what is what, and the signal is lost. Its like making waves with your hand in choppy water. You can see the waves you make expand from where your hand moves, but at a certain distance the choppyness of the water ‘swallows’ your signal. The signal to noise ratio talks about how clearly the signal can still detected.
Sender ………………>> signal >>……………. Reciever
You can find S/N ratings in many devices. We want to hear the radio signal clearly, we want to hear the voice on the phone clearly, we want to know our GPS position precisely and we want to identify possible enemies on the radar screen correctly. It is akin to focussing, our brain increases the signal to noise of an outside stimulus by increasing the contrast between what is allowed in and what is filtered out. Principles of how the brain does this have actually been used in electronic signal processing.
There is another aspect about data on a transmission line and that is what it encodes. What is the meaning transmitted. One of the important names in the history of humanity that few people know is that of Claude Shannon. He wrote a small book about information, his information theory, in which he originated the concept of a ‘Bit’ of information. The way he saw information transfer was a process of enabling the reciever to make a choice between different options. A message is transmitted correctly if the receiving end can make the same choice as the orginator intended. The Bit is the smallest amount of ‘discrimination’ that can be transmitted. So if you take all the options you want to transmit (say 5 flavors of icecream) then you need to transmit at least 3 bits of data because you can only count to 5 binarily with 3 bits (and you’d have bits left over!). Of course you’d have a decoding list where each number stands for a flavor.
To make it simple, say if I want you to say ‘Potato’ and I have to signal to you from 400 meter with my hands. If you never seen a potato or said the word potato or connected the two (you call a car a potato) then my position is pretty hopeless. Luckily we can share information beforehand. Now I can give you a little note that says if I hold up my right hand I mean potato, and if I don’t I mean something else. This seems trivial but of course that is sufficient, job done, case closed. This is me transmitting one bit of information, and that bit allows a choice between ‘potato’ and everything else. The only noise possible here would be fog or smoke or night without a moon making it impossible to see my hand.
We are used to transmitting a lot more over one ‘line’, for example the alphabet, audio, although these days much of all transmission is digital. The big advantage of digital transmission is that you can compress data and use compression ‘libaries’. The latter are like notes you send out. So the for example the JPEG image libary is a set of tiles, little pieces of image (like lego), that have a number and can be used to reconstruct an image. You can choose to do it 100% correct (so no loss of any pixel) or less. This is like letting someone rephare your message to make it more compact before it is send. The full sentence starts at ‘sir, could I have a cup of coffe please’, but this can be compressed to ‘Could I have a cup of coffee please’ or ‘could I have coffee please’ or ‘Coffee please’ etc.
Our mind can also compress and decompress data it recieves, because we may think different from what someone verbally offers us. So someone says ‘I need a bike’, you know you have three kinds, so this is not enough information, you say ‘what kind of bike’ (if you want the sender to use your options) or ‘we have three kinds, racing, mountain or electric, what will it be’ (here you send your options so the sender can use them). The person then goes ‘mountain’ and you know how to behave. So there is a direct parallel to every day interactions and data transmission, noise, encoding and decoding.
When we apply the transmission analogy to economics first we have to identify what is what, who is the sender, who the reciever, what is the transmission line, what is the signal. In economics the signal is money, and it is transmitted from account to account. This is the same as light from my hand being traveling from my hand to your eye, or the electricity from a telegraph station being transmitted to another telegraph station.
This does not completely explain tha magical effect of money as it sits in one account or another. A message that is recieved in a telegram office, or the email you read (which outside your field of view has met with all kinds of noise and error correction along the way it travelled) is nothing in itself. It is what it means (where I take meaning to mean ‘effect’). In short the meaning of money is energy, which can be human effort, fossil energy, caloric energy, things that make things move and happen.
This ties into the formula for Wealth, which is Energy x Skills x Materials. It does no feature money, because money is means of exchange, a token for trade. Money does not satisfy a desire in itself. The economic system is meant to use money as a signal, because it wants to distribute effort to where it is needed and most usefull. Still money is a purse signal, so not the energy itself, because even if you send a million to an account whover uses that account has to use the money to buy the energy or harness the effort etc.
Wealth = Energy X Skills X Materials
But in this analogy the signal transmits data, information. What is the information that sending money transmits? It is that of an opportunity. When I transmit money to the butcher as I pay for my meat, I transmit an opportunity for the butcher to apply the energy he can now aquire to getting more meat to process and offer for sale. If I transmit money to my employee I transmit (hopefully) the opportunity for that employee to be my employee for another day, week or month. It is an opportunity because the money can be send on to recieves that do not help the employee do that, or there can be other reasons why this fails.
When there is ‘profit’ to be made in a trade this too is an opportunity. A source of freedom for whoever manages to become the reciever of that money. If there is a prize offered for say a new type of invention “Invent a way to conserve food for longer” then the money gives the inventer freedom in return for the seclusion and isolation he/she had to seek to make the invention. In this sense the ‘conversation’ we have through our economic system is about how to maximize our opportunities.
So what is noise then in our economic system? It seems there is no noise to speak off when you send money from one account to another, or hand it over in cash. What shape does the noise take? The noise can express itself on the network level.
The first source of noise is just reality, life itself, humans and their faults. Even if a butcher gets the right amount of money for his meat, he may fall sick and not be able to buy new meat, or the meat he buys may be rotten or the cooling system he uses fails etc. etcl. When these things happen there can be error correction signals (payment for cooling system repair, medicine, time spend finding better meat) or the reciever, the butcher has to quit and wait for investment or find another opportunity.
But even in itself, the transmission is not cost free, the system is run by banks and banks have an interest in more signals in the system. This in itself is a source of noise. The economy should produce the maximium amount of wealth for the least amount of ‘effort’ or energy, but it tries to send the maximum amount of signal, regardless what it means for effort or wealth. It just finds that humans that send and recieve the signal will not simply send more all the time, they want to see real opportunity as a result. So banks are one to introduce noise in the system.
Another source of noise is the energy or effort supply. If you pay for an employee you are outsourcing a lot of work, the job of keeping one’self available for work, alive preferably. The money that you recieve has to ultimately power the machines and produce what the employee needs. If that process is not efficient or distorted or disturbed, your money signal does not have the desired effect. Economic theory relies on humans to fix such problems, but of course it does not plan to reward them if they work extra hours or travel long distances to earn or eat insufficiently or live in horrible rental homes or out of their car. Economic theory is abstract, its a perfect world scenario. It has a prima donna syndrom as well in that it expects you to say ‘oh god no of course our mistake you are perfect!’
My conclusion is that the way economists and banks try to make the system work is by managing the amount of money in the system with respect to the amount of energy that the money can buy. So if there is less energy for sale (like right now, oil is at $95) it will contract the amount of money so that the price comes down (less demand). On the world market his is an automatic effect, as foreign countries do not have unlimited dollars. Right now, with the $95 brent crude oil price (set by production reductions by Saudi Arabia), many countries will see their systems fail in the weakest spots. That means opportunites are lost, people are not able to do jobs or aquire services, there is not enough signal to go around. Lines remain silent. This can lead to riots because ultimately people are existentially dependent on the signal.
When Russia cut off the gas supply to Europe (it was more complicated but lets say this is what happened) the price of gas went through the roof. Now it is still way to high. Gas companies are thus reducing opportunity in the economy. Not only gas companies but many others have raised their prices. That money goes into reserves that are not used and this leads to a slowdown in activity, in utilization of manpower. The main reason for this clear relationship is the fossil nature of most energy used, as human effort is not a real means of production in most cases (except light construction, manual labour jobs).
At the same time energy companies try to keep renewable energy out of the market and off the grid, they use their money to lobby and of course make sure its all very complex and difficult. This is an example of noise in the system. Nobody that tries to maximize wealth using the system would act this way. The reason this happens is because renewables can be owned by private citizens, local communities, and this means the signals send in the system will be more local. The banks and energy companies both have an interest in keeping it more centralized, that is their way to earn their opportunities.
Yet another source of noise is the offsetting of opportunities in organizations and governments in the sense that the top is given more opportunities if they support actions that lower the opportunities of those they represent or are supposed to manage. A large part of the economic signalling is to make people do things they don’t want to do voluntarily or that is harmfull. The true signal nature of money becomes more clear if we recognize that if a member of parliament or congress has 1000 USD it is different from when a truchdriver recieves it. For the MP it is a good meal in a restaurant but there really was no need, for the lorry driver it can mean a lot of things. So the signal for the MP decodes into different things than the signal to the lorry driver. But of course the MP should be payed by the tax payer only, and to a degree that makes him/her able to function. How come distortion is even possible?
This may be an asside but the economy, and the desire of people to maximize their opportunity and banks to maximize the total signal leads to ‘stratification’ of the market and community. The effect is that if you achieve money which grants you X opportunities, it may be that this puts you in a different market. The market is constantly organized so that to be at level Y you have to have XYZ stuff. These are lifestyles you can afford or not, and through exclusion and rejection people are motivated to strive to be included. You can strive to own a Rolex for $8.000 or $12.000 or $200.000 its up to you. It must be clear that the price at this level has little to do with ‘effort’ or energy that goes into an object or opportunity. Here the human recieving the message is learning there are new things to signal for, new opportunities and there’s a strong psychological manipulation industry dedicated to faking opportunity, to divert the signal to doing the manipulation.
The above introduces serious noise in the system, the opportunities are not created where they are most effective. Diverting signal to recievers that really don’t need more opportunity starves those that need it, and we can see that in the economy when people can’t afford a decent meal while working 3 jobs out of their car. The type of noise this represent is almost like feedback in an amplifier system, because of course those that have recieved overabundant opportunity send some to people that supported the distortion of the system. A bank can bribe a poltician without even sending much, but by just enabling more opportunities, for example a loan that would otherwise not have been given, or stock tips or help to a family member.
I think today the economy, because of the banks and energy companies incenitives to maximize the (or their) signal, is not functioning correctly even if the theory makes sense (which it doesn’t but that’s another story). Governments are trying to fix this, but many are infiltrated by people that are corrupted or that see no harm in serving banks or energy companies. Greed is desirable if you are a bank, it increases the signal, but it also misdirects opportunities to people who don’t need more. Greed causes shortages that then induce need, so even if only a few people hoard money, signal, the rest will now have to be greedy too. This leads to less opportunities for those with less to offer, it makes everything more expensive (so the money or signal people recieve loses meaning).
[older version below]
When we apply signal to noise to economics we find that the theory in principle has flaws, the foremost being that the economy only looks at what exists, in order to trade it for profit. It does not conserve resources or protect what lives or do anything to keep the situation fit for humans. But even if we where to fix that, we have humans testing and checking every economic activity (small shops, industry etc.) for their impact on humans, animals, the planet, we still have challenges.
In the economy the signal is opportunity to profit. Its not so much the profit itself. The signal changes something on the other end of the line. The words in the message change your behavior and anticipation of the future. If I was standing with my hand raised to signal potato to you all day, you only have to look once and you know ‘its potato’. The economy has profitable activities, it will do them until the situation changes, until there is a signal of some kind. You can work a man to death, but if he dies, that’s a clear signal you have to stop and find another man.
Luckily we have a less barbaric method of signalling in our economy, and that is our spending, or where money can be earned. Now if we have for example a farm that has employees, those employees can earn a living. It is the task of the farmer to pay their salaries. For the employees the signal is clear and their behavior is stabile (of course ignoring many possible influences from living a human life). Some signal does not get transmitted though, the farmer will perhaps hide financial problems and use his reserves to cover the cost of his employees, because he knows how hard it is to find them, or how being layed off will impact their lives. This is an exampe of ‘noise’ in the transmission of the signal. It prevents the employees from sensing that they should look elsewhere to secure their lifestyles.
In other places in the economy the noise can take other forms. For example you have a big chemical company that produces toxic chemicals that pollute the public waters (like Chemours in Dordrecht, Holland). Why does that company keep going? It did not recieve much if any signal in its economic ‘transmission lines’ (money flows)? This is indeed unlikely. This is a major problem of the world economy as a whole. The ‘transmission lines’ or money flows of many companies are totally isolated from the public. The public only sees the balance sheet and profit and loss etc. If the company is polluting, maybe some politician should complain and make a law to fight it? But that person has economic dependencies. In principle his economic signal is not directly dependent on the pollution, only on what the public thinks about it. Strangely the economic ‘signalling’ system does not tie into governance in a way that protects the population. This is an example of blocked transmission, no noise needed!
Of course the director of the polluting company can also have a signal with a lot of noise. To stay with the analogy, and moving into the realm of cryptography, the signal can not only be degraded by noise (which you first have to know is happening mind you), it can also be replaced, tampered with, faked, replayed to hid what is going on on the sending end of the line. How does this translated into economics? Well, you have people making a lot of money to keep things as they are. They may be at the head of an organization that has a governance task, but they get the same money no matter what happens. So where is the signal? No signal, no (possible) change. On the other side you can have a bonus system, which is designed to evoke behavior in order to recieve a signal (a bit of reverse psychology). Its a no cure no pay (so cheap) method of paying for what you want. It can however completely drown out the actual (especially human) relevant signal. Many scandals are with companies who’s leaders get bonusses and rewards even though they did an absolute shit job (literally now with the pullution of UK waterways by priviatized water companies)
Economics recognizes that our society is made up of many individuals that all have partial control over our environment, streets, factories, companies. The idea is to make them all cooperate to the benefit of all. The signals send between people and people and organizations etc. all seem to or pretend to serve that purpose. In reality we have some people and organizations that have quite a biased motivation, their economic signal is to extract money and control the amount of money we use to send the signals. These are the financial companies (don’t call them institutions, they are all privately owned!). We all know they are not like normal businesses. They pretend that the only way to transmit economic signals is with their money.
Another group of companies that is not quite fairly operating in our economic signalling system are energy companies, especially those where the energy originates, so oil, gas,coal and even solar and wind energy companies. Its not that they are intrinsically economically bad (of course fossil companies are ultimately devastating to our economies), it is that what they sell is money, which is confusing. You can buy a barrel of oil for $95 at the monent. Say its converted to gasoline, say its 158 liter. That is about 1000 km in a small car. You can drive a lot of Uber passengers over that distance. I guess you’d make at least $1000. This is called profit. How can that be? Because there is no way to turn that $1000 into anything usefull without more oil. I theory you could get 9 other people to drive Ubers and take 10% you’d be golden. But even if you have $100.000 eventually and you could not buy oil, suddenly that money would be worthless (unless you drive a Tesla but then you’d have to consider where the energy came from and at what cost). What this tells you is 1. There are more and less profitable things you can do with energy and 2. That profit is not worth much (zero) if you have no energy. You would have a strong ‘signal’ but it would be meaningless because it can not drive behavior, you need energy to have behavior.
So in the system we have the producers of the signal (Banks) and the behavior (Energy) and noise in the transmission (corruption, hoarding) and blindness of the signal to the plight of humans. You can clearly observe that banks and energy companies introduce noise and sabotage the economic signals to retain their control. This perspective of signal to noise may be helpfull to fix the way the economic system functions. Part of this can be by tuning the signal to reflect relevant factors. Another part can be to introduce signal in order to reflect the needs of our planet and humanity. The biggest challenge in this is to have a stable transmission system to begin with. You can see prices as part of the ‘note’ which explains the options the signal can have. If a car that is damanging to the environment, your health and future is cheaper than one that is not, your behavioral options will be distorted.
There are many ways in which economic signals get muddled, the media plays a role in it too. It is clear humans are not optimizing profit naturally, but lifestyle. The social aspect is way more imporant, and although it is recognized the conflict with the goals of banks is evident. This results in a constant barrage of marketing and lifestyle advertisement that create the wrong signal for humanity and even the individual. Is sitting in front of a laptop at Starbucks the highest attainable goal for a mid 20 woman? Or doing Yoga? While we all are supposed to work as hard as we can? Why do men spend so much on watches, in the hundreds of thousands on some tiny metal object. What does this solve rally? Are Rolexes really a good ‘investment’? How come if companies manage economic signals they are very precise about it, using performance indicators, quantifying everything, while in our lifestyles we are asked to ignore money when we spend it?
My suggestion would be to start looking at the noise and view it as a cost to society. Capitalism is not bad, it is the way to solve challenges as a community (share resources, that is the traditional meaning). Bank dominance and widespread noise (also called ‘hidden cost’) in our economic system is bad, and a true economists would talk about this!