PRIORITY FILING - INITIAL DRAFT
A fully revised and formatted version will follow.
Gregory Caldwell Beier
Susarb LLC, Cambridge, Massachusetts
March 19, 2026
From the Prolegomena to the Unification of Economics, Computer Science, Mathematics, and Physics by Gregory Caldwell Beier (forthcoming 2026).
© 2026 Gregory Caldwell Beier. Licensed under CC BY-NC-ND 4.0.
When capital is allocated on the basis of price signals that have compressed away constraint information, the resulting misallocation does not simply reduce current output - it accumulates. Each year of misallocated investment produces infrastructure, contractual commitments, workforce specialization, and institutional path dependencies that constrain future choices. The gap between the trajectory the economy is on and the trajectory it would be on if allocation had reflected full constraint information widens over time, and the cost of closing the gap compounds. This paper introduces the concept of reality debt: the present value of the accumulated cost of decisions made on compressed information. Reality debt is the stock counterpart to the flow measure developed in the companion paper on TFP (Beier, 2026ae). Where the Solow residual measures the annual coordination loss from information architecture failures, reality debt measures the accumulated burden of coordination failures compounded over years and decades. Climate change is reality debt on atmospheric constraint information - decades of capital allocation that ignored atmospheric loading because the price system carried no channel for it. Aquifer depletion is reality debt on water constraint information. Infrastructure decay is reality debt on resilience constraint information. The concept connects the compression framework to the economics of sustainability, intergenerational welfare, and path dependence. Reality debt can in principle be measured as the cost of returning to the trajectory that full constraint information would have produced - though the measurement is subject to the same difficulties that plague counterfactual estimation in any path-dependent system. The Disclosure Incentive (Beier, 2026b) reduces the rate at which new reality debt accumulates by making constraint information visible before allocation decisions are made.
Keywords: reality debt, misallocation, path dependence, sustainability, intergenerational welfare, information architecture, compression, climate, infrastructure, aquifers
JEL Codes: O44, Q54, H23, D62, E22
Financial debt accumulates when expenditure exceeds revenue and the difference is borrowed. The borrowed amount earns interest, the interest compounds, and the stock of debt grows even if the annual deficit stays constant. Reinhart and Rogoff (2009) documented the dynamics of sovereign debt accumulation across eight centuries, showing that the compounding property produces crises whose severity reflects not only the current deficit but the accumulated stock of past borrowing.
Reality debt accumulates through an analogous mechanism, but the borrowing is informational rather than financial. When an economy allocates capital on the basis of price signals that are missing constraint information, the allocation diverges from what full information would have produced. The divergence in any single year may be small - a few percentage points of misallocation, a marginal overinvestment in water-intensive agriculture, a slight underinvestment in grid resilience. But the misallocation produces physical infrastructure (the irrigation system that draws from the stressed aquifer), contractual commitments (the twenty-year power purchase agreement that assumes stable grid capacity), workforce specialization (the engineering talent trained for fossil fuel extraction rather than energy transition), and institutional path dependencies (the regulatory framework calibrated to yesterday's constraint environment). Each of these locks in a trajectory, and the trajectory diverges further from the full-information counterfactual with each passing year.
The companion paper on TFP (Beier, 2026ae) measures the flow cost of compression-induced misallocation: the annual output lost because the price system's information content is insufficient to guide allocation to its most productive uses. Reality debt measures the stock: the accumulated cost of years of flow losses, compounded by the path dependencies that each year's misallocation creates.
The concept is not new in substance - Stern (2007) argued that climate change represents accumulated damage from decades of unpriced atmospheric externalities, and Nordhaus (2017) computed the present value of that damage through integrated assessment models. What is new is the framing: reality debt is the general concept of which climate damages, aquifer depletion, infrastructure decay, and ecosystem degradation are specific instances. Each is the accumulated cost of decisions made on compressed information about a specific constraint environment. The compression framework (Beier, 2026a, 2026b) provides the common mechanism, and reality debt provides the common accounting.
Section 2 defines reality debt formally. Section 3 develops the compounding mechanism. Section 4 examines three constraint domains. Section 5 connects reality debt to sustainability economics. Section 6 addresses measurement. Section 7 states limitations. Section 8 concludes.
Let theta(t) denote the state of a constraint environment at time t, and let theta*(t) denote the counterfactual state that would have obtained if all allocation decisions from time 0 to time t had been made with full constraint information. The constraint environment evolves according to:
theta(t+1) = g(theta(t), a(t), epsilon(t))
where a(t) is the vector of allocation decisions at time t and epsilon(t) is an exogenous shock. Under compressed information, agents choose a(t) on the basis of price signals p(t) that are missing constraint information. Under full information, agents would choose a*(t) on the basis of the complete constraint assessment.
Reality debt at time T is the present value of the cost of returning from theta(T) to theta*(T):
RD(T) = PV[C(theta(T), theta*(T))]
The cost function C encompasses both physical remediation costs (restoring an aquifer's water table, retrofitting infrastructure, removing atmospheric carbon) and economic deadweight loss from stranded assets and misallocated capital that must be written off. Physical remediation may be partially or fully irreversible - some reality debt, like species extinction or aquifer compaction, cannot be repaid at any price. The economic component includes the welfare cost of capital reallocation: industries built on compressed-information allocation must shrink, workers must retrain, and infrastructure designed for the wrong trajectory must be replaced or abandoned.
Reality debt at time T depends on the entire history of allocation decisions from 0 to T, not only on the current-period misallocation. This is the stock-flow distinction: the TFP loss from misallocation (Beier, 2026ae) is the flow - the output lost in the current period due to current misallocation. Reality debt is the stock - the accumulated cost of the entire history of misallocation, compounded by path dependence.
Reality debt compounds through three channels.
The first is physical lock-in. Capital investment creates physical infrastructure with a useful life measured in decades. A coal-fired power plant built in 2005 because the price of electricity did not reflect atmospheric constraint information operates for forty years, producing emissions throughout its life that the allocation decision embedded in its construction committed to. The reality debt from that single decision is not the one-year emissions cost but the present value of forty years of emissions, discounted at whatever rate intergenerational welfare assessment requires. Hsieh and Klenow (2009) measured the static cost of misallocation - the output lost from having resources in the wrong places at a point in time. Physical lock-in extends their analysis dynamically: the resources are not merely in the wrong places today but committed to being in the wrong places for the useful life of the infrastructure.
The second channel is institutional lock-in. Allocation decisions create regulatory frameworks, contractual obligations, workforce training investments, and organizational structures that persist beyond the investment itself. A region that allocates agricultural land to water-intensive crops builds an irrigation infrastructure, a regulatory framework for water rights, a workforce trained in those crops, a supply chain serving those crops, and a political constituency invested in their continuation. Reversing the allocation - shifting to less water-intensive crops because the aquifer is depleting - requires not only physical investment but institutional change across every link in the chain. The institutional lock-in compounds the physical lock-in because the institutions that formed around the original allocation resist the reallocation that full information would indicate. Arthur's (1989) analysis of increasing returns and path dependence formalizes this mechanism: early allocation decisions create positive feedback loops that make the chosen trajectory self-reinforcing, even when the trajectory diverges from the socially optimal one.
The third channel is informational lock-in. Decisions made on compressed information generate data about the compressed-information trajectory, not about the full-information alternative. A region that has always allocated water on the basis of prices that exclude aquifer interaction effects has decades of data about crop yields, water usage, and economic returns under the existing regime, but almost no data about what would have happened under alternative allocations that accounted for constraint interactions. The information environment is itself shaped by the allocation history, and the shaping reinforces the existing trajectory by making it better-documented and therefore apparently better-understood than any alternative. This is a subtler form of compounding than physical or institutional lock-in, but it is real: the information base from which future decisions are made is itself a product of past decisions made on compressed information.
Climate change is reality debt on atmospheric constraint information. From the beginning of industrialization through the present, capital allocation decisions have been made on the basis of energy prices that excluded atmospheric loading costs. The accumulated stock of atmospheric CO2 - approximately 420 parts per million as of 2025, compared to the pre-industrial baseline of roughly 280 ppm - is the physical manifestation of reality debt in this constraint domain. The cost of returning to a trajectory consistent with stated climate targets (1.5-2 degrees Celsius of warming) is measured in trillions of dollars of required investment in energy transition, stranded fossil fuel assets, and adaptation infrastructure (Stern, 2007).
The compounding channels are all active. Physical lock-in operates through fossil fuel infrastructure with multi-decade useful lives. Institutional lock-in operates through energy regulation, trade agreements, and political economies built around fossil fuel extraction. Informational lock-in operates through decades of economic data collected under a regime that excluded atmospheric costs, making the fossil-fuel trajectory appear economically validated while alternatives appear speculative.
The Disclosure Incentive addresses the flow of new reality debt accumulation by making atmospheric constraint reasoning visible in capital allocation decisions. It does not address the existing stock - the CO2 already in the atmosphere, the infrastructure already built, the institutions already formed. The distinction between reducing the flow and addressing the stock is central to the policy implications: the Disclosure Incentive is a flow instrument that reduces the rate of new reality debt accumulation, not a stock instrument that remediates existing reality debt.
Groundwater depletion in major agricultural aquifers - the Ogallala in the US Great Plains, the North China Plain aquifer, the Upper Ganges in India - represents reality debt on water constraint information. Decades of allocation decisions made on the basis of water prices that excluded interaction effects among users and depletion trajectories have drawn down aquifer levels to points that threaten the viability of the agricultural systems built on them. The cost of the accumulated reality debt includes the infrastructure that assumed sustainable water availability (irrigation systems, processing facilities, transportation networks), the communities that formed around the agricultural economy, and the remediation cost of restoring aquifer levels if restoration is even hydrologically feasible.
The Ogallala case is instructive. Depletion began in the 1950s with the expansion of irrigated agriculture, accelerated through the 1970s and 1980s, and continues today at rates that vary by region but exceed recharge across most of the aquifer's extent. The reality debt accumulated over seven decades of water pricing that did not reflect the constraint environment. Each year's extraction was individually rational at the prevailing price. The accumulated effect is a constraint crisis whose cost dwarfs the annual flow of misallocation in any single year.
Aging infrastructure in advanced economies represents reality debt on resilience constraint information. Bridges, water systems, electrical grids, and transportation networks were built to standards calibrated to historical constraint environments (historical flood frequencies, historical temperature ranges, historical load profiles). The constraint environments have changed - more intense precipitation, higher peak temperatures, higher electrical loads from electrification - but the infrastructure reflects the constraint information available at the time of construction, not the current constraint reality.
The American Society of Civil Engineers' 2021 Infrastructure Report Card estimated that the US faces an infrastructure investment gap of $2.6 trillion over ten years. This gap is reality debt: the accumulated cost of decades of infrastructure investment decisions made on constraint information that did not account for the trajectory of the constraint environment. The compounding is evident in the cascading failure patterns that characterize infrastructure crises: a bridge failure disrupts transportation, which disrupts supply chains, which disrupts economic activity in communities that depended on the infrastructure the original allocation decision created.
The concept of sustainability - meeting present needs without compromising the ability of future generations to meet theirs (Brundtland Commission, 1987) - translates directly into the reality debt framework. An economic trajectory is sustainable when the rate of new reality debt accumulation is zero: current allocation decisions, made on full constraint information, do not create a growing gap between the actual trajectory and the trajectory that full information would support. An unsustainable trajectory is one where reality debt is accumulating - where current allocation decisions, made on compressed information, are committing future generations to remediation costs, stranded assets, and constrained choices that they did not create and did not consent to.
The intergenerational dimension of reality debt is where it departs most sharply from financial debt. Financial debt is a contract between identified parties: the borrower and the lender agree to terms, and both bear the consequences of default. Reality debt is imposed on parties who were not consulted - future generations who inherit the constraint environment that current allocation decisions created. The ethical dimension is present in Stern's (2007) discount rate argument: a near-zero pure rate of time preference gives future generations' welfare nearly equal weight to the present generation's, producing a high social cost of carbon and a large estimated reality debt. Nordhaus's (2017) higher discount rate gives future generations less weight, producing a lower estimate. The disagreement is in the end about the terms on which reality debt is imposed on the future, not about whether it is being imposed.
The Disclosure Incentive reframes the sustainability debate as an information architecture problem. The question is not whether the economy should be sustainable - nearly all parties agree in principle - but how to make constraint information visible in the allocation decisions that determine whether sustainability is achieved. Reality debt accumulates not because agents choose unsustainability but because the information architecture does not give them the constraint information they would need to choose differently. Repair the architecture and the flow of new reality debt slows, even without the explicit sustainability mandate that political economy has found so difficult to enact.
Reality debt is defined as the present value of the cost of returning from the actual constraint state to the full-information counterfactual. Measuring it requires specifying both the actual state and the counterfactual, which faces three difficulties.
The first is counterfactual specification. The full-information trajectory depends on what allocation decisions agents would have made if they had possessed complete constraint information - a counterfactual that requires modeling agent behavior under an information environment that has never existed. Different behavioral models produce different counterfactuals and therefore different reality debt estimates. This is the same difficulty that afflicts social cost of carbon estimation, and for the same reason: the relevant comparison is between the actual trajectory and a hypothetical trajectory that requires assumptions about behavior under hypothetical conditions.
The second is path dependence. Because reality debt compounds through physical, institutional, and informational lock-in, the cost of returning to the counterfactual trajectory depends on the path of return, not just the destination. A rapid transition (immediately redirecting all investment to the full-information trajectory) has different costs from a gradual transition (slowly shifting allocation over decades), and the optimal transition path depends on parameters (adjustment costs, stranded asset recovery rates, institutional flexibility) that are themselves uncertain.
The third is discounting. The present value of reality debt depends on the discount rate, and the discount rate for intergenerational costs is the most contested parameter in all of welfare economics. The Stern-Nordhaus debate about the social cost of carbon is structurally a debate about this rate, and it applies with equal force to reality debt measurement in every constraint domain.
These difficulties do not make reality debt unmeasurable. They make it measurable with uncertainty - which is the condition of every important economic quantity. Gross domestic product, total factor productivity, the social cost of carbon, and the infrastructure investment gap are all measured with substantial uncertainty, and their imprecise measurement is vastly more useful than no measurement. Reality debt estimates, even imprecise ones, provide a framework for comparing the accumulated cost of information architecture failures across constraint domains and across economies.
The concept of reality debt is a framework, not a model. A formal model would specify the constraint environment's dynamics, the allocation decision process under compressed and full information, the compounding mechanism through physical and institutional lock-in, and the remediation cost function. Each of these specifications is domain-specific (the dynamics of an aquifer differ from the dynamics of the atmosphere, which differ from the dynamics of an electrical grid), and a general model that applies across all constraint domains is beyond this paper's scope.
The paper treats reality debt as the cost of compressed information specifically. In practice, misallocation reflects many factors beyond information compression: political distortions, regulatory capture, corruption, behavioral biases, and coordination failures that are not primarily informational. The compression framework explains the informational component of misallocation, which the companion papers argue is large, but it does not explain all misallocation and therefore does not explain all reality debt.
The Brundtland Commission definition of sustainability is used as a reference point but not formalized. The connection between reality debt and sustainability - that a sustainable trajectory is one where reality debt is not accumulating - is conceptual rather than derived. Formalizing it would require a welfare criterion that specifies the weight given to future generations, which returns to the discounting problem that Section 6 identifies as unresolved.
The paper does not address the political economy of reality debt reduction. Reducing the flow of new reality debt requires changing allocation decisions, which creates losers (agents whose activities are revealed by constraint information to be unsustainable) alongside winners (agents whose activities are well-calibrated to constraint realities). The political resistance to information architecture improvement is itself a form of informational lock-in - the institutions that formed around the compressed-information trajectory resist the disclosure that would reveal the trajectory's costs.
Reality debt is the accumulated cost of decisions made on compressed information. It compounds through physical lock-in (infrastructure built for the wrong trajectory), institutional lock-in (regulations, contracts, and organizations calibrated to the wrong constraints), and informational lock-in (data and expertise generated along the wrong path). Climate change, aquifer depletion, and infrastructure decay are specific instances of reality debt in specific constraint domains, united by the common mechanism: prices that compressed away constraint information led to allocation decisions whose cumulative consequences grow more expensive to reverse with each passing year.
The Solow residual measures the annual flow - the output lost this year because the information architecture is insufficient. Reality debt measures the accumulated stock - the total cost of every year's flow, compounded by path dependencies. The Disclosure Incentive addresses the flow by making constraint information visible in allocation decisions. It cannot remediate the stock - the CO2 already in the atmosphere, the aquifers already depleted, the infrastructure already decayed. What it can do is slow the rate at which new reality debt accumulates, by closing the gap between what the price system carries and what allocation decisions need. The stock of existing reality debt must be addressed through remediation, adaptation, and transition. The flow of new reality debt is the variable the information architecture controls.
This paper presents results from the Prolegomena to the Unification of Economics, Computer Science, Mathematics, and Physics (Beier, forthcoming 2026). Reality debt is the stock counterpart to the flow measure of coordination quality developed in the companion paper on TFP (Beier, 2026ae) and the consequence of the compression mechanism developed in the companion papers on the price system (Beier, 2026a, 2026b). The author invites engagement from the sustainability economics, climate economics, and intergenerational welfare communities.