Doom and Gloom in the Economy

After a long absence, I have decided again to attempt a regular blogging schedule -- the intention today is certainly to be regular. I do need the writing practice.

The main theme of this post is about the 'economy' (the dictionary says it is 'wealth created by the process of production and consumption'). Things today (Nov'2008) do not look exactly great. Many countries around the planet are literally racing into a so called 'recession'. Thankfully, the dictionary tells me that 'recession is temporary'. Lets hope that we do not need to re-define this term.

The most intriguing part of economies is that these are systems that emerge out of a million people making 'local' decisions. Each and every person more or less is making decisions based on their current context. People are not exactly thinking in terms of the 'state', let along the 'global economy'.

Over the last couple of weeks, I have noticed my own thoughts regarding spending choices. I must say that I have started to skip that impulsive 'coffee' purchase along with a rethink on other choices. This is the crux of the problem in the way our modern economies are organized. Once a million such decisions are made, very soon we are selling 1 million less coffee's each hour -- this adds up sadly for the farmers that make these beans and the entire chain that processes and distributes these beans.

In my research, I study what are known as 'complex systems'. These are structures and systems that have emergent properties, like economies. Millions of small interactions all made with 'local' knowledge, cause a thing to emerge. The most interesting aspect of these systems is that they are rather resilient do not easily break. The Internet is a complex system, the world-wide web is a complex system. Recent work suggests even the human brain may be organized along these principles. However, there is a down-side to these complex systems -- when they break, they can fall apart catastrophically.

Let me attempt to summarize:
- Every action has a consequence.
- In complex systems, a million small actions and interactions between them creates a consequence.
- But, give a consequence we can never really tell what the cause is. Because what emerges as a consequence in a complex system is often thousands of little choices all creating a cascade. The problem is, we do not know ahead of time when this cascade will start. However, once the cascade starts -- we can at best guess a cause, chances are we will not get it right.
- This is the reason, why the so called economic leaders look so 'inept' and 'incompetent'. They are attempting to patch-up stuff with 'local' knowledge and guess work.
- To make things really messy -- these complex systems are full of feedback loops. So, once things get started -- they can feed of each other and go places that no one really can fully predict.

Back to the economy. Economies are complex systems, they are quite resilient and robust. However, when things go bad -- there is a chance that things can go very very bad.

I have a feeling that what we are seeing today is exactly this cascade playing out in real-time. But, being a complex system I would not hazard a guess as to its future state -- except to say that it would be pointless looking for a reason why this is happening.

Now can this be solved? That assumes we know what 'solved' is. If the solution is -- 'it should be like 2006'. The answer most certainly is that injecting large wads of 'cash' is not going to guarantee it -- we do not know what the consequences of this are, we can say for certain it will have an impact -- a disproportional impact (not a good thing in complex system cascades because of the feedback loops).

So, what can do one? Do not look for causes, just learn to adapt to the changes as they come about. Ignore the 'talking heads' on the TV regarding the economy -- they are just guessing and saying stuff at random. If you do not believe me, just scan the Business headlines for the last 6 months. Even worse, look at the series of statements issued by so called 'informed sources'.

Looking ahead is only possible when we know the rules of the game and the current economic system is no game of chess. Looking back and picking a cause is possible only if we have a simple linear system and the modern economy is not an arrow shot from a bow (we cannot infer its origin by looking at the angle).

So .. live for now. I will try my very best to follow the above advise (and not fret about an imminent collapse of the world as we know it).

-- rv