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A Continent Adrift
Paul Krugman, New York Times
I’m concerned about Europe. Actually, I’m concerned about the whole world — there are no safe havens from the global economic storm. But the situation in Europe worries me even more than the situation in America.
Just to be clear, I’m not about to rehash the standard American complaint that Europe’s taxes are too high and its benefits too generous. Big welfare states aren’t the cause of Europe’s current crisis. In fact, as I’ll explain shortly, they’re actually a mitigating factor.
The clear and present danger to Europe right now comes from a different direction — the continent’s failure to respond effectively to the financial crisis.
Europe has fallen short in terms of both fiscal and monetary policy: it’s facing at least as severe a slump as the United States, yet it’s doing far less to combat the downturn.
(16 March 2009)
Benoit Mandelbrot and the wildness of financial markets
John Matson, Scientific American
In a lecture at Columbia University this week, famed fractal pioneer Benoit Mandelbrot once again inveighed against traditional economic theories, returning at a time of financial malaise to many of the points he raised in a 1999 Scientific American feature.
… A persistent complaint levied by the Wolf Prize–winning French mathematician: many economic models ignore dramatic jumps, whether in a commodity’s price or in an index such as the S&P 500, treating them as outliers. But real-life economic systems, Mandelbrot said, are “dominated by details”—the extreme cases, and specifically the outer 5 percent, are just as important as the rest of the data. To prove his point, Mandelbrot showed a graph of the S&P since 1985, overlaid with the same data minus the wild swings that constitute the outliers. The two graphs were completely different, implying that to ignore the extreme cases is to ignore reality. “I’m extremely visual,” Mandelbrot said. “Often the pictures suggest the deeper truth underlying the formulas.”
Mandelbrot also has beef with economists who model prices for shares or commodities using variations on so-called random walks, which assume that the price at any given moment depends on what it was the moment before. But prices, Mandelbrot noted, can be discontinuous, jumping instantly from one value to another without any graduated transition—more like a random teleportation.
…Theories grounded in the physical sciences, Mandelbrot said, presume that the markets harbor elements of randomness, but in a form that he calls “mild randomness.” Mild randomness is embodied by the roulette wheel at a casino—each spin is random but over time the distribution of winning numbers averages out. (And, of course, over time the casino wins out.) He contends that more realistic models of economics—including, naturally, models based on fractals—are driven by “wild randomness,” wherein things don’t average out and individual freak occurrences matter. This wildness, he said, “imitates real phenomena in a very strong way.”
(13 March 2009)
Professor Mandelbrot has influenced the thinking of Nassim Taleb (Black Swan).
Mandelbrot’s ideas suggest that it is foolish to expect that we can predict the price of oil with any accuracy. Instead, they suggest that we should prepare outselves for uncertainty. -BA
Time to gamble on a post-carbon world
Adam Corner, Guardian
An economy that promotes quality over quantity will restore the confidence we need to live within our ecological means
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… One of the trickiest aspects of getting to grips with climate change is acknowledging that some of our beliefs about the world – say, for example, that private car ownership should be encouraged because it enhances personal freedom – might have to be reconsidered. Geoffrey Cohen, a psychologist at Yale university, has demonstrated that when people feel threatened or lack confidence they are less receptive to evidence that challenges their existing beliefs. In a study involving opinions about capital punishment, people reacted defensively when their beliefs were challenged, and new evidence failed to alter their existing opinions. But when the participants in the study were made to feel good about themselves – when their self-confidence was enhanced – they were more willing to take on board new evidence and reconsider their beliefs.
Climate change challenges us all to think differently and question our assumptions. The last thing we need is financial uncertainty to unsteady our nerves. But the doctrine of continual economic growth requires great risks to be taken in the hope that great gains will be achieved. Can we get to grips with climate change within an economic system that demands we live life on the edge?
Herman Daly,a former economist at the World Bank, has proposed a radically different system – a steady state economy.
… While the quality of life of millions of people in the developing world is fundamentally contingent on increasing their financial wealth, the developed nations have stormed past the point at which there is any correlation between additional wealth and happiness. Certainly, this masks gross inequalities in per capita income but as a nation we have more money than we need. Should we keep on getting richer? Or should development take priority over growth?
Dr Adam Corner is at Cardiff university’s school of psychology
(17 March 2009)
Too Big to Fail? Think Again.
Alex Steffen, WorldChanging
Clay Shirky, makes an excellent point about the collapse of newspapers, which could just as easily apply to a host of other North American industries that are so unwilling to even consider the possibility that times have changed that they’ve entered a period of surreality:
When reality is labeled unthinkable, it creates a kind of sickness in an industry. Leadership becomes faith-based, while employees who have the temerity to suggest that what seems to be happening is in fact happening are herded into Innovation Departments, where they can be ignored en masse. This shunting aside of the realists in favor of the fabulists has different effects on different industries at different times. One of the effects on the newspapers is that many of their most passionate defenders are unable, even now, to plan for a world in which the industry they knew is visibly going away.
A whole host of North American industries have allowed fabulists to set their agendas for resisting reform: sprawl developers, auto manufacturers, coal-dependent power companies and cattle feed lots.
What they refuse to see is that a business model is not a mandate. People still want good stories and quality information today, just as they will want housing, mobility, energy and food tomorrow: the newspaper is still a doomed model.
(14 March 2009)
