Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. In fact, they tend to be too calm and exhibit minimal variability as silent risks accumulate beneath the surface. Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite. These artificially constrained systems become prone to “Black Swans” — that is, they become extremely vulnerable to large-scale events that lie far from the statistical norm and were largely unpredictable to a given set of observers.
….Preventing small forest fires can cause large forest fires to become devastating. This property is shared by all complex systems. In the realm of economics, price controls are designed to constrain volatility on the grounds that stable prices are a good thing. But although these controls might work in some rare situations, the long-term effect of any such system is an eventual and costly blowup whose cleanup costs can far exceed the benefits accrued.
….Humans simultaneously inhabit two systems: the linear and the complex. The linear domain is characterized by its predictability and the low degree of interaction among its components which allows the use of mathematical methods that make forecasts reliable. In complex systems, there is an absence of visible causal links between the elements, masking a high degree of interdependence and extremely low predictability. Nonlinear elements are also present, such as those commonly known, and generally misunderstood, as “tipping points.” Imagine someone who keeps adding sand to a sand pile without any visible consequence, until suddenly the entire pile crumbles. It would be foolish to blame the collapse on the last grain of sand rather than the structure of the pile, but that is what people do consistently, and that is the policy error.
The Black Swan of Cairo: How suppressing volatility makes the world less predictable and more dangerous
By Nassim Nicholas Taleb and Mark Blyth
Colin Twiggs: ~ This is a must read for those who want a deeper understanding of why complex systems fail and why we are continually blind-sided by unforeseen political and economic events.
Best article I have seen describing the causal effects of the exisiting economic situation.
Volatility is hidden in every sector of the global economy that can have a financial measurement attributed to it. But nowhere is the camouflage more obvious than China, the so-called and often promoted bastion of the world economy. China hides its volatility with the same force that it suppresses human rights. The mountain ranges of iron ore, black coal and copper in turn hide the oceans of crude oil that the public sector and banks use for speculation and corrupt personal gain. The mandating of compulsory growth targets financed by banks and illegal city borrowings has masked the volatility of the future when the banking system will collapse under the weight of unrepayable loans. Just as it will in USA Europe et al. The challenge facing the vertically challenged is how to make money out of other peoples misery.
Vahe, THAT’S the problem. Causal effects are a misnomer. Non-linear dynamics have to take into account the current state of the (current/particular) economic system.
Once the idea that economics is a self referencing mechanism, is understood, then decisions made with psychology of large numbers tend to be vastly superior to those that are stuck in a linear fashion.