Friday, July 16, 2010

From Self-Organized Criticality to Cycles

One of the intentions of government regulations of the economy is to reduce unpredictability in the economy. Certainly the Federal Reserve was put in place with that stated purpose -- the Fed is supposed to reduce economic uncertainty. However, unpredictability and uncertainty are features of complex adaptive systems. And the economy is a complex adaptive system. When you simplify a dynamic system, you move it from the region of self-organized criticality, where new things are created, into a state of periodicity -- cycles. In other words, the effect of government regulations, including those involving the Federal Reserve, that are intended to simplify and reduce unpredictability and uncertainty, in fact cause economic cycles. The cure is the cause of the illness of business cycles. Worse, further simplification to remove uncertainty and unpredictability further only works to calcify the system -- until it is no longer a system, let alone a complex adaptive system.

This is a fancy, scientific way of saying that the Austrian economists were right about business cycles.
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Brad DeLong blogged on how our cyclic pattern has turned structural. This is very bad. The economy is rigidfying -- as one would predict from systems theory. This is the original post, by Dave Altig.
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