CHAOS, PLANNING AND ORDER IN ECONOMIC SYSTEMS

We live in a chaotic world that, despite attempts at economic and social planning in various capitalist and socialist countries, there has been no success in finding their ordering and economic and social stability. The Soviet Union inaugurated the centralized state planning effort that brought extraordinary economic growth for the country until the 1970s, but could not prevent its decline and disintegration in the late 1980s of the twentieth century. Some central and peripheral capitalist countries, like Brazil, have planned their economies based on the Keynesian model after World War II obtaining high economic growth that did not become sustained.

 

With the demise of the Soviet Union and the socialist countries of Eastern Europe and the victory of neoliberal model throughout the world from the 1990s, government planning was abandoned throughout the capitalist world as a tool for promoting economic and social development. With the crisis of 2008, the state has adopted monetary and fiscal policies with the sole purpose of avoiding bankruptcy of the capitalist world system. Still prevails in the operation of the world capitalist system in several countries the thesis that the state should not intervene in economic planning economic and social development.

 

Throughout history, the development of capitalism has always gone hand in hand with the economic and social chaos in all regions of the world. The economic history of several countries demonstrates that while capitalism intervene at national borders with the adoption of policies of economic and social planning does not succeed in ordering their economies and their sustainable economic and social development, and less will enable the ordering of the world economy. In other words, no matter what it´s planned on each country's, economic and social chaos will prevail in its economy and also in the world economy.

 

All that has just been reported demonstrates that the ancient belief in determinism, in the control and predictability of economic models do not hold in the contemporary era. The chaos and complexity of the business environment mean that governments, businesses and people feel a sense of being swept away by a tornado that permeates the political, economic and social life. This means that to understand and manage a complex social and economic system we must think and act in complex ways using concepts and practices, at least comparable to the complexity of this system.

 

The classical sciences in the past, that offered a series of methods to understand the reality and build economic and organizational models no longer meet the needs of the contemporary era. We live and work in a world that can no longer be considered based on the concepts of Newtonian mechanics, the rationalism of Descartes and the determinism of Laplace. We cannot continue with economic and organizational models in which everything related to them is treated in isolation and disconnected from the whole.

 

Every country on the planet and the world we live in are made of chaotic political, economic and social systems, unpredictable and sensitive to initial conditions are characterized by the inability to predict its future stages because a small change in the initial conditions of the system cause large implications on its future behavior. One can take as an example the market of the stock exchange. After the purchase of shares in the capital market, we can estimate the future price of these shares in the short term. An estimate for the value of these shares however, as the time passes, ie, long-term yields, very probably will be wrong. It can be stated that each country and the world operate according to Chaos Theory that is one of the most important laws of the Universe .

 

The central idea of Chaos Theory is that a tiny change in the beginning of an event can bring any huge consequences and absolutely unknown in the future. Therefore, such events would be virtually unpredictable - chaotics, so. The air of unpredictability gained serious scientific study in the early 1960s, when the American meteorologist Edward Lorenz discovered that apparently simple phenomena are behaving as chaotic as life. Edward Lorenz came to this conclusion when testing a computer program that simulated the movement of air masses. One day, Lorenz spoke about a number of calculations that fed the machine with some less decimal, hoping that the results changed little. But the insignificant change completely transformed the pattern of air masses.

 

Over time, scientists concluded that unpredictability appeared in almost everything, from the rhythm of heartbeats to quotations from the Stock Exchange. In the 1970s, the Polish mathematician Benoit Mandelbrot gave a new impetus to the theory by noting that the Lorenz equations corresponded with what he himself had done when he developed the fractal figures generated from mathematical formulas that depict the geometry of nature, as relief ground or ramifications of our veins and arteries.

 

A joint experiment of the Lorenz with Mandelbrot math indicates that chaos seems to be the essence of everything, shaping the Universe. Recent research showed something even more surprising: the same equations appear in chaotic phenomena that have nothing to do with each other. The Lorenz equations for the chaos of air masses also arise in experiments with laser beam, and the same formulas governing certain chemical solutions are repeated when studying disordered rhythm of drops from a faucet.

 

Prigogine developed the theory of dissipative structures that are those far from equilibrium. In some stages, system elements behave in a deterministic way and in other phases - near bifurcations - works not deterministic manner (See Article Order Out of Chaos of Ilya Prigogine & Isabelle Stengers published on the website <http://www.mountainman.com.au/chaos_02.htm>). Economic models of deterministic simulation widely used today do not respond to the challenges of the contemporary era as it has no random variables. In this model, for a known input data set will have a single set of output results. It´s need to consider the use of probabilistic, stochastic models that have one or more random variables as input, which lead to random outputs too. 

 

In the twentieth century, scientific determinism created by the Classical Science went into crisis. The Theory of Relativity and Quantum Mechanics rejected Mechanics of Newton and the rationalism of Descartes. From the 1960s, new scientific discoveries such as Chaos Theory, which eliminated the Laplacian fantasy of deterministic predictability, and Complexity Theory, which eliminated the idea that the world is simple and can be studied by isolated disciplines, demonstrated that the world is a multi-and transdisciplinary phenomenon. Sciences, from the mid-twentieth century, began to deal with what is real in the world,  that is, considering complex and unpredictable most of the phenomena that take place in it. Therefore, human systems as business, economies and societies must be considered as complex systems.

 

For the above, make mistakes not just technocrats formulators of economic models that do not work and also the politics that envisions transforming society without taking into account the nature of economic and social system. The nature of the economic and social system is not subject to any proactive political or economic project. Attempts to force the economy with goals that contradict the economic logic does not have the long-term stability. This is evidenced in the economic failure to industrialize some peripheral capitalist regions, as the failure of real socialism, which had to recognize their own economic irrationality.

 

* Fernando Alcoforado , member of the Bahia Academy of Education, engineer and doctor of Territorial Planning and Regional Development from the University of Barcelona, ​​a university professor and consultant in strategic planning, business planning, regional planning and planning of energy systems.

Comments

Autumn Cote Added Apr 6, 2017 - 8:29pm
Please note, the best way to draw more attention to your work is to comment on the work of others.  I know this to be true because of you do I'll do everything in my power to draw more attention to your work.  I also advise engaging your commenters.  PS - There is a lot I can do and would like to do.  
Fernando Alcoforado Added Apr 6, 2017 - 8:53pm
OK, Autumn Cote,
John G Added Apr 7, 2017 - 4:38am
But you don't know anything about macroeconomics in the post Bretton Woods world you old fool.
 
You live in a pre 1971 paradigm and you abuse those who don't.
 
If you really were an engineer you'd understand fiat currencies.
Mike Haluska Added Apr 7, 2017 - 11:18am
Fernando - it is apparent that what you didn't learn from Dr. Lorenz is the utter futility of trying to "control" or forecast complex, non-linear, non-deterministic (chaos) systems.  Remove "controls" and "regulations" on a free market and it will self-optimize and self-correct for non-systemic disruptions.  In essence, it is not only impossible to "control or regulate" the free market, it is highly undesirable even to try!
George N Romey Added Apr 7, 2017 - 11:26am
Fernando chaos and complexity theory enables large organizations to run afoul of regulations without detection.  Essentially that is what happened pre 2008.  The regulators were hopelessly outmatched in their understanding of how complex derivatives and swaps worked.  Even top regulators like Paulson, Chris Cox and Sheila Bair were dumbfounded by the complexity (and illegality) of the garbage being peddled on Wall Street and Central  London.
 
Since then nothing has changed only the risk has grown and the bad actors have gotten much bigger through forced acquisitions.  Even Dodd Frank did not effectively stop these practices despite being a 2,000 page document.
 
As I have said before based upon the previous 30 year history another crash is coming and economists much more knowledgeable than me such as Jim Rickards see it coming, and relatively soon.  This time the damage will run into the tens of trillions, likely beyond the Central Banker's ability to squash any ill-fated impact on the financial cartels.
 
Unfortunately, the masses will suffer untold along with the bankers as deposit accounts are frozen, redemptions halted and exchanges closed.  People will find credit card accounts cut and cash withdrawals severely limited as we saw in Greece.
Fernando Alcoforado Added Apr 7, 2017 - 2:44pm
John G, I'm used to debating at high level with my interlocutors. I see that you are a intolerant character in calling me a foolish old man. Our dialogue has ended with this stupid attitude.
Fernando Alcoforado Added Apr 7, 2017 - 3:02pm
Mike Haluska, I study Chaos Theory about 40 years ago. The capitalist system is chaotic precisely because of the lack of feedback and control mechanisms. Your thesis that the capitalist system self-optimizes and self-corrects means accepting that chaos is established continually producing damaging consequences on society. The inability to control or regulate the capitalist system or the free market will only occur if chaos is established in the absence of feedback and control mechanisms. To avoid chaos, we have to establish feedback and control mechanisms.
Fernando Alcoforado Added Apr 7, 2017 - 3:14pm
George Romey, you present arguments that reinforce my point of view regarding the need for feedback and control mechanisms to avoid financial chaos. Large financial organizations took advantage of the unregulated environment to carry out their operations until chaos settled across the system. I agree with your assessment that the risk has grown and bad actors have become much larger through forced acquisitions. I have no doubt that the future of the financial system without the regulation will further amplify the dominant chaos.
Mike Haluska Added Apr 7, 2017 - 4:29pm
Fernando - your statement below shows that you either forgot or didn't learn a damned thing about Chaos Theory:
 
"The capitalist system is chaotic precisely because of the lack of feedback and control mechanisms."
 
Systems are NOT "chaotic" because they lack feedback and control mechanisms!  Your confusing disastrous results with "Chaos" - a grammatical error.  It always amazes me that the US economy went along fairly well without any "control" in a cyclic manner between well defined upper and lower bounds for hundreds of years and only NOW do we "economic cycles".  Your thinking produces the same arrogant foolishness that prompts pseudo scientists to think they can "control" the climate.
 
Ever since the 1960's when economists decided out of thin air that they were "smart enough" to "fine tune" the economy, we have seen irregular, unstable economic stumbling. 
 
Dino Manalis Added Apr 7, 2017 - 5:16pm
Central planning is wrong and disappoints people and businesses.  Any planning has to be shared among central; state or provincial; and local governments.  
Fernando Alcoforado Added Apr 7, 2017 - 11:06pm
Mike Haluska, economic systems go into a state of chaos when fluctuations that were hitherto corrected by self-stabilizing feedbacks are out of control. The development trajectory becomes non-linear: prevailing trends collapse and in its place several complex developments emerge. Rarely is chaos an extended condition. In most cases, it is only a transitory time between more stable states. When system fluctuations reach levels of irreversibility, the system reaches a critical point where it collapses into its stable individual components (collapse) or undergoes a rapid evolution towards a state resistant to fluctuations that have destabilized it (revolutionary breakthrough).
It is precisely at the point of fork that the system manager must have feedback and control mechanisms to prevent system collapse and make it evolve into revolutionary breakthrough. If this path of revolutionary advancement is selected by the system manager, the system evolves into a state in which it has an intensified information processing capacity, as well as more flexibility, greater structural complexity, and additional levels of organization. This is the situation experienced by the economy of many countries that, after the crisis that broke out in 2008 in the United States and spread throughout the planet, there has not been a restructuring of national and global economic systems. I offered this answer to clarify my view on Chaos Theory applied to the economy which is a subject that I master.
You need to consider the fact that if the US economy has performed well for hundreds of years with no control it does not mean it will continue to perform well in the future. One must pay attention to the fact that the economic system has become increasingly complex and therefore cannot continue to be administered as it used to. I reject your words when you said that my thinking produces the same arrogant nonsense that leads pseudo-scientists to think they can "control" the climate.  I have no doubt that without mechanisms to control the world economy and the climate we will be led to a catastrophic scenario for humanity. Either humanity tame the economy and climate or our future will be catastrophic.
Jeffry Gilbert Added Apr 10, 2017 - 12:39pm
State control has proven to be anything but. Its as unreliable as corporate control. Both are full to the brim with incompetent knaves. 
 
Political authority, or the authority of State, or the authority of Government, is something the average person virtually never questions. Almost everyone goes through their entire life believing that the Government – although it’s almost always composed of provable criminals, cheats and liars – still has a solid basis for its political authority. Many people, whether left, right or anywhere in between on the political spectrum, are Statists: they think that Government has an inherent right to rule, using coercion if necessary. Yet, even a cursory examination shows that if a normal person acted like Government, they would characterized as cunning, secretive and manipulative, and either be diagnosed as insane, or locked up as a danger to society, or both. So why do people allow and consent to such a situation?
 
Decentralized money - cryptocurrency - that is beyond the control and corruption of government bureaucrats and banksters is the only answer. 
 
We know this because those bureaucrats are dead set against it. 
Mike Haluska Added Apr 10, 2017 - 4:43pm
Fernando - your assertion:
 
"You need to consider the fact that if the US economy has performed well for hundreds of years with no control it does not mean it will continue to perform well in the future."
 
must take into consideration that:
 
"Non-US economies that were under direct control have always failed and continuation and spread of government control does not mean it will begin to perform well in the future."
 
The advocates of Central Planned and Controlled economies have nothing successful to point towards, yet they insist that all that they are missing is the right "Angels" to push the economic levers and switches.  How many economies have to go down the toilet for you guys to admit you're wrong?  Please - point me to a single "central planning success"!!!
 
America went from a backwoods agrarian society to the most powerful and prosperous nation with the highest standard of living in human history in less than 10 generations!  The rest of the world had a 3,000 year head start on America - yet who has bailed out and saved whom from poverty, tyranny, plague, etc.???  The Great Depression in America didn't result from lack of central planning - it was a direct result of it!!!   
Fernando Alcoforado Added Apr 10, 2017 - 6:47pm
Jeffry Gilbert, I agree with you that state control is unreliable and that many of the governments in the world are composed of likely criminals, crooks and liars. I understand your position that money would become decentralized and not under the control of governments and bankers. I understand that both a situation with state control and the other with the absence of control are extremely negative. The ideal would be to have a state that seeks to reconcile the interests of capital with civil society by acting as a mediator of conflicts and composed of competent people.
Fernando Alcoforado Added Apr 10, 2017 - 7:04pm
I think there's a mistake on your part to consider that I advocate central planning of the economy because where it was implanted it failed miserably. What I am advocating is the ordering of the financial system, which has become a world hydra, to prevent bank oligopolies from once again leading to bankruptcy of the world economy. I disagree that the Great Depression in America in 1929 resulted from central planning. On the contrary, it was the lack of planning that resulted in the Great Depression. The central planning expressed by Roosevelt's New Deal was decisive in overcoming the 1929 crisis.
Jeffry Gilbert Added Apr 10, 2017 - 11:45pm
The ideal would be to have a state that seeks to reconcile the interests of capital with civil society by acting as a mediator of conflicts and composed of competent people.
 
That's the problem - its an ideal. 
 
Those who have power never willingly give up power. They stack the mediators with those sympathetic to power and nothing changes for the better. 
 
It will never work. 
 
Good on paper but only on paper. 
 
 
John G Added Apr 11, 2017 - 4:23am
Alcoforado is a neoclassical economist. They don't deal in real world. They have models that bare no resemblance to reality.
Fernando Alcoforado Added Apr 11, 2017 - 5:16am
John G, I´m a neoclassical economist and you a neoliberal economist. I prefer to be neoclassical economist than to be neoliberal economist. We have to build new economic order to change reality.
Fernando Alcoforado Added Apr 11, 2017 - 5:22am
I agree with you, Jeffry Gilbert, that those who have power never voluntarily renounce power. But we must strive to make this situation to change for the benefit of our society.
Jeffry Gilbert Added Apr 11, 2017 - 6:13am
Centralized power is proven to be not up to the task Fernando. I agree change is required and trying the same old failed solutions will result in the same failed results.
 
Blockchain. Its time. 
Mike Haluska Added Apr 11, 2017 - 9:56am
Fernando - your assertion that:
 
"The central planning expressed by Roosevelt's New Deal was decisive in overcoming the 1929 crisis."
 
has been shown to be a myth of New Dealers.  All that the New Deal accomplished was prolonging the Depression, which was caused by the Central Bank (the Fed) not stepping in to stop the run on banks.  The country was falling into financial ruin and the Fed stood by "keeping its powder dry for a REAL EMERGENCY"!
 
Mike Haluska Added Apr 11, 2017 - 10:01am
Fernando -
 
Although a true free market is unregulated, that does not mean that the market is "out of control" - it is under the control of millions of individuals each with their own separate interests. 
 
Watch a large flock of birds fly in formation - there isn't a single bird dictating the flow and pattern of the flock but they all ebb and flow according to a few simple rules being practiced simultaneously by all of them.  The result is a beautiful, unchoreographed ballet of flight that serves to benefit them all.
 
Fernando Alcoforado Added Apr 11, 2017 - 2:36pm
Jeffry Gilbert, I agree with the use of Blockchain, but with the supervision of a Central World Bank to be set up to intervene when the financial system threatens to collapse.
 
John G Added Apr 11, 2017 - 2:43pm
you a neoliberal economist
 
Nope, not even close. I'm a post-Keynesian.
I was taught all your nonsense at university years ago.
But the evidence came in and the 'logic' was never there to begin with.
 
Neoliberals follow the neoclassical models btw. 
Fernando Alcoforado Added Apr 11, 2017 - 3:16pm
Mike Haluska, You use two false arguments that do not apply to the financial system. The first is that although the free market is not regulated does not mean that the market is "out of control" and the second, compare the financial market with a large flock of birds flying in formation without a single bird dictating the flow and The standard of the herd. The absence of regulation in the financial market, can make it "out of control" in the event of riots and nothing is done to prevent it from collapsing. Flying in flocks and in an organized way is a strategy for migrating birds to spend less energy and cover greater distances. The energy savings are so great that, at the end of the journey, birds reach up to 70% further than if they were flying disorderly. Positioning also helps the birds to watch over each other, as none of them out of sight of the other. "Another differential for birds that migrate together, even out of training, is the issue of survival. When in a group, they are more protected from predators, who become confused by attacking a bird and causing a flock of others around.  Unlike the financial market in which all its members act in an uncoordinated way, the birds fly in a coordinated way. There is an automatic adjustment between them. Look for new arguments to defend your thesis.
Mike Haluska Added Apr 12, 2017 - 11:24am
Fernando - I think we are getting to a better understanding of each other.  Your statement:
 
"The absence of regulation in the financial market, can make it "out of control" in the event of riots and nothing is done to prevent it from collapsing."
 
calls for what I claim are certain "emergency actions" to be taken under extreme conditions not related to the day to day transactions that steer the market.  For example, a run on a bank (or banks) due to rumors of financial malfeasance of the bank officers is an "extreme condition" that is not part of the day to day market transactions.  These types of regulations are of course, proper and necessary, as are audits to prevent malfeasance. 
 
However, the type of regulations that I feel are unnecessary and cause undue harm and waste are those that attempt to arbitrarily favor/punish a particular industry, company or individual.  Sales taxes on liquor or cigarettes is a good example - it is totally arbitrary and attempts to artificially control the buying behavior of a segment of the market. 
 
Other regulations are more harmful and catastrophic.  The "stated intentions" of the US home mortgage market regulations included making home ownership possible for low income buyers.  The actual outcome was that many people lost their homes and jobs due to the subsequent collapse of the housing market - the bedrock of the US economy.  
 
Regarding my "bird analogy", I wasn't referring to migratory formations.  There are many species of birds such as Starlings are remarkable in their ability to constantly and rapidly change the shape, speed, direction of the thousands of birds in their flock.  This occurs without any "central coordination or regulation" nor is there a single leader like a goose's "V" formation.  See link below:
https://www.allaboutbirds.org/how-do-starling-flocks-create-those-mesmerizing-murmurations/
The birds are not being "coordinated" by a single entity (e.g. follow the leader) because there isn't one.  They achieve flight patterns that suggest an underlying "system" is guiding the flock yet not guiding them.  The Starlings all follow a few simple navigation/formation rules like:
1) stay within a wing length of the bird in front
2) move left when the bird on your left moves left
etc. 
http://www.huffingtonpost.com/roeselien-raimond/chaos-in-motion-murmurati_b_9866900.html
 
The participants in a free market operate in a similar manner.  Guided by a few simple rules that are repeated billions of times, millions of people operating independently in their own self interest produce an apparently "orderly market".  When government planners try to "intervene" in this complexity in an attempt to force a more "desirable" result (e.g. minimum wage), the actual result is always undesirable with many unintended harmful consequences.  This intervention is akin to changing the formation rules for a few of the Starlings - the result is a mish-mash of collisions and dissipation of the flock.   
 
I hope this clarifies my position and aids in your understanding of Chaos.
 
John Minehan Added Apr 12, 2017 - 4:47pm
"[E]conomic systems go into a state of chaos when fluctuations that were hitherto corrected by self-stabilizing feedbacks are out of control."
 
Thus, your argument is that certain actions by corporate actors have short circuited the feedback mechanisms?
 
If so, is that  because of  government intervention that these entities  had the political power to co-opt, for example, by the creation of regulatory barriers to entry. 
 
This is Hayek's view. 
 
Hayek's remedy is to re-centralize and to reduce regulation, so decisions can be made at the level where the most information exists, generally, at a user level.
Fernando Alcoforado Added Apr 12, 2017 - 5:46pm
Mike, your assertion about the existence of bird flight patterns that suggest that an underlying "system" would be guiding the herd reinforces my arguments made explicit in my earlier comment. I disagree with you when you say that participants in a free market operate similarly to birds. I agree that millions of people who operate independently in their own interest produce an apparently "orderly" market (emphasis mine) until instability sets in the system as it did in 1929 and 2008. I advocate the thesis that government planners should monitor the Financial System and intervene before the occurrence of the crisis and not after as happened in 1929 and 2008. Regulating the financial system for me means to monitor it to avoid the excesses of some actors and to anticipate crises avoiding their occurrence. I hope I have made my vision clear about dealing with chaos in the financial system.
Fernando Alcoforado Added Apr 12, 2017 - 6:17pm
John Minehan, an economic system of a country is a dynamic system that operates for a certain period of time in a stable way until the appearance of "fluctuations" that takes it to a point of bifurcation from which the system reaches a new dynamic stability (advance) if it is restructured or collapses if nothing is done. In other words, at the bifurcation point the system has to be restructured or it will collapse. To make the system evolve favorably and prevent its collapse, there needs to be regulation. The fluctuations or instability of the system are caused by the individual actors who participate in the system and also by the government that does not have sufficient mechanisms of feedback and control. I disagree with Hayek's remedy of recentralizing and reducing regulation, so that decisions can be made at the level where most information exists, usually at the user level because the set of individual decisions is not sufficient to obtain system regulation. On the contrary, it makes it possible to feed the crisis even more when it occurs as experience of 1929 and 2008 demonstrates.
George N Romey Added Apr 12, 2017 - 6:40pm
Isn't this oldest trick in the book?  Make something so complex, complicated, and chaotic it can't be overseen.  Just look at the US tax code.
John Minehan Added Apr 12, 2017 - 6:52pm
Now, I understand your position! You reject Schumpeterian Creative Destruction!
 
You could make a rational argument for that if: 1) terrible conditions did not create great opportunities for risk investments (Baron Rothschild's dictum, "The time to buy is when there is blood in the streets."); and 2) if conditions were so secularly dire there could be no investment.
 
This may be a tenable argument against a global system that lacks "fire breaks," even if it may not be a tenable argument for social democracy. 
Fernando Alcoforado Added Apr 12, 2017 - 7:52pm
John Minehan, I accept Schumpeter's "creative destruction" as a progress factor when applied to competition between firms in the market. What I consider extremely serious is to admit the "creative destruction" applied to the financial system that leads to the destruction of the economy with the widespread breakdown of companies and banks and mass unemployment. We need to equip the financial system with rationality to avoid its bankruptcy.
Fernando Alcoforado Added Apr 12, 2017 - 8:02pm
It is evident, dear George Romey, that the more complex, complicated and chaotic a system that operates without supervision, the inevitable consequence is disaster to the detriment of the whole system and of society.
 
Mike Haluska Added Apr 13, 2017 - 12:01pm
Fernando - your assertion:
 
"I advocate the thesis that government planners should monitor the Financial System and intervene before the occurrence of the crisis and not after as happened in 1929 and 2008."
 
might make sense if not for the fact that the Government Planners (the Federal Reserve, Congress) CAUSED THE CRISES you speak of!!!  The Federal Reserve refused to inject cash into the banks while the public was making panic withdrawals (Bank Runs) and allowed 1/3 of the banks to fail unnecessarily.  The 2008 Financial Crisis was caused by the stupid laws that encouraged banks to make very risky loans.
 
Tell me - why will putting different "Angels" in charge to watch the kitty guarantee any better results?  Especially with a public that has been conditioned since the New Deal that government should solve all their social ills and financial problems!!!  Your entire thesis is based on finding such "Angels" which is why it will never work.  There are "NO ANGELS" with the infinite wisdom, knowledge and clairvoyance required to perform the job you advocate. 
Fernando Alcoforado Added Apr 13, 2017 - 8:10pm
Mike Haluska, what we have to do is to fight for governments to work differently than they did in the past,  that is, efficiently and effectively supervising the financial system. The fact that governments have worked poorly in the past does not mean that they will continue to work poorly in the future.
George N Romey Added Apr 13, 2017 - 8:15pm
In the absence of government and regulation is chaos.  Would you suggest the NFL play its games without a referee?  
Fernando Alcoforado Added Apr 14, 2017 - 7:47am
Great conclusion and magnificent argument, dear George Romey.
Mike Haluska Added Apr 14, 2017 - 10:14am
George - your statement:
 
"In the absence of government and regulation is chaos.  Would you suggest the NFL play its games without a referee?"
 
requires that I make some clarifications.  First of all, it is unfortunate that Complexity Theory got the name "Chaos" associated with it.  It implies complete disorder and randomness, when in reality many complex natural systems achieve order through billions of independent actions based on a few simple rules. 
 
Take the shape of a tree for instance.  When you look at an oak tree you recognize it immediately - but you know that no two oak trees are exactly alike.  The growth of the trunk and branches follow simple rule sets (branching, direction of growth, etc.) so that the tree optimizes the location it's in.  An oak tree planted next to a taller tree will grow in a direction that doesn't compete for sunlight with the taller tree.  There are many such complex systems (atmosphere, planetary orbits, stock market, economy, etc.) all with the following in common:
 
1) they are non-linear, non-deterministic, non-repeating
2) they are extremely sensitive to changes in initial conditions
3) they are impossible to forecast past a very short interval 
 
As far as your NFL Referee analogy, I see that as an example of enforcement of rules, not making rules or attempting to change results.
 
Mike Haluska Added Apr 14, 2017 - 10:29am
Fernando - your statement:
 
"The fact that governments have worked poorly in the past does not mean that they will continue to work poorly in the future."
 
Again implies that we need to find and appoint "Angels" to "supervise" the financial system.  My assertion is that ANY attempt - made with good or bad intentions - to manage/fine tune the economy will always produce results different than those expected along with bad unintentional consequences.  My reasons for this view are the 3 properties of Complex Systems:
 
1) they are non-linear, non-deterministic, non-repeating
2) they are extremely sensitive to changes in initial conditions
3) they are impossible to forecast past a very short interval 
 
They have proven themselves valid over and over again in reality because despite the laments of you and many like you, we have yet to find one of the "Angel" who is all-knowing, all-wise, all-benevolent enough to manage the economy.  It is only when we interfere with the economy in an attempt to get some arbitrary (more "fair") result that bad things like the Housing Market Collapse occur.  In that case, the market followed a simple rule (lend only to qualified people) which we broke - albeit for a "compassionate" reason (give poor people homes) and the result was NOT what we expected (lots of happy new home owners).
 
We need to EMBRACE the rules of complex systems - not try and invent ways around them. 
Mike Haluska Added Apr 14, 2017 - 10:37am
Note to "Climate Change" fans:
 
The post above explains why the climate computer forecast models are always so inaccurate to the point they are of no practical value.  The "best" models produce Actual to Forecast Accuracy of (+/-) 400%.  That's like the weatherman saying:
 
"Tomorrow's high temperature will be 88 degrees F with a range of (- 264 degrees F) to (440 degrees F)"
 
George N Romey Added Apr 14, 2017 - 10:45am
Again you don't understand the real genesis of the global economic meltdown. The subprime mortgages never threatened the system, it was all of CDOs, CDO squares, derivatives and other credit default swaps written to try to profit off the garbage loans. The smart people on Wall Street saw the future and either tried to protect themselves through various hedging means or profit off the insanity.  Suddenly when there wasn't enough cash to cover the bets the system imploded.
 
What you and many others do not understand is that the real savior wasn't the TARP bailout.  It was the Fed buying all of the garbage securities from the banks at face value not actual market value. How do you think firms like GS, Morgan Stanley and JP Morgan chase were back to barn burning profits by the middle of 2009? Less than one year after the initial implosion.
 
The financial sector was the great experiment in deregulation and self market rule.  There were characters like Bernie Madoff then Chairman of the NASDAQ working behind the scenes providing political pressure to repeal Glass Steagall and push out regulators. His contention at the time was that the market had become so sophisticated with advanced technology that puling off an illegal scheme was impossible.  (There is footage out there of him giving speeches to that effect.)  Well he certainly proved his own words wrong.
 
Instead of regurgitating the incorrect mantra of how the financial meltdown occurred I suggest you do some reading.  There are many, many good books out there that go into detail how the market failed.  You would also find that both parties have been complicit and allowing a runaway financial sector and today still pay homage to crony capitalism.
Mike Haluska Added Apr 14, 2017 - 12:54pm
George - if the CDO's etc. weren't full of bad loans created by government interference, they wouldn't have gone south to begin with!  You're talking about the "unintended consequences" and domino effect - which is predicted by Complexity Theory!!! 
 
As far as the scams, government bailouts, etc - that has nothing to do with the free market, that is just human nature. 
Mike Haluska Added Apr 14, 2017 - 12:59pm
George - going back to my oak tree example, the "housing market tree" was growing, flourishing and stable when it was operating under sound market rules (like "don't lend money to unqualified people").  It didn't require or desire any "human interference" to continue to grow and be successful. 
 
Along comes Dodd-Frank and the government injects rule changes not based on rational market based reasons but political reasons - and the rest is history.
Fernando Alcoforado Added Apr 14, 2017 - 5:46pm
Mike Haluska, a Complex System is a set of units that interact with each other. Complex systems have the characteristics described by you: 1) they are non-linear, nondeterministic, nonrepetitive; 2) are extremely sensitive to changes in the initial conditions; And, 3) they are impossible to predict past a very short interval. The ideas that must be taken into account in a basic chaotic system are three: 1) Attractors (defined as the set of characteristic behaviors for which a dynamic system evolved independently of its starting point); 2) Phase space (defined as the space formed by the generalized positions and their corresponding conjugate moments); And, 3) fractals (geometric object that can be divided into parts, each of which resembles the original object). An important feature not mentioned by you is that chaos or instability occurs when observing the behavior of the system variables represented in a three-dimensional graph would be a convergence toward something that is called a strange attractor. Strange attractors must have detailed structures. It is evident that if there are people supervising the evolution of the system, they would be able to identify the strange attractors and intervene in order to avoid their harmful consequences. It is clear from our discussion that while I think it is possible to work on a complex system to avoid its disastrous consequences, you think that it is impossible to act on the system.
 
Mike Haluska Added Apr 15, 2017 - 3:46pm
Fernando - your assertion:
 
"It is evident that if there are people supervising the evolution of the system, they would be able to identify the strange attractors and intervene in order to avoid their harmful consequences."
 
reeks with a desire to be authoritarian and increase self-importance. First of all, if a Free Market is undisturbed there are no "harmful consequences" - just billions of mutually beneficial trades.  
 
"People supervising the evolution of the system" ????  This represents the height of human arrogance and hubris.  Tell you what - choose any 3 body complex system and just TRY and "supervise" it!  Einstein was wrong about one thing . . . God DOES play dice with the Universe!  
Fernando Alcoforado Added Apr 15, 2017 - 9:41pm
Mike Haluska, History proves that the operation of a free market without control or regulation contributed to the economic depressions of 1873, 1929 and 2008 contrary to your opinion. It should not be forgotten that the depression of 1873 contributed to the outbreak of World War I and the depression of 1929 contributed to the advent of World War II. Therefore, Liberalism is bad for the economy and for society. If the crisis of 2008 did not lead to the advent of a new world war this can still happen as one of the solutions to overcome it. The existence of regulation of the financial system would prevent the occurrence of new economic depression and also of a new world conflict.
On what it means to solve the problem of n bodies, their solution would consist in obtaining an expression for the position of each body at an arbitrary instant, given the masses of the bodies and their positions and velocities at an initial instant to. In this case some classical solutions are known. Such solutions exist for three bodies of arbitrary masses, but with initial positions and velocities duly chosen.
I agree with your assertion that Einstein was wrong when in the debate about quantum mechanics and the uncertainty principle asked whether God played dice with the Universe.
Mike Haluska Added Apr 17, 2017 - 9:21am
Fernando - your assertion:
 
"On what it means to solve the problem of n bodies, their solution would consist in obtaining an expression for the position of each body at an arbitrary instant, given the masses of the bodies and their positions and velocities at an initial instant to."
 
is akin to "then a miracle occurs"! 
 
I refer you back to the axiom of "sensitivity to initial conditions".  The slightest change in initial conditions (location, velocity, mass, distance) creates drastic differences in output.  The compounding error of trillions of iterative calculations renders any meaningful multi-body model useless as a forecast of actual. 
Mike Haluska Added Apr 17, 2017 - 9:31am
Fernando - the recessions you speak of will occur regardless of whether or not there is a Free Market!  Crops fail, floods happen, wars break out, disease spreads, industries go bankrupt/obsolete, technology changes, etc.  These events are outside the "regulation" of any system and have a drastic effect on the economy!  I agree that proper intervention should occur if a crisis occurs (e.g. 1929) but even then the Federal Reserve did the wrong thing and let the Great Depression grow from a local failure (Bank of United States - a private bank in NYC) to a nationwide disaster.
 
Instead of keeping the banks solvent while depositors withdrew their money, the Federal Reserve did NOTHING and watched the crisis grow and spread all over the country.  This is why I have NO CONFIDENCE in the "Angels" you speak of.
Fernando Alcoforado Added Apr 17, 2017 - 11:19pm
Mike Haluska, supervision of a complex system requires to identify instability when it occurs, as well as its strange attractors, and to intervene to prevent system to collapse. Supercomputers are able to do trillions of iterative calculations by collaborating with system supervision to intervene when needed. If we follow its orientation of non-supervision and nonintervention over the system, it means accepting the collapse of the system with all the dire consequences.

Regulating a system becomes necessary to deal with unexpected events such as those you have cited. I disagree that they are outside the regulation. The regulation should consider all variables that interfere with system performance. It is perceived that you will understand that an appropriate intervention should occur if the crisis happens. The fact that the FED has acted poorly in the case of crises of 1929 and 2008 does not mean that regulation cannot be successful if we have an appropriate FED.
 


Mike Haluska Added Apr 18, 2017 - 2:17pm
This is where academics always go wrong.  Just because a computer is capable of making lots of calculations per second is insufficient.  The "sensitivity to changes in initial conditions" means that our imperfect measuring systems will yield small differences between measured and actual.  This small discrepancy will result in vastly different outcomes!
 
Just the time it takes to measure all the variables and enter them into system means that the earlier entered data points are already obsolete before they're used by the program! 
Mike Haluska Added Apr 18, 2017 - 2:27pm
As far as "Supervision" of complex systems goes, how do you know what to do to "correct" a problem if:
 
1) you can't be certain of the cause
2) you can't predict the actual outcome of ANY change
 
And by the way, your assertion that:
"If we follow its orientation of non-supervision and nonintervention over the system, it means accepting the collapse of the system with all the dire consequences."
 
begs the question - why is it a foregone conclusion that a complex system left un-interfered with is certain to collapse???  I can run a complex Mandelbrot program and it will continue ad infinitum without any interference whatsoever.  If I halt the program and change any numerical constant by a single digit in the 8th decimal place, guess what happens???
I'll tell you what happens - nobody knows for sure and it will certainly be drastically different from an un-interfered with program.
Fernando Alcoforado Added Apr 18, 2017 - 7:36pm
Mike Haluska, I totally disagree with your view that chaotic systems are not controllable. There are three types of systems: periodic, random, and chaotic. The periodic are those whose evolution is totally predictable. This is the case of the simple pendulum: knowing some parameters, one can know their position at each moment. Random systems evolve completely unpredictably. It is of little value to know its initial state: it is impossible to know what the subsequent state will be, as with the play of data, which can equally well result in six different numbers. Chaotic systems lie between these extremes of the vast territory that separates the periodicity of randomness. It is now known that chaotic phenomena are not only predictable to some extent - unlike random, totally unpredictable - as potentially controllable. Thus, chaos can be an ally that allows human beings to exercise their creativity more freely: potential applications of chaos control spread through such areas as the financial market, telecommunication, mechanical engineering, and genetics.
In March 1990, researchers at the University of Maryland revealed the possibility of controlling chaos. The impact of the idea, published by Physical Review Letters, was significant. Within a few months, experimental groups from other institutions moved from idea to practice in various fields. The development of the chaotic dynamics allows something considered impossible: to predict the behavior of stock market trading. The reliability of the program carried out by the USP (University of São Paulo) team in Brazil extends over a period of up to two months. The swings in the stock market are almost on the edge of randomness. They are totally chaotic or super chaotic. It is a turbulent system with many variables. It is impossible to know all variables, but on the whole its recurrence is typical of a system with few variables. For this reason, physicists do not want to determine what the value of each individual action will be, but they can predict how long the system as a whole needs to return to its current state.

Researchers at the University of California have demonstrated that chaos control can be used to target cardiac activity. Through a drug, they induced chaotic beating in rabbit hearts and, with small electrical impulses, brought their hearts back to normal periodic states, manipulating this condition: at their command, hearts beat faster or slower. One of the possibilities opened by the experiment is to implant a device near the heart to detect any anomaly and bring it back to the periodic beating.
Mike Haluska Added Apr 19, 2017 - 11:18am
Fernando - you state chaotic systems are controllable than give examples of somebody's 27 year old paper that "maybe it's possible" and an example of induced erratic heartbeat in a bunny rabbit.  If you dig a little further you'll find that heartbeats are anything BUT stable and in fact inherently unstable.  Attempts to make heartbeats "stable" have the same effect as "gimble lock" and actually induce massive heart failure!!!
 
Your other example involves forecasting complex systems (stock market) which is vastly different (and still impossible for long term) from controlling a complex system!
 
Physicists HATE 2 things:
 
1) Turbulence
2) Non-Linear, Non-Deterministic Systems
 
because they can't find a reliable way to represent them mathematically and thus derive physical laws that are repeatable.
Fernando Alcoforado Added Apr 19, 2017 - 7:45pm
Dear Mike Haluska, it has been a pleasure to discuss with you about such relevant issue related to Chaos Theory. Unfortunately, I could not convince you and vice versa. Anyway, I will continue the study of Chaos in the light of your intelligent observations. Perhaps, I will modify my thinking about Chaos with the evolution of time taking into account your observations.