Published on February 28th, 2014 |
by Jack Cowell
Image © www.economist.com
Ignorance is strength – accepting unpredictability and the futility of coercion in financial markets
Impotence can sometimes have a surprising emancipatory quality. Similarly, the illusion of agency can have dire consequences. This is a fact embodied in the current discussions among 11 EU nations of a financial transaction tax (FTT); a levy which will be payable on all trades in equity and debt markets, foreign exchange, and derivative markets. The underlying logic of the tariff is that it will somehow prevent the recurrance of volatile, aggressively speculative trading which many groups blame for the financial crisis of 2008.
The validity of arguments suggesting that savings will be hurt or those which suggest that the tax will primarily hurt those who “caused the crash” will not be discussed here, for fear of being drawn into the headless witch-hunt that is the remit banker-bashing crowd. It is the assumption of agency which underwirtes this tax which this author wishes to discuss. Understanding the inherent degree of chaos in any system which seeks to use monetary transactions to create wealth will show that the tax is entirely impotent to it’s purpose, and as such is nothing but a drain on efficiency and a poor reallocation of enormous*1.
In 1963 Edward Lorenz published a paper called Deterministic Non-periodic Flow*2. In it he detailed his findings on the implications which different starting values, or initial conditions, have on future outcomes when put through a differential equation. Entering figures representing the weather at a given point would produce one model of weather over the next few days or so. However, Lorenz found that when slightly altered figures are entered, the new model initially tracks the first , then diverges at an ever increasing rate until the two bear no resemblance at all. This is sometimes referred to as the Butterfly effect, and it demonstrates how vociferous the multiplication of errors can be in a complex system. This paper would go largely unrecognised for quite some time.
Ecologists played around with the same logistical difference equation used by Lorenz when seeking to map animal populations in a given area. The results seemed to be fluctuating around some equilibrium point which the ecologists took to be their quarry. Once again however, the Lorenzian nature of a complex system such as population expansion served to show how sensitive such systems were on initial conditions. Robert May turned his attention to the chaotic nature of biological populations*2; a subject which one may liken to the study of economic growth, if one views money as a population.
May questioned what would happen when a population’s propensity towards boom and bust passed a critical point. Trying different parameters shows one kind of regularity; when the parameters are low, the system is in a steady state. When the parameters are large, the steady state would break apart at increasing rates. Even higher paramteres produced unpredictable chaos. While the analogy between capitalism and populations (in May’s original study, fish populations) may be tenuous, both systems inherently go through periods of boom and bust, and as a theoretical device it works well. It is the size of the initial population, or the initial size of the economy, which dictates the movement of the population over time. Beyond a certain point, the future of the system becomes unpredictable, with a propensity towards cycles of boom and bust, but without any regularity between cycles. Such is the nature of unrestrained capitalism. But what of trying to reign in this unfettered production of wealth?
Worse still are the results seen when seemingly predictable attempts at altering the course of a dynamic, complex system are pursued. Looking at the supposed regular and irregular periods of rise and decline in diseases, May looked at what would happen if the system were given a little kick, like a period of inoculation or increased awareness, etc, which could be analogous to government intervention in the supply of money, or the ease with which money moves around. The results were what one would expect if one grasped fully just how complex such systems are. The system may change in overall direction, which any observer will see as smooth, but it will be fraught with oscillations, as numerous as they are chaotic.
May himself wrote in his 1976 review paper in Nature; “Not only in research, but also in the everyday world of politics and economics, we would all be better off if more people realised that simple non-linear systems do not necessarily possess simply dynamical properties“. This is as much of a warning to the Robin Hood tax activists as it is to governments.
Chaos reigns supreme, and only by recognising our impotence in removing it can we begin to work with it. One must always bear in mind that capitalism is a system which necessarily produces boom and bust. By acknowledging that the operations of enormous markets and the causes of boom and bust can go beyond our comprehension, one can plainly see that it is not in our interests to hinder efficient movements of capital. Nor is it wise to drain the capital pool of those that drive the economy and create jobs while the conditions are right. Doing so will ensure that fluctuations in the “population” become increasingly painful. Let us make Robert May proud, and embrace our insignificance in the face of international markets and global psychology.
*1 – . According to the Guardian, the tax could siphen off £35bn a year.
*2 – Journal of Atmospheric Science, 20, pp. 130-41
*3 – “Simple Mathematical Models with very Complicated Dynamics” Nature 261, 1976.
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