The economy – who can we believe?

Nobody really knows how we got into the financial mess we’re in, or how to get out of it.  Nobody knows what the stock market will do this week, next week, next month.  No less a figure than Warren Buffett said in an Op Ed piece in the New York Times last week “I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now.” Yet we have an abundance of experts: economists, economics editors in the media, and common or garden columnists giving us their predictions, their analyses, their expert opinions about what’s wrong, and their confident critiques about the ‘remedy’. That they don’t really understand what they’re talking about seems to be no barrier.  They are joined by a host of letter writers to the editors and online bloggers who have a variety of simple diagnoses and remedies.  Their assessments and solutions are often quite different, and sometimes diametrically opposed.  Why?  Why the disagreement?  Why the confusion? 

This piece puts forward the proposition that it is the type of thinking most commentators use that underlies the confusion that characterizes contemporary comment.

Science is still bedevilled by convergent thinking and the reductionist approach to understanding phenomena.  Medicine has been in thrall to this for centuries, vainly looking for the single cause and the one cure.  Nowadays, particularly in the face of the growing burden of chronic disease, it is recognized that almost always there are multiple causes, genetic, environmental, physical, social, psychological, and so on, and almost always there are multiple remedies.  This change in thinking has been brought about through the adoption of systems theory as an underlying strategy.

Systems theory is the study of the nature of complex systems in nature, society, and science. More specifically, it is a framework by which one can analyse and describe any group of objects that work in concert to produce some result. This could be a single organism, any organization or society, or any electro-mechanical or informational device. Systems theory first originated in biology in the 1920s out of the need to explain the interrelatedness of organisms in ecosystems.  It refers to the science of systems that resulted from Ludwig von Bertalanffy's General Systems Theory published in 1929.  Since Descartes, the ‘scientific method’ had progressed under two related assumptions – a system could be broken down into its individual components so that each component could be analysed as an independent entity, and the components could be added in a linear fashion to describe the totality of the system. Von Bertalanffy proposed that both assumptions were wrong.

Stated in its simplest terms, systems theory acknowledges the interconnectedness of everything to everything else and proposes that change in one part of the system causes changes in all other parts.  It therefore refutes linear cause-effect thinking.

The application of systems thinking to economics, and contemporaneously to the global financial crisis, has the capacity to bring some glimmer of clarity to our deliberations. [more]

Dr Doug Turek came close to explaining how we got to where we are on ABC Melbourne 774 radio last Saturday when he described the multiplicity of factors that had combined and interacted to produce the evolving situation, which even as we breathe, continues unabated.  We need more of this type of analysis, which although difficult to grasp, at least avoids the simplistic ego-fuelled accounts so often dished up to us by the ‘experts’.

Chaos theory too may have an explanatory role.  Chaos theory describes the behaviour of dynamic systems that are highly sensitive to initial conditions (referred to as the ‘butterfly effect’*). As a result of this sensitivity, which manifests itself as an exponential growth of perturbations in the initial conditions, the behaviour of chaotic systems appears to be random. Chaotic behaviour is observed in natural systems, such as the weather, and, if one can judge from contemporary events, applies also to economic systems.  That the collapse of the sub-prime market in the US could result in such global financial turmoil points to a butterfly effect.

So what should our commentators do? 

First they should desist from simplistic analyses.  Let them state the facts, and if they want to hazard a guess about their meaning, let them state clearly that it is just their guess and capable of being quite wrong.

Next let them desist from giving their ‘expert’ and often dogmatic commentary on the actions being taken by Government, commerce and industry to counter the situation.  For example, many columnists have said with great authority that the $14,000 home buyers grant will only inflate house prices and is therefore a bad move.  Is that so?  Is history a great guide now that circumstances are so different?  Have they considered and weighed each factor in this move and reached a dynamic appraisal, or are they just shooting off their mouth without thinking too much.  Others argue the opposite to be true.  They can’t all be right.

Then let them desist from demanding that they be supplied with the facts underlying the Government’s actions, as if knowing this would enable them to figure out and debate the merit of them.  They may find that the ‘facts’ are so nebulous and so continually changing as to render them unsuitable for linear cause-effect thinking and logical debate.  The Opposition persists in its clamour for the ’facts’.  This is understandable as a political ploy, but not sustainable if, as they claim, the rationale underlying the $10.4 billion package should be the subject of a parliamentary debate.  Has Malcolm Turnbull thought through the likely nature of the factors influencing the Government’s actions, the level of uncertainty surrounding them, and the likelihood of the various actions bearing the anticipated fruit?  And does he think that suitable for meaningful debate, debate that will build up rather than erode public confidence? Has he considered that the Government’s actions are likely the outcome of a measured value judgement of key ministers and advisers based on an appraisal of a continually evolving situation, and on their prediction of future events?

Finally, commentators would do us all a service if they desisted from making dogmatic, egocentric comments, and giving gratuitous advice based on their manifest ignorance and inability to comprehend the dynamics of the complex system that is our contemporary financial world, and leave it to those elected to make the momentous decisions needed to minimize its effect on our nation.  If politicians get it wrong they will pay the price; if the commentators get it wrong, they will of course continue on their merry way.

Who do you want to believe?

* Butterfly effect refers to the idea that a butterfly's wings flapping somewhere in the world might create tiny changes in the atmosphere that may ultimately alter the path of a tornado elsewhere in the world.

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janice

20/10/2008Everybody and his dog are ‘experts’ these days. Then there are those who seek opinions every whichway until one is found that agrees with their own line of thinking. Politicians mostly don’t have opinions of their own, or if they do they suppress them in favour of the party dogma. It is difficult to find a media commentator who isn’t pushing his/her own agenda or the politics he/she supports. No longer is there unbiased reporting of facts where the reader is left to form his/her own opinion from the facts presented. There is often blatant and intended misinterpretation of statements made by politicians, especially by labor politicians, but others as well if it suits the bias of the writer. There needs to be some reforms made to the operations of the 4th Estate. A new code of ethics wouldn’t go astray and journos need to be required to nominate the sources to go with the analysis and be required to state if the opinions expressed are personal. In matters of national importance, there should be strict guidelines imposed on opinion pieces so that there is responsibility and accountability to ensure there is the least possible confusion placed in the community. ‘Freedom of the press’ is okay but the press ought not to have the freedom to distort the facts, undermine a government or confuse the public. The current confusion over the global financial crisis and it’s causes is widespread and not fully understood by anyone. The solution is complex, hence the getting together of world leaders to find a way out of the mess. It seems they have recognised that too much deregulation is part of the equation and that governments must go back to having a finger firmly on the pulse. It is human nature for the strong to prey on the weak, to prey on the financially ignorant in order to enrich themselves so it is the responsibility of governments to put in place the necessary rules and regulations to curb this tendency. Malcolm Turnbull sees himself as an ‘expert’ in the private business world and is pushing this as his main credential to win the top job of PM of Australia. His ambition to govern is over-riding any sense of responsibility he may have and, it seems, he thinks that if he adds to the confusion and even causes the nation to suffer longer it doesn’t matter as the end will justify the means. He is calling for 'facts' simply because he is looking for more ways he might use to undermine the decisions made by the government.

Bushfire Bill

20/10/2008While the commentariat and the Opposition (basically the same thing anyway) clamour for "facts" and claim inconsistency on the part of the government, they don't realise how their [i]own[/i] meme has changed. Just a few weeks ago the Rudd government was "process obsessed". They "hit the ground reviewing", to use Abbott's phrasing. They couldn't make a decision if their lives depended on it. Well, now they are making decisions, and the new Opposition meme is that the government is going off half-cocked, using the back of an envelope instead of... wait for it... proper process. Rainmaker Turnbull is playing the "Goldilocks" role: the government is "too fast", or "too slow", but never "just right". Of course if Truffles had been in control - which he wasn't - things would have been perfect. Why, Glenn Milne even told us breathlessly today that a "senior banking exceutive" (was it Arthur Sinodinis, who Milne mentioned works for the NAB?) had begged - at a private dinner, of course - Malcolm not to offer any more advice to Rudd... because Rudd would be sure to up the ante and, in doing so, ruin it for everyone... again. The truth is that the Libs very deliberately left Turnbull out in the cold, preferring to wait (like Godot) for their Messiah Costello to come back to the fold and lead them to the Promised Land. We even had Cozzie the other day wistfully wishing he'd stepped up and taken on the leadership. The problem being that to do what Rudd is doing (rather than suggesting it) takes guts. As Opposition Leader, or PM (if the Coalition had won the election) Costello would have been all alone: a position he has never voluntarily taken on. He likes to have someone - anyone - to blame for when things go wrong. But when you're the leader, the buck stops with you. So instead we had 9 months of vacillation and back-stabbing from the political geniuses of the Liberal Right to try to keep Turnbull out. A wasted opportunity. Malcolm's predictions fell on deaf ears, not only of the voters, but of his own party. What a rabble! In any case, I take with a grain of salt any archival quote attributed to Turnbull. He tends to cover both sides of the equation pretty well. There'll always be something someone can dredge up to prove him right. It's the way the Rainmaker Scam works: tip every horse in the race and someone will think you're a genius. Hold onto them like glue: they're your mugs. But your point re. commentators is a good one. Remember last year when the Indigenous Intervention was sprung on us? Within hours the likes of Shanahan, Milne, Kelly, Uncle Tom Cobbley and All were instant experts on the problems confronting Aboriginal people in the Northern Terrirory. They wrote with such authority, such wisdom, such passion and empathy, such praise for what Howard was doing. Most of them wouldn't have met half a dozen aboriginal people in situ in their miserable lives. They simply fed off each other, trying to make out however, that their commentary was the result of original research. Similarly we come to the present situation: the Global Fiscal Crisis. Most people - and this would include political journalists - don't know much more abut fiscal matters than what Alan Cohler (or one of his commercial cousins) tells them on the 7pm news. Yet suddenly they're instant experts, confidently predicting what will happen. The only reason anyone reads them is that there is little alternative available on the 8.10 commuter train to the City from Hornsby. Their understanding is shallow, yet they opine like gurus: indigenous Intervention meets Wall St. Take Shanahan, for example. He went with Rudd to New York a few weeks ago, yet his sole contribution to the story was an off-the-cuff audio piece telling us how useless the trip was, and how Rudd was more concerned with getting back for the AFL Grand Final as he "bolted" to the airport after addressing the UN. Maybe the politcians Shanahan knows and adores are like this, but the public didn't buy it where Rudd was concerned. Rudd's poll ratings went up as a result of the trip, with specific approval for both the original reason for it (to lobby for reprsentation onthe Security Council) and the adaptive reason: to eyeball some of the world's most influential bankers and economic politicians and to see if there was fear in their eyes... which there was. Rudd came back convinced he should act fast. The economic stimulus package was a direct result of the terror Rudd saw on the faces of world leaders who were facing the unedifying prospect of their whole, precious capitalistic system melting down. You can only get that conviction by [i]smelling[/i] fear, something emails and phone calls (the opinionistas' preferred method of communication... for [i]Labor[/i] Prime Ministers at any rate) have yet to make possible. Paradoxically (well, not really, when you consider who was involved) a few weeks later they were criticising Rudd for doing exactly what they told him to do: picking up the phone. Apparently even this was too presumptuous for an Australian PM to do. Suddenly Rudd was a "celebrity junkie", the "mouse that roared" etc. etc. big-noting himself by "trumpeting" (a favorite commentariat word) the fact that he'd spoken to Bush, Brown and that other bloke whose name begins with a "B". But that was a distraction. Pretty soon they were back onto their pet theme: the world is ending. Not that they knew for sure, but global apocalypse seems a pretty safe bet when everyone else is predicting it. In a crisis of confidence, [i]confidence[/i] is what is needed to be maintained. Eff that! We want to see Rudd go down a few points in the polls and make out that we're tough guys, who know the score. It's worth making more miserable the lives of The Mob to try that one on. But it hasn't worked. Today's Neilsen poll shows Rudd triumphing for his measured stance. But the opinionaters need something to bag him with. So, now the crisis is that Rudd is holding back on the formal figures he was given by Treasury. It's little matter that the figures are probably half-baked and wrong, or partly wrong, or incomplete. The forces of darkness want to see them NOW! If they're gloomy they might add to the general malaise the country is going through, which is - in an almost treasonable way (they shoot economic traitors in China) - a quick method of scoring cheap political points. Hartcher wrote this morning that Rudd was performing brilliantly, but that the crisis would probably bring Rudd down. Milne yesterday was more generous. He wrote that Rudd's so-far good response might, [i]just might[/i] rescue his government. Like small dogs with large bones, they don't give up a collective opinion easily. The fact is that, as Ad astra wites, no-one really knows what's going on. We're in a chaos situation right now. The old rules no longer apply. [i]No[/i] rules apply, for that matter. Yet the commentators keep on trotting out column after column as if they (or their political patrons) are the only ones who really have the skinny on the GFC. This morning the share market went up "unexpectedly", that is, against the hopes of the gloom-and-doomers who seem to have vested interests in misery. All they see is the public's supposed fascination with watching traffic accidents (as long as they're not part of it). As the economic lanes ramp down to a crawl so everyone can have a gawk, it's only the kids in the back seat who ask, "What are we looking at? Why are we going so slow?" It's time a few adults, [i]responsible[/i] adults asked the same question.

Ad astra reply

20/10/2008Great comments janice and Bushfire Bill. Apropos the Glenn Milne article in today’s issue of [i]The Australian - Hairy-chested PM bids up Malcolm Turnbull[/i], he seems to be suggesting that the PM and Opposition Leader are playing political poker with the nation’s fortunes, and that the ‘hairy-chested’ Kevin Rudd will always raise Malcolm Turnbull’s bid, and in the case of the ‘economic stimulus package’, Rudd didn’t just outbid Turnbull, he doubled the bid. Some poker player! If that is what he’s saying, he’s accusing Rudd of grossly irresponsible and reprehensible behaviour. If that’s what he feels, he should show us how ‘hairy-chested’ he is by saying this up-front, instead of hiding behind metaphorical language. He supports Turnbull’s demand for the ’facts’ underpinning the size and nature of the stimulus package so that it can be the subject of a parliamentary debate. Has Milne considered the possibility that there are few if any hard facts, and that what facts there are, are in a state of flux, so much so that any debate about them would be meaningless as parliamentarians try to comprehend the ever-changing clouds. Malcolm Farr seems to have a better take on this in his article in today’s issue of [i]The Daily Telegraph - Quick draw Rudd or twitchy on trigger[/i] http://blogs.news.com.au/dailytelegraph/malcolmfarr/index.php/dailytelegraph/comments/quick_draw_rudd_or_twitchy_on_trigger/. He says: “There is no precise formula of economic indicators which trigger such a huge stimulus package. There is no strict science, there are no precedents. It is a matter of dealing with a peril which has yet to arrive.” Exactly.

janice

21/10/2008Where do reports, such as that run by the Oz this morning that the RBA is concerned about the Rudd's unlimited bank deposit guarantee? The 'report' is nowhere to be found in the Oz this afternoon after the RBA have stated it supports the governments initiative? Naturally Truffles and co have been yelling their heads off that Rudd and Swan have mislead parliament and so on. No doubt the Oz and its reporter won't be bothered apologising for running an untrue report, but really, shouldn't they be forced to name the source of the 'facts' presented?

Ad astra reply

21/10/2008janice, you should have seen Question Time this afternoon, where Rudd relentlessly blasted Turnbull, Bishop and Hockey into stunned speechlessness. No doubt it will be on ABC News. It was a spectacular demolition, in which he repudiated any suggestion that he had acted against the advice of the Reserve Bank, and castigated Hockey and Turnbull for syggesting that Ken Henry, who had transmitted the opinions of the Reserve Bank and the regulators to Rudd and his ministers as they met to make their guarantee decisions, had misrepresented the advice they gave. He turned an attack on Henry into an attack on them. The whole episode looks like another Oz beat-up, so readily seized upon by an Opposition desperate for relevance. Like you, I don't expect an apology, however mild, from the Oz.

janice

21/10/2008Ad Astra, I'm listening to it on ABCs PM at the moment. Pity I missed QT this afternoon. It seems Truffles et al have a lot of egg on their faces.
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