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.