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A system doomed to fail
The second are systems which are characterized by disorganized complexity. These may consist of huge numbers of agents or variables, and their interactions cannot be described by simple equations; yet the overall system is well-described statistically through averages and can be described as being stochastic. Such systems are typically characterized by a stable equilibrium, provided there are no external shocks to the system. They are incapable of generating internal shocks or surprises. For example, you might consider the distribution of air molecules in a room. You may not be able to predict the motion of any particular air molecule, but you can be reasonable certain that the global population won’t do anything unexpected (like all move into one side of the room leaving a vacuum on the other side).
The third type of system is characterized by organized complexity. As the systems above, one may consist of many variables or agents, each of which is simple, but the system’s behaviour does not lend itself to statistical description because instead of the activities of each component dissolving into a background equilibrium, large-scale (even global scale) structure “emerges” instead of seething chaos. Along with these “emergent properties”, common features of such a system include multiple equilibria, adaptive behaviour, and feedbacks. There is no simple way to describe its behaviour, as much of the system’s history is bound up in its behaviour (what economists call “long memory”).
Complex systems, for all their unpredictability are remarkably resilient. The resilience arises from the way in which this type of system interacts with its environment–through the individual actions of its simple components, the system is able to gather information about its environment and modify its operations to adapt. Yet this adaptation and evolution all occur in the absence of central control.
The above descriptions–and characterizations of three types of systems–go back to 1948. Unfortunately it appears that Dr. Weaver was too optimistic when he recommended science develop an understanding of the third type of system “over the next 50 years”. Here we are 65 years later and we have made only basic improvements in our understanding of such systems.
What has gone wrong? I think it is partly due to the limitations of the Newtonian paradigm on which science has rested over the past few hundred years.
Back to Weaver. He asks,
How can currency be wisely and effectively stabilized? To what extent is it safe to depend on the free interplay of such forces as supply and demand? To what extent must systems of economic control be employed to prevent the wide swings from prosperity to depression? These are also obviously complex problems, and they too involve analyzing systems which are organic wholes, with their parts in close interrelation.
The Fed has answered.
Sixty-five years ago, economics was known to be a complex, organized system. Yet today, the Fed continues to set policy as if the economy were a stochastic system that could be sledgehammered into whatever equilibrium state is deemed politically expedient. I would further argue that the Fed has not managed to succeed even in hammering the economy into a desirable equilibrium, but rather has mastered the ability to create artificial statistics to “justify” its actions.
The system is doomed to fail, because the resilience of natural complex systems requires freedom of action for its individual components. We do not observe resilient complex systems with central control. Yet central control is the dominant ideology of our present political and economic systems. Total control, with a vanishingly thin veneer of democracy, ephemeral as the morning dew.
Overnight China reported disappointing export data, missing expectations of +5%. The gvoernment explained this on the basis that they were losing their competitive edge since the Yuan has strengthened to 20 year highs but perhaps most telling is that fact that, as the FT reports, China became the world’s biggest trader in goods for the first time last year – overtaking the US for all of 2013. We suspect the powers that be are starting to get nervous as this comes soon after China’s surge to become the world’s largest oil importer marking a notable shift in the world’s most powerful nations – as trade with the rest of Asia and increasing flows with the Middle East represent a shift in power away from the US.
There is one exception.. of course – net imports with Japan continues its 3 year trend lower as tensions between the two nations sour further.
Via The FT,
The total value of China’s imports and exports in 2013 was $4.16tn, a 7.6 per cent increase from a year earlier on a renminbi-adjusted basis, according to figures released by the Chinese government on Friday.
The US will release its full-year figures in February but its total imports and exports of goods amounted to $3.57tn in the 11 months from January to November 2013, making it a virtual certainty that China is now the world’s biggest goods trading nation.
Some historians argue China was the world’s largest trading nation during the Qing dynasty – which lasted from 1644-1912 – despite the ambivalence of Chinese emperors toward foreign trade.
“This is a landmark milestone for our nation’s foreign trade development,” said Zheng Yuesheng, chief statistician of the customs administration.
Mr Zheng said he expected a stronger showing in 2014, thanks to an improving world economy, the impact of structural reforms in China and a lowered outlook for commodity prices, which would help offset rising costs of labour and financing for Chinese manufacturers.
One can only note that nothing lasts forver…
However, as always with China, there is a caveat…
The Chinese government itself has expressed some concern about Chinese trade data in late 2012 and early 2013. Statistics officials have acknowledged that during that period export numbers in particular were distorted by a huge amount of fake invoicing by companies and individuals evading China’s strict capital controls to move cash in and particularly out of the country.
That will probably lower growth figures for the first months of this year.
“We should be prepared for a period of low headline year-on-year export growth due largely to the faked exports data between December 2012 and April 2013,” said Lu Ting, China economist at Bank of America Merrill Lynch.