Financial Quake

Given the impact many of the financial crises have had, several econophysicists have tried to understand them in the same way as geophysicists view and study earthquakes.  In essence these econophysicists are seeking to model financial tremors in order to predict and prepare for future seismic financial quakes.

Not surprisingly they are finding that financial quakes are far less predictable than earthquakes.  Econophysicists recognize that “the real world is a complex system that is constantly adapting.”  However, one reason not mentioned for the unpredictability is the fact that the financial system is not a phenomenon of nature.  The economic system, of which the financial system is a part, is a human activity system and not a physical system of nature.  Yes some people made it up—it is (literally) man-made!

Because we can’t change the essential structure of planet earth—though we are doing our best to make it uninhabitable—we must learn more about its natural movements so that we can create predictive models to afford preparation to minimize effects of earthquakes.  Planet earth’s gyrations are a given and we must learn more about them in order to live with them.  Thus, it is important that seismologist strive to improve understanding of the movement of the earth’s structure so we can better prepare and thus minimize the devastation from the next earthquake.

However, the same thinking doesn’t make much sense in regards to the economic system and its associated financial system.  We can change the essential structure of the economy.  Unlike our universe, it is not as it is because of physical parameters/constants.  In short, it need not be as it is; it can be otherwise.  We cannot only remake it, we can make it far more helpful to everyone.

Given this it would seem a far better use of our intellect to recreate our economic system than to let it remain as it is and try to prepare for the next seismic economic blast.  What would be better to rid our house of damaging pests or try to predict when they will play havoc so we can add buffers in the house to minimize the damage?

We can fundamentally change the system obviating the need for such buffers. Why not simply change the economic system—and correspondingly its financial system—so we need not rely on creating buffers to minimize the devastation from a misaligned system?

2 thoughts on “Financial Quake

  1. Great post, Gregory! As a life-long student of the social sciences, I have always found it a wonder–when I wasn’t being irritated by it–that the math jocks spent as much time as they did treating the man-made conventions that drive our social and economic behavior as it they were laws of nature. There is an inherent conservative bias in models that are built in this spirit. By treating existing conventions as if they were immutable laws of nature, they exempt them from scientific inquiry and rational criticism. I think you hit the very essence of this approach when, in your book, “It’s the EconoME, Stupid,” you drilled into Adam Smith’s notion that “labor is irksome.” I especially liked the part where you asked Smith why he wrote his tome, “The Wealth of Nations,” if labor was so irksome.

    The same econophysicists who attempt to predict seismic financial events will look at what has happened to the distribution of income over the past thirty years and see an “inevitable” exponential pattern. The higher the income bracket, the more of the growth that income bracket captured. The bottom quintile, by the way, has actually lost 1% in real income over that time period, while the income accruing to the top 5% has grown by 81%. I bet the folks in the bottom quintile would be really happy to know that the sum total of social wealth has greatly increased over that time period.

  2. . . .I almost forgot to add: If they knew that it was mathematically inevitable, that God had made the universe this way, they wouldn’t be likely to complain about the distribution of wealth.

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