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Friday, September 19, 2008
Economics/Business ... Science ...

Chaos theory has been in the public eye for about 10 or 15 years now; James Gleick’s book about the development of chaos theory (Chaos: Making a New Science) was first published in 1988. You still don’t hear people at NFL tailgate parties discussing the finer points of strange attractors, period doubling, fractals or sensitivity to initial conditions; but these concepts have escaped the confines of mathematical textbooks and are regularly discussed in popular periodicals and “books for the layman” on scientific topics. In a nutshell, chaos theory seeks to find patterns in the midst of midst of messy, “real world” phenomenon, things that seem to vary without rhyme or reason. E.g. the day-to-day ups and downs of the stock market and the presidential election polls.

One of the most recent “chaos concepts” to free itself from the ivory tower is called “self-organized criticality”. Self-organized criticality is hard to explain at first; the best way to wrap your mind around it is through the classic example of a sand pile having a steady flow of sand particles falling from a tank or conveyor belt above. The pile of sand gets taller and taller as the sand particles pile up; but not in a steady fashion. Every now and then there are “little avalanches”, when the pile suddenly flattens out a bit. The side angle of the sandpile gets too steep and the internal friction holding the grains of sand together suddenly gives way in a shock wave, causing a lot of grains to lose their grip and run down towards the ground all at once. But the sand keeps on pouring down from the top, and a new sand cone starts building up again, its sidewalls getting steeper and steeper until another avalanche takes place.

The interesting thing is that these avalanches do not occur with any regularity. Sometimes the sand builds way up and a big avalanche takes place. Sometimes a number of little avalanches happen before the new cone tower can get too high. There doesn’t seem to be much rhyme or reason to how this works. But scientists have been studying and recording these avalanche patterns, and have found some interesting things. Conceptually, the falling sand is “self-organizing” itself into a “state” (i.e., the sand pile) that is “critical”, i.e. a state where things can suddenly change. Those sudden changes (i.e., the sand slides / mini-avalanches) seem to occur randomly because they are highly dependent on initial conditions; if a few grains of sand fall a little more to the left or right, it can make a big difference as to whether a tall pile and a big avalanche follows, or a short pile with small, frequent sand-slides takes place. This is much like the famous “butterfly effect” (e.g., a butterfly flapping a certain way over Beijing can trigger a hurricane a month later); i.e., sensitivity to initial conditions.

A further refinement to the sandpile example is needed in order to better understand the concept, so that you can apply it to other “shifty” things that happen in our world. So far I have led you to imagine a sand pile on a wide, flat surface, like a big parking lot. But now let’s imagine that the sandpile is on a plate, maybe three or four feet wide. The plate is up on stilts, so that when the sand avalanches happen, the sand falls off the plate and away from the pile. What’s interesting about this is that over longer periods of time, the arrangement assumes a “steady state”. Sand pours in steadily from the top, piles up, and then starts sliding off the plate every so often. When you average it out after an hour or so, just about as much sand is pouring into the sandpile as is leaving it over the edges of the plate. But there are still big differences between the mostly steady, constant rate at which sand pours down onto the pile, and the intermittent way that sand pours off the edges the pile. You can go 20 or 30 seconds, maybe a minute, and no sand leaves the pile; then the avalanche happens and a lot of sand leaves all at once. Over time, there are many little slides happening frequently and a handful of bigger slides that require some build-up. But every now and then there’s a “mother of all slides” that follows a long period without any slides. That’s the pattern that the chaos scientists have documented in their studies of “self-organized criticality”.

So how does this apply to the bigger world that we humans live in? Well, the most obvious example that I can think of is the current state of the US economy, with all the big financial institution failures and disruptions of late. Since the 1930’s, our financial system has been fairly stable. There have been a lot of little “slides”, e.g. periods of credit tightening when bank profits were down and risks were higher. And there have been a handful of “medium slides”, e.g. the savings and loan crisis in the 1980s, the Russian insolvency in the 1990s and the Enron and WorldCom bankruptcies in the early 2000’s. But over the past 6 or 7 years, things have seemed absolutely peachy in finance. Interest rates were low, and money was available everywhere. All you needed to get a mortgage was a pulse. Credit cards were being handed out like candy. Everyone thought that the old days of periodic credit tightenings were gone and forgotten.

Well, guess what. The sand was still piling up. We just happened to be in one of those “big slide” preludes, where nothing bad happens for a relatively long time (i.e., no metaphorical avalanches). The finance people then start writing articles and books about how things have changed fundamentally, how the worries of the past can now be forgotten, how growth rates and wealth accumulation has no more limit! Real estate, the stock market, currency trading, whatever, are heading for the moon! No more downturns!

Until it happens. And then it happens BIG. Well, luckily our own economic “sandpile” does in fact have somebody watching over it. The US Federal Reserve and Treasury are trying to keep things from running down too quickly. And the government will impose some regulations that will try to keep the “sand pile” from building up too high in the future; some limits on credit expansion may slow the economy up in the short run, but avoid the “big avalanches” and the damage that they cause in the long run.

But for now, there is still too much sand on the economic plate. Some of it has to go; the metaphoric translation is that our economy is in for a slowdown, our average wealth levels are not going to keep increasing. They may even decrease for a while. Eventually our economy can, and hopefully will, get back to sustainable growth. But for now, it’s a question of spreading out the pain and disruption over time, and doing it fairly (i.e., since a lot of the clean-up cost is going to be paid for by the taxpayer, and it was mostly rich taxpayers who were guiding the financial system into uncharted territory in search of huge profits, it seems fair that the rich bear most of the new tax burden).

But overall, the poor are going to remain poor and the rich are going to remain rich. And the economic sand pile will still have its random build-ups and set-backs over the years. That’s the price we pay for an admittedly vigorous and highly productive capitalist system. Arguably, a greater portion of the populace is at least somewhat better off in our system than under a planned, highly-controlled socialism-based economy. Let’s hope, anyway.

◊   posted by Jim G @ 9:27 pm      

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