Michael Battalio

Friday, September 18, 2015

Discussions on Wealth (part 11): Chapter 5: discussion

This discussion on wealth is an offshoot of  Serious Conversations parts 53 and 54.  We are considering the book  The Origin of Wealth by Eric D. Beinhocker.  (I do not profit from clicks).  (Ed.:  we will be taking the general format of outlining the major points of the chapter and then discussing what we believe to be important or intriguing points.) 

Chapter 5 explains how economies are chaotic, nonlinear dynamic systems.  That is, they depend on initial conditions, do not repeat, and are difficult to model.  A simple example describing boom and bust cycles is elucidated.  The inventory of a product is a short-term solution to increased demand; used production capacity is a middle-term solution; new factories are a long-term solution.  Boom and bust cycles exist because of the time lag between the short, middle, and long-term solutions to increased demand.

This entry is going to diverge a bit from wealth and into weather forecasting, which is another chaotic system.  I find it interesting that the author mentions James Gleick’s Chaos on the first page.  It’s a very good book, as it describes the development of chaos as a mathematical entity.
In the first section I’m struck by how starkly he has to lay out simple concepts like flow or feedback.  I am also struck by all of the parallels in weather forecasting there are in this discussion.  The weather is of course highly complex and approaches chaos in the long term.  It is also highly dependent on initial conditions (The assimilation of initial conditions is one of the main thrusts of research by modelers nowadays.).  I dispute the author’s statement that accurate long-term forecasts of the weather will always be impossible.  You have to define “accurate” and “long-term”.  I very much think that as assimilation systems improve we will have reasonably accurate forecasts out to three or four weeks.  I would call that long-term, but long-term could be defined to be more than a few weeks.  It’s all in semantics.  
That section on the boom and bust cycle is so abstract, I wish he had made a more concrete example of it.  Normally I like abstractions, but in this case there are so many examples to choose from that he could have given us a ton of examples (e.g. the airline industry).  He does give a good description of it though, and the way he explains it makes it sound like there is no alternative to the cycle.  There will always be a time delay, and due to lack of communication between competitors and incomplete knowledge of future demand, there will always be supply mistakes made.  Industries that are cyclical are doomed to remain that way in perpetuity because humans are so bad at predicting systems that have delays and feedbacks.

This is a short chapter, so we limit the discussion here.
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