About the complexity of financial markets

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

Henry Ford.

In Michael Moore's last movie, Capitalism: A love story, two important arguments were made about the complexity of financial markets: (1) the smartest students do not become any more engineers or scientists, but go work for financial companies (or become lawyers), (2) where they use their intelligence to create financial products and derivatives that a handful of people only can understand.

Following the idea of Darwin's evolution, there is a strong incentive for having the mechanisms of financial markets to be purposely muggy and incomprehensible. As Henry Ford recognizes, if the rest of us would understand, there would be a revolution. This hidden complexity does not do any good to the rest of the society, whatever your own economic or social values are. This needs to be changed.

Market, People and Happiness

The Market was invented to make the People Happy.
The People are now oppressed to keep the Market Happy.

The "invisible hand" needs a hand

Alan Greenspan, one of the chief advocate of laissez-faire capitalism over the past decade, has formally accepted the idea that nationalization of banks might be needed to help to overcome the present financial and economic crisis. Not that I think nationalized industries are competing better. I just appreciate and respect when one recognizes the limits and weaknesses of its own system and trends to a more balanced view of the world.

A flaw in the model

Excerpt from the Government Oversight Committee (chaired by Rep. Waxman) interviewing Alan Greenspan, former chairman of the US central bank on October 23, 2008 about the financial crisis:

REP. HENRY WAXMAN: The question I have for you is, you had an ideology, you had a belief that free, competitive — and this is your statement — “I do have an ideology. My judgment is that free, competitive markets are by far the unrivaled way to organize economies. We’ve tried regulation. None meaningfully worked.” That was your quote. You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others. And now our whole economy is paying its price. Do you feel that your ideology pushed you to make decisions that you wish you had not made?

ALAN GREENSPAN: Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not. And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.

REP. HENRY WAXMAN: You found a flaw in the reality…

ALAN GREENSPAN: Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak. [...] I made a mistake in presuming that the self-interest of organizations, specifically banks, is such that they were best capable of protecting shareholders and equity in the firms.

Thus if the banks themselves, the pinnacle of capitalism, fail to follow their own self-interest, what about the rest of the society. Where was that cherish "invisible hand"? invisible.

watch the PBS report.

see also this post from "A sociologist's commonplace book" blog.

"The shock doctrine" by Naomi Klein

Naomi Klein lays down in "The shock doctrine, the rise of disaster capitalism" a powerful thesis backed up by an impressive list of evidences, quotes and facts. She argues that, contrary to the claims of Milton Friedman and his followers, hard-core globalist capitalism has not been followed by peace and prosperity but rather by violence and the demise of democracies: Chile, Argentina, Russia are examples where that extreme breed of capitalism has lived on undemocratic regime. Using the pressure of the national debt, the pro-american international financial institutions even forced newly democratic governments to comply to their directives, open their markets to international companies, and shred down the existing net of social measures, all against the will and expectations of the people.

The preferred technique, as Klein explains, is that of the shock doctrine: use a shock, either a natural disaster, a coup d'etat or a political revolution, to take benefit of the stress and the weakness of the people to impose the hardship of lawless capitalism:

Believers in the shock doctrine are convinced that only a great rupture -a flood, a war, a terrorist attack- can generate the kind of vast, clean canvases they crave. It is in these malleable moments, when we are psychologically unmoored and physically uprooted, that these artists of the real plunge in their hands and begin their work of remaking the world.

Naomi Klein, The shock doctrine, Introduction.

One of the interesting example is that of South Africa that tries to explain why, several years after the coming in power of the African National Congress (ANC), more (black) people are poor than under apartheid: while negotiations for the share of political power were done in the open, the former president of South Africa, Thabo Mbeki, was negotiating in secret with the international institutions and the economic power of the country detained by the white community. The political agreement gave full human rights to the blacks, while the economic agreement was stripping down the socialist chart of the ANC and was assuring that little economical power can be transferable to the rest of the population:

A longtime antiapartheid activist, Rassool Snyman, described the trap to me in stark terms. «They never freed us. They only took the chain from our neck and put it on our ankles.» Yasmin Sooka, a prominent South African human rights activist, told me that the transition «was business saying, 'We'll keep everything and you [the ANC] will rule in name... You can have political power, you can have the façade of governing, but the real governance will take place somewhere else.'»

Naomi Klein, The shock doctrine, Democracy born in chains.

Although the book is convincing, I do not reject the possibility that a selection of the facts has been done to support overwhelmingly the thesis. Is Naomi Klein entirely balanced? Likely no, but nobody could argue against what happened in Chile, Argentina and South Africa and deny the role played by Milton Friedman and his supporters. Those examples, alone, are enough to make Klein's thesis a likely and worrying story.

Naomi Klein finishes positively by assuring that the people has learnt from the damages of the shock doctrine and will be ready next time. We are at the time of a serious financial crisis. Is it part of the hard-core capitalist agenda and is the people ready for a next round of salvaging measures? Or, on the contrary, is that crisis the end of that extremist capitalism and a return to a humbler, fairer and more social view of capitalism?

A pragmatic, positive and integrated use of the ideas of nonlinear science and complex systems

Manuel De Landa closes his book, A thousand years of nonlinear history, with a reflection on the pragmatic use of the ideas borrowed from nonlinear science and the science of complex systems. The two main forces that De Landa has been recognized throughout his book are homogenization and heterogenization. The first force assures a pyramidal or stratified construction with a hierarchy and a strong commandment, the second a flat or destratified organization or meshwork with no central control.

De Landa recognizes that linear science, adapted to describe hierarchic and stratified systems, have dominated the western thought for the last three centuries and thus limited our view of the world. On the other hand, the actual homogenization of the world, in terms of economies or ecology and occuring over many scales, have rendered the world more linear:

"[A]s our industrial, medical and educational systems became routinized, as they grew and began to profit from economies of scale, linear equations accumulated in physical sciences and equilibrium theories flourished in the social sciences. In a sense, even though the world is inherently nonlinear and far from equilibrium , its homogenization meant that those areas that have been made uniform began behaving objectively as linear equilibrium structures, with predictable and controllable properties." Manuel De Landa, A thousand years of nonlinear history, Conclusion and speculations.

Still, the nonlinear contribution is important and indeed necessary to avoid the world and Earth to become a dead, predictable and uncreative body. So what should we do? First, De Landa cautions not to adopt the extremist view of destroying the homogeneous part of the system. As Deleuze and Guattari wrote:

"If you free [the system] with too violent an action, if you blow apart the strata without taking precautions, then instead of drawing the plane you will be killed, plunged into a black hole, or even dragged into catastrophe. Staying stratified -organized, signified, subjected-, is not the worst that can happen; the worst that can happen is if you throw the strata into demented or suicidal collapse, which brings them back down on us heavier than ever." Deleuze and Guattari, A thousand plateaus, pp 160-161, cited in A thousand years of nonlinear history, Conclusion and speculations.

What a balanced and moderate view from post-modernists such as Deleuze and Guattari that are supposed to be, according to what I heard about them, more nihilist that positivist! It reminds me of Camus who wrote in, L'homme rebel, that revolutions were not necessary. Revolutions are actually counter-productive. They may do more harm than good and only by changing the world small steps at a time, can we achieve the ideal dreamed. De Landa, Deleuze and Guattari expand that idea acknowledging the complexity and nonlinearity of the system:

"This is how it should be done: lodge yourself on a stratum, experiment with the opportunities it offers, find an advantageous place on it, find potential movements of deterritorialization, possible lines of flight, experience them, produce flow conjunctions here and there, try out continuum of intensities segment by segment, have a small plot of new land at all times." Deleuze and Guattari, A thousand plateaus, pp 160-161, cited in A thousand years of nonlinear history, Conclusion and speculations.

De Landa explains that

[a]ll these precautions are necessary in a world that does not possess a ladder of progress, or a drive toward increased perfection, or a promised land, or even a socialist pot of gold at the end of the rainbow. Moreover, these warnings derive from a recognition that our world is governed not only by nonlinear dynamics, which makes detailed prediction and control impossible, but also by nonlinear combinatorics, which implies that the number of possible mixtures of meshwork and hierarchy, of command and market, of centralization and decentralization, are immense and that we simply cannot predict the emergent properties of these myriad combinations will be." in A thousand years of nonlinear history, Conclusion and speculations.

De Landa pursues:

"Thus the call for a more experimental attitude toward reality and for an increased awareness of the potential for self-organization inherent in even the humblest forms of matter-energy." in A thousand years of nonlinear history, Conclusion and speculations.

He finishes by emphasizing that this approach does not necessarily mean a hopeless and boring view of life. Far from it:

"It is important, however, not to confuse the need for caution in our exploration of the nonlinear possibilities of (economic, linguistic, biological) reality, and the concomitant abandonment of utopian euphoria, with despair, resentment and nihilism. There is, indeed, a new kind of hope implicit in these new views. After all, many of the most beautiful and inspiring things on our planet may have been created through [partial] destratification. A good example of this may be the emergence of birdsongs: the mouth became destratified when it ceased to be a strictly alimentary organ, caught up in the day-to-day eating of flesh, and began to generate other flows (memes) and structures (songs) where the meshwork element dominated the hierarchical. The emergence of organic life itself, while not representing a more perfect stage of development than rocks, did involve a greater capacity to generate self-consistent aggregates, a surplus of consistency. The human hand may also have involved a destratification, a complete detachment from locomotive functions and a new coupling with the external environment, itself further destratified when the hand began converting pieces of it (rocks, bones, branches) into tools. Thus, despite all the cautionary tales about simplistic calls for anarchic liberation, there is in these theories a positive, even joyful conception of reality. And while these views do indeed invoke the «death of man», it is only the death of «man» of the old «manifest destinies», not the death of humanity and its potential for destratification." in A thousand years of nonlinear history, Conclusion and speculations.

The delicate balance of capitalism

Mark C. Taylor describes in his book The moment of complexity the delicate balance of a capitalist society between the discipline of the worker and the undiscipline of the consumer:

"The operation of the assembly line depends on the repeated execution of tasks carried out with precise timing. [...] Ford and his engineers realized that efficient production required the imposition of mechanical regularity on natural rythms. [...] Within the all-encompassing logic of industrialism, work, leisure, and rest are designed to promote efficiency and thus increase profitable production. Workers not only have to produce but also consume more and more products. [...] For industrial society to thrive, a sufficient number of people must have the time, money, and desire to consume what they do not necessarily need. The intricate relation between production and consumption underscores one of the inescapable contradictions of capitalism. Profitable production demands, on the one hand, the rational control of emotions and desires and, on the other, the cultivation of the desire to consume, which often is unreasonable." (M. C. Taylor, The moment of complexity, From grid to network)

No wonder that frustation is the general mood of Western peoples.