Very topical, Pedro. A few remarks, interleaved:
At 01:58 PM 10/29/2008, Pedro C. Marijuan wrote:
Dear FIS colleagues,
Some aspects of the current financial crisis might be related to
discussions we had in this list on information and the nature of
economic flows years ago (economic networks, and also, central aspects
of ecological ascendancy).
The amazing growth of financial assets of many kinds during last decade
may have conduced finally to a brutal crisis like the current one, not
just for greed or political lack of control, but also for dearth of
scientific understanding. I would argue that:
1. Financial flows are anticipatory information flows that preclude
the structural changes and the evolution to follow by real economic
structures.
This seems correct in general, but in the current situation a lot of
the response is reactive.
2. Without financial anticipation, economic changes could not keep pace
with technology science progress due to the viscosity of social and
legal webs of relationships.
I think there is also a regulative role in distributing risk according to
risk tolerance and greed. Futures markets (and other derivatives
like hedges) are a bit like predators, with prey the primary market.
In predator-prey relations, predators can even out booms and busts
in the prey. This is well documented in ecological work (e.g., the
introduction of wolves to islands like Grand Mannan in New Brunswick
and Isle Royale in Lake Superior). However things are not quite so
simple, since predators can increase to much, leading to a drop in
prey and a lagging drop in predators (lynx and rabbits in the Canadian
subarctic are a classic example). Now imagine that the secondary
market becomes much larger than the primary market. Perilous,
I would say, especially if it is unregulated.
3. The creation of successive informational (financial) layers becomes
an exercise in complexity accumulation, that almost inexorably leads to
cross instability thresholds and a general loss resilience.
Right, as above. There is an additional problem with complex derivatives,
though: the information about them is obscure. Neo-classical economics
relies on perfect information. My friend Don Ross has invetigated
neo-classical economics in some depth (some relevant books at
http://mitpress.mit.edu/catalog/author/default.asp?aid=238) across
a number of applications. We discussed applying information theory
with an eye to understanding the role of imperfect information
in evolutionary game theory, but I found that nobody really knows
what economic equilibrium is (Nash equilibria and Pareto optimality
are only a small part of the story). However, if the market is not
ideal, then its evolution is highly path dependent.
This is from a letter I wrote to Don some time ago:
Dear Don,
I hope this gets to you in time. This is off the top of my head. It isn't
as organized as I would like it to be.
State Functions and Non-Equlibrium Systems
In traditional physics we deal only with conserved quantities like energy,
mass, spin, charge and the like. In this case the conservation laws serve
as the reference for calculations of change. The conservation laws permit
the use of the Hamiltonian formulation of physics. The fundamental
quantities are also guaranteed to be state functions. In fact their sum
over all component systems is an invariant. This also preserves
reversibility. The basic idea can be extended to other types of systems in
which all of the fundamental properties are conserved. Although the
equations of motion are not linear, conservation of fundamental quantities
permits linear additivity of these quantities, making analysis of state
changes relatively easy through approximative methods. This is fairly
straight-forward. You will recall my claim in my Laplace paper that this is
the model for not only physics, but for most of modern science.
The extension to equilibrium systems is also straight-forward. In this case
the usual assumption is that the system moves from one equilibrium state to
another. Examples are classical thermodynamics, classical economics and
classical population genetics. In this case, however, there are
nonconserved quantities, such as entropy and work capacity, money supply,
and adaptation, respectively (the last is explained in my papers on
increases in fitness). Note that these are all information based functions,
even if they are not directly related to energy in an obvious way. Since
these quantities are not conserved, change can induce sources and sinks,
and the quantities are not linearly additive. The solution to this problem
is to look at changes as if they occur arbitrarily close to equilibrium,
making the changes reversible. This fiction requires that the changes occur
arbitrarily slowly. In real cases this does not occur, of course. The
fiction, though preserves linearity and reversibility, and allows us to
define the
