Liberty without Law: Financial Chaos

Considering the forecasts of outcomes made, and not made, that led to the subprime crisis and its aftermath, it is time to create a new paradigm for real estate and capital markets, or at least to modify the existing paradigm. Former Chairman Greenspan’s testimony Such a new paradigm was called for in the Soros book Maury's Notes on Three Books Related to the Subprime Crisis where the author focused on his reflexivity concept. There are, however, numerous other concepts not adequately integrated into standard economics. These include cognitive science that not only goes beyond bounded rationality and behavioral economics, but is heavily interdisciplinary.

Additional concepts worthy of integration include the science of networks, emergence, and complexity. Integrating these concepts into the economics paradigm dealing with mortgage markets is an application of the concept of consilience. Furthermore, dealing with the risks and uncertainties cries out for better strategies. Therefore, it is time to examine the paradigms that predominate and come up with something much more reflective of reality.

The list of readings recommended in this essay is a start. It is provided as part of Maury's Blog in order to facilitate others to modify the recommendations for reading and to comment on relevance of the concept. Reading Recommended to Improve Forecast of Outcomes

The comment, again from the ASPEC seminar essays, is as follows:

Liberty without Law: Financial Chaos - Paul Carr
(Liberty Without Law)

The discontinuities in the complexity versus uncertainty figure can be attributed to non linear phase transitions and the Matthew Effect, "to him who has more shall be given." This is similar to Shermer's "Cumulative advantage and best seller effects."

Should laissez-faire economics be regulated? Too much liberty can degenerate into unaccountable chaos. Thaler & Sunstein (2008) argue that totally free markets can lead to disasters precisely because autonomous individuals are not good decision-makers. Too little liberty may cause stagnation. What is an optimum balance between autonomy and heteronomy (law) ?

Peters (2001) and Shermer ((2009) build on Adam Smith's invisible hand and chaos/complexity theory to show how free markets are by their nature continually evolving, emerging systems that require uncertainty to operate successfully. Let us apply this to the gross domestic product (GDP). Counties with too much regulation, control, and law (such as the USSR and China before 1989) had a low GDP. At this time, Europe and the US had a high GDP, indicating an optimum mix of law and liberty to innovate. In countries without enough law, i.e. anarchy, like Zimbabawe, the GDP was again low. Trust and the Matthew Effect (Shermer) contribute to maximizing the GDP. Reading Recommended to Improve Forecast of Outcomes

Freedom decreases as the price of oil increases. (Friedman's (2008) Law of Petropolitics).

Alan Greenspan, when asked about the present financial crisis, said he had "overestimated the correcting power of free markets." The delicate balance between law and liberty had been tilted too much toward the latter.
"Confirm thy soul with self control, thy liberty with law." (Bates 1895 "America The Beautiful").

(References and additional comment are in the essay: (Liberty Without Law)

Posted by Maury Seldin on behalf of Paul H. Carr, AF Research Laboratory Emeritus. The comment was prepared prior to the blog opening and the link is to an essay prepared by Dr. Carr for Maury's seminar at ASPEC. Dr. Carr has his Ph.D. in Physics.