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Economic crisis and butterfly effect
By Robert J. Shiller |
March 16, 2010, Tuesday
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Print Edition
Print Edition
FEW economists predicted the current economic crisis, and there is little agreement among them about its ultimate causes. So, not surprisingly, economists are not in a good position to forecast how quickly it will end, either.
The state of economic knowledge was just as bad in the Great Depression that followed the 1929 stock market crash. Economists did not predict that event, either. In the 1920s, some warned about an overpriced stock market, but they did not predict a decade-long depression affecting the entire economy.
Late in the Great Depression, in August 1938, an article by Ralph M. Blagden in The Christian Science Monitor reported an informal set of interviews with US "professors, banking experts, union leaders, and representatives of business associations and political factions," all of whom were given the same question: "What causes recessions?"
The multiplicity of answers seemed bewildering, and did not inspire confidence that anyone knew what was causing the deepest crisis of capitalism. The causes given were "distributed widely among government, labor, industry, international politics and policies." They included misguided government interference with markets, high income and capital gains taxes, mistaken monetary policy, pressures towards high wages and monopoly.
Although economic theory today is much improved, if we ask people about the cause of the current crisis, we will mostly get the same answers. More likely than not, many or most of these people would be mostly or partly right, for the economic crisis was caused by a confluence of many factors, the chance co-occurrence of a lot of bad things, which pushed the financial system beyond its breaking point.
Indeed, the crisis knows no end to the list of its causes.
For, in a complicated economic system that feeds back on itself in many ways, events that start a vicious cycle might be as seemingly trivial as the proverbial butterfly in the Amazon, which, by flapping its wings, sets off a chain of events that eventually results in a far-away hurricane.
(The author is professor of economics at Yale University. Copyright: Project Syndicate, 2010. www.project-syndicate.org. Shanghai Daily condensed the article.)
The state of economic knowledge was just as bad in the Great Depression that followed the 1929 stock market crash. Economists did not predict that event, either. In the 1920s, some warned about an overpriced stock market, but they did not predict a decade-long depression affecting the entire economy.
Late in the Great Depression, in August 1938, an article by Ralph M. Blagden in The Christian Science Monitor reported an informal set of interviews with US "professors, banking experts, union leaders, and representatives of business associations and political factions," all of whom were given the same question: "What causes recessions?"
The multiplicity of answers seemed bewildering, and did not inspire confidence that anyone knew what was causing the deepest crisis of capitalism. The causes given were "distributed widely among government, labor, industry, international politics and policies." They included misguided government interference with markets, high income and capital gains taxes, mistaken monetary policy, pressures towards high wages and monopoly.
Although economic theory today is much improved, if we ask people about the cause of the current crisis, we will mostly get the same answers. More likely than not, many or most of these people would be mostly or partly right, for the economic crisis was caused by a confluence of many factors, the chance co-occurrence of a lot of bad things, which pushed the financial system beyond its breaking point.
Indeed, the crisis knows no end to the list of its causes.
For, in a complicated economic system that feeds back on itself in many ways, events that start a vicious cycle might be as seemingly trivial as the proverbial butterfly in the Amazon, which, by flapping its wings, sets off a chain of events that eventually results in a far-away hurricane.
(The author is professor of economics at Yale University. Copyright: Project Syndicate, 2010. www.project-syndicate.org. Shanghai Daily condensed the article.)
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