Cause and Effect in Global Free Markets

This is a post I wrote to a question on LinkedIn about the cause of the financial crisis. I wrote about it before, but I gave it a slightly different slant here.

Nature and therefore everything in it – that includes the economy – is a complex adaptive system. The reasons for that are unknown but similar dynamically interacting structures even exist on the lowest quantum physical level. Schrödinger’s Cat (which is neither dead or alive until you look at it) explains that paradox of not finding cause and effect in this universe. And there certainly is not a single cause to anything, but just a complex resonance of potential across a source and sink. It’s called supply and demand in economy. Yes, executives did what they did but so did consumers. And not just Americans but so many in the global economy we now have. Even the 20 million Chinese farm workers who dropped their hoes to work in Shouzou are now horrified to go back to their farms. They played the cheap workforce that fueled the American shopping spree and made China the largest holder of American dollars – which in the end is good.

And no, it is not a problem of greed because greed is not a part of Capitalism. There are greedy people in any political fragment. Competing for more resources is the most natural thing and a part of evolution. What you call executive greed is no more than an outlier in potential (income). Everyone says now, we knew it couldn’t last but we played the game like everyone else. And rightly so. It is not the pay-packages that are the cause of this, because they are no more than a symptom. So what causes are there possibly on a larger scale? Economy as a complex adaptive natural system works best when the dynamics of change are unbridled. That’s why free markets work better than others. And that is the problem, because we do not have free markets as the entities (businesses and governments) involved are too big. Cascading or domino effects are normal in such systems but when the entities are too big then small changes can topple one giant and the other giants simply fall into the void created. If those giants are infrastructure relevant then a global structural crisis will ensue.

What we have right now is freedom of capital, which is not the same as Capitalism. Capitalism just needs free markets but not freedom of capital. Monetary instruments are a resource of free markets and need to be carefully controlled and tuned, much like running an electric grid. Both too much or too little can cause a collapse. Governments gave the financial business giants the authority to create monetary instruments (CDS) without any limitation or control and without the need to back them up with secured debt value. AIG simply insured that debt risk with some strange insurance model. When the real estate market crumbled, the dominoes came down one by one and governments now are trying to stop the dam from breaking. There is a fair chance it still will. Hang on …

The economic crisis that hit the automakers is not connected to the financial crisis. It was created by the media panic mostly. But also that would not be a problem if those car manufacturers were smaller. Some would fail, be reestablished, new more creative manufacturers would grow into the void. Resonance at work again. The unions however want to hang on to their power in those large automaker giants and thus want them kept alive. It is really not about American jobs there at all. Also large unions work against free markets and thus send American jobs to China.

There you go – we are all at fault and if by no more than voting for these governments that made these laws and buying Chinese made products or American cars. So all that I can see is that we all need to change. Start with the (wo)man in the mirror! Go vote differently (America already did) and buy at the small vendors rather than the super-chains where you are no more than a number …. don’t forget – consumer demand shapes the market.

In Memoriam Dr. Wilhelmine Pucher (1919-2009)

Dr. Wilhelmine Pucher

Hier zum Nachruf auf Deutsch.

Today, March 19th, 2009 is a day for emotions but not for mourning. My mother passed away peacefully after only a few days of hospitalization. She was still up and walking yesterday evening refusing to be considered immobile. She truly died like an oak – standing up. I just remember that as I drove to the hospital this morning, a completely fresh, white blanket of snow – very unusual for this time of spring – covered the trees, lawns and houses in the outskirts of Vienna, as if to dampen the noises in respect.

My mother had a full life with all the ups and downs that one can imagine. She first learned to be seamstress only to turn to nursing shortly before the Second World War. Her life was however focused for ten years on her career in aquatic sports as a competitive diver in 10m platform and 3m springboard diving. She was Austrian Champion for many years and did participate in the last Olympic Games in Munich before the war. Her first husband died early in the war leaving her with a daughter. After the war she remarried and had another daughter and three sons, me being the oldest. After the war she was diagnosed with tuberculosis that only fully healed while she was pregnant with me. She said many times that I saved her life.  After the war she studied medicine and became a medical doctor and worked as an anesthesiologist until she retired. Her extremely high medical ethics were always cause for discontent at the hospital, when she refused to perform at operations that were done without regard to the patient.

She always said that the hardest time of her life had been the fatal accident of my older sister Gabriele 20 years ago. That was even harder than my mother’s diagnosis with cervical cancer at 45 and her fight for survival. Before my father’s death 17 years ago she nursed him patiently for 7. Afterwards she did not rest but restarted a very active life, travelling with her friends in her camping van all over Europe, reaching Gibraltar, the North Cape, as well as Istanbul. I always expected her to die while on the road. She had been fairly well for the last years and only stopped driving last summer to her great disappointment but all our relief.

For me she was a lioness who was willing to risk her life for her family. She was however not the homy kind of person and always considered housecleaning a waste of valuable time. She lived a life of jolly chaos.

Considering all of the above how can someone be in sorrow? Yes, we will all miss her deeply but the grief is our emotional weight that does not weigh on her life. She lived her’s to the fullest and in many ways she set an example. She has enriched and touched the life of so many people who will keep her in respectful and loving memory. Please, spare us the condolences, but let’s continue to celebrate life like she did as the wonderful gift it is, until and beyond the day we die.

Goodbye, mother. We love you dearly!

Your son Max, in the name of my brothers Albert and Michael and the wonderful large family you built.

The Economy as a System

I am struggling with my own principles.

On the one hand I believe that the economy is a natural complex adaptive system that defies modeling and on the other hand I am proposing changes that will supposedly improve the situation. I do however not propose I understand all causes and that my changes would have a certain effect. I believe that my changes could have an overall positive influence on people and society and they would rectify the situation themselves. People cause changes not rules and regulations. The concept of free markets follows that but right now we only have freedom of capital and not freedom of people.

We can now spend endless time to figure out why it happened and whose fault it is. That is however absolute nonsense. I have said for the last twenty years that the stock markets are a casino and was laughed at. As we now do have a complex financial system that is nearly impossible to regulate, I propose that a simple set of governing principles would have to be put in place rather than putting in even more detailed regulation that no one will understand and whose effects are completely unknown. There are no quickfixes.

There is absolutely to reason to have pity with anyone (businesses and individuals) who lost money on the stock market. One should never play a game where the rules are so complex that no one understands them. But it is criminal for a bank or an insurance company to sign a contract that promises a safekeeping of funds for a certain purpose, may it be interest or a retirement scheme, and then turn to overly risky investments.

Unfortunately many of these contracts do not allow people to step away should they discover the truth. This is where I do see the role of government. Not in creating as many rules as possible for individuals as it does now, but rather in setting the principles and guidelines for financial markets and while we are at it for large corporations as well. Alternatively I would see the need to either prohibit businesses too large to fail or to simply tax them so heavily that they won’t even exist except there is such a big benefit that it can pay those taxes. At the same time do away with taxes for small corporations up to a 100 people. You will see the economy fluorish. Too large businesses are hindering free markets. Too large financial institutions are endangering the world’s financial system dynamics. As much I am in favor of a European Union, as much I am opposed to make it a superpower. It must remain a federation of free entities that cooperate out of free will.

I take issue with all forms of thinking that demand that we fully understand something to then plan to change it into something new. Regardless of what you call it. Causal analysis and plans for change are caused by our human tendency for arrogance. ‘System Thinking’ is as much a fallacy as are other concepts if it proposes to achieve full understanding. Physics had to come to accept that Heisenberg’s Uncertainty Principle stops us from measuring the presence and from predicting the future. The same is true on a classical physics and therefore on a systems level. Nature successfully defies reductionism because it is not built from components but it represents complex adaptive systems in various layers in which functions emerge rather than being predictable from lower functionality.

Mathematics are not the cause of certain effects in nature but they are models that describe certain levels of natural activity. This tendency to believe that a mathematical principle is a LAW is absolutely wrong. Once you grasp that  systems thinking turns into a humble acceptance of the wonderful dynamics and unpredictability of our universe. Therefore it is the Black-Scholes model of future utility that is responsible for our current financial crisis, that has been turned by the dynamics of the media into an economics crisis. Actually it is not the model as such that is the cause but the ignoramuses who used it. While I do agree that we need leaders that can inspire people to pull together towards a common goal we must cautious of leaders who think they know it all.

Green Thinking is also reductionist thinking because it puts the blame on people for anything to achieve a COMMUNIST political goal. We have absolutely no proof of any of the claims that are being made about climate change! We are not even sure of there is a substantial difference in climate change NOW to other times when the climate changed. The world’s climate is ALWAYS CHANGING! So the question would be: ‘Is it changing differently to what it would be without human influence?’ There are no answers to that. Yes, glaciers are receeding, but why we have absolutely NO CLUE. To say we do is either arrogance or political misinformation.

The whole idea of sustainability is wrong too. Nothing is sustainable, because nature is about dynamics and change. To sustain would mean to freeze the status quo. That in itself is a silly idea. Complex Adaptive Systems can not be modelled and reduced to components and explained with a set of formulas with which we could then predict the future of a sustainable world. That was LaPlace’s idea and every scientist knows now that he was wrong. The universe is not a clockwork of classical physics even with the added concepts of Thermodynamics.

If YOU believe that you are in any way better than someone else because you are applying ’systems thinking’ then you fall into the same trap of human arrogance. We know a lot and understand nothing. Not because we are stupid but because nature is that way.

Someone who wants to promote CHANGE is building on the assumption that he understands what causes the current situation that is supposedly undesirable, even so he does not know what the situation will be tomorrow, which might be better than today, and then has a plan as to how a certain CHANGE will CAUSE a better (more sustainable?) situation tomorrow. System thinkers who ask for change are as dangerous as all others who want to stick with their current ways. Stop thinking in systems and start thinking in natural human terms. This is what I try to do. We are the only place where we can really cause change. Don’t ask for others to change, but first change yourself. Start with the man in the mirror.

The only thing we can change in this world is our own perception. Nothing else. People want explanations, they want security and predictability and those who want to take power promise these, whether it is a husband, a priest or a political leader. They all lie because it is something that can’t be promised! That is the change we need to work on. It has to do in a large part with the ability to be humble in the face of the great mystery of our universe. So let’s drop systems thinking and start to do ‘humane thinking’. Why do we try to abstract nature into something inhumane. All problems are caused by human tendencies, fallacies and sometimes ignorance. While ignorance can be bliss, the worst of all problems are caused by people who are so arrogant to think they know it all.

How about some humbleness for a change?