I spent roughly two years of my life attempting to rework Paul Samuelson’s Le Chatelier Principle as the guiding thesis for my start-up in predictive analytics for financial firms. Eventually, with a nudge from DARPA, we became interested in looking at ways in which the United States was vulnerable to non-lethal economic warfare tactics, such as people fooling around with food supply data or commodities pricing. This is interesting, considering that hundreds of thousands of traders are screwing around with the prices of both every day in Chicago and New York. The U.S. government is interested in knowing how the Chinese, Iranians and Saudi’s might play around with these instruments instead of using lethal force. You can see how well that research is going, cybersecurity is experiencing a massive boom. The outcomes we were looking for turned out to be horrendously complicated. My project did not get enough lift, or funding.
When it was all over, I spent a season making wine in Northern California with dear friend who invited me to "let my head breathe". I learned almost as much about asymmetry and nonlinearity with my nose in a wine glass and walking through the vineyards and cellars of a small winery as I did with my nose in Samuelson's Foundations of Economic Analysis.
Curiously, asymmetrical anomalies, (like the fires whose smoke influenced the wines in the Anderson Valley in 2008, or the famous noble rot in Burgundy), are unavoidable and end up in the wine. The results are always interesting. The vineyards too near the fires that year could barely harvest their loads. However, the tiny vineyard we worked on near the sea caught just enough smoke to give the Pinot that year the faintest hint of wood smoke and cedar, nicely balanced by the wet sea fog.
Having met many winemakers during that year and in the years since, I realized that greatness in making wine, (in anything, for that matter), often comes from asymmetry or the irrational. There are dozens of nuanced considerations per grape and per wine that goes into that “delicious” bottle. Think about those things next time you pop the cork. I mention this because when writing the past few pieces, I've written on alll manner of asymmetrical features in modern economic life; most of all the problem in investment banking, wage inequity and energy/resource allocation.
Life is not perfect, most adult readily admit this, so the notion that asymmetry applies to everything in life should not surprise anyone. The Mona Lisa is that much more impressive because her nose is crooked. The less than perfect shot is still a goal, and yes coach and first class passengers land at the exact same time. That we love quirks in another person, their "funny nose" or wry smile, is testament to our very human appreciation for things that are a little out of whack.
During my research, I identified entropy, asymmetry, and irrationality as part of how the market functions imperfectly, and how when left to it's own devices, markets do indeed find systemic balance (at least theoretically). I'm also intrigued that these three prevalent organic or systemic effects that people and their leaders need to address so that real, sustainable change can be achieved.
By entropy, we are referring to the second law of thermodynamics that states that the entropy of an isolated system never decreases because isolated systems always evolve toward thermodynamic equilibrium, a state of maximum entropy. Economic systems also evolve towards equilibrium, and I beleive that we are currently in the very chaotic part of that process. Think of things this way: we are like particles of pulp in a glass of water. Right now we are being spun around, but eventually, we will settle. As idealistic as that may sound, the tremendous imbalance in the markets must shift policy. Look no further than the political preoccupation with "rigged" systems for evidence of this.
Asymmetry, as far as we are concerned, involves the natural imbalances in any system, without which we would not have all of the perfect imperfection around us. In other words, we allow for these imbalances, and if we rely on the first rule—that of entropy—things will settle in time. You can see both of these forces at work. Overvaluations and asset bubbles are asymmetrical economic phenomena, (even though they are incorrectly regarded as indeliberate) while the market’s initial acceptance and eventual purging of these instruments are equilibrium in action. These two forces largely define the market’s fundamental dynamic. Though they may seem arcane to the reader, this is essential to understanding certain stumbling blocks of the current economic paradigm shift.
As long as certain bodies like the FED or ECB manipulate the markets, or allow their majority shareholders to continue to real massive financial benefit from instability without creating parameters or "guiderails" for the middle class and impoversished the market will be definition "push up against" those forces as it tries to rebalance. That rebalancing can be understood and managed or forced.
Last, by irrationality, I am referring to what economist Paul Samuelson was awarded the 1970 Nobel Prize (in memoriam) for his industrial application of a little-known theory called the Le Chatelier Principle. Samuelson discovered similarities between thermodynamics and economics and mapped out several relationships between markets, people, and stability that are used to this day. His work stemmed from the notion that economic agents tend to seek satisfaction irrationally instead of attempting to maximize utility.
When applied to both corporations and individuals, this idea is not new. Samuelson's principle talks about maximizing the behavior of agents, (including the behavior of consumers about utility, and the behavior of business firms concerning profit), as well as the behavior of economic systems in stable equilibrium. Samuelson’s hypothesis explains economic outcomes when one or more constraints are tightened or relaxed.
In other words, those bankers, investors and shareholders who are attempting to maximize utility without addressing the contexts of sustainability and wage equity necesssarily pervert the markets
Samuelson concerns us with the amount of flexibility and rigidity in any given system. For instance, rigid systems, as opposed to open-source (flexible) business processes, naturally lack dynamism. Previously, this sort of rigidity was well-suited to certain market conditions and practices. Given these parameters, it follows economists’ proposed rigid (and standard) theories. To some degree, the status quo requires systems that could not and would not change. Hence, we became accustomed to conventional thinking that came from Alan Greenspan for nearly twenty years and dominates FED policy. In 2016, the marketplace was anything but predictable. Even so, most organizational systems still in place are prohibitive to change and obstructive to innovation. They do not flex. Therefore, they are not useful for maximizing utility in the context of improving holistic economic conditions.
I wrote yesturday about responsibility at the international banking level. The very people whose jobs require complex discovery, interpretation, negotiation, and decision-making are often thwarted by the lack of recognition of this gap between predictability and the state of the markets these days. It should be the prime imperative of innovation and innovators to be acutely concerned with maximizing utility, and how to accomplish it using a more human-centric approach.
Innovation in the financial world in particular rests on this notion, especially given that its problems are based on a mindset that cultivates greed and inequity. Irrationality to date has proven a reliable indicator of success, however those agents and bodies who seek to maximize their agency but do it without regard to the holistic fitness of the system, bring about more chaos, not less.
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You can read more of my work at www.bigthinker.com, or you can check out what my consulting firm does at www.quodfatum.com.