From: nelson_p@apollo.hp.com (Peter Nelson)
Subject: Re: Economics and the Dart Board (...and the theory of Chaos)
Date: Tue, 15 Dec 1992 14:20:52 GMT
Organization: Hewlett-Packard Corporation, Chelmsford, MA

In article <tervio.8@katk.Helsinki.FI> tervio@katk.Helsinki.FI (TERVI| MARKO J) writes:
>>Economics is supposed to explain economic phenomena and make
>>predictions.  But many different studies (both amateur studies
>>done by magazines and newspapers and academic studies) have 
>>shown that economic models have little ability to predict movements
>>in the stock market, so that one might as well throw darts at
>>the Wall Street Journal to select stocks.  Therefore, economics is
>>a total failure as a science.
>
>Just think of a situation where stock market prices COULD be predicted.
>This would make it possible for an infinite number of people to get extremely
>rich by speculating in the stock market - I believe everyone understands that
>this is not possible for real economic reasons. Therefore repeated and
>reliable stockmarket "forecasts" are impossible by definition (I'm sorry I 
>can't remember the name of this theory).

  Whatever it's called, it has a major flaw: "an infinite number of people
  to getting extremely rich" is not the only possible outcome.  The other
  one is that the market would be totally predictable, and *NOBODY* would
  get extremely rich.  In other words the fact of its being predictable
  would mean that prices would truly reflect the underlying value and
  potential of the stock (the perfect efficient market) so you couldn't
  make any money in it.   Another outcome is that you could make money but
  in only a limited way -- the appreciation of my bank CD's is absolutely
  predictable over the term of the CD, but I'm only getting 4%.

  You're making the mistake of thinking of this as a single variable
  problem -- the market stays the same except for one thing: it's
  predictable.   In reality it's a complex system so when you change 
  one thing, the predictability, for instance, lots of other things
  change -- the way people can use the market or the role of capital
  markets, for instances.
                        

>   There is an excellent book by James Gleick called Chaos in which he 
>explains these phenomena in a more reassuring way. I think it's an 
>invaluable book for all libertarian-minded  people. It makes one understand 
>the impossibility of a centrally planned society in a different and a 
>refreshing way.   

  Yes, Gleik's book is a good layman's introduction.  Although it should
  be noted that Lorenz's "sensitive dependence on initial conditions"
  (the "butterfly effect") does not say things *can't* be predicted, it 
  merely explains why it's so hard.  After all, we *can* predict the
  weather with better-than-random-chance reliability; just not very
  precisely or very far in advance.  But we can do it better now than
  we could 20 years ago, and better 20 years ago than 40 years ago.

  Also calling centrally-planned societies "impossible" is disingenuous
  since clearly they exist.  Moreover, the most prosperous societies 
  in the world (and also the ones with the greatest individual 
  liberty), i.e., the major industrial democracies, are all centrally
  planned to some degree.

  The other problem with chaos for libertarians is this: if you truly
  think that these systems are unpredictable then there is no basis 
  for *predicting* that a minarchy would confer any particular
  benefits in terms or prosperity of personal liberty over any
  other system.       


---peter


Newsgroups: talk.politics.theory,talk.politics.misc,alt.conspiracy