william the wie
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- Nov 18, 2009
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While I was writing my novel I relaxed by taking breaks with the Great Courses "Chaos" series. What surprised me was how much economics can be reduced to a few simple laws that are not part of economic debates:
Back in the 1800s Pareto discovered that because of compound interest most economic distributions are power law. The compounding of returns is an example of a fractional exponent, at 8% interest the equation for return is a sum of differential equations that includes an exponent of 1.08. Since fractional exponents and differential equations are a pain to work with it is easier for most of us to work out the problem using tables and/or a programmed computer/calculator to get the same result. The difference is that the easier way to solve the equation fools the brain into thinking that it is dealing with a much more orderly process than is the case.
Population biologists in the 1970s when applying chaos to animal populations came up with the interesting discovery that all logistic maps (supply curves) yield chaotic results when pushed beyond their current peak sustainable supply. This happened most famously in the 1921-7 housing bubble that gave us the 1930s depression and in the 1994-2006 housing bubble.
Since I got my degree in finance with a great deal of economics thrown in after these discoveries were made and no one mentioned either of these facts I am wondering how many politicians are even aware of these problems in their economic policies.
Back in the 1800s Pareto discovered that because of compound interest most economic distributions are power law. The compounding of returns is an example of a fractional exponent, at 8% interest the equation for return is a sum of differential equations that includes an exponent of 1.08. Since fractional exponents and differential equations are a pain to work with it is easier for most of us to work out the problem using tables and/or a programmed computer/calculator to get the same result. The difference is that the easier way to solve the equation fools the brain into thinking that it is dealing with a much more orderly process than is the case.
Population biologists in the 1970s when applying chaos to animal populations came up with the interesting discovery that all logistic maps (supply curves) yield chaotic results when pushed beyond their current peak sustainable supply. This happened most famously in the 1921-7 housing bubble that gave us the 1930s depression and in the 1994-2006 housing bubble.
Since I got my degree in finance with a great deal of economics thrown in after these discoveries were made and no one mentioned either of these facts I am wondering how many politicians are even aware of these problems in their economic policies.
