Thursday, June 4, 2009

Can Humans See Bubbles Coming?

The most underreported story of the decade is that so few seemingly smart people who spend their time thinking about economics didn't see the bubble coming.

There were several odd moments in this decade where economists realized that for the first time, consumer demand (for houses and everything else) was driving or damaging growth. Have we become so wealthy that our individual incomes are driving these cycles? Clearly not - consumer power was predicated on credit.

What's not clear is that we could have seen it coming, or that the people who claim to aren't just doomsayers who, like broken clocks, are bound to be right eventually. Bubbles are like a cognitive closure principle of economics - if we could clearly see them coming and understand the cascade leading up to them, they wouldn't happen.

Which leaves us with how to avoid them in the future. If such things as depressions are predictable in principle (even if not by the legacy system of meat inside our skulls) then we could conceivably commission economists and programmers to put together an expert system to stand guard and warn us of impending calamity, unencumbered by the madness of crowds that keps us all from seeing what's coming. But if Tolstoy's aphorism about unhappy families all being unhappy in a different way also applies to unhappy economies - as it seems to - then the only thing to be done is to accept that economic crashes are part of the human condition.

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