The natural chaos of markets


Having just watched the second episode of All Watched Over By Machines of Loving Grace by my favourite documentary maker Adam Curtis, in which he tells the “story of how our modern scientific idea of nature, as a self-regulating ecosystem, is actually a machine fantasy”, I am once again struck by what an absurd body of ideas, or more accurately, self delusions, much of modern economic prejudice-masquerading-as-theory is.

Curtis, in this episode, shows that the idea that there was a balance of nature was always flimsy, never supported by the empirical evidence, and based on extreme, self proving over simplifications. Ecological thought is about on the same level as economic thought, it seems. Nature is not in balance at all. Consequently all those ideas about self correcting systems — you know, Adam Smith’s so called invisible hand — also turn out to be a fantasy. The neo-liberal assumption that markets are like an ecology, a natural system that will self correct provided it is left alone, is also looking rocky. If, indeed, markets are natural systems — and they are not, they are created systems — then they will not self correct. The vegetative metaphor is extremely unpersuasive.

Curtis does not explore the implications for economics, his interest lies more in how we have given up the power to act because we have allowed machine driven systems to take us over. But what he traces is extremely damaging for General Equilibrium theory, a central plank of much economic “theory” and the basis of micro-economics. General Equilibrium theory basically borrows the vegetative metaphor, that there is a “balance of nature” and applies it to markets. This was always a nonsense move, because markets are not natural, they are artificial. As Curtis shows, it is double nonsense, because even if the metaphor holds, it leads to the opposite conclusion. That markets will probably not incline towards equilibrium at all. Quelle surprise.


In one sense, the assumption that there will eventually move towards equilibrium is typical of the kind of circular arguments of which economists are so fond. Balance is implied in the transactional structures. Balance sheets have to, well, balance; assets must match liabilities. Prices must reflect some sort of balance between supply and demand. That is what a price is. Debts must be repaid from income. And so on. In the artificial rules of finance, equilibrium is implicit.

But of course that is not what happens, especially when you allow markets to be “free”, and especially when you allow financial markets to be “free” to make up their own rules. They are not self organising systems that incline towards balance. They become out of control exercises in chaos that move towards anything but equilibrium. I cite the GFC, the Great Depression, the Latin American debt crisis, Japan’s asset bubble, the Asian financial crisis and ever so much more, even back to Tulipmania.

Accordingly, what needs to happen, in financial markets in particular, is that equilibrium is ENFORCED, and continually at that. I recognise that such enforcement is difficult in today’s global markets, but the idea that if things are left free, the system will self correct — which was Alan Greenspan’s now exploded assumption — is just plain wrong. It is a system of rules. When traders are left to make up their own rules, the system of rules will be weakened and may collapse. Ergo, continually enforce the rules to ensure that the necessary balances are maintained.


Curtis goes on to show how the vegetative metaphor was used to justify the networking of machines, especially the internet and social media. That is exactly the type of shift that has occurred in finance, with machines being used increasingly to unleash the forces of financial “freedom” (derivatives, algorithmic trading, the mechanisation of risk models, etc.) that is supposed to lead to a self correcting system but which actually leads to its exact opposite. It must, quite frankly, be stopped before it does more harm to our system of money. Not that I see much hope of that happening.

It is always fascinating how bad ideas become so poular. No-one is better than Curtis at showing how it happens, although he does not really explain why it happens. Perhaps it is simply mysterious. Perhaps it is what Chesterton meant when he said that when people give up older beliefs they do not then believe in nothing, they believe in anything. Perhaps it is just that metaphors are powerful, we must have them, and we have become susceptible to very bad ones.

I don’t know. What I do know is that it is about time to jettison the assumption that markets, left free, will be self correcting and incline towards equilbrium. The opposite is the case. And human beings need to be put at the centre of human systems, not pushed to the side as just components in a “system” (how that is happening now is beautifully documented by Curtis). That, in turn, means putting the consideration of morality (an equilibrium that actually makes some sense) back into the consideration of economics.


Tomas Sedlacek’s book, The Economics of Good and Evil: The Quest for Economic Meaning from Gilgamesh to Wall Street, might be a good place to start to reconstruct the entire discipline from the ground up. This is what he had to say in a recent interview:

So, “Does the system behave the way we want it to behave?” is ultimately a moral question, one that we are banned from asking. In economics, this is exactly the sort of a question we’re not allowed to ask, because economics is supposed to be a positive science, not a normative science. The difference is clear: positive statements should describe things as they are (“facts only, baby”), whereas a normative statement describes things the way we want them to be.

Let’s take Milton Friedman, who was, of course, the biggest proponent of positive economics. He wrote the famous essay “Economics as a Positive Science.” In that essay, on the first page, you will find the following sentence: “Economics should be a positive science.” Now, please tell me if that is a positive or a normative statement. [Laughter]