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Economic Outlook 2013: Unique, Changing, Unpredictable

Economics / Global Economy Jan 03, 2013 - 04:41 AM GMT

By: Andrew_McKillop


Evolutionary biologists, botanists, zoologists, ecologists and other scientists - for example astrophysicists and cosmologists - will tell you that the universal history of change has several unchanging rules. One of these, specially when it concerns living things, is that the history of life is fractal. A very simple example is any tree-type or dendritic evolutionary diagram: take away the time or scale labelling from any part of the diagram and you cannot tell which direction we are moving because evolutionary change is a process of continual splitting of the branches of the tree. We only assume (often wrongly) that living things in a species tend to get bigger or that species get more numerous or more specialized or less specialized - or any other criteria we might apply, almost randomly.

The link with the economy starts right here: economic progress is assumed to convert randomness into organized growth and complexity. This is what life on Earth seems to have done - so can the economy.  This inferred, apparent or default goal however faces another link between the economy and evolution - that we cannot rewind, as Stephen Jay Gould argued in 'Wonderful Life'. If we could, and we wound back the evolutionary clock, or the economy to an earlier stage and let them run again the only certain thing would be that the outcomes would be different, a second time around. Evolutionary science explains why this is in no way magical: it is impossible to exactly reproduce all the massive numbers of initial and intermediary factors of change and tipping points in the process. Many were random. Others will have a different effect, a second time around.

These are the rule, unfortunately, if we tried arguing that evolutionary economic progress would always and necessarily feature growth and complexity - which it needs to be repeated is only an apparent or inferred goal - because the progress can or might include extinction, downsizing, simplification or "anti-fragile" evolution for Nassim Taleb, and might even include criteria we (as human beings) did not know or could not understand. The relatively recent scientific knowledge of how DNA works is an example: changing the amino acid bases, even by a tiny amount, can have effects on the cell and organism which range from none at all to total and fatal but to us, when tinkering, all the amino acids looked and seemed the same.

This underlines one rule we know is not applied to the economy: blind change is frequent, often made by "innocents" who think they are "managing" and can imagine they are able to backtrack or rewind the economy anytime they want, by suppressing a reform they had made, or making new ones. "Obviously" they say, "we can get back to a balanced budget".

Evolutionary life sciences and physical sciences also tell us that we cannot learn anything concrete from how natural systems evolve or change with time: this varies so much - from all kinds of change over extreme long to short periods - that any so called steady state or equilibrium state (jargon terms bandied around by economists) has no guaranteed life expectancy at all. More simply, natural systems do not have steady or equilibrium states, when the scale and time factors are applied and we drill down into the fractal chaos system that, in reality, is what rules change.

Again able to be compared with the economy, we can talk about macro states, and micro states: a continental sized ecosystem, like its forests, can give us a picture of long-term stability, at the macro-level, but this is in no way what is happening with individual trees or even species of trees. Paleobotanists from as early as Dunkinfield Scott have detailed knowledge for the last 20 000 years, and find that tree species can often physically change place at an average speed of anywhere from 100 metres to 1000 metres, per year, for long periods.

Result: the forest is still there but its species composition has changed. This is what happens to the economy, too. The danger for learn nothing-forget nothing economic "mandarins" is they do not understand this and other, real world factors changing the macroeconomy, through constant change of the micro-economy. When they start playing around top-down, with the macroeconomy, as we can guess the effects can range from almost nothing at all to almost instantly catastrophic. We can call this an "ecological approach" to understanding the economy.

One thing is certain concerning change in natural systems: there is always, but always a component of catastrophic change, which can be a starting state or ending state, or intermediary. To be sure, our economic deciders, actors and players of the late stage randomized New Economy believe they are avoiding catastrophe - by randomness - or at least it will only hurt others, not them, when or if it comes. But one thing which evolutionary biology shows is that no species outside human beings ever plays kamikaze by deliberately creating fragility and randomness, because catastrophes will always come - from higher and wider systems - notably from climate change at the evolutionary timescale of tens of thousands of years, and up.

For this reason all living things, including human beings are "hard wired for loose fit", they are designed to have what looks like obsolescence and redundancy built-in. A check on "junk DNA" will help understand why human beings and - for example - house flies are "almost identical" by their DNA. Reasons for this vast oversupply of possible cell-coding and reproduction options or combinations could include a thing as unobvious, but necessary in an evolutionary timeframe as protecting life from cosmic radiation-induced random spontaneous mutation and the inevitable huge percentage of this which can only produce cancers.

The all-new "knowledge based" economy supposedly aims for specialization, tight fit, rapidly scaled up output, minimum stocks and similar goals, but as I remarked in a recent review of Nassim Nicholas Taleb's new book on fragility and how to avoid it, setting two-only basic goals, of specialization and scale, are a flirt with catastrophe: they merely produce bigger baskets to place more eggs into. Diversification could at least start with including ostrich, pheasant, duck and (why not?) snake eggs in the ever growing baskets. Utilising other types of containers, than baskets, is another track. Moving on from the fixation with eggs, is yet another. Trying other domesticated or even wild animals which do not lay eggs, for example.

In the coming Chinese year of the Snake (from 10 February) a little numerology as well as statistical chance could help us think about the outlook. Other Chinese years of the Snake have included 1929, 1989 and 2001 all of them years which had a "rather certain" unexpected impact on global finance and geopolitics. The stack of unresolved financial and economic hangovers from the 2008 crisis have in no way been magicked away, with the fragilizing role of unresolved national or 'sovereign' debts high up the list and scale of factors which can trigger fast or catastrophic change in the global economy - with almost no advance warning.

The first days of 2013 have already given us a taste of how fragile expectations can be manipulated to create an unreal surge of equity and commodity speculation, on 2 January. As we were told by business news spin doctors, the US Fiscal Cliff "has been resolved', but was in fact split into 3 or 4 new cliffs, with different best-by dates.

The analysis used to rationalize or justify this kind of cloud cuckoo "thinking' is easy to find. One example is the 24 December forecast by Forbes magazine staffers titled 'International economic forecast 2012-2013' where the writers say on regional prospects in the Middle East: "Turmoil in the Middle East is setting back tourism, lowering foreign investment, and putting oil revenue at risk. This region could bounce back moderately if Egypt and Syria settled their political problems. There’s probably not much of an upside scenario possible with respect to Iran, so let’s just say that a Persian Gulf war would be very harmful for much of this region".

The logic is nonsensical because sufficient turmoil in the region able to actually reduce oil export capacity will instantly raise oil prices by as much as 50% above present prices. For as long as turmoil boils in the background but does not harm export capacity, oil market operators will keep slapping a "risk premium" on prices, estimated as anywhere from $15 - $25 per barrel. Without the turmoil, the premium disappears, putting oil revenues at sure and certain risk of facing the reality of already oversupplied world markets for oil. To be sure, tourist visits to destimations like Syria will be unsurprisingly low - as they were before the Syrian civil war. War against Iran would firstly be unwinnable because Iran is impossible to occupy without insane numbers of troops, and secondly would be catastrophic, not just "very harmful for much of this region".

None of this seeps through the coded language of rentacrowd "analyses" which stoically forecast "better times coming" and betray the complete absence of systems thinking.

The outlook for 2013, probably more than for the majority of recent years is unique, changing and unpredictable - in other words, evolutionary. Adaptation is always the only alternative to extinction therefore this year will very likely feature both, with the permanent possibility of catastrophe being the biggest lever of change.

Recent years - certainly since 2008 - have shown that "inflation has disappeared", when rational analysis of "print and spend" tactics and expedients used by Harvard-Soviet minded clique of high level deciders should normally have produced massive inflation. Analysis of macroeconomy-microeconomy impacts of and from "fiscal incontinence" helps show why inflation hasn't happened: the two are further apart than ever, evolving along totally different trajectories. helping explain the apparent big surprise of deflation outcropping in whole sectors and segments of the economy.

To be sure it is not possible to have both processes operating simultaneously without major (if hidden) changes and adaptive responses also operating, especially in exposed sector and in the microeconomy. One key result for which the figures are stark is the global car industry's continuing rapid growth of output capacity, and the disaggregating and segmenting car industry in nearly all OECD countries. Another example is global energy, with continuing supply growth and rising capacity, but weak, zero or declining growth of energy consumption.

One key insight from evolutionary science will likely dominate: the unique nature of evolutionary change. For what we can call "average analysts" it can seem that 2013 will be just another year with any number of follow-on and muddle-through behavioral traits, but this ignores the major role of uniqueness in real world evolution. Each state of change is always unique, literally, meaning there is always a real danger of simply projecting "trends continued" and finding these diverge from the real trends at an exponential rate. The potential for massive and unexpected economic system change, with or without catastrophic drivers of change, is almost certainly very high in 2013.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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