The core insight  of the resilience-stability tradeoff is that stability leads to loss of resilience. Therefore stabilisation too leads to increased systemic fragility. But there is a lot more to it. In comparing economic crises to forest fires and river floods, I have highlighted the common patterns to the process of system fragilisation which eventually leaves the system “manager” in a situation where there are no good options left.

Drawing upon the work of Mancur Olson, I have explored how the buildup of special interests means that stability is self-reinforcing. Once rent-seeking has achieved sufficient scale, “distributional coalitions have the incentive and..the power to prevent changes that would deprive them of their enlarged share of the social output”. But what if we “solve” the Olsonian problem? Would that mitigate the problem of increased stabilisation and fragility? In this post, I will argue that the cycle of fragility and collapse has much deeper roots than any particular form of democracy.

In this analysis, I am going to move away from ecological analogies and instead turn to an example from modern medicine. In particular, I am going to compare the experience and history of psychiatric medication in the second half of the twentieth century to some of the issues we have already looked at in macroeconomic and ecological stabilisation. I hope to convince you that the uncanny similarities in the patterns observed in stabilised systems across such diverse domains are not a coincidence. In fact, the human body provides us with a much closer parallel to economic systems than even ecological systems with respect to the final stages of stabilisation. Most ecological systems collapse sooner simply because the limits to which resources will be spent in an escalating fashion to preserve stability are much smaller. For example, there are limits to the resources that will be deployed to prevent a forest fire, no matter how catastrophic. On the other hand, the resources that will be deployed to prevent collapse of any system that is integral to human beings are much larger.

Even by the standards of this blog, this will be a controversial article. In my discussion of psychiatric medicine I am relying primarily on Robert Whitaker’s excellent but controversial and much-disputed book ‘Anatomy of an Epidemic’. Nevertheless, I want to emphasise that my ultimate conclusions are much less incendiary than those of Whitaker. In the same way that I want to move beyond an explanation of the economic crisis that relies on evil bankers, crony capitalists and self-interested technocrats, I am trying to move beyond an explanation that blames evil pharma and misguided doctors for the crisis in mental health. I am not trying to imply that fraud and rent-seeking does not have a role to play. I am arguing that even if we eliminate them, the aim of a resilient economic and social system would not be realised.


The puzzle of the history of macroeconomic stabilisation post-WW2 can be summarised as follows. Clearly every separate event of macroeconomic stabilisation works. Most monetary and fiscal interventions result in a rise in the financial markets, NGDP expectations and economic performance in the short run. Yet,

  • we are in the middle of a ‘great stagnation’ and have been for a few decades.
  • the frequency of crises seems to have risen dramatically in the last fifty years culminating in the environment since 2008 which is best described as a perpetual crisis.
  • each recovery seems to be weaker than the previous one and requires an increased injection of stimulus to achieve results that were easily achieved by a simple rate cut not that long ago.

Similarly, the history of mental health post-WW2 too has been a puzzle and is summarised by Whitaker as follows:

The puzzle can now be precisely summed up. On the one hand, we know that many people are helped by psychiatric medications. We know that many people stabilize well on them and will personally attest to how the drugs have helped them lead normal lives. Furthermore, as Satcher noted in his 1999 report, the scientific literature does document that psychiatric medications, at least over the short term, are “effective.” Psychiatrists and other physicians who prescribe the drugs will attest to that fact, and many parents of children taking psychiatric drugs will swear by the drugs as well. All of that makes for a powerful consensus: Psychiatric drugs work and help people lead relatively normal lives. And yet, at the same time, we are stuck with these disturbing facts: The number of disabled mentally ill has risen dramatically since 1955, and during the past two decades, a period when the prescribing of psychiatric medications has exploded, the number of adults and children disabled by mental illness has risen at a mind-boggling rate.

Whitaker then asks the obvious but heretical question - “Could our drug-based paradigm of care, in some unforeseen way, be fueling this modern-day plague?” and answers the question in the affirmative. But what are the precise mechanisms and patterns that underlie this deterioration?

Adaptive Response to Intervention and Drug Dependence

The fundamental reason why interventions fail in complex adaptive systems is the adaptive response triggered by the intervention that subverts the aim of the intervention. Moreover once the system is artificially stabilised and system agents have adapted to this new stability, the system cannot cope with any abrupt withdrawal of the stabilising force. For example, Whitaker notes that

Neuroleptics put a brake on dopamine transmission, and in response the brain puts down the dopamine accelerator (the extra D2 receptors). f the drug is abruptly withdrawn, the brake on dopamine is suddenly released while the accelerator is still pressed to the floor. The system is now wildly out of balance, and just as a car might careen out of control, so too the dopaminergic pathways in the brain……In short, initial exposure to neuroleptics put patients onto a path where they would likely need the drugs for life.

Whitaker makes the same observation for benzodiazepines and antidepressants:

benzodiazepines….work by perturbing a neurotransmitter system, and in response, the brain undergoes compensatory adaptations, and as a result of this change, the person becomes vulnerable to relapse upon drug withdrawal. That difficulty in turn may lead some to take the drugs indefinitely.

(antidepressants) perturb neurotransmitter systems in the brain. This leads to compensatory processes that oppose the initial acute effects of a drug…. When drug treatment ends, these processes may operate unopposed, resulting in appearance of withdrawal symptoms and increased vulnerability to relapse.

Similarly, when a central bank protects incumbent banks against liquidity risk, the banks choose to hold progressively more illiquid portfolios. When central banks provide incumbent banks with cheap funding in times of crisis to prevent failure and creditor losses, the banks choose to take on more leverage. This is similar to what John Adams has termed the ‘risk thermostat’ - the system readjusts to get back to its preferred risk profile. The protection once provided is almost impossible to withdraw without causing systemic havoc as agents adapt to the new stabilised reality and lose the ability to survive in an unstabilised environment.

Of course, in economic systems when agents actively intend to arbitrage such commitments by central banks, it is simply a form of moral hazard. But such an adaptation can easily occur via the natural selective forces at work in an economy - those who fail to take advantage of the Greenspan/Bernanke put simply go bust or get fired. In our brain the adaptation simply reflects homeostatic mechanisms selected for by the process of evolution.

Transformation into a Pathological State, Loss of Core Functionality and Deterioration of the Baseline State

I have argued in many posts that the successive cycles of Minskyian stabilisation have a role to play in the deterioration in the structural performance of the real economy which has manifested itself as ‘The Great Stagnation’. The same conclusion holds for many other complex adaptive systems and our brain is no different. Stabilisation kills much of what makes human beings creative. Innovation and creativity are fundamentally disequilibrium processes so it is no surprise that an environment of stability does not foster them. Whitaker interviews a patient on antidepressants who said: “I didn’t have mood swings after that, but instead of having a baseline of functioning normally, I was depressed. I was in a state of depression the entire time I was on the medication.”

He also notes disturbing research on the damage done to children who were treated for ADHD with Ritalin:

when researchers looked at whether Ritalin at least helped hyperactive children fare well academically, to get good grades and thus succeed as students, they found that it wasn’t so. Being able to focus intently on a math test, it turned out, didn’t translate into long-term academic achievement. This drug, Sroufe explained in 1973, enhances performance on “repetitive, routinized tasks that require sustained attention,” but “reasoning, problem solving and learning do not seem to be [positively] affected.”……Carol Whalen, a psychologist from the University of California at Irvine, noted in 1997 that “especially worrisome has been the suggestion that the unsalutary effects [of Ritalin] occur in the realm of complex, high-order cognitive functions such as flexible problem-solving or divergent thinking.”

Progressive Increase in Required Dosage

In economic systems, this steady structural deterioration means that increasing amounts of stimulus need to be applied in successive cycles of stabilisation to achieve the same levels of growth. Whitaker too identifies a similar tendency:

Over time, Chouinard and Jones noted, the dopaminergic pathways tended to become permanently dysfunctional. They became irreversibly stuck in a hyperactive state, and soon the patient’s tongue was slipping rhythmically in and out of his mouth (tardive dyskinesia) and psychotic symptoms were worsening (tardive psychosis). Doctors would then need to prescribe higher doses of antipsychotics to tamp down those tardive symptoms.

At this point, some of you may raise the following objection: so what if the new state is pathological? Maybe capitalism with its inherent instability is itself pathological. And once the safety nets of the Greenspan/Bernanke put, lender-of-last-resort programs and too-big-to-fail bailouts are put in place why would we need or want to remove them? If we simply medicate the economy ad infinitum, can we not avoid collapse ad infinitum?

This argument however is flawed.

  • The ability of economic players to reorganise to maximise the rents extracted from central banking and state commitments far exceeds the the resources available to the state and the central bank. The key reason for this is the purely financial nature of this commitment. For example, if the state decided to print money and support the price of corn at twice its natural market price, then it could conceivably do so forever. Sooner or later, rent extractors will run up against natural resource limits - for example,limits on arable land. But when the state commits to support a credit money dominant financial system and asset prices then the economic system can and will generate financial “assets” without limit to take advantage of this commitment. The only defense that the CB and the state possess is regulations aimed at maintaining financial markets in an incomplete, underdeveloped state where economic agents do not possess the tools to game the system. Unfortunately as Minsky and many others have documented, the pace of financial innovation over the last half-century has meant that banks and financialised corporates have all the tools they need to circumvent regulations and maximise rent extraction.
  • Even in a modern state that can print its own fiat currency, the ability to maintain financial commitments is subordinate to the need to control inflation. But doesn’t the complete absence of inflationary pressures in the current environment prove that we are nowhere close to any such limits? Not quite - As I have argued before, the current macroeconomic policy is defined by an abandonment of the full employment target in order to mitigate any risk of inflation whatsoever. The inflationary risk caused by rent extraction from the stabilisation commitment is being counterbalanced by a “reserve army of labour”. The reason for giving up the full employment is simple - As Minsky identified, once the economy has gone through successive cycles of stabilisation, it is prone to ‘rapid cycling’.

Rapid Cycling and Transformation of an Episodic Illness into a Chronic Illness

Minsky noted that

A high-investment, high-profit strategy for full employment - even with the underpinning of an active fiscal policy and an aware Federal Reserve system - leads to an increasingly unstable financial system, and an increasingly unstable economic performance. Within a short span of time, the policy problem cycles among preventing a deep depression, getting a stagnant economy moving again, reining in an inflation, and offsetting a credit squeeze or crunch.

In other words, an economy that attempts to achieve full employment will yo-yo uncontrollably between a state of debt-deflation and high, variable inflation - somewhat similar to a broken shower that only runs either too hot or too cold. The abandonment of the full employment target enables the system to postpone this point of rapid cycling.

The structural malformation of the economic system due to the application of increasing levels of stimulus to the task of stabilisation means that the economy has lost the ability to generate the endogenous growth and innovation that it could before it was so actively stabilised. The system has now been homogenised and is entirely dependent upon constant stimulus. The phenomenon of ‘rapid cycling’ explains a phenomenon I noted in an earlier post which is the apparently schizophrenic nature of the markets, turning from risk-on to risk-off at the drop of a hat. It is the lack of diversity that causes this as the vast majority of agents change their behaviour based on absence or presence of stabilising interventions.

Whitaker again notes the connection between medication and rapid cycling in many instances:

As early as 1965, before lithium had made its triumphant entry into American psychiatry, German psychiatrists were puzzling over the change they were seeing in their manic-depressive patients. Patients treated with antidepressants were relapsing frequently, the drugs “transforming the illness from an episodic course with free intervals to a chronic course with continuous illness,” they wrote. The German physicians also noted that in some patients, “the drugs produced a destabilization in which, for the first time, hypomania was followed by continual cycling between hypomania and depression.”"

(stimulants) cause children to cycle through arousal and dysphoric states on a daily basis. When a child takes the drug, dopamine levels in the synapse increase, and this produces an aroused state. The child may show increased energy, an intensified focus, and hyperalertness. The child may become anxious, irritable, aggressive, hostile, and unable to sleep. More extreme arousal symptoms include obsessive-compulsive and hypomanic behaviors. But when the drug exits the brain, dopamine levels in the synapse sharply drop, and this may lead to such dysphoric symptoms as fatigue, lethargy, apathy, social withdrawal, and depression. Parents regularly talk of this daily “crash.”


At this point, I seem to be arguing that stabilisation is all just a con-game designed to enrich evil bankers, evil pharma etc. But such an explanation underestimates just how deep-seated the temptation and need to stabilise really is. The most critical component that it misses out on is the fact that the “patient” in complex adaptive systems is as eager to choose stability over resilience as the doctor is.

The Short-Term vs The Long-Term

As Daniel Carlat notes, the reality is that on the whole, psychiatric drugs “work” at least in the short term. Similarly, each individual act of macroeconomic stabilisation such as a lender-of-last-resort intervention, quantitative easing or a rate cut clearly has a positive impact on the short-term performance of both asset markets and the economy.

Whitaker too acknowledges this:

Those are the dueling visions of the psychopharmacology era. If you think of the drugs as “anti-disease” agents and focus on short-term outcomes, the young lady springs into sight. If you think of the drugs as “chemical imbalancers” and focus on long-term outcomes, the old hag appears. You can see either image, depending on where you direct your gaze.

The critical point here is that just like in forest fires and macroeconomies, the initial attempts to stabilise can be achieved easily and with very little medication. The results may seem even miraculous. But this initial period does not last. From one of many cases Whitaker quotes:

at first, “it was like a miracle,” she says. Andrew’s fears abated, he learned to tie his shoes, and his teachers praised his improved behavior. But after a few months, the drug no longer seemed to work so well, and whenever its effects wore off, there would be this “rebound effect.” Andrew would “behave like a wild man, out of control.” A doctor increased his dosage, only then it seemed that Andrew was like a “zombie,” his sense of humor reemerging only when the drug’s effects wore off. Next, Andrew needed to take clonidine in order to fall asleep at night. The drug treatment didn’t really seem to be helping, and so Ritalin gave way to other stimulants, including Adderall, Concerta, and dextroamphetamine. “It was always more drugs,” his mother says.

Medication Seen as Revealing Structural Flaws

One would think that the functional and structural deterioration that follows constant medication would cause both the patient and the doctor to reconsider the benefits of stabilisation. But this deterioration too can be interpreted in many different ways. Whitaker gives an example where the stabilised state is seen to be beneficial by revealing hitherto undiagnosed structural problems:

in 1982, Michael Strober and Gabrielle Carlson at the UCLA Neuropsychiatric Institute put a new twist into the juvenile bipolar story. Twelve of the sixty adolescents they had treated with antidepressants had turned “bipolar” over the course of three years, which—one might think—suggested that the drugs had caused the mania. Instead, Strober and Carlson reasoned that their study had shown that antidepressants could be used as a diagnostic tool. It wasn’t that antidepressants were causing some children to go manic, but rather the drugs were unmasking bipolar illness, as only children with the disease would suffer this reaction to an anti-depressant. “Our data imply that biologic differences between latent depressive subtypes are already present and detectable during the period of early adolescence, and that pharmacologic challenge can serve as one reliable aid in delimiting specific affective syndromes in juveniles,” they said.

Drug Withdrawal as Proof That It Works

The symptoms of drug withdrawal can also be interpreted to mean that the drug was necessary and that the patient is fundamentally ill. The reduction in withdrawal symptoms when the patient goes back on provides further “proof” that the drug works. Withdrawal symptoms can also be interpreted as proof that the patient needs to be treated for a longer period. Again, quoting from Whitaker:

Chouinard and Jones’s work also revealed that both psychiatrists and their patients would regularly suffer from a clinical delusion: They would see the return of psychotic symptoms upon drug withdrawal as proof that the antipsychotic was necessary and that it “worked.” The relapsed patient would then go back on the drug and often the psychosis would abate, which would be further proof that it worked. Both doctor and patient would experience this to be “true,” and yet, in fact, the reason that the psychosis abated with the return of the drug was that the brake on dopamine transmission was being reapplied, which countered the stuck dopamine accelerator. As Chouinard and Jones explained: “The need for continued neuroleptic treatment may itself be drug-induced.”

while they acknowledged that some alprazolam patients fared poorly when the drug was withdrawn, they reasoned that it had been used for too short a period and the withdrawal done too abruptly. “We recommend that patients with panic disorder be treated for a longer period, at least six months,” they said.

Similarly, macroeconomic crises can and frequently are interpreted as a need for better and more stabilisation. The initial positive impact of each intervention and the negative impact of reducing stimulus only reinforces this belief.


A typical complaint against Whitaker’s argument is that his thesis is unproven. I would argue that within the confines of conventional “scientific” data analysis, his thesis and others directly opposed to it are essentially unprovable. To take an example from economics, is the current rush towards “safe” assets a sign that we need to produce more “safe” assets? Or is it a sign that our fragile economic system is addicted to the need for an ever-increasing supply of “safe” assets and what we need is a world in which no assets are safe and all market participants are fully aware of this fact?

In complex adaptive systems it can also be argued that the modern scientific method that relies on empirical testing of theoretical hypotheses against the data is itself fundamentally biased towards stabilisation and against resilience. The same story that I trace out below for the history of mental health can be traced out for economics and many other fields.

Desire to Become a ‘Real’ Science

Whitaker traces out how the theory attributing mental disorders to chemical imbalances was embraced as it enabled psychiatrists to become “real” doctors and captures the mood of the profession in the 80s:

Since the days of Sigmund Freud the practice of psychiatry has been more art than science. Surrounded by an aura of witchcraft, proceeding on impression and hunch, often ineffective, it was the bumbling and sometimes humorous stepchild of modern science. But for a decade and more, research psychiatrists have been working quietly in laboratories, dissecting the brains of mice and men and teasing out the chemical formulas that unlock the secrets of the mind. Now, in the 1980s, their work is paying off. They are rapidly identifying the interlocking molecules that produce human thought and emotion…. As a result, psychiatry today stands on the threshold of becoming an exact science, as precise and quantifiable as molecular genetics.

Search for the Magic Bullet despite Complexity of Problem

In the language of medicine, a ‘magic bullet’ is a drug that counters the root cause of the disease without adversely affecting any other part of the patient. The chemical-imbalance theory took a ‘magic bullet’ approach which reduced the complexity of our mental system to "a simple disease mechanism, one easy to grasp. In depression, the problem was that the serotonergic neurons released too little serotonin into the synaptic gap, and thus the serotonergic pathways in the brain were "underactive". Antidepressants brought serotonin levels in the synaptic gap up to normal, and that allowed these pathways to transmit messages at a proper pace."

Search for Scientific Method and Objective Criteria

Whitaker traces out the push towards making psychiatry an objective science with a defined method and its implications:

Congress had created the NIMH with the thought that it would transform psychiatry into a more modern, scientific discipline…..Psychiatrists and nurses would use “rating scales” to measure numerically the characteristic symptoms of the disease that was to be studied. Did a drug for schizophrenia reduce the patient’s “anxiety”? His or her “grandiosity”? “Hostility”? “Suspiciousness”? “Unusual thought content”? “Uncooperativeness”? The severity of all of those symptoms would be measured on a numerical scale and a total “symptom” score tabulated, and a drug would be deemed effective if it reduced the total score significantly more than a placebo did within a six-week period. At least in theory, psychiatry now had a way to conduct trials of psychiatric drugs that would produce an “objective” result. Yet the adoption of this assessment put psychiatry on a very particular path: The field would now see short-term reduction of symptoms as evidence of a drug’s efficacy. Much as a physician in internal medicine would prescribe an antibiotic for a bacterial infection, a psychiatrist would prescribe a pill that knocked down a “target symptom” of a “discrete disease.” The six-week “clinical trial” would prove that this was the right thing to do. However, this tool wouldn’t provide any insight into how patients were faring over the long term.

It cannot be emphasised enough that even increasing the period of the scientific trial is not enough to give us definitive answers. The argument that structural flaws are being uncovered or that withdrawal proves that the drug works cannot be definitively refuted. Moreover, at every point of time after medication is started, the short-term impact of staying on or increasing the level of medication is better than the alternative of going off the medication. The deeper issue here is also that in such a system, statistical analysis that tries to determine the efficacy of the intervention cannot deal with the fact that the nature of the intervention itself is to shift the distribution of outcomes into the tail and continue to do so as long as the level of medication keeps increasing.

The Control Agenda and High Modernism

The desire for stability and the control agenda is not simply a consequence of the growth of Olsonian special interests in the economy. The title of this post is inspired by Holling and Meffe’s classic paper on this topic in ecology. Their paper highlights that stabilisation is embedded within the command-and-control approach which itself is inherent to the high modernist way that James Scott has criticised.

Holling and Meffe also recognise that it is a simplistic application of “scientific” methods that underpins this command-and-control philosophy:

much of present ecological theory uses the equilibrium definition of resilience, even though that definition reinforces the pathology of equilibrium-centered command and control. That is because much of that theory draws predominantly from traditions of deductive mathematical theory (Pimm 1984) in which simplified, untouched ecological systems are imagined, or from traditions of engineering in which the motive is to design systems with a single operating objective (Waide & Webster 1976; De Angelis et. al. 1980; O’Neill et al. 1986), or from small-scale quadrant experiments in nature (Tilman & Downing 1994) in which long-term, large-scale successional or episodic transformations are not of concern. That makes the mathematics more tractable, it accommodates the engineer’s goal to develop optimal designs, and it provides the ecologist with a rationale for utilizing manageable, small sized, and short-term experiments, all reasonable goals. But these traditional concepts and techniques make the world appear more simple, tractable, and manageable than it really is. They carry an implicit assumption that there is global stability - that there is only one equilibrium steady-state, or, if other operating states exist, they should be avoided with safeguards and regulatory controls. They transfer the command-and-control myopia of exploitive development to similarly myopic demands for environmental regulations and prohibitions.

Those who emphasize ecosystem resilience, on the other hand, come from traditions of applied mathematics and applied resource ecology at the scale of ecosystems, such as the dynamics and management of freshwater systems (Fiering 1982) forests (Clark et al. 19759, fisheries (Walters 1986) semiarid grasslands (Walker et al. 1969), and interacting populations in nature (Dublin et al. 1990; Sinclair et al. 1990). Because these studies are rooted in inductive rather than deductive theory formation and in experience with the effects of large-scale management disturbances, the reality of flips from one stable state to another cannot be avoided (Helling 1986).


My aim in this last section is not to argue against the scientific method but simply to state that we have adopted too narrow a definition of what constitutes a scientific endeavour. Even this is not a coincidence. High modernism has its roots firmly planted in Enlightenment rationality and philosophical viewpoints that lie at the core of our idea of progress. In many uncertain domains, genuine progress and stabilisation that leads to fragility cannot be distinguished from each other. These are topics that I hope to explore in future posts.



I hope you'll allow me to try out your analogy a bit (I apologize in advance if my thoughts are unclear): Let me start from the perspective of Harvey's/Brenner's macro description of the economic development since WW2. The big problem you identify at the end is that indicators of health are always measured locally/in specific systems, with the doctors who are concerned with "health" in those measures having different amounts of power over the entire body. Now, in order for the metaphor to work, your "body" would have to be closed system (though I suppose it could be allowed to grow), which means that it has to enclose the entirety of the globalizing world. As such, (ignoring external shocks like those provided by GW for the moment) 'good health' means 'balanced production/consumption'. So, what happened? First, Western Europe, Japan and later the Asian Tigers were integrated. In every case, these countries weren't just added to increase production and drive down production costs, but they also worked on creating additional demand, in order to keep the thing balanced (though hardly universally; see The Shock Doctrine). Yet the next big entrants -- China/India/SE Asia -- entered without sufficiently emphasizing this need to maintain balance. And balance is necessary, because excess/cheaper production poisons the body, leading the body (via the doctors) to further decrease the body's ability to consume produced materials, while making it seem healthier than it is in the areas measured by the health-measurers). But while it then is fairly easy to argue that stupid, but powerful shrinks (US policy makers) will prescribe courses of action that will make the system less healthy in the long run because of their willingness to ignore the health in other parts of the body, I don't really see yet what analogies might work for other parts of this extremely simplistic story (such as how to analogize the fact that they've been busy moving production to different parts of the 'body' in order to make the production costs as low as possible). Anyway, to say a few more words about your conclusion. The second issue seems to me the question who or what has agency in this story, and how to express conflicts between agents. But the issue here isn't simply an epistemological one, but really an epistemological/ontological question, since different disciplines focus on different parts of the body, using them as indicators of overall health. So in order to make this work, you'd have to let different disciplines speak about the same overall state. (One alternative discipline that might be of interest might be Sapolsky's work on the physiology and psychology of stress as a catalyst for trauma (because of the way stress inhibits the immune system, rather than affecting health directly, attenuating the way in which different parts of the body metabolize and produce things).) In any case, the question would be first what different kinds of doctors interested in maintaining a resilient system suggest as the best course of action. And second, and more importantly, who/what decides which doctors/disciplines becomes dominant, and who decided that the psychiatric ontology of health would become the dominant one in trying to explain the problems the body was experiencing. (Or am I wrong in my conclusion that you identify psychiatry with neoliberalism? ;)) (For a few interesting reads on this issue of different ontologies of the same identifiable body, see Annemarie Mol's work, e.g., her The Body Multiple, or this: )


Foppe - Thanks for the comment. On the first part of your comment, you're applying the thesis to a more global context. I haven't yet thought of a sensible resilience lens on the production-consumption balance, primarily because I haven't been able to think of anything smart to say! On the second part, my point is more that the natural way of "scientific" thinking in the modernist era is biased towards stability. And in an uncertain situation, we never know whether we've made a breakthrough or if we are simply fragilising the system. My take on the current era is more that we've somehow perfected the ability to stabilise, an ability that makes ultimate collapse more likely.

Igor G.

Thanks for a thought-provoking piece, Ashwin. I mentioned it here:


Igor - Thanks.


This analogy shows how difficult change will be. Is your next post about an anti-withdrawal drug our society can take? More seriously, this reminds of the stereotypical eastern/western differences. Judeo Christians have the 10 commandments (stability). To Taoists, the true Tao is the unspoken Tao (resilience). I suppose it's been a few thousand years since our last prophet...


Matthew - I wish there were an anti-withdrawal drug! The "cure" as far as I know is only systemic collapse. Your intuition is on the right track - although I will need to write a few more posts before I get to it, there is a deep philosophical divide that can be simplistically mapped out as east/west. And yes Taoism is the quintessential resilient philosophy.


Is systemic collapse the cure, or the result of our current system? We are so addicted to measurements, but things like well-being or happiness can only be indirectly measured. We want to have a beautiful society, but aiming for the best bust-waist-hip size will only lead to an excessive amount of plastic surgeons. Does happiness only exist with despair? Does beauty require ugliness? Perhaps we simply need to embrace a wider range of emotions and accept the variability of life. I hope that instead of being taught through failure we can learn by way of a positive example. I look forward to your future posts.


I guess by "cure" I simply mean the only feasible path through which I see the fragility being tackled. Like you, I would prefer resilience to be restored without an intermediate collapse - some of my economic views, e.g. using helicopter drops to individuals to counter bank failures, are aimed at restoring resilience without systemic collapse. But even if they are adopted, we've simply reset the clock till the next phase of stabilisation. As you pointed out, the resilience way is inconsistent with the core of the philosophy that underpins modern civilisation. And the same biases that fragilise are also responsible for a lot of the technological progress.

The Gold Standard » Stability and interventions

[...] friend Srinivas Thiruvadanthai recommended that I read Ashwin Parameswaran’s post in his ‘macroresilience’ blog. Indeed, it is a perceptive post and it requires careful [...]


Nice piece once again. However it leaves me with a slight feeling that what you have presented us with is really just a very sophisticated restatement of the classical Austrian/libertarian view. Especially with this bit: "In other words, an economy that attempts to achieve full employment will yo-yo uncontrollably between a state of debt-deflation and high, variable inflation – somewhat similar to a broken shower that only runs either too hot or too cold. The abandonment of the full employment target enables the system to postpone this point of rapid cycling." That is very Austrian, and I would say it evidences some bias that is misplaced. A bias towards achieving full employment is a stabilisation bias, but so is avoiding inflation volatility. You may not have meant it, but I think here you are guilty of not following your own prescription. A resilient system is presumably one which cares neither about full employment or inflation or indeed any other specific 'measure' of success. I may well have jumped to unfair conclusions here but that is how I read this post.

Steve Roth

Damned interesting thinking. Wondering if you've read Dirk Bezemer's work: Tried a google search and didn't find any references herein, thought you'd find it interesting.


The passage you quote is just a restatement of Minsky who is a Post-Keynesian. I am not arguing for avoiding inflation/deflation per se - it is the rapid cycling that is clearly a pathological phenomenon and a sign of fragility. Of the Austrians, I have only really read Hayek whom I am significantly influenced by. But I'd be shocked if any Austrian has ever made this point. Even Minsky's point is one that his centrist followers usually gloss over primarily because his prescription for avoiding this problem of rapid cycling is the 'socialisation of investment' just like Keynes. My departure from Minsky is that resilience usually requires that we allow the system to fight off small sicknesses and restrict our interventions to fighting off severe sicknesses. This is slightly Schumpeterian but he would have probably said don't intervene at all. But my deeper point in this post is that there are deep-seated reasons for why we, at least in the West, choose stability. The current fragility only reflects the fact that we have gotten a lot better at the task of stabilisation compared to say a 100 years ago. Even worse, in an uncertain world it's hard to distinguish between stabilisation/fragilisation and more genuine progress. The two may even be inseparable.


Steve - Thanks. Yes - I've read some of his papers such as this one which is excellent. There's a reasonable amount of literature that treats the economy as a complex, non-linear system but there is precious little that treats it as an complex adaptive system. The reason, as Bezemer notes at the end of the paper, is that the model without micro-foundations is hard enough but an agent-based micro-founded model that also gets the disequilibrium dynamics of bank credit creation right is a very complex exercise. It is this adaptive, co-evolutionary dynamic of the system that I am most interested in.

Steve Roth

Do you follow Steve Keen's modeling work? He definitely seems to be moving in the right direction. When do you think we'll see anything of interest out of the Santa Fe Institute guys?


" it is the rapid cycling that is clearly a pathological phenomenon and a sign of fragility." Why? Firstly, that is what we had under the 19th century gold standard, very rapid price changes over short time periods, and that was characterised by much less stabilisation, at least as far as the money system was concerned. The cycle time of inflation/deflation in a healthy resilient economy is defined by what? Is there some basic time constant? Lastly e have had a long period of relative price stability (measured over the short run) which you suggest has been a bad thing. SO I would have thought a faster cycle would be a good thing. Confused...


Steve - Yes, I have read Steve Keen's work. Again, I like a lot of it. But his models are also focused on aggregates. If you ignore the adaptive consequences of your interventions, then you almost always end up with a pro-stabilisation conclusion. I follow the work at Santa Fe quite keenly but in all honesty, I haven't seen that much yet on the macro front that excites me.


LH - the rapid cycling is a logical consequence of the stabilisation. Any attempt to remove the stimulus sets off a debt-deflation and any attempt to tackle this debt-deflation sets off a inflation. What we have now is a sort of temporary release valve in the form of higher unemployment aka the reserve army of labour. But as I have noted before, this is simply converting an economic fragility into a social fragility. Obviously if there was a rapid cycling which was entirely natural to the system, then it would not be pathological. But remember that what I am talking about is essentially a bimodal distribution where the only two states available are high inflation or deflation. I don't think the 19th century was like that. At any rate, I'm not a gold bug. The 19th century had the same stabilising tendencies, just implemented in a much less effective manner.

Anonymous Coward

Hi. The posts are interesting. I find myself checking this site several times a week for new stuff.


Ashwin - I feel a similar discomfort to LH. I like your piece; but doesn't it justify an entirely laissez-faire approach to macroeconomics? After all, automatic stabilisers are what they say - an attempt to stabilise the economy. I appreciate you are not a gold bug, but your piece sounds pretty Schumpeterian - let natural 'creative destruction' take its course. You have commented before that you favour a dynamic form of capitalism where business failure is welcomed, but your piece seems to do more than justify letting businesses fail - it justifies poverty and growing inequality.


Anders - Quoting from what I said in my earlier post on river flood management and resilience, "Economic policy must allow the “river” of the macroeconomy to flow in a natural manner and restrict its interventions to insuring individual economic agents against the occasional severe flood." So long as automatic stabilisers only protect against severe disturbances, e.g. low levels of unemployment insurance, they have very few fragilising consequences. Allowing business failure, removing barriers to entry, removing all rents that flow to businesses - these are critical. Insurance for individuals is not the issue here. As I have illustrated on multiple occasions, it is these rents and implicit protections of regimes such as the Greenspan Put that are responsible for increased inequality. If we allow creative destruction to take place and protect the weak against the collateral damage, inequality will fall dramatically in an instant.


Ashwin - I accept the counterfactual that if there had been better institutional protections erected over the last 100-200 years to banish rent-seeking and barriers to entry, there would be less inequality. But you are making a more ambitious claim: that despite the fortunes and wealth inequality (not to mention the Bourdieusian social and cultural capital) already in place today, somehow the creative destruction of certain business models would lead to inequality being reduced. This doesn't seem so plausible; perhaps there is a particular post you can direct me to where you make this argument? Doesn't this even go beyond what Olson was arguing? To the rest of your comment, it seems you are saying that stabilisation of a complex system doesn't *always* compromise resilience, but only does so where stabilisation is aimed at non-severe disturbances to the system. The distinction of 'degree of severity of disturbance' has a plausibility when it comes to flooding; but in macroeconomic terms, your account needs to characterise a business failure as 'non-severe', whilst characterising a person being genuinely without a job as a severe disturbance. I'm a progressive and so have sympathy with this, but it doesn't seem an entirely obvious delineation that the average WSJ reader would accept.


" “Economic policy must allow the “river” of the macroeconomy to flow in a natural manner and restrict its interventions to insuring individual economic agents against the occasional severe flood.”" That is only a wise call if the underlying mechanisms of the macroeconomy are themselves 'natural'. But of course they are not because they have always been based on the deeply unnatural notion of a risk free asset. Until the macroeconomy is purged of such fictions, any call to allow the economy to follow its 'natural' path is premature. This is where I think your analysis is wrong or at least the emphasis is wrong. When we have a financial system that reflects the underlying reality of negative carrying costs for deferred consumption then we may consider the option of leaving the system to correct for itself. The foremost enemy here is not policy makers, its entrenched notions of the moral value of saving and wrong headed expectations of positive yields. In so far as policy makers pander to such notions we might say they are making things worse. However the reason they do so is due to a long standing cultural bias that is deeply embedded in our civilisation and cannot be changed simply by "policy".


LiminalHack: "the deeply unnatural notion of a risk free asset." I agree with this on some level, but I am wondering what, in particular, you have in mind. Whatever the definition of money there is some rate at which the market will lend against excess collateral.  If we allow the borrower to choose the collateral then the market rate will be unique and universal. Where "money" is USD we call this the GC or General Collateral rate. What do you see as the problem with this rate/asset?


K, any asset immune to nominal losses is a risk free asset. While such assets may be vulnerable to "real" losses, this matters only over the long run. As for your market clearing argument, I don't disagree but will merely observe that in the absence of assets **immune** from nominal losses that the status of best performing asset in terms of avoidance of short term nominal losses (aka liquidity) will change on a regular basis. Therefore no collateral asset nor the money exchanged for it would qualify as risk free over anything but the shortest time frame. This is equivalent to the case where there is no universal unit of account.


But there are always assets that are immune from nominal losses. You just create a repo loan. Repo loans are recollateralized daily so there will always be plenty of excess collateral even for a long term repo. And so long as you are talking about thoroughly overcollateralized loans then the there will be a unique risk free rate over any given period. For example a 10% one month loan against an arbitrary diversified portfolio of stocks is risk free as is a 90% one month loan against 1 year t-notes and will be struck at the same rate (so long as the borrower is free to choose the collateral).


Anders - You could try the posts under the 'inequality' category such as and if you want an overarching macro framework under which I think, this post has it. On a simple level, simply removing this obsessive focus on asset price stabilisation itself would reduce inequality dramatically. On focusing on individuals, the rationale isn't really on non-severe vs severe disturbances but on the inability for individuals to game the system to as great a degree as limited-liability entities which I mentioned here : "In order to promote system resilience and minimise moral hazard, any system of direct transfers must be directed only at individuals and it must be a discretionary policy tool utilised only to mitigate against the risk of systemic crises. The discretionary element is crucial as tail risk protection directed at individuals has minimal moral hazard implications if it is uncertain even to the slightest degree. Transfers must not be directed to corporate entities – even uncertain tail-risk protection provided to corporates will eventually be gamed. The critical difference between individuals and corporates in this regard is the ability of stockholders and creditors to spread their bets across corporate entities and ensure that failure of any one bet has only a limited impact on the individual investors’ finances. In an individual’s case, the risk of failure is by definition concentrated and the uncertain nature of the transfer will ensure that moral hazard implications are minimal. "


LH - you said "the reason they do so is due to a long standing cultural bias that is deeply embedded in our civilisation and cannot be changed simply by “policy”" That is exactly my point in the second half of this post! I am trying to move beyond the usual explanations of special interests etc and hopefully tie this implicit bias towards stability to something that is almost fundamental to modern civilisation.


Ashwin, You make an excellent case that successive stabilization leads us to an inevitable condition in which future expectations teeter hopelessly on the knife's edge between hyperinflation and debt-deflation. But you don't make an effective case that such stabilization would even occur in an alternate universe devoid of government sponsored private fractional reserve money creation. It is not at all clear that in a 100% reserve economy (perhaps one in which money was backed and convertible to capital assets rather than created via repo loans devoid of any ultimate nominal anchor) that the occasion for stabilization would ever arise in the first place. Also, the earth yields rents which are a positive externality of *all* economic activity. These rents are largely privatized but they are the rightful property of every citizen. Being their rightful property, an equal distribution of rents cannot *in principle* have moral hazard risks.


K - I don't deny that our current monetary system depends on the state's backing. But I see this evolution towards a purely credit-money, repo-based system itself as a symptom of a desire to stabilise the monetary system. If we have a system in which money is backed by real assets, then this may be a resilient system but it is certainly not stable. At the first sign of instability then I'd expect a clamour to revert to some more stable system. I'm not condoning this, just asserting that this dynamic is almost inevitable. On rents from the earth, I'm guessing that you're making a Georgist argument. And yes, I am not opposed to such rents being distributed to the masses and I certainly do not think they have any moral hazard implications.


Why don't you think it would be stable? Imagine that money was just the units of a giant ETF which contained a large cross section of liquid capital assets. Anyone one could redeem the money for the underlying basket or exchange the basket for new units. There would be no illusion of the ability to flee risk for nominal assets because they are one and the same. If capital assets still "wanted" to fluctuate in value relative to consumption goods and if this caused problems due to nominal rigidities (price and wage stickiness) then a central bank could simply split or reverse split the ETF units to stabilize nominal prices - a purely nominal solution to a purely nominal problem. But I'm not sure that would even be necessary. What is the intrinsic positive feedback process that you see as demanding stabilization in an effectively barter economy?


I'm not concerned with nominal rigidities. But this basket will and should be fairly volatile in terms of price relative to consumption goods. And this is not a situation that most people are comfortable with, which leads them to seek the illusion of stability. I'm not saying that your idea isn't good, it is. Personally, I'd even be happy with a sort of open-access repo/deposit system where every citizen has the effective rights and privileges of a bank. As long as this is combined with an emphasis on allowing micro-failure, I think it's probably good enough and close enough to our current system. But I am not at all convinced that any CB will allow micro-failure. In your system, I'd expect the first instance where asset prices fall significantly to be followed by a call for the CB to backstop asset prices or something of that sort.


"But this basket will and should be fairly volatile in terms of price relative to consumption goods." Possibly, but I doubt it. Since increases in expected returns are, at equilibrium, offset by increases in discount factors, changes in the macro outlook has no impact on the value of capital assets in aggregate (this would be transparently obvious since given a fixed number of ETF units, both nominal rates and nominal returns would be fixed at zero). But, if utilities are innately concave functions of absolute consumption levels then we get systemic risk aversion, i.e. negative correlation between uncertainty and general asset prices (in real terms) which is a source of volatility. But maybe absolute consumption utility is an artificial preference generated by nominal fixation in a world of inflation targeted money. There's certainly plenty of evidence that people aren't particularly more happy today than they were 50 years ago (maybe less so?) despite a vast increase in absolute per capita consumption. If, perhaps, utility is a function of relative (to our peers) consumption then there's no reason to expect a non-zero risk premium, which significantly reduces the possible sources of capital asset volatility. Here's another argument: if people suddenly perceive an increase in the uncertainty of the outlook (or for whatever reason, they are suddenly gripped with fear), then in this new economy the agents certainly have the ability to reallocate from speculative to less speculative capital assets. But I can't see why they would try to dump capital assets in aggregate since the only thing the entire portfolio can be exchanged for is current consumption, a decision that doesn't strike me as particularly favoured by a sudden onset of animal spirits. "In your system, I'd expect the first instance where asset prices fall significantly to be followed by a call for the CB to backstop asset prices or something of that sort." They can't. Let's say 100 units of money are backed by 10% of all capital assets. Now let's say capital assets drop in real terms. So the bank buys another 10% of all capital assets. But since each unit is already exchangeable for 0.1% of capital assets, every new unit will but exactly that much. So they can can keep "buying" until all capital assets are inside the ETF and there are 1000 units outstanding. They simply don't have the tools to do anything. A simpler way to view the system is if we imagine that the CB is the custodian ("registrar" in the UK) for all securities and they define the basket that constitutes "money". Then we don't even need the "ETF" buying and selling assets. We just have a simple software solution in which your portfolio can be viewed either as its constituent securities or as a portfolio of money plus residual securities. Then any money transaction merely effects a transfer of securities in the proportion specified in the defining basket. Instant settlement of securities/money would be a useful feature (its about time).


Some more cool things about "ETF" money: You don't need an investment industry, just some hedge funds to bring relative value in line. But most people can just hold money and don't need to deal with professionals. Also, borrowing, as a contract on future consumption, can't be framed in simple monetary terms but must be defined explicitly relative to a consumption basket index. This makes the zero-sum, exotic derivative nature of debt contracts very explicit which ought to mute the appeal a bit.


Just a couple of points on the volatility of asset markets - My reading of the whole "animal spirits" argument is that investments are the most volatile part of the economy. In the current regime, people leave capital assets for liquid assets i.e. money. If there is no risk-free asset, what will they do? I have no clear answers but I'm very wary of making any argument that markets will be efficient and there will be no endogenous volatility. You said that the CB can't backstop prices. I agree! My point is that people will clamour for the system itself to be abandoned and for reform to get us back to something similar to our current system.


"In the current regime, people leave capital assets for liquid assets i.e. money." Well, they *think* they do. In reality, of course, all we actually have is capital assets. Money being a derivative, its ability to transport aggregate consumption in time is a fallacy. So nobody "leaves" anything except work and consumption. Individually, of course, whoever holds the most money wins, so the behaviour is perfectly rational. It's the government, the provider of the (failed) consumption insurance that suffers the main losses. We absolutely need to deprive people of the false security blanket and tie their money illusion to capital assets. Personally, I think they'll be perfectly happy so long as you provide them with a safe focus for their nominal fixation. The private market can provide some short term consumption insurance for those who so require. But the risks must be properly priced by the insurance provider.


"My reading of the whole “animal spirits” argument is that investments are the most volatile part of the economy." It's really important that it's the existence of discounted consumption insurance that causes the collapse, not individually irrational behaviour. There is an insurance price cap at the ZLB and even when not in a liquidity trap, even knowing that it's there and that there is therefore a possibility of the system switching to the deflation attractor gives the system 2 expectations equilibria. Investors must constantly be on the outlook for a possible regime switch. In between the two stable equilibria (maxima) there exists a vast unstable minimum in which positive feedback amplifies all fluctuations. That is the meaning of "animal spirits" and it's the principal source of capital asset volatility. It's pure torture and all the more so because it's totally unnecessary. If it were the Martians [actually the Chinese] selling us cheap consumption insurance that ought to be fine. In principle we'd just arb them and shift towards relative over-consumption/under-investment for as long as it lasts. It's because it's the collective selling it to the individuals that we get the coordination failure in which we all arb ourselves.


Forget the comment about the Chinese. They are offering discounted consumption, not discounted insurance. Need to think about that last paragraph more. The rest stands.


That last paragraph should have said: If the Martians sell us discounted consumption insurance then we will purchase some of it and reduce current consumption and investment. But that's OK since the Martians can deliver on future consumption. If, on the other hand, we are collectively selling it to ourselves at a capped price, then the drop in investment will result in an inability to deliver on the insurance and the insurance seller (government) will end up either defaulting on the insurance or unilaterally redefining the insured consumption basket (inflating). "My point is that people will clamour for the system itself to be abandoned and for reform to get us back to something similar to our current system." I haven't heard much clamour for wholesale monetary reform even in our current horrific predicament, which suggests to me that the clamour for massive change ought to be lower if we had a system that exacted far less misery than what we are currently experiencing.


" they *think* they do." Yes but the illusion is quite a powerful one! And in a pure fiat world, the socialisation of insurance/losses can go on for a very long time. I think we're reasonably close to the end of this process but who knows? I don't think we disagree on much - primarily I'm skeptical that market efficiency will save us from instability in the "inelastic" money regime. But given the speculative nature of this discussion, I'd say that's a minor disagreement. If I had to speculate as to why monetary reform is not top of any reformer's list, I'd say that it is because of its status as a pet topic of the political right i.e. a call for a gold standard. I wish the left were more interested in it but they seem to think that you can keep the current "elastic money", maximum maturity-transformation backstopped by the state regime and somehow regulate the financial system and the financialised corporates and prevent them from extracting rents from the rest of us. IMO this is a pipe-dream.


The elastic phase will persist for a long time, during which a new notion of money will be formed. I think this is likely to be driven by the incremental financialization of currently "non financial" corporates (like Siemens with its banking licence) and the incremental de-financialization of existing pure play financial corporates. Ultimately the distinction will be erased, which equates to a process of dis-intermediation and at the same time a process of entropic mixing. K's 'vision' of money is very much one based on a re-imagining of the past paradigm of centralised money. In entropic terms, irreversible mixing cannot be prevented between complex system of many parts which are in constant communication (aka, thermal contact). The lowest common denominator is destiny. This applies in the physical world and there is no logical reason to think that the will of men means it does not apply in higher order social systems as well.


K: "Personally, I think they’ll be perfectly happy so long as you provide them with a safe focus for their nominal fixation." There is no such 'safe focus'.


LH - Hence my call for "open-access" banking/repo for all, deposits funded by short-tenor T-bills or individual accounts at the central bank etc. In an elastic system, that is the only "fair" option. K - I recall you saying something along the same lines on Nick Rowe's blog? If we had sufficient low-level disturbances, then we could have an elastic system that oscillated around "peak sustainable elasticity" but stabilisation has brought us IMO to an unsustainable level in many key pockets of the economy. Hence my calls for some failure mitigated by simple money-printing to the masses to prevent intermediate collapse.


"LH – Hence my call for “open-access” banking/repo for all, deposits funded by short-tenor T-bills or individual accounts at the central bank etc. In an elastic system, that is the only “fair” option." I agree. But the size of those facilities need to be strictly limited per individual. And only available to real people. I think you already said that though. So the size of this facility is sufficient only to provide for short/medium consumption smoothing and not sufficient for retirement planning. We'd have to accept then that long term wealth transfer through time is probably doomed in aggregate and therefore we cou;n't have a society based on an alternative assumption.


Oh yes, real people only, no limited liability SPVs for the masses!


"We’d have to accept then that long term wealth transfer through time is probably doomed in aggregate" So you agree with the above then?


Ashwin: "I don’t think we disagree on much" I don't think so either. But I feel strongly that our biggest problems by far are the ones that are caused by rent seeking/agency problems. I worry that one encourages defeatism by lumping the effects of our advanced stage of crony capitalism together with intrinsic, inevitable macroeconomic instabilities. I want people to focus on the corrosively dysfunctional bits with the hope that it is possible to achieve something truly superior. "somehow regulate the financial system and the financialised corporates and prevent them from extracting rents from the rest of us. IMO this is a pipe-dream." Indeed, it's a ridiculous waste of time. It reminds me of passport options. There's a decent literature on figuring out the highest payoff strategy (the expectation of which is the option value) but it's basically hopeless in all but the most trivial cases. And capital regulations, for example, are anything but trivial. "Hence my call for “open-access” banking/repo for all, deposits funded by short-tenor T-bills or individual accounts at the central bank etc... K – I recall you saying something along the same lines on Nick Rowe’s blog?" I did indeed discuss something like that on Nick's blog recently and I actually first thought of it in a discussion on his blog about a year ago (my thoughts at that point were rather more muddled than now). The idea about "ETF money" was first proposed (at least by me) here (I think). I had been thinking about it ever since that first discussion last year. This last link has a really good discussion with Marcus Pivato. I believe that open access would lead effectively to 100% reserve banking, but I think there are a few distinct advantages over a mandatory 100% reserve system. First, it gives everyone the freedom to choose in what form they want to hold their money and by virtue of giving everyone the option of keeping their money securely at the CB, we can be be free of deposit insurance and LOLR responsibility and the banks, in turn, can be freed of burdensome regulation. In its simplest and most similar form to the system we have today, banks would raise capital exclusively by issuing debt or equity (just like any other corporation) and lend the raised capital to worthy clients as usual. The investors who buy the banks liabilities, in turn, would create new money by repoing those liabilities (with huge haircuts) at the CB. Everyone could have an account at the CB and anybody could create new money in such an account by repoing liquid securities. But the greatest advantage over a mandatory 100% reserve system is political: Having freedom and deregulation on ones side gives one the moral high ground when arguing with right wingers. LH: "But the size of those facilities need to be strictly limited per individual. And only available to real people." No, no. Open access for everyone, real or virtual. There is no rent to be extracted from a risk free deposit account at the Fed (so long as everyone can get one). Put $1 there or put $1Tn. It's all good.


The decision of providing open access (who creates money) and the decision of creating money via repo or equity (how it's created) are, of course, quite separate. In the case, though, where money is created by repo I think you are quite right, LH (I'm taking back my last comment), to want to limit the quantity of money created since 1) holding it is inefficient (you are forced to give up holding real assets) and 2) because of the lack of convertibility to real assets, it will result in the usual money fixation and pyramid scheme in which I repo my assets for money and then *spend* the money but continue to receive the full benefit of owning the capital assets so long as the market is stable or rising. That is, owners of capital are not forced to choose between consumption and investment; they get *both* and others therefore get less (and we call the difference risk free savings!) In other words, it's the owners of capital assets who get to earn seignorage profits off the demand for liquidity and money illusion (as usual). Fairness and money neutrality are only ensured by the auctioneer at the end of time, i.e. never. Sure, the CB can control money creation much more explicitly when all money is created by their balance sheet. And perhaps there are helpful measures they could take like reducing liquidity demand by supporting instant settlements and perhaps finding ways to make holding money costly (Silvio Gesell's solution) But the problem, of course, is that the system would still require them to do so and therefore would be prone to all the usual failures of crony capitalism. The more I think about it, the more certain I become that the only safe solution is equity (or ETF) money in which Say's law is quite explicitly and transparently enforced: invest or consume; there is no "save" (ht Yoda).


LH - On “We’d have to accept then that long term wealth transfer through time is probably doomed in aggregate”, I'm not sure I completely understand. If you're talking about individuals saving for retirement, they'd just have to do so via risky real asset investments right? Or are we talking about something else?


To clarify, when I said I was taking back my last comment, I was just taking back the part with my reply to LH. Not the reply to Ashwin.


K - yes it was the first post you linked to which I was thinking of. The discussion in the last one is also excellent. I agree completely that "free" systems are better. It still baffles me how the centre-right maintains a free-market rhetoric with an escape clause just for banking - give us our freedom and an infinite supply of "safe" assets! :-) Btw, you really should put all these thoughts in a post and start a blog. It feels a little wasted buried in various comments sections.


Ashwin, "you really should put all these thoughts in a post and start a blog" I know :-( And thank you for the vote of confidence. Just commenting, though, takes up a significant amount of time and mental space. I'm terrified that a blog would negatively impact both job and family. I think I'd have to quit what I'm doing and pick up a lighter career. Or maybe a blog without a comment section. It's such a slippery slope though. Maybe a short book, something more or less finite and immutable. You should do the same, by the way. Even keeping everything buried in old, inevitably somewhat repetitive and imperfectly organized blog posts is not particularly inviting for those who are new to the things you are saying. I'm going through all your old posts but would certainly love a synthesis. Even a long one would be fine.


I don't think writing a book is much better! I am in the process of trying to put some of my posts in a longer organised format. But as you said, the day job and life doesn't make it easy. And the blog format where you just link to past material and other people's posts rather than having to elaborate upon everything is a lot easier at least for me. But a short ebook may work better for you.




LH - I'm not qualified to say but if it's used for severe, life-threatening conditions, then it probably doesn't qualify.


Why not?


Well if the alternative is death, then you can hardly call prevention of death stabilisation. The point of system resilience is also to avoid collapse/death by allowing a moderate disturbance regime to persist. So allowing death would hardly be resilient.


Well the Tourettes sufferer was not under immediate threat of death, but the situation would probably have progressed to that point without intervention. Likewise, in the late 20th century, the capitalist system, while not under immediate threat of death, would probably have progressed to that point without intervention. The question is what the nature of the system that would have replaced capitalism is, and what the implications of delaying its arrival as a result of "stabilisation of the patient" will have in the long run. I'm inclined to agree with K that its an equity based system. But there is nothing "money like" about K's ETF money apart from the fact s(he) assumes it would be used as if it were money. It would result in a different economic system and crucially, a completely different culture and values. Ironically, following the emergence of that successor culture, the ETF money system may prove to be redundant.


"Likewise, in the late 20th century, the capitalist system, while not under immediate threat of death, would probably have progressed to that point without intervention." I'm sympathetic to the idea that our system is due for a fundamental systemic change. But IMO most of the interventions over the last 30-40 years have reduced the lifespan of the current regime, not increased it. And they have made any eventual transition much more painful and risky than it needed to be.


OK, that's one POV. I don't think you have made the case to support the view above, since you have never outlined what the successor system is. Once you can hypothesise a successor, you can judge what the ultimate implications of policy decisions to date would be. Until then you are just telling stories.

Jüri Saar

Great post with lots of good links. Appreciate it. It also brought to mind a paper a read few years back: Liberalism, Socialism, and Robust Political Economy


Juri - Glad you liked it. Thanks for the link.

Keeruliste adaptiivsete süsteemide toimimisse sekkumisest « VABALOG

[...] pärinevad Ashwin Parameswaran blogis Macroeconomic Resilience ilmunud postitusest The Pathology of Stabilisation in Complex Adaptive Systems, mis toob välja hulgaliselt sarnasusi, mis on psühholoogiliste patoloogiate lahendamisel [...]


Please check out: Our entire page is devoted to Systems Theoretic Governance models and Complexity Economics. The wall of this page has many articles, peer reviewed papers, videos, speeches, government analyses, etc. regarding these subjects.


Nick - Thanks for the link.

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Tanja - Thank you. Yes - The Cobra effect is quite similar. Essentially a sort of adaptive backlash from the complex adaptive system that subverts attempts to control it.

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