Sentences to ponder, the real political business cycle theory

From Macroresilience:

As Minsky has documented, the history of macroeconomic interventions post-WW2 has been the history of prevention of even the smallest snap-backs that are inherent to the process of creative destruction. The result is our current financial system which is as taut as it can be, in a state of fragility where any snap-back will be catastrophic.

Taleb and Blyth write:

Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. In fact, they tend to be too calm and exhibit minimal variability as silent risks accumulate beneath the surface. Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite.

Hat tips go to Nick Rizzo and Andrés Alonso and another MR reader.


These arguments seem like red herrings to me. If you believe the Fed controls NGDP, why is the Fed producing a stable NGDP growth rate any more "artificial" than the Fed producing a highly volatile NGDP growth rate? You can, of course, argue that the Fed doesn't control NGDP or that NGDP is unrelated to overall financial stability. To me, those seem like the relevant questions.

In winter driving conditions it is very common to see people in the ditch on the inside of a corner. By definition there was enough traction, but they reacted badly to an event and made the situation worse.

For the Fed, two examples. Would Greenspan/Bernanke do what they did in 2000-2003 if they knew that they were inflating a housing bubble that would end up in the situation we have today? Why did they do it then?

Greenspan said that he thought the financial firms would not act so contrary to their self interest. All those times he saved them by the Greenspan Put. All it did was convince them that they could do no wrong.

So there is a third alternative. The Fed, or anyone for that matter, is not capable of controlling the economy. Not because they don't have the tools. Simply that they don't understand the extremely complex system that an economy is. It may be that to be successful would require a radically strict adherence to a limited mandate of managing the money supply in response to economic indications, with any notion of control or direction viewed as heresy and subject to whatever consequences our fevered imaginations can come up with.

Tyler - Thanks for the link. I should point out that the idea is well-known in ecology and was originated by the Canadian ecologist Buzz Holling who coined it the resilience-stability tradeoff (stable complex adaptive systems are not resilient). For a post comparing Holling's and Minsky's ideas, see

Examples of this tradeoff abound in biological and ecological systems but the best parallel to economic systems are forest fires . The post also contains some quotes from Minsky on this evolutionary problem.

Kind of reminds me of the old forest service policy of suppressing every fire which led to a huge
buildup in dead wood so that now every fire risks catastrophe. Sometimes it's better to let
nature take its course.

Any real peer reviewed, published papers on this? I'm extremely, extremely wary of trusting any "movement" in economics that seeks to explain something through blog posts and other popular forums. It's why I dislike kitschy Old Keynesian Revivalists, MMT folks, Austrians etc. etc.

Kind of reminds me of descriptions of "Hell's Gate" where the Long Island Sound, Harlem River, and East River meet. It contains powerfully strong currents but has a surface that often looks like a sheet of glass.

It is not just the Fed the whole political economy of the Western world is focused on protecting incumbents, political, economic, and intellectual. The what is unseen part is completely unseen, and any destruction allowed has the creative upside minimized in the name of safety.

In electric power systems, it has been asserted that policies implemented to reduce the risk of local outages can increase the likelihood of a large-scale outage. See Dobson, et al.,"Complex systems analysis of series of blackouts: cascading failure, critical points, and self-organization." (2007)

Same principle as forest fires which is where they borrow the model from

Key principle in their model is the buildup of fuel - in markets and forest fires, another important factor is that absence of disturbances increases connectivity within the system. Regular fires breed "patchy" landscapes and fires cannot travel from one patch to another.

This is an interesting concept--similar to some things Hayek said--but can it be stated or modeled with any descriptive or quantitative precision? Obviously, there are exceptions: suppressing ordinary crime does not lead to revolution or episodes of mass murder; suppressing weeds may make a field less resilient in some sense, but not in the sense that total food production would be higher without plowing, nor in the sense that some catastrophic invasion of parasites becomes inevitable; etc. So when do we know when suppressing volatility is going to be produce worse problems in the long run, and when it won't?

How could you model something that cannot be understood?
In the case of agriculture, it isn't the statistical likelihood of something like that happening, it is the consequences of it happening that matter. Resilience would indicate having more than one strategy for crop yields. If one fails there is still enough to eat. I'm not as young as I used to be, and during my lifetime I have never experienced a lack of food due to lack of supply. I could begin to think that failures as you describe never happen. So could policy makers, agriculture industry participants, everyone. Then it does. And the tight and efficient food distribution system works for four days then not.
Robustness is a way of thinking that eschews efficiency in exchange for what I call slop factor. It doesn't matter how sloppy anything is implemented, there is enough leeway to handle them.

I'm not sure that those are true analogies as they are absolute amounts of things, not variability measures.

The analog to field resilience would be monoculture v. multiple crop farming. The former is steadier but less resilient.

Another variability analog might be that authoritarian regimes that suppress free speech may gain stability and reduce dissent by narrowing the range of public opinion, but at the cost of making their regimes vulnerable to catastrophic collapse in something like the Arab Spring revolutions.


Extending the last point, it has been argued in published economics articles in refereed journals that the argument applies to comparing command socialist economies, such as those in the former Soviet bloc, to market capitalist ones. The former were more stable macroeconomically, but were not resilient and collapsed when sufficiently shocked, whereas the latter fluctuate more but are more resilient. Sort of like a oak tree vs a palm tree, as it has been put in some published papers.

Like forest fires, I see. A hot topic out here in the blazing (literally, a couple of months ago) desert.

The planet Venus has no tectonic plates, and therefore (presumably) has no earthquakes or active volcanoes.

And yet the surface of the planet appears to be geologically young, at no more than 300 to 600 million years old.

Unlike Earth, where energy is regularly released in small-scale tectonic events, it is speculated that Venus may undergo periodic "resurfacing" events at long intervals, when pent up volcanism erupts cataclysmically in a planet-wide lava flood that destroys everything in its path.


"Earth's tectonic activity acts as a cooling mechanism for the interior. If Venus has episodic plate tectonics, where nothing happens for a while, the heat builds up in the interior. Eventually it can't stand it any more, and you have this rapid overturning. Then it's quiescent for a while, and the heat builds up again. If you believe that episodic model, then the visible surface we see on Venus is the record of the last time that happened, which is maybe 600 million years ago. " ref.


The Taleb and Blyth quotes are from an article in Foreign Affairs, which I think is refereed, if not an economics journal.

Leijonhufvud has made similar arguments over a long period of time in published articles in refereed journals.

One can also find a large literature in ecological economics that has been published in refereed journals by quite a few people, including Brock and at least one other that I shall not name. Oh, and there is a lot more.

"can it be stated or modeled with any descriptive or quantitative precision?"

Important question, and I wonder if it has a counter-intuitive answer.

Let us imagine we could effectively model, and thus predict, this effect: we could know when Fed action was making the economy 'too placid', and the Fed would withdraw, close its eyes, pretend it wasn't paying attention for a while. By allowing a modest amount of instability, we could stabilize the larger system.

But wait: isn't the model here that pro-active stabilization at any single scale ultimately increases the probability of large-scale destabilization at a larger scale? Thus, our effective modeling, which we would use to stabilize economic variation, would itself raise the probability of causing disorder at an even larger scale. I don't think this is a game you can win by intentional action, as the hypothesis is defined. And this, if only by reductio ad absurdum, means that no modeling of this effect can be effective, provided you consider enough scales.

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