Thursday, January 7, 2010
Mirowski On The Market Crash
At the recently completed AEA/ASSA meetings in Atlanta I organized a joint HES/AEA session on "Complexity in the History of Thought." Speakers included me, David Colander, John Davis, and Phil Mirowski of the Notre Dame department that is about to be abolished. He spoke provocatively to an overflow audience on "Inherent Vice: Complexity vs. Behavioral Explanations of the Crisis." In this he dismissed views that emphasized "bad behavior by individuals" including irrationality and corruption as causes of the crash and larger breakdown. He argued that it was a systemic problem, doing so by extending his recent idea of markomata, that markets are fundamentally algorithms that evolve as competing systems with increasing levels of hierarchy in the form of futures and derivatives markets. While conventional theory says such developments should improve efficiency and spread risk, they can lead to increased fragility as the rising complexity can lead to a breakdown of computation as in the halting problem in computer science, implying an inability of the system to set prices, which was exactly what happened in the crash. I was the discussant, and while I had some technical complaints, I find this a very intriguing argument, and it generated considerable and very lively discussion in the session.