Financial bubbles and crashes are a form of collective madness: a catataxic moment when suddenly more of the same is different. Perhaps you think there is no more to be said about financial crisis? You might be right from about economists, who failed to see it coming anyway but the most interesting analysis on financial crises, risk and blame, comes from cultural anthropologists.
Though Mary Douglas first developed this framework in a different context, it seems to add much more insight than standard economic models. Douglas suggested we could view societies (all societies) within a framework of four different groups within a society, all acting rationally and consistently from their own perspective.
These groups are: i) self seeking individualists, ii) fatalists, iii) hierarchical bureaucrats and iv) egalitarians. Crises happen when one of these groups becomes too powerful and too popular, which of itself creates instability.
The anthropologists have gone further and use the mathematics of biological ecosystems to model this instability. In the early 20th century, a Ukrainian chemist, Alfred Lotka, and an Italian mathematician, Vito Volterra, built a famous model to describe the volatility created by interactions between predator and prey. Imagine an island populated by foxes and rabbits, as the rabbit population grows, the foxes eat more rabbits: the fox population increases and the rabbit population falls. Yet the growth in fox population means that there is less food available per fox, while surviving rabbits have more food available. The system never settles down, but swings back and forth in favour of foxes, then in favour of rabbits. The ups and downs do not come from an outside source, they are built into the very structure of rabbit and fox populations on the island.
For a while the anthropologists experimented with the two agent version of Lotka-Volterra, but in the end found that their four agents of i) self seeking individualists, ii) fatalists, iii) hierarchical bureaucrats and iv) egalitarians was a more useful framework.
What does this mean for protections ourselves from future crises? Perhaps instead of trying to maintain stability as a goal “no more boom and bust!” we should accept that instability and volatility are the natural state of societies. And instead of looking for specific causes such as “bad lending decisions” or “greedy bankers” which economists, regulators and journalists can only see with the benefit of hindsight; we should instead look for warning signs when one group’s narrative becomes too widespread. And so, despite the financial crisis, perhaps the views of economists are still too popular.
This is a guest post by my good friend Bruce Packard