Thursday, May 12, 2011

Volatility, continued (and perhaps done for now)

The marbles have continued to rattle around in my brain, and last night settled briefly in an interesting pattern.

If I may state my premise succinctly: Nature, and life by extension, is inherently volatile.  Human nature desires to constrain volatility, but is better off accepting core volatility and hedging peripheral volatility.

for no real reason, just to mix it up.  And isn't it cute when he laughs?!

In more words: there exists an intersection of volatility and control, chaos and order that is ideal for human existence.  Too much control leads to a undeserved complacency; too little leads to, well, chaos.

Consider the difference between a politically democratic system and an autocratic regime; the former is superficially volatile, with the masses expressing their cacophanous views, but with an ex post policy trajectory that exhibits little volatility.  In contrast, the autocracy promises stability on the surface, but generally leads to periodic expressions of high volatility.

The economic systems often associated with those two political systems exhibit similar characteristics.  A command economy is nominally stable, but actually subject to extraordinary volatility (one could argue that command economies and autocratic regimes often act to mask the unpleasant outcomes of the systems in place); in a free economy, the opposite trend generally rules.  In a completely free economy / open market, the succession of data points can be extremely volatile, but the trends that emerge exhibit robust stability.

Taking as an example the recent housing market brouhaha, one might incorrectly believe that the meltdown was a free market failure; in fact, the prime actors were operating under significant non-open market motivations and their actions flourished under a scheme of collective market interventions.  To be clear, a non-interventionist policy (true laissez faire) would undoubtedly see serious episodes of volatility, but possibly of lesser magnitude and quicker to self-correct than in the intervention scheme.

et cetera and et cetera

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