Sunday, November 20, 2011

Stability is Destabalizing

A post from a couple of months ago charted the course of various post-WWII US recessions and posed the question Was there a structural change in the economy in the late 1970s - early 80s?
Over the period from the late 1950's to 1980, US macro-economic policy became better and better at managing recessions. They continued to come at roughly the same frequency, but they were shorter and shallower than the earlier ones. This could, potentially, indicate an increase in rigidity over time as US macroeconomic policy attempted to 'smooth out' the business cycle.
A recent post at Resilience Science draws attention to a similar matter and provides a nice set of links to analytic resources relative to the issue. Here is a key passage:
In complex adaptive systems, stability does not equate to resilience. In fact, stability tends to breed loss of resilience and fragility or as Minsky put it, “stability is destabilising”. Although Minsky’s work has been somewhat neglected in economics, the principle of the resilience-stability tradeoff is common knowledge in ecology, especially since Buzz Holling’s pioneering work on the subject. If stability leads to fragility, then it follows that stabilisation too leads to increased system fragility. As Holling and Meffe put it in another landmark paper on the subject titled ‘Command and Control and the Pathology of Natural Resource Management’, “when the range of natural variation in a system is reduced, the system loses resilience.” Often, the goal of increased stability is synonymous with a goal of increased efficiency but “the goal of producing a maximum sustained yield may result in a more stable system of reduced resilience”. The entire long arc of post-WW2 macroeconomic policy in the developed world can be described as a flawed exercise in macroeconomic stabilisation.

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