Economic Resonance 2: Caveat

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Caveat

The economy is complex and multi-layered. Clearly every aspect is effected by all others: the local by the corporate, the corporate by the national, and all by the global macro economy and the various forces that comprise them. Perhaps nothing illustrate this more than the recent Great Recession in which the failure of the U.S. to control irrational home lending, and the blind trading in derivatives of these loans, led to a deep, global recession.

When examining any complex system, it is common to eliminate some of the complexities in order to focus on the concept one it trying to propose. This is not to say that the system is not affected by these other parts or forces, only that the effects are such that, at least sometimes, they do not invalidate the point being made.

For example, if we are describing the combustion cycle of a gasoline automobile motor, we can ignore the drivetrain, in spite of the fact that the motor will run differently while under a load. We can ignore the exhaust system, even though we understand well that an obstructed exhaust may cause the motor to stall.

We can do this because we understand that the outside factors do not have an excessive affect on the system, as long as those factors are not in some extreme condition. Until they reach some heightened state, they clearly do have effects, but not overwhelming ones. For example, the external transportation system for a factory will vary with normal fluctuations in the price of gasoline, and can be described without reference to the price, but if the price suddenly doubles (as when OPEC first started in the 70s). Then important adjustments need to be made.

Until these unusual events occur that change the macro environment, we can ignore them in normal discussion of a process, just keeping in mind that our discussion is never the whole story.

In this vein we offer this discussion.


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