Special Guest Monday
J. Doyne Farmer, legendary heterodox economist
On Monday, August 12, at 8 PM New York time, I will have as a guest on Zoom the heterodox economist J. Doyne Farmer. I recently reviewed his book, Making Sense of Chaos.
Farmer points out that in the late 1990s major investment banks adopted “value at risk” (VaR) as a strategy for controlling market exposure. VaR measures the loss from, say, an adverse price movement of two-standard deviations. Using such a metric, a risk manager would say that you can increase risk exposure as market volatility declines, and you have to decrease it when volatility goes up. In good times, you get a self-reinforcing feedback loop that raises asset prices as banks expand their portfolios. But then a little adversity leads everyone using VaR to try to sell at once, causing a really severe self-reinforcing loop on the downside. Farmer says that this describes what happened in financial markets before and during the financial crisis of 2008.
I will be curious to find out if he sees the recent dive in stock prices as another example.
If you will forgive the pun, Dr. Farmer spent years toiling in the field of complexity economics, which received little recognition from mainstream academics. But with the advent of Large Language Models, his approaches could be on the cusp of becoming much more widely applied.
The link below first goes out to paid subscribers. But it will be unlocked on Sunday for anyone else who wants the link to join the Zoom.
https://us02web.zoom.us/j/81270473090?pwd=NlVidk1uejZmL0Z3aU9YbXZZc0I2QT09
Farmer's opinions point toward anti-cyclical prudential regulation or rather regulation that incorporates systemic risk that individual market players lake the incentive to fully incorporate.
Re: "But as maps for policy makers, agent-based models are still far from reliable. I would be careful not to presume that they make centralized decision-making a good way to operate an economy." — Arnold Kling, review at embedded link.
Will the next step be computer simulations of agent-based public-choice models of political behaviors by "a demographically accurate synthetic population" (Farmer) of politicians, regulators, and civil servants?
Arnold's review touches on Farmer's model of "the feasibility of an 'energy transition' to forestall climate change." (Arnold)
Farmer writes:
"In 2050, for example, our estimated global annual expenditure on the electricity network for the Fast Transition is about $670 billion per year, compared with $530 billion per year for the No Transition. However, the expected total system cost in 2050 is about $5.9 trillion for the Fast Transition and $6.3 trillion per year for the No Transition. Thus, although the additional $140 billion of grid costs might seem expensive, it is significantly less than the savings that come from cheaper energy." p. 253 (quoted by Arnold in review)
It seems that switching to the Fast Transition is like assuming a can opener.
Is Farmer's economics *post complexity theory* (an advance on representative-individual economics) but *pre public choice theory* (a step backwards from the economics of politics of Black, Buchanan, Tullock)?
I look forward to Arnold's interview of Farmer.