Why the economy is devilishly hard to predict: Chaos

An animation of a double-rod pendulum at an intermediate energy showing chaotic behavior. Starting the pendulum from a slightly different initial condition would result in a vastly different trajectory. The double-rod pendulum is one of the simplest dynamical systems with chaotic solutions.

Animation of a double-rod pendulum showing chaotic behavior. Starting the pendulum from a slightly different initial condition results in a vastly different trajectory.

Here is why the economy is devilishly hard to predict. Think first of the weather. We all agree it’s hard to predict, though it’s based on just a few simple facts:

  1. The sun is essentially a point source of our heat that heats the ground and water and, to a lesser degree, the air.
  2. Hot air rises; cool air falls; the earth’s uneven surface turns, and all that motion creates wind.
  3. Warm water evaporates, forms clouds, and comes down as windblown rain or snow when it cools.

Add in a few other things like cloud covers, volcanos, and the human creation of CO2, and that’s about it. The whole thing, though complex and chaotic, can be described mathematically.

You could predict the weather with sufficient data, the proper formulas, and the fastest supercomputers. It’s just numbers.

Now consider economics, the science of money. It’s a bifurcated science, part Monetary Sovereignty and part Gap Psychology. The Monetary Sovereignty part is similar to the weather in that it can be described mathematically.

  1. A monetarily sovereign entity creates laws from thin air, and these laws create money from thin air.
  2. Money is scarce to users but never scarce to issuers. Being able to create infinite laws, the monetarily sovereign entity can issue unlimited money. It never can run short, even without collecting taxes.
  3. All money is a form of debt; it’s the issuer’s debt in that the demand for any one form of money is based on the issuer’s full faith and credit. If the issuer has good credit: People want that money. Bad credit: No one wants that money.
  4. Because money is an infinitely available exchange medium, money’s value is generally based on the scarcity of the goods and services for which it is exchanged. Scarcity makes goods more valuable, thus requiring more money in exchange.

Like the weather, Monetary Sovereignty, though complex and chaotic, can be described mathematically. Given sufficient data, one could predict the flow and value of money.

Except . . .

Except for Gap Psychology, the human desire to widen the income/wealth/power Gap below and to narrow the Gap above. We want to distance ourselves from those below us and come closer to those above us.

Gap Psychology is based on human emotions about comparisons. Consider a middle-income, middle-wealth person today. He (she) has much more and much better “stuff” than even a wealthy person of yesteryear.

Today’s “middle” people have air-conditioned, heated homes and cars, televisions, cell phones, computers, and indoor flush toilets. They drink purified water, eat purified foods, and receive painless (relatively) dentistry. They have modern medical care paid for by insurance. Vaccination protects them from dozens of diseases, many fatal.

They fly or drive hundreds of miles in a few hours on paved roads. They ride escalators and elevators up tall buildings.

They are middle-income, middle-wealth, but by the standards of yesteryear, they are fabulously wealthy. Even John D. Rockefeller, possibly the richest person in history, didn’t have what the average Joe in America has now.

You would feel poor if you had smelly plumbing, mud streets, no air conditioning, and a horse-drawn buggy to get around.

Gap Psychology creates the appeal of lotteries and Las Vegas, expensive cars, natural diamonds rather than fake ones, and celebrities. Gap Psychology is the genuine desire to earn more money, own more wealth, and have more power, in short, to be more prosperous.

“Rich” is not absolute. It is a comparative.

There are two ways for you to become more prosperous, i.e., to widen the Gap below or narrow the Gap above. You either must acquire more income, wealth, and/or power for yourself, or others must lose income, wealth, and power.

And this is where economics becomes hard to predict. It is based on human psychology, which devolves into individual psychology and often into one person’s psychology.

Gap Psychology causes people to vote against poverty aid lest it narrows the Gap below. That narrowing would make you feel poorer. Gap Psychology encourages people to vote against their freedoms if that vote would restrict the poor even more, thus widening the Gap.

There is no mathematics to predict that an incompetent psychopathic President would receive enough votes to be elected. And there is no mathematics to measure what that incapable psychopath would do to the economy.

One such President added duties on Chinese goods (for which you paid and which raised prices). COVID came along, and its denial caused hundreds of thousands of Americans to die and raised prices further. Shortages and inflation were direct results.

There is no mathematics to reveal that millions would ignore their eyes, ears, and brains to continue believing the most recent election was stolen. A mob is chaotic.

It took losing a war, but the German people finally understood what Hitler had done to them, and belatedly they rejected white supremacy and fascist hatred. The Italians hung Mussolini by his heels.

Recently, Italy elected a pro-Russia, anti-gay conservative to be Speaker of their lower house of Parliament.

One day earlier, an ultra-conservative lawmaker, who collects fascist memorabilia, became their Senate Speaker; a month earlier, a neo-fascist conservative became Prime Minister.

Mussolini must be laughing (upside down) in his grave. Who could have predicted post World War II Italy’s (and America’s) failure to learn where extreme conservatism leads?

Chaos theory describes the difficulty of predicting some events because of the “butterfly effect.” Some small events can multiply upon themselves until a butterfly flapping its wings in Brazil eventually results in a hurricane over Florida — or an extreme conservative being re-elected.

Edward Lorenz  described chaos this way: “When the present determines the future, but the approximate present does not approximately determine the future.”

American economics is a blend of Monetary Sovereignty and Gap Psychology.

The former is a factual and mathematical description of money. It could allow us to predict our economic future if we were logical machines having sufficient data.

The latter results from human psychology, individual and herd, which is chaotic. Here, logic disappears, as witness the likes of Donald Trump, Herschel Walker, Lauren Boebert, Marjorie Greene, Ted Cruz, Matt Gaetz, Jim Jordan, et all, intentionally being chosen by many voters.

Think about it. These politicians, and others of their ilk with economic and political power, actually received votes from sentient human beings. It boggles.

For the same reasons why Psychology is not a science, Economics, which relies on psychology, is not a science. They are beauty contests with results in the eyes of the beholders.

And as with beauty contests, where no strict criteria are possible, everyone is absolutely, positively, unequivocally sure about the correctness of their opinions.

Now, try to predict who the next U.S. President will be and what effects she will have on the economy.

Rodger Malcolm Mitchell
Monetary Sovereignty

Twitter: @rodgermitchell Search #monetarysovereignty
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