econophysics

System Meltdown – Newer ways to understand System Fiscal Behaviors

Article by – Srinidhi Boray

The Adam Smith’s Theory needs Sledge Hammer treatment

Econophysics – Interdisciplinary Approach to Study Behavioral Economics

All system display behavior those are dynamic in nature. The study of the system dynamics finds many of the classical models inadequate. In the world of physics, Newtonian classical models progressed into Einstein relativity and then into quantum dynamics. While the subject progressed, the inadequacies in the discipline surfaced and newer and newer mechanisms were sought to represent and study the subject more accurately. Many challenges remain in studying the system as a whole by reconciling macroscopic aspects that with the microscopic behaviors. To further the cause in the realm of physics, ‘Unified Theory’ is being attempted that brings together the different aspects of the macro and the micro. One of the stark features of any system is that it is deterministic in a probabilistic way, but remains in-deterministic when processes around individual events are followed. Also, the physical nature at the macrocosm completely alters when studied at the microscopic level. At one level it is a particle and in another it is quanta (or a wave). The probabilistic studies are attempted by applying Monte Carlo computational approach, which iteratively incorporates various coefficients in its attempts to discover the probable behavior. The random occurrences are studied applying stochastic methods.

Lot of similarities are being discovered between the systems dynamic studies that applied in Physics and Economics. Especially when the equilibrium studies are conducted in a system characterized by heterogeneous agents. It is argued by many that the neoclassical economics relies on principles that worked well in a system based on the Adam Smith’s simple axioms in which the heterogeneous agent complexities do not exist. Adam Smith’s principle sates that the individual greed plays a vital part on the overall economics for the better good of the whole society and then invisible hand works to correct the course when in-equilibrium occurs. This notion is now being contested to be an incorrect assumption. For, in modern economics era, the unpredictability of the market is in the lack of understanding the complex agent behaviors, that exists more like a flux, which is difficult to be discerned. This adds to the conundrum when predicting the random events in a market that is inherently unstable. Furthermore, the flux state defies the Cartesian system, based on which the present computations are derived. Almost all the applied agent behavior incorporates coefficients that encapsulate the supply demand behavior triggered by the one or more variables as observed within the Cartesian coordinate system.

One among many other behaviors observed in the neoclassical economics model is that the wealth creation has displayed exponential distribution. These distributions are considered harmful as it allows for the wealth localization. For, reasons such as these, econophysics is sought to accurately understand and study the complex economic system dynamics.

In the recent times, few universities have begun to conduct formal research in the econophysics area. One of the goals is to rewrite the economics theory by reconsidering the dynamics that relies on the realities of the unstable behavior.

Reference:

http://www.phys.uh.edu/research/econophysics/

http://en.wikipedia.org/wiki/Econophysics

http://www.unifr.ch/econophysics/articoli/papers/Economic_System_Dyn-joco.pdf

http://www.unifr.ch/econophysics/comments/nov_99/9911291.pdf

Click to access PhysicaA-299-213-2001.pdf

http://www.pbs.org/wgbh/commandingheights/

Recent Article on Economic Disparities owing to Gaussian Distribution

Concentration of wealth in hands of rich greatest on record

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BY DANIEL TENCER

Published: August 15, 2009
Updated 1 day ago

The wealthiest 10 percent of Americans now have a larger share of total income than they ever have in records going back nearly a century — an even larger amount than during the Roaring Twenties, the last time the US saw such similar disparities in wealth.

In recent years, the fact that differences between rich and poor are the greatest they’ve been since the Great Depression has become a popular talking point among liberal-leaning economists.

But an updated study (PDF) from University of California-Berkeley economist Emanuel Saez shows that, in 2007, the wealth disparity grew to its highest number on record, based on US tax data going back to 1917.

According to Saez’s study, which Nobel prize-winning economist Paul Krugman drew attention to at his New York Times blog, the top 10 percent of earners in America now receive nearly 50 percent of all the income earned in the United States, a higher percentage than they did during the 1920s.

“After decades of stability in the post-war period, the top decile share has increased dramatically over the last twenty-five years and has now regained its pre-war level,” Saez writes. “Indeed, the top decile share in 2007 is equal to 49.7 percent, a level higher than any other year since [records began in] 1917 and even surpasses 1928, the peak of stock market bubble in the ‘roaring’ 1920s.”

By comparison, during most of the 1970s the top 10 percent earned around 33 percent of all the income earned in the United States.

The contrast is even starker for the super-rich. The top 0.01 percent of earners in the US are now taking home six percent of all the income, higher than the 1920s peak of five percent, and a whopping six-fold increase since the start of the Reagan administration, when the top 0.01 percent earned one percent of all the income.

There is no consensus among economists on whether large disparities in income lead to economic disruption, but it is hard to ignore the correlation between rising income inequality and the onset of economic crisis. The last time the US saw similar differences in income was in 1928 and 1929, just before the start of the Great Depression.

Saez also broke the numbers down by administration, and found that while the wealthiest few saw their incomes rise as quickly during the Bush years as they did during the Clinton years, the same was not true for the rest of the population.

Saez suggests that the economic growth seen on paper during the Bush years was little more than an illusion for the vast majority of Americans, who saw their income grow much more slowly in the 2002-2007 period than they did during the Clinton years.

During both expansions, the incomes of the top 1 percent grew extremely quickly at an annual rate over 10.3 and 10.1 percent respectively. However, while the bottom 99 percent of incomes grew at a solid pace of 2.7 percent per year from 1993–2000, these incomes grew only 1.3 percent per year from 2002–2007. As a result, in the economic expansion of 2002-2007, the top 1 percent captured two thirds of income growth.
Those results may help explain the disconnect between the economic experiences of the public and the solid macroeconomic growth posted by the US economy since 2002. Those results may also help explain why the dramatic growth in top incomes during the Clinton administration did not generate much public outcry while there has been an extraordinary level of attention to top incomes in the press and in the public debate over the last two years.
Saez, who this spring won the prestigious John Bates Clark Medal for economists under 40, links this disparity to the Bush tax cuts, noting that “top income tax rates went up in 1993 during the Clinton administration (and hence a larger share of the gains made by top incomes was redistributed) while top income tax rates went down in 2001 during the Bush administration.”

TWO MORE RECESSIONS?

The economic crisis that has taken hold over the past year isn’t over, and the world could in fact see two more recessions before the crisis is finally over, says the chief economist of Germany’s influential Deutsche Bank.

Norbert Walter told CNBC that investors are worried about the health of the US dollar, and many countries are facing difficult financial problems because of overspending by governments on bailouts and stimulus. Those things combined could push the world economy downwards not once but two more times in the near future, he said.

“I believe that the rescue packages brought on have been so costly for so many governments that the exit from this fiscal policy will be very painful, very painful indeed,” he said. “Some of us are already talking about a W-shaped recovery. I’d probably talk about a triple-U-shaped recovery because there are so many stumbling blocks here to get out of this.”

“The world is in trouble,” Walter told CNBC.

Published on Friday, August 21, 2009 by Facing South

Depression-Era Inequality, Only Worse

by Zach Carter

Generative Transformation – Economic Model – System Dynamics

By Srinidhi Boray

Enterprise Architecture Assists in Understanding Enterprise’s Unique Economic Model

Remember : With Increasing Complexity Degree of Freedom Reduces

When System Strives for Extreme Commoditization – Individual Should Strive for Specialized & Unique Competencies

On 26th Feb’ 2009 CNN Reports – Reason for GM failure blamed on steep Fixed Cost. Cost per day loss $110 Million.

However one may attempt to distort reality, in the end one cannot play with numbers, as numbers are mere numbers. Rational number cannot be irrational number and vice-versa. Math is one among of those pure art, without which no science can ever be validated. It helps bring immense clarity to observation. When one is severely deficient in this art, then it can conveniently be assumed, that one is also deficient in the process of accurate deduction. This is why, it makes it important to ardently school, paying attention to those rudimentary subjects, that help mind ascertain facts quickly and deal with life with more clarity. Failing which, all architecture design will be a fallacious attempt and distortion of reality. Even Mozart used Math to compose his symphonies, which is akin to Enterprise Architecture. It was because of employing Math, that he produced great order in all his works, despite disorder in his own personal life. After all one must know, it is in the numbers that rich and poor are unequally divided.

Gartner has begun to endorse the view proposed in this article. Check Brian Burke of Gartner discuss Below

As an anti-thesis – this is also said of Maths by Albert Einstein “as far as the laws of mathematics refer to reality, they are not certain; and as far as they are certain, they do not refer to reality.“ This is where Enterprise Architecture improves upon on by providing better abstraction and logical reasoning by introducing structure derived from ontology that is intrinsically ‘architecture’.

Enterprise Architecture, via its structure helps in achieving ‘loss of innocence’. When this happens many architectural cross-sections can be derived, such as – business model, information model, solution model, technology model, security model so on so forth. When all these pan out, by attributing cost, the economic model becomes available that can be further analyzed for Total Cost of Ownership, Cost Savings and Return on Investments. These costing perspectives are better clarified by understanding ‘fixed cost’ and ‘variable cost’ and the way they operate within the larger portfolio. A better perspective of all the costing elements helps in performing informed capital planning and investment control needed fr any cost optimization planning. All things abstract add to the variable cost. It is here where standards work and help in reducing the variable cost across the enterprise and firming up the ‘fixed cost’. Anything that cannot be subjected to “loss of innocence” and remains intellectual; becomes available to be exploited for promoting bureaucracies.

All large institutions struggle to gain good control on the fixed cost and find ways and means to reduce the variable cost. Also, institutions are continously pushed towards the ‘economy of scale’ to achieve competitive product offerings. The dynamics introduced by all the economic criterias is a systemic property. It is not the willful desire of any company to attempt ‘scaling of the economy’ and hurt the local interests. If they have to thrive in a competitive environment then they have to follow the fundamentals that defines the nature of that environment. Moreover, it is the unrelenting strife between the order and disorder within the system, that triggers generative transformation, that intends to seek equilibrium in the system dynamics reaching an optimized (cost + process) state. This drives companies to seek opportunities for lowering the cost. Non scalable and repetitive activities are the work units that have best opportunities to be treated like a cookie cutter component and be rendered at a site where it can be created at the least cost. All most all the activities in the manufacturing sector is non scalable and can be linearly componentized. In the service sector as-well, there are many activities which are non-intuitive and non-scalable, these also become ‘unit of work’ that can be translated into components to be manufactured at a cost effective site. The off-sites (Contract Manufacturers) who render the ‘unit of work’ at a reduced cost, also attempt to achieve ‘economy of scale’. This push-pull brings down the cost and also turns the ‘unit of work’ into a commodity that has a diminishing intellectual worth. Contract Manufacturing is a large and specialized business and all-most all the large electronics manufacturers engage contract manufactures to achieve competitive product pricing. Even IPOD is manufactured taking advantage of pricing advantage that contract manufacturing offers.

Enterprise Architecture incorporates both ‘synthesis’ and the ‘analytical’ process in understanding and describing the enterprise. The analytical reductionism, pans out all the linear ‘uow/s’. While the synthesis brings all those ‘uow/s’ into a process, that most times exists as a fuzzy network (non-linear and non-hierarchy) such that the enterprise can forge into the market competitively.

With all this said, by careful planning self sustaining and profitable IT ecosystem can be built within US by investing in townships and IT infrastructure that takes advantage of the economics of scale. There are lot of towns in US that offers lower cost of living and also very pleasant country side amenities. Such town-ships can be planned to arrest the Gaussian distribution which has riddled the present system resulting into fragmentation.

Economic model is not a snap shot but a process that works continuously to render the overall macro-balance sheet healthy. Please refer link to gain an insight on budget lead Enterprise Architecture Transition Planning Framework.

Link below discusses the possible newer ways of studying enterprise fiscal behaviors when subjected to heterogenous market agents.

https://ingine.wordpress.com/2008/09/28/enterprise-meltdown-newer-ways-to-understand-enterprise-fiscal-behaviors/