A new perspective on economic bubbles and crashes and how to avoid them

July 8, 2013

(Phys.org) —By using methods developed to study the interactions of particles and applying them to economics, researchers at the University of Sydney have shown that small changes can create a tipping point and lead to catastrophic changes for the whole economy.

"We have shown that when many economic agents are interacting, all while trying to get the most out of their dealings with each other, a point can emerge which tips the whole into a sudden downturn," said Dr Michael Harré, from the University's Faculty of Engineering and Information Technologies.

"For example, if car manufacturers are competing against each other to sell electric or petrol-powered cars and there is a sudden shift from electric to petrol-powered it would drastically shift the demand for petrol with subsequent economic knock-on effects.

"On the upside if we know how to reward individual market sectors within an economy it is possible to steer the economy around these changes to avoid potential economic disasters."

Dr Harré is lead author, with colleagues from the University's Complex Systems Research Group, of a paper recently published in the European Physical Journal B.

The article is based on previous research on how economic agents making in an economy behave like physical particles in a closed system.

"It has become increasingly clear that is not able to sufficiently explain the unexpected bubbles and crashes occurring in economies throughout the world. These are not only sudden plunges in share markets, but also in housing markets which have a direct and immediate impact on many of us," said Dr Harré.

"Alternative models such as ours can contribute to our understanding of such events."

The researchers have previously shown how the interaction of tax rates can unintentionally drive an economy towards a tipping point. Their current paper looks at average net profits.

"Using this interpretation we were able to show that as an industry sector's profitability varies over time small changes can result in the industry sector and all of the interconnected industries collapsing at the same time," Dr Harré said.

"On the positive side, we showed that if we are able to mildly tweak the incentives and profitability of each industry sector, these tipping points can be avoided, essentially steering the economy around catastrophic collapses."

Being able to successfully navigate such depends on improving our understanding of the economic interactions that drive economies, the researchers claim.

"Encouragingly, there are a number of key areas currently being studied such as economic resilience and flexibility that will help us understand how close we are to a tipping point and what to do about it."

Explore further: Averting worse economic collapses

More information: epjb.epj.org/articles/epjb/abs … b121064/b121064.html

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1.7 / 5 (11) Jul 08, 2013
So lame. The crashes are caused by bubbles of bankster fiat funny money wherein the ability to buy shifts from your savings to the amoung of worthless funny money you can borrow from the banksters. Crash occurs when ability to repay the loan falls due to recession invariably caused by FED price distortions closing productive industries in favor of get rich quick scheme bubble

Bubbles did not occur when America used colonial scrip, prior to the advent of central banking
2.3 / 5 (15) Jul 08, 2013
Bubbles have happened as long as humans have exchanged one thing of value for another.

Google "Tulip bubble 1637"
2.5 / 5 (6) Jul 08, 2013
So, now we have quants by another name, telling us they can predict and ameliorate bubbles, IF they could just get the information right. Of course, IF frogs had wings...

I'm suspicious that their previous work was in taxes and profits. Sounds like captive research to me.
1.3 / 5 (12) Jul 08, 2013
This might be interesting if most of us more advanced in intellect hadn't discovered that bubbles and crashes are just part of the economic management of western governments.
Vast reams of books and data support this. But you do have to pay attention.....
1.8 / 5 (16) Jul 09, 2013
Affirmative action housing loans of Barny Frank and early Obama activism tanked the whole world economy and now Western governments have become Enron.

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