Sunday, July 15, 2007

Not that weird

Peter Pitsch’s The Innovation Age (1996) made me question something I’ve taken for granted: that complexity and uncertainty in the economy is growing, and doing so at an unprecedented rate. Pitsch’s book is based on this premise, and it made me wonder: what is the evidence?

The number of industry players who are inter-connected may be growing due to the Internet and cheap global travel, but an individual companies is not necessarily directly connected to more counterparts. It’s a bigger graph, but when one looks at individual nodes, the connectivity is much as it has always been.

Uncertainty isn’t new, either. Pitsch mentions the late Middle Ages as a tumultuous period that produced amazing innovation, and the Industrial Revolution was similar. The uncertainty in aggregate may be larger today, but so is the world population; has the normalized per-capita uncertainty grown? A reasonable measure might be stock market volatility. Schwert’s data for the 1859 – 1987 period doesn’t show any trends I can see with the naked eye (G.W. Schwert, “Why Does Stock Market Volatility Change Over Time," Journal of Finance, vol. 44, pp. 1115-1153, 1989). Market uncertainty, at least, is much the same.

I now believe that this is the Special Present Fallacy at play again. We’re always biased to see the present moment as exceptional; the odds are that it’s not.

1 comment:

Anonymous said...

In fact one could go further - the amount of information available is certainly increasing, which may increase complexity, but since information is the enemy of uncertainty, uncertainty is in fact diminishing, at least in a marginal sense - in my view one of the major contributions of the Internet is an aggregate lowering of risk because of increased availability and reduced latency of information. This might even show up as a small decrease in average interest rates - hard to detect in all the noise of course.