We have created a monster. Financial markets have grown so complex that neither intuition nor standard economic models can get to grips with them. So what’s to be done to avoid a repeat of the financial disasters of the past couple of years?
In the following pages, Mark Buchanan looks at some of the creative ideas being explored to tame the markets, not just by economists, but by physicists, engineers, biologists and others. What does science have to say – and will anyone listen?
“Estimated global credit write-down 2009-10 $4 trillion”
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“US government debt 2010 (est.) $ 9.9 trillion”
Bubble math
The human factor
Network solutions
Predicting the big one
An economy in a computer
Out of kilter
Will it be enough?
The madness of crowds
All speculative bubbles have one thing in common: a belief that a particular company or commodity will be worth more in the future than it is today. The objects of desire through the ages have been many and varied.
Tulip mania
1636-37 The Netherlands
Contracts for the most prized varieties of tulip exchanged hands for exorbitant prices that increased 20-fold in three months – and then collapsed before a single bulb changed hands. The is that the whole Dutch economy took a huge hit as a result, although has suggested the effects were more limited.
South Sea bubble
1720 Great Britain
The South Sea Company held exclusive rights to trade principally slaves with the Spanish colonies of South America. In anticipation of huge future profits its share price rose 10-fold between January and June 1720, then collapsed again. Isaac Newton was one of the luminaries who were burned, losing £20,000.
Railway mania
1840s UK
Following the opening of the world’s first intercity railway, the Liverpool and Manchester, in 1830, new speculative schemes attracted huge amounts of capital. Many of them never materialised and investors’ money disappeared with them.
Roaring twenties
1920s US
Post-war prosperity, the rise of mass consumerism and easy credit combined to create the jazz age. By 1929, though, the money was running out. Wall Street crashed, dragging the world into the Great Depression.
The Dotcom bubble
Late 1990s Global
Boundless optimism about the prospects of the internet business model created a generation of aggressive, free-spending, “get big fast” companies. The NASDAQ new technology index doubled in value in 1999-2000 – and rapidly crashed again as the promised profits failed to arrive.