Robert Shiller: Feedback Mechanisms An Echo Chamber of Boom and Bust
Shiller’s view is simple; social epidemics can boost confidence which in turn can become contagious (lifting all boats).
Introduction (Via NYT)
THE global signs of a recovery in economic confidence seem puzzling. It is a large and diverse world, after all, so why should confidence have rebounded so quickly in so many places? Government stimulus and bailout packages have generally not been big enough to have such a profound effect. What happened? Economic analysts often turn to indicators like employment, housing starts or retail sales as causes of a recovery, when in fact they are merely symptoms. For a fuller explanation, look beyond the traditional economic links and think of the world economy as driven by social epidemics, contagion of ideas and huge feedback loops that gradually change world views. These social epidemics can travel as swiftly as swine flu: both spread from person to person and can reach every corner of the world in short order.
Exceprt (Via NYT)
At first, the feedback explanation may sound too simple, and may suggest that the stock market and its turning points are easy to predict. But because day-to-day noise shrouds these changes, and because the stories change in their retelling and as new evidence emerges, the process is actually very complex.
And even when feedback mechanisms are straightforward, they can produce very strange outcomes, not predictable very far into the future, as the modern mathematics of chaos theory can attest.
All of this suggests that a social epidemic is supporting renewed confidence. This confidence can keep growing by contagion, as a kind of self-fulfilling prophecy, and we may see the markets and the economy recover further.