China and Global Finance: Transformation of a Complex System Carlo Jaeger Hot Topics in the Study of Complex Systems in Asia CCS ‘ 15, ASU, Tempe, Sep 26 -Oct 2, 2015
Overview 1) The Evolution of Global Money 2) Complexity and Economics 1) Hegemony or Polycentrism?
1) The Evolution of Global Money
Ancient Chinese Coins
First Paper Money (Song Dynasty)
Spanish Peso
UK Guinea
US Dollar
Global Currency Reserves € $
1820 -2000
The Shifting Technological Frontier Patents by city regions
The Global Network of Financial Control
A Question of Hegemony? (here: trade network) USA China
GDP p. c. , US & China, 2010 -2050 US 2%, China from 10 to 4%
2) Complexity and Economics
Gardner & Ashby, 1970 A conjecture based on computer simulations: “all large complex dynamic systems may be expected to show the property of being stable up to a critical level of connectance, and then, as the connectance increases, to go suddenly unstable. ”
May, 1972 Claims the May-Wigner theorem: “The central feature of the above results for large systems is the very sharp transition from stable to unstable behaviour as the complexity (as measured by the connectance and the average interaction strength) exceeds a critical value. ”
Boreal forest
Rainforest
Cohen & Newman, 1984 Counter-proof: “We now show, by explicit counterexamples, that the assertions of May […] are false in the generality with which they are stated. ”
![Hastings, 1984 May-Wigner reloaded: “In the case of Harrison-May scaling [. . ] stability](https://present5.com/presentation/204656794_437362934/image-21.jpg "Hastings, 1984 May-Wigner reloaded: “In the case of Harrison-May scaling [. . ] stability")
Hastings, 1984 May-Wigner reloaded: “In the case of Harrison-May scaling [. . ] stability of May-Wigner matrices tends to increase with increasing complexity. […] A brief, informal look at the world economy provides a dramatic illustration. […] Although trading transactions probably satisfy at least weak versions of the Harrison-May scaling rules, currency transactions need obey no such rules. ”
Battiston et al. , 2013 Arguing for simplifying financial markets: “The continued development of myriad new instruments and the steady increase in the number and connectivity of market players therefore seem to give rise to the conditions stipulated by the May–Wigner theorem.
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A Three Bodies Problem?
Complexity and Economics
A Stage Game on Hegemony Claim Resign
The Hegemony Game Play a repeated game as follows: Choose the strategy that promises the best outcome based on your current expectations. Update your expectations as well as you can, combining previous expectations, current experiences, observation of others, and your understanding of the system. Try to modify the game to your advantage.
From Trichet, bypassing Weber, to Draghi: “countries have found themselves in a bad equilibrium” “we will do whatever it takes…” Carlo Jaeger (GCF) | Complexity, Austerity, and Growth 27 March 2015
A Chinese Equilibrium Switch
Keynes’ Vision for a Global Monetary System In the 40 s, Keynes envisioned a global monetary system, which came with schemes for • Delivering sufficient liquidity for enabling economic growth of all nation states; • Keeping destabilizing macro-economic imbalances in check.
Keynes’ Vision for a Global Monetary System • Keynes conceived the Bancor, an international reserve currency. • Basically, the Bancor was a fiat currency. • In Keynes’ vision, it was used for stabilizing commodity prices via commodity buffer stocks. • Keynes even suggested to back the US-Dollar by commodities.
Bretton Woods and Beyond • The Bretton Woods conference established the USDollar as world reserve currency, and the IMF and the World Bank as institutions. • In the late 60 s, Special Drawing Rights were created as an alternative source of international liquidity. • Special Drawing Rights are options that enable countries, if need arises, quick and easy access to currencies under favorable conditions.
A Chinese Proposal • The governor of the Chinese central bank, Zhou Xiaochuan, has made a remarkable proposal: • In the long term, he aims at an international reserve currency with a stable valuation benchmark. • In the short term, he proposes to strengthen the role of Special Drawing Rights as stepping stones towards the long-term goal.
Inventing a Polycentric System? • Developing IMF’s Special Drawing • • Rights (SDR) towards an international reserve currency “should be a gradual process that yields win-win results for all. ” Reframe this process as co-ordination exercise rather than as social dilemma. Initiate a process of social learning.
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