COGNIZANT PSYCHOLOGY SYNCHRONIZES WORLD ECONOMICS.

COGNIZANT PSYCHOLOGY IS CORE TO ECONOMICS.

Paul Krugman claims that the synchronization of the world business cycle is something of a mystery (NYT blog, August 22, 2008).

It seems to me we had a similar quandary earlier, when some of us were mystified by the influence of the price of the futures in oil on the oil cash price itself. (Traditionalists, such as Krugman, said it is not so, because, according to them, it could not be so; that is the traditional authoritarian explanation pitfall: refusing the observation, because it does not fit the preexisting theory; some commodities hedge fund managers disagreed deeply, because, in their experience, futures influence cash prices.)

In both cases, a mystery influence apparently propagates, and it cannot be detected with numbers attached to matter or currency exchanges. Conventional economics seems baffled.

But the nature of the propagation may simply be that this thing being transmitted has to do with basic cognitive psychology.

A hunter walking in the forest can detect something is amiss, just by the absence of bird singing. In an equivalent case, a conventional economist would detect nothing because the presence of the absence of something not easily quantified would not strike him as relevant to a jury of his peer reviewers (hence to the advancement of his career).

On the other hand, the average businessperson, however small and remotely located, or the governmental, or administrative decider, or the average cab driver, even in Karachi, hears, or reads the news. Thus, they become cognizant that an economic tsunami has struck a remote, but important part of the world. Naturally that decider will expect the tsunami to come around, and rather soon than later. it is not a matter of their career, but most of the time, of their livelihood.

Primitive people are not always primitive when their life is at stake. When the giant earthquake (9.3 Richter) struck Indonesia, the people in the closest islands to the epicenter immediately went to the high ground, and suffered nearly no casualties when the 120 feet waves crashed on the shore. More sophisticated people did not know what to do, until waves crashed into cities. Thus the total, illiterate savages demonstrated a better appreciation for risk than the most sophisticated specialists. Why? Because they were more concerned.

As people, worldwide, expect a slowdown, they batten their hatches, reduce, or even stop investing, and the crisis is instantaneously transmitted, faster than anything economists usually measure. Nowadays, information moves at the speed of light, and information always was at the core of economics.

Patrice Ayme
http://patriceayme.wordpress.com/