
A Batesian Mimicry Explanation of Business Cycles (2010) - applecore
http://falkenblog.blogspot.com/2010/07/batesian-mimicry-explanation-of.html
======
tlb
The assumption here is that business cycle busts are caused by the inevitable
collapse of companies that weren't sincere about creating a sustainable
business in the first place. There are plenty of anecdotes to color in this
story, but I don't believe it's the main driver of business cycles.

EDIT: Admittedly, I'm in a filter bubble of sincerity, since it's one of the
main things we look for in YC founders.

~~~
aston
The author's theory allows not just for insincere entrepreneurs but also
incompetent ones. No matter how strongly an entrepreneur believes his idea to
be a billion dollar business, it's very possible that it isn't, even if he's
able to convince investors (and himself) that it could be based on some
superficial metrics.

~~~
dnautics
Right, and the the incompetence can be subtle and from many causes, such as
poor management skills, just-less-than-necessary technical capability, in
addition to the standard Dunning-Kruger effect, and cargo cultists who
identify superficial qualities of entrepreneurships. Ironically, in an
entrepreneur you want just the right amount of impostor syndrome, but the
process may select for Dunning-Krugers.

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carsongross
For those of you unfamiliar with the austrian explanation of the business
cycles, here is layman's intro via an excerpt from a talk given by the always-
excellent-whether-I-agree-with-him-or-not Tom Woods:

[https://www.youtube.com/watch?v=5K4Os5eXPw4](https://www.youtube.com/watch?v=5K4Os5eXPw4)

(Personally, I think the orthodox austrians generally undervalue the mass-
psychological explanations of things when they dip into rational-actor
assumptions, but I still find their explanation compelling.)

~~~
sitkack
Shitty stereos on the 80s. Brands 'mimicked' themselves to get extra profit
since consumers signaled off of the logo, the chrome and heft not the sound.

~~~
carsongross
I think that the austrians would respond (and, again, I'm not an orthodox
austrian) that value is subjective and, if consumers find that chrome and
logos are what make stereos valuable, then that's the way it is. Perhaps the
social-marker value when less knowledgable friends visit, or the general
aesthetic look of their living room, is what's important to them. After a
while, if the consumers really could tell the difference in sufficient numbers
to warrant large scale production, superior stereos should win out.

I dislike shoddy stuff generally and how much brand matters (it matters to me,
too, why oh why!?) so I don't intrinsically _like_ that argument, but I
understand the rational power of it. It implies, in as much as we should be
angry with someone, we should be angry at _ignorant consumers_ , rather than
evil producers for shoddy stuff. And the stunningly great news is that we can
fight that problem by simply blogging about what we are passionate about.

This is one of the great benefits of the internet I did not expect: the spread
of knowledge across _consumers_ has dramatically increased the quality of many
things. To pick a few examples:

\- I can get a cappuccino in Sacramento, CA that would have been available in
only a few cities in the world two decades ago.

\- There are more beers worth drinking being brewed within 50 miles of my
house right now than there were in all of California in the 70's.

\- There has been an absolute explosion in high quality, low cost mechanical
watches in the last ten years (see stowa, chris ward, and steinhart, to name a
few)

EDIT: I pick these examples to show how the internet has improved even old-
fashioned, extremely non-digital things through the spread of knowledge.

In any event, I'm drifting dramatically OT...

~~~
sitkack
I am not blaming anyone. Stereo equipment got very popular in the 70s and in
the 80s it became very cheap to produce good enough electronics, so high
valued brands effectively did a hostile takeover of themselves and burned
their product lines down making things that mimicked their earlier higher
quality goods.

There are a relatively small number of participants in any system doing stuff
that is new or truly creative, everyone else copies the leader.

First it was netbooks, then it was tablets. Markets I think are sprouted by
first movers, who after fail, and truly grown by an army of mimics.

------
lifeisstillgood
In brief: animals who are not poisonous or dangerous copy the markings /
signals of animals who are and thus gain protection of being vicious killers
without the metabolic cost.

This article posits that all the woes of Capitalism are due to copycat
entrepreneurs offering "facebook for dogs" and eventually the investment that
would go to killer companies to create wealth simply vanishes

I cry rubbish here. Firstly he destroys his argument in the article himself
("""alternatively, one could remember the rule "Red on yellow, kill a fellow;
red on black, friend of Jack" """). Fairly simple rules of thumb allow even
not-so-smart-money to avoid Facebook for dogs.

Secondly mimicry is only a useful defence against predators of the killers.
Killer snake happily kill non-poisonous snakes as well as prey.

And finally, Hy Minsky seems to have this already sewn up - Hedging,
Speculating, Ponzi.

Sidenote: my all time favourite Batesian mimicry is the Cheetah cub,
([http://milgistrust.wildlifedirect.org/files/2009/01/23.12.08...](http://milgistrust.wildlifedirect.org/files/2009/01/23.12.08-cheetah-
cub.jpg)) whose colouring reflects that of the adult Honey Badger. Honey
Badgers are great, such vicious fighters that lions basically think "I'll
leave that for another day" \- the animal kingdom's equivalent of short
hairless Glaswegian pub landlords.

~~~
washedup
It's not a "woe of Capitalism", just an inherent property of an economy. In
fact, it's an inherent property of all life. Economic cycles and life/death
cycles in species have a lot in common. The dynamic nature of such systems
make them hard to predict, but you can be sure that they will continue to
occur. It's a way of resetting (or reallocating) resources that is essential.

~~~
lifeisstillgood
An interesting point - thank you. I was just listening to a bbc podcast on
Minsky, and while everyone agreed that previous economics failed to predict
their instability, everyone now thinks Minsky is the key to preventing
instability - but no one mentioned that actually death is part of life and we
need not to prevent the next crisis, just not let it cause such damage. Harm
reduction as public policy - whatever next

~~~
washedup
Thanks for pointing me to the Minsky podcast, giving it a listen now.

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dnautics
I feel like this is also a suitable explanation of the impending correction
that needs to happen in scientific research. We promote scientists who are
adept at Batesian mimicry of the scientific power structure, and not
necessarily adept at science.

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kristianp
This theory (is it a theory?) sounds good, but as someone else here implied,
those who copy aren't employing mimicry, but are actually trying to compete
with those they copy. I would say that the bubbles are closer to biological
arms races than biological mimicry.

The irrational exuberance is met by companies that are competing to be the
most successful in exploiting that exuberance. Hence Enron's success at being
one of the best performers on the market until its bust.

I'm sure this stuff has been explained before, but it doesn't seem to be part
of any popular economic theory?

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washedup
Great read. I look forward to the day when Economic graduate programs are
taught from a more biological/psychological perspective than through aggregate
supply/demand and equilibria models. The real issue here is that macroeconomic
systems cannot be predicted or successfully controlled, but they can surely be
made more robust. The current policies in practice are potentially dangerous.

~~~
csentropy
Nothing excites people like a false analogy. Looking to biology to model how
economies work is like looking at stars and movements of heavenly bodies to
see how stock prices change. I can find a thousand things common between them,
but you know how accurate that science is.

~~~
washedup
No model is perfect. If it is a better model than the current one (which is
the argument), it should be used as a replacement. Economic systems came from
biological systems. As a result, they share some fundamental characteristics
and the "false analogy" carries significant weight.

I suggest you read this Wikipedia article:
[http://en.wikipedia.org/wiki/Ecological_economics](http://en.wikipedia.org/wiki/Ecological_economics)

~~~
csentropy
Yes. Some are much farther from perfect than the others. Economic systems came
from biological systems that came from matter and physical forces. Therefore
astrology?

The impetus is on the claimant to show how their models are "better". From the
link above, it sounds more like a religion or cult than as a science "
ecological economics is defined by its focus on nature, justice, and time" .
Economics is supposed to be descriptive, not prescriptive or ideological. What
financial crises/trends did these ecological economists predict to claim that
their methodology is better?

~~~
washedup
What financial crises/trends do aggregate models predict? Unfortunately,
current economic theory resides in a grey area of ideology because of how
poorly it explains and predicts such things. Assumptions can often be made in
any ideological direction.

I also don't claim that the entire Wikipedia article is useful, I just wanted
to expose you to some of the ways economists are using biological system
(ecology) to model an economy.

~~~
csentropy
Well, austrian economists have predicted the 2008 housing/financial crisis. A
good methodology can predict crises based on aggregate models. Predicting when
is a different issue, although some have done that, at least with the 2008
financial crisis. [http://www.lewrockwell.com/2010/12/walter-e-block/who-
predic...](http://www.lewrockwell.com/2010/12/walter-e-block/who-predicted-
the-housing-bubble/)
[http://archive.lewrockwell.com/block/block168.html](http://archive.lewrockwell.com/block/block168.html)

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josephlord
Steve Keen's model
([http://www.debtdeflation.com/blogs/manifesto/](http://www.debtdeflation.com/blogs/manifesto/))
seems to provide a convincing explanation to me. Basically that debt growth
(and acceleration) are key to understanding the business cycle and crashes. He
has an open source Kickstarter dynamic modelling tool called Minsky
([http://www.debtdeflation.com/blogs/minsky/](http://www.debtdeflation.com/blogs/minsky/)).

Alarmingly the models used by mainstream economists don't seem to cover
crashes (not as in can't predict their timing but really can't model them at
all generally).

~~~
dnautics
I'm highly sympathetic to austrian explanations of economics, and somewhat to
chartalist explanations* (but I don't generally agree with chartalist
prescriptions) but I'm unconvinced that debt causes crashes. I personally
believe that debt systems aggregate small, localized crashes which happen all
the time into large, systemic crashes.

A good resource is Mandelbrot's (mis)behavior of markets. It explains a lot of
things like how the Pareto principle appears. Reading between the lines, it is
easy to see how levy-alpha-stable distributed events can aggregate into bigger
levy-alpha-stable distributed events, since this distribution obeys the
undefined-variance equivalent of the central limit theorem.

*The "QE for the public" is a horrible public policy choice and to me is exactly a good example of where chartalist prescriptions go off the rails. The Jubilee is a better idea, but to prevent a total collapse of the banking system, you could structure it differently, like making all debts voluntary. Basically our society has been trending towards this (with currently the exception of educational debts) and so what we are seeing is that people with good credit that don't spend their line of credit boozing through their twenties being highly valued. But because lending from individuals is becoming tapped out as their credit is wasted, a lot of debts have become shifted to the public, in the form of municipal, state, and federal debt - sometimes through public spending and sometimes by explicitly converting private debt into public debt.

~~~
josephlord
I might look into the Mandelbrot book. From my perspective if you accept that
GDP is the economy's production plus the change in aggregate debt it seems a
small step to see how debt growth builds during the boom and stops suddenly
reducing spending to form the crash. Debt in itself is not bad but in the
absence of stabilisation it is likely to cause problems.

I quite like his Modern Jubilee idea a.k.a. QE for the public (although it is
an alternative to TARP and the QE that took place in the midst of the 08/09
crisis not for now) I'm not sure how a traditional Jubilee would work and how
it would stabilise the banks at all. The Jubilee Shares are the Keen policy I
don't quite buy.

~~~
dnautics
Basically it seems to me the distinction between the more contemporary, non-
crazy, parts of the austrian school (i.e. not the goldbugs) and the chartalist
position is how to deal with it. Austrians would suggest that debt is not
fundamentally bad, but dangerous, and the market should price in the risk of
debt (which it does not, because of things like bailouts and backed reserve
lending), and that any attempt to stabilize the swings caused by lending
activities will backfire and create moral hazard (the specific economic term).

A modern jubilee might take a form like, legally not permitting any debt to
last beyond X years.

There is a particular moral hazard associated with sovereign and government
debt - Unlike debt accrued by you or I, which is discharged upon our deaths,
leaving the lender holding the bag (a risk that should be priced in the loan
term), sovereign debt is unlimited. If you believe in the principle of "no
taxation without representation" which really boils down to the idea that
legitimate government should not act (i.e. spend) without the consent of
governed - then is it really morally permissible for future generations to be
legally bonded to the profligacy of previous generations? Where are the checks
and balances? Can our grandchildren go back in time and vote against spending
policies that they are responsible for paying back?

So generational debt, which is generally considered to be immoral along the
lines of slavery, especially among progressives who see it as a means of
keeping the poor poor, is suddenly okay when the state does it.

Perhaps unsurprisingly, the state itself is also reverting to this feudal
practice. [http://www.washingtonpost.com/politics/social-security-
treas...](http://www.washingtonpost.com/politics/social-security-treasury-
target-hundreds-of-thousands-of-taxpayers-for-parents-old-
debts/2014/04/10/74ac8eae-bf4d-11e3-bcec-b71ee10e9bc3_story.html)

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ArkyBeagle
Two things:

1) It's a history book, not particularly an econ book, but "Nation of
Deadbeats" covers this _well_. Each boom-bust cycle is actually quite unique,
and most of them are caused by human action and not spontaneous.

2) In the 20th Century, just about all depressions, recessions and
hyperinflations were monetary in nature. The ones that were not were due to
failed states. A lot of this was due to the gold standard - which is nearly
tautological - because since the gold standard was in play, we saw those
pathologies. Douglas A. Irwin has a paper "Did France Cause the Great
Depression?" that was an eye-opener for me. It actually describes a real
mechanism.

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vajrabum
I liked the article. I think it captures something real. However it dismisses
out of hand without discussions any number of other theories which do in fact
have at least some explanatory or predictive value--exogenous shocks (i.e. gas
crisis of the 1970s), credit/debt cycle, inventory cycle, interest rate cycle,
fixed-investment cycle, and the 60 year Kondratiev waves which may be driven
by a new technology introduction cycle. It also ignores recessions and
depressions that don't fit it's thesis. See here
[http://en.wikipedia.org/wiki/Business_cycle](http://en.wikipedia.org/wiki/Business_cycle).

