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Averting worse economic collapses

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Posted June 26, 2013

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A new study shows how specific parameters can help us steer clear of tipping points in dynamic systems, such as entire economies.

By managing macro-economic parameters, scientists believe that—unlike previously thought—it is possible to steer an economy around irreversible changes in its complex dynamics and avert potential economic disasters. These findings, about to be published in EPJ B, stem from the theoretical work of Michael Harré and colleagues at the Complex Systems Group at the University of Sydney, Australia.

Physicists have a long experience of using statistical mechanics to study equilibrium points and small fluctuations in large numbers of interacting particles under varying pressure and temperature conditions. By applying statistical-mechanics methods to economic game theory, it is possible to describe the strategic interactions between, say, businesses which are influenced by their own incentives as well as the incentives of third parties.

By changing a macro-economic parameter like tax rates, previous research has shown the system will usually move away a little from where it had settled, but not much. Their new results show that such optimisation can produce a tipping point where a change in the tax regime, for example, will cause the whole economy to suddenly collapse.

Read more at: Phys.prg

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