A Introduction to Bubble-nomics -- Kent Palmer 1 An Introduction to Bubble-nomics CHAPTER 01 Markets as Meta-systems Meta-systems Theory and the Structure of Markets : An Explanation of Speculative Bubbles, their Bursting and other Strange, yet Dangerous, Market Dynamics Kent D. Palmer, Ph.D. P.O. Box 1632 Orange CA 92856 USA 714-633-9508 kent@palmer.name Copyright 2008 K.D. Palmer. All Rights Reserved. Not for distribution. Started 08.09.29; Version 0.2; 08.10.06; BUB01a02.doc See http://bubblenomics.biz See also http://archonic.net http://holonomic.net Keywords: Market Dynamics, Speculative Bubbles, Bull and Bear Markets, Financial Market Crisis Introduction Sometimes it is good to appeal to some other field to explain phenomena that does not seem to make sense within the field of study which addresses the phenomena directly. This is particularly true when there is some underlying assumption in the primary field that prevents the understanding of the phenomena in question. Here the phenomena in question are speculative bubbles within markets. Since we are in the middle of a market crisis brought on by the Sub-prime lending and the selling of these loans as Mortgage Backed Securities and which has led to a Credit Crisis with many firms now going out of business due to over leveraged positions in these securities, and other problems associated with global market conditions at this time. So this crisis may cause us to reflect on the academic problem that we do not seem to have any fundamental theory of markets. And without such a theory it is difficult to understand global market phenomena and especially those that lead to binge and bust behavior on the part of investors caught up in the euphoria of the growth of these market bubbles. So we will use the terms Bubble-nomics to refer to this overall problem of markets, which seems to be the case even of determinate markets, that they give rise to bubbles. Bubble-nomics gives rise to Burst-nomics when the increasing returns 1 cannot be sustained within the bubble and some limit is reached which causes the market to fall apart, because the organizing principle of the market no longer can be sustained and the investors or lenders in this case lose confidence in the majority market position that has led to and sustained the bubble. In the present case a rescue package of 700 Billion dollars is being considered to help correct the imbalance in the markets caused by the Bubble. With that much money on the line I think it behooves us to spend some time seriously thinking about the problem that is will probably be costing us so much money. In this case what I would like to draw your attention to is the fact that the academic discipline of Market Theory is weak, and that explanations of seemingly endemic Bubble and Burst dynamics hard to come by. Exacerbating the problem has been a philosophy of de- regulation of the market and a fundamental assumptions that markets are self-regulating. If the markets are self-regulating the current environment does not display much evidence of that. So here we will jump out of Economics and traditional Market Theory all together and will instead appeal to extensions of Advanced Systems Theory recently developed by the author called Meta-systems Theory to explain 1 Arthur, W. Brian. “Increasing Returns and the New World of Business” Harvard Business Review, July- Aug.,1996