Ormerod on LTCM

[Chris Burford]

I have just caught Paul Ormerod presenting an interesting crtique of events
at LTCM. He argued that it is in the nature of economic models that they
can work well repeatedly and then suddenly go awry. This would explain why
LTCM was not protected by the presence of Nobel prize winners in finance.

Ormerod has emphasised the relevance of chaos theory in his book entitled,
(I think I recall correctly) The Death of Economics. Although the occurence
of occasional chaotic phenomena is a strong incentive even for capitalists
to abandon neo-liberal dogma about the benign working of the free market, I
am not clear whether Ormerod is right in attributing the LTCM problems just
to the unpredictability inherent in chaos theory. Surely from a marxist
point of view, one would argue that with the expansion of credit as the
business cycle moves ever higher, there is an increasing probability that
somewhere a break is going to occur, which will cause a chain reaction.
Could this be factored into the equations?

Chris Burford

London