The End of Predictability: Economics is a 3-Body Problem

The Old Models are Broken

2025 is off to a turbulent start in markets, geopolitics, and macro. While some are rightly uneasy about the new environment unfolding, we must admit that it's quite fascinating. Decades-long forces are shifting and it now seems clear we have entered a new paradigm.

But it's important to keep a strong sense of skepticism around opinions. Some are calling for a new golden age while others are calling for a 1929-style depression. I've absorbed countless takes in the news and opinions that confidently predict what's next. 

Of course, they can't.

For decades, we’ve been taught to think of the global economy as something you can chart and predict: interest rates go up, inflation cools; innovation drives growth; trade expands, everyone benefits. But today, that old map is breaking apart.

Why? How? These are the critical questions. In short, the once-prevailing view that economics was a set of equations to be solved is now giving way to a view that it's really a complex, dynamic system of chaos. 

What we are witnessing is what I like to call the three-body problem of macroeconomics. In other words, we live a dynamic system where technological innovation, economic cycles, and geopolitical power shifts pull on each other in unpredictable, destabilizing ways. 

From Equilibrium to Chaos

Economists like to boldly claim that we have a deep understanding of market forces and how they respond to changes. In reality, economists are not great at predictions because their tools rely heavily on static inputs and the future behaving like the past.

In the early days, classical economists like Adam Smith and David Ricardo pioneered economic modeling. They imagined markets as largely self-correcting systems, governed by the "invisible hand." These tools were helpful at articulating forces at play, but they were eventually looked at as too rudimentary.

Later, neoclassical economists refined the old models with mathematical equations designed to optimize supply, demand, and utility. Even Keynesian models, which introduced government intervention, still largely assumed that with the right tools, we could steer the economy toward stability.

Over time, the tools have evolved. While classical economists used models reflecting nature's equilibria, neoclassical economists were more interested in how institutions and policies could influence or steer those equilibrating forces to achieve stability.

These tools were often helpful, especially in times when peace and stability were more common than not (especially since the second world war ended). But in the long run, things inevitably unraveled.

Crucially, the past two decades have exposed how so-called 'long-tail' or 'seven-sigma' events—like the 2007-08 global financial crisis, the COVID-19 pandemic's supply chain collapses, rising inflation, regional bank collapses, and the recent U.S. Treasury basis trade unwind—reveal cracks in the system that conventional models failed to anticipate. These extreme, low-probability events demonstrate how interconnected shocks ripple unpredictably, magnifying instability across financial, economic, and geopolitical domains.

Additionally, neoclassical beliefs underestimated the role of technology and large-scale geopolitical forces, which, as we now recognize, can act as powerful disruptors. 

Neoclassical economics was widely accepted as mainstream in the 20th century, but it notably failed to predict the great depression, gold shock, dot-com bubble, and great financial crisis.

Schumpeter's Relevance in Today's World

Despite the global adoption of neoclassical thinking, one 20th century thinker stood apart: Joseph Schumpeter. Schumpeter believed capitalism was not a system of equilibrium but of creative destruction — where entrepreneurs, innovations, and new business models constantly disrupt old ones, creating waves of change from within. This idea planted the seeds for what today we call complexity economics: the idea that economies are dynamic, evolving, and often unpredictable.

Schumpeter's insights are particularly timely today because the past few decades have shown that the most impactful shifts often come not from slow, predictable changes but from rare, extreme events — the so-called long-tail or 'seven-sigma' events that standard models struggle to account for. The 2008 global financial crisis shattered faith in financial system stability; the COVID-19 pandemic exposed the fragility of global supply chains; and the recent U.S. Treasury basis trade unwind highlighted hidden risks even in supposedly "safe" government bond markets.

Schumpeter's view reminds us that economic progress is inherently disruptive, and that today's shocks are not merely anomalies but symptoms of a system defined by continuous transformation and risk. In a world where innovation collides with geopolitical tension and financial complexity, Schumpeter's framework helps us understand why old models crack under pressure — and why adaptability and resilience are the only sustainable strategies.

Geopolitical Wild Card: Mearsheimer's Realist World

Until recently, most macroeconomic models quietly assumed the stability of the liberal world order: a system underpinned by U.S. dominance, free trade, open capital flows, and global institutions. But as political scientist John Mearsheimer and other realists have long argued, this order was never permanent. Today, with the rise of China, the resurgence of Russian intervention, the fracturing of global supply chains, and the rise of BRICS and other regional alliances, we are witnessing the end of the liberal order and the reemergence of raw great-power competition.

https://www.youtube.com/watch?v=JrMiSQAGOS4

This shift matters deeply because geopolitics is no longer just a backdrop; it is an active force reshaping global markets, investment flows, and technological strategies. When you layer geopolitical turbulence onto Schumpeterian economic disruption, you don't just get a more complicated system — you get a fundamentally unpredictable one.

The Three-Body Analogy

I was recently introduced to the concept of the three-body problem from the popular sci-fi book and Netflix series of the same name. The book uses a beautiful analogy of an alien world following a solar system of three stars where civilization is constantly at risk of collapse due to ice ages and fiery inferno. Civilizations attempt to predict the movements of the suns, but inevitably their models fail and they must attempt to survive and reboot.

In physics, the three-body problem describes how three massive objects (like stars or planets) interacting under gravity create a system so complex that no exact solution exists. Small changes in one body can create wild swings in the whole system. Likewise, in today's global economy, the interaction between:

1. Macroeconomic dynamics (debt, inflation, capital flows),

2. Technological innovation (AI, automation, crypto, energy), and

3. Geopolitical shifts (statecraft, great-power rivalry, fragmentation, new alliances),

creates a dynamic, interlocking system where small shocks can ripple unpredictably and where old forecasting models fail.

These shocks are made worse by the fragility of systems that grew reliant on the perceived equilibria of the past 70 years. Over time, layers of financial leverage, outdated government systems, defunct or strained trade relationships, and widely accepted investment strategies like the 60-40 portfolio allocation have all been built on assumptions of stability and predictability. But as extreme events expose hidden weaknesses, we see that many of these frameworks no longer hold.

Financial systems, for example, are more interlinked and leveraged than ever, amplifying small shocks into systemic risks. Governments, meanwhile, struggle with slow institutional responses designed for a different era. Even basic investment principles, like relying on bonds to offset stock risk, have cracked under the pressures of inflation, negative real yields, and policy uncertainty.

Chaos-oriented frameworks like Schumpeter's help explain why these cracks aren't random accidents but the natural byproducts of an evolving, constantly rebalancing system. If we zoom out with a lens of more than 70 years, we see that these rebalances are not so rare and can even be expected every-so-often.

Implications for Leaders, Investors, and Thinkers

What we are now seeing unfold at the global macroeconomic level is a response to the reality that equilibria are often interrupted. While it seemed for a moment that we had entered an eternal age of stability, the reality is a cliché of change being the only constant. 

For policymakers, this means abandoning the dream of precision control and embracing resilience, adaptability, and scenario planning. Risky strategies like wild debt burdens cannot withstand sudden, unpredictable change.

While it may be tempting to blame figures like the CCP, the Biden administration, Vlad Putin, or Donald Trump and his supporters for the shift to chaos, the reality is that their actions did not precipitate the paradigm shift, but rather responded to it and accelerated it. The belief that the post cold war order would never fail was a pipe dream. 

For investors, it means looking for robustness, not just returns: assets and strategies that can survive multiple futures, not just one forecasted path. The extraordinary rise in gold and precious metals prices in the recent past are telltale signs of restructuring. Commodities have been excluded by funds, but are now finding a place amid higher risk of otherwise reliable securities. Bitcoin and stablecoins are demonstrating that innovation may provide new and enticing solutions to the problems of a new age.

For institutions and businesses, global macroeconomic shifts are particularly troubling. They require building flexibility and innovation capacity into our organizations and institutions, and recognizing that markets, technologies, and political landscapes may shift suddenly and deeply. Luckily, innovations like powerful automation and generative AI technologies offer us the ability to rapidly consider and employ alternative pathways forward. 

We are entering a new era where the economy isn't just a machine to be tuned, but an evolving, chaotic system shaped by the interplay of innovation, macro forces, and geopolitical power. This calls for a new mental model: one that braces itself for the unknown and taps into insights on dynamic change.

In a world where the old order is gone, adaptability and synthesis are the new superpowers.