A recent article in New Scientist, When the Financial System is Like an Ecosystem, blames the world’s current financial troubles on the inability of established models and methods to take account of the complex dynamics of the global financial system. It advocates that the system should be re-engineered, using insights from the natural world.
At the same time, though, the article ignores the powerful influence of the complex social dynamics of the overall process. These are fundamental to the way that the ‘system’ works. And it is these that continue to undermine the attempts that governments and others are making to return the economy to some degree of normality.
The article begins by highlighting the interconnectedness of banking throughout the world. The result of this is that actions taken or crises arising in one country rapidly transfer their effects elsewhere in complex and unpredictable ways. The article also points out that, besides propagating effects across the globe, increased connectivity "makes the whole system less diverse and more vulnerable to dramatic shifts". Analogies are drawn with the complex dynamics of natural ecosystems, such as the weather and ponds.
To avoid future breakdowns, the article argues for the system to be re-engineered to take account of this complex network of interrelationships and to limit future instabilities. Amongst other things, it suggests that steps should be taken to limit the level of connectivity (by installing what it calls "firebreaks" within the system) and to reduce uniformity. The aim would be to create and maintain diversity, by preventing everyone becoming "part of the same pond, all following the same rules". Although this would limit transactional efficiency and potentially increase the cost of trading, it is argued that the diversity would make the overall system more resilient.
The article and its expert contributors are essentially viewing the global financial world as what in complexity science would be referred to as a Complex Adaptive System (CAS). Here, collective patterns of behaviour can be seen to emerge out of the local interaction of individual "agents" within the system. The argument put forward is that scientists "can now model the global system and capture the key collective behaviour that causes collapse". The article implies that, were this approach to be adopted by the global financial community, future economic policies could be subjected to verification with scientific rigour. Also, consistent with the "simple rules" view of how to manage a CAS, Governments are cautioned that they would need to be very careful with any proposed interventions "set[ting] rules and limits for the system without actually telling people what to do".
An overlay of social complexity
The article makes some very important points about viewing the financial system in ways that take account of its global connectivity and the complex dynamics that flow from this. The unpredictability of the particular outcomes that might emerge across the world, as a result of actions in one part of it, has been appropriately highlighted in the article; as has the goal of retaining diversity to counter this tendency.
However, one of the critical dimensions of the overall process that the article ignores – which cannot be inferred from comparisons with the natural world – is that of the complex social dynamics of people in interaction.
I believe that this points to a basic flaw in the CAS view, where this is applied to a complex social process. It is also the reason why analogies from the natural world are inadequte to explain the underlying dynamics of these processes.
People have diverse perspectives, competing agendas, fears and concerns, hopes and aspirations, self-consciousness and a multitude of other, distinctively human characteristics. Their interactions are affected by – and affect – the underlying patterns of power relations, political dynamics and cultural assumptions. And it is people whose actions, interactions and transactions ultimately comprise the ‘system’ – the bankers, the consumers, the legislators and regulators, the commentators, the bystanders and so on. Every one of these people has an influence on the ‘health’ of the financial system as a whole, through the impact of their everyday, local actions on the global patterns of behaviours and outcomes that emerge.
So, whatever ‘structural’ changes might result from the complexity-based insights outlined in the article, these would count for nothing if the implications of social complexity were ignored. Structural factors (such as the level of indebtedness and the adoption of a "me too" approach to banking practices in general that have reduced diversity within the system) can be highlighted as factors contributing significantly to the current crisis. However, financial stability ultimately depends on people’s confidence in the system. And it is also confidence – or rather the lack of it – that is contriving to frustrate Governments in their efforts to reverse the tide.
For example, despite the vast sums of money invested by the UK Government to underpin the country’s banking system, the banks themselves are refusing to ‘play ball’. Or, more accurately, the people who are decision-makers within the banks are still not confident enough to lend to each other. In consequence, money is still not circulating in sufficient quantities to stimulate the desired levels of economic activity. Structurally, the money might now be there. Structurally, there might be sufficient guarantees to ensure that actual risks are relatively small. But people don’t base their decisions and actions on structural factors. They base them on their perceptions. A similar argument could be made about the ways in which consumers are responding to what is happening.
So, any application of complexity science to a social phenomenon like banking needs to pay primary attention to the complex social process of people in interaction.
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