Behavior of Complex Systems

Off the keyboard of Monsta666

Discuss this article at the Geopolitics Table inside the Diner

Introduction from RE: The Diner is happy to add Monsta666 as one of our Native Diner Authors.  His contributions inside the Diner are detailed and insightful, and he often brings a different perspective to many threads pursued at the Diner Tables.In my last two articles, The Burning of the Great Library at Alexandria and Panarchy & the One-to-the-Many: The Final Countdown, I viewed the Collapse of Industrial Civilization from the perspective of recurring cyclical events, which occur on differing timescales in a Fractal manner.This of course is not the only way to look at this collapse, it also can be viewed from the perspective Complex Systems Theory, pioneered by Joseph Tainter, and applied recently to the collapse by David Korowicz.  Monsta takes a concise look here at how these concepts are affecting the progress of Cascade Failure of systems throughout our society. The rest below from the keyboard of Monsta666.

I do find that one of the big differences between the doomer lites and normal doomers comes from whether one grasps the normal behaviour of complex systems and consider factors such as efficiency and resiliency. The people who do place a higher importance on such issues tend to hold a more pessimistic outlook while those who do not value or consider such factors in any great  depth tend to hold a more optimistic outlook for our world economy. The most notable example I can recall where a system thinker projected a detailed doomer scenario is that of David Korowicz with his report on Financial System Supply-Chain Cross-Contagion. For those unfamiliar with his work I would advise reading the 78 page .pdf file here. If this file is too long I would recommend reading the blog entry of Watching the Global Economic System by George Mobus as a suitable short summary. In either case both sources provide a good backdrop to what I will discuss later on this article.

At the moment our economic system has undergone a process spanning several centuries from a point of high resiliency and low efficiency to one that is highly efficient but carries significantly less resilience. This process of increasing efficiency and interconnections has resulted in greater profits as the resource and energy stocks are allocated in an increasingly more efficient manner. These increased profit margins that can come from greater efficiency arise because the amount of output per unit input declines meaning the costs of the inputs are lowered relative to the proceeds of output. This process of increased efficiency often comes at a cost of resiliency; as the means of production become leaner and carry less redundancy. To offer an example of this many businesses today operate with significantly lower stocks of inventories and much of this remaining inventory arrives on a Just-In-Time basis. This process reduces storage costs but means any unplanned event can cause the business to grind to a halt more quickly as there is less of a buffer to absorb these shocks.

This increased efficiency and declining resiliency is also further exacerbated by the increased amount of interconnections. This increase in the number of interconnections has also resulted in the economic system undergoing a process of consolidation where more and more factors of production have been concentrated into fewer but larger organisations. This consolidation process while offering some increased resiliency from local shocks has meant that the nodes have become less autonomous and more dependent on the overall system to meet its needs. Since there are fewer but larger players it means the whole system has become more vulnerable to wider systemic shocks. While smaller shocks can be more easily absorbed larger shocks have a greater potential of causing cascading failures in the overall system. This occurs because although smaller shocks can be absorbed more readily by a larger network if there is a shock sufficiently large to overwhelm one node the amount of flows/stocks that will get disrupted is likely to be sufficient to cause failures of other nodes. Such examples can be seen in large electrical distribution networks where if there is a failure higher up the chain where more electrical power is transmitted then a failure of this module is likely to cause failure in other nodes as all the excess load is offloaded to other nodes which are then more likely to become overloaded and fail as well.

Another important element to consider is that of risk. In a larger system the risks are never entirely eliminated but merely dispersed. In other words the costs of a disruption are no longer borne by one party but are diffused to many members of society. To offer an example of this phenomenon, before the advent of widespread trade a local farmer could only depend on the food they produced as well as that of his nearby neighbours. If there happened to be drought the farmer would absorb all of the costs from this disruption. With the advent of more widespread trading this risk has afforded the farmer greater resiliency but has made him more dependent on the overall system to provide his income and wellbeing as he depends on the incomes of other trading partners to sell his produce. He is no longer entirely self-sufficient and depends on distant markets to meet his income. However even with this arrangement the risk of disruption has not been eliminated; it has merely been diffused across more party members. As a result, if there is a disruption then this will be borne with rising food prices.

This diffusion of risk while acceptable or even desirable can also create an insidious effect of making it appear that risk has been eliminated when it has merely been diffused and displaced. This perception of no risk can lead market participants to act out in an overly aggressive or optimistic manner heightening the chances of systemic failures. This behaviour of underestimating risk was most famously seen just prior to the 2008 financial market crisis where various mortgages were bundled into mortgage backed securities. This process diffused the risk of mortgage defaults across many more participants but it did not eliminate the risk; it merely displaced it. The general perception however was the risks had been eliminated and the resulting over exuberant behaviour that came from this incorrect assumption almost resulted in the total failure of the financial system.

While the economic system that has developed is highly effective at allocating and expanding resource extraction efficiently it is less resilience and becomes less resilient year on year. This overall behaviour comes because the objective of the system is to expand and increase efficiencies (or profits) and since resilience is not an objective of the system devised it is always the factor that is sacrificed to promote its primary objectives. However as the resilience lowers then the set of suitable conditions required to maintain current system behaviour narrows and the range of parameters for it to achieve a dynamic equilibrium becomes more difficult to maintain.

Like all complex system, once under stress there will be various feedback mechanisms that will be placed on the overall system. At this moment the system is under some stress however the various negative feedback loops (stabilising loops) serve to maintain system integrity. These negative feedback loops can be seen everywhere for example the price of oil places a strain on the economic system. To compensate for this stress factor the system undergoes a process of demand destruction and allocates this critical resource in a more efficient manner that primarily serves to keep the core functions running. This reallocation of resources serves to maintain the system while it is under stress. Another analogy can be made when the human body is suffering from hypothermia. In this state the body will cut circulation from the peripheral regions such as the arms and legs to maintain a normal temperature at the core. These two negative feedback processes come from two different set of complex systems but they both achieve the same purpose of maintaining or preventing the death of the overall system. I am sure with some thought you could offer some other negative (stabilising) feedback loops.

However this behaviour of the two complex systems highlighted will result in similar outcomes if the factor causing the distress is not relieved in short order. In the case of the human body if circulation is not restored to the arms and legs then eventually the cells in those regions will slowly die and if no further action is taken the regions will develop gangrene and these infected regions will spread to the other regions (a contagion effect) where the whole body dies. A similar process will occur in the economic system where the peripheral regions such as the PIIGS or MENA countries suffer first. When those regions economies finally collapse their bad debts will pass toxic amounts of risk to the core economies and then those will eventually cease to operate thus a contagion effect serves to cause a series of cascading that brings the overall system down.

Also in all this, we need to remember there are positive feedback (self-reinforcing) feedback loops. In the case of the economy a positive feedback loop can be found in economies suffering from deflation where lower demand for products will mean more job losses which then results in more demand destruction and further job losses. Such feedback loops are often known as vicious circle when describing a negative cycle or virtuous cycle when describing something positive. These positive feedback mechanisms – if left unconstrained by negative feedback loops – can cause the system to radically change in short order. However at this moment of time it seems the various negative feedback loops are roughly as powerful as the positive feedback loops so the overall system seems to be in some kind of dynamic equilibrium. However in time it is quite likely that the force of positive feedback loops will become more powerful than the negative feedback loops so the parameters in the system will change and the stresses and risks will escalate.

As this happens the system will leave the island of stability and it will soon reach a tipping point i.e. the point when the systems response to a stress event is disproportionate to the stress itself. It is impossible to say when this tipping point will be reached but this point will come provided the stress factors are not removed or contained. When that happens it is likely we will see dramatic changes in behaviour (or collapse) in the overall system. Most system thinkers are aware of such points and even a recent  IMF report on oil prices does highlight the fact there would be a tipping point in oil prices that can cause significant changes in the behaviour of various economies. In either case I would say this tipping point is something that is often neglected by doomer lites as they feel the system can carry on getting more and more stressed without the overall system suddenly undergoing drastic changes in behaviour. This lack of tipping point does not generally happen in complex systems or in ecology so I do not see any reason why the economic, political or social systems will fair any differently, they are complex systems after all.

Saying all that, one should not draw the conclusion that all complex systems are inherently unstable. Some complex systems are highly adaptable, resilient and can withstand large disturbances in the level of stocks and flows before being pushed out from its equilibrium range. Such examples of stable complex systems occur in many natural ecosystems which exhibit great stability despite their extreme complexity.  What needs to be stressed is the fact that the current economic system man has devised is a complex system that is highly unstable because one of the prime objectives of this particular complex system is to increase efficiency and promote growth. This increased efficiency and accompanying growth often come at the expense of resilience and this lack of resilience is what makes the system unstable.

What needs to be remembered when making an assessment of how a system behaves and will operate is to consider what the primary objectives of a complex system are. Every system has a primary objective and this objective will be maintained at any cost, even to the detriment of other important factors. With humans the primary goals is to avoid death and reproduce. These objectives will be maintained at any cost even if it means the cost of a limb, local habitat or any other large cost. The cost of life may even be an acceptable cost if the first objective is reproduction. The same concepts described here can also be applied to our economic system. Since the primary objectives of our current economic system are efficiency and growth then redundancy and resiliency will be an anathema to our system as not only does redundancy means less efficiency (which translate to less profits) it also means each subsystem can operate more autonomously which is not good for the illuminati who wish to control everything by making its subjects more dependent on the system to provide its needs.