Slowing down to avoid a crisis

One of the great pleasures in life is to browse around a good bookshop. I picked up a great book at the Columbia University bookshop last month. It was a primer on systems thinking by the late Donella Meadows, a scientist and systems analyst who was lead author of the 1972 book The Limits to Growth.

Dana, as she was known, was one of those early environmentalists who suggested that there are limits to human consumption. Her book was finished in 1993, but it took her friends nearly seven years to complete the editing after she died in 2001.

Her book is full of simple stories on why there is an internal logic to systems. It begins with a quotation from Robert Pirsig, author of the 1970s cult classic, Zen and the Art of Motorcycle Maintenance: 'If a revolution destroys a government, but the systematic patterns of thought that produced that government are left intact, then those patterns will repeat themselves ... There's so much talk about the system. And so little understanding.'

The way we think defines our world. Classic teachers, such as Aristotle or Confucius, taught not on specific subjects, but offered wide-ranging thoughts on man and nature. Today's students are taught to be specialists. We know more and more about less and less. Classical philosophers knew less about much more.

As specialists, we think more narrowly and partially, using models of the world that have many assumptions, which could be patently false. In economics, the most basic assumption is 'other things being equal'. In life, other things are often not equal. If the assumption is wrong, the theory is wrong. Macroeconomics went wrong because much of its theory did not add up.

As an environmentalist, Dana defined a system as an interconnected set of elements that is coherently organised for a function or purpose. A system is more than the sum of its parts, which exhibits adaptive, dynamic, goal-seeking, self-preserving, self-organising and evolutionary behaviour. Societies are complex systems with their own logic and inconsistencies.

She illustrates this with a coiled spring toy which can 'walk itself' downstairs. If you tilt the spring at the top of the stairs, the coil tilts over into the step, pulls itself and tilts over the next step. It is the tension in the spring that gives it its motion. In other words, our action releases behaviour that is latent in the structure of the spring - and it walks itself down the stairs.

Within a system, the parts exchange information through feedback loops, which could be positive (destabilising) or negative (stabilising). Neoclassical economists thought that market systems would be self-stabilising. Observers like George Soros and Hyman Minsky understood that, sometimes, markets can be destabilising.

The existence of feedback loops means that there are no simple linear cause and effect (as is found in most economic models), because in the loop, A causes B and B causes change in A, perhaps creating C. In the Chinese Book of Changes, this is described as 'one creates two (binary), two creates three, and three creates all things'. Complexity comes from the evolution of very simple functions or processes. Balancing feedback mechanisms can help stabilise systems but, at the same time, they can be resistant to change. We call these vested interests.

Because of feedback loops and interactivity between the parts, many relationships in systems are non-linear and uncertain. This is the concept of reflexivity expounded by Soros. For most economists, economic concepts are abstract and pure and could be measured statistically, so that we can model these for predictive purposes. We now know that each concept is relative and fuzzy, because they are constantly being changed by interaction with other concepts. For example, for practical purposes, we measure bank liquidity and solvency separately, but in a crisis when there is no liquidity, insolvency occurs. Water is normally liquid, but, at boiling point, it becomes steam and is then not easily measured.

One of Dana's insights is that changing the delay in feedback loops can make the system oscillate towards stability or instability. This is what Nobel Laureate James Tobin called putting sand in the wheels to slow systems down, so that the system reverts to stability. If the market system trades faster and faster, such as through the use of smart computerised trading, are we surprised that we get higher and higher market volatility?

In other words, we may be having a crisis because the world is growing too fast, by consuming too much relative to the scarce global resources. Certainly, we now understand that money and financial derivatives are still growing very fast relative to real economy activity. Isn't inflation the natural outcome?

Drawing upon ecology, Dana understood that human greed and limited knowledge (what economists call bounded rationality) can lead to collective action traps or 'the tragedy of the commons'. Because of self-interest, we are all consuming resources beyond the capacity of the earth.

Being aware of systems thinking does not solve all problems, but it helps us understand how to prevent collective action traps, meaning we feel trapped because no one seems able to change the whole system.

Dana teaches us to be humble about making changes to prevent collective action traps. We need to identify the leverage points in a system, where changes can affect behaviour for good or bad. Good leverage points are often counterintuitive. Perhaps slowing down may be a natural solution. If not, a crisis will stop things for us. We must have time to stand and reflect where we are heading on planet earth.

Andrew Sheng is author of From Asian to Global Financial Crisis