Friday, November 18, 2011
Analysis by Jay B Gaskill
CALMLY ADDRESSING THE COMING SYSTEMIC FAILURE
Why the Way Out Requires Re-Thinking Fundamental Assumptions
Overcoming Hysteria in the Face of Fundamental Change
The Western democracies in general and the United States in particular are facing a systemic failure in finance and governance. The problem is critical and potentially catastrophic because policy makers are unable to grasp that the very organizational architecture that has been taken for granted is the main problem. Complex systems characterized by emergent order are being politically mismanaged by a hierarchical, top-down process that is doomed to crash. The political class is responding to the challenge by attempting to achieve even more centralization and top-down control. This will have the perverse effect of increasing the scope and depth of the damage when the inevitable failure cascade takes place.
Among the early signs of runaway hysterical thinking are four related loops: (1) Category mistakes, as in confusing practical necessity with immorality; (2) Priority paralysis, as in letting arguments over the desired long term outcomes get in the way of obvious necessity; (3) denial, as in pretending that we have more time than we really do; (4) the tendency to grandiose gestures, like an infant’s tantrum about being denied sugar. Illustrations:
 Economist Paul Krugman stubbornly continues to mischaracterize the debate between conservative and liberal economic analysis as primarily a conflict between bad and good versions of “social justice” 
 Conservative and liberal advocates who are currently tied up in a paralyzing debate about the tax and welfare system should wait for some later time when the country is durably prosperous. Liberals are rejecting necessary reductions in entitlement programs that cannot be paid for in real time, holding national defense expenditures hostage (contrary to the recommendations of even the liberal Secretary of Defense) and rejecting even disguised tax increases proposed by conservatives (in the form of specially crafter tax reform). Other conservatives, more removed from the practical arena, are opposed to any tinkering with the tax code until the entitlement issue is addressed on a more permanent basis.
 Like someone caught in the path of a coming tsunami, unable to decide between getting in the car or simply running to the neared hell, the hysteric clings to the delusion that it’s really not all that dire, and walks up one flight of stairs.
 The sense of powerless that accompanies hysteria is so intolerable (remember that hysteria is incompatible with clear thinking and setting reasonable priorities) those in its thrall are given to grandiose gestures, as in the incoherence and sense of infantile indiscipline of the street protesters near Wall Street and (in a paradox of geography) near Oakland’s City Hall.
A DOSE OF REALISM
Here are some general observations that might be of some help:
THE TWO MEANINGS OF SYSTEMIC FAILURE:
· A systemic process infecting various critical systems
· A ‘design’ failure in the systems themselves
APPLICATION: Most of what is going on at present represents the inability to recognize the second meaning. There is a design failure in the systems themselves. And it is a familiar one, the inherent fragility of large scale “imperial systems.”
These are scale and complexity-engendered failures that always follow the attempt to load more control than complex systems can take. All large-scale complex systems have a scale-failure point. This is particularly true of economic and political systems when they are just too large and complex for top-down management to work. Examples: The EU, the Euro, the international banking system and the partly unified US credit/finance system.
Imperial failures happens among states and also within states-
Socialism in its various forms is the failed imperial model applied to economics. The various international and pan-national regimes (whether founded on a paleo-imperial ethos or a neo-utopian ideology), is the classic failed imperial model.
The collapse of the Soviet Union is a perfect example of both kinds of failure, internal and external.
APPLICATION: Financial systems have reached a scale of complexity in which they are effectively outside the day-to-day (or even year-to-year) management by centralized bureaucracies, both political and non-political. The inability of “science” to accurately predict the course of chaotic weather systems, let alone the financial system, should have been a hint to those social “scientists” who still think that the even more complex economic systems can be effectively managed. This is a separate issue from the equally trenchant and accurate charge that the political class is famously incompetent at any form of management, except the more destructive forms. The most important implications of this include these three: (1) Complex systems exhibit emergent order that is the result of the prevalent motivations of individual players. Rational self- interest, mediated by strong protections against force, intimidation and fraud, tends to produce outcomes that optimize the overall interest. (2) Failures and successes always repeat in a crud by recognizable wave-form. (3) Just as strong protections against force, intimidation and fraud tend to keep a system healthy, the compartmentalization of the inevitable failures operates as a firewall against their spread. The public policy rationale against monopolies and concentrations and against failure bailouts is the same: the protection of healthy systems from contamination and/or extermination.
NORMATIVE INCOHERENCE OR ORGANIZATIONAL INCOHERENCE
The Mediaeval and modern examples contrasted:
The Medieval system was held together by common moral system (propagated by the Roman Catholic Church following the dissolution of the pagan Roman imperial system) and a political system that remained loosely coupled in a dispersed form.
The modern system is characterized by a mix of conflicting “moral” systems (mostly in the form of secular accommodations) that are coupled to temporarily-unified political organizational units.
APPLICATION: The modern system is still suffering the aftereffects of the collapse of a moral consensus without its replacement by a new one. As some philosophers and ecumenical theologians have begun to demonstrate, there are acres of common moral ground among the various competing cultural, religious and ideological frameworks. But essentially tribal considerations are in the way of achieving a more general consensus, as one sober glance at current UN debates and the yawning chasm between rhetoric and reality will demonstrate. This means that it is all too easy to load more political unification onto social/moral differences than they can take. The prudent solution is to allow much more local variation, mediated by an emphasis on bottom-up social change and emigration and voluntary resettlement patterns.  Of course, we need more normative coherence, but the process cannot be rushed.
FAILURE STRATEGIES AND ACCOMODATIONS
Failures either teach, or they are hidden by reallocation to a still higher level of operation where they will inevitably recur with even greater consequences. Failure containment requires compartmentalization and firewalls.
The nation state system and other individually separated competing utilities (think banks and communication systems) have inherent, though imperfect firewalls. It is a fallacy to equate states and organizations to living organisms. Their failure still permits the out-migration of the real organisms (people) within.
APPLICATION: Bailouts and the artificial unification of organizations represent the same core error.
MISDIRECTED HIGH INTELLIGENCE
We see this when an extraordinary sophisticated and stubborn attention to details continues to operate within a failed analytic construct. This style of thinking commonly leads to the reallocation of failure syndrome. For example, Keynesian economic theory held that the manipulation of the money supply could always smooth out economic boom and bust cycles. Just as that theory – which was first iterated when the subject economies were essentially closed systems – has been discredited, ever more sophissticated computer algorithms have been generated by ever more sophisticated economists to ramp up its application to ever larger and less predictable scales.
APPLICATION: Algorithms that disguise theft and fraud (thinking, for example, of the toxic mortgage bundling schemes) are instruments of theft and fraud. Algorithms and complex economic models that facilitate the buildup of massive, unsustainable sovereign debt are instruments of bankruptcy. Otherwise intelligent people who uncritically trust the purveyors of unnecessarily complex schemes with unreasonably cost-free outcomes are functional fools.
Beyond hysteria is the calm perspective that these problem can and will be solved as soon we recognize that the old fashioned basics, like ‘We don’t get something for nothing’; ‘If it’s too good to be true, it probably is not true’; and ‘Those who promote stealing from others intend to steal from you’, are still true and relevant.
The author, a California attorney, is the creator/editor of The Policy Think Site – www.jaygaskill.com
Copyright 2011, by Jay B Gaskill, All Rights Reserved. Forwards & links are encouraged. Permissions: email@example.com
 See for example Paul Krugman’s Op Ed in the New York Times of November 18, 2011, “Failure is Good” (the title refers to the pending failure of the deficit supercommittee) herein “slashing spending” is framed as a moral issue because the necessity of balancing spending and expenditures is about “fundamental values”, as if the practical exigencies of US economic survival is not and the conservative economists who favor a culture of less dependency in the context of greater overall prosperity are morally deficient. But the moral issue – wanting the best overall outcomes for everyone – is inextricably tied up with the practical issues framed by the question: But what is actually working here?
 This does not mean acquiescence in genocide, of course, or the abandonment of the US tradition of rescuing victims of tyranny, but it does mean – among other things – greater respect for immigration restrictions designed to maintain cultural stability and for gradualism where cultural evolution is concerned.
 As David Brooks writes in the 11-18-2011 New York Times, “The European Union is an attempt to build an economic and legal superstructure without a linguistic, cultural and civic base.”
 One of many obvious policy implications here is that badly managed financial institutions should be allowed to fail rather than propping them up by bleeding good financial institutions
 For example, US commercial banks have not been sufficiently insulated from speculative investment patterns. The problem has not yet been actually fixed.
 One implication is that inevitable institutional bankruptcies should be accelerated rather than delayed and the policy emphasis should be on facilitating the great majority of well-performing employees to move to a better situation. The crash of the Icelandic banking system was no bailed out because Iceland was not on the Euro. The government had no choice but to let them fail. The rapid recovery of the Iceland economy is paradoxical only if you cling to the notion that badly managed organizations must always be rescued.
 Keynes himself famously and seriously advanced a thought experiment where an isolated English village solved its unemployment problem when a vast cache of money was buried nearby, and workers were employed in digging it out, then spent it employing others, and so on. This survived as an Emperor’s New Clothes fallacy for decades because no one noticed that this closed system was being clothed and fed by an economy outside that was operating on the more ruthless, value given for value received model. The fallacy was that meaningless, fake work generates real value. Individual nations now operate in an open environment more like the one in which the buried money in that hypothetical village can no longer buy bread made outside the tiny circle of Keynes’ hypothetical construct.