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Fig. – (Organizational Complexity trough History) Four forms behind the Organization and Evolution of all societies (David Ronfeldt TIMN). Each form also seems to be triggered by major societal changes in communications and language. Oral speech enabled tribes (T), the written word enabled institutions (I), the printed word fostered regional and global markets (M), and the electric (digital) word is empowering worldwide networks (N). [in David Ronfeldt, “Tribes, Institutions, Markets, Networks: A framework about Societal Evolution“, RAND Corporation, Document Number: P-7967, (1996). PDF link]
[…] Organizational complexity is defined as the amount of differentiation that exists within different elements constituting the organization. This is often operationalized as the number of different professional specializations that exist within the organization. For example, a school would be considered a less complex organization than a hospital, since a hospital requires a large diversity of professional specialties in order to function. Organizational complexity can also be observed via differentiation in structure, authority and locus of control, and attributes of personnel, products, and technologies. Contingency theory states that an organization structures itself and behaves in a particular manner as an attempt to fit with its environment. Thus organizations are more or less complex as a reaction to environmental complexity. An organization’s environment may be complex because it is turbulent, hostile, diverse, technologically complex, or restrictive. An organization may also be complex as a result of the complexity of its underlying technological core. For example, a nuclear power plant is likely to have a more complex organization than a standard power plant because the underlying technology is more difficult to understand and control. There are numerous consequences of environmental and organizational complexity. Organizational members, faced with overwhelming and/or complex decisions, omit, tolerate errors, queue, filter, abstract, use multiple channels, escape, and chunk in order to deal effectively with the complexity. At an organizational level, an organizational will respond to complexity by building barriers around its technical core; by smoothing input and output transactions; by planning and predicting; by segmenting itself and/or becoming decentralized; and by adopting rules.
Complexity science offers a broader view of organizational complexity – it maintains that all organizations are relatively complex, and that such complexity arises that complex behavior is not necessarily the result of complex action on the behalf of a single individual’s effort; rather, complex behavior of the whole can be the result of loosely coupled organizational members behaving in simple ways, acting on local information. Complexity science posits that most organizational behavior is the result of numerous events occurring over extended periods of time, rather than the result of some smaller number of critical incidents. […] in Dooley, K. (2002), “Organizational Complexity,” International Encyclopedia of Business and Management, M. Warner (ed.), London: Thompson Learning, p. 5013-5022. (PDF link)
The Internet has given us a glimpse of the power of networks. We are just beginning to realize how we can use networks as our primary form of living and working. David Ronfeldt has developed the TIMN framework to explain this – Tribal (T); Institutional (I); Markets (M); Networks (N). The TIMN framework shows how we have evolved as a civilization. It has not been a clean progression from one organizing mode to the next but rather each new form built upon and changed the previous mode. He sees the network form not as a modifier of previous forms, but a form in itself that can address issues that the three other forms could not address. This point is very important when it comes to things like implementing social business (a network mode) within corporations (institutional + market modes). Real network models (e.g. wirearchy) are new modes, not modifications of the old ones.
Another key point of this framework is that Tribes exist within Institutions, Markets and Networks. We never lose our affinity for community groups or family, but each mode brings new factors that influence our previous modes. For example, tribalism is alive and well in online social networks. It’s just not the same tribalism of several hundred years ago. Each transition also has its hazards. For instance, while tribal societies may result in nepotism, networked societies can lead to deception. Ronfeldt states that the initial tribal form informs the other modes and can have a profound influence as they evolve:
Balanced combination is apparently imperative: Each form (and its realm) builds on its predecessor(s). In the progression from T through T+I+M+N, the rise of a new form depends on the successes (and failures) achieved through the earlier forms. For a society to progress optimally through the addition of new forms, no single form should be allowed to dominate any other, and none should be suppressed or eliminated. A society’s potential to function well at a given stage, and to evolve to a higher level of complexity, depends on its ability to integrate these inherently contradictory forms into a well-functioning whole. A society can constrain its prospects for evolutionary growth by elevating a single form to primacy — as appears to be a tendency at times in market-mad America. [in David Ronfeldt, “Tribes, Institutions, Markets, Networks: A framework about Societal Evolution“, RAND Corporation, Document Number: P-7967, (1996). PDF link]
Finally, on these areas (far behind the strict topic of organizational topology and complex networks), let me add two books. One his from José Fonseca, a friend researcher I first met in 2001, during a joint interview for the Portuguese Idéias & Negócios Magazine, for his 5th anniversary (old link) embracing innovation in Portugal. His book entitled “Complexity & Innovation in Organizations” (above) was published in December that year, 2001 by Routledge. The other one is more recent and from Ralph Stacey, “Complexity and Organizational Reality: Uncertainty and the Need to Rethink Management After the Collapse of Investment Capitalism” (below), Routledge, 2010. Even if, Ralph as many other past seminal books on this topic. Both, have worked together at the Hertfordshire University.
Fig. – A Symbolical Head (phrenological chart) illustrating the natural language of the faculties. At the Society pages / Economic Sociology web page.
You have much probably noticed by now how Scoop.it is emerging as a powerful platform for those collecting interesting research papers. There are several good examples, but let me stress one entitled “Bounded Rationality and Beyond” (scoop.it web page) curated by Alessandro Cerboni (blog). On a difficult research theme, Alessandro is doing a great job collecting nice essays and wonderful articles, whenever he founds them. One of those articles I really appreciated was John Conlisk‘s “Why Bounded Rationality?“, delivering into the field several important clues, for those who (like me) work in the area. What follows, is an excerpt from the article as well as part of his introductory section. The full (PDF) paper could be retrieved here:
In this survey, four reasons are given for incorporating bounded rationality in economic models. First, there is abundant empirical evidence that it is important. Second, models of bounded rationality have proved themselves in a wide range of impressive work. Third, the standard justifications for assuming unbounded rationality are unconvincing; their logic cuts both ways. Fourth, deliberation about an economic decision is a costly activity, and good economics requires that we entertain all costs. These four reasons, or categories of reasons, are developed in the following four sections. Deliberation cost will be a recurring theme.
Why bounded rationality? In four words (one for each section above): evidence, success, methodology, and scarcity. In more words: Psychology and economics provide wide-ranging evidence that bounded rationality is important (Section I). Economists who include bounds on rationality in their models have excellent success in describing economic behavior beyond the coverage of standard theory (Section II). The traditional appeals to economic methodology cut both ways; the conditions of a particular context may favor either bounded or unbounded rationality (Section III). Models of bounded rationality adhere to a fundamental tenet of economics, respect for scarcity. Human cognition, as a scarce resource, should be treated as such (Section IV). The survey stresses throughout that an appropriate rationality assumption is not something to decide once for all contexts. In principle, we might suppose there is an encompassing single theory which takes various forms of bounded and unbounded rationality as special. cases. As with other model ingredients, however, we in practice want to work directly with the most convenient special case which does justice to the context. The evidence and models surveyed suggest that a sensible rationality assumption will vary by context, depending on such conditions as deliberation cost, complexity, incentives, experience, and market discipline. Beyond the four reasons given, there is one more reason for studying bounded rationality. It is simply a fascinating thing to do. We can mix some Puck with our Hamlet.
Book cover from Economics Nobel prize (2008), Paul Krugman (link): Paul R. Krugman, “The Self-Organizing Economy“, Cambridge, Massachusetts, and Oxford: Blackwell Publishers, 1996. What follows is the entire excerpt review on his book, by Cosma Shalizi, a friend and colleague, done in March 1996 with minor corrections in 1997 and 2006:
[…] Paul Krugman cannot be accused of lacking good opening lines:
Is an economic slump like a hurricane, or is it more like an earthquake? Is a growing city like an embryo, or is it more like a meteorite?
Obviously some explaining needs to be done here.
The term “self-organization” seems to have entered the language in a 1947 paper in the Journal of General Psychology on cybernetic mechanisms of adaptation, though related ideas are considerably older. It has, of course, become a buzzword, indeed an indispensable element in modern techno-cant – I was once on a mailing list where some people proposed to write a “self-organizing” novel – but a lot of real science carries on under the label, in some remarkably different fields:
[W]hat links the study of embryos and hurricanes, of magnetic materials and collections of neurons, is that they are all self-organizing systems: systems that, even when they start from an almost homogeneous or almost random state, spontaneously form large-scale patterns. One day the air over a particular patch of tropical ocean is no different in behavior from the air over any other patch; maybe the pressure is a bit lower, but the difference is nothing dramatic. Over the course of the next few days, however, that slight dip in pressure becomes magnified through a process of self-reinforcement: rising air pulls water up to an altitude at which it condenses, releasing heat that reduces the pressure further and makes more air rise, until that particular piece of the atmosphere has become a huge, spinning vortex. Early in the process of growth an embryo is a collection of nearly identical cells, but (or at least so many biologists believe) these cells communicate with each other through subtle chemical signals that reinforce and inhibit each other, leading to the “decision” of some cells to become parts of a wing, others parts of a leg. [pp. 3–4]
This is vague, for which I am grateful, since sharpening the notion of self-organization into something quantifiable is the subject of my thesis. But let us draw a veil over this and press on.
There’s a sense in which economists have been studying little but the “spontaneous formation of large-scale patterns” ever since Adam Smith and the creation of self-regulating markets, but Krugman is not interested in convincing his profession that it has been speaking prose all its life; it would, in his words, “be entitled to change the channel.” Rather he wants to look at the way economies organize themselves in space and over time, which they do in a most conspicuous way. (There is, however, a brief discussion of technological lock-in in chapter six.) Krugman picks out three examples in particular: the way cities differentiate themselves into specialized districts; the power-law distribution of city sizes; and business cycles.
That cities – even Los Angeles – are not homogenous lumps, with everything mixed together, seems to have been true from earliest times. Some of this is simply because different locations have different advantages – dockyards go by the water, fortresses on heights, and brothels and bars near fortresses. Some of it is due to zoning boards, planning commissions, real-estate magnates and red-lining, to say nothing of the police and cross-burning – whether such forces contribute to urban self-organization is a delicate question, and in any case Krugman is silent about them. Still, this leaves a lot of differentiation which seems to be due to nothing but self-reinforcement, which (unlike zoning boards and red-lining) has actually been studied in economic theory, especially by economic geographers, for some time. (Krugman is at pains to point out that self-organization was not unknown to economists before the arrival of missionaries from Santa Fe.) He begins his discussion of this with so-called “edge cities,” and then passes on to a marvelously elegant illustration from Thomas Schelling’s marvelously elegant book, Micromotives and Macrobehavior, which suggests how the former (requiring that at least 37% of your neighbors be like yourself) can lead to the latter (massive segregation). He then dives into a discussion of “urban morphogenesis” directly inspired by Turing’s classic work on embryological morphogenesis. He assumes his city is one-dimensional and either infinite or circular, but claims no more value for it than that of qualitative illustration; I can think of physicists who should be so modest. Self-organization happens here because the initial random noise contains components which correspond to many different patterns in nucleo, and the dynamics are such that some of these get magnified faster than others. The pattern which grows fastest ultimately dominates the system, which is called “pattern selection” in traditional reaction-diffusion systems. [Note containing the words “Fourier decomposition.”]
A power law distribution means that the number of objects whose size is at least S is proportional to S^a, for some (hopefully negative) constant a. It happens that the size of cities obeys a power law known as Zipf’s law, which is usually stated thus: the size of a city is inversely proportional to its rank order so that, for example, the 100th largest city is a tenth the size of the 10th largest city. This rule is almost exactly true of the sizes of American cities (it corresponds to a value of a of -2), and has been for at least a century. Physicists have liked power laws ever since Galileo, and recently we’ve developed a taste for power law distributions; Prof. Per Bak and his disciples sometimes seem to want to claim everything obeying a power law distribution for “self-organized criticality.” Krugman explains the power law distribution as an outcome of growth processes where the expected rate of growth is independent of the size already attained. Such processes do, in fact, generate power laws, and have been known to for some time – Herbert Simon proposed one, “in a completely impenetrable exposition,” in 1955. Alas, none of them are as regular as the empirical data!
At this point Krugman tells us that what we have just seen are order from instability (“When a system is so constituted that a flat or disordered structure is unstable, order spontaneously emerges.” – p. 99) and order from random growth (“[O]bjects are formed by a growth process in which the expected rate of growth is approximately independent of scale, but the actual rate of growth is random.” – p. 100). He declines, thankfully, to call these universal laws of self-organization, but he does suggest they are “principles,” or rather common ways of self-organizing.
Temporal self-organization in the economy is more familiarly known as business cycles, or yet more familiarly as booms and crashes (err, depressions; err, recessions; err, slumps; err, slow-downs). Since Keynes (at least) the idea that these are in some way self-reinforcing has been common, and Krugman resurrects a body of Keynesian theory from the ’50s, “non-linear business cycle theory.” This is of the order-from-instability type, and so predicts a characteristic size to business cycles, which, on a comparison of 1933 with the recent unpleasantness, or even the early 1980s, is less than plausible. Krugman also presents an order-from-random-growth theory – really percolation theory in wolf’s clothing – which avoids that problem at the cost of “[making] less contact with what seems to happen during a boom or slump,” and predicting a power law distribution for business fluctuations, which is not observed. Charitably, Krugman chooses to “regard them both more as illustrations as how one might approach self-organization in time than as finished statements of how one actually ought to do it.” Some such theory will be necessary if we are not to continue treating shifts in aggregate demand as external shocks administered, perhaps, by the vengeful specter of Karl Marx.
If this were a formal and comprehensive treatise, I would be disappointed by the passing over of evolutionary and institutional economics; the cavalier starting of models from tabulæ rasæ rather than already-differentiated settings; the fact that most of the models are what in physics would be called “phenomenological,” i.e. they don’t try to connect to the underlying mechanisms, such as markets; the absence of even qualitative comparisons with empirical data; and the indifference to exogenous forces, natural , social or political, which in practice are very important in all of the topics Krugman discusses. But this is not a formal and comprehensive work; that will have to wait for a good many years. It is a self-described “discourse” of exactly a hundred pages, a very brief introduction and an appeal for further development, for the work which will make the treatise possible. As befits such a book, Krugman’s writing is clear, informal and concise (but then, it usually is). His attitude towards the mathematics is that it should be used and not seen; accordingly we get the hypotheses once as stories (“I do not want to dignify them by calling them models”); a second time with a bit of calculus; and a third time in an appendix for those who want the nitty-gritty. (Even there he draws the line at Fourier decomposition and linear stability analysis; phase space and attractors are explained verbally, and well, in the body of the text.) The economics should be accessible to anyone who’s taken Econ. 1, and probably many (such as your humble narrator) who haven’t. The book will be of particular interest to those crossing the bridge from economics to self-organization and dynamics in either direction, but most educated readers should find it informative and engaging. […] Cosma S. Shalizi, 1996.
Video – A 1964 film based on the novel Zorba the Greek by Nikos Kazantzakis. The film was directed by Michael Cacoyannis and the title character was played by Anthony Quinn. The supporting cast included Alan Bates as a visiting Englishman as well as Irene Papas. The theme, “Sirtaki” by Mikis Theodorakis, has become famous and popular as a song and as a dance. The movie was shot on location on the Greek island of Crete. Specific places featured include the town of Chania, the Apokoronas region and the Akrotiri peninsula. The famous scene, in which Quinn’s character dances the Sirtaki, was shot on the beach of the village of Stavros. (from YouTube)
Basil (Alan Bates), a young English writer, meets a free-spirited Greek peasant named Zorba (Anthony Quinn) while waiting to travel to the island of Crete. While Zorba pursues a relationship with aging French courtesan Madame Hortense, Basil attempts to court a young widow. Along the way, he learns valuable life lessons from the earthy Zorba, who has an unquenchable joie de vivre (link):
[…] Basil: I don’t want any trouble. Alexis Zorba: Life is trouble. Only death is not. To be alive is to undo your belt and look for trouble. […] Zorba: Damn it boss, I like you too much not to say it. You’ve got everthing except one thing: madness! A man needs a little madness, or else… Basil: Or else? Zorba: …he never dares cut the rope and be free. […] Basil: Teach me to dance, will you? Zorba: Dance? Did you say… dance?! … Come on my boy… together… Let’s go… hop … Again… hop … […] Zorba: Boss, I have so much to tell you, … I never had loved a man like you … […] Zorba: Hey boss, did you ever see a more splendiferous crash?! … Oh, … You can laugh too!… hmmm… Hey!… You laugh! […]
[…] Spontaneous orders should be paired with the contrasting ideal type of an instrumental organization, characterized by having a specifiable goal, unequal status ranked on the basis of service to that goal and ease of replacing, and openness to cooperative endeavors justified by their utility in serving that goal. Once this distinction is understood, it is possible to analyze symbiotic and confictual relations between spontaneous orders and the instrumental organizations within them. This approach can be used in more empirical studies of spontaneous orders and the organizations within them, such as corporations and markets or political parties and democracies or research organizations and science. […]; Weber‘s concept of spontaneous order as described by Reinhard Bendix, “Max Weber: An Intellectual Portrait“, 1959.
[…] It is an old idea that society is in a number of respects similar to an organism, a living system with its cells, metabolic circuits and systems. As an example, the army functions like an immune system, protecting the organism from invaders, while the government functions like the brain, steering the whole and making decisions. In this metaphor, different organizations or institutions play the role of organs, each fulfilling its particular function in keeping the system alive, an idea that can be traced back at least as far as Aristotle, being a major inspiration for the founding fathers of sociology, such as Comte, Durkheim and especially Spencer […], in Vitorino Ramos, On the Implicit and on the Artificial – Morphogenesis and Emergent Aesthetics in Autonomous Collective Systems, in ARCHITOPIA Book, Art, Architecture and Science, INSTITUT D’ART CONTEMPORAIN, J.L. Maubant et al. (Eds.), pp. 25-57, Chapter 2, ISBN 2905985631 – EAN 9782905985637, France, Feb. 2002.
“The first serious infowar is now engaged. The field of battle is WikiLeaks. You are the troops”. ~ WikiLeaks, Dec. 3, 2010. / “It’s not wrong to lie, cheat, steal, corrupt, and torture. It’s wrong to let people know about it”. ~ Robby Pickert (@zerocl). / “I do not agree with what you have to say, but I’ll defend to the death your right to say it.” ~ Voltaire
One thing that WikiLeaks have shown, among many others, is that the (“corporate“) United States of America are no longer worried about open democracies along with their 1st amendment free speech. What WikiLeaks is doing, is just part of what any proper journalism should be doing, but scarcely does. So, here’s a simple piece of advise: if WikiLeaks goes down, we all (as open free democracies) go down. Do not doubt one second about it…, We are all Julian Assange, now…; So do please stop with that “You can’t handle the truth” anecdote idiosyncrasy shit. The sad irony of all these, is that Assange himself, is now the most persecuted hunted man on planet Earth, instead of Bin Laden…
note – As I have twitted this morning, 10 AM GMT time at https://twitter.com/#!/ViRAms/status/10638501351530496, WikiLeaks were still available at http://wikileaks.ch after a 48h trial succession of WWW host places, including Amazon.com, who left them on the string very badly. Let’s now see how much that endures…)
Photo – The devastating Gulf of Mexico oil spill – With criticism of the fuel giant at its peak after 36 days and up to 39 million gallons of crude lost into the sea, engineers attempted a last-ditch clogging method known as a “top kill” (source: Mike Swain, Mirror Journal, UK).
Aside from biblic messianic like “top kill” terms, let us all stop for a moment and think about all this mess. On one hand we have powerful resources directed to just one greedy goal, independently from the rest, on the other, a immense huge fail. Let us recapitulate the whole forest, not the tree: […] So they have the most absolute, extraordinary high-tech science and financial resources to pump oil, but not even a single clue on how to cork it […] @ViRAms , May 30, 2010.
Let me just add this: BP’s logo (here) is rapidly turning onto one of the most ironic logos ever made…
“[…] QUESTION_HUMAN > If Control’s control is absolute, why does Control need to control?
ANSWER_CONTROL > Control…, needs time.
QUESTION_HUMAN > Is Control controlled by his need to control ?
ANSWER_CONTROL > Yes.
QUESTION_HUMAN > Why is Control need Humans, has you call them ?
ANSWER_CONTROL > Wait ! Wait…! Time are lending me…; Death needs time like a Junkie… needs Junk.
QUESTION_HUMAN > And what does Death need time for ?
ANSWER_CONTROL > The answer is so simple ! Death needs time for what it kills to grow in ! […]”, in Dead City Radio, William S. Burroughs / John Cale , 1990.
After the Portuguese President invented a new problem for our country (has we had not enough), here’s a brilliant and genius blog post counter response:
[…] Now only an expert can deal with the problem, Because half the problem is seeing the problem, And only an expert can deal with the problem, Only an expert can deal with the problem […] So if there’s no expert dealing with the problem, It’s really actually twice the problem, Cause only an expert can deal with the problem, Only an expert can deal with the problem […] Now in America we like solutions, We like solutions to problems, And there’s so many companies that offer solutions, Companies with names like Pet Solution, The Hair Solution. The Debt Solution. The World Solution. The Sushi Solution. Companies with experts ready to solve the problems. Cause only an expert can see there’s a problem. And only an expert can deal with the problem […] Laurie Anderson, ‘Only an Expert’ lyrics.
Out of Control – The New Biology of Machines, Social Systems, and the Economic World, 1994’s Book (from Kevin Kelly web site) is a summary of what we know about self-sustaining systems, both living ones such as a tropical wetland, or an artificial one, such as a computer simulation of our planet. The last chapter of the book, “The Nine Laws of God,” is a distillation of the nine common principles that all life-like systems share. The major themes of the book are:
1) As we make our machines and institutions more complex, we have to make them more biological in order to manage them. 2) The most potent force in technology will be artificial evolution. We are already evolving software and drugs instead of engineering them. 3) Organic life is the ultimate technology, and all technology will improve towards biology. 4) The main thing computers are good for is creating little worlds so that we can try out the Great Questions. Online communities let us ask the question “what is a democracy; what do you need for it?” by trying to wire a democracy up, and re-wire it if it doesn’t work. Virtual reality lets us ask “what is reality?” by trying to synthesize it. And computers give us room to ask “what is life?” by providing a universe in which to create computer viruses and artificial creatures of increasing complexity. Philosophers sitting in academies used to ask the Great Questions; now they are asked by experimentalists creating worlds. 5) As we shape technology, it shapes us. We are connecting everything to everything, and so our entire culture is migrating to a “network culture” and a new network economics. 6) In order to harvest the power of organic machines, we have to instill in them guidelines and self-governance, and relinquish some of our total control.
The world of our own making has become so complicated that we must turn to the world of the born to understand how to manage it.
[via Foreign Policy / Contrafactos Twitter] (…) Want to get a sense of just how bad things are? Take a spin on Google Earth. The above image, pulled yesterday from Vesseltracker.com’s Google Earth file, shows container ships languishing off the Singapore coast. Welcome to the largest parking lot on Earth. International Economy explains (…):
“The world’s busiest port for container traffic, Singapore saw its year-over-year volume drop by 19.6 percent in January 2009, followed by a 19.8 percent drop in February. As of mid-March 2009, 11.3 percent of the world’s shipping capacity, sat idle, a record.”
Extremely bad news. Meanwhile, someone have made a huge mistake…
Two “The Economist” covers. The first one was manually created and posted by Richard Dawkins himself, … – yes – the evolutionary Biologist. The second one is real as well recent (as of April 4th) – UNDER ATTACK, a 14-page special report on the rise and fall of the wealthy. Do note the Blackberry on top of the dead guy in the front and the skyline of London’s Canary Warf financial district in the background (via HS Dent blog). The Laissez-faire Economy lead to all this (more).
After reading at Yahoo! Finance (Oct. 24), “The Twilight of Free-Market Ideology” by Charles Wheelan (lecturer at Univ. of Chicago and author of Naked Economics) I decided to create a poll. Here are some passages from his article (as well as my very similar opinion over here):
[…] When I heard Alan Greenspan’s testimony before Congress last Thursday, I had one immediate thought: This is the beginning of the end for the free-market ideologues (…) According to press reports of the testimony, Greenspan told Congress that he “had put too much faith in the self-correcting power of free markets.” That’s no small statement. In fact, it struck me that if 1989 was the year when no reasonable person could still believe in communism (or any of its government-intensive relatives), then 2008 will go down in history as the year in which the free-market zealots saw their “wall” come crumbling down. […]
So, what’s your opinion?
It’s not everyday we see a 40 year ideology collapsing through a dramatic act of contrition. It has happened just a few hours ago (check video above), yesterday in the “financial crisis” congressional hearing in Washington (23. Oct. 2008). Moreover, what seems remarkable, is that the recognition comes from one of his most universally respected founding fathers and defenders.
Alan Greenspan was the longest serving chairman in the Federal Reserve board history (1987-2006), and during this 18-year period of time he were perhaps the leading proponent of de-regulation along with libertarian capitalism, vividly expressed on his “The Age of Turbulence – Adventures in a New World” 2007 book, advocating above all issues, Adam Smith’s “Invisible Hand” that markets can regulate themselves. As it’s known, for his whole adult life, the former Fed chairman has been a devotee of the philosophy of Ayn Rand, who celebrated free-market capitalism as the world’s most moral economic order and advocated a strict laissez-faire approach to government regulation of the marketplace. Ironically, he was a regulator that did not believed in any regulation at all.
It is now quite a remarkable historic moment seeing former Federal Reserve chairman, a lifelong champion of free markets, publicly questioning the philosophy that guided him throughout his years as the world’s most powerful economic policymaker. A philosophy followed and strongly defended by him (along with many others like Margaret Thatcher and Ronald Reagan), at least in the last 40 years, as he himself acknowledged yesterday. Asked by the congressional committee chairman, whether his free-market convictions pushed him to make wrong decisions, especially his failure to rein in unsafe mortgage lending practices, Greenspan replied that indeed he had found a flaw in his ideology, one that left him very distressed. “In other words, you found that your view of the world, your ideology was not right?” he was asked:
“Absolutely, precisely“, replied Greenspan. “That’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence it was working exceptionally well“. Albeit he was surely one of the most influential voices for de-regulation: “There is nothing in Federal regulation that makes it superior to Market regulation”, said Greenspan back in 1994, in one among many of his past radical free-market statements.
I presume we now all wonder, where was Greenspan, when back in 2003 one of the most prestigiously recognized and legendary financial investors such as Warren Buffet, called credit default obligations and derivatives “weapons of financial mass destruction“? Or where was he when Princeton Professor of Economics, Paul Krugman – the recent Nobel laureate – said back in 2006 that “If anyone is to blame on the current situation (sub prime) is Mr Greenspan who poopooed warnings about an emerging bubble and did nothing to crack down on irresponsible lending“. Or what did he, Greenspan itself, said just a few days after ENRON collapsed?
People working in complex systems – and surely financial markets are one of them (yes, for the past 4-5 years including these present turbulent times I am working hard in this area as well) – for long know that any systemic structure could collapse if only positive-feedbacks are injected into them, creating an auto-catalytic snow-ball effect, leading among other things to a power-law like Black Swan. Indeed power-laws are a striking powerful signature. This is specially true when we address self-organization (read it in the present context as self-regulation). In order to be a truly self-regulated system, financial markets should also be embedded with negative-feedbacks as well, as I have addressed in a post about finance and complex systems one month ago. In fact, in order to emerge as a truly self-organized system, self-interest, should constitute just one among many of the ingredients over the entire financial system, and not the isolated unique ingredient. Self-interest promotes amplification and positive feedback, which is – as I recognize – necessary. However, left alone, promotes instead dramatic snowballing drifts over chaotic regimes, due to it’s intrinsic amplification. What’s amazing (at least for me), is that Alan Greenspan just recognized that in a tiny few seconds along his current discourse (check video above), pointing it to the precise key-word:
[…] I made a mistake in presuming that the self-interest of organizations, specifically banks and others, was such that they were best capable of protecting their own shareholders. […] So the problem, here is something which looked to be as a very solid edifice, and indeed a critical pillar to market competition and free-markets, did breakdown and I think that, as I said, shock me. I still do not fully understand why it happened, and obviously to the extend, that I figure out where it happened and why, … aaaaaa, … I will change my views. If the facts change I will change. […]
As a result, “the whole intellectual edifice” of risk management collapsed, Greenspan said. In what regards his unexpected words yesterday at the congressional hearing, at least, I frankly praise him for his huge intellectual courage and present honesty. In the end, it seems that during the past 18 years, former FED chair was nothing else then a simple-man driven by his own blind faith on markets, from which he apparently comes out now. Unfortunately, only now at a very high price. Meanwhile as we know, severe consequences are here to stay, as was already evident when Greenspan addressed the House Financial Services Committee on 2003 (video below). Let’s hope that all these will not be forgotten in 3 decades from now (though, I doubt it – after all, nothing really serious came out from the entitled 3-man dream-team Bush-Sarkozy-Barroso “new global finance order” summit at Camp David last weekend, as expected):
“You have told the American people that you support a trade policy which is selling them out.” – Rep. Bernard Sanders to Federal Reserve Chairman Alan Greenspan on 7/16/03. Rep. Bernard Sanders (Independent-Vermont), now a US Senator, dresses down Federal Reserve Chairman Alan Greenspan in front of the House Financial Services Committee on 7/16/03.