Evolution and Interdependence

So President Bush has finally taken a complex systems view of the economy:



Stupidity aside, he's entirely correct: our economy is highly interdependent. We discussed this situation last post, now I'd like to give some perspective on how interdependence comes to be.

Our economy, like life, is an evolutionary system, featuring competition, innovation, and adaptation to internal and external challeges. And I think some of the difficulty in understanding the current financial crisis comes from a misconception about evolution.

We usually think of (biological) evolution as a species-level process: each species makes its own incremental improvements in search of competetive advantage. But this is too simple a picture. Species do not evolve in isolation; they co-evolve in concert with all they interact with: plants, animals, microbes, and even minerals. In this co-evolutionary process, species develop relationships with each other; sometimes competitive, but often symbiotic or mutually beneficial in some way.

In the long run, co-evolution seems to produce increasing interdependence. Consider that all life started out as single-celled organisms, and that the co-evolution of these organisms led to multicellularity, which is a form of indterdependence so advanced that the component cells can no longer live on their own. On a larger scale, multicellular organisms co-evolved to form ecosystems. While not as interdependent as a multicellular organism, an ecosystem still has the property that if you remove enough vital components, the whole system fails.

An interesting thing happens now. As interdependence grows, so does the scale at which evolution occurs. Life started with cells competing against cells, grew into organsims competing with organisms, and now, in a sense, we also have ecosystems competing with ecosystems. The rainforest, for example, is competing with the desert in Africa. If the rainforest fails, so do all species that live there.

A similar process happens with economies. They begin with small, relatively self-suffient businesses. These businesses develop relationships with each other, co-evolve, and grow webs of interdependence. In the US, the webs have become so complex that an obscure industry known has mortgage-backed securities has sunk our entire economy.

So here too, evolution has "scaled up." It's no longer just companies competing against companies, it's also our whole nation's economy competing against those of other nations, and indeed the whole world's economy competing against, well, itself.

I don't think interdependence can be avoided, but it certainly needs to be understood. When people speak of the "free hand of the market" correcting our economy's mistakes, they're thinking of individual companies competing idependently, and failing to grasp the reality that, to some extent, our economy lives or dies as a whole.

Too Important to Fail?

The federal government is set to take over mortgage companies Fannie Mae and Freddie Mac. Earlier this summer, the government rescued the investment bank Bear Stearns. In each case it was decided that, even though the companies were in trouble of their own making, the damage caused by their failure would be too great for the economy to bear.

Strictly speaking, this isn't how our economy is supposed to work. It's supposed to be survival of the fittest: the companies that make the best decisions survive, and others fail. In this way good practices are rewarded, better business models evolve, and society progresses.

The problem is that, as part of this evolutionary process, the US economy has become increasingly interdependent. Companies need each other to survive, so that if a big one goes down it could take others with it. In the cases of Fannie Mae, Freddie Mac, and Bear Stearns, it was deemed that the failure of these companies would take out entire sectors of the economy, and as a country we couldn't let that happen.

I won't argue the merits of these decisions, but I'm interested in what they say about our economy. We're accustomed to thinking of our economy in terms of a system of competing animals. If one dies, others arise to take its place. But it may turn out our economy is more like another system: the human body, wherein if one part fails, the system suffers as a whole.

If this is true, then the whole of economic theory is based on an incorrect assumption. We may have some fundamental rethinking to do about how our economy works and why.

Is Global Complexity Worth It?

I had a wide-ranging lunch conversation with my friend Seth
a week ago. We touched on many things, but kept circling back to the above question. More specifically, I was wondering if our current level of global complexity could ever be sustainable, even with the best international governance and planning.

Let's define what we're talking about. In today's world, actions you take have consequences around the globe. For example, if you buy a computer, it likely was not made in a workshop down the road. The parts that go into your computer come from many different countries. These parts had to cross vast distances to come together, burning oil from other countries in the process. These parts were assembled in yet other countries, shipped several more times, and finally delivered to you. The money that you paid for the computer feeds back into all these various countries and processes, strengthening and perhaps changing them.

The effects of this global entanglement have been amazing. Without it, we wouldn't have computers, cellphones, airplanes, plastics, television, cars, or curry powder in the supermarket. None of these products can be made in any one local community; they all require cooperation on a continental, if not global, scale.

But I'm worried by globalization, on both a theoretical and practical level. It's clear that as humans, we aren't living within our means--I won't go into the details of that argument here. What concerns now is whether the very structure of our global society may be preventing us from ever living within our means.

First, feedback loops are getting too complex. Suppose we lived in a simple, hundred person community, and someone was stealing from his neighbors, dumping trash in the public square, or doing other undesirable actions. These actions would become apparent to everyone in short order, and the community could punish the perpetrator in various ways; economically, socially, even physically.

In theory, we have a legal system now to provide these kinds of punishments. But the more complex our society becomes, the harder it is to identify those who are screwing things up. Furthermore, laws and enforcement vary wildly across countries. Multinational corporations can get away with dumping trash in the ocean, toppling Central American democracies, intentionally creating blackouts in California, or supporting sweatshops in China because a) the actions might be legal in whatever location they're operating out of, b) they can obscure their practices behind a wall of complexity that regulators can't penetrate, and c) the consumers usually have no idea what the company is doing and therefore can't exercise moral judgment in their purchases. It could be decades before any consequences (legal, economic, or environmental) catch up with the perpetrator. And decades is too long to be an effective deterrent.

Second, we are increasingly interdependent. Witness how the mortgage crisis spread throughout American economic sectors and is now spreading through the world. Infectious diseases like avian flu have the potential to go global due to the volume of international travel. Even our environmental problems have globalized--we worry about global warming now, whereas the environmental agenda in the past was more about local pollution issues.

I see this as a problem because it means we have only one chance to screw up. The inhabitants of Easter Island destroyed their ecosystem and suffered for it, but the damage was contained to the island. In our current connected world, one disaster could ruin things for all humanity.

Can we do anything about global complexity and interdependence? I've been thinking about ways we can promote some simplicity in our economy, like buying local food or supporting local independent retailers over mega-chains. I'm not advocating we go back to preindustrial tribal society, but a little extra simplicity seems like a good thing.