Greenewable’s Weblog links to This Sociological Theory Explains Why Wall Street Is Rigged for Crisis at The Atlantic. It opens with a great story:
On October 25, 1962, a bear tried to climb the perimeter fence at the Duluth Sector Direction Center, a sensitive U.S. military installation in Minnesota, setting off an alarm during a DEFCON 3 alert. The alarm signal was connected to a mis-wired klaxon at Volk Field in Wisconsin, and the blaring klaxon led to an immediate order to launch aircraft. Pilots of nuclear equipped F-106A’s were taxiing down the runway to respond to the start of nuclear war when the error was discovered. A car flashing its lights raced from the command post to the tarmac and stopped the jets.
This near brush with nuclear catastrophe, brought on by a single foraging bear, is an example of what sociologist Charles Perrow calls a “normal accident.” These frightening incidents are “normal” not because they happen often, but because they are almost certain to occur in any tightly connected complex system....
Further back, in a harbinger of what was to come in the financial crisis of 2008, we can look to the 1998 failure of Long Term Capital Management. The hedge fund had made a bad bet on derivatives tied to the Russian market, and its collapse threatened to cause a chain reaction throughout the world financial system. The traders at Long Term Capital were no rookies. Among their advisors were Myron Scholes and Robert Merton, 1997 winners of the Nobel Prize in Economics for their path-breaking work on a "new method to determine the value of derivatives."
Normal accidents, like these, occur because two or more independent failures happen and interact in unpredictable ways.
This near brush with nuclear catastrophe, brought on by a single foraging bear, is an example of what sociologist Charles Perrow calls a “normal accident.” These frightening incidents are “normal” not because they happen often, but because they are almost certain to occur in any tightly connected complex system....
Further back, in a harbinger of what was to come in the financial crisis of 2008, we can look to the 1998 failure of Long Term Capital Management. The hedge fund had made a bad bet on derivatives tied to the Russian market, and its collapse threatened to cause a chain reaction throughout the world financial system. The traders at Long Term Capital were no rookies. Among their advisors were Myron Scholes and Robert Merton, 1997 winners of the Nobel Prize in Economics for their path-breaking work on a "new method to determine the value of derivatives."
Normal accidents, like these, occur because two or more independent failures happen and interact in unpredictable ways.
I don't know. Maybe. Sure, why not. But I don't like it already by the second paragraph: "These frightening incidents ... are almost certain to occur in any tightly connected complex system".
So, we can stop looking at the economy and we can stop trying to figure out what went wrong? That's what it sounds like they are saying. But no, we didn't get the financial crisis of 2008 because the economy is a "tightly connected complex system" and we happened to have a coincidence of "independent failures". No, we didn't.
There is some good stuff in the article, though. That part about two things interacting to produce unpredictable results, I like that. Doesn't have to be two failures, though. It could be two successes. And they don't have to be independent. They could be related.
And the problem may end in failure not because the results were unpredictable, but because when we started seeing the results, we didn't stop to wonder if they might be related to our successes.
1 comment:
Hi, Arthurian. Yeah. The solution is to design a system for resilience, and not efficiency. A maximally efficient system will fail if the load increases, or if the resource input decreases. (The economy is a Jenga tower. The wealthy are taking blocks from the bottom, and moving them to the top. Be warned.)
Also, in a tight system disturbances propagate a long way, so to avoid this the system should be designed with slack, so disturbances dampen out, and remain, so far as possible, local. (Actually, the news media do this now, but with interesting selectivity!)
This also means a low dimension of connectivity. In high dimensional networks, the nodes are, on average, closer together, so disturbances quickly propagate. (To an observer on a lower dimensional network with coincident nodes, one disturbance may instead appear as many different and apparently distant simultaneous disturbances.)
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Thanks for the shout out. Have you read my series on libertarian states and why they fail? It relates to the article you posted the conclusion of.
I like the attention you are paying to debt. I haven't read too much of your blog recently, so I don't know if you are paying attention to the fact that along with increasing debt there is also increasing ownership of debt. Debtors and creditors tend to be different people. (This does have to be qualified. The situation is different in high finance, where there can be chains of debt.) And this ownership of debt counts as wealth, and this is becoming increasingly concentrated. I am unhappy with FRED in regards to this, as I do not know how to divide household debt into quintiles: Although total household debt may have decreased lately, I am concerned that the distribution of debtors and creditors has become more unequal.
Check out the movies: "Money as Debt, I and II" over on YouTube. As household debt decreases, so would the money supply, which would add deflationary pressure to everything. Well, deflationary pressure on commodities, but not so much on assets, because the supply of money held by the wealthy is increasing. And then there are offshore tax havens, where I presume money is held as cash. And that would slow down the appreciation of asset values. Hmm. Not a pretty picture. OK.
Thanks again, Authurian, for the shoutout. You were most proper in your handling of the editing issue. I am not always as cogent as I would like to be. And please feel free to repost anything, (I'm afraid I don't usually get much traffic,) but let me know, so I can clarify and respond to any comments. Thanks.
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