Collapse and Complexity May 13, 2010Posted by Dwight Furrow in Current Events, Dwight Furrow's Posts, Technology.
Tags: Jared Diamond, Jon Taplin, stock market collapse
Last week, the stock market plunged nearly 1000 points in a matter of minutes, although the market clawed its way back a bit before it closed. We still don’t know what happened.
A stock market out of control is a scary thing, and it led Jon Taplin to reflect on the problems inherent in complex systems, problems which are likely to get worse as society becomes even more complex.
As societies and systems get more complex the layers of hierarchy cannot keep up with the complexity of the system. American organizational philosophy has always been built around the idea that “bigger is better”. As Alfred Chandler stated in his seminal history of industrial capitalism, the American advantage flowed from the “potential for exploiting the unprecedented cost advantages of the economies of scale and scope.” [ …]
But what Tainter and other writers like Jared Diamond are suggesting is that a certain point, scaling up begins delivering diminishing returns, as MacKenzie points out.
The extra food produced by each extra hour of labour – or joule of energy invested per farmed hectare – diminishes as that investment mounts. We see the same thing today in a declining number of patents per dollar invested in research as that research investment mounts. This law of diminishing returns appears everywhere, Tainter says.
But complexity often leads to tragedy as well. Just as in the forward operating base in Afghanistan or on the floating drilling platform in the Gulf of Mexico, the front line soldiers only have some of the information needed to handle a breakdown in the complex systems because of the chain of command structure in both the military and the oil business. And of course the complexity of a campaign like the Afghanistan war confuses even the most senior commanders. […]
The real story of today’s market crash will be the war between the high-frequency trading systems and the the retail brokers.
Among the big losers in the selloff were likely to be investors who had put limit orders on stocks they held. If an investor had placed a limit order with his broker to sell his P&G shares if the price fell to $50, then that sell order would have been triggered as the stock tumbled to its low of $39.97. The investor would have lost money on that sale and then lost again when the stock rebounded back to close at $60.76. Worse, if the investor had held the stock for a long time and had a gain, he would be hit with a tax bill on his profits.Accelerating the declines, high-frequency hedge funds, which use computers to trade at super high speed, appeared to pull back from the market as prices collapsed. These hedge funds have grown to account for a significant amount of trading volume, and their absence likely created a void into which prices fell.
As a system becomes more complex, the interconnections between the individual parts grow geometrically. Each new input multiplies exponentially, the number of potential interactions. Yet, the amount of work accomplished typically can only grow arithmetically, by adding more hours or more workers. (Unless new technologies increases productivity) Even the designers of complex systems may not be able to explain how input produces output, and the combination of possible inputs is too large to thoroughly test. Thus, in complex systems, responsible mangement may be impossible because there is much one doesn’t know and you don’t know you don’t know.
Eventually we simply run up against the ability of human beings to process information rapidly. So we let computers do the thinking. But computers are not good at anticipating the unexpected.
The result is system fail.
For political commentary by Dwight Furrow visit: www.revivingliberalism.com