Bailout

Complexity and doom

By Felix Salmon

Clay Shirky is talking about media, but might as well be talking about finance:

Complex societies collapse because, when some stress comes, those societies have become too inflexible to respond. In retrospect, this can seem mystifying. Why didn?t these societies just re-tool in less complex ways? The answer Tainter gives is the simplest one: When societies fail to respond to reduced circumstances through orderly downsizing, it isn?t because they don?t want to, it?s because they can?t.

In such systems, there is no way to make things a little bit simpler ? the whole edifice becomes a huge, interlocking system not readily amenable to change. Tainter doesn?t regard the sudden decoherence of these societies as either a tragedy or a mistake??[U]nder a situation of declining marginal returns collapse may be the most appropriate response?, to use his pitiless phrase. Furthermore, even when moderate adjustments could be made, they tend to be resisted, because any simplification discomfits elites.

Meanwhile, Steve Waldman makes the case that banks are far too complex, these days, for notions of “capital” to mean anything any more. What we need, he says, is to get simpler: “we are doomed,” he says, “unless and until we simplify the structure of the banks.”

Which, if true, is to say that we are doomed. We have reached a level of institutional complexity which renders radical simplification impossible, short of outright collapse. We can see this even in relatively simple structures like that of U.S. financial regulators: such things are much easier to create than to abolish, and so they tend to multiply. But it’s even more true of finance more generally. The world’s biggest banks must become much simpler; the world’s biggest banks won’t become much simpler. The conclusion is not a pretty one.

Full post as published by Macroprudential on April 04, 2010 (boomark / email).