Saturday, May 22, 2010

The wages of complexity

While accusations continue to fly back and forth about who is to blame for the massive oil spill in the Gulf of Mexico and investigations commence into the recent wild one-day gyration in the American stock markets, the real culprit stands quietly and in plain sight in the corner: Complexity.

The wages of complexity

It is a strategy as old as civilization. Assign each person to do a part of the entire job, and the job will get done faster and better as each member of the work team hones skills and learns tricks to improve his or her performance with each repetition of the task. It's called the division of labor, and as it spreads and intensifies, it leads to greater and greater complexity in society.

That complexity has yielded impressive results in practically every human endeavor. Perhaps the most emblematic task involving the division of labor and its complexities, something that might be considered the apotheosis of this method, is human space exploration. Countless people have been involved in minute tasks necessary to conceive and plan space missions; to design and manufacture spacecraft, their components and all the sophisticated equipment on the ground including the control center; to select  and train the needed personnel; to oversee the launch, flight and landing; and to do myriad other tasks such as designing scientific experiments to be performed. Ultimately, much of the industrialized world was involved in the various tasks surrounding the paramount example of space exploration, the International Space Station.

But maybe more astonishing are civilization's mundane accomplishments in food production, the procurement of energy supplies, the manufacture and distribution of goods through a global logistics system, and the linking of people who do all this through an extensive communication network. These activities are able to support a growing population, a population which is now almost seven times what is was in 1800 consuming perhaps 45 times what it did then (using the rise in energy consumption as a proxy). These are amazing feats involving bewilderingly complex systems. The vulnerabilities engendered by that complexity are now on display in the physical and virtual worlds of the Gulf of Mexico and the stock exchange, respectively.

The search is now on for what exactly went wrong on the Deepwater Horizon offshore drilling rig around 10 p.m. on April 20. But that is probably the wrong question. Certainly, investigators will find some irregularities in the actions of the crew sufficiently close to that time to label as "causes" of the disastrous explosion, fire and subsequent oil leak. The broader question is how such a system of oil exploration became subject to such a catastrophic failure.

One answer is that offshore drilling, specifically deepwater drilling, is an exceedingly complex enterprise. And, the more complex an operation is, the greater the chances of a breakdown. Counterintuitively, the safer we try the make such operations, the more the operators of such rigs will likely push the limits of what those rigs are capable of doing and thereby invite additional disasters. (We already know that automobile drivers take more risks as cars and roadways are made safer, something known as the rebound effect.)

Joseph Tainter, author of The Collapse of Complex Societies , the seminal work on the fall of entire civilizations, explains that increases in complexity in a society are natural responses to challenges to survival. For a time, sometimes a long time, increased complexity succeeds in aiding the expansion and success of a society. The primary manifestations are the ever greater division of labor (often in the form of additional layers of managers, technical experts and government regulators) and the ever greater technical complexity of the methods and devices deployed. No doubt the response to the Gulf of Mexico oil spill will be to implement additional regulations and mandate more safety equipment such as remote shutoff devices that enable rig operators to activate blowout preventers even if a rig must be abandoned or ends up destroyed. The Deepwater Horizon rig operated with no such device.

But there comes a time, Tainter cautions, when the returns from additional complexity begin to diminish and ultimately turn negative--that is, additional complexity can result in a reduction of resources, safety, security and other measures of societal well-being. When he wrote his book in 1988, Tainter already believed that our global society was experiencing diminishing returns on additional complexity. Might we now be reaching the point where additional complexity brings negative returns?

Some are now making the case that the potential damage from offshore oil drilling could far outweigh its continued benefits or returns. The broadest definition of returns might include the disruption of livelihoods; the destruction of ecosystems and the lost productivity of those systems to humans as well as animals; the climate and pollution effects of using oil and its byproducts; the energy and financial costs of containment and cleanup of spills; the additional energy and financial costs which are likely to be imposed on future offshore oil exploration; and the additional regulatory costs and disaster readiness which will be borne by society. Such a broad tally of consequences lends some support to the idea that we are past the point of positive returns to society of continued oil use, especially if the oil is obtained from offshore wells.

The same kind of argument is being made for the financial system. It has become so complex that even the people who run it did not understand the risks they were taking, risks that contributed to the market meltdown in late 2008 and early 2009. That means it was even harder for the clients of the big banks and hedge funds to understand the risks of the complex financial products they were being offered for the supposed purpose of "hedging" their exposure to other risks.

Some are calling for treating banks like utilities with stringent regulation for deposits used for plain vanilla lending such as home mortgages, car loans, and small business loans. Separating the "utility" functions of banks from the "gambling" part would constitute a reduction in complexity.

As for the recent one-day wild gyrations in the U. S. stock markets, journalists are fond of calling it a "glitch." A glitch sounds like something one can easily fix once it is found. But an anonymous analysis by a trader on the blog Naked Capitalism provides a sense of just how complex the dynamics might have been.

No doubt regulators will determine that more regulations will solve the problem rather than a return to a simpler system of market-making that relies on real human beings rather than high-speed, computerized trading. In other words, regulators probably won't choose to simplify the system. Instead, they'll choose to complicate it even further.

There is a frequent cry from technological optimists that so-called innovation can solve all our problems. Innovations almost always mean more complexity. But if problem-solving, but complexity-increasing innovations have unintended and unforeseen consequences which overwhelm the benefits, can we call such innovations progress? And, if the unforeseen consequences are the ones which we must worry most about, should we be so sanguine about innovations that are supposed to solve the problems created by the failure of the last set of innovations? These questions are worth contemplating as we continue to witness the wages of complexity both in our attempts to secure more energy supply and in our operation of a highly complex global system of finance.

The Costs of ComplexityGulf spill won’t dampen U.S. appetite for oil

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