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Brittleness   (January 29, 2007)

Some time ago our U.K. Correspondent sent in some comments on the "brittleness" and resilience of systems--such as economies. This is a "systems analysis" view of complex systems, and as such it can be profitably applied to everything from the immune system to the electrical grid to the stock market. Here is his brief commentary: (emphasis added)

Moving the analogy to economics I would ask: Is it better to have an economy that degrades and rebounds gracefully under stress or one that bears heavy loads but which fails dramatically when it hits the limits? The first is inherently robust but exhibits many variations in state. The second shows much more stability - but offers fewer indicators of the stresses the system is under.

Which style of economy do we have now? In practice it would seem that there is a spectrum which ranges from bouncy to brittle. Looking at business cycles, it appears that 50 years ago most western economies tended to be a bit bouncy. The exception was the Soviet block economies which exhibited characteristics of the stable-to-failure type. Now, with today's much more flattened economic cycles it would appear that most of the developed world's economies are at the brittle end of the scale. One sees articles proclaiming the end of the business cycle as a fine and wonderful thing - I have my doubts.

It's more than just the flattened business cycles that make me think today's economies are brittle. As I look at things I tend to see a lack of robustness everywhere and this is my fundamental problem with an organization like Wal-Mart. It is big, it is massively wealthy and it can take a lot of stress and it will show little external effect. It is vulnerable though - there is quite a list: long supply chains, dependency on a high value dollar and low fuel prices etc. etc.. Wal-Mart is very strong but because of the centralized simplicity of the organization and the inability of its component parts to adapt it is brittle. Hit it in the right place and it will fail. Its not a matter of running out of money - the failure could take other forms. Perhaps it will manifest itself as a sudden inablity to offer the goods and services it used to provide. This will leave a huge hole in the economy. You don't get that catastrophic failure mode with an equivalent collection of mom-and-pop operations. Wal-Mart's dominance makes it an economic monoculture: very strong but brittle. Too many brittle components and you get a brittle economy. I subscribe to the view point that this is not a good thing.
Though I am still learning about such analytic tools, it seems that many of the complex systems we rely on are also extremely brittle in the sense that they depend on a handful of chokepoints.
  • Oil: The majority of the seaborne world's oil passes through two narrow, vulnerable channels: the Strait of Hormuz in the Persian Gulf and the Strait of Malacca in the South China Sea.
  • Grains. Monocultures of corn, wheat and rice mean that any blight which adapts to attack one of these crop strains would have an undue effect on yields.
  • Electrical power lines. A relatively small number of main lines transfer electrical power from one area to another.
  • Ports. The vast majority of goods arriving in the U.S. by sea come ashore at a small number of major ports.

  • And so on. The idea behind hubs and ports and highly consolidated industries (there are only two manufacturers of large commercial aircraft in the entire world, for instance) is that the resulting economy of scale will be efficient. But as our U.K. Correspondent points out, that consolidation carries a cost which is only visible when the brittleness of such concentration becomes glaringly apparent.

    To take another disturbing example: bird flu (H5N1) has killed 150 million birds globally. This virus somehow overcomes birds' normally robust immune system. Research suggests that the global Flu Pandemic of 1918 which killed millions of humans was a bird virus which "jumped" to human hosts. The immune response to that virus caused massive congestion in the lungs, causing the human host to suffocate. In effect, the normally resilent human immune system was rendered brittle by this terrible microbe.

    The global financial markets, we are constantly reassured, are actually made more resilient by the instantaneous flow of capital across borders and by the proliferation of derivatives. But what if the opposite is true, and the global financial markets have been pushed by an unprecedented tide of derivatives to the edge of chaos? More on that later.

    For more on this subject and a wide array of other topics, please visit my weblog.


    copyright © 2007 Charles Hugh Smith. All rights reserved in all media.

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