This is as true of us today as it was of the dinosaurs.

This article is on my presentation on "Systems Thinking for Free Thinking about the 'Free Market'" on Wednesday, February 23, 2011, 7:00 PM. Gill Foundation, 315 East Costilla, Colorado Springs. This commentary is in the Freethinkers box in this week's Colorado Springs Independent.

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Presentation 9 slides/page no notes (pdf, 5.7MB)

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Insanity in individuals is something rare, but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche (1844 - 1900)

'Free Market' Fundamentalism

Systems thinking is required to understand behavior in dynamically complex systems, systems with multiple feedbacks and long delays. Our economy is dynamically complex, with a vast number of feedbacks and delays of years and even decades.

There's a saying: "The whole is greater than the sum of its parts". It's quite literally true. That's because complex systems have emergent properties: properties of the whole that are not properties of the parts.

Peter Senge notes in The Fifth Discipline, an introductory book on systems thinking, that we can't cut an elephant in half and get two elephants. An elephant is more than the sum of its parts. Likewise, our minds aren't a property of the individual neurons in our brains; they're a manifestation of the interactions among them. What makes you "you" is an emergent property of the parts of you.

The same is true for nations, communities, economies, mobs, families, and military units; they are far more than the sum of their individual parts. We're part of the whole, not separate from it.

So we're not only "individuals" or only a "part of collectives". We're both. Either-or thinking -- the "false dilemma" logical fallacy -- leads us astray. Either extreme is a form of fundamentalism.

Thinking about anything, including religion or the “free market”, is based on mental models. But our mental models aren't reality. They're simplifications, abstractions, inevitably incomplete, incorrect. They're wrong.

John Sterman, Director of MIT's System Dynamics Group, wrote in All models are wrong: reflections on becoming a systems scientist : "Fundamentalism, whether religious or secular, whether the unquestioning belief in an all-powerful deity, the all-powerful state or the all-powerful free market, breeds persecution, hatred and war."

To understand the operation of the "free market", many invoke Adam Smith's "invisible hand". It's a dual feedback structure that balances supply and demand using price as an intermediating factor. It's correct as far as it goes, but it's a vast simplification; it's a model of only a small part of what's happening.

The "Invisible Hand" feedback structure of markets. Figure 5-26 of Business Dynamics: Systems Thinking and Modeling for a Complex World. The typical view is that the primary factor equilibrating (balancing) supply & demand is price. That is, the higher the price, the less demand and vice-versa. This mechanism becomes ineffective when either supply or demand is inelastic or when there are long delays associated with changing either supply or demand.

Adam Smith’s most-cited passage includes: "... he is in this led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it."

This unintended societal benefit is an emergent property. It's the result of the whole, the collective, being greater than the sum of its parts. "Good-for-society" results can come from "self-interested behavior."

Unfortunately, the opposite can also be true: individually-logical actions can be collectively irrational. They can lead to price instability, speculative bubbles, inadequate investment in heath and education, pollution, a failing heath insurance system, extremes of wealth and poverty, enormous trade deficits, and infrastructure backlogs.

That's because many effects negatively impact the market's ability to effectively balance supply and demand and create a well-functioning economy. These include delays, inelasticities, externalities, adverse selection, and path dependence. With these systemic failures we get many individual failures despite individual best efforts.

Policies to address these failings are possible, but "free market" fundamentalists believe, like Niccolo Machiavelli, that when government interferes, it does far more damage than good. We now live in the 21st century, not the 16th. We know more than we did then, and this doesn't have to be the case.
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Topic: Systems Thinking for Free Thinking about the 'Free Market'

Abstract:

In systems, feedback structures produce patterns of behavior made up of the events we experience. Unless we understand system structure it's very difficult to determine what actions to take and which policies to adopt in order to positively affect system behavior. Instead of addressing fundamentals, we apply band-aids.

When band-aids don't work, the prevailing "common sense" is that it's obvious we should do nothing. But common sense "derived from experience" is inadequate for addressing the problems we face. As Albert Einstein observed, "Common sense is a bundle of prejudices we develop before the age of 18."

Systems thinking is necessary for understanding the operation of dynamically complex systems, that is, systems with multiple feedbacks and long delays. The systems approach is based on the fact that "the whole is greater than the sum of its parts". This is quite literally true, because systems have emergent properties: properties of the whole that are not properties of the parts.

The "invisible hand" of the "free market" is a dual feedback structure that balances supply and demand using price as an intermediating factor. This feedback structure can be explicitly shown using causal loop diagrams.

It's not just Price. Product Availability can be an equilibrating factor balancing supply & demand.

This presentation reviews systems thinking and uses it to examine the structure of the "invisible hand." It describes many of the factors that negatively impact the invisible hand's ability to effectively balance supply and demand and create a well-functioning society. Among the factors are delays, inelasticities, positive & negative externalities, adverse selection, path dependence, and the tragedy of the commons.

Because of these effects we experience price instability and speculative bubbles, inadequate investment in heath and education, pollution, a failing heath insurance system, extremes of wealth and poverty, and infrastructure backlogs.

What's more, we underinvest for the long-term because net present value (NPV) calculations devalue future returns and embed short-term thinking in our economy. The result is that the private sector inadequately represents the future to the present.

A simple diagram showing input, accumulation, and output can be used to explain why our economy is failing and guide us for thinking practically about what to do for economic development -- locally and nationally. Turns out it's mostly arithmetic, not rocket science.

Bio

Bob Powell earned Ph.D. in Physics from Case Western Reserve University and an MBA is from Florida Institute of Technology. He's held positions as manager of ASIC product engineering and ASIC Computer-Aided Design software integration in the semiconductor industry.

His company, Continuous Improvement Associates, uses the lens of systems thinking to help organizations to overcome what he calls, "group multiple personality disorder," create exponential process improvement, and generate strategic alignment. The systems approach explicitly examines system feedbacks that foster improvement and defines measures that monitor that improvements are on track.

It's not just Price. Service Quality can be an equilibrating factor balancing supply & demand.

While his primary focus in on organizational issues, he's become interested in applications of systems thinking to social issues, economics and, in general, the operation of what's called the "free market." This includes the workforce system, economic clusters, the dynamics of urban growth and sprawl, poverty, health care, and the decline of U.S. jobs in manufacturing & IT. His website is www.exponentialimprovement.com.