Imagine a parallel world in which no supplier of computer operating systems had offered an upgraded product since, say, 1990. Software developers would still be coming up with ideas, but they would have to work on machines running Windows 3.0 or Mac System 6. It is fair to assume that people living in this world would be missing out on many things we take for granted. And that their computers would crash more often.
Yet, something analogous might be happening in our own world. Many of the systems on which the global economy relies are abuzz with 21st century energy and creativity, but governed -- and constrained -- by 20th century norms and institutions.
This insight emerged from the World Economic Forum's annual survey on the question "What risks should the world's leaders be addressing over the next 10 years?" As explored in the Forum's Global Risks 2012 report, published on Wednesday, one theme that came up again and again was poorly-designed regulations having unforeseen consequences.
This is not to say that our community of experts thinks regulations are, in general, a bad thing -- far from it. True, overly-strict regulation can stifle an industry, denying us the potential benefits of the activity being regulated. But regulations that are inadequate can rebound in unanticipated ways, with the same ultimate effect.
An example? The meltdown at Japan's Fukushima nuclear power plant, after the March 2011 tsunami, could have been prevented by safeguards defined with more imagination and forethought. Lack of such safeguards led to a disaster that reverberated around the world, fueling public worry about nuclear power and prompting German Chancellor Angela Merkel to decommission her country's nuclear power plants.
In the complex, interdependent systems on which the world depends, causal effects are nonlinear and virtually impossible to predict. Who could have guessed that a tsunami in Asia would rewrite energy policy in Europe? The global financial system is another prime example of a complex system, as we discovered when mortgage-backed securities originating in the US crippled banks around the world.
Discussions typically center on regulations and approaches to regulating, a term that is politically loaded in many countries. We prefer to talk about "safeguards", to promote discussion from a systems perspective. And when defining safeguards for a complex system, we must strike a complex balance. On the one hand, safeguards must not be so restrictive that they prevent innovation from bringing benefits. On the other hand, they must not be so loose that they allow for a significant chance of a catastrophe.
In other words, we should seek in our systemic safeguards what we seek in our computer operating systems -- an environment that unleashes innovation and liberates individuals' creativity, but which minimizes the chance of us inadvertently wiping our hard drives.
While the financial crisis of 2007-2008 is the most high-profile recent case of "this program has stopped responding", the systems on which wealth increasingly depends are many and varied. Consider fast-changing emerging sciences such as nanotechnology and DNA synthesis. How should we define safeguards applying to them? Too onerous, and researchers might fail to make discoveries that could transform our world. Too hands-off, and a disaster - say, the release of toxic nanoparticles -- could wreak havoc. This, in turn, would cause a public backlash to prompt more onerous regulations, returning us to the first problem.
From fiscal imbalances to the management of land and waterways to climate change and greenhouse gas emissions, comparable issues emerge.
How, then, do we define safeguards for complex systems? There is no silver bullet, but we can suggest some heuristics. We should make more effort to understand who bears risks and who reaps benefits, and try to align incentives. We should pay more attention to understanding the cognitive biases of leaders and populations -- the quirks and foibles of the human mind, which are known to influence decision-making processes.
We must find ways to avoid a stifling global regulatory monoculture, without encouraging regulatory arbitrage. This implies embracing trial-and-error, accepting that in complex systems we will inevitably get things wrong.
Finally, and above all, we need to take defining systemic safeguards much more seriously. We need the people who define them to have access to the best brains in the industry, to be able to closely monitor in real time the direction in which innovations are moving and craft flexible safeguards that can be tightened or adapted in response to emerging risks and opportunities.
If only it were as easy as doing a Windows Update.
Lee Howell is Managing Director at the World Economic Forum. He is responsible for the Global Risks 2012 publication.
Is there a journalist that dares tell the truth about this? In China, red China, for example there is a requirement of 50% down for a second home. Would that have stopped flipping? Simple rules.
We investors stay in the rigged market since it seems it's the only way to grow money, risky though it be. What needs to be done that would help is to force CEOs to reset their take-home pay so it isn't so outrageously disparate from their workers and the rest of humanity. In addition, they should not be rewarded for their risky deals till a period of 5 years to determine if the deals really panned out or not. In unprofitable years, companies should not be rewarding their executives unduly.
We investors are complicit in goading companies to show quick and constant stock price hikes so we are partly to blame for the culture of greed. We all have to reset our expecations, esp. in this economic downturn. We have to accept slower growth and single-digit stock prices till better times come back.
Hang in everyone! Best to luck to all in the new year !!
It is not an accident that a Tsunami let hotel owners depopulate the beaches by sending fishers inland. American corporations paid politicians to destroy the livelyhood of those victims of the tsunami by making them victims of a much worse catastrophe: the takeover of free market of their beaches.
Free market today is free only for those who are willing to destroy other's lives and livelihood for their own profit.
And THAT has not change since money was invented. no matter how old the rules are they have always been taken over or even written outright by the ones who's sole interest is stealing from those who do the work that gives the money they steal its value.
The systems are complex and interdependent not because they have to be but because that is how the biggst crimes against humanity can be hidden. They COULD be simple. But the ones profitting from the ruin of people have to hide them or the people would rise up and slay them. THAT and nothing else is the one sole reason for the complexity of taxes and the financial systems.
As an example of working in a regulatory enviroment, see my novel "Rad Decision", based on my decades in the US nuclear power industry. The plant involved and the climatic event bear some simularities to Fukushima. Free online,with no advertisements or sponsors - just google the title or go to my website.
Anyhow: one factor that I think we've not been paying enough attention to is the very real existence of "high crime." In other words, yes, we might have (say...) a Securities and Exchange Commission, soberly tasked with the enforcement of the Securities and Exchange Act as-amended, but "that don't mean a tinker's dam" if that Commission has been (as I allege that it has been) "bought off."
Any elected official, in Congress or anywhere else, who feels that he can have an open purse sitting outside his or her office door, and "it's okay, it's legal, the Supreme Court says so...", well, we know from the start that this person isn't going to be listening to the people who will suffer if laws are broken or deleteriously written. He's going to, frankly, become a very willing accomplice. And this (again, I allege...) is precisely what has taken place, quite without apology.
These, too, are "inherent risks" to our system of governance, which can and (I allege...) have had devastating and continuing consequences. I am of the opinion that right now we do not have sufficient procedural ... nay, Constitutional ... processes in place to properly defend our law-making and law-enforcement systems from corruption by law-breakers. If we do not (as I allege) have these "assuredly in place," pretty much everything else becomes moot.
and Windows updates are notorious for introducing new bugs and breaking old applications.
Doing complex and risky things that make no sense cannot have safeguards that will matter. The thing to do is to avoid the super risky stuff in the first place and stick to normal.
Example: the repeal of the Glass Stegal Act. Glass Stegal was not a safeguard but a prohibition to mix investment banking and normal banking for grandma. No safeguards could have helped once the prohibition to do stupid things was erased.
The Japanese putting a set of atomic power plants on the earthquake/tsunami coast could not have been safeguarded, because it is a stupid idea.
People try and pretend how they can manage risk, when on Earth this is not possible. Risk is risk and normal risk is OK and stupid risk is not. There is a difference!
The spread of a biological epidemic is a stupid risk and nothing much is being done to lower the risk. No safeguards are possible, as the risk it too big. Prohibitions are needed.
Safeguards are needed in many areas that are manageable but I am afraid we are in an unmanageable era. The risks are systematic and intrinsic and all the Kings horses and all the Kings men will not be able to pout Humpy Humpty together again.
It was a mechanical governor: a feedback system.
GS was repealed, and for about ten years, "gosh, look at all the money" ... but, not fifteen years later, "where is the money?" It's gone. Eaten up by rampant securities fraud that (I allege) was solidified in place by the bribery that it could well-afford to do. But: the money is gone, the securities are worthless, and so is the (e.g. "credit default swaps") so-called insurance. The three legs of the stool were bound into a single column with all three formerly-opposing forces greedily pulling it down -- only to wind up sucking on the empty air of their own folly.