Life Is About Complex Adaptive Systems

What was the impetus behind this aha moment? In 1995 I read the first edition of the book, Complexity: Life at the Edge of Chaos by Roger Lewin. It changed my perspective on humanity’s relationship to the ecosphere.

This book was my introduction to complexity theory and the concept of Complex Adaptive Systems (CASs). In brief, a CAS is a network of self-similar adaptive agents. These agents operate as a supra-entity, as a collective. Each individual agent interacts and communicates with the others in a dynamic way. A CAS’s overall behavior is shaped, altered, and dependent on the experiences of each individual agent and that of the collective as a whole.

Before reading this book, I had an innate sense of the interconnectedness of humankind with Earth’s ecosystem services. After all, prior to receiving my MBA, I majored in ecology (I also majored in molecular microbiology). But the notion of CASs opened up a more technological understanding of this interconnectedness and made me realize that economies cannot thrive in the longterm without full integration into the ecosphere.

Economies As Malfunctioning CASs

Economies depend upon raw materials that are processed to create and exchange value of some form or fashion. The raw materials range from basic materials such as natural resources to higher-level materials such as human thought, energy, and action. All along the way, inputs of one type of material are transformed into outputs of another type of material.

Each subsystem within an economy is its own Complex Adaptive System (CAS). In fact, economies operate as nested CASs. Transactions within and between an economy’s CASs ebb and flow across information channels—the outputs and inputs that conjoin the various parts of the overall system.

The set of all economic subsystems is a singular high-level economic CAS, the master CAS in which all other economic system exists. Here we use the singular term “economy” to encompass the global economic engine, the net affect of all subset economies.

In a healthy functioning economic system, the likelihood (probability) of outputs from one Complex Adaptive System being properly received and utilized as inputs to another CAS is high. The issue with today’s economy is that outputs that are deemed of low-value (have limited utility in being processed into new outputs) are usually classified as waste products and expunged from the system.

Another way of stating this is that waste products are not perceived by the economy as worthwhile inputs for any other process. The terms byproduct and waste are often used interchangeably to differentiate what is considered low-value materials from that which is considered useful output.

The Economy Has Become Malignant

The economy is not the highest-level Complex Adaptive System. And as much as some people may like to believe, the economy is not the most important CAS either. For purposes of this discussion, we will assume that the highest-level system is the ecosphere—the concatenated, symbiotic network that encompasses the atmosphere, biosphere, geosphere, and hydrosphere. It is the complex web of planet-wide foundational services upon which all life depends.

From an information theory viewpoint, CASs can only have two operating states—they ingest inputs and release outputs. In order for CASs to operate in harmony, in a healthy and symbiotic manner, all inputs and outputs must be processed. In other words, nothing is considered waste. Another CAS exists that can readily accept a given output as its needed input. This is exactly what a properly functioning ecosphere does. There is not a single output that does not act, is not received, as an input into some other CAS at the same or different level.

A malfunctioning economy–such as our current global economy–accepts the existence of some outputs that cannot be reused or repurposed anywhere. The issue that the global economic CAS currently is facing is that some of the waste products expunged by lower-level economic CASs are not readily usable by the ecosphere—or at best are not needed in the quantities that they are currently being produced.

What does this mean? The “waste” generated by a diseased economy might actually not find a CAS at any level that wants or needs it as an input. From this sense, an unhealthy economy acts more like a cancer than a valued collection of tissue. Over time, it provides little value, maybe even harm, to the larger CAS of which it is a part.

Sustainability and Growth Can Be Counter Currents

Economies depend on growth as a key measure of health. As the highest-level CAS, the ecosphere depends on resource sharing and recycling. If one sub-level CAS consumes a disproportionate share of those resources, the higher-level CASs can get out of balance. In other words, growth in one CAS is not necessarily sustainable when it results in other CASs losing resiliency. The notion of economic growth as the only desirable, sustaining measures of health needs to be revisited.

All economic outputs need to be viewed as resources that should and can be utilized by at least one other CAS—whether a subsystem CAS within the economy or a higher-level CAS outside of the economy. By retooling the economy to properly think about its inputs and outputs, this diseased, misbehaving tissue cluster can be reintegrated into the larger CAS.

Shouldn’t we want to truly integrate the economy into the ecosphere? After all, the ecosphere is the higher-level CAS upon which the global economy ultimately depends.

Additional Resources

For more resources on Complex Adaptive Systems, visit the Santa Fe Institute’s site.

Notes

Part of this article was originally posted to a Google Plus post by me as a comment to one of Seb Paquet’s posts. I’ve decided to extract my comment and expand the concept into an article that lives on my blog, under my full control. Why would I do this? See my article, Is Surrogate Blogging via Google Plus a Good Idea?

With the recent meltdown in the global-financial system, it became apparent that risky-trading behavior is a rampant, real issue in financial markets. Whereas requiring strict disclosure and transparency may help ameliorate risky trading in general, a new study explains a possible genetic link to risky economic behavior. Taking measured risks in business are necessary. But it is never wise to make financial gambles. This is exactly what happened and continues to happen today.

How can corporations accrue some of the advantages of the open market while better insulating themselves from banking and insurance firms that literally game the system? I believe that the current two-part equity system–private or public–does not currently make that goal possible. The two-part system does not offer corporations–who choose to take advantage of the benefits of “going public”–a sufficient level of fiduciary control over their capital structures.

What if another option existed? What if corporations could decide the terms with which their stock would be publicly traded?

I propose that the SEC create a new type of stock market—the semi-public market. In this market, corporations would decide the listing terms of their stock from a SEC-predefined list of market-trading options.

Options might include:

• Whether or not the stock would be allowed to trade on the derivatives market
• Whether or not the stock could be shorted
• Whether or not the stock could be bought on margin
• The number of days the stock had to be held before it could be sold: (zero – ?)
• Whether the stock traded on a third-party market or on the corporation’s own, regulated trading platform
• The maximum percentage ownership of the float allowed to various entities: institutional investors, private equity, hedge funds, individual investors
• The terms of their IPO

In summary, I propose that companies are offered three structures for issuing their stock:

1. private
2. semi-public
3. public

Allowing corporations the ability to customize the market environment in which their shares trade offers three obvious advantages to stakeholders. First, potential shareholders will have a wider selection of investment options that better suit their risk profiles. Second, corporations will regain an acceptable level of fiduciary control over their capital structure while still having an option to go public. Third, some of the market manipulation that publicly-trade companies currently face can be alleviated which will result in increased insulation from some forms of systemic risk.

What do you think? Should corporations have three options for issuing their stock instead of the current two?