Monday, November 21, 2016
"... without a structure to interrelate facts and observations, it is difficult to learn from experience, this is, it is difficult to use the past to educate for the future..." - Jay Forrester
"...absolute continuity of motion is not comprehensible to the human mind. Laws of motion of any kind become comprehensible to man only when he examines arbitrarily selected elements of that motion; but at the same time a large proportion of human error comes from the arbitrary division of continuous motion into discontinuous elements......only by taking infinitesimally small units for observation (the differential of history, that is, the individual tendencies of men) and attaining the art of integrating them (that is, finding the sum of these infinitesimals) can we hope to arrive at the laws of history..." - Leo Tolstoy, War and Peace.
Saturday, January 30, 2016
How did the US control the inflation that had plagued it throughout most of the 1970's? An unlikely hero drove the inflation down in most unexpected ways, by looking at the system.
Today I came across this story which completely caught my attention as a beautiful example of systemic thinking. I am an avid Podcast listener during my commuting to and from work, and it continues to be a great source of insights. With System Dynamics permanently in my head, I am increasingly conditioned to hear the systemic effects in the stories that I hear, and I must accept that these episodes of system-realization are increasing. I find myself wondering continuously at all the systems around me I failed to see when I did not think in terms of systems.
If you want to listen to the podcast first, you can do this here. Thereafter you can go to the section in this blog where we analyze what happened. If you don't want to listen, read on.
1. Summary of the storyThe basic facts of the story are the following.
US Inflation out of controlThe US was in an inflationary crisis during most of the 1970's. Inflation reached as much as 10% annually, meaning that the quantity people could buy with the money they were earning , was less and less every month. This was partially caused by the uncontrolled printing of money by the Federal reserve. Why does this printing of money have this effect?
An island to understand the problemWell, to quote the example in the podcast, imagine an island where there is 1000 coconuts and 1000 printed bills with which to buy them. Then each coconut would be worth 1 bill. Now imagine a plane flies over the island and drops another 1000 bills. How much would each coconut be worth now? by simple math, if there are still the same 1000 coconuts in the island and now there are 2000 bills in total, then each coconut would now be worth 2 bills instead of one. The "inflation" generated by these additional bills has then resulted in each bill being able to buy less coconut than before. A similar effect was happening in the US at that point in time.
This can create a vicious loop where as people can buy less with the money they have, and thus complain to the government, it leads to the government printing more money, which in turn decreases even more the purchasing capacity of the existing money. If not controlled, this can lead (and has led in many cases throughout history) to the collapse of a currency.
An unlikely hero proposes a solutionThe President of the US at that time, Gerald Ford, wanted to get hold of the inflation, and appointed Paul Volcker in 1979 as chairman of the US Federal Reserve. He was convinced that it was the uncontrolled printing of money which was causing the problem, so he decided to stop printing money. According to his understanding this would then stop the existing money from loosing more of its value, and thus inflation would be controlled. It all seemed to work fine in theory. Only that when he did this, the inflation not only continued, but rose to higher levels, and stayed at those high levels for almost 2 years before coming down. There was something Volcker had overlooked.
Stuff in your head
Eventually inflation subsided
2. Why did this happen?
First, there are several feedback loops involved in this process These feedback loops result in the inevitable boosting of an unwanted behavior, just because of how the people and relationships present in the system.
Expected inflation LoopA first feedback loop is the one concerning the expectation of inflation:
"Causal Loop Diagrams". Keep in mind the individual relationships between the components of this feedback loop, which we have named the "Self-fulfilling prophecy reinforcing feedback loop". It is read something like this:
- "Expectation of Inflation" and "Preemptive purchasing are related because the story tells us that since the population expected prices to increase, they would buy goods sooner rather than later before the prices would be higher, not necessarily because they needed those goods at that point. These two are POSITIVELY related since, the more that people expected a rise in inflation, the more preemptive purchasing there would be. Look at the relationships within feedback loops here.
- In the same way, the more preemptive purchasing there was in the market, the more scarcity there would be of goods (positive relationship)
- the more scarcity there was of goods, the more the prices would in fact increase (positive relationship)
- the more the prices would increase, the more the inflation rate would also increase
- finally, the more the inflation rate would increase , the more the expectation of inflation increase would be confirmed and strengthened.
Available paper money loopAlso there is the feedback loop concerning the printing of money salary and purchasing power of the money:
The story of this Feedback loop,which we have named the "Money Printing debacle" Reinforcing feedback loop", goes something like this:
- An increasing inflation rate, due to complaints by the population according to the US inflation story, led to government printing more money to solve the issue (this is, until Paul Volckner came along). These two variables are then positively related: the higher the inflation rate, the more additional bills are printed.
- Now according to the simplified coconut story, but just as true in a real, more complex economy, the printing of more bills leads to a decrease in the value of money, meaning that the same physical bill will be able to buy less and less due to the effect of there simply being more bills around. Therefore the "Additional printing" leads to a DECREASE in the value of money. Since these two related variables behave in opposite ways (when one increases the other one increases or vice-versa, these are said to be related in a NEGATIVE way (indicated with a negative sign in the causal loop diagram. Look at the relationships within feedback loops here.
- The less value money has, the more money it will be required (more physical bills) to purchase the same goods, and thus the prices will increase. These two variables "value of money" and "Increase in Prices" are NEGATIVELY related, when one increases, the other decreases or vice-versa.
- Finally, when the price levels increase, the inflation rate increases as well.
Loop speedIt is important to note that the purchasing power of money (Value of Money) as reflected through the prices in the economy, is something that can adjust very quickly, and so it did in this story. However, the expectation of inflation is something that took a long time to adjust. Expectations are beliefs held throughout a group of people, and these normally take a long time to adjust, depending mainly on how quickly the "contagion for the new expectation" spreads throughout the population.
The loop named "Money printing debacle" has a greater speed than the slower "Self-fulfilled prophecy" loop.
Several models have been developed to explain how this "contagion" can take place. One that is relatively well known is the Bass Diffusion model, developed for the marketing industry in the 1950's. This model basically proposes that the contagion of ideas within a population can take place in two different ways, either through direct contact between people, or through the influence of advertising.
There are many things in our everyday systems that modify slowly, such as the example of the adjustment of expectations. Things that take along time to adjust are said to have a greater systemic inertia, as they are difficult to "move" and thus slow to change. Things that are difficult to "move" and which have been found to have big systemic inertia are, for example, cultural norms, habits and perceptions present in a community, as well as multiple types of expectations present in society and which invisibly, yet surely influence our lives, just as in the case of the "expectation of inflation" mentioned in the story here.
When a long and a short term loops coincide and act on the same problem (as it will normally be the case), it is a very normal thing to react first to the short term loops as their effects are apparent more quickly. This would however lead to a short term solution which would be deleterious in the long term, which is the appropriate time-span from which to search solutions to inflation.
It is thus remarkable that Volcker remained by his decision, somehow firmly believing in the long-term effects of his measures, no matter how tumultuous their effects where in the short term. eventually the expectation of inflation subsided, as the community slowly but surely realized that these measures were not a passing fancy, but rather where having the effects the Federal Reserve promised.
Wednesday, October 22, 2014
Side effects of Drug supplement Intake
- How does an increased level of hormones affect the development of an ill-functioning endocrine Gland?
- Are there any techniques which aim at the recuperation of Gland function?
- What are the economic incentives that would promote the search for Gland recuperation instead of drug consumption?
Thursday, February 13, 2014
Medina's book is based on her 2005 PhD Thesis for the History and Social Study of Science and Technology at MIT and includes interviews with the main actors in this peculiar story, including interviews in 2001 with the now late Stafford Beer.
The book is an entertaining account of the events that led to the formation of a team that was to develop a cybernetic control system for Chile in the early 1970's, and the vicissitudes this project had to experience until its final cancellation on the day of Pinochet's military coup.
It is particularly interesting to read about the changes experienced by the protagonists throughout the process. In the case of Stafford Beer and in the words of Humberto Maturana, "he arrived to Chile a business-man, and he left a hippie". After the project had its abrupt end, Beer gave his life a considerable change, abandoning his lifestyle in London to settle in a remote area of Wales in a cabin that even lacked running water, and as a result of his realization of the socially-imposed pressures for unnecessary material possessions.
On the other hand, Fernando Flores changed from the young 27-year-old Chilean minister who having heard of Beer's ideas, contacted him to set up a cybernetics system of government monitoring in Chile. He later went on to study at Stanford and UC-Berkeley and admittedly "noticed the restrictions of cybernetics" within communities undergoing drastic societal changes. He eventually returned to Chile a multimillionaire leading a lukewarm political career.
Cybersyn was an ambitious project that marked a milestone in the history of systemic interventions at a governmental level, and the teachings this experience left behind I consider are still ill-understood. The story is either quickly discarded as the ravings of madmen such as Beer or Flores, or this cybernetic approach, given the political circumstances in which is was carried out, is described as a soviet-style centralized control system.
Other countries followed Chile's lead, including Mexico in 1982 and Uruguay in 1985 (Project Urucib, derived from Uruguay-Cibernetica), but a lack of a decided project leadership such as the one provided by Fernando Flores, did not allow these paradigm-shifting projects to be implemented to the same extent as Cybersyn had been in Chile.
Monday, December 16, 2013
Sunday, November 24, 2013
Let us do a simple mind exercise. Think about a bathtub. This bathtub is originally empty, but might be filled by opening the water tap above it, and closing the drain. In this way, the bathtub may be filled until a certain depth. What would happen if we open the drain? Well it depends. If the water escaping through thee drain is greater than the water coming in through the water-tap, then the water level inside the drain will slowly being to decrease. The contrary will happen if the water coming in is greater than the water leaving the bathtub through the drain. Now imagine the "Water" inside the Bathtub was instead the Greenhouse gasses in the earth's atmosphere. The dynamics of accumulation, as well as delay in closing or opening the "taps" and "drain" for the greenhouse gasses, are in this way much more understandable.
This example, from which a parallel can be drawn to our own experiences, is a very simple conceptualization of the stock, low and delay concept central to the System Dynamics framework. The Bathtub can be considered as the stock in this system, and the water coming in through the tap or leaving the bathtub through the sink can be considered to be the flows.
It results that, if thought out carefully, many problems can be represented in these terms, as concepts that can be viewed as stocks include available forests, wildlife diversity, cars in a specific street at a given time, or the experience in building houses at a particular construction company, for instance. The rates at which these quantities change can have a wide variety of influences in the way the complete system behaves over time, can expose a causal relationships that can be quite complex, and a resulting behavior that is highly non-linear.
There is extensive literature on the application of these techniques in industrial settings, yet from the information I have been able to gather so far, I am for the time being convinced that at MIT I have come across a discipline which is not getting nearly as much attention as I believe it must, and I am having a hard time figuring out why . I have spoken with leading practitioners and direct disciples of the inventor of this approach, Jay Forrester, who have been able to provide their particular viewpoint, but this matter is something in which I believe much is to be written.
Friday, November 22, 2013
Its been more than 40 years from a very dramatic scientific declaration: if the humankind continued to go about its business as it had been doing until then, using up resources and imposing a tremendous footprint onto the ecosystem, the conditions on the earth will become unfit for human existence.
I am talking about the 70's.
Those scientists, (based at MIT System Dynamics group and led by Jay Forrester, founder of the System Dynamics Discipline by applying Control Theory principles to organizational systems), as well as those who have followed in their footsteps were, after an initial shock in the scientific and economic world, heavily criticized, notwithstanding the open and documented scientific method through which those conclusions were reached. The world was not ready for such extreme indications.
Four decades later, many of the predictions are indeed happening. The Smithsonian recently published some interesting graphs that show the trend several of the indicators have followed through the years, and which unfortunately continue to rise, already above the current environmental thresholds.
Tools such as System Dynamics can give us an outlook into the broad vision of processes with multiple dimensions and crossed influences, like no other method I am aware of.
However, not everybody seems to think in this way. Politicians or economists, who influence policy directly are not being trained consistently in this domain, and the main uses for system dynamics are within Businesses and for academic enjoyment, notwithstanding several other current societal issues, such as Education, Public Health, and Strategic Industrial Development may surely benefit from this type of analysis.
A typical System Dynamics Model, has just a few crucial components (i.e. Stocks, Flows, Delays, Auxiliary Variables) which unleash a myriad of dynamic behaviors. Relatively simple diagrams can add a wealth of understanding on the different causal paths decisions take, and show explicitly all relevant feedback flows, when some decisions affect us back through their unintended chain effect on the original policy.
Saturday, November 16, 2013
It is interesting to think about the implications that assumptions have on the way people behave. Many of the paradigms with which we evaluate the world are full of our own experiences and conclusions, cloaked in the illusion of objectivity, which scientific education purports. Beyond the hard data, any interpretation of the information that can be obtained is inevitably subject to the investigator. The first five sessions of this Advanced Strategic Management course have allowed me to continue analyzing this, and have added to the intuitive appreciation of this subjectivity which engulfs organizations, appreciation I have had the chance of experiencing in all previous organizational roles I have had the opportunity of fulfilling.
Monday, July 8, 2013
In fact, the foundations of the current economic system have been maintained as if nothing had happened. Gruesome assumptions which became clear in a somewhat pathetic fashion, were well reflected by Alan Greenspan, Head of the Federal reserve at the time (2008), when declaring in front of the US congress, stating bluntly that he did not anticipate institutions or private companies would proceed in any other direction than in the utmost benefit of its shareholders. He at that hearing accepted he believed in the markets and their supposed power to restore equilibrium, condition which never arrived.
If we consider Mr. Greenspan to be one of the most respected and powerful men in the world economy at the time, this statement is baffling. How could he not have seen this crisis coming? In the aftermath, from Chile, a corner of the world that has followed the Monetarist doctrines faithfully,and a country which has diligently opened up its economy to the world according to the school of Chicago's gospel, I can respectfully say that the due reflections on the real causes of the crisis have not yet been carried out. The crisis has somewhat been left behind, maybe because we did not experience it first hand, and due to soaring commodity prices and increased internal demand due to 2010 earthquake reconstruction activities.
Our main universities are still far away from having an independent knowledge generating process, and have since the time of the military dictatorship, been in charge of producing generation after generation of economists who firmly defend the dogma of the free market economy, without so much as a thread of doubt regarding the foundations of the doctrine. The reasons for this may be multiple, such as a high percentage of Catholicism in the country, the effect of a repressive regime in the formation of alternate theories or independent thought, and the overhanging shadow of the US over Latin America, both through international investment as well as in the formation of minds in their elite campuses, minds that have taken, and still hold the main administrative seats in the economic direction of the country and the education policies at Chile's main Universities.
The foundations of the doctrine are clearly shaky, have been for over 50 years, and these weaknesses have been much more evident since the crisis, and even more so after Mr. Greenspan's words before congress. However, Chile apparently has not taken notice so far.
How could this be regarded as the intention of an economic model which is there to maximize the well-being of society? Clearly there were some big winners and some big losers, and in that aspect, following my own experience when confronted with situations where great inequality was caused by my doing, a sense of social responsibility (ethics), I considered also drove actions.
Much to my dismay, my question was quickly discarded by the professor, a middle-aged economist with the usual credentials for professor at the university, a PhD at a US university, many years of teaching experience and little to no published papers. His argument was simply that the ethical question was not something relevant at the level of policy making, where an ethical process was expected, and rather the ethical controls were mainly applied to the organization, the middle management and operators.
Well, that is just great, i thought to myself. What I carried out with me that day was the deeper conviction that the ethical aspect of business was being ignored by those who needed it the most, and this attitude of no ethics for me, but indeed to those who work for me, is something that can be felt at the worker level as actually widespread in the Chilean idiosyncrasy.
I have therefore welcomed the real-world economics review as a fruitful source of fresh thinking in regard with the economics which affects the people on the street, and urge anyone interested in educating him/herself into alternate ways of thinking about the society that should be built through the knowledge of relevant economics, to investigate further, keep a close watch over the World Economics Association (please note how suspiciously little information can be found in internet regarding this organization) and begin to take part in the discussion.
What does this have to do with Complexity? Well, the economy can also benefit very much from having a Complex adaptive system model approach, proposal still in a nascent state, but which has been explored so far by researchers such as Dirk Helbing in articles such as Rethinking economics using complexity theory .
Friday, June 28, 2013
An interesting challenge that has been undertaken by several researchers for well over a decade now, is the modeling of Supply Networks as Complex adaptive Systems (CAS's). One of the first to attempt the characterization of what Supply networks look like and how these charcteristics can be Modeled as CAS's, is Professor Choi at the Arizona State University in the early part of the 2000's. Through analyses of actual supply networks, he made a series of propositions which were further scrutinized and have been improved by subsequent research:
Proposition 1: The greater the level of shared schema (e.g. shared work norms and procedures, shared language) among allied firms in a Supply network, the higher will be the level of fitness for each of these firms (e.g. firm performance)
Proposition 2: Firms that adjust goals and infrastructure quickly, according o the changes in their customers, suppliers, and/or competitors, will survive longer in their Supply networks than firms that adhere to predetrmined, static goals and infrastructure, and are slow to change
Proposition 3: Witin a Supply Network, firms that are cognizant of activities across the supply chain (including tertiary level suppliers) will be more effective at managing materials flow and technological developments, than firms that are cognizant of activities of only their immediate suppliers
Proposition 4: Successful implementation of control-oriented schemes (e.g. ERP, JIT II) leads to higher efficiencies, but it may also lead to negative conbsequences such as less than expected performance improvements and reduction in innovative activities by the suppliers
Proposition 5: The degree of innovation by suppliers is directly proportional o the amount of autonomy that suppliers receive in working with customers
Proposition 6: Supply Networks that turn over quickly stand a better chance of exposing weak members and thus, gaining higher efficiency than supply networks that are artificially bound by long-term relationships
Proposition 7: Modilarization of tasks will decreace overall inter-dependencies among firms in a supply network, and thus, offer a higher efficeincy when optimizing the overall system
Proposition 8: Over time, quantum changes will last longer within a supply network than incremental changes that go against accepted practices
Proposition 9: Firms that deliberately manage their supply networks by both control and emergence will outperform irms that try to manage their supply networks by either control or emergence alone
Proposition 10: In a supply network, upstream suppliers that are more diversified are more likely to survive than those that are not
Whether you agree or not with these statements will depend on your background and experience, but to me they resonate for their soundness and simplicity, specially for having become a first milestone in the explicit description of complex adaptive systems.