Very Complex Systems, Very Hard Problems

I have just finished reading Michael Lewis's (2010) roller-coaster ride of a book The Big Short, which is an account of some of the events that led up to the massive financial crisis brought about in September 2008 by the behaviour of the world's largest investment banks and related financial institutions.We say that truth is stranger than fiction, but what Lewis describes is a world without values: a world in which quite literally no one understood what they and others had created and the ramifications this would have and continues to have on our collective prosperity. Starting in the early 1980s, deregulation of the ways in which financial institutions might lend, fix interest rates, and develop new financial products have tended ever since to generate unforeseen consequences in the way in which investments have been valued, as well as encouraging excessive risk taking in markets that are intrinsically volatile. Few if any now understand the arcane processes in which debts are packaged and repackaged, repriced by rating agencies who have little idea of their `true' worth, and then sold on to witting and unwitting investors who hedge them against their arbitrary values, waiting for markets to respond, as they always do in unpredictable ways. There is little science capable of explaining such phenomena, for the world's financial systems no longer operate in any rational manner. It is hard to try to understand systems where whim, ignorance, bluff, and counterbluff dominate critical decision making, which in itself is highly divorced from its wider consequences. To an extent, complexity science, like all sciences that have come beforeöindeed, like much rational knowledge predicated on the quest for certaintyöis at a loss as to how to deal with such phenomena. To an extent, this is becauseöalthough we have good methods for dealing with very large physical systemsöthe science that has developed to handle these systems treats them as being relatively benign in their behaviour, notwithstanding the fact that these systems may be chaotic, far from equilibrium, and thus intrinsically unpredictable. In the social domain we have only just become aware of the complexity and scale of the systems that we need to make sense of, and it is well nigh impossible to observe these systems in the detail essential if we are to generate appropriate theories and models that let us understand their form and structure. Problems abound with respect to defining our systems of interest, assuming that such systems can be abstracted and simplified to enable us to pinpoint critical understanding. The problem with understanding the way the financial system underpins the economy is that it is increasingly difficult to detect what are its significant features that need to be defined. Science presumes some pattern and logic, even in the face of baffling complexity. And if there is little logic with all behaviour being contingent on whim, deception, and ignorance, then outcomes become impossible to tie to what are traditionally assumed to be well-established events. Lewis's description of just a little of how investors have behaved in the last decade highlights the fact that those involved did not understand what they were betting on, yet their activity grew enormously. In terms of loans that underpin the housing market, there was little interest in their nature per se but only in their paper worth. Loans were in fact partitioned up into tranches of debt that were forever sliced to produce packages of investment that might even now take a generation to disentangle. In some senses, the disconnect from the real economy was complete, until the system floundered, and then the Editorial Environment and Planning B: Planning and Design 2010, volume 37, pages 385 ^ 386