Systems Thinking for Free Thinking about the 'Free Market'

by Bob Powell, Ph.D.

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" (http://web.mit.edu/jsterman/www/All_Models_Are_Wrong_%28SDR%29.pdf).

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.

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.

Systems Thinking for Free Thinking about the 'Free Market'

by Bob Powell

Appeared February 17-23, 2011 in the Freethinkers of Colorado Springs "Freethought Views" column in the Colorado Springs Independent (p. 7) with the quotation below.

Insanity in individuals is something rare - but in groups, parties, nations and epochs, it is the rule.

Friedrich Nietzsche   

Bob Powell's web site is www.exponentialimprovement.com.