The latest financial crisis shows that we have still not learned all the lessons of the credit crunch
ONCE upon a time, ecologists talked of the 鈥渂alance of nature鈥�. It seemed that any small fluctuation in an ecological system was always balanced out by some other change, maintaining equilibrium even in complex situations.
Though a seductive idea, it was finally killed off in the 1960s by the American social scientist Herbert Simon, . For example, a complex ecosystem such as the Amazonian rainforest can be more fragile than a simple one, such as the African savannah, because risks can cascade rather than cancel.
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聯We now know complex systems can be fragile, but this conclusion has not reached economics聰
Yet this conclusion seems not to have reached economics. Today鈥檚 economists believe in , according to Andrew Haldane, the Bank of England鈥檚 executive director for financial stability. They reason that big, complex banks can make money in diverse ways, so that a bust in one kind of asset will be cancelled out by a boom in another.
But perversely, as big banks diversify they become more similar, and the problems inherent in this are also mirrored in nature 鈥� in the vulnerabilities of a monoculture. The biggest, supposedly safest, banks then become the equivalent of 鈥渟uper-spreaders鈥�: infectious agents that can wreak havoc throughout the system. In a , Haldane uses ecological thinking to (see 鈥溾�楬aircuts鈥� identified as a cause of financial crisis鈥�).
Haldane has been studying the global financial system with Robert May of the University of Oxford, an early proponent of chaos theory. Since May鈥檚 pioneering work in the 1970s, we have known that markets don鈥檛 behave in a predictable way. Still, that hasn鈥檛 stopped the European Central Bank and the G7 industrialised nations claiming this week they can 鈥渃alm鈥� market turmoil.
May argues that there is another issue that makes prediction close to impossible. Whether by accident or design, complex mathematics often obscures flawed or simplistic assumptions in financial models. No wonder, then, that mysterious concepts endure, such as the 鈥渋nvisible hand鈥� that signifies the self-regulating marketplace. It鈥檚 high time that economics caught up with ecology.