Complex Systems, Dysfunctional Industries, and Catastrophic Collapse

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Over the holidays we tempted fate by booking a multi-stage plane trip … and ended up with cancelled flights, missed connections, and blank-faced airline employees who sincerely didn’t care if we spent a night or a week on the terminal floor.

While I wallowed in self pity over this loss of control, my wife noted that it’s not just the airlines. Big Food, Big Pharma, and the big banks, among others, are all just as customer-unfriendly. This distracted me from my rage and I spent some time thinking about how strange it is that in a time when Apple is creating Star Trek-level gadgets that streamline and simplify their users’ lives, and Amazon is making shopping almost supernaturally easy, there are huge industries that seem to go out of their way to make their customers’ lives complicated and hard.

Why do they do this when it makes so many people so mad? A pharmaceutical company CEO, for instance, probably can’t leave the house without someone accusing him of doubling the price of a crucial prescription drug while spending millions marketing erectile dysfunction pills to TV football viewers. An industrial food company exec can’t attend a cocktail party without being cornered by someone who reads labels and is appalled by trans fat, high fructose corn syrup-laden “food”. Goldman Sachs execs must cringe every time they pass a newsstand where the latest Rolling Stone is calling their company a “vampire squid”.

 And airline employees, of course, must be abused non-stop by people like me who have had their vacations turned into exercises in enforced patience and asymmetrical negotiation. South Park caught the general mood perfectly with this episode. (Ed Note: A very very rude episode of SouthPark and not necessary to watch to get the point of this article)

Anyhow, on a different vacation this line of thought might have been nothing more than a way to occupy a pissed-off mind for an hour or so. But this time I had James Rickards’ new book Currency Wars on my Kindle (a device from customer-friendly Amazon that makes my life simpler and easier), and while waiting for a flight I came across this:

The third principal is that complex systems run on exponentially greater amounts of energy. This energy can take many forms, but the point is that when you increase the system scale by a factor of ten, you increase the energy requirements by a factor of a thousand, and so on. The fourth principal is that complex systems are prone to catastrophic collapse. The third and fourth principals are related. When the system reaches a certain scale, the energy inputs dry up because the exponential relationship between scale and inputs exhausts the available resources. In a nutshell, complex systems arise spontaneously, behave unpredictably, exhaust resources and collapse catastrophically.

That’s a pretty good framework for understanding these huge, complex, mostly dysfunctional industries. They’ve spent decades consolidating and concentrating and now have to generate sales on pretty much any terms, no matter how questionable, in order to avoid death by complexity. The customer takes a back seat to the desperate institutional need to survive and the product gets crappier and crappier until the production/delivery system breaks down.

The same dynamic is at work in the global financial system, says Rickards. In the US, a dollar of new debt produced nearly that much in new GDP in the 1960s. But today the return on new debt is negative. From here on, we can borrow as much as we want and the only result will be more debt. Wealth won’t increase at all. But we can’t stop; as with any other Ponzi scheme, the choice is more debt or instant bankruptcy.

This stage is generally followed by catastrophic failure, with the only question being what else the financial system takes down with it. As Rickards puts it:

A considerable challenge arises when one considers the interaction of human behavior and market dynamics. The complexity of human nature sits like a turbocharger on top of the complexity of markets. Human nature, markets and civilization more broadly are all complex systems nested inside one another like so many Russian matryoshka dolls….When you apply this paradigm to finance, you begin to see where the currency wars are headed.

About Dollar Collapse: is managed by John Rubino, co-author, with GoldMoney’s James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.