The Park Ranger, Stability, and Resilience

When I read "stability breeds loss of resilience", your Park Ranger analogy really started to make sense.

We have enormous forest fires out west, and (I put myself at risk of correction) these are man's fault in that we extinguish small fires that clear out the underbrush and fuel that eventually get consumed in a large fire.

The metaphor with financial systems is a very good one. We develop an unfounded confidence in our powers of curatorship, by apparently "fixing" small problems that were never systemic. Meanwhile the system now reposes in a falsely stable environment. The inevitable regression to the mean is now a single catastrophic event instead of lots of small events.

Heaven forbid we are ever able to "manage" the San Andreas Fault.

Jeremy - forest fires are probably the best example of the resilience/stability tradeoff in action.

Arnold - The resilience-stability tradeoff is just a specific example of the broader problem that you're getting at which is complexity, irreducible uncertainty and unknowability.

This is connected to Hayek's concepts of dispersed knowledge and his accusations of the mainstream indulging in fake scientism. But it goes a lot further - in situations of irreducible uncertainty and complexity, even the local agents do not have sufficient knowledge to act in the manner that rational choice theory assumes them to.

In the face of uncertainty and complexity, the "rational" course of action is one that involves heuristics, experimentation, exploration. As Gerd Gigerenzer's research program shows, most of what passes for "irrational" in the behavioral economics literature is in fact entirely rational when faced with irreducible uncertainty.

On this topic, I'd recommend James Scott's book "Seeing like a state: how certain schemes to improve the human condition have failed" , especially Chapter 9 which tackles how a complex,uncertain environment requires a mode of decision-making that is at odds with most of modern science.

The problem with any this line of thought is that it is fundamentally different from almost all of modern science, not just economics. And this difference lies not at a superficial level but at a fundamental epistemological level which means it is relegated to the sidelines almost by definition.

Ashwin - fascinating, thanks. Chapter 9 is very probing.

You said "... heuristics, experimentation, exploration", which means, "sometimes, failure".

This leads directly back to Arnold's view that regulators should not prevent failure, but only to try to arrange that failure is not catastrophic. This probably means lots of small failure, all the time. Markets are good at this.

I have always thought about this issue as revolving around the distinction between stability and rigidity.

Ashwin's comment also makes me think of the exploration/exploitation trade-off.

Reminds me of a pop song.

They took all the trees, and put 'em in a tree museum
Then they charged all the people a dollar and a half just to see 'em

SB& - It is intimately connected to the exploration-exploitation tradeoff. You may be interested in a recent post connecting our economic malaise to the rise of Olsonian crony capitalism which utilizes the exploration-exploitation framework - http://www.macroresilience.com/2010/11/24/the-cause-and-impact-of-crony-capitalism-the-great-stagnation-and-the-great-recession/ .