Arnold Kling  

The Park Ranger, Stability, and Resilience

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From Ashwin:


The relevant insight in Holling's work is that resilience and stability as goals for an ecosystem are frequently at odds with each other. In many ecosystems, "the very fact of low stability seems to produce high resilience". Conversely, "the goal of producing a maximum sustained yield may result in a more stable system of reduced resilience". Minsky's hypothesis is thus better described as "stability breeds loss of resilience", not "stability breeds instability".

Ashwin refers to C. S. Holling, who distinguishes stability from resilience. A system can be stable with respect to small disturbances but lack resilience relative to large shocks.

The park ranger, in my ongoing metaphor, allows the rain forest to suffer from small disturbances in order to preserve its resilience. The museum curator creates a rain forest that is more stable with respect to small disturbances but less resilient to large shocks.

That may be part of what I am getting at with the metaphor, but it is not necessarily the main point. The curators could indeed reduce the resilience of the system by trying to stabilize it, and this may very well be a good way to describe the impact of financial regulation. However, I think that curators can do harm in more ways than than just reducing the resilience of a system. Their actions can have unintended and unforeseen consequences because they do not understand the system as well as they believe that they understand it.


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COMMENTS (6 to date)
Jeremy, Alabama writes:

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.

Ashwin writes:

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.

Jeremy, Alabama writes:

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.

SB7 writes:

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.

Salem writes:

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
Regulation ending creative destruction, and accompanied by rent-seeking. It's all there! And the last verse warns of the Road to Serfdom. I think Joni Mitchell is Arnold's muse.

Ashwin writes:

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/ .

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