I am writing this post in three parts to provide a structure to break
down a swirl of emerging interconnected concepts. The path forward to
the future is always a fog, but a pattern is forming from the words of
very talented individuals which I hope to capture. It is one thing to
say we live in a networked, interconnected world but another to change
our metaphors, language, economic models, and management practices.
My impetus for these posts is a new year, a new presidential leader,
Davos – World Economic Forum underway and a recent conversation between
Robert
Rubin Former Secretary of the Treasury of the United States and
Sebastian Mallaby, director of the Maurice R. Greenberg Center for
Geoeconomic Studies and the deputy director of studies at the
council on Foreign Relations and Economist writer.
Macro networks is the focus of this post, the second will be Network Driven Business
Models, Risk and Mitigation and the third is on Leadership/ Management 2.0.
Yes, networks and complexity are an underlying theme.
When Jenny Ambrozek and I started the 21st Century blog it was to
continue to explore what we saw emerging and to offer practical
applications. We had no idea how rich the territory might become, only
a hint. But when we descend from stratospheric foresight to terra firma
insight the world around us keeps rapidly changing – it is a dynamic
open system after all. And as in painting or creating anything I need
to step outside what I am doing and see the big picture, foggy or not.
So why not the usual round of trends for 2009? I intentionally
have moved away from trends alone as historically picking these
correctly is anybody’s guess. And like other techniques for looking
ahead, trends, seem to be on my “not so useful list.” We can put forth
probabilities and rank ideas with the wisdom of the crowd, but we
surely can not predict with certainty.
At least 15 years ago I worked with some very talented folks at
Northeast Consulting who had one of the sharpest means of ranking ideas
clustered as events and trends. They morphed into Nervewire and were
later acquired by Wipro…but that’s another story. Their database of
events and trends was deep and had been compiled from multiple sources
(early crowdsourcing). The relevance here is in the distinction between
an event and a trend (often not made) and the relative weighting of
both as they might impact an industry and/or an organization.
Typically we look for events and trends in the marketplace or macro
business environment as a context for organizational strategizing and
decision making. The macro categories are: technology, geo/political,
socio/cultural, science, education, economic/financial, and
environmental.
But what we have come to learn is that none of these arenas operates in
isolation of the other. I am not saying the exercise is not beneficial,
but the frame we use, literally the boxes and squares gets us in to
mischief. It leads us to believe we have more data and control than the
reality which limits the scope of potential opportunities as well as
risks. Imagine these arenas depicted as a network and we begin to
understand better the interconnections and interdependencies. I’ve
added the column Network Effects™ as a next step demanded of
strategizing in a networked world. A hypothetical global
economic/financial network map of interconnections is later in the
post.
The 500lb gorilla for everyone right now is the Economic/Financial arena.
Two examples reveal how we need to shift our future thinking, language
and visualizations if we are to be more adept in a hyperlinked world.
First, a fall 2008 Economist cover story Redesigning Global Finance
which depicts a more typical mechanical view of connectedness.
Second,a recent conversation between Robert Rubin and Sebastian Mallaby which
makes the case for an open networked view of the financial crisis.
Redesigning global finance, – now there is a small challenge to take on
between breakfast and lunch. The cover story of the November 15th
Economist caught my eye with this the Rube Goldbergian graphic.
But my attraction was also my curiosity. Is this the appropriate
depiction for our interconnected financial system? Yes, Earth (all of
us) is in the balance, but the fickle finger of fate up there which
sets us on the fall is connected to the, spring connected to the
pulley, connected to the plunger, connected to the guy with the sledge
hammer – you get the picture. Is this the metaphor for the 21st
century? Will reinforcing this mental view help us understand how to
move out of our free fall?
I think not.
Yes, it is all connected but WAY to linear and mechanistic. And
unfortunately the $700bn Congressional bailout mavens must have had
this view in their heads when they agreed to the three page request.
Turn on spigot “H” of money and correct the system.
Now consider the second example, the Rubin and Mallaby conversation as context for a network view.
Mallaby began the conversation by asking Rubin which of two macro
economic factors had been the most important in the collapse of the
global markets – lack of regulation or foreign currency imbalance
specifically, China. Rubin responded, partly in jest, “my part in this
is to take your questions reframe them and then give my answer”. This
was a setup for Rubin’s point that those were among a “vast array of
factors which came together in an improbable perfect storm event and go
beyond negative feedback loops.”
Although Mallaby pushed several times
on the importance of regulation and China as having more weight Rubin
stuck to the global interconnectedness of the overleveraged hedge fund
operations, credit default swaps, sub prime mortgages, limited risk
measures, valuation issues, stagnant middle class real wages and more.
He stressed the complexity of events even for the experts to try to
“unravel”. The risk was systemic.
Rubin equated our global financial crisis to global climate issues. One
country can not solve the problem alone; we need better co-operation
among the global regulatory centers. “Global problems require ceding
power to global regulatory institutions” and to the G20 not just G8.
A good portion of their conversation centered on “moral hazard” and the
unintended consequences of government bailouts and stronger regulation.
Moral hazard
is typically defined as “the prospect that a party insulated from risk
may behave differently from the way it would behave if it were fully
exposed to the risk. Moral hazard arises because an individual or
institution does not bear the full consequences of its actions, and
therefore has a tendency to act less carefully than it otherwise would,
leaving another party to bear some responsibility for the consequences
of those actions.”
And conversely if a financial institution is government controlled will they be more risk averse?
Rubin remarked that he always believed that hedge funds needed to be
backed by more capital and protection for the investor as far back as
his Treasury days. He recounted the difficulty in cutting non efficient
activities while at Treasury as political interests prevented. It was
the potential marshaling of political power by the hedge fund managers
that he believes foiled even considering regulation from occurring.
He wrapped up with two points the current administration will have to
weigh, “political capital and leverage over government institutions can
only go so far” before it is used up and the psychological climate is
important to confidence in the market. “There is plenty of cash out
there but it is waiting to be released.” Some might say this is both an
emotional and rational appraisal.
Overall I was struck by Rubin’s laying out all of the interconnected
aspects of the financial environment and quickly running through a
scenario if one chose to take a particular action and how those
consequences would impact say, the bond markets. Or letting Lehman go
under, that this was based on an assumption of “self-correction” in the
system.
Mallaby seemed to want to find the one or two bad actors, the two
factors and rectify these going forward. But a dynamic system is not so
easily adjusted. Even thinking fix is a trap.
Now imagine a hypothetical network map of the global economic/financial ecosystem.
The key players (individuals) and hubs or nodes (organizations)
co-evolved the perfect storm of financial crisis over a period of time.
Going forward any institution on the network map has the capability to
map, through network analysis, its connections to any other
organization, as well as, sub networks of products or services.
I’m strongly suggesting that going forward, not only financial
institutions, but all organizations map their networks both for solid
opportunities as well as risk assessment in a networked world.
The underlying network map is one of a real pond food web used with previous permission from Pacific Ecoinformatics and Computational Ecology Lab.
Post 2 will address Network Driven Business Models and Risk Mitigation.
~ Victoria G. Axelrod
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