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.
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