Tag Archives: resilience economics

Adaptation, Vulnerability

Resilience and Euro – diversity

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On MacroEconomic Resilience ex-banker Ashwin Parameswaran draws upon Holling’s pathology of natural resource management and the work of Hyman Minsky (a connection I’ve mentioned previously and Ashwin has explored extensively – see here and here) to write about The Resilience Stability Tradeoff: Drawing Analogies between River Flood Management and Macroeconomic Management.

Ashwin Parameswaran insightfully writes:

In complex adaptive systems, stability does not equate to resilience. In fact, stability tends to breed loss of resilience and fragility or as Minsky put it, “stability is destabilising”. Although Minsky’s work has been somewhat neglected in economics, the principle of the resilience-stability tradeoff is common knowledge in ecology, especially since Buzz Holling’s pioneering work on the subject. If stability leads to fragility, then it follows that stabilisation too leads to increased system fragility. As Holling and Meffe put it in another landmark paper on the subject titled ‘Command and Control and the Pathology of Natural Resource Management’, “when the range of natural variation in a system is reduced, the system loses resilience.” Often, the goal of increased stability is synonymous with a goal of increased efficiency but “the goal of producing a maximum sustained yield may result in a more stable system of reduced resilience”.

The entire long arc of post-WW2 macroeconomic policy in the developed world can be described as a flawed exercise in macroeconomic stabilisation. But there is no better example of this principle than the Euro currency project as the below graph (from Pictet via FT Alphaville) illustrates.

Instead of a moderately volatile mix of different currencies and interest rates, we now have a mostly stable currency union prone to the occasional risk of systemic collapse. If this was all there is to it, then it is not clear that the Euro is such a bad idea. After all, simply shifting the volatility out to the tails is not by itself a bad outcome. But the resilience-stability tradeoff is more than just a simple transformation in distribution. Economic agents adapt to a prolonged period of stability in such a manner that the system cannot “withstand even modest adverse shocks”. “Normal” disturbances that were easily absorbed prior to the period of stabilisation are now sufficient to cause a catastrophic transition. Izabella Kaminska laments the fact that sovereign spreads for many Eurozone countries (vs 10Y Bunds) now exceed pre-Euro levels. But the real problem isn’t so much that spreads have blown out but that they have blown out after a prolonged period of stability.

Scenarios

Resilience economics: a scenario

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Jamais Cascio presents Resilience Econmics as a scenario of an economy in 2030. He also presents two alternatives – Just in Time Socialism and Robonomics in his column in the business magazine Fast Company.  Jamais writes:

Resilience Economics

United States: Resilience Economics employs a mix of regulations and norms (i.e., non-regulated but expected behavior) to shift standard business processes away from a focus on efficiency towards a focus on flexibility.

Resilience Economics (RE) emerged out of the realization that Neoliberal Globalized Corporate Capitalism made money hand-over-fist when everything was working right, but was like a rapidly-spinning top–seemingly stable, but if it hit too rough a patch, it went wildly out of control. The RE world, conversely, is less-lucrative during growth periods, but weathers downturns so well that most folks don’t even notice when “recessions” hit.

Proponents of NGCC dismissed RE as unable to compete with the 20th century way of making money, and that appeared to be correct up until the Great Retreat of 2017 hit, the downturn that made the 2008-2010 recession pale in comparison. Ironically, most folks figure that it was because we didn’t fix the problems in the first real 21st century recession, just offered bailouts and slaps on the wrist, that we got hit by the Great Retreat a decade later.

Three key characteristics of Resilience Economics shape the way we live:

  • Polyculture markets means that no one economic (or financial) institution ever gets “too big to fail,” or so big that it distorts markets the way WalMart used to. This was probably the most politically controversial set of rule changes, but the least visible for most everyday people.
  • Transactional Transparency upset some politicians and executives, too, but really worked to smooth out markets. All along, economists said that capitalism depends on transparent markets, where buyers and sellers know all the relevant details, but that was always the one aspect of capitalism that most “capitalists” ignored.
  • Collaborative Flexibility, aka the “Lego Economy.” The result of the previous two characteristics, really. Lots of small companies, individual entrepreneurs, even part-time workers able to come together as necessary for big projects.

Is it perfect? No. It’s noticeably less efficient than the 20th century model, and a lot of older folks say that they don’t feel as “rich” as they did a few decades ago, but it’s hard to say how much of that is from RE, and how much is just that we’re all trying to deal with adapting to a global environmental crisis.

Big Back Loop, Scenarios

Scenario: Resilience Economics

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Futurist Jamais Cascio presents a scenario set twenty years in the future where the world post-capitalism is based on resilience economics. He writes from the point of view of someone living in that future on his blog Open the Future:

The trigger was a phrase we’d all become sick of: “Too Big to Fail.” The phrase had moved quickly from sarcasm to cliché, but ended up as the pole star for what to avoid. Any economy that enabled the creation of institutions that were too big to fail — that is, whose failure would threaten to collapse the system — could never be thought of as resilient. And, as the early 21st century rolled along, resilience is what mattered, in our environment, in our societies, and increasingly in our economics.

Traditional capitalism was, arguably, driven by the desire to increase wealth, even at the expense of other values. Traditional socialism, conversely, theoretically wanted to increase equality, even if that meant less wealth. But both 19th/20th century economic models had insufficient focus on increasing resilience, and would often actively undermine it. The economic rules we started to assemble in the early 2010s seek to change that.

Resilience economics continues to uphold the elements of previous economic models that offer continued value: freedom and openness from capitalism at its best; equality and a safety net from socialism’s intent. But it’s not just another form of “mixed economy” or “social democracy.” The focus is on something entirely new: decentralized diversity as a way of managing the unexpected.

Decentralized diversity (what we sometimes call the “polyculture” model) means setting the rules so that no one institution or approach to solving a problem/meeting a need ever becomes overwhelmingly dominant. This comes at a cost to efficiency, but efficiency only works when there are no bumps in the road. Redundancy works out better in times of chaos and uncertainty — backups and alternatives and slack in the system able to counter momentary failures.

It generates less wealth than traditional capitalism would, at least when it was working well, but is far less prone to wild swings, and has an inherent safety net (what designers call “graceful failure”) to cushion downturns.

Completely transactional transparency also helps, giving us a better chance to avoid surprises and to spot problems before they get too big. The open-source folks called this the “many eyes” effect, and they were definitely on to something. It’s much harder to game the system when everyone can see what you’re doing.

Flexibility and collaboration have long been recognized as fundamental to resilient systems, and that’s certainly true here. One headline on a news site referred to it as the “LEGO economy,” and that was pretty spot-on. Lots of little pieces able to combine and recombine; not everything fits together perfectly, but surprising combinations often have the most creative result.

Lastly, the resilience economy has adopted a much more active approach to looking ahead. Not predicting, not even planning — no “five year plans” here. It’s usually referred to as “scanning,” and the focus is less on visions of the future than on early identification of emerging uncertainties. Resilience economists are today’s foresight specialists.

What does this all look like for everyday people? For most of us, it’s actually not far off from how we lived a generation ago. We still shop for goods, although the brands are more numerous and there are far fewer “big players” — and those that emerge tend not to last long. People still go to work, although more and more of us engage in micro-production of goods and intellectual content. And people still lose their jobs and suffer personal economic problems… but, again, there’s far less risk of economic catastrophe, and some societies are even starting to experiment with a “guaranteed basic income” system.

Is it perfect? By no means. We’re still finding ways in which resilience economics isn’t working out as well as past approaches, and situations where a polyculture model doesn’t provide the kinds of results that the old oligarchic/monopoly capitalist model could. But those of us who remember the dark days of the econopalypse know where non-resilient models can lead, and would rather fix what we’ve made than go back to the past.

Okay, I’ll be the first to admit that this isn’t as complete a picture as we’d like, but the core idea — that resilience becomes the driver of new economics — strikes me as very plausible. It’s a pretty technologically conservative scenario; no AI-managed “just-in-time socialism” here, nor any nano-cornucopian visions. But it’s very much the kind of model we could create in the aftermath of a disastrous economic crisis, in a world where the importance of resilience is becoming increasingly evident.

Regime Shifts

Paul Krugman on Resilience Economics

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On Paul Krugman’s Blog he presents a graphical model of the current financial crisis in the US that implicitly discusses how the system lost resilience. He identifies leveraged investments as a slow variable which can lead to the creation of alternative regimes, the possibility for a shock to flip the system from one regime to another, and now possibly a new regime.

Krugman RS

The other day I realized how much the Fed’s attempts to resolve the financial mess resemble sterilized foreign exchange intervention. That set me thinking about other parallels — and I realized how much the stories now being told about “systemic margin calls” and all that resemble the stories we all tried to tell about the Asian financial crisis of 1997-98. Leverage, balance sheet effects, self-reinforcing financial collapse — the details are different, but there are some clear common themes.

…Think of the demand for “securities” — lumping together all the stuff that’s in trouble, from subprime to Alt-A to corporate bonds, as if it were all the same. Ordinarily we’d think of a downward sloping demand curve. At a given point in time, there’s a fixed supply of these securities that has to be held by someone [Normal Situation]

But in the current situation, a lot of securities are held by market players who have leveraged themselves up. When prices fall beyond a certain point, they get calls from Mr. Margin, and have to sell off some of their holdings to meet those calls. The result can be a stretch of the demand curve that’s sloped the “wrong way”: falling prices actually reduce demand.

In this case, there are two equilibria, H and L. (there’s one in the middle, but it’s unstable) And this introduces the possibility of self-fulfilling panic: if something spooks the market, you can get a “systemic margin call” that causes the whole financial market to go to L, and causes a big, unnecessary price decline. [Highly leveraged investment]

Implicitly, Fed policy seems to be based on the view that if only they can restore confidence — with extra liquidity to the banks, Fed fund rate cuts, whatever — they can get us out of L and back to H. That’s the LTCM model: Rubin and Greenspan met a crisis with a rate cut and a show of confidence, and the whole thing went away.

But at this point a series of rate cuts and other stuff just hasn’t done the trick — which suggests that maybe there isn’t a high-price equilibrium out there at all. Maybe the underlying losses in housing and elsewhere are sufficiently large that the situation really looks like this [current situation?]

And in that case, the Fed can’t rescue the financial markets. All it — and the feds in general — can do is to try to limit the effects of financial crisis on the rest of the economy.

Ecosystem services, General

Coral Reef Futures and Resilience Economics

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At Crooked Timber, Australian economist John Quiggin reflects on the recent Coral Reef Futures Forum, which was recently organized by Resilience Alliance member Terry Hughes group at the ARC Centre of Excellence for Coral Reefs Studies in Australia. The forum aimed to discus how global changes such as fishing, climate change, and ocean acidification are threatening coral reefs. John Quiggin writes:

I spent the last couple of days in Canberra at the Coral Reef Futures Forum, as part of my new Federation Fellowship is to look at economic approaches to management of the Great Barrier Reef. As one of the speakers said, a lot of the talks had people staring at their shoes in gloom, though the tone got a little more positive towards the end. …

The most hopeful view is that, if we can fix the local threats like overfishing and poor water quality, the resulting increase in resilience (part of my project is to develop a more rigorous understanding of this popular buzzword) will offset moderate global warming, so that if we can stabilise the climate (an increase of no more than 2 degrees) we might save at least some reef systems.

It will be interesting to see what type of resilience economics John Quiggin develops. Several other economists have been working on the economics of resilience, such as Wisconsin econmist Buz Brock, Charles Perrings at Arizona State U, as well as Anne Sophie Crepin and others at the Beijer Institute, but the there is a lot that needs to be done to create a broadly useful resilience economics.