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Systems Success, Failure & Rebirth

Fall 2012 Features

Systems Success, Failure & Rebirth

Le Québec et la Constitution «stratégique» du CanadaHow the current global crisis may trigger a fundamental transformation of the world’s systems

When the world slumped into depression in 1929, it took a long time for the right diagnosis to be made, let alone the right prescription for recovery. Only after the passage of another 15 years and a devastating world war were the right moves made to prepare for prosperity across most of the developed world. (Only a handful of countries, including New Zealand and Sweden, and to a lesser extent the US, got there faster.) Sixty years before the Great Depression, the slump was equally protracted. The Long Depression, which began in 1873 and ran until the end of the 1870s, prompted radical shifts in public policy, including state-led industrialization and the birth of the modern welfare state. Similar leaps forward – in science, industrial production and government organization – were forced by the great wars of the last century. In all cases, the depth of the crisis prompted a step change in what we would today call ‘collective intelligence’ – that is, the ability of systems to generate knowledge and coordinate complex activities. In each case, too, politics changed, finding new ways to bring more of the public into governance, whether in national politics or in the workplace. Bref, the disruptions and dislocations caused by economic crises and military conflict opened up space for radically new ideas that would have been resisted for much longer in more stable times.

Of course, in the throes of crisis, most of the people at the top could only see the chaos, not the order that was coming. New ideas were not strong enough to displace old ones. Nearly half a decade into the current crisis, this pattern is being repeated. From close up, all that is visible are leaders struggling to restore what they had before, in an endless circuit of summits, task forces and emergency stimulus packages. For them, this is at best a barren crisis, where the most that can be hoped for is a return to the status quo ante. Indeed, most interpret their mandate as involving recovery and the restoration of growth, but not radical transformation.

Seen in the long view, however, there are signs that we are on the cusp of another jump forward in collective intelligence. A financial system that had lost sight of its role as a servant of the real economy is not the only system in need of drastic change. The systems that provide us with energy, health, social care, transport, food and knowledge are also being remade in ways as radical as those of 70 years ago. (The word ‘system’ is often overused: we use it here to refer to the complex, interconnected arrangements of multiple institutions, roles, technologies and flows that now provide us with many of the essentials of daily life.) Each of these systems is, at present, visibly broken: energy systems designed to produce and distribute energy, but not to use it well; a food system that generates worsening obesity; a health system dominated by hospitals ill-suited to populations suffering from long-term conditions, including mental illness; social care systems wholly unprepared for rapid ageing; and, among others, economic systems that still suffer profound imbalances of unused resources and unmet needs. In each case, these systems that now look broken are as much victims of success as anything else. As so often, success repeated itself until it finally became failure, which is why those at the heart of each of these systems are often the last to understand how they need to change.

How should we understand the present crisis and its longer-term aftermath? Many of the causes of the crisis were distinct: the subprime problems, the deep imbalances, the inflated risks and rewards of finance. Still, in many ways, these causes echo those of previous economic crises, which began with overreach, as greed fuelled price bubbles – in land, housing or stocks – and in some instances outright fraud. Each time, overreach culminated in a crash (1873, 1929 and 2008) and a juddering series of financial crises, which in turn spilled over into broader economic stagnation. Economic crisis would lead to fiscal crisis, as rising demands on government coincided with shrinking revenues. Only then, after everything else – usually including protectionism – had been tried, did populations and governments turn to genuinely new solutions in order to reconstitute their institutions in ways that allowed for a return to growth.

On this logic, we are still in the early stages of the crisis. To be sure, the debates in most of the West are strikingly unimaginative – a battle between traditional austerity and traditional stimulus. The most creative ideas – from peer-to-peer finance and collaborative consumption to web activism and urban agriculture – seem to be distant from the decision-makers, and largely ignored in the mainstream media.

How will we work our way out? Three big shifts may well define the coming few years: shifts in how we handle predation; shifts in how we organize creativity; and, finally, changes to the very systems on which our lives depend.

The first key shift requires us to rein in the predatory side of capitalism, and to put right the distortions that led to vastly inflated rewards for finance, bubbles in property, sharply widening inequality and chronic waste. We know that predation is endemic to human societies, and that much of human history consists of attempts to protect us from predators – including those who claim to be working in our interests. All progress in global affairs has involved raising the costs of predation – for rising imperial powers, for rogue states, or even for states with a predilection for bombing their own citizens. And a good deal of progress in economic affairs has involved restraining the predation that is common in market economies, from monopolists overcharging, to traders colluding and lobbyists seeking special privileges, to employers exploiting employees. Indeed, whole sectors can at times become predators: finance in the 2000s, for instance, sucked value out of the rest of the economy on a phenomenal scale, exploiting asymmetries of information and favourable regulations that gave financial institutions rewards for risk, while protecting them from the costs.

Some of this predation is highly visible. We naturally resent predators, and are well-attuned to spotting predation, which is why greedy bankers and corrupt politicians elicit such contempt. When not very smart investors become immensely rich, the public can sense that something is not quite right. Some 80 years ago, the very visible predation of what Roosevelt called “economic royalists” coloured contemporary American politics. Yet in today’s complex, interconnected economies, predation is often invisible, hidden in complex financial tools that are scarcely understood even by the firms selling them, with no contact or line of sight between predator and prey.

Complex systems allow for new connections between different types of predation. For example, financial predation worsens ecological predation by demanding larger, shorter-term returns that incentivize the running down of natural assets. (Progress toward better accounting measures, regulations and taxes that properly reflect natural capital or ecological services in market prices has been painfully slow.) Financial predation also creates a tiny class of super-rich people with tendencies to exceptional waste in consumption, from the billionaire owners of a dozen homes – most of which are scarcely used – to the moderately wealthy buyers of clothes that are worn only once.

Capitalism was born out of puritanical distaste for the waste and profligacy of monarchy and feudalism. But it has now more than matched the system that it displaced. As a result, all solutions to the present crisis must rein in this destructive predation: returning finance to a service industry; reflecting the costs of externalities in market prices; and discouraging the more wasteful forms of consumption – not least by shifting taxation away from labour and toward land and property.

If predation is the dark, zero-sum side of the modern, interconnected economy, where gains for some mean losses for others, then the flip side is the positive-sum world of networks and creative ideas, where gains for some spill over for others. Each mobile phone user, for instance, creates new value for existing ones. Each new piece of knowledge increases the wealth of everyone who might use it. Technologies like the computer have given great wealth to, say, Bill Gates and Michael Dell, but even more to everyone else. Luckily, we live in an era in which this sort of positive value is exploding. Many nations worldwide are driving up investment in R&D: at the National Endowment for Science, Technology and the Arts, we estimate a four- to five-fold global rise in R&D investment by 2050 – largely thanks to Brazil, India and China – alongside a proliferation of new tools for open innovation, crowd-sourcing and collective intelligence that will mobilize millions of minds to solve problems.

Many of the tools of late 20th century innovation policy have faltered. These failed policies included overemphasis on a linear flow of intellectual property out of universities, cookie-cutter science parks, and public subsidies for venture capital. But the bigger picture is one in which innovation policy is becoming more central, more sophisticated and better funded. From school systems to everyday life, we are seeing intense specialization by technologists working in large teams on new materials and genomics, fast-moving creative industries like fashion and music, and new tools for mobilizing mass creativity.

The third area of change will come in how we organize the systems on which everyday life depends. Past great crises prompted dramatic shifts in how systems are organized – including the spread of telegraph, rail and electricity, as well as pension systems and unemployment insurance. The Great Depression paved the way for the mass adoption of cars and consumer goods, as well as welfare states, the UN and macroeconomic management. Now, once again, many of the basic systems that surround us and sustain life look antiquated and ill-suited to the times. We have already noted the problems of health systems dominated by ever-more expensive hospitals that cure rather than promote prevention and healthy living. Huge investments in pharmaceuticals and medical procedures have brought diminishing returns, and are not matched by investments in behavioural change or environmental improvement – despite the evidence that these are likely to do more to cut mortality. Pensions and social care systems have barely begun to adapt to older populations suffering from diabetes or cardiac disease – ailments that require patients to play a much larger role in managing their own health. Our energy systems pump out energy, but do little to economize or reduce: smart meters, grids and renewables are all still marginal, and most of the industry is incentivized by volumes sold, rather than by how much these volumes contribute to warmth or mobility. Transport systems are dominated by cars with technologies not so different from a century ago. Even today’s systems of democracy, still largely stuck in the 19th century world of parliaments, parties and occasional elections, look outmoded, insufficiently flexible and responsive for the times, and poor at generating legitimacy for difficult decisions. And yet, as before, jumps forward in how we organize the big systems of daily life usually involve innovations in political life, enabling more and more people to take part in public debate and decision-making.

In the short-run, systems change will appear exceedingly difficult against a backdrop of slow growth and fiscal squeeze. However, history suggests that, in each crisis, a tipping point will be reached – a point at which the costs and inefficiencies of inherited systems become inescapable, and new ideas take advantage of the bankruptcy of the old. Finance is a good case in point. While huge efforts have gone into reviving the existing financial system – from quantitative easing to emergency loans and bailouts – some of the brightest younger shapers of the field are imagining what might come next, including far greater standardization of financial languages and risk assessment (by analogy with the ways in which standardized barcodes transformed trade in goods, and standardization of URLs and IP addresses made the Internet possible). There is also growing interest in how new tools like crowd-funding or peer-to-peer finance might render the costly bureaucracies of big banks obsolete. For now, of course, the new is too weak to replace the old. Still, it may be a matter of when, and not whether, this happens.

Or take food. The world’s food system has become remarkably efficient at production. Nevertheless, with forecasts that obesity will soon account for a majority of the population in some Western countries – with disastrous consequences for health – success has, once again, repeated itself until it has become failure. Radically new ways of thinking about consumption and production are therefore taking shape in everything from the industry of health-enhanced foods to urban agriculture and organics. Of course, the new is still too weak to displace the old. But the pace of change seems to have accelerated through the current crisis, and the more far-sighted thinkers within the food industry now realize that many of their erstwhile assumptions about global food will soon become outmoded.

There is a common element to all of these examples of potential systems change – to wit, the deepening and growth of the digital world that mirrors the everyday economy. The visible side of the digital economy can be seen in iPads and smartphones, YouTube, Google and Facebook. However, the invisible side of this economy may be even more important, as transactions data, analytics and ‘big data’ of all kinds become larger in value, and more influential in reshaping the day-to-day practice of businesses and other organizations. Healthcare is already being transformed by far more feedback, including everything from real-time feedback on blood pressure to data on mortality rates and qualitative reports of patient experience. This is changing the lives of clinicians: UK heart surgeons, for instance, have had their survival rates published for several years now, with dramatic effects on performance. This may have even more impact on patients who benefit not just from devices to monitor their conditions, but also from linking up with other patients with similar conditions. In short, government is being transformed and shaken up by transparency around data. Everyday life is becoming more quantified, more reflexive and more self-aware. Once again, we may see a step change in the mobilization of collective intelligence.

Another sign of the coming change is the rising visibility of social innovation, which links together the desire to constrain predatory behaviour, the interest in social creativity, and the need to transform systems. In the last quarter of the 20th century, innovation meant ‘stuff’ – that is, hardware and technology. Governments consequently competed to bump up their spending on R&D, with a few like Israel and Finland going well above three percent of GDP. Having said this, in all of the most important systems, it has become apparent that technological innovation alone is not enough. Technical fixes for climate change are simply not sufficiently powerful unless matched by behavioural change. Likewise in the health field, smart drugs and treatments are often both too costly and insufficiently effective to tackle the big health challenges like dementia, obesity or diabetes – challenges that now account for the majority of health spending in developed countries. In time, we will undoubtedly see extraordinary new treatments resulting from the interaction of genomics, bioengineering, neuroscience and the other life sciences. In the meantime, however, new models of innovation are taking shape, linking behaviour and psychology, social change, as well as technology and economics. The embryos of new institutions are taking shape across the world – centres for social innovation, labs, incubators and funds that will, in the next few decades, become as visible as the scientific laboratories at the turn of the 19th and 20th centuries. Much of this is being led from the South – particularly from India and Brazil, where radical traditions of innovation in civil society are coming together with the rapid diffusion of new technologies, unencumbered by the vested interests that often block change in the North. A good example of this is the way in which East Africa has pioneered new uses of the mobile phone for banking and healthcare, developing more efficient methods for distributing money and information that would surely be blocked by regulators in the North.

If social innovation is bringing with it far more multipolar global patterns – that is, with many more places becoming sources of influential ideas – then what of the bigger picture of how the long crisis will play out in geopolitics? Past crises often left the tectonic plates irreversibly shifted. WW1 destroyed the big empires. The Great Depression ultimately consolidated the US’s economic dominance. At first glance, the current crisis should consolidate the shift in power to China and India, revive Africa, and strengthen major roles for Russia and Brazil. But linear forecasts may mislead. Past forecasts of the supremacy of the USSR and the transformation of Japan into a superpower are warnings of how apparently obvious linear trends may prove misleading. Europe is in a funk of declinism at the moment, and may well be consigned to a much more marginal role by mid-century. Of course, extreme declinism has in the past crystallized at the very moment when the trends were about to bend: consider France in the 1940s, the UK in the 1970s or the US in the late 1980s, each of which convinced itself that it was in irreversible decline, when in fact it was on the brink of decades of unprecedented growth and prosperity.

Moreover, it remains unclear which types of society will deal with a new era of systems change most effectively. We might expect fast-growing developing countries that can jump to entirely new systems to benefit most from new opportunities – perhaps using fuel cell-based smart grids, pension models that reward much later retirement, or healthcare based on co-production and more structured partnerships between clinicians and patients. But the old countries have adapted before. And they may yet surprise and turn out to have untapped reserves of adaptable intelligence. That is the fascinating thing about crises: they throw the pieces up in the air. No one can be quite sure where they will land.


Geoff Mulgan is Chief Executive of the National Endowment for Science, Technology and the Arts, former head of the UK government’s strategy unit, and former head of the Prime Minister’s policy unit. His upcoming book is The Locust and the Bee.

(Illustration: Harry Campbell)

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