Economist Systemic Idiots

What exactly is a system? A system is a group of interacting, interrelated, and interdependent components that form a complex and unified whole. This definition applies to all economic systems.

The performance of the system depends on how well the parts fit together, not how well they perform individually and the ‘whole’ system exhibits emergent properties that are not to be found in its parts. The whole of the German economic system is quite different to Italy ‘whole’ system’. This applies to a football team, automobile company ect..

In certain cases adaptation effort (things that are done) generates more system damage or triggers serious side effects impacting system performance; typical example Italy fiscal compact constraints not only reduced output, it increased un-employment and public debt. Why is that?

Reality governors fail to effectively govern the system, fail to avoid serious emergence (consequences) that have serious negative impact on the system, fail to do the right things. Economist believe that the cure applies to any conditions; they might understand the meaning of resilience but fail to understand critical aspects such resilience basin of attraction, resilience regime and trajectory within resilience basin of attraction not fully understanding ‘of what to what’.

The Conant-Ashby Theorem, which states that “every good regulator of a system must be a model of that system”.  Or in everyday language, to control a system you have to have a model of how it works. This definition is also fundamental to effectively govern the system, deal with complexity and variety whereby failure leads to economic decline and rise of populist politics.

Economist can be defined as an individual that study, develop, and apply theories and concepts from economics and write about economic policy. Within this field there are many sub-fields, ranging from the broad philosophical theories to the focused study of minutiae within specific markets, macroeconomic analysis, microeconomics analysis or financial statement analysis, involving analytical methods.

Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.
John Maynard Keynes

Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. It can be measured in nominal or real terms, the latter of which is adjusted for inflation.  A country’s economic growth is usually indicated by an increase in that country’s gross domestic product, or GDP. Generally speaking, gross domestic product is an economic model that reflects the value of a country’s output. In other words, a country’s GDP is the total monetary value of the goods and services produced by that country over a specific period of time.

The EU is excellent framework regarding economic governance considering that economies cannot use currency to exploit or cover-up systemic issue. Why is the German economy so successful while Italy underperforming?

One the key factors impacting economic growth are the efficacies of the Keynesian multiplier. Government investment—things like infrastructure building—results in higher multipliers. Economists at the IMF have calculated the long-run multiplier at 1.5 for developed countries and 1.6 for developing countries. In other words, developing countries really benefit from government investment over government consumption. Investment can build the productive capacity of the economy, resulting in beneficial long-term effects.

Where economist fail dismally is to understand systemic behavior from a sustainability and viability perspective resulting in economic policies (adaptation-doing the right things) that fail to achieve desired benefits. Most of economic policies emanating from leading economist have outcomes that can be clearly associated to one or more categories within Senge’s 11 Laws of Systems whereby indented benefits are not achieved or creating serious side effects.

Further critical evidence of economic policy failure is the current growth trap currently experienced within EU countries even though there is high level of money supply, close to zero interest rates.  Many economist identify the EURO being the principal cause, the deficit constraint and Euro exchange rate rather than systemic efficacy.

Majority of economist and political leaders fail dismally to understand systemic behavior and the efficacy of governance to effectively manage macro and micro economic policies: the required management approach that are able to leverage potential, ensure effective management and manage resilience.

Economist understand that what is needed to win in motor racing but do not understand how to make the parts work effectively (optimum) in relation to different elements (sub-systems) of the system to obtain the optimum performance of the whole.

Some consideration within the EU:

  • Greece continuous economic decline considering significant financial aid 
  • Italy economic stagnation and high unemployment

Most economist and political leaders indicate that the solution to both Greece and Italy problem would be to:

  • Deficit spending: ignore austerity measure currently set at 3% and embark on massive government spending
  • Leave the EURO (favored by majority of Italy political parties): allow devaluation and manage control on monetary policies.

For both countries the above options would be disastrous in that systemic weakness still prevail. Any additional government spending will increase government debt with marginal economic growth. Both have very low resilience thresholds.

The systemic weakness can be considered to be as follows:

  • Bad governance: high taxation is needed to sustain government investments that are prone to corruption and high running costs. Most government investment require further funding for completion due too poor management. In certain cases investments are abandoned such as new hospital; further cases of bad management where completed infrastructure need rework due to poor materials and bad construction practices caused by poor or lack of checks by government officials. High taxation is also needed to sustain government employee poor efficiency, high delinquency and massive absenteeism. In Italy alone excluding holidays, government workers obtain an average 19 additional days. The justice system alone workers have 45 paid holidays plus 19 additional days implies that generally only work 9 months of the year.
  • High level of corruption, fraud and tax evasion are a further cause serious systemic problems. In Italy Tax evasion 2015 worth around 180 billion Euro. With respect to corruption, rated the worst in the EU valued at 60 billion and represent  50% of the EU. The key factor for this high level of corruption is that from justice system perspective crime does pay. The justice  system has failed dismally to convict criminals related to corruption and fraud: poor efficacy of the justice department including high potential  for corruption, minor jail terms (over 70 years old now jail term) and zero success in recovery helped by ‘prestanome’ normally a lawyer that provides fictitious names to hide assets. Statute of limitation on criminal and fraud cases is the norm rather than exception. There is no interest in understating reasons for high level of criminal cases reaching  statute of limitation. Basically corruption and tax evasion represent  close to 15% gdp.
  • Wrong initiatives such as investment in infrastructure that are not need (Greece Olympics or defense spending on German tanks and submarines) and in Italy freeways that are not needed. This occurs due to lobbying, conflict of interest, lack of transparency and corruption influencing investment projects
  • In Italy state provided 12 billion Euro incentives to employ workers in order to reduce the high level of unemployment. This spending has resulted in marginal increase in new employment but at the end of incentive period new employment basically dried up. In reality a 12 billion tax reduction would have caused permanent benefit influencing consumption spending in turn increasing employment.
  • Within Italian banking system there are 380 billion irrecoverable bad debts within banking system. Government has failed to address and intervene: it has preferred to help Spain’s banks rather than clean up its own. In some cases individual banks have close to 6 times EU average. Banks have close relationship with political parties whereby conflict of interest and lack of transparency has resulted organized fraud between banks, politicians and individuals.

To overcome the serious situation to the above can be found within Management Cybernetics.

Management cybernetics is the application of cybernetics to management and organizations. “Management cybernetics” was first introduced by Stafford Beer in the late 1950s. Beer developed the theory with respect to system viability using the Viable System Model framework.

Viable means capable of independent existence and implies both maintaining internal stability and adaptation to a changing environment. “Internal stability” and “adaptation” can be in conflict, particularly if the relevant environment is changing rapidly, so the viable system model (VSM) is about maintaining a balance between the two such that the system is able to survive.

Key consideration from a Cybernetics perspective:

  • Organization and control: setting goals, accountability. Ensure efficacy in normative, strategic and operation management in order to strive for continuous viability
  • Ensuring transparency and cohesion among productive units
  • Maximizing potential / potentiality
  • Adaptation: doing the rights things
  • Ensure systemic robustness: effective with resilience management
  • Adequacy with respect to complexity management. Ensure adequate variety attenuators and amplifiers to deal with complexity facing state and its operating units.

Reality: once there is effective systemic efficacy via Cybernetics Management economic micro and macro policies do create desired leverage with long-term benefits.

Further reading:

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systemic2016

IT Transformation consultant specifically within SAP space with strong interest in System Thinking and Cybernetics Management.

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