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                                                                              RADIO 4
CURRENT AFFAIRS     



ANALYSIS  
COGS AND MONSTERS

TRANSCRIPT OF A RECORDED DOCUMENTARY

Presenter: Diane Coyle
Producer:  Michael Blastland
Editor:  Nicola Meyrick


BBC 
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020 8752 6252





Broadcast Date:  09.080.01
Repeat Date:  12.08.01
Tape Number: TLN130/01VT1032
Duration:  27'34"




Taking part in order of appearance:


John Gaddis
Professor of History, Oxford University

Eve Mitleton-Kelly
Director of the Complexity and Organisational Learning Research 
Centre at the London School of Economics

Brian Arthur
American complexity theorist 

Alan Kirman
Professor of Economics, Universite d'Aix-Marseille 

Richard Freeman
Professor of Economics at Harvard and the LSE

Lawrence Summers
Former United States Treasury Secretary




COYLE			A car cuts you up at the lights. You're cursing the boy 
racer driving it as you hit the number 23 bus, which swerved to avoid a poodle. When 
you do reach the car park, it's full, you miss the train, arrive irritable and late for a 
critical meeting. Since you happen to be Foreign Secretary, the result is a 
catastrophic breakdown in international relations and World War Three. Don't you 
just hate it when one darn thing leads to another?

The little complications of life, and their utterly unexpected consequences, are 
absolutely everywhere. Which makes it all the more astonishing, when trying to 
understand the way the world works, that complexity is something theorists usually 
ignore.

GADDIS			Think about the M40, think about driving from Oxford to 
London.

COYLE			John Gaddis is a professor of history at Oxford.

GADDIS			In an ideal world this should be a predictable process and 
you should be able to specify if you drive at 70 miles an hour you will arrive at a 
certain time if you drive at a 100 miles an hour, you will arrive at a faster period of 
time.  But of course that's theory and the real world is the world that we all know of 
the M40 - the world of complex causation.

COYLE			In the real world we're all too familiar with the way road-
works, stray cones, accidents, or even a shower of rain can clog up a congested 
route, turning the journey into a nightmare crawl instead of a 70 mile an hour breeze.

John Gaddis has obviously got bitter experience of the M40. An American expert on 
the Cold War, he's become convinced that messy reality often intrudes into what's 
presented as a straightforward calculation in all sorts of subjects.

GADDIS			The difference between simple and complex causation, I 
think, can be well expressed for anybody who's ever taken physics classes and been 
told to do experiments which would illustrate Newton's laws of motion or Gallileo's 
principles on gravity. You're suppose to visualise perfectly smooth ball bearings 
rolling down perfectly smooth inclined planes, told that feathers and stones, if you 
drop them, will arrive on the floor at the same time.  But, of course, the inclined 
planes are never that smooth  - the feathers and the stones don't actually drop at the 
same rate.  And we were all told in freshman physics not to worry about this, just try 
to understand the fundamental principles involved, smooth out the data if it looks a 
little messy.  But, of course, what we were being told to do was to reject what our 
own eyes and ears and senses were telling us about the real world, and we were 
doing it in the interest of, sure, illustrating a valid scientific principle. But again there's 
a gap between that valid scientific principle and the way the real world works.	

COYLE			If the theories are inadequate then maybe the decisions 
based on them are wrong. This matters, for governments, corporations and others 
who use theories or models to describe and understand us - their citizens, 
employees and consumers - and the world. 

The chasm between textbooks and real life isn't just because we still lack powerful 
enough computers to solve all those familiar complications, to predict exactly when 
the feather will land. It's also because people are free to choose unpredictably. 

Eve Mitleton-Kelly is director of the Complexity and Organisational Learning 
Research Centre at the London School of Economics. She works with big companies 
to tell them that in practice, although not in theory, everything depends on everything 
else. 

KELLY			If I take a decision or an action and you respond to it, you 
have a choice.  You are never limited to simply respond in one particular way and 
even if that choice were limited to only two and then I respond to that decision or 
action or statement that you make, I also have a choice.  So you can see very 
quickly how those choices of interaction actually create complexity.  So complexity 
actually arises from interaction.

COYLE			The simple truth is that almost everything we do involves 
reacting to other people; but that makes our actions impossibly hard to predict. For 
instance, think, as the American complexity theorist Brian Arthur does, about 
choosing which bar to go to for a good night out. 

ARTHUR			There's a bar called El Farol in Sante Fe and a lot of us 
used to go there on a Wednesday night to hear Irish music.  Let's say a hundred 
people are thinking of going to the bar and they don't have cell phones and they're 
not communicating and if a lot of people go to this bar, say more than sixty, it gets 
terribly crowded and I simply don't want to show up and everybody else feels the 
same way.  So think of the problem then of trying to forecast.  If I think that, say, 
about eighty people are going to go next Wednesday, I won't go and if everybody 
else thinks, say, around eighty people are going to go, they won't go - therefore 
nobody will go, therefore that forecast certainly won't be true.  So there's no way of 
everybody trying to figure out what everybody is trying to figure out what everybody's 
trying to figure out.  And it gives you an example that's very indeterminate and quite 
strange and wonderful.  It's like what Yogi Berra said about Toots Shor's restaurant 
in New York in the 1930's - he say's, 'oh that place, it's so crowded nobody goes 
there'. 

COYLE			You have to laugh - it is absurd. No wonder it's so 
common to skate around this sort of difficulty. 

Brian Arthur, based at the Santa Fe Institute in New Mexico, is world-renowned for 
launching a fierce assault on the conventions of standard economics. He looks not 
only at which bars and restaurants become popular - but not too popular - but also at 
questions like how investors choose which shares to buy or sell, or how consumers 
settle on one type of product rather than another. 

Any theory has to ignore a lot of detail, or it isn't a theory at all. But  complexity's 
case is that much economics goes astray in a particularly pig-headed way by 
ignoring what matters most - everyday happenstance.

Alan Kirman is a dissident British economist, and a fan of complexity, based in 
Marseilles. 

KIRMAN			What will happen in the conventional approach is that all 
the information you need is in the price of some asset you want to look at.  So you 
simply have to look at that asset and decide how much you want to buy and you're 
not going to worry about what other people think about them.  Now, think of another 
view in which you're reflecting on the value of this asset and then you talk to your 
neighbour who has a different view of what's going to happen to it - so this influences 
you.  And then you see somebody else trading in it and you see that that person's 
buying and then you say to yourself well maybe the information I have is not so 
good, maybe I should follow what that person's doing and buy also.  So you start to 
drop the information you might have because you see the crowd moving in one way 
and that's the way you're going to win in markets - you're not going to win by hoping 
your own opinion about some asset is going to prevail - you're going to win if you get 
the way the market goes right.  So people are trying to guess the market and that 
very soon snowballs so that people are following each other, imitating each other, 
communicating with each other and they start to forget about the private information 
they have and just take the public information.  So information gets lost and people 
get onto a bandwagon.
 
COYLE			According to Brian Arthur the trouble with standard 
economics is that it treats life in all its richness like a machine.

ARTHUR			Standard economics was set up in the last hundred, two 
hundred years and is very much a product of an age that had steam machinery that 
thought in terms of linkages and pulleys and levers and things like this.  So the 
economy is seen as a well functioning machine where everything's ticking over 
smoothly and things are held in balance or equilibrium.  But it's a little bit like nailing 
a butterfly to a board or putting it in chloroform, nailing it to a board, and then asking 
how does its wings fly - very hard to see how an economy changes or evolves if it's 
supposed to be an equilibrium all the time.

KELLY			All you have to do is listen and hear how many machine 
metaphors we use in every day language and then you'll realise how imbued we are 
with the machine metaphor.

COYLE			Eve Mitleton-Kelly 

 KELLY			The very language brings in the idea that this organisation 
and the world around it will respond in the same way that a machine responds to a 
slight adjustment of the cogs or the wheels or whatever.
 
COYLE			Complexity thinking is trying to put life back into theory, 
revive the ghost in the machine. It's doing so by looking at the whole of the economy 
or society, all of the interactions between everybody. 

It's a hot new area for research, laying siege to conventional wisdom, posing a 
challenge both to free markets and to government attempts to control the economy. 

But there's a dilemma. Does trying to capture everything in all its glorious 
technicolour detail make it impossible to say anything for certain? Better that, argue 
complexity theorists, than saying something that captures next-to-nothing of the 
reality. Brian Arthur.  

ARTHUR			This is an inherently different way of looking at things.  
Whether I'm an entrepreneur in Silicon Valley or whether I'm in the stock market, 
basically I'm trying to foresee a future that is determined by not just what I foresee 
and therefore do, but what other people foresee and therefore do.  There's a kind of 
loop in complexity and if there's no way for me to know what other people are 
thinking or what other people are forecasting then the system for me and for 
everybody else is not determinate and some people find this a little bit shocking that 
fundamentally in economics there's an indeterminency.  We're all trying to forecast 
patterns that our forecasts create and if there's no way to co-ordinate or forecasts, 
we don't what those patterns will be.  So, if you like, complexity economics is trying 
to look at the formation of patterns and it gives you a very different way of looking at 
the economy.

COYLE			As the playwright Tom Stoppard once said, the numbers 
seem to eat themselves. If you're a professional producer of numbers, that's a 
headache. So how does economics plead to the charge of missing the point? 
Richard Freeman is Professor of Economics at Harvard and the LSE. 

FREEMAN			Conventional economics is largely based on the notion 
that everybody has full information, knows what they want to do and therefore 
behaves in a rational way.  The alternative view which clearly resonates with much of 
the world is no-one's quite sure how to produce products in the best way, no-one's 
quite sure what price to give to products.  There's an incredible amount of 
uncertainty there and a lot of what people are doing is making guesses and exploring 
what's the best choice.  The same thing is true of consumers.  Standard economics -
think of it as one mountain with a peak and everybody knows where the top of the 
mountain is - there's a nice path - there's signs leading off.  This other thing says 
'gee maybe you'll get on to this peak and you'll notice it's a false peak - there's really 
a higher one somewhere else'.  And so then it's much more of an exploration than it 
is of a final analysis.

COYLE		 	That makes the critique sound very reasonable.  People 
are saying economics over simplifies for the sake of finding a simple path up the 
mountain but actually if the real world isn't like that, it's not very helpful.

ARTHUR			Well economics can still be helpful because if all I tell you 
the world is complicated and economics is too simple to get to the truth, that's not 
going to help you either.  You know, economists are quite aware of the fact that they 
make great simplifications just as everybody else does in order to derive some, you 
know, general rules.  Let's say it was the newspaper: if you price it at £20, we know 
there's going to be zero demand for that newspaper.  If you price it at 1 pence, you 
know, people will up it like they would pick up the Metro for free.  So, the issue 
becomes in between where's the price. And certainly the economic laws of demand 
which says if you overprice your product - £10 - no-one will buy it - that's true.  So I 
wouldn't want to go down the route of saying, gee all of economics is so simple that it 
misses the truth of the world.  It captures a whole lot of the truth of the world it's just 
that when we get down to particular decisions you make every day or businesses 
make every day, there's this area of uncertainty and lack of knowledge.

COYLE			Richard Freeman argues that economics can draw very 
accurately the outlines of the picture but not the fine detail. Like having a good road 
atlas, indispensable for those long motorway journeys but not so much use for 
finding your way to number 33 Station Terrace.

This defence doesn't entirely convince the complexity theorists. Take share prices, 
for example. Standard economics says that e-commerce companies that won't make 
a profit aren't worth anything. It's a very definite prediction that was absolutely right 
… eventually, but fails to explain why, in real life, for a couple of years, investors 
went dot com crazy. Alan Kirman says examples like this mean complexity triumphs. 

KIRMAN			It's useful to simplify if you get the basic features right, I 
think, if you can winnow away all the features that are not really relevant and get 
down to the essentials.  Now the question is, is our model in some sense an 
idealised, a simple version of the way the world really works - and that's the 
question.  And my suggestion would be, and I'm not alone in that, would be that our 
basic model is not a description of how markets work in general or how the economy 
works in general.  And that's why whenever you open even an elementary 
economics text book, the authors are always looking around for examples of markets 
of the sort that are described - and there are very few.  I mean most markets do not 
work in the way in which we suggest they work.

COYLE			If this were only a theoretical dispute, over-simplification 
wouldn't do any harm. The trouble is that conventional economics forms the basis of 
forecasts used by policy-makers to set interest rates and taxes, or by businesses to 
work out how many employees they need. That's why John Gaddis believes we 
should worry about it.  

GADDIS			It matters because the social sciences are supposed to 
tell us what is going to happen in society.  They are predictive disciplines or at least 
they claim to be able to predict phenomena within society.  It seems to me that too 
often, far too often, they're wrong.  The gap between the predictions made and the 
actual reality can be quite astounding in some disciplines.  And I think this comes 
with the territory when one is trying to do prediction because the only way that one 
can do prediction of a complex reality is in fact to simplify it, to reduce it to one or two 
variables on an x,y axis, for example.  That's necessary in order to do prediction but 
that act of simplification in turn renders the prediction too often wrong.  So there 
really is kind of a catch 22 situation and what you have to do to try to predict at the 
same time puts you at odds with what's really happening in the world.

COYLE			If this is right then the standard prescription of lower 
interest rates to boost a flagging economy, so many percentage points working their 
way through the economic mechanisms to ensure a recovery in 12 months' time, is 
seriously misleading. The anxious policy-maker also needs to factor in business 
pessimism, fears about stock-market crashes overseas and even anti-capitalist riots, 
which may mean that a cut in interest rates feeds the general gloom, producing the 
opposite of what was intended - more pessimism, less spending and investment, and 
a deeper recession.   

This is all the more persuasive when conventional thinking finds it so hard to explain 
why the US economy is in a tail-spin right now or predict what will happen in the next 
six months. Will there be a recession or not? How many of us stand to lose our jobs? 
Will the cost of our mortgages go down or up? 

Nobody knows. And with good reason. Richard Freeman - a defender, remember, of 
the conventional approach.  

FREEMAN			Yeah well I think the biggest failure or the biggest - 
because it's such a hard problem - macroeconomics is extraordinarily hard.  We're 
studying how the overall economy operates with, you know, millions of consumers 
interacting with hundreds of thousands of firms over thousands of products. That's a 
very complicated problem.  Let's say  'well how much empirical observations do we 
have about this entire economy?'  Well, we may want to go back 10, 15 years or if 
the economy today is different then it was 15 years ago, we can't go back any further 
than that to analyse.  So there are very few observations.  That's also going to be 
hard for an alternative model also.

COYLE			But there is one difference which is alternatives like 
complexity theory say that we know that we can't make any useful predictions 
whereas if you're a policy economist you actually want to have some way of getting 
at useful predictions for policy purposes.

FREEMAN			I think if the people are starting off saying to you 'gee the 
world's too complicated because of complexity' and they can say nothing, then 
they've given up, I don't see any reason to study it, and I don't think that's right.  
Remember, it isn't that you can't predict things a little bit into the future.  You can 
take weather as the great example - and that's a complex system, weather is the 
ultimate, you know, complexity system but that doesn't mean you make no 
predictions. 

COYLE			But he in turn poses a challenge to complexity theorists: 
are they nothing more than whining critics, washing their hands of policy, or do they 
have anything constructive to say about the way the economy works?  

The question is all the more urgent because reality is pulling further away from 
standard theory. Less and less of the economy is machine-like and predictable, more 
and more like those ancient maps whose furthest reaches were labelled "Here be 
monsters". It could be a much more dangerous and unpredictable world. Seeing the 
way the economy is changing has persuaded many top policy makers to give 
complexity a hearing. 

Lawrence Summers was until this year the United States Treasury Secretary. He 
presided over the longest economic expansion in American history. And he says that 
because of complex effects it's easier than it has ever been for success to feed on 
success, and failure to breed failure.
 
SUMMERS			What's new about the new economy is that value resides 
much more in knowledge than it does in mass.  And the difference between mass 
and knowledge is that a mass- based good like a shoe has the feature that if I 
consume it that means you can't.  But a new good like an idea does not have that 
property, I can profit from listening to this radio show and so can you and that makes 
the economics of enlarging the market for a show like this particularly attractive and 
that's paradigmatic of all of these goods that are based on ideas.  It means they will 
… things will tend to run a long way on both the good and the bad side.  Expanding 
markets will create virtuous circles, contracting markets will create vicious cycles.

COYLE			So at the very least we ought to be braced for more 
instability with this extra scope for herd-like behaviour. Alan Kirman gives another 
example of the unpredictability of success or failure. 

KIRMAN			One of the reasons for thinking that that might be true is 
that it's much more difficult to put a valuation on a company which is, in a certain 
sense virtual.  Take telecoms, I mean, there's a classic example.  Nobody had any 
real notion of what the demand for the new types of portable telephones would be so 
these telecom companies spent huge amounts of money in auctions designed, of 
course, by colleagues of mine.  They probably hugely overspent.  So, once again, 
you know, lack of information, really almost pure uncertainty about the future plus the 
fact that people will start to form opinions and influence each other, can generate 
these sort of bubbles in markets.

COYLE			On top of the sheer uncertainty, new technologies can 
cement their own success in place once they get going. That's because most of the 
cost is in the development, so that the more they sell, the cheaper they can be to 
each consumer. The price charged to me depends on you. Lawrence Summers.

SUMMERS			A very important feature of today's economy is that more 
and more goods are characterised by high up front costs and then low costs of 
production at the margin.  Think about a new software programme, think about 
developing a new drug that's relatively easy to produce, think about books, think 
about almost any product that's based on information.  And in an economy of that 
kind you get the paradox that a larger market means a lower price which makes the 
market larger in turn and that's the sense in which the avalanche becomes the right 
kind of metaphor.

COYLE			So with many new goods like software or mobile phones, 
the more people buy them, the cheaper and more attractive they are for everybody 
else - so the more people buy them. There are many examples of these avalanches 
in high-technology markets, where a slight edge for one product rather than another 
can turn out to be decisively important, according to Brian Arthur.

ARTHUR			In the early 80s the operating system for personal 
computers was in contention.  Microsoft had MS DOS and Apple computer had the 
MAC or the Macintosh operating system.  And it seemed to me very strange, it 
seemed to me that the more people used DOS then the more likely it would be that 
good computer programmes, applications would be written in DOS, therefore the 
more people would use DOS.  So it seems that if you had a contest like that, highly 
likely advantage to one system would build up over another and would begin to lock 
that system in.

COYLE			Indeed, DOS was technically inferior so when it 
succeeded triumphantly it wasn't for any conventional reason. Brian Arthur paints a 
very different sort of picture of the economy, not a stable machine with mechanisms 
that regulate it to a steady temperature, but more like a coral reef where one 
technology grows around earlier encrustations. After all, laptop computers in the 
early 21st century still have keyboards with a century-old and completely illogical 
layout of keys in that familiar QWERTY pattern.

If the economy is not at all like a machine but more like a force of nature, it puts 
policy-makers in the same vulnerable position as any one of us, knowing that we 
only have an illusion of control over our lives. So if you're running the economy or for 
that matter a business without any working levers to pull or buttons to press, is there 
anything you can do? Just give up trying to run anything? Well, it's not such a daft 
idea, at least at the level of an individual organisation.  Eve Mitleton-Kelly gives an 
example of one that took complexity seriously, the Humberside Training and 
Enterprise Council.

KELLY			First of all they did become much more flexible.  In fact, 
people could come in any time that it suited them and they were trusted that the job 
that needed to be done was done.  There was an open door policy.  In fact, the 
managing director eventually didn't have an office.  Not only was his door open 
initially but towards the end it was, you know, wherever he happened to find himself.  
They had a coffee area where they found that an awful lot of self organisation was 
taking place.  The way of working changed, the whole atmosphere changed.  It did 
not suit everyone.  I mean I must emphasise that.  Some people left because they 
could not work with such degree of freedom and responsibility because you don't 
have the rules, you don't have the tight regulations, you don't have your manager 
one step above that is going to control you.

COYLE			If businesses are organising themselves around the 
coffee machine, though, the captains of industry, like the admirals of economic 
policy, are only kidding themselves that they're in charge. It's a mistake to think of a 
company as a supertanker, hard to steer or turn around but nevertheless responsive 
to skilful commands from the bridge. Think of it instead as a swarm of ants or herd of 
wildebeest.

Eve Mitleton-Kelly is working with several very big companies in finance, oil and 
telecoms to switch to a style of management better suited to self-organisation. For 
the top executives it must be rather like that moment parents experience when a 
more-or-less obedient child becomes a bolshie teenager. All of a sudden, you realise 
you can't expect to issue instructions and be obeyed. 

And if that's what it means for a company, what about Gordon Brown and the Bank 
of England? For starters, they could be more modest about what they can achieve. 

GADDIS			Maybe the answer to this lies in the world of sports.  If you 
think about playing games, you would just not go in cold without knowing anything 
about the game, without knowing anything about the rules and try to play it - you 
would not get very far.  The whole purpose of learning the rules, the whole purpose 
of training to play the game, being coached to play the game, is to be able to deal 
with an unpredictable situation which is the other team, which is the particular 
circumstances in which the game is played.  I think this transfers into the realm of 
policy in precisely this way: it seems to me the more training and experience and 
knowledge that a policy maker has of how some particular problem - the subject of 
policy - has evolved, the more likely the policy maker is going to be … to be able to 
deal with unpredictable situations.  It's not that the training tells you how to do it but 
the training does prepare you for it and then it's up to you to assess the situation, to 
assess the uncertainties.

COYLE			So the skill for policymakers is reacting to events they 
can't predict, not predicting and fixing. 

Echoes here of the free-market ideologue Friedrich Hayek. As long ago as 1960 he  
wrote: "What we must learn to understand is that human civilisation has a life of its 
own, that all our efforts to improve things must operate within a working whole which 
we cannot entirely control." 

He was saying sit back and don't interfere. Is complexity, then, an argument against 
government intervention in the economy? 

Perhaps. Except that complexity theory also casts doubt on the perfection of 
conventional free-market economics. It says markets don't always work well, the best 
products don't always triumph, nor do share prices reflect what the companies are 
worth. 

Complexity is upsetting the orderly world of economics, maybe politics is next. 
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