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Thursday, May 28, 2009

Is Enterprise Going Non-Linear?



I just finished reading an older but still well-written book on American technology and enterprise entitled (appropriately enough), A History of American Enterprise, by John M. Dobson. Dobson was a professor at Iowa State University and he wrote the book in 1988 as a text for undergrads. Dobson did a great job of summarizing how technology and enterprise worked hand-in-hand from colonial days up to his time. Now that twenty more years have elapsed, it is interesting to see how the next couple of unwritten chapters have played out: the Gulf War, the Booming 90's, the dot com crash, 9/11, the Iraq and Afghanistan Wars, and now the bursting of the housing bubble and the deepest recession since the Great Depression. Clearly, this has not been a very stable period.

In reading this history, I was struck by how much more volatile recent times seemed to have been. Boom and bust cycles have always been a part of our history, of course. So have crooks, moguls, builders, and innovators. No, what struck me was that sometime around the 1970's, the system seemed to have moved from being reasonably understandable to being very volatile, almost chaotic in the mathematical sense of the term. The U.S. was moving into a post-industrial economy that was based more on imported products. Finance and services were rising as a total share of employment. Globalization was driving more and more businesses to outsource jobs and functions. In many ways, all these things were linear extensions of what had come before. Companies have always sought lower labor costs and more technology to automate their operations. Something else seemed to be happening that was quite different from the past.

I believe that the U.S. economy went into a new period in history because of two related things that reached some sort of critical mass in the late 70's and early 80's. The first (and the main driver) was the advent of ubiquitous, high-speed computer information networks. These networks not only opened the door to new financial products and services but they also allowed clever traders to generate profits on momentary differences in security prices across markets (arbitrage) that could never have been realized by human traders. These profits brought about the second change. The seemingly unstoppable ability to make easy money in financial trades invited huge sums of money into the market. More and more people and institutions felt like they were being left behind by traditional investment plans and the uncertain future of Social Security. The massive amount of money that was then traded in increasingly complex and split-second automated transactions essentially took us into a world where no one clearly understood or had sufficient control of business cycles. Some of this is becoming visible only now as people try to untangle the web of securitized mortgages and credit default swaps and other even more complex vestiges of the current melt-down.

I realize that there were dozens of other things going on during that time; Reagan supply-side economics, de-regulation, the explosion of wireless technology and the World Wide Web to name just a few. Part of complex, non-linear systems is that small inputs can create large and unexpected outputs. But I do believe that the system somehow slipped beyond the immediate control of real, breathing people. The question is not whether we will return to the "good old days". We will never go back to pre-automation. We wouldn't want to if we could. The question is whether future systems can be built with enough intelligence to limit the damage that can occur when huge sums are traded across the globe in microseconds. I believe that our systems will get smarter, partly because someone will figure out how to make a buck by helping them to do so. I also think that regulation is the human version of technology control systems. They are there to provide checks and balances to the operation.

I believe that the long view of history and technology provides us with a much needed antidote to the 24-hour business news cycle. When I read books like Dobson's, I see that there have been periods when we have accomplished great things and other periods when we seemed to have lost our rudder. Hopefully, we will be coming out of our current downturn soon. And you can be sure that technology will play a vital role as it always has.

[Photos: Top picture is a Lorenze Attractor from Chaos Theory. Bottom is a Televideo computer terminal. Both from Wikipedia.]

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