A recent New Scientist article about the financial crisis features commentary by NECSI president Yaneer Bar-Yam. The article, "Why the Financial System is Like an Ecosystem," stresses the importance of thinking about the economy as a complex, interdependent system.
"The source of the current problem is ignoring interdependence," Bar-Yam says in the article. Bar-Yam cites as an example the US regulators' failure to effectively control short selling. By relaxing the rules, the SEC allowed short sellers to run wild and do serious damage, not just locally, but throughout the system globally. When regulators finally stepped in and attempted to curb short selling, their efforts were ineffective because they did not address the systemic problem. "It shows they still aren't thinking about this as a connected system," Bar-Yam says.
The article also points out the similarities between the collective behavior of an ecosystem and the complex behavior of economic markets. Bar-Yam states that models of complex relationships similar to those between predators and prey can be useful tools for illustrating market behavior.
"At its core the science of complex systems is about collective behavior," says Bar-Yam. '"The invisible hand of the market is collective behavior." Models that allow us to watch and predict collective behavior may lead to more effective economic regulation. This is unexplored territory in the study of economics, but Bar-Yam is optimistic that further research will result in a stronger, more stable market. "With recent scientific advances, I believe we can now truly inform policy."
Read the article at New Scientist (subsription required):
Why the Financial System is Like an Ecosystem
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