Why Conventional Economic Crisis Management Strategies Increase Overall Vulnerability

Posted: January 18, 2009 in Uncategorized

In this post, I wanted to explore an idea I’ve been considering.  Namely, how the current financial & economic crisis might move us in entirely the wrong long term direction.  

The two most common responses to an economic downtown are (a) retrenchment and (b) strategic market share acquisition.  These responses are not necessarily mutually exclusive as it is conceivable that an organization might attempt to scale back some functions (i.e R&D) in order to free up resources to take out a competitor.  

 The first reaction that most organizations have to the onset of hard times is, understandably, retrenchment.  Afterall, if the level of general economic activity is contracting, it makes sense for a lot of companies to cut back where possible.  Advertising and promotional budgets get slashed.  New products get cancelled or put on hold.  Workforces get “rationalized” (don’t you just love the dehumanization of business-speak?).  Although a common response by many organizations, this is a particularly common approach for organizations who were already on the margins even during the credit-induced boom phase.

The second reaction, strategic market share acquistion, is probably less common.  My guess would be that the kinds of organizations who’ve hired people with fancy business school degrees, and who have read Sun Tzu & Clausewitz would be the one’s to pursue this strategy.  From the standpoint of the investment community – these are your value investors.  The people and organizations who are out there, shopping around, trying to snap up companies trading well below their intrinsic value (if there is such a thing).  The idea behind this approach is simple to understand, but takes a lot of discipline and confidence to act upon.  Individuals and organizations pursusing such a strategy believe that, once the market turns around, they will have gained market share at the expense of their less able competitors.  

This is all well and good, if it weren’t for the fact that this strategy of consolidation and market dominance is quite likely the wrong direction in which society needs to be moving.  Anyone familiar with the views expressed on this blog, knows that entropy is the ever present enemy of all complex systems.  As an organization grows (use whatever metric of growth you want) it becomes more complex.  As complexity increases, the overall energy required to sustain that organization also increases.  So, here you have an environment where the biggest organizations are either being bailed out to protect whatever special interest group they represent, or are strategically acquiring market share.  The medium-long term societal consequencs of such behaviour is very dangerous.  It centralizes more and more power, in the hands of fewer and fewer larger organizations, which ultimately increases their complexity.  More complexity means more energy is required to sustain the organization.  In a world where net energy is set to start declining, it sure seems like our leaders are making a lot of poorly reasoned decisions.  At a time when we should be decentralizing the systems upon which we depend, increasing their resilience, and generally downscaling everything we do, we ‘re seeing attempts by politicians and business leaders to consolidate political and economic power.  Surely this does nothing but increase long-term vulnerabilities.  

It would be nice if the gatekeepers of major capital & resource allocation decisions understood these kinds of tragedy of the commons dilemma’s – but I just don’t see that happening.  This tendency to consolidate political and economic power and to build hierarchical structures will become increasingly at odds with a world where declining amounts of net energy makes sustaining complex structures inherently more difficult.  As many authors have noted, it’s not that we lack the technology to solve our problems – what we lack is the collective will to identify and discuss the fundamentals.  


– a.j.m. 


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