Why Complexity Can’t Be Controlled

Thailand’s political landscape is drawn along class lines.  In 2011, the party of the poorer north made a populist election pledge to “put money into poor farmers’ pockets and stimulate domestic demand” which helped drive it to election success.  But what happened next exemplified why leaders shouldn’t try to command or control complex systems like markets.

The election pledge was promptly implemented by the new government.  They would buy rice from poor farmers at twice the market rate.  To cover the losses of this extreme intervention the government stockpiled the rice - 18 million tonnes worth, or half the annual global trade - in an attempt to push up global prices before selling on its reserves.  Thailand’s position as the world’s biggest rice exporter contributed to it’s belief that it could 'make the market' in such a manner; yet it's failure to understand how actions in a complex system are never isolated or reactions so simply predictable has contributed significantly to Thailand's recent problems.  

First to respond were other major rice exporters, India and Vietnam, who quickly increased their supply to meet global demand - containing the global price of rice.   In fact, the only thing to rise dramatically was the Thai rice mountain, which left the government in a ‘stick or twist’ quandary: sell the rice at a huge loss or continue to stockpile further and wait out the market.  But while the Thai government waited out the market, the market out waited it, sure in the knowledge that as the quality of the stockpiled rice  deteriorated so would it's market value.  When the poorer-quality rice flooded the market, prices struck rock-bottom.  The market won because it was resilient - it had options.  Thailand did not.  The rice mountain policy cost it $12,5 billion in the first year and $15 billion in year two - equal to 4% of GDP.  

Beating the market is beyond the ability of many organisations and almost all governments.  The market is complex - it has almost infinite variation from which an optimal solution can be selected - while organisations are limited to a few ‘good’ or ‘best practice' options that can become obsolete in a moment when changes in the wider eco-system gang up on them.  Jack Welch, former GE Chairman, warned that “if the rate of change on the outside exceeds the rate of change on the inside, the end is near.”  It’s a lesson learned too late by Thailand and others, not least the former US Federal Reserve Bank Chairman, Alan Greenspan. 

In his testimony to Congress on October 24th 2008, following the collapse of Lehman brothers and a global slump that wiped “no less than $12.8 trillion” from the US economy alone Greenspan expressed ‘shocked disbelief’ at a fallout ‘much broader than anything I could have imagined’ because his subscribed ideology - that informed the mechanisms by which the US economy was regulated - had been working ‘exceptionally well for 40 years or so’ he explained.  

Yet hubris reigned in financial services - innovation had not perfected the management of risk and unprecedented occurrences were more likely to occur because of the financial innovation that more tightly coupled the global economy.  Cleverness doesn't trump complexity - it merely makes it more exponentially likely that something that has never failed before will do so now as we take our eye of the ball.  Alan Greenspan and Thailand learned the third lesson of complexity too late and too hard ...

The third ‘rule’ of complexity is that it changes as we engage with it

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