Chaos, Management and Economics
David Parker and Ralph Stacey
Centre for Independent Studies,
Imagine a world where long-term plans are achieved only by chance … a world where the relationship of systems within systems is so complex they can’t be described either in words or symbols … a world where the attempt to negate an unwanted consequence only leads to further unwanted consequences. It shouldn’t be too difficult to imagine, because according to David Parker and Ralph Stacey, that’s the way it is in the real world. Their very manageable and readable work Chaos, Management and Economics explains the chaos theory of natural phenomena for a non‑academic. It shows why setting out from one point with another clearly in view can involve unimagined complications and consequences and will almost always end up with business and the economy somewhere other than the planned destination.
The fundamental idea of chaos theory is that tiny variances from the general tendency or direction of a process can interact with other tiny variations in a way which magnifies the variations to the extent where they can interact with other similar changes in ways which become indescribably complex. Final outcomes can be so far from the original, logical expectation that they appear to be entirely random and unconnected.
The degree of success of any planning process relies on the degree of predictability between causes and effects. Chaos theory suggests that only very short‑term plans, can be reasonably predictable. Long‑term plans will not be achieved except by chance. What comes out of a process is not determined by what may be intended, but by how the process evolves. The countless interactions between things happening inside the process and things happening outside the process can lead to expectations being negated while other unexpected events are amplified, sometimes into dominant outcomes.
In the world of nature, the chaos theory can be credited with all of the variations and adaptations of the plant and animal kingdoms. In society, where we people pretend we are able to plan and control the evolution of human systems, we blame individuals, their politics and their attitudes when things “go wrong”. But chaos theory lets us all off the hook. It isn’t anyone’s fault when things turn out differently from what was promised, because complex systems, such as the market, are unpredictable and their long‑term characteristics cannot be known.
To describe some simple examples of chaos theory in action, Parker and Stacey enlist Chris Argyris, a Harvard academic (of great age now because I recall sitting at his feet, mouth agape), who describes the ways organisations learn to react to important processes or events). His “single loop learning” paradigm likens the way an organisation reacts to variances from desired trends to the way a thermostat operates in controlling the temperature of a room. If room temperature drops below a certain desired level then the thermostat tries to negate this trend by activating the room heater. The heater will remain engaged until room temperature exceeds an acceptable upper limit, when the thermostat again negates this trend by switching off the heater and allowing room temperature to drop.
The “single loop learning” paradigm is a negative means of control. It is always responding to undesirable aspects of a process in attempting to reverse the trend. Argyris gives successful organisations credit for a more complicated reaction to undesired trends. His “double loop learning” paradigm introduces the possibility of an organisation learning something of the causes of variations from desired trends, and taking pre‑emptive action to recognise the portents and stimulate action designed to reduce the fluctuation between acceptable parameters of the process.
However, Parker and Stacey demonstrate that even Argyris’s double loop learning theory is overly simplistic in describing what really happens. They develop models of learning and modifying and influencing behaviours which quickly become visibly complex enough to persuade the reader that even a very limited number of influences on the way a process evolves can lead to an unimaginable number of possible outcomes.
How firms, markets and economies react in trying to force some predictability into an otherwise “chaotic” world have been described in a variety of economic theories, from “command” economies to “market” economies. These have in common an overarching theory that assumes the number of variables impacting on the economy can be determined, understood and controlled. The authors say that this is optimistic nonsense. They explain that chaos theory does not suggest that all planning is totally useless, or that all processes contain aspects whose unpredictable interactions will cause them to explode. If we were not able to devise simple linear systems and processes where a given cause has one and only one effect, then any form of organisation would be impossible. The theory also allows for some (relatively) large-scale parameters or shapes to appear as recognisable patterns, while the interactions which create them remain unpredictable. To use another example from nature, we can describe a cloud but cannot predict how its shape will change from moment to moment.
Most systems involving human beings are “non‑linear” which involve a synergy among the component parts which result in patterns of behavior which cannot be predicted by examining each component of the system. Like it or not, people have choices and respond in ways which allow them to preserve a degree of individuality or even eccentricity. The inevitable consequence, Parker and Stacey point out, is that the future of a chaotic system is inherently unknowable. It is not possible to establish how a large and complex human system will react to changes in policy in anything but the short term.
How true. Could the advisers surrounding President Jacques Chirac have foreseen the strength and bitterness of opposition to the resumption of weapons testing at Mururoa? What will be the ultimate political consequence for France’s influence in the Pacific? Will the effects flow on to other areas of French influence in the world? More interesting, can France now devise and implement a sequence of political or diplomatic events which will have predictable, positive outcomes for Paris? Chaos theory suggests that there may be unknown events stimulated by France’s action to date which could cause the resulting unwelcome group behaviour to be amplified into political action with enormous but unpredictable consequences.
As the authors point out, human systems involve people responding to the way other people respond in ways that are not predetermined. Therefore the potential outcome of human responses can be very difficult to identify, let alone measure.
The consequences of human unpredictability can sometimes result in even a small variation from the expected human response to result in otherwise highly predictable systems becoming uncontrollable. I remember a discussion among academics at Berkeley about why attempts by the State of California to control the economic effects of fruit fly infestation of the citrus crops had turned into a disaster. The state government had intervened to the extent of installing roadblocks at interstate boundaries and confiscating every piece of citrus fruit entering or leaving the state.
Not content to control human behaviour, the authorities had devised a cunning plan to reduce reproduction among the fruit flies. They had located a particularly virulent and macho strain of male fruit flies in Colombia. Their plan was to sterilise huge batches of these insect superstars with X-rays and ship them to the orchards of California. Any observer of Californian mating rituals (for example, fans of Melrose Place) will know the entirely predictable outcome ‑ the female fruit fly will immediately ditch the puny fly next door for the muscle-bound new fly on the block ‑ going all the way on the first date.
Unfortunately, a lowly paid laboratory technician in Colombia, possibly under the influence of some of his country’s better known export, did not follow the strict sterilisation procedures and inadvertently shipped a batch of virile hot‑blooded Latin fruit flies which, once they got to California, performed even better than predicted. The results were catastrophic.
The authors acknowledge that it is even possible to control human systems, even an economy, through rules and regulations, but point out that the consequence is inevitable stagnation. The natural forces of selection, which in economic systems are called competition, weed out all systems which are not able to respond to the unpredictable. Parker and Stacey point out that while it is possible to impose predictable and therefore restrictive practices on organisations, this inevitably leads them to drift away from a “fit” with their competitive environment until some crisis provokes a return to equilibrium.
Until relatively recently, and sometimes still, the main job of management was to devise and implement ways of restricting the activities of individuals within organisations so that their results were predictable. Parker and Stacey point out the inevitable consequences of a management style which stifles the ability of an organisation to react rapidly to what is evolving both within the organisation and in its environment. Management must accept that linear models of system behaviour are successful only if variations from the cause/effect relationship can safely be ignored. An inflexible reaction to change is extremely dangerous in situations where tiny variances can produce significant changes in the system.
The challenge for management is therefore to understand the behaviour of people, the organisation, the market, in holistic terms rather than formulaic, reductionist terms. Making and sticking to long‑term plans introduces a high probability of failure as the system evolves away from the situation in which the planning assumptions were valid. Planning scenarios which predict possible futures relating to production, demand, competition etc, are not plans which predict a certain outcome. They are scenarios which improve an organisation’s ability to respond to events as they occur. Success in a “chaotic” world will depend on the ability to understand the detailed changes taking place in a system, and respond in an innovative way.
The authors are entirely persuasive in describing the real world of “chaos” and numerous examples spring to mind of situations where inflexibility or lack of attention to what may have seemed at the time to be tiny signals of changes have caused the downfall of organisations ‑ and their managers. They point out that at present there is a “widespread” inability for management to design and sustain organisations which are capable of continuing variety and innovation.
The challenge is for managers to create a working environment which provides the information that allows changes in demand, production etc, to be detected and analysed, understands and rewards behaviours which support innovation and flexibility, while maintaining sufficient discipline and procedure to realise short‑term goals. Stacey and Parker stop short of suggesting how this might be achieved.
The implications for chief executives, of a “chaotic” world which cannot be reduced to understandable causes and effects, are huge. We used to laugh about “Murphy’s Law” dogging our best intentions, but chaos theory says that hitting the target except when it’s very close is a fluke. Managing a well‑oiled machine can be counter-productive if it means that annoying people with a different perspective of events and their implications are ignored.
Maintaining the balance in an organisation between people who keep their focus on achieving the short-term tasks, and people who can see the turns ahead and make the necessary adjustments, is a management skill which is in extremely short supply. Are there management courses which teach innovation? Are there performance management systems which recognise and reward the ideal mix of conformity and daring? The future chief executive must combine the experience and boardroom skills of the corporate diplomat with the enthusiasm for change and thirst for new information of a junior manager. Or at least combine these skills at the top level, and manage the team so that the organisation does not fall apart.
The success of Chaos, Management and Economics is its clarity in describing the real world as an unknowable, ever-changing combination of tiny events. In doing so it lays bare the real challenges for managing an economy or a business ‑ without managing to control the uncontrollable while responding to vital but sometimes tiny changes in circumstances. It’s an important book which makes a potentially difficult and stuffy topic both accessible and fascinating.
Colin Knox is a strategic management consultant based in Auckland.