Mar 16 2010

Niall Ferguson — On the Edge of Chaos, Immersed in the Long Wave

Dr. Ferguson is a very insightful history professor at Harvard who has previously written about the financial history of the world, and recently in Foreign Affairs (March/April, 2010) used some ideas from complexity theory to explain the downfall of nations. Ferguson’s article points away from grand theories like those of Toynbee or more recently Diamond, who focus on long-term cultural, economic, or ecological forces, in favor of very rapid changes; e.g. “A very small trigger can set off a “phase transition” from a benign equilibrium to a crisis…”; the Butterfly Effect.

I am especially intrigued with Ferguson’s portrayal of self-organized criticality in this context because it fits well into the Maslow Window model — that explains rhythmic, twice-per-century clusters of great human explorations, macro-engineering projects, and major wars over the last 200 years – which is fundamentally driven by a long business cycle known as “the long wave.”

What Caused World War I?

No one expected it, but soon historians had constructed a theory extending back to an unfortunate treaty signed in 1839. Nonsense. According to Ferguson, “the proximate triggers of a crisis are often sufficient to explain the sudden shift from a good equilibrium to a bad mess … World War I was actually caused by a series of diplomatic miscalculations in the summer of 1914…”

In terms of the long wave, WW I is a classic “peak war”; i.e., one of several major wars that occur near or shortly after the peak in the long wave – a time when a major economic boom has culminated in widespread societal affluence – such as near the end of the Peary/Panama Maslow Window. When asked why nations would fight a major war in the midst of such affluence, the response of some political scientists – apparently seriously – is that’s the only time nations can afford them. However, physicist Theodore Modis (1992) suggested that peaks of the long wave are likely to be times of chaos in an economy or among nations, as opposed to rapid growth periods like Maslow Windows.

Thus the Maslow Window/Long Wave model and Ferguson-style self-organized criticality together provide a plausible explanation for the timing and magnitude of WW I as well as other peak wars over the last 200+ years.

What About the British and Soviet Empires?

Ferguson marvels at the rapidity with which the British Empire and more recently the Soviet Union collapsed. “The United Kingdom’s age of hegemony was effectively over less than a dozen years after its (WW II) victories over Germany and Japan.” And “less than 5 years after Gorbachev took power, the Soviet imperium in central and Eastern Europe had fallen apart, followed by the Soviet Union itself in 1991. If ever an empire fell off a cliff — rather than gently declining it was the one founded by Lenin.”

However, the persistent influence of long wave economic trends apprears to have contributed in both cases. For example, Fareed Zakaria (2008) notes that at its height the British Empire covered “a quarter of the earth’s land surface and included a quarter of its population.” And yet,

Britain’s exalted position was more fragile than it appeared … Britain was a strange superpower … The wonder is not that Britain declined, but that its dominance lasted as long as it did … By World War I, the American economy was twice the size of Britain’s, and together France’s and Russia’s were larger as well … Having spearheaded the first industrial revolution, Britain had been less adept at moving into the second.

Although complexity probably played a role in Britain’s decline in the mid-1950s relative to the U.S., the effect of America’s economic surge toward the 1960s Apollo Maslow Window was also crucial. And if the Butterfly Effect triggered the Soviet Union’s downfall, its centrally planned economy, lack of democratic institutions, and the downward trend in the long wave (toward its trough in 1997), didn’t help either.

Is the U.S. Poised To Go Down?

Because national decline is “precipitous and unexpected” and most involve “fiscal crisis,” Ferguson maintains that “Alarm bells should be ringing very loudly, as the United States contemplates a deficit for 2009 of more than $ 1.4 trillion — about 11.2% of GDP, the biggest deficit in 60 years — and another for 2010 not much smaller.”

It’s not just the numbers that matter, it’s the perception. “In imperial crises, it is not the material underpinnings of power that really matter but expectations of future power.” This is similar to our concept of “ebullience” that powers unparalleled explorations and engineering projects during Maslow Windows, as well as the anti-ebullience experienced during great recessions (like now).

Suddenly one day,

it will not be just a few policy wonks who worry about the sustainability of U.S. fiscal policy but also the public at large, not to mention investors abroad. It is this shift that is crucial: a complex adaptive system is in big trouble when its component parts lose faith in its viability.

We may be reaching that point in the U.S. now. However, unlike the old Soviet Union, America has an informed electorate that can change the country’s direction like it has done recently beginning with President Obama’s election and continuing to the present. Although Ferguson is right that we are running high economic risks today, the U.S. has successfully weathered pre-Maslow Window financial panics and great recessions over the last 200 years that have never failed to give birth to unparalleled, undelayed, truly ebullient Maslow Windows.

And we expect the next one by 2015.

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