Beginning to Map the DNA of Policy Reform: Dr. Flaherty's “Beyond DNA: Lessons from the Born”

Dr. Bob Flaherty, MD, of Montana State University is the author of this week’s FREE Insights. Bob has lectured at several FREE seminars, and he and his wife Carol (retired from MSU) are long and deeply trusted friends. They are the kind of individuals who help make Bozeman such an attractive place.  

While Bob is trained in medicine and the biological sciences, he has a strong and sophisticated interest in the foundations of ethics and public policy. His perspective shows why so many attentive, intelligent, and nuanced individuals understand why pathologies are inherent to large scale enterprises that attempt to manage by regulation and command.

Bob notes: “Importantly, successful networks quickly become too complex to be managed effectively from the top down. They must be ‘managed’ – in a non-traditional sense - very close to the level of the individual components. The brain cannot control each cell in the body. A central government cannot control each buyer-seller interaction.”

Bob is, of course, correct-and we can go further. The central government cannot even control the agencies it creates. The environmental, economic, and ethical failures of many federal agencies are legion. While some are improving, the Park Service comes to mind, in many agencies pathologies are growing.  

The reasons are not primarily the result of unethical or ignorant individuals. Rather, most problems flow from bad or inadequate information and perverse incentives. FREE’s focus has been to analyze such situations and propose reforms.     

The result is FREE’s major accomplishment, legitimizing the New Resource Economics (NRE). This became a Kuhnian revolution in thinking about natural resources and the environment. The Bozeman perspective generated a “paradigm shift.” Scholars around the nation found it attractive. As a result an enduring group of adherents have replaced the conventional command-and-control perspective that originated in the Progressive Era of 1900. Ours understands the importance of creativity, incentives, and time and place specific information.    

Today the NRE approach is generally accepted. No reputable scholar under 60 years of age defends the command-and-control institutions my colleagues and I began critiquing 40 years ago. Further, people now recognize the value of non-profit and for profit entrepreneurship in the social and environmental arenas.  

Dr. Flaherty’s following essay explicates the biological logic underlying our approach. His conclusion is increasingly shared among both mature citizens and college students. And the reason is clear, Bob provides a logical framework for organizing commonplace observations about how political and bureaucratic systems fail to achieve their proclaimed intentions. From his approach “...we can better understand policy failures, like the Soviet economy, and design potentially more effective and sustainable public policies.”

-John Baden

“Life breaks free. Life expands to new territories. Painfully, perhaps even dangerously. But life finds a way.” -Michael Crichton, “Jurassic Park”

Introduction

Biology is responsible for arguably the most complex systems in the known universe. Starting with a simple but elegant language, DNA creates cells. As remarkable as this is, at least as remarkable is how these cells organize into complex systems like individual organs and even more complex systems like organisms.

As we study the “born” – animals, fish, insects, plants - fundamental characteristics of biological systems have emerged. Other large complex systems, such as the telephone network, electrical grids, global manufacturing corporations and even market economics, are non-biological, yet they share many of the fundamental characteristics of biology.

Large complex systems form in a biological way:  They are born on a small scale as individual components, such as a single cell or a single telephone. They grow by the multiplication and connection of these individual components, much like an embryo grows, or like a telephone network grows as telephones are connected together. Complex systems, both biological or non-biological, grow from the bottom up, not from the top down.

Importantly, successful networks quickly become too complex to be managed effectively from the top down. They must be “managed” – in a non-traditional sense - very close to the level of the individual components. The brain cannot control each cell in the body. A central government cannot control each buyer-seller interaction.

The Biology of Systems

Several fundamental rules apply to large complex systems, whether biological or not. This list is not comprehensive, but it is illuminating.

• Systems are made up of many similar small independent components.

   Examples: 

• The liver is made up of millions of liver cells.
• The market is made up of millions of buyer-seller units.

• Although each component is crucial to the existence of a complex system, the characteristics of the component do not predict the characteristics of the system.

   Examples: 

• A bone cell is squishy and cannot support weight, but the bone can.
• Buying bacon from the corner butcher shop does not predict the existence of the Chicago Board of Trade.

• Management of systems is management of change. Since change occurs at the level of the basic components, information exchange is necessary for each component to respond to change.

   Examples: 

• Pancreatic cells monitor blood sugar and release insulin into the blood stream as needed to control the metabolism of sugar by other cells.
• Supply and demand information about a product is transmitted to buyers and sellers by the local price.

• Information exchange between components must be multifocal (involving many components), multilevel (up and down any hierarchy that develops), easy and rapid.

   Examples: 

• A single brain cell communicates through biological “wires” with many other brain cells, even located in distant areas of the brain.
• Kitco.com transmits precious metal spot prices to buyers and sellers worldwide on a minute-by-minute basis (see for example, collectorusa.com and click on the price ticker box).

• Complex systems are non-linear. Going from A to C might not involve components following a path of A-B-C, but more likely follows a path like A-F-L-D-C.

   Examples: 

• For DNA to make insulin, it first must make an RNA which makes proteins that make ribosomes, and several different RNAs to make construction enzymes. Then the DNA must make yet another RNA to instruct the ribosomes and the enzymes to make the insulin.
• Read Adam Smith’s treatise on the “Invisible Hand” or Lawrence Reed’s “I, Pencil”.

• Components must be healthy. They must have nutrients to function.

   Examples: 

• Cells need oxygen to remain alive.
• Buyer and sellers need some form of value transfer (e.g. money) and rules (e.g. implicit or explicit contracts) to assure the legitimacy of transactions.

• Because of their complexity, large systems fail in novel ways (the Rule of Unintended Consequences).

   Examples: 

• The HIV virus, unlike any previous pathogen, paralyzes the immune system.
• The Community Reinvestment Act expanded house purchase opportunities, but ultimately collapsed the housing market.

Three Laws of Large Complex Systems

Large complex systems, both biological and non-biological, can be best understood through three  laws.

1. The optimum function, and therefore success, of a large complex system requires healthy components through provision of

• Adequate nutrients (for a market, willing buyers and sellers, money, rule of law, etc.)
• Efficient information exchange (non-fixed price information easily available to buyers and sellers, etc.)

2. It is impossible to exert top down control of every characteristic of a rapidly changing component or component environment. Thus, systems cannot be satisfactorily controlled from the top down.

3. Systems can, however, be fostered (by providing nutrients and information exchange) or hindered (by restricting nutrients and information exchange) from the top.

These characteristics and laws suggest that the role of hierarchy (e.g. management, government) in complex systems is not to try to control the fundamental components - Five-Year Plans will always fail. Instead, the role of hierarchy is to provide the necessary physical and philosophical/legal infrastructure to nurture the autonomous grass roots components.

This large complex system approach can importantly inform our discussions about things as diverse as health care reform and environmental economics. From this approach we can better understand policy failures, like the Soviet economy, and design potentially more effective and sustainable public policies.

Life has much to teach us.