Cyclicality is good

The impact of the economic cycle over the last month has been rather bumpy for commerce, in case anyone missed it.  We had several US institutions taken over, going bust and some rapidly changing status to avoid one of the previous two fates.  We had fallout in the UK – and I work for one of the institutions that found itself in the middle of it, so experienced it rather first hand.  Like everyone, I found myself making rapid assessments of where it could go based on far too little information, and revising them completely every hour or so.  As the expression goes, may you live in interesting times!  If anyone has not read ‘The black swan‘ by Nassim Taleb then they should.

But, from the enormous distance of a week, I have got to thinking about the cycles and wondering why they are viewed as a bad thing.  Lack of cycles misses the tyranny of lack of change.  If nothing moved then everything would get heavily optimised.  But, the optimisation wouldn’t be the best, just the best that’s close to the situation that people find themselves in (it’s called local optimisation).  As an example, in the US everyone drives, so shops are now optimised in strips with large car-parks, so folks don’t just like to drive, they HAVE to drive.  The shop designs get more optimised, with better drive-through’s and nicer premises.  But people still HAVE to drive and considerable distances.  And, well intentioned initiatives to improve can get over-ridden by short-term views – for example the US exception on fuel efficiency for light trucks that was negotiated by Detroit and directly led to giant SUVs that were worse than anything that existed before.

So, concern about global warming is fine, but the behaviour of car drivers in America is not likely to change hugely since the shopping format is optimised for it, and the car industry is attached to it, and since they don’t move the format doesn’t move either.  Now, roll on a bit of cyclicality in oil price.  Big rises in fuel prices make folks suddenly really look at their behaviour, and drive change much faster than would otherwise have happened.  If you look over a longer time frame the trend towards improved efficiency will probably be clear, and the last 20 years will look like an anomaly – but without the cyclicality in fuel price it might have taken an awful lot longer to achieve and  lot more environmental damage.

This ability of cycles to puncture the status quo and move behaviour to a new place where it can optimise is everywhere, and in my view it’s long-term value in helping positive trends is under-rated.  I see folks raging against these cycles, or trying to actively prevent them.  This feels strange, since interconnected systems (and the real world is massively interconnected) have a tendency to have positive reinforcing feedback in them.  Suppressing one sort of self-correcting cycle simply allows another less well understood dynamic to come into play, and that may not self correct nearly as fast with a worse outcome.  A good example is wildfire suppression.  For years the aim in US forests was to stop all wildfires.  However, wildfires used to be mostly localised fires that burned dead wood on the ground and left the live trees.  But, when fires had been suppressed for many years, the stock of deadwood on the ground built up to large levels, and when a fire did break out it was much much harder to put out – and they now burned so hot that the live trees got killed as well.

So, whilst you wouldn’t want unfettered lack of focus on the impact that cycles have on real people, I do wish that there was a bit more focus on the positive trends and how they could be nudged along and a little less on trying to pretend that cycles can be controlled.

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