Thursday, 11 December 2008

Why is regulating in realtime not practiced?

Yesterday's McKinsey Quarterly features in article titled Creative destruction and the financial crisis. It is an interview with Mr. Richard Forster, a former director at McKinsey from 1992 to 2004, quite a respectable (long) period.

Reading the article it struck me how easily the question can the government only regulate AFTER a crises has struck is not addressed, while there is a vast body of literature available how to regulate in realtime. So I dropped the following letter to the editor:

It's very good to see Schumpeter being rediscovered in the public eye. Ofcourse many will claim in retrospect that he was never out of sight, but history, at least the last 40 years, suggests this was mostly lip service, not acceptance of the message. As Cybernetics learned since the '50's: the purpose of a system is what it does.

And the financial market did, as neatly indicated in this article, nothing more that purposedly acting
outside the scope of the regulated areas. This poses the next question: why are regulators behind reality and only regulate when things go out of control. Haven't they learned how to regulate? How is that possible with all scientific progress since Schumpeter? Only mentioning

  • Prigogine's dissipative systems,
  • complexity and chaos theory,
  • Stafford Beers' Viable Systems Model,
  • Maturana's autopoiesis,
  • Checklands' Soft Systems Model,
  • Senge's Learning Organization and
  • Stuart Kaufmanns' work on co-evolution

should be sufficient for regulators to learn and realize regulation in real time instead of after the fact. And finally: the same techologies developed for fighting terrorism can be effectively applied for monitoring the development of values systems and detect weak signals of non-complience as Dave Snowden and his crew at Cognitive Edge have shown.

Now back to today's article. The funny thing is that Schumpeter himself identified the descructive forces
with INNOVATION. Innovation is, according to him, not associated with new ideas that get new business started - as this article suggest - instead it is identical, or at least strongly associated to the creative destructive forces external to the existing players: innovation as a force comes from the outside, not from within.

We seem to have forgotten about this since 1960, but destruction and the emergence of new (human) value
systems are at the core of innovation. INVENTION, despite its press, is, will and never has been the key factor in innovation. ACCEPTANCE by customers (the one who pays the bill) and increasingly users (the ones that have to use the product or consume the service) are in the driver seat. In that sense the role of centralized R&D departments has been oversold the last 50 years.

At its core, the same holds for transaction-focussed services industries like banking and insurance. There
invention is associated with new financial instruments like mentioned derivatives. Unlike product industries the R&D function of the banking systems is far more discributed and thus it is hard today to point to "the guilty".

Regulating discributed processes seem not the most top-of-mind concern of regulators today and in the past, but it is - in my opinion exactly - where complexity based holistic science can be applied very effectively. Please reread mentioned literature with the perspective glasses on that innovation is related to the co-creation of new (human) value systems and how these processes can be regulated from WITHIN the system.
Yes within, please reread Beer


I guess this is enough food for thought for today.

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