Two key structure-related variables—diversity (the existence of different types of agents acting as “nodes” in the network) and interconnectivity (number of pathways between agents)—play a central role in both efficacy and resilience but in the opposite direction. In general, a system’s resilience is enhanced by more diversity and more connections, because there are more channels to fall back on in times of trouble or change. Efficacy, on the other hand, increases through streamlining, which usually means reducing diversity and connectivity.
The main point is that nature never selects for maximum efficacy, but for an optimal balance between the two opposing poles of efficacy and resilience. Because both are indispensable for long-term sustainability and health, the healthiest flow systems are those that maintain an optimal balance between these two opposing pulls. Conversely, an excess of either attribute leads to systemic instability. Too much efficacy leads to brittleness and too much resilience leads to stagnation: the former is caused by too little diversity and connectivity, and the latter by too much diversity and connectivity.
Sustainability of a complex flow system can therefore be defined as the optimal balance between efficacy and resilience of its network. With these distinctions we are able to define and precisely quantify a complex system’s sustainability in a single metric. Indeed, we now have a way of quantitatively measuring all the relevant components separately: total throughput, efficacy, and resilience. Furthermore, the underlying mathematics are well behaved enough so that there exists only one single maximum for a given network system. The generic shape of the relationships between sustainability and its constituent elements is such that there is an asymmetry: optimality requires more resilience than efficacy!
Until recently, total throughput and efficacy have been the only means for us to identify the relative success of a system, whether in nature or in economics. For example, in ecosystems, as in economies, size is generally measured as the total volume of system throughput/activity. Gross Domestic Product (GDP) measures size this way in economies, while Total System Throughput
(TST) does so in ecosystems. Many economists urge endless growth in size (GDP) because they assume growth is a sufficient measure of health. GDP and TST, however, are poor measures of sustainable viability because they ignore network structure. They cannot, for example, distinguish between a resilient economy and a bubble that is doomed to burst—or between healthy “development,” as Herman Daly describes it, and explosive growth in monetary exchanges simply due to runaway speculation.
Now, however, we can distinguish whether a particular increase in throughput and efficacy is a sign of healthy growth or just a relatively short-term bubble that is doomed to collapse. Over time, nature must have solved many of the structural problems in ecosystems (otherwise, these ecosystems simply wouldn’t exist today.)
APPLICATION TO OTHER COMPLEX SYSTEMS
The question will undoubtedly be raised whether what we learn from ecosystems still makes sense when applied to other systems, such as economic communities. It is critical to understand that the findings described so far arise from the very structure of a complex system, and therefore that they remain valid for any complex network with a similar structure, regardless of what is being processed in the system: it can be biomass in an ecosystem, information in a biological system, electrons in an electrical power network, or money in an economic system. This is precisely one of the strong points of using a weblike network approach instead of machinelike metaphor.
The fields of engineering, business, and economics have all been focusing almost exclusively on efficacy, and therefore constitute a wide-open field to explore the validity of the proposed metrics to improve sustainability. For example, electrical power grids have been systematically optimized for decades toward ever-greater technical and economic efficacy. It has come as a surprise to many engineers that, as they have approached higher efficiencies, suddenly large-scale blackouts have been breaking out with a vengeance “out of nowhere.” For instance, large-scale blackouts have hit huge areas of the United States and Northern Germany. Among the famous ones, we should mention the 1965 blackout in New York, or the Northeastern United States blackout of 2003, and the November 2006 blackout hitting much of Western Europe. But, even excluding lightings and other catastrophic natural events, on the average every four months a power outage large enough to darken at least five million American homes occurs. The data should be available to model these systems as networks because that is what they literally are. One can then quantify their efficacy and resilience. The solution on how to rebalance such a system to make it less brittle, and to determine its optimal sustainability, would be an obvious “hard science” test application of the metrics described here.
The point being made here is truly profound and has wide-reaching implications for all complex systems, natural or humanmade, including our worldwide financial and monetary system.
Placing too much emphasis on efficacy tends to automatically increase size and consolidation at the expense of diversity, connectivity, and resilience until the entire system becomes unstable and collapses. In short, excessive focus on efficacy tends to create exactly the kind of bubble economy that we have been able to observe repeatedly in every boom-and-bust cycle in history, including the biggest bust of them all, the 2008 crisis and its aftermath.
APPLICATION TO FINANCIAL/MONETARY SYSTEMS
Viewing economies as flow systems ties directly into money’s primary function as a medium of exchange. In this view, money is to the real economy like blood is to your body: it is an essential vehicle for catalyzing processes, allocating resources, and generally allowing the exchange system to work as a synergetic whole. The connection to structure is immediately apparent. In economies, as in ecosystems and living organisms, the health of the whole depends heavily on the structure by which the catalyzing medium, in this case, money, circulates among businesses and individuals. Money must continue to circulate in sufficiency to all corners of the whole because poor circulation will strangle either the supply side or the demand side of the economy, or both.
Our global monetary system is itself an obvious flow network structure, in which monopolistic national currencies flow within each country (or group of countries in the case of the euro), and interconnect on a global level. The technical justification for enforcing a monopoly of national currencies within each country was to optimize the efficacy of price formation and exchanges in national markets. Tight regulations are in place in every country to maintain these monopolies. In his seminal 1955 paper on this topic, Milton Friedman proposed that letting markets determine the value of each national currency would further improve the overall efficacy of the global monetary system. This idea was actually implemented by President Nixon in 1971, to avoid a run on the dollar at that time. Since then, an extraordinarily efficient and sophisticated global communications infrastructure has been built to link and trade these national currencies. According to the Bank of International Settlements (BIS), the trading volume in the foreign exchange markets reached an impressive $4 trillion per day in 2007, and the derivatives are not included in that statistic! Nobody questions the efficacy of these markets, but many people are now coming to question their resilience.
The global network of our monopolistic national moneys has evolved into an overly efficient and dangerously brittle system. This system’s lack of resilience, however, shows up not in the technical field of the computer networks (which all have backups), but clearly in the financial realm. This fact has been spectacularly demonstrated by the large number of monetary and banking crashes over the past thirty-five years. Such crises—particularly a combined monetary and banking crash—are, other than war, the worst thing that can happen to a country.
Even more ironically, whenever a banking crisis unfolds, governments invariably help the larger banks to absorb the smaller ones, under the logic that the efficacy of the system is thereby further increased.
Today’s global monetary
ecosystem is significantly overshooting the optimal balance, because of its exclusive emphasis on efficacy. It is careening toward brittleness and collapse because a general belief prevails that all improvements need to go further in that the same exclusive direction of increasing growth and efficacy. For instance, the global monoculture of bank-debt money as legal tender is technically justified on the basis of efficacy of price formation and exchanges within each country. Internationally, floating exchanges were also justified because they make the foreign exchange markets “more efficient.” An overly efficient system is an accident waiting to happen. In observing the dynamics of an artificially enforced monoculture in a complex system where efficacy is the only criterion considered relevant, we find that the only possible outcome is systemic collapse.
As stated earlier, nature has over billions of years selected the conditions under which complex ecosystems are sustainable; otherwise they wouldn’t exist today. In contrast, humanity still struggles with the issue of how to create sustainable economies. We know that the theoretical framework applies to both natural and manmade complex systems. Has the time not come to learn in this domain from nature?
THE SYSTEMIC SOLUTION
The systemic solution to our monetary crisis, therefore, is to increase the resilience of the monetary system, even if at first sight that may be less efficient. Conventional economic thinking assumes the de facto monopolies of national moneys as an unquestionable given. The logical lesson from nature is that systemic monetary sustainability requires a diversity of currency systems, so that multiple and more diverse agents and channels of monetary links and exchanges can emerge.
This is the practical lesson from nature: allow several types of currencies to circulate among people and businesses to facilitate their exchanges, through the implementation of complementary currencies. These different types of currencies are called complementary because they designed to operate in parallel with, as complements to, conventional national moneys. The problem is the monopoly of one type of currency, and replacing one monopoly with another isn’t the solution.
As Edgar Cahn’s work on Time Dollars demonstrates,21 whenever complementary currencies begin flowing through the mainstream, the degree of diversity and interconnectivity in the system will increase, due to their ability to catalyze business processes and individual efforts that are too small or inefficient to compete for national currencies in a global marketplace. This approach will certainly appear unorthodox to conventional thinking, but conventional thinking is precisely what got us into this trouble to begin with. This tactic can also resolve the dilemma of what to do now about today’s systemic banking crisis.
OUR PROPOSAL
Our proposal focuses here on what can and should be done most urgently to reduce the impact of the financial crisis on the “real” economy, the one where businesses produce and sell nonfinancial goods and services. It involves three components: (a) actions by the private business sector, (b) decisions by national governments, and (c) decisions by city and local governments.
THE BUSINESS SECTOR
The “real” economy is predictably becoming the biggest victim of the ongoing financial crisis. Whatever governments do for the banks, credit will be a lot harder for companies to obtain from banks for years to come. However, there is something that companies can do themselves to avoid the worst aspects of this problem. It is possible for companies to lead themselves out of this crisis.
THE WIR IN SWITZERLAND: A CASE STUDY
Once upon a time, during a crisis similar to the one in which we are now mired, sixteen businessmen got together to decide what they could do among themselves. They or their clients had each received a notice from their respective banks that their credit line was going to be reduced or eliminated; hence bankruptcy was only a question of time. They realized that business A had needed the bank loan to buy goods from business B, which in turn needed money to buy stuff from its own suppliers. So they decided to create a mutual credit system among themselves, inviting their clients and suppliers to join. When business A bought something from B, A got a debit and B the corresponding credit. They created their own currency, whose value was identical to the national money, but with the interesting feature that it didn’t bear interest.
The country’s banks mounted a massive press campaign to try to squelch this revolutionary idea. Miraculously, that campaign failed, and this little system saved the businesses involved at the time. A cooperative was set up among the users to keep the accounts dealing with that currency. Soon participants could also borrow from that cooperative in that currency at the remarkably low interest rate of 1 percent. All such loans needed to be backed by inventory or other assets. Over time, the system grew to include up to one-quarter of all the businesses of the entire country.
Sixty-five years later, James Stodder from Rensselaer Polytechnic Institute performed an econometric study proving that the secret for the country’s legendary economic stability was that strange little unofficial currency, circulating among businesses in parallel with the national money. That well-known economic resilience was usually credited to some mysterious and unknown national characteristic. Stodder’s remarkable quantitative study used more than sixty years of high quality data to prove the points made in this story.22
Whenever there was a recession, the volume of activity in this unofficial currency would expand significantly, thereby reducing the recession’s impact on sales and unemployment. Whenever there was a boom, business in national currency expanded, while activity in the unofficial currency proportionally dropped back again. The surprising implication of this study is that the spontaneous counter-cyclical behavior of this little “unorthodox” system actually helped the central bank of the country in its efforts to stabilize the economy.
This is not a fairy tale, but the true story of the WIR system in Switzerland; the sixteen founders met in Zurich in the year 1934, and the system is still operating today. The annual volume of business in the WIR currency is now about $2 billion per year. The WIR system is also now accepting deposits and making loans in Swiss francs as well as in WIR. The biggest limitation of the WIR system is that WIR are not convertible into national money. Therefore, credits earned in WIR need to be spent on good and services of other members of the same network. That limitation has now been resolved thanks to another complementary currency innovation called the Commercial Credit Circuit (C3).
COMMERCIAL CREDIT CIRCUITS (C3)
It is also a well-known fact that the vast majority of private jobs (between 80 and 90 percent) are provided by small and medium sized enterprises (SMEs). And the survival of many such firms is now increasingly at risk because of cash flow problems.
SMEs are being pressured by suppliers for prompt payments, say within thirty days, while their larger customers pay them only in ninety or more days. This becomes a deadly cash flow trap whenever banks refuse to provide bridge financing, or do so at steep conditions. This problem has become more critical recently in developed countries under the impact of the financial crisis, but it has long been an endemic issue in developing countries.
The Social Trade Organisation (STRO), a Dutch research and development NGO, has successfully developed business models over the past decade in several Latin American countries which culminated with a financial innovation that structurally addresses this precise challenge. The process uses insured invoices or other payment claims as liquid payment instruments within a business-to-business clearing network. Each recipient of such an instrument has the choice to either cash it in national money (at a cost), or directly pay its own suppliers with the proceeds of the insured invoice. This is achieved via the following six steps:
Participating businesses start by securing an invoice insurance up to a predetermined amount, based on the specific credit worthiness of their own business and of the claims they obtain on third parties.
The business that has obtained such an insurance (hereafter referred to as business A) opens a checking account
in the clearing network, electronically exchanges the insured invoice for clearing funds, and pays its supplier (business B) immediately and fully with those clearing funds via the clearing network.
To receive its payment, business B only needs to open its own checking account in the network. Business B has now two options: either cashing it in for conventional national money (at the cost of paying the interest for the outstanding period, e.g., ninety days, plus banking fees); or pay its own suppliers with the corresponding clearing funds (at no cost).
Whatever the timing of the payment is to business A, business B is in a position to use the positive balance on its account in the network, for instance to pay its supplier, business C.
Business C only needs to open an account in the network. It has then the same two options as business B: cash it in for national money, or spend it in the network. And so on …
At maturity of the invoice, the network gets paid the amount of the invoice in national money, either by business A or by the insurance company (in case of default of business A). Whoever owns at that point the proceeds of the insured invoice can cash them in for national money without incurring any interest costs.
The implementation of a C3 a system has distinct benefits for businesses, governments, and banks.
Businesses increase their access to short-term credit as needed to improve their working capital and the use of their productive capacity. The size of this credit can be built up to a stable level between a quarter (covering therefore up to an average of ninety days of invoices) and half of annual sales, at a cost substantially lower than what is otherwise possible. Suppliers are paid immediately, regardless of the payment schedule of the original buyer, injecting substantial liquidity at very low cost in the entire SMEs network. The approach provides a viral spreading of participation to the C3 networks from clients to suppliers. The technology is a proven one, doesn’t require any new legislation or government approvals, and the necessary software is available in open source.23 Only invoices that are 100 percent guaranteed, and 100 percent computerized, are acceptable in a C3 system. C3 thereby encourages the generalization and more efficient use of IT infrastructure among SMEs, including the opening of new markets and marketing channels through e-commerce.
What Comes After Money Page 10