Interesting Article on FT

Complexity

Published: March 16 2009 09:12 | Last updated: March 16 2009 16:07

High up peoples’ list of culprits for the credit crunch is complexity. The accusation? That certain financial products were incomprehensible to all but a tiny few. Buyers and sellers, therefore, had no idea what they were trading. Executives devised entire strategies on businesses they did not understand. Regulators and ratings agencies flapped about in the dark.

The solution is to make things simpler, right? Wrong. For that supposes humans are opposed to complexity when in fact they create it whenever possible. Many sociologists see the process of making the simple complicated as one method social groups employ to help identify themselves. Linguists sometimes refer to “esoterogeny” where speakers add verbal tricks in order to make their language harder for outsiders to understand and to foster inclusiveness.

So why do it in finance or any other industry? By making what they do incomprehensible to everyone, bankers, management consultants, plumbers and academics protect their franchise, and therefore their earnings. Adding complexity is doubly important in industries where nothing physical is created. It is no surprise, therefore, that those earning the most money ended up in jobs that none else could understand.

That makes a policy response pointless. If regulators tried to simplify asset backed securities, their complexity would simply take another form. Banks cannot have anyone off the street applying to trade derivatives (although research shows that random punters would be just as profitable). And dumbing down the entire banking industry would just result in a complexity bubble (and higher wages) emerging somewhere else.

Now that governments around the world have all the power – with workers from the private sector clambering to get on board – it is a fair bet that public offices will be next to pile on the gibberish. After all, bureaucracy in all its numbing detail is simply another form of complexity designed to keep a frustrated public at bay.