Systems Thinking and Economic Disruption (A Bat Sneezed Pt. 3)

Updated: 4 days ago

In 1920 (and especially 1720) the wilderness seemed infinite, and the environment capable of absorbing the small burdens that humans placed upon it. By 2020, humans consume too much of the earth for environmental impacts to be trivial. A field of thought, known as “Systems Thinking”, is well-applied here, derived from two feedback loops described by Donella Meadows in her book Thinking in Systems [20], and Peter Senge in his, The Fifth Discipline [21]. They each quote the other, and Meadows developed her theories based on studies of nature.

In Reinforcing Loops, growth in an element encourages more growth, fed by other elements. In an avalanche, a snowball dislodged at the top of hill rolls, picks up snow and boulders, which in turn pick up more snow and boulders. The loop reinforces itself until it consumes all available resources, in this case when the avalanche buries the ski chalets at the bottom of the mountain.

In Balancing Loops, growth in an element is counteracted by other elements, until an equilibrium is found. We see this in the price sensitivity of commodities; as a product becomes more popular its price rises, which makes it and associated goods less popular. The sale of gas-guzzlers counteracts the price of oil; as oil prices climb, SUV sales fall, and vice-versa.


Systems Thinking highlights that individual actions have systemic effect; our actions create our reality. The pandemics we face are not malicious and external but are the summation of smaller independent actions. The past century of economic growth has brought a net gain in societal value [10], but in the process placed burdens on environmental systems (and social systems, though that is beyond the scope of this post.) which are now limiting human and economic growth. I’ll discuss four such models.


Exponential Growth in Humans and Viruses


Reinforcing loops grow (and shrink) exponentially; a little growth makes a little more growth that much easier. In the Industrial Age, the introduction of the steam engine made life easier on humans, who used mechanization to grow more food and support longer life-spans. This created opportunities for further innovation into mass production which made life easier still. The human population grew exponentially.

A viral infection also grows and shrinks through systemic reinforcement. It originates as a tiny infectious agent which reproduces itself inside the cells of living hosts, at which point the host cell is forced to rapidly produce thousands of identical copies of the original virus. If it first grows within a horseshoe bat (right), it will expand into its brethren, then to local pigs, birds, or rodents, and then to local humans, to world-wide humans, and to the bats, birds, pigs, and rodents on new continents.


Limits to Growth Models



Biological populations grow until they either consume all available resources or face some opposing force, known as “Limits to Growth” model. Humans are social creatures providing the viral reservoir with an opportunity to grow, but will eventually retreat from the reservoir by either diminishing transmission (through social distancing) or diminishing susceptibility (a vaccine). Humans’ neurological need to connect balances against the pathological risk of debilitating disease. As humans retreat, the reservoir diminishes. As the reservoir diminishes it seems safer to gather, and the reservoir grows. The number of active infections will rise and fall in waves.

The figure at right shows two such waves in U.S. COVID-19 cases. The solid blue line is the sum of New York, New Jersey, and Michigan, in which human hosts of the viral reservoir (aka “infected people”) grew quickly. By early April, those three states alone accounted for as many infections as the remaining states and territories combined, but they limited viral growth through mandates and societal norms, and created a reinforcing decline. The dashed orange line sums all other states and shows the effect of not controlling a reinforcing loop early. By late August, all states had slowed the growth of the viral reservoir, though this may change in later months as schools reopen and temperatures fall, driving people indoors to connect.[22]

Shifting the Burden…

Senge describes a “Shift the Burden” model, in which:


“An underlying problem generates symptoms that demand attention, but the problem is difficult to address because it is obscure or costly to confront. People “shift the burden” of the problem to other solutions – easy fixes which seem efficient.

Unfortunately, these easier solutions only address symptoms, leaving the problem unaltered. The problem gets worse as the symptoms appear to clear up; the system loses whatever ability it had to solve the underlying problem.”


In the figure we can see two balancing loops, the bottom represents a fundamental solution (which will eventually be adopted) but is more time-consuming and costly than available symptomatic solutions. The use of symptomatic solutions becomes reinforcing as they (seem to) address relevant issues, but symptomatic reliance makes the fundamental solution ever more difficult to achieve. Eventually, side effects of the symptomatic solution appear, leading the reinforcing loop to collapse.


In the following examples, shifting the burden of manufacturing production onto a global value chain allowed for the viral spillover of COVID-19, leading to systemic economic collapse.


Local Supply Chains: In the following, I propose that the fundamental supply chain solution is to produce the entirety of a product as local as possible to its point of consumption. Here are three examples of burden shifting:


… in Pharmaceutical Production

The Wall Street Journal reports [23] on production of over-the-counter medications like acetaminophen, an inflammation reducer. A key ingredient is phenol, which American pharmaceutical makers produced in Texas and Louisiana until around 2000, at which point they shifted their attention to high-margin blockbuster drugs and allowed the burden of bulk pharmaceutical manufacture to shift to China, which now produces half of the world’s active pharmaceutical ingredients. (The ingredients in a pill that make it ‘work’.)


But as SARS-CoV-2 expanded in China in January 2020, exports of acetaminophen to the U.S. declined by 70%. Chinese factories closed due to employee quarantines or directed their production to meet local needs. The U.S. saw supply shortages as the pandemic appeared.


Chinese exports picked up again in March and April, which reinforces the symptomatic solution, and makes it more difficult to develop a fundamental localized supply chain solution. In the article, Christopher Priest of the U.S. Department of Defense states “The national security risks of increased Chinese dominance of the global active pharmaceutical ingredient market cannot be overstated.”


… in Masks


By July 2020, the head of the US Centers for Disease Control estimated that “the pandemic could be brought under control over the next four to eight weeks if we could get everybody to wear a mask right now” [24], at a time when the virus was known to be infecting 65,000 new patients per day. (The CDC estimated that they are aware of only 10% of the actual infections, meaning that there may have been 650,000 new infections daily.) Imagine the value of even fewer masks at the time the pandemic was first identified in mid-March, when the new daily case rate was less than 1,000. Mask-wearing could have limited early growth of the viral reservoir and put it into a reinforcing decline.


Studies show that viral particles can “float” as an aerosol in closed spaces and permeate the entirety of a small room within minutes. A mask-wearing person (even a simple cloth mask) decreases aerosol spread. Masks are inexpensive, do not require months or years of research as is required of a vaccine, do not require injections, do not impose a safety risk, and have little in the way of negative side effects. (American politics notwithstanding.)


Medical staff use special “N-95” masks to protect themselves as they work in viral-laden environments, but these were in short supply in the early weeks of the U.S. pandemic. (In September 2020 there are still questions on availability.) Lean management metrics used by hospitals encourage low inventories and low unit cost, leading them to buy inexpensive masks from overseas “just in time”. As with acetaminophen, by the early 2000’s ninety percent of N-95 mask production [25] had shifted to low-cost providers overseas.


In 2009, the company Prestige Ameritech was one of few remaining U.S. companies capable of manufacturing N-95 masks. The H1N1-09 “swine flu” pandemic was on the horizon, and Prestige increased production to meet the expected need, but that pandemic ended quickly, the market collapsed, and the company nearly went bankrupt. The symptomatic solution of purchasing from low-cost suppliers throughout the global chain was “working”, in that the U.S. survived the 2009 swine flu and 2003 SARS-1 pandemics without the need for local mask production. There was no perceived need for a more fundamental solution.


However in 2019, as SARS-CoV-2 appeared, Prestige again recognized the impending risk and reached out to the U.S. Department of Health and Human Services to seek funding to restart their 2009 production lines, not wanting to face bankruptcy again. But HHS did not follow through with an offer, Prestige’s manufacturing capacity of 7 million masks per month remained idle, and medical staff were infected (in some cases fatally) in the early days of the U.S. pandemic. A new symptomatic solution appeared in late April as large manufacturing companies (including the automaker General Motors) began making masks and ventilator equipment. But if the fundamental "local supply" solution is for mask manufacturing to occur within a short delivery widow to local hospitals, the U.S. seems a long way off.


This concept is applied to the world-wide manufacture of a COVID-19 vaccine in a related post: A New Economy for the Fourth Industrial Revolution

… in Management Theory


The “single-bottom-line” metrics of the airline, theme park, sports stadium, hotel, and restaurant industries (among others) all rely on a healthy populace, but they do not themselves take on the burden of general public health. Had airlines invested hundreds of millions of dollars in manufacturing stockpiles of personal protective equipment they might have saved hundreds of billions in lost revenues. Or they could have advocated for (and willingly paid) higher taxes so that the government would take on the public health responsibility. Calling for higher taxes and/or supporting high inventories of hundreds of millions of unused masks (or mask-making equipment) seems financially inefficient for an airline, or any company in the travel and entertainment industry… except in comparison to the pandemic which they now face. This is not to fault past decision-makers, but to highlight the systemic nature of risk in running their companies based on mass, lean, and single-bottom-lines.


From The Butterfly Defect:

"The prevailing logic of supply chain management today is that the production of goods, where possible, should be outsourced to the most cost-efficient provider, and the homogenization of management education (in MBA programs) … cements the spread of practices like lean management and outsourcing.
"But it also leads to an over-reliance on a homogenized box-checking approach to risk management. As students in emerging Eastern Universities learn the techniques of their Westernized counterparts, and vice versa, it facilitates the spread of monocultures.”

Management thought emphasizes low inventories and low component cost, to the exclusion of lost opportunity cost; what opportunities are unavailable to humanity with high fatalities and dysfunctional economies? As industries and business schools throughout the world align on a single set of practices, diversity of thought diminishes and the monoculture develops. All practitioners follow a single approach, losing the ability to recognize failures in that approach.


A systemic failure in modern management theory is that it does not advocate for industries to demand (and pay for) increased public health spending.


The fundamental solutions to exit this Pandemic Age are to:

  • Avoid viral reservoirs, by retracting the human footprint and allowing apex predators and wild spaces to flourish.

  • Minimize the transportation of pathogens and invasive species, most notably through reshoring supply chains.

  • Increase the health of the public to recognize and defend against new viruses and other biological invaders.

These will be discussed in a separate post, but mass, lean, and single-bottom-line corporations (particularly in the travel and entertainment industries) must recognize that their businesses will not restart until these burdens are re-shifted.

Tragedy of the Commons

Donella Meadows supplies the following example in Thinking in Systems:

“Imagine a common pasture open to all herders. Each will try to keep as many cattle as possible in these commons, and will independently ask “what is the benefit vs. cost of me adding one more animal to my herd?” The benefit is the entire proceeds gained by one cow, while the cost of overgrazing is shared by all. The rational decision for each herder is to continue to add to their own herd, even though this eventually leads to systemic collapse.”

Senge diagrams this in the figure at right, where organization’s “A” and “B” each gain from their own activity, though the activities draw from a common resource which is eventually depleted. While the decisions made by “A” and “B” are locally rational, they eventually lead to systemic failure.


… in Lobster Fishing

A historical example of this is found in lobster fishing off the coast of Maine [27], where each boat attempts to maximize its own catch, with the systemic result of depleting all available lobsters. Tragically, depletion of the fisheries in the 1990’s led to bankruptcies and economic suffering for not only the lobstermen, but the surrounding towns as well.


Through fisheries management lobsters came back to the coast of Maine [27], and fishermen and governments developed cooperative mechanisms to limit individual activity in pursuit of maximizing regional goals. Maine is a popular tourist destination, and all businesses benefit when a steady flow of lobster is available.


Local banks take on a systemic risk across the regional economy as they make loans to restaurants, hotels, and gift shops. While for the fisher it is economically rational to acquire as many lobsters as possible, for local banks it is rational to insist on sustainable practices in lobstering. The local economy is interconnected, and banks have the best visibility.


Global Investing to Manage Systemic Risk


In SARS-1 and SARS-2, the World suffers the fate of the Tragic Commons story. Mass, Lean, and single-bottom-line financial metrics led to industrialization near the habitat of viral-laden bats (habitat of the Rufous Horseshoe Bat shown at right) near hundreds of millions of people in southern China. There are trillions of viruses to be found around the world. SARS Coronaviruses seem to have originated in this region, though SARS-CoV-2 is now found on every continent.


Nearby airports accommodate millions of international passengers per year, and the infected unwittingly allow the viral reservoir to expand across continents, pushing economies into recession. While industries have a Common need for public health, they Tragically think independently, and none has an economic rationale to invest in it.


However, large institutional investors such as BlackRock, Vanguard, State Street, and CalPERS, with trillions in assets under management, recognize that they are too big to avoid systemic risk. Blackrock CEO Larry Fink, with $7 Trillion in assets, told investors that it will make its investment decisions with environmental sustainability as a core goal:

“The evidence on climate risk is compelling investors to reassess core assumptions about modern finance… Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance”. [28]

This will be further discussed in A New Economy for the Fourth Industrial Revolution .


Related Posts:

This and related posts are extracted from a chapter developed for the 2020 Conference Proceedings for the American Institute of Aeronautics and Astronautics, held in Orlando in January 2020.


  • 1: A Bat Sneezed and the Economy Collapsed (Intro)

  • 2: Mass-producing an Efficient Pandemic ("A Bat Sneezed" Pt. 2) Gives a brief history on Mass Production, Lean Management, and "bottom-line efficiency", referred to as Industry 2.0. Originating a century ago these brought unprecedented value to society, but have now reached their limits and create global systemic risks.

  • 3: Systems Thinking and Economic Disruption ("A Bat Sneezed" Pt. 3) (This Post) Discusses 'Systems Thinking' models, Exponential Growth, Limits to Growth, Shifting the Burden, and Tragedy of the Commons, as means of understanding the systemic nature of the COVID-19 pandemics, and how Industry 2.0 economics will lead to more pandemics.

  • 4: A New Economy for the Fourth Industrial Revolution ("A Bat Sneezed" Conclusion) Discusses how 'Industry 4.0', encompassing both new technologies and new economics of "People, Planet, and Prosperity". Includes impacts of Digital Twins, Automation, Reshoring Supply Chains, and Workforce Development.


References

[20] D. H. Meadows, Thinking In Systems, White River Junction: Chelsea Green Publishing, 2008.

[21] P. M. Senge, The Fifth Discipline, New York: Currency, 2006.

[22] New York Times Interactive:," New York Times Company, [Online]. Available:

https://www.nytimes.com/interactive/2020/world/coronavirus-maps.html

[23] C.-W. Yap, "Pandemic Lays Bare U.S. Reliance on China for Drugs," 5 August 2020. [Online]. Available: https://www.wsj.com/articles/how-the-u-s-ceded-control-of-drug-supplies-to-china-11596634936

[24] C. McCabe, "Face Masks Really Do Matter. The Scientific Evidence Is Growing," 13 August 2020. [Online]. Available: https://www.wsj.com/articles/face-masks-really-do-matter-the-scientific-evidence-is-growing-11595083298

[25] A. C. Davis, "In the early days of the pandemic, the U.S. government turned down an offer to manufacture millions of N95 masks in America," 9 May 2020. [Online]. Available: https://www.washingtonpost.com/investigations/in-the-early-days-of-the-pandemic-the-us-government-turned-down-an-offer-to-manufacture-millions-of-n95-masks-in-america/2020/05/09/f76a821e-908a-11ea-a9c0-73b93422d691_story.html

[26] K. e. a. Mills, "“Resilience, Adaptation, and Transformation in Lobster Fishing Communities”," Gulf of Maine Research Institute website, [Online]. Available: https://www.gmri.org/projects/resilience-adaptation-and-transformation-lobster-fishing-communities

[27] Maine.gov, "A guide to lobstering in Maine," [Online]. Available: https://www.maine.gov/dmr/science-research/species/lobster/guide/index.html#management

[28] A. R. Sorkin, "BlackRock C.E.O. Larry Fink: Climate Crisis Will Reshape Finance”," 24 February 2020. [Online]. Available: https://www.nytimes.com/2020/01/14/business/dealbook/larry-fink-blackrock-climate-change.html


 
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