Systemic importance and blowdown

As we consider the risks of “systemically important” firms (i.e. those “too big to fail”) we should take a lesson from forests. Their growth and structure can tell us a lot about the growth and structure of our economic system, as well as its future.

Forests do not simply pop into existence. There is a succession through which an ecosystem passes on its way to becoming a stable forest. In the case of bare earth exposed by a retreating glacier, there is initially a scarcity of materials with which to gain nourishment, and lichens are usually the only beings that can eke out an existence with the water, sunlight and bare rock.

But they break down the rock and process it into soil, which gathers in crack until it is sufficient to support mosses and small plants, which attract small animals. These animals occasionally leave their waste products, and further build the nutrient base. Shrubs and small trees move in.

The first trees are generally sun-loving fast-growing broadleaf trees, like alders. These trees fix nitrogen in the soil, which is essential to building the biomass that will sustain what is known as a climax forest.

At climax, the forest has essentially reached adulthood and stopped growing. While individual trees come and go, the makeup of the forest remains relatively stable. Climax forests tend to be made up largely of conifers. These take much longer to grow than alders. But their full height is generally taller than the broadleaf trees, and eventually they crowd out their predecessors. The forest has become a two tiered place, in which the canopy blocks out the sun, and the forest floor is an open place, populated by ferns and small shrubs.

Climax forests are sometimes likened to cathedrals, and like cathedrals, they are relatively quiet places.

However, climax forests do not live forever. Their stability yields to stagnation. The average age of the trees increases, and diversity decreases until sometimes a forest canopy will consist of a nearly homogenous stretch of one species, stretching for miles.

This forest becomes increasingly vulnerable, and eventually it begins to collapse. This can come from fire or disease or a combination of the two. But often these weakened forests are brought down by wind.

This process is known as blowdown. When trees fall, they often start chain reactions. This may be the simple result of one tree’s pushing over others on its path to the ground. This domino effect is enhanced by the new opening in the canopy, which can allow the wind to drop down and catch the other trees that were previously protected from the wind by each other.

On occasion, blowdown turns into a chain reaction, transforming many acres of tranquil old-growth forest into a jumble of broken trunks and branches. At first glance, this looks like a horrible mess; from the point of view of the individual trees, that’s just what it is. However, the collapse of one order paves the way for another, as the cycle starts anew.

A few years ago, a huge Douglas fir went down in a forested park near where I live, taking about a half dozen smaller trees with it. When I discovered it in the spring, this new clearing was home to a riot of new growth. The old trees were still bleeding sap, but already the forest floor was covered with a thick growth of nettles and elderberry, taking full advantage of the sunlight’s return.

Once again, it was a place for rapid growth and flexibility. And as the years pass, the old trees will decompose and release the nutrients that they had hoarded for so many years. Once again, flexibility and vitality will be important assets until the climax forest returns.

The development of human civilization has tended to follow a similar path. In exploring these parallels, it can be helpful to view individual organisms as analogs to human organizations.

At first this progression favors small and aggressive entities, which can adapt to changing conditions. These pioneers put a premium on rapid rates of reproduction. They fail often, and when they do, they are rapidly reprocessed to serve the next generation, adding to the soil base on which the system depends. Those that do survive provide protection for their successors.

This has its parallels in the simplest bands of hunters and gathers. Their structures are simple, their size is small, and they do not have much specialization among their parts. Over time, more complex structures evolve and because of their complexity they are able to supplant their predecessors. Smaller, simpler structures are broken down and integrated into their replacements.

Height is an important part of the succession, and something like it functions among organizations. This is not literal height, although high-rise office towers can reflect this relationship to the world. Rather, organizational height is marked by variations in rank and compensation.

In the same way that a trees crown needs a lot of trunk to hold it high enough to catch the sun, many clerks and cashiers are required to elevate the management to the heights that give it an advantage over its competitors. The lower parts also benefit from being part of the structure, but on the whole, a huge amount of inert material is required to facilitate a relatively small amount of vitality and growth.

A 100-foot tree and a corporation with employees spread over a large area have an important thing in common. They are not going anywhere. Witness the ongoing implosion of our auto industry, in which their inertia and organizational stiffness are preventing them from adjusting to the winds of change that are blowing.

These giant organizations do well in times of basic stability. But as soon as turbulence strikes—whether gusting wind or political upheaval—they turn out to be much weaker than they appeared. They are also more dependent upon each other, and much more likely to take down a lot of thier neighbors when they go.

Rather than propping up these old institutions, we must quickly find ways to replace them with smaller and less top-heavy firms that can fail without taking down everything in their path.

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2 Responses to Systemic importance and blowdown

  1. Jeremy says:

    I like the comparison of our financial system to a forrest. Being someone that works for a ‘sapling’ financial institution, it is nice to get some sunlight from time to time. While this new administration does seem to be propping up the big guys, they have also been supportive of alternative financing – for example, the CDFI (Community Development financial Institution) budget of the US Treasury received 100million in the stimulus and the budget has increased as well.

  2. Susan McLeod says:

    Great column today. Very interesting.

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