The Uses of Diversity. David Ellerman

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СКАЧАТЬ a system based on either the logic of exit or the logic of commitment. Both ways are possible; the best system will depend on the particular circumstances.

      The fourth point is that there are often interdependencies in a system based on one of the logics so that hybrids tend to be lethal rather than vigorous. If one tries to “mix and match” exit-based components with commitment-based components, then the system will most likely malfunction.⁵

      For instance, in an exit-based system of conflictual labor relations, large inventories help to mitigate the holdup problem of workers going on strike. A just-in-time inventory system fits together with cooperative labor relations. But if a company with conflictual labor relations decides to try a just-in-time system to save on inventory costs, then any labor conflicts (e.g., truckers) will lead to costly holdups for the company.

      Or in an exit-oriented system of arms-length finance, companies need low leverage and a large equity buffer since when the company hits some turbulence, their financiers may not be willing to extend or rollover their loans. But in a commitment-oriented system of relational finance, firms can have more leverage since their financiers are expected to stay committed in times of trouble.⁶

      One of the (partial) explanations for the East Asian crisis in the late 1990s was that the globalization of finance tempted highly leveraged firms in countries that historically had relational finance (e.g., Korea) to “take advantage” of the cheap and easy finance available from international (arms-length) financiers. But then small shocks to the new “hybrid” system were soon amplified to a crisis when arms-length financiers did not rollover loans and firms had too much leverage to ride out the shocks. In such a system that got stuck halfway between the two system logics, there are two basic policy options. One option is to make a wholesale conversion to an exit-based system of arms-length finance. The other option is to curtail the impact of the exit-based features to maintain functionality in a modernized commitment-based system, for example, using capital controls to install “speed bumps” on the “hot money highway” of globalized arms-length finance.

      The fifth point is that while one system logic may be appropriate in one case and the other logic in another case, there is however a “worst of both worlds” hybrid which combines the fixed characteristics of the one logic with the fixity of the option in the other logic. If both the option and the characteristics are fixed, then one has an unviable “lethal hybrid” that cannot change in the face of adversity and decline. Unfortunately, some attempts to create hybrids with the virtues of both logics may end up with the worst case that only combines their vices.⁷ And some attempts to jump over the chasm by converting a system based on one logic into a system with the other logic may stall halfway across and fall into the chasm to get the “worst of both worlds.”

      I am focusing on cases where the two logics tend to be antagonistic or mutually exclusive (i.e., hybrids are more lethal than vigorous) so that the system needs to be based on one logic or the other. If the two logics are on the two axes, then we are interested in cases where the best solution is a corner solution.

      There is a whole range of cases where the two logics are complementary rather than antagonistic. The logics appear as two “moments” that need to be optimally combined to have the best solution. Then the best case is not a corner solution but some convex combination of the two moments. For instance in complex adaptive systems, the parallel-oriented moment is called exploration (or variation) and the series-oriented moment is exploitation (or selection).⁸ If the goal of the model is to reach a higher altitude on a rugged and cloudy “adaptive landscape,” then exploitation means staying committed to the given hill and climbing higher on it, while exploration means jumping, traversing, or otherwise exiting to another hill that may be higher. In such a system, a corner solution would not work. A system with all exploration would jump in an agitated manner from hill to hill without settling down to climbing higher on any hill. A system with all exploitation would only climb the hill it is on so it would tend to get stuck on a low hill.⁹

      Two Ways to Put Eggs in Baskets

      One of my theses is that often there seems to an awareness of only one system logic to the exclusion of the other. This is probably nowhere truer than in neoclassical economics which is based on the exit-oriented logic of the market. But the one-sidedness also extends to basic questions of handling risks. One often finds the almost knee-jerk response to any risk problem; the solution is the parallel-oriented strategy of diversification. “Don’t put all your eggs in one basket.” Use one’s resources to place many small bets rather than one or a few large bets. In terms of a tree search, this is the strategy of making an extensive parallel search of the first boxes on many different branches rather than an intensive search over the series of boxes along one branch.

      The usual diversification recommendation to “spread your eggs between many baskets” makes the implicit assumption that the baskets have fixed characteristics (e.g., a fixed probability that the eggs in a basket will be broken by the basket tipping over or being dropped). But if the characteristics of some baskets can be significantly changed by a commitment of attention and control to one or a few baskets, then the dual risk reduction strategy emerges. Put all your eggs in one or a few baskets, watch them very carefully, and make sure the baskets are not tipped over or dropped.¹⁰

      The logic of commitment enters through the door of flexible characteristics—in this case, the risk characteristics. The probabilities of a person having an accident might not be fixed independently of the person’s activities but might depend on the precautions taken by the person. When the logic of exit (diversification) works too well, for example complete insurance against the consequences of accidents, then the insured will neglect taking precautions and hazards will increase, that is, moral hazard. To combat moral hazard, one has to move back a little way toward the logic of commitment by exposing the insured to some of the costs of accidents, for example deductibles and co-pay in medical insurance.

      This foreshadows a basic theme. When the choice environment is parsed into a set of options each having certain characteristics, the choice of a commitment-oriented strategy or an exit-oriented strategy will in part depend, respectively, on the extent to which the characteristics are flexible or are fixed.

      Two Biological Reproductive Strategies

      The choice of risk reduction strategy hinges on the question of whether or not a commitment of resources to one or a few options can significantly change the risk characteristics of those options. In biology, all organisms face the reproductive risk that their genes may not survive into the next generation. Since organisms only have limited reproductive resources to address this risk problem, they tend to “choose” one or the other of the “corner solutions” to solving this risk reduction problem.

      If organisms have little or no control over the risk characteristics faced by their offspring, then the organisms will tend to favor a diversification strategy called r selection. They spread their reproductive resources over many offspring as with most insects and fish, and then the offspring face the odds with little or no parental assistance. The emphasis is on the quantity rather than quality of offspring. However, if the parents can significantly control the risk characteristics faced by their offspring and if the offspring can be produced with a “quality” to improve their odds, then that species will tend to favor the commitment-oriented strategy called K selection. They invest their reproductive resources in a few “quality” offspring as with mammals and then they provide intensive parental care to the offspring.

      Two Ways to Increase Reliability

      Another example is from reliability theory in engineering. The risk is system failure when a component breaks down. The parallel-oriented approach to reducing that risk (increasing reliability) is redundancy. In the general parallel (exit-oriented) case, there may be two ways to explore parallel options, one at a time or, if possible, simultaneously. One form of exit-oriented behavior is to try СКАЧАТЬ