The fundamental principle by which the modern world works is that increased efficiency reduces costs and therefore quality of life increases as each individual can either afford more of what they like or they can step up to improved quality at the same cost.
This is the basic driver behind every business endeavour: the delivery of content that would be too inefficient in terms of overall cost to quality of life for an individual to provide for themselves, and for which they are therefore willing to pay another to provide to them.
This core function of any financial transaction is true regardless of technological level, historical era, or magnitude of transaction. It applies just as much to the wool trade of mediaeval England, as it does to a hedge fund in 2011; and to the purchase of a loaf of bread by a citizen in the Roman Empire, as to buying a house today. Even hunter-gatherer tribal societies apply this principle by dividing the hunting and gathering (and other tasks of life) between different subsets of the tribe, thus improving overall tribal efficiency. Communist societies are no different either, with the profit motive being abstracted into (and distorted by) a central authority, still existing through quota allocations. While there exists a limited amount of resources to be divided amongst a number of people, the drive for efficiency will always accompany humanity.
There is therefore a permanent drive built into society to increase efficiency as to do so increases the economic power of any given transaction. This is to the benefit of both the seller and the purchaser as both have potential to get more out of the transaction: more service gained by the buyer, and more profit accrued to the vendor.
The limiting factor to this activity is the stability of the mechanism by which efficiency is increased. For every step up in efficiency, there is an increase in complexity. A highly unstable mechanism becomes unpredictable, and so costs rise, negating the initial efficiency gain. Risks to the system occur when unstable mechanisms are implemented in an attempt to extract the efficiency gain (and so extra profit) before the system is stable enough to endure implementation. If this happens, the net cost to both parties actually increases: the buyer purchases a faulty item or service, and the seller has to fix the problem.
This is the root of moral hazard, the financial risk associated with implementing any new system. It is the loss of this connection between risk and return that concerned central bankers so much during the financial crisis (both with regard to the way debt was repackaged/resold and with the bank bailouts thereafter), and continues to ripple outwards in examples as diverse (but connected) as the risks attached to European sovereign debt levels and credit availability in the mortgage market.
A more prosaic example can be found in the recent discovery of toxic dioxins in German eggs used in various products in the UK. Here the system is the interconnected nature of the global food industry, and the efficiency gained by leveraging mass industrial processes to feed populations at a cost they will tolerate. Without this complex logistic web, food would be significantly more expensive. The flipside is that the when the system fails, the negative effect ripples outwards much more than it would have in an earlier era.
Technological advances drive efficiency gains, which lead to more refined and extended logistics chains, delivering more affordable products to more people, driving up purchasing power and so, quality of life. The challenge is how to ensure systems that are implemented to improve efficiency are also sufficiently robust to reduce the risk of systemic collapse to a tolerable level. In other words, how not to push the system beyond the tipping point.
The question is what level of risk is tolerable? Any logistics chain is inherently risky. Equally, surviving independently of a wider economic network would be a subsistence and lonely existence. Redundant systems (or their abstract corollary, the insurance industry) stabilise complex system, but carry their own costs and so are themselves prone to the same failings (viz. the failure of collateralised debt obligations/CDOs to protect the banks in the way they expected).
Understanding how complex and chaotic systems interact with each other will be crucial to safeguarding our ever more complex and interdependent society.
But even that does not provide a solution to the fundamental conflict between efficiency and stability. I wonder if such a solution exists?
The only possible theoretical way out I can think of would be a the equivalent of a perpetual motion machine: a way to get something for nothing, a lifting off the pressure on resources. Perhaps developing fusion power would allow that, at least for a while? Virtually free unlimited power would increase efficiency of every other system, though of course we would then be dependent on yet another fragile system (the fusion power generation network). Still, I think it no random coincidence that every single major world power is investing in that fusion research. Certainly, I can think of no other project that has unified China, the EU, the USA, Russia, Japan, Korea and India in common purpose.
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