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On Systemic Risk and the Legal Future

If you’ve heard the term “systemic risk” it was most likely in connection with that little financial system hiccup we’re still recovering from. But the concept of systemic risk is not limited to financial systems–it applies to all complex systems. I have argued in a forthcoming article, for example, that complex legal systems experience systemic risk leading to episodes of widespread regulatory failure.

Dirk Helbing of the Swiss Federal Institute of Technology has published an article in Nature, Globally Networked Risks and How to Respond, that does the best job I’ve seen of explaining the concept of systemic risk and relating it to practical contexts. He defines systemic risk as

the risk of having not just statistically independent failures, but interdependent, so-called “cascading” failures in a network of N interconnected system components. That is, systemic risks result from connections between risks (“networked risks”). In such cases, a localized initial failure (“perturbation”) could have disastrous effects and cause, in principle, unbounded damage as N goes to infinity….Even higher risks are multiplied by networks of networks, that is, by the coupling of different kinds of systems. In fact, new vulnerabilities result from the increasing interdependencies between our energy, food and water systems, global supply chains, communication and financial systems, ecosystems and climate.

As Helbing notes, the World Economic Forum has described this global environment as a “hyper-connected” world exposed to massive systemic risks. Helbing’s paper does a wonderful job of working through through the drivers of systemic instability (such as tipping points, positive feedback, and complexity) and explaining how they affect various global systems (such as finance, communications, and social conflict). Along the way he makes some fascinating observations and poses some important questions. For example:

  • He suggests that catastrophic damage scenarios are increasingly realistic. Is it possible, he asks, that “our worldwide anthropogenic system will get out of control sooner or later” and make possible the conditions for a “global time bomb”?
  • He observes that “some of the worst disasters have happened because of a failure to imagine that they were possible,” yet our political and economic systems simply are not wired with the incentives needed to imagine and guard against these “black swan” events.
  • He asks “if a country had all the computer power in the word and all the data, would this allow government to make the best decisions for everybody?” In a world brimming with systemic risk, the answer is no–the world is “too complex to be optimized top-down in real time.”

OK, so what’s this rather scary picture of our hyper-connected world got to do with Law 2050? Quite simply, we need to build systemic risk into our scenarios of the future. I argue in my paper that the legal system must (1) anticipate systemic failures in the systems it is designed to regulate, but also (2) anticipate systemic risk in the legal system as well. I offer some suggestions for how to do that, including greater use of “sensors” style regulation and a more concerted effort to evaluate law’s role in systemic failures. More broadly, Helbing suggests the development of a “Global Systems Science” discipline devoted to studying the interactions and interdependencies in the global techno-socio-economic-environmental system leading to systemic risk.

There is no way to root out systemic risk in a complex system–it comes with the territory–but we don’t have to be stupid about it. Helbing’s article goes a long way toward getting smart about it.

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