Chapter 4 - The Edge of Chaos

OCTOBER 29, 2011

Another term you hear a lot these days is “complexity”.  Complexity theory is really just another way of expressing chaos (which really has its origins in science and mathematics) as a business fitness landscape – kind of a “chaos theory without the math”.

It could also be said that complexity theory is the study of complex adaptive systems, which operate “on the edge of chaos and order” (Chris Langton, Santa Fe Institute)

Of course, all these scientists and business strategists are simply trying to make the point that it is always profitable to inject complexity into a system that you alone can manage best.

Wall Street has understood this for years.

Read any accurate financial statements lately? Yeah, right.

After listening to the talking heads at CNBC or Bloomberg do you still believe that any of that “drivel” makes sense?  The stock market was up (or down) today because of what? The dollar strengthened (or didn’t) on what news?

Can anybody tell me what a derivative is? Or, how it was derived, how to correctly monitor its performance, or assess its true risk?  What about P/E’s?  Sharpe ratios? Black-Scholes option calculation formulas? No wonder index funds are so popular.

And Wall Street isn’t alone. Governments large and small are aware of this little secret too.  Tried cutting through any “red tape”? Want to get something simple like a building permit?  The last time I heard, New York City required no less than forty-two (42) steps (sign offs) to approve a new bathroom. And each of those “sign offs” comes at a price. I guess we now know why the costs keep escalating regardless of bids.

We don’t really need to mention the internal revenue code now, do we? Either it was purposely written to be confusing – or else somebody somewhere is getting paid by the word.  Of course, there might be another explanation too – this is what happens when nobody takes responsibility, but everyone is in charge.

Maybe Will Rogers was right – “It is a good thing we don’t get all the government we pay for.”

Then again every dark cloud has to have its silver lining. The ever changing tax code and its complexity has long been the mainstay of many an accounting firm's competitive advantage (a la Michael Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors, 1980 Harvard Business School Press).  And the accounting profession has leveraged that advantage in the past to develop core competencies (more Porter) in several related areas. Their focus now is to further leverage that expertise, client base, and resources to achieve even more dominance in the tax preparation field and into related fields such as financial services.