Friday, November 28, 2008

The Finance Goose and the Telecoms Gander

I’ve been trying to think through the analogies between finance and ICT (aka telecoms [1]) in the hope of gleaning insights about ICT regulation from the market melt-down. (Recent posts: From transparency to intelligibility in regulating finance, Lessons for communications regulation from banking complexity, More on Intelligibility vs. Transparency.)

While finance and ICT are both complex adaptive systems, there are some deep differences [2] – deep enough that “Re-regulate, Baby!” thinking about financial markets shouldn’t automatically include ICT. In other words: while self-regulation on Wall Street may be anathema in the current climate, it should still be on the menu for ICT.

Money is a core commodity

The dotcom bust of 2001 was severe, but pales in comparison to the Savings & Loan debacle, let alone the current crisis. The ICT business doesn’t have the societal or financial leverage to drive meltdowns that rock society. Finance is about making money with money, and money drives the economy. Money is the ultimate commodity; when you can’t get money, nothing works.

ICT is not (yet?) so central. Information, for all the talk about bits and bytes, is not really a commodity. A dollar is a dollar is a dollar, but a brother could be a sibling, a comrade in arms, or any human being, depending on the context [3]. Distortions of information transfer, whether in transport or content, are therefore not as leveraged as bottlenecks in the money supply.

Information flows are undoubtedly important, and their interruption would cause disruption. For example, cargo ships need to provide electronic manifests to their destination ports 24 hours before arrival in the US. If this data flow were blocked, the movement of goods would stop. However, this is a point failure; it isn’t obvious to me how something like this could cause a cascade of failures, as we saw when banks stopped lending to each other [4].

Leveraged Intangibles

Finance is more leveraged than ICT. It’s more abstract, not least because money is a more “pure” commodity than information; that is, it’s more generic. The sub-prime crisis was the collapse of a tower of derivatives: loans were bundled into CDOs, which were then re-bundled into CDOs, and again, and again. There was double leverage. First, the obvious leverage of betting with borrowed money; second, the recursive bundling of financial instruments to magnify even those inflated returns. The tower of derivatives was possible because its bricks were intangible; failure only came when the conceptual opacity of the structure overwhelmed our individual and institutional comprehension, rather than when its weight exceeded the compressive strength of its materials.

ICT also has its fair share of intangibles; many problems of large-scale software development are due to the opacity of boundless webs and towers of abstractions. However, the recursiveness is not as thoroughgoing, at least at the lower levels of the stack. The risks of network infrastructure companies misusing their market power in interconnection, say, is limited by the fact that no part of the network is many abstraction steps away from tangible wires and routers.

The risks do become greater in the higher network layers, such as applications and content. Software carries more and more value, here; even though the bits and MIPS live in data centers somewhere, complex layers of abstract processing can create unexpected risks. One example is the way in which personally identifiable information doesn't have to be a name and address: when sufficiently many seemingly random items can be aggregated, someone becomes uniquely identifiable even though they didn't provide their name.


The finance business is shot through with unquantifiable and unpredictable subjectivity, notably trust, greed, and panic. Of course, all businesses including ICT rely on trust, etc. However, in finance subjective assessments drive minute-by-minute market decisions. When banks lost faith that their counter-parties would still be solvent the next morning, all were sucked down a maelstrom of mutual distrust. Businesses all try to quantify trust, but it’s a fragile thing, particularly when assets are intangible and unintelligible. Investors thought they could depend on ratings agencies to measure risk; when it turned out that they couldn’t due to the agencies’ conflicts of interest, the downward spiral started (and was accelerated by leverage).

The ICT business, at least at the lower transport levels, is much less dependent on subjective assessments. One can measure up-time and packet loss objectively. Things are less sure at the content layers, as can be seen in the rumblings about the incidence of click fraud, and whether the click-through accounting of search engine operators can be trusted; so far, though, there’s been no evidence of a rickety tower of dubious reputation.


Finance today arguably needs more supervision because of the wide ramifications of unfettered greed, fear or stupidity. The impacts are so large because of the amplifying effects of leverage and intangibility; the risk is greater because of the opacity due to unintelligibility.

ICT also has leverage, intangibility and opacity, but not at the same scale. Therefore, objections to delegated regulation in finance do not transfer automatically to ICT.

Counter-intuitively (to me, at least), the parts of the ICT business that are most defensible against claims for re-regulation are those that have a great deal of physical infrastructure. The more software-intensive parts of the cloud are most vulnerable to analogies with the runaway risks we’ve seen in financial markets


[1] While telecoms is an easy old word that everybody knows, it really doesn’t capture the present situation. It connotes old technologies like telephony, ignores the media, and misses the importance of computing and software. There is as yet no better, commonly used term, and so I’ll reluctantly use the acronym ICT (Information and Communication Technologies). ICT is about business and policy as well as technology, but it’s a little more familiar, and shorter, than “connected computing”, my other preferred term.

[2] Jonathan Sallet observes that the financial crisis derives from market externalities that put all of society at risk (personal communication, 26 Nov 2008). The very large scope of this risk can be used to justify government intervention. We’re hoping to combine our thinking in an upcoming note.

[3] I’m toying with the notion of doing a metaphor analysis of information. At first sight, the discourse seems to be driven by an Information Is a Fluid analogy; it’s a substance of which one can have more or less. This metaphor is both pervasive, and open to criticism. Reddy introduced the Communication Is a Conduit metaphor for knowledge transfer; this is related to the Lakoff’s Ideas Are Objects. See here for his critique, and citation of his paper.

[4] Just because I can’t see a cascade doesn’t mean it isn’t there, of course; it may just be my uninformed and uninspired imagination. Network security analysts have, I’m sure, constructed many nightmare scenarios. The weakness of my analysis here is that my argument for the implausibility of a meltdown rests in part on the fact that it hasn’t happened – yet. The 9/11 fallacy. . . .

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