We can understand the performance of systems at three basic levels.

The three levels at which we can understand the performance of systems consist of Events, Patterns of Behavior, and Systemic Structure. Working from the bottom up, each level provides more knowledge about what influences the system’s behavior.

This diagram shows the direction of influence—most important influence at the top.

Description

Graphic

The description begins from the least informative level of performance—Events—and proceeds to the most informative, and influential, level—Systemic Structure.

Events

Events, which amount to one-time occurrences, consist of a single result from the systemic processes.

Examples of events:

• the current price rose 5% this today
• long-term interest rates rose 1/8 th of a point yesterday
• Sears sold 10,000 socks yesterday.

Systems produce results one event at a time. An event shows us what the system has produced at a single place and time, but a single event provides little explanation of events in the past or evidence about what the system will produce in the future.

Patterns of Performance

Patterns of behavior show a series of events that trace out a pattern over time. These patterns reveal a much deeper level of understanding of system performance. They show behavior over time.

Examples of patterns of behavior:

• interest rates have fallen (risen) for 14 consecutive months
• stock prices have fluctuated within a 20% range for three years
• bank reserves have trended upward for the past 93 years

A series of events produced by a single system form a pattern of systemic behavior. Patterns of systemic behavior provide a history of what a system has produced in the past.

Based on the assumption that the system will produce results in the future similar to those it produced in the past, we can predict future events (or results). Patterns of behavior do not help us to understand why a system produces the results that it does.

The Theory of Variation, which I will describe in a later publication, can help us determine whether the system has produced a particular event or whether an external influence has caused a variance in behavior.

Systemic Structure

Systemic Structure provides the fundamental determinant of system behavior. The deepest understanding of systemic performance comes from understanding the systemic structure.

To understand why a system produces specific results (events or patterns), one must know the system’s structure.

A person cannot make lasting changes to the behavior of a system without first understanding its Structure. The Structure of a system determines the limits of its performance—what events it will produce and what patterns those events will form.

Examples of systemic Structure:

• fractional reserve banking, the Fed’s power to create reserves, which influence money creation at banks, and mental models of those in charge. A structure that influences the natural market forces to expand credit without limit (reinforcing process)
• the capacity of the government to spend money. It drives increasing taxes, borrowing, and inflationary monetary policy (reinforcing process)
• the free market system. It gives the greatest influence to consumers for all levels of the market (generally balancing process)

Complex Adaptive Systems

One type of systemic structure, known as a “complex adaptive system”, can make predicting patterns in systemic behavior difficult. These systems, which include all living systems, have the ability to observe their own patterns of behavior and modify their structure and change their behavior to some degree.

And you wonder why most economic and market forecasters don’t do it too well.

Conclusion

I have given you only a brief introduction to a very complex subject. I hope I have helped you see why the more you understand the structure of a system, the more you will understand its performance. Be careful how much you believe predictions about a system’s performance from someone who does not understand its structure.

Remember, the designer has a greater effect on a racecar’s performance than the driver does.