A new study of the 2008 collapse has joined economics and network theory in a graphic depiction of inevitable failure.

In the preceding years, formerly far-flung sectors of the economy had been pulled together, linked by a newly deregulated financial industry. Thus intertwined, the economy took a form known to network theorists as “intrinsically fragile,” in which a local glitch would cascade into system-wide catastrophe.

“The fact that the system became fundamentally fragile is very clear in the data,” said systems theorist Yaneer Bar-Yam, president of the New England Complex Systems Institute. “The financial sector was responsible for many of the crucial links in the economy that allowed for shocks to be propagated from one sector to another.”

Economists have pointed to financial industry entanglement with the entire U.S. economy as a crucial factor in the 2008 collapse, but Bar-Yam’s team drives the point home with new clarity.

In the study, published November 16 on arXiv.org, the researchers used network-mapping tools to analyze the relationships between 500 corporations with the highest stock-trading volume. These were linked to oil prices, bond prices and interest rates.

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Other research on network dynamics has shown that interdependence can promote stability, but eventually reaches a point of reversing returns (see “Networked Networks Are Prone to Epic Failure“). Shortly after the peak of interdependence at the end of Bar-Yam’s graph came those fateful months when the real estate bubble popped, followed by financial-sector collapse and a hastily averted implosion of the U.S. economy.

Since then, long-standing debates about the role and nature of financial regulation have taken center stage in American politics. Often these degenerate into ideological battles between people who believe market regulation is necessary, and those who think markets should be completely free.

Bar-Yam’s group doesn’t overtly take a side, but they hope their analysis can provide an understanding of the economy’s systemic properties and how they’ve changed.

“We’re identifying the actual system. We’re not coming in here as ideologues. We’re asking, what’s going on, and how do we characterize it,” he said. “If we don’t recognize the vulnerabilities of the system, we will repeat and suffer the consequences.”

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