Context: Cascading Failure in the Financial Network

The concept of cascading failure is perhaps the most critical lesson of the current economic crisis. Over time, a self-perpetuating destruction mechanism has evolved within the financial network. Interdependencies are so complex that actions produce unforeseen reactions. The new global market is so complex no one can grasp the moving parts in play.

Banks and investors are working feverishly to protect their self-interest. The actions of each bank may well be rational and logical—their decision, for example, to not expose themselves to additional risks and focus instead on holding onto dollars. Ironically, it is the combined effect of many similar actions that creates cascading failure. Thousands of banks and many more investors are locking down resources in order to survive. However, their actions have actually worked against their desired goal. The combined impact of these rational acts of self-preservation led to the acceleration of banks collapsing and the crash of the market on a global scale. And so a “run on the banks” —a comparatively manageable problem—quickly cascaded into a “run on the global financial network”[1] that wreaked havoc. Once the cascading failure mechanism kicked in, there was no way for individual banks to reverse their strategies without getting destroyed in the process.

The lesson of cascading failure is among the most important for us in the advocacy and campaign networks.

Cascading failure in an advocacy movement would be triggered in similar fashion. The cash flow that sustains advocacy is disappearing. The movement is faced with significant downsizing and restructuring. It is safe to assume all sources of funding are going to be reduced (let’s assume between 20% and 50%).

Nobody knows how donors will respond to the crisis. No one knows which investments each individual group depends on or which foundations are taking the biggest hits. The funding in the sector is provided by a complex set of sources, and those sources might not even fully understand the fall in their own fortunes.

When the movement battens down the hatches in order to survive, the threat of cascading failure comes into play. Like banks, the organizations in the movement act rationally in their own interests; they refocus on core mission, cut back on meetings and travel, reduce work with allies, and withdraw from “risky” collaborative projects. Like the financial system, the movement then “loses liquidity”—meaning, in this context, it sees a decreased capacity to collaborate due to a drying up of the social trust and communication channels it needs to synchronize. This seizing up of the system leads to cascading failure: the creation of a negative feedback loop that will result in the collapse of more groups, the shedding of more capacity and talent, and a slide into cultural and political irrelevance. In the nonprofit sector, money does not move toward innovation. The tensions over funding and the disconnect because of staff loss and decreased peer-to-peer communication accelerates bickering and dysfunctional coalitions. The work of advocacy organizations in survival mode becomes less exciting, cohesive, collaborative, and visible. Donors, in turn, are forced to further reduce funding because the increased immediate need created by the bad economy for social services on one hand overpowers the ever smaller and more fragmented social action and advocacy networks.

We must plan to deal with the unraveling of larger and more complex advocacy and issue networks.