Applying Agile Software Development Principles to the Economy

April 13, 2009 in Markets, Technology

Many people seem to be laying out the groundwork for “Finance 2.0”.  Recently I came across a great piece by JP Rangaswami that compares Taleb’s 10 Principles to principles of Open Source software.  This got me thinking.

An economy is like an operating system and markets are like pieces of software.  They has many users who demand certain functionality, reliability/stability, and flexibility.   Markets must work within the operating system and both can be hacked, and are susceptible to viruses and obsolescence.

In software development there are two ends of the spectrum.  One one end there are traditional “predictive”, or “plan-driven” methods (such as the Waterfall Model), where requirements are set early on and software is developed from the “Top-Down”.   These types of development projects are levered to the successful alignment of the requirements to the users needs at deployment.  On the other end there are more contemporary non-traditional “adaptive”, agile development methods such as Extreme Programming, which constantly update requirements and adapt to user’s needs.

The biggest problem we will face in Finance 2.0 is that our economy is not open-source and certainly not agile.  It is quite planned and predictive.  Institutions like the Fed and the banking cartels are more Microsoft than Linux,  and any “software” that is produced is still very dependent on the “operating system” it is run on.

Currently our economy and markets have been developed using the “plan-driven” method.  The Fed has a certain set of requirements (low unemployment, stable prices) which flow down to the member banks and hopefully get installed and maintained properly in the economy.  Markets that form must work within this operating system, which can often times be hacked to the benefit of a few developers who also were incremental in installing the original operating system itself.   The result is that we have become Microsoft Windows.  Every update to our operating system seems to be going backwards.  Our latest version was Windows Vista to our previous Windows XP.  While many want to go back to XP (and some do), the reality is that long-term that is not an option.  The methodology in which we develop our economy, our operating system is flawed, and in order to go forward, and for Finance 2.0 to really take root, the operating system itself must be developed using more non-traditional, agile methodologies.