"Hierarchy (...) is a way of limiting complexity in the interest of both stability and evolvability. Simon argued that systems structured in this way possess a basic, competitive simplicity. (...) Take ordinary bone, for example, which is remarkably tough, yet lightweight, with properties that our technology still cannot match. The secret is hierarchy. Within bone, small molecules bind together into proteins, which then link into filaments, which in turn organize into larger structures. When a bone suffers a blow, the hierarchy provides a variety of mechanisms by which it can pass along the excess energy it absorbs, without creating lasting damage. Bone, like most other structures in biology, is not just complex, but complex in a highly organized way.
What about structures in economics and finance?
The growth of modern finance seems to have violated the principle of hierarchical structures, and with gusto. Two trends in the past 30 years — the merging of banks into huge institutions and the explosion of derivatives that link them around the globe — have made the network much less modular. We have created a vast web of interconnections with extreme complexity but little organization. And this does appear to have made the system less resilient. (...) Unlike organisms, of course, financial systems haven’t undergone evolutionary competition from which only the fit have emerged. We have little reason to expect that what exists would be anything like optimal, or even reasonable. (...) Both high concentration and high interconnectedness contribute to an “everything is linked to everything” outcome that is the very opposite of modularity, and a likely recipe for instability. Financial engineering should learn to avoid this architecture, just as surely as biology has.”