GENERAL SYSTEM THEORY (GST) AND VALUATION
david hornby MEA Llb FAPI
Traditional scientific theory has been modified and enriched by knowledge from a variety of underlying disciplines. General Systems Theory (GST) offers the opportunity of synthesis in scientific research and theory and allows us to view the total subject of study. For example, a valuation system including its interaction with its many environments and recognition of the relevant subsystems.

A SYSTEM is an organised unitary whole but composed of two or more interdependent parts or subsystems with identifiable boundaries from its environmental suprasystem. Therefore, what is generally thought of as the valuation process, is in reality only a subsystem. This is shown in the diagram below shows the environments for a valuation. GST goes further, providing a basic frame of reference for the development of a total valuation system and therefore, helps the valuer to understand the "big picture". GST and its basic concepts were pioneered by the biologist, Ludwig von Bertalanffy (1950).

The biology analogy is most useful for the complex economic, financial, social, mercantile and legal system which is valuation. The valuation process can be compared with an organism as it is a system of mutually dependent parts, each of which includes many subsystems. The starting point of GST is the important distinction between closed and open systems.

CLOSED SYSTEMS

A number of physical and mechanical systems can be considered as "closed" in relationship to their environment. That is, there is very little intercourse between the system and it's outside environment. A closed system is inefficient and will eventually "die". For example, a shopping centre that ignores changing demographic factors within it's trade area or what it's competitors are doing.

OPEN SYSTEMS

Unlike a closed system, the valuation process is in constant interaction with its environment and is therefore, an open system. Too many commentators in valuation fail to recognise this. For example, what may appear to be a brilliant valuation method in the cloistered atmosphere of academia may prove to be completely useless in the "real" world of valuation. The concept of open or closed is a matter of degree and in an absolute sense, all systems are open or closed, depending on the point of reference. All systems are "closed" to some degree from external forces for example, the valuer generally does not reveal ALL his workings in the valuation report. GST allows better understanding and integration of knowledge from a wide range of specialized fields or disciplines. In the valuation process these include: The social nature of the valuation process should not be underestimated for example, writers such as Talcott Parsons have used the systems approach to effectively analyze and understand society. Parson's method can also be used to analyze and understand buyers and sellers in real estate market transactions (1951). Economists have also used the systems approach for example, with equilib­rium concepts which are fundamental in economic thought, and the very basis of this type of analysis is the consideration of subsystems of a total system. Economics is moving away from static equilibrium models appropriate to closed systems toward dynamic equilibrium considerations appropriate to open systems.

HOLISM

Holism is the view that all systems are composed of interrelated subsystems. The whole is not just the sum of the parts, but the system itself can only be explained as a totality. This concept applies to the valuation process. For example, the "identification of land" system (the starting point for the valuation process) consists of surveying, land titles, plans, maps, curtilages, fencelines subsystems.

KEY CONCEPTS OF GST AND VALUATION BOUNDARIES

The closed system has rigid, impenetrable boundaries whereas the open system has permeable boundaries between itself and the outside environment. Boundaries set the "domain" of the organization's activities. The valuation process has been largely thought of as a closed system similar to that in diagram one. That is, valuation has been largely seen from the perspective of the valuer, "downplaying" the effect of the other environments and systems in the process. However this is not the case. Rather, valuation is a mix of largely, economics, law, politics and values. The boundaries are not easily defined and are determined primarily by the functions and uses of the valuation. The valuation system should be seen within the context of broader perspectives including the needs of clients and organizational factors.

The process is better illustrated by the second diagram below where the valuer's perspective has been reduced to "system one" and is subject to the outside perspectives and environments in "system 2". For example, the type of valuation report is determined largely by the needs of the client. If the client is part of the private sector and requires a valuation report for an application for mortgage funding then the valuation firm will respond with a speaking (full) report. On the other hand if the client is within the same organization, a brief one page statement of value may be sufficient. There is a tendency for complex organizations to achieve greater differentiation and specialization among internal subsystems. For example, in a large valuation firm, specializations appear such as industrial or commercial departments.


SUBSYSTEMS OR COMPONENTS A system by definition is composed of interrelated parts or elements. This is true for all systems are composed of interrelated parts or at least two elements, and these elements are interconnected. Systems exchange information, energy, or material with their environments. the more open the system, the greater is such exchange. Feedback from the valuation client is most important in the valuation system.

FEEDBACK

The concept of feedback is important in understanding how a system maintains a steady state. Information concerning the outputs or the process of the system is fed back as and if there is deviation from a prescribed course, the system then readjusts to a new steady state. For example, a valuation firm may adjust the wording of valuation disclaimers following the result of a recent court decision. Interaction with the environment goes further than that shown in the diagram below.

Law, society (values), science and economics are all powerful environments which cut across subsystem two. The outside environment shown in the last diagram is most important. For example, social values require that a good property tax system is one that is easily understood by the consumer (the taxpayer) and that there is an effective appeal process subject to the decision making environment of the courts. This is why property taxes cannot be wholly replaced by indices or some proxy to market value derived by computer. As the legal environment is the final and ultimate umpire, their rules cannot be ignored. The valuer must be able to prove his/her valuation in court. That is why the valuer cannot be replaced by the computer and why research tools such as multiple regression analysis (MRA) can never become anything more than a support or secondary method of valuation. Society, consumers, clients and the courts will not allow it as a primary method of valuation.



Once the "big picture" provided by GST is appreciated it can be seen that in many valuation processes the "tail wags the dog". For example, the consumer of a property tax valuation demands certain valuation criteria which the law and governments try to provide. For example, a circuit breaker that provides relief to certain groups seen to be subject to property taxes that are too high. The extended valuation system shown in the diagram below can be further extended. For example, international law is playing an increasingly important role in the maintenance of the environment and a large amount of Federal jurisdiction in land management is achieved through the signing of international treaties.

With better and better communications certain world systems will have a greater bearing on the Australian valuation system.

LEGAL CONTROLS

All states and territories except South Australia and the ACT have legislation controlling the activities of real estate valuers particularly by way of licensing.
 
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