“The moment I make a statement about reality, contradiction is present, for what I say is ideality.”Soren Kierkegaard. De Omnibus Dubitandum Est. 1843
Or rather, we don’t know everything, and even if we did, no language or model exists to express such complete knowledge. The known implies the unknown; the predictable implies the unpredictable.
The modern global economy and political system has labored to reduce to obscurity the unpredictable, or the risk, through the binding and bundling of everything, like Zebras.
This makes sense in the same way that we are more stable with crutches, taller with stilts, and can avoid illness if we incase ourselves in a bubble. You will have tremendous difficultly in knocking me over if I have crutches, but if I continue this strategy I soon will lose the ability to walk on my own. We all choose to risk falling down more often in the name of walking and standing independently.
Like zebras, we are stronger together, mathematically – thus spake David Ricardo – and of course international trade and cooperation is fantastic. It’s how I make my living and how you likely do and how we all get virtually anything in two days from Amazon.
The weakness in our system is the fragility that we create through constant optimization strategies. In predictive modeling, it’s always mathematically better to avoid risk, specialize, and maximize – assuming you exclude future generations from your modeling, which most of us do.
This could be called a modern religion – the worship of the known.
It’s crazy to worship an unknown, metaphysical Deity or Deities. Only that which is provable is that which is actionable. Alas, it’s what we know for sure that just ain’t so that tends to have a disproportionate and negative impact.
We built a philosophy of ontological materialism that shorts risk through bundling, and minimizes contradiction through binding compacts of shared responsibility.
This works well when the Jenga tower only goes a few rungs high. This is why localism has adopted shared responsibility strategies for millennia and gladly accepted the risks of the whole. This helps when the whole is visible, local, and small.
Go to an army platoon and see for yourself. “Mass punishment” for the mistakes of one is very acceptable, however frustrating it is… The unit accepts this, and continually refreshes this policy within its ranks, because each individual in the unit quite literally is putting their life in the hands of another. Equal responsibility, equal risk.
We have applied this to the global economy like a garment, wearing it as a fashion without understanding its underlying principles. Moreover, globalization a local strategy presents a problem of scale, and creates tremendous variance between responsibility and risk.
We all hold the same theory of risk (our garment) but the facts tell a different tale (the variance). See Nassim Taleb on “skin in the game” here. Some of us are exposed to risk (i.e. have skin in the game), and some of us don’t. If you want to know who is who, the coronavirus is an easy case study. Jobs are lost while markets go up. The people filing for unemployment have skin in the game.
A more general result in this de-risking system is that nobody effectively is held to account (on the grounds that if everyone is responsible, no one is responsible).
Or rather, those without risk hold no structural incentive towards being responsible. As the number holding no risk increases, the number of people dropping the burden of responsibility increases. The responsibility line is exponential, because as society witnesses more and more people adopting no responsibility, more and more “check out” in the name of “why should I take care of a system that nobody else is taking care of?”
It’s a logical argument. Watch it applied to liter. If 1 person liters, we pick it up. If 100 do it, 1,000 will tomorrow.
Our “Robust” response to the fragile system we built
Our knee jerk reaction to a volatile event is one of over reaction and scapegoating. This, paradoxically, reinforces the broken record, by convincing ourselves that music with skips and crackles is actually better.
Notably, our over reactions by intention have more to do with advertising than anything (volatile events are a growth industry for the media, INfluencers, and politicians); while our over reactions by un-intention concern 2nd and 3rd order effects, like forcing the world to spend tens of trillions of dollars on redesigning international travel security post 9/11.
As for our scapegoats – like one banker, one political party, one ethnic or religious group; the logic in all is the same. Ask not what you can do for your country, or even yourself, ask only what you are entitled to, and what the collective is responsible for, then select which part of this sum is to be blamed for the prevailing failure.
Thus, when everyone holds the risk, when responsibility is ubiquitous, and when we all have rights to an ever-expanding everything, and when this system of risk, responsibility, and rights are bundled together like a Gordian knot, all we have is a complexity that can’t be unraveled or managed because it’s a bloated, unaccountable, slow, black box.
There is a famous story about a Gordian knot. A bunch of Greek philosophers and politicians talked about it. Alexander cut it.
“We assume no risk”
“We assume no risk…” To quote the CDO manager in the film The Big Short.
When everything is bundled, nobody assumes risk, or rather, the risk becomes so spread out that, effectively, nobody has to concern themselves with the risk.
No risk? Great! And they lived happily ever after. But you haven’t read a story like this. There isn’t one.
Yet, this is the global economic and political environment.
It is also the function of many CSR initiatives – we can divert the business and reputational risks of negative business activities by paying a tithe to the moral consensus. Or, in the case of more severe negatives, as was the case in the housing market and financial collapse, find a scapegoat. But punishments and fines don’t reveal responsibility, nor do they upend poor behavior – they simply add a potential cost into bad behavior.
A lot of research is pretty clear about this – fines don’t change behavior, they just add a price to rambunctiousness, which we are willing to pay from time to time.
This means that bad behavior is a matter of calculation. A calculation that becomes easier the larger the system of rights, responsibilities, and collective risk grows – we can hide in a pack. Nobody needs to check under the hood because there are so many people. Surely someone has checked, right?
This is a description of history. The older generation becomes willfully blind, greedy, and corrupt.
When this happens in corporations, we turn to something approximating CSR.
A handful of CEOs get fired, corporations issue dissertations of mea culpas via Twitter, and an announcement is made that directs a portion of some fund (created by this very system) to some popular charitable cause. A decade ago this was the troops, then earthquake victims in Nepal, and now it will certainly be for coronavirus relief, testing, safety, etc.
What this all avoids is perfectly captured in a scene that never happened in The Big Short – how did this all start to begin with? Why could we all allow such reckless and unethical behavior in the housing market?
Prior to the invention of the financial vehicles that allowed the eventual housing collapse, we, the people, got a new right – everyone deserves a house. It’s a right, a human right, for all of us. A home is dignity, and nobody could deny someone dignity. It’s an unassailable argument, and I believe that unassailable arguments are fragile.
It’s the popular story of corrupt bankers that accepted all loan applications and disregarded all financial standards. We like having someone to blame, and this story is truth enough because it is true. It’s just part 1 of the story. We were comfortable stopping there.
What’s left is everyone talking about everything but the real consequence of the alternative. Could bankers deny loan applications? Denying people the right to a home due to their economic status, job status, and credit history is discrimination. Even more, it’s against the American economy and the mythos of the land of opportunity. With how liberally the word has been thrown around over the past few years, that kind of banking scruple could be called treason.
By 2015 we could safely, and popularly call this fraternity of bankers corrupt and criminal. And of course, many found that this system was perfectly hospitable to corruption and criminality – in large part thanks to an addiction to de-risking everything and providing government-backed from A to Z. But we ignore that this system of subprime mortgages began with the same fanfare with which the same institutions praise corporate charity and CSR initiatives – they are moral, just don’t look behind the curtain.
What do we do with 7 fat cows?
I like Joseph’s interpretation of the Pharaoh’s dreams from Genesis 41.
The seven fat cows indicated times of abundance, and the seven thin cows that followed indicated times of scarcity. The Pharaoh was admonished to save during high times, in order to maintain during the low times. Because the Pharaoh followed this advice, via dream interpretation, Egypt did not suffer during their seven years of drought. This is a central principle of Keynes. Modernity has only taken his views on the positive role of the visible government hand in economic affairs, not his strategy to prevent the levees from breaking. The full picture is pretty lindy. Maybe we should read the entire text, and not just the portions that agree with our initial presuppositions.
But let’s go back to Egypt. The result of Pharaoh’s strategic planning for the future famine is not just a robust strategy, but something that can be quite anti-fragile. Seven years where a society focuses on food production and storage then turns into seven years where it can shift focus, say on world wonder construction.
I know using the Bible as a tool for insight is frowned upon. But first rate your company or country in how well they prepared for our current situation. Perhaps Genesis 41 has some merits.
The second element, given my recurring theme, concerns risk. I draw a similar conclusion as Nassim Taleb regarding the significance of Hammurabi’s Code. The Code is effectively line after line repeating different variations of if the thing you administer directly results in a damage to the person or entity you administered it for, you shall suffer equivalent damage. In specific terms, if you built a roof and it collapses and kills the owner, you shall suffer equivalent damage. This applies to the owner’s son, and your son; to the owner’s grandchildren, and yours. This is shared risk.
What is the consequence of this? The business owner has to take extreme responsibility, because, quite literally, everything they do is as if it is for themselves.
We have removed this principle.
The consequence of removing this principle is equally clear – we ask car companies to fund homeless shelters to be good moral agents, but if they produce a car and identify a defect that will kill a percentage of drivers, what do they do? They certainly aren’t on the line for this – or rather, not on the line like the drivers of their cars are. They instead measure the cost of the legal fees versus the cost of the car recall.
Hammurabi isn’t the ideal model for today. It would conflict with our sensibilities. But somewhere between risk adoptance (Hammurabi) and risk avoidance (today), would be a more useful CNN townhall debate.
The 2018 hurricanes in the US are a good example of this.
Historically, major environmental events result in significant death. Natural disasters have been an unsung but consistent cause of the greatest tragedies and spell an empire’s demise. That is, until the combustion engine and oil.
Our recent disasters, which are simultaneously both random events, and are occurring with greater frequency and severity due to global warming, of which modern industrial practices share a portion of responsibility, resulted in historically insignificant damage and almost no loss of life. Thousands of trucks of food and water, powered by engines and oil, saved hundreds of thousands of lives.
If I even have a way to wrap this up
“How could anything originate out of its opposite? For example, truth out of error? Or the Will to Truth out of the will to deception? Or the generous deed out of selfishness?”Friedrich Nietzsche. Beyond Good and Evil. 1886
Order grows from disorder. If more disorder is coming from your disorder, then the structures in your system are fragile.