Archives for posts with tag: Nassim Nicholas Taleb

The oldest surviving civilized nation, China, calls itself Zhongguo.
The Middle Kingdom. ‘In the middle’ of the barbaric people that surrounded her but also at middle distance between Heaven and the rest of the Earth. The aforementioned barbarians.

And, according to Confucius, it was the emperor’s job to ‘keep things as they should remain’.

Which makes sense. After all, the whole kingdom was the exclusive property of the emperor. And whose job is to watch over one’s property?

Well, things went on long enough for those involved to believe this was the natural order of things.
Until the whole arrangement was upset by a small number of people which had come, more or less ‘under their own steam’, from the other side of the world. And who were, at that time, a lot less civilized than the Chinese.

How can be explained something like this?
OK, the Aztec and the Inca empires might have been primitive relative to the Spanish invaders. They might have prevailed over the small number of invaders by brute force but they had been overcome by the sheer novelty and the apparent sophistication of the assailants.
But China had been in contact for centuries with the rest of the ‘civilized’ world! And way advanced than the rest. Both culturally and economically.

So, what had happened?
How can something like this be explained?

We might try to take the ‘historical route’. And observe that, exactly as Confucius and Laozi had told us, China’s destiny had been tightly linked to the ability of those in charge – the emperors, to manage the empire. From the paleolithic migrations until the Mongol invasion in 1271, nothing from outside had any significant impact over the Chinese hinterland. But the fortunes of those living in that hinterland had oscillated from the misery induced by almost constant ‘live conflict’ during the Warring States period to the various prosperous eras. The Han, Tang and Song dynasties, to mention just a few of them.
The same principle had been valid also for what went on while foreign dynasties had been in power. As long as the ‘managers’ were doing their jobs, things continued to improve. As soon as the helm was grabbed by an incompetent leader… all hell broke loose.

But is the emperors’ incompetence enough to explain what had happened during the XIX-th century? The most advanced, and numerous, nation on Earth had been subjugated – for all practical purposes, by a bunch of drug pushers pretending to act in the name of the far away, and far weaker, British King?

Or we can take the sociological route.
Along which we’ll notice that the ‘drug pushers’ were only nominally subjects of the British Empire. Which empire was behaving imperially only towards the exterior while inside it was already a democracy!

Sounds familiar?

Ancient Athens, the first known democracy, had dominated the Eastern Mediterranean for as long as it had retained its democratic character and had failed, abysmally, each time it had reverted to tyranny?
Ancient Rome had established a huge empire as a democratic republic and collapsed four short centuries after becoming a totalitarian empire?
And so on…?

And what might be the difference between a totalitarian empire and a democratic one?
On the face of it, a democratic empire sounds like an oxymoron… yet there’s plenty of such examples in our history…

As you might guess from the title of this post, the ‘famous’ middle class was both the engine and the explanation for the ease with which the ‘democratic’ empires had been established. And yes, the Spanish and Portuguese ones can be explained in the same manner. At that time none of the Iberian monarchies was yet behaving in the absolutist manner they had pursued as soon as the looted precious metals had started to pour in…

But what makes the middle class so special?

Nassim Nicholas Taleb would tell you that the middle class has enough skin left in the game to really care about the outcome and I’m going to add that the middle class is simultaneously distanced enough from the fray to act in a reasonable enough manner.

Let me put back, for a short while, my historian’s cap.

Most of us consider that the middle class is a late appearance. That most of the time, humankind had been divided in two. The haves and the have-nots. The powerful and the meek.
Well, I’m not so sure about that…
For the first 60 000 years after we had learned to speak – which had made us really human, we had been living in small packs. Led by the more powerful male member of the group – if we consider that our ancestors used to behave like our Chimpanzee cousins, or ‘self managed’ in a more or less democratic manner if our ancestors had used the model followed by our other cousins, the Bonobos.
Or we could look at how the surviving ‘primitives’ lead their lives. None of the Hadzabe, Yanomami or Inuit, who have survived in the most difficult conditions on Earth, have a hierarchical social structure.
Primitives?!? Maybe… but not because of their social arrangements. After all, they are freer than most of us.
And what is it that we, proudly modern people, value more than our individual freedom?

Money? I’m going to let this rest… for a while.

Let’s go back to our ancestors.
Who, by all indications, had been living as ‘extended middle class societies’. Without any 0.1% and without people who went to bed hungry while the rest of the gang had been gorging themselves.
Let’s remember now that during those times we had actually transformed ourselves from apes to humans. And if you consider this to be a small feat, just try to teach a bonobo to speak. Then remember how many people who had been born in poor and backward countries are now successful business people or scientists. After passing through a thorough educational process, true! Only that educational process is in no way accessible to any bonobo…
Don’t disparage the long evolution we had graduated from, as a species, while living in ‘extended middle class societies’.

‘But you haven’t explained what you mean by middle class! Most of us see the middle class as those people who make a certain amount of money each year and you keep speaking about primitive people… who have absolutely no use for any money…!’

OK.
For good or for bad, our present society consist of three categories of people.
The haves, the in-between and the dirt poor.

I’m not going to assign numerical values to any of these.
Taleb’s Skin in the Game criterion is far more useful in this situation.

The haves qualify only after they have no skin left in the game. In the sense that they have so much ‘money’ that come hell and/or high water they feel safe. What they make of this world is heavily influenced by the thick ‘insulation’ which separates them from the rest of the world.
The dirt poor – or the lumpen proletariat, in Marx’s terms, have all their skin in the game. In fact, they are the famous ‘Boiling Frog’. They have no way of leaving the kettle so…

In a sense, both haves and the dirt poor are  prisoners. Neither can leave their respective cell blocks. Simply because the dirt poor have no way to go anywhere while almost none of the haves would be able to survive ‘outside’.

the boiling frog

Wesley Chang, The Boiling Frog, Medium.com

Which leaves us with the middle class.
Who have some resources stashed away – or enough credit available, to weather some crises. But not enough to last them for their entire remaining lives.
Which makes the middle class the only really interested people in the long term well being of the entire society. The only ones really interested in maintaining the freedom of the market as the main economic engine. The only ones really interested in maintaining democracy as the main manner of avoiding catastrophic mistakes perpetrated by the too powerful autocrats.

Or, from a psychological point of view, we can look at the haves/dirt poor as being stuck in an immobile state of mind while the middle class are the only open minded members of the society.
In fact, I prefer this last approach.
You see, until recently the American Dream was relatively accessible. With some luck, a ton of determination and a fair amount of brain power, the sky was the only limit. Belonging to any of those three categories, haves, middle class and dirt-poor was as much about the state of mind of those involved as it was about actual economic conditions.
The haves were free to consider the big picture, the dirt poor could contemplate brighter perspectives while the middle class were doing their thing. Keeping the whole show afloat.

I’m afraid we have reached an inflexion point. A watershed mark, if you prefer.
For whatever reason – I’m not ready to tackle this subject right now, we’ve become so preoccupied with something in particular that we’ve lost sight of everything else.

Including the middle class.

Exactly those which were supposed to maintain their cool heads and open minds.

part of the problem

Matthew Stewart,
The 9.9 Percent is the New American Aristocracy,
The Atlantic

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We were discussing ‘worst possible scenarios’ on Facebook and somebody mentioned ‘climate change’.
I must add here that the exchange was ‘framed’ by ‘skin in the game‘, a concept used by Nassim Nicholas Taleb in his rather don-quixotic quest for more responsible decision makers.

OK, the whole domain of climate change is riddled with epistemological holes.
Linear models are used to approximate processes we barely know anything about.
‘Starting points’ have been, again and again, been proven wrong.
I could go on for hours.

I’ll make a small parenthesis here and inform you that according to a fresh study things might be far worse than we’ve reckoned. This paper, published by Nature.com, suggests that Earth’s oceans used to be far cooler than we’ve previously thought they were.

In this context, one of the participants made the following remark:
the burden (of proof) should fall on those calling for changes, for the rather obvious reason that we could suggest changes all day long. Only a few can be implemented.

Hard to argue with that, right?

But which changes are we talking about here?

A change in our manner of interacting with Mother Nature?
Costly, indeed, financial wise, but nowadays technologically possible.

Or about the changes we’ve already – unwittingly, most of them, imposed upon our ‘spaceship’?

We’ve dramatically changed the ‘use of land’. Agriculture and transport – yes, roads and railways have a huge impact – have changed the very nature of what’s going on on a considerable portion of the Earth’s surface.
We’ve dramatically changed the composition of the atmosphere. And I’m not talking about CO2 yet. CFCs, pesticides, NOx and SOx gases, etc., etc….
And, last but not least, we’ve reversed a trend which had been going on for hundreds of millions of years. Photosynthesis used to transform atmospheric CO2 into organic matter, some of which has been steadily accumulated as coal and crude oil.

So, about which changes should we worry first?

Or, in SITG terms, whose skin should bear the brunt of change?

Ours or our children’s?

tainted vote

“It was a fair vote. They may not like the outcome but nobody’s saying that the vote was tainted. Maybe by the misinformation ahead of it … but the actual voting process…”

If there is something to be learned from the current debacle is that democracy is about way more than honestly counting the votes.

In fact, if we resume ourselves to that, we’ll end up tied down in a cage known as ‘mob rule’. Who ever succeeds to stir up more efficiently the public sentiment will rule the day and ‘apres nous, le deluge‘.

In order for the democratic process to be efficient – actually democratic, that is – the electorate must have at its disposal all the pertinent information that is available at that moment. If the electorate doesn’t really care and doesn’t mind that information… that’s it. But the information has to be readily available.

And there’s the catch.

If those ‘in charge’ use the media to spur up public sentiment instead of honestly informing the people about the  situation at hand then we’ll have a beauty pageant instead of a democratic election. Or referendum.

What we really need to remember, fast, is that for a democracy to maintain its function – weed up the really bad leaders/ideas proposed in the public square – we need to add two things to ‘honestly counting the votes’.

‘Mutual respect’ among all members of a given society and a keen enough interest of a majority of the members of that society in the well being of their community.

‘Democracy’ won’t work properly unless the voters respect each-others, and the government they had, themselves, elected. Simultaneously  the government has to treat ‘the people’ with utmost respect, not as if they were hapless children in dire need of close guidance.

At the same time no democracy ever successfully maintained its character unless the ‘leaders’ were constantly remembered of their ‘mortal’ status.

And the Lord God said, “The man has now become like one of us, knowing good and evil. He must not be allowed to reach out his hand and take also from the tree of life and eat, and live forever.”” Genesis, 3:22

The point being that those who think they can make the difference between good and evil need their feet constantly brought back to the Earth.

In Heaven it was God who did that. Here on Earth God works through the hands of Man. Hence we have to take good care of our own fate.
We won’t be able to do that efficiently unless we start respecting each-others, and each-others’ opinions – because none of us will ever be able to know the entire truth so we’ll be better off collectively if we share our knowledge.
For the very same reason – no one can master all the information that floats around us – all those who try to grab too much power must be treated with ‘extreme caution’. Again, this can be done more efficiently in a collaborative, and respectful, manner.

That’s why I’m convinced that the EU needs to be remodeled, not bulldozed.

It depends on the meanings we attach to these two concepts.

Yanis Varoufakis, Greece’s ex finance minister, is convinced that ‘Capitalism will eat democracy – unless we speak up.

Since he has some experience in this matter I’ll follow his line of thinking – for a while.

His point being that you can have successful capitalism in undemocratic societies – like Singapore and China – and that effective power has slowly shifted from the political sphere of the society to the economic one – which is undemocratic by definition.

Can’t say he’s entirely wrong, can we?

But we can say he’s somewhat confused…
So, he mentions Lee Kuan Yew’s Singapore and China as capitalistic success stories and then says that  the political sphere is gradually falling  under the yoke of the economic one… Well, last time I looked, in China the state was still in full control of everything that moved and the state was firmly in the hands of the politicians. Same thing was happenning during Yew’s tenure as Singapore’s good willed dictator.

Unfortunately there is some truth in his words when we look at what’s going on on the both sides of the Atlantic and that’s why I’m going to examine whether we have the same kind of capitalism in both situations.

By Google-ing the word I got two definitions for the concept.

The first definition that was offered by the search engine came from Oxford Dictionaries, “An economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state” and the second one came from Merriam Webster: capitalism is “an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market“.

Putting them together we have private ownership, private decision, free market and profit as a goal.

Are these enough to describe a reasonably well functioning economic system?
I’m afraid not.

Let me give you some examples.
The French state has a controlling interest in Renault and the land of Bavaria quite a sizeable one in VW. Renault is in good shape and VW was too, until very recently. So private ownership is not an absolute necessity.
In the US we had quite an interesting situation. Two out of the three big car manufacturers  had to be bailed out by the state. All three were privately owned so we must look somewhere else: the Ford family still has a powerful word in the management of the single one which didn’t had to be bailed out. In Europe the best run auto company seems to be BMW – again controlled by a single family, the Quandt’s. It seems that it helps a lot if those who call the shots have a long time interest in the well being of the company versus the situation in which the top management has (short time) profit as the single/obsessive target.
Coming back to Renault and VW, they can be compared to Singapore, China and, maybe, Spain. Singapore was able to develop a ‘capitalistic’ economy despite it being an authoritarian society simply because Lee Kuan Yew was a very special kind of ‘dictator’ – one that not only cared sincerely for the greater good of his people but also didn’t loose his head during his long stage at the helm. A similar thing happened in Spain – Franco was the sole dictator who had made preparations for a democratic evolution after his demise, while China had to wait for another good-willed dictator to grab the power – Deng Xiao Ping – before it could steer towards the present course. No other authoritarian regimes but these two have ever managed to replicate this feat – we still have to wait a little before pronouncing Vietnam as the third, and very few other publicly owned companies fare so good as Renault does.

So, we have rather strong evidence suggesting that ‘skin in the game‘ trumps blind insistence on short time profit and that a free, democratic, society offers greater chances for economic development than a authoritarian one. In fact the politicians that need periodic confirmation from the people they govern do have some skin in the game while the authoritarians are in a position that is somehow equivalent to that of the CEO’s of the huge corporations whose stock owners are so disspersed that practically don’t count much – the members of the board practically slap each-other on the back and are able to do practically what they want with the companies. Look what happened at GM, Chrysler and, for example, ENRON.

But how free should be that society in order for capitalism to thrive?

Could it be so free that a guy could come from the street and claim your house as being his own? No?

So we need a free but orderly society. One where private property changes hands only when its owner says so – or has previously entered into a contract which stipulates that in certain conditions that transfer has to take place.

Meaning that in order to have a functioning capitalist society we need not only private ownership but also private owners who have enough trust in each other to start making business together.

You see, the feudal lords of the Dark Ages did have a lot of private property but capitalism couldn’t take hold in earnest as long as the (absolute) monarch could strip a man of his property and give it to somebody else. They couldn’t enter into (longish time) contracts because the era was dominated by huge uncertainties regarding various aspects of the social and economic life.

In fact it is exactly this well tempered freedom that is the crux of functional capitalism. Enough freedom so that everybody could feel confident that he is his own master but tempered by rules enforced in a pwerfully enough manner to give everybody sufficient trust that most contracts will be executed faithfully.

In this sense for capitalism to work properly we need to have a market that is free in more dimensions that one.

It has to be free from political intrusion in the sense that the government should leave it alone as a rule of thumb but also that the same government should keep it free from becoming cornered by a single group of interests.
In fact there is no difference from a market that is run by a governmental agency or by a monopolistic corporation – no matter if the latter is private. As soon as decision making becomes concentrated in too few hands mistakes starts happening. And their effect accumulate until the system finally collapse. Or is dismantled by some ‘exasperated’ more powerful agency – as Standard Oil and  ‘Ma Bell’ were dismantled by the US government. Which, by doing so, created the premises for  the huge development of those two respective markets – oil and communications.

Only this freedom of the markets can seldom be preserved by an authoritarian regime. Yew’s Singapore and contemporary China are exceptions, not the rule. Most authoritarian regimes cannot resist temptation and start meddling in the economic life of their countries. By doing so, they introduce a lot of ‘noise’ into the system. Eventually, this noise drowns the useful signals and ‘blinds’ the decision makers.

Same thing happens – and here Varoufakis has a valid point – when economic agents become so powerful that they can dominate the policy makers. The politicians can no longer preserve a balanced stance towards the economy and give in to ‘special interests’. This way the markets loose their freedom, with all the malign consequences that come with this situation. Among them, the lack of trust that slowly creeps in the souls of those who have to do business in the no longer free markets. Which lack of trust is very bad for all those involved.

And another thing about which Varoufakis is absolutely right. A lot of money are not being moved through the ‘front doors’. Not that they are not invested at all but because they are kept somewhat hidden they do not contribute as much to the well being of the world economy as they could/should.

2.1 $ trillion have been accumulated, as of  October 2015, in off shore accounts by the top 500 American companies in order to avoid taxes and
Between $21 an $32 trillion have been hiding in 2012 in various offshore jurisdictions.

Why is that? Simply because those who are called to decide about these money do not ‘trust’ that by bringing these money home and by investing them there, after paying the taxes, will be able to generate profits equivalent to those produced by leaving them off shore?

So what should we do? Tell them ‘democratically’, by electing somebody who is crazy enough to implement such a measure, to bring them home? Or even  confiscate them, one way or another?

I’m afraid that here I part again ways with Mr. Varoufakis. And with Aristotle: the way I see it democracy is not ‘the constitution in which the free and the poor, being in majority, control government‘. That would be ‘mob rule’.
A truly democratic process starts before the vote. When every stakeholder can make its point known to those who are going to cast a ballot so they’ll be able to do that having a reasonably clear understanding about what’s going on.

Frankly I’d rather rephrase Varoufakis’ message. ‘Corporatism has a tendency to disembowel democracy and transform it into ‘mob rule’ – the situation where the poor are no longer that free simply because they are convinced through ‘unholy’ methods to vote one way or another.

What can be done? Explain, loud and clear, that if jobs disappear the same thing will happen with the aggregate demand?
Explain that by giving their workers as little money as they can in reality the results are way worse than if the wages were as high as the companies could afford?
Ford didn’t give his workers more money because he loved them but simply because he had understood that in the long run he would be better off himself by doing this, you know!

Bill Gates Alex Wong Getty Images

Bill Gates disapproves of Thomas Piketty’s method of leveling the play-field – levying a capital tax – and proposes a different tack: a progressive tax on consumption.

While I agree with both Gates and Piketty that extreme economic imbalances are bad for the society I profoundly disagree with both about how we should deal with them.
First things first. Extreme economic imbalances being bad has nothing to do with morals and very little to the fact that the poor feel bad when exposed to the excesses of the ‘filthy rich’.
They are bad simply because the dirt poor cannot express their creative potential and because the rich end up concentrating too much of the decision power. The society as a whole – including the super rich – looses, specially on the long run.
Taking the decision power from the hands of the super rich and giving it to the governments, through increased taxation, would only complicate matters. Not to mention the byzantine mechanism needed to enforce Bill Gates’ consumption tax.
Encouraging the rich to donate more would somewhat alleviate the problem but not much since until the money were distributed, if ever, the decision power would still remain too concentrated for our own collective good.
How about those same very rich people, now that enough of them have understood the perils associated with extreme economic imbalances, simply setting an example and start calculating wages using a completely different principle than is used today?
What if instead of ‘as low as the market allows’ they would ‘compensate’ their employees, all of them, as generously as their businesses can reasonably afford to? Somewhat in line with what Ford did back at the start of the XX-Th century, with more than excellent results for both sides? And does again now!

And how about the same rich and powerful individuals using their ‘political muscle’ and insisting on better governance? After all if their businesses and trust funds would have been run as most governments are run today they would have gone under a very long time ago…
And then, after the governments would have been ‘fixed’, and tax money not wasted anymore, how about the very same 1% start paying in earnest their ‘normal’ taxes, like the rest of us?

Surprise, surprise…

The real dangers of extreme economic imbalances: https://nicichiarasa.wordpress.com/2014/10/29/extreme-fragility-dead-ahead/
Why Ford increased wages back then: http://www.forbes.com/sites/timworstall/2012/03/04/the-story-of-henry-fords-5-a-day-wages-its-not-what-you-think/
Ford increases wages now: http://www.wsj.com/articles/ford-to-move-hundreds-of-entry-level-workers-to-higher-pay-rate-1423026005

Antifragile, things that gain from disorder by Nassim Nicholas Taleb, http://www.randomhouse.com/book/176227/antifragile-by-nassim-nicholas-taleb
https://www.facebook.com/pages/Nassim-Nicholas-Taleb/13012333374
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