Expect the 'Unexpectedly'

“Why is surprise the permanent condition of the U.S. political and economic elite?” That’s the topic that Richard Fernandez explores at the Belmont Club: 

Nassim Taleb, writing in Foreign Affairs, describes why a Black Swan came to Cairo without anybody noticing and in general why opinion leaders keep getting caught on the wrong foot by the arrival of “large-scale events that lie far from the statistical norm and were largely unpredictable to a given set of observers.”  The fall of the Berlin Wall was a surprise. The 2008 meltdown was a surprise. The Arab Spring was a surprise. “Why is surprise the permanent condition of the U.S. political and economic elite?”

The answer, he argues, is that the elites won’t see them coming rather than that they can’t. Part of the problem is the consequence of their own damping. By attempting to centrally manage systems according to some predetermined scheme they actually store up volatility rather than dispersing it. By kicking the can down the road they eventually condemn themselves to bumping into a giant pile of cans when they run out of road.

Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. In fact, they tend to be too calm and exhibit minimal variability as silent risks accumulate beneath the surface. Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite.

Thus every bailout and rescue made in the name of preventing the demise of something deemed “too big to fail” builds up a head of steam until the point is reached when the system can no longer contain the pressure. Then the volatility goes from a seeming zero to an extremely high number. The Black Swan will have arrived. And it always will for as long as fiction is substituted for fact, failure is relentlessly reinforced and false assurances are given all around. In Auden’s words “The lights must never go out, the music must always play … lest we should see where we are, lost in a haunted wood, children afraid of the night who have never been happy or good.” The antidote, Taleb argues, is information. To price risk into the present rather than hide it to fester unseen beneath the surface.

But the elites cannot admit to surprise; nor can they admit to bad things starting on their watch. Therefore they keep sweeping things under the carpet until, as in some horror movie, it spawns a zombie. To make systems robust, says Taleb, you’ve got to admit that you can make mistakes and pay the price. You will have to in the end anyway.

While central planning has never worked (see also: Union, Soviet), it’s understandable how it appealed to elites in the two-thirds of the 20th century, when Big — BIG! — was the essence of industry and government. Big assembly lines powered by big electrical resources; three national TV networks, a couple of newspapers per city; big was where it was at. And a small number of big industries made it easier for government elites to control.

As Alvin Toffler noted in the Third Wave, the dominate archetype during that period was the brute machine; today, it’s the tiny, yet infinitely more multifaceted microchip. But unfortunately, too many reactionary elites are still stuck in the mid-1950s.

Next year presents America with an opportunity to rejoin the 21st century. Will they take it? Or will they embrace Paul Krugman’s naive nostalgia for the Happy Days era?