One of the themes of this blog is the idea of Uncertainty (and indirectly Causation) and how policy responds to it. Take this example:
... insofar as this new set of norms or something like them come into force, they will have Consequences.
Some of those will, as defined by Stephen Hughes et al, be 'positive': more employed people will work rather fewer hours. But some will be negative. Employers are unlikely to take on extra people to do that work now not being done. Everyone loses.
Or take this consequence. My doctor friend in the NHS tells me that a direct result of European 'Health and Safety' requirements is that doctors are qualifying with far fewer hours having been spent practicing real medicine. And that this will lead inexorably to more botched operations and more costly litigation against the NHS: "suing doctors is the business to be in"
So, Mr Hughes, tell us. When you have your complex operation in a few years' time, who would you rather have leading it?
The doctor with lots of experience gained from tiring longer hours earlier in his/her career?
Or the bright, untired less experienced doctor who tends to make more ruinous mistakes carving through your pallid flesh, thanks to the EU Parliament being unable to mind its own business?
Put it another way. We hugely understimate the fact that so many of our institutions and ways of thinking flow from the way limited information was organised by the then available technology. So arrangements set up years ago to give ourselves a better chance to cope with Uncertainty may be familiar and even comforting, but now simply not relevant in a world that allows (compels?) sompletely different ways of doing things.
Thus to this fine Reason interview with Nassim Nicholas Taleb, author of The Black Swan. Read the whole thing. So smart.
Highlights:
... Let’s compare the banking system to, say, transportation. Every plane crash makes the next plane crash less likely and our transportation safer. Now, with the banking system, [a failure] leads to increased probability of failure of an entire system. That’s a bad system.
Reason: What’s the best way to stop that so you’re not allowing the problem to replicate throughout the system?
Taleb: What fragilizes an overall system? Three things: One, centralization. Decentralization spreads mistakes, makes smaller mistakes. Decentralization is where we converge with libertarians. A second one is low debt. The third is skin in the game...
... Debt leads to fragility. We’ve discovered since the Babylonians that debt has systemic consequences whereas equity doesn’t. Let’s say that you have two brothers. One of them borrowed and they both had predictions about the future—forecasts. One brother borrows. The other issues equity. The one who borrows will go bust if he makes a mistake. The one who issues equity will fluctuate but will be able to survive a forecast error.
Reason: But is it also true that the brother with equity can never really have that big payday?
Taleb: For him! But overall the system is well distributed. There’s an accounting equality. Debt traditionally has blown up systems and has been very good for governments to wage war. I’m not against credit. I’m against leverage...
... The problem we have had in almost all Western countries is that nominally they say they are decentralizing, but effectively they’ve [given] more and more power to the central government. You want decisions to be spread out. Government debt is a result of centralization, and typically the cause of more centralization. It’s a very bad circle.
Reason: When you think about the future are you optimistic? Are you pessimistic? Or is that the wrong way to approach it?
Taleb: It’s the wrong way to view it. My view of the future is you don’t have to be right, you have to have a dominant strategy to act as if you were pessimistic. I don’t want the pilot of the plane to be optimistic. But I want the flight attendants to be extremely optimistic. So it’s functional. I don’t believe in beliefs...
Reason: Where are the signal incidents of decentralization that’s leading to better outcomes, broadly speaking? Where do you see that either in the United States or in the West or in particular pockets and subcultures?
Taleb: Take Switzerland as a culture, where nobody can name the president easily but they can name the president of France. This is a good society because you have a lot of volatility—but at the local level, the lower level, micro level, translating to macro level stability. So Switzerland is a well-decentralized system.
The problem is size. As size gets larger you have some gains of economies of scale, whatever it is. But you have some losses in governance, in a lot of other things.
Spot on. Government is now too big to be flexible. So it is boring money on an unfeasibly large scale to bribe voters. And in turn it is failing, and dragging us all down.
If you don't believe me, look at this graph. Something extraordinary slowly but surely is happening to the world's money supply, that looks to be trending to the Totally Unmanageable:
... the path of least resistance is simply to continue to issue more and more money (so long as it has any purchasing power). The alternative, permitting the collapse of the banking system, businesses and even government itself, is unpalatable. Meanwhile, the dollar has a brief window of zero interest rates before the effect of excessive increases in money quantities on prices graduates from inflating asset values to inflating prices for food, energy and other consumables.
These four separate problems apply to all major currencies, as well as the dollar. At some point confidence in fiat currencies will begin to slide, to be reflected in a surprise fall in their purchasing powers, evidenced by a jump in prices. This should be in the back of everyone’s mind as we navigate through the increasing economic and financial difficulties of 2013.
Debt + over-centralisation. Creating systemic weakness. And even if it understands these trends, no government is prepared to face up to the underlying logic of this situation. Who can blame them? Where to start?
Gulp.
