The Long Run

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Niall Ferguson’s misunderstanding of Keynes led me to the question of how humans should balance the present against the long run?

It’s hard for us primates to have a real clue about the long run — the chain of events that may occur, the kind of world that will form. In the long run — the billions of years for which Earth has existed — modern human civilisation is a flash, a momentary pulsation of order imposed by primates on the face of the Earth — modern cities, roads, ports, oil wells, telecommunications and so forth built up over a little more than a century, a little more than two or three frail human lifespans.

Human projections of the direction of the future are notoriously unreliable. Professional futurists who devote careers to mapping the trajectory of human and earthly progress are often far wide of the mark. And in the realm of markets and economics, human projectional abilities are notoriously awful — only 0.4% of money managers beat the market over ten years.

As humans, our only window to the future is our imaginations. We cannot know the future, but we can imagine it as Ludwig Lachmann once noted. And in a world where everyone is working from unique internal models and expectations — for a very general example, Keynesians expecting zero rates and deflation, Austrians expecting rising rates and inflation — divergent human imaginations and expectations is an ingredient for chaos that renders assumptions of equilibrium hopelessly idealistic.

A tiny minority of fundamental investors can beat the market — Keynes himself trounced the market between 1926 and 1946, for example by following principles of value investing (like Benjamin Graham later advocated). But like in poker, while virtually everyone at the table believes they can beat the game in the long run — through, perhaps, virtues of good judgement, or good luck, or some combination of the two — the historical record shows that the vast majority of predictors are chumps. And for what it’s worth, markets are a harder game to win than games like poker. In poker, precise probabilities can be assigned to outcomes — there are no unknown unknowns in a deck of playing cards. In the market — and other fields of complex, messy human action — we cannot assign precise probabilities to anything. We are left with pure Bayesianism, with probabilities merely reflecting subjective human judgments about the future. And in valuing assets, as Keynes noted we are not even searching for the prettiest face, but for a prediction of what the market will deem to be the prettiest face.

This means that long run fears whether held by an individual or a minority or a majority are but ethereal whispers on the wind, far-fetched possibilities. It means that present crises like mass unemployment have a crushing weight of importance that potential imagined future crises do not have, and can never have until they are upon us. As the fighters of potential future demons — or in the European case, self-imposed present demons — suffer from high unemployment and weak growth in the present (which in turn create other problems — deterioration of skills, mass social and political disillusionment, etc) this becomes more and more dazzlingly apparent.

But in the long run, the historical record shows that crises certainly happen, even if they are not the ones that we might initially imagine (although they are very often something that someone imagined, however obscure). Human history is pockmarked by material crises — unemployment, displacement, failed crops, drought, marauders and vagabonds, volcanism, feudalism, slavery, invasion, a thousand terrors that might snuff out life, snuff out our unbroken genetic line back into the depths antiquity, prehistory and the saga of human and prehuman evolution. While we cannot predict the future, we can prepare and robustify during the boom so that we might have sufficient resources to deal with a crisis in the slump. Traditionally, this meant storing crops in granaries during good harvests to offset the potential damage by future famines and saving money in times of economic plenty to disburse when the economy turned downward.  In the modern context of globalisation and long, snaking supply chains it might also mean bolstering energy independence by developing wind and solar and nuclear energy resources as a decentralised replacement to fossil fuels. It might mean the decentralisation of production through widespread molecular manufacturing and disassembly technologies. In the most literal and brutal sense — that of human extinction — it might mean colonising space to spread and diversify the human genome throughout the cosmos.

Ultimately, we prepare for an uncertain future by acting in the present. The long run begins now, and now is all we have.

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Sparkassen — A De Facto Glass-Steagall?

Ed Miliband has a very good idea to break the British lending freeze:

Ed Miliband is to make his firmest commitment to a regional-based economic policy when he proposes a network of banks around the country responsible for providing capital to businesses in their locality.

The proposals, due to be unveiled in a speech to the British chambers of commerce, mark a further attempt to map out a different industrial policy, some of which has echoes of plans for a revival of city regions set out by the coalition adviser Lord Heseltine.

Miliband will say it is time to stop tinkering with the banks and recognise a wholly new system is needed.

He will say: “We do not just need a single investment serving the country. We need a regional banking system serving each and every region of the country. Regional banks with a mission to serve that region and that region alone, not banks that are likely to say no but banks that know your region and your business; not banks that you mistrust, but banks you can come to trust.”

I would not support politicians interfering with the financial sector if the British financial sector was a successful model. But the country is still hurting from its utter failure in 2008. Back then, Ed Miliband’s predecessor Gordon chose to bail out the banking system. Had the financial sector been allowed to fail, then a new model would have been forced to emerge. But that wasn’t the case. Now, politicians must take responsibility for putting the banking system on a life support system. The current government’s attempts at reform have not succeeded in revitalising the economy.

Miliband’s idea approximates the German model of Sparkassen — publicly owned regional banks:

Supporters of the local banks claim that in 2011 total loans by the Sparkassen stood at €322bn (£280bn), whereas the total loan stock of Germany’s large commercial banks was only €177bn (£153.5bn). Like Britain’s large banks, Germany’s large commercial banks cut credit during the financial crisis; lending fell by 10% between 2006 and the middle of 2011. In contrast, the Sparkassen increased lending by 17%.

On the surface, regionalisation may be helpful in that British banks have become over-centralised and disconnected from the interests of their local customers. This may be one factor that can explain why local, small and new businesses are struggling to get credit.

But this is an even better idea than Miliband may realise. Why? Because so long as the regional banks behave solely as depository and business investment institutions, and not as investment banks, insurance brokers, hedge funds, shadow banks, or proprietary traders, or any of the other highly interconnective and risky activities favoured by today’s supermarket banks — then such a system acts as de facto Glass-Steagall-style separation between the riskier privately-owned national and international-level commercial banks, and the regional level business investment and savings banks.

Such a system also echoes the recommendation made by Nassim Taleb, to nationalise the parts of the banking system that act as a public utility, and deregulate the rest so it is free to gamble, speculate, succeed and fail without significantly destabilising business lending, public savings, and the wider economy.

Taleb on Overstabilisation

It’s nice to know that Taleb is preaching more or less the same gospel that I am.

Via the NYT:

Stabilization, of course, has long been the economic playbook of the United States government; it has kept interest rates low, shored up banks, purchased bad debts and printed money. But the effect is akin to treating metastatic cancer with painkillers. It has not only let deeper problems fester, but also aggravated inequality. Bankers have continued to get rich using taxpayer dollars as both fuel and backstop. And printing money tends to disproportionately benefit a certain class. The rise in asset prices made the superrich even richer, while the median family income has dropped.

Overstabilization also corrects problems that ought not to be corrected and renders the economy more fragile; and in a fragile economy, even small errors can lead to crises and plunge the entire system into chaos. That’s what happened in 2008. More than four years after that financial crisis began, nothing has been done to address its root causes.

Our goal instead should be an antifragile system — one in which mistakes don’t ricochet throughout the economy, but can instead be used to fuel growth. The key elements to such a system are decentralization of decision making and ensuring that all economic and political actors have some “skin in the game.”

Two of the biggest policy mistakes of the past decade resulted from centralized decision making. First, the Iraq war, in addition to its tragic outcomes, cost between 40 and 100 times the original estimates. The second was the 2008 crisis, which I believe resulted from an all-too-powerful Federal Reserve providing cheap money to stifle economic volatility; this, in turn, led to the accumulation of hidden risks in the economic system, which cascaded into a major blowup.

Just as we didn’t forecast these two mistakes and their impact, we’ll miss the next ones unless we confront our error-prone system. Fortunately, the solution can be bipartisan, pleasing both those who decry a large federal government and those who distrust the market.

First, in a decentralized system, errors are by nature smaller. Switzerland is one of the world’s wealthiest and most stable countries. It is also highly decentralized — with 26 cantons that are self-governing and make most of their own budgetary decisions. The absence of a central monopoly on taxation makes them compete for tax and bureaucratic efficiency. And if the Jura canton goes bankrupt, it will not destabilize the entire Swiss economy.

In decentralized systems, problems can be solved early and when they are small; stakeholders are also generally more willing to pay to solve local challenges (like fixing a bridge), which often affect them in a direct way. And when there are terrible failures in economic management — a bankrupt county, a state ill-prepared for its pension obligations — these do not necessarily bring the national economy to its knees. In fact, states and municipalities will learn from the mistakes of others, ultimately making the economy stronger.

It’s a myth that centralization and size bring “efficiency.” Centralized states are deficit-prone precisely because they tend to be gamed by lobbyists and large corporations, which increase their size in order to get the protection of bailouts. No large company should ever be bailed out; it creates a moral hazard.

Consider the difference between Silicon Valley entrepreneurs, who are taught to “fail early and often,” and large corporations that leech off governments and demand bailouts when they’re in trouble on the pretext that they are too big to fail. Entrepreneurs don’t ask for bailouts, and their failures do not destabilize the economy as a whole.

Second, there must be skin in the game across the board, so that nobody can inflict harm on others without first harming himself. Bankers got rich — and are still rich — from transferring risk to taxpayers (and we still haven’t seen clawbacks of executive pay at companies that were bailed out). Likewise, Washington bureaucrats haven’t been exposed to punishment for their errors, whereas officials at the municipal level often have to face the wrath of voters (and neighbors) who are affected by their mistakes.

If we want our economy not to be merely resilient, but to flourish, we must strive for antifragility. It is the difference between something that breaks severely after a policy error, and something that thrives from such mistakes. Since we cannot stop making mistakes and prediction errors, let us make sure their impact is limited and localized, and can in the long term help ensure our prosperity and growth.

Who Should Be Giving Thanks This Thanksgiving?

Not the wider public.

Our financial system is broken. Our political system is broken. Oligarchs and their cronies reap easy rewards — bailouts, crony capitalism, corporate handouts, liquidity injections, favourable “regulation” (that puts oligarchs’ competition out of a business) — while taxpayers pay the bill.

But no such thing lasts forever.

Thanksgiving is very much the day of the black swan. Nassim Taleb used the example of a turkey fattened up for Thanksgiving as an example of a black swan phenomenon. The turkey sees itself being fed every day by the turkey farmer and assumes based on past behaviour that this will continued indefinitely until the day comes when the farmer kills the turkey. Nothing in the turkey’s limited experiential dataset suggested such an event.

But Thanksgiving also commemorates the end of pre-Columbian America, a huge earth-shattering black swan for the people of the Americas. The day before the first European immigrants landed in North America, very little in the Native Americans’ dataset suggested what was to come.

In a globalised and hyper-connected world, drastic systemic change can occur faster than ever before.

All it takes is the first spark.

George Osborne & Big Banks

The Telegraph reports that George Osborne thinks big banks are good for society:

The Chancellor warned that “aggressively” breaking up banks would do little to benefit the UK and insisted the Government’s plans to put in place a so-called “ring fence” to force banks to isolate their riskier, investment banking businesses from their retail arm was the right way to make the financial system safer.

“If we aggressively broke up all of our big banks, I am not sure that, as a society, we would benefit from it,” he said. “We don’t have a huge number of banks, sadly, large banks. I would like to see more.

His comments came as he gave evidence to the parliamentary commission on banking standards where he was accused of attempting to pressure members into supporting his ring-fencing reforms.

“That work has been accepted, as far as I’m aware, by all the major political parties. We are now on the verge of getting on with it,” he said.

Several members of the Commission have argued in favour of breaking up large banks, including former Chancellor, Lord Lawson.

This is really disappointing.

Why would Osborne want to see more of something which requires government bailouts to subsist?

Because that is the reality of a large, interconnective banking system filled with large, powerful interconnected banks.

The 2008 crisis illustrates the problem with a large interconnective banking system. Big banks develop large, diversified and interconnected balance sheets as a sort of shock absorber. Under ordinary circumstances, if a negative shock (say, the failure of a hedge fund) happens, and the losses incurred are shared throughout the system by multiple creditors, then those smaller losses can be more easily absorbed than if the losses were absorbed by a single creditor, who then may be forced to default to other creditors. However, in the case of a very large shock (say, the failure of a megabank like Lehman Brothers or — heaven forbid! — Goldman Sachs) an interconnective network can simply amplify the shock and set the entire system on fire.

As Andrew Haldane wrote in 2009:

Interconnected networks exhibit a knife-edge, or tipping point, property. Within a certain range, connections serve as a shock-absorber. The system acts as a mutual insurance device with disturbances dispersed and dissipated. But beyond a certain range, the system can tip the wrong side of the knife-edge. Interconnections serve as shock-ampli ers, not dampeners, as losses cascade. The system acts not as a mutual insurance device but as a mutual incendiary device.

Daron Acemoglu (et al) formalised this earlier this year:

The presence of dense connections imply that large negative shocks propagate to the entire fi nancial system. In contrast, with weak connections, shocks remain con fined to where they originate.

What this means (and what Osborne seems to miss) is that large banks are a systemic risk to a dense and interconnective financial system.

Under a free market system (i.e. no bailouts) the brutal liquidation resulting from the crash of a too-big-to-fail megabank would serve as a warning sign. Large interconnective banks would be tarnished as a risky counterparty. The banking system would either have to self-regulate — prevent banks from getting too interconnected, and provide its own (non-taxpayer funded) liquidity insurance in the case of systemic risk — or accept the reality of large-scale liquidationary crashes.

In the system we have (and the system Japan has lived with for the last twenty years) bailouts prevent liquidation, there are no real disincentives (after all capitalism without failure is like religion without sin — it doesn’t work), and the bailed-out too-big-to-fail banks become liquidity sucking zombies hooked on bailouts and injections.

Wonderful, right George?

The Problem With Centralisation

Nassim Taleb slams the European project. Perfect timing to counteract the Nobel Peace Prize nonsense.

Via Foreign Policy:

The European Union is a horrible, stupid project. The idea that unification would create an economy that could compete with China and be more like the United States is pure garbage. What ruined China, throughout history, is the top-down state. What made Europe great was the diversity: political and economic. Having the same currency, the euro, was a terrible idea. It encouraged everyone to borrow to the hilt.

The most stable country in the history of mankind, and probably the most boring, by the way, is Switzerland. It’s not even a city-state environment; it’s a municipal state. Most decisions are made at the local level, which allows for distributed errors that don’t adversely affect the wider system. Meanwhile, people want a united Europe, more alignment, and look at the problems. The solution is right in the middle of Europe — Switzerland. It’s not united! It doesn’t have a Brussels! It doesn’t need one.

The future is unpredictable. In economics some decisions will be lead to desired results and others will not. Real-world outcomes are ultimately impossible to predict, because the real world is chaotic and no simulation can ever model the real world in precise detail; the map is not the territory.

Centralisation concentrates decision-making. Centralisation acts as a transmission mechanism to transmit and amplify the effects of centralised decisions throughout a system. This means that when bad decisions are made — as inevitably happens in human behaviour — the entire system will be damaged. Under a decentralised system, there is no such problem. Under a decentralised heterogeneous system, mistakes are not so easily transmitted or amplified. Centralisation is fragile.

And central planning is mistake-prone. Central planners are uniquely ineffective as resource allocators. Free markets transmit information; the true underlying state of supply and demand. Without an open market to transmit price information, central planners cannot allocate resources according to the true state of supply and demand. Capital, time, and labour are allocated based on the central planner’s preferences, rather than the preferences of the wider society.

These two factors taken together mean that centralised systems tend to be both fragile and mistake-prone. That is a dangerous — and unsustainable — combination.

Double or Nothing: How Wall Street is Destroying Itself

There’s nothing controversial about the claim— reported on by Slate, Bloomberg and Harvard Magazine — that in the last 20 years Wall Street has moved away from an investment-led model, to a gambling-led model.

This was exemplified by the failure of LTCM which blew up unsuccessfully making huge interest rate bets for tiny profits, or “picking up nickels in front of a streamroller”, and by Jon Corzine’s MF Global doing practically the same thing with European debt (while at the same time stealing from clients).

As Nassim Taleb described in The Black Swan this strategy — betting large amounts for small frequent profits — is extremely fragile because eventually (and probably sooner in the real world than in a model) losses will happen (and, of course, if you are betting big, losses will be big). If you are running your business on the basis of leverage, this is especially dangerous, because facing a margin call or a downgrade you may be left in a fire sale to raise collateral.

This fragile business model is in fact descended from the Martingale roulette betting system. Martingale is the perfect example of the failure of theory, because in theory, Martingale is a system of guaranteed profit, which I think is probably what makes these kinds of practices so attractive to the arbitrageurs of Wall Street (and of course Wall Street often selects for this by recruiting and promoting the most wild-eyed and risk-hungry). Martingale works by betting, and then doubling your bet until you win. This — in theory, and given enough capital — delivers a profit of your initial stake every time. Historically, the problem has been that bettors run out of capital eventually, simply because they don’t have an infinite stock (of course, thanks to Ben Bernanke, that is no longer a problem). The key feature of this system— and the attribute which many institutions have copied — is that it delivers frequent small-to-moderate profits, and occasional huge losses (when the bettor runs out of money).

The key difference between modern business models, and the traditional roulette betting system is that today the focus is on betting multiple times on a single outcome. By this method (and given enough capital) it is in theory possible to win whichever way an event goes. If things are going your way, it is possible to insure your position by betting against your initial bet, and so produce a position that profits no matter what the eventual outcome. If things are not going your way, it is possible to throw larger and larger chunks of capital into a position or counter-position again and again and again —mirroring the Martingale strategy — to try to compensate for earlier bets that have gone awry (this, of course, is so often the downfall of rogue traders like Nick Leeson and Kweku Adoboli).

This brings up a key issue: there is a second problem with the Martingale strategy in the real world beyond the obvious problem of running out of capital. You can have all the capital in the world (and thanks to the Fed, the TBTF banks now have a printing-press backstop) but if you do not have a counter-party to take your bets  (and as your bets and counter-bets get bigger and bigger it by definition becomes harder and harder to find suitable counter-parties) then you are Corzined, and you will be left sitting on top of a very large load of pain (sound familiar, Bruno Iksil?)

The obvious real world example takes us back to the casino table — if you are trying to execute a Martingale strategy starting at $100, and have lost 10 times in a row, your 11th bet would have to be for $204,800 to win back your initial stake of $100. That might well exceed the casino table limits — in other words you have lost your counter-party, and are left facing a loss far huger than any expected gains.

Similarly (as Jamie Dimon and Bruno Iksil have now learned to their discredit) if you have built up a whale-sized market-dominating gross position of bets and counter-bets on the CDX IG9 index (or any such market) which turns heavily negative, it is exceedingly difficult to find a counter-party to continue increasing your bets against, and your Martingale game will probably be over, and you will be forced to face up to the (now exceedingly huge) loss. (And this recklessness is what Dimon refers to as “hedging portfolio risk“?)

The really sickening thing is that I know that these kinds of activities are going on far more than is widely recognised; every time a Wall Street bank announces a perfect trading quarter it sets off an alarm bell ringing in my head, because it means that the arbitrageurs are chasing losses and picking up nickels in front of streamrollers again, and emboldened by confidence will eventually will get crushed under the wheel, and our hyper-connected hyper-leveraged system will be thrown into shock once again by downgrades, margin calls and fire sales.

The obvious conclusion is that if the loss-chasing Martingale traders cannot resist blowing up even with the zero-interest rate policy and an unfettered fiat liquidity backstop, then perhaps this system is fundamentally weak. Alas, no. I think that the conclusion that the clueless schmucks at the Fed have reached is that poor Wall Street needs not only a lender-of-last-resort, but a counter-party-of-last-resort. If you broke your trading book doubling or quadrupling down on horseshit and are sitting on top of a colossal mark-to-market loss, why not have the Fed step in and take it off your hands at a price floor in exchange for newly “printed” digital currency? That’s what the 2008 bailouts did.

Only one problem: eventually, this approach will destroy the currency. Would you want your wealth stored in dollars that Bernanke can just duplicate and pony up to the latest TBTF Martingale catastrophe artist? I thought not: that’s one reason why Eurasian creditor nations are all quickly and purposefully going about ditching the dollar for bilateral trade.

The bottom line for Wall Street is that either the bailouts will stop and anyone practising this crazy behaviour will end up bust — ending the moral hazard of adrenaline junkie coke-and-hookers traders and 21-year-old PhD-wielding quants playing the Martingale game risk free thanks to the Fed — or the Fed will destroy the currency. I don’t know how long that will take, but the fact that the dollar is effectively no longer the global reserve currency says everything I need to know about where we are going.

The bigger point here is whatever happened to banking as banking, instead of banking as a game of roulette? You know, where investment banks make the majority of their profits and spend the majority of their efforts lending to people who need the money to create products and make ideas reality?

Does Jamie Dimon Even Know What Hedging Risk Is?

From Bloomberg:

J.P Morgan Chief Executive Officer Jamie Dimon said the firm suffered a $2 billion trading loss after an “egregious” failure in a unit managing risks, jeopardizing Wall Street banks’ efforts to loosen a federal ban on bets with their own money.

The firm’s chief investment office, run by Ina Drew, 55, took flawed positions on synthetic credit securities that remain volatile and may cost an additional $1 billion this quarter or next, Dimon told analysts yesterday. Losses mounted as JPMorgan tried to mitigate transactions designed to hedge credit exposure.

Having listened to the conference call (I was roaring with laughter), Jamie Dimon sounded very defensive especially about one detail: that the CIO’s activities were solely in risk management, and that its bets were designed to hedge risk. Now, we all know very well that banks have been capable of turning “risk management” into a hugely risky business — that was the whole problem with the mid-00s securitisation bubble, which made a sport out of packaging up bad debt and spreading it around balance sheets via shadow banking intermediation, thus turning a small localised risk (of mortgage default) into a huge systemic risk (of a default cascade).

But wait a minute? If you’re hedging risk then the bets you make will be cancelled against your existing balance sheetIn other words, if your hedges turn out to be worthless then your initial portfolio should have gained, and if your initial portfolio falls, then your hedges will activate, limiting your losses. A hedge is only a hedge if it covers your position. That is how hedging risk works. If the loss on your hedge is not being cancelled-out by gains in your initial portfolio then by definition you are not hedging riskYou are speculating.

Dimon then stuck his foot in his mouth even more by claiming that the CIO was “managing fat tails.” But you don’t manage fat tails by making bets with tails so fat that a change in momentum produces a $2 billion loss. You manage tail risk by making lots and lots of small cheap high-payoff bets, which appears to be precisely the opposite of what the CIO and Bruno Iksil was doing:

The larger point, though, is I think we all know damn well what Jamie Dimon and Bruno Iksil were doing — as Zero Hedge explained last month, they were using the CIO’s risk management business as a cover to reopen the firm’s proprietary trading activities in contravention of the current ban.

Personally, I have no idea why the authorities insist on this rule — if J.P. Morgan want to persist with a hyper-fragile prop trading strategy that rather than hedging against tail risk actually magnifies risk, then there should be nothing to stop them from losing their money. After all, these goons would quickly learn to stop acting so incompetent without a government safety net there to coddle them.

The fact that Dimon is trying to cover the tracks and mislead regulators is egregious, but that’s what we have come to expect from this den of vipers and thieves.

Genius is Not Educated

The WSJ published an interesting article entitled Educating the Next Steve Jobs:

Though few young people will become brilliant innovators like Steve Jobs, most can be taught the skills needed to become more innovative in whatever they do. A handful of high schools, colleges and graduate schools are teaching young people these skills.

In most high-school and college classes, failure is penalized. But without trial and error, there is no innovation. Amanda Alonzo, a 32-year-old teacher at Lynbrook High School in San Jose, Calif., who has mentored two Intel Science Prize finalists and 10 semifinalists in the last two years—more than any other public school science teacher in the U.S.—told me, “One of the most important things I have to teach my students is that when you fail, you are learning.” Students gain lasting self-confidence not by being protected from failure but by learning that they can survive it.

It’s nice to read about the value of failure, a topic that I have written a few words about.

But really, I don’t think that revolutionary thinking can be educated, and I think it’s foolish (and possibly even counter-productive) to try. School by definition inculcates systematic thinking, methodology and dogma. It inculcates competence. That’s generally a good thing; surgeons, medical researchers, lawyers, engineers, musicians and all manner of professionals need to be competent to function. Innovation is not necessarily inherent in any of those fields. But genius and revolutionary thinking is not really about competence and confidence.

Malcolm Gladwell is famous for formulating the idea that with 10,000 hours of practice, it is possible to master a skill.

The key to success in any field is, to a large extent, a matter of practicing a specific task for a total of around 10,000 hours.

So is 10,000 hours of practice all that stands between incompetence and world-changing greatness?

Gladwell grandly theorises that many famous history-changers (“outliers”) like Bill Gates, Steve Jobs, and the Beatles got to where they did with 10,000 hours of practice. But that ignores a lot of silent evidence; for every Bill Gates programming over a mainframe for 10,000 hours, there is a housewife that we have never heard of who has done 10,000 hours of parenting, and (probably much more than) 10,000 hours of housework. There is a surgeon who has done 40,000 hours of operations. There is a truck driver who has driven for 100,000 hours.

Gladwell is keen to point out, of course, that people’s skills also flourish through the networks they cultivate, and the people they meet, and that (of course) it’s just a little more complicated than 10,000 hours of practice.

My view is that all 10,000 hours of practice (something which of course can be delivered within a traditional educational framework) does is lay down a bedrock of competency.

My theory is that revolutionary thinking is not simply a matter of persistence, but is instead attitudinal, and mostly comes out of people who are forced or who force themselves to take a radically different perspective to the rest of the world. They are — almost by definition — autodidacts, simply because their style of thinking has not yet been pioneered. They have to teach themselves, and iron out the kinks. Being an autodidact of course is not necessarily a matter of choice; very often it is a matter of necessity — people who don’t have access to traditional education, or who are forced to exist outside the system. This can be due to poverty, strong personalities, or a preference for self-teaching (very often expressed as a preference for doing over thinking).

The established system is often very useful for such people, because it gives them a framework from which to hang contrarianism. It gives them something to rebel against and kick out against.

On the other hand there are many examples of professional academics and those within the establishment who pioneer and innovate (although of course it should be noted that the overwhelming majority of academic papers today are masturbatory regurgitation). But such activity forces even the most staid into autodidactic learning; it forces them to make mistakes, and challenge themselves and learn their own lessons.

I suppose it is possible to try to inculcate a love of tinkering, of trial-and-error, and an understanding of the value of failure. It is certainly possible to encourage an interest in self-teaching. But it remains to be seen how many of us will really bite. It strikes me as if most of us do not really want to be innovators; I see far more who want job security, loving families, and plenty of leisure time.

I tend to believe that today’s education system is fit for its own purposes; it churns out competent thinkers, competent doers, people who can analyse to a framework and work to a deadline. True autodidacts and philosophers (in the most literal sense of the word — lovers of thinking, learning and wisdom) will find their own way.

Two Kinds of Black Swans

The black swan is probably the most widely misunderstood philosophical term of this century. I tend to find it being thrown around to refer to anything surprising and negative. But that’s not how Taleb defined it.

Taleb defined it very simply as any high impact surprise event. Of course, the definition of surprise is relative to the observer. To the lunatics at the NYT who push bilge about continuing American primacy, a meteoric decline in America’s standing (probably emerging from some of the fragilities I have identified in the global economic fabric) would be a black swan. It would also be a black swan to the sorry swathes of individuals who believe what they hear in the mainstream media, and from the lips of politicians (both Romney and Obama have recently paid lip service to the idea that America is far from decline). Such an event would not really be a black swan to me; I believe America and her allies will at best be a solid second in the global pecking order — behind the ASEAN group — by 2025, simply because ASEAN make a giant swathe of what we consume (and not vice verse), and producers have a historical tendency to assert authority over consumers.

But black swans are not just events. They can also be non-events. To Harold Camping and his messianic followers who confidently predicted the apocalypse on the 21st of May 2011 (and every other true-believing false prophet) the non-event was a black swan. Surprising (to them at least) and high impact, because it surely changed the entire trajectory of their lives. (Camping still lives on Earth, rather than in Heaven as he supposedly expected).

To true-believing environmentalists who warn of Malthusian catastrophe (i.e. crises triggered by overpopulation or resource depletion), history is studded with these black swan non-events.

From the Economist:

Forecasters of scarcity and doom are not only invariably wrong, they think that being wrong proves them right.

In 1798 Thomas Robert Malthus inaugurated a grand tradition of environmentalism with his best-selling pamphlet on population. Malthus argued with impeccable logic but distinctly peccable premises that since population tended to increase geometrically (1,2,4,8 ) and food supply to increase arithmetically (1,2,3,4 ), the starvation of Great Britain was inevitable and imminent. Almost everybody thought he was right. He was wrong.

In 1865 an influential book by Stanley Jevons argued with equally good logic and equally flawed premises that Britain would run out of coal in a few short years’ time. In 1914, the United States Bureau of Mines predicted that American oil reserves would last ten years. In 1939 and again in 1951, the Department of the Interior said American oil would last 13 years. Wrong, wrong, wrong and wrong.

Predictions of ecological doom, including recent ones, have such a terrible track record that people should take them with pinches of salt instead of lapping them up with relish. For reasons of their own, pressure groups, journalists and fame-seekers will no doubt continue to peddle ecological catastrophes at an undiminishing speed. These people, oddly, appear to think that having been invariably wrong in the past makes them more likely to be right in the future. The rest of us might do better to recall, when warned of the next doomsday, what ever became of the last one.

Critics will note that Malthusians only have to be right once to provoke dire consequences; deaths, famines, plagues. Of course, that is the same logic that has led governments to spend trillions, and trample the constitutional rights of millions of people in fighting amateurish jihadis, when in reality more Americans — yes including the deaths from 9/11 — are crushed to death by furniture than are killed by Islamic terrorism.

But it is true, the scope of the threat posed by Malthusian catastrophe is probably an order of magnitude greater than by jihadis with beards in caves. And of course, groups like the Club of Rome and individuals like Paul Ehrlich will keep spewing out projections of imminent catastrophe.

So what were the real threats to humanity following Malthus’ predictions? Was it overpopulation? Nope. Imperial warfare killed far, far more than any famine or resource crisis in the 20th Century. To the overwhelming majority of the population, World War I — both in its origins (the assassination of an obscure archduke), its scope, its death toll, and its final ramifications (i.e. the Treaty of Versailles, the rise of Nazism and World War II) was the great black swan event, the great killer, the great menace.

Black swan events defined the 20th Century; the black swan non-events of Malthus did not. The true story of the early 20th Century was the decline of a heavily indebted, consumptive and overstretched imperial power (Britain), and the dangers to peace and international commerce as its productive and expansionistic rivals (especially Germany, but also America) rose and challenged her (in vastly different ways).

There are some real environmental concerns like the dangers posed by nuclear meltdowns, runaway global warming (although I believe a little global warming is probably a good thing, as it will keep us out of any prospective future ice age), tectonic activity, or an exotic solar event like an X-flare, but we have no clue what will hit us, when it will hit, and its branching tree of consequences. We don’t have a full view of the risks. In spite of what unsophisticated mathematician pseudo-scientists in the tradition of Galton and Quetelet may tell us, we cannot even model reality to the extent of being able to accurately foretell tomorrow’s weather.

But once again a heavily consumptive, indebted and overstretched imperial power (America) is coming to terms with the problem of decreasing power in the face of productive and expansionistic rivals (particularly China). That parallel tends to lead me to believe that imperialist warfare will be the greatest menace of the 21st Century, too. But that’s the problem with predicting the future: we simply don’t know what black swan events and non-events nature will deliver (although it would be wise not to place too much trust in politicians or the establishment media, who simply blow their own trumpet and hope for the best).

So what are we to do?

Well, I think it’s important that businesses, governments and individuals think about Malthusian concerns. Malthus’ incorrect theorising touched upon the most significant of human concerns. Quite simply, without food, water and energy we weak and fragile humans are imperilled. It’s important that governments (particularly of importer nations) devise strategies to cope with (for example) breakdowns in the international trade system. Individuals, families, businesses and communities should be aware of where their food, energy and water come from, and of alternatives in case the line of supply is cut. Keeping backups (e.g. solar panels, batteries, wind turbines, storable food and water) is a sensible precaution for all citizens. There will be shocks in the future, just as there have been in the past. We should be prepared for shocks, whatever they may be.

And we should learn to love such volatility. Nature will always deliver it. We evolved and developed with it. It is only in modernity that we have adopted systems procedures and methodologies to subdue volatility. And — as we are slowly learning via the disastrous consequences of every single failed experiment in central planning — volatility suppressed is like a coiled spring.