The Long Run


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.

24 thoughts on “The Long Run

  1. The question “How should we balance the present against the long run?” is a moral issue, not a technical one. BUT conventions in technical analysis do privilege some moral positions over others.

    For example, the practice of exponential discounting of future cash flows is predicated on the assumption that the opportunity costs of any capital investment are represented by the interest that could be drawn on guaranteed bonds. It is common practice to choose among investment opportunities with intertemporal tradeoffs by aggregating cash flows in time to a net present value. However, when compared to naturalistic time preferences, we find that exponential discounting favors near-term events at the expense of longer-term.

    The alternative is hyperbolic discounting, which much more accurately models the behavior of animals and humans in natural decision-making settings. Hyperbolic discounting places less emphasis on the near term and more on longer term consequences.

    There’s plenty available on the web related to hyperbolic discounting. In relation to intergeneration equity, you could start with my video posted here:

    • A guess: different people’s time preferences resemble both hyperbolic discounting and exponential discounting, as well as various other patterns relative to individuals’ subjective preferences!

      • John, your latest tweet re: Structural unemployment was a good read.

        I think this is a pressing problem for the future, as we are relying on highly skilled employees for any job growth in the West, and now with globalisation and outsourcing, firms are unwilling to spend money on training programs. In Australia, it is far easier to fly someone in from oveseas on a 457 class visa, than train someone. Firms are head hunting each other’s staff, not employing apprentices. Long term unemployed have no chance in getting an interview. Disability welfare (Lack of cultural fit, or inadequate physical strength-old age) is their only support line.

        We have a major problem in Australia, as we take in many refugees, but unfortunately the manual jobs are no longer there (My refugee grandfather had 2 jobs and did overtime) As a result you get frustrated teenagers and depressed adults.

        You can’t have a refugee program and not have work for them. They would be better off in the developing third world, as they will have work to do rebuilding their country. This is a time bomb waiting to go off.

        • Good points Buddy. I highly recommend Booker T. Washington’s autobiography “Up From Slavery”.

          Emancipation abruptly changed the social and economic landscape in America. As a result former slaves were suddenly faced with the “responsibilities of freedom” as Booker called it. Masters were also faced with the shock reality of having to work—Booker wisely points out how the system of slavery had disabled both master and slave in regards to labor and industry. Booker wisely saw the path that education should take, a path that was 180 degrees out of phase with mainstream academia.

          Our nation is about to face an abrupt change similar to emancipation and the educational establishment has likewise wrongly trained a future work force. They have malinvested educational effort.

          There is much hope for our youth, of which nine are mine. The future will involve humility, hard work, industry, and diligence. It will involve sweat. It will involve what Booker rightly perceived as the right focus of education—looking at the ground, as opposed to looking at the stars.

        • Buddy’s and Doug’s of May 12 (on refugees and work) are spot on! In the US, Obama and the radical Democratic leadership ignore (but surely know) this in order to gain votes/power. Individuals, families and communities can’t be left alone to govern themselves. After teaching Alinski’s “Everything we do, we do for power!” at U. of Chicago, Obama puts it into practice — just like Hitler, Stalin, Mao, Pol Pot.

  2. John: I hope readers will indulge me in a brief subjective comment — I think you have provided an excellent value- and thought-provoking stimulus (I’m trying to combine both “moral” and “technical” issues). I’ll offer some controversy to try to liven things up!

  3. Presuppositions underlie anyone’s expectations of what the future holds. Is the progress of history a matter of chance or Divine orchestration? I hold to the latter which inescapably links moral responsibility to social blessing. Seen in this light the future is bright, although getting there may require many painful lessons.

    “Each of them will sit under his vine
    And under his fig tree,
    With no one to make them afraid,
    For the mouth of the Lord of hosts has spoken.”
    -Micah 4:4 (NASB)

    • See my comment below. People will be reading from a different book and presupposition. Great that you have 9. I need to start on my first! The problem is women today don’t want kids or as many as they did in the past.

  4. ” …how humans should balance the present against the long run?”

    Considering the fact that there is no present and no, ‘long run,’ the question in [absolute terms] is mute.

    Even in the playground of the relative, the intellect simple can not comprehend the paradoxes, the conundrums, and a world of infinite stimuli in constant flux.

    Even here, the throw-up wheel [as my kids liked to call it], propels us round and round, changing our placement on the four axises, but little else. On to the sliding board, we make our way up the ladder only to find that the view from the top is quite unpleasant, the foreground littered with the bodies of those kicked in the teeth and sent crashing back to the ground.

    The teeter-totter teaches us that those who carry more weight are always tempted to remove themselves at the apogee of our vulnerability. And finally to the swings, where we follow the prescribed arc inducing temporary delights, an brief escape from the drudgery of being prisoner to an object of much greater mass.

    Prognostication is [perhaps] man’s greatest fantasy. It is the ultimate attempt at escaping His own mind, allowing Himself the delusion that one might be able to understand the interactions of an infinite number of events with an infinite number of events.

    What we do know is never because we understand it, it’s only because we allow our intuitive sense to take over. Reality is simply inaccessible to the human mind, no matter how much we attempt to make it so.

  5. Futurists and Economists should be surveying the youth in the third world, and Muslims at that. They will be the future, as the atheist West and Eastern birth declines are no match. Consumption and Politics will be driven by the former, so we need to take this into account.

    I don’t care who is in charge, as long as the animals and plants are protected. It would be a shame for the Tiger, Whales, Panda’s, Forests to disappear, when we are so close at protecting their future. Where will the political will and economic clout to protect them, come from, if the future generations do not value them, as we do now. I know Islam commands that they value all of Allahs/Gods creation, so I hope their zealots protect the environment, flora and fauna.

    • “I don’t care who is in charge, as long as the animals and plants are protected.”

      Long after we are but a fleeting memory of the nuisance man has become, it will [once again] be the weeds and the insects fighting it out for terrestrial planetary supremacy.

      • The problem is there will be one crazy prepper that survives nearly everything that God can throw at him. One pesky one will escape in a pod and travel to the nearest place in the cosmos that is cosy.

        • Although it seems probable that there is indeed another habitable world out there, I wouldn’t bet the farm on to finding it. 🙂

  6. Well guys, someone has to be the smartass to remind you that ONE human won’t be able to repopulate, and that FINDING a habitable world is easy compared to getting there in a workable time interval. [Oh — maybe you’re counting on “in vitro”?]

    Anyway, you should hurry! Even if we dodge all the mega meteorites and comets, solar flares, x-ray beams, etc., we’re doomed to be swallowed by our dying sun in a few billion years!

    The immensity of time-space does have a way of putting human affairs in perspective, right? I greatly admire Stephan (sp.?) Hawking, and I haven’t read his full statement, but I can’t follow him from his recent discovery — that the/any universe can be self-starting — to the conclusion that there needs be no Creator. Now that’s REALLY a challenge for our collective human mind?

    • “I greatly admire Stephan (sp.?) Hawking, and I haven’t read his full statement, but I can’t follow him from his recent discovery — that the/any universe can be self-starting — to the conclusion that there needs be no Creator.”

      I am sure that Stephan Hawking is a good guy and everything, but imagine making such a statement!

      This is a great example of somebody who does not understand the relative nature of all things knowable. Even with an IQ of six million, one can not understand the simplest of things, yet the origination of the Universe.

      People are really silly, their fears taking them here, there, and everywhere, yet missing that which is right in front of their faces, that which spells out every-thing they will ever have to know; all free, all Real, all the time.

  7. I looked into fertiliser, to improve grass yield for sheep, but decided not to.

    We not only have relied on oil, but fertiliser to “supercharge” the past 200 years.

    Note the reduction in micro nutrients in food, and the destruction of soil microbes and fungi. I guess the scientists who invented fertiliser did not understand “intelligent design” fundamentals.

    Talk about taking a bite from the tree of knowledge!

  8. Pingback: George Osborne’s Misconceptions About Countercyclical Fiscal Policy | azizonomics

  9. Pingback: Randomness is different in social sciences | Technology

  10. Pingback: Randomness is different in social sciences | Risk Management

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s