Capital’s Fragility: A Discussion Inspired by Nassim Taleb
My first Intro to Taleb
Around a few years ago, I informed my dad that I was thinking about studying statistics in college, and he ended up giving me a book titled “The Black Swan” by a man named Nassim Nicholas Taleb. At the time, I had no idea who this man was, but I quickly came to realize he is a brilliant statistician, and I continued to follow his work in order to learn more (and because his Twitter account is endlessly entertaining).
Taleb on Overoptimization and Fragility
Recently, I saw a series of tweets in which Taleb discussed the dangers of “overoptimization” and “fragility” in processes such as globalism, etc. Below are a few of them:
From as early as January(!), Taleb and some of his peers have been sounding the alarms on Coronavirus (far earlier than other “experts”). As someone who has closely followed this pandemic since February, I have been continuously impressed by Taleb’s work. And even more than just his work on pandemics, his discussions of fragility in the economic system are extremely important! Taleb presents a strong defense and intuitive and empirical argument for subsidiarity, localism, and durability with our economic and political systems:
Now, I am in strong agreement with Taleb on the importance of these values. I discussed in my last two pieces on political economics that I remain deeply distrustful of bureaucrats in a central government running an economy (either directly through planning or indirecty through regulation, etc). This is not only from an empirical/functional point of view, but even moreso from a moral point of view. I find the surveillance that would be needed for such a process to be a serious violation of privacy, one that is simply unacceptable in any society that praises individuality to any meaningful extent.
Discussing Localism, Overoptimization, and Fragility
So when Taleb lays out localism and subsidiarity as follows, I instinctually yell “Yes!”:
So the question becomes, how do we build such a durability model? Subsidiarity is a good principle, but it’s also somewhat vague as presented. How do we ensure that the government becoming the “manager of systemic risk” doesn’t begin overstepping its bounds? Power naturally centralizes, and power inequalities naturally grow, so what is to stop the State from growing its bureaucracy and eventually filling up with Intellectual-yet-Idiots with no skin in the game once again?
Taleb’s Guidelines for an Anti-Fragile system
Taleb attempts to provide an explanation of what this subsidiarity represents, as a kind of “sophisticated libertarianism” as opposed to the “vulgar libertarianism” of the “sociopathic” individuals who have no conception of the common good:
Some Issues I See
But I have serious issues with this argument for the following reason: I do not believe it will lead to the localism, subsidiarity, and durability that Taleb and I both value. In fact, I believe it falls prey to the same issues that I have been discussing in my last 2 posts in this series.
First, I will note that Taleb largely agrees with the stated goal of Adam Smith:
Taleb: “transforms private greed/incentives into collective good”
Smith: “he intends only his own gain, and he is in this, as in many other cases, led by an inivisble hand to promote an end which was no part of his intention” (The Wealth of Nations IV.ii.9)
Again, this is a belief with a long theological and philosophical history(Shaftesbury, Pope, and Hutcheson [who was the mentor of both Adam Smith and David Hume], to name a few), and is one I don’t think many people seriously dispute. The issue simply becomes implementation.
“The Capitalist’s Fork”: An Inescapable Dilemma for Capitalist Localists
As we have stated in the last two posts in this series, the system of incentives (firm’s profit motive and consumer’s utility maximization) and signals (prices) that characterize capitalism actually work to undermine the system itself and actively work to disincentivize approaching the common good. In other words, private incentives only lead to the common good under highly idealized scenarios that actually make zero sense and very clearly do not hold in the real world (ex: nosy preferences). In fact, the “end result” of a “free market,” pareto efficiency, is not inherently a good thing and it certainly does not inherently lead to a more durable system.
The very incentives and signals of capitalism lead to the predation by big corporations that Taleb (and I) disdain. And yet, the only way to resolve this issue with the incentive structure while maintaining the incentive structure itself, is to hand over immense power to a centralized government of bureaucrats! Not ideal (to put it lightly). We can call this dilemma “The Capitalist’s Fork” and, unfortunately, both options suck. But what about the other points Taleb makes?
I will roughly define “freedom of enterprise” as “freedom of association” which is a good thing (for the most part)! I have no issue with that. Again, if we are implementing an incentive structure and the signals and mechanisms for it to function, we are looking for indirect coordination of production. We do not want bureaucrats sitting in some far away capitol to make decisions for local communities, as Taleb noted in his second point in the tweet above, even if I don’t wholly agree with how it is structured. The important point is to allow communities to work things out themselves. Develop durable systems. The issue remains: capitalism’s incentive structures work against this.
Unrestrained capitalism (i.e. capitalism’s very incentive structures) demands over-optimization. Capital and Land lying around represents unrealized profit. The profit motive demands lowering labour costs by offshoring and outsourcing work. Just-in-Time supply chains are the most profitable and yet the most fragile. And maximizing utility demands the cheapest goods, even if the production of said goods becomes increasingly more fragile. In the world of financial capitalism, these effects only become more pronounced. In fact, beyond just the firm’s profit motive (which could feasibly be considered “less important” than other goals so long as the firm acheived a sufficient level of profit), financial capital provides further motivations (ex: fiduciary responsibility) to engage in short-term thinking that boosts fragility (ex: the stock buybacks over the past decade that have inflated stock prices at the expense of a massive corporate debt bubble — an issue, considering Taleb himself notes how Mediterranean cultures have always known that debt leads to fragility). And it isn’t just public companies who suffer from this added incentive to maximize profit at the expense of durability: venture capital and private equity both demand maximized returns as they fundamentally transform huge swaths of the economy into more profitable yet massively more fragile systems. And in order to eke out more and more marginal amounts of profit, the system will be forced to continue becoming more fragile. This is baked in to capitalism’s incentive structure. It cannot be escaped. Predation by big corps is inevitable so long as we don’t hand over power to IYI technocrats in a distant government, which is a terrible option as well. The Capitalist’s Fork is inevitable.
But can’t we at least devise some system to be aware of tail risks? NO! The profit motive rewards those firms that ignore tail risks because they end up with (momentarily) cheaper goods that consumers prefer which leads to them making the most money and outcompeting firms that rely on adequately considering risk! Capitalism actually inherently incentivizes the ignorance (or undervaluation) of risk, especially tail risk!! And this is only magnified and intensified by financial capital!!!
Truly Establishing and Defending Localism: How can we do it?
So how do we get out of this? We want freedom of association, we want localism and subsidiarity, and we want property rights and law. We need these in order to build a more durable (and, arguably, ethical) system. A system properly situated to withstand tail risks. A system that isn’t hopelessly over-optimized. We simply cannot do this with capitalism’s incentive structure and signals. It is impossible absent handing over power to technocratic IYI’s. And that is not something I am willing to tolerate.
Which means we need to develop an all new incentive structure. One built specifically with subsidiarity and durability in mind. One which rewards durable, flexible, antifragile systems as opposed to incentivizing fragile, inflexible, overoptimized ones. I hope that Taleb, and others like him (such as Justin Amash), can join me in developing this new incentive structure. I believe I have developed such a system, and as I present it over the coming weeks, I look forward to engaging with the more sophisticated proponents of localism and subsidiarity, to ensure that the system is antifragile and effective. Because Taleb and I both agree, the incentive structures of today are not sustainable.