Socialism, Capitalism and REALism
Nassim Nicholas Taleb has popularized the idea of the Black Swan.
Random events of huge magnitude and smallish, yet unknown probability.
I have already written about some of the implications of his idea: It enables you to tweak your personal luck and it gives an interesting perspective on investing. [never take investment advice from me]
Does this concept have any implications on the “socialism” vs. “capitalism” debate?
The market as evolutionary system
Let’s first look at how innovation works in a market system:
“Effectively, if free markets have been successful, it is precisely because they allow the trial-and-error process I call “stochastic tinkering” on the part of competing individual operators who fall for the narrative fallacy—but are effectively collectively partaking of a grand project. We are increasingly learning to practice stochastic tinkering without knowing it—thanks to overconfident entrepreneurs, naïve investors, greedy investment bankers, and aggressive venture capitalists brought together by the free-market system.” [TALEB]
In essence, the individual actors are (on average) mistaken about their personal odds of success, but the system itself moves forward nevertheless. Selfish, individual decisions are transformed into a social good, in which we are all fortuitously failing forward together! Now that’s a good system!
Random trials and feedback, the basic building blocks of evolution are helping the market to find good solutions for a given environment. Change the situation and with a high probability another solution will be the best fit.
Adapting quickly is the best preparation
Inherently, flexibility and adaptability amount to an unplanned system. There are (almost) always different people in different companies working on the same or closely related projects. Does it really take 50 companies to work on batteries for electric cars? Do you really need hundreds of companies working on valves? Why not we just plan it better and make it more efficient?
Planning and optimization reduces “slack”, but it also removes redundancies and resilience. When you have a company trimmed down to the bare minimum needed for the most efficient operation, how do you react for unforeseen events? What do you do, if the the events are huge? How do you prepare for them?
“[D]o not try to predict precise Black Swans—it tends to make you more vulnerable to the ones you did not predict. [I]nvest in preparedness, not in prediction. Remember that infinite vigilance is just not possible.” [TALEB], which mirrors an observation by Scott Adams: “If you have only one mortal risk, it might make sense to spend huge amounts of money to drive that risk to zero. But if you have multiple mortal risks, it might make more sense to allocate your money across several risks.” [ADAMS, p.136]
So you don’t prepare for black swans, you remain quick on you feet.
The same principle applies to positive Black Swans. You can’t mandate random events, so you can’t mandate innovation, let alone breakthroughs. You need to make a lot of mistakes to enable innovation. That’s precisely what all lean-production and efficiency programs try to prevent: they are geared towards making the production process of a specific product as efficient as possible. Great for the bottom line in a spreadsheet, not so great for innovators.
All you can do is to create systems that can cope with randomness. If you are doing really well, you can design systems that shield you from the negative sides of randomness and and expose you the the positive sides. The inherent unpredictability of nature and the budding companies in a capitalistic systems, that use resources and build skills redundantly, might be its greatest asset in comparison to more strictly planned economies. Plans are more efficient, if everything happens according to plan, but they are brittle in the face of randomness. And randomness and unknown unknowns are everywhere, but especially near the boundaries of our technology.
Binding the risk
We need to be aware of Capitalism’s Achilles’ heel, though: “if you make corporations compete, it is sometimes the one that is most exposed to the negative Black Swan that will appear to be the most fit for survival.” [TALEB]
I don’t know of an antidote to that other than transparency and regulations. In the field of finance, this perverse risk structure might be mitigated by something like the Limited Purpose Banking plan, presented previously.
As explained in my series about justice, I think the current manifestation of market capitalism stands to gain considerably from binding the downside risk of its participants and regulating its most egregious failures, like the existence of confusopolies, a lack of carbon prices and healthcare, as well as problems with generating income in the age of robots, for which alternative funding schemes for the state might become necessary.
Implementing these measures creates another “barbell strategy” for society:
leveraging the market for what it’s great at: creating innovation
using the state for what it’s good at: providing mature, well-tested products and services at scale for everybody. And of course exercising natural monopolies, like justice, the military, etc.
The whole debate between “socialism” and “capitalism” might have been entirely pointless: the binary extremes of a debate that should have been about the spectrum in between. It was never a question of “either … or”, but a question about what mode of provision of goods and services works for which areas. Ideological debate took precedence over results and a lot of people suffered for it.
Taleb’s probability focused frame of buying insurance against bad outcomes and opening up for positive black swans, the barbell, seems to be far superior. We have become good at “stochastic tinkering” for the upside, mostly by accident, I assume. It’s time to focus on binding the downside risk as well, which I’d like to embed it in the Rawlsian framework of justice. That will need a few tweaks for liberal democracy that acknowledge our lack of knowledge, our inability to foresee the future and the effects of randomness on our lives and ourselves.
We can do so with negative utilitarianism, which focuses on statistical improvements for the lowest income brackets, societal insurance against downside risks by providing education, healthcare and some form of sustenance, aggressive seeking of positive Black Swans by broadly indexing investments in R&D and startups, risk-benefit analysis for regulations with A/B testing and randomizing the legislature to guarantee diversity of opinion and reduce corruption.
We could pay for all of that by a “pay-per-use” financing model of governmental services, which should ensure sufficient resources to finance consumption and investments and put friction on the formation of large estates, even if automation grows considerably. With “golden shares” in intellectual property that is spawned by governmental R&D money, societal investments could also be a net positive on the balance sheet.
Lastly, the STAD branches of government should be explicitly tasked with constantly detecting flaws in and improving on the system. We just need to accept that we can’t do any better than adjusting to our previous error, when new data becomes available.
How does progressively eliminating the greatest sources of suffering and aggressively innovating, by collaboratively financing innovation in a competitive market setting sound to you? I like it!
It’s time to embrace Randomized Experimental Advancive Liberalism!
It’s time to get REAL.
Let’s get going!
SOURCES:
[ADAMS] ADAMS, Scott. Loserthink. Penguin Publishing Group. Kindle-Version.
[TALEB] TALEB, Nassim Nicholas. The Black Swan: The Impact of the Highly Improbable. Penguin Books Ltd. Kindle-Version.