Wednesday, 28 November 2012

Rudyard Kipling was a better economist that Gordon Brown


If by Rudyard Kipling probably isn’t taught in many schools these days, but it ought to be. Consider the truth packed into just two short lines from the poem:
  • “If you can meet with Triumph and Disaster / And treat those two impostors just the same”
Much more than a simple encouragement to take life’s ups-and-downs in one’s stride, it is a recognition that disruptive events are unpredictable (though inevitable) and that what makes one grow as an individual (“you'll be a Man, my son!”) is not some vain attempt to control such uncertainties, but our willingness to adapt to and learn from them.

It is a philosophy that was brought bang up-to-date by Nassim Nicholas Taleb in his international bestseller, The Black Swan – which exposed the complacency and arrogance that led to our current economic predicament.

Writing in the Wall Street Journal, he develops his thinking:
  • “Several years before the financial crisis descended on us, I put forward the concept of ‘black swans’: large events that are both unexpected and highly consequential. We never see black swans coming, but when they do arrive, they profoundly shape our world: Think of World War I, 9/11, the Internet, the rise of Google.”
  • “Some made the mistake of thinking that I hoped to see us develop better methods for predicting black swans. Others asked if we should just give up and throw our hands in the air: If we could not measure the risks of potential blowups, what were we to do? The answer is simple: We should try to create institutions that won't fall apart when we encounter black swans—or that might even gain from these unexpected events.”
In the English language there is no word for the ability to gain from unexpected events, so Taleb invents one of his own: “antifragility”:
  • “…natural or organic systems are antifragile: They need some dose of disorder in order to develop. Deprive your bones of stress and they become brittle. This denial of the antifragility of living or complex systems is the costliest mistake that we have made in modern times. Stifling natural fluctuations masks real problems, causing the explosions to be both delayed and more intense when they do take place. As with the flammable material accumulating on the forest floor in the absence of forest fires, problems hide in the absence of stressors, and the resulting cumulative harm can take on tragic proportions.”
Taleb argues that the attempt to eliminate uncertainty in the economic realm can also have disastrous consequences:
  • “…our economic policy makers have often aimed for maximum stability, even for eradicating the business cycle. ‘No more boom and bust,’ as voiced by the U.K. Labor leader Gordon Brown, was the policy pursued by Alan Greenspan in order to ‘smooth’ things out, thus micromanaging us into the current chaos. Mr. Greenspan kept trying to iron out economic fluctuations by injecting cheap money into the system, which eventually led to monstrous hidden leverage and real-estate bubbles.”

Debt has its uses, of course, but it also tempts us to deny reality, evade responsibility and put-off the inevitable. This applies to individuals, but also to entire nations. In misusing debt to abolish boom and bust (“Triumph and Disaster”) Gordon Brown and Alan Greenspan only succeeded in turning disruption into devastation.

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