We can also see from the turkey story the mother of all harmful mistakes: mistaking absence of evidence (of harm) for evidence of absence, a mistake that we will see tends to prevail in intellectual circles and one that is grounded in the social sciences.
So our mission in life becomes simply “how not to be a turkey,” or, if possible, how to be a turkey in reverse—antifragile, that is. “Not being a turkey” starts with figuring out the difference between true and manufactured stability.
The reader can easily imagine what happens when constrained, volatility-choked systems explode. We have a fitting example: the removal of the Baath Party, with the abrupt toppling of Saddam Hussein and his regime in 2003 by the United States. More than a hundred thousand persons died, and ten years later, the place is still a mess.
TWELVE THOUSAND YEARS
We started the discussion of the state with the example of Switzerland. Now let us go a little bit farther east.
The northern Levant, roughly today’s northern part of Syria and Lebanon, stayed perhaps the most prosperous province in the history of mankind, over the long, very long stretch of time from the pre-pottery Neolithic until very modern history, the middle of the twentieth century. That’s twelve thousand years—compared to, say, England, which has been prosperous for about five hundred years, or Scandinavia, now only prosperous for less than three hundred years. Few areas on the planet have managed to thrive with so much continuity over any protracted stretch of time, what historians call longue durée. Other cities came and went; Aleppo, Emesa (today Homs), and Laodicea (Lattakia) stayed relatively affluent.
The northern Levant was since ancient times dominated by traders, largely owing to its position as a central spot on the Silk Road, and by agricultural lords, as the province supplied wheat to much of the Mediterranean world, particularly Rome. The area supplied a few Roman emperors, a few Catholic popes before the schisms, and more than thirty Greek language writers and philosophers (which includes many of the heads of Plato’s academy), in addition to the ancestors of the American visionary and computer entrepreneur Steve Jobs, who brought us the Apple computer, on one of which I am recopying these lines (and the iPad tablet, on which you may be reading them). We know of the autonomy of the province from the records during Roman days, as it was then managed by the local elites, a decentralized method of ruling through locals that the Ottoman retained. Cities minted their own coins.
Then two events took place. First, after the Great War, one part of the northern Levant was integrated into the newly created nation of Syria, separated from its other section, now part of Lebanon. The entire area had been until then part of the Ottoman Empire, but functioned as somewhat autonomous regions—Ottomans, like the Romans before them, let local elites run the place so long as sufficient tax was paid, while they focused on their business of war. The Ottoman type of imperial peace, the pax Ottomana, like its predecessor the pax Romana, was good for commerce. Contracts were enforced, and that is what governments are needed for the most. In the recent nostalgic book Levant, Philip Mansel documents how the cities of the Eastern Mediterranean operated as city-states separated from the hinterland.
Then, a few decades into the life of Syria, the modernist Baath Party came to further enforce utopias. As soon as the Baathists centralized the place and enforced their statist laws, Aleppo and Emesa went into instant decline.
What the Baath Party did, in its “modernization” program, was to remove the archaic mess of the souks and replace them with the crisp modernism of the office building.
The effect was immediately visible: overnight the trading families moved to places such as New York and New Jersey (for the Jews), California (for the Armenians), and Beirut (for the Christians). Beirut offered a commerce-friendly atmosphere, and Lebanon was a benign, smaller, disorganized state without any real central government. Lebanon was small enough to be a municipality on its own: it was smaller than a medium-size metropolitan area.
War, Prison, or Both
But while Lebanon had all the right qualities, the state was too loose, and by allowing the various Palestinian factions and the Christian militias to own weapons, it caused an arms race between the communities while placidly watching the entire buildup. There was also an imbalance between communities, with the Christians trying to impose their identity on the place. Disorganized is invigorating; but the Lebanese state was one step too disorganized. It would be like allowing each of the New York mafia bosses to have a larger army than the Joint Chiefs of Staff (just imagine John Gotti with missiles). So in 1975 a raging civil war started in Lebanon.
A sentence that still shocks me when I think about it was voiced by one of my grandfather’s friends, a wealthy Aleppine merchant who fled the Baath regime. When my grandfather asked his friend during the Lebanese war why he did not go back to Aleppo, his answer was categorical: “We people of Aleppo prefer war to prison.” I thought that he meant that they were going to put him in jail, but then I realized that by “prison” he meant the loss of political and economic freedoms.
Economic life, too, seems to prefer war to prison. Lebanon and Northern Syria had very similar wealth per individual (what economists call Gross Domestic Product) about a century ago—and had identical cultures, language, ethnicities, food, and even jokes. Everything was the same except for the rule of the “modernizing” Baath Party in Syria compared to the totally benign state in Lebanon. In spite of a civil war that decimated the population, causing an acute brain drain and setting wealth back by several decades, in addition to every possible form of chaos that rocked the place, today Lebanon has a considerably higher standard of living—between three and six times the wealth of Syria.
Nor did the point escape Machiavelli. Jean-Jacques Rousseau wrote, citing him: “It seemed, wrote Machiavelli, that in the midst of murders and civil wars, our republic became stronger [and] its citizens infused with virtues.… A little bit of agitation gives resources to souls and what makes the species prosper isn’t peace, but freedom.”
Pax Romana
The centralized nation-state is not exactly new in history. In fact, it existed in a nearly identical form in ancient Egypt. But this was an isolated event in history, and it did not survive there for long: the Egyptian high state started collapsing upon contact with the crazy unruly barbaric disorganized harassing invaders coming from Asia Minor with their assault chariots, literally a killer app.
The dynasties of ancient Egypt did not run the place like an empire but like an integrated state, which is markedly different—as we saw, it produces different types of variations. Nation-states rely on centralized bureaucracy, whereas empires, such as the Roman empire and Ottoman dynasties, have relied on local elites, in fact allowing the city-states to prosper and conserve some effective autonomy—and, what was great for peace, such autonomy was commercial, not military. In reality, the Ottomans did these vassals and suzerains a favor by preventing them from involvement in warfare—this took away militaristic temptations and helped them thrive; regardless of how iniquitous the system seemed to be on the surface, it allowed locals to focus on commerce rather than war. It protected them from themselves. This is the argument brought by David Hume in his History of England in favor of small states, as large states get tempted by warfare.
Clearly neither the Romans nor the Ottomans were allowing local autonomy out of love of freedom on the part of others; they just did it for convenience. A combination of empire (for some affairs) and semi-independent regions (left alone for their own business) provides more stability than the middle: the centralized nation-state with flags and discrete borders.
But the states, even when centralized, as in Egypt or China, were, in practice, not too different from the Roman and Ottoman ones—except for the centralization of intellect with the scribes and the mandarinate system establishing a monopoly of knowledge. Some of us may remember that there were days with no Internet, no electronic monitoring of wire transfers to supervise tax receipts. And before mode
rnity’s communication networks, with the telegraph, the train, and, later, the telephone, states had to rely on messenger services. So a local provincial ruler was king for a large number of matters, even though he was not so nominally. Until recent history, the central state represented about 5 percent of the economy—compared to about ten times that share in modern Europe. And, further, governments were sufficiently distracted by war to leave economic affairs to businessmen.5
War or No War
Let us take a look at Europe before the creations of the nation-states of Germany and Italy (marketed as “re-unification,” as if these nations had been crisp units in some romantic past). There was, until the creation of these romantic entities, a fissiparous and amorphous mass of small statelings and city-states in constant tension—but shifting alliances. In most of their history, Genoa and Venice were competing for the Eastern and Southern Mediterranean like two hookers battling for a sidewalk. And here is something comforting about statelings at war: mediocrity cannot handle more than one enemy, so war here turns into an alliance there. Tension was always present somewhere but without large consequences, like precipitation in the British Isles; mild rain and no floods are vastly more manageable than the opposite: long droughts followed by intense rainfall. In other words, Mediocristan.
Then of course the contagious creation of nation-states in the late nineteenth century led to what we saw with the two world wars and their sequels: more than sixty million (and possibly eighty million) victims. The difference between war and no war became huge, with marked discontinuity. This is no different from a switch to “winner take all” effects in industry, the domination of rare events. A collection of statelings is similar to the restaurant business we discussed earlier: volatile, but you never have a generalized restaurant crisis—unlike, say, the banking business. Why? Because it is composed of a lot of independent and competing small units that do not individually threaten the system and make it jump from one state to another. Randomness is distributed rather than concentrated.
Some people have fallen for the naive turkey-style belief that the world is getting safer and safer, and of course they naively attribute it to the holy “state” (though bottom-up Switzerland has about the lowest rate of violence of any place on the planet). It is exactly like saying that nuclear bombs are safer because they explode less often. The world is subjected to fewer and fewer acts of violence, while wars have the potential to be more criminal. We were very close to the mother of all catastrophes in the 1960s when the United States was about to pull the nuclear trigger on the Soviet Union. Very close. When we look at risks in Extremistan, we don’t look at evidence (evidence comes too late), we look at potential damage: never has the world been more prone to more damage; never.6 It is hard to explain to naive data-driven people that risk is in the future, not in the past.
The messy multi-ethnic empire, the so-called Austro-Hungarian Empire, vanished after the great war, along with its Ottoman neighbor and rival (and, to a large extent, sibling—don’t tell them), to be replaced with crisp, clean nation-states. The Ottoman Empire with its messy nationalities—or, rather, what was left of it—became the state of Turkey, modeled after Switzerland, with nobody noticing the inconsistency. Vienna became trapped in Austria, with whom it shared very little outside the formal language. Imagine moving New York City to central Texas and still calling it New York. Stefan Zweig, the Viennese Jewish novelist, then considered the most influential author in the world, expressed his pain in the poignant memoir The World of Yesterday. Vienna joined the league of multicultural cities such as Alexandria, Smyrna, Aleppo, Prague, Thessaloniki, Constantinople (now Istanbul), and Trieste, now squeezed into the Procrustean bed of the nation-state, with its citizens left in the grip of intergenerational nostalgia. Unable to handle the loss and integrate elsewhere, Zweig later committed suicide in Brazil. I first read his account as I was put in a similar situation of physical and cultural exile when my Levantine Christian world was shattered by the Lebanese war, and I wondered whether he might have stayed alive had he gone to New York instead.
1 I bypass here the economic argument as to whether autonomous city-states were invigorated with economic energy (as Henri Pirenne or Max Weber advocated, in a sort of romantic way); my (mathematical) point is that a collection of small units with semi-independent variations produces vastly different risk characteristics than a single large unit.
2 It is quite distressing to hear debates about political systems that make comparisons between countries when the size of the entities is not the same—say, comparing Singapore to Malaysia. The size of the unit may matter more than the system.
3 Thankfully, the European Union is legally protected from overcentralization thanks to the principle of subsidiarity: things should be handled by the smallest possible unit that can manage them with efficacy. The idea was inherited from the Catholic Church: philosophically, a unit doesn’t need to be very large (the state) nor very small (the individual), but somewhere in between. This is a powerful philosophical statement, particularly in light of both the transfers of fragility we saw in Chapter 4 and the notion that size fragilizes, much on which later.
4 When randomness gets distributed across a large number of small units, along with small recurrent political disorder, we get the first type, the benign Mediocristan. When randomness concentrates, we get the second type, the sneaky Extremistan.
5 Note that people invoke an expression, “Balkanization,” about the mess created by fragmented states, as if fragmentation was a bad thing, and as if there was an alternative in the Balkans—but nobody uses “Helvetization” to describe its successes.
6 A more rigorous reading of the data—with appropriate adjustment for the unseen—shows that a war that would decimate the planet would be completely consistent with the statistics, and would not even be an “outlier.” As we will see, Ben Bernanke was similarly fooled with his Great Moderation, a turkey problem; one can be confused by the properties of any process with compressed volatility from the top. Some people, like Steven Pinker, misread the nature of the statistical process and hold such a thesis, similar to the “great moderation” in finance.
CHAPTER 6
Tell Them I Love (Some) Randomness
Maxwell in Extremistan—Complicated mechanisms to feed a donkey—Virgil said to do it, and do it now
The point of the previous chapter was that the risk properties of the first brother (the fragile bank employee) are vastly different from those of the second one (the comparatively antifragile artisan taxi driver). Likewise, the risk characteristic of a centralized system is different from that of a messy municipally-led confederation. The second type is stable in the long run because of some dose of volatility.
A scientific argument showing how tight controls backfire and cause blowups was made by James Clerk Maxwell of electromagnetic theory fame. “Governors” are contraptions meant to control the speed of steam engines by compensating for abrupt variations. They aimed at stabilizing the engines, and they apparently did, but they paradoxically sometimes brought about capricious behavior and crashes. Light control works; close control leads to overreaction, sometimes causing the machinery to break into pieces. In a famous paper “On Governors,” published in 1867, Maxwell modeled the behavior and showed mathematically that tightly controlling the speed of engines leads to instability.
It is remarkable how Maxwell’s neat mathematical derivations and the dangers of tight control can be generalized across domains and help debunk pseudo-stabilization and hidden long-term fragility.1 In the markets, fixing prices, or, equivalently, eliminating speculators, the so-called “noise traders”—and the moderate volatility that they bring—provide an illusion of stability, with periods of calm punctuated with large jumps. Because players are unused to volatility, the slightest price variation will then be attributed to insider information, or to changes in the state of the system, and will cause panics. When a currency never varies, a slight, very slight move makes people belie
ve that the world is ending. Injecting some confusion stabilizes the system.
Indeed, confusing people a little bit is beneficial—it is good for you and good for them. For an application of the point in daily life, imagine someone extremely punctual and predictable who comes home at exactly six o’clock every day for fifteen years. You can use his arrival to set your watch. The fellow will cause his family anxiety if he is barely a few minutes late. Someone with a slightly more volatile—hence unpredictable—schedule, with, say, a half-hour variation, won’t do so.
Variations also act as purges. Small forest fires periodically cleanse the system of the most flammable material, so this does not have the opportunity to accumulate. Systematically preventing forest fires from taking place “to be safe” makes the big one much worse. For similar reasons, stability is not good for the economy: firms become very weak during long periods of steady prosperity devoid of setbacks, and hidden vulnerabilities accumulate silently under the surface—so delaying crises is not a very good idea. Likewise, absence of fluctuations in the market causes hidden risks to accumulate with impunity. The longer one goes without a market trauma, the worse the damage when commotion occurs.
This adverse effect of stability is straightforward to model scientifically, but when I became a trader, I was told of a heuristic used by veterans, and only old seasoned veterans: when a market reaches a “new low,” that is, drops to a level not seen in a long time, there is “a lot of blood” to come, with people rushing to the exit. Some people unused to losing shekels will be experiencing a large loss and will incur distress. If such a low market level has not been seen in years, say two years, it will be called “a two-year low” and will cause more damage than a one-year low. Tellingly, they call it a “cleanup,” getting the “weak hands” out of the way. A “weak hand” is clearly someone who is fragile but doesn’t know it and is lulled by a false sense of security. When many such weak hands rush to the door, they collectively cause crashes. A volatile market doesn’t let people go such a long time without a “cleanup” of risks, thereby preventing such market collapses.
Antifragile: Things That Gain from Disorder Page 12
