Black Swans and Monetary Monocultures

November 30th, 2008

Trawling through links on a Sunday afternoon, we see that one of my favorite mathematicians – The REAL Maverick: Present Economy worse than Depr Video

confirms the ‘Monetary Monoculture Danger’ BLOGDIAL post, and introduces us to a new smart guy, Nassim Nicholas Taleb:

“My major hobby is teasing people who take themselves & the quality of their knowledge too seriously & those who don’t have the courage to sometimes say: I don’t know….” (You may not be able to change the world but can at least get some entertainment & make a living out of the epistemic arrogance of the human race).

I like it.

He wrote a book called ‘Black Swans’, and on his page there is this line:

The Black Swan: Quotes & Warnings that the Imbeciles Chose to Ignore

I REALLY like it.

Nassim Nicholas Taleb: The Black Swan: The Impact of the Highly Improbable (April 2007)

For the last 12 years, I have been telling anyone who would listen to me that we are taking huge risks and massive exposure to rare events. I isolated some areas in which people make bogus claims –epistemologically unsound. The Black Swan is a philosophy book (epistemology, philosophy of history & philosophy of science), but I used banks as a particularly worrisome case of epistemic arrogance –and the use of “science” to measure the risk of rare events, making society dependent on very spurious measurements. To me a banking crisis –worse than what we have ever seen — was unavoidable and NOT A BLACK SWAN, just as a drunk and incompetent pilot would eventually crash the plane. And I kept receiving insults for 12 years!

Regular readers of BLOGDIAL will know why this man and his work has such a strong appeal to us.

From what little we can glean from an hour of digging around, this man is a real scientist i.e. a scientist that is outside of the Science Cult.

His Black Swan Theory dovetails perfectly with what we and many other people have been saying about UFOs for decades. All you need is a single event to prove that everything you believe is wrong; in this case, all you need is a single instance of a UFO being of ET origin to demonstrate that there is Extraterrestrial Life and that some of it is intelligent and some of it can get here from wherever it is they come from. Such an even would also trash the mistaken idea that the distances are too far, and every other false piece of reasoning to exclude the possibility that Alien scientists and explorers coming here.

No matter what you think, no matter what you want to believe, facts are either true or they are not and the rules of evidence do not change simply because you do not like what they imply. Putting people out of work for their entire lives does not make something you find unthinkable not true.

But I digress.

We can now add Benoit Mandelbrot and Nassim Nicholas Taleb to the list of people who have been warning about an impending financial super crash, and Dr Mandelbrot brings a particularly interesting point of view to the table=, because in the discipline that he pioneered we can find a solution to the booms and busts that are created by interfereing in markets, and I wrote of it in my Monoculture post.

If it is true that economic systems are ‘far more complicated than the weather’ AND (for the sake of argument) we want to stop polluting to prevent an environmental disaster from happening, then governments should also get out of the way of how economies spontaneously and naturally order themselves.

On the surface, governments implicitly agree that market forces exist and that you can precisely alter their behavior by chanting the rates of taxes; Gordon Brown’s government is lowering VAT to 15.5% from 17.5% to encourage spending. This is an admission that indeed, human beings are rational, and that the market reacts to prices rationally. If we extrapolate this move and eliminate all government from the equation, that is, all taxes, would not the economy experience a boom big enough to correct the problem? If this is the case, then why not reduce VAT to 0% if this is the greatest crisis since the great depression? Why keep any VAT at all?

Then we read that there is a secret plan to increase VAT to 18.5% after this ‘VAT holiday’ is over. Wait a minute, if more buying and selling is a good thing, and lowering VAT makes this happen, raising VAT will cause buying and selling to slow down, which is exactly what ‘we do not want’.

Looking at this even in these most simple of terms, and then taking into account the true nature of the scale and complexity of billions of people interacting on the smallest of scales, its clear that this government and in fact no government could possibly understand and regulate any economy for any purpose, and they demonstrate the absolute pinnacle of conceit by thinking that they actually can control the economy. This is quite apart from the moral aspects of their ‘running’ the economy by having a monopoly on initiating force.

We are faced with two choices when we observe government interfering with markets.

The first, is that they do not know what they are doing; they are incompetent and are recklessly tampering with something that they do not understand, and that this crisis is a direct result of this incompetence.

The second, they DO know what they are doing, and they have in their possession a complete scientific model that explains every part of the economy, and that they have deliberately created this crash as a means to some end.

No government, not even that of Gordon Brown would claim that they have a complete, mathematical model of the economy that they work from and use to make decisions. This means that they cannot possibly know what they are doing or what the effects of their decisions will be in the future.

Both of these cases mean that no government should be involved in any aspect of any economy, since it is inevitable that they will do harm and not good either by incompetence or by malice. This is, once again, completely separate from their lack of a right to interfere in the private transactions of people who do no harm to others while transacting.

In order for any reasonable man to accept that these evil entities should have any say in the economy, just for the sake of argument, they would have to demonstrate that a government was competent, but this presents problems by itself; what metrics should be used, who is to say what a success is or is not etc etc. The fact of the matter is that there is no man alive and no group of men that has either the tools or the experience or the knowledge of what is happening right now to be able to steer the behemoth that is an economy of even a small country.

Like I said in my other post, if people are left to their own devices, we will get stability; long term stability where everyone knows, more or less, what is going to happen in the long term future in a narrow field. What is for certain is that once the government, whether it is incompetent or evil, is taken out of the equation if there are future crashes we will be able to respond to them in ways that ameliorate the situation much more rapidly. By nature also, since we would not be in a monetary monoculture, these crashes would be highly localized and not international or even continental.

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