The merits of fragile systems – a quibble with Nassim Taleb

I know that I have a tendency to criticize without acknowledging the achievements of the critized. Nassim Taleb is certainly one of those people whom I admire for their insights, although I do have a quibble with the conclusions he draws from those insights.

So, what is the insight?

Taleb is, of course, famous for the black swan. Events coming out of the blue. Either for lack of prior experience of the system, as in the canonical example: Australia had not been discovered where Black Swans live. Or, as in financial markets, neglect of interactions between the agents making up a system. The insight is obvious, but where self-delusion is the order of the day, saying the obvious is a heroic act.

Systems that are large and highly efficient tend to be fragile, in Talebs sense. This is perfectly true, but I take issue with the conclusion that such systems should be avoided in general. Both fragility and antifragility depend on the scope of what you are looking at. A single restaurant at a street corner may be a fragile enterprise, while the restaurants of a city taken as a whole are definitely antifragile.

The main reason why we should not be scared of large scales is: Economies of scale just work. Many systems – financial systems, retail, logistics, manufacturing, most powerplants etc. – benefit hugely from economies of scale. It may seem that the damage is also huge when they fail, but the damage is still in proportion to the benefit. What Nassim Taleb does not mention when he points out that the losses of the banks in the post-2007 world surpass all the losses they ever had in their history, is that the total of the world economy in the 2007 and thereafter is gargantuan in comparison with the world of the Great Depression in the 1930ies or even the crash in 1987.

The question is, would we really be better off in a world, in which we would have foregone the benefits of economies of scale? Is it worth to be scared of things being too big to fail? Is there anything at all, that is too big to fail?

Now don’t get me wrong. This is not an apology for reckless behaviour. The banks that failed, the management that failed the banks and the public alike, got off far too lightly in the recent economic crisis.

Nassim Taleb is absolutely right when he says that such systems are prone to failure. But the question that has not seriously been addressed is, whether they are truly too big to fail. Finance for one thing, is limited to juggling with numbers. Numbers are the most convenient thing about the economy. There can be a shortage of bullion – gold or silver. But there can never be a shortage of numbers. If private banks fail to provide money to the markets, the state can always do the same. And it did – to an insufficient extent, if you ask me or people like Paul Krugman.

A large system can much more easily be addressed by legislators if something goes wrong. This of course assumes that legislators want to take action in the economy or certain parts of society (where similar principles apply) and that governments can resist large companies attempts to influence legislators. If this seems not to be the case, it is because our minds are biased by news. We hear the news, when a system fails, we don’t hear the news, when it works just as intended. This is the reason why there is such a thing as a System Administrator Appreciation Day. You blame the Administrator for his shoddy work, when things go wrong – but don’t realize the good work he does, when you’re not on the phone crying for help.

Again, that’s no apology for corruption or bad work. It is just that failures are in fact much more acceptable and much more survivable than the term “too big to fail” would imply. When people were talknig about banks being too big to fail, what they really meant was “they are too big to let them fail without changing them and integrating state intervention into the financial system”.

The question is, is this failure? The failure I see has nothing to do with the size of any bank. It is the failure of the government to intervene. Or rather, the intentional distortion of the economy both in the US and the EU to create the illusion of economic prosperity after the dot.com crisis and 9/11 in 2001 threatened to cause a serious recession that then happened 7 years later.

It is important to note, that the world has not ended is very far from post-apocalypic scenarios that seemed to have been just around the corner. Not everything is fine, to be sure. The economic and political systems of Europe and the US are not equipped to effectively cope with the current situation. Especially the political systems are incapable of any near-term reform that is necessary to prevent people from suffering the ill-effects of a decade of financial folly. But the system is robust enough to not collapse until the lethargic mammoth of modern legislation has finally stopped charging in the wrong direction, made up its mind and turns its attention towards a more promising and hopefully better target.

Politics will improve in the long run, based on the folly of the past – despite all the fragility inherent in the system. And as well it should be. Human nature is part of the whole, it is part of economy – it is the point of having an economy to serve human beings. It is not a failure of the system to have human folly included in it. To the contrary. Isolating the great system of politics and economy from human stupidity would make it all the more likely to collapse in the long run.

Antifragility with respect to human nature requires us to have some fragility in our systems and sufficient robustness to allow for the time it takes for the system to grow back from failure – for antifragility to have its positive effect.

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