Tuesday, March 3, 2009


Our Black Swan Economy …

In The Black Swan: The Impact of the Highly Improbable, Nassim Nicholas Taleb tells the story of how we once understood the swan world. There was a time when we believed that it was made up of nothing but white swans, because that’s all we saw. Then came the discovery of the first black swan in Australia in 1697, and all we knew about the swan world changed. Taleb then tells us that this is how we look at and understand markets today. In a few words, what we see is a function of what we know about markets which – as we’re seeing today – is not much.

Part of the reason for this is that we are obsessively focused on efficient and smoothly functioning markets. We don’t make much room for human frailties, like greed and stupidity because we like to assume market players operate rationally. Today, like the discovery of the black swan, we are finding that we don’t know as much as we thought we did about markets. What we thought we knew has been collapsed by reality. Why? Because market players find it’s easier to place short-term gains ahead of long-term considerations, which leads them to do stupid things that affect us all. This helps explain why the ideas we have about free markets are, quite frankly, a myth (which I discuss in my book).

The cumulative effects of seeking favorable legislation, exploiting gaps in the regulatory system, or simply acting irresponsibly is neither pretty, nor predictable – as the collapse of AIG illustrates. The activities pursued by AIG not only undermined market expectations but make a mockery of capitalist markets and our free market beliefs.

This is important to understand because if we don’t know as much about capitalist markets as we thought we did, you can be assured that the people talking about creeping socialism have no clue what they’re talking about. How can they? In order to understand socialism you have to understand capitalism (ask me later about private ownership, the existence of free labor, and the allocation of resources via the price mechanism).

For the record, here’s a socialist primer: The state ...
(1) seeks to own the means of production while controlling the price mechanism,
(2) promotes guaranteed (and egalitarian) forms of compensation, and
(3) curtails individual rights by cracking down on unwelcome dissent, stifles the press, and punishes political enemies.
What we are currently living through is a Black Swan moment, made worse by inarticulate observations of impending doom. In order to fix what ails us we need to embrace the Black Swan and ditch the doomsayers.

- Mark

For those of you who want to read more, see NPR's interview with Taleb and his intellectual mentor, mathematician Benoit Mendlbrot here. They think what we're facing could be bigger than the Great Depression.

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