Optimism vs Pessimism

As I mentioned at the end of my post yesterday, many of the comments on my recent Bloomberg column chided me for being overly optimistic about the future of humanity, and especially about our capacity to create a sustainable future, especially through the intelligent use of technology to help us control and manage a complex world. The criticism was elegantly put by David Johnson:

I just saw your piece on Bloomberg on augmenting our decision making skills artificially, and I am sorry to say, based on quite a bit of painful experience, that this doesn't actually work as one might hope.

I'm retired now, but I spent nearly thirty years as a computer software designer, and I can't tell you how many times I have seen people flatly refuse to believe counter-intuitive results coming from some sophisticated program. 

Indeed, even simple instruments, such as pressure gauges can present results that cause system operators to dismiss the data as the output of a defective sensor. 

For example, the accident at Three Mile Island was the direct result of operators misjudging the meaning of two gauges that were apparently giving contradictory readings.  One gauge implied that the level of cooling water was getting too high, while the other implied that it was dangerously low.  The operators could not envision any scenario in which both could be correct, so they decided (arbitrarily and without ANY cross-checking!) that the low reading was invalid, and they shut down the emergency cooling water, which was precisely the wrong thing to do.

In that case, it turned out that there was a vapor lock in the plumbing connecting the two parts of the system that the two gauges were monitoring, so, indeed, the pressure in the cooling water supply was rising, even as the water level in the reactor vessel itself was dropping dangerously.  However, as simple as this problem really was, it was totally outside the experience of the operators, so they never considered the possibility.  Moreover, the system designers had not recognized the possibility either, or they would have designed the plumbing differently in the first place.

My point here is that a problem of this sort is stupidly simple compared to the complexities of systems like the global climate, yet even trained professionals cannot handle the level of weirdness that can result from one unanticipated discrepancy.

In other words, we are generally stupid enough that we cannot understand, much less accept, how stupid we really are, so there is no way that the average person will casually defer to the judgment of an artificial system like a computer program.

I received many comments making similar points, and I'd like to say that I agree completely and absolutely.

The way I look at the argument of Sander van der Leeuw is that he has identified a weak point in the nature of our relationship with the world. Our brains individually and collectively simply cannot match up to the complexity of the world in which we live (especially as our own technology has made it much more complex in recent decades). It's this mismatch that lies behind the pervasive tendency for our actions and innovations to have unanticipated consequences, many of which have led us to very big problems. Hence, he's suggesting that IF WE HAVE ANY HOPE of finding some solutions to our problems through further innovation it will be by finding ways to help our brains cope more effectively. He suggests information technology as the one kind of technology that might be useful in this regard, and which might help -- again, if used properly -- to heal the divide between the real complexity of the world and our pictures and models of it.

I think this makes a lot of sense, and it ought to inform our future use of technology and the way we use it to innovate. But I certainly wouldn't want to go any further and predict that we will actually be able to act in this way, or learn from this insight. If asked to bet on it, I would actually bet that humanity will have to suffer dearly and catastrophically before we ever change our ways.

Even more than stupid, we are stubborn. On this point I also could not agree more with David Johnson:

Seriously, the Arctic ice cap has been more or less stable, within a few percent, for about three million years, but now, in just thirty years, about 75% of the mass of ice has disappeared.  Yet, millions of people simply ignore this massive and extremely dangerous change.  Instead, they chalk up the reports as evidence of a conspiracy by climate scientists to frighten taxpayers into supporting more fictitious make-work for those self-same scientists.  That is a lethal level of stupidity, but it still passes easily for "common-sense" among a very large fraction of the general population.

Archeology of Innovation

My last Bloomberg column appeared a few days ago. Anyone interested can read it here. I wanted to bring some attention to what I think is a truly profound argument being made by anthropologist Sander van der Leeuw of Arizona State University on the nature of innovation (technological, social, or otherwise).

Obviously, humans excel at innovation and this is what probably accounts for our great (rampant) success as a species. This innovation has also brought us to the brink of catastrophe. A recent study published in Nature concluded that the next few generations should expect "a sharp reduction in biodiversity and severe impacts on much of what we depend on to sustain our quality of life, including fisheries, agriculture, forest products and clean water." This is also the outcome of our innovation, which is a double-edged sword. A deep question is WHY? Why is our innovation like this, always (it seems) leading to unintended consequences?

My Bloomberg column gives the basics of the argument, but I strongly recommend reading van der Leeuw's paper, "The Archeology of Innovation," for the full picture. It's a fun, mind-expanding paper in an informal style, and what really makes it unique is that it looks at human evolutionary history (over the past 50,000 years or so) through the lens of information and information processing. This is a novel idea, and especially novel given our current information revolution. The paper argues that most of the fundamental transitions in human history -- including the agricultural and industrial revolutions -- were essentially revolutions in which we learned to use information in a new way. As he notes, 

... the current emphasis in certain quarters on our present-day society as the ‘information society’ is misguided—every society since the beginning of human evolution has been an ‘information society.’

Learning from the past is of course a good way to see what might happen in the future.

But the most interesting part of his argument, for me, concerns what past patterns might imply for the future of humanity and our ability to overcome our current global challenges. He essentially suggests that we need to think very carefully about how we innovate, rather than do it recklessly with more or less blind hope (as we do today, encouraged by short-sighted economic return). I'll just give a few short segments:

Human cognition, powerful as it may have become in dealing with the environment, is only one side of the (asymmetric) interaction between people and their environment, the one in which the perception of the multidimensional external world is reduced to a very limited number of dimensions. The other side of that interaction is human action on the environment, and the relationship between cognition and action is exactly what makes the gap between our needs and our capabilities so dramatic.

The crucial concept here is that of ‘unforeseen’ or ‘unanticipated’ consequences. It refers to the well-known and oft-observed fact that, no matter how careful one is in designing human interventions in the environment, the outcome is never what it was intended to be. It seems to me that this phenomenon is due to the fact that every human action upon the environment modifies the latter in many more ways that its human actors perceive, simply because the dimensionality of the environment is much higher than can be captured by the human mind. In practice, this may be seen to play out in every instance where humans have interacted in a particular way with their environment for a long time—in each such instance, ultimately the environment becomes so degraded from the perspective of the people involved that they either move to another place or change the way they are interacting with the environment. 

Ultimately, this necessarily leads to ‘time-bombs’ or ‘crises’ in which so many unknowns emerge that the society risks being overwhelmed by the number of challenges it has to face simultaneously. It will initially deal with this by innovating faster and faster, as our society has done for the last two centuries or so, but as this only accelerates the risk spectrum shift, this ultimately is a battle that no society can win. There will inevitably come a time that the society drastically needs to change the way it interacts with the environment, or it will lose its coherence. In the latter case, after a time, the whole cycle begins anew—as one observes when looking at the rise and decline of firms, cities, nations, empires or civilizations.

Van der Leeuw's point is that it's rather simple minded -- and not really consistent with a real knowledge of history -- to have blind faith in the ability of humanity to innovate its way out of the various global crises we're now confronting. Our innovation in the past is what has caused them. We need, therefore, to innovate differently and more predictably. Can we?

 

Some readers of my Bloomberg column offered my some insightful criticisms by email, which I intend to share tomorrow.

debtrank

My latest Bloomberg column can be read here. The title sounds rather weird, I think, because the research I've written about has nothing to do with Google helping anyone. The hazards of writing and the production process. But ignore that -- I think the subject matter is important, and I wanted to offer some further information on what I wrote about there, and a link to the original research.

The basic topic is a new measure of systemic risk known as DebtRank, which was just introduced a few days ago in this new paper in Nature Scientific Reports. This is the work of physicist Stefano Battiston and a team of other physicists and economists, and takes its inspiration from the famous PageRank algorithm invented by Google founders Sergey Brin and Larry Page. DebtRank could do for the analysis of global financial risks what Google did for web search -- make it really possible to determine which elements in the network matter most.

The essential insight of the PageRank algorithm is that in any network of things that make references to each other -- web pages through hypertext links, or scientific papers through citations, for example -- each element effectively votes for other importance of other elements by linking to them. Hence, the most important web pages, Page and Brin reasoned, should be those drawing links from many other pages, especially from other really important pages. The best scientific papers should be those that get those most references, especially from other profoundly important scientific papers (rather than from papers no one ever reads).

To calculate the PageRank of a web page (or a scientific paper), you have to look at all the web pages that link to it. The page gets a higher PageRank in so far as many other pages link to it, especially if those other pages are important, i.e. are pages that have many other web pages linking to them, especially other important web pages. The definition is obviously circular -- you have to know which pages are important in order to be able to calculate which pages are important. That may seem useless, but this problem is easy to sort out mathematically (it's just some linear algebra).  That's what Google algorithm does, and it can be done with lots of computing power, which makes Google so powerful (this is of course only part of the recipe of the search engine). 

Now, what about finance? The analogy for DebtRank is quite direct -- those institutions that present the greatest risks to the financial system are those that, if they fail, would cause the widest spread of economic distress. Naturally, you would tend to have a high DebtRank if you are linked by loans and other financial ties to other firms with high DebtRank -- the same circularity again.

I won't go into more detail except to say that an algorithm can calculate the DebtRank using real data (a partial network of financial ties between institutions based on public information). This is what Battiston and colleagues have done, and it shows some surprises. At the peak of the financial crisis, for example, DebtRank measures for the largest 20 or so banks show that simple bank size just isn't as important as we've come to think. Institutions such as Barclays, Bank of America, JP Morgan and Royal Bank of Scotland presented more systemic risk than did Citigroup or Deutsche Bank, despite being significantly smaller in total assets. Wells Fargo stands out even more: It presented as much systemic risk as Citigroup, despite having only a quarter of the assets. 

This is really only a proof of principle, as the network used is indeed very incomplete. But it shows quite clearly how the phrase "too big to fail" is slightly misleading. We need to worry about which institutions are too central to fail, or really a mixture of too big and too central, and this is what something like DebtRank lets you get at.

Most importantly, the study shows how any assessment of global financial risks will require much more public knowledge of the links between institutions, most of which are currently not public. For more information, I suggest looking at the web site of the European project FOC (Forecasting Financial Crises), in which this research took place. In particular, you may want to have a look at the widget produced by the researchers that shows some of the key institutions and reflects their systemic risks at the height of the crisis as estimated by DebtRank.

 

Germany leaves the Euro?

The idea, crazy as it sounds, makes a lot of sense. The current hope -- in discussion today in Brussels -- is to consider ways for some central European finance minister to exert veto power over national budgets. That sounds to me like a recipe for disaster and ultimately real vicious conflict between European nations. Do we really want to experiment with that? As an alternative, consider a unilateral German exit from the Euro:

A better, bolder and, until now, almost inconceivable solution is for Germany to reintroduce the mark, which would cause the euro to immediately decline in value. Such a devaluation would give troubled economies, especially those of Greece, Italy and Spain, the financial flexibility they need to stabilize themselves.

Although repeated currency devaluations are not the path to prosperity, a weaker euro would give a boost in competitiveness to all members of the monetary union, including France and the Netherlands, which is why they might very well choose to remain in it even if Germany were to gradually leave. A resurgence of manufacturing would also allow the vast unemployment rolls of Spain, Portugal, Greece and other countries to begin to decline. The tremendous loss of human capital and human dignity we are witnessing would ease.

Reintroducing the mark would not solve the debt burdens of southern European countries, but it would give them needed breathing room to restructure their economies, reform labor markets, collect more taxes and reassure investors. The ability of the southern European countries to service their sovereign debt would immediately improve, helping to end the slow-burning debt and banking crises that have engulfed the Continent since 2008.

Read the whole proposal here. Sadly I suspect this is a little too bold and creative to actually be considered seriously. 

John Lanchester on Marx

I know very little about Karl Marx, but this beautiful essay by John Lanchester convinces me that his analysis of capitalist economics was indeed profound to the core, right, wrong, sometimes short-sighted, but penetrating and still relevant to our situation today. Very much worth 20 minutes of your time:

Consider these passages from The Communist Manifesto, which Marx wrote with Engels in 1848, after being kicked out of both France and Germany for his political writings:

Capitalism has subjected the country to the rule of the towns. It has created enormous cities. Capitalism has agglomerated population, centralised means of production, and has concentrated property in a few hands.

Capitalism has left remaining no other nexus between man and man than naked self-interest, than callous ‘cash payment’.

Capitalism has been the first to show what man’s activity can bring about. It has accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts and Gothic cathedrals; it has conducted expeditions that put in the shade all former Exoduses of nations and crusades. Capitalism has created more massive and more colossal productive forces than have all preceding generations together.

Capitalism cannot exist without constantly revolutionising the instruments of production, and thereby the means of production, and with them the whole relations of society. Constant revolutionising of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the capitalist epoch from all earlier ones. All old-established national industries have been destroyed or are daily being destroyed.

In place of the old wants, satisfied by the productions of the country, we find new wants, requiring for their satisfaction the products of distant lands and climes.

Commercial crises put on trial, each time more threateningly, the existence of the entire capitalist society. In these crises a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed.

It’s hard not to conclude from these selected sentences that Marx was extraordinarily prescient. He really did have the most astonishing insight into the nature and trajectory and direction of capitalism. Three aspects which particularly stand out here are the tribute he pays to the productive capacity of capitalism, which far exceeds that of any other political-economic system we’ve ever seen; the remaking of social order which accompanies that; and capitalism’s inherent tendency for crisis, for cycles of boom and bust.

Read it all here.

Physics proof of innocence

In the category of unimportant but highly amusing, I think many will enjoy this very short paper written by a physicist in California. It was apparently offered, successfully, as proof of his innocence in a traffic case in which he was accused of running a red light. Based on three simple and plausible assumptions, he demonstrates that the perceiving officer must have been deceived. As the author describes the work:

A way to fight your traffic tickets. The paper was awarded a special prize of $400 that the author did not have to pay to the state of California.

Still here everyone...

Sorry I haven't managed to post anything now for quite some time. All the result of lots of travel to various scientific meetings -- including one fascinating event on non-equilibrium economics -- and a MAD effort to get my book done on time. Deadline is effectively NOW!!!!!

So I haven't been able to afford any time to blog. But I will be posting more soon. And I have Bloomberg pieces appearing once a month (with one due out now in the next couple of days).

Meanwhile, Satajit Das has an excellent deconstruction of a recent article in The Economist that could (may?) have been written by the financial industry itself, arguing why financial innovation is indeed such a wonderful thing, making the world more prosperous, stable, etc (have you heard that before?).