Jan 13 2015 : The Economic Times (Delhi)
BY INVITATION - A New Year Wish for More Decentralisation
NASSIM NICHOLAS TALEB
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There is a pressing need to focus on imparting technical skills while respecting serial failure
In the wake of the January burst of optimism, let's make a wish list of [economic transformations].The world today is, in many respects, better than that of our grandparents, except for the vulnerability. The very technologies that improved the lives of millions have the side effects of bringing unprecedented fragility into the system. Never before has the world been so interconnected, with the consequences that small disturbances in one place can lead -very rapidly -to large effects in another, or even generalised cascades. Furthermore, never have we been less robust in the face of disorder, with institutions that operate brilliantly in normal times, but aren't equipped to confront the new conditions. This is a byproduct of efficiency: an electronic tablet compresses more information than a book, but it breaks more easily.
The good news is that we know what works best under random events -and what is antifragile, that is, can actually benefit from disorder.
The first wish is to have more decentralisation, a distribution of decision making across as many centres as possible, both at the administrative and economic level.We have lived since modernity under the illusion that centralisation is better, more “efficient“, that the large works better than the small, and that the reduction of the numbers of decision-makers improves stability.
However centralisation, while making systems less noisy, causes them to be less opportunistic, less capable of changing direction, and worsens their performance at times of crisis.
In fact, government decentralisation would help reduce public deficits. Large public projects, under the myth of costs savings, appear to incur disproportionately large costs overruns. Size produces visible benefits but also hidden risks; it increases exposure to large losses.
This wish translates into a principle of maximal effective diversification and decentralisation, which, when applied to administrations, is similar to that of “subsidiarity“ which helped the Catholic Church survive two millennia.Nothing in a hierarchy should be done at a higher level if it can be effectively managed at a lower one.The principle doesn't mean that some things should not be centralised: the military, for example, cannot be effectively decentralised, except for guerilla warfare.
Compare canton-based decision making in Switzerland or the federal system in Germany to the centralised regimes in Soviet Russia and Baathist Iraq and Syria. In fact, historically, both Pharaonic Egypt and Imperial China achieved success prior to the centralisation around scribes and scholars, not after, when they fell apart. The Roman empire, on the other hand, was maximally decentralised.
The distribution of decisions and projects across as many units as reasonable reinforces the system by spreading errors. Uniformity is risky: while, for instance, monoculture seems more efficient and a more stable form of agriculture, such concentration makes the system more prone to consequential trauma, “Black Swans“ such as the Irish potato famine of the 19th Century. Oil-dependent countries such as Saudi Arabia and Venezuela are currently getting a crash course on that.
Decentralisation leads to smaller, more adaptable companies -In Germany it led to the rise of midsize companies, the Mittelstadt, which have fueled the latest economic performance. A centralised state is more vulnerable to lobbyists giving an advantage to the bailout-prone large corporations.
Further decentralisation reduces the risk of coups -Italy's distribution of power prevented it from falling into dictatorship, as Greece did in the 1960s. It also curtails ethnic violence -as shown by complexity specialist Yaneer Bar-Yam, good fences make good neighbours.
The second wish is for economies to focus on technical skills, instead of formal higher education. Rich countries with highly educated populations became rich first, with education catching up. What these countries had was down-toearth practical skills. Germany, ever so robust, has nearly half its youth undergoing some apprenticeship -learning real, useable, things. Beyond a point, education decreases entrepreneurial risk taking -the good kind of tinkering-style risk taking with small downside that has generated wealth since the Industrial Revolution. Just imagine what would have happened if Bill Gates, Steve Jobs, Marc Zuckerberg, and Larry Ellison stayed in school -and ended up as lawyers or consultants. We know that higher education increases the income of a family but it does not increase that of a country -label education is helpful for employment in bureaucracies and large mature corporations, and the parent's ego. Even doctors are trained according to an apprenticeship mode under the cover of science.
The third, associated wish is for culture shift in favour of serial fail ure. Industries that perform the best -such as technology -are those in which failure is a badge of honour. “Fail fast“ is the mode of Silicon Valley, and places like Japan and France where failure carry a stigma are doomed.
The final wish is to have more long term stability via less overstabilisation: the 2008 crisis resulted from a US Federal Reserve providing cheap money to stifle economic volatility which, ironically, led to the accumulation of hidden risks in the economic system. Preventing severe crises may be necessary; preventing fluctuations is not recommended. For it is during economic fluctuations that evolutionary pressures in an economy clean up the dead wood and opens up opportunities for newcomers -systematic stabilisation disadvantage entrepreneurs in favour of established large corporations fit for yesterday, not tomorrow.
I have more wishes, but I leave these for 2016.
A derivatives traderrisk taker for 20 years, Nassim Nicholas Taleb is an essayist, scholar, statistician and risk analyst. He is the author of the Incerto (The Black Swan, Fooled by Randomness, and Antifragile), a multivolume philosophical essay on uncertainty.
The good news is that we know what works best under random events -and what is antifragile, that is, can actually benefit from disorder.
The first wish is to have more decentralisation, a distribution of decision making across as many centres as possible, both at the administrative and economic level.We have lived since modernity under the illusion that centralisation is better, more “efficient“, that the large works better than the small, and that the reduction of the numbers of decision-makers improves stability.
However centralisation, while making systems less noisy, causes them to be less opportunistic, less capable of changing direction, and worsens their performance at times of crisis.
In fact, government decentralisation would help reduce public deficits. Large public projects, under the myth of costs savings, appear to incur disproportionately large costs overruns. Size produces visible benefits but also hidden risks; it increases exposure to large losses.
This wish translates into a principle of maximal effective diversification and decentralisation, which, when applied to administrations, is similar to that of “subsidiarity“ which helped the Catholic Church survive two millennia.Nothing in a hierarchy should be done at a higher level if it can be effectively managed at a lower one.The principle doesn't mean that some things should not be centralised: the military, for example, cannot be effectively decentralised, except for guerilla warfare.
Compare canton-based decision making in Switzerland or the federal system in Germany to the centralised regimes in Soviet Russia and Baathist Iraq and Syria. In fact, historically, both Pharaonic Egypt and Imperial China achieved success prior to the centralisation around scribes and scholars, not after, when they fell apart. The Roman empire, on the other hand, was maximally decentralised.
The distribution of decisions and projects across as many units as reasonable reinforces the system by spreading errors. Uniformity is risky: while, for instance, monoculture seems more efficient and a more stable form of agriculture, such concentration makes the system more prone to consequential trauma, “Black Swans“ such as the Irish potato famine of the 19th Century. Oil-dependent countries such as Saudi Arabia and Venezuela are currently getting a crash course on that.
Decentralisation leads to smaller, more adaptable companies -In Germany it led to the rise of midsize companies, the Mittelstadt, which have fueled the latest economic performance. A centralised state is more vulnerable to lobbyists giving an advantage to the bailout-prone large corporations.
Further decentralisation reduces the risk of coups -Italy's distribution of power prevented it from falling into dictatorship, as Greece did in the 1960s. It also curtails ethnic violence -as shown by complexity specialist Yaneer Bar-Yam, good fences make good neighbours.
The second wish is for economies to focus on technical skills, instead of formal higher education. Rich countries with highly educated populations became rich first, with education catching up. What these countries had was down-toearth practical skills. Germany, ever so robust, has nearly half its youth undergoing some apprenticeship -learning real, useable, things. Beyond a point, education decreases entrepreneurial risk taking -the good kind of tinkering-style risk taking with small downside that has generated wealth since the Industrial Revolution. Just imagine what would have happened if Bill Gates, Steve Jobs, Marc Zuckerberg, and Larry Ellison stayed in school -and ended up as lawyers or consultants. We know that higher education increases the income of a family but it does not increase that of a country -label education is helpful for employment in bureaucracies and large mature corporations, and the parent's ego. Even doctors are trained according to an apprenticeship mode under the cover of science.
The third, associated wish is for culture shift in favour of serial fail ure. Industries that perform the best -such as technology -are those in which failure is a badge of honour. “Fail fast“ is the mode of Silicon Valley, and places like Japan and France where failure carry a stigma are doomed.
The final wish is to have more long term stability via less overstabilisation: the 2008 crisis resulted from a US Federal Reserve providing cheap money to stifle economic volatility which, ironically, led to the accumulation of hidden risks in the economic system. Preventing severe crises may be necessary; preventing fluctuations is not recommended. For it is during economic fluctuations that evolutionary pressures in an economy clean up the dead wood and opens up opportunities for newcomers -systematic stabilisation disadvantage entrepreneurs in favour of established large corporations fit for yesterday, not tomorrow.
I have more wishes, but I leave these for 2016.
A derivatives traderrisk taker for 20 years, Nassim Nicholas Taleb is an essayist, scholar, statistician and risk analyst. He is the author of the Incerto (The Black Swan, Fooled by Randomness, and Antifragile), a multivolume philosophical essay on uncertainty.
