Weekend Reading: Who's Weird? Maybe We're Weird

Like many of you, I think, I feel increasingly unmoored, and it is often unclear what, for want of a better word, still works. As physicist Stephen Hawking famously wrote, "Science will win because it works". That was always my implicit demarcation line between facts and nonsense, the idea that good ideas based on facts work, and thus win out, eventually (and eventually can be very long), whether in science, capital markets, or elsewhere (mostly).

But, but ... we are increasingly finding out, across a host of domains, that maybe we over-extrapolated from limited evidence. Just because something works, that it fits the facts, however briefly, or makes a lot of people a lot of money, doesn't make it a law of nature, economic or otherwise.

It is easy to fall into wave theory traps here, becoming a naive theoretician throwing around Fernand Braudel's ideas about cycles of capital accumulation, or Giovanni Arrighi's compelling expansion thereof. Those, too, are laws, albeit meta-laws, and we are therefore right to be suspicious of their claims, however appealing.

We are left with ... questions.

What works? And why? Who is the weird one?

Here is Financial Times columnist Gillian Tett on the topic in a recent Odd Lots episode on complexity and risk in finance. She makes many terrific points (with my emphasis added):

[The current economic] mindset arose from a combination of three factors. One was the growth of neoliberal free market ideas after the 1970s and 80s. The second was the explosion in computing power. And the third was the explosion in the financial industry.

And those three things came together to create a voracious demand to use the new digital tools in computing to model finance and free markets, supposedly free markets, to create a set of instruments that the fast-expanding ranks of financial professionals could use to price securities, predict the future, place trading bets, et cetera, around the world, backed by groups like the CFA, which were a bit like the American financial equivalent of the Catholic Church, in that they went around the world evangelizing and spreading the creed right around the world. 

Now that was the mindset which we all grew up with—and an anthropologist would say we're all creatures of our own cultural environment—it seems to us to be normal natural and inevitable. It doesn't just use computing power to predict the future; it's also marked by a certain amount of tunnel vision because it assumes that if you put the right inputs into an economic model or put the information that matters onto a balance sheet of a compass you've basically got the key to model and forecast what's going to happen next.

And in some ways, that worked really well. But the problem is that there are always things that you leave out of your economic model. There are always things that you leave out of your balance sheet or just footnotes. And those things tend to be things like politics, social conflict, tech change, environmental risk, medical risk, or what groups like the World Economic Forum. interstate conflict, better known as war.

And the story of the last two decades is that everything that wasn't on the balance sheet or in the model is what's really blown up everyone's forecasts and become increasingly important. 

So what we're seeing now, in my view, is the fifth big swing in the intellectual zeitgeist since 1900. And by that, I mean that up until 1914, you had imperialism. imperialist free market capitalism in the world. Then, between the wars, you had protectionist, populist, and nationalist visions of the economy. Then, after World War II, you essentially had Keynesianism, the idea that the state could jump in and direct things for the good of all. And that was sort of international Keynesianism. Then you had the neoliberal age, starting in the 1980s.

And now you've got a swing of the pendulum back towards effectively geoeconomics: the world's woken up and discovered what they always knew back in the 1920s. And they also sort of knew back in the Keynesian period, which is that power matters; politics matters.

[T]he period of time that we all grew up with when free market ideals were taken for granted is actually a historical aberration—if you look across societies and most points of history, it's not the case that the world we're moving into now is weird. We were the weird ones for the last 40 years.

This is me, Paul, back again. Tett's powerful and important points are worth heeding. I am reminded of author Douglas Adams writing about a sentient puddle:

This is rather as if you imagine a puddle waking up one morning and thinking, 'This is an interesting world I find myself in — an interesting hole I find myself in — fits me rather neatly, doesn't it? In fact it fits me staggeringly well, must have been made to have me in it!' This is such a powerful idea that as the sun rises in the sky and the air heats up and as, gradually, the puddle gets smaller and smaller, frantically hanging on to the notion that everything's going to be alright, because this world was meant to have him in it, was built to have him in it; so the moment he disappears catches him rather by surprise. I think this may be something we need to be on the watch out for.”
― Douglas Adams, The Salmon of Doubt: Hitchhiking the Galaxy One Last Time

I think we have some things to watch out for as we try to re-discover what works and what is transient in a post-Keynesian world of AI, tribalism, and zero-sum thinking.