Inequality, Free Markets, and Crashes
Nassim Taleb and Mark Spitznagel talk about how government intervention postpones the inevitable.


Spitznagel: I see the whole “r>g” [meaning return on capital is greater than the rate of growth] thing as taking bubble observations and rationalizing their extrapolation forever, thus simultaneously neglecting both the incidence of asset bubbles and what’s so bad about them. Such enormous shortsighted errors follow from the noisy duration of the “long term.” And exploiting these errors is the name of the game. In everyone’s scorn of the roundabout lies its greatest edge.

The main metaphor of my book is the “Yellowstone effect”: A massive fire in Yellowstone Park in 1988 opened the eyes of foresters to the fact that a century of wildfire-suppression, and with it competition- and turnover-suppression, had only delayed, concentrated, and by far worsened the destruction — not prevented it. This isn’t just about dead-wood accumulation creating a fragile tinderbox network. The real issue is how our tinkering artificially short-circuits the fundamental capacity of the system to allocate its limited resources, correct its errors, and find its own balance through the internal communication of information that no forestry manager could ever possibly possess. (The more this is mocked by technocratic naïfs like Geithner, the more valid it is.) But that capacity is still there, and homeostasis ultimately wins through a raging inferno. This is a cautionary tale for our economy. A crash, or the liquidation of assets that have grown unimpeded by economic reality (as if there were more nutrients in the ecosystem than there actually are), looks to academics and bureaucrats — and just about everyone else as well — like the system breaking down. It is actually the system fixing itself.

Taleb: Let us each conclude here. For my part, I would say three things. First that intervention — in general, whether medical, governmental, or other — has side effects and needs to be treated exactly as we do with other complex systems: only when extremely necessary.

Second, counter to naïve conservatism, nature is not conservative, it destroys and creates species every day, but it does so in a certain pattern: Its destruction has the effect of isolating the system from large-scale harm. It does not try to preserve the past; it only tries to preserve the system.

Finally, liberty is not an economic good, but an existential one. The economic good is a mere bonus. The argument that liberty is good for economic activity or for growth of the system feels lowly and commercial (an argument used by consequentialists). If you were a wild animal, would you elect to be in a zoo because the economy is better over there than in the wild?  Liberty is my raison d’être.

Spitznagel: Yes. The Daoist scholar Zhuangzi once said, upon being offered the prime ministership about 2,500 years ago, “Would the dead and adorned turtle in the king’s palace not prefer to be alive and free in the mud? So too would I.”

Here’s how I would reconcile my own position with yours: I agree that liberty is an end in itself, and is not to be valued merely as an instrumental means to something else. But precisely because of that, even if hypothetically you could convince me that a certain government intervention in the market were extremely necessary, as you say — for instance, would likely lead to greater economic growth or lower unemployment — I would still reject it on principle, because my support for property rights and a sphere of individual autonomy free from political meddling is not ultimately based on a utilitarian criterion. By all means, let’s brainstorm and see if there are ways to alleviate these problems and provide relief to the suffering. But any proposal that involves using coercion on unwilling citizens should be off the table. Anything else is a slippery slope to what we have today from these serial crises. To say this by no means demonstrates that I’m an ideologue or unscientific.

What we get from this is a self-organization that often seems chaotic to our myopic eye, yet when we take a step back we can see how the ecosystem ultimately and optimally steers itself. It was Zhuangzi, as I discuss in my book, who first articulated this idea of spontaneous order — whereby order naturally emerges from bottom-up individual interactions when things are left alone rather than from top-down control — a concept developed later by Menger and Hayek. We live in an economic age where we’ve simply lost our ability to look at the world in this way, though I suspect we’ll be reminded of it again sooner rather than later. Perhaps our takeaway from economic crises will finally be different the next time around.


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