The sacred mystery of capital - Prospect Magazine

Summary:
Julian Gough compares capitalism and modern economics to religion. The advance of science has removed the divine mystery from much of life, but in the past 30 years, the advance of free market capitalism has put it back. Only modern economics can now provide forces that we don’t understand. Modern high finance, like the Latin of the Christian Church, has profound mysteries at its core. Not even bankers know what a collateralised debt obligation cubed really is. The abandonment of the gold standard in 1971 was the crucifixion and resurrection of capitalism; the traumatic and liberating event which allowed capitalism to be purely religious and entirely driven by faith. As with all religions, once its link to the physical world was severed, free market capitalism mourned briefly, then experienced a surge of energy and expansion. From "fiat lux" to “fiat money.” But as with all religious expansions, success bred hubristic dementia. The elevation of metaphysical above physical turned into a kind of contempt for the physical. (Published: July 2008)

Expand notes

Summary only...

Nassim Nicholas Taleb: the prophet of boom and doom - The Times

Summary:
Interview with Nassim Nicholas Taleb, author of "The Black Swan: The Impact of the Highly Improbable." Problem with probability theory: Fat Tony vs. Dr. John. On buying "out-of-the-money" options: when markets rise, they rise by small amounts, when they fall, they fall dramatically. Mediocristan vs. Extremistan. On banks and failing of Long Term Capital Management. Importance of religion and being ecologically conservative. Investment strategy: 90% in safest government securities, 10% high risk. (Published: 01/06/08)

Notes:

• most economists, and almost all bankers, are subhuman and very, very dangerous
• live in a fantasy world in which the future can be controlled by sophisticated mathematical models and elaborate risk-management systems
• in December lectured bankers at Société Générale
• told them they were sitting on a mountain of risks – a menagerie of black swans
• didn’t believe him
• six weeks later the rogue trader and black swan Jérôme Kerviel landed them with $7.2 billion of losses.
• "Clothes matter; they send signals"
• risk management
• facing up to those aspects of randomness about which something can be done
• “Scientists don’t know what they are talking about when they talk about religion. Religion has nothing to do with belief, and I don’t believe it has any negative impact on people’s lives outside of intolerance. Why do I go to church? It’s like asking, why did you marry that woman? You make up reasons, but it’s probably just smell. I love the smell of candles. It’s an aesthetic thing.”
• "Take away religion, and people start believing in nationalism, which has killed far more people."
  
• Religion as way of handling uncertainty
• lowers blood pressure
• thinks religious people take fewer financial risks
• obsessed with probability
• Brooklyn-born Fat Tony and academically inclined Dr John: two of Taleb’s creations
• You toss a coin 40 times and it comes up heads every time. What is the chance of it coming up heads the 41st time?
  
• Dr John gives the answer drummed into the heads of every statistic student: 50/50.
  
• Fat Tony says the chances are no more than 1%.
  
• “You are either full of crap,” he says, “or a pure sucker to buy that 50% business. The coin gotta be loaded.”
• chances of a coin coming up heads 41 times are so small as to be effectively impossible in this universe.
  
• It is far, far more likely that somebody is cheating.
  
• Fat Tony wins. Dr John is the sucker
• 1985: France, Germany, Japan, Britain and America signed an agreement to push down the value of the dollar
• held options that had cost him almost nothing and that bet on the dollar’s decline
• 1987 – Black Monday
• options were suddently worth a fortune
• became obsessed with buying “out of the money” options
• was sitting on a pile of out-of-the-money eurodollar options
• realised that when markets rise they tend to rise by small amounts, but when they fall – usually hit by a black swan – they fall a long way.
• on fall of Long-Term Capital Management
• hedge fund set up in 1994 by, among others, Myron Scholes and Robert C Merton
• joint winners of the 1997 Nobel prize in economics
• had grandest of all possible credentials and used the most sophisticated academic theories of portfolio management
• went bust in 1998 and, because it had positions worth $1.25 trillion outstanding, it almost took the financial system down with it
• modern portfolio theory had not accounted for the black swan, the Russian financial crisis of that year
• Mediocristan vs. Extremistan
• Mediocristan: where early humans lived
• Most events happened within a narrow range of probabilities – within the bell-curve distribution still taught to statistics students.
• we don’t live there any more.
• Extremistan: world we live in
• created world we don't understand
  
• black swans proliferate, winners tend to take all and the rest get nothing
• our systems are complex but over-efficient
• no redundancy, so a black swan strikes everybody at once
• banking system is the worst of all
• banks make money from two sources
• they take interest on current accounts and charges for services
• this is easy, safe money
• but they also take risks, big risks, with the whole panoply of loans, mortgages, derivatives and any other weird scam they can dream up.
  
• “Banks have never made a penny out of this, not a penny. They do well for a while and then lose it all in a big crash.”
• increased economic concentration has raised our vulnerability to natural disasters
• Kobe earthquake of 1995 cost a lot more than the Tokyo earthquake of 1923
• countless other ways in which we have built a world ruled by black swans – some good but mostly bad
• believes in tinkering
• Trial and error will save us from ourselves because they capture benign black swans
• three big inventions of our time: lasers, computers and the internet
• all produced by tinkering and none of them ended up doing what their inventors intended them to do
  all were black swans
• big hope for the world is that, as we tinker, we have a capacity for choosing the best outcomes
• good investment strategy is to put 90% of your money in the safest possible government securities and the remaining 10% in a large number of high-risk ventures
• insulates you from bad black swans and exposes you to the possibility of good ones
• Your smallest investment could go “convex” – explode – and make you rich
• High-tech companies are the best
• The downside risk is low if you get in at the start and the upside very high
• Banks are the worst – all the risk is downside
• Don’t be tempted to play the stock market
• “If people knew the risks they’d never invest.”
• We should be mistrustful of knowledge. It is bad for us.
  
• Give a bookie 10 pieces of information about a race and he’ll pick his horses.
  
• Give him 50 and his picks will be no better, but he will, fatally, be more confident.
• We should be ecologically conservative:
• global warming may or may not be happening but why pollute the planet?
  
• "Taleb's top life tips"
1. Scepticism is effortful and costly. It is better to be sceptical about matters of large consequences, and be imperfect, foolish and human in the small and the aesthetic.
2. Go to parties. You can’t even start to know what you may find on the envelope of serendipity. If you suffer from agoraphobia, send colleagues.
3. It’s not a good idea to take a forecast from someone wearing a tie. If possible, tease people who take themselves and their knowledge too seriously.
4. Wear your best for your execution and stand dignified. Your last recourse against randomness is how you act — if you can’t control outcomes, you can control the elegance of your behaviour. You will always have the last word.
5. Don’t disturb complicated systems that have been around for a very long time. We don’t understand their logic. Don’t pollute the planet. Leave it the way we found it, regardless of scientific ‘evidence’.
6. Learn to fail with pride — and do so fast and cleanly. Maximise trial and error — by mastering the error part.
   
7. Avoid losers. If you hear someone use the words ‘impossible’, ‘never’, ‘too difficult’ too often, drop him or her from your social network. Never take ‘no’ for an answer (conversely, take most ‘yeses’ as ‘most probably’).
   
8. Don’t read newspapers for the news (just for the gossip and, of course, profiles of authors). The best filter to know if the news matters is if you hear it in cafes, restaurants... or (again) parties.
   
9. Hard work will get you a professorship or a BMW. You need both work and luck for a Booker, a Nobel or a private jet.
   
10. Answer e-mails from junior people before more senior ones. Junior people have further to go and tend to remember who slighted them.
    

Expand notes

Summary only...

I and My Brother Against My Cousin - The Weekly Standard

Summary:

Stanley Kurtz reviewing Philip Carl Salzman's "Culture and Conflict in the Middle East". Dominant theme of cultural life in Arab Middle East is the template of tribal life: collective responsibility, feuding, balanced power and honor shaping every action and thought; Islam and state merely superficial layers. Controlled anarchy. Tribal societies egalitarian and democratic. Islam: uniting all Arab tribes in ultimate feud against infidel outsiders. Western strategy for change should focus on tribal aspect not Islam; Islam sacred, tribal aspects not so and open for criticsim (14/04/2008)

 

Notes:

• Middle Eastern tribes: think of themselves as giant lineages, traced through the male line, from some eponymous ancestor
• each giant lineage divides into tribal segments, subdivide into clans, divide into sub-clans, etc down to families
• traditionally Middle Eastern tribes have existed outside of the police powers of the state
• keep order through a complex balance of power between these fusing and segmenting ancestral groups
• central institution of segmentary tribes is the feud
• security depends on willingness of every adult male in given tribal segment to take up arms in its defence; universal male militarization
• attack on lineage-mate must be avenged by entire group; vice versa, any lineage member is liable to be attacked in revenge for offense committed by relative
• results in system of collective responsibility: action of any one person directly affect reputation and safety of entire group; collective guilt
• Muslim tribal society is both fundamentally collectivist and profoundly individualist
• no man of the tribe can, by right, command another
• all males equal, free to dispose of their persons and property and to speak in councils that determine fate of the group
• fundamentally democratic
• Arab saying: "I against my brother; I and my brother against my cousin; I and my brother and my cousin against the world"
• liberal Westerners: why risk battle without first making a reasonable effort to talk problem out?
• sort of question liable to be posed by someone living where a state monopolizes the legitimate use of force and police and courts can be relied upon to keep the peace
• in non-state setting, where anarchy is kept under control only by the threat or use of force, it makes sense to send a war party first and ask questions later
• conveying impression of weakness
• preventing future abuse in lawless desert environment by publicly making capacity known to swiftly unify to preserve interests
• Arab tribesmen preoccupied with maintaining deterrence and are prepared to use force preemptively
• much like neocons: hawkish conservatives ("rightly") believe global anarchy underlies reality of international system; much like de facto stateless anarchy in which Bedouin Arabs live
• swift and seemingly disproportionate resort to retaliatory force against apparently trivial offenses is an effective technique for surpressing future challenges
• eg careful use of targeted force against Western critics of Islamism; overtly religious action actually shaped by a hidden tribal template
• eg fatwa against Salman Rushdie, rage against Muhammed cartoons, killing of Theo van Gogh, ...
• all examples of pro-active deterrence
• doves: use of force serves to unite foe; creating impression of an infidel war against Muslims, thus recruiting every Muslim lineage into bin Laden's civilisational war party
• true, but on the other hand, failure to strike back creates impression of weakness that invites further attacks
• Islamists view cooing of the doves as sign that their feud against the West has successfully weakened and split our own coalition
• disturbing lesson: in the absence of fundamental cultural change, the feud between the Muslim world and the West is unlikely ever to come to an end
• tribal feuds simmer on and off for generations, with negotiated settlements effecting only temporary respites
• Western liberal template takes an experience of peace under the lawful authority of a state as the normal human condition
• in this view, when peaceful equilibrium is disturbed, reasonable men reason together to restore normalcy
• in tribal template, low-level endemic feuding in conditions of controlled anarchy is the norm
• liberal "come let us reason together" model has little currency in Arab tribal culture
• Salzman: Tribal template is dominant pattern of Arab culture, not religion
• religion is overlay in partial tension with, and deeply stamped by, the dynamics of tribal life
• To think of Middle East as consisting of a number of states is mistake.
• Rather, collection of tribes.
• Governing party essentially tribe or tribal coalition with most power (e.g. Saddam Hussein)
• Statelessness increases as one moves towards periphery of nation.
• Statelessness seen by tribes as essential condition of dignity, equality, and freedom.
• State = predation under official guise
• Importance of avoiding dishonourable submission; avoiding life of peasant humiliation and exploitation
• Salzman: tribal template dominant pattern of Arab culture
• not details of tribal kinship matter, but underlying principles of "balanced opposition," in which collective responsibility, honor and feuding shape every action and thought;
• quick shifts in loyalty often called for
• unite with erstwhile enemies in opposition to a more distant foe
• all members of an enemy group are potential targets
• demand honourable behaviour from members of own group
• maintain own and group's honour by a clear willingness to sacrifice for the collective good
• Islam's founding triumph was to raise stakes of balanced opposition by uniting all the Arab tribes in an ultimate feud against infidel outsiders
• Muslim's treating tribal era of Muhammed and his early successors as golden age of Islam
• cultural influence of tribal template thus remains pervasive
• Gaza's feuding clans: revelation of bedrock of Middle Eastern social organisation
• ever-present and ever-influential beneath superficial layers of Islam and state
• political paradox posed by Salzman's tribal interpretation of Arab culture
• on one hand, pervasive tribal principles of balanced opposition are "precluding democracy" in Middle East
• to democratise Middle East, the particularist loyalties at the core of balanced opposition (kin, tribe, sect) need to be replaced by greater "individualisation"
• only then could an authentic liberal democracy based on constitionalism and the rule of law take root in the Arab world
• on other hand, tribal culture is largely egalitarian, individualist and democratic in character
• balanced opposition is democratic because decision making is collective and everyone has a say
• absence of government authority, combined with system of shifting coalitions of willing individuals, means that freedom, equality and personal responsibility - along with bellicosity and courage - are fundamental tribal values
• confusion about meaning of words "freedom," "equality," and "democracy"
• in liberal state, freedom is rights-based and universal
• in tribal society, freedom is freedom of freestanding warrior and his tribe to dominate and deprive others of their liberty
• equality refers to equal combat, as opposed to submission
• democracy is closer to a conclave of family heads in the Godfather, never far from potential violence, than to debate in a modern representative assembly
• not equality before the law, but equality outside of the law
• democracy requires something more fundamental than open consultation between descriptively free and equal parties
• Arabs know all about freely expressing their opinions in open council, yet have fundamental reservations about entering into the sort of social contract required to create a modern liberal state
• largely justified: state offers only thin alternative to "the war against all"
• most Middle Eastern states are just reincarnations of the predatory winner-take-all tribal coalitions of old
• why exchange protection of your family, tribe or sect for submission to a weak or predatory state?
• "tribal society contains just enough order to make a bit of violent anarchy bearable, and just enough grasping anarchy to make a liberal social contract unreliable"
• won't be easy to weaken cycle of particularism, ie the self-reinforcing loyalties of extended family, tribe and sect that dominate Arab countries at both state and local levels
• West needs to learn to understand and critique the Islamic Near East through a tribal lens
• Islam is only half the cultural battle
• tribal practices, however, are less swathed in sacredness than explicitly Koranic symbols and commandments
• therefore more susceptible to criticism and debate
• new and smarter strategy for change

Expand notes

Summary only...