Saturday, January 3, 2015

State Robustness

Nassim Taleb co-authored a piece in Foreign Affairs that articulates a concept that FLG has been thinking about for a long time -- states that appear stable are actually less stable.   Italy, for example, is more adept at absorbing shocks and change than Saudi Arabia.

According to the article, these are the signs of a fragile state:
Centralized power
Economic specialization (ex. tourism or oil)
Being highly indebted and highly leveraged
Lack of moderate levels of political change
Lack of a record of surviving big shock

These five markers function best as warning signals. They cannot indicate with high confidence whether a given country is stable—no methodology can—but they certainly can reveal if a given country should cause worry.

FLG is completely fascinated by the idea of entropy in both economic and political systems.  One could use either of two definitions:
A measure of the disorder or randomness in a closed system.
Inevitable and steady deterioration of a system or society.

The following passage from the article expresses FLG's thoughts on the matter far more concisely than he could on his own:
Although centralization reduces deviations from the norm, making things appear to run more smoothly, it magnifies the consequences of those deviations that do occur. It concentrates turmoil in fewer but more severe episodes, which are disproportionately more harmful than cumulative small variations.
FLG has previously used the idea of pressure in a system to articulate this.  The entropy in any system creates pressure.  Trying to contain the pressure is only a temporary solution.  There needs to be some sort of release valve or the entire system will be destroyed.

This means that a political system, including say central banks trying to manage the economy, that tries to tweak the system over time to preserve or optimize the status quo is deluding itself, as this continual optimization results in a sub-optimal long-term outcome.  The best rebuttal FLG has seen, not surprisingly for long-time readers a time horizons-based one based on Thomas Jefferson -- maybe a series of stable regimes that last for several decades, only to be violently replaced, is actually the best solution.  FLG doesn't agree, but it is a compelling argument.

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