The sheer complexity of the modern world makes fools of us all.
It’s no wonder that conspiracy theories, just plain weird ideas and deeply counterfactual views abound these days. We don’t like to be bewildered or shocked by unexplainable events, and, regrettably we confront plenty of these every day. Confronted with the inexplicable, it is human nature to find patterns, to weave disparate, and unrelated, facts into narratives or memes. The problem is we seem entirely comfortable drawing conclusions, seeing causality and taking action on what often turns out to be wildly wrong-headed notions of what’s really going on. Ready, fire, aim. (A particularly troubling infirmity of our governing elites…see below.)
Long ago, there was a wide swath of the world that was not susceptible to understanding through observation and would have been completely confounding but-for mythos and religion (for this purpose, we’ll keep those as distinct categories to avoid offending anyone). The supernatural was real, its evidence was all around us and it provided a comforting answer to almost everything outside the boundaries of the observable known. It created a nicely closed system of knowledge.
But isn’t this the modern world, the world of science and logical deductive thinking? It’s the 21st century, baby. The truth is that we are just as befuddled as we ever were when confronting reality and are as likely to do dumb things because we don’t really get it.
Complexity is our new supernatural.
Two hundred years ago, a well-educated gentleman could actually know a very large percentage of what was then considered knowable. He or she (okay it was largely hes in those days) could understand how a steam engine worked. He could appreciate the basic principles of Newtonian physics and grasp what medical knowledge (albeit not much and almost entirely wrong) that was in circulation. He read the cannons of literature, knew how gunpowder was made, had an easy familiarity with the extant theories of history and pre-history and the known laws of the land and generally, probably had a self-satisfied sense that he understood the world. What wasn’t observable was the realm of myth, but that was okay. Everyone agreed that those myths were real but were, in fact, objectively observable. (Hell, as late as the 21st Century, notable authors were writing non-fiction accounts of fairies – for fun, read Robert Kirk’s “The Secret Commonwealth of Elves, Fauns and Fairies,” a very serious book…it’s a hoot.) Of course, much of this was wrong, but that’s not the point here.
Today, we have largely given up on reliance on the transmundane for answers and expect that through observation and ratiocination we can explain the world around us. But none of us have more than a very imperfect understanding of the observable. The problem here is complexity. I saw a report somewhere that said there’s only 250 people in the entire world who really understand how a cell phone works. I understand almost nothing about how computers work. Medical science is largely a mystery. I don’t really get electronics nor what in the world is string theory, and heaven knows whether the universe is contracting or expanding. I have an undergraduate degree in economics and know enough to understand that I don’t understand economics. (The evidence suggests that professional economists don’t either.)
I couldn’t begin to tell you that I know all the laws that affect the life I live every day and certainly have never read the United States Code back to back, nor, God help me, the three quarters of a million pages in the Code of Federal Regulations without mentioning the similar compilations from each of our states, counties and local governments that I’m sure say something relevant to the way I live, the business I run and the clients I serve. Even technical specialists, within the realm of their own specialization, don’t know “everything” (trust me on that). Our understanding of the reality in which we function is largely impressionistic and assumptive, based on the few things we really know and guesses, perhaps educated guesses, one might even call them biases, about what we don’t.
So in large measure, we have exchanged one world of the unknown for another, and in fact, notions, based on the easily observable, what we all know for certain, are generally about as reliable as explanations based on the doings of angels, fairies and demons. With our God-given confirmation biases that tend to allow us to elide from our consciousness troubled thoughts that might challenge our ideas, we can comfortably live our lives. We have embraced a false hubris that we actually do understand how things work while continuing to pity the poor Hobbesian denizens of the past for relying on superstition and religion for answers.
While it’s one thing for Tom down at the hardware store to pontificate about aliens on ice in Area 51, or fluoride in our water turning us into Communists (showing my age) or free trade causing Tourette syndrome (watching the evening news, I sort of get how one could think that), it’s somewhat more troubling when our elected representatives and the doyens of the swamp similarly embrace simple easy to understand yet wholly invalid narratives about how the world works. Girded with certainty, they apparently all believe that they have been given a God-like ability to design our polity and economics and continue to tinker away. They’re certain that they understand cause and effect. They’re certain they understand how the world works. They know they can fix stuff. The flash is they can’t. And as time goes by, the accretion of more and more wrong-headed initiatives based upon fundamental misunderstanding of how the world works has an accumulated impact that causes the edifice of our economy and polity to wobble more and more.
What got me thinking about all this is a small example of a “whoops” that I noticed in a recent FT story that discussed how the U.S. Treasury yield curve has been impacted by a provision of the tax reform bill that essentially allowed corporate entities to continue to deduct contributions to their pension schemes at the old 35% applied corporate tax rate and not at the lower 23% rate that applied to their actual income in 2018. Apparently that was designed to help corporate America address an underfunding problem in their pension schemes (put aside for a second that the real underfunding problem is in the public pension scheme). But in consequence, it has depressed pricing at the long end of the yield curve as these pension schemes have piled into ten to thirty year paper. That, of course, in turn has flattened the yield creating at the least anxiety about the performance of the economy in out corners and depressed the earnings of our banks who live for an upward tilting yield curve. Even anxiety about the future shape of the economy has real life impacts. Does it affect hiring? Does it affect Cap X? Does it affect expansion plans? Does it affect the use of excess cash for buybacks or further investments? Sure does. And so here we are, blindsided by a tax policy change that has significant real world impacts of which I was entirely unaware (but I’m sure my ERISA partners are all over this).
I was ready to view this potential inversion of the yield curve as a strong cypher for an upcoming recession and maybe it’s not. Maybe it’s not aggregate demand, it’s the unintended consequence of a misfiring pension scheme. Who knew?
So you see my point – when we don’t understand how things actually work, we make stuff up. Think about the poor Turks whose president is convinced high interest rates cause inflation and therefore is driving its poodle-like central bank to continue to expand the money supply and pave the road to hyperinflation. Or how about the doomed Venezuelans whose government has destroyed almost every part of their economy while concluding that the solution to this problem is more of the same medicine, administered, if necessary, at bayonet point.
And here at home, look at what we did knocking around after the Great Recession of 2008 to “fix the problem.” The Volcker Rule – what did it do? It constrained liquidity and as far as I can tell, it fixed nothing. Skin in the Game – what did it accomplish? It increased legal fees (not necessarily a bad thing), but has it changed the calculus of risk and reward across banking and finance?
I am virtually certain that when the next denouncement arrives and the economy turns south, we will find out that it did not. Something else, something not on our radar will be the culprit. We ballooned the Federal Reserve balance sheet to over $4.5 trillion. Seemed like a good idea at the time. Do we have any idea of what will happen when we unwind it? (A candidate for the next bad thing? I’m just saying….) Our world is so damn complex that we marinate in a sea of unintended consequences every day. My point here, to the extent I have a point, is that we all need, from voters to legislators to regulators to business leaders, to really internalize the notion of unintended consequences. To try mightily to think beyond the easily observable to the underlying structures of things. We need to find some humility in the face of a world that in fact is so complex that it’s no more easily navigated than the world of Gods, demons and angels. (What really is the difference between a handheld computer with more computing power than on all the computers that took us to the moon some 40 years ago and magic? As far as I can tell, it’s sort of the same thing.) We need to be more clear-eyed about unintended consequences and we need to be prepared to act as the previously unrevealed become apparent. Churchill famously said (or is reported to have famously said), “when the circumstances change, I change my mind.” Not a bad approach to life. We don’t do it enough and we tend not to honor those who do. We do love stubborn certainty, don’t we? We need more willingness to reset our course when new facts and new relationships are uncovered, to fight our confirmation bias and to once again look beyond the easily observable. Causality is easily obscured. In many cases, the direction of the arrow of causality is not at all clear.
So here’s a fervent wish for all of us to be a little less certain, to have a little less hubris about our ability to act and affect the world; to be a little less certain of theories upon which policies are based are right simply because they appear to accord with the data we have observed.
Probably a fruitless hope, but, hey, even a blind cat finds a dead mouse once in a while.
