Antifragility goes to Davos

A sample of statements made at the 2013 meeting of the world leaders in Davos (as reported by Felix Salmon):

“[We have] removed the tail risk from the euro” Mario Draghi (European Central Bank)
‘There is no tail risk anymore’ Oli Rehn (European Commission)
“In Europe, the tail risk has been moved off the table” Zhu Min (IMF)

“[R]andomness in the Black Swan domain [fat tails] is intractable…The limit is mathematical, period, and there is no way around it on this planet. What is nonmeasurable and nonpredictable will remain nonmeasurable and nonpredictable…” (Nassim Taleb, Antigragility, p. 138)

“While in the past people of rank or status were those and only those who took risks, who had the downside for their actions, and heroes were those who did so for the sake of others, today the exact reverse is taking place. We are witnessing the rise of a new class of inverse heroes, that is, bureaucrats, bankers, Davos-attending members of the I.A.N.D. (International Association of Name Droppers), and academics with too much power and no real downside and/or accountability” (Nassim Taleb, Antigragility, p. 6)

Ten things I learned from ‘Red Plenty’

Red Plenty is Francis Spufford’s semi-fictional book about the efforts to apply economic planning in the Soviet Union during the 50s and 60s. It is a great book and has been already extensively discussed elsewhere. (Don’t miss Cosma Shalizi’s post in particular). Here is what I learned from ‘Red Plenty’:

1. Linear programming has been developed in the Soviet Union as a technique to optimize centralized economic planning. It has been later re-discovered in the US.
2. During the 50s Soviet scientists have been developing a successful independent line of computer technology, later to be dropped at the expense of copying the West.
3. In a centralized economy, consumers always face the greatest shortages because they are the end of the supply line.
4. Nikita Khrushchev has expressed doubt and remorse for the violence of the Soviet regime during the 30s and 40s in his memoirs.
5. The Soviets built in the midst of Siberia Akademgorodok – an entire city for scientists from all sorts of academic disciplines. With an artificial sea next to it.
6. A Clockwork Orange is inspired by a violent Soviet youth subculture.
7. Women in the Soviet Union have been forbidden to experience pain during birth. In a softer form, the Soviet programs for ‘natural’ birth have been later revamped in Western Europe.
8. The Americans have charmed Soviet citizens in their first exhibition in Moscow by showing shiny plastic consumer goods and appliances and a dazzling video display.
9. In the Soviet planned economy being able to buy staff requires similar skills (and middlemen) as being able to sell staff in a market economy.
10. It is impossible to avoid prices in coordinating an economy.

Debt and the nature of money

When I wrote that David Graeber’s book opens your eyes, that was not just a figure of speech. First, consider this:

In recent weeks, Theodoros Mavridis has bought fresh eggs, tsipourou (the local brandy: beware), fruit, olives, olive oil, jam, and soap. He has also had some legal advice, and enjoyed the services of an accountant to help fill in his tax return. None of it has cost him a euro, because he had previously done a spot of electrical work – repairing a TV, sorting out a dodgy light – for some of the 800-odd members of a fast-growing exchange network in the port town of Volos, midway between Athens and Thessaloniki.
In return for his expert labour, Mavridis received a number of Local Alternative Units (known as tems in Greek) in his online network account. In return for the eggs, olive oil, tax advice and the rest, he transferred tems into other people’s accounts.

Fascinating, but also completely understandable according to a token theory of money. Whether you call it euro, drahma, or tems doesn’t really matter. It is just a unit of exchange. For the community within which it functions, it doesn’t need the backing of the state (or a central bank) or a gold standard. Of course, the limitation is that the system can only function within a relatively small community:

“It’s also a way of showing practical solidarity – of building relationships.”

This quote directly links to Graeber’s argument about the intimate association between debt and community: the tems are nothing less than a system of keeping track of (small) debts within a circle of trust.

What is also characteristic is the Guardian’s subtitle of the mateiral: A determination to ‘move beyond anger to creativity’ is driving a strong barter economy in some places [emphasis mine]. Having read Graeber, one immediately recognizes that the ingenious Greek system of tems is the exact opposite of barter – people are not exchanging goods directly (barter) but through the medium of small debts, and the tems which keep track on the debts. The myth of the barter origin of money shows its ugly head even when one observes in vivo the origin of money as a system to count and manage debts.

And now, the second case. Normally, at the local cafeteria at my university in the Netherlands you can pay either in cash or using the cashless Chipknip system (it’s like paying with a debit card but no pin required). The latter option is much more popular since in this country one can pay almost everywhere with the Chipknip or PIN (both on the same card). A few weeks ago, the Chipknip terminal at the cafeteria broke down and one was required to search his pockets for small change to get his daily caffeine fix. During these weeks, on more than one occasion I actually didn’t have enough coins to get a coffee. Apparently, I wasn’t the only one. Once the Chipknip machine was repaired, there was a note from the cafeteria requesting all people to clear the debts they had accumulated over the period the machine was out of order. So the cashless economy didn’t revert to cash transactions (coins) but miraculously, and instantaneously, transformed itself into a system of debt! 

Geometric Currency Sculptures by Kristi Malakoff

[artwork via Colossal]

David Graeber’s ‘Debt’ will shake your world

David Graeber’s ‘Debt: The First 5,000 Year‘ is easily the most thought-provoking, insightful, erudite and provocative book I have read over the last few years. While you can disagree with particular arguments or resist certain conclusions, it will shake your most fundamental assumptions about social life. After reading the book, you will never see money, credit, war, debt, slavery, states, religion, capitalism, finance, economics, anthropology, presents, hierarchy, and history in the same way again.

Don’t be fooled by the title (and the horrendous cover) – this book is nothing less than a reconstruction of world history in the grand traditions of Toynbee, Spengler, Jaspers, and Braudel. Debt plays center stage but one learns just as much about the genesis of the state, the origin of money, the history of slavery and the meaning of gifts. The approach of the book not only spans history, anthropology, social science and philosophy but switches effortlessly between the empirical and the normative, the theoretical and the metaphysical. Which is actually, my major problem with the book. The prose is so convincing and the erudition of the author so deep that one has to be constantly on the alert to separate the evidence from the opinion, the analysis from the speculation, the social critique from the dispassionate search for scientific truth (I suspect Graeber wouldn’t really agree that these can be separated anyways).

Personally, I found the demolition with the help of anthropological evidence of the ‘foundational myth of the discipline of economics’ – the origin of money from barter – the most convincing part of the book. You can get a taste of the argument here. The chapter is important also because it illuminates so well the differences between economics and anthropology as modes of scientific inquiry.

On the other hand, I found the last parts of the book the least convincing. It’s not that the arguments about the links between the origin of modern states, the rise of capitalism, slavery, and credit are totally misplaced, but they all just seem to have been pushed too far.

The book has already been discussed and reviewed in numerous blogs, magazines, etc. (see for example the forum here). It was actually out of print just before Christmas both in the US and Europe, but now you have no excuse – get it and get ready to have your world shattered.

Concentration of control in the global economy

All conspiracy theorists know that the global economy is concentrated in the hands of a few. But even they will be blown away by this paper which maps the network of global corporate ownership and control. Here is the (somewhat understated) abstract:

“The structure of the control network of transnational corporations affects global market competition and financial stability. So far, only small national samples were studied and there was no appropriate methodology to assess control globally. We present the first investigation of the architecture of the international ownership network, along with the computation of the control held by each global player. We find that transnational corporations form a giant bow-tie structure and that a large portion of control flows to a small tightly-knit core of financial institutions. This core can be seen as an economic “super-entity” that raises new important issues both for researchers and policy makers.”  (Vitali, Glattfelder and Battiston)

Some of the findings:
– almost 40% of the economic value of transnational companies in the world is in the hands of a group of 147 tightly-interconnected companies “which has almost full control over itself” (p.6)
– “[N]etwork control is much more unequally distributed than wealth…[T]he top ranked actors hold a control ten times bigger than what could be expected based on their wealth” (p.6)
10 companies control 20% of the network; 50 companies control 40% of the network (!)
– 35 of these 50 companies belong to a strongly connected core, meaning that they are all “tied together in an extremely entangled web of control” through co-ownerships (p.32)
77% (463 006) of the firms in the entire network belong to a single connected component [formally, in a connected component all firms can reach each other along the paths of the network]. The second largest connected component has only 230 firms.  

Here is the map of the core of the core of the network itself; not very informative as such but beautiful nonetheless:  (Superconnected companies are red, very connected companies are yellow)

(Image: PLoS One, via New Scientist)
This is the first paper to include indirect and weighted control paths in constructing the global economy network and it introduces a new method for measuring control that is suitable for such complex networks. Although quite technical, the paper does a remarkable job of walking the reader step-by-step through the analysis. New Scientist has a less-technical presentation of the research here.

The implications of this work for the stability of the economy and competition should be quite obvious, but the authors (all from ETH Zurich) also explicitly discuss them in the paper. One can only hope that economic policy makers and politicians take note.