Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Beyond neoliberalism - A heuristically approach to resolving the growth-sustainability dilemma

21 views

Published on

Lecture at HHL Doctoral Summer School 2019 on Growth vs. Sustainability

Published in: Economy & Finance
  • Be the first to comment

Beyond neoliberalism - A heuristically approach to resolving the growth-sustainability dilemma

  1. 1. Beyond Neoliberalism A heuristical approach to resolving the growth-sustainability dilemma Dr. Johannes Meier
  2. 2. Starting point: orthodoxy of neoliberalism Source: Cambridge Dictionary
  3. 3. Core beliefs of Neoliberalism • Society of rational individuals seeking to maximize their own utility (homo economicus) • Competition primary driver in human affairs • Success of a nation = ∑ individual’s utility (GDP) • Proper role of government: establish and protect free markets
  4. 4. Reach of Neoliberalism Market-based philosophy of neoliberalism has reached most economic aspects of our lives reaching beyond industrial and trade policy to labor policy, fiscal policy, and welfare policy. Looking at conventional progress indicators like GDP neoliberalism seems to have worked. Scope of this market-based thinking has gone far beyond economics: • Most corporate strategies assume the continuing existence of free markets and global trade. • Neoliberalism drive models of corporate governance and the success logic of the financial sector. • All major strategy consultancies rely on neoliberal orthodoxy as the hammer that turns the world into a nail. • Since the 1980’s most political parties in Western societies have come to agree on the primacy of markets and the need to rely on them first whenever possible. • The education and health care systems have been largely colonized by market-based thinking. • More recently there has even been intense debate whether modern philanthropy is implicitly stabilizing the neoliberal orthodoxy in spite of all the rhetoric of changing the world. 4 References: Hans Rosling, Factfulness, 2018; Anand Giradharadas, Winner Takes All: The Elite Charade of Changing the World, 2018
  5. 5. 1. Emperor of the rising tide and justice Three emperors without clothes
  6. 6. Emperor of the rising tide and justice Income and wealth distributions 6
  7. 7. Emperor of the rising tide and justice Consumption and footprint distributions 7 First World Rest of World 7,5 bn Consumption/Footprint x 32 per-capita average ~80% of total footprint Can the planet support 7,5 bn people with the consumption patterns and footprint of the First World? X “We promise developing countries that, if they will only adopt good policies, like honest government and free market economies, they too can become like the First World today. That promise is utterly impossible, a cruel hoax.” Jared Diamond
  8. 8. 1. Emperor of the rising tide and justice 2. Emperor of the commons Three emperors without clothes
  9. 9. Emperor of the commons 9 Tragedy of the commons • Accelerated growth in many dimensions • Accelerated “use” of atmosphere, oceans, rare metals, etc. Tragedy of the horizons • Old Sales wisdom: ”The fast $ beats the slow $”
  10. 10. 11
  11. 11. Additional complexities of global warming Source: IPCC AR4 5.2.2.3. 12
  12. 12. Average hides huge and dangerous variance
  13. 13. Carbon budget concept
  14. 14. Mark Carney, Chairman of BOE: Financial stability at risk Since the 1980s the number of registered weather-related loss events has tripled; and inflation-adjusted insurance losses from these events have increased from an annual average of around $10bn in the 1980s to around $50bn over the past decade. The horizon for monetary policy extends out to 2-3 years. For financial stability it is a bit longer, but typically only to the outer boundaries of the credit cycle – about a decade. Once climate change becomes a defining issue for financial stability, it may already be too late. Three types of risk for financial system due to climate change: • Physical risks: the impacts today on insurance liabilities and the value of financial assets that arise from climate- and weather-related events • Liability risks: the impacts that could arise tomorrow if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible • Transition risks: the financial risks which could result from the process of adjustment towards a lower-carbon economy (e.g. stranded assets) 15 Source: Speech by Mr Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board, at Lloyd’s of London, London, 29 September 2015
  15. 15. 1. Emperor of the rising tide and justice 2. Emperor of the commons 3. Emperor of transactional efficiency Three emperors without clothes
  16. 16. Emperor of transactional efficiency 17 • With homo economicus comes a tendency to ignore elements of relations that cannot be measured easily; complex relationships between individuals are reduced to transactions. • Ambivalence of “You get what you measure.” • Relations get measured in transactions, likes, clicks • Friendship and love get reduced in transactional templates on Facebook and Tinder “The gross national product … measures everything … except that which makes life worthwhile.” Robert F. Kennedy
  17. 17. Counterintuitive observations about the collective • The average behavior of the market participants will not allow us to understand the general behavior of the market • The psychological experiments on individuals showing „biases“ do not allow us to automatically understand aggregates or collective • The higher the dimension, i.e. the number of possible interactions, the more disproportionally difficult it is to understand the macro from the micro, the general from the simple units Fundamental limitation of behavioral economics on how to play the market or generate policy Mathematically speaking, the mean-field approach, where one generalizes from the average interaction to the group is only possible if there are no asymmetries 18Source: Taleb, Skin in the game, appendix to book 3
  18. 18. Homo sapiens vs. Homo economicus Most social processes are not neatly decomposable into separate subprocesses – economic, demographic, cultural spatial. Yet, this compartmentalization in insular departments and journals is how we tend to organize the study of social systems (e.g., finance vs. strategy vs. marketing departments in B-schools) In order to develop realistic and relevant models it is essential to begin with solid foundations regarding individual behavior and spatial structures. Current laboratory social science (e.g. Tversky and Kahneman) are giving us an ever-clearer picture how homo sapiens – as against homo economicus – actually makes decisions. Agent-based modeling offers an integrative, inherently multi- dimensional alternative. 19Joshua M. Epstein (2006). Generative Social Science: Studies in Agent-based Computational Modeling. Princeton UP
  19. 19. 20 Heuristics for the transition beyond neoliberalism
  20. 20. 21 Heuristics for the transition beyond neoliberalism 1. Listen to diverse voices and beware of reductionisms 2. Avoid risks of irreversible system change and stranded assets 3. Aim for antifragility 4. Reduce polarization and look for new balances
  21. 21. 22 Heuristics for the transition beyond neoliberalism 1. Listen to diverse voices and beware of reductionisms 2. Avoid risks of irreversible system change and stranded assets 3. Aim for antifragility 4. Reduce polarization and look for new balances
  22. 22. Listen to diverse voices and beware of reductionism 23Source: Real World vs. Science according to N. Taleb, Skin in the game Consultants Consultants often reduce a complex reality to a problem that can be solved with a given methodology. Powerpoints are not very precise forms of communication when it comes to qualifying solution claims. In a complex system this often leads to unforeseen higher-order effects and non-sustainable impacts.
  23. 23. Listen to diverse voices and beware of reductionism 24 John Browne, ex-CEO BP
  24. 24. 25 Heuristics for the transition beyond neoliberalism 1. Listen to diverse voices and beware of reductionisms 2. Avoid risks of irreversible system change and stranded assets 3. Aim for antifragility 4. Reduce polarization and look for new balances
  25. 25. Different types of risk • Manageable Risks vs. Unmanageable Risks (W. Nordhaus – 2018 Nobel laureate) • Problem of long tails and discounting of long-term uncertainty (N. Taleb) • Relevance and the law of declining love (D. Kahneman, O. Hondrich) 26
  26. 26. Risk domains Interesting, normal life Black Swan Domain Classical management domain Insurance and Casino domain High exposure to rare, tail events Low exposure to rare, tail events Incomputable events Computable events „Robustification“ 27
  27. 27. Risks are interconnected and impacts non-linear 28Source: http://reports.weforum.org/global-risks-2018/global-risks-landscape-2018/
  28. 28. Worth noting that climate change risks are on top of list 29Source: WEF, 2019
  29. 29. Learning from tipping points in nature • All ecosystems are exposed to gradual changes in climate, nutrient loading, habitat fragmentation or biotic exploitation. • Nature is usually assumed to respond to gradual change in a smooth way. However, studies on lakes, coral reefs, oceans, forests and arid lands have shown that smooth change can be interrupted by sudden drastic switches to a contrasting state. • Although diverse events can trigger such shifts, recent studies show that a loss of resilience usually paves the way for a switch to an alternative state. • This suggests that strategies for sustainable management of such ecosystems should focus on maintaining resilience. 30 Source: Marten Scheffer, Steve Carpenter, Jonathan A. Foley, Carl Folkes & Brian Walkerk, Catastrophic shifts in ecosystems, NATURE, VOL 413, 11 OCTOBER 2001, p. 591-596
  30. 30. Hysteresis and path dependency 31 Path 1: Start looking at image from the upper left corner proceeding to the lower right corner. Path 2: Start looking in inverse direction.  Perception of image changes at different points. Source: H. Haken (1983), Synergetik, Springer-Verlag.
  31. 31. Greenland Ice Sheet tipping point model 32Source: Nordhaus, William (2013). The Climate Casino – Risk, Uncertainty, and Economics for a Warming World. Yale UP
  32. 32. The risk of tipping points from climate change 33Source: PIK
  33. 33. Precautionary principle in the face of tipping points 1992 United Nations‘ Rio Declaration on Environment and Development: „Where there are threats of serious or irreversible damage, lack of full scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation.“ Game-theory minimax strategy: In the absence of scientific certainty, society should make policies that prevent the worst outcome. Nordhaus‘ cost-benefit perspective: If the damages are uncertain, highly nonlinear, and clifflike in the Climate Casino, then a cost- benefit analysis will generally lower the optimal target to provide insurance against the worst-case outcomes. As complex systems do not have obvious one-dimensional cause- and-effect mechanisms, you should not mess with such systems under opacity. 34
  34. 34. 35 Heuristics for the transition beyond neoliberalism 1. Listen to diverse voices and beware of reductionisms 2. Avoid risks of irreversible system change and stranded assets 3. Aim for antifragility 4. Reduce polarization and look for new balances
  35. 35. The concave nature of travel 36 • A small disturbance in a congested traffic system can lead to major disruptions/delays. • Systems like traffic rarely experience positive disturbances. • Traffic is a system with „one-sided disturbances“ which leads to underestimation of randomness and harm. • Buffers are important to avoid major failures. The average does not matter. Foto basykes
  36. 36. Fragility – The concave Example: Driving a car against an obstacle 37 Speed Harm The nature of fragility: • For the fragile, shocks bring higher harm as their intensity increases (up to a certain level) • For the fragile, the cumulative effect of small shocks is smaller than the single effect of an equivalent single large shock. • The more concave an exposure, the more harm from the unexpected, and disproportionately so. Concave or negative convex curve For a set deviation in a variable the concave loses more than it gains Reference: Taleb, Antifragility
  37. 37. Case: Fannie Mae 2003 internal risk report of Fannie Mae showed • Move upward in an economic variable led to massive losses • Move downward in same variable led to small profits • Acceleration of harm in concave curve visible as simple fragility detection heuristic High fragility indication possible even without good model for risk measurement 38 Fragility is quite measurable. Risk in real life not so at all, particularly risk associated with rare events. Reference: Taleb, Antifragility, Chapter 19
  38. 38. Antifragility – The convex Antifragility: Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty. Detecting antifragility: For the antifragile, shocks bring higher benefits as their intensity increases 39 Variable Gains Convex curve: For a set deviation in a variable the convex gains more than it loses Reference: Taleb, Antifragility
  39. 39. Life is long gamma (Anthony Glickman) • Long – benefits from • Short – hurt by • Gamma – nonlinearity of options Option = asymmetry + rationality The fragile has no option. The antifragile needs to select what‘s best, the best option. 40
  40. 40. Different types of exposures of systems Fragile Robust/Resilient Antifragile Errors Hates mistakes Irreversible, large (but rare) errors, blowups Mistakes are just information Loves mistakes (since they are small) Produces reversible, small errors Biological & economic systems Efficiency, optimized Redundancy Degeneracy (functional redundancy) Science & technology Directed research Opportunistic research Stochastic tinkering, bricolage Regulation Rules Principles Virtue Political systems Nation-state, centralized Collection of city-states, decentralized Economic life Bureaucrats, Agency problem Entrepreneurs, Principal operated Physical training Organized sports, gym machines Street fights 41Reference: Taleb, Antifragility
  41. 41. The mechanical vs. the organic The mechanical, noncomplex, nonbiological The organic, complex, biological Needs continuous repair and maintenance Self-healing Hates randomness Loves small variations* No need for recovery Needs recovery between stressors No or little interdependence High degree of interdependence Stressors cause material fatigue Absence of stressors cause atrophy Age with use (wear and tear) Age with disuse Undercompensates from shocks Overcompensates from shocks Equilibrium in a state of inertia Equilibrium only with death „Much of modern life is preventable chronic stress injury“ (Taleb, p. 64) * Nature is antifragile up to a point, but that point is quite high 42
  42. 42. Organisms are populations and populations are organisms Analysis needs to accomodate the fact that an organism is not something isolated and stand-alone; there are layers and hierarchies. With evolution, something hierarchically superior to an individual organism may benefit from the damage to the individual organism. The surviving cohort is stronger than the inital one – but not quite the individuals, since the weaker ones died. There is total tension between man and nature in the trade- off of fragilities. A strengthening mechanism for the species comes at the expense of some organisms. Fragility of individuals (particularly after reproducdtion) is prerequisite for evolutionary selection to take place. Similarly an organism strengthens at the expense of some cells, all the way down and all the way up as well. (e.g., autophagy, hormesis) 43 Black Swan Management 101: Nature (nature-like systems) likes diversity between organisms rather than diversity within an immortal organism.
  43. 43. Pseudo-stabilization • James Clerk Maxwell modeled the behavior of controlers of the speed of steam enginges by compensating for abrupt variations. The paper „On Governors“ (1867) proves mathematically that tightly controlling the speed of engines leads to instability. • His argument can be generalized across domains to help debunk pseudo-stabilization and hidden long-term fragility. • Artificially suppressing volatility not only makes system extremely fragile, but at the same time hides risks. Volatility is information! • Artificially constrained systems become prone to Black Swans. 44
  44. 44. Examples of pseudo-stabilization • Personal doctors (Michael Jackson, Prince) • Helicopter parents removing every random element from children‘s lives • Greenspan‘s ironing out the “boom-bust cycle“ • US opioid crisis (as example of concealed iatrogenics compounded by principal-agent problem) • US stabilization strategies in Middle East (Egypt before the riots of 2011, Saudi Arabia) • Reductions of humans to what appears to be efficient and useful • Avoiding fluctuations in the market via price fixing or forbidding noise traders (George Cooper The Origin of Financial Crises) • Micro-management of forests to avoid small forest fires that would otherwise cleanse the system of the most flammable material so that it cannot accumulate • High-frequency sterile information in media disrupting the noise/signal filtering mechnisms Foto: David Earle 45
  45. 45. Discussion Antifragility implies – contrary to initial instinct – that the old is superior to the new. Time will know about a system‘s fragilities and break it when necessary. If something has been around for a very, very long time, then, irrational or not, you can expect it to stick around for much lover, and outlive those who call for its demise. The most fragile is the predictive – those who underestimate Black Swans will eventually exit the population. Crucially, if antifragility is the property of all those natural (and complex) systems that have survived, depriving these systems of volatility, randomness, and stressors will harm them. In nature things break on a small scale all the time, in order to avoid large-scale generalized catastrophes. 46
  46. 46. Solutions to antifragility You are antifragile for a source of volatility if potential gains exceed potential losses (and vice versa) • Simple test: If I have „nothing to lose“ then it is all gain and I am antifragile. • Recognize path dependence: No upside without survival • First step towards antifragility: Decrease downside, protect yourself from extreme harm (negative Black Swan) and let the upside (positive Black Swan) take care of itself Solution to antifragility is combination of aggressiveness and paranoia Solution takes form of a barbell (bimodal strategy) „Provide for the worst; the best can take care of itself.“ (Yiddish proverb) Yet, there is ample evidence from insurance that people are averse to small losses, but so much toward very large Black Swan risks (which they underestimate) 47
  47. 47. Barbell transformation in time series 48Reference: Taleb, p. 438
  48. 48. Examples of barbell strategies • Ray Dalio on speculative bets: „Make sure that the probability of the unacceptable (i.e. the risk of ruin) is nil.“ • Montaigne‘s life strategy as a serial barbell: First „doer“ then „thinker“ • In social policy, protect the very weak and let the strong do their job, rather than helping the middle class to consolidate ist privileges • In publishing, avoid having 100% of the people finding your mission acceptable, but instead aim for high percentage of people disliking you and your message combined with a low percentage of extremely loyal and enthusiastic supporters 49
  49. 49. Case: Antifragile nuclear reactors Fragile nuclear industry • Relying on prediction of no catastrophic failures • Heavily centralized and scaled • Limited learning across major installations (projects, not products) • Fukushima fundamental point of reckoning of „Black Swan domain“ Antifragile nuclear industry • Minimizing exposure to failure • Small reactors, buried underground, with major protection layers • Automatic termination of chain-reaction in case of failure • Economices of scale from learning in distributed system with many units 50
  50. 50. Fragility-Antifragility in project management • Studies shows that increases in the size of projects maps to poor outcomes and higher and higher costs of delays as a proportion of the total project. • However, it is the size of the project segments that matters, not the entire project. • Bridges, dams and tunnel projects involve monolithic planning as these cannot be broken into small portions. Their percentage cost overruns increase markedly with size. • For roads, built by small segments, there is no serious size effect, as the project managers incur only small errors and can adapt to them. • Other influencing factors • Learning curves across project also affect nature of cost/benefit curves. • Psychological factors like overconfidence. • Principal-agent problems and unforeseen complexity from increasing number of actors in specialized supply chains. • Excessive efficiency optimization with the help of IT systems at the expense of buffers/redundancy/optionality. 51BENT FLYVBJERG, NILS BRUZELIUS, WERNER ROTHENGATTER (2003) Megaprojects and Risk An Anatomy of Ambition
  51. 51. Factors affecting the fragile-antifragile balance Antifragility Fragility • Specialization • Departmentalization • Silo Thinking • Bureaucracy • Privatization of gains, socialization of risk • Numerical predictions • Overconfidence of experts • Success and fear of loss • Narrative knowledge • Curiosity • Interdisciplinarity • Systems Thinking • Entrepreneurialism • Skin in the game • Large libraries • Wisdom in decision- making • Mentally adjusting to „the worst“ • Optionality 52
  52. 52. 53 Heuristics for the transition beyond neoliberalism 1. Listen to diverse voices and beware of reductionisms 2. Avoid risks of irreversible system change and stranded assets 3. Aim for antifragility 4. Reduce polarization and look for new balances
  53. 53. 54 Polarization in media Source: graphika.com
  54. 54. The middle is losing 55 Source: graphika.com
  55. 55. Finding new balances and resolving dilemmas 56 “It is in vain that we search for an essential difference between good and evil, for their constituents are the same. The crucial distinction lies in their structure, i.e., the manner in which the pieces are assembled. Evil is disintegration, an angry juxtaposition of alienated opposites, with parts always striving to repress other parts. Good is the syntheses and reconciliation of the same pieces.” Charles Hampden-Turner
  56. 56. Finding new balances and resolving dilemmas 57 Growth Sustainability Quality of life Risks of climate tipping points
  57. 57. Candidates for new balances • Finding a balance between Inequality vs. Innovation calls for a dynamic view of equality, i.e. attracting barriers need to be avoided. Note that if we want dynamic equality upward and downward mobility in society are inevitable. (Nicholas Taleb) • Finding a balance between Individual unfolding vs. Solidarity needs to rely on the recognition that humans can only flourish in community. At a most elementary level: “The triumph of individual fulfilment through personal achievement over meeting obligations to family” [and community] “is beginning to look psychologically flawed.” (Paul Collier) • Finding a balance between Competition vs. Collaboration could start with a broader view on what should count as public goods and what kinds of government action may be appropriate to stimulate their production. (Larry Kramer) There is a urgent need for a deeper public- private partnership that transcends the short-termism and shallowness of current lobbying and industrial policy. 58
  58. 58. Thank you for your attention johannes.meier@xigmbh.de

×