Antifragility - The Genesis of Fragility

[Note: My earlier posts on this subject are 1)Antifragility - The Issue of Optionality, 2)Antifragility - Optionality, Ethics and the Agency Problem, 3) Antifragility - The Choice. The posts are best read in that order with this one being no.4]

I like to stare at maps. Big maps of the World, Europe, the Americas and at times more detailed maps of a country or a region. I see them as TV screens that span centuries, at times millennia. I can see scenes of history marching across like a grand documentary.

Another thing I like to stare at is nature. Parks, forests, my back yard or films / documentaries about nature, animals, birds, reptiles, fish……

Sometime ago while engaging in two of my favorite pastimes – staring and reading, a question popped into my head. How did debt arise? How did we invent debt?

Let me explain why the question arose. In my research about Antifragility I have been struck by a thought – for just about all our human behaviors there is an example in nature. Or, put the other way round, all human behavior characteristics are facsimiles of behaviors we see in nature. Violence, nurture, hijacking, murder, generosity, loyalty, theft, cooperation … you name it, and an example will be found among the many living creatures in nature. Except debt. There are no examples I can think of where some creature takes a loan from another creature. They give, yes. They take, yes. But a loan?

So where on earth did we find this idea? Is it truly something that we just invented out of our fertile brains?

Luckily, around this time I was also deep into reading David Graebers book “Debt – the first 5000 years.” It helped to clarify or provide part of the answer – credit relations grew out of how humans structured relationships.

We trust that we will do things for each other. Small, everyday things. (Graeber calls this primitive communism.) The concept of credit grew from this concept of innate trust and then as our civilizations grew more complex, credit relations took on a life of their own so to speak.

What however, does this have to do with Fragility / Antifragility?

Well, a question that arose in my mind in parallel to the question about the genesis of debt was about the genesis of Fragility.

You see, just as I could find no example of raw debt / credit in nature I could really not think of anything that is a priori fragile in nature. Nature is by definition, a priori, anti-fragile. That is why it is still here and we are a part of it. The fragile exited the gene pool, as I am sure Nassim Taleb would say. That would mean that we as humans really have no facsimile of fragility to use as a model. We must have created fragility all by ourselves – we invented it. Antifragility is the rule – fragility is the exception. But the world we experience today feels the other way round. And fragility has been around for quite some time now. In fact, almost since we started the so-called agricultural revolution we have been fragilizing ourselves.

If we follow natures / evolution's logic – then we should have gone extinct (exited the gene pool) by now. All fragile things eventually do…there are no exceptions. But here we are. SO what is making fragility survive? What purpose does it serve? Cui bono?

It is worth at this point reminding ourselves about the basic definitions.

Fragile, are things that do not like volatility, disorder. They are vested in the status quo.

Anti-fragile, are the things that gain from disorder. They like volatility as they gain from it.

And just for clarity – we are not talking about things that are robust, resilient or those that are strong and can resist.

We must keep these words in focus – gain from disorder.

So, if fragility likes the status quo i.e., not disorder, then one can perhaps deduce that the status quo has a vested interest in fragility.

Let us now bring back the agency problem or moral hazard (some carry the benefits others bear the losses) into this scene.

When we have a status quo that is deeply ingrained with the agency problem then that status quo has a vested interest in “not-change” i.e., no volatility, no disorder. In other words it has a vested interest in fragility.

But how did the agency problem / moral hazard issue, come about and why has it become so ubiquitous in the worlds status quo? It is not a new problem. It has been around for millennia but it has today, in a completely globalized world, taken on a scale and implication that is completely unprecedented.

Taleb points out that “fragility” is how large globalized corporations hold government’s hostage – by becoming too big to fail.

I would venture to go a step further. I suggest that this is how the neo-liberal political economy holds the world hostage. The fragility of globalization is itself used as a weapon to keep the world vested in the status quo. The neo-liberal world has consciously made itself ‘too big to fail’. As Mr. Taleb emphasizes often enough – I paraphrase – don’t lose sight of the issue of scale! Scale kills!

Historically, the agency problem spawned fragility and today it has become systemic to the extent that localized failures (the way it works in nature) are no longer possible. It’s all or nothing.

But we still have the dangling question – where did the agency problem / moral hazard turn up from? In nature, feast and famine hits everyone alike. No one is specially favored. So, once again where did we get this idea from?

Wikipedia describes moral hazard as follows:

“In economics, moral hazard occurs when one person takes more risks because someone else bears the burden of those risks. A moral hazard may occur where the actions of one party may change to the detriment of another after a financial transaction has taken place.

Moral hazard occurs under a type of information asymmetry where the risk-taking party to a transaction knows more about its intentions than the party paying the consequences of the risk. More broadly, moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the perspective of the party with less information.

Moral hazard also arises in a principal–agent problem, where one party, called an agent, acts on behalf of another party, called the principal. The agent usually has more information about his or her actions or intentions than the principal does, because the principal usually cannot completely monitor the agent. The agent may have an incentive to act inappropriately (from the viewpoint of the principal) if the interests of the agent and the principal are not aligned.”

I draw the reader’s attention especially to the second paragraph above. Information asymmetry – starts to give us an insight into the very origins of this phenomenon.

Information asymmetry arises or is brought about when someone (people, institution) has or claims to have some exclusive power over the information. It may be real or simply purported but nonetheless exercised enough that it has impact on society i.e., people accept that the power exists and must be acquiesced to.

It is not hard to find examples of information asymmetry arising more or less in parallel with the rise of agricultural society. Institutionalized religion, Priests, Institutionalized storage of surplus, Kings, Institutionalized power, asset holders, all had a vested interest in maintaining the status quo of information asymmetry as that was the basis of their survival. Moral hazard was simply the necessary mechanism to keep the asymmetry alive.

A deeper anthropological discussion of this asymmetry is beyond the scope of this little post but now that we know the relationship between information asymmetry and moral hazard it is not difficult to see how the dynamic is alive and well in the modern world. There is not a single aspect of the functioning of modern society that is not infested with the asymmetry.

I would once again remind the reader that this is a completely globalized world we are living in i.e., scale is “off the scale” if I may put it that way!

If we now put this information asymmetry into this globalized scale or put another way – imagine completely globalized moral hazard – then perhaps we have some idea of how deeply invested in fragility we have become. Any attempt at bringing about anti-fragility i.e., information symmetry, would be a colossal threat to the globalized status quo.

But what about debt that we talked of above? Where does that fit into all of this?

Once again – debt and credit have long since been ripped out of their original context of trust relations between people in a society.

Debt is globalized. Remember scale? Well, debt is now not a contractual obligation between two people with their reputations and their credit in their societies. It is a chain of amorphous obligations starting at a debtor (me and my little mortgage) and scaling up right across this globalized world until neither the eventual creditor nor I really knows who owes what to whom.

But this chain of amorphous obligations (securitizations and derivatives etc.,) is nothing but a vast chain of globally scaled information asymmetry. At each stage of the scaling only selected information is traded. Moral hazard is implicit in such a chain of debt – without it the asymmetry is impossible. And without the asymmetry the status quo collapses.

In my view this is how fragility was invented and has now become the weapon used to convince us not to question the status quo. Without fragility the world as we know it will collapse. Fragility is used to keep us hostage to the status quo.

Antifragility can therefore only come about when information asymmetry / moral hazard are removed.

Antifragility first requires the via negativa – the removal of the sources of fragility i.e., the removal of information asymmetry and moral hazard. And only then can one do other things that make one anti-fragile. Not the other way around.

How does one do that? That will be my next post.