Beware those Black Swans

The bestselling economist Nassim Nicholas Taleb argues that we can’t make the world financial system

After completing my book The Black Swan, I spent some time meditating on the fragility of systems with the illusion of stability. This convinced me that the banking system was the mother of all accidents waiting to happen. I explained in the book that the best teachers of wisdom are the eldest, because they may have picked up invisible tricks that are absent from our epistemic routines and which help them survive in a world more complex than the one we think we understand. So being old implies a higher degree of resistance to "Black Swans" (events with the following three attributes: they lie outside the realm of regular expectations; they carry an extreme impact; and human nature makes us concoct explanations for their occurrence after the fact).

Take Mother Nature, which is clearly a complex system, with webs of interdependence, non-linearities and a robust ecology (otherwise it would have blown up a long time ago). It is a very old person with an impeccable memory. Mother Nature does not develop Alz­heimer's - and there is evidence that even humans would not easily lose brain functions with age if they took long walks, avoided sugar, bread, white rice and stock-market investments, and refrained from taking economics classes or reading the New York Times.

Let me summarise my ideas of how Mother Nature deals with the Black Swan. First, she likes redundancies. Look at the human body. We have two eyes, two lungs, two kidneys, even two brains (with the possible exception of company executives) - and each has more capacity than is needed ordinarily. So redundan­cy equals insurance, and the apparent inefficiencies are associated with the costs of maintain­ing these spare parts and the energy needed to keep them around in spite of their idleness.

The exact opposite of redundancy is naive optimisation. The reason I tell people to avoid attending an (orthodox) economics class and argue that economics will fail us is the following: economics is largely based on notions of naive optimisation, mathematised (poorly) by Paul Samuelson - and these mathematics have contributed massively to the construction of an error-prone society. An economist would find it inefficient to carry two lungs and two kidneys - consider the costs involved in transporting these heavy items across the savannah. Such optimisation would, eventually, kill you, after the first accident, the first "outlier". Also, consider that if we gave Mother Nature to economists, it would dispense with individual kidneys - since we do not need them all the time, it would be more "efficient" if we sold ours and used a central kidney on a time-share basis. You could also lend your eyes at night, since you do not need them to dream.

Almost every major idea in conventional economics fails under the modification of some assumption, or what is called "perturbation", where you change one parameter or take a parameter henceforth assumed to be fixed and stable by the theory, and make it random. Take the notion of comparative advantage, supposedly discovered by David Ricardo, and which has oiled the wheels of globalisation. The idea is that countries should focus on "what they do best". So one country should specialise in wine, another in clothes, even though one of them might be better at both. But consider what would happen to the country if the price of wine fluctuated. A simple perturbation around this assumption leads one to reach the opposite conclusion to Ricardo. Mother Nature does not like overspecialisation, as it limits evolution and weakens the animals.

This explains why I found the current ideas on globalisation (such as those promoted by the journalist Thomas Friedman) too naive, and too dangerous for society - unless one takes into account the side effects. Globalisation might give the appearance of efficiency, but the operating leverage and the degrees of interaction between parts will cause small cracks in one spot to percolate through the entire system.

The debt taboo

The same idea applies to debt: it makes you very fragile under perturbations. We currently learn in business schools to engage in borrowing, against all historical traditions (all Mediterranean cultures developed over time a dogma against debt). "Felix qui nihil debet", goes the Roman proverb: "Happy is he who owes nothing." Grandmothers who survived the Great Depression would have advised doing the exact opposite of getting into debt: have several years of income in cash before any personal risk-taking. Had the banks done the same, and kept high cash reserves while taking more aggressive risks with a smaller portion of their port­folios, there would have been no crisis.

Documents dating back to the Babylonians show the ills of debt, and Near Eastern religions banned it. This tells me that one of the purposes of religious traditions has been to enforce prohibitions to protect people against their own epistemic arrogance. Why? Debt implies a strong statement about the future, and a high degree of reliance on forecasts. If you borrow $100 and invest in a project, you still owe $100 even if you fail in the project (but you do a lot better in case you succeed). So debt is dangerous if you are overconfident about the future and are Black Swan-blind - which we all tend to be. And forecasting is harmful since people (especially governments) borrow in response to a forecast (or use the forecast as a cognitive excuse to borrow). My "Scandal of Prediction" (bogus predictions that seem to be there to satisfy psychological needs) is compounded by the "Scandal of Debt": borrowing makes you more vulnerable to forecast error.

Just as Mother Nature likes redundancies, so she abhors anything that is too big. The largest land animal is the elephant, and there is a reason for that. If I went on a rampage and shot an elephant, I might be put in jail and get yelled at by my mother, but I would hardly disturb the ecology of Mother Nature. On the other hand, my point about banks in my book - that if you shot a large bank, I would "shiver at the consequences" and that "if one falls, they all fall" - was subsequently illustrated by events: one bank failure, Lehman Brothers, in September 2008, brought down the entire edifice.

The crisis of 2008 provides an illustration of the need for robustness. Over the past 2,500 years of recorded ideas, only fools and Platonists have believed in engineered utopias. We shouldn't think that we can correct mistakes and eliminate randomness from social and economic life. The challenge, rather, is to ensure that human mistakes and miscalculations remain confined, and to avoid them spreading through the system - just the way Mother Nature does it. Reducing randomness increases exposure to Black Swans.

My dream is to have a true "epistemocracy"; that is, a society robust against expert errors, forecasting errors and hubris, one that can be resistant to the incompetence of politicians, regulators, economists, central bankers, bank­ers, policy wonks and epidemiologists.Here are ten principles for a Black Swan-robust society.

What is fragile should break early while it's still small: Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks become the biggest.

No socialisation of losses and privatisation of gains: Whatever may need to be bailed out should be nationalised; whatever does not need a bailout should be free, small and risk-bearing. We got ourselves into the worst of capitalism and socialism. In France, in the 1980s, the Socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

People who drove a school bus blindfolded (and crashed it) should never be given a new bus: The economics establishment lost its legitimacy with the failure of the system in 2008. Find the smart people whose hands are clean to get us out of this mess.

Don't let someone making an "incentive" bonus manage a nuclear plant - or your financial risks: Odds are he would cut every corner on safety to show "profits" from these savings while claiming to be "conservative". Bonuses don't accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives.

Time to definancialise

Compensate complexity with simplicity: Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. Complex systems survive thanks to slack and redundancy, not debt and optimisation.

Do not give children sticks of dynamite, even if they come with a warning label: Complex financial products need to be banned because nobody understands them, and few are rational enough to know it. We need to protect citizens from themselves, from bankers selling them "hedging" products, and from gullible regulators who listen to economic theorists.

Only Ponzi schemes should depend on confidence: Governments should never need to "restore confidence". Cascading rumours are a product of complex systems. Governments cannot stop the rumours. We just need to be able to shrug off rumours, to be robust to them. Do not give an addict more drugs if he has withdrawal pains: Using leverage to cure the problems of too much leverage is not homoeopathy, it's denial. The debt crisis is not a temporary problem, it's a structural one. We need rehab.

Citizens should not depend on financial assets as a repository of value and rely on fallible "expert" advice for their retirement: Economic life should be definancialised. We should learn not to use markets as warehouses of value.

Make an omelette with the broken eggs: The crisis of 2008 was not a problem to fix with makeshift repairs. We will have to remake the system before it does so itself. Let us move voluntarily into a robust economy by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here and teaching people to navigate a world with fewer certainties. Then we will see an economic life closer to our biological environment: smaller firms and no leverage - a world in which entrepreneurs, not bankers, take the risks, and in which companies are born and die every day without making the news.

Extracted from the postscript to "The Black Swan: the Impact of the Highly Improbable" by Nassim Nicholas Taleb (Penguin, £9.99)
© Nassim Nicholas Taleb 2008 penguin.co.uk

This article first appeared in the 05 July 2010 issue of the New Statesman, The cult of the generals

Martin O’Neill
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How nostalgic literature became an agent in American racism

From To Kill a Mockingbird to Gone With The Wind, literary mythmaking has long veiled the ugly truth of the American South.

Alongside this summer’s debate over the meanings of the Confederate flag, sparked by the Charleston shootings, another story about the history of American racism flared up. Harper Lee’s Go Set a Watchman, an early draft of To Kill a Mockingbird, revealed further discomfiting truths, this time about the background to one of the nation’s most beloved fictional standard-bearers for racial equality.

In Watchman, Atticus Finch is discovered, twenty years after the action of Mockingbird, fighting against desegregation during the civil rights era. The shock readers have felt is akin to finding an early draft of Nineteen Eighty-Four in which Orwell defends surveillance in the name of national security – but stumbling upon a segregationist Atticus Finch should not surprise readers who know their history. In the end, he proves just as problematic a symbol as the Confederate flag, and for exactly the same reasons: both flew in the face of civil rights to defend white prerogative in the South. And both were gradually romanticised through the process of revision, wrapping America in comforting white lies.

Like our euphemistic habit of calling Jim Crow laws “segregation” rather than apartheid, all of this partakes in a time-honoured communal practice of deracination through whitewashing, through popular fictions of innocence such as Mockingbird and ­popular histories such as folk tales about the innocence of the Confederate flag. America keeps willing its own innocence back into being, even as racist ghosts continue to haunt our nation’s dreams of the pastoral South, a society whose fantasy of gentility was purchased at the cost of brutal chattel slavery and its malignant repercussions.

An essential aspect of the history of American racism is also the history of its deliberate mystification. Many Americans continue to accept an idealised view of the antebellum and Jim Crow South, which emerged as part of a national romance known as the Lost Cause, a legend that turned terrorism into a lullaby. In the aftermath of the South’s crushing defeat in the civil war, southerners began trying to reclaim what they had lost – namely, an old social order of unquestioned racial and economic hierarchies. They told stories idealising the nobility of their cause against the so-called War of Northern Aggression, in which northerners had invaded the peaceful South out of a combination of greed, arrogance, ignorance and spite. Gentle southerners heroically rallied to protect their way of life, with loyal slaves cheering them all the way. This Edenic dream of a lost agrarian paradise, in which virtuous aristocrats and hard-working farmers coexisted peacefully with devoted slaves, pre-dated the war: merging with Jeffersonian ideals of the yeoman farmer, it formed the earliest propagandistic defences of slavery. One of the most powerful broadsides against this spurious fantasy was launched in 1852 by Harriet Beecher Stowe, a north-eastern preacher’s daughter who had lived in border states and seen what really happened to ­fugitive slaves. The South responded to Uncle Tom’s Cabin with a furious denunciation of Stowe’s knowledge and motives, insisting on the benevolence of their “peculiar institution” – an especially sordid ­euphemism that recast plantation slavery as an endearing regional quirk.

Once institutional slavery was irrevocably destroyed, nostalgia prevailed, and southerners began producing novels, ­poems and songs romanticising the lost, halcyon days of the antebellum era. Reaching their apotheosis in Margaret Mitchell’s Gone with the Wind in 1936, and its film version in 1939, they have become known as the “moonlight and magnolia” school of plantation fiction, exemplified by the novels of Thomas Nelson Page, whose books, such as In Ole Virginia (1887) and Red Rock (1898), helped establish the formula: devoted former slaves recount (in dialect) their memories of an idyllic plantation culture wantonly destroyed by militant northern abolitionists and power-crazed federalists. A small band of honourable soldiers fought bravely on the battlefield and lost; the vindictive North installed incompetent or corrupt black people to subjugate the innocent whites; southern scalawags and northern carpetbaggers descended to exploit battle-ravaged towns. Pushed to the limits of forbearance, the Confederate army rose again to defend honour and decency – in the noble form of the Ku Klux Klan.

This thoroughly specious story is familiar to anyone who knows Gone with the Wind, but Mitchell learned it from Page and other novelists, including Mary Johnston and Thomas Dixon, Jr. Dixon wrote a series of books celebrating the rise of the Ku Klux Klan, of which the most notorious remains The Clansman (1905), for the simple reason that ten years later a director named D W Griffith decided to adapt it into a film he called The Birth of a Nation. Released exactly a century ago, it faithfully follows the same narrative blueprint. This was neither an accident nor a coincidence: Griffith was himself the son of a Confederate colonel (memorably known as “Roaring Jake”) and had listened to legends of the Lost Cause at his father’s knee. Reading The Clansman, Griffith said, brought back “all that my father had told me . . . [the film] had all the deep incisive emotionalism of the highest patriotic sentiment . . . I felt driven to tell the story – the truth about the South, touched by its eternal romance which I had learned to know so well.” That “truth” was a story in which the cavalry that rode to the rescue of an imperilled maiden was the KKK, saving her from a fate worse than death at the hands of a white actor in blackface. Griffith had considered hiring black actors for the film, he told an interviewer in 1916, but after “careful weighing of every detail concerned”, none of which he imparted, “the decision was to have no black blood among the principals”, a phrase that says it all by using the so-called one-drop rule to justify racist hiring practices in a film glorifying racism.

The Birth of a Nation was a national phenomenon, becoming the first film ever screened at the White House, in March 1915, for President Woodrow Wilson. Born in Virginia, raised in Georgia and South Carolina, Wilson was the first southern president since before the civil war. He attended Johns Hopkins University with Thomas Dixon, who became a political supporter of his; Wilson also appointed Thomas Nelson Page his US ambassador to Italy. Many members of his administration were equally avowed segregationists; their influence reverberated for generations. Wilson’s history books were quoted verbatim by Griffith in some of The Birth of a Nation’s titles, including: “‘The white men were roused by a mere instinct of self-preservation . . . until at last there had sprung into existence a great Ku Klux Klan, a veritable empire of the South, to protect the Southern country.’ – Woodrow Wilson”.

Wilson does not, however, actually seem to have said the quotation most frequently attributed to him, that The Birth of a Nation was “like writing history with lightning, and my only regret is that it is all so terribly true”. The source for this appears to be Griffith, who told a 1916 movie magazine: “The motion picture can impress upon a people as much of the truth of history in an evening as many months of study will accomplish. As one eminent divine said of [moving] pictures, ‘they teach history by lightning!’” They can teach myths the same way, as Griffith’s film regrettably proved. Northern white audiences cheered it; black audiences wept at the malevolence it celebrated; it prompted riots and racist vigilante mobs in cities across America, and at least one racially motivated murder. Together, Griffith and Dixon worked to elevate a regional legend, designed to save face after a catastrophic loss, into a symbolic myth accepted by much of the nation.

 

***

The Birth of a Nation helped to invent the feature film. It also helped to reinvent the Ku Klux Klan, which enjoyed a huge resurgence following the film’s release, spreading up through the north-east and Midwest. The Klan had a strong presence on Long Island in the 1920s, for example, which is why F Scott Fitzgerald made Tom Buchanan a believer in “scientific racism” in The Great Gatsby, a story set there in 1922, the same year in which Thomas Nelson Page died while working on a novel about the Klan called The Red Riders.

Four years later, a young writer named Margaret Mitchell began her own tale of the Lost Cause, a story that follows the same pattern, to the extent of describing Scarlett O’Hara on its first page in coded terms as a woman with “magnolia-white skin”. Gone with the Wind became a global sensation when it was published in 1936. Mitchell’s ideas of southern history were deeply influenced by Dixon’s racist ideology, although she was considerably more knowledgeable about the workings of plantation slavery than is often recognised. In fact, the great majority of antebellum southern planters (some 75 per cent) were what historians class as yeoman farmers (growing primarily for domestic use, selling only a small portion of their crop), not aristocratic owners of vast plantations. Such farmers often did not even own a slave, but rented or borrowed one or two during harvest time. But although the Hollywood version dispensed entirely with Mitchell’s sense of history (and her considerably more interesting take on historical sexism), it retained her racism, despite the stated intentions of its producers. The film of Gone with the Wind contributed greatly to the gradual displacement and dislocation of the historically specific time and place that had given rise to the antebellum plantation myth. Ben Hecht’s famed floating preface to the 1939 big-screen version labours at making the story timeless, a legend dissipating in the mists of history:

There was a land of Cavaliers and Cotton Fields called the Old South . . . Here in this pretty world Gallantry took its last bow . . . Here was the last ever to be seen of Knights and their Ladies Fair, of Master and of Slave . . . Look for it only in books, for it is no more than a dream remembered. A Civilisation gone with the wind . . .

as history recedes into ellipses.

Yet even this feudalist imagery has a specific history of its own, forming another crucial part of the popular culture of the Lost Cause. It was Mark Twain, whose works remain one of our most powerful literary antidotes to the toxin of moonlight and magnolia, who most famously named its source: the novels of Sir Walter Scott. Scott “did measureless harm”, Twain insisted in his 1883 Life on the Mississippi, “more real and lasting harm, perhaps, than any other individual that ever wrote”. Scott’s bestselling romances filled southerners’ heads with enchanted “dreams and phantoms . . . with the sillinesses and emptinesses, sham grandeurs, sham gauds and sham chivalries of a brainless and worthless long-vanished society”. In fact, Twain concluded acidly, “Sir Walter had so large a hand in making Southern character, as it existed before the war, that he is in great measure responsible for the war.” This is only slightly exaggerated: Scott’s novels were as popular in early-19th-century America as were the films of The Birth of a Nation and Gone with the Wind a century later. It is certainly thanks to the popularity of novels such as Ivanhoe and Waverley that the cult of the “clan” was distorted into the Ku Klux Klan, with its bogus orders and knights. Scott’s novels may even have given rise to antebellum America’s use of the medieval word “minstrel” to describe itinerant blackface musicians; the OED offers no logic for the coinage, but its earliest citation is from 1833, when the mania for Scott’s work in the American South was at its highest. The feudal fantasy of “gallantry”, “cavalier knights” and “ladies fair” is a powerful one, not least, doubtless, because it gives America a sense of a much older past than it has, merging our history with a faux-feudalism in which slaves are rewritten as serfs, bound by devotion to the land and the family they serve.

***

But even as Gone with the Wind was in its ascendancy, another national narrative was slowly gaining traction. Black writers including W E B DuBois, Zora Neale Hurston, Langston Hughes and Richard Wright were vigorously challenging the dominant racist narrative, while white southern writers such as Ellen Glasgow and, especially, William Faulkner, also began debunking and complicating this facile tradition. Faulkner took from the Lost Cause legends that he, too, had heard as a child in Mississippi, some much darker truths about memory, history, distortion, perspective. Faulkner’s Absalom, Absalom! is probably his greatest meditation on the processes of myth-making and how they intersect with national history, writing a Homeric epic of America. Absalom came out in 1936, the same year as Gone with the Wind, and in many ways can be read as a corrective to it, shaking off the dreams of moonlight and magnolia to show the Gothic nightmare underneath.

Just twenty years later, a young woman who had been born in the year Margaret Mitchell began to write Gone with the Wind, named Nelle Harper Lee, produced her own version of the story of America’s struggles with its racist past. To Kill a Mockingbird takes place between 1933 and 1935 (just before Gone with the Wind was published), during which time Atticus Finch tells his young daughter, Scout, that the Ku Klux Klan was “a political organisation” that existed “way back about 1920” but “couldn’t find anybody to scare”, relegating the Klan to ancient history, instead of a mere dozen years before Lee’s story.

Nor is it any coincidence that Mrs Dubose, the racist old lady addicted to morphine, forces Jem Finch to read Walter Scott’s Ivanhoe to her as a punishment: there are more encoded traces of Lost Cause history in Mockingbird than many readers have recognised. Mockingbird resists this history on balance, but it also participates in collective myth-making, most significantly in its depiction of lynching as a furtive, isolated practice in the dead of night. It would be pretty to think so. In Lee’s version, a lynch mob is dispersed by the innocent prattle of the child Scout, who unwittingly reminds its members of their basic “decency”. In fact, by the 1920s, lynching in the South was often publicly marketed as a tourist attraction, in a practice historians now refer to as “spectacle lynching”, which took place in the cold light of day, with plenty of advance warning so people could travel from outlying areas for the fun. There were billboards and advertisements letting tourists know when and where the lynching would take place; families brought children and had picnics; postcards were sold and sent (horrific images of which are easy to find online). Burning at the stake was common; victims were often tortured or castrated, or had limbs amputated, or were otherwise mutilated first; pregnant women were burned to death in front of popcorn-crunching crowds. This was so well established that in 1922 the National Association for the Advancement of Colored People took out a full-page advertisement in the New York Times with the headline “The shame of America”, demanding, in underscored outrage: “Do you know that the United States is the Only Land on Earth where human beings are BURNED AT THE STAKE?” It went on to outline a few salient facts: between 1889 and 1922, 3,436 people had been lynched in America. Of these, “only 571, or less than 17 per cent, were even accused of rape”. Eighty-three of the victims were women, which further undermined the myth that rape led to lynching.

Lee’s picture of lynching in To Kill a Mockingbird is not merely sentimental, but an active falsification: it participates in a wider American story seeking to minimise, even exonerate, the reactions of white southerners to African Americans’ claims to equal rights under the law. It functions as a covert apology, suggesting that lynching was anomalous, perpetrated by well-meaning men who could be reminded of common humanity – when, in fact, members of lynch mobs in the 1920s posed for photographs in front of their victims. But Atticus Finch stands up to racism, and Scout persuades Cunningham and the rest of the lynch mob to go home. This is why it matters that an earlier version of Atticus advocated segregation: it shows that the process of revising Mockingbird was a process of idealisation, promising readers that systemic racism could be solved by the compassionate actions of noble individuals.

This is the consolatory promise of individualism, that the nation can be redeemed collectively by isolated instances of benign action. The romance of individualism has always been how America manages injustice and unrest, how it pastes over irre­concilable differences and squares imaginary circles: the heroic figure who temporarily, occasionally, overcomes all structural and social impediments is taken as communal evidence that these obstructions don’t exist, or aren’t very obstructive. It is, of course, a deeply Christian idea: the redemptive individual who expiates collective sin, the original lost cause, sacrificed for the good of all.

The doctrine of individualism is further tangled up in yet another exculpatory logic: that of states’ rights. The remnants of this rationale also surface at the end of Go Set a Watchman: Atticus Finch argues that segregation is really a matter of states’ rights, and Jean Louise, his now adult daughter, though nauseated at his racism, accepts the legitimacy of that argument. What right has the federal government to insist that the people within its borders adhere to its laws, or even to the principles (truth, justice, equality, democracy) they purport to uphold? Some might conclude from reading this passage that, like paradise, causes are invented to be lost. The idea of the Lost Cause redeems a squalid past; it is an act of purely revisionist history, disavowing the notion that slavery or racism had anything to do with the civil war and its vicious, lingering aftermath. Glorifying that history as “gallantry” is not merely dishonest: it is ruinous.

Dismissing all of this as ancient history, or mere fiction, is not the solution, it is part of the problem. As Faulkner famously observed and this brief account shows, the past isn’t dead; it isn’t even past. The word “legend” comes from the Latin legere, to read. Many insist that the stories we consume endlessly are harmless entertainment, but that, too, is part of the mystification, pretending that these legends did not arise precisely to veil an ugly truth with moonlight, to smother with the scent of magnolia the stink of old, decomposing lies.

Now listen to Sarah Churchwell discussing the fiction of the American South with the NS's Tom Gatti:

An American in London, Sarah Churchwell is an author and professor of American literature. Her latest book, “Careless People: Murder, Mayhem and the Invention of the Great Gatsby”, is published by Virago.

This article first appeared in the 20 August 2015 issue of the New Statesman, Corbyn wars