Covid-19 pandemic is not a ‘black swan’ author says; Governments should have been prepared
Nassim Nicholas Taleb is “irritated,” he told Bloomberg Television on March 31, whenever the coronavirus pandemic is referred to as a “black swan,” the term he coined for an unpredictable, rare, catastrophic event, in his best-selling 2007 book of that title.
“The Black Swan” was meant to explain why, in a networked world, we need to change business practices and social norms—not, as he recently told me, to provide “a cliché for any bad thing that surprises us.” Besides, the pandemic was wholly predictable—he, like Bill Gates, Laurie Garrett, and others, had predicted it—a white swan if ever there was one. “We issued our warning that, effectively, you should kill it in the egg,” Taleb told Bloomberg. Governments “did not want to spend pennies in January; now they are going to spend trillions.”
The warning that he referred to appeared in a January 26th paper that he co-authored with Joseph Norman and Yaneer Bar-Yam, when the virus was still mainly confined to China. The paper cautions that, owing to “increased connectivity,” the spread will be “nonlinear”—two key contributors to Taleb’s anxiety. For statisticians, “nonlinearity” describes events very much like a pandemic: an output disproportionate to known inputs (the structure and growth of pathogens, say), owing to both unknown and unknowable inputs (their incubation periods in humans, or random mutations), or eccentric interaction among various inputs (wet markets and airplane travel), or exponential growth (from networked human contact), or all three.
“These are ruin problems,” the paper states, exposure to which “leads to a certain eventual extinction.” The authors call for “drastically pruning contact networks,” and other measures that we now associate with sheltering in place and social distancing. “Decision-makers must act swiftly,” the authors conclude, “and avoid the fallacy that to have an appropriate respect for uncertainty in the face of possible irreversible catastrophe amounts to ‘paranoia.’ ” (“Had we used masks then”—in late January—“we could have saved ourselves the stimulus,” Taleb told me.)
Yet, for anyone who knows his work, Taleb’s irritation may seem a little forced. His profession, he says, is “probability.” But his vocation is showing how the unpredictable is increasingly probable. If he was right about the spread of this pandemic it’s because he has been so alert to the dangers of connectivity and nonlinearity more generally, to pandemics and other chance calamities for which COVID-19 is a storm signal. “I keep getting asked for a list of the next four black swans,” Taleb told me, and that misses his point entirely. In a way, focussing on his January warning distracts us from his main aim, which is building political structures so that societies will be better able to cope with mounting, random events.
Indeed, if Taleb is chronically irritated, it is by those economists, officials, journalists, and executives—the “naïve empiricists”—who think that our tomorrows are likely to be pretty much like our yesterdays. He explained in a conversation that these are the people who, consulting bell curves, focus on their bulging centers, and disregard potentially fatal “fat tails”—events that seem “statistically remote” but “contribute most to outcomes,” by precipitating chain reactions, say. (Last week, Dr. Phil told Fox’s Laura Ingraham that we should open up the country again, noting, wrongly, that “three hundred and sixty thousand people die each year “from swimming pools — but we don’t shut the country down for that.” In response, Taleb tweeted, “Drowning in swimming pools is extremely contagious and multiplicative.”) Naïve empiricists plant us, he argued in “The Black Swan,” in “Mediocristan.” We actually live in “Extremistan.”
Taleb, who is sixty-one, came by this impatience honestly. As a young man, he lived through Lebanon’s civil war, which was precipitated by Palestinian militias escaping a Jordanian crackdown, in 1971, and led to bloody clashes between Maronite Christians and Sunni Muslims, drawing in Shiites, Druze, and the Syrians as well. The conflict lasted fifteen years and left some ninety thousand people dead. “These events were unexplainable, but intelligent people thought they were capable of providing convincing explanations for them—after the fact,” Taleb writes in “The Black Swan.” “The more intelligent the person, the better sounding the explanation.” But how could anyone have anticipated “that people who seemed a model of tolerance could become the purest of barbarians overnight?” Given the prior cruelties of the twentieth century, the question may sound ingenuous, but Taleb experienced sudden violence firsthand. He grew fascinated, and outraged, by extrapolations from an illusory normal—the evil of banality. “I later saw the exact same illusion of understanding in business success and the financial markets,” he writes.
“Later” began in 1983, when, after university in Paris, and a Wharton M.B.A., Taleb became an options trader—“my core identity,” he says. Over the next twelve years, he conducted two hundred thousand trades, and examined seventy thousand risk-management reports. Along the way, he developed an investment strategy that entailed exposure to regular, small losses, while positioning him to benefit from irregular, massive gains—something like a venture capitalist. He explored, especially, scenarios for derivatives: asset bundles where fat tails—price volatilities, say—can either enrich or impoverish traders, and do so exponentially when they increase the scale of the movement.
These were the years, moreover, when, following Japan, large U.S. manufacturing companies were converting to “just-in-time” production, which involved integrating and synchronizing supply-chains, and forgoing stockpiles of necessary components in favor of acquiring them on an as-needed basis, often relying on single, authorized suppliers. The idea was that lowering inventory would reduce costs. But Taleb, extrapolating from trading risks, believed that “managing without buffers was irresponsible,” because “fat-tail events” can never be completely avoided. As the Harvard Business Review reported this month, Chinese suppliers shut down by the pandemic have stymied the production capabilities of a majority of the companies that depend on them.
The coming of global information networks deepened Taleb’s concern. He reserved a special impatience for economists who saw these networks as stabilizing—who thought that the average thought or action, derived from an ever-widening group, would produce an increasingly tolerable standard—and who believed that crowds had wisdom, and bigger crowds more wisdom. Thus networked, institutional buyers and sellers were supposed to produce more rational markets, a supposition that seemed to justify the deregulation of derivatives, in 2000, which helped accelerate the crash of 2008.
As Taleb told me, “The great danger has always been too much connectivity.” Proliferating global networks, both physical and virtual, inevitably incorporate more fat-tail risks into a more interdependent and “fragile” system: not only risks such as pathogens but also computer viruses, or the hacking of information networks, or reckless budgetary management by financial institutions or state governments, or spectacular acts of terror. Any negative event along these lines can create a rolling, widening collapse—a true black swan—in the same way that the failure of a single transformer can collapse an electricity grid.
COVID-19 has initiated ordinary citizens into the esoteric “mayhem” that Taleb’s writings portend. Who knows what will change for countries when the pandemic ends? What we do know, Taleb says, is what cannot remain the same. He is “too much a cosmopolitan” to want global networks undone, even if they could be. But he does want the institutional equivalent of “circuit breakers, fail-safe protocols, and backup systems,” many of which he summarizes in his fourth, and favorite, book, “Antifragile,” published in 2012. For countries, he envisions political and economic principles that amount to an analogue of his investment strategy: government officials and corporate executives accepting what may seem like too-small gains from their investment dollars, while protecting themselves from catastrophic loss.
Anyone who has read the Federalist Papers can see what he’s getting at. The “separation of powers” is hardly the most efficient form of government; getting something done entails a complex, time-consuming process of building consensus among distributed centers of authority. But James Madison understood that tyranny—however distant it was from the minds of likely Presidents in his own generation—is so calamitous to a republic, and so incipient in the human condition, that it must be structurally mitigated. For Taleb, an antifragile country would encourage the distribution of power among smaller, more local, experimental, and self-sufficient entities—in short, build a system that could survive random stresses, rather than break under any particular one. (His word for this beneficial distribution is “fractal.”)
We should discourage the concentration of power in big corporations, “including a severe restriction of lobbying,” Taleb told me. “When one per cent of the people have fifty per cent of the income, that is a fat tail.” Companies shouldn’t be able to make money from monopoly power, “from rent-seeking”—using that power not to build something but to extract an ever-larger part of the surplus. There should be an expansion of the powers of state and even county governments, where there is “bottom-up” control and accountability. This could incubate new businesses and foster new education methods that emphasize “action learning and apprenticeship” over purely academic certification. He thinks that “we should have a national Entrepreneurship Day.”
But Taleb doesn’t believe that the government should abandon citizens buffeted by events they can’t possibly anticipate or control. (He dedicated his book “Skin in the Game,” published in 2018, to Ron Paul and Ralph Nader.) “The state,” he told me, “should not smooth out your life, like a Lebanese mother, but should be there for intervention in negative times, like a rich Lebanese uncle.” Right now, for example, the government should, indeed, be sending out checks to unemployed and gig workers. (“You don’t bail out companies, you bail out individuals.”) He would also consider a guaranteed basic income, much as Andrew Yang, whom he admires, has advocated. Crucially, the government should be an insurer of health care, though Taleb prefers not a centrally run Medicare-for-all system but one such as Canada’s, which is controlled by the the provinces. And, like responsible supply-chain managers, the federal government should create buffers against public-health disasters: “If it can spend trillions stockpiling nuclear weapons, it ought to spend tens of billions stockpiling ventilators and testing kits.”
At the same time, Taleb adamantly opposes the state taking on staggering debt. He thinks, rather, that the rich should be taxed as disproportionately as necessary, “though as locally as possible.” The key is “to build on the good days,” when the economy is growing, and reduce the debt, which he calls “intergenerational dispossession.” The government should then encourage an eclectic array of management norms: drawing up political borders, even down to the level of towns, which can, in an epidemiological emergency, be closed; having banks and corporations hold larger cash reserves, so that they can be more independent of market volatility; and making sure that manufacturing, transportation, information, and health-care systems have redundant storage and processing components. (“That’s why nature gave us two kidneys.”) Taleb is especially keen to inhibit “moral hazard,” such as that of bankers who get rich by betting, and losing, other people’s money. “In the Hammurabi Code, if a house falls in and kills you, the architect is put to death,” he told me. Correspondingly, any company or bank that gets a bailout should expect its executives to be fired, and its shareholders diluted. “If the state helps you, then taxpayers own you.”
Some of Taleb’s principles seem little more than thought experiments, or fit uneasily with others. How does one tax more locally, or close a town border? If taxpayers own corporate equities, does this mean that companies might be nationalized, broken up, or severely regulated? But asking Taleb to describe antifragility to its end is a little like asking Thomas Hobbes to nail down sovereignty. The more important challenge is to grasp the peril for which political solutions must be designed or improvised; society cannot endure with complacent conceptions of how things work. “It would seem most efficient to drive home at two hundred miles an hour,” he put it to me.“But odds are you’d never get there.”
Credit: The New Yorker