Even as I read The Black Swan for the first time, I've already read it. I've listened to several in-depth interviews with Nicholas Nassim Taleb since the book came out in 2007, and he's had a recent resurgence in attention as the credit crisis fits his titular metaphor aptly. Despite my familiarity with the main thesis I'm still enjoying the book, just as one might still enjoy slurping down the spiced milk after finishing his Cinnamon Toast Crunch. Indeed, I've not come across another book that so completely elucidates (in a far more sophisticated and erudite manner, granted), how I've come to think about things generally. I'm 2/3 of the way through the book and have come across many passages tempting me to blog, but the following will probably be the only one I excerpt (you, yes YOU, should really just read the book). In it, Taleb describes the limitation of making predictions in a complex system by using an example computed by a mathematician named Michael Berry:
If you know a set of basic parameters concerning [a billiard] ball at rest, can compute the resistance of the table (quite elementary), and can gauge the strength of the impact, then it is rather easy to predict what would happen at the first hit. The second impact becomes more complicated, but possible; you need to be more careful about your knowledge of the initial states, and more precision is called for. The problem is that to correctly compute the ninth impact, you need to take into account the gravitational pull of someone standing next to the table (modestly, Berry’s computations use a weight of less than 150 pounds). And to compute the fifty-sixth impact, every single elementary particle in the universe needs to be present in your assumptions! An electron at the edge of the universe, separated from us by 10 billion light-years, must figure in the calculations, since it exerts a meaningful effect on the outcome. Now, consider the additional burden of having to incorporate predictions about where these variables will be in the future. Forecasting the motion of a billiard ball on a pool table requires knowledge of the dynamics of the entire universe, down to every single atom!
In a dynamical system, where you are considering more than a ball on its own, where trajectories in a way depend on one another, the ability to project into the future is not just reduced, but is subjected to fundamental limitation. (p. 178)
Austrian economists like Hayek used similar reasoning in the early 20th century to critique Soviet-style central planning. One oft-forgotten miracle of prices is that they provide a basis of comparison for completely different things. If I decide to use my $100 for golf lessons, I know exactly what I'm giving up for them: $100 worth of Braeburn apples, Suzie's babysitting, Tide laundry detergent, Clive Owen's acting, the neighbor's stash of dope, the additional interest I would earn in my Citibank savings account, a lecture by Al Gore, Hamburger Kunsthalle tickets, the copyright on Beatles sound recordings, taxi rides from JFK to Manhattan, common stock in a Mumbai start-up, etc. In other words, prices tell me about relative values. In the absence of a price system, the Austrians argued, it would be impossible to ration resources effectively, and even if prices were used, no central planner could ever hope to set them correctly because prices reflect an incomprehensible amount of dispersed knowledge particular to time and place. Just think about the task Mr. Planner would have to face:
- Set the price of every resource (including, for example, the time of every person in the economy)
- Make sure each price is correct relative to every other price both now and in the future.
- Repeat steps 1-2 every second as conditions change.
Could we, like Camus, imagine Mr. Planner happy in his Sisyphean task? And to extend it to Taleb's point, do we really think anyone could make a certain and accurate forecast of where prices will be in a decade? A year? A day? For that matter, are my powers of clairvoyance to be trusted?
Happily I can report they are, for after reading the above passage and forming this post in my head I turned the page to find a brief section discussing Hayek; Roma Downey has my undying gratitude.