If nothing else, paradox provokes a deeper consideration of the related issues. Or at least it would if the modern mind was open to such forms of enquiry. Sadly we’ve become so trammelled by simplistic psuedo-rationality that even the mildest spurs to imagination are rejected as illogical. 

Here’s something else that might not make sense: my book of the year is by the aforementioned Mr. Taleb, but it’s not the book he published this year (the brilliant Skin in the Game: Hidden Asymmetries in Daily life), but Antifragile: Things that Benefit from Disorder, which came out in 2013. The reason I’ve chosen the older book is not just because I love it and keep returning to it, but because of one of the key ideas featured in Antifragile: the Lindy effect.

Because we’re human we associate age with impending mortality. But for things not subject to a process of inevitable decay, the opposite tends to be true: the longer something has been around already, the longer it’s likely to survive into the future. Taleb calls it “‘aging’ in reverse.”

Books are a great example. The longer that a book has been in print, the greater the chance of it still being in print for years or decades to come. One year in print proves nothing; ten years shows staying power; a hundred and it’s probably a classic; and if it’s older than printing itself, then it’s a cultural cornerstone and quite possibly sacred.

This is why book reviews should be of older books – not the very oldest, because they speak for themselves, but those whose relevance is sufficiently enduring to require explanation. Furthermore, if a reviewer is re-reading and thinking about a book years after the first read, he or she might just have something worth saying about it.

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Ten years after the crash, we should still be terrified

By Peter Franklin

To my mind, Taleb is the greatest living UnHerdian – no contemporary thinker has done more to challenge the herd-like thinking of the economic, political and cultural elites. Taleb’s best-known work is The Black Swan, which argues that people are very bad at foreseeing extremely unlikely, but massively consequential, events. Because these ‘Black Swans’ are bound to happen sooner or later, it is the improbable and unpredictable that shapes human history, not the commonplace events that can be predicted.

What distinguishes modernity from the rest of history, however, is that because we now have the technical ability to predict the commonplace with considerable accuracy (e.g. short-term weather forecasts), we’re deluded into thinking that we can also foresee the events that really matter. Hence a banking system organised around sophisticated risk models that supposedly had us prepared for the worst that could happen.

Taleb was among the very few financial experts who recognised that the models were fundamentally flawed – and said so long before the credit crunch and the global banking crisis. Furthermore, as a trader, he put his money where his mouth was – betting against the prevailing wisdom of the financial markets.

He’s never said just how much money he made in the process, but it was enough for him to give up the day job and devote his life to philosophical enquiry. Antifragile is the result of those studies, but it isn’t a conventional work of philosophy – not in the modern academic sense, anyway. Thankfully, it owes a great more to the classical tradition, in that it is accessible, eclectic and useful.

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Why you should read more history

By Tom Chivers

In fact, more than useful, it is indispensable. While his earlier books explained why extreme events are so hard to predict, Antifragile is about how to live in this fundamentally unpredictable world.

This is where his concept of ‘antifragility’ comes in. You might think that the opposite of ‘fragility’ is ‘robustness’, but things that are robust are merely immune to the harm that disorder does to things which are fragile. The complete opposite of fragility would apply to things that actually gain from disorder.

There is no word for this property in the English language, which is why Taleb has invented one of his own. He gives various practical examples of antifragility – one of the most important of which lies in the difference between mechanical and living systems. The latter are antifragile not only because they can repair themselves, but because in the process of doing so they often get stronger.

Think about the impact of exercise on the human body – in the short-term, individual muscle fibres break under the strain (hence the soreness that results from a workout), but as the muscles repair themselves the fibres multiply, increasing muscle mass and power.

Indeed, to avoid the stresses and strains of physical effort altogether is very bad for our health. It weakens the body and invites the Black Swan of catastrophic illness – an extreme shock from which the body might never recover.

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The writer whose books simply have to be shared

By Polly MacKenzie

Much the same applies to the economy. In the years prior to the credit crunch, governments used cheap money policies to smooth out the business cycle – “no more boom and bust” as Gordon Brown once said. For a while it worked, growth was steady and recessions were avoided, but only at the cost of running up debts that hugely amplified the pain when the crunch finally came.

In a warning that is sadly just as relevant today, Taleb argues powerfully and persistently against the distorting effect of debt – that great attractor of Black Swans. He also argues that the normal ups-and-downs of the business cycle are in any case to be welcomed, not avoided. In order to be antifragile it is necessary that some parts of the economy are allowed to fail so that the whole can get stronger.

Taleb makes the appropriate nods to those who have made this point before him – in particular, Joseph Schumpeter and his idea of creative destruction. However, Taleb brings something new to the table: he takes a number of established ideas that will be well-understood and appreciated by conservatives (the real kind, not those lobbying on behalf of crony capitalism) and systematically relates them to his insight on the true nature of risk and uncertainty.

Suggested Reading

The West is one crash from chaos

By Henry Olsen

As he repeatedly reminds us, it is the extreme probabilities – the Black Swan events – that matter. Simplistic models of risk concentrate on the most likely scenarios (i.e. the highest point on a bell curve of possible outcomes). Supposedly more sophisticated models take account of some of the more extreme possibilities – say, the one-in-a-hundred chances. Taleb, however, urges us to take into account the full range of possibilities contained within the ‘tails’ of the bell curve.

For some things, the tails don’t extend very far – for instance, the possible range of human life expectancies is limited on one side of the graph to zero years, and on the other to roughly 120 years. But in other cases – such as household income – at least one side of the curve is practically unlimited, extending far beyond the commonplace. Statisticians calls these ‘fat tails’ because they encompass such a wide spread of outcomes.

Because these fat tails tend to occur on only one side of the curve, the nature of risk in the real world is highly asymmetric – i.e. the worst that could happen is much more significant than the best that could happen and vice versa. For instance, exceeding the speed limit may get you to your destination a bit faster (modest upside) or it might get you killed (extreme downside). On the other hand, a canny investment in an exciting new start-up might see you lose an affordable slice of your savings (modest downside) or get you an early stake in the next Google (extreme upside).

Conventional policy making tends to focus on the most likely outcomes in any given scenario, yet it is the extreme events which change the world. Therefore our top priority should be to minimise our exposure to the extreme downsides (the negative Black Swans) and maximise our exposure to the extreme upsides (the positive Black Swans).

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If you don't 'get' statistics it's just as bad as not 'getting' Shakespeare

By Graeme Archer

The key to such a strategy is what Taleb calls “optionality”. In investment terms, an option gives you the right, but not the obligation, to pursue an opportunity. It therefore allows you to cut your losses if things don’t work out or maximise your gain if they do. Furthermore, because positive Black Swans (like their negative brethren) are uncommon and you can’t tell in advance where they’ll appear, you need to have the widest possible range of options.

Policy making that maximises optionality will therefore favour the small over the large, diversity over uniformity and localisation over centralisation. Of course, many other thinkers have come to similar conclusions. For instance, in a famous paper entitled ‘The Use of Knowledge in Society’, Friedrich Hayek argued that information is widely dispersed and thus can only be made use of though the free interaction of local actors as opposed to a single, central authority.

But Taleb shows us there’s more going on than local knowledge. While knowledge of the commonplace may well be local in nature, advance knowledge of the extreme events that make the most impact isn’t available anywhere. The strongest argument for decentralised, diversified decision-making is that it allows us to make lots of little investments in the hope that at least one of them will pay off big-time. In other words, localism isn’t just about getting smart, it’s also about getting lucky (and not leaving everything exposed to any particular instance of bad luck).

Looking at the great policy disasters of recent times, it’s telling that the approach taken by policy makers is diametrically opposed to Taleb’s ideas. Over and over again, we see governments betting the farm on projects with limited optionality and where the worst that can happen overshadows the best that can happen.

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The great British cock-up: ten times the state got it catastrophically wrong

By Peter Franklin

The Eurozone, for instance, represented a single enormous investment in a scheme with a modest upside (reduced transaction costs) and an extreme downside (the ongoing Eurozone crisis). The deregulation of the banks was another example (profits for the few versus bail out costs for the many), as was the deliberate inflation of the property market (short-lived boost versus long-term damage to growth and housebuilding). Looking to the future one has to question mega-projects like HS2 (modest improvement to travel times versus spiralling costs) or the construction of nuclear power stations (ask the Japanese).

As this is a book review, I should say something about its style as well as its substance. So, a word of warning: the former will not be to everyone’s taste.

For a start you never quite know what’s coming next. The book is a patchwork of philosophy, economics, mathematics, lifestyle advice and autobiography. Alighting from one subject to the next, Taleb also switches between different modes of explanation – from graph to anecdote to polemic. There are snatches of history, literary allusions and fictional dialogues. In short it’s a riot (though not a mess). If you prefer the sort of book that behaves itself, proceeding from point to point in a straight line then Antifragile is not for you.

The book also places some demands on the reader. Not because of its language, which is far from turgid, nor because of its grounding in statistics and probability (all but the simplest maths is confined to a technical appendix). Rather, it is the structure of the argument that requires the reader’s full attention. By approaching his points from various tangents and angles, Taleb is showing that they apply not just to the world of finance but to other domains too. Moreover, by making the reader work, the book embodies its own advice. Physical effort strengthens the body and mental effort strengthens the mind.

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How (some) economists finally caught up with financial reality

By Peter Franklin

Finally, the reader needs to get on with the author as a person. For all of its patchwork quality, every part of the book is stamped with Taleb’s character – and he is not a man given to false modesty or to suffering fools (and knaves) gladly. Readers may or may not care for this sort of thing, but for me it was a breath of fresh air.

Those who were morally, intellectually and directly responsible for the economic calamities of the 2000s have mostly got away with it. Many are still in post – whether in government, business or academia – others enjoy comfortable retirements.  So why shouldn’t those who were right about the banks and the Eurozone and all the other disasters say ‘I told you so’? They have every right to their anger.

For the most part, however, this is not an angry book. Rather it is a demolition of the false certainties that still bedevil the modern world.

Antifragility is neither Left-wing nor Right-wing in its politics, but is an important addition to – indeed a development of – conservative thought. Conservative philosophers have long recognised the limits of human rationality, but their suggested response to this reality has tended towards the passive, bordering on the defeatist.

Taleb’s great achievement is to bring a more active principle into play. Fully aware of the uncertainties of human existence, he nevertheless shows us that we can position ourselves against them – shielding ourselves against the downside, but open to the upside.

Some ardent defenders of capitalism rail against the “stupidity” of voting for politicians who advocate economic policies that have been tried and found wanting. They see as irrational the rejection of a model that has transformed the standard of living of billions of people across the globe. But they are the fools, because in ignoring the lived reality of millions of people in advanced capitalist economies, their attitude will spell the downfall of the very model they seek to protect.

For last summer’s poll findings are far from irrational. Living standards have been stagnating, along with wages, for decades. Job security has been eroding. Social mobility stalling. Inequality growing. These facts are irrefutable – in the UK and America, the rich are indeed getting richer as everyone else gets relatively poorer. While the great engine of prosperity may be running smoothly for developing nations, in the West it’s barely stuttering.

But if the first step in solving a problem is recognising there is one, then maybe we’re about to set off on the road to recovery. For while the extremes of Left and Right may not understand the value of reforming capitalism, there is a growing consensus among those in the middle that a reboot is needed. That capitalism is the right model, just not in its current – corrupted – form.

This was the subject of my podcast discussion with Michael Jacobs, co-editor of the 2016 book Rethinking capitalism: economics and policy for sustainable and inclusive growth.

Rethinking capitalism is a critique of economic orthodoxies – exposing, via a series of essays by eminent academics and economists, the flawed thinking that has led to our current broken model. As Jacobs and Mariana Mazzucato point out in their introduction:

“None of the key problems which Western capitalism has experienced over recent decades – weak growth and financial instability, declining investment and financialisation, the stagnation of living standards and rising inequality, dangerous environmental risk – is explained by [orthodox theories].”

It is largely written from a left-of-centre perspective, but as someone coming from the right of centre, I found much of the analysis compelling. Here are four examples of the “orthodoxies” the authors unpick.

1. Markets alone deliver economic equilibrium, with perfect competition driving productivity.
   In reality, markets operate within a set of legal rules, cultural expectations and institutional structures. As William Lazonick writes in his chapter, that’s why there are different models of capitalism around the world, and different types of firms. Markets are not operating in a vacuum.
2. The role of the State is to correct market failure or get out of the way.
   In fact, the State sets the regulatory framework that shapes the capitalist model, but more than that it plays a fundamental role in driving growth through innovation. Mariana Mazzucato points out that the rate of innovation has declined over past decades, as the State has retreated, and the private sector has focused more on the ‘D’ in R&D. This is a problem for the long-term economic health of capitalist nations – history shows that some of the most ground-breaking innovations have been driven by the State, like the internet and nanotechnology.
3. Maximising shareholder value creates the right managerial incentives for a profitable company.
   Wrong – this narrow obsession with shareholder returns has helped embed short-termism in corporate culture, reduced sustainable growth and penalised long-term investors. In his essay, Andrew Haldane quantifies the “capital market failure” that means publicly held firms are excessively discounting long-term opportunities. And it is this managerial philosophy that has helped drive sky-high executive pay and reduced investment in the sort of productivity-boosting innovations that deliver broader prosperity. 
4. Trickle-down economics raises all boats and differences in remuneration are down to the marginal productivity of different participants in the production process.
   Stagnating living standards despite the huge injection of money via quantative easing disproves the trickle-down theory, if anything it’s proved to be trickle-up, inflating the assets of the already wealthy – as L. Randall Wray and Yeva Nersisyan argue. And Joseph Stiglitz exposes the broken relationship between productivity and prosperity: rent-seeking, not just deserts, explains soaring executive pay.

We can add to that the oligopolisation of many markets – banking, energy, telecoms, housing – and the far too cosy relationship between politics and big business, lubricated by billions of lobbying cash. The crisis in capitalism has escalated to the point that more than three quarters of Britons and Americans believe the economy in their country is “rigged to advantage the rich and powerful” – and they’re right.

At the end of the podcast, Michael and I discussed the building consensus on Left and Right that an urgent “rethink” of capitalism is needed. Michael believes we’re facing a moment of change as powerful as that which ushered in Keynesianism in the post-war era, and neoliberalism in the 1980s. I agree. The defenders of capitalism who dismiss the need for reform should look at that polling and consider the alternative.

Click below to listen to the UnHerd in-depth podcast with Michael Jacobs.

https://soundcloud.com/user-970100804/rethinking-capitalism

First came the uncompromising manifesto, sharply critical of corporate excess and promising “an examination of the use of share buybacks, with a view to ensuring these cannot be used artificially to hit performance targets and inflate executive pay”.

Then came the clear warning to those running big companies that business as they knew was coming to end:

“Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.[1. .’A Sense of Purpose‘, Jan 2018]”

Those who do not “will ultimately lose the license to operate from key stakeholders”.

No wonder some business leaders are quietly terrified by the revivalist movement among left-wing populists that includes Jeremy Corbyn, Bernie Sanders and Jean-Luc Mélenchon.

Except those words don’t come from the Left. The manifesto was that of Theresa May’s Conservative Party. And the warning to CEOs came from Larry Fink of Blackrock, the biggest investor in the world.

When criticism of corporate short-termism and self-interest comes from such sources, it seems fair to conclude that something is up.

Meanwhile, some things are down. Business investment, for example. Companies are spending less of their money on the technology, equipment and training that will, over time, make their operations and – crucially – their people more productive.

At the Social Market Foundation, we recently calculated that the cash reserves of UK non-financial corporations stood at £660 billion in 2016[2. .’Concentration, not competition: the state of UK consumer markets‘, SMF, 17 October, 2017].

Business investment that year was around £178 billion, or 28% of that cash pile. In 2000, businesses invested the equivalent of 58 % of their cash reserves.

Even allowing for fluctuations in the business and political cycle and changes in monetary policy over that period, companies are investing less. We’re nowhere near unravelling the puzzle of dismal post-crash productivity growth in developed economies, but it is extremely hard to imagine that corporate investment decisions have no part in it.

Dismal productivity, of course, means slow, low or even negative wage growth, which in turn means that when the Corbyns and Sanders and yes, Trumps of this world tell workers in traditional industries that they’re being screwed by a rigged system, they probably have a point.

In other words, the corporate titans who wring their hands about the rise of anti-capitalist populism might stop and ponder whether their own failure to plan – and invest – for the long-term might just have helped shake the pro-business, open-market political settlement they’d come to take for granted.

At the same time as companies have been investing less, they are handing more of their cash to shareholders. Dividend payments by UK companies were almost £95 billion in 2017, up 10% on the previous year, and the latest in a string of record highs.

On a narrow reading of corporate duties and responsibilities, dividends are reasonably defensible: it is, after all, the shareholders’ money.

Much harder to defend are the share buybacks mentioned in that Conservative manifesto – surely the first time any major party referred to a relatively obscure and technical bit of financial engineering.

Buybacks, where companies use their own cash to buy their own shares on the open market, are economically inexplicable. But if you’re an executive whose remuneration package is linked to earnings per share, they’re good business, because by reducing the number of shares in circulation you bump up EPS and make yourself rich(er).

And they’re on the rise, as Charlotte Pickles explained here last month with devastating precision. Recent research from Deloitte nicely charts the trends in buybacks and investment.

What’s the answer? A lot of people talk about reporting rules, the fiduciary hoops that CEOs must jump through to keep markets and investors informed and content. Chasing good numbers for quarterly reports prevents executives taking a longer view, it is said.

After John Kay’s characteristically incisive report for the Coalition Government in 2012[3. ‘Kay review of UK equity markets‘, July 2012], the Financial Conduct Authority (FCA) stopped mandatory quarterly reporting in 2014.

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Corporate buyback culture is financial engineering not value creation

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UK companies have duly started to move away from quarterly reporting: firms such as National Grid and Aviva led the way, and now 40 of the FTSE do not issue full reports every three months. In the FTSE-250, more than half have abandoned quarterly reporting. An end to short-termism? This battle is far from done. Work by Suresh Nallareddy and others at Oxford University questions whether a change in reporting periods alone can significantly alter corporate behaviour.

They found no clear evidence that moving away from quarterly reporting led to an increase in investment.

There is, then, still much to be done to persuade the people running big companies to think about more than EPS and annual profits.

Some of the answers will surely be found in other parts of the Kay Report, which also called for real change in executive pay deals, suggesting that much of the huge wealth bestowed on CEOs be locked away from them for years after their departure: that might create a real incentive to plan for the firm’s long term interests.

Breaking the curse of short-termism will require countless changes, not least in culture: “corporate social responsibility” has become a discredited PR wheeze that must sooner or later be replaced by an understanding that without a genuine sense of social duty, business will not just create its own gravediggers, it will ensure they get elected too.

But as a first step on that journey, start with CEO pay and tenure, which should be lower and longer.