• We will experience many surprising exogenous economic and political shocks. That they’ll be “exogenous” implies they’ll be harder to see coming. Nassim Nicholas Taleb famously labeled these as “black swans,” events that have a major impact, come as a complete surprise, and which people often attempt, fecklessly, to rationalize in hindsight.  Black swans:
    • Are rare, high-impact events that normal expectations in finance, science, technology, and political theory cannot predict or account for;
    • Thanks to the essential nature of tiny probabilities, escape normal calculations of likelihood; and
    • Exploit our psychological biases, which blind us to an accurate understanding of uncertainty and the massive impact of rare events.
  • Technology will develop in unforeseeable and, in a profound sense, unimaginable ways. Imagine showing a smartphone to Thomas Jefferson, or for that matter Dwight Eisenhower, and asking them to guess how its technology works and what it can do.  This illustrates Arthur C. Clarke’s postulate that “any sufficiently advanced technology is indistinguishable from magic.”  We may think we live in the post-Steve Jobs era, but viewed differently we’re living in the pre-Benjamin Franklin era.
  • Social mores, customs, and assumptions about such bedrock institutions as work, family, religion, sexuality, and education will, if the past few decades are any guide, soon make today’s received wisdom seem primitive and unsuitable for polite society, even contemptible.
  • The ongoing struggles between liberty and authority, spontaneous bottom-up and technocratic top-down organizing principles, and meritocratic vs. egalitarian societies, will continue to play out unabated.  Contrary to “end of history” buffs, you can trace this debate forward from Plato through Locke, Hume, and Rousseau, to Kant and Nietzsche, and lately even to John Rawls and Richard Dawkins, with no sign of its impending resolution.
  • And competitors, rivals, clients, and talented professionals within your industry or adjacent to it will react to all of the above in unforeseeable ways.

In reality, the word “complexity” fails to do justice to why the future will never play out quite as we might have liked to imagine.  The shortcoming of invoking “complexity,” in isolation, is that we tend to view it as a spatial characteristic of the world—technology in this corner, shocks and black swans erupting from that corner, special interests in their own Venn diagram bubbles, etc.—and we ignore the all-important dimension of time: If one condition changes, it is intellectually and analytically impermissible to assume no other conditions will change in response.

The military has a nice phrase for this: “The enemy gets a vote.”

Or, completing our geometric analogy, the world is not only three-dimensional, it is dynamic.

A tributary of economic thinking that went sadly ignored for nearly a century, and is now enjoying an overdue and well-deserved renascence, is typically referred to as the concept of “radical uncertainty,” and whether or not that term fires your memory neurons, that’s what we’ve been talking about for the past few pages.

Frank Knight (1885—1972), a University of Chicago economics professor, published Risk, Uncertainty, and Profit in 1921 (Boston: Houghton Mifflin), which introduced the world to the distinction between “risk” and “uncertainty:”

“Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated…. The essential fact is that ‘risk’ means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomena depending on which of the two is really present and operating…. It will appear that a measurable uncertainty, or ‘risk’ proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all.”

Indeed, “radical uncertainty” is by some referred to interchangeably as “Knightian uncertainty.”  Examples can be useful in drawing the risk/uncertainty distinction, and a few common ones are insuring your home against fire (a “risk,” with a calculable policy premium associated with it, which actuaries will happily specify for you) vs. asking whether nuclear fusion will be a significant source of electricity generation by 2040.  Where to begin?

Similarly, airlines and regulatory authorities can calculate the likelihood of a fatal crash per X million passenger-miles, but what the economics of the airline industry will look like in (say) 2040 and who the major carriers will be, pursuing what business models?  Not a prayer.

Keynes himself not only fully appreciated Knight’s insights, but extended their implications to conventional economic analysis in The General Theory of Employment, Interest, and Money:[1]

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