Wednesday, June 13, 2018

Elites Have No Skin In The Game

mises  |  To review Skin in the Game is a risky undertaking. The author has little use for book reviewers who, he tells us, “are bad middlemen. … Book reviews are judged according to how plausible and well-written they are; never in how they map the book (unless of course the author makes them responsible for misrepresentations).”

The risk is very much worth undertaking, though, because Skin in the Game is an excellent book, filled with insights. These insights stress a central antithesis. Irresponsible people, with what C.D. Broad called “clever silly” intellectuals prominent among them, defend reckless policies that impose risks on others but not on themselves. They have no “skin in the game,” and in this to Taleb lies their chief defect.

Interventionist foreign policy suffers from this defect. “A collection of people classified as interventionistas … who promoted the Iraq invasion of 2003, as well as the removal of the Libyan leader in 2011, are advocating the imposition of additional such regime change on another batch of countries, which includes Syria, because it has a ‘dictator’. So we tried that thing called regime change in Iraq, and failed miserably. … But we satisfied the objective of ‘removing a dictator.’ By the same reasoning, a doctor would inject a patient with ‘moderate’ cancer cells to improve his cholesterol numbers, and proudly claim victory after the patient is dead, particularly if the postmortem showed remarkable cholesterol readings.”

But what has this to do with risk? The fallacy of the interventionists, Taleb tells us, is that they disregard the chance that their schemes will fail to work as planned. A key theme of Taleb’s work is that uncertain outcomes mandate caution.

“And when a blowup happens, they invoke uncertainty, something called a Black Swan (a high-impact unexpected event), … not realizing that one should not mess with a system if the results are fraught with uncertainty, or, more generally, should avoid engaging in an action with a big downside if one has no idea of the outcomes.”

The same mistaken conception of risk affects economic policy. “For instance, bank blowups came in 2008 because of the accumulation of hidden and asymmetric risks in the system: bankers, master risk transferors, could make steady money from a certain class of concealed explosive risks, use academic risk models that don’t work except on paper … then invoke uncertainty after a blowup … and keep past income — what I have called the Bob Rubin trade.”

Instead of relying on mathematical models, economists should realize that the free market works. Why use misguided theory to interfere with success in practice? “Under the right market structure, a collection of idiots produces a well-functioning market. … Friedrich Hayek has been, once again, vindicated. Yet one of the most cited ideas in history, that of the invisible hand, appears to be the least integrated into the modern psyche.”

Upsetting a complex system like the free market, can have disastrous consequences. Given this truth, libertarianism is the indicated course of action. “We libertarians share a minimal set of beliefs, the central one being to substitute the rule of law for the rule of authority. Without necessarily realizing it, libertarians believe in complex systems.”