Expanding the Limits of Anti-Fragility

What does a marathon runner, a weightlifter, a shop owner who saw his shop burnt down in riots, a bullied schoolchild, an academic failure and one of the many millions unemployed in Southern Europe all have in common? The answer is that they are all in the process of determining whether they are fragile, robust or anti-fragile to circumstance. At a time when national finances are straining under a tidal wave of debt, it is worth considering these people and the qualities they require to succeed in their respective situations. It is also worth considering whether state spending is maximising the utility of every penny spent or merely adding to an ever expanding debt pile. Is it a roadblock to private investment, discouraging bazinga  charitable donations and creating a culture of entitlement or is it providing the infrastructure and social safety net that convinces citizens that whatever their challenges or objectives, they are able to succeed? There has never been a better opportunity to redesign the objectives of the state whilst also reducing annual budget deficits and the growth of government debt. So why do fragility and robustness matter and what does anti-fragility even mean?

In Nassim Nicholas Taleb’s latest book Anti-fragile (2012), Taleb coins the term anti-fragility in which those who take risks and gain experience of challenging or novel situations can profit from unforeseen benefits. We are familiar with the Nietzsche quote, “what doesn’t kill you makes you stronger” but until now we have not had the use of the term anti-fragility. He gives the metaphor of a mystical package being shaken but ultimately benefitting from experiencing the volatility. It is crucially different from the term robust because this implies that the challenging situation has not affected you in either a positive or a negative way. To give an example, a leader or manager in an organisation that has experience of prior crises will commonly be in a stronger position to deal with worse crises in future. Rather than just surviving it without benefit or detriment, the leader or manager has had the opportunity to challenge themselves rather than just coasting through tranquil times. This increases their value to that organisation. There are plenty of examples of anti-fragility in action involving entrepreneurs, inventors and parenting.

It requires a completely different outlook on risk, opportunity, challenging situations and state intervention. Western society has transgressed in the last couple of decades so large parts of it feels entitled not to experience challenges, competition, pain or failure. It has created an elite which thinks it is acceptable to live a sheltered life whilst avoiding paying tax to the societies in which it has profited. It has created sections of the population that will cling tightly to what they believe they deserve from the state rather than what they truly need to make themselves self-sufficient and free to largely support themselves. I think John F Kennedy’s famous quote “Ask not what your country can do for you – ask what you can do for your country” needs to be updated for the current predicament. Ask what you need from your country to help it maximise its tax revenues and help future generations meet their potential. Don’t ask for ever more debt funded spending or debt funded tax reductions.

A nation with high and ever increasing debt levels is fragile to interest rates rising. Regrettably (for much of Europe) a nation with reduced debt levels is anti-fragile and able to invest in its future prosperity whilst others struggle with their debts. That is why you fix the roof when the sun is shining. You do not wait for the rain and then lash out at those who try to fix the roof. There is no choice but to try to do more with less. The only exception must be for crucial infrastructure projects if funded by long term debt that is not exposed to interest rate risk. Do not listen to the dangerous politicians and economists who predict that interest rates will never go up and we can continue on this path of ever increasing debt levels. They are largely people who have no business experience, no understanding of risk and no track record of anticipating previous crises. They and their views are fragile.

In Greek mythology, Icarus ignored his father’s advice which was not to fly too close to the sun when escaping from Crete as his wings were glued on with wax. We are all aware of Icarus’ fate when he flew too close to the sun and the wax started to melt. Debt, like wax is an inanimate object. It does not experience the benefits from anti-fragility and is subject to relatively fixed limits which should not be exceeded. People don’t have to be inanimate objects if they see change, challenges or even crises as opportunities to become anti-fragile. However, future economic growth prospects will suffer the same fate as Icarus if debt is not brought onto a downward trajectory.

So how do you create an anti-fragile society whilst reducing budget deficits and slowing the growth of debt? How do you provide the conditions for “exit velocity” to be generated for the UK economy? All budgets should be examined for potential savings with no budgets ring-fenced. The required tools must be accessible to those who want to learn skills to contribute to economic growth and the generation of tax revenues. Those dependent on state hand-outs must accept that with the exclusion of exceptional cases, there is going to be a squeeze on their incomes and levels of comfort. Those who avoid taxes in societies in which they have generated their profits must be highlighted to consumers so that they can make informed choices with their purchase decisions. Those who pay their taxes and contribute to charities need to be much more open and transparent about their arrangements to flush out those who utilise the first order and second order benefits from UK public services without contributing to them. Opposition politicians need to get serious about the debt challenges facing the UK economy rather than whipping up hysteria at every tax rise and spending cut. Infrastructure projects such as airport expansion and house building need to get off the ground and exporters need to focus on emerging economies with laser like focus. It is not too late to embrace anti-fragility.

In my view, we have breached the limit of anti-fragility with regards unemployment in various countries in Southern Europe. You can only push desperate, hopeless people so far before they lose faith in their governing institutions and look to overturn them. A desperate never ending struggle to provide food, education and shelter for one’s family with no light at the end of the tunnel has no discernible benefits to the country or continent as a whole if there is no opportunity to learn the skills or languages necessary to generate income and growth in future. This is not a charitable point; in a world where innovation is key for global growth, it is crucial that those with different life experiences and thought processes have the opportunity to contribute to global growth. Insights into the motivations and aspirations of people across the wealth spectrum can prove invaluable in the identification of business opportunities. These opportunities are not always identified burrowed in a book or a web based course at home. Anti-fragility makes the case for varied learning methods including more hands-on activities, school trips, interacting with communities, business training and guest speakers.

Governments cannot resolve to find a solution to all problems on their own. Everyone who contributes, utilises or supports the provision of public services has the power to make purchasing decisions based on the information they have at their disposal about corporations. Consumers who buy from corporations that avoid contributing their fair share to public services are effectively impairing their right to complain about tax rises and cutbacks to public services. It is important not to get fooled by spin, obfuscation and muddying the waters. There should be tax breaks for investment but the defences of many of these tax avoidance schemes get destroyed by basic common sense. There have been smarter achievements in finance than creating tax structures to reduce corporation tax pay-outs. If a global corporation has been positioned in a territory for many years where it is “unprofitable” due to large transfers of commission payments and therefore paying minimal corporation tax in that territory, common sense suggests it should be looking to exit that territory. If it is not, you can conclude that it is utilising unethical tax practices and does not make a contribution to the public services it relies upon to do business in that country. In a perfect world, a new simplified global tax code which clamps down on tax havens and tax avoidance schemes would be agreed and implemented but given the past track record of attempted global agreements it is better to proceed assuming this won’t be possible.

The repairing of national finances is a long term challenge and corporations that continue to starve public finances of corporation tax revenues are not appreciating the gravity or the deep-rooted nature of the situation. This is an opportunity for corporations to address a serious reputational risk and expose themselves to the upside of being positioned as a brand that consumers can trust to invest in their communities and not to pile tax liabilities onto the consumer. Taking almost half of a high earners’ pay cheque by the state seems too high to me but it won’t be able to be lowered in the medium term given the perilous state of the national finances. This perilous state has been caused by years of tax avoidance, inefficient uses of public money and banking failures. Profits are made relying on law and order, travel infrastructure and having access to an educated and healthy workforce. Employees and consumers pay their contributions for these benefits accrued, it is entirely justified to ask corporations to make their contribution too.

When a graduate enters the job market, they are relatively fragile until they have a substantial period of employment under their belts. At this point they are more robust to losing their job and are maybe looking to take some risks such as taking on more responsibilities or moving to a different department. Therefore employment law should reflect this. There will always be short sighted people who may want to fire a graduate a few weeks or months into their career; perhaps they are a slow starter, perhaps university didn’t prepare the graduate for the rigours of the job or perhaps they don’t gel with a manager in the firm. However, after a couple of years of poor performance it makes no sense for the firm go through various time consuming and administrative hoops to be able to move the employee on without fear of legal action. The shock of losing their job can spur them to look more closely at what they need to do to succeed in their careers. They may learn a new skill, a new language or choose to move to a region in the world where there are vacancies. So the experience can later be seen as an episode of anti-fragility in action.

However, periods of stability when available are generally a public good and should be taken advantage of. I am not advocating throwing the (fragile) baby out with the bathwater. Taleb studies in seclusion and wouldn’t benefit from a brick getting thrown into his window on a regular basis. Financial crises that take more than a decade to recover from also cannot be seen to be beneficial. The greatest achievements which have succeeded in meeting the greatest challenges have taken long periods of time and continuous effort. During periods of market stability, governments with high debt levels should be straining to get their finances in order. Instead complacency creeps in whilst markets are stable with governments getting into the habit of only reactively responding to jumps in market volatility.

Regulators are rightly concerned about systemically important financial institutions that rely on implicit taxpayer support and are so large that risks are concealed giving the appearance of pseudo-stability. However, regulators and credit rating agencies are not best placed to dictate which investment risks all institutions should take through risk weightings and complex formulae to calculate capital requirements. The general public do not seem to be aware of the hundreds of pages of regulations that the financial sector was subject to in the run up to the financial crisis ultimately paid for by consumers and investors and creating a system that generated the biggest collapse in generations. The solution is not to pile on hundreds more pages of regulation creating an even greater barrier to entry and resulting in ever larger financial institutions. Regulators should not be imposing business plans on nimble start-ups and SMEs who can be wound up without causing systemic disruption.

There is a philosophical argument on reflexivity which revolves around the fact that some individuals see themselves as being managed by their environment whilst others see themselves managing their environment. In reality it is a two way street with billions of actions and reactions occurring every second. In a two way street, every individual has the power to have an impact on others’ actions and reactions. In Baz Luhrmann’s song Everybody’s Free (To Wear Sunscreen) he advises to “do one thing every day that scares you”. Let’s expand the limits of society to make it both big and anti-fragile.

 

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