Tuesday, May 19, 2009

Concept IV: Risk vs Uncertainty

It is easy to mistaken risk for uncertainty. They are different things.

Risk can be covered by institutional arrangement, but not uncertainty.

There may be risk to the system, but uncertainty prevails for the individual.

While the recession may present a risk to the economy, the individual faces grave uncertainty over his economic future.

A recession may present a great opportunity for the economy to renew itself, the same recession may be the end of the economic fortune of one individual - but an opportunity for great fortune for another.

In the simple case of insurance, for example, where statistical theory is applied, the probability of a person being killed by a car while crossing a road death may be 10% for the whole population. But the probability of a particular person being knocked down by a car and die is zero or one to the person.

The insurance industry takes a immortal view, while an individual takes a personal view.

In economic life, an individual faces grave uncertainty over his future. He fears he has no food and no place to stay in future - this is the worry of the modern person.

He fears the unknown - that which will happen in the next moment or the moment after next.

It is this great fear of the unknown that individuals strive to store up food and shelter for the future - which in the modern money-using exchange markets, the item most desired by individuals is called "asset."

It used to be called "money" when money was an asset.

With the debasement of money by modern policy makers, particularly central bankers, through the pursuit of loose monetary policy or quantitative easing, money has become a useless commodity.

New items come up in the minds of the people which they think are assets - assets are things that people treasure but which they cannot consume and they end up sitting on them in the hope of releasing their utility some time in the future.

One can therefore go through any range of durable objects. Do not laugh at the ancients over stone money or shells. Modern people treasure even computer numbers stored in certain places.

But every durable object that has been considered to be valuable by individual human beings, when the supply is unlimited has been shown to be rendered useless in value - by the very simple operation of the market supply and market demand.

Even houses, the Japanese has shown, can be a liability. Houses are, after all, spaces created by partitions called walls which people put around themselves when they are fed up with society or when they fear animals (as animals take on human shapes).

In those spaces called houses, like-minded animals of all kinds live with their own kinds - to reduce uncertainty - because they know how their kind behave or will behave in future under various stereotyped scenarios - until the pet dog chews up the human baby.

So, in the face of uncertainty which naturally exists in the minds of human beings as a result of the creation of the concept called time, individual human beings have been acting very strangely - to waste time in the present over unncessary things in order to secure time in the future that does not exist.

The only uncertainty in human society is human behaviour under varying conditions. If your friend will not feed you when you have no money and are hungry, the uncertainty is that of the friendship - not the future which does not exist.

You accumulate riches because you have no friends who will take care of you when you have nothing.

The society with the greatest amount of artificial man-made market-oriented assets is the most friendless society - because one does not have to be nice and make friends.

Poor people have to be friendly to each other because they need each other all the time - who knows who will need who at this moment or the next.

The current global economic recession is the result of too much supply of assets which now do not have value in the market - because of oversupply.

The answer is to reduce the oversupply by downsizing the industries that are overproducing and move human and other natural resources in areas of activities for which there could be greater appreciation by fellow people - charity, compassion, generosity, laughing, being nice.

The world worries about the future while ignoring the present.

That is the risk we all take when reacting to uncertainty.


walla said...

An interesting post, scintillating with insights. From dismal science to a new field. Stoic economics.

It used to be that the way out of poverty was to work hard. Now it is work smart. Productivity from know-how seduced by leverage from know-who and know-what.

Leverage is practiced in many forms. From stock market to risk market. Betting on non-human risk motivated by human uncertainty.

When productivity and leverage are combined, efficiency is achieved. With efficiency, more time is made leisure. With more leisure time, more choices are made available. With more choices, more wants are created. Efficiency has become a means to an end that is not effectiveness in living.

Effectiveness in living is further subordinated by another form of leverage.

Like human parts, motor parts are engineered to fail after fixed usage. Failure is embedded into systems so that demand will be assured. To satisfy the demand, more efficiency will be needed. With more efficiency in the sense elaborated, there will be more progress invested but less effectiveness in living achieved.

To bypass the inevitability of increasingly ineffective living amidst increasing spoils, an equilibrium needs to be reached. A tipping level beyond which there will be decreasing marginal returns for every new unit of material progress. Until a sigmoid curve draws up a plateau where material progress and immaterial needs coexist in some harmony. Before nature takes its next downward course. Like too much rich food causing heart and gut problems to end the very system that is the entity being discussed.

What is the tipping level for the average malaysian in today's situation? The middle path for the middle-aged. The wild dreams brought down to hard earth.

Drawing a small list:

(1) steady monthly income net of tax, adjusted for inflation and sufficient to null regular and reasonable monthly expenses for two families (individual and parental);

(2) savings from additional income from side business, property usage or stock holdings;

(3) sufficiently stable physical and mental health.

Today, the foundation,(1), is uncertain in a way that is more telling than before. Due to urbanization, for instance, it is impossible to return to tilling the land in cities as an alternative income source and if a market situation is bad, everyone will be in the same boat and looking for other jobs of the same selection. Demand outstrips supply.

Ergo, the system of the world increases your choices but limits your ability to make them effectively.

Because (1) is uncertain and may even have deteriorated, (3) will be similarly affected because the system of the world has created efficiency which has created time which has created the need to keep busy which in turn is dependent on more choices which are however made difficult to select because even making immaterial progress needs the same currency as material progress.

For the poor and needy cannot live on prayer and presence alone.

Similarly, the denudation of (1) has affected (2). Which again affects (3).

The only solution, it seems, is to not let more choices create more wants.

But there is a problem. Efficiency creates free time. One cannot be staring at the wall all the time. Things must be done. And done in such a way as as to be replicable with some enjoyment. Otherwise the motivation to do repeatedly senseless things will be hard to maintain. And it will be hard to maintain because there is another fault embedded in the system.

The fault of the learning nervous system.

From cradle to crypt, the only constant that creates awareness, some say 'life', is the nervous system in the body. It learns in order to earn, protect, progress and enjoy enough to motivate it to earn more, protect more, progress more and enjoy more. An iterative process. Until it degenerates.

So it seems the only way to achieve effectiveness in living in the present situation is to try not to be too clever.

But no man is an island. And there will be others who will depend on one inasmuch one has and will depend on others. The baby at birth is completely helpless. So too the old man in the hospital bed.

That's how nervous systems thrive to slow their own time-built degeneration. Systems need motivation too.

However, the system of the world has its own thinking and learning sub-nervous systems. It 'realizes' that if such an argument continues to its final destination, every player in the market will soon want to achieve that equilibrium marked by low needs, low wants and low nervous activities. The word 'arctic' comes to mind. Soon, the dawn of a new ice age.

So it destabilizes itself. Someone already rich, for instance, will strike a big win just by buying the meter reading of the bungalow he has been viewing to buy.

In other words, the world system uses 'luck' to destabilize itself.

Unfortunately the economics of luck as opposed to the concepts of risk and uncertainty is not discussed here.

walla said...

For etheorist....