Rhetoric and Non-ergodicity Management

My latest at EE is a stab at a Schumpeter-Knight-Kirzner-North synthesis. Boiled down, I find it useful to distinguish risk, uncertainty, and non-ergodicity as zones in a function of decreasing knowledge of possible outcomes. Risk describes well-governed, well-understood probability functions. Uncertainty describes well-governed, but poorly understood probability functions, and non-ergodicity describes wild probability functions. Another way to think about it that risk is a threat to an individual, uncertainty is a threat to a firm, and non-ergodicity is a threat to society. I’m not sure if the way I parse these ideas are capital-T True, but to me this is useful. At the risk of immodesty, that’s good enough for me.

Protection against the unknown satisfies deep atavistic cravings common to many species. In humans, this desire is strong enough to divert many billions of dollars into insurance schemes of one sort or another. A, if not the, function of the finance industry (or at least the vibrant, robust derivatives markets) is to allow people to pool and trade risk (even when what they’re actually trading is uncertainty), easing tensions about the obscure future, permitting long-term planning and investment. Read through a 10-K sometime and you’ll see that quite a bit of the fluff is devoted to talk about how the firm devotes resources to contingency planning and how well diversified they are. One of the big reasons many economists flog the virtues of a stable rule of law is that the productive capacity of the many industries of the nation suffer when the threat of capricious expropriation looms. 

I submit to you that the hedge we enjoy against big social upheaval (by this, I mean developments that destroy entire industries, change the political process, or result in mass migrations) is rhetoric. If citizens are comfortable with the decline of patterns of production and exchange, they will be naturally less prone to petitioning the legislature for redress. A civilization that tolerates dynamism, that accepts the destruction part of creative destruction will more aptly resist ossification. The civilization that yields to truculent Ludditism will waste precious resources on protecting incumbents, shielding defunct industry, and perpetuating inefficiency. A society, in other words, of untempered backwards-looking faith is one that will mire itself in the treacle of the past.

Our best hedge against non-ergodicity is to learn to stop worrying and love what truly matters in life.

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