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Plus The Politics of Catastrophe And Blockchain Technology
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“Speak to all men as you do to yourself, with no concern for the effect you make, so that you do not shut them out from your world; lest in isolation the meaning of life slips out of sight and you lose the belief in the perfection of the creation.”
Leo Szilard
 
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The Best of What I’ve Been Consuming

Systemantics (The System’s Bible)
John Gall

Charlie Munger has the classic line “All I want to know is where I'm going to die so I'll never go there”.

Systemantics is in that vein, with the equally important, but probably less catchy angle of “All I want to know is how complex systems fail so I can avoid them.”

Part of the reason this is less catchy is that the term "systems" just doesn't feel very personal or applicable. Like, no wakes up in the morning and thinks "wow, I'm really worried about systems failure today."

It's important to recognize then that systems here are used in a very broad way. Gall points out:

  1. Everything is a system.
  2. Everything is part of a larger system.
  3. The universe is infinitely systematized, both upward (larger systems) and downward (smaller systems).
  4. All systems are infinitely complex.

You are part of a system that is part of a business, country, planet, solar system, galaxy and universe.

A general understanding of systems is really important because pretty much everything we care about as humans can be viewed as a system: our health, our families, our careers, and our countries. These are the things that we wake up in the morning worrying about and studying how complex systems operate is a good framework for thinking about all of them.

There are a few key points that Gall makes in his book.

One is that not only do systems expand well beyond their original goals, but, as they evolve, they tend to oppose even their own original goals. Indeed, “Systems tend to oppose their own proper function”.

The end result is that systems rarely do what they say they do and people in systems rarely do what their title says they do.

In George Orwell’s dystopian novel 1984, the Ministry of Peace was about promoting war and the Ministry of Love is about controlling the population. The Ministry of Love building has no windows and is surrounded by barbed wire entanglements, steel doors, and hidden machine gun nests. It’s funny because we recognize it’s true.

It’s not entirely clear what the purpose of the system known as The Center for Disease Control actually does, but one can hardly argue in the wake of COVID-19 that it actually controls diseases.

This is not me ragging on the people that work for the CDC. Indeed, it’s quite the opposite. Complex systems can produce an outcome very different from what anyone inside them intends or wants.

The Congressional disapproval rating from Americans has been hovering around 70-80% for years. Basically, no on likes Congress, no matter which party is in control. How can it be that the body elected by Americans is disapproved of by Americans? Why wouldn’t they just elect people they like better?

Well, in fact, they do. People generally approve of their congressperson. It’s the system of elected officials known as Congress of which people disapprove.

Systems are other than the sum of their parts. Just as a collection of Congresspeople that are supported by their constituents can produce a Congress that no one likes, many systems in general “work poorly or not at all” for reasons that are not obvious nor intended.

As the more popular Murphy’s Law goes, if anything can go wrong, it will. This is not just an offhand, pessimistic remark, but a point that as systems become more complex, there are more ways for them to fail and the failures tend to be more expected.

A simple system, like say a can opener, tends to fail in rather predictable ways: the blade becomes too dull or the gears don’t turn properly. A complex system, like the global economy, tends to fail in new and unexpected ways, say a supply chain breakdown following a global pandemic or a financial crisis following a mortgage bond structuring problem.

The general reaction to these problems is usually some version of “well, let’s just re-organize the complex system to work better.”

This is a version of The Maginot Line Problem. The French tried to reform their defensive system after the First World War to prevent a German invasion, and yet the German invasion that launched World War II was far more effective than the prior one.

This approach always seems like a reasonable response. Every economic crash results in reforming the system and, yet, they keep on coming.

Humans tend to vastly overestimate our ability to design effective complex systems and it is this hubris that tends to get us in trouble, creating an illegible margin.

It is extremely difficult (read: effectively impossible) to design a complex system from scratch and have it function well. The best complex systems start as very simple systems and evolve from there.

Gall shows this in his list of elementary systems principles:

  1. A complex system cannot be "made" to work. It either works or it doesn't.
  2. A simple system, designed from scratch, sometimes works.
  3. Some complex systems actually work.
  4. A complex system that works is invariably found to have evolved from a simple system that works.
  5. A complex system designed from scratch never works and cannot be patched up to make it work. You have to start over, beginning with a working simple system.

The lesson from Gall then is that we should not focus on top-down reforming of complex systems, but a more bottom-up approach. We should start with a working simple system and then let it build up over time.

Perhaps the best example of this would be why seemingly small and inconsequential startups seem to routinely overcome large incumbents.

Though it seems like they could shift, incumbents with the baggage of a built-up complex system cannot reform effectively. As Clayton Christenson showed in his book The Innovator's Dilemma, the popular explanation for this, incompetent management, is completely wrong.

In fact, the problem is that managers are extremely competent! They are just operating in an established and complex system with many competing parts that make it very hard to adapt.

What seems like the harder and longer path, starting with a new, simple system and evolving it over time, is in fact, the easier and shorter path.

The key lesson across all domains is to not focus on top-down solutions, but keep things simple and robust, giving up short-term efficiency for long-term resilience, ultimately creating a more ergodic outcome.




Doom: The Politics of Catastrophe | Niall Ferguson
Hidden Forces

Following the COVID-19 pandemic, a lot of interest has gone into thinking about how we can prevent future pandemics. As I argued in The Maginot Line Problem, this is helpful but ultimately too narrow of a framing.

The better question is how should we think about preventing and responding to a more general class of unpredictable, but highly impactful events. This interview with Niall Ferguson looks at that idea more generally, based on his book investigating the many ways in which catastrophes have happened in the past.

In particular, Ferguson feels that the U.S. and Europe are not paying nearly enough attention to China:

Unlike the Soviet Union, the Chinese Communist Party CCP has worked out how to have a market economy wrapped around the planned economy that is at the core. But they have not in any way sacrificed the party's total control over daily life and indeed the economy. And Xi Jinping has reasserted that control and use technology to create the most powerful surveillance state and I'd say the most powerful totalitarian state of all time.

So we have to stop kidding ourselves about the nature of the Chinese system and we certainly have to kiss goodbye to the fantasy that if we engage with China economically, it would somehow liberalize and become more democratic.

Sure, I think sentiment towards China has become more negative, but it's still a stretch to persuade even well-educated Americans that China is ideologically and strategically as large a threat to the United States and the Soviet Union was and bigger in the sense that it is economically a far more formidable opponent than the soviet union ever was.

He also points out that it may be inappropriate to compare the U.S. federal government of today to that of the 1950s or earlier times.

The federal government is less good at doing stuff than it was in the 1950s. Not only was its pandemic management superior, it was very much better at doing infrastructure than it is today.

We have some fundamental pathologies in the public sector of bureaucracy. Waste, inefficiency, a penchant for meticulous overregulation rather than resiliency and antifragility. And if you take that federal government and say to it here is limitless money to go save the planet and build green infrastructure, do not be surprised if the results are as dismal as they have been in California because remember the state of California has been running a version of this policy at the state level for years and I'm still waiting for that high-speed rail link because of course none of these things have actually gotten built. So I think when you look at California you see a disturbing [look at what] the U.S.A. as a whole could look like if it pursues these indiscriminate policies.



Chris Dixon - The Potential of Blockchain Technology
Invest Like The Best

I wrote a piece in 2018 called Markets are Eating the World that looked at how public blockchains like Bitcoin and Ethereum could facilitate the creation of new markets.

The recent developments in Decentralized Finance (DeFi) are an interesting development along that line. This interview with a16z principal Chris Dixon was a great overview of the thesis surrounding the space. This particular example on lending really stuck out as an interesting example:

Let's just take lending as an example. Like to me, the promise of DeFi and lending is the same promise of the internet in a lot of other industries where you essentially have disintermediation, think about this process. If you want to open a restaurant down the street from me, let's say a restaurant, you go to Citibank, you fill out a bunch of forms. They don't know who you are. They have no idea whether there's a demand for a restaurant in that area and they don't know you and God knows how long that process takes. Meanwhile, I'm three blocks away from that restaurant. I want a new restaurant, but there's no way to measure that demand signal. I go to Citibank, I lend my money, put it in a savings account, I get what zero interest or close to zero or something like that.

The restaurant may or may not get approved in some really archaic old fashioned process months later and then pay some huge interest rate. And who knows how much that delta is between the zero I'm getting and the whatever they're paying. Some of that's going to the profit of the banks. [The banks are certainly not collecting] a huge numbers of demand signals.

There are all sorts of signals you can imagine collecting that would tell you. That's my neighborhood, I know that I would like a new Thai restaurant or something. None of that [local] information is going into that system. We have the ability to send bits instantly around the world to do all these kinds of modern things. Almost none of that is being used.

So it's about modernizing, it's about disintermediation, it's about producing all of these layers of fees in the middle. It's about transparency. Who knows what the state of [the current] system is. I think you can make a strong argument that a lot of what happened in 2008 with mortgage loans and things was around just this incredible complexity and opacity of the system. Everything in DeFi everything on blockchains is open, it's all publicly available. It's actually a very hard, unsolved problem is how to make it private.


 
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The Interesting Times is a short note to help you better invest your time and money in an uncertain world as well as a digest of the most interesting things I find on the internet, centered around antifragility, complex systems, investing, technology, and decision making. Past editions are available here.
 
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