When Nassim Taleb Channels Ludwig von Mises

Reading Nassim Nicholas Taleb, the student of Austrian economics finds much to like. Taleb’s clear, razor-sharp and ruthlessly unqualified commentary often reminds the reader of Mises – indeed even the content of his ideas is sometimes strikingly Misesian. In exploring an argument, Taleb frequently follows it to its logical conclusion whether or not that fits well with established opinion.

In this post, we explore some areas of similarity between Taleb and Austrian Economics – entirely contrary to Taleb’s own wishes as he does not want to be associated with any non-orthodox school of thought. In the follow-up post, we’ll discuss some great differences between Taleb and Mises.

Describing his own work as “angry, dismissive and irascible philippic” (2014:331), Taleb’s intellectual journey has focused on hammering out the implications of, and intellectual support for, his One Big Idea – the series of writings that’s included in “Incerto.” The Latin term for ‘doubt’ or ‘uncertainty’ capture Taleb’s core work and the set of books are together described as “an investigation of luck, uncertainty, probability, opacity, human error, risk, disorder, and decision-making in a world we don’t understand:”

  • Fooled by Randomness (2001)
  • The Black Swan (2007, 2010)
  • The Bed of Procrustes (2010)
  • Antifragile (2012, 2014)
  • Skin in the Game (2017)

Amidst publishing technical work in academic journals, last year Taleb also released a more technical book called The Logic and Statistics of Fat Tails . For the uninitiated, these thousands of pages may seem daunting but the experience of reading them makes anybody a much more well-informed person in areas ranging from literature, ancient philosophy, risk and probability theory as well as economic theory. Taleb’s register is, in other words, impressively wide.

What They Have in Common

Many writers in the Austrian tradition have observed the similarities between Taleb and Austrian thinking. Jeff Deist, for instance, pithily describes Taleb’s prose as “Rothbard meets Hayek”; David Howden and Gene Callahan have both reviewed different Taleb books. Some of the main overlap includes the following topics.

Spontaneous orders . Orders that arise organically – bottom-up – have antifragile attributes, they gain from exposure to volatility. Taleb specifically defends the evolutionary argument that because cultural and religious teachings have survived, they carry some benefit to us that remains hidden. We may despise aspects of our societies and the teachings of religion , but their antifragile ability to survive informs us that they have the tools to successfully overcome societal challenges – a conservative, Edmund Burke style of argument, not at all inconsistent with the fundamental creed of libertarian social philosophy .

Shocks to individual components of such orders generally make them evolve, incorporate defects and overcome future challenges. Culture, religion, and language are examples of antifragile undirected orders – and Taleb adds the aviation industry, the restaurant business and the human body to those examples. Indeed, markets in the world’s most extreme situations provide a similar safety net of antifragility, adapting, changing, and improving in the face of dire experiences.

Social scientists tend to call such things ‘traditions’ or ‘institutions’ and the Ivy League-educated intellectuals ignore them at their own peril – or, as it turns out, the perils of others, as pundits, intellectuals and politicians almost never have “ skin in the game ” for the rationalistic projects they implement. Profit and loss, argues Mises throughout his work (he literally has a pamphlet titled that ), is how the capitalism system evolves and re-directs resources to where they are most needed, as defined by consumer wants.

While we may associate disbursed knowledge and spontaneously organized orders primarily with Hayek, it is present in Mises’ writing as well. Market-based institutions are unplanned and they completely encompass the idea of Antifragility. In Ultimate Foundation of Economic Science , Mises writes:

Social cooperation among individuals—society—can be based either upon spontaneous coordination or upon command and subordination; […] The market economy was not devised by a master mind; it was not first planned as an Utopian scheme and then put to work. Spontaneous actions of individuals, aiming at nothing else than at the improvement of their own state of satisfaction, undermined the prestige of the coercive status system step by step.

Risk and probability: Taleb’s discussion of probability theory with emphasis of tail risks is remarkably Austrian. Indeed, Mises’s “ case probability ” fits well into Taleb’s exposition of what formal probability theory is lacking: an underappreciated role for the truly rare events. Humans, writes Taleb (2014: 133) “will never be able to turn politics and economics into the tractable randomness of blackjack”. As we experience again and again in financial markets and other domains of intrusive government planning, the chances of disaster are not that rare – remember the Goldman CFO David Viniar’s “ 25-standard deviation moves, several days in a row ”? Every time somebody argues that this time is different , chances are that this time is very much like the previous time .

One commonsensical way to explore this is the following. Observing reality, no matter how astutely, we do not know from which set the events of the world is drawn. That set could logically include even worse Great Depressions than we have already experienced. In referring to the then-worst event, Taleb makes a profound but obvious remark: when the Great Depression occurred, it was worse than the previously Worst Possible Event. The logic of comparing the worst-case-scenario to the until-then observed worst outcome is thereby flawed; there is no reason why we couldn’t observe even more extreme tail risks in the future.

Anti-econometrics and mathematical invasion of economic thinking : Among Austrian scholars from Mises and Rothbard to more modern ones, a long-standing objection to mainstream economic thinking has been to deride its improper use of mathematics . Collapsing the many unknowable facets of an economy into a few (or sometimes quite a few) artificial equations confuses complexity for knowledge. To add insult to injury, most economists regard any economic reasoning that lack this aura of supreme enlightenment as non-rigorous. Taleb, though a mathematician, couldn’t agree more. James Sheehan wrote on Mises. org as early as 2006 that: “Taleb’s critique of econometrics is quite compatible with Austrian economics, which holds that dynamic human actions are too subjective and variegated to be accurately modeled and predicted.”

In Antifragile, the book Taleb says encapsulates the foundational ideas he had been working on until then, he writes: “much of what is taught in economics that has an equation, as well as econometrics, should be immediately ditched – which explains why economics is largely a charlatanic profession.” (pp. 294-295) He continues  “the simple argument that Black Swan and tail events run the socioeconomic world – and these events cannot be predicted – is sufficient to invalidate [econometrics].” (p. 307)

The future is not merely unknown, but unknowable, as Mises would say, and we can’t trust the econometrician’s estimate, no matter how fancy his model.

In the next post we’ll look at some areas where Taleb strongly diverges from Mises – particularly so the use of theory.

 

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