Thoughts on economics and liberty

Is the world getting more uncertain, or less uncertain?

I've by now attended a few expert sessions where I hear that uncertainty is increasing in the modern world. For instance this report talks about an "increasingly uncertain global environment", and that "The complexity and uncertainty that the public sector faces is driving the need for governments to foster agility in its people, systems and outlook."

I agree that complexity is increasing, even as things look increasingly simper on the surface because of a more sophisticated way of using technology (a good example would be the I-Phone). Also, of course, things are getting more complicated – which is a subset of complexity (consider modern cars compared with earlier cars). 

But I can't find evidence that uncertainty is increasing. On the contrary, I find uncertainty is decreasing.

Let's use the Rumsfeld framework to determine the extent of our knowledge (or ignorance):

1. known knowns: This is the situation of  perfect information. 

2. known unknowns: In this case we may know the distribution of something (say in the game of dice), but don't know precisely which outcome we will experience. So there is a level of known risk with well-defined probabilities. 

3. unknown unknowns: This refers primarily to Black Swan events that hit us from the blue. We neither know their mean, nor distribution. We don't even know that they exist! 

The question before us is: Are (2) and (3) increasing? Are uncertain events increasing? Are shocks and accidents increasing?

Consider this graph from my draft manuscript DOF

As knowledge about the world has grown our ignorance has reduced.

To the hunter-gatherer, life was almost entirely uncertain. He did not know whether he'd find food on a given day, how far and in which direction he'd have to go to find food, whether he would return home safe, whether his wife would still be at home when he returned or have been picked up in a neighbouring tribal raid, whether his child would live or die of disease, snakebite, and so on. Life was a mystery. Survival was a herculean challenge. The savage knew virtually nothing. Almost everything was an unknown unknown.

In that sense certainty has dramatically increased. We get up at a fixed time. Immediately, hot water and food are available. We go to work in a bus (in my case) that might be five minutes late, but the thing still comes! We might see a traffic accident on the way once in a year but generally everyone reaches safely to work. Our families are generally safe, our children don't mosly die of disease. And so on.

We know almost exactly what we know and what we don't know. What we don't know we can find on google.

The area of the unknown unknown has shrunk to almost total insignificance. Black swan events that are largely man-made (e.g. GFC) can be readily explained by those who know, and will confound those who are ignorant about how markets work. The fact that some people don't understand freedom and free markets doesn't mean that the event was not predictable.

True,  we do a lot many more things than we did in the past. Therefore the things that can change have increased. So there are more 'distributions' today – that were not even in existence in our hunter-gathering days – many of which are not fully known.

But despite that, on average, on all things that matter, life is FAR MORE certain than it was ever before.


Ways by which uncertainty is reduced in the modern world:

– Hedging of risks (typically foreign exchange risk).

– Diversification of one's portfolio

– Insurance and risk management

– Complete markets including for insurance (although insurance markets will never be complete)

– Predictable regulatory frameworks

– Systematic governance arrangements (both in the public and private sectors) including accounting and other practices.

– continuous improvement in health technology and science

As competition has increased (relatively to our hunter-gathering days? – not sure) people's jobs are not assured. But it is still assured that they will survive longer and healthier than hunter-gatherers or pre-modern men. 

Even if a major glitch occurs (e.g. the Virgin Blue breakdown of computers yesterday), the net loss is relatively small, since individually, these things account for an increasingly smaller share of our income. 

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2 thoughts on “Is the world getting more uncertain, or less uncertain?
  1. Sanjeev Sabhlok

    Comment from a friend on Facebook:

    Dear Dr Sabhlok,

    Your analysis of the uncertainty in today's world is truly amazing. I do agree with you that we are more informed than our predecessors, we live in a world where ‘unknown unknown’ is almost non-existent and ‘known unknown’ can be predicted with sophisticated statistical tools with great precision. However, I still feel that there is a dark area of uncertainty that hunts human civilization. We still cannot predict the mood of Mother Nature. She never allows us to assess her upper limit of tolerance. We yet don’t know how far she will be able to sustain the pain and injuries inflicted upon her by human activities. We may forecast a hurricane or tornado but cannot predict its intensity or severity. We are yet to forecast an earthquake or a tsunami. The impacts of global climate change on human civilization are perhaps the biggest ‘known unknown’ we are facing today. We may know the consequences but we cannot ascertain the specific date time of their occurrences. There lies the uncertainty. 

    Another point I would like to make here is that till date we have not been able to understand the intricate interrelation of species existence in nature. It is like a building with many pillars, but we don’t know exactly the pillars that hold the entire structure. Any damage to those pillars will lead to an immediate collapse of the entire structure. We cannot predict how nature will react to extinction of a particular species. “The point is not that nature has to be forever preserved in its pristine form, nor that nature needs protection from humans. The point, rather, is that human beings sometimes need protection from the consequences of their own shortsighted actions that might force nature to strike a new equilibrium, one in which human survival becomes that much more difficult. Sustainability, in other words, is not to protect nature and the environment in themselves, but to protect human society from its own thoughtless actions, whether burning a hole in the ozone layer, or saturating the atmosphere with noxious gases. Here, the question really is of studying the short- and long-term impact of a particular activity.”(‘Playest Thou Satan, In Tribal Paradise?’, T K Arun, The Economic Times, September 9, 2010)

    Best Regards,

  2. ramesh

    Dear Sabhlok,
    I envisage two aspects of certainty:
    1.      Physical aspect (materialistic approach) – Certainty has increased to some extent as you say. (Some extent because we are yet to develop a human being with man, buddhi, chitta, ahankar in the laboratory!!. Whether it is realistic or not thing is different and may be discussed separately.)
    2.      Stability of mind – More stable the human mind the more certainty in the life of that particular person- I assume morality, faith etc has a lot to do with this. With the increase of materialistic approach and decrease of Dharmic approach morality and similar things are suffering a lot thereby causing the mind flicker more. Example for decreasing morality or similar thing: No instant support for FTI or similar things compared to other events like cine events or political event (by Congress or BJP etc). In the past there was a little compromise on aspects like morale etc than is today. Thus in modern life mind is more uncertain than in the past. I have heard it from many mouths and also believe the same. Hope you say not it is a ‘Speculation’. There is a solution to this or not, the thing is different (I have a solution you know well)
    It is in this sense alone that this 2nd aspect is more important and where the uncertainty has actually increased!

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