One of my favorite economists, Tyler Cowen, talks about Black Swans here:
While I agree with much of the discussion, I think he could improve the specification of his point about countries. He states:
“If systemic risk is now higher does that mean we should have larger countries or smaller countries? … The small country is more useful because the smaller country is nimble… [or] the smaller economies don’t handle risk as well, they can’t save their own banking systems. … The case for larger countries becomes stronger if you live in a world where you suddenly discover it has more black swans than you think.”
This way of looking at the problem isn’t really the best way to ask the question.
The interesting question is, ”If systemic risk is high, should we have strong central governments empowered with a robust national Keynesian toolkit or strong local control with a national approach even F.A. Hayek would love?”
To start the nanocivics look at the question, consider this figure:
In any society there is distribution of outcome expectations. While most swarm to the conventional wisdom to form some sort of consensus expectation, there remains a minority (firms, people, governmental entities) which reject the consensus and expect something different. Some, perhaps only a very few, may even be expecting what the consensus will later deem the Black Swan.
If the preponderance of financial, economic, policy, and business matters are subject to group decision-making through direct or indirect central government control, then every actor is forced behave as if they agree with the consensus expectation. Is not Keynesian action only possible when it is favored by the majority?
However, in a decentralized system, those whose expectations don’t line up with consensus are free to pursue alternate strategies. The few who expected the Black Swan stand firm and can continue business or personal operations through the Black Swan event. Does not Hayek’s Pretence of Knowledge exhortation extend to economic forecasting, business investment, and household borrowing?
The nanocivics preference for empowering the small-scale relationships of local public life and Legatum’s own data on the link between prosperity and freedom agree on this. After all, free markets are resilient for a reason. In part, because people and businesses try different strategies based on different expectations about the future. Their reward comes from the market, not government spoils.
That said, Cowen’s Black Swam remedy of “study more history” is a welcome and timely prescription.