Uncertain Predictability, Predictable Uncertainty August 2016
Subscribe to Insights in Brief to be notified about new Featured Content as it becomes available!
Under the best circumstances, professional futurists can identify only a range of possible futures and outcomes; however, experts in a variety of fields recently raised the chilling prospect that even understanding potential future developments is becoming increasingly difficult. As University of Cambridge (Cambridge, England) political economist and research fellow at the University of Sheffield's (Sheffield, England) Sheffield Political Economy Research Institute (SPERI) Helen Thompson recently put it, "In the surreal world of post-2008 financial markets and monetary policy 'black swan' events [rare and unpredictable events] shouldn't surprise us any more" ("The Coming Crisis: we're not in Kansas any more," SPERI, 25 May 2016; online). She is not alone in this assessment.
Journalist Steve LeVine, an adjunct professor in the Security Studies Program at Georgetown University (Washington, DC), looks at energy developments in the context of technology and geopolitics. LeVine notes that although global oil prices have fallen dramatically since 2014, analysts did not see the price drop coming. He also points out that analysts failed to predict that Saudi Arabia would launch a price war in response to the shale gale—the rise in oil production in the United States thanks to fracking and in Canada thanks to the exploitation of oil-shale reserves—attempting to use the moment to push smaller oil-producing nations such as Venezuela and Iran aside. Analysts also failed to anticipate Saudi politicians' willingness to maintain this stance even at the cost of the nation's revenues and their willingness to lowball other countries about the magnitude of the nation's oil reserves—analysts underestimated Saudi Arabia's geopolitical resolution and its oil reserves. Such a surprise in technological developments, oil supply, and political decision making is significant because energy markets drive global economic growth, and academic economists, government policy makers, and traders alike study them very thoroughly. Perfect oil-price forecasts have always proved elusive; however, until recently, understood models existed that economists could test and improve. Such models now appear to be in question at a fundamental level.
The decreasing understanding of developments and dynamics and the deteriorating ability to anticipate them raise questions about how political and commercial actors can make rational and forward-looking decisions.
The financial market has seen upheaval and surprised many experts. Helen Thompson argues that because of a combination of quantitative easing, extremely low interest rates, and high-frequency trading, finance markets now behave in ways that no one can predict. And Artemis Capital Management (Austin, Texas) managing director Christopher Cole refers to an era of postmodern finance, arguing that "we are in the greatest period of stability with the largest probabilistic tail risk ever" ("Volatility and the Allegory of the Prisoner's Dilemma: False Peace, Moral Hazard, and Shadow Convexity," Artemis Capital Management, October 2015; online). The Financial Times draws comparisons between Cole's interpretation of economic developments and a theory by the late Washington University in St. Louis (St. Louis, Missouri) economist Hyman Minsky: "As Minsky once wrote, it's stability that proves to be the greatest source of instability. A phenomenon Cole likes to attribute to the presence of shadow convexity in the system.... There's arguably a new scale of self-reflexivity that's been added into the system—the mother of all feedback loops, if you will" ("The shadow convexity risk in the machine [and the VIX]," Financial Times, 13 October 2015; online). In addition, acquiring economic information has proved increasingly difficult. The quality of Chinese economic data from the Chinese government has lacked trustworthiness in general, and although other fast-growing economies lack the infrastructure necessary to report reliably about their economic conditions, they have numerous incentives to paint misleadingly rosy pictures. Meanwhile, sophisticated global companies have learned how to use reporting laws to their advantage to make themselves opaque. Finally, the growth of algorithmic trading has created an entire class of significant financial players that no one can understand because looking at algorithms' assumptions and processes is intrinsically difficult. Such developments prompted successful hedge fund Nevsky Capital (London, England) to close in early 2016. The firm argues that because algorithmic trading increases volatility, the quality of data and the transparency of decision making and equity markets decreased while fat-tail risk increased.
Political instability is also increasing, and the United Kingdom's unexpected decision to withdraw from the European Union adds the newest twist to political uncertainty. A 2016 survey of global experts by the Bertelsmann Foundation (Gütersloh, Germany) revealed a deep sense of pessimism about the future in the face of growing authoritarianism, increasing influence of sectarian religion on domestic politics and geopolitics, and growing extreme poverty, which affects people in more countries today than it did a decade ago. As such instabilities build and feed on one another, the likelihood that extreme politicians and political movements will emerge increases, which creates dynamics that will diverge in many directions.
The foundations of economic and societal planning are also under consideration. Researchers from the University of Hamburg (Hamburg, Germany) and the University of Göttingen (Göttingen, Germany) have suggested that economic growth in Western countries is coming to an end. Whereas some economists believe GDP growth is exponential, the researchers argue that it has been linear since the 1960s. The problem, then, is that creating a constant percentage growth in GDP as the economic base continues to grow becomes impossible. The implications for government budgets and retirement funds, which assume ongoing growth of between 1% and 2% annually, are profound. A host of current political and economic theories and related decisions make sense only under the assumption of long-term economic growth for all.
The decreasing understanding of developments and dynamics and the deteriorating ability to anticipate them raise questions about how political and commercial actors can make rational and forward-looking decisions. In a world in which many regions are becoming increasingly authoritarian and antidemocratic and descending into political and economic turmoil and in which the old rules of geopolitics and standard economic frameworks seem no longer to apply, taking uncertainty into consideration more explicitly will become a strategic competence of utmost importance.