Skin in the Game: Hidden Asymmetries in Daily Life
Nassim Nicholas Taleb
Random House, 2018
To review Skin in the Game is a risky undertaking. The author has little use for book reviewers who, he tells us, “are bad middlemen. … Book reviews are judged according to how plausible and well-written they are; never in how they map the book (unless of course the author makes them responsible for misrepresentations).”
The risk is very much worth undertaking, though, because Skin in the Game is an excellent book, filled with insights. These insights stress a central antithesis. Irresponsible people, with what C.D. Broad called “clever silly” intellectuals prominent among them, defend reckless policies that impose risks on others but not on themselves. They have no “skin in the game,” and in this to Taleb lies their chief defect.
Interventionist foreign policy suffers from this defect. “A collection of people classified as interventionistas … who promoted the Iraq invasion of 2003, as well as the removal of the Libyan leader in 2011, are advocating the imposition of additional such regime change on another batch of countries, which includes Syria, because it has a ‘dictator’. So we tried that thing called regime change in Iraq, and failed miserably. … But we satisfied the objective of ‘removing a dictator.’ By the same reasoning, a doctor would inject a patient with ‘moderate’ cancer cells to improve his cholesterol numbers, and proudly claim victory after the patient is dead, particularly if the postmortem showed remarkable cholesterol readings.”
But what has this to do with risk? The fallacy of the interventionists, Taleb tells us, is that they disregard the chance that their schemes will fail to work as planned. A key theme of Taleb’s work is that uncertain outcomes mandate caution.
“And when a blowup happens, they invoke uncertainty, something called a Black Swan (a high-impact unexpected event), … not realizing that one should not mess with a system if the results are fraught with uncertainty, or, more generally, should avoid engaging in an action with a big downside if one has no idea of the outcomes.”
The same mistaken conception of risk affects economic policy. “For instance, bank blowups came in 2008 because of the accumulation of hidden and asymmetric risks in the system: bankers, master risk transferors, could make steady money from a certain class of concealed explosive risks, use academic risk models that don’t work except on paper … then invoke uncertainty after a blowup … and keep past income — what I have called the Bob Rubin trade.”
Instead of relying on mathematical models, economists should realize that the free market works. Why use misguided theory to interfere with success in practice? “Under the right market structure, a collection of idiots produces a well-functioning market. … Friedrich Hayek has been, once again, vindicated. Yet one of the most cited ideas in history, that of the invisible hand, appears to be the least integrated into the modern psyche.”
Upsetting a complex system like the free market, can have disastrous consequences. Given this truth, libertarianism is the indicated course of action. “We libertarians share a minimal set of beliefs, the central one being to substitute the rule of law for the rule of authority. Without necessarily realizing it, libertarians believe in complex systems.”
Taleb greatly admires Ron Paul, the foremost libertarian in politics, and he is one of two people to whom the book is dedicated. (Ralph Nader is the other.) Ron Paul grasps Taleb’s fundamental lesson that misguided theory should not supplant what has stood the test of time. “The insightful and luckily nonacademic historian Tom Holland … wrote: ‘The Romans judged their political system by asking not whether it made sense but whether it worked,’ which is why while dedicating this book, I called Ron Paul a Roman among Greeks.”
One common objection to the free market is that it allows powerful corporations to dominate people. Taleb’s response converges with that of Murray Rothbard: “There are two ways to make citizens safe from large predators, say, big powerful corporations. The first one is to enact regulations — but these, aside from restricting individual freedoms, lead to another predation, this time by the state, its agents, and their cronies. … The other solution is to put skin in the game in transactions, in the form of legal liability, and the possibility of an efficient lawsuit. The Anglo-Saxon world has traditionally had a predilection for the legal approach instead of the regulatory one; if you harm me, I can sue you. This has led to the very sophisticated, adaptive, and balanced common law, built bottom-up, by trial and error.”
Rothbard held the same view. In his pathbreaking monograph “Law, Property Rights, and Air Pollution,” he remarks: “There are, of course, innumerable statutes and regulations that create illegality besides the torts dealt with in common-law courts. We have not dealt with laws such as the Clean Air Act of 1970 or regulations for a simple reason: None of them can be permissible under libertarian legal theory. In libertarian theory, it is only permissible to proceed coercively against someone if he is a proven aggressor, and that aggression must be proven in court (or in arbitration) beyond a reasonable doubt. Any statute or administrative regulation necessarily makes actions illegal that are not overt initiations of crimes or torts according to libertarian theory. Every statute or administrative rule is therefore illegitimate and itself invasive and a criminal interference with the property rights of noncriminals.”
Another complaint against the free market stems from “behavioral economics.” Consumers, it is alleged, often act in an irrational way against their own best interests. Hence the benevolent action of bureaucratic experts is required to “nudge” people into rationality. Taleb responds. “We have survived in spite of tail risks; our survival cannot be that random.” (Tail events are “extreme events of low frequency,” i.e., the Black Swans mentioned earlier.) The supposed “mistakes” that the behavioral economists allege people commit often are good ways to cope with tail risks.