Metastability

My latest Epsilon Theory note is about the metastability of social systems.

A social system remains metastable as long as there is a reasonably broad consensus regarding its core values and mythology. Without this consensus, metastability weakens. Put another way: first-order threats to social stability, such as isolated riots and street crime, are risks that lie in the body of the distribution of outcomes, both for individuals and society. Metainstability is a higher-order threat. The risks associated with metainstability lie in the tails of the distribution. They fall under the broad category heading of Really Bad Stuff and include things like:

  • violent revolution
  • war
  • property expropriation

Back to the Ants and the Grasshopper. Would it behoove the Ants to share a bit of food with the other insects to shore up the metastability of the forest’s social system?

You can read the whole thing at Epsilon Theory.

Metastability is a rich concept to explore. I didn’t spend a lot of time defining metastability in my ET piece, but I find it worthwhile to look at the concept through the lens of elementary calculus.

If you’re reading this blog, you’re probably familiar with the differentiation of the simple quadratic function f(x) = x^2. The first derivative (a.k.a “instantaneous rate of change”) of f(x) = X^2 is 2x. The second derivative of f(x) = x^2 is just the derivative of 2x, the constant, 2. This, in turn, can be interpreted as the “instantaneous rate of change” for the function f(x) = 2x.

So you can see there’s some mathematical intuition behind that old saw, “change is the only constant.” It’s rates of change all the way down.

These concepts show up in finance all the time. In fixed income, there’s an inverse relationship between bond prices and yields. The first derivative of this function is a bond’s duration. The second derivative is its convexity.

With an option, the payoff depends on the price of the underlying relative to the strike price at expiration. The sensitivity of the option’s price to changes in the price of the underlying is the first derivative of this relationship. This is the option’s delta. The second derivative of this relationship, the sensitivity of the option’s delta to changes in the price of the underlying, is the option’s gamma.

(homework: consider the CAPM or any other linear factor model of financial asset returns in this context)

Anyway, on to metastability.

Take a society at any given point in time.

Social stability is its first derivative. Social stability is the instantaneous rate of change for society’s consensus values and norms.

Metastability is the second derivative. Metastability is the rate of acceleration (or deceleration) of changes in social stability.

In the language of options traders, social stability is society’s delta. Metastability is society’s gamma. Unfortunately for society, it’s generally short gamma. Which is just a fancy way of saying change is dangerous. Change stresses human social systems. The greater the magnitude of social change, and the faster the rate of change accelerates, the greater the stress on the existing social order.

Want to destroy social order in a hurry?

Lose a big war. That typically gets the job done.

Of course, this also invites the question, how would you strengthen social metastability?

By cultivating shared values and mythology.

The most common negative responses to my ET piece were comments along the lines of “the ants shouldn’t have to ‘share’/the Grasshopper should have to ‘earn’.” That’s a fine point of view. But it’s only a first-order look at the issue. Heck, from a first-order perspective, I completely agree. But that says nothing about metastability. I wish I’d made this a bit more explicit in the original post, but I did elaborate in the comments.

Actually, as far as metastability is concerned, in the fable’s base case involving the ants and a single grasshopper, it’s perfectly fine to just let the grasshopper starve. A moral philosopher might challenge that view, but the moral philosophy of this is a whole other issue.

In fact, you can easily imagine the Ayn Rand version of my “extended edition,” where all the insects are strict utilitarians. Here there’d be no need for any “metastability insurance” because of a strong consensus around libertarian utilitarian values as the organizing principles for society.

Likewise, you can imagine a Scandinavian “extended edition” where all the insects are social democrats or whatever. That society may have a very different set of consensus values and an entirely different level of metastability.

This is what I’m driving at when writing about metastability as a reflexive process, and why the social contract is necessarily something that’s negotiated. The obnoxious, twenty-five cent word for this process would be “dialectic.” Outside of relatively small, culturally homogenous communities, it becomes increasingly difficult to establish a strong consensus around values. The example of Prussia used in the post is a prime example. The Prussian “solution” to the problem of forging consensus around shared values at scale was to bind cultural identity to the state. It worked pretty well. Too well, in fact.

Anyway, for the purposes of this post I’m not concerned at all with whether libertarian or social democratic values are inherently superior. I’m more concerned with the idea that at the scale of a large, technologically advanced nation-state, maintaining social metastability is a balancing act across different constituencies.

I think I will likely have more to say on this subject in future posts.

ET Note: The Grand Inquisition

Below is the teaser for my latest Epsilon Theory note. The piece is a meditation on freedom, through the lens of Dostoyevsky’s parable, “The Grand Inquisitor”:

The Nudging State and Nudging Oligarchy believe they are giving us a gift: Freedom from Choice.

Except that it is neither a gift nor freedom in any sense. Rejecting it isn’t always easy and it isn’t always costless. But it’s the only choice for anyone who would be free.

Click through to Epsilon Theory to read the whole thing.

There’s an idea embedded in this note, related to the specific mechanism through which the Nudging State engages in social engineering, which is worth making more explicit. I’ve written around the edges of it before on this blog, in The Tyranny of Optimization, when I wrote:

Here you’re not staring down the barrel of a gun but rather at a smartphone screen. Here, the trick is not only convincing people to buy into your optimization, but that buying in was their idea in the first place. This is tyranny updated for the 21st century. Much cleaner than putting people up against a wall.

What I’m describing here is what my friends at Epsilon Theory call “fiat thought.” These are thoughts and behaviors you believe are your own, though in reality they’ve been engineered by the Nudging State and the Nudging Oligarchy to promote some policy or behavior.

How do you test for fiat thought?

Ask why.

“Why do I believe [whatever]?”

For fiat thought, the answer is always some permutation of “because someone told me so.” Maybe that’s a politician. Maybe it’s a business leader. Maybe it’s a public intellectual or “thought leader.” Maybe it’s a go-to media outlet (or several). Bottom line is you won’t have a principles-based reason for believing whatever is at issue.

Having your thoughts replaced with fiat thought is perhaps the purest form of slavery I can imagine. It’s like being transformed into a pod person, except you don’t even realize the transformation is taking place. In fact, to the extent you notice the transformation at all, you’ll believe it was your own idea. This is the nature of “choice architecture.” It’s a kind of rigged game–a simulation of free will.

In reading some of the responses to my note, there are a couple common threads:

  1. Aren’t constraints on our behavior necessary to some extent to have a functional society?
  2. Most of the folks who serve the State do not have malicious intentions and are sincerely doing the best they can to balance tradeoffs when making policy.

These are both excellent points. I totally agree with both of them.

Constraints on our behavior and incentive systems are terms we negotiate as part of the social contract. The negotiation process is ongoing and dynamic. It never ends. An important aspect of freedom is the ability to participate in the negotiation process as a principal. “Nudgers” do not treat us as principals. Nudgers treat us as biological systems to be engineered.

ET Note: Kobayashi Maru

I suspect I have some significant reader overlap with Epsilon Theory, but for those of you who aren’t also ET readers (you should be, btw), I was recently invited to contribute to the site. Perhaps needless to say, I jumped at the opportunity. I’m excited to join Ben, Rusty, Peter, Neville and David on a platform offering some of the most unique perspective out there on politics and investing. For now, I expect to contribute approximately one note every three weeks, and to cross-post the links to those notes on this site.

My first note went live Tuesday afternoon. It’s titled “Kobayashi Maru”, and it’s about how in a no-win scenario, the best strategy is to change the conditions of the game.

More specifically, it’s about discretionary active management and the way ESG investing is sold to investors and financial advisers.

And, obviously, it involves a Star Trek analogy.

kobayashi_maru