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This is why, for example, large numbers of Americans oppose the idea of an estate tax even though the current form of the tax, slated to return in 2011, is very unlikely to affect them or their estates. In narrowly self-interested terms, that view may be irrational, but most Americans are unwilling to frame national issues in terms of rich versus poor. There’s a great deal of hostility toward various government bailouts, but the idea of “undeserving” recipients is the key factor in those feelings. Resentment against Wall Street gamesters hasn’t spilled over much into resentment against the wealthy more generally. The bailout for General Motors’ labor unions wasn’t so popular either—again, obviously not because of any bias against the wealthy but because a basic sense of fairness was violated. As of November 2010, congressional Democrats are of a mixed mind as to whether the Bush tax cuts should expire for those whose annual income exceeds $250,000; that is in large part because their constituents bear no animus toward rich people, only toward undeservedly rich people.

envy is usually local. At least in the United States, most economic resentment is not directed toward billionaires or high-roller financiers—not even corrupt ones. It’s directed at the guy down the hall who got a bigger raise. It’s directed at the husband of your wife’s sister, because the brand of beer he stocks costs $3 a case more than yours, and so on. That’s another reason why a lot of people aren’t so bothered by income or wealth inequality at the macro level. Most of us don’t compare ourselves to billionaires. Gore Vidal put it honestly: “Whenever a friend succeeds, a little something in me dies.”

Occasionally the cynic in me wonders why so many relatively well-off intellectuals lead the egalitarian charge against the privileges of the wealthy. One group has the status currency of money and the other has the status currency of intellect, so might they be competing for overall social regard? The high status of the wealthy in America, or for that matter the high status of celebrities, seems to bother our intellectual class most. That class composes a very small group, however, so the upshot is that growing income inequality won’t necessarily have major political implications at the macro level.

All that said, income inequality does matter—for both politics and the economy.

The numbers are clear: Income inequality has been rising in the United States, especially at the very top. The data show a big difference between two quite separate issues, namely income growth at the very top of the distribution and greater inequality throughout the distribution. The first trend is much more pronounced than the second, although the two are often confused.

When it comes to the first trend, the share of pre-tax income earned by the richest 1 percent of earners has increased from about 8 percent in 1974 to more than 18 percent in 2007. Furthermore, the richest 0.01 percent (the 15,000 or so richest families) had a share of less than 1 percent in 1974 but more than 6 percent of national income in 2007. As noted, those figures are from pre-tax income, so don’t look to the George W. Bush tax cuts to explain the pattern. Furthermore, these gains have been sustained and have evolved over many years, rather than coming in one or two small bursts between 1974 and today.1

At the same time, wage growth for the median earner has slowed since 1973. But that slower wage growth has afflicted large numbers of Americans, and it is conceptually distinct from the higher relative share of top income earners. For instance, if you take the 1979–2005 period, the average incomes of the bottom fifth of households increased only 6 percent while the incomes of the middle quintile rose by 21 percent. That’s a widening of the spread of incomes, but it’s not so drastic compared to the explosive gains at the very top.

The broader change in income distribution, the one occurring beneath the very top earners, can be deconstructed in a manner that makes nearly all of it look harmless. For instance, there is usually greater inequality of income among both older people and the more highly educated, if only because there is more time and more room for fortunes to vary. Since America is becoming both older and more highly educated, our measured income inequality will increase pretty much by demographic fiat. Economist Thomas Lemieux at the University of British Columbia estimates that these demographic effects explain three-quarters of the observed rise in income inequality for men, and even more for women.2

Attacking the problem from a different angle, other economists are challenging whether there is much growth in inequality at all below the super-rich. For instance, real incomes are measured using a common price index, yet poorer people are more likely to shop at discount outlets like Wal-Mart, which have seen big price drops over the past twenty years.3 Once we take this behavior into account, it is unclear whether the real income gaps between the poor and middle class have been widening much at all. Robert J. Gordon, an economist from Northwestern University who is hardly known as a right-wing apologist, wrote in a recent paper that “there was no increase of inequality after 1993 in the bottom 99 percent of the population”, and that whatever overall change there was “can be entirely explained by the behavior of income in the top 1 percent.”4

And so we come again to the gains of the top earners, clearly the big story told by the data. It’s worth noting that over this same period of time, inequality of work hours increased too. The top earners worked a lot more and most other Americans worked somewhat less. That’s another reason why high earners don’t occasion more resentment: Many people understand how hard they have to work to get there. It also seems that most of the income gains of the top earners were related to performance pay—bonuses, in other words—and not wildly out-of-whack yearly salaries.5

It is also the case that any society with a lot of “threshold earners” is likely to experience growing income inequality. A threshold earner is someone who seeks to earn a certain amount of money and no more. If wages go up, that person will respond by seeking less work or by working less hard or less often. That person simply wants to “get by” in terms of absolute earning power in order to experience other gains in the form of leisure—whether spending time with friends and family, walking in the woods and so on. Luck aside, that person’s income will never rise much above the threshold.

The funny thing is this: For years, many cultural critics in and of the United States have been telling us that Americans should behave more like threshold earners. We should be less harried, more interested in nurturing friendships, and more interested in the non-commercial sphere of life. That may well be good advice. Many studies suggest that above a certain level more money brings only marginal increments of happiness. What isn’t so widely advertised is that those same critics have basically been telling us, without realizing it, that we should be acting in such a manner as to increase measured income inequality. Not only is high inequality an inevitable concomitant of human diversity, but growing income inequality may be, too, if lots of us take the kind of advice that will make us happier.

Why is the top 1 percent doing so well?

Steven N. Kaplan and Joshua Rauh have recently provided a detailed estimation of particular American incomes.6 Their data do not comprise the entire U.S. population, but from partial financial records they find a very strong role for the financial sector in driving the trend toward income concentration at the top. For instance, for 2004, nonfinancial executives of publicly traded companies accounted for less than 6 percent of the top 0.01 percent income bracket. In that same year, the top 25 hedge fund managers combined appear to have earned more than all of the CEOs from the entire S&P 500. The number of Wall Street investors earning more than $100 million a year was nine times higher than the public company executives earning that amount. The authors also relate that they shared their estimates with a former U.S. Secretary of the Treasury, one who also has a Wall Street background. He thought their estimates of earnings in the financial sector were, if anything, understated.

Many of the other high earners are also connected to finance. After Wall Street, Kaplan and Rauh identify the legal sector as a contributor to the growing spread in earnings at the top. Yet many high-earning lawyers are doing financial deals, so a lot of the income generated through legal activity is rooted in finance. Other lawyers are defending corporations against lawsuits, filing lawsuits or helping corporations deal with complex regulations. The returns to these activities are an artifact of the growing complexity of the law and government growth rather than a tale of markets per se. Finance aside, there isn’t much of a story of market failure here, even if we don’t find the results aesthetically appealing.

When it comes to professional athletes and celebrities, there isn’t much of a mystery as to what has happened. Tiger Woods earns much more, even adjusting for inflation, than Arnold Palmer ever did. J.K. Rowling, the first billionaire author, earns much more than did Charles Dickens. These high incomes come, on balance, from the greater reach of modern communications and marketing. Kids all over the world read about Harry Potter. There is more purchasing power to spend on children’s books and, indeed, on culture and celebrities more generally. For high-earning celebrities, hardly anyone finds these earnings so morally objectionable as to suggest that they be politically actionable. Cultural critics can complain that good schoolteachers earn too little, and they may be right, but that does not make celebrities into political targets. They’re too popular. It’s also pretty clear that most of them work hard to earn their money, by persuading fans to buy or otherwise support their product. Most of these individuals do not come from elite or extremely privileged backgrounds, either. They worked their way to the top, and even if Rowling is not an author for the ages, her books tapped into the spirit of their time in a special way. We may or may not wish to tax the wealthy, including wealthy celebrities, at higher rates, but there is no need to “cure” the structural causes of higher celebrity incomes.

to be sure, the high incomes in finance should give us all pause.

The first factor driving high returns is sometimes called by practitioners “going short on volatility.” Sometimes it is called “negative skewness.” In plain English, this means that some investors opt for a strategy of betting against big, unexpected moves in market prices. Most of the time investors will do well by this strategy, since big, unexpected moves are outliers by definition. Traders will earn above-average returns in good times. In bad times they won’t suffer fully when catastrophic returns come in, as sooner or later is bound to happen, because the downside of these bets is partly socialized onto the Treasury, the Federal Reserve and, of course, the taxpayers and the unemployed.

if you bet against unlikely events, most of the time you will look smart and have the money to validate the appearance. Periodically, however, you will look very bad. Does that kind of pattern sound familiar? It happens in finance, too. Betting against a big decline in home prices is analogous to betting against the Wizards. Every now and then such a bet will blow up in your face, though in most years that trading activity will generate above-average profits and big bonuses for the traders and CEOs.

To this mix we can add the fact that many money managers are investing other people’s money. If you plan to stay with an investment bank for ten years or less, most of the people playing this investing strategy will make out very well most of the time. Everyone’s time horizon is a bit limited and you will bring in some nice years of extra returns and reap nice bonuses. And let’s say the whole thing does blow up in your face? What’s the worst that can happen? Your bosses fire you, but you will still have millions in the bank and that MBA from Harvard or Wharton. For the people actually investing the money, there’s barely any downside risk other than having to quit the party early. Furthermore, if everyone else made more or less the same mistake (very surprising major events, such as a busted housing market, affect virtually everybody), you’re hardly disgraced. You might even get rehired at another investment bank, or maybe a hedge fund, within months or even weeks.

Moreover, smart shareholders will acquiesce to or even encourage these gambles. They gain on the upside, while the downside, past the point of bankruptcy, is borne by the firm’s creditors. And will the bondholders object? Well, they might have a difficult time monitoring the internal trading operations of financial institutions. Of course, the firm’s trading book cannot be open to competitors, and that means it cannot be open to bondholders (or even most shareholders) either. So what, exactly, will they have in hand to object to?

Perhaps more important, government bailouts minimize the damage to creditors on the downside. Neither the Treasury nor the Fed allowed creditors to take any losses from the collapse of the major banks during the financial crisis. The U.S. government guaranteed these loans, either explicitly or implicitly. Guaranteeing the debt also encourages equity holders to take more risk. While current bailouts have not in general maintained equity values, and while share prices have often fallen to near zero following the bust of a major bank, the bailouts still give the bank a lifeline. Instead of the bank being destroyed, sometimes those equity prices do climb back out of the hole. This is true of the major surviving banks in the United States, and even AIG is paying back its bailout. For better or worse, we’re handing out free options on recovery, and that encourages banks to take more risk in the first place.

there is an unholy dynamic of short-term trading and investing, backed up by bailouts and risk reduction from the government and the Federal Reserve. This is not good. “Going short on volatility” is a dangerous strategy from a social point of view. For one thing, in so-called normal times, the finance sector attracts a big chunk of the smartest, most hard-working and most talented individuals. That represents a huge human capital opportunity cost to society and the economy at large. But more immediate and more important, it means that banks take far too many risks and go way out on a limb, often in correlated fashion. When their bets turn sour, as they did in 2007–09, everyone else pays the price.

And it’s not just the taxpayer cost of the bailout that stings. The financial disruption ends up throwing a lot of people out of work down the economic food chain, often for long periods. Furthermore, the Federal Reserve System has recapitalized major U.S. banks by paying interest on bank reserves and by keeping an unusually high interest rate spread, which allows banks to borrow short from Treasury at near-zero rates and invest in other higher-yielding assets and earn back lots of money rather quickly. In essence, we’re allowing banks to earn their way back by arbitraging interest rate spreads against the U.S. government. This is rarely called a bailout and it doesn’t count as a normal budget item, but it is a bailout nonetheless. This type of implicit bailout brings high social costs by slowing down economic recovery (the interest rate spreads require tight monetary policy) and by redistributing income from the Treasury to the major banks.

the “going short on volatility” strategy increases income inequality. In normal years the financial sector is flush with cash and high earnings. In implosion years a lot of the losses are borne by other sectors of society. In other words, financial crisis begets income inequality. Despite being conceptually distinct phenomena, the political economy of income inequality is, in part, the political economy of finance. Simon Johnson tabulates the numbers nicely: From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.7

There’s a second reason why the financial sector abets income inequality: the “moving first” issue. Let’s say that some news hits the market and that traders interpret this news at different speeds. One trader figures out what the news means in a second, while the other traders require five seconds. Still other traders require an entire day or maybe even a month to figure things out. The early traders earn the extra money. They buy the proper assets early, at the lower prices, and reap most of the gains when the other, later traders pile on. Similarly, if you buy into a successful tech company in the early stages, you are “moving first” in a very effective manner, and you will capture most of the gains if that company hits it big.

The moving-first phenomenon sums to a “winner-take-all” market. Only some relatively small number of traders, sometimes just one trader, can be first. Those who are first will make far more than those who are fourth or fifth. This difference will persist, even if those who are fourth come pretty close to competing with those who are first. In this context, first is first and it doesn’t matter much whether those who come in fourth pile on a month, a minute or a fraction of a second later. Those who bought (or sold, as the case may be) first have captured and locked in most of the available gains. Since gains are concentrated among the early winners, and the closeness of the runner-ups doesn’t so much matter for income distribution, asset-market trading thus encourages the ongoing concentration of wealth. Many investors make lots of mistakes and lose their money, but each year brings a new bunch of projects that can turn the early investors and traders into very wealthy individuals.

These two features of the problem—“going short on volatility” and “getting there first”—are related. Let’s say that Goldman Sachs regularly secures a lot of the best and quickest trades, whether because of its quality analysis, inside connections or high-frequency trading apparatus (it has all three). It builds up a treasure chest of profits and continues to hire very sharp traders and to receive valuable information. Those profits allow it to make “short on volatility” bets faster than anyone else, because if it messes up, it still has a large enough buffer to pad losses. This increases the odds that Goldman will repeatedly pull in spectacular profits.

Still, every now and then Goldman will go bust, or would go bust if not for government bailouts. But the odds are in any given year that it won’t because of the advantages it and other big banks have. It’s as if the major banks have tapped a hole in the social till and they are drinking from it with a straw. In any given year, this practice may seem tolerable—didn’t the bank earn the money fair and square by a series of fairly normal looking trades? Yet over time this situation will corrode productivity, because what the banks do bears almost no resemblance to a process of getting capital into the hands of those who can make most efficient use of it. And it leads to periodic financial explosions. That, in short, is the real problem of income inequality we face today. It’s what causes the inequality at the very top of the earning pyramid that has dangerous implications for the economy as a whole.

What about controlling bank risk-taking directly with tight government oversight? That is not practical. There are more ways for banks to take risks than even knowledgeable regulators can possibly control; it just isn’t that easy to oversee a balance sheet with hundreds of billions of dollars on it, especially when short-term positions are wound down before quarterly inspections. It’s also not clear how well regulators can identify risky assets. Some of the worst excesses of the financial crisis were grounded in mortgage-backed assets—a very traditional function of banks—not exotic derivatives trading strategies. Virtually any asset position can be used to bet long odds, one way or another. It is naive to think that underpaid, undertrained regulators can keep up with financial traders, especially when the latter stand to earn billions by circumventing the intent of regulations while remaining within the letter of the law.

For the time being, we need to accept the possibility that the financial sector has learned how to game the American (and UK-based) system of state capitalism. It’s no longer obvious that the system is stable at a macro level, and extreme income inequality at the top has been one result of that imbalance. Income inequality is a symptom, however, rather than a cause of the real problem. The root cause of income inequality, viewed in the most general terms, is extreme human ingenuity, albeit of a perverse kind. That is why it is so hard to control.

Another root cause of growing inequality is that the modern world, by so limiting our downside risk, makes extreme risk-taking all too comfortable and easy. More risk-taking will mean more inequality, sooner or later, because winners always emerge from risk-taking. Yet bankers who take bad risks (provided those risks are legal) simply do not end up with bad outcomes in any absolute sense. They still have millions in the bank, lots of human capital and plenty of social status. We’re not going to bring back torture, trial by ordeal or debtors’ prisons, nor should we. Yet the threat of impoverishment and disgrace no longer looms the way it once did, so we no longer can constrain excess financial risk-taking. It’s too soft and cushy a world.

Why don’t we simply eliminate the safety net for clueless or unlucky risk-takers so that losses equal gains overall? That’s a good idea in principle, but it is hard to put into practice. Once a financial crisis arrives, politicians will seek to limit the damage, and that means they will bail out major financial institutions. Had we not passed TARP and related policies, the United States probably would have faced unemployment rates of 25 percent of higher, as in the Great Depression. The political consequences would not have been pretty. Bank bailouts may sound quite interventionist, and indeed they are, but in relative terms they probably were the most libertarian policy we had on tap. It meant big one-time expenses, but, for the most part, it kept government out of the real economy (the General Motors bailout aside).

We probably don’t have any solution to the hazards created by our financial sector, not because plutocrats are preventing our political system from adopting appropriate remedies, but because we don’t know what those remedies are. Yet neither is another crisis immediately upon us. The underlying dynamic favors excess risk-taking, but banks at the current moment fear the scrutiny of regulators and the public and so are playing it fairly safe. They are sitting on money rather than lending it out. The biggest risk today is how few parties will take risks, and, in part, the caution of banks is driving our current protracted economic slowdown. According to this view, the long run will bring another financial crisis once moods pick up and external scrutiny weakens, but that day of reckoning is still some ways off.

Is the overall picture a shame? Yes. Is it distorting resource distribution and productivity in the meantime? Yes. Will it again bring our economy to its knees? Probably. Maybe that’s simply the price of modern society. Income inequality will likely continue to rise and we will search in vain for the appropriate political remedies for our underlying problems.

For instance, in terms of education levels, we no longer live in a world that is divided into the West and the rest; our world today stretches from Canada to Yemen with all the other countries somewhere in between. There’s a broad spectrum of levels

even when people act within a fact-based worldview, they are used to talking with sterile figures. They are used to standing on a podium, clicking through slide shows in PowerPoint rather than interacting with their presentation. The problem is that companies have a strict separation between their IT department, where datasets are produced, and the design department, so hardly any presenters are proficient in both. Yet this is what we need. Getting people used to talking with animated data is, to my mind, a literacy project.

What’s important today is not just financial data but child mortality rates, the number of children per women, education levels, etc. In the world today, it’s not money that drags people into modern times, it’s people that drag money into modern times.

I can demonstrate human resources successes in Asia through health being improved, family size decreasing and then education levels increasing. That makes sense: when more children survive, parents accept that there is less need for multiple births, and they can afford to put their children through school. So Pfizer have moved their research and development of drugs to Asia, where there are brilliant young people who are amazing at developing drugs. It’s realising this kind of change that’s important.

The problem isn’t that specialised companies lack the data they need, it’s that they don’t go and look for it, they don’t understand how to handle it.

What is so strong with animation is that it provides that mindset shift in market segmentation. We can see where there are highly developed countries with a good economy and a healthy and well-educated staff.

At the moment, I’m quarrelling with Sweden’s Minister of Foreign Affairs. He says that the West has to make sure its lead over the rest of the world doesn’t erode. This is a completely wrong attitude. Western Europe and other high-income countries have to integrate themselves into the world in the same way big companies are doing. They have to look at the advantages, resources and markets that exist in different places around the world.

And some organisations aren’t willing to share their data, even though it would be a win-win situation for everybody and we would do much better in tackling the problems we need to tackle. Last April, the World Bank caved in and finally embraced an open data policy, but the OECD uses tax money to compile data and then sells it in a monopolistic way. The Chinese Statistical Bureau provides data more easily than the OECD. The richest countries in the world don’t have the vision to change.

‘database hugging disorder’

we have to instil a clear division of labour between those who provide the datasets – like the World Bank, the World Health Organisation or companies themselves – those who provide new technologies to access or process them, like Google or Microsoft, and those who ‘play’ with them and give data meaning. It’s like a great concert: you need a Mozart or a Chopin to write wonderful music, then you need the instruments and finally the musicians.

Just as a robust economic system is one that encourages early failures (the concepts of "fail small" and "fail fast"), the U.S. government should stop supporting dictatorial regimes for the sake of pseudostability and instead allow political noise to rise to the surface. Making an economy robust in the face of business swings requires allowing risk to be visible; the same is true in politics.

Both the recent financial crisis and the current political crisis in the Middle East are grounded in the rise of complexity, interdependence, and unpredictability. Policymakers in the United Kingdom and the United States have long promoted policies aimed at eliminating fluctuation -- no more booms and busts in the economy, no more "Iranian surprises" in foreign policy. These policies have almost always produced undesirable outcomes. For example, the U.S. banking system became very fragile following a succession of progressively larger bailouts and government interventions, particularly after the 1983 rescue of major banks (ironically, by the same Reagan administration that trumpeted free markets). In the United States, promoting these bad policies has been a bipartisan effort throughout. Republicans have been good at fragilizing large corporations through bailouts, and Democrats have been good at fragilizing the government. At the same time, the financial system as a whole exhibited little volatility; it kept getting weaker while providing policymakers with the illusion of stability, illustrated most notably when Ben Bernanke, who was then a member of the Board of Governors of the U.S. Federal Reserve, declared the era of "the great moderation" in 2004.

Washington stabilized the market with bailouts and by allowing certain companies to grow "too big to fail." Because policymakers believed it was better to do something than to do nothing, they felt obligated to heal the economy rather than wait and see if it healed on its own.

The foreign policy equivalent is to support the incumbent no matter what. And just as banks took wild risks thanks to Greenspan's implicit insurance policy, client governments such as Hosni Mubarak's in Egypt for years engaged in overt plunder thanks to similarly reliable U.S. support.

Those who seek to prevent volatility on the grounds that any and all bumps in the road must be avoided paradoxically increase the probability that a tail risk will cause a major explosion.

In the realm of economics, price controls are designed to constrain volatility on the grounds that stable prices are a good thing. But although these controls might work in some rare situations, the long-term effect of any such system is an eventual and extremely costly blowup whose cleanup costs can far exceed the benefits accrued. The risks of a dictatorship, no matter how seemingly stable, are no different, in the long run, from those of an artificially controlled price.

Such attempts to institutionally engineer the world come in two types: those that conform to the world as it is and those that attempt to reform the world. The nature of humans, quite reasonably, is to intervene in an effort to alter their world and the outcomes it produces. But government interventions are laden with unintended -- and unforeseen -- consequences, particularly in complex systems, so humans must work with nature by tolerating systems that absorb human imperfections rather than seek to change them.

What is needed is a system that can prevent the harm done to citizens by the dishonesty of business elites; the limited competence of forecasters, economists, and statisticians; and the imperfections of regulation, not one that aims to eliminate these flaws. Humans must try to resist the illusion of control: just as foreign policy should be intelligence-proof (it should minimize its reliance on the competence of information-gathering organizations and the predictions of "experts" in what are inherently unpredictable domains), the economy should be regulator-proof, given that some regulations simply make the system itself more fragile. Due to the complexity of markets, intricate regulations simply serve to generate fees for lawyers and profits for sophisticated derivatives traders who can build complicated financial products that skirt those regulations.

The life of a turkey before Thanksgiving is illustrative: the turkey is fed for 1,000 days and every day seems to confirm that the farmer cares for it -- until the last day, when confidence is maximal. The "turkey problem" occurs when a naive analysis of stability is derived from the absence of past variations. Likewise, confidence in stability was maximal at the onset of the financial crisis in 2007.

The turkey problem for humans is the result of mistaking one environment for another. Humans simultaneously inhabit two systems: the linear and the complex. The linear domain is characterized by its predictability and the low degree of interaction among its components, which allows the use of mathematical methods that make forecasts reliable. In complex systems, there is an absence of visible causal links between the elements, masking a high degree of interdependence and extremely low predictability. Nonlinear elements are also present, such as those commonly known, and generally misunderstood, as "tipping points." Imagine someone who keeps adding sand to a sand pile without any visible consequence, until suddenly the entire pile crumbles. It would be foolish to blame the collapse on the last grain of sand rather than the structure of the pile, but that is what people do consistently, and that is the policy error.

Engineering, architecture, astronomy, most of physics, and much of common science are linear domains. The complex domain is the realm of the social world, epidemics, and economics. Crucially, the linear domain delivers mild variations without large shocks, whereas the complex domain delivers massive jumps and gaps. Complex systems are misunderstood, mostly because humans' sophistication, obtained over the history of human knowledge in the linear domain, does not transfer properly to the complex domain. Humans can predict a solar eclipse and the trajectory of a space vessel, but not the stock market or Egyptian political events. All man-made complex systems have commonalities and even universalities. Sadly, deceptive calm (followed by Black Swan surprises) seems to be one of those properties.

The system is responsible, not the components. But after the financial crisis of 2007-8, many people thought that predicting the subprime meltdown would have helped. It would not have, since it was a symptom of the crisis, not its underlying cause. Likewise, Obama's blaming "bad intelligence" for his administration's failure to predict the crisis in Egypt is symptomatic of both the misunderstanding of complex systems and the bad policies involved.

Obama's mistake illustrates the illusion of local causal chains -- that is, confusing catalysts for causes and assuming that one can know which catalyst will produce which effect. The final episode of the upheaval in Egypt was unpredictable for all observers, especially those involved. As such, blaming the CIA is as foolish as funding it to forecast such events. Governments are wasting billions of dollars on attempting to predict events that are produced by interdependent systems and are therefore not statistically understandable at the individual level.

Political and economic "tail events" are unpredictable, and their probabilities are not scientifically measurable. No matter how many dollars are spent on research, predicting revolutions is not the same as counting cards; humans will never be able to turn politics into the tractable randomness of blackjack.

Most explanations being offered for the current turmoil in the Middle East follow the "catalysts as causes" confusion. The riots in Tunisia and Egypt were initially attributed to rising commodity prices, not to stifling and unpopular dictatorships. But Bahrain and Libya are countries with high gdps that can afford to import grain and other commodities. Again, the focus is wrong even if the logic is comforting. It is the system and its fragility, not events, that must be studied -- what physicists call "percolation theory," in which the properties of the terrain are studied rather than those of a single element of the terrain.

When dealing with a system that is inherently unpredictable, what should be done? Differentiating between two types of countries is useful. In the first, changes in government do not lead to meaningful differences in political outcomes (since political tensions are out in the open). In the second type, changes in government lead to both drastic and deeply unpredictable changes.

Humans fear randomness -- a healthy ancestral trait inherited from a different environment. Whereas in the past, which was a more linear world, this trait enhanced fitness and increased chances of survival, it can have the reverse effect in today's complex world, making volatility take the shape of nasty Black Swans hiding behind deceptive periods of "great moderation." This is not to say that any and all volatility should be embraced. Insurance should not be banned, for example.

But alongside the "catalysts as causes" confusion sit two mental biases: the illusion of control and the action bias (the illusion that doing something is always better than doing nothing). This leads to the desire to impose man-made solutions

Variation is information. When there is no variation, there is no information. This explains the CIA's failure to predict the Egyptian revolution and, a generation before, the Iranian Revolution -- in both cases, the revolutionaries themselves did not have a clear idea of their relative strength with respect to the regime they were hoping to topple. So rather than subsidize and praise as a "force for stability" every tin-pot potentate on the planet, the U.S. government should encourage countries to let information flow upward through the transparency that comes with political agitation. It should not fear fluctuations per se, since allowing them to be in the open, as Italy and Lebanon both show in different ways, creates the stability of small jumps.

As Seneca wrote in De clementia, "Repeated punishment, while it crushes the hatred of a few, stirs the hatred of all . . . just as trees that have been trimmed throw out again countless branches." The imposition of peace through repeated punishment lies at the heart of many seemingly intractable conflicts, including the Israeli-Palestinian stalemate. Furthermore, dealing with seemingly reliable high-level officials rather than the people themselves prevents any peace treaty signed from being robust. The Romans were wise enough to know that only a free man under Roman law could be trusted to engage in a contract; by extension, only a free people can be trusted to abide by a treaty. Treaties that are negotiated with the consent of a broad swath of the populations on both sides of a conflict tend to survive. Just as no central bank is powerful enough to dictate stability, no superpower can be powerful enough to guarantee solid peace alone.

As Jean-Jacques Rousseau put it, "A little bit of agitation gives motivation to the soul, and what really makes the species prosper is not peace so much as freedom." With freedom comes some unpredictable fluctuation. This is one of life's packages: there is no freedom without noise -- and no stability without volatility.∂

Jeffrey Sachs, an advisor to the United Nations and director of Columbia University's Earth Institute, is one such expert. In books and countless speeches and television appearances, he has argued that poor countries are poor because they are hot, infertile, malaria-infested, and often landlocked; these factors, however, make it hard for them to be productive without an initial large investment to help them deal with such endemic problems. But they cannot pay for the investments precisely because they are poor -- they are in what economists call a "poverty trap." Until something is done about these problems, neither free markets nor democracy will do very much for them.

But then there are others, equally vocal, who believe that all of Sachs's answers are wrong. William Easterly, who battles Sachs from New York University at the other end of Manhattan, has become one of the most influential aid critics in his books, The Elusive Quest for Growth and The White Man's Burden. Dambisa Moyo, an economist who worked at Goldman Sachs and the World Bank, has joined her voice to Easterly's with her recent book, Dead Aid. Both argue that aid does more bad than good. It prevents people from searching for their own solutions, while corrupting and undermining local institutions and creating a self-perpetuating lobby of aid agencies.

The best bet for poor countries, they argue, is to rely on one simple idea: When markets are free and the incentives are right, people can find ways to solve their problems. They do not need handouts from foreigners or their own governments.

According to Easterly, there is no such thing as a poverty trap.

To find out whether there are in fact poverty traps, and, if so, where they are and how to help the poor get out of them, we need to better understand the concrete problems they face. Some aid programs help more than others, but which ones? Finding out required us to step out of the office and look more carefully at the world. In 2003, we founded what became the Abdul Latif Jameel Poverty Action Lab, or J-PAL. A key part of our mission is to research by using randomized control trials -- similar to experiments used in medicine to test the effectiveness of a drug -- to understand what works and what doesn't in the real-world fight against poverty. In practical terms, that meant we'd have to start understanding how the poor really live their lives.

Flow is a tread­mill, and you can’t spend all of your time run­ning on the tread­mill. Well, you can. But then one day you’ll get off and look around and go: Oh man. I’ve got noth­ing here.

But I’m not say­ing you should ignore flow!

this is no time to hole up and work in iso­la­tion, emerg­ing after long months or years with your perfectly-polished opus. Every­body will go: huh?

if you don’t have flow to plug your new fans into, you’re suf­fer­ing a huge (here it is!) oppor­tu­nity cost. You’ll have to find them all again next time you emerge from your cave.

we all got really good at flow, really fast. But flow is ephemeral. Stock sticks around. Stock is cap­i­tal. Stock is protein.

And the real magic trick in 2010 is to put them both together. To keep the ball bounc­ing with your flow—to main­tain that open chan­nel of communication—while you work on some kick-ass stock in the back­ground.

all these super-successful artists and media peo­ple today who don’t really think about flow. Like, Wes Ander­son

the secret is that some­body else does his flow for him. I mean, what are PR and adver­tis­ing? Flow, bought and paid for.

Today I’m still always ask­ing myself: Is this stock? Is this flow? How’s my mix? Do I have enough of both?

Despite the cowboy outlaw connotations, black-hat services are not illegal, but trafficking in them risks the wrath of Google. The company draws a pretty thick line between techniques it considers deceptive and “white hat” approaches, which are offered by hundreds of consulting firms and are legitimate ways to increase a site’s visibility. Penney’s results were derived from methods on the wrong side of that line, says Mr. Pierce. He described the optimization as the most ambitious attempt to game Google’s search results that he has ever seen.

TO understand the strategy that kept J. C. Penney in the pole position for so many searches, you need to know how Web sites rise to the top of Google’s results. We’re talking, to be clear, about the “organic” results — in other words, the ones that are not paid advertisements. In deriving organic results, Google’s algorithm takes into account dozens of criteria, many of which the company will not discuss.

But it has described one crucial factor in detail: links from one site to another. If you own a Web site, for instance, about Chinese cooking, your site’s Google ranking will improve as other sites link to it. The more links to your site, especially those from other Chinese cooking-related sites, the higher your ranking. In a way, what Google is measuring is your site’s popularity by polling the best-informed online fans of Chinese cooking and counting their links to your site as votes of approval.

But even links that have nothing to do with Chinese cooking can bolster your profile if your site is barnacled with enough of them. And here’s where the strategy that aided Penney comes in. Someone paid to have thousands of links placed on hundreds of sites scattered around the Web, all of which lead directly to JCPenney.com.

Who is that someone? A spokeswoman for J. C. Penney, Darcie Brossart, says it was not Penney.

“J. C. Penney did not authorize, and we were not involved with or aware of, the posting of the links that you sent to us, as it is against our natural search policies,” Ms. Brossart wrote in an e-mail. She added, “We are working to have the links taken down.”

Using an online tool called Open Site Explorer, Mr. Pierce found 2,015 pages with phrases like “casual dresses,” “evening dresses,” “little black dress” or “cocktail dress.” Click on any of these phrases on any of these 2,015 pages, and you are bounced directly to the main page for dresses on JCPenney.com.

Some of the 2,015 pages are on sites related, at least nominally, to clothing. But most are not. The phrase “black dresses” and a Penney link were tacked to the bottom of a site called nuclear.engineeringaddict.com. “Evening dresses” appeared on a site called casino-focus.com. “Cocktail dresses” showed up on bulgariapropertyportal.com. ”Casual dresses” was on a site called elistofbanks.com. “Semi-formal dresses” was pasted, rather incongruously, on usclettermen.org.

And there is another, related aspect of discussions about eugenics that should be at the forefront of our consideration: what was particularly objectionable about American and Nazi early 20th century eugenics is that the state, not individuals, were to make decisions about who could reproduce and who couldn’t. Savulescu continues: “to grant procreative liberty is the only way to avoid the objectionable form of eugenics that the Nazis practiced.” In other words, it makes all the difference in the world if it is an individual couple who decides to have or not have a baby, or if it is the state that imposes a particular reproductive choice on its citizenry.

but then Savulescu expands his argument to a point where I begin to feel somewhat uncomfortable. He says: “[procreative liberty] involves the freedom to choose a child with red hair or blond hair or no hair.”

Savulescu has suddenly sneaked into his argument for procreative liberty the assumption that all choices in this area are on the same level. But while it is hard to object to action aimed at avoiding devastating diseases, it is not quite so obvious to me what arguments favor the idea of designer babies. The first intervention can be justified, for instance, on consequentialist grounds because it reduces the pain and suffering of both the child and the parents. The second intervention is analogous to shopping for a new bag, or a new car, which means that it commodifies the act of conceiving a baby, thus degrading its importance. I’m not saying that that in itself is sufficient to make it illegal, but the ethics of it is different, and that difference cannot simply be swept under the broad rug of “procreative liberty.”

designing babies is to treat them as objects, not as human beings, and there are a couple of strong philosophical traditions in ethics that go squarely against that (I’m thinking, obviously, of Kant’s categorical imperative, as well as of virtue ethics; not sure what a consequentialist would say about this, probably she would remain neutral on the issue).

Commodification of human beings has historically produced all sorts of bad stuff, from slavery to exploitative prostitution, and arguably to war (after all, we are using our soldiers as means to gain access to power, resources, territory, etc.)

And of course, there is the issue of access. Across-the-board “procreative liberty” of the type envisioned by Savulescu will cost money because it requires considerable resources.

imagine that these parents decide to purchase the ability to produce babies that have the type of characteristics that will make them more successful in society: taller, more handsome, blue eyed, blonde, more symmetrical, whatever. We have just created yet another way for the privileged to augment and pass their privileges to the next generation — in this case literally through their genes, not just as real estate or bank accounts. That would quickly lead to an even further divide between the haves and the have-nots, more inequality, more injustice, possibly, in the long run, even two different species (why not design your babies so that they can’t breed with certain types of undesirables, for instance?). Is that the sort of society that Savulescu is willing to envision in the name of his total procreative liberty? That begins to sounds like the libertarian version of the eugenic ideal, something potentially only slightly less nightmarish than the early 20th century original.

Not to mention that rich people can provide better health care, education and nutrition to their children and again no one is questioning their right to do so. Wouldn't a couple of inches be pretty negligible compared to getting into a good school? Aren't we applying double standards by objecting to this issue alone? Do we really live in a society that values equal opportunities? People (may) be equal before the law but they are not equal to each other and each one of us is tacitly accepting that fact when we acknowledge the social hierarchy (in other words, every time we interact with someone who is our superior). I am not crazy about this fact but that's just how people are and this has to be taken into account when discussing this.

So the question becomes "what is denialism?" Denialism is a mindset that chooses to deny reality in order to avoid an uncomfortable truth. Denialism creates a false sense of truth through the subjective selection of evidence (cherry picking). Unhelpful evidence is rejected and excuses are made, while supporting evidence is accepted uncritically - its meaning and importance exaggerated. It is a common feature of denialism to claim the existence of some sort of powerful conspiracy to suppress the truth. Rejection by the mainstream of some piece of evidence supporting the denialist view, no matter how flawed, is taken as further proof of the supposed conspiracy. In this way the denialist always has a fallback position.

Delingpole makes the following claim: Whether Goldacre chooses to ignore it or not, there are many, many hugely talented, intelligent men and women out there – from mining engineer turned Hockey-Stick-breaker Steve McIntyre and economist Ross McKitrick to bloggers Donna LaFramboise and Jo Nova to physicist Richard Lindzen….and I really could go on and on – who have amassed a body of hugely powerful evidence to show that the AGW meme which has spread like a virus around the world these last 20 years is seriously flawed.

So he mentions a bunch of people who are intelligent and talented and have amassed evidence to the effect that the consensus of AGW (Anthropogenic Global Warming) is a myth. Should I take his word for it? No. I am a sceptic. I will examine the evidence and the people behind it.

MM claims that global temperatures are not accelerating. The claims have however been roundly disproved as explained here. It is worth noting at this point that neither man is a climate scientist. McKitrick is an economist and McIntyre is a mining industry policy analyst. It is clear from the very detailed rebuttal article that McIntrye and McKitrick have no qualifications to critique the earlier paper and betray fundamental misunderstandings of methodologies employed in that study.

This Wikipedia article explains in better laymens terms how the MM claims are faulty.

It is difficult for me to find out much about blogger Donna LaFrambois. As far as I can see she runs her own blog at http://nofrakkingconsensus.wordpress.com and is the founder of another site here http://www.noconsensus.org/. It's not very clear to me what her credentials are

She seems to be a critic of the so-called climate bible, a comprehensive report by the UN Intergovernmental Panel on Climate Change (IPCC)

I am familiar with some of the criticisms of this panel. Working Group 2 famously overstated the estimated rate of disappearance of the Himalayan glacier in 2007 and was forced to admit the error. Working Group 2 is a panel of biologists and sociologists whose job is to evaluate the impact of climate change. These people are not climate scientists. Their report takes for granted the scientific basis of climate change, which has been delivered by Working Group 1 (the climate scientists). The science revealed by Working Group 1 is regarded as sound (of course this is just a conspiracy, right?) At any rate, I don't know why I should pay attention to this blogger. Anyone can write a blog and anyone with money can own a domain. She may be intelligent, but I don't know anything about her and with all the millions of blogs out there I'm not convinced hers is of any special significance.

Richard Lindzen. Okay, there's information about this guy. He has a wiki page, which is more than I can say for the previous two. He is an atmospheric physicist and Professor of Meteorology at MIT.

According to Wikipedia, it would seem that Lindzen is well respected in his field and represents the 3% of the climate science community who disagree with the 97% consensus.

The second to last paragraph of Delingpole's article asks this: If  Goldacre really wants to stick his neck out, why doesn’t he try arguing against a rich, powerful, bullying Climate-Change establishment which includes all three British main political parties, the National Academy of Sciences, the Royal Society, the Prince of Wales, the Prime Minister, the President of the USA, the EU, the UN, most schools and universities, the BBC, most of the print media, the Australian Government, the New Zealand Government, CNBC, ABC, the New York Times, Goldman Sachs, Deutsche Bank, most of the rest of the City, the wind farm industry, all the Big Oil companies, any number of rich charitable foundations, the Church of England and so on?I hope Ben won't mind if I take this one for him (first of all, Big Oil companies? Are you serious?) The answer is a question and the question is "Where is your evidence?"

if lost generation were made up for entirely by coal-fired plants, carbon emissions would increase annually by as much as 33 million tons. This would represent an overall 4% annual increase in carbon emissions for the country and an 8% increase in carbon emissions for the power sector alone.

The moratorium could cause a spike in CO2 emissions as Germany turns to its other, more carbon-intensive sources to supply its energy demand. Already, the country has been engaged in a "dash for coal", building dozens of new coal plants in response to the perverse incentives and intense lobbying from the coal industries made possible by the European Emissions Trading Scheme. (As previously reported by Breakthrough Europe).

Alternatively, should the country try to replace lost generation entirely with power from renewables, it would need to more than double generation of renewable energy, from where it currently stands at 97 billion kWh to about 237 billion kWh. As part of the country's low-carbon strategy, Germany has planned to deploy at least 20% renewable energy sources by 2020. If the nation now chooses to meet this goal by displacing nuclear plants, 2020 emissions levels would be higher than had the country otherwise phased out its carbon-intensive coal or natural gas plants.

*Carbon emissions factors used are those estimated by the World Bank in 2009 for new coal-fired power plants (0.795 t C02/MWh) and new gas-fired power plants (0.398 t C02/MWh) **Data from Carbon Monitoring For Action, European Nuclear Society Data, and US Energy Information Administration

Organized by the New Economics Foundation and the Working Group on Climate and Development, the report (in PDF) is actually pretty good and contains much valuable information on climate change and development (that is, once you get past the hype of the press release and its lack of precision in disaggregating climate and vulnerability as sources of climate-related impacts). The participating organizations have done a nice job integrating considerations of climate change and development, a perspective that is certainly needed. More generally, the IPCC suffers because it no longer considers “policy options” under its mandate. Since its First Assessment Report when it did consider policy options, the IPCC has eschewed responsibility for developing and evaluating a wide range of possible policy options on climate change. By deciding to policy outside of its mandate since 1992, the IPCC, ironically, leaves itself more open to charges of political bias. It is time for the IPCC to bring policy back in, both because we need new and innovative options on climate, but also because the IPCC has great potential to serve as an honest broker. But until it does, its leadership would be well served to avoid either the perception or the reality of endorsing particular political perspectives.