Let’s suppose that in early 1997 an analyst had suggested to the governments of Russia, South Korea and Brazil that Thailand’s real estate market posed a systemic risk to their entire economies. Let’s further suppose that the analyst had gone out on her limb and suggested that if the relatively small Southeast Asian nation began to face a potential market bubble-burst, the three giants should all pump in capital to bail it out in order to save themselves. It’s not hard to imagine that our hypothetical analyst would’ve become a major laughing stock and even been recommended to seek psychiatric help for delusion.
Russia, South Korea and Brazil were three of the biggest emerging economies in the world at the time. Meanwhile, Thailand’s economy was only about 7 percent that of the three giants combined and its real estate constituted but a fraction of its relatively small economy. As far as the three giants were concerned, Thailand was neither too big nor too interconnected to fail. Any reasonable economist or financier at the time would be absolutely certain that Thailand—let alone its real estate market—was not a systemic risk.
Our hypothetical analyst did not, as far as we can tell, exist. But had she been, she would’ve had the last laugh. Thailand’s real estate bubble did burst and in an unpredictable chain reaction brought down the entire Southeast Asian economy with it. The shockwave didn’t stop there; in a few months it destroyed South Korean economy and in a year it imploded Russia’s and pushed Brazil into a crippling economic crisis.
In The Age of the Unthinkable, senior geostrategic advisor Joshua Ramo contended that policy makers, politicians, and economists have been using arcane tools to predict what may or may not happen in today’s world. They are akin to physicists who try to apply Newtonian physics—a science of certainty—to understand quantum mechanics—a world of probability.
Ramo argued that today’s systems—economic, political, or otherwise—are best described as what physicists refer to as a sandpile model. The idea is that if you piled sand, grain by grain, until it formed a typical sandpile of a certain size, it would enter a strange “critical” state. At first take, the sandpile would look like a stable system and you might be tempted to believe that you could predict whether the next single grain of sand would simply make the pile taller or cause an avalanche. You would be wrong.
As a matter of fact, the sandpile is completely unpredictable. If you had a thousand identical sandpiles and kept adding one grain of sand at a time on top of each, you would observe that some could hold thousands of grains before the sand started sliding off, some could hold hundreds, some could hold dozens, while others would experience avalanche just by one additional grain. It is a system so complex that it would be impossible to make absolute predictions. Such is the difference between Newtonian physics and quantum mechanics—at the quantum level, you can never say, “The particle is here and not there,” you can only say, “The particle has a higher probability of being here than there.” And such is the difference between the economic system modeled by conventional economics and the actual economic system we are living in.
Unfortunately, it seems that arcane science prevails in Indonesia. Respectable economists and financiers had claimed with absolute certainty before lawmakers that Bank Century did not pose any systemic risk to Indonesia’s financial sector. Some gave a clear, black and white assessment that only fifteen banks, and no other, posed systemic risk. They were absolutely certain—there was no room for unpredictability. History would beg to differ. A single grain of sand has caused avalanche plenty of times in this century.
In 1987, an accumulation of small factors—not one was considered a risk—led to a systemic shift that ripped apart the U.S stock market. It happened again in 1997 in Asia. And again just last year on a global scale.
Such unpredictability doesn’t stop at the financial sector. Certainly a small country like Vietnam could never win an all-out war with the mighty United States; it did. Certainly a small search engine company operating from a small garage could never beat a giant established company like Yahoo; Google did. Certainly a housewife would never have a fighting chance in a legal battle against a giant hospital chain tens of thousands times as rich as she was; as far as everyone is concerned, Prita has already won.
Now our experts are very confident that Bank Century was neither too big nor too interconnected to fall. Then again, neither was Thailand’s real estate market in 1997.
It is not our experts’ conclusion that we should be wary about, but rather the degree of certainty they place on the result of their analysis. They failed to acknowledge that the systems in today’s world are so complex that such absolute prediction is simply ludicrous. That our lawmakers and their advisers are still under the impression that they can make decisions based on solid predictions is a cause for concern.
Kwik Kian Gie resorted to a crude analogy and called Finance Minister Sri Mulyani a “frog professor;” an allusion to a learned scientist who is detached from the real world. Yet if we choose to learn from history and sandpiles, one may wonder who the real frog professors are. Is it those who acknowledge the complexity of today’s systems, adopt the principles of unpredictability in assessing situation, and make a judgment call to take swift action in order to prevent a possible cataclysm; or those who cling on ancient tools and dare to make absolute predictions in today’s world of complex systems?
An edited version of this article is featured in The Jakarta Globe