Feel Vulnerable? You can beggar your neighbors and your kids for temporary relief.

Stop Saving Now! by Daniel Gross in the March 23^rd issue of Newsweek is an excellent discussion of the “paradox of thrift,” an observed fact that during hard times the safest strategy for an individual is to save what he/she can to minimize personal risks.  However, to end hard times people as a whole must spend more and take greater risks. The paradox of thrift is just one manifestation of a far deeper engineering principle: in any closed system we cannot reduce overall risks, we can only redistribute them.

This deep principle is an offshoot of the 2^nd Law of Thermodynamics: that uncertainty in a closed system increases with time. Earth, except for sunlight’s energy and the heat sink of outer space, is a closed system. (Okay fellow engineers… that a big exception… I deal with it later) Nature, the global economy, our national economies, our local economies, businesses, banks, nations, our cultures, our families, our individual lives and our personal belief systems are merely some of the subsystems within the closed system of Earth. In our journey from tribalism to modern societies we have traded-off uncertainties and vulnerabilities among these subsystems in ways that enabled significant portions of the human race to live reasonably invulnerable lives for limited periods of time. In the process, we also destabilized other human lives and other systems on Earth.

Unfortunately, we cannot eliminate any particular personal or financial risk in our own lives, regardless of how much effort we expend or how much wealth we accumulate; we can only approach personal or social invulnerability for limited periods of time, much as we can only approach the speed of light when we accelerate a material object, no matter how small its mass or how much energy we impart to it. To come even tantalizingly close to certainty or invulnerability for an individual or group by focusing on accumulating its wealth or power, requires that we make everyone else’s lives completely uncertain and vulnerable, we must beggar our neighbors and our progeny.

We’ve lived a social example of that principle in our efforts to prevent another 9-11 terror attack at all costs. The Bush administration (with our tacit consent) chose to suspend rules of law, anti-torture policies, Constitutional rights to privacy and due process, and to the principle of a just war. Prior to 9-11 we accepted those discarded rights and principles as a more optimum trade-off between our individual security and the average security of our fellow citizens; even though doing so let many lawbreakers go free and our personal vulnerability to crime was significant.  After 9-11, out of an abundance of fear we made other nations and many of our own citizens more vulnerable, including those fellow citizens we sent to fight in Iraq and Afghanistan, in order to make ourselves and our leaders feel less vulnerable. My point here is to illustrate that we made trade-offs, we didn’t get something for nothing.

An economic example of these deep principles? Amassing enormous personal wealth can reduce personal economic uncertainties, but at some point it makes others more economically vulnerable until their collective actions undermine the security of personal wealth.  The Bush tax cuts (and ones before them) and deregulation regimes which allowed greater concentrations of wealth in the hands of fewer individuals and institutions, was a contributing factor to this economic crisis. I will elaborate on this in future blogs, along with specific recommendations towards more optimum tradeoffs between personal, institutional and national risks. Pools of wealth, like pools of water, are essential to modern societies so long as they are not too few and too large. Water comes in the forms of steam, rain, puddles, lakes, streams and oceans. Water in all forms contributes things essential to life, as do the dynamics of changing from one form to the other. Money, or more accurately credit, is like water.  We have allowed it to accumulate into too few, too large pools of individual and institutional wealth and thereby lost much of the flow and transformations essential to continued prosperity. One of the perceptions that has permitted, nay driven, this overconcentration is a belief that the larger an institution is the less likely it is to fail. That is true to a point, an inflection point, beyond which it becomes less and less true because of its deleterious effects on the other systems upon which it depends.

Earlier I referred to Earth as a closed system, except. The exception, a net inward flow of usable energy from the sun and an outward flow of more random thermal waste to space, means that it is possible (but slow and difficult) to slightly reduce average disorder in the biosphere over the eons. Nature (I use the term as a convenience, I’m not personalizing it) developed photosynthesis as a means for doing this several billion years ago, and used this capacity to develop life on earth, including human life. However, it has sustained and grown life as a whole, and set aside pools of energy, by allowing individual organisms to be highly vulnerable, even going so far as to build in term limits, and species to be reasonably vulnerable and by enabling diversity. As we tap pools of energy, we too have the capacity to improve things and to support some growth, but we cannot avoid trade-offs between individual, community, local and global objectives. 

In the global economy, we cannot eliminate any risk related to any specific sub-system; we can only reduce it to some reasonable level by increasing risks outside that subsystem. Any attempt to reduce a particular risk to zero, for example to assure perpetual economic growth or make all bonds AAA rated, requires choices that eventually throw everything else into chaos, and increase the particular risk as well.

Edwin Lee was CEO of a hi-tech company for 16 years. His biography is available at  www.elew.com