Too much thinking, too little observing

In the midst of the current economic crisis, the main cast which include politicians, the soon-to-be burned bankers, economists, newspaper columnists and talking heads, all well endowed with brain power, never tire of pontificating about the crisis. Each would come up with his/her own assessment of the situation together with the proposed nostrum. Unfortunately the diagnosis is invariably wide of the mark, what more the prognosis and remedy.

This woeful situation is the result of everybody using too much brain power, when in fact he/she should not be thinking at all. In pattern recognition, all you need to do is recognise the pattern to be able to portend the future state. Thinking, if any, should be kept to the absolute minimum. If you need to think, it should have been accomplished long ago, not when the crisis is brewing.

Alfred North Whitehead (1861-1947), the English mathematician and philosopher, years ago warned against thinking about something anew since it would invariably lead to ill-thought-out decisions: 'Civilisation advances by extending the number of important operations which we can perform without thinking of them.' In fact, the failure of the many personalities in coming up with a coherent diagnosis and prognosis of the current crisis can be attributed to the overuse of their grey matter and underuse of habituated responses.

By grey matter, we specifically mean the prefrontal cortex (PFC), the 20 percent of the brain that is involved in decision-making, empathising, higher-order thinking, directing attention and regulating emotions. Lying in the anterior (front) part, it is also the brain's working memory. In the animal kingdom, mankind not only has the greatest ratio of brain to body size but also the highest percentage of PFC, enabling it to dominate life on earth. However because the PFC holds only short-term memory, over-reliance on it can make us choke in our decision-making. If you've faced a panic before, such as stage fright, you would've experienced choking: your heart starts racing, your palm begins sweating, your muscles tense up and your mind seems blocked. That's because your PFC is bombarded by incessant messages that are too numerous to handle. So as the PFC jams shut, your mind goes blank and your body becomes stiff. To overcome this, we need to change our thinking process to become more automated.

As guides to transforming our thinking process from meditated to automatic, we have two acronyms to help us: OODA and FEED. Both amount to the same thing. OODA, short for Observe, Orient (or Orientate for Brits), Decide and Act, is a decision making loop developed by USAF Colonel John Boyd (1927-1997), a co-designer of the F16 fighter jet. The intent is to get inside the enemies' loop so that you think several cycles faster than your enemy, preventing him from discerning your thinking pattern. A simple example helps: in a crocodile infested river, you should never fetch water from the same location. The crocodile's thinking pattern is to sneak up on you the next time you come to the same spot. Your pattern is to keep changing the spot. It's easy to outwit a crocodile since it doesn't have PFC.

But with human adversaries, the difference is fine. For example, in air combat, a few seconds can mean the difference between registering a kill and being blown to smithereens. Similarly, the renowned undefeated samurai, Miyamoto Musashi, also the author of The Book of Five Rings that predated OODA by centuries, continually honed his swordplay through regular practice so that he could gain the few precious seconds needed to defeat his opponents in sword duels.

Let's see what OODA really is. On the top left diagram is the OODA loop. For comparison, below it is the PDCA loop typically used by Japanese companies; the PDCA is the reason why the Japanese are good at incremental but not radical progress. Immediately, without reading the boxes, you can spot the key difference between the two. The process flows from all the boxes in OODA not only proceed sequentially forward but also feed back to the Observe box (note that most of the OODA diagrams on the web are wrong except for Boyd's original) while that of the PDCA only advance sequentially. The flows in OODA imply that the Observe process is the most important part of the OODA loop.

That's the reason we are endowed with five sense organs and only one brain. If you look at the top predators in the animal kingdom, say, the sharks, their sense organs have been highly developed and seem almost perfect for the environment in which they roam. Their brains do not have PFC but they don't need to since they have vastly superior sense organs that can hear low frequency sound from a distant, detect electrical impulses generated by their prey, smell one part blood in a million parts seawater, and feel vibrations from pressure waves that bounce off objects.

The other acronym, FEED, comes from John B. Arden the author of Rewire Your Brain. It represents Focus, Effort, Effortlessness and Determination. Focus is akin to Observe. You then spend Effort, particularly practice, on your area of Focus in order to achieve Effortlessness in thinking as reflected in fast decisions and actions. Determination means to keep in practice so that Effortlessness is continuously maintained.

We can achieve the quick decisions by assigning to the PFC and the other cortices of the brain their true roles. The PFC should be used to process new information which should then be etched into other parts of the brain since the PFC's capacity is limited and temporary. To do so, the brain must be trained (or oriented) through repeated practices, much like what Miyamoto Musashi did, so that it rewires the other areas of the brain for long-term storage, thus enabling quick recall. The PFC is then left free for higher order thinking.

What about economics which is not amenable to being practised? Well, by continually deliberating and focusing on the issue, testing your own hypothesis against similar situations in different time periods and locations, you'll achieve the same effect. Extensive readings are also a must. You can start with economics topic but as you go along, digress into economic history, general history, military history, ecology, politics, demography, technology history, agricultural history and anthropology. Yes, anthropology, the study of humanity, because economics, which is the study of the material welfare of humankind, is actually a branch of anthropology.

Anthropologists possess several enviable traits that economists should emulate. They don't pass value judgement on the subject matter, i.e., the tribe or society, of their research. And they embed themselves within the subject matter in order to get first-hand information. Economists on the other are stuffed with preconceived notions of what's right and what's wrong. Free trade for example is sacrosanct. As long as sacred cows exist, progress in knowledge cannot proceed. The whole exercise can be purposeful as well as serendipitous, discovering things both intentionally and accidentally.

Without the help of OODA, our economic cast of characters can be likened to the six blind men and the elephant. The neo-Keynesian economists having touched the tail, proclaim that failing demand is the cause. At the front feeling the trunk are the monetarists. Unknowingly having been misled by Milton Friedman, they counter that falling money supply contributes to the mess. This flawed reasoning is the approach adopted by Bernanke, noted for his failed QEs. Next are the supply-siders who include the Republicans. They argue that fixing the supply side through a low tax regime will rejuvenate growth at a time when the problem is demand, not supply. Another are the ECB bankers and the EU bureaucrats who having forged an economic union that is not matched by a political one, thus ensuring its quick demise, are now hastening its death through a suicidal austerity measure. Japan is still lost as musical chair leaders still have no clue on what ails Japan. Then there is China still infatuated with superpower grandeur, not realising that the bigger threat is internal implosion. The coming depression itself is a tragedy but the nonsensical delusions of these blind men are turning the whole thing into a farce.

The orienting part needs to do one more step to complete the Orient process, that is, to develop the underlying pattern. It's not enough to have eyes to see the shape of the elephant since we must delve into its various functions, e.g., respiratory system, locomotion system, digestive system and so on. We need to know how changes in one aspect of the elephant's system affect the future state of the elephant. For economics, the 4C (see Reality in 4C) is a framework that sufficiently explains the mechanics of societies or nation-states. Why four, not seven or eight? Simply because the human mind cannot remember too many things. For example under Capacity, we could have enlarged it into energy, materials, agriculture and demography. But the framework would have been too unwieldy, slowing decision-making. To reduce many categories into a brain-manageable one, we use sub-grouping or nesting, one on top of the other. So under Capacity we have probably four more sub-groups. The longer the chain the more nesting levels needed but under normal situations, two would have been enough.

The key issue is not just grouping but how things are grouped. An expert group things by function whereas a novice does so by physical proximity. For example, the respiratory system is a grouping of body organs — nose, mouth, trachea, lungs, and diaphragm — that has the objective of supplying oxygen through the blood to all parts of the body. A novice groups things by physical proximity, for example, categorising eyes, ears, trunk and mouth together as they are physically located in the head. We know that the first grouping is more meaningful as it gives us a diagnosis and prognosis capability while the second one doesn't.

Once you have mastered these thinking skills, decisions and actions come naturally. You'll have a complete grasp of the overall landscape, having a helicopter view of your surroundings. You may not have an in-depth knowledge of any particular spot but that is the least of your worries. You can always drill deep down by hiring micro experts. On the other hand, with so much information that can be googled, you may not even need them.

And you'll never by caught off-guard by Nicholas Taleb's black swan. Using this approach you can even laugh him off. In fact with the current advanced knowledge in genes, we now know even if the black swan doesn't exist, we can tailor make one by changing the relevant genetic marker. Like science, economics and all other spheres governing human interactions are governed by the laws of nature. And anything that is subject to such laws can best be understood through the application of pattern recognition.

On and off the Marx

Marxism nowadays has been totally discredited and rejected by all save for a score of diehard revolutionaries who still believe in its view of how society and economy would eventually evolve. However, Marxism's real appeal to its staunch advocates doesn't lie in its economic or socio-political ideas since it's highly doubtful that they understand the complexity of Karl Marx's (1818-1883) Das Kapital. Instead Marxism's attraction to them is the class struggle that would lead to the triumph of the proletariat as idealised in a communist classless society. Such a society has hardly existed except in tribes living in unforgiving landscape, such as the Kalahari desert where equality is a necessary precondition for survival. As for the proletariat, once they gain power they take on the affectations of the bourgeoisie, dashing Marx's dream of his utopia.

However we cannot totally dismiss what Karl Marx wrote since he spent the better part of his life studying capitalism and its inherent weaknesses. He actually read the works of every economist. Also bear in mind that the background to Marx's economics thoughts was 19th century Europe, specifically England where he lived from 1849 till his death. In fact Marx's life straddled two Kondratieff wave periods, i.e., the first (1780-1840) and the second (1840-1900). So he was able to observe firsthand the winding down of the first Kondratieff wave and its succession by the next wave.

Thus it is Marx's economic ideas, not his revolutionary ones, which are more momentous since they could actually plug the missing gaps in the present repository of economic knowledge. Several of his predictions proved prescient. Among them, the growth of a few huge business firms that would come to dominate commerce and industry at a time when the prevailing business forms were small-scale. The most notable of course is his reckoning that the collapse of capitalism was the logical outcome of a constant class struggle between the bourgeois and the proletariat.

How that collapse would come about is an interesting piece that should have been required reading for all economists. Marx foresaw that to maintain profits, a business must constantly innovate. To him, the direction of innovation was in labour-saving machinery. Nowadays we know that innovation can take many forms—new processes, new materials, new machinery and so on—but the bottom line is the same: more output for less input. As the capitalist enterprises invest in more machinery, fewer workers will be needed resulting in a higher number of unemployed. If we examine the evidence in the later half of the past three Kondratieff waves Marx has actually been vindicated.

Even now in the fourth Kondratieff wave, a stream of unrest is plaguing most economies as the ranks of the unemployed begin to swell. The proletariat has risen in protest against the status quo. The cause is the imbalance of wealth distribution which cannot be solved by increasing productivity but by upending the manner in which wealth is presently distributed.

Having presciently pointed where capitalism would lead to, Marx miserably failed in recognising how capitalism overcame that weakness. He thought that capitalism would eventually destroy itself. He couldn't see that a succession of new Kondratieff waves would be ushered in to creatively destroy the wealth accumulated in the productive investments of the previous wave. The investments would be destroyed not physically but through obsolescence as the new wave's investments would produce better and cheaper products. The benefits of the new wave were not only enjoyed by the bourgeoisie but also spilled over to the proletariat. Marx was in despair when he witnessed his proletariat transformed into bourgeois proletariat. Having spent so much time and effort in formulating his theory, most of it in the reading room of the British Museum, he couldn't bring himself to rewriting it even though his observation was contradicting it.

For example, the second wave introduced cheap steel to replace wrought iron. This enabled boiler steam pressure to be increased making engine more efficient. Ships also could be made lighter and rails could bear heavier loads. New communication modes utilising rail, telegraph and telephone superseded canals. The impact was enormous. In the US the grain producing areas moved from New York and Pennsylvania to the Midwest. Rail also enabled France and Germany to industrialise by unlocking their landlocked coal fields.

Marx could only predict the demise of capitalism but he could not come up with an alternative beyond that of the proletariat rule. His Labour Theory of Value appears laughable now given that labour input forms a very small part of the production cost. In Marx's days the work week was around 80 hours. The communist countries took Marx's labour theory seriously. Instead of letting demand and supply set the price of goods, they were using labour input as the price determinant. Their central planning and mispricing produced the wrong goods for the wrong market. In the end, the lack of a profit motive reduced the incentive to produce. The USSR in its final days had to rely on oil to sustain itself because in all other areas, the workers were pretending to produce. Communism's failure thus was a failure of supply.

If communism failed because of supply, its anti-thesis, capitalism surely would meet its fate because of failure of demand. In fact, the depression that characterises the end of a Kondratieff wave is the result of demand not keeping pace with supply. Fixing demand is many times harder than fixing supply since those willing to spend must first be given the means to spend. Remember that during this stage of the Kondratieff wave, there are many unemployed people whose demand for economic goods has vanished. In the last few years, credit has been liberally dished out to continue stoking demand. The result is a world awash in toxic debts that cannot be solved other than writing them off. Because of the prominence of the toxic debts, it's commonly believed that the current crisis is a credit crisis where in fact it is a secondary cause. The root cause is the imbalance in wealth distribution the solution to which requires a major paradigm shift 0f the fifth Kondratieff wave.

The only remaining way to sustain demand in the current Kondratieff wave is continual deficit spending by the government or for the wealthy to donate part of their riches to the poor. You've probably heard suggestions to fix the crisis by resolving the supply side so that goods can be made cheaper and more affordable to the public. This is the wrong approach because cheaper goods usually entail more automation. The benefits eventually flow back to a narrower band of rich owners of capital. The poor still have no income no matter how cheap the goods are. Whatever means must be resurrected to reinstate income to the poor even to the extent of erecting the economically inefficient tariff barrier.

Only the government is capable of doing so but with the government heavily swayed by the benefits of free trade and its budget undermined by the planned spending cuts, the government has been hobbled. That makes 'giving' the only option left. However Adam Smith's individual self-interest working collectively for the public good no longer applies here. Instead as the rich wind down their spending and generosity because of fear of future uncertainties, the rest are consigned to the depths of despair and misery. But no, when humans are in such wretched conditions, they fight back and everyone will be the loser. Adam Smith's The Wealth of Nations should now be aptly retitled The Woes of Nations.