Bee-urocratic lessons for the EU

The EU is a region with weird contradictions. While austerity measures are being imposed on the hapless EU southerners, late last year the overpaid EU eurocrats threatened to strike over a pay dispute, a proverbial case of the eurocrats fiddling while the EU burns. It seems that not only the EU political leaders but also its 40,000 eurocrats are out of touch with the hardships faced by the southern EU states.

This classic failure of communication is a common phenomenon between EU leaders and its eurocrats, on the one hand, and the EU populace, on the other. No, the communication here refers not to the virtual communication which itself has been carried far to extremes, drowning the important in a sea of insignificance. Instead, the real communication failure is the breakdown in thought process, or more precisely, the neuronal communication.

Our brain neurons communicate with other neurons both for learning new patterns and for quickly retrieving existing patterns. The former is handled by our prefrontal cortex, while the latter is delegated to other parts of the brain's grey matter. We can see the process at work by observing how swarm animals, such as ants, bees, starlings, termites, locusts and schooling fish communicate. The essay that explains how these animals do so appeared in the National Geographic, July 2007. Its author, Peter Miller, has followed it up in interesting detail with his book, The Smart Swarm.

Unlike human brains, swarm animals' brains lack the ability to learn new patterns but they have an astounding ability to retrieve ingrained patterns that have ensured their survivability over thousands, if not, millions of years. We can take the ants as an example of how swarm animals use their simple brains to tackle complex tasks. Ants communicate through pheromones, that is, the chemicals that they secrete through the tips of their abdomens. There's not just one type of pheromone, but at least more than ten, each used to signal a different purpose.

The pheromone trail created by this process is used, for example, to tell other ants the best path to take in foraging for food. There could be more than one path but over time the best path, usually the shortest, would have the strongest pheromone trail as ants that go out the shortest route would walk back the same way earlier than the ants using other paths, in the process reinforcing the trail scent with more chemical secretions. The decision to choose the right path thus is a result of the collective effort of many ants. Other types of pheromones are used for alerting the colony to danger, marking territory, or summoning help.

Ants also communicate by antennae touching. In deciding whether the colony should forage for food on any day, scout ants would go out first. The foragers would wait near the entrance for the scouts to return at the right pace. They know it by touching the antennae of the scout ants as well as through the odour of the scout ants. If the scouts' rate of return is too slow or too fast, the foragers would be discouraged from going out. Again, the decision is reached after having inputs from scout ants.

In practically all situations, ants rely a lot on communication. Each individual ant is analogous to a neuron in our brain, possessing the ability to make simple decisions. However when an ant is joined in a chain of many ants, the chain possesses the ability to generate varied patterns. We can take the example of digital storage: a bit can have two states but when strung into an 8-bit byte, the different permutation of data that it can store increases to 2⁸, i.e., 256. Replace the bits with neurons and you can imagine how the brain functions. One neuron by itself doesn't store much but a string of neurons do.

For any living organism with brain, only certain of the whole possible permutations are used so as not to overwhelm the brain. As the organism matures, the unused neuron pathways are pruned and the commonly used ones are reinforced, speeding up neuronal communication. Our exceptional thinking ability among living organisms is because our brain, specifically the prefrontal cortex, can put together a longer string of neurons that is dedicated towards learning, planning and self-control, abilities that the non-humans can hardly attain to.  Of course, whales and elephants have bigger brains than us but their prefrontal cortices as a proportion of their brains are very much less.

The EU leaders and the eurocrats, on the other hand, are analogous to a very small brain, and a very slow one at that, directing a massive body. The leaders are so distant from the whole EU populace to be able to decide what's in its best interest. The neuronal communication line is no longer connected. In nature, if there is a mismatch, one part has to size down in order to restore balance. That's reason enough for the EU to split itself into north and south, if not, its constituent states.

Swarm insects living in nest colonies also split off to form new nests. They leave their nest to establish a new colony once the present colony has outgrown its optimum size. They have no need to keep expanding the size of the present colony since beyond a certain carrying capacity, costs would outweigh benefits. This rule also applies to pack animals, such as wolves. The EU, in fact, has exceeded its optimum size and is ripe for a scale down. Expanding its borders means taking on states with vastly different economic, political and cultural values, adding on more costs with marginal benefits in return.

Although the ants' communication pattern appears resilient, it actually suffers from two serious weaknesses. In rare circumstances, the chemical trail can get washed out, for example, by a downpour, leaving the ants scrambling to form a new trail. Peter Miller recounted such a scene in Panama in 1936 in which a group of army ants had been trapped in a suicidal circular march. Apparently, the ants at the periphery had laid down a circular trail of pheromone that the other ants followed. Because the ants had been circling on the same spot, the pheromone scent had become too strong for them to escape. By the following day, all the ants had died of exhaustion.

Like the ants' suicidal circling, the EU leaders and eurocrats are similarly caught in a vicious circle of austerity measures that eventually will doom the whole of the EU. The surprising thing is that although the economic indicators all over the EU states are pointing towards a negative outlook, the EU leaders are sticking to the austerity tack, believing that the present efforts are not strong enough to yield positive results. More is needed to achieve the desirable outcome. The fault lies in depending too much on the received wisdom that low inflation, savings, current account surplus, and government budget surplus are good. Yes they are good but only in certain circumstances, certainly not at the end of the Kondratieff Wave cycle in which the opposite should prevail.

But how do you escape from this deathly vicious circle? For this, we need a helicopter, or rather, bee view. Ants rely much on information passed on by other ants. Bees, however, in matters crucial to the survival of the whole colony, such as scouting for a new nest site, do not rely solely on information passed on by other scout bees. How they overcome this shortcoming is fascinating to note. Scout bees would normally visit several sites and each would advertise its preference for a site by the vigorousness of its waggle dance. Other scout bees, attracted by the intensity of the dance, would check out the site themselves. Eventually, once most of the scouts are convinced of the site attractiveness, the bee colony will migrate to the new site. Like the bees, the EU leaders must seek their own counsel, putting less reliance on the pernicious advice of economists and central bankers.

Political leaders must understand the workings of an economy because the economy inevitably underpins politics. A struggling economy makes for chaotic politics. Economics is too critical an issue to be left to economists, more so when most economists hold fatally erroneous views on money, inflation and deflation. Accentuating these errors is the separation of economics from political and social matters. All these bodies of knowledge must be taught and learned together, compartmentalising them results in tunnel vision economists and politicians, both extremely dangerous because of the influence that they hold on the rest.

That brings us to the second weakness of the ants or all the swarm animals, to wit, their limited learning capacity. As long as the environment remains stable, their communication pattern will stand them in good stead. But when faced with a major ecological upheaval, their brains are not designed to quickly adapt to the changed environment. To overcome this constraint, we need the human brain. Unfortunately, we do not fully avail ourselves of the powerful thinking process at our disposal.

The common fault that most smart people commit, is not in the problem analysis which is very thorough but in the problem solution which is very facile. Their thinking depth should have been in reaching the solution. Actually, they do not have to think much. The failure of most decision makers is in putting too much thought in dreaming up the solution from scratch. Look at the swarm animals, their limited brain capacity does not allow them the luxury of thinking. Everything is based on established patterns which are in-built in their DNA. We can go one better than them, if only we know how. Through our written records and recorded visuals, we actually have access to a cornucopia of patterns, be it in history, economics, ecology, anthropology or any other body of knowledge. We do not need to store them in our DNA.

The proper decision making process then is to choose the right pattern. When we concoct our seemingly novel solution instead of tapping into established patterns, we do not go the full length. Everything in the real world is really a pattern, that is, a sequence of events that unfold in a predetermined manner. For example, our half-baked solution may go from step A to D, whereas the  right one should have stopped at step M. Our brain is not powerful enough to think of all the complete steps without resorting to established patterns.

In tribute to the intelligence of the bees, we will recall two instructive though fictional patterns from the bees, one a recorded visual and the other a written record. The first is the animated film, Bee Movie, which tells the story about a bee that successfully stops the human race from consuming its honey. In so doing, the bee disrupts the balance of nature as the massive stockpile of unconsumed honey leaves most bees unemployed and flowers unpollinated. This triggers a collapse of the food chain which is averted only at the last moment. Realising their mistake, the bees restart their honey production and allow the human race to resume its consumption of honey. Wouldn't the EU austerity measures be a repeat of the bees' mistaken belief in the false virtue of holding back consumption?

The other is the poem, The Grumbling Hive, that appeared in the book, The Fable of the Bees. It was authored by Bernard Mandeville and published in 1714. It shares a common theme with the Bee Movie. The poem is about a corrupt but prosperous hive that suddenly turns virtuous. This results in a rapid loss of prosperity. The moral of the poem is that to have a prosperous society, some vices, such as greed, luxury and depravity, among others, have to be tolerated. In economics, virtue and vice are inseparable. There can be no creditors without debtors, no income without spending, no savings without borrowings, and no current-account, trade and budget surpluses without someone else or some other nations incurring deficits of equivalent amounts. The well-off nations and individuals should always hold this in mind when bearing down on their unfortunate indebted counterparts. Harsh and repressive measures bring only misery to all.

Creditor vs. Debtor

The breakup of the EU is definitely a foregone conclusion. The EU must get rid of its debt mountain first before it can get out of the morass. In zeroing on the highly indebted states, the EU leaders remain blind to the real crisis. They conveniently choose the easy way out by heaping pressure on the struggling states. The chance of those states ever repaying their debts even with tons of bailout money is as good as zero.

One of the rules of management is not to manage things that are beyond your control. If the EU leaders have some sense, they should confront the creditor banks instead of the struggling states. In a crisis of a massive debt overhang, it's the creditors that must bear the heavy burden of debt write-offs. After all, it's not just the debtors that are at fault, the creditors are equally guilty of indiscriminate lending. But the creditors hold the debt assets while the debtors have only debt liabilities. Writing off liabilities is virtually impossible when the asset owners are in no mood to play ball. However it's the asset owners that are actually in a weaker position.

We only need to recall Jean Paul Getty's quote on the relative strength between borrowers and their bankers, "If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem.", to remind ourselves as to who really should hold the upper hand in the debt negotiations between the opposing parties.

But the debtors don't know how to play their hands. They should've entered the negotiations in concert, all the PIIGS countries banding together. Only then can they force the bankers' hands. Note that with just a 30 percent write-off of the banks' debts, the bank owners would lose all their equity holdings. In time, practically all the eurozone banks will become wards of state. With the current economic conditions in the eurozone, debt write-offs of more than 50 percent are almost certain. There's no way that the eurozone banks with total loan exposure of $30 trillion could survive without nationalisation. To put it in perspective, the EU's GDP is only $12.6 trillion. This colossal hole is the thing that EU leaders are trying to prevent from an implosion that would wreak havoc on the German, French and British banks and, by implication, the three biggest economies in the EU.

Instead of calling the banks' bluff, the debtors are being picked off one by one by the banks. Next in the target sight after Greece is Portugal. To make matters worse, both Greece and Italy have picked former professors as their political leaders. Cocooned in the academic world, professors go by the book, never once willing to put up with unconventional approaches. At negotiations, they can easily play into the hands of the bankers. Lucas Papademos naively believes that failure to obtain bailout money would lead to chaos. Actually it's the austerity measures imposed by the bailout terms that would see Greece descend into anarchy.

Now how the PIIGS should have strategised? Before going to the negotiating table the PIIGS must countenance all the available means of countering the banks so that their negotiating position is stronger than that of the banks. Dumping the euro in favour of their former national currencies, bank holiday, capital controls and trade protectionism are in. Only then can they have the negotiating flexibility to arm-twist the banks. Instead the PIIGS are ludicrously sticking with the status quo, very much weakening their negotiating position. The EU project anyway is an anachronism in a world that's moving towards fracturing of states and societies.

These are desperate times. We are in the midst of the Grand Depression, that is, the 1930s Great Depression scaled up multifold. What the PIIGS are suffering from now is an extreme shortage of currency or liquidity. The only way out is a huge dollop of spending money which could only come about if they are in control of their own currencies. Only then can they export their way out of economic depression. Of course, they can no longer maintain the same lifestyle as in the past but at least they could get their jobs back instead of rioting in the streets. Initially, things would be very expensive but prices would soon stabilise after the initial spurt as the whole world is now suffering from excess capacity coupled with insufficient demand. For example, Iceland which has seen its krona value dropping by about 50 percent since 2008 no longer endures high inflation (see left chart from The Washington Post).

What if all other states also embark on money printing to depreciate their currencies? Don't worry, money printing without public spending won't cheapen the currency. Just ask Ben Bernanke and Mervyn King about their recent experiences. Apparently they still can't figure out why things don't turn out as predicted. Even if the other governments unleash their public spending and drive up inflation, that's well and good. That'll transfer the wealth from the creditors to the debtors and that's what we need to redress the extreme imbalance between creditors and debtors.

But all these can only happen if the PIIGS realise that they have a strong bargaining hand. The debt fight is theirs to lose. For the sake of the whole world, they'd better use their trump card.