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OPINION: Achieving Economic Antifragility Through Closed Loops

Opinion piece from Ștefan Tesoi about closed loop system

This post is an opinion piece from Ștefan TESOI, Front-end developer at Unbox.


Antifragility, in Nasim Taleb's vision, is the ability of an organism, a system, an economy to withstand and thrive in an environment of volatility and uncertainty. And, in order for the greater sum of the components to become antifragile, the subcomponents/subunits of the system must be fragile. This fragility being described as an ongoing process of failure and adaptation to volatility and randomness. Without this ongoing process of achiving environmental fit of the system subcomponents the bigger, larger system is prone to Black Swan events.

In an organism, cells decay and die so that the organism doesn't go through the same process, for example, a sunburn causes some of the cells of the epidermis to die, then the organism pumps more blood to the skin in order to sustain the regeneration of new cells. A wound wouldn't be able to heal without the sacrifice of cells.

In nature, smaller scale fires clean the forest floor debris, nourish the soil and remove dead trees and potential fuel for bigger scale fires.

In economy, the equivalent of small scale fires are the recessions that prune out the fragile companies that did not achieve market fit. So, the more the state subsidizes big (and inefficient) companies the more fire fuel accumulates for the next big economic crisis.

How much should a funder support an inefficient company? There should be limitations on how much a funding party can continue to fund a Closed Loop participant. (no point in flogging a dead horse). Closed Loops can remove friction and "spillage" from an economic system but what about this kind of "waste"?

Just like nature which gains its antifragility from the fragility of its species, the economy gains its antifragility from the fragility of its subunits and their necessarily high failure rate.

Closed loops are the economy subunits which remove the friction and the waste from the economic environment, facilitating the interaction between economy actors and participants and facilitating the exchange of information (randomness, uncertainty and stressors are actually information coming in the system, the closed loop). Closed loops, as subcomponents of the economy, can be fragile and prone to failure so that the bigger, encompassing, economic component achieve antifragility. Fear and one of it's forms, the fear of failure is deeply ingrained in humans, in their amygdala, and can offer an useful evolution advantage. In the very dynamic world of economics however, fear and conservation don't go well with the thick texture of randomness and entropy of reality. So, a system (be it an organism, a state, or a company etc) has to embrace the high entropy of reality, acknowledge that fragility is needed in order for a greater encompassing system to become antifragile.

Nasim Taleb gives us the example of Switzerland, "the most antifragile place on the planet" in his words. Switzerland is a country without a large central government, yet with high stability. How the Swiss govern themselves is entirely bottom-up, their small regions called cantons being the "cells" of the Swiss confederation. Problem solving and dealing with stressors (information) of all kinds is left to the devices of these smaller regions, thus creating stability. Problem solving and information exchange is best done at the level of the subunits and shouldn't come from the top. People know better what their needs are and know how to handle things locally. The USSR used centralized planning and they had a big building full with people who were trying to figure out the exact needs of the common soviet people. Information from all the corners of USSR would come in, it would get compiled and analyzed, and then the experts would plan accordingly, the TV factory needs to produce X amounts of TV's next year, the bicycle factory needs to produce Y amounts of bicycles next year and so on. As hard as they tried, they never managed to meet the exact needs of the people, too many bicycles were being produced and perhaps too few TV's were being produced.

Just like in the case of the Swiss confederation, Closed Loops are the cantons and the Swiss army knives of the economy, producing stability by keeping decision making and problem solving in a bottom-up system.

Optionality and having options is one of the main pillars of antifragility and in closed loops is the precursor of information exchange. For Funders, Beneficiaries and Contractors optionality comes from the possibility of searching and choosing other parties for business transactions. Optionality opens the door for possibilities and opportunities (defined technically as convexity in the book).

Capped closed loops: when the closed loop is capped to a given monetary mass it can be a hedge against inflation (basic economics 101 tell that an increase in monetary mass leads to inflation) but it can also create weird situation such as when a funder (and the only funder in the CL) has (capped) funds which are not enough for new transactions, other parties have to wait until transactions clear out and "fresh" funds are available for new transactions. Speaking of waiting for transactions, this can create problems for merchants because they have to wait until all the orders are cleared and the CL admin approves the payment. This will make contractors to not overly rely on closed loops in order to avoid potential cashflow issues.

Also related to capped closed loops: what happens when a contractor has overcosts while executing the order, for example, the contractor and the beneficiary agreed for 100 monetary units but while executing the order the contractor realizes that its costs will go over the agreed sum. Capped funds can create an obstacle to a solution for this potential problem.

For funders: distributing funds across multiple closed loops can be an advantage (not keeping all the eggs in one basket). It's optionality and convexity.


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