Sunday, March 13, 2011

The Extreme Path-Dependence of History

The Steyn article below hints at something that is enormously under-appreciated, which is the fact that major political and historical events are incredibly difficult to predict. I don't think that the CIA is especially stupid due to its inability to forecast major political events like 9/11, the fall of the Berlin Wall etc. I remember hearing that the great Gary Becker toured around Eastern Europe in 1989  a few months before the wall fell, and he didn't see anything that hinted at instability.

This exercise is of course enormously clouded by hindsight bias - after the fact, everyone's sure that they knew that Mubarak was unstable, that there weren't going to be any weapons of mass destruction in Iraq, that real estate was overvalued in 2006, and that structural factors meant everybody knew that World War 1 was inevitable. Which is why there's such great value in exercises like Niall Ferguson's paper that looks at the reaction of bond prices to the outbreak of World War 1 - what do you know, they went crazy. It turns out that investors in government bonds, who aren't exactly incurious about political risk, were truly surprised by World War 1. When you go back to what people were saying and doing at the time, it turns out that there were far fewer expert predictors at the time than "expert predictors" years later

It goes without saying that if you go back 6 months, nobody was predicting the collapse of governments in Tunisia and Egypt, nor massive unrest in Bahrain and Libya. Certainly not the CIA. But then again, neither were the people currently laughing at the CIA for its ineptness. Short answer, nobody was.

This is where the concept of path-dependence comes in. As wikipedia describes it, it states that "predictable amplifications of small differences are a disproportionate cause of later circumstances."

This is in contrast to the classic debate in history about structure vs. agency. 'Structure' roughly says that broad social trends and circumstances determine the path of history, and that individual actions make little overall difference. 'Agency' says that individuals have free choice, and that these decisions end up affecting history (such as through the impact of 'big men' political leaders whose decisions determine outcomes).

The way I interpret path-dependence is somewhere in between - essentially that the vast majority of individual decisions don't actually matter, but when they do they can matter in extremely amplified and unpredictable ways. Which is why forecasting history is so difficult.

Tunisia is a perfect example of this. Let's read the Wikipedia description:
The demonstrations were precipitated by high unemployment, food inflation, corruption, a lack of freedom of speech and other political freedom and poor living conditions. ... The protests were sparked by the self-immolation of Mohamed Bouazizi on 17 December and led to the ousting of President Zine El Abidine Ben Ali 28 days later....
Or as the Malaysia Star puts it:
"Fruit seller ignites a revolution"
Mohamed Bouazizi set himself on fire in protest of official corruption and harassment of his fruit-selling business. Now, doubtless millions of Tunisians had been pissed off at official misbehaviour before, and taken angry actions in response. But this particular one struck a nerve, and the riots it set off brought down the government. Seeing the example of Tunisia, Egyptians protested in response, and so too did the Libyans.

No doubt, the protests wouldn't have happened without the volatile social conditions described in the Wikipedia article (which is why there are few spontaneous revolutions in rich, peaceful first world countries).

But ask yourself this: what would the world look like today if Mohamed Bouazizi hadn't set himself on fire?

There's a strong argument to be made that the middle east political situation would be considerably different.

And that's why I don't blame the C.I.A. for not forecasting these events. If history is path-dependent, then individual actions can sometimes matter, but usually in incredibly chaotic and unpredictable ways.

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