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"BLACK SWANS" THE ONES TO WATCH FOR
The lesson is to be aware of how easily whole industries can be blown apart. Photo: AP
'Black swans' the ones to watch for
Source: smh.com.au
MATTHEW LYNN
April 26, 2010
The lesson is to be aware of how easily whole industries can be blown apart.
Whether it's banks collapsing or volcanoes erupting, the unexpected can upset the global apple cart.
FOR a generation or more, no one ever gave a second thought to Iceland. Now it has shaken up the world twice in a couple of years.
First, its banks collapsed in the most dramatic illustration of the fragility of our financial system. Now an Icelandic volcano has been spewing ash into the sky, prompting a shutdown, for some time, of European airspace.
The continent was paralysed. Planes were grounded.
Travellers were stuck thousands of kilometres from their families and workplaces. Business, for a time, ground to a halt.
Both happenings are strangely similar. They are, to borrow a phrase from financial theory, "black swan" events: unexpected developments, coming out of nowhere, for which no one has any kind of contingency plan. And they are a warning about the fragility of the modern economy.
The lesson, surely, is to be aware of how easily whole industries can be blown apart. And to make sure we build systems robust enough to survive the worst that can be thrown at them.
The Eyjafjallajokull volcano caused chaos on a massive scale. After the April 14 eruption, more than 80,000 flights were cancelled.
An easing of the cloud of ash, which can cause lethal damage to aircraft engines, meant that European airports could re-open.
But London's usually busy Heathrow Airport remained shut until late last week.
No one really knows how long the volcano will be a threat to the skies. Its last major eruption in 1821 lasted more than a year.
It can teach us useful lessons, if we want to learn them.
First, we are dependent on air travel. Our global economy is kept in motion by fleets of jetliners and a network of airports.
Business revolves around meetings in hotels next to the runways. Documents are ferried around by air. Even the food in grocery stores often lands a day before from another continent.
But air networks are very delicate. They are constantly at the mercy of the weather, mechanical failure, labour strikes and terrorist plots. We should have learnt after the September 11 attacks on New York and Washington not to depend so much on flying. Likewise, we should listen more to the climate-change scientists warning about the impact of global warming. Perhaps the recent chaos will teach us that our economy needs to be more grounded, both metaphorically and literally.
Second, we forget that distance counts. Globalisation has made the world seem a very small place. E-mails ping from continent to continent in the blink of an eye. Social networks allow us to be friends with people thousands of kilometres away as easily as if they lived in the next street. Money flashes from country to country, and ideas and trends zip around the world.
And yet, when the technology breaks down, it is a long way from Helsinki to Madrid, or from New York to Berlin.
Try doing that journey the old-fashioned way - by car, by boat, or on foot - and you suddenly realise the distance between places still counts for a lot.
The world isn't as much of a global village as we think it is. It's still a vast place, and the local can often bite back at the global.
Third, we need to prepare for the unexpected. A couple of years ago, it was the financial system that fell to pieces.
Right now, it is the transport system. In both cases, the cause was something we didn't expect, or make any plans for.
We thought hedge funds might blow up the banks - instead some rather dull-looking mortgages did. We thought terrorists might spread chaos through the airline system - it turned out that ash from an Icelandic volcano did that job.
In reality, "black swans" are everywhere. Much of Europe's energy is now supplied by Russia. Is that really stable in the long term? Much of our food is now genetically modified. What would happen if we suddenly discovered that it was not safe any more?
The euro is a relatively new currency. It has struggled to cope with a few deficit issues in Greece, one of the smallest member states. There must be half a dozen different kinds of crises that could mean the money most of the continent relies on does not work any more.
All sorts of unexpected events are lurking in the shadows.
By definition, we haven't thought about them. It is because they are so unexpected that they are so dangerous. What we can do is think harder about the threats, get better at forecasting them, and find ways of making ourselves less vulnerable.
Air travel is useful. It is the quickest and usually the cheapest way of getting around. But we shouldn't depend on it as much as we do.
We should not rely so completely on any single network, be it financial or technological. That should be obvious. But sometimes it takes something as powerful as a volcanic eruption to make a simple point.
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