Michael H. Goldhaber

Crash-free No Longer

In a recent post, I discussed the current problems re sub-prime mortgages and the credit crunch in connection with ignorance in high finance and in general. The complex entities that are investment banks, which were supposedly highly knowledgeable as organizations, actually were quite in the dark, quite ignorant in fact, when it came to the mortgage problems. I argued that someone has to be knowledgeable and interested for a problem to be understood — some specific person, that is. An organization that has no one paying attention can’t function in a knowing way, in other words, and as we move further towards an attention economy, there are additional reasons to stay ignorant of what is not essential to grab an audience at the moment. As I was thinking about those issues, it occurred to me that there seemingly was a clear counter-example, namely the complex organization that is responsible for the fact that there have been no major US airline crashes since 2001.

Now, airline crashes are prevented by a combination of knowledge of what keeps planes airworthy and prevents collisions, and this knowledge as embedded in a mixture of physical  instruments, physical mechanisms and careful adherence to complex inspection and control protocols that make sure the instruments and mechanisms  are in good working order and are used correctly. But this too does not happen without there being dedicated people who pay attention to keeping all these protocols actually functioning. In the piece I was drafting, I was going to write that if no crashes occur over a long enough period, inevitably attention will shift and the the protocols will stop being followed so assiduously, so that eventually further air crashes will  occur, even though we now apparently know extremely well how to prevent them. We will lose that knowledge as active knowledge  over the course of time, because we just won’t think we need to know it if we never have crashes to remind us.

Well, it now turns out that in fact this disintegration had already begun. Luckily enough, there was enough redundancy left  in the inspection system — apparently, in this case Congressional oversight— for someone to notice that the chief federal agency in charge of airline safety had stopped doing its job. In fact, the successful period of no crashes was already the result of past momentum, not current care.  It could be that the alarm caused by the recent revelations will keep someone connected with the system making sure for awhile that it holds together, but for how long? Currently, American Airlines is in financial trouble and passengers are very annoyed because many flights have had to be canceled while forgotten inspections are finally performed. How many times would this have to happen, before passengers would insist that inspections are not really necessary? The inspectors in this way might eventually be forced to be more lax until an actual crash occurs. You cannot have knowledge without attention, but the need for attention also promotes ignorance, as I showed earlier.

Pfffffffft

Meanwhile, what of the financial system? Could it be that the “masters of the universe” who run it are so ignorant of the actual workings of what they do that a much more complete meltdown than has already taken place is possible? (After I drafted this very post, I learned today that George Soros has just come out with a book proclaiming the breaking of a super-bubble in the money economy.)  Why the possible meltdown? What would the ramifications be? As with the Enron collapse, and as with the recent sub prime debacle, the people running things seemed awfully smart and knowledgeable until it turned out they had vastly overestimated their own knowledge, or at least convinced others to overestimate it. That can happen, perhaps, to the whole current financial system. What has happened is that just as the Internet in the broadest sense permits all sorts of new social inventions with unpredictable effects, such as Facebook, it also permits a wide variety of new financial inventions,  which in reality do nothing but allow money to be moved around in new ways, and perhaps merely create new, purely numerical wealth, wealth that can certainly be turned into goods, but which stems really from nothing other than mathematical legerdemain with various complex financial instruments.

If we look at the apparent growth of the US economy since 2001, it is quite possible that most of the so-called additions to  GDP were actually only growth in the “products” of financial firms, as measured by their overall earnings. In this case no real extra anything — except numbers — was actually created. Furthermore,  these numbers only have value to the extent that the “instruments” behind them remain sufficiently credible to enough players. In other words, financial performance can be viewed, increasingly, as indeed a performance, a form of theater, which works only while there is a sufficient “suspension of disbelief” while the audience is transfixed and mesmerized. If and when that stops, the air can just go  “pfffft” out of the balloon, in much the same way as it did for Enron.

Nowhere Safe to Park?

The new rich, the old rich, plus things like university endowments and standard pension funds —  and other forms of insurance for that matter, all have to “park” their monetary wealth somewhere. Mattresses are decidedly out of fashion, since they don’t keep up with inflation. Of late, the parking lot of choice has been more and more in these new financial forms — hedge funds, buyout firms, or other exotic schemes. The alternative is mostly more traditional forms such as corporate stocks, mutual funds, bonds or even government-backed bonds. None of these is actually secure, at present. Nor, by the way, are even the more old fashioned holdings such as gold. (Gold retains its worth only if the industrial world swallows it fast enough, which requires a high level of industrial production.) Because finance is now such a large part of everything, all these supposedly reliable old-fashioned forms of wealth can fall if the financial sector falls far enough. Hedge funds and buyout firms very much need leverage in the form of extensive borrowing, but if there is no assurance suddenly that they can pay back, the value of these funds can quickly disappear. But if that happens, ordinary stocks, also based on confidence in future performance are much more vulnerable now than in the past. Very few firms simply are made up of solid assets such as factories that have fairly definite break-up values. Instead most firms today rely on the promise of innovation yet to come to retain their current value. (For all stocks, there is a ratio of price of the stock to current earnings that is often of the order of 20 to 1. That means that for an average  investor just to break even, the stock will have to pay out the same earnings for twenty years, or alternatively the profits will have to grow over a shorter time frame. In today’s world, twenty years is a very long time horizon. Meanwhile while shorter-term growth is always risky to assume, and especially so in a downturn of any duration.)

Also, current stock valuations are very tied into the workings of the financial sector these days. For instance, bankers are constantly flying first class around the world. If banks slow down, so do airlines, and numerous other related industries. Because we no longer have a (money-based)  economy that primarily produces things, and still less, fairly necessary things, a large part of it can become completely unstuck quite fast.
Since the US government, at least, has been run on substantial borrowing even during a supposed growth period, while facing increased payouts for social services such as medicare and social security even if it does nothing. So its indebtedness may become too great to pay off. There goes the reliability seemingly safe investments such as treasury bonds. Pension funds, increasingly necessary for an aging population, since they have to rely on funds parked somewhere, yielding some  not-too-small rate of return, may not be able to hold up either. That would mean a disastrous meltdown that would strorngly affect amlost everyone in the US.

Glooom, Doom,and the Bloom of the Real Attention Economy?  Away from Money?

Now, maybe these visions of “doom and gloom” are unwarranted. Quite possibly  the whole system will easily stave off collapse. For instance, it could be that the tremendous flexibility of Internet connection will allow credit crunches to be overcome with new kinds of assurances and money routed in new ways. It is possible that alternative currencies, informally constructed, will be able to replace the dollar. And so on. It is even more possible that the collapse will not so deeply effect the euro or the renminbi, etc. But given the still pivotal role of the US, it is also possible that the doom and gloom would spread across the globe. If so, we will suddenly begin to find ourselves in a new world. It could be that what emerges from the mess will be a much fuller Attention Economy with money playing a much less key role, and eventually virtually no role at all. That , while definitely no utopia, may be the best that one could reasonably hope for.

Here, I am of course speaking of the real Attention Economy, or Attention System, Epoch, Society or World which I have been discussing in the is blog and elsewhere for years   —  and not the advertising-based  much less important system that other people who use this term have come to mean. This real Attention Economy already is quite important, as I have tried to show earlier, when I pointed out that attention “transactions” are already far more common and influential for most people in the advanced countries than are money transactions. The standard economics profession as well as most people who focus on business have remained utterly blind to this fact. But the real Attention Economy, based of course on the scarcity and desirability —for persons— of the attention that can only come from other human beings, is entirely differently structured and organized than is the monetary, industrial-based or capitalist economy. That is why this new system  ultimately does not run on money in any form.

In the next installment, I will explain in detail why the (real) Attention Economy probably can only grow at the expense of the standard forms of the money-industrial system, and why both probably cannot co-exist for too long. This is another reason we may be headed there now. If it is coming, thought must go now into how to mitigate its bad features, while still benefitting from its good ones.

This is supposed to be the era of knowledge. Yet I think we should be increasingly worried that it is in fact even more the era of ignorance. The two are in some ways complementary. An expert has long been known, at least by cynics, as someone who “knows more and more about less and less.” That means that even experts — as well as the rest of us — also know less and less about more and more. And more gets missed by even experts. We might view expanding knowledge as a yeasty sort of bread — the faster it expands, the bigger the holes all through it. Meanwhile, there are new reasons that cause people to adopt ignorance as a stance, as all right, as even desirable. Many people have noticed this, but it seems to me some of the root causes and the nature of the new ignorance escape them, just as some elements still escape me.

Still, despite my own ignorance of the topic, this this is my contribution to the study of ignorance, a study I think we should all take more seriously.

So, welcome to Ignorance Studies 101.

First, ignorance comes in more than one flavor.

Ignorance type A = not knowing what no one else knows either, also known as “Society-Wide Ignorance.” As overall societal knowledge grows and grows, igA obviously decreases.

However, that leads to a growth in Ignorance type B, not knowing what some other people do know. If experts each “know more and more about less and less,” a corollary is that they also know less and less about more and more of what is known. Non-experts also each find igB growing.

But both types of ignorance can be further sub-divided into: Ignorance about things humans cannot affect (call this “Nature”); and Ignorance about things that we can, including things that humans ourselves create (call this the “Human World”). Of course, as knowledge of Nature grows, so does our often unknowing ability to affect it, increasing Human-world ignorance in a sometimes dangerous way. (Think global warming.)

Ignorance about ignorance grows too: Ignorance about what is known (by society, in other words by someone somewhere) — and ignorance about who knows or does not know what. Finally, comes ignorance about whom and how to ask about what one does not know. You can’t even begin to ask if you don’t know you don’t know, but even if you do know you are ignorant, that may not help you much.

What about Google and Wikipedia?

Wait! Don’t Google and Wikipedia and the web in general immeasurably increase each person’s effective knowledge and so decrease effective ignorance? I certainly use both of these frequently and think they are each a real step forward. Still, knowledge is not simply an assemblage of information; it must be rooted in an understanding of connections, limitations, context, and so on. If you could study all of Google, or even follow a line of links from each and every web page that surfaces from a particular query, or could study all of Wikipedia, then you would surely have knowledge, indeed almost all knowledge on a great many subjects. but this is clearly beyond anyone’s ability. So you would have to select on the basis of prior knowledge, and the incompleteness and holes in that knowledge are precisely why neither of these tools can be assumed to provide you with effective knowledge, or effective lack of ignorance. Instead, the best they can do is little more than make us more aware of the very breadth and depth of of our ignorance. As they enlarge every day, our ignorance only grows.

Attention, Knowledge and Ignorance

If I’m right, our actions are increasingly governed by the scarcity of attention that we can pay and even more by the scarcity of the attention we can get from others. That is the Attention System, or what I meant originally when I introduced the so much misunderstood term “Attention Economy.” Living in this system greatly affects and is affected by what we know or don’t as well as what find it valuable to know or to skip.
One key axiom of attention is that to pay it to someone, you must align your mind to hers. The more you know what she knows, at least what she knows that is relevant to her right now, the better you can pay attention. If, for example, you don’t even know what language she is speaking you will have a very hard time paying attention.
The first corollary: If you want attention, don’t assume much specialized knowledge. In other words: assume ignorance on the part of your listener, viewer or reader, and don’t challenge that ignorance too much. Example: the US media, but also most media throughout the world. This also explains much about politicians, business people etc.

The second corollary: don’t bother learning what won’t get you attention, because you have to pay a lot of attention to do that.
This second corollary explains a lot:
• The ignorance about many things (history, geography, science, politics) of American high school students, (along with countless other students around the world);
• The narrow focus of many business people, entertainers, scholars and other experts, etc;
• The appeal of religious fundamentalism, at least in part.
• The fact that the pursuit of knowledge itself is increasingly subject to what the philosopher or historian of science Thomas Kuhn called “paradigm shifts.”

Once Upon a Paradigm

In a paradigm shift, knowledge gets a new basis, with some brand-new central ideas, and in the process, old knowledge can safely be ignored as no longer relevant. I think it works like this. As a field grows, so much knowledge accumulates in it, that only narrow specialists can really familiarize themselves with it. Then, new people find it much easier to start over with an almost clean slate, which they can if there are hints of another paradigm around.The new one explains certain phenomena while allowing a completely new set of knowledge to be developed. “Early adopters” of this new knowledge are at a special advantage.They can reach a relatively large audience without themselves necessarily having to know much.

Paradigm shifts of this sort are not limited to science. The same causes make advantageous to be a fan of or participant in a new sport, a new music genre, or a new kind of art. You don’t have to be familiar with all the nuances established over many years. Similar reasons led to young people eagerly adopting new technologies, new kinds of web links (such as Facebook or MySpace or Second Life) new computers, new operating systems, programs, new video games, etc..

Through this process, the attentional value of having old knowledge rapidly decreases. This would be fine if the new knowledge always included or trumped the old, and if there were not whole areas left out as “progress” increases.

What a Tangled Web..

We are all now intertwined in a global society, six billion strong. As the universe of knowledge relevant in some way to each of our lives keeps expanding, the share of it we individually have any mastery over keeps dropping. In terms of attention, the accelerated demands on our attention outrace our individual supply at ever-greater speeds. We do not know enough to form reasonable judgements about many matters that will affect us quite a bit, nor do we know sufficiently well how our actions affect the world. We are often less and less capable of knowing that we do not know, or even knowing whom to ask about who would know about a host of issues. So we punt. With ignorance and half understanding, a certain carelessness is the inevitable outcome.

We can see the effects of that all around us. Take the growing technosphere in which our lives are ever-further embedded. We assume, for instance, that someone at the phone company or the cable company or the computer company or the software company or even the open-source community is “minding the store,” but often it turns out that as tasks have been sub-divided and farmed out, even simple possibilities have not been considered, or whoever was supposed to know about a certain issue has been downsized, fired, retired or forgotten. Systems simply do not work, or work increasingly badly. The managers of such businesses do not know much about the desires, limitations, habits and customs of their customers. The eagerly install such things as voice-activated automated phone systems, which add to the complexities of correcting or even finding out about how to solve common or unusual problems. And life is full of unusual problems.

Here in Northern California, we have perhaps the world’s largest congeries of technical expertise, but it is not large enough so that the companies trying to save a buck will be able to hire technically competent and knowledgeable people to do things like keep Internet or cable or even electric services going seamlessly. Perhaps even if they paid fairly well, no one would find it of interest to do seemingly mundane maintenance when that same person could be involved creating something completely new that potentially could be of interest or even value to millions.

Or take the money economy in its most direct form — the world of high finance. Very clever people invented things like mortgage bundling, which led to the bundling of sub-prime loans in ways that most actors assumed to be pretty fail-safe, at least in the short time horizon on which investment bankers now work. Theoretically, rating agencies were supposed to evaluate the the risks associated with such loans, but they simply did not understand them well enough, it seems. Rating financial risk may be one of those rather uninteresting areas, most of the time, anyway. No one gets a lot of attention for such activity, unless she offers a completely unexpected rating. If there had been no rating agencies, the bankers who took on the loans might have felt they had to be a bit more cautious, but as it was, it was easy to pay minimal attention, since it was easy to take for granted that the rating agencies knew what they were doing. No one was rating the raters. Similarly, it now seems, many other kinds of loans, such as industrial bonds and “commercial paper” may have been incorrectly rated as to risk.

Banks have suddenly realized that they are in the dark as to the risk environment, so they are newly frightened about extending loans even to other big banks. This re-creates the same sort of problem that occurred at the time of the Great Depression, even though the amount of knowledge of the financial (money-based) economic systems is supposedly so much greater.

Not Ads but Adages

Politicians are another class of people who seemingly know less and less about more and more. They rely on experts to fill them in on how to handle all sorts of areas, but these experts in turn may not really be terribly knowledgeable, nor do they necessarily understand the complex interconnections necessary to make their advice any good. Whether the subject is education, healthcare, international relations, security from terrorism, control of media, the environment or economics, politicians of all stripes seemingly adopt a few rather dogmatic ideas as a way to get by. The citizenry who elect them are even more reliant on mere adages to understand what is going on. Or they rely on the politicians to find out what they themselves have given up trying to understand. But politicians dare not go against those who do believe in certain adages, whether it is “the free market is always best” or “we need protection from foreigners stealing our jobs” (or both) or “Islamo-fascists are out to get us” or “Israel is the biggest violator of human rights, ” or “it’s cold this winter, so global warming is a false alarm,” or “we need population control in Africa to slow down global warming” among equally many other views based mostly on over-simplified ignorance. Awareness of ignorance itself breeds paranoia, such as the conspiracy theories floating around 9/11, or the view that those who warn about global warming are secretly trying to impose socialism on everyone.

These simplified adages function as paradigms, even though there is often very little behind them, and they can often be very easily be replaced, with new paradigms — that is, nice fresh adages. When a politician such as Barack Obama excites voters with talk of hope and change, he succeeds largely through his lack of being specific. If he tried to spell out detailed policies, many of his listeners would not be able to continue to pay attention, though some others might be able to follow him and perhaps like what they hear.

Deeper

A deeper problem is that no politician really is willing to recognize that a deep change is under way. They may pay too much lip service and attention to the bromides of conventional economists to see that we are entering a whole new era, in which the very meaning, for instance, of continued economic success is thrown into question.

But no Air Crashes

We should expect that the varying degrees of ignorance I have been discussing will eventually cause more and more severe human and natural world problems, if we do not find some way to keep growing ignorance somehow at bay. How might we do all this? One example that comes to mind is an area where the technosphere seems to be excelling of late, rather than breaking down. It is the system that prevents air crashes. The example may be instructive. To be continued…..