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"Winter war" by Finnish Army
personnel - http://lcweb2.loc.gov/frd/cs/finland/fi01_05a.jpg – The
Library of Congress. Licensed under Public Domain via Commons -
https://commons.wikimedia.org/wiki/File:Winter_war.jpg#/media/File:Winter_war.jpg
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Nassim Nicolas Taleb's book "Black Swan" introduces the concept of a black swan event. This is an unlikely event that's almost impossible to predict and that has serious real life consequences. Collapse of the Soviet Union is a perfect example of a black swan, because no one saw it coming, but it had major effects on the world.
Black swans are all around us because we just can't predict a lot of things. This concept is also very useful to start this blog for explaining politics. Taleb himself doesn't write much about politics except a few condescending remarks about the inability of politicians and bureaucrats to accurately predict things.
It may be true that the state has difficulties predicting the cost and building time of unique projects like the Sydney opera house, but the state is in fact much better in predicting things like the cost of building schools, roads or the income from collecting taxes. The state doesn't need to predict the tax revenue from every company and individual, the ministry of finance just has to predict the aggregate income from taxes. If they do their work well lower tax revenue from one company will be offset by a higher tax revenue from another. In fact, well run states are remarkably good in predicting their tax revenues. Some countries tend to be too optimistic but this is not a prediction mistake but a deliberate fraud.
Size matters
In his latest book "Antifragile" Taleb has a few good words to say about city-states but again he doesn't go any deeper to explain why they are better than large centralized states. His fondness for city-states is a bit curious because these days we don't have a lot of independent, successful city-states. Singapore and Luxembourg would be probably the only ones who are genuinely independent and that could still be called city-states.
Why is that so? Well, we used to have more city-states but most others got conquered or are independent in name only. Big states may have a lot of weaknesses but they have on crucial strength - when you are big, you can build a big army and conquer your enemies, thus becoming even bigger, which allows to build an even bigger army and conquer some more. This cycle of states becoming ever bigger is checked only by other large states or when a state becomes so big that it becomes difficult to rule areas already conquered. This last problem is called imperial overstretch and to solve it large states try various solutions that give temporary fixes but create hidden weaknesses, thus making possible a sudden collapse of the state. This collapse will come as a surprise to almost everyone, being yet another black swan event.
Taleb writes mostly about individuals and corporations, because that's where most black swan events take place. States are much less vulnerable to black swan effects because they are bigger and have more power over their environment. An example of a black swan Taleb uses a lot is book sales. Some bestsellers make their authors very rich because they sell thousands of times more than most other books. A bestseller, for instance a Harry Potter book, is not a thousand times better than an average book. It's success is mostly a matter of luck, but author of such a book still becomes rich. Now imagine the state taking a look at all the people who buy a Harry Potter book. Does it matter for the state that Harry Potter books are selling really well? Do people chop down all trees to print Harry Potter books? No. Do people impoverish themselves to buy Harry Potter books? No. Is there an effect on state revenues? No, because if people would not buy Harry Potter books, they would be buying something else and the state would still get it's taxes. The fact that people buy Harry Potter books and nothing else just has no effect for the state. One bestseller will make a few people rich but compared to the income of the state all this is paltry.
States are much less vulnerable to black swans because compared to individuals or corporations they have more opportunities for influencing their environment. States can create regulations and monitor their implementation, states can levy taxes and use force to collect them, state can punish people and corporations with fines, imprisonments and liquidation (or capital punishment) and the state has the monopoly of legitimate violence, including the right to fight a war. Big states are also considerably bigger than even the largest corporations. All this gives the state more resources to avoid black swans or to mitigate their effects.
The American giant
Most people who write about politics or economy live in the US, so the United States is implicitly their country of reference when they think about the world. Yet this can mislead them because the United States has a lot of unique features, among them the biggest economy in the world.
For the last century the US has had only some major black swan events. Two of them, attacks on Pearl Harbour and Twin Towers came from outside. The Great Depression and the Great Recession came from structural flaws in the US economy. Yet in most cases America had more control of her destiny than most other states. United States decided to fight a more aggressive war against Japan and Islamic terrorists than was necessary - Washington made a deliberate choice to be aggressive. In case of both economic crises Americans suffered badly but several other countries suffered much more. US was simply so big that it had more choices.
On the other hand during the last hundred years when the US has been world's largest economy it has been on the providing side of black swan events for many countries. Imagine you were an Iraqi in the summer of 2001 - would you have predicted that in two years George W. Bush will invade Iraq and topple Saddam Hussein? Probably not. In addition to starting several wars the US has been creating all kinds of other black swans for other countries. Economic disparities between the US and most other countries are reflected in the saying "when the US sneezes, the world catches a cold".
These black swan events have been less dramatic for Americans because the United States has so many more resources than most other countries. The US is unable to save everyone from the nasty effects of black swans but it has enough to shield the American people from them.
What about small countries?
If the size of the United States gives her enormous resources against black swan events, small and marginally located countries are much more vulnerable. Finland is a good example of this.
Finland become independent in 1917 when the Russian empire was imploding, which in itself was a black swan event. In early 30s Finland also suffered from the worldwide crisis but emerged from it faster than most nations. During the World War II Finland fought two wars against the Soviet Union, both of which were major black swan events. When the cold war ended Finland suffered a serious depression because the lucrative Soviet market collapsed. Then in 2008 the Great Recession hit Finland hard, In addition to the general crisis the important paper industry was in trouble because Internet was killing the newspapers and thus the world needed less Finnish paper. Nokia also collapsed at that time, also due to foreign competition.
One notices that a country like Finland gets a lot of black swan events from abroad. When Russia and the world market leave Finland alone she's able to combine high growth rate with social stability and a good quality of life. Notice how neighboring Sweden has experienced less black swan events because it is a bit bigger, closer to big markets in Western Europe and further away from harmful influences of Russia.
The Decline and Fall of Nokia
Now let's take a closer look at Nokia to understand the limits of small and marginally located states.
David J. Cord's book "The Decline and Fall of Nokia" leaves an impression that Nokia never really had a chance. In 2006 Nokia sold 35% of all the mobile phones in the world. It was tremendously important for Finland. In 2007 Nokia paid €1.3 billion in corporate taxes, and at their peak contributed 23 per cent of all corporate income taxes in Finland. Depending upon the year, they were also responsible for about a fifth of all exports from Finland.
Within a few years it was all gone. Nokia's weakness was their small presence in Northern America. Nokia initially didn't worry much about it because the Finns were kings in rest of the world. Unfortunately Northern America was technologically the most advanced part of the world so when Apple and Google got interested in mobile phones they took the business away from Nokia within a few years.
Nokia was ambitious, it wanted to produce both handsets and software. It failed. These days practically all software used in mobile phones is made in American companies, while non-American companies have the less lucrative job of making handsets.
Southern California has several advantages compared to Finland. It has a big population and a very strong tech sector, so they have the biggest concentration of tech talent in the world. US has a huge internal market where companies can grow before going global. Finland didn't have those benefits and it has an additional disadvantage - it is far away, dark, cold and therefore had difficulties attracting talent from abroad.
What to do?
So what will you do when you are a small and marginally located country like Finland that keeps getting big black swan events from abroad? Instability of small countries is often explained by their weak institutions but Finland already has some of the best institutions of the world so strengthening them won't help.
The answer is that a country like Finland will really like the European Union, because the EU will give her additional size and thus stability. To begin with the common market is really important for countries with a small internal market because it gives them secure access to a large market, but there is more to it. EU is increasingly becoming a political union because her member states increasingly need her size to achieve their goals. These goals are often associated with stability. For instance the EU in 2014 declared sanctions against Russia for invading Ukraine (another black swan event). Russian president Vladimir Putin hoped that there would be no sanctions because the EU has 28 member states and they all had to agree to sanctions. Putin hoped that at least one country with close ties to Russia (like Finland) would block the sanctions. It didn't happen. Finland knew that sanctions will hurt Russian economy and thus also the Finnish economy but they still agreed with the sanctions because they didn't want to be the only ones in Europe who stood with Putin. Finland dreaded isolation more than economic harm. Finland wanted to make sure that when she needs the size of the EU all others would line behind her.
EU keeps getting more important because member states are increasingly confronted with problems they can't solve alone. It's not just the problem of small states. In 2015 Germany, the biggest, richest and most stable country in the EU had to ask help from others to cope with a sudden influx of refugees.
In these times of instability member states increasingly want problems to be solved on a European level. This creates a lot of stress for the EU. There are many who predict the EU's demise because those very public quarrels but this view is mistaken - the current troubles of the EU show her increasing importance for all member states. All EU's member states increasingly need EU's huge size to cope with black swan events.
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