This article first appeared in Forum, The Edge Malaysia Weekly on December 20, 2021 - December 26, 2021

Why do we keep on missing the black swan and grey rhino events that surprise us? The behavioural economist Daniel Kahneman (Thinking, Fast and Slow) observed that we make fast decisions based on heuristics (rules of thumb) and available information. However, we think more slowly and act more carefully when the situation becomes more complex.

This column has argued that economics has remained largely in the Newtonian classical mode of a linear, mechanical worldview, whereas physics, biology, psychology and other science disciplines have advanced to more complex, organic, non-linear paradigms of uncertainty. Economics appeals to politicians because it lays out the cost-benefit aspects of policy options. But it really is not that simple.

The current US-China rivalry reflects these fundamental differences in thinking and worldviews. One simple way of categorising the difference is a mechanical versus an organic view of life. One can say that the American attitude towards China is zero-sum; either you are with us or against us. The Chinese attitude towards America is non-zero-sum, meaning that they want a win-win cooperation, rather than a lose-lose confrontation.

The US has been on a winning streak since her 1865 Civil War, because by 1870, the US overtook Britain in terms of gross domestic product (GDP). However, it took another 75 years (and two World Wars that brought the British Empire to her knees) before the US built enough institutional strength, such as the financial might of Wall Street, to replace the pound sterling with the US dollar as the dominant global reserve currency. With super military power, financial muscle and advanced technology, it has been the dominant unipolar player, until she bogged herself down in endless wars.

China, on the other hand, has witnessed at least 3,000 years of rise and fall, and in the 19th century was reduced to near poverty, losing wars both internally and externally to foreign powers. In the 20th century, it was invaded by Japan and nearly dismembered by a civil war that divided Communist China from Nationalist China, the latter retreating to Taiwan in 1949. The organic cycle of life in which there is war and peace, decline and fall, and nothing is certain, is very much ingrained into Chinese philosophy.

We can see from more recent Asian examples how deeply ingrained mental models influence policies and approaches.

Take Walt Rostow’s take-off model of development. Rostow was President John F Kennedy’s national security adviser and developed in the 1960s a logical, linear four-stage model of modernisation — traditional society, preconditions to take-off, take-off, drive to maturity and age of high mass consumption. In other words, developing countries go from simple agricultural economies and gradually mature, after taking off like a plane, to become sophisticated advanced economies like the US. The model was refined into the Washington Consensus by the late 1970s, advancing the idea that any neoliberal free market economy could attain Nirvana like the US.

The Rostow model was marketed as a universal theory that seemed logical, hopeful and simple — follow the free market, democratic path and good governance to attain advanced-market status and become a high-income economy. Development is linear in direction where take-off is achieved through acceleration in growth. The implicit paradigm of limitless growth and hope was imbued through the Bretton Woods institutions, the World Bank and International Monetary Fund. Many developing countries bought into the idea, although there were Marxist contrarians and other sceptics.

Contrast this with the Japanese Flying Geese model, expounded by the Japanese economist Kaname Akamatsu in the 1930s that was popularised in the 1960s after his works were translated into English. Drawing on Japan’s successful industrial experience, the lead economy (Japan) in East Asia would fly in V-shaped formation, helping others that follow (South Korea, Taiwan, Hong Kong, Singapore — Four Dragons) and eventually Four Tigers (Thailand, Malaysia, Indonesia, the Philippines). Notice the organic metaphor used — much more flexible, interactive, learning and collective in formation and development. East Asians intuitively bought into the Flying Geese model, because they saw growth in organic terms. They also understood that the formation can be disrupted by bad weather or predators. Indeed, in certain areas, South Korean technology has surpassed even Japan. China is arguably the lead geese in East Asia.

However, the neoliberal free market ideology was so intuitively logical and attractively promoted that it was adopted in many different areas. For example, in financial development, financial “deepening” (meaning increasing sophistication and depth of financial products and institutions) was seen essentially as a linear progression from a basic cash economy to banking systems, then more complex bond and stock markets and finally derivatives markets like futures, forwards and highly leveraged synthetic derivatives. The assumption was that if developing countries make their financial institutions more sophisticated and like Wall Street, eventually they would have efficient resource allocation, sound risk management and through transparent markets, good and competitive corporate governance.

Real experience proved otherwise.

The 1980s Latin American debt crisis, 1997 Asian financial crisis and the 2008 global financial crisis put paid to this naïve, simple model of financial development. As Latin American economist Carlos Diaz-Alejandro famously said in 1985, “Goodbye financial repression, Hello financial crash”. In other words, take-offs also have crashes. Development is neither inevitable, linear nor pre-ordained. We learn through failures and crashes, so an organic perspective of non-equilibrium change is far superior to linear, mechanical models of equilibrium. Pretty advanced economies like Europe have not developed significantly beyond their banking systems.

Mechanical models fail because they assume that the parts would react like robots with very simple algorithms. They are additive, because the parts add up to the whole. Organic models are much more complex because each part is living and will react to pressures, competition and cooperation in very different ways. The parts interact with each other such that the “aggregated” outcome is not the sum of each part’s behaviour, but could be either positive (more than the sum) or negative (lose-lose) with very unpredictable outcomes.

Living parts in organic systems interact through recursive loops with feedback. Trade is win-win because I exchange what I don’t need for what I need from someone who has a surplus of my desired items and a need for my surplus items. Both parties win from the mutual exchange. Game theory shows that when two or more parties do not trust each other, there are multiple outcomes, some where everyone loses.

An organic nuanced systemic view will show why linear projections of Chinese growth may be wrong, because growth cannot accelerate forever. At the same time, just because the US is the strongest in GDP, finance, technology, education and military power does not mean that she will stay No 1 forever.

Conflict will occur if one group of players assumes that their system is best and therefore everyone must follow that model, whereas another group feels that diversity with different approaches would be more competitive and ultimately gives more options to deal with global uncertainties. We may be entering a period in which there are no simple answers, only messy outcomes that no one likes.

In 2022, it is likely that many mainstream forecasts of markets or global events may be wrong. No one exactly foresaw the pandemic, and certainly no one saw how complex the Covid-19 mutation has become, leaving perhaps very deep scars or trauma on everyone. Those central bankers who thought that inflation would be subdued despite excessively loose monetary policy are now startled that inflation has spiked in the advanced markets. Mainstream health experts who thought that the pandemic would be “conquered” by 2021 are shocked to know that we may have to live with Covid-19 for longer.

Militarists who thought that wars can be quick wins discover from the bitter lessons of Iraq and Afghanistan that wars are often long-drawn and messy affairs. They do not end with a bang, but with a whimper, because the mainstream media has become blind and deaf to the devastations to the war victims.

It is so very impressive and dramatic to be able to predict in 2022, A will win or B will lose. It may very well be that A will appear to win, but actually will lose in the long term, whereas B may be on the defensive, but may win later. Living organisms are entangled systems in which nothing is that simple.

Darwin’s evolutionary theory predicts that only the fittest survive, but the fittest may not be the kindest, gentlest, most humane or righteous. When human beings play God, some end up being the devil incarnate. So we must be much more humble to admit that there are many things we do not know, or understand.

When we are prepared to be surprised, black swans or grey rhinos lose their fear factor. That is probably a better way to meet the New Year. Season’s greetings and best wishes to all.

Tan Sri Andrew Sheng writes on global issues from an Asian perspective

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