How debt ruins systems: Black Swan author Nassim Nicholas Taleb on fragility, centralization, and capitalism.

• Author: Gillespie, Nick
• Position: Interview

NASSIM NICHOLAS TALEB is a former trader and hedge fund manager, a bestselling author, and a groundbreaking theorist on risk and resilience.

A finance professor at New York University and a research scholar at Oxford, Taleb drew wide attention after the 2007 publication of The Black Swan: The Impact of the Highly Improbable, which warned that our institutions and risk models are not designed to account for rare and catastrophic events. Among other things, the book presciently cautioned that oversized and unaccountable banks using flawed investment models could trigger a financial crisis. He also warned that the government-sanctioned housing finance agencies, Fannie Mae and Freddie Mac, were sitting on a "barrel of dynamite." One year after The Black Swan was published, Taleb's predictions came to pass.

Taleb doesn't identify as a libertarian, but he often sounds like one. He supported Ron Paul in the 2012 presidential election and has cited the libertarian economist Friedrich Hayek as an influence. He has called New York Times columnist Thomas Friedman "vile and harmful," and he coined the phrase "Stiglitz Syndrome" after Nobel Prize-winning economist Joseph Stiglitz, referring to the phenomenon of public intellectuals being held utterly unaccountable for their bad predictions. The economists Paul Krugman and Paul Samuelson are among Taleb's other Nobelist betes noire.

Taleb's new book, Antifragile: Things that Gain with Disorder, argues that in order to create robust institutions we must allow them to build residence through adversity. The essence of capitalism, he argues, is encouraging failure, not rewarding success.

Reason TV Editor in Chief Nick Gillespie sat down with Taleb in January for a wide-ranging discussion about debt, technology, the banking system, capitalism, and why he'd never take writing advice from "some academic at Cambridge who sold 2,200 copies." Video of this interview can be seen at reason.com.

reason: What is antifragility and why is it so important?

Nassim Nicholas Taleb: Antifragility is something that likes volatility and likes variation, likes turmoil, likes stress--up to a point. The opposite would be robust. Robust is like a rock. It doesn't care. Diamond is perfectly robust. What is antifragile gains from disorder and may even need disorder for fuel.

reason: You talk about it in terms of materials, but anti-fragility applies more to systems or living organisms, right?

Taleb: Exactly. What people fail to understand--and this is what libertarians tend to pick up rather quickly--is that even when you read Adam Smith, you have this illusion that the economy functions like a machine. But it's not like a washing machine. A washing machine needs maintenance. It's more like a cat than a washing machine. A human body needs some stressors. And everything organic and complex communicates with the environment via stressors.

reason: Is it kind of a fractal system?

Taleb: Exactly. It's fractal because you have layers. Like the restaurant business. It's composed of restaurants. And for the restaurant business to be robust--or perhaps antifragile--you need every single restaurant to be fragile. It's the opposite of Nietzsche's "What doesn't kid me makes me stronger." What kills me makes others stronger.

reason: Because they learn?

Taleb: They learn from your mistakes. You have evolutionary forces where the individuals sacrifice for the collective. It works within your biological system. You're composed of cells. If you harm some cells, your overall health will improve.

reason: Most people would say when you have a system and if there's a contagion in it, if there's a cancer in it, if there's some kind of stressor that starts taking over, it's going to spread to the whole system. This is what we hear about the banking system, the financial crisis. You're...