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John Casti Leena Ilmola Petri Rouvinen Markku Wilenius

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John Casti Leena Ilmola Petri Rouvinen Markku Wilenius John Casti This book serves as the final report of Leena Ilmola Extreme Events the Game Changers project, which was Petri Rouvinen established towards the end of 2009 as Markku Wilenius a part of the Extreme Events in Human Society initiative at IIASA, International John Casti, IIASA John Casti, Institute for Applied Systems Analysis (Laxenburg, Austria). A specific extreme event (Xevent) is unlikely but it potentially has signifi- cant societal impacts. However, due to the range of possible Xevents and their transmission via global links, the effects of some Xevent touch upon Finland quite frequently. We argue that Xevents should be one of the central concerns of Ilmola, IIASA Leena decision makers in all sectors. A completely Xevent-free society is infeasible, but some protection is near- ly cost-free and comes as a by-product. Contingency planning should be con- sidered as a part of good governance. Casti – Ilmola – – WileniusRouvinen We propose that Finland be turned to a model for an anticipatory society, which constantly prepares for contingencies of ETLA Rouvinen, Petri various kinds. Louis Pasteur said that Chance favors only the prepared mind. We whole- heartedly agree. And we encourage preparing sooner rather than later. For further information and additional material, please visit Xevents.fi. Univ. Wilenius,Markku Turku Extreme Events Extreme Events This page is intentionally left blank for double-sided printing This book serves as the final report of the Game Changers project lead by John Casti and coordinated by Leena Ilmola. The project was established towards the end of 2009 as a part of the Extreme Events in Human Society initiative at IIASA, the International Institute for Applied Systems Analysis (Laxenburg, Austria). Extreme Events John Casti, IIASA Leena Ilmola, IIASA Petri Rouvinen, ETLA Markku Wilenius, Turku University Supporters of the project This project would not have been possible without the stimulus and support of Tekes, the Finnish Funding Agency for Technology and Innovation. The other supporters of the project are ETLA, The Research Institute of the Finnish Economy; Fountain Park Oy; Itella Corporation; Metso Corporation; Ministry of Employment and the Economy; National Emergency Agency; Sanoma Group; Scottish Government; Sitra, The Finnish Innovation Fund; and UPM Corporation. The advisory board of the project Jaakko Kiander, Sixten Korkman (chair), and Chihiro Watanabe. The researchers and other contributors of the project Ugur Bilge, Katriona Carmichael, John Casti, Juha Honkatukia, Leena Ilmola, Peter Klimek, Olli Lehtonen, Manfred Lex, Juuso Liesiö, Laila Riekkinen, Richard Rollison, Ruggero Rossi, Petri Rouvinen, Ahti Salo, Markku Tykkyläinen, and Markku Wilenius. Publisher: Taloustieto Oy (on behalf of IIASA and ETLA) ISBN 978-951-628-530-9 ISBN 978-951-628-531-6 (PDF) Front cover: iStockPhoto (modified) Printed: Unigrafia Oy, Helsinki 2011 Extreme Events Executive summary 1. Introduction 7 2. Expect to be surprised 21 3. Wrong assumptions 29 4. The invisible hand is choking us 37 5. Surprise, uncertainty, and extreme events 45 6. The upcoming socio-economic wave 61 7. Anticipating the unimaginable 73 Appendix: The Game Changers project 83 References 125 Endnotes 130 Contents This page is intentionally left blank for double-sided printing Executive summary The cover of Newsweek on 28 March 2011: Apocalypse now: Tsunamis. Earthquakes. Nuclear Meltdowns. Revolutions. Economies on the Brink. What the #@%! Is Next? Yes, there will be more events of this nature due to a number of reasons, including complex- ity, global networks, flat-world instability, paradigm shifts, global crises of maturity, and several in-built features of modern societies: – Complexity leads to a mismatch between the system and the mechanisms available to control it. Furthermore, complexity per se drops our ability to understand and control the system. – Flat-world instability refers to the interdependence of individual actions globally, in- duced by instantaneous access to the same information. Instead of asynchronous and often balancing actions we previously had, this leads to global herd mentality and bub- bles of various kinds. – Paradigm shifts are major discontinuities in global socio-economic trajectories that typically take place in 40–60 year intervals. Such a shift is induced by a technologi- cal breakthrough. Arguably the world is current shifting to a new paradigm, which is a major source of turmoil. – Global crises of maturity: There are more than half a dozen acute and inflamed glob- al crises that are nowhere near to be solved. Reaching a tipping point in any these cri- ses would have major consequences worldwide. The virtually complete lack of effec- tive global governance exacerbates the risk of a meltdown of the global socio-economic system. – In-built features: A modern society is lean, individualistic, specialized, just-in-time, and short-sighted. It excels in efficiency and dynamism. It also produces shocks internally and is quite exposed to external ones. Furthermore, these – coupled with a few other features – often lead to a situation where no one in the society has an interest to take a bird’s eye view upon considering stability and responsiveness. As far as major shocks are concerned, a dynamic modern society is quite adequate after the fact; its perfor- mance is far worse as far as preventing, anticipating, or preparing for shocks is con- cerned. No, we do not provide a list of disasters to come. The reason is twofold. First, the domain of unknown unknowns – the set of things we don’t even know we don’t know (more on this rid- dle in Chapter 1) – cannot possibly be completely exhausted. Second – even if the starting point may be an Act of God –, we are dealing with social randomness, which is inherently unstructured and untraceable. There is no overarching theory of surprise, but by employing a diverse set of approaches and tools one can get a better understanding of the future. An extreme event (Xevent) is a rare incidence with potentially significant societal impli- cations. While a specific Xevent has a low probability, due to the range of possible Xevents and due to a myriad of global networks acting as transmission paths, a small-open economy such as Finland experiences consequences of an Xevent quite frequently. The paradox thus is that everyone agrees that Xevents are possible and do happen but when the discussion moves to more specific Xevents, the consensus is that due to their rarity considering them is not worthwhile. Upon considering Xevents, we are easily captured by ‘a failure of the collec- tive imagination of many bright people’. The extreme events we have in mind tend to be systemic in nature. Their scope is often be- yond any individual actor or organization within the society, which calls for emphasis on national-level action in preparing for them. We insist on considering both positive and negative extreme events. Previous discussions have mostly touched upon the latter kind – for a good reason. It is simply a lot easier and quicker to destroy something than it is to build it – in part the X-ness of an event is related to its unfolding time. The consequences of systemic Xevents are mostly addressed by taking decisive government action and by spending vast amounts of public money. Yet, the public willingness to devote resources for anticipation, planning, and preparation for Xevents beforehand is negligible. We argue that Xevents should be among central concerns of decision makers in the public and in the private sector. Finland needs resilience – capacity to absorb and recover from negative Xevents as well as capacity to nurture and benefit from positive ones. A society’s ability to react on an Xe- vent crucially depends on its institutions and infrastructures as well as on the coordination and cooperation among its members. In these respects Finland compares favorably to virtu- ally all other countries in the world. Finland’s challenges with respect to Xevents are differ- ent from the challenges of most other countries – Finnish focus should be more on having adaptive structures and on exploiting opportunities that might arise with Xevents. Contingency planning should be considered as a part of good governance. We propose that Finland be turned to a model for an anticipatory society, which constantly prepares itself for contingencies of various kinds. 7 Introduction Introduction 1 In this book we consider unlikely incidences with significant societal implications – extreme events (Xevents). A specific Xevent has a low probability. However, due to the range of possible Xevents and their transmission via global networks, an Xevent touches upon Finland quite frequently. We argue that Xevents should be among central concerns of decision makers in both public and private sectors. Our conclusions provide some suggestions for further considerations. This book concludes the Game Changers project. The ideas we present have been honed in count- less discussions with our fellow researchers, the names of which are listed on the title page (the other contributions of the project are described in the Appendix). This project would not have been possible without the stimulus and support of Tekes, the Finnish Funding Agency for Technology and Innovation, as well as the other partner orga- nizations listed on the title page. Our warmest gratitude to all ! 8 Preparing for the uncertain future Extreme Events Tomorrow is much like today 99% of the time. This book on extreme events (Xevents)
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