So what are the challenges that are facing us? What do we need to—how do we need to understand globalization so we are aware of the risks? And we might also be aware of the opportunities. Again, I'm taking a fairly negative view in all this because I think we have to counterbalance the hubris, but we could translate a lot of these as opportunities. But for now, let's think of them as potential risks. Okay? And what do they consist of? One of the biggest problems is there's lots of work on systemic risk in finance, particularly finance, there's just huge amounts of stuff. There is systemic risk in infrastructure. There's a literature on systemic risk in energy, in food systems. Okay? The problem and the reason why we really have to think about this is that we might not address the issues that we're talking about, these risks, by dealing with any one of these domains in isolation. We might fix the finance system, we might fix the food system, we might fix the energy system. But we also have to realize that for the broad system of globalization to work, all these domains must work. And their interaction adds yet another level of complexity. Already, we have a great deal of complexity in the financial system, particularly as we will see in a little bit. But it—now imagine linking that complexity to the energy complexity to the food complexity to the infrastructure complexity to the IT complexity. Add to this the whole, in a sense, unknown, unknown of AI, and how AI is going to coordinate all this, and you start realizing the kind of level of challenge that we're facing. So again, there have been efforts to explore these silos. Okay? But we need to break free from these silos, we need to start thinking about how the finance silo is connected to the trade silo which is connected to the epidemiology silo, which is connected to the infrastructure silo. We need to, in a sense, build bridges between these. And what this approach talks about is, let us not be looking at these silos of these domains in isolation. Let's think of them as part of a larger system, where they all depend on each other to continue to work. We define "systemic risk" as the risk that a given system will experience a systemic collapse, driven primarily by endogenous forces, such that it can no longer fulfill its critical function through damage that is not easily undone. What does that mean? So we depend on globalization for our food, for our energy, for our culture. What happens if it starts collapsing? What happens if there is some failure on the part of this system, which leads to other failures of the system, and the damage can't be undone? And if we think about the various dangers here, I'll just read a few of these: biodiversity laws, climate change, state collapse, social instability, network breakdown, cyber attacks, infrastructure failure, infectious diseases, terrorist attacks, interstate conflicts, deflation, asset bubbles, all of these. In a sense, these are in the individual domain. So we might call this a finance domain, we could call this the IT domain, the infrastructure domain, the natural domain, and then the political domain. And this is just some. We realize that these are not operating in isolation. A regional or global governance issue might have consequences for an infrastructure failure, okay, or it might have fiscal crises, and each of these is linked to the other. And that's what we have to, sort of, walk around with. This is why I said it's important to think about this graphically, almost as a map, and to start thinking about how each decision or each outcome in each domain starts affecting the other domains. A systemic collapse. What do we mean by this? And we're going to finish up the course talking about this. But for now, let's just go— an event that critically impairs the system's ability to perform its core function. What is the core function of globalization? Providing for the economy, providing for the transport, providing for the communication of seven and a half billion people. And each subsystem has its core function, providing food, providing whatever it might be. So an event that critically impairs the system's ability. The collapse demonstrates hysteresis, that is, that process of collapse changes its basic shape, that it can't just bounce back like a rubber band, but actually leaves a legacy, that collapse leaves a scar in a sense, and a scar that we can't ignore when we're thinking about the future of globalization. We have to think of globalization, in one scenario functioning— continue to function the way it is. But what happens if something bad, just to use a silly term, something bad or catastrophic happens? Okay? How is the system going to respond to that? And can it survive? And how is it going to be different after that change? Although potentially triggered by an external shock, the main cause of the systemic collapse is endogenous system factors. Okay? So that's how we can combine our concerns with globalization, which is the system, with a systems approach. Okay? And taking a look at the risks of that system. All right? And that—can it continue to perfectly function, or do we have to come up with at least the awareness of how it could stop functioning? And this is a wicked problem. And one of the problems, I mean, and there's many of them, but one of them is that capitalism is global, but governance is local. This is at the very heart of the contradiction of governance and globalization. We have these global phenomena; we have these global interactions, yet our governance systems are very much limited. The Peace of Westphalia, it created this new basic unit of a nation state. We are still in that world. We need, perhaps, a post-Westphalia way of governing that doesn't— that recognizes a little bit of this global effect. There is no central coordinating mechanism except interacting markets, except these individual agents. And markets, not just economically, but migration markets, labor markets, cultural markets, et cetera. That we are dealing as a species with bounded rationality. Okay? That we can't see everything. We don't see all the problems, that we have a limited amount of time in a sense to make decisions. And obviously, that we are possibly in danger from any opportunism. A wonderful definition from an ex-professor of mine, Oliver Williamson, who called opportunism a "self-seeking behavior with guile." That is, that you're trying to— you're pursuing your self interest, but you're doing it under disguise. And again, we think about all these various interactions that are taking place, think how opportunistic behavior in one domain can lead to a failure and then a greater catastrophe. And what are the characteristics of wicked problems? We're not sure what the problem is. Again, one of my favorite social science books, The Hitchhiker's Guide to the Galaxy, where the answer to the question is 42. But what's the question? Well, we don't even show what the problem is. We don't know what needs to be known. More people—we have seven and a half billion agents that we have to coordinate. Can't be disentangled from its context. The boundary between the globe and the system is not clear. Priorities called into question. What should be our priority? Should our priority be growth? Should our priority be environmental sustainability? Just to choose one obvious. It's a longer uncertain timescale. We really have to think about the future. And there's no solutions. Or, in the words of another friend of mine who said, "the problem with every solution is that they create more problems." So even if we had a perfect solution, that would create yet another set of problems. We can't come to some permanent equilibrium, where we can just imagine that the world can go on forever. And the final and most important part is—this is the trolley dilemma. And the trolley dilemma is a favorite of philosophers and cognitive scientists. This trolley is coming down the line, this person, and there's very— there's lots of variants on this. But imagine that this person over here has to choose whether the trolley is going to kill these five people, or the trolley is going to kill this one person. And you have to choose, there is no possibility of simply stopping the trolley. The trolley is going to kill, all right? Now, well, in one way, you could say it's five versus one, you could use some utilitarian logic. I don't think any of us are very comfortable with that. But even if you just had, let's say three people on each side, which three people will the trolley run over? And again, I want you to think about this as this is fundamental to any policy debate, certainly that we have at SPIA, the school for Public and International Affairs here at Princeton. Policies are not about simply the utilitarian optimality, but also involve choices. Are we going to— whose problems are we going to resolve? Whose needs are we going to resolve? And when you no longer just have three, or four, or five people sitting around trying to figure out how they're going to choose a restaurant or a movie; Now you've got seven and a half billion people, each with their particular utility preferences, each with their tastes, each with their biases, each with their bounded rationality. And we have to come up with some balance, why which the trolley can continue to go. The question is over whose body? Now, what I'm going to talk about in greater detail now that I probably have depressed you madly, is let me give you some examples of how this global systemic risk could work out.
