How Can We Game A Future Economy?

We have previously written about the possibility of joining together a sequence of games to generate a set of nested games (see here for more detail). In pursuit of that objective, we have now played one of the middle games to see how it all unfolds. The basic premise is that a set of geopolitical events drives movements in the financial markets. There is a set of actors who can influence outcomes within those markets, and that provides the basis for the game. To complete the description, the game then provides a set of market outcomes which can be used as inputs into a game examining how individual firms respond to rapidly moving markets. 

We played the middle game where geopolitics is driving market movements and where actors can respond and influence those market movements. The geopolitical frame we chose was 'The Belarussian Right Hook' (see here for more detail). To recap, the setting is that Russia uses the cover of wargames in Belarus as a launch pad to complete an invasion and absorption of Ukraine. Initially, things go well, but then they start to go off plan. NATO becomes involved, highlighting a tension between NATO and the institutions of the European Union. Eventually the US becomes involved. As that happens, China becomes a bit more aggressive in East Asia. The scenario ends with Russia expelled from Ukraine - but not Crimea - and European (but not necessarily NATO) forces in Smolensk, along the line of the Dnepr River. This represented a 30 day time frame of geopolitical drama.

Within that framework, the markets fluctuated wildly. We played with five actors, representing an amalgam of the Central Banks and Treasuries of the US, the ECB, China, Russia, and Japan. Each player was given a set of indices that they had to defend and a range of instruments to use in defending them. Collaborative play was encouraged and the players took to supporting each other in their game play. The players are gamers and not Central Bankers, so they brought to the game a more general knowledge than that of subject experts. The first four turns were played as part of a session delivered to the Edinburgh Futurists, with the remaining six turns played by e-mail after the event.

The broad results of the game were both interesting and instructive. The players rather rapidly formed two groups. The US, ECB, and Japan on one side (the Allies); Russia and China on the other side. If anything, China and Russia did a bit better than the Allies. To a certain extent, the game deepened the dependency of Russia on sales of hydrocarbons and minerals to China through long term contracts for supply at favourable rates, whilst driving the spot prices for hydrocarbons and minerals on the world markets to prohibitive levels. The Commodities Metals Index rose from 100 to 124 and the price of oil rose from $50 per barrel to $80 per barrel. Further along the value chain, the Chinese Overseas Trade Index rose from 100 to 107 and the Shanghai Composite Index rose from 3,500 to 3,579. From the Russian and Chinese perspective, the geopolitical adventure was good for business.

Russia beggared it's customers in Europe and the US. This was reflected in the falls in the stock indices over the 30 day period. The S&P 500 fell from 30,000 to 19,425; the Stoxx 600 fell from 400 to 191; and the Nikkei 225 fell from 27,750 to 17,610. This had repercussions in the bond markets and the global currency markets. The 10 Year US Treasury went from 1.00% to 0.83%, reflecting it's safe haven status; the 10 Year German Bund went from -0.50% to -0.83%, representing a loss of confidence that induced large doses of QE; whilst the 10 Year Japanese Bond went from 0.25% to 0.17%, representing a loss of faith in equities. As for currencies, the WSJ $ Index rose from 100 to 133, again highlighting the safe haven status of the US Dollar, whilst the Euro moved from €1.25 to the $  to €0.91 to the $. There was a lot of selling of Euros. From the perspective of the Allies, war in Europe was not at all good for their economies.

I think that we can draw some tentative conclusions at this point. The most obvious conclusion is that war is an expensive business, not only in human and financial terms, but also in terms of opportunities forgone. It is much better to stay out of a conflict than to rush into one. That isn't always possible and in the game the US was drawn into this conflict rather reluctantly. However, once the conflict was started, the Allies readily acted in concert and Russia acted to gain support from China, who was more than willing to provide it. This is a conclusion we have drawn from other games, to an extent that we now see this as something of a default future. Towards the end of the game, US involvement in Europe created room for a bit of Chinese adventurism in East Asia. A Chinese expeditionary force had set sail into the East China Sea, possibly towards the Senkaku Islands, possibly towards Taiwan. This is one potential continuation point for the game.

The end of the game left us in a position where the economies of the Allies needed a cessation of hostilities. The unresolved questions of Kaliningrad and Crimea had been left on the table. There was also a question over Belarus that we didn't really tease out. In terms of development, I think we can take this game in two possible directions. The first is to play out the Hedge Fund game - the final tier in the nested game system. That would be a fun thing to do. The second possibility would be to game the peace conference and throw in the thorny questions of Kaliningrad, Crimea, and Belarus. That would make a great matrix game for the future.

On the whole, I'm pleased with the progress that we have made. We are starting to generate sets of games that dovetail into each other quite well. They are generating some interesting ideas for spin-off games, and we starting to reach a wider audience. I guess that's a cue for more of the same.

Stephen Aguilar-Millan

© The European Futures Observatory 2021

Why are some foresight tools more equal than others?

My work has recently brought me into contact with the world of academic foresight. The group I am working with includes not only futurists, but also people from other disciplines. The focus of the work is on foresight, so those from other disciplines are asking the not unreasonable question of foresight is about? One answer placed me in contact with Popper's Foresight Diamond (see picture), which, I have to admit, I had never encountered prior to this work. I'll leave why that is as a question for later. My first reaction to the analysis was one of deep unease.

This was followed by reference to a piece that suggested that the point of foresight was to predict change (don't agree with that) and how foresight tools are useful for thinking about the future (agree with that). In this particular piece, the author then goes on to reference the Three Horizons Model and Causal Layered Analysis. This left me deeply dissatisfied and extremely uncomfortable. It is worth tracking the source of this discomfort.

The second piece gave me a better clue to the source of the discomfort than the first, but let's start a bit further back. What is the point of foresight? For the insights into a range of emergent futures that they can provide. How do we unlock those insights? By using a range of foresight tools developed for that purpose. The key point is the range of tools because that suggests an intention worth uncovering. Tools are used because they are useful. A tool that has little utility is a fairly poor tool. It follows that if the purpose of foresight is to be useful, then it needs to embrace tools that have a high degree of utility and to discard tools that have little utility. This is right to the point.

The second piece was binary. Only the 3H Model and CLA were mentioned. The two are not equivalent in practice. The 3H Model is encountered more frequently in practice nowadays, but, outside of the public sector and a few voluntary agencies, CLA is hardly encountered at all. In the private sector it is extremely rare to encounter CLA. Why is that? I think that it can be ascribed to three factors. First, there is the relative complexity of the competing models. CLA intentionally delves into complex layers of meaning and intention. This is intuitively difficult to grasp and needs a great deal of explanation just to arrive at the starting point of a project. The 3H Model is simple and intuitive as a descriptor of change. There is the present (Horizon 1), the future (Horizon 3), and the transition between now and then (Horizon 2). Nothing more complex is needed to understand the model and it can start straight away.

The second problem area relates to what the models are looking at, their strategic intent. CLA aims to examine deeper layers of meaning that most commercial organisations are uninterested in exploring. They take the view that Jungian archetypes and bedrock stories might be interesting conversations, but they aren't exactly on message for the future running of the organisation. The 3H Model, by way of contrast, has the strategic problem as the centre of the exercise. It focuses on the problems that are worrying those who commissioned the investigation. That speaks to the third problem area - the cost of project. Because of the developmental time involved and the breadth of the staff whose input is needed on a project, CLA is far more expensive to deliver a project than the 3H Model. If resources are constrained, then the uncertainty over whether or not a tool will deliver a useful result can be minimised by using the less expensive model. The cost of writing off a project that delivered no appreciably valid or impactful results is lessened.

This is why the foresight diamond makes me feel so uneasy. It identifies a large number of foresight tools, but then ascribes to them a degree of equivalence that I consider false. I appreciate that an academic work has to include all possible outcomes for the sake of completeness. I imagine the peer reviewers looking carefully at what had been excluded. However, the final result is misleading because not all tools have an equivalence. Perhaps that's why I hadn't encountered the foresight diamond before? As a practitioner, it has very little of use for me. 

If the foresight diamond were to be reworked as a word cloud, with the size of the entry determined by the frequency that it is encountered in practice, then I wouldn't mind betting that virtually all of the diamond would be occupied by the 2x2 Matrix. The 2x2 Matrix is by far the most commonly encountered foresight tool. It is easy to understand, it is quick to deploy, and useful results can be derived with fairly minimal cost. Whereas the 3H Model might yield useful results over an afternoon, the 2x2 Matrix can yield useful results over a cup of tea. If a 2x2 Matrix doesn't yield useful results, you will have lost a tea break. If a CLA project doesn't yield useful results, you will have lost a much greater sum of resources, be they time or money. This is why I am rebelling against the foresight diamond. It creates a false equivalence between foresight tools.

Coming back to the original question, why are some foresight tools more equal than others? One reason is that some foresight tools have a much lower cost to generate more useful results than others. These are the ones more frequently encountered in practice. This helps managing the uncertainty around the ability of different tools to generate useful results because the cost of a write off of results that aren't useful is much lower. I'm afraid to say that, at the end of the day, money talks.

Stephen Aguilar-Millan

© The European Futures Observatory 2021

Are we the architects of our own future?

There tends to be two extremes of thought when it comes to agency about the future. There are those who believe that the future just happens to us, that there is little agency in the future we experience, and that the future can almost be random at times. At the other end of the spectrum are those who take the view that we have an high degree of agency in creating our own future. We can see things coming and prepare for them, we can control the factors of our lives that influence our future, and we can exercise choice over the options in front of us. Is one of these views correct? Or can we reconcile the position so that both can be correct?

It is useful to distinguish between microfutures and macrofutures. Microfutures are those aspects of the future that can be controlled through a degree of personal agency. It generally involves a degree of personal choice and whilst some choices close pathways into the future, that is a choice in which there is a high degree of personal agency. This ensures that the spread of choice you face can be very wide indeed. For example, in thinking about a career path, you could choose to become a doctor or you could choose to become an accountant. However, there are very few doctors who are qualified accountants, which suggests that if you choose one course of action, then the other becomes closed to you. It's not impossible to re-train from the one to the other, but it is very lengthy and expensive, which is possibly why so few do. Either way, as the future is malleable, we can prepare and plan for it. In this sense, there is a point to the study of the future. 

Macrofutures are something yet again. These are those aspects of the future where you cannot change anything. They simply happen to you. There is very little personal agency over macrofutures because they are caused by factors beyond your control. This makes the choices available to you very limited. For example, you might decide to buy a property in London, and then find that your firm wants you to move to Newcastle. The choice you then face is almost binary - change jobs or move to Newcastle. You could try to add in extra options, such as exploring the commute to Newcastle or weekly lodging in Newcastle. However, that is an attempt to take a macrofuture - one that is handed to you - and convert it into a microfuture - one that you can create. With macrofutures, the future is one that is given, almost like fate. In this sense, there is no point to the study of the future from a personal perspective because it will happen anyway.

This raises an important question about our ability to create our own future and the role that luck plays in this. Lucky chance can help or impede one's future. It can blow events to your favour and it can blow them to your disadvantage. Placing chance in the context of microfutures and macrofutures is an interesting exercise. Chance in microfutures is an element that you can prepare for and anticipate, either to enhance a positive turn of events or to counter a negative turn of events. The impact of chance in macrofutures - to the degree that it cannot be controlled by your agency - is an altogether different matter.

In the environment of microfutures, a chance event can be moulded to suit your wishes. In a macrofuture environment, there is little you can do about it. You might want to insure against an adverse event, such as a fire or flood. Or you might want to ready yourself for an unfavourable event, such as your company moving production to the Far East, by staying attractive in the jobs market. In both cases, we are seeing again the conversion of a macrofuture into a microfuture. This is the process by which we can start to reconcile the apparent dichotomy between the two.

If we can adopt a process by which we convert macrofutures (things we can't control) into microfutures (things we can control), then we introduce a degree of agency to the process. It is in this way - the process of adaptation and preparation - that we can become the architects of our own future.

Stephen Aguilar-Millan

© The European Futures Observatory 2021

Carry On Spending

When I was growing up, an extremely popular sequence of films were the 'Carry On' films. They included a cast of staple actors, playing broadly similar characters, in mildly differing situations. They were a product of their times, and as a child I found them hilarious. In the humourless world of today, the films are denounced as misogynistic, racist, and homophobic - mainly because they are. However, they do occupy a niche in British folk memory that leaves them cherished by many. I was reminded of the Carry On films as I listened to the recent Chancellor's Budget speech.

As an economy, we are in trouble. Activity is currently in deep freeze. We are in yet another lockdown, with the prospects of relaxation not being fulfilled for some months to come. The scientists are warning of further waves of infection, which means that further lockdowns can't be ruled out. The vaccine roll out is going much better than we could have hoped for, but we don't know for how long it remains effective. These are not attractive prospects.

The fiscal response has been to provide financial support to households and businesses. This has been reasonably generous in historical terms. A furlough scheme has been introduced where 80% of salary has been funded by the state. For businesses, a series of very soft loans and grants of 80% of profits have been provided from public funds. And for those who have been made redundant, there has been an uplift to out of work state benefits for the crisis period. There have been some constituencies for whom the support has been less generous - company directors who pay themselves through dividends spring to mind - but there are very few who have received no support at all.

All of this funding was due to expire on March 31st. Many pointed to the sudden end to the support, especially as the country is still in lockdown and the ability to earn is very restricted. The Budget announced that most of the support will be extended into the autumn. This fits nicely into an official future in which all lockdown restrictions will be relaxed during the summer. The plan is to have the adult population vaccinated against the virus by the end of summer, allowing a relaxation of the economic restrictions. This will be followed by a short period in which levels of activity return to normal, and at the end of that, economic support will cease. That's the plan. Reality may turn out a bit different, but that's a conversation for another day.

As the Chancellor was rolling out this plan, many were asking how he intended the country to pay for it? And what would happen to the cost of public borrowing if inflation were to tick upwards in an appreciable way? The Budget went a little way to address these questions. A sequence of tax rises were announced - some explicit, such as a corporation tax rise, some stealthily, such as using fiscal drag to expand the tax base. Tucked into the small print were some proposals for public spending. There is, by and large, to be a public sector pay freeze for a number of years to come. This is using fiscal drag to achieve a reduction in public spending in real terms. 

There is a certain retro quality to the Budget. We are returning to the use of fiscal drag and cash limits, last seen in the 1980s, to restrain the public finances. As prices and salaries rise, and as the threshold at which tax is paid remains constant, and as the amount of public sector pay remains constant in cash terms, the politicians need do nothing. Inflation will impose the fiscal squeeze. The system has inflation at 2% built into it though the mandate for the Bank of England. But what if inflation takes off at an appreciable rate in excess of the policy target?

In many respects, the Chancellor has gambled that this happens. If inflation rises appreciably above the policy rate, the impact of the fiscal drag on taxation and cash limits on public spending will be that much more pronounced. It will help to pay down the public debt that much sooner. Of course, it will have a consequential impact on the cost of servicing that debt if interest rates are also forced to rise, but that may be a problem for another day. The average outstanding term for UK debt is 11.5 years. Rising interest rates are only a problem for future issuance, which is, on average, half a generation today.

And so we have returned to the Carry On farce of Treasury operations. We have a Budget that spends oodles of money immediately (Hooray!), that places tax increases on the villainous corporate sector (Hooray!), that introduces a stealth tax on the general public (Boo!), and which reduces public sector salaries in real terms in future years (Boo!). To top it all, the cost of this largesse is palmed off onto future generations through potentially higher borrowing costs (Aah!). Sometimes, politics is nothing more than a pantomime.

Stephen Aguilar-Millan

© The European Futures Observatory 2021

How do you stop foresight from becoming wishful thinking?

The world of the futurist is dominated by the five 'Ps' of the futures cone. We have the projected and probable futures that describe a limited state of future outcomes. These are knowable futures which belong to the world of risk. 'Small world futures' as described by John Kay and Mervyn King in their book 'Radical Uncertainty'. There are a limited set of outcomes in a determinate future that occurs in a world where there is a large base of information about previous outcomes to draw upon. You flip an unbiased coin and expect a head or a tail. 

Opposite small world futures are 'large world futures'. In these, the future states are primarily unknowable. There is a very large range of potential outcomes with a very limited, or non-existent, information base to draw upon previous experience. You flip an unbiased coin and you have no idea what the outcome might be. The coin may land on it's side. Or it could fall down a drain. Or it could be intercepted in the air and doesn't land at all. There are many potential outcomes here. This is the world of uncertainty, which is dominated by possible futures and plausible futures. 

These distinctions - between projected, probable, plausible and possible futures - matter because over this structure lies any number of preferable futures. Preferable futures provide the point at which foresight becomes wishful thinking. However, it is worth reaching that point the long way round because it allows us to see what is going on here.

Preferable futures are unambiguously normative. They describe what we want to see happen in the future. Some observers position projected futures as a polar opposite to preferable futures. It is argued that a combination of observation and quantification adds a degree of objectivity, which contrasts with the essential subjectivity of preferable futures. However, upon closer examination, this might not be entirely the case. When we drill into the probabilities that underpin the case for the objectivity of  projected futures, we find all manner of subjectivities that can enter into  seemingly objective exercise. There is the question of what is being measured. The basis upon which it is measured. The interpretation of the results. And so on, and so on. Whilst some futures can be numerical, that does not mean that they are entirely objective.

This is where wishful thinking enters the picture. An essential part of wishful thinking is the focus upon the future that we want to happen. We may have a particular end in mind, but that might not be the only possible outcome. For example, in the game 'Monopoly', two dice are thrown to determine how far a player progresses around the board. We play the rule that a double six gives a player an additional turn. The player may want to throw a double six (because that will help them progress round the board), but that desire doesn't exclude the possibility of throwing any number between two and eleven. It is only when the player is adamant that they will throw a double six that we have entered the realm of wishful thinking.

This is important because it enters into our analysis of the future. In 1941, Stalin convinced himself that Hitler wouldn't invade Russia, despite the contrary evidence of Chamberlain being equally wrongly convinced in 1938 about Poland. Both Stalin and Chamberlain were engaged in wishful thinking to the exclusion of all other possible futures. Whenever we undertake a futures exercise, we bring to bear a number of assumptions about the future. It is the potential inaccuracy of these assumptions that give rise to various possible futures, and the uncertainty inherent within that structure. This is where we can begin to prevent foresight from becoming wishful thinking.

A really important aspect in the study of the future is to identify the assumptions, both explicit and implicit, within the study. That is an argument for plurality. If the team undertaking the study has a degree of diversity, shows differences of opinion, and argues the point a lot, then you can have a greater degree of confidence in the resulting study. To put it another way round, if you want to stop your foresight from becoming wishful thinking, go out and argue with people different to you. Do it with an enquiring mind and accept that you might be wrong. That way, your work will naturally improve.

Stephen Aguilar-Millan

© The European Futures Observatory 2021

Why do we bother about the future?

A question that has intrigued me recently concerns at what point in the human story we started to become concerned about the future? I think that the answer to this question might suggest why the future is a topic of interest. It is easy to be blithe about the question and simply state that we have an innate desire to know what comes next. But why do we have that desire? And when did we acquire it? Even more importantly, how does that affect us today?

Part of the answer to the question can be found in the treatment of risk and uncertainty. The two concepts are often confused in ordinary conversation, but there is a strict distinction between them that is worth teasing out. Risk refers to a knowable world, in which the future range of outcomes can be identified, even if we don't know exactly which outcome will be experienced. Risk readily lends itself to probabilities and an assessable future. 

Uncertainty, on the other hand, refers to an unknowable world in which the future range of outcomes cannot be readily identified. Uncertainty lends itself to a world of possibilities and plausibilities that are not readily quantifiable. Any probabilities provided for an uncertain world are necessarily subjective. This is the world of preferred futures, which can degenerate into an exercise in wishful thinking. We'll put preferred futures aside for another day and just focus on risk and uncertainty.

I often wonder if early man worried about the future? In a state of hunter gathering, I can see that there would have been a lot of risk, but would there have been much uncertainty? There would have been the risk of encountering a higher predator - such as a sabre tooth tiger - whilst out hunting. Or there would have been the risk of a collectable food source - such as berries - being eaten by birds before they could be gathered. These are risks that would have been known to early man. But what about uncertainty? Would early man have unknowable futures? And would it have bothered them much?

I think that the advent of agriculture is the point at which uncertainty enters the story. As early tribes settled and started to cultivate the land and husband their flocks, they would still have encountered risk. However, they would have also encountered uncertainty as well. The risks would be reasonably well known, such as a poor harvest or sickness amongst their various flocks and herds. Some of these risks could be mitigated and some couldn't. However, they were knowable and manageable.

One of the features of agriculture is the surplus in production. Cultivation, in particular, introduces a time lag between planting and harvest. We can think of this as an investment lag. However, early farmers have to eat during that period, so there has to be a surplus that carries them from one harvest to the next. This surplus is vulnerable to the predation of those who are still in the hunter gather mode. To protect their surpluses, villages, towns and cities emerged. Communal enterprises - such as common defence features - arose, leading to the diversion of some of the surplus into a common fund through early forms of taxation.

This fairly simplistic model is the point at which uncertainty becomes a greater factor. As the complexities of society grew, so did the variety of unknowable factors that could impact upon society. We find this process still at work today. The growth of complex financial instruments has led to a far more uncertain financial environment. When those complexities become too much to resolve, the financial system boils off a degree of complexity through a financial crash. We know the possibility of that, but we are uncertain exactly where it will originate, where it will unfold, and when it all will happen.

This is the key to why we bother about the future. The future contains elements of risk that are concealed from us in the present and uncertainties that originate in an unknowable future. We have a desire to plan and prepare for those eventualities as part of our innate survival strategies. We want to see what is just down the road, or just over the horizon. Partly for comfort, but mainly to be satisfied that we are unlikely to encounter an existential threat in the immediate future. We bother about the future because that is part of the human condition. It's an aspect of our shared humanity.

Stephen Aguilar-Millan

© The European Futures Observatory 2021