On August 10th and 12th, I shared some thoughts on Morgan Housel's book Same as Ever: A Guide to What Never Changes. Today, I’d like to explore another chapter that particularly resonates with me, titled "Calm Plants the Seeds of Crazy: Crazy doesn't mean broken. Crazy is normal; beyond the point of crazy is normal." This chapter delves into the intriguing relationship between calmness and chaos, stability and disruption, especially within the context of economic cycles.
Housel draws on Hyman Minsky's seminal financial instability hypothesis, which unfolds as follows:
- When an economy is stable, people become optimistic.
- As optimism grows, so does debt.
- As debt accumulates, the economy becomes unstable.
Minsky's key insight is that stability itself is destabilizing. A growing belief in the continuity of good times propels us—like a law of physics—toward eventual disruption.
First, when circumstances are calm or stable, they quietly set the stage for instability. Complacency takes root, leading people to take risks they would otherwise avoid.
Second, rather than viewing craziness as abnormal, Housel suggests that a certain degree of it is inherent to human behavior—indeed, it’s expected. When events move "beyond the point of crazy," it may signal a return to stability, underscoring the cyclical nature of stability and instability.
Third, Minsky's theory posits that economic stability breeds overconfidence. When people feel secure, they are more inclined to take on debt, believing that prosperity will continue indefinitely. Ironically, the very stability they seek is what eventually precipitates economic crises.
A Chinese saying, 物极必反 (wù jí bì fǎn), perfectly encapsulates this dynamic. It means "things will develop in the opposite direction when they become extreme." When a situation reaches its peak or an extreme state, it naturally reverses course. This concept aligns with the idea that prolonged stability can lead to instability, just as chaos can eventually give rise to a new order. It reflects the cyclical nature of many processes in life and in society, where balance is ultimately restored after extremes are reached.
In essence, this chapter illuminates the delicate equilibrium between stability and instability, calm and chaos, prosperity and decline, order and disorder. Stability can paradoxically be destabilizing, sowing the seeds for the next crisis, just as prosperity often carries within it the seeds of decline—good fortune and misfortune are inextricably linked.