Power of the exponential: What matters is the exponent!

Thursday, 25 February 2021 00:20 -     - {{hitsCtrl.values.hits}}

If you think COVID-19 is the ultimate enemy, the climate crisis is much more intense, dangerous and chronic. The UN has just indicated that more will die from climate change than with COVID-19, trying to bring attention to this old problem

Facing an exponentially developing situation is an interesting experience but not always and most definitely not during these COVID-times. COVID-19 is showing exactly the power of the exponential – how the contagion spreads! 

The infections as the final scenario is a result of the transmission being an exponential function. The exponent dictates whether the spread is happening or is curtailed. These days we see but without saying much that the exponent is greater than one in the virus transmission and therein is the problem. 

Exponential departs from the usual beaten track of linear patterns and takes you to places and scenarios way different from the obvious. In innovation, we like to see the stick part of the hockey stick curve. With passage of time and overcoming the inertia for accepting a new concept, masses catch up to what’s new on offer, the product takes on a whole new meaning once this accelerated growth take place. 

We have identified consumer items from the time they came to the market and the time each one took to penetrate society and we have seen the half-life to success getting shorter and shorter while the potential consumer base grows equally faster. In this exponential consumerism, we have come to value the power of advertising and perhaps equally the power of brainwashing! 

Investors and compound interest

Exponential is an experience preferred by investors. You place your money in an account and allow the interest to accrue and allow the deposit to grow to unbelievable levels, which is a dream. Babylonians apparently were the first to realise this fun of realising interest on interest! 

In finance this is the miracle of compounding. Basically, compound return cause exponential growth. We as a country did have the experience of giving significant rates of interests to savings and fixed deposits unheard of in developed economies. Many plan for this obvious ‘no work all gains’ type of experience and work towards realising some cash to jump-start the process. 

How banks yield the results from interest at this level is also a guess but one thing is certain. For someone who wants to take a loan and carry out a different type of real investment the situation is quite tricky. The investor would have to endure such a rate of interest for the borrowed capital the project must yield well above the rate of interest coming from just by saving. This is not easy as we all know and maybe what pays off in such amounts are projects that are quite dicey or seedy. 

For other projects then we have become to rely on loans and grants from outside and nothing really meaningful materialises. The banks of course cannot lend all its deposits as the Central Bank is too strict on them on the mandatory retain. Then they too must make money to pay the depositors what they have promised from a limited loan portfolio – thus the lending rates have to be high. 

This pattern of savings and borrowings with significant rates of interest had been a story of our country. COVID-19 did push these record values to be lowered and some were quite aghast as overnight the kitty went lighter. Then some say quite a few turned to play the stock market. That is another story. 

We must know that we just do not have development banks – well we did but the mindsets of those bankers must have been those of commercial bankers as they were quite quickly turned into the commercial type. Sad to think that we actually had the development bank concept established in 1955 when DFCC came along with the region’s first industrial estate at Ekala-Jaela but the journey from then on has not been one to admire. 

Today we love opening LCs and warehousing to cater to imports and transhipments are the bread with much less butter. With an excellent ‘geo’ but a poor economy, geopolitics is what we have to deal with and perhaps proving again and again the reason indicated to be the problem of Ceylon by Lee Kwan Yew – too much politics! 

Albert Einstein once made an interesting comment. He indicated that understanding relativity (of course he provided that understanding to the whole world) was to be easy but understanding the concept of compound interest was not easy which he alleges to have indicated as the eighth wonder of the world – he who understands it, earns it; he who does not, pays it! It must be said however that there are definitely more people understanding compound interest than those who understand relativity.

Getting the equation wrong

When the virus started spreading we are witnessing an exponential characteristic. In that particular mode the prognosis is quite bad. Lives get lost, medical systems get overwhelmed, more oxygen is needed and space for isolation along with hospital beds. Tackling the worst-case scenario is by tackling the exponent and getting the value below one. How is given by science and not by politics! 

The best example of getting the equation wrong comes from the country with the most number of Nobel Laureates – USA. Having just lowered the national flag to half-mast in honour of 500,000 dead – more than the combined dead from two World Wars and the Vietnam War, the reason had to be attributed to divisions in governance. 

As I indicated at the very beginning in this column, the science had to be given the chance to solve the issue. The science is also quite clear when the controls fail and the situation takes on an exponential route. 

The climate crisis

If you think COVID-19 is the ultimate enemy, the climate crisis is much more intense, dangerous and chronic. The UN has just indicated that more will die from climate change than with COVID-19, trying to bring attention to this old problem.

In France there is the use of the concept to teach children the importance of being proactive by demonstrating the principle in relation to environmental impacts. A lily pond, as the French riddle goes, contains a single leaf. Each day the number of leaves doubles―two leaves the second day, four the third, eight the fourth, and so on. Hope you see the scenario, the variable and the exponent!

They pose the question to children and you can do this in two ways. One question is if the pond is completely full on the 30th day, when was it half full? Answer: On the 29th day. That gave the title to a book by Lester Brown who had worked on this problem of environment for so long.

The other way to pose the question is with the same conditions on when you have seen the half-full pond on the 29th day. When do you think the pond is going to be completely full – of course the answer is the next day! This indicates the urgency of not ignoring the signs – We are almost facing the 29th day but appear to be living happily thinking that there is plenty of time to take action. 

Lester Brown was quite particular on the way we generate energy, which actually brought in the climate issue. The transformation to renewables is the choice for us. Still what we do on the ground is consider only the obvious costs and plan to realise profits through the use of wrong technologies. 

The externalised costs are going to descend on us much faster than we imagine as we are in exponential zones of impact accumulation. The global lily pond in which six billion of us live and crave consumption may already be half full. 

The internet

The internet and the world-wide-web is also an ultimate demonstration. The web is all about networks and today your net worth is proportional to your network. We pursue connectivity, many organically, but some with money spent. The latter always believes the expenditure to achieve one more connection is much more yielding. 

If we see a network with n connections, the combinations possible with full connectivity is simply staggering as n increases. The downside is keeping the network well-oiled; you simply may not have sufficient time which is of course a constant. Yet as in a single second the information travelling is along exponential pathways with almost the speed of light, the limitation is not crippling but many try to push for connectivity as the joy of connectivity is too much to ignore. 

The emerging generation grows up in a ‘likes’ economy and post when they pass connectivity mileposts. This too is another issue to worry but who is concerned? The fossilised lot of the society and their opinions are almost irrelevant. Without the participation in technology development we have not seen the Flynn effect in action – the growth of IQ in new generations– but only the immersion in new technology goodies. 

In all these scenarios what is evident if you look at the underlying relationship is the power of the exponential. If one visualises the function, the exponent dictates the outcome. There is the need to understand scenarios in functional terms and manage the systems appropriately. Time will tell how we succeed or not. Of course with failure there will not be that 31st day.

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