Is the Golden Age of Liberal Capitalism Over?
MIKE GREEN: Mike Green. I am here in Marin County. It's late in the day. My day started at 4:30 this morning, it is now five o'clock at night. And I'm excited to sit down and talk with Viktor Schvets. Viktor, you're coming to me from China by way of Macquarie Global. And so, you are the global strategist, or you are a global strategist for Macquarie. And I was introduced to your work by one of our viewers. And so, I just wanted to say thank you, first of all, to the viewer who reached
out and said, you should take a look at this. They reached out through a Twitter direct message. I'm always open to these types of introductions. And, Viktor, you and I chatted a little bit before but it's strange that we don't know each other because we've been circling on some of the same themes, this general idea that you, and I'll give you full credit for having thought of it and introduced it before me. But your work has explored through both books
and your writing from Macquarie, a really provocative thesis, which is effectively that capitalism already died, liberal capitalism is already dead. We just haven't identified that the body has stopped breathing yet. And something unique is happening, that we're effectively marching backwards from a 500-year experiment with liberal capitalism to what feels like a much more authoritarian or monarchical system. Expand on that
share. Share how you came to this realization and what your book approach is and how you break down that or how you arrived at that conclusion. VIKTOR SHVETS: Well, first of all, Michael, thank you for having me. You are absolutely right. Certainly, for the last 10 or 15 years, I've been arguing that what we have experienced over the previous 500 years, the recipe for success either at an individual level or at the country level that really drove us over the last five centuries might no longer apply. And what it was, is the freedom to explore,
the freedom to innovate, the freedom to discuss ideas, the freedom to move from one place to another. All of those freedoms are becoming less and less relevant as we go forward. The private sector signals and the primacy of private sector in driving economic outcomes is sunsetting. And the new world is emerging. And so, one of the things I've discussed in my book is what I call the Fujiwara effect. That's when the two hurricanes merge and become much stronger hurricanes. To my mind, those two hurricanes are technology and information age, and financialization. Now, financialization happens to be a self-inflicted wound,
but technological innovation is the human spirit. It's our ingenuity. But the speed with which technological innovation progresses depends on the cost of capital. The lower the cost of capital, the faster technological innovation progresses and penetrates all life. And so, it's really the merge of the two things. All financialized in our economy, as we financialized our economy, we must generate more capital than we require. We become addicted to asset prices as a primary cue for most economic decisions that we make. As that continues, what
you find is a cost of capital crashes, because you do generate more capital than you need. And that's extra capital supports your asset prices holistically, so to speak, as you go forward. And the book tries to address the question, why did we decide to financialize? Who made that decision in 1980s? If you go back to '50s, '60s, and '70s, every country in the world needed more than one, no more than one at $1.50 of liquidity in debt for every dollar of GDP. Today, depending on the country, you look at, you need $3 to $5, in some cases, even more than that.
So, who made the decision? Why have we decided to financialize? And then you look at technology, and one of the chapters in the book shows the key differences between industrial age and that's what we have experienced over the last 200, 300 years, and the information age. And the key message is that everything that liberal capitalism is all about which is capital in labor is changing. In other words, the role and functioning of capital is changing rapidly. The role and functioning of labor is changing rapidly. Societal norms are changing rapidly. And so, these are the two forces driving us towards a black hole. And the question then
becomes what lies on the other side of the black hole? And the answer to me was, and my editors were recommending I don't use that word, but I did. I describe it as enlightened communism, that whatever lies on the other side will not be liberal capitalism as we got to know over the last several hundred years, but communism. But communism in a sense the way Karl Marx thought of communism, and that is a high productivity society at a level that slavery of labor, slavery of work disappears completely, and society gets rewired. Now, that's not dissimilar to what john Maynard
Keynes was describing in 1930 when he looked at the future of our grandchildren, four generations from now. It's actually not dissimilar to what Peter Drucker was discussing in late 1980s, in the early 1990s. But for Karl Marx in 1850s, that was way off. John Maynard Keynes was closer, Peter Drucker was closer still, but the reality of it actually will hit us in the next two decades.
And the closer you get to the black hole, the more your body stretches, the more your atoms stretch, the more your perception of reality stretches, the more you economic models, your investment models change. And that will be our growth over the next two decades. One of the keys from the book is that freedom in that system becomes optional, that you don't need to have the same degree of freedom to explore, to innovate, to exchange ideas, to move. And China, the place you suggest I'm speaking from,
is actually trying to prove today that freedom is indeed optional in the system. And one of the things the book suggests is what policies can we put in place in order to keep as much of those freedoms as possible? Clearly, we're not going to be as free as we used to, but can we please at least keep some of those freedoms? And what I do, I explore four or five policies that can actually help us in that transition. MIKE GREEN: So, before we go on to the policy prescriptions, because I always think this is an interesting distinction, I talked about this in the context of modern monetary theory that there's a distinction between description and the actual prescription, what you believe should be done in response to it. One of the things I
find so fascinating about your description of the system, is that it feels so intuitively correct to me. So, when you're dating to roughly 500 years ago, I would describe broadly is the age of exploration and discovery. So, the introduction of cross-Atlantic and circumnavigation where we radically expanded the quantity of land that was available to, in particular, the Western societies beginning with the Portuguese and the exploration along the African coast. What we saw in that environment, it's quite fascinating when you think about it in the context of the exploration that could happen today, it was effectively the cost of exploration, the technological change of exploration made available to privately funded individuals or corporations. So, the Mayflower corporation or the Dutch East India Company, they were able to raise capital and pursue in a semi-private-public partnership, the exploration of untapped resources effectively dramatically expanding what I've described elsewhere as the labor surplus. And as those costs continued to fall, not just in terms of the actual mechanical costs, what it costs to mount an expedition, because you didn't have to build a new ship, you already had a ship, the navigation technologies and awareness improves so that ships were less likely to crash and sink in a hurricane, etc. We figured out those processes, it became more and more
reliable. And so, the costs fell, even though the technology didn't change all that much. Obviously, steam power had a huge impact there, etc. So, we saw this continual fall in exploration that led to the exploitation of effectively the New World. You could come to the United States, make an investment of three months, if we're talking 300 years ago, and three weeks if we're talking 100 years ago, that would transport you to a place where the land surplus was great enough that you radically changed your economic standing simply by virtue of that transition. And you also took advantage of the old Chinese proverb, the mountains are high, and the Emperor is far away. So, you were able to look at the nobility at the elite within your society and say, I now have an exit voice. If I don't like what you're doing, I'm going to take advantage of my
freedom and choose to change my lot in life. What I love about what you're describing, and I hate what you're describing, I just want to emphasize that but what I love about the description that you've provided, is that it really helps us understand how things are changing because the refrain that I always hear from people now is, well, where are you going to go? It was New Zealand for a brief period of time. I'm going to spend $150,000 and get a New Zealand passport and I'm going to pick up. I'm going to move to New Zealand and now, New Zealand is firmly locked down, no entry, no exit, should you not choose to. I'm not disputing whether that's being done by what people perceive to be democratic standards. But the reality is there has been a dramatic devolution of freedom in Australia, in New Zealand, in the United States and elsewhere around the developed world that would have been hitherto unimaginable 20 years ago. Even a year ago, I think people would have been really challenged to think in these terms.
Is there anything I'm describing that you would react to and say no, that's crazy. You totally misunderstand what I'm saying? VIKTOR SHVETS: No, Michael, you're absolutely correct. The only thing one can argue a little bit with is that it's really what you describe as a Western experience. You did not describe the experience of Mongols, of Ottomans, of Russia, of China. And remember, if you go back to 1200s to 1400s, 60% of global economy was really China
as well as India. The rest was very, very peripheral. So, when you describe the voyages, you have to remember that Chinese predated Western voyages by hundreds of years. You have to remember that Chinese [?] in late 1300, early 1400 already had bulkhead design. They already have compass. They already were exploring Indian Ocean, they were going as far as Africa, east and west coast of Africa. If you think of the Ottomans, Persians and Arabs were the primary merchants. It was not the Europeans who were doing it. So, the question one of the things book explores is that why in that critical periods, some civilizations decide to commit suicide, both politically and economically. And why
another civilization decided to embark on a completely different course? And the answer really, it's a mixture of critical junctions. In other words, there are times when the world really changes. So, for example, when Mongols swept across the steps, that really changed the history of Eurasia, and completely reshaped the Russia coincidentally, and China in the period. The same apply to the Black Death. The same applies to Renaissance and the reawakening of human spirit. They're all those critical junctions. And when you get there, depending on the decisions you make, initially, it doesn't make much difference actually. And even as late as 1500, 1600, China was still far more prosperous than what you find anywhere globally. But then it accumulates, and it accumulates more and more. And the
interesting question is why societies persist with wrong decisions, when pernicious effects of those decisions are evident for that stage for everybody to see? But there is this resistance to change. And you can see it actually even today in a Western society. There is this resistance to change, resistance to accept a difference. So, as I said, it only provides what you describe as a Western experience, you did not describe experience of majority of the population and indeed, majority of the countries. But then stepping forward,
I think you are absolutely right that we coming to the next major junction. So, if you are Russia, if you are Mongols, if you're India, if you're Ottomans, you've missed your industrial revolutions, you've missed those turning points. But now, there is a new turning point coming. It is reshaping societies, it is reshaping economies, it is reshaping capital markets. As you correctly said, you can't just progress through Smithian growth, in other words, using the same technology, just spreading it over wider terrain than you did prior to that. You have to have Schumpeterian growth. You have to have much more disruptive growth. And that growth increasingly is coming at the expense of the labor market. It's increasingly coming at the expense of conventional capital and how conventional capital functions. And
that's the difference. Over the last 300, 400 years labor was a primary productivity driver. And that's why we needed to educate people. That's why we eliminated illiteracy. That's why we progressed the college education. Because younger people was supposed to become more productive as you progress and support older generations, support the countries and progress. In information age, labor is suffering from what I describe is declining marginal utility and declining marginal pricing power. Every day, you sit in that chair, your marginal pricing power declines, and you know. You feel it no matter what your profession is, you feel it. Now, with COVID
right now, there is huge dislocations, perhaps you don't feel that as much as you did 18 months ago. But as soon as COVID is out of the way, you will feel it again, that you're becoming less valuable. Now, the first people to feel it is anybody who is dealing with digits of information. In other words, trading on New York Stock Exchange, providing information, entertainment, songs, writing articles, anything where you exchange purely information.
But over the next 20 years, it's all going to be about disintermediation of atoms, of physical matter. In other words, factories will disappear, supply chains will disappear. Gradually, construction workers will not be required. So, gradually, you spread it wider. Eventually, there is a singularity. And that is when you can't differentiate human and non-human contribution. So, part of the reason why we resent foreigners is that when your marginal utility and when your marginal pricing power declines on a daily basis, you suffer from a Slovenian disappointment. You're disappointed in your life. You're disappointed that your children you think might not have as good life as what you are going to have.
And so, almost inevitably, you're stuck looking inward. And that is a recipe for protection. That is a recipe for deglobalization. That is a recipe for restriction of immigration flows. And exactly the same thing is happening to capital. Industrial age was incredibly capital intensive. This is the time, as you correctly said, of steam. This is the time of railways. This is a time of highways, of cars, of factories, of machinery.
Now, the last 20 years were much less capital intensive. The next 20 years will be a little bit more than what we were spending in the previous 20 years. But we're not going back to industrial age. So, we live in a societies that are less capital intensive. And not only it's less capital
intensive, but the capital is much more flexible. It actually can be deployed in a variety of ways across a variety of industries. That capital offers synergistic benefits, spillover benefits, suddenly one industry competes against each other. They didn't even know they were competitors yesterday, but today they know it. And so, capital is much more flexible, much more widespread,
doesn't require as much as it used to, provides all sorts of synergies, all sorts of spillovers, disrupt industries, disintermediate corporates from their brands, from their distribution systems, from their products. And at the same time, because we financialized, and we financialized because we felt we deserved wealth that we don't deserve. In other words, despite our declining productivity, societies insisted that we must maintain economic growth rates and we must maintain wealth creation. When people say who is to blame for what happened, my answer is when you shave in the morning, if you're a man, look yourself in the mirror, it's you. It's no central bank. You asked, and the politics delivered exactly on what you ask. And what you ask is a perpetual wealth creation. So, as we financialize, what actually happened
is that we're creating more capital than we need. So, for the first time in human history, we are plotting a [?]. We have at least 5, 10 times more capital than we need. It is not evenly distributed. It is not fairly distributed, but there's plenty of it. And so, the result is that what you have is a cost of capital must continue to fall. And if cost of capital falls, technology
accelerates even more as you go forward. So, to answer your question, why did we have Donald Trump? Why do we have Boris Johnson? Why do we have Conti in Italy? Why do we have Xi Jinping in China? Why do we have Modi in India? The answer is disrupted environment. Very similar to what happened during the first Industrial Revolution. There is a reason why Karl Marx penciled his Communist Manifesto in 1848. That was a peak of disruption that was created by the first Industrial Revolution. Suddenly, the nobility didn't know what their social responsibilities were. [?] suddenly saw factories springing up everywhere,
they're no longer where artisans are becoming slaves of the factory system. Suddenly, peasants were no longer looking up to the Lord of the Manor. And so, it was incredibly disruptive society. And this is exactly what we're seeing now. And in that disruption, the impulse is to protect yourself, to protect your society, to blame the foreigners, to blame the policymakers. And it's incredibly a fertile ground for any demagogue, for any populist, because people are asking for help. And even though populist very seldom deliver that help, it is, as I said, it's an incredibly fertile ground for it. MIKE GREEN: When you think about that,
because you brought up a number of points there and I agree with you completely, that people tend to forget the context of what was occurring around Marx, that it was this huge inflection that led to or was part of an upheaval of the traditional institutions that existed in society. There was effectively a search for new organizational methods, new ways that individuals could come together either in unionization or in guilds, or in limited liability corporations to pursue all sorts of interesting stuff because we had this substantive change. And you bring up the dynamic of the elites, part of the end of the medieval period and the transition out of even the Renaissance and into the Industrial Revolution was the stripping of peasants of their traditional lands in the enclosure movements. So, that consolidation and that focus led to many of these changes, displaced
a lot of these workers who would have historically been in relatively low productivity, high fertility, meaning child production environments, where they were taking care of sheep, they were grazing in the common lands, they were subsisting in largely homespun environments where they made their own clothes, grew their own food, etc., and paying taxes in kind in the form of rent to a lord, where there's very little actually happening in a broader market economy. The productivity associated with the Industrial Revolution and the early stages of that, the need to grow wool, for example, for industrial production, and looms, that upset the applecart. Now, the solution set that existed at that time that I would argue postponed the visions of Marx and others was the existence of an incredible land surplus in the New World, effectively the ability for people to pick up and say, we're going to go. And you saw this, in particular, in places like Scandinavia, where 30% of the adult male population emigrated to the United States, creating conditions of significant labor scarcity, and giving rise to the socialist or the social safety net phenomenon.
But today, we don't have that. Again, this refrain of where you go indicates that there has been a substantial rebalancing of that negotiating leverage. So, effectively, labor has no real recourse against the elites. It's almost like we're back in the
enclosure movement. If Jeff Bezos decides that he wants to fire me, oh, well, what am I going to do? VIKTOR SHVETS: Yeah. You're absolutely right, Michael. For the Western societies, because again, we're not talking about non-Western society. MIKE GREEN: Absolutely. And I definitely want
to visit the eastern society component of it, because I think that's fascinating. VIKTOR SHVETS: For the Western societies, you're absolutely right that as the pressure increased in Western Europe, the left out was the United States, Canada, Australia, New Zealand, South Africa, all of those countries. 62 million Europeans moved out of Europe between 1830s to 1840s and the early 1900s. In some places like Ireland, like Norway, like Portugal, 30%, 40% of workforce just disappeared. At the same time, US, Canada or any of those places, did not have
enough labor, did not have enough expertise, but had plenty of resources that you could utilize. And so, it was a very nice rebalancing that both areas, the old Europe as well as the new world benefit from. I think going forward, not only what you've just described is true, that there is no new frontiers. But more importantly, in the industrial age,
people were the primary productivity drivers. You couldn't do anything with people. Increasingly, people are marginalized. So, in other words, not only you have nowhere to go, but you actually are not needed. Even if $1 an hour wages will no longer require you. Now, it's not yet evident to everybody, particularly now with COVID and disruptions. But that's
been a process since at least late 1980s. If you're saying the first area to be affected was really PC and enterprise-based area, this is your rationalization of vice presidents, information system. Remember, in the late '80s, it could have taken CEO a week to figure out what's going on with his company. By late '90s, he could get this information in a day or less than a day. And so, the first area to feel it was all regarding intercompany, government security services, it was not so much consumer oriented. It's now the world of Sun Microsystems and Cisco and IBM and Dell and Ericsson and companies like that.
After 2000, it's gone mainstream. And that was predominantly digit manipulation, predominantly consumer oriented. Remember that Amazon in the 2000 dot-com crash was a tiny company, Google didn't even exist, Alibaba didn't even exist. All of them become really titans over the last 15 years or so. Now, that period very quickly disintermediated a lot of people. So, if you were a journalist in the early to mid-90s, and if you're a journalist today, these are two completely different worlds you are inhabiting. If you're an entertainer in early to mid-90s and if you're an entertainer today, this is two completely different universes you are inhabiting.
If you're a trader, for example, I was based in New York in the early 2000s, we used to have 300, 400 traders in New York. Today, they only have like five left. So, if you were trading a stock exchange, or currencies or commodities, you today inherited a very different world than what you did back 20 or 30 years ago. So, those people whether you're an accountant, whether you're a trader, whether you're a journalist, whether you're an entertainer, you know the world has changed profoundly. But if you're a truck driver, if you're a construction worker, if you are an electrician, if you're a plumber, you didn't see it, but it's coming, it's coming for you. And the same process will work for that. So, one of the things
that we described in the book, and I described in my research as well, is that apart from the fact that there is no way to go, you're no longer need it. And so, one of the argument was the basic income guarantee, or minimum income guarantee and that it's not so much it encourages laziness, but it compensate for growing irrelevance of what you are and what you do. And as I said, within the next 20 years, factory workers, construction workers, truck drivers will feel it. As soon as we have air conditioning units that don't have any moving parts, suppliers will feel it. And so, as gradually it goes through this process, it will be wider and wider and wider.
I said eventually, you get to the stage that PhD in computer science will feel that as well. And that's getting close to your singularity. And so, what basic income guarantee tries to do is basically reduce social pressures arising from growing irrelevancy of what you are as an individual, of what you are as a labor or contributor. Now, that's much more disruptive than Industrial Revolution. I think McKinsey at one stage calculated that the impact of information age is about 3000 times the impact of Industrial Revolution, meaning it impacts a lot more industries. It's got 300 times the waterfront, and it progress is 10 times faster than industrial revolutions were. And perhaps one
more point, people are sometimes surprised that technology leads to lower productivity, not high productivity. And people say maybe we mismeasured productivity. We don't mismeasure. Whenever you look at the First Industrial Revolution or Second Industrial Revolution, it takes roughly five decades for the benefit to spread widely enough and to be accepted widely enough for aggregate productivity to rise. In the meantime, productivity falls because what happens, productivity rises very rapidly in the areas directly in line of fire. In other words, if you're a biotech guy today, if you're an IT guy today, if you're a computer coder today, you are seeing a massive increases in productivity and compensation levels. However, if you're a commercial banker today, you don't see it. If you are a factory worker, you only see it
because of COVID. But otherwise, you don't really see it. And so, what happens is that our areas of economy that are improving in productivity kill the rest of the economy one cut at a time, and they kill it slowly and painfully. And so, the aggregate productivity cannot rise. It only rises when we stop warehousing people in what one of the academics used to describe bullshit occupation. So, what I meant to say, as soon as we stop warehousing people, as soon as we stop trying
to employ people, productivity will mushroom. Before the First Industrial Revolution, productivity was 0.1% per annum. After the First Industrial, it was about 50, 60 bps. After the Second Industrial, it was like 1.5%, 2%. We're now down back to below 1%. But as soon as we stop warehousing people, it will mushroom to 3%, 4%, 5% incredibly fast, but we must stop warehousing people. And one way of trying to bridge this gap is a basic income guarantee. Also, at the same time, you have to remember that technology progresses in stages. It's not just one revolution. Technology today progressed far enough to reduce your marginal pricing power,
to reduce your marginal utility, to reduce satisfaction that you derive from your life, but not far enough to displace you completely. And so, what you're doing, you're sitting in the chair, you're being warehoused effectively, pending your final disposal in a form or manner in which society ultimately will find it acceptable. But whilst your warehoused, as I said, the productivity rates have difficulty of really rising. MIKE GREEN: Well, and what you're describing can be thought of in a slightly-- the first one of those is empirical evidence to support what you're saying. So, in the United States, since 1990,
every recession has been characterized by a surprising feature that didn't exist in prior recessions. What has become known as colloquially as the jobless recoveries is a rise in productivity accompanying the reduction in employment. We effectively end up producing more with fewer people because we've reduced the surplus labor that has been warehoused. Now, as I sit in my chair, and I feel like warehoused labor, I take that somewhat personally, but at the same time, what you're saying is 100% correct. I see it within our industry where two decades ago, three decades ago when I got started, the idea that I could add individual value by studying individual companies, etc. was extraordinarily high. It was the effort
that you put in, the productivity of a single high-quality analyst was extraordinary. And today, we all know that we all feel irrelevant in that process. There's another interesting phenomenon, though, that accompanies a lot of that. If we go back to prior periods where this has
been the case, and again, the last 500 years has been somewhat of an exception. If we go back to the pre-enclosure movement type dynamic, many of the things that feel like personal affronts and mysteries in a Western experience, things like the rising difficulty of affording ownership of a home, or the inability to found and run your own business, those start to make sense in the context of what you're saying. Because if I go back 500 years ago, I couldn't own my own home. The vast majority of people were somehow or another engaged in service to the local manner, as compared to having the degree of freedom and independence. And so, one of the things that always scares me as I look at rising asset prices is maybe this is just a rational reorganization of society back to that environment, where we're looking at the very unfortunate situation that you won't own your own home, you won't actually control your future in that way. And bemoaning it,
you can certainly choose to protest, you can certainly choose to resist it. And I realize I sound like I'm describing the Borg from Star Trek and that this is insanely depressing. And I think that there is an element of true loss that we do have to accept and understand the grieving associated with it, but it is very difficult to see how it reverses. It's very difficult. VIKTOR SHVETS: I agree, I agree completely.
We can't cry over spilled milk, but the reality is there is no way of going forward. And it's not just your house, it's essentially property rights as such. If you think of industrial age, one of the success stories of liberal capitalism was secure an impartial property rights or asset rights in general, whether it's the right to your invention that you can then exploit all over a period of your license be it 20, 25 years, whether it's ownership of your home, secure property and asset rights was something that clearly differentiated the West from the East. That was not the case in Russia, that was not the case in China. In many ways, that was not the case for Ottomans, and most non-Western civilizations. In those civilizations, even today,
your rights are contingent. They are not absolute. So, you do have your right to property in China or Russia so long as you do what you're supposed to do. And I say in other words, as Russians used to say, so long as you in the service of the [?]. That doesn't mean that there is complete anarchy of property rights. But what it does mean,
there was no certainty of property rights. They were contingent on your relationship to the state. Now, the excellent thing about the West, and that's one of the things that differentiate it is that it was not contingent. It was absolute rights that you've enjoyed. And so, if you go forward, increasingly, the most important things in our economies do not reside in physical assets. And because they don't reside in the physical assets, it's incredibly difficult to enclose it. How do you patent a sequence of a code in information? How do you patent what we do? And so, one of the things is that the importance of property rights, the importance of impartial and absolute property rights is diminishing, because increasingly, they're residing in what Rifkin call commons. They are available to almost everybody,
they can be accessed by almost everybody. And so, we're returning back to more feudal times, where instead of owning a property, you had the right of access, you had a right to use, but you didn't actually own it. And so, we go back to that. And so, the question then becomes who actually owns it? Well, increasingly, what society is saying is that government must step in. Government must be the guardrail. So, if you go back to 1950s and 1960s, for example, the first generation of economists, our macroeconomists, did not believe that there was a huge difference between public and private sector, they did not believe the private sector is always necessarily more efficient at allocating capital. That came later in the 1970s, it was Milton Friedman, was Ronald Reagan, was Maggie Thatcher, was Ronald Coase. Now, that's idea of primacy that private sector is always better and whatever problem you have, private sector solution is always better. That idea died at least 10, 15 years ago. And what
society is increasingly demanding is that the government is a guardrail. Very similar what people felt in 1950s. Very similar. And so, it becomes a guardrail. If it becomes a guardrail, what should the government do? And that is where the West is debating. There is no need to debate it in China. In China, government is everything. Its central banks, its banks, its money, its operations, its usage of money, its everything. But in the West, we do have a separation between the two. And so, the question then becomes, what role should it play?
Increasingly, society is insisting that certain rights are human rights, they're not businesses. And so, for example, basic income guarantee, human rights. Affordable housing, human rights. Affordable healthcare, human rights. Access to broadband, human rights. Education, human
rights. So, increasingly, societies in the West are demanding that all of that must be regulated by the state, quite often, must be distributed by the state, and it shouldn't be left to the private sector. And so, one of the things that is happening, the nature property rights is changing, the importance of property rights is changing, more and more value resides in the commons that are not really surrounded by the walls of property rights and licensing and the rest of it. And at the same time, the society insist that the government must provide the guardrail against the chaos that otherwise would prevail. And the governments are responding
as they have to because politics always responds to what people have. Look at the Republicans today, they're not the Republicans that we used to know. Look at the Democrats today, and whether you're labor or conservative in the UK, policies are very similar. If you're seeing called liberals versus labor in Australia, they're very similar. Nobody is talking about austerity, that idea died back in 2012. Everybody is talking about government doing more. Where they disagree
is some of the areas but they all agree that the government will play a substantially greater role. MIKE GREEN: So, you bring up a really interesting point, which is that property rights are-- well first, let me phrase something a little bit differently. So, when I think about the descriptive books, the narrative books that have been produced in the last 20, 30 years, ranging from Jared Diamond's Guns, Germs, and Steel to Daron Acemoglu with Why Nations Fail, etc., there has been a broad description of the success of the West was tied to geographic
features, was tied to viral dynamics, the bugs that we had were worse than others had elsewhere. They were tied to where we were in the latitude framework, etc. You're suggesting actually something radically different is that it was a conditional effect that those countries that embraced the dynamic of freedom in an environment of capital surplus, or land surplus really was the undeveloped capital at that point. And labor scarcity benefitted from reinforcing the individual rights associated with that. That would be your interpretation of why those books correctly explain what transpired, but they don't have to be descriptive of what works going forward. In fact, you're saying there's a very real risk it's the opposite. VIKTOR SHVETS: Correct. Part of the reason I wrote the book was, there is, as you correctly said,
lots of book describing why nations fail, why have they succeeded, and what was the recipe of the Western society, the role that geography, cocktail of diseases, or the role that secure property rights, institutions, culture, religion, whatever played in the success of the West compared to the east. There is also a lot of books on technology. Yuval Harari, you have Bernsen and McAfee. There's a lot of books on technology. How technology is changing what we do society, but they don't actually relate back to what happened over the last 500 years. Then we have a lot of books which are mesmerized by debt. We,
for Christ's sake, we have like $700 trillion, $800 trillion piece of paper outstanding now, which is almost 10 times global GDP. Does anybody thinks anybody will ever repay any of that stuff? The answer is no. But there is still a preoccupation with debt, preoccupation with debt servicing. So, there is a lot of books that are actually describing the issues of economy, describing the issue of debt, describing how we need to reset the economy's in order to return to liberal capitalism. There's a lot of history books that actually dwell on individuals, whether it's specific emperor of China or Russia, or the role that federal papers or anything else have done, but I didn't find any that actually puts it together and say, okay, this is what succeeded. This is what's happening
now. This is like saying how it's going to change and how the formula for success is actually in my view very different over the next 20 years. MIKE GREEN: So, Viktor, when you bring up this idea of the obsession of debt, and the idea that we're not going to pay it back, this is part of what I object to and the conversations around, oh, well, we're just going to run inflationary, we're going to pay off the debt with inflation. That feels highly implausible to me. One, it's ahistorical. We've never seen anything like that before. And two,
again, it just feels impossible to me. What's your reaction to that narrative, and how it plays out? VIKTOR SHVETS: Well, I usually describe to my clients that when I started in the industry in the 1980s, my first crash was the Black Monday of 1987. And I remember I was sitting next to some of the older traders, and they were saying, well, that will set up men from the boys. Well, it didn't really. And then I remember I was doing Japan in 1990, 1991 and everybody was saying, oh my God, the only way out of this is debasement of yen to 300 or 400.
You need to reflate the economy. Well, it didn't. I was in London during the dot-com, and people said, well, this is the end, this is going to have a massive reprise. Well, it didn't. The same pretty much happened with the global financial crisis. The same is happening was COVID. So, this idea of comeuppance, this idea of paying for your themes, this idea of rebasing to some kind of mythical normality is just idiotic in my view, because it can't be done.
And the reason it can't be done, not that we can't do it, we don't want to do it. And so, every time we've come to T-junction, whether it was 1987, 1991, 1997, 2001, 2008, 2020, and people asked, do you want to reset the economy? People say, yeah, good idea. But I must warn you, your 401k might not be worth much. And by the way, the house you're living in will be worth maybe a fraction of what you've paid for it. Are you okay with that? And most people say,
no, I'm not okay with that. And so, the way I'm basically describe it, every time we come to T-junction, people rejected liberal capitalism, and people insisted on some version of communism. Now, the only way you can reconcile those two conflicting demand was through continuous financialization, bringing future consumption to the present in order to support the level that you believe is appropriate. That can only be done by hooking you to asset prices and using asset prices as a guide to make a decision whether to save or consume, whether to invest or to do share buybacks and the rest of it. Now, there are consequences to that. And the consequences are income and wealth inequalities. The consequence of that are the more you do it,
the more cost of capital collapses. The consequences are zombie companies survive that otherwise would not have survived because cost of capital is so low. The consequences are the technology and technological progression accelerates massively. So, there are consequences in that. But that is what we have decided. And so, we reached a
stage now that there is no going back. If we wanted to debate virtues or vices of debt, we should have had this debate in 1980s. That train left the station a couple of decades ago. And so, from now on, we have to go forward. And so, the idea of deleveraging is very bad. In fact, it can't be done without very serious consequences. And so, what central banks certainly for the last 10 years, I want to argue in the case of Japan for more than 25 years, what they were doing is threading the needle between trying to avoid compression of debt and credit, compression of liquidity and asset prices on the one side and trying to minimize or at least modulate the credit risks that arise. So, nobody is deleveraging. Nobody is trying to return back to normality. Everybody is trying to minimize the risk while recognizing that we must continue to financialize, we must continue to leverage, we must continue to lubricate the system as we go forward.
Now, a lot of people say how do we break it? How do we break the cycle? Well, the only way, first of all, you can't break it. But the only way you can try to make it less impactful is by introducing fiscal policies. In other words, if you just rely on monetary levels, capital stays in a cloud of finance. It doesn't actually go down to the ground where people live. And so, we've created two very distinct universe. One is the financial economy, and the other one is real. Financial economy demands more and more capital insatiably. Real
economy has problems digesting all of this debt and capital. And so, the central banks are the linchpin between the two very different economies responding to very different signals. And so, one way of trying to reconcile that to some extent or to minimize the negative impact is for fiscal policy. And fiscal policy basically reflects desire of societies to put capital exactly where people want it to be. Not in Picasso paintings, not in Hamptons mansions, not in speculating on various financial instruments, but exactly where people would likely to see.
And that's what the government have been increasingly doing. Now, a lot of people say that's interfering with free market signals. What free market signals? Central banks are now determining costs and volume of money. If they don't like the price, they create the price, they control the yield curve. Bank of Japan, Reserve Bank of Australia, the ECB now control the yield curve. If they don't like the volume, they create volume. And if they don't like how it's multiplied, they're even now increasingly lending directly to the mainstream, and therefore bypassing the banking system altogether. And when central bank digital coin comes in,
which will happen at the end of this year, early next year in China, but over the next two or three years, everywhere, the capabilities that central banks will have will be even greater. So, the only way to reduce the negative impacts, not eliminate them, you can't eliminate them, but to reduce them is through fiscal policies. And the key areas clearly are the areas that society demands are human race. MIKE GREEN: Well, it's fascinating to
think about it in that context. So, now let's transition to the eastern societies. And so, your book focuses on Russia, the Ottomans, and China as having been dominant societies, pre–Industrial Revolution, really pre-Age of Discovery. Laggards to that experience, and ultimately, as we were just discussing in the Acemoglu, etc., framework, failed to embrace the systems that encouraged individual freedom, risk taking, exploration that facilitated the rise of the West. But they also retain something that you highlight, which is effectively a collectivist dynamic that says we will share in our good and bad fortunes, that if things are getting worse, we're going to collectively share them. Whereas in the West, the reaction is basically, well, pull yourself up by your bootstraps. If you didn't succeed, you're
clearly just a failure, you as an individual. That seems like that can be both an advantage and a disadvantage. I think it is, exactly to your point, it is state dependent, not state meaning are you Russia, or the United States? Meaning are you in a period of labor surplus, or are you in a period of capital surplus? And so, if you're in capital surplus, you need to embrace that individualism risk taking. You want people to take risks with capital, because capital is in surplus, true capital, not financialized capital. Today, you're saying it's effectively the opposite, that we've got tons of financial capital, very little real capital needs. The world wouldn't know what to do if 50 more toilet paper factories came on, the world would have no idea what to do if an additional 50 state of the art car factories were built, or for that matter, even chip factories. As much as we think about the unlimited demand for
semiconductors, the reality is that by and large, they have fallen in price every single year, the capabilities have exploded. And as TSMC thinks about moving and offshoring from Taiwan, they're talking about increased introducing facilities in Arizona that would represent 50% of their capacity, its nameplate capacity dynamics. So, even in the areas of shortage, it just doesn't really exist. VIKTOR SHVETS: Yeah, you're absolutely right. We're in the world of declining marginal return and pricing on everything. Declining marginal pricing power of labor, declining marginal pricing power of conventional capital, rapidly declining marginal pricing power of financial capital. The only parts where pricing power is increasing, and that's only temporarily, is in the areas of extreme digital capital.
And in other words, if you invent something, it actually does have a pricing power. But the time of that pricing power is diminishing. So, in other words, in the past, invention could have given you a runway of 20 years, 25 years, 30 years. Now, sometimes it only gives you six months
if you're lucky. And so, that starts questioning everything, like why do we have corporations? We have corporations to reduce transaction costs, we have corporations to mobilize capital. If we have ample financial capital and if transaction costs on a marginal basis are declining everywhere, why do you need a corporation? Well, the answer, you probably don't. And you can go back to 17th and 18th centuries where there used to be some trading houses that lasted for a period of time, but mostly, it was ad hoc ventures that were created that would be dissolved as soon as the objective of that venture was fulfilled. And so, we could see all of that disintegrating into what I've described as 1000 stars or points of light everywhere. Now, the other thing you've described I think very well is in
that world of declining marginal return on labor, declining marginal return on conventional capital, surplus of financial capital, governments are the ones that are capable of reallocating that capital exactly where people want it to be. Now, Western societies are generally reluctant to embrace this role. Because by and large, we're still mesmerized by the idea of private sector allocation of capital guided by various efficiency criteria. But as I said, early on, that hasn't been our world for at least two decades. Central banks or Treasury departments really determined so many variables today than they used to. Peter Drucker once described it, even back in late 1980s, when he said that in the past, the government would try to control climate.
Today, they're trying to control weather. So, in the past, they will only interfere when there is something very dramatic. But today, they want to have 72 to 76 degrees Fahrenheit every day, mostly sunny, occasional cloud, but certainly no rain. And so, we have lived in the world of private
sector signals for very, very long time. And so, if you think of Eastern model, particularly Chinese model, not only it's much more community based, and that's the culture that you have, not only it is very much centralized model, even though there is a lot of competition within that model, don't get me wrong, but much more centralized model. It's actually better suited, potentially, for that world. And the only question to ask is, first of all, can a government allocate capital in an even remotely efficient manner? And number two, is that can you invent, not innovate, invent, big difference? Chinese were great innovators, but they invented nothing. Well, the ancient Chinese did, but certainly in the modern time, they invented nothing. And so, can you do that? And one of the things I described in the book is that Lenin and Bukharin in the Soviet Russia in the 1920s tried to introduce new economic policy on that. And what it was basically is trying to combine capitalism
and socialism, trying to have government allocating capital, and they believed that government can do a better role than a very chaotic market. Now, people say they didn't understand economics, that is not true. Bolsheviks didn't understand economics. They just felt they can do a better job. No, they didn't. And so, Bukharin was shot, the whole thing disappeared. Allende in Chile tried to do something similar in the early 1970s. Mao tried to do something similar. All of those things failed. And so, one of the questions I asked you in the book, should we raise a socialist calculation debate, which raged the 1920s, 1930s and 1940s, but then died in the 1950s? And that is, is it true that the government necessarily is an inefficient allocator of capital? And what China is trying to prove that what Bukharin in Russia, Bolshevik Russia lacked was the computational power that now, with computational power improving in leaps and bounds, that China actually has a much better ability to allocate capital that Bukhari was keeping files on nails and galoshes and all the rest of it. So, that's one argument that is starting
to be resurrected, the extent to which you can actually have the right tools for the government to allocate capital. The other argument is inventiveness. One thing we know, 500 years told us, if you don't have the freedom to explore, if you don't have the freedom to question, if you don't have the freedom to criticize, you can't invent. And indeed, that is true. And indeed, that is true. So, if you think of China, a great innovator, invented nothing. If you look at any of the price from Nobel Prize to mathematic prize to computer
science prize, they worth almost nothing. Now, China would argue a lot of Chinese heritage people did win, but they were based in the US, they were based in the UK. And so, the question is whether those people that was still based in China would have won? Those Nobel Prizes or mathematical prizes, or Turing prices or anything else, and the answer they probably wouldn't have. And so, the question is, can you invent? That comes back again to
computational power and artificial intelligence. It is progressing so rapidly that it's going beyond the routine tasks, it goes beyond just replacement of menial tasks. And over the next 20 or 30 years, it is possible, not possible, it's very likely, that demand for postdocs will collapse, the value of PhDs will collapse. And increasingly, you will have artificial intelligence making quite a few breakthroughs, that otherwise, you required human ingenuity to be able to deliver. Now, if that is true, if in fact government can allocate better, or at least not much worse, and if at the same time, you don't need human ingenuity, why should you allow a professor at Beijing University to have access to international scholars, or to exchange information with international scholars? And so, one of the things the book argues is that over the next couple of decades, all of those questions will become important. And China is trying to prove that, yes, you need some freedom, just like the Bukhari.
Bukhari didn't envisage it to be a prison. You do need some freedom. But the government and state delegation is paramount in this process. And at the same time, you can invent, not just innovate. Just look how quickly Trump kneecapped China last time around, and the reason is that China is totally dependent on Western intellectual capital. So, can you create that intellectual capital as you go forward? If the answer is yes, then freedom becomes optional.
And so, my argument in the book is to say, I would hate to see the world. And so, there are policies and prescriptions that I think we can pursue, not to create or go back to the type of freedom that baby boomers gave us over the last three or four decades, not to go back to that, but at least limit the extent to which our freedoms will be constrained. MIKE GREEN: So, I love-- again, I hate almost everything you're saying, that is the libertarian core of most Americans or Australians reacting to a certain extent and saying this can't possibly be true. But unfortunately, I would argue that I see it too much in the data, I feel it too
much in my bones to argue that you're truly off based. So, I want to explore just a couple of very quick components of that. The first is you highlight this dynamic of productivity, and the decline in productivity. And this is actually well articulated by John Fernald at the San Francisco Fed unintentionally, I would point out, in which he notes that effectively, the productivity that many think we are mismeasuring is actually just a budgetary effect. As productivity or as ease of access of any particular good explodes, it collapses as a share of our purchasing basket. So, nobody in the Western world really realistically thinks about obtaining their daily allotment of grain. Instead, we may think, can we get prepared foods
for us? Can we go to Chipotle? Can we dine at The Palm? Can we do all these sorts of things? But nobody is really thinking about coarse wheat. In the same way, I would argue that nobody really thinks about how I access entertainment anymore. That would have been an incredible luxury, where a minstrel traveling through town would show up and only for a brief period of time, would you be able to take enough from the local population with this degree of novelty to be in to survive. That couldn't exist in a fixed location. Today, we turn on the television, we turn on our iPad, or
we turn on our phone, and we watch any number of entertainment components that simply distract us. I would also highlight your point about this idea of is sharing always good. Because when you talk about innovation versus invention, innovation requires me to be aware of what you have done and come up with a marginally better way to do the same thing or to combine it in a marginally novel way with something that somebody else I'm connected with. But true invention could very well require us to become disconnected. It requires us similar to a punctuated equilibrium in evolution to have Australia separate from North America and North America separate from Europe in order to have truly, naive is the wrong word here, but it's effectively what I'm looking for, experimentation that is free to succeed or fail. And then when they come back together again, we find out which are the most robust ideas? So,