Is the Golden Age of Liberal Capitalism Over?

Is the Golden Age of Liberal Capitalism Over?

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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,

2022-03-07 13:01

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