What Nassim Taleb is on about, and why you should read him

If you have something to say do so simply.  Nassim Taleb drifts between probability theory and Mafia morality codes.  He peppers his work with insights from the Levant, ancient Greece, Rome and central Asia, through to modern Iraq and the Beltway.  His rambling style, verbosity and arcane references lose many readers, and his personal attacks turn others off.  Yet he has much to say.

In Black Swan, Anti-fragility and Skin in the Game Taleb addresses three inter-related questions.  Why do bad things like financial crises and the Iraq and Syrian debacles occur?  Why do good things, from great literature to traditional cooking survive?  Given these, how should we behave?

Black Swan argues that extreme outlier events have impacts vastly disproportional to their statistical probability.  In a normal distribution, some extreme tail risks can be so catastrophic we can’t afford to take them.

Genetic engineers, economic forecasters and financiers ignore the risk of extreme outliers.  Investment bankers and policy makers caused the 2008 GFC because they had no skin in the game.  After such events, bureaucrats then develop regulations that grow in complexity and make future black swans more likely.

Resonant with Hayek’s Pretence of Knowledge and Joshua Ramo’s The Age of the Unthinkable, individual creativity and innovation should be fostered in a devolved not centrally directed way. Rather than over-regulate financial instruments it may be better to reduce risks obliquely, for example by lifting individual savings rates and fostering more devolved, small scale and relational banks and investment agents.

Anti-fragile argues that some things are fragile and break too easily, some are robust but don’t improve over time, and others are both robust and evolve over time – the anti-fragile.  Anything that is anti-fragile has more upside than downside from random events.

An ancient cathedral is robust enough to outlive Le Corbusier and New Zealand leaky home architects.  However, it does not improve over time. Some Christian beliefs and canonical literature such as Shakespeare can be robust and improve over time as they inspire further human endeavour.

Adversity creates learning and adaptiveness and makes things anti-fragile.  Jewish culture has been anti-fragile for over 2000 years. Getting sick improves the immune system and makes people healthier.  Israeli attacks on Hizb’allah actually strengthened it by forcing it to adapt.  Overuse of antibiotics leads to bacteria becoming more resistant.

Keynesianism is an anti-fragile economic paradigm.  Obamacare is so cleverly designed it will survive the Trump administration’s attacks and become stronger – it is anti-fragile.  Kiwisaver might prove to be anti-fragile in the New Zealand context.

In Skin in the Game Taleb argues that leadership and business success depends on people taking risks and bearing the up and down sides.  Most great firms are started by those with skin in the game and grow organically.  CEOs create less value than entrepreneurs who have put their houses on the line.

You should also be prepared to put your body on the line.  Taleb cites warrior kings who died leading their armies. George Orwell wrote that the English aristocrats he disparaged for their dimness were morally sound because they were prepared to die in war.

Duels between two people with skin in the game can stop conflict between them spreading wider.   Menelaus and Paris’s duel in the Iliad could have ended the Trojan war if Aphrodite (someone with no skin in the game) hadn’t interfered.

Politicians who dodge the draft are often the worst warmongers. The Iraq invasion resulted from politicians and their advisors not having skin in the game.

Learning comes from practical engagement with the world rather than risk-free theory.  Unschooled street traders learn the English and arithmetic needed to trade. Steve Jobs was a craftsman more than a theoretician.  Artisans have soul as well as skin in the game, and this drives their success.

Taleb associates skin in the game with moral symmetry between people.  This includes such principles as the Golden Rule: “do unto others as you would have them do unto you”.  He adds a “silver rule” – “do not do to others what you would not like them to do to you”.   He who seeks a benefit should bear the cost if things go wrong.  You should not give advice that you yourself are not following.

Taleb argues that an authentic conversation must be on equal terms. Caveat emptor is unethical.  All involved in a transaction should have the same information.    This overcomes information asymmetry and bounded rationality, and reduces rent seeking.  He cites the Islamic ban on gharar, a form of trade with high uncertainty which can damage other parties.

Taleb highlights some basic rules to live by.  Live by the Golden Rule rather than pay lip service to it.  Ignore what people say and watch what they do.  In business, only trust people who put their money where their mouths are.  Learn in the real world, not through abstractions.  Keep things as simple as possible.

When readers put their skin in the game, Taleb’s insights stay with them.  However, he could say things more simply, following one of his own rules…

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Henning von Tresckow: 10 January 1901 – 21 July 1944

We are not the first who, with best meaning, have incurred the worst.

Cordelia, in King Lear

Today is the 117th anniversary of the birth of Major General Henning von Tresckow, mastermind of the 20 July 1944 attempt to assassinate Adolf Hitler. https://en.wikipedia.org/wiki/Henning_von_Tresckow

Tresckow was from a long line of Prussian aristocrats and military officers. His father was a cavalry general, and his grandfather a Prussian Minister of Education.  He fought in the German army in World War One, gaining a reputation for intellectual independence.  His commanding officer predicted that “You, Tresckow, will either become Chief of the General Staff, or die on the scaffold as a rebel.”

Resistance within the German army to Hitler began before the war, and was intensified by wartime atrocities. When Tresckow learnt of the “Commissar Order” requiring the execution of captured Soviet commissars his reaction was:

If we don’t convince the Field Marshal [Fedor von Bock] to fly to Hitler at once and have these orders cancelled, the German people will be burdened with a guilt the world will not forget in a hundred years. This guilt will fall not only on Hitler, Himmler, Göring, and their comrades but on you and me, your wife and mine, your children and mine, that woman crossing the street, and those children over there playing ball.

 

Army officers began planning Hitler’s removal, if necessary through assassination.  However, they faced moral as well as security challenges.   Hitler had bewitched a nation with the “stab in the back” narrative – that Germany was betrayed in World War One by the “November criminals” who sued for peace when the German army had not been defeated.  This led to a Versailles agreement that dismembered Germany and imposed crippling reparations.

 

Keynes’ The Economic Consequences of the Peace (1919) predicted that impoverishing Germany through the Versailles agreement would lead to disastrous future conflict.  Apirana Ngata also predicted dire consequences from destroying German pride.

https://winsleys.wordpress.com/2011/11/19/risking-lives-for-health-apirana-ngatas-support-for-maori-participation-in-world-war-one/

The 1923 hyperinflation and the Great Depression from 1929 created the conditions for Hitler to come to power.  Infrastructure investment and rearmament expenditure then made huge inroads into unemployment and bolstered support for the Nazi government.

While Hitler closed down political opposition, he had been democratically elected, and could claim constitutional credibility.  German soldiers were also required to swear loyalty oaths to Hitler, and many Generals were further bound by Prussian honour codes.

Resistance conspirators therefore risked their actions being perceived as a traitorous “stab in the back” that would alienate Germans and strengthen Hitler’s hold.  Field Marshal Erwin Rommel opposed Hitler’s assassination for fear it would make him a martyr.  Field Marshal Erich von Manstein declined to actively support the resistance, arguing that “Prussian officers do not rebel”.

In December 1941, Tresckow reflected:

I would like to show the German people a film with the title “Germany at the end of the war”. Then perhaps people would be alarmed and realize where we are heading. People would agree with me that the superior warlord [Hitler] must disappear. But since we cannot show this film people will create the legend of the “stab in the back” whenever we will act against Hitler.

 

However, resistance conspirators developed a counter-narrative to Hitler’s.  The struggle was for Germany’s soul and honour, and within that, for Prussian and wider German culture and values.  At his son’s confirmation at Potsdam Garrison Church in 1943, Tresckow argued that:

The real Prussian spirit means a synthesis between restraint and freedom, between voluntary subordination and conscientious leadership, between pride in oneself and consideration for others, between rigor and compassion. Unless a balance is kept between these qualities, the Prussian spirit is in danger of degenerating into soulless routine and narrow-minded dogmatism.

 

On 13 March 1943 Tresckow planted a time bomb on Hitler’s aircraft.  Unfortunately, it failed to explode.   After the Allied landings in France in June 1944, the conspirators decided to risk another attempt – planting a bomb in Hitler’s meeting room, and then launching a military coup in Berlin.

In the lead-up to the 20 July attempt, Tresckow argued that:

The assassination must be attempted at all costs. Even if it should not succeed, an attempt to seize power in Berlin must be made. What matters now is no longer the practical purpose of the coup, but to prove to the world and for the records of history that the men of the resistance dared to take the decisive step. Compared to this objective, nothing else is of consequence.”

Tresckow further noted that:

“It is almost certain that we will fail. But how will future history judge the German people if not even a handful of men had the courage to put an end to that criminal?”

On learning that Hitler survived the bomb that Claus von Stauffenberg had planted, Tresckow committed suicide. His parting message to a friend was:

 

The whole world will vilify us now, but I am still totally convinced that we did the right thing. Hitler is the archenemy not only of Germany but of the world. When, in few hours’ time, I go before God to account for what I have done and left undone, I know I will be able to justify what I did in the struggle against Hitler. God promised Abraham that He would not destroy Sodom if only ten righteous men could be found in the city, and so I hope for our sake God will not destroy Germany. No one among us can complain about dying, for whoever joined our ranks put on the shirt of Nessus. A man’s moral worth is established only at the point where he is ready to give his life in defence of his convictions.

 

In the aftermath of the 20 July attempt, around 7,000 people were arrested and 4,980 executed.  These included army officers, diplomats, Christian leaders, conservative and liberal politicians.   Field Marshalls Rommel and von Kluge committed suicide rather than face treason charges.  While awaiting his death sentence, the ultra-conservative Prussian politician Carl Goerdeler wrote a farewell letter, which ended with “I ask the world to accept our martyrdom as penance for the German people”.

At the time, many Germans were angry with the assassination attempt.  For some years after the war ended the conspirators were not always seen positively within Germany.  East Germany’s communist authorities ignored the 20 July attempt because the conspirators were largely from conservative rather than socialist backgrounds.  However, the conspirators are now widely seen as German heroes.

Germany owes much to Henning von Tresckow, and to the other resistance members.

Most Germans today reject ‘kadavergehorsam’ (uncritical obedience).  Typically, German people apply critical thinking to politicians’ actions and words.   The German Army is sworn to obey parliament, and MPs are sworn to obey their conscience, not their party leaders.

 

 

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The future has more rights than the present: real interest rates, domestic savings and tax policy

 

New Zealand has long been in relative economic decline.  It suffers from stagnating productivity and a weak tradeable sector. It is a relatively low wage economy.

Understanding our persistently high real interest rates provides insights into these problems[1], and suggests how to deal with them.

High real interest rates discourage capital investment that lifts labour productivity.  They are associated with a high real exchange rate.  They reduce tradeable sector competitiveness.  This means lower per capita incomes.

Low domestic saving and high population growth cause high real interest rates.

New Zealand is one of the few OECD countries that lack compulsory retirement savings.  New Zealand’s superannuation policy settings mean people have weak incentives to save.  New Zealand has a thin share-market with limited liquidity and investor choice.  Many cooperative and private businesses are not open to external investment.  New Zealanders therefore have limited opportunities to invest savings domestically.

New Zealanders borrow or seek equity from offshore to make up for their low savings. New Zealand’s net private sector indebtedness is high by international standards, and dominated by home mortgage and farm lending.

New Zealand historically benefited from a high resource to people ratio.  While its birth rate is slightly higher than median advanced countries, many New Zealanders move overseas.  However, high non-citizen migration means net population growth over the past 25 years has been higher than the OECD median.

Highly skilled and entrepreneurial migrants are assets to the economy and society. However, many non-citizen migrants are modestly-skilled.  Population growth draws investment away from the tradeable sector into infrastructure, housing and other non-tradeable sector expenditures.  This drives higher real interest rates and real exchange rates that disadvantage our tradeable sector.

The above problems are compounded by lack of a capital gains tax, and restrictions on new housing developments.

New Zealand’s rural land prices are higher than for similar land in countries with capital gains taxes. Capital gains rather than productivity opportunities drive much farmer behaviour.

For example, dairy farm debt to banks grew from $18.8 billion in 2007 to $40.9 billion in October 2017[2].  This equates to around $22 per kg of milk solids.  Some debts are equivalent to $30 kg of milk solids[3].  This debt is owed largely to overseas-owned banks[4], whose profits go offshore.

The overall effect is that scarce domestic savings are misallocated away from productive investment into inflating prices of inelastic farmland and housing assets.  Primary industries are left without the investment needed to both boost productivity and address environmental sustainability challenges.

Inflated housing prices harm tenants and aspiring first home owners, and benefit only incumbent owners in the short term.  In the longer term these owners can face higher costs of purchasing their next home, and they also suffer from the economy’s overall weaknesses.

New Zealand needs increased domestic savings, and this requires some compulsion.  New Zealand should also grow its own banking sector[5], and retain more profits in New Zealand.  A comprehensive capital gains tax is needed to channel savings into productive, tradeable sector businesses. Regulatory restrictions on new housing developments should be reduced.

Capital gains taxes can be implemented incrementally to align behaviour to long-term productivity enhancement and environmental sustainability.

Saving requires short-term sacrifices to support higher future consumption. The burden of increased savings can be shared between employers, employees and government.

The government introduced a compulsory contributory superannuation scheme in 1975[6].  This was designed to lift savings and enhance investment in the economy, as well as to supplement the old age pension[7].  However, the 1975 election result saw compulsory superannuation replaced with a universal non-contributory scheme with age 60 eligibility.  This might well be New Zealand’s worse ever economic decision.

Brian Gaynor and others estimate that, had the 1975 scheme been retained, it would now be worth around $500 billion. We would have deeper and more patient capital markets, and a lower real exchange rate. New Zealand might be one of the top five OECD economies.  More of our high productivity businesses would be global players, owned and anchored in New Zealand.  New Zealanders would have higher incomes, and our retirees would be better off.
The New Zealand Superannuation Fund (NZSF) was established in 2001 to partly pre-finance the state’s superannuation liability[8].  Around $2 billion was invested per annum in the NZSF, until payments were suspended in 2008.  The government’s $14 billion contribution is now worth more than $36 billion. The NZSF has returned 10.35% since inception, and 9% per annum over the past 10 years.

In 2007 KiwiSaver[9] was launched.  Its funds now total around $43 billion. In total, combined KiwiSaver and NZSF funds total around $79 billion.  The building blocks are therefore in place to expand domestic savings and investment, largely linked to retirement policy.

New Zealand’s government investment schemes invest globally, however they contribute disproportionately to our economic development. When terminated after just 37 weeks, all of the 1975 scheme’s $41.3 million in investments were in New Zealand.

KiwiSaver has about 44% of its funds invested in New Zealand. The NZSF has around 15% of its funds invested here, including in tradeable sector and technology-based businesses.  ACC has about 8% of its funds invested in New Zealand equities, and is a significant infrastructure investor.

Kiwisaver supplements the NZSF, and can also be drawn on for first home ownership.  However, it is not compulsory.  Furthermore, existing savings schemes are retirement focused, and no systematic effort is made to encourage savings to underpin investment in children and young people.

Currently, social welfare transfers typically subsidise short-run consumption. This partly reflects policy settings designed to support a low wage economy.  These settings create downwards pressure on wages, which in turn reduces business incentives to invest in innovation to lift both productivity and wage rates.  Many employers do not pay a living wage, so “working for families” type interventions make up the difference.

Some part of social welfare expenditure could be configured to boost long-term savings and investment, while achieving short-term social objectives.

For example, individual savings accounts could be established for children and young people[10].  These could be tagged for longer-term education and other capability development investment[11].  They could be weighted to enhance social mobility for children and young people from low socio-economic backgrounds.  Community groups and families[12] as well as government could contribute.

Policy design would ensure funds were used in young people’s interests, and aligned to key lifecycle points. Part of the social welfare budget could therefore help lift domestic savings, while also fostering social mobility.

The NZSF, compulsory Kiwisaver and capability development savings would make up a “whole of lifecycle” savings and investment package.  This would start with government and family contributions to capability funds for children, with a focus on early childhood through to tertiary education.  When young people join the workforce, Kiwisaver would cut in, funded through employee and employer contributions.  Retirees would have their national superannuation topped up with compulsory Kiwisaver.

All New Zealanders would benefit from higher savings and investment rates lifting productivity and per capita incomes.

Economic analysis is worthless unless policy makers translate it into action.  Inclusive, MMP government makes it difficult to take a long-term view and to carry through transformative change.  However, it also means when consensus emerges there is enduring multi-partisan commitment.

People do put their children and grandchildren ahead of themselves.  Voters who reject short-term tax cuts are willing to support wider, including intergenerational public goods[13].

The political tension is between those who focus on today, and those concerned with the future.  It is between those who accept fragmented individualism, and those who believe society is on a collective journey.

Leaders need courage.  They must articulate a narrative where short-term sacrifice leads to greater long-term benefits.

Above all, they must recognise that the future has more rights than the present.

[1] Acknowledgements to Michael Riddell for his analysis of these issues.

[2] Acknowledgement to Keith Woodford for this analysis.

[3] This is bank debt, and excludes some Fonterra loans to farmers.

[4] ANZ is the major creditor, while Rabobank holds about $10 billion in loans to New Zealand agribusiness as a whole.

[5] An option to explore is government banking services being transferred to a New Zealand-owned bank.

[6] The scheme was established through the New Zealand Superannuation Act 1974 and brought into operation in April 1975.

[7] This scheme was established through the New Zealand Superannuation Act 1974. It was based on individualised and portable accounts.  After a short phase-in period, compulsory contributions were 8 per cent of gross income – 4 per cent by employees and 4 per cent by employers.  Contributors could take 25% of their contributions when they reached retirement age and the rest as an ongoing income stream.

 

 

[8] Another motivation was to invest government surpluses in the future, and avoid populist pressures to spend today.

[9] A criticism of Kiwisaver is weak transparency and alleged high fees.  Transparency can be enhanced, and the Simplicity Fund provides a low fees option.

[10] Ngai Tahu’s Whai Rawa savings scheme encourages saving for education and home ownership as well as retirement.  Saving schemes can therefore be designed to achieve multiple socio-economic objectives for individuals as well as strengthening the economy as a whole.

[11] This can include investment in enhanced net worth.

[12] For example, grandparents could contribute with confidence that the money would benefit their grandchildren and not be misused by parents.

[13] For example, there is growing support for action on climate change and other long-term sustainability issues.

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Frontier IT businesses, and how things may play out

Never in modern history has there been such equality across the world.  However, inequality has grown within developed countries, bringing tensions with it.

Aggregate US productivity has grown more than 250% since the early 1970s, yet hourly wages have stagnated.  Over the last decade, productivity within the top 5% of businesses has increased by more than a third, while productivity in other businesses has stagnated (Muniz, 2017).

Much productivity growth has come from IT frontier businesses such as Microsoft and Google.  These create IT platforms, with marginal costs diminishing sharply with new users.  These users are locked in through software upgrades and increased functionality.

IT frontier businesses capture information flows and the channels through which these are managed.  This creates barriers to entry, and cumulative gains to the businesses: “to he who hath shall be given even more”.   The IT businesses capture private information, and influence culture and politics as well as customers.  They face minimal controls over private information use, or sanctions for misuse.

Market rents incentivise innovation, however when they persist over time they concentrate wealth and create monopolistic power.  Kurz (2017) contends that since the 1970s US firms with widely distributed ownership have been increasingly superseded by (largely IT) businesses with highly concentrated ownership.  This creates monopoly surplus.

Unlike for example “Big Pharma”, dominant IT businesses have limited vulnerability to expiry of intellectual property (IP) rights.  IP typically exchanges a limited term property right for public access to knowledge.  However, IT monopolists use their control over networks and information to create barriers to competitive entry.  They may also buy up emerging competitors.  This means their market rents persist.

Frontier businesses are transnational, which precludes nation state “trust busting”.  For example, it is now difficult for governments to leverage the type of “grand bargain” that existed tacitly between the US government and AT&T until 1982.  This saw AT&T maintain a dominant telecommunications position, in return for innovations that spilled over widely to the economy.

Frontier businesses are difficult to tax.  They can arbitrage across jurisdictions through transfer pricing, differential asset valuation, and raising money in one jurisdiction and returning cash to shareholders via another jurisdiction.

In the past productivity gains were reflected in income growth and increased leisure time.  For example, since 1870 real per capita incomes in western countries rose by around five times, while working hours halved.  The difference now is that productivity and income growth are decoupled.

IT and other technological change hollows out the middle class, lower income service sector jobs grow, and wealth becomes concentrated among a few higher income people.  Those at the top have money to spend, but their marginal propensity to do so is low.  Middle income worker numbers shrink, lower income worker numbers grow, and both lack purchasing power.

The above suppresses aggregate demand, which needs to grow to trigger an investment response and expanded productive capacity to serve the demand.   With inadequate demand, businesses sit on cash and central banks expand money supply, causing downward pressure on interest rates. This pushes up bond and equity prices and reduces interest rates for middle class savers.  The world economy in the 1970s faced “stagflation”; now it faces “stag-disinflation”.

However, IT frontier business owners are restless.  Some are philanthropic research funders, others invest in IT-leveraged “physical” businesses.  This suggests the existing stasis will not persist.

IT frontier businesses are likely to transform transportation, manufacturing and primary production.  This will reverse the “Rolls Royce model”, where an aero-engine manufacturing business became more of a software-empowered services business.  Some IT businesses will evolve into material product-related businesses, fuelling new waves of innovation and Schumpeterian “creative destruction”.  Rents arising from such innovation are unlikely to be as concentrated and persistent as those captured by existing IT frontier businesses.

Given the above, how might things play out for New Zealand, and how should we position ourselves?

We must start with the long view: productivity determines per capita income and living standards.  However, it only does so if it translates into broadly-shared gains.  These gains can be increased leisure time, more social connectedness, greater human dignity and well-being as well as market returns.

People cannot eat IT, clothe themselves in it, or build houses and multi-story buildings from it.  Economic growth will create growing demand for New Zealand food and fibre products.  Mass adoption of electric vehicles forecast by Arbib & Seba (2017) will slash New Zealand’s imported oil bill.  This will be as positive an economic boost as the 1973 oil crisis was a negative one.

The combination of primary and manufacturing sector productivity gains and leveraging our renewable energy strengths will free up both the spending power and people to grow the services sector.  However, much of the services sector is low productivity, as measured conventionally.   This means the employment share of the economy made up of “low productivity” jobs will increase.

This challenges us to rethink the role of services.  While services are perceived as low value and low paid, the spectrum runs from surgeons to dishwashers.  Jobs with high cognitive, regulatory or other barriers to entry will continue to be well-rewarded.   People also pay premiums for quality personal services such as fitness coaching, physiotherapy, live music, and some tourist services.

Social fragmentation and alienation of people from each other is at the heart of many of our worst problems.  These include poor mental health, loneliness, household dysfunctions, neglect of the young and the elderly, youth disengagement and crime.   Everyone agrees these are serious problems and that those addressing them should be highly valued.  However, this is not reflected in labour market returns for many workers addressing these problems.

There is unmet need for face-to-face personal services to overcome social isolation, build people’s dignity and esteem, and enrich communities and lives. While easy to automate service sector jobs will disappear, society needs more face-to-face services that are currently underprovided.  These services require “the personal touch” – they cannot be automated.  If we place authentic rather than rhetorical value on such personal services, Baumol’s “cost disease” can look more like a health tonic.

Technological change lifts productivity in the primary, manufacturing and IT sectors and makes growth possible in people-intensive service sectors.  However markets fail in their redistributive function and in their valuation of social goods that are only partly transacted for in markets.

Where there are few barriers to entry and low differentiation, service sector employment is low paid, even though the services provided may be more socially valuable than they are privately rewarded.  We therefore need to think through how we can bridge the gap between social value and the market valuation of many service sector jobs.

To do so, government can regulate and unions can act to enhance the rewards from valuable but modestly-paid employment.  Examples include past action on wage rates for nurses and rest-home workers.  More fundamentally, society must value people-intensive services in ways going beyond market rewards.

Already, many people in boring, low paid or low status jobs gain high self-esteem and community standing from their non-market activities and the identities they build around them.  A worker with no autonomy, esteem or standing at work may be an iwi leader, a legendary trout fisher, an expert in local geology, a sailing coach or a jazz musician.  This builds esteem, and keeps people connected and socially productive.

Technological change delivers increased leisure time, and this can lead to additional private and social goods.  Private goods may include hobby pursuits and home improvements.  Social goods may range from enhanced neighbourliness through to transformative, unpaid scientific research.

An ageing population will mean more people working part time, or doing voluntary work.  For many, avocation will displace vocation.  Unpaid work will expand and, being voluntary, need not be onerous.

There will be growth in face-to-face, service sector activities involving deep institutions that bind society together.  Examples include sport and recreation clubs, churches, marae, educational, art and cultural groups, urban gardens, and environmental protection, civil defence, social service and special interest activities.  These services are typically unmeasured and non-market.

The future can therefore see more people involved in new social services, for a world abundant in material but not yet in social and community goods.

References

Arbib, J.; Seba, T 2017:   Rethinking transportation 2020 – 2030.  RethinkX.

https://winsleys.files.wordpress.com/2017/12/de550-rethinkxreport_051517.pdf

Kurz, M. 2017: On the formation of capital and wealth: IT, monopoly power and rising inequality.   On-line paper at:

https://web.stanford.edu/~mordecai/OnLinePdf/Formation%20of%20Capital%20and%20Wealth%20Draft%209%2010%202017.pdf

Muniz, M. 2017: Economic growth is no longer enough.  Project Syndicate, 25 October 2017.

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An economic strategy for New Zealand

New Zealand has many conditions in place to support increased per capita income and living standards.  These include inclusive, high-integrity government, quality institutions, macroeconomic stability and microeconomic flexibility.

However, productivity is stagnating.  We are struggling to address rising superannuation and health costs, let alone close the per capita income gap with better-performing economies.  We are poorly positioned to deal with threats.  These include breakdowns in international trade and biosecurity.  The primary industries are vulnerable to disruptive offshore innovation.  There are risks that our access to the Australian labour market will be eroded.

New Zealand’s relative decline is associated with its weak tradeable sector and its persistent high real exchange rate.  Inwards migration has put pressure on infrastructure and housing affordability.  New Zealand suffers from massive capital misallocations that inflate existing farm and housing prices.  This leads to indebtedness (largely to overseas banks), and barriers to entry.  It starves innovative businesses of investment capital.

New Zealand’s isolation limits trade connections and slows technology transfer.  However, it has some advantages.  We have low defence expenditure and high biosecurity.  We are better placed than Western European countries to service Asia-Pacific markets.   Shipping costs to export markets are often lower than land transport costs for continental countries.   IT is making knowledge flows faster and cheaper.  However, unlike Singapore and China we lack an economic strategy.

A strategy is needed because hands-off market liberalism from the mid-1980s has failed to arrest our relative decline.  Our economy has no growth trajectory that can meet future health and social security expectations, let alone manage major shocks.

New Zealand’s economic strategy should aim to recapture our past position near the top of the world’s per capita income ratings.  This is what underpinned our lead in living standards, social cohesion and human rights.

Internationally, productivity gains and returns on capital have been disproportionately concentrated in dominant frontier firms[1].  Productivity growth and returns on capital have been decoupled from wage growth, exacerbating inequality.

New Zealand’s economic strategy needs a supporting narrative based on investing in people, inclusive growth, sustainability, and concern for others.  New Zealand colonists rejected the British class system and believed in fairness, equalitarianism and self-reliance.  In Maori culture, Manaakitanga involves caring for others and whanaungatanga supports the importance of relationships.  Kaitiakitanga values environmental stewardship, and Te pae tawhiti supports a long-term intergenerational view.

We must also hold to an even more important narrative.  We are citizens of the world, especially the modernist, democratic world.  While our capital and ownership must be more local, ideas and technologies are increasingly international, and we must meet our global obligations.

An economic strategy for New Zealand would involve:

Lifting domestic savings rates

Lifting domestic savings rates will deepen and diversify New Zealand’s capital markets, and over time see more financial sector profits retained in New Zealand.  It will reduce the real exchange rate, and lift the capital to labour ratio.  It will make exporters more competitive, improve labour productivity, and foster innovation, entrepreneurship and economic diversification.

Lifting domestic savings rates means addressing issues such as retirement provisions and tax policy.  New Zealand superannuation is equitable, efficient and gives people good incentives to work beyond retirement age.  However, pay as you go (PAYGO) schemes do not contribute to capital market development and productive sector growth.  Save as you go (SAYGO) schemes such as the New Zealand Superannuation Fund (NZSF) and Kiwisaver develop capital markets and expand productive capacity.

New Zealand is unusual among OECD countries in lacking mandatory requirements for personal retirement savings.    Compulsory saving can reduce other savings forms, and squeeze consumption.  However, increased savings flowing into productive investment makes higher consumption possible in later time periods.

Compulsory savings for superannuation could be reintroduced[2].   However, this is politically challenging, and can increase complexity and transaction costs.  It raises equity issues.  Domestic savings can be increased through other interventions.  These include lifting contributions to the NZSF, making Kiwisaver mandatory, and other initiatives akin to Whai Rawa and Individual Development accounts – see: https://en.wikipedia.org/wiki/Individual_Development_Account

Tax on interest should not discourage savings in, for example, retirement schemes.  However, tax or other subsidies for private saving should not lead to government dissaving.

Shifting domestic savings and investment into the productive sector

Higher savings will lift growth and per capita incomes when invested in expanding productive capacity.  Tax and business regulatory policy needs to support this.

We need to ensure that regulatory settings and incentives lead to a greater share of increased savings being invested in the tradeable sector and expanding productive capacity, rather than inflating fixed asset prices.

Tax policy, financial market and business regulatory settings need to support “retain and invest” rather than shareholder maximisation business models – see: https://winsleys.wordpress.com/2017/01/15/what-caused-the-mess-we-are-in-and-how-do-we-get-out-of-it/

Savings rates and business tax policy need to encourage businesses to apply more capital to labour. Capital needs to be in productive capabilities, and be patient.  What is scarce in New Zealand is not money, but equity in productive, tradeable sector businesses with long-term, innovation-focused strategies.

Gearing social expenditure to support economic development

Social policy has three main pillars.  These are:

  • Services that government can deliver more efficiently and equitably than the private sector (much health, education and superannuation provision, and ACC)
  • Targeted interventions to address at risk populations, such as vulnerable children
  • Social transfers to keep people out of poverty, and to act as fiscal stabilisers during recessions (unemployment benefits, support for low income families)

Social policy dominates government spending.  Even incremental efficiency improvements have massive economic benefits.  Social investment to provide security and well-being can be geared to economic development in a mutually reinforcing way.

The best social welfare is a high-performing economy that generates rewarding jobs, with social welfare as a backstop.  Comprehensive social security systems in Scandinavian countries encourage rather than stifle risk-taking.  Entrepreneurs know that if they fail they can recover rather than be left destitute.

However, some social welfare expenditure that subsidises consumption and keeps people out of absolute poverty can entrench them in relative poverty, and the passivity this gives rise to.  Some social welfare transfers subsidise businesses that should be paying a living wage.

Social expenditure should build people’s human capital capabilities, and build assets for them, allowing them to escape from poverty.

Singapore avoided a welfare-dependent underclass from emerging.  It did so through investing in individual and family education, financial assets, and home ownership rather than subsidising consumption.  New Zealand should develop similar approaches.

Individual Development Accounts (IDAs) could be established to invest in education, net worth and productive asset creation.  These could involve start-up government contributions beginning from birth or early childhood.  They would be open to contributions from different sources, with withdrawals restricted to capability development purposes.   For example, some part of child poverty-related financial transfers could be invested in IDAs.  Grandparent, wider whanau, iwi and church contributions could be made with confidence they will be invested in children’s interests and not be diverted to “other purposes”.

IDA accounts could be drawn on at particular lifecycle stages, such as early childhood, tertiary education, and for financial and business asset creation.  Aggregate savings from these accounts would boost economy-wide growth, while building individual wealth-creating capabilities.

New Zealand should continue a “social investment” approach to optimise expenditure targeting, taking account of all direct and indirect benefits and costs.  This can complement capability development.

Social investment allows targeting investment to key lifecycle stages, and to address specific risks or opportunities.  It could for example target investment more heavily at the earliest childhood development stages, building capability from then on, and delivering both wealth creation and avoided social cost dividends.  This can lift the productivity of New Zealand’s social expenditure, giving better outcomes for people at lower cost to all parties.

New Zealand can lead the world in social investment.

Tax reform

New Zealand has a well-designed, broad-based and low transaction cost tax system.   GST is comprehensive, and minimises exemption-based transaction costs.  Simplicity in tax policy and in regulatory design makes it difficult for the powerful to game.

Tax policy should encourage savings and investment in productive capacity.  Capital gains taxation would help shift investment into productivity and wealth creation.

Tax policy needs to keep up with how technological change erodes tax bases and creates monopoly rents.  For example, some global IT companies and private equity investors have exercised monopolistic powers through their scale and network barriers to entry, more so than intellectual property rights.  This has exacerbated inequality.  This might be addressed through tax and competition policy interventions.

Tax reform can focus on changing behaviour more so than raising revenue.  We should increase taxes on “bads” (for example, pollution, tobacco and sugar drinks) and reduce taxes on “goods”, such as interest from savings.

End corporate welfare and incumbent coercive power

Businesses should exist to serve their customers, and to allow their staff, owners and communities to flourish.  CEO rewards should be based on productivity, not bargaining power.  Business regulation must not protect incumbents or discourage new business entries and competition.  It should favour value creation rather than value extraction.

Immigration policy and labour market regulation should avoid a “race to the bottom”.  Migration should not be used to subsidise businesses through, for example, putting downward pressure on wages, or lifting demand for housing at times of housing shortages.

Migration should grow our intellectual, creative and entrepreneurial capabilities, our links to the world, and shift our productivity possibility frontiers outwards.  It should bring diversity in forms that meld with our democratic and modernist values.  We should ensure we are a good global citizen through refugee intakes.

Weakening of trade union bargaining power in the 1990s reduced incentives for businesses to invest in training and in labour-augmenting and labour-displacing technology.  It is likely to have harmed both worker interests and long-run business productivity.

Labour market regulation should balance business flexibility with a more stable work environment that encourages longer-term investments such as apprenticeship and other training, and which helps workers plan their lives.  Done well, this can underpin cooperative and “positive sum game” approaches to labour relations.  Employees then see the need for businesses to grow through dynamic responses to markets, underpinned by stable and cumulative approaches to workforce development and human capital creation.

Businesses do not have a monopoly on incumbent coercive power and impeding opportunities for others.  Restrictive trade union practices can impede innovation and productivity.   Workplace bullying by peers as well as bosses causes misery and stifles new perspectives.   “Nimbyism” impedes new housing developments.

Innovation-driven industrial development

Government should champion innovation-driven industrial development see: https://winsleys.wordpress.com/2017/02/15/how-innovation-can-fulfil-our-future/

Innovation and business development policy can include government equity investment and other “hands-on” policies.   While honouring international agreements, New Zealand can actively use innovation-related procurement policy to foster industry development.

New Zealand needs to be linked to and participating in international basic research, and have the capacity to adopt, extend and apply leading-edge science and technology.  Universities need the freedom to pursue undirected basic research.  However, we need more challenge-based research and DARPA model approaches to create technological solutions and “new economic space”.

We should set technological challenge targets, and marshal public and private capabilities to achieve them.   This will create technology to grow New Zealand businesses.  Illustrative examples might include electrical engineering innovation[3], for example to manage renewable generation intermittency, and for primary industry vehicles and machinery.  Remote monitoring technology can enhance environmental and natural resources management and EEZ surveillance.  Precision agriculture can optimise nutrient management.  Automation of dangerous and debilitating work can lift productivity and enhance worker safety and job satisfaction.

Business-specific technology adoption and application must be market-driven.  However, Government has a key role in strategic research going beyond business time horizons, and focused on opportunities for New Zealand.  Its research investment needs to be enhanced, and focused on specific technological platforms that multiple companies can draw on.

Government should not provide corporate welfare through non-competitive business grants.  It should take stakes in the technologies it helps fund, and leverage returns from this taxpayer investment.

Science-driven and “high tech” businesses can be powerful enablers.  However, they generate few jobs directly.  Innovation-based growth must be leveraged over broad product and service sector opportunities.  Some of these will be core New Zealand industries, others will be tightly-focused microcosms of future mass markets.

New Zealand-specific strategies are needed.  These could focus on:

Leveraging off the primary industries

The primary industries are a growth platform.  New Zealand has primary industry scale, and many business models to build from.  Leading-edge technology from other industries can be applied in primary sector applications.   Landcorp can play a role in trialling new technologies at scale, and diffusing what is learnt more widely.

The primary industries are also a base from which to grow manufacturing, engineering, biotechnology (including pharmaceuticals), IT, energy and other industries.

Some growth can come from businesses that cluster around the primary sector.  Examples include agricultural equipment and machinery, grading, product testing and processing plant, IT, and plant and animal genetics products and services.  Other businesses can begin in the primary industries, and from this platform diversify into different markets.  This can come from a “migration of market structure” business journey.

Using sustainable development as an economic development strategy

New Zealand’s low per capita population to natural resources ratio is a key to our living standards.    Most of our land is mountainous or has poor soil, and we should minimise urban encroachment on our best agricultural land.   We already harness most of our low cost hydroelectricity potential, and are up against water use, biodiversity and sustainable fisheries limitations.

However, natural resources are not entirely inelastic.   They can be expanded (for example through forestry plantings), more widely harnessed (wind and geothermal power) and used more efficiently (nutrient management).

Imagine a thought experiment in which someone invented “an imaginary country” designed to survive and prosper through climate change and sustainability challenges.  This country would have a long coast to land area ratio, and be located in the “roaring forties” to maximise wind power.  It would have good farming and forestry resources for sustainable food, fibre and energy production.  It would be mountainous to harvest rain, and to create hydro-electricity potential.  Its volcanism would sustain soil fertility over geological time, and underpin geothermal power.  It would be located in a large ocean away from the poles, to reduce climate change extremes.

New Zealand is well positioned to move to sustainable resource use and break dependence on fossil fuels and other non-renewables.  In doing so it would reduce import costs, create competitive technology-based businesses, and address climate change and other environmental challenges.

We must set high ambitions and fulfil them.  Our renewable electricity resources can underpin mass electric vehicle adoption.  Farm and forestry businesses can contribute to distributed generation.

Healthy, sustainable housing is a foundation for families and communities.  It can also generate electricity and enhance grid security.  Government-led housing, construction and infrastructure development can drive technological innovation, and translate this into business growth. We can be the world leader in multi-storey, highly engineered wood-based buildings, and move our commodity timber into high-end applications.

Growing and retaining knowledge-intensive manufacturing and services (KIMS) businesses

New Zealand has birthed many knowledge-intensive manufacturing and services (KIMS) businesses.  They are often private or unlisted public companies.  They typically focus on industry rather than consumer good markets.  They compete in technically challenging, small to medium scale niche markets. They have economies of scope more so than scale.  Their competitive strategies include customisation, flexible production runs and customer responsiveness.

New Zealand fails to grow and retain the benefits of KIMS businesses.   Some of them move offshore, for example Glaxo and many IT companies.  Others are bought out by offshore competitors and turned into “branch offices” or import distribution arms.  Examples include Interlock and Navman, and more recently Sistema, Compac Sorting Equipment and PowerbyProxi.

Sales of businesses to offshore investors can make sense.  Some such businesses are footloose, with little to anchor them in New Zealand.   Proceeds from offshore sales can be reinvested in other New Zealand technology-based businesses, supporting “serial entrepreneurship”.

However, New Zealand loses when it fails to grow many KIMS businesses into globally significant players and anchor them in New Zealand.  To do so needs capital investment of a scale and long-termism that local private investors struggle with.

There is nothing autocratic or self-defeating in governments retaining high-productivity businesses within their borders.  The Lower Saxony State owns 12.7% of Volkswagen, giving it 20% of the voting rights in the world’s seventh biggest company.  The French government intervened to prevent foreign buyout of Danone.  Nestles’ headquarters, and about one third of its shareholding are anchored in Switzerland.  The United States masquerades as a free market economy while protecting its own strategic businesses.

A publicly-supported “growth and anchoring” fund could be established to take cornerstone shareholdings in KIMS businesses.  The intent would be to help these businesses achieve international scale and long-term growth horizons.  In return, these businesses would have to anchor core activities in New Zealand, even though much of their marketing, servicing and manufacturing might be offshore.   These core activities might include R&D, design, business strategy and financial management.

Such a fund could be administered via the NZSF, or some other stable, long-term investment vehicle.  KIMS businesses with this government stake might also attract stable investment from other New Zealand superannuation funds, iwi and other long-term investors.

Returns from NZSF and ACC investment compare favourably with private investors.  They have the scale and patience that New Zealand private funds lack. New Zealand should use long-term state investment to substitute for the private investment it lacks.

Concluding comment

New Zealand cannot prosper in the long-term through dependence on market-based resource allocation, with government’s role limited to setting the rules.  The government must be a prominent actor on the economic development stage, without at the same time stifling or crowding out the other players.

Addressing capital misallocations and low domestic savings rates are the biggest challenges government needs to address.  Without this, “industry policy” will lack traction and wider economic impact.

The government must align savings, tax and business regulatory policy and social investment to support inclusive economic growth.  It must also focus on time horizons longer than those of individuals and businesses, and on opportunities for future generations.

 

[1] This might partly explain why low interest rates and high business cash surpluses have not translated into higher demand, business investment response to service it, and higher employment and wage levels.

[2] This was introduced by the 1972-75 Labour Government.

[3] New Zealand has strengths in wireless power, power conversion and superconductivity science.  A New Zealand engineer, Ian Wright co-founded Tesla.  However, we have not fully leveraged these capabilities and retained benefits in New Zealand.

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Russian, Chinese and American economic narratives

Some convince with numbers, most with stories.  When stories turn into national narratives, history is made.

Narratives turn complexity into simplicity, and give identity and purpose.  Individuals can be conflated into a nation state akin to a single person: “China will”, “Iran is…”

Even preposterous narratives convince if they feel right.  They can motivate people beyond their individual limits, for good or ill.  “Good” narratives can focus on a country’s living standards and global citizenship. “Bad” narratives can strip people of their individuality, create double standards of morality between in and out-groups, and encourage win: lose competition between countries.

Russia, China and America all have greatness narratives.

Russia is crumbling internally.  It has high morbidity, low fertility and risks population collapse.  It is deindustrialising.  It depends for exports on military and space technology and natural resources, not complex civil market products.   Elites control its wealth.

Russia’s malaise results from its lack of market memory and its autocratic history.   Market exchange requires respect for customers as individuals – economic autocracy does not.

Russia’s inability to develop a market economy and supporting institutions can be traced to Ivan the Terrible’s destruction of the boyar class.  Russia never developed a strong middle class that demanded property rights and the civil and political rights arising from them.  There was no Russian Magna Carta.

The 1917 Bolshevik revolution swept away Tsarist autocracy, however Russia did not have deep enough market roots for a modern economy to build from.  Coercion rather than market forces drove economic development.

Some Bolshevik leaders such as Bukharin, Rykov and Tomsky favoured a New Economic Policy based on market liberalism.  Bukharin was a keen botanist, an accomplished poet, and had deep cultural interests.  He split with Stalin in 1929 over collectivisation, fearing it would lead to military-feudal exploitation.  His advice to peasants was” “enrich yourselves”.  His thinking on “market socialism” was influential among Chinese communists, and helped lay the groundwork for Deng Xiao Ping’s reforms.

Placed on trial for opposing Stalinism, Bukharin pleaded guilty to the “sum total” of crimes in the abstract, but denied specific crimes against particular individuals.

From the late 1920s, Stalin destroyed the kulaks, using famine as a weapon.  In doing so he crippled Soviet agriculture, despite its huge resource base and economic potential.  This is notable, because autocratic narratives impoverish even countries with huge resource advantages.  Mugabe created a famine in the bread basket of Africa!  Chavez created a petrol shortage in Venezuela, a country with the world’s higher per capita oil endowments!  Such tragedies occurred because populist and autocratic narratives replaced individualism and market exchange.

Putin has sought to recreate national pride through an imperial narrative expressing power over non-Russians.  He has courted Orthodox Church spiritual support, Solzhenitsyn’s cultural validation and Great Patriotic War history to support his narrative.  He shows no interest in economic advancement and lifting Russia’s own population out of degradation.

Arguably, China of all countries has had the longest historical periods in which it was the world technological leader with the highest per capita income and the most stable continuous polity.  Its market memory stretches back for centuries.  Much was suppressed by Mao Zedong’s communist government, but remained latent.  Even under Mao, Zhou en-lai drew on China’s cultural and market heritage to moderate communist excesses.

Zhou served as Premier from 1949 to 1976.  He acquired a life-long passion for Chinese literature and opera from his adoptive mother.  He supported liberal reforms that he saw beneficial for China.  He prevented Beijing from being renamed “East Is Red City”, and the Chinese guardian lions in front of Tiananmen Square from being replaced with statues of Mao… The 1966 Cultural Revolution destroyed cultural artefacts, but failed to destroy cultural narrative.

The Chinese people had subtle ways of signalling their views, even with limited civil rights.  Zhou’s death in January 1976 triggered nationwide grief for a leader seen as exemplifying cultural continuity, economic hope and supporting narrative.  The April 5 1976 Tiananmen Square incident saw about two million Chinese commemorate Zhou’s death with flowers, poems and prayers, rather than communist slogans.

Deng Xiaoping built on Zhou’s liberalising tendencies.  Though purged twice during the Cultural Revolution, he led China from 1978 to 1989 and liberalised China’s economy.  Zhou and Deng were Chinese patriots who used central planning as tools for China’s development, not for ideological ends.

Xi Jinping’s father, Xi Zhongxun was known for moderation, empiricism rather than ideology, empathy with cultural minorities, and economic pragmatism.  He influenced Deng Xiaoping’s early experiments with market liberalisation, including the creation of special economic zones.

Key Chinese leaders learnt from other countries, and integrated that thinking into a Chinese cultural and economic context.   Xi Jinping was profoundly influenced by his 1985 visit to America to study agriculture, and to stay for a time with an American family.

China’s economic growth and dynamism comes from a powerful idea – China has been great, and will be great again.  Chinese leaders and people, including minorities within China share this narrative.  It has deep cultural and intellectual as well as economic roots, and connects to individual motivations.  Xi wants young people to “dare to dream, work assiduously to fulfil the dreams and contribute to the revitalisation of the China Dream”.

China liberalised its economy through learning by doing and thinking in time, not rigid ideology.  Chinese leaders characterised the process as crossing a river and “feeling for the slippery underwater stones”.  China opened the windows to let fresh market air in, but “kept the fly screens up” to avoid such destabilising forces as international financial crises.  It adopted a “bird-cage” strategy, liberalising within a framework based on China’s wider interests, and including a core role for the state.

China’s bureaucracy is meritocratic.  China has been innovative in its state-owned enterprise sector, in local government and private sector joint ventures, and in using state power to adopt and extend international technology.  Open debate and pluralism is welcome in China, but attacks on the Communist Party’s political legitimacy are not.

America has led the world scientifically, technologically and economically for the last century. It has unchallenged military capability.  America is still great, and does not have to revive an imaginary “lost greatness”.  However, individuals in Rust Belt zones and in low socio-economic groups do not feel great when they compare themselves with others, and benchmark themselves against past American “high expectations” narratives.

America’s current turmoil reflects conflicts between narratives.

One narrative is America as a melting pot where anyone can aspire to go from rags to riches, from log house to White House, or college drop-out to unicorn start-up entrepreneur.  America is an endless frontier of unbounded optimism, a City on the Hill.  Dreams come true if you want them to.

A Charles Koch variant is that America is the land of free business entrepreneurship involving a profit and loss system which creates opportunities for most, even though gains are unevenly distributed.  It concedes that some lose out, in relative if not in absolute terms.

This narrative is intellectually and socially libertarian.  Broadly, it resonates with the thinking of the late Milton Friedman, and of Tyler Cowen and Deirdre McCloskey.  This narrative supports free trade, and despises corporate welfare and vested interests (including coercive forms of trade unionism) that impede opportunities for others.  It is consistent with strong competition policy, however government’s role focuses largely on public goods rather than economic leadership.

This narrative supports helping the downtrodden through second chances, whether through prison reform or new entrepreneurial opportunities and the jobs and wealth coming from them.  It is humble enough to concede that the American free enterprise system failed indigenous Americans and Afro-Americans, but is deeply sceptical of stronger central government.

The American “liberal narrative” is a variant of European social democracy.  Its intellectual leaders include Paul Krugman and Joseph Stiglitz.  It supports a market system, but with a more prominent role for, and confidence in government.  It aims to replicate in the American economy the best features of the German and Scandinavian market systems, with their risk-buffering macro-economic and social policy devices.

Another American narrative thread is state and individual rights to counter perceived federal government over-reach. Its origin myths include the American War of Independence and the Constitution (selectively interpreted).  Its historical manifestations include attempted secession of the southern states during the Civil War, and the later overhang of Jim Crow policies.  Enduring cultural expressions include Gun Rights and the Tea Party.  Other American narratives are even more inchoate, or so divisive they speak only in code…

Donald Trump’s rise gives insights into facile, plausible narratives.  Such narratives typically have a core of truth. They are most powerful when their core of truth has been suppressed by those in elitist positions.  Stating truths that others have suppressed legitimatises a mass of subsequent falsehood.

President Trump is a master-singer of subtly false narratives, credentialed with uncomfortable truths.  Iraq was not developing nuclear weapons.  The Iraq invasion and its aftermath created a power vacuum ISIS filled.  America’s infrastructure is degraded.  That someone states these truths means false contentions about climate change and free trade are believed.

The difficulty with the Trump narrative is the inherent conflicts woven into its fabric.  There is no affinity of interest between the far right Republican establishment and the embittered Rust Belt.  The Trump narrative is supported by millions of American voters who would lose badly if the Affordable Care Act was repealed, or taxes on the rich reduced in a way that shifts the long-term burden to blue collar workers.  Trump’s trade, defence and climate change policies will damage America’s industrial base, erode its security, and forego massive opportunities from sustainable energy technologies.

However, damaging narratives such as the Trumperian patchwork can be challenged and co-opted.  Attitudes to single sex marriage improved when they were personalised as being about love, not abstract human rights.  American Muslim women can wear stars and stripes headdresses…

America has deep local democracy, intellectual pluralism, and effective constitutional checks and balances.  The tension between America’s federal and state government systems impedes central action.  However it also allows real-time experimentation between competing state policies.

America will meander before it develops a narrative it can rally around.  This narrative will have threads from Lincoln, Martin Luther King, Obama, and from market liberalism.  When it comes together, America will feel as well as be great.

However, true greatness for America, China, Russia and other big powers depends on their international as well as domestic contributions. This means shared narratives relating to global environmental, health, communication and security public goods, and to international rules fostering trade and international law.  Only then will these powers be authentically great; as they see themselves, and others see them.

 

 

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Kinship, modernism and Donald Trump

Kinship, modernism and Donald Trump

Kinship-based societies are based around extended family relationships.  They transmit learning and beliefs vertically, from elders to children.  They may limit women’s rights, and have larger families.  These societies meet kin obligations, yet may permit cheating of out-group members and mandate tax evasion and benefit fraud.

Kinship-based societies dominate in tribal regions, and can be powerful in non-tribal ones. Some scholars such as Edward Banfield attributed Southern Italy’s underdevelopment to “amoral familism” that focuses narrowly on family interests, and assumes others do the same.  This leaves little space for social capital and non-kin collective projects.

Modernist societies value individual advancement and meritocracy.  They are typically urbanised, engaged with international trade, and they learn horizontally from non-kin sources.  Women have rights, and are likely to participate in the paid workforce.  Modernist societies have small families, and invest heavily in individual children.

Urbanisation, IT and mass media make it easier to learn from non-relatives, and for horizontal cultural transmission to occur.  Famously, TV soap operas depicting modernist lifestyles led to reduced fertility rates in Brazilian favelas communities.

Humanistic principles, civil society, moral codes, and secular institutions underpin modernist societies.  Taxes are moral as well as legal obligations, to deliver shared public services, and to socially mitigate individual risks.  Modernism dominates in regions such as East Asia, Western Europe and North America.

America is a modernist society, yet it has a kinship-based President.  Donald Trump is a product of kin influences from his grandfather and father, and ideation from sources such as Fox News.  He is a kinship-based, amoral family leader, misplaced within a modernist society.

Donald Trump came to power with the support of a Republican Party tribally visceral in its hostility to out-groups. He made his money from inheritance, asset management, real estate price inflation and amoral business ruthlessness.  He created no new technology, innovation or idea.  None of his investments deliver wider social benefits.  Trump Tower and his golf courses will survive him as artefacts.  Nothing he created will be a platform for future enduring benefits.

Kinship-based societies are poor partly because they under-deliver social innovations.  Such innovations deliver non-rival benefits that spill-over wider than those which can be captured by individuals and kin.  They persist longer than an individual’s lifetime, and are building blocks for future innovation.

Social innovation sparks future innovation that transcends individual and kin-based interests.  It underpins ongoing human creativity, technological development and higher civilisation.

Paradoxically, it is “individualistic” modernist societies that deliver social innovation, yet such innovation requires feelings for others and magnanimous spirit.

America’s constitutional protections are constraining President Trump.  However, it is American generosity of mind and intellectual unboundedness that will end his presidency.  America can then once again become the leader of the modernist world.

 

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