The post-WW II order

The Editor
New York Times

Dear Sirs or Madam,

This has reference to the article by Peter Goodman (‘The Post-World War II Order Is Under Assault From the Powers That Built It’, published online on March 26, 2018 –

I first comment on some specific statements made by Mr. Goodman before offering general comments.

Naïve comment:

But American leaders have failed to deliver job training and other  programs that might have cushioned the blow for communities hurt by imports.

The scale of the dislocation and jobs displacement was so huge as not to be amenable to such romantically naïve prescriptions.

Faulty logic:

Mr. Trump’s trademarks — “Make America Great Again,” and “America First” — underscore his forsaking of his country’s traditional commitment to collective ideals.”

This is an example of ultimate finessing:

“But if the justice of the liberal order has been contentious, now its basic endurance appears in question.”

An order that is not just will not endure. Period. The cumulative injustice perpetrated by the order has now threatened its basic endurance. That is the way to frame the sentence and understand the developments.

Barking at the wrong tree:

He appears to subscribe to the notion that the United States, the largest economy on earth, must unabashedly pursue its self-interest, free of constraints like naïve reverence for the rules of the global trading system.”

This statement would have been authentic and correct had it been directed at China.

Let us rephrase it and that would make a lot more sense:

“Xi appears to subscribe to the notion that China, the second largest economy on earth, must unabashedly pursue its self-interest, free of constraints like naïve reverence for the rules of the global trading system.”

My comments:

Collectivist ideals were easy to forge in the bloddy aftermath of the WW II,e especially after the holocaust induced killings.

Rising prosperity – again, relatively easy, after the Great Depression and WW II – made it easy to commit to ‘collectivist ideals’.

Then, in the aftermath of the 1979 Soviet entry into Afghanistan and the tantalising opening up of China to the West, it was easy to renew commitment to collectivist ideal. The common threat was clearly recognised and always a visible and identifiable enemy enables one to define oneself as ‘not the enemy and what it/he stands for’.

Then, in the 1990s, after the collapse of the Soviet Union and the reunification of Germany, optimism about the Western system of capitalism and the Grand Euro project cemented the collectivism.

In the new millennium, after 09/11, the threat of ‘Islamic terrorism’ provided the glue.

But, while all these were going, we had countervailing forces that were chipping away at the collectivist glue – technology, outsourcing and offshoring – that concentrated profits in few hands.

Technological developments, on their part, weakened familial ties, glues and increased the atomisation of families and societies, leaving humans feeling lonely, vulnerable and stressed. The onward and relentless march of technology was another of the ‘Globalist’ projects.
All that they can offer in compensation for what they had and are still unleashing is ‘Universal Basic Income’ – arrogant and stupid at the same time.

Nothing much has changed in the world of finance either. The rise of finance that ruined economies has not been arrested. Even nine years after the crisis of 2008, average bonuses on Wall Street had returned to the levels of 2006!

Blame the ‘globalists’ for the failure of the ‘global project’. Not the populists and the nationalists. They are doing just the final rites on the corpse. The murder of the ‘global project’ was done by the so-called globalists.

Until the world gets it and until people like Goodman gets it, the populists are not going to be pushed back. They will be strengthened by these false framing of the issue and the narrative.

Thank you.
Anantha Nageswaran

Need for luck and learning: constant and continuous

Last week was rich pickings for insightful stories, for me. I still remain captivated by the story, ‘The case against Google’. I blogged on it here.

The next story that I liked immensely was the story in Wall Street Journal on GE under Jeff Immelt.

I like such stories not for the reason that they vindicate my priors (I remind myself not to hold too many of them!) but because they make me think.

This one short paragraph summed up the story rather well:

But Mr. Immelt didn’t like hearing bad news, said several executives who worked with him, and didn’t like delivering bad news, either. He wanted people to make their sales and financial targets and thought he could make the numbers, too, they said. [Link]

Jena McGregor in Washington Post has a good follow-on article on this story. She writes,

The article puts GE well out of its usual role as management exemplar. And it shines a light on a problem endemic to corporate America, leadership experts say. People naturally avoid conflict and fear delivering bad news. But in professional workplaces where a can-do attitude is valued above all else, and fears about job security remain common, getting unvarnished feedback and speaking candidly can be especially hard.

There was an added complication for Jeff Immelt. He was a celebrity CEO. No matter how hard he tried, people would hesitate to share bad news.

From Jane McGregor’s article:

Being led by a celebrity CEO who succeeded a man once named “manager of the century” probably doesn’t help either. Immelt, who rose through GE’s sales and marketing ranks before leading its plastics and health care divisions, became CEO after a high-profile horse race to succeed Jack Welch that catapulted him into the spotlight. One of the most recognized faces of corporate America for the 16 years he held the job (he stepped down last year) Immelt led President Obama’s jobs council and was considered as a veteran corporate hand to replace Uber CEO Travis Kalanick.

Leadership experts say such prestige can create a “social distance” between the CEO and direct reports, even if they make efforts to improve personal relationships. (Immelt, for instance, was known to host dinners with one of the top 185 officers of the company each month at his home and reconvene for a few hours the next morning to talk about their careers and their performance.)

“People tend to not want to tell them the bad stuff,” said Tim Pollock, a professor of business at Penn State University who has studied celebrity CEOs. “They become starstruck; they’re less likely to want to speak up and say negative things.”

As with most things in life, this too could go wrong. You could create an organisation culture where everyone only brings up bad news and uses them as an excuse not to perform or deliver. There is a fine line and no one knows where it is drawn.

It requires repeated experimentation, trial and error, learning by trying and, above all, good luck, to figure out the right balance between fostering a culture of frankness, honesty and of positivism; right balance between awareness of limitations and of strengths too.

In general, today’s world is a high pressure world – not just in jobs or in businesses but in just about everything. From parenting to maintaining social networks, friendships, from pursuing multiple interests. The culture is one of doing so much in so short a time. Efficiency and scale, even in personal lives, pursuits and social interactions, are privileged. They used to be expected only in business organisations.

When people are running everywhere and in every place with no place to rest, pause and reflect, anyone who allows them to step back, reflect and question these will actually be deemed a saviour! People feel grateful to be allowed to voice their self-doubts and inner doubts, their anxieties and frustrations once in a while and feel connected with those who do not hesitate to let them know that they share these too!

Therefore, that CEO or leader who allows his lieutenants the odd opportunity to step back, to say NO and to warn him of over-reaching, should be received with gratefulness and will be reciprocated with trust, commitment and higher motivation actually. That is my guess.

Not without dangers. Someone might take advantage and someone might embarrass the leader publicly about this. Some one in the media might say that the leader is a shirker and the share price might nosedive! The leader will be out of his or her job soon.

It is not that easy to swim against the prevailing currents even if you are convinced that the current will eventually plunge into a ravine. Given time, it will be right. The GE story is an example. The company went with the social norms and ethos of the times – good news, optimism, success, high performance, not taking NO for answers and deadlines are yesterday, etc. Indeed, it defined the ethos and norms of the times. Has it succeeded? Now, we know that it has not.

But, it takes time to know that it does not work. Not many have that luxury of time or luck to take a bet against consensus norms and ethos and succeed. They have to live in a society and be part of it. Humans are social animals. They need to belong. Some of us actually come to like it. It is seductive. It is lonely to be not part of it. Not easy.

The best we can do is to be aware of how excessive any organisational culture can become and modulate it from time to time. No one size fits all and no one culture works in all situations.

Let us also not forget that these articles are appearing with the benefit of hindsight. Note this paragraph in the WSJ story:

Former GE Chief Financial Officer Keith Sherin, who worked alongside Mr. Immelt during challenges such as the financial crisis, said the CEO would methodically approach a problem with his team, consider multiple viewpoints and communicate regularly with the board, making sure executives stayed focused on the most important issues. “I never found him to be overly optimistic,” said Mr. Sherin, who retired in 2016.

To his credit, Jeff Immelt did not preach one thing and practise another. He believed in his model:

At a conference hosted by Axios in November, the month after he stepped down as chairman ahead of schedule, Mr. Immelt noted that GE is “125 years old; we go through cycles,” and said he was “fully confident that this company is going to thrive in the future.”

A spokesman for the former CEO pointed to his decision to purchase $8 million worth of GE shares in 2016 and 2017. That included 100,000 shares in mid-May at a price roughly twice today’s.

The only enduring lesson in all this is that in business as elsewhere, the need for luck and learning is constant and continuous.

Jordan Peterson

Peggy Noonan has an interesting article (ht: Venugopal Ramakrishnan) on the interview of clinical psychologist and social philosopher Jordan Peterson by a British television journalist. From what she writes, I think Peterson’s work resonates with me. I listened to the interview he gave to Cathy Newman of Channel 4. He handled himself exceptionally well.

If you want to be ‘shocked’ at how someone could so deliberately distort the interviewee’s words and if you do not want to watch the interview, you can read an article in ‘The Atlantic’ on the conversation.

I got to know of Jordan Peterson as the person who had interviewed the Google employee James Damore. Sunder Pichai fired him for posing important questions on the culture at Google. Now, Mr. Pichai says he stands by his decision. Well, I suppose, it is too early for a mea culpa. Julian Baggini has a review of his book at FT.

The sub-title of the review is: ‘A YouTube intellectual’s advice on how to live emphasises order and tradition’. That is enough to put any objective reader off. The arrogance of some of these self-styled intellectuals is blinding them to the obvious reality that it is not helping but hurting the very causes that they claim to espouse – so-called liberal values. There is nothing very liberal or liberating about putting down another person. It is cheap and vulgar. It is intolerance. There are far better, more effective and more persuasive ways of critiquing a book’s content or the lack of it.

Cathy Newman of Channel 4 and Julian Baggini have done the greatest disservice to genuinely liberal values and principles.

Peggy Noonan has an answer for Julian Baggini:

When cultural arbiters try to silence a thinker, you have to assume he is saying something valuable.

So I bought and read the book. A small thing, but it improved my morale.

As many readers-commentators in FT have said, the article in ‘The Guardian’ on his book is far more insightful. I could also read what Professor Peterson had to say about the backlash his interviewer from UK’s Channel 4, Cathy Newman, faced.

The last line of that article tells me that he is a liberal:

If Cathy is interested, maybe we could model a conversation. That would be a good thing.

That is the way to foster a dialogue.

No information; no accountability

Andy Mukherjee’s piece in Bloomberg on how HDFC Bank has likely understated its impaired loans based on research done by Hemindra Hazari. That is a bit unfortunate and sad too. It has been easy for all of us to criticise governments partly because (and correctly too) governments are elected and they are deemed accountable. Therefore, we feel that we have a moral right to question the government. With private sector, it is a different ball game. We are afraid of reprisals and it might have to get more specific. Criticism directed at the government is general and there is no specific ‘naming and shaming’.

But, if private sector chose not to live by the rules of transparency and truthfulness that one expects of government, then government over-reach, controls and more scrutiny will be inevitable. Countries will have the worst of both worlds. People are poorer for it.

I checked out a blog post by Hemindra Hazari on independent research on large cap companies. He mentions how he has been denied access by ICICI Bank and Axis Bank and how another analyst was put through the police wringer for his piece on Indiabulls. There is so much outrage in public space world over about rising intolerance and authoritarian populism. But, what does one make of such behaviour in the private sector? is indeed an interesting platform.

Corporate shenanigans

We had learnt of the gaming of emission tests by Volkswagen. In fact, the charge was made against other German car makers too. In August, all of them agreed to update their software. Of course, we know enough about financial institutions. They gamed everything – interest rates (LIBOR), exchange rates, option prices and precious metals. The saga is endless. See the more recent story about Wells Fargo (a great read) and also note that Australia is appointing a Royal Commission to inquire into the conduct of its banks.

Some think that central bankers – deliberately or not – are gaming the stock market. But, they are public institutions. Let us stick to the private sector.

We learnt of Kobe Steel and now there is another Japanese firm in this inglorious list.

It is quite disappointing that Japanese and German firms are part of the unfolding story line on corporate immorality. Firms in both nations have done a lot of work to acquire reputation for quality. It is sad to see them undo the hard work.

Without moral foundations, a market economy is meaningless.

No more crisis in our life times

Well, that is not what I believe. But, that is what Ms. Janet Yellen, chairperson of the Federal Reserve believes. When I read it in a blog post by Gavyn Davies, I could not believe my eyes. Why would anyone say that? It is bad risk management. If it did not happen, no one would remember the prediction. If it happened, her predictions would be played over and over again. Ask Chuck Prince. Perhaps, he has stopped dancing now.

According to a Reuters story, this is what she said:

Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be. [Link]

I was glad to find John Mauldin come out with a strong reaction to her remarks:

I disagree with almost every word in those two sentences, but my belief is less important than Chair Yellen’s. If she really believes this, then she is oblivious to major instabilities that still riddle the financial system. That’s not good. [Link]

His entire post, ‘Prepare for turbulence’ is worth reading.

With amazing consistency, the International Monetary Fund wrote in its Article IV assessment of the Eurozone that the European Central Bank should maintain its current easy money policy and that it should not hasten into a tightening. In the same breath, it added that debt-heavy countries in Europe have not utilised the space afforded by the easy money policy to undertake fiscal consolidation and improvement. See this:

Most high-debt countries have so far not saved the windfall interest reductions from monetary accommodation (text figure). It is important to make decisive progress on fiscal adjustment before monetary accommodation is reduced. Otherwise, countries could face dangerous debt dynamics as interest rates rise—running the risk that self-fulfilling expectations could emerge if markets begin to doubt fiscal sustainability. [page 21-22 – link]

Why would they? When we make bad habits less costly for people, they do not stop them. They persist with them. That is what governments are doing. Central banks are not making it easy for governments to shed debt addiction. They are making it easy to stay addicted. Low interest rates remove pressure to reform. No pain; no gain. No pain; no reform.

I enjoyed writing my MINT column for August 1. I said it was time for the queen to ask intellectuals as to why they were failing to stop another crisis coming. By the time she asks the question again, assuming she does, it might well be too late.

Millennials and the hard Left

I came across this interesting article in my mailbox (ht: Vaidy).  It talks about how voters in the age group of 18-24 favour hard Left candidates. That is not quite ‘Millennials’. But, the short-hand works for expository convenience.

It was the case with Bernie Sanders in the American Presidential elections, with Jean-Luc Mélenchon in the French Presidential polls last month and with James Corbyn, now in the UK elections due on June 8. They have made the race a lot tighter than it appeared in April.

There was one sentence that I could not quite understand:

As the world is going against a concrete wall of debt, the youngsters may think accelerating one more time could work.

Was the writer being ‘tongue-in-cheek’? Perhaps. That remains a big risk with hard Left policies.

The young just do not want the Left but the hard Left. That is a bit  worrying because Theresa May’s Conservative Party is not Margaret Thatcher’s Conservative Party. Her speech at the Party Annual Conference in 2016 was a watershed moment. I wrote a column in MINT on it in October last year.

Coincidentally, only last morning, I had finished reading Kenneth Arrow’s ‘A cautious case for Socialism’, a speech delivered at Columbia University in 1978. Yes, Kenneth Arrow!

While he was not sure if democracy and socialism could co-exist, he said the following about democracy and capitalism:

In a capitalist society, economic power is very unequally distributed, and hence democratic government is inevitably something of a sham. In a sense, the maintained ideal of democracy makes matters worse, for it adds the tensions of hypocrisy to the inequality of power.”

Even more breathtakingly, he said that it was near impossible to have prices for all State-Contingent situations in future because the market for uncertainty was not developed. In other words, he was prepared to throw a big pail of water on his groundbreaking work with Debreu on the allocative efficiency of a competitive market equilibrium.

In practice, it simply did not exist. In that sense, perhaps, we had misinterpreted their work, all along!

I recall my professor in the Grad School at UMASS Amherst back in the 1990s telling us that Modigliani and Miller, they did not set out to prove that capital structure was irrelevant. By showing that it was irrelevant only under extreme assumptions that did not prevail in reality, they actually proved that capital structure mattered. It had stuck with me ever since.

In a way, Arrow and Debrew were doing the same thing. Only by knowing all future States, the state contingent claims and if a market existed that priced all State contingent claims, could the allocative efficiency achieved by a competitive market economy be superior – without scarcity or surplus – to that of a planned economy.

Since those conditions are never met, the case for the superior allocative efficiency of a competitive market economy was never established! Professor Arrow was actually admitting to that in that speech!

The central argument, which implies the efficiency of a competitive economic system, presupposes that all relevant goods are available at prices that are the same for all participants and that supplies and demands of all goods balance. Now virtually all economic decisions have implications for supplies and demands on future markets. The concept of capital, the very root of the term “capitalism,” refers to the setting-aside of resources for use in future production and sale. Hence, goods to be produced in the future are effectively economic commodities today. For efficient resource allocation, the prices of future goods should be known today. But they are not. Markets for current goods exist and enable a certain coherence between supply and demand there. But very few such markets exist for delivery of goods in the future. Hence, plans made by different agents may be based on inconsistent assumptions about the future. Investment plans may be excessive or inadequate to meet future demands or to employ the future labor force.

The nonexistence of future markets is no doubt linked to uncertainty about the future. But this points to an even more severe shortcoming of the actual capitalist system compared with an ideally efficient economic system. The uncertainties themselves are relevant commodities and should be priced in such an economy. Only a handful of insurance policies and, to a limited extent, the stock market serve to meet the need for an efficient allocation of risk-bearing.

In the ideal theory of the competitive economy, market-clearing prices serve as the communication links that bring into coherence the widely dispersed knowledge about the needs and production possibilities of the members of the economy. In the absence of suitable markets, other coordinating and communicating mechanisms are needed for efficiency. These come close to defining the socialist economy, although admittedly wide variations in the meaning of that expression are possible.

Of course, I would admit to a few caveats. He was speaking in 1978, at the height of the period of economic turbulence in the West – wars, oil shortage, stagflation, etc. The weaknesses of the Soviet economy had not been exposed yet (sub-caveat: to a large extent, the Soviet economy was undone by a combination of arms race with America in the Eighties combined with the collapse of the price of oil in the same decade).

Further, many state-contingent financial products were developed in the Eighties and Nineties. But, of course, they did zilch to the allocative efficiency of the economies nor did it prove that financial markets knew how to price uncertainty. To date, the answer is an emphatic NO. Financial markets know next to nothing about how to price risk, let alone uncertainty.

So, who is to say that the hard-Left policy agenda – Sanders, Corbyn, Mélenchon – would be worse, in economic terms? I feel certain about lesser and lesser things these days.

Where the Hard Left worries me is with their their conflation of secularism and appeasement of hardcore Islamists. They are very likely wrong on that one and that would be disastrous for the rest of the society and the country. What has been happening in Britain in the last few months is, perhaps, a culmination or lagged effects of misguided policies of the last several years or even decades. But, that is a separate topic.

[Postscript: I just read two tributes to Kenneth Arrow who passed away few months ago. I liked this one a lot better than this one. But, both do not mention the speech I mention here. Pity. He was teaching a class even at 94. Incredible.]