De-globalisation and cultural marxism

Rana Foroohar has a well-written piece in FT on how elites are failing to see deglobalisation coming. It marshalls facts to show that ‘elites’ may be misreading or not reading the situation at all correctly.

Personally, the useful thing about the piece is that it cites research on elites’ strengths and weakness in cognition. The biggest weakness is overconfidence and that negates all other strengths in my view.

Since, we all come under the category of ‘elites’ as per the definition – it is not just material wealth or positions of power that determine ‘elite’ status – we must beware of the weakness in ourselves.

The paper cited by her can be accessed here.

This is a good time (make it, ‘great time’) to be a student for the world is in a churn/inflection point. One order is gone or is going and the other order is trying to establish (or, re-establish) itself. I am not even saying if it is good or bad. It is inevitable.

The pendulum will keep swinging from one fashion to the other. That is what Rana Foroohar’s article is hinting it – it is back to nationalism-socialism now. I think there are some common elements between Nationalism on the Right and Cultural Marxism that Anthony Mueller writes about here. Both don’t like markets, competition and both are elitist in their own ways.

Some of his observations, well-known, bear repetition:

Communist authors spread the insight that the socialist dictatorship must come in disguise. Before socialism can succeed, the existing culture must change. Control of the culture must precede political control.

His observation that cultural Marxism is dictatorship of the intellectuals is quite apt and spot on.

Unfortunately, for India, all of these have adverse implications both culturally and economically. In the Indian context, we need less of socialism for the economy (from our starting point) because, in practice, it has always meant state control over assets and incomes and their utilisation or distribution. The state’s record in that is not pretty. It has neither brought about equity nor prosperity.

With respect to cultural Marxism, it has the potential to wreak moral destruction of the individual through its attack on the dominant culture and religion in the country. Thus, India faces twin risks, in this regard. The following paragraph appears pertinent in the Indian context:

The way toward the rule of the cultural Marxists is the moral corruption of the people. To accomplish this, the mass media and public education must not enlighten but confuse and mislead. The media and the educational establishment work to put one part of the society against the other part. While group identities get more specific, the catalog of victimization and history of oppression becomes more detailed. To turn into a recognized victim of suppression is the way to gain social status and to obtain the right to special assistance, of respect and social inclusion.

Anthony Mueller identifies at least two weaknesses in cultural Marxism: one is that it is utopian in nature and because of its inherent nature of promoting group conflicts, it cannot grab political power. Presumably because it divides and does not assimilate or integrate to form a coherent and powerful electoral or voting bloc. He does not discuss ways and means to exploit those weaknesses to nullify the effectiveness or mute the appeal of cultural Marxism.

Worrying and dangerous times for the world and for India.

Soulless capitalism is now global

In the last three years, CEOs’ combined compensation has expanded at a compound annual growth rate (CAGR) of 18.3 per cent, against 13.3 per cent growth in corporate earnings, 4.8 per cent CAGR in net sales and 10.1 per cent annual rise in the total salary and wages bill. [Link]

There are at least seven top executives among listed companies who earn more than a thousand times the compensation of their median employees….The gap at the very top of this ranking was actually higher in this larger sample, with the top executive earning over 25685 times the pay of the median employee.

The top companies in terms of this difference for 2017-18 include information technology, auto and engineering companies.

There are also no women in the top ten list of remuneration multiples for either year. [Link]

The above two are from Indian corporate sector!

Nearly 50% of the US Foreign Direct Investment Income for the United States come from five tax havens. In other words, profits-shifting by US corporations overseas is rampant. [Link]

Gabriel Zucman, Professor at University of California, Berkeley, author of the paper above, has this to say:

If globalization means ever-lower taxes for the rich and for multinational companies, and ever-higher taxes for those who presently don’t benefit from globalization—for retirees, for small businesses—then it’s a scam. It doesn’t work. [Link]

Check out this discussion of a paper by Thomas Piketty published in April 2018. The link to the paper is here.

Piketty says that both the Left and the Right mainstream parties have been captured by elites – intellectual or moneyed or both. He takes three countries – US, UK and France. So, the only option left for the people is to go with the populists because there is no consideration for their concerns in the mainstream parties of the Left and the Right. It is not about the Left vs. Right but Globalists vs. Nativists. Makes sense.

Instead, both the left- and right-wing parties have come to represent two distinct elites whose interests diverge from the rest of the electorate: the intellectual elite (“Brahmin Left”) and the business elite (“Merchant Right”). Piketty calls this a “multiple-elite party system”: the highly educated elite votes one way, and the high-income, high-wealth elite votes another.

There is a very good summary of the critique of the Piketty paper and other related papers by Thomas Edsall here. But, I personally believe that Piketty is on the ball here, notwithstanding the neglected role of race in Piketty’s analysis, as his critics charge.

I don’t think it is a white vs. black thing in America or white vs. non-white (black or brown). It is about ‘globalists’ and ‘nativists’ as Piketty put it. Globalists are comfortable with racial and religious minorities and immigrants as they see these minorities as similar to them although they are not in economic terms. Far from it. It assuages their guilt at being self-centred globalists, unrooted locally and unconcerned about local issues where they reside.

Thomas Edsall’s NYT article had a link to this very interesting sounding paper, ‘Why Hasn’t Democracy Slowed Rising Inequality?’. The paper is co-authored by four  academics and can be found here. Have not read it yet.

On a related note, the interview with Dani Rodrik, also by, a month before the discussion of the paper by Piketty took place is also interesting. In this interview, Dani Rodrik distinguishes between economic populism (‘good’ populism) and political populism (‘bad’ populism).

He defines economic populism, in the context of the United States as follows:

Today in the US, economic populism would take the form of bringing the financial sector down to size, reducing the influence of Wall Street in political institutions, and having much greater regulation of the financial sector. It would mean taking aim at concentrations of power in high-tech and digital industries. It would mean taking aim at our current pattern of trade agreements, which often privilege particular corporate interests and investors. [Link]

Gulzar Natarajan deal with some of the elements of ‘economic populism’, as outlined by Dani Rodrik above, in our forthcoming book, ‘The Rise of Finance – Causes, Consequences and Cures’.

As for market concentration, high-tech and digital power, lest we forget, here is the story of Barry Lynn of (formerly) the New America think-tank who was fired (in 2017) because they had dared mention Google by name:

In the run up to that event, the leadership at New America became very concerned about the fact that some of our work was focused on Google, and they asked us to maybe add different people to the panels, to frame panel discussions in different ways, to give them a heads up, to let other organizations have a say in what we’re doing. That had never happened before and it was very clear that it had to do with Google. Because we’ve done events in which we’ve really hammered Wal-Mart or Anheuser-Busch or Amazon, and there were no problems. But that event, it was the fact that we were mentioning Google by name that got people really upset. [Link]

UNCTAD’s annual report for 2017 presents the evidence for and the consequences of market concentration:

Concentration has increased markedly in terms of revenues, assets (both physical and non-physical), and market capitalization: in 2015, the combined market cap of the world’s top 100 firms was 7,000 times that of the bottom 2,000 firms, whereas in 1995 the same multiple was 31. At the same time, the share of surplus profits grew significantly for all firms in the database, from 4 percent of total profits in 1995–2000 to 23 percent in 2009–2015. For the top 100 firms, the share of surplus profits grew from 16 percent of total profits in 1995–2000 to 40 percent in 2009–2015.

The trend toward concentration, the authors note, has not extended to employment. Between 1995 and 2015, as the market cap of the world’s top 100 firms quadrupled, their share of the job market didn’t even double… [Link]

There is a counter-argument that much of the surplus that accrues to market concentration is not rent but due to technology leadership and productivity. But, it is strange that such critics do not acknowledge that both arguments need not be mutually exclusive.

A former Google Scientist tells Senate to act over Google’s unethical and unaccountable China censorship plan. Bravo!

Finally, this review of Walter Scheidel’s book, ‘The Great Leveler’ is worth a read. I had not heard of the book until my good friend Ajit Ranade mentioned it to me. Walter Schidel, I understand, thinks that violent levelers have been more often the answer to inequality – Four Horsemen’ – warfare; revolution; state collapse; and pandemics – have been the primary mode through which income levelling has occurred throughout history.

Despite overwhelming evidence, this LSE blog expresses the hope that peaceful levelers will achieve the job as they have done sporadically and feebly in a couple of minor instances.

But, let me end this blog post on that hopeful note.

“Dictatorships do not grow out of strong and successful governments, but out of weak and helpless ones” and other links

On September 15, 2008, Lehman Brothers filed for bankruptcy. That marked neither the beginning nor the end of the financial and economic crisis of 2008. Yet, there has been such a deluge of coverage in the last one week of the crisis. That is part of the crisis. Excessive event-oriented attention that does little to improve the process.

Central bank hubris and complacency and the ‘Rise of Finance’ (the title of an upcoming book authored by Yours Truly and Gulzar Natarajan) played a part in the 2008 crisis. They are still around and alive. The world is unprepared because of the protagonists of the crisis of 2008 are unrepentant. That is the burden of my column in MINT on Tuesday.

Ben Bernanke summarises his own research published by the Brookings Institution (he is a Senior Fellow there) in this post. He is partly right. I have alluded to that in my column above. Why did the financial panic become global? The role and the rise of Finance have a lot to do with it. He does not go there. That is where my column went.

It is obligatory to refer to the piece that Paulson-Bernanke-Geithner wrote because it contains nothing of meaning except this passing ‘mea culpa’ reference:

Although we and other financial regulators did not foresee the crisis, we moved aggressively to stop it. [Link]

It is instructive to see the links that come up below the article. They sum up the failure of their post-crisis efforts too:

NYT Headers.png

Staying with Ben Bernanke and his former colleagues, we note the speech by Peter Fisher (not to be confused with Richard Fisher, former President, FRB Dallas) at James Grant’s Symposium last year. Peter Fisher has served in the U.S. Treasury and in the Federal Reserve. See his profile here.

A key extract from his speech delivered in March 2017:

Curiously, the Fed has acknowledged no failures. All the experiments have been successful, every one: no failures, no negative side effects, no perverse consequences, only diminishing returns.

The third claim, inviting us to imagine how much worse things would have been had the central banks not done exactly what they did, suggests exactly the opposite of the scientific method and a striking lack of imagination. It implies that the only other possible courses of history would have been worse. It leaves no room for perverse consequences or negative side effects. It claims the counterfactual all to itself, leaving no room for doubt….

… So, as I see it, forward guidance is the process through which the Fed – through its more explicit influence on the expected rate of interest – becomes the much more explicit owner of the “conventional valuation” of asset prices.

One person who referred to this speech is John Authers of FT. His remarks:

Ten years ago many of us, myself included, thought a rerun of the Great Depression was very likely, and some of the actions taken in desperation during the crisis hold up slightly better than might have been expected. But long waves of monetary ease, fiscal austerity, and legal leniency for the guilty did not need to follow from this, and have left the bulk of the populace angry and embittered. [Link]

What John Authers has done in the piece linked above is something similar to what I am attempting here. He has linked to several pieces of writing on the crisis. The good thing for you, dear reader, is that his coverage and mine have only few common elements. So, if you read this blog post and his column, you will have covered a pretty good range of the writings that marked the 10th anniversary of the global financial crisis.

But, pieces such as these were not very common. We have another one by Peter Doyle, former IMF staffer in FT Alphaville. A key extract from his post:

But these ex-firefighters cannot bring themselves to say — though let’s hope it hasn’t entirely escaped their attention — that: public debt has more than doubled, curbing critical fiscal capacity (even if only due to political constraints) to respond in future; that policy interest rates are barely off their floors and QE is barely off its ceiling, so they are not much in reserve for the future either; that banking concentration has increased since pre-crisis; that no-one has any idea if international bank resolution frameworks will actually work in the heat of battle; and that the whole policy response to the crisis has emphatically underscored to big institutions that they will collectively be bailed out — spurring herd, concentration, and moral hazard behavior further. Focussing only on policy actions taken (raising the flood barriers) and ignoring the increased moral hazard and other impairments arising from the crisis response itself (the higher tide), everyone wants to agree that things are “safer” now; but absolutely no-one wants to be asked if things are safe.

However, I believe that Peter Doyle lets bankers off too lightly. He does not ask the question that John Authers asks. He is dismissive of the fact that no real big cat banker went to jail.  Peter Doyle is happy with political accountability.

Also, I am not quite sure that China bailed out the world economy and that they did it out of their generosity or enlightened public interest. Of course, policymakers who were part of the G-20 deliberations at that time tell me that those who had the capacity to stimulate were asked to stimulate their economies (those with external surpluses). China had one of the largest external surplus.

But, central bankers have their defenders too. A prime example is Neil Irwin of NYT. The header of the article gives the story away:

The Policymakers Saved the Financial System. And America Never Forgave Them [Link]

It comes across as a pathetic attempt to paint policymakers as victims of irrational, ungrateful lynch mobs.

I think Peter Fisher demolishes the argument that they saved the world. Assuming that American policymakers did indeed save the world, the question that comes to mind is this:

If a firefighter puts out the fire dousing the house with water, one will be thankful. But, what if he continues to douse the house with water, long after the fire is put out?

Joseph Sternberg in Wall Street Journal asks the right questions:

After decades of financial transformation, globalization and policy experimentation, central banks know less than they used to about the effects they have on Main Street. It’s likely to be some time before we figure out what central banks actually did to the economy after the Lehman crisis, let alone whether it worked. [Link]

He says that central banks lost control of the transmission to the real economy after the 1970s. Quite true. They never admitted to it. The change happened with the Rise of Finance as banks created money (credit) plentifully since then.

Matt Stoller of the Open Markets Institute contrasts the Roosevelt bailouts with that of Geithner-Obama bailouts. He says that the Paulson-Geithner-Bernanke bailout eroded the social contract that lies behind the capitalist America – home-ownership. He has a pithy quote from Roosevelt:

In 1938, Franklin Delano Roosevelt offered his view on what causes democracies to fail. “History proves that dictatorships do not grow out of strong and successful governments,” he said, “but out of weak and helpless ones.” Did the bailouts of ten years ago work? It’s a good question. I don’t see a strong and vibrant democracy in America right now. Do you? [Link]

I have to agree with Franklin Roosevelt there. Obama administration is responsible, in more ways than one, for the economic and social polarisation of the American society.

Anand Giridhardas takes a different but related line about the elites (ht: Rohit Rajendran). The burden of his song is that philanthropy is a very poor (even morally wrong) substitute for self-aggrandisement of the elites in their normal lines of business or commerce. Quite true. Their true philanthropy will come through or should come through in the manner in which they run their businesses and treat their employees. You can read his interview and his article here and here.

But, the interesting thing – no fault of Giridhardas – is that he has very few cogent answers’ to elite aggrandisement. His ideas – assuming student loans and doing some affordable housing – sound too naive. I do not blame him. That is the nature of the world. Even democracy is only a symbolic fig leaf for the dominance of the elites. It gives the ordinary folks a belief (false) that they have a stake in the process and they shape it. It is far from the truth. They benefit when the tide is so big that it lifts all boats. But, they fail to notice that some of the boats are lifted higher and those are bigger and more powerful boats too. The second time their needs get some attention is when a crisis like the ‘Great Depression’ strikes.

In a way, by preventing the ‘Great Depression II’, the crisis managers – Paulson, Bernanke and Geithner – prevented meaningful benefits and better lives for the ordinary masses which Teddy Roosevelt managed to deliver using the Great Depression as the trigger.

Barry Ritholtz, a bear (Pre-2008) turned bull (post-2008) has a short and pithy column on ten things that people still get wrong about the crisis. One tends to agree with most of what he had written. Talking of Barry Ritholtz, one should read this column by Joshua Brown (ht: Rajeev Mantri) who had commented on how he met Barry and benefited. The column is about how intellectually open-minded Bary was (and, if I may add, lucky) after the crisis and turned bullish. That merits a separate blog post. I shall do it after this one.

Aaron Brown of AQR Investments wrote (ht Rajeev Mantri) in Bloomberg that crisis autopsies asked the wrong questions. He wonders why banks accumulated illiquid assets, cut loan-loss reserves and raised dividend payments after 2006 when the problems were beginning to manifest already. That could be due to poor risk management, complacency and indefinite extrapolation of near-term optimistic trends.

In India, Ila Patnaik could not resist taking potshots at RBI for claiming to have handled the crisis fallout far better than other countries did. But, that is true. Not only did RBI do well in the immediate aftermath but some of its pre-crisis measures are only now becoming de rigueur in the Western world.

This sentence is too clever by half:

It (India) was at the other end of the spectrum, where instead of worrying about sophisticated derivatives products being traded, most derivative products have restrictions, or are banned, and the bulk of the population has no access to bank loans. [Link]

It is too clever because ‘non-access to bank loans’ is a serious problem but not trading derivatives is not. It is gambling by another name. Putting both in the same sentence or mentioning them in the same breath is to draw an utterly false equivalence between the two.

If India had absorbed the lesson from the crisis that financial sector liberalisation had to be pursued even more deliberately than before, it was then a lesson well learnt, unlike what Ms. Patnaik thinks.

Niranjan Rajadhyaksha (now with IDFC Institute) wonders if there is so much a need for a new economics as there is one for a dialogue between different schools of economics, in the wake of the 2008 crisis:

Too many critics have lazily equated modern economics with a certain style of macroeconomic thinking that was dominant in the financial markets as well as in central banks, especially the ability to forecast future outcomes. It is a bit like criticizing all of modern medicine because oncologists are not yet capable of predicting when cancer will strike. [Link]

He praises Olivier Blanchard for intellectual honesty. But, Blanchard has not deviated from the Washington – New York consensus as much as he made us believe that he has done so. Niranjan’s praise is not fully earned, yet.

Ira Dugal has a good conversation with Dr. Subbarao, who stepped into RBI and stepped into the crisis, into G-20, etc. His entire tenure was marked by a series of global and local crises. Her interview with Dr. Y.V. Reddy is here.

My favourite academic-politician Yanis Varoufakis was part of a panel of experts whose views ‘The Guardian’ newspaper sought. I had not read all their views. But, here are his proposals to make the world better:

What should be done? First, we need a global green investment programme to put the global glut of idle savings to useful purpose. A multilateral partnership of public investment banks could issue bonds in a coordinated fashion, which their respective central banks would support in the secondary markets. In this manner, global savings would be energised into major investments in jobs, the regions, health and education projects, and the green technologies that humanity needs.

Second, trade agreements must commit governments of poorer countries to minimum living wages for their workers. Third, we need a new Bretton Woods agreement to rebalance trade, re-couple trade and capital flows, put the financial genie back in the bottle, and create an international wealth fund to alleviate poverty and support marginalised communities across the world. [Link]

His ideas make sense to me. But, that also means that they won’t be taken up seriously. Comments by rest of the panel also, at the headline level, make sense. But, one has to dig deeper. I have not done that.

The panel by FT – a novel one – was not a panel. It simply asked seven people as to how their lives changed post-crisis. Each one was interesting and human in its one way. Comments by Nick Bayley, who was the Head of Regulation at the London Stock Exchange are appropriate in this context.

This episode alone would make for an interesting case-study:

I was on the Sunday night conference call on September 14 2008 when Paul Tucker from the Bank of England told representatives of all the big City firms and infrastructure that the Barclays acquisition of Lehman had failed, and Lehman was going to go down the pan the following morning.

It was just a monumental time. Lehman was a global titan. The idea that it would collapse was unthinkable. We knew there were issues in the market; prices were all over the shop. But we went into that weekend assuming that someone would step in and a deal would be done.

There must have been 30-odd institutions on that Sunday night call. When Paul told us that Lehman would go down the next day, nobody said anything. He said he wanted to go around the call and hear that we were ready and this wouldn’t cause a problem. He said he’d start with the London Stock Exchange, so I was the first person to speak.

When in doubt, keep it short. I made a few noises about Lehman’s important role in the equity markets and that we have default rules that come into play, and then I shut up. We went around the call and everybody said the same thing. Nobody told Paul Tucker, ”This is going to cause huge problems, and there will be a major domino effect.” [Link]

No one says what every one knows to be true because no one wants to be the bearer of bad tidings! Nor does Paul Tucker probe them (based on this recollection here, of course).

Andy Kessler (I have read one of his books but forgotten which one it is!) has a good piece on the politics of the collapse of Lehman Brothers. His concluding words:

There is more concentration in banks today than pre-Lehman. They’re better capitalized with better reserves, but it’s still fractional reserve banking. And the shadow banking business that got drenched in derivatives may be larger today than it was before the crisis. Leveraged loans are rampant. That doesn’t point to stability.

In downturns, equity hurts but debt kills. Like an electrode-implanted rat that can’t stop pushing a pleasure lever, banks will lend until they implode. A decade ago, the Fed failed as the lender of last resort. It’s still failing at preventing the next crisis. [Link]

This is the best quote (by Nick Bayley) to end this blog post:

We live in a bubble in financial services. Anyone who tells you otherwise is probably kidding you. We get paid more than most industries do. Do we deserve it? Not in my view. Are people much cleverer in financial services than in other industries? No, not in my view.

Kissinger on Artificial Intelligence

I am no fan of Henry Kissinger. One cannot be, after reading ‘The Blood Telegram’. But, his comments on Artificial Intelligence were very thoughtful. They were written in ‘The Atlantic’ three months ago. I do not know why I never got around to posting the extracts from that article here, although I had saved the extracts for posting as soon I had finished reading that piece. Today, when I read the well-written review of Yuval Harari’s latest book by Manu Joseph in MINT, I resolved to post it here today:

Inundated via social media with the opinions of multitudes, users are diverted from introspection; in truth many technophiles use the internet to avoid the solitude they dread. All of these pressures weaken the fortitude required to develop and sustain convictions that can be implemented only by traveling a lonely road, which is the essence of creativity. ….

………….  Before AI began to play Go, the game had varied, layered purposes: A player sought not only to win, but also to learn new strategies potentially applicable to other of life’s dimensions. For its part, by contrast, AI knows only one purpose: to win. It “learns” not conceptually but mathematically, by marginal adjustments to its algorithms. So in learning to win Go by playing it differently than humans do, AI has changed both the game’s nature and its impact. Does this single-minded insistence on prevailing characterize all AI?…

…….  Through all human history, civilizations have created ways to explain the world around them—in the Middle Ages, religion; in the Enlightenment, reason; in the 19th century, history; in the 20th century, ideology. The most difficult yet important question about the world into which we are headed is this: What will become of human consciousness if its own explanatory power is surpassed by AI, and societies are no longer able to interpret the world they inhabit in terms that are meaningful to them?

…………  Ultimately, the term artificial intelligence may be a misnomer. To be sure, these machines can solve complex, seemingly abstract problems that had previously yielded only to human cognition. But what they do uniquely is not thinking as heretofore conceived and experienced. Rather, it is unprecedented memorization and computation. Because of its inherent superiority in these fields, AI is likely to win any game assigned to it. But for our purposes as humans, the games are not only about winning; they are about thinking. By treating a mathematical process as if it were a thought process, and either trying to mimic that process ourselves or merely accepting the results, we are in danger of losing the capacity that has been the essence of human cognition….

….. the scientific world is impelled to explore the technical possibilities of its achievements, and the technological world is preoccupied with commercial vistas of fabulous scale. The incentive of both these worlds is to push the limits of discoveries rather than to comprehend them. [Link]

So, what did Manu Joseph write about Artificial Intelligence that triggered this post?

To draw our attention to the impending darkness, Harari mentions a chess contest that was held in December last year. One of the contenders was known to chess players around the world. Stockfish, believed to be the world’s most powerful chess engine, is a computer program that has been designed to analyse chess moves. No human has a chance to beat it. Stockfish played AlphaZero, Google’s machine-learning program. The two programs played a hundred games.

AlphaZero won 28, drew 72 and lost none. The programmers of AlphaZero had not taught it chess; it learned on its own—in 4 hours.

Google’s claim of “4 hours” is actually a bit dramatic and opaque.

Also, AlphaZero has been training through such powerful devices that we should not try to comprehend “4 hours” in human terms. Harari, despite being a historian, is not concerned with the nuances of it all. He wants us to be scared. All things considered, it still is extraordinary that AlphaZero could teach itself chess and become the best chess player in the universe known to us. Harari uses such events to point to the future when machines will do almost all human tasks.

It is fitting (in many ways) to end this post with a link to the article by Nicolas Carr published in 2008 on whether Google was making us stupid. Now, we know the answer or do we?

Socialism defined by rage to replace Capitalism defined by greed?

I think it has become important to re-interpret Adam Smith or interpret him correctly. About eleven days ago, this blog had posted about an article in Aeon on the visibly famous Adam Smith for his ‘invisible hand’. It turns out that he was not a big fan of ‘Invisible hand’ and certainly, not in isolation or independent of social norms and values. The blog post had also referred to a review by John Kay of a book by the British Conservative MP Jesse Norman.

It turns out that a good summary of his book is provided by Jesse Norman himself in an article he had penned for FT in June this year (ht: Gulzar Natarajan).

He wants to dispel five myths or point out five facts about Adam Smith and his famous work, ‘The Wealth of Nations’ (a short hand, no doubt):

(1) ‘Wealth of Nations’ is important because Smith is the first person to put markets at the centre of economics.

(2) “Markets are living institutions embedded in specific cultures and mediated by social norms and trust.” (verbatim quote from Jesse Norman’s article)

(3) What matters to a market economy is not empty rhetoric but the reality of effective competition and its most important feature is that companies internalise their costs. Something that banks are terribly adept at passing on, for example. Privatisation of gains and socialisation of losses is the anti-thesis of free markets.

(4) “Markets constitute a socially constructed and evolving order that exists and must exist not by divine right but because it serves the public good”. Again, a verbatim quote. This is important because once imperfections – that exist – are allowed, many of the supposed benefits of free markets (for public good) disappear.

(5) “Both individual markets and the free market order itself rely on the state.”

These five key aspects or elements of a market order are very important for its very survival and existence. Slowly,  the ‘capitalism defined by greed’ is being replaced by ‘socialism defined by rage’. It will be hard to choose between the two as to which is the bigger evil. Very hard.

Bagehot has a timely warning on the leftward lurch in British politics:

The compensation of the average boss of a FTSE 100 company increased by 11% in 2017, to £3.9m, while the pay of the average worker failed to keep up with inflation. Banking in Britain is a game played by insiders who enjoy a large implicit subsidy from taxpayers, who have to bail them out if they get into trouble. The same banks have little connection with the real economy: only about 10% of their lending is to businesses outside commercial property. Global companies such as Amazon and Google get away with paying little tax by the ruthless use of tax havens and transfer pricing.

No political party or leader in the world is able to convince or persuade businesses to understand that capitalism without conscience is a crime. By the time they realise it, it may well be too late. The world is responding or reacting, accordingly.

Reuters has a story out on the popularity of the incarcerated Brazilian leader Lula da Silva. It is unlikely he will become President. But, his party candidate might win, under his blessing or on ‘imported popularity’. But, PT, unlike in 2002-08 will be clearly Left-oriented.

In South Africa, there is fear about takeover of land from white farmers. Most of the media report might be slanted and that the South African government might be pursuing reasonable policies. Or, may be not. But, it may well be impossible to divine the truth for quite some time. Headlines mention the Zimbabwe parallel, of course. See here for the issues at stake.

Summary: Land can be taken over without compensation but such takeover can be challenged too in courts.

In America, Bernie Sanders and Elizabeth Warren are the most popular Democratic party leaders. Alexandria Ocasio-Cortez, the young democratic socialist firebrand ousted established Rep. Joe Crowley in the New York House Democratic primary in June.

These are enough warning signs. Capitalists must admit to their follies and reform themselves.

Higher taxes for higher incomes and for capital gains are in order. Higher wages are in order too. The march of artificial intelligence that takes away jobs and psychological security must be slowed and reversed, if possible. Eroding self-worth lowers life expectancy and the living begin to live unhealthily too.

If capitalists fail to read the tea leaves correctly and ignore warning signs, it may be too late. They may be swept away and the world will have replaced one form of lawlessness with another.

Dilemma on Rodrik’s trilemma

More than eleven years ago, Professor Dani Rodrik had posted the ‘inescapable trilemma of the world economy’. You can see the chart in his post.

He wrote:

I have an “impossibility theorem” for the global economy that is like that. It says that democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full. [Link]

My question is this: Regardless of whether the government is a democracy or authoritarian, is it possible to have global eocnomic integration and national sovereignty which means national policy autonomy?

I think not. So, it is really a dilemma. One can have global economic integration or one can have national policy autonomy/sovereignty but not both.

By the way, Paul Tucker’s book ‘Unelected Power’ is also about a form of ‘Global Economic Integration’ inasumuch as policy is increasingly made by unelected elites in global forums that then become binding on nations. No debates; Democracy or not – does not matter. These norms apply to India; apply to Russia.

Paul Tucker, summarising his book, for wrote,

central banking has drifted into being, or always was, a vehicle serving the interests of a globalized metropolitan elite: policy by and for “Davos Man.” [Link]

In other words, if policy elites stayed away from Davos, Rodrik’ trilemma (or, dilemma) can be largely addressed or attenuated.

Read Paul Tucker’s interview with here. I doubt if many would read his (needlessly) dense book. In fact, I think Willem Buiter’s paper written in 2012 anticipates much of Paul Tucker’s arguments on democratic non-accountability in the domestic context. So, if you do not have time to read Tucker’s book, reading Buiter’s paper (speech) will do just fine.