Democracy or
Autocracy
We
discuss political economics. In this essay and
in
a subsequent one we will discuss the political
system that has made globalization possible.
In 1776, Adam Smith published “The Wealth of Nations.” It contained this notable quote:
“To found a
great (commercial) empire for the sole purpose of raising up a people of
customers may at first appear a project fit only for a nation of shopkeepers.”
Consider the
daily concerns of a shopkeeper. He has to please his customers, stock the
appropriate inventory (a use of funds), and turn a
profit when all is said and done. Such underly the flexible concerns of
capitalism that has grown to encompass almost the whole world, resulting in the
promise of corporate brands, sophisticated supply chains, and the facilitating
discipline of free markets.
But to persist,
a social system has to address three major human
concerns: Economic Efficiency, Moral Appropriateness and National Security.
What does pleasing one’s customer mean? In general, it
depends upon the proper alignment of the goals of the organization with the
personal goals of the people in them. However, the core motivations of the
capitalist system, a product of the Enlightenment, are generally positive and
ultimately pertain to the flourishing of the individual.
It is at
this moral crux that societies differ greatly. In the democratic British
system, the principle of, “everything in its place,” likely governs, in an
order that protects the freedoms of the individual. The American system is in
danger of backsliding into created chaos and finally into authoritarianism. The
Economist estimates that 31% of the world’s GDP is now produced by
authoritarian, non-democratic countries.
The
difference between modern democratic and authoritarian systems is the locus of
power. Democratic systems operate upon the principle of shared power, power
shared among different organizations and people: such as church and state,
producer and consumer, executive and legislative, civil society
and government, and so on. These societies maintain both modern and traditional
elements, people pursuing their own goals, unified by the legal rules of
society. Power in modern authoritarian, and of course totalitarian societies,
is highly centralized in the person of the leader who simply exercises it, or
who lays claim to a superior knowledge of some historical process. In such
societies, the control state, aided by technology, is predominant; and, as recent events in Ukraine have demonstrated, they can
tolerate a pathological leader with delusions of empire.
We have a
preference, of course, for a congruence between a society’s political and
economic systems. In developing countries, the two systems may become highly
incongruent, with the differences swept under the rug until they emerge or
explode over the issues of rights, corruption, or the dominance of the
political over the economic. Such societies, lacking independent corrective
mechanisms, become worse, because everything becomes political and therefore
not based on facts and reality.
But freedom
to do what? We think it is now to preserve the freedom to adapt in their own
ways. As a value investor, we believe in intrinsic value; but we will have to
contend with different forces than previous. The capitalist economy is efficient, because it mimics the nature of life itself. As a
stock market analyst confessed, “The stock market is like life, it cannot be
predicted.” The nature of life, as a biologist would say, is “punctuated
equilibrium,” that is things stay the same for a long time until they suddenly
change. The natural forces driving such change on earth, and which have driven
four of the five past extinctions, is increasing levels of atmospheric CO2.
The same is true of financial markets, they stay the same until something
drastically changes.
The prior
era of rapid globalization ended in 1914, with an assassin’s bullet in
Sarajevo. That precipitated the fall of empires and the rise of the
nation-state in 1945. The international system, set up by the Congress of
Vienna in 1815, as classical scholar Donald Kagan (1995) suggested, had become
increasingly rigid, failing to contend with changes, including the rise of
nationalism - a "force multiplier." Peace, he concluded, requires
continual active effort, planning, and the expenditure of resources. The
present fact that Putin has shut down communications with the U.S. military,
according to James Stavridis, former Commander of
NATO, is “concerning.” Putin is trying to maximize FUD;
fear, uncertainty, and doubt.
The current
issue of Foreign Affairs Magazine contains an article titled, “The
End of Globalization?” Bloomberg contains an article by Micklethwait
subtitled, “Unless
the U.S. and the allies mobilize to save it, the second great age of
globalization is coming to a catastrophic close.” CNN contains an
article headlined, “BlackRock
(the world’s largest asset manager) says Russia’s war in Ukraine is the end of
globalization.” Our way of putting this is that economic efficiency will
take a back seat to considerations of moral appropriateness for society,
lifting more groups than previous; and to national security, with shorter
supply chains closer to home. The driving forces for change will be higher
inflation, reflecting shortages of food and energy (higher petroleum prices
will also facilitate the shift to renewables), increased transportation costs,
and lower asset prices (already reflected in the bond market). This means a diminution,
but of course we hope not the severing, of the ties created by globalization.
In
democratic societies, people have to be first
convinced of the rightness of a political action. Consider these two quotes:
1) “…if the
people are to be sovereign – as democracy says they should be – (concerns with
wages and profits, taxes and debts, trade and capital)
are not optional. Their complexity is such that it is unjustifiable to abandon
them to a small caste of experts. The contrary is true. Precisely because they
are complex, only broad collective deliberation, based on reason and on the past history and experience of every citizen, can lead to
progress resolving these issues.” Thomas Piketty; economist; Capital and
Ideology (2020).
2)
“Interests are formed by interpretation as much as by brute fact, and so they
are shot through with ideals. Environmental imagination has always been a blend
of the two….This is where taking responsibility for
nature and taking responsibility for democracy come together. The democratic
responsibility is the responsibility of making a world...” Jedidiah Purdy, law
professor, After Nature (2015).
Interests
are formed by both fact and value. In “The Wealth of Nations,” Adam Smith noted
that the ultimate source of wealth is the skills of the people. Particularly in
the economy of future, in the knowledge economy that must happen, people
matter, not fossil fuels in the ground.
__
In a crucial
3/16/96 article, The Economist discussed the Enlightenment basis for the
market system described above. It concluded:
“It ought to
be obvious but evidently it needs saying: to the everyday lives of hundreds of
millions of people, western liberalism has brought standards of material and
emotional well-being unimagined in earlier times. The daily portion of all but
the rich was once ignorance, injustice, fear, pain and want. On every
dimension-health, education, physical security, economic opportunity-conditions
have been utterly transformed, and for the better. As catastrophic failures go
(for the critics), the Enlightenment has served mankind quite well.”
By opening up new markets and new suppliers, the liberal system also opened up
new opportunities for many around the world, but left frayed traditional social
ties such as family, community, and nation for others. In developed countries,
as has been seen, that can be expressed as group anger. In developing
countries, as in Russia or in some other countries, that can also be expressed
as elite anger. The result, as MIT Nobel Economics Prize Winners, Banerjee and Duflo note in their very practical book, “Good Economics
for Hard Times (2019)”, “…facts or fact-checking don’t seem to make much of a
dent on people’s views, at least in the short run….It remains possible that in
the longer run, when the initial “How dare you challenge my beliefs?” reaction
fades, people will adjust their views. We should not stop telling the truth,
but it is more useful to express it in a nonjudgmental way.”
The authors
further note, “…the fact that preferences (values) are not necessarily
internally consistent makes attaching ad hominem labels…‘racist’-
to other human beings suspect because…expressions of prejudice are often
expressions of pain or frustration. Those who voted for Obama and then Trump
may be confused about what each candidate stood for, but to dismiss them as
racists after they voted for Trump is both unfair and unhelpful.”
Politics in
the U.S. is highly polarized and therefore not based on common facts. We
discuss the common political facts presented by the Ukraine, common natural
facts presented by climate change and then suggest a common set of facts
applied to the United States. Appropriate adaptions to these common facts are
crucial; for the risks are now short-term to intermediate.
Ukraine
What began
as an opportunistic land-grab by an out-of-touch Putin has now become an Allied
effort to preserve the freedom and independence of the European nations from
brutal Russian influence and rule. Although not presenting a direct threat to
Putin’s rule in Russia, Administration and allied
efforts to help Ukraine should remain unified in order to permanently weaken
Russia, so this never happens again. To let Putin win in the Ukraine would be
to give him substantial commodity power; he would then control 21.6% of the
world’s traded wheat supplies and is now the world’s largest natural gas
exporter and its second-largest crude oil exporter.
Climate Change
click here (Branch of the Loire, Franck Dubray,
Ouest-France)
The effect
of climate change on the earth has become increasingly, but not perfectly,
understood.
A 4/6/22
Gallup poll found that, “Extreme Weather (from hurricanes, blizzards, and
forest fires) Has Affected One in Three Americans,” in the past two years.
Although the earth should otherwise by experiencing a cooling trend, in the
past two years, the United States has suffered through at least 20 incidents of
extreme weather in each of the two years, costing $1 billion or more. In
comparison, “Between 1980 and 1999, only one year (1998) recorded as many events.” The climate is getting much more extreme.
In its most
recent 2022 report, The Intergovernmental Panel on Climate Change now recommend
a “strong urgency” in climate action and an enhanced focus on risk. A warming
of 1.5ºC (currently around 1.2ºC) above the preindustrial level is considered
the upper limit where life for people will remain substantially unchanged. With
CO2 levels increasing at the current rate, that upper limit will
likely be reached between 2030 and 2052. (After that, conditions will become
unbearable at the 2.5ºC level. The earth will do fine, but will humans?)
“Global net anthropogenic (caused by humans) CO2 emissions (should) decline
by about 45% from 2010 levels by 2030, reaching net zero around 2050 – to
maintain a 1.5ºC temperature level.
But
furthermore, this modeling does not take into account
tipping points, the unknown points where different climate interactions cause
the earth’s climate to run away – between snow cover and heat absorbed, the
melting of glaciers causing more melting thus further raising sea levels, the
melting of permafrost in the Arctic releasing CO2 trapped in organic
matter, warming forests becoming carbon emitters, and the loss of biodiversity.
Engineers design bridges with safety factors. Doesn’t the earth deserve the
same regard? According to Johan Rockstrőm,
professor of environmental science at the University of Stockholm, the years of
this decade, 2020-2030, will be decisive for humanity’s future
Here is
what’s happening now
An 8/18/22 NYT
article wrote, “It has been a summer of heat and drought across Europe,
affecting nearly every part of the economy and even its normally cool regions,
a phenomenon aggravated by human-caused climate change. France has been scarred
by vast wildfires, and its Loire Valley is so dry the river can be crossed in
places on foot. The Rhine in Germany is inches deep in parts, paralyzing
essential commerce….Italy is drier than at any time
since 1800, and the growers of its iconic rice used for risotto now risk losing
their harvest.” (noting what this means for inflation
and interest rates)
Chandni
Singh, climate researcher, “In India, higher temperatures are coming earlier
and staying longer every year. The most
vulnerable are bearing the impacts of this prolonged heat now. Those who can
cool will cool; those who can’t, cope. (NY Times, 5/24/22)
Here is
what could happen
Kim
Robinson, sci-fi novelist, “'Go to the lake! Get in the water!’…He tasted the
hot lake water, tasted how foul it was, filled with organics and who knew
what.” (The Ministry for the Future, 2020)
NYT 6/8/22, “Salt Lake City – If the Great Salt Lake, which has
already shrunk by two-thirds, continues to dry up, here’s what’s in store: The
lake’s flies and brine shrimp would die off - scientists warn it could start as
soon as this summer – threatening the 10 million migratory birds that stop at
the lake annually to feed on the tiny creatures….Most alarming, the air
surrounding Salt Lake City would occasionally turn poisonous. The lake bed contains high levels of arsenic and as more of it
becomes exposed, wind storms carry that arsenic…” Regarding the environment,
Utah’s congressional delegation seems not to be concerned. *
For the
politics of climate change to be effective, people in democratic societies need
to organize; and that will bring pressure upon decision makers, provided these
occur in a timely manner. The trend in social innovation and change is to ask
those most directly affected – and then to elect the people who can pass the
necessary laws.
*According
to a NYT 6/13/22 article by economist Paul Krugman, “It doesn't take
fancy analysis to show that there is a persistent upward trend in temperatures,
but many people aren’t convinced by statistical analysis of any kind, fancy or
not, only by raw experience.” (Sounds like momentum investors.) It is this “raw
experience” that offers some hope to get action on the climate. The nature of
climate change is that it does not affect the planet, uniformly. Due to local
conditions, there will be those much more affected, for instance in Utah, than
others.
An analogy might be made to gun control.
Finally, Congress seems ready to act (somewhat) by the latest mass shooting
outrage in Uvalde, Texas. Those most affected by the toxic climate change in
Utah are also likely to put political pressure on their legislators to finally
do something. This is another reason for democracy. It is, ultimately,
responsive to the local conditions faced by those most affected.
The
Liberal Market System
click here (US Port, BBC, Reuters)
Foreign
policy is not an item of great interest for most people. Yet, whether a people
are called upon to defend themselves, whether they have products and
commodities available, whether they feel their cause or country is significant
in the world, all depend upon a well functioning
system of sovereign states rather than a condition of anarchy and chaos.
At the end
of WW II, the United States and its allies won a military victory, thus
achieving the power to establish a system of free sovereign states tied
together by international institutions such as the United Nations and the IMF.
At the center of this new system was the United States, running the
international system, as one writer described, like a benign ambling elephant,
carrying with it a flourishing ecosystem of birds and plants. Coalitions of
states against this system did not arise, because all benefited.
The primary
danger to this system now arises from within the nation-state, from groups who
feel that they have been disadvantaged by the workings of the liberal market
system, that by design, creates inequalities. This is acknowledged in trade
theory, the winners then theoretically compensating the losers. In fact, as
Banerjee (2019) points out, this barely happens, “(Economists) looked at the
extent to which the government stepped in to help the regions ill-affected by
trade with China. They found that while they received somewhat more money from
public programs, it was much too little to fully compensate for the lost
incomes. For example, comparing the residents of the most affected commuting
zones to those of the least affected, incomes per adult went down by $549 more
in the former, whereas government welfare payments went up by only
approximately $58 per adult.”
Further and
most important, as Gray (1998) noted, the theory of comparative advantage
becomes inequitable regional economics if there is mobility of capital. In her
new book, Foroohar (2022) notes, “The laissez-faire
case for free trade made more sense when entire supply chains couldn’t be
outsourced to myriad countries (in the interest of lower costs) and when
international capital was far less mobile. Ricardo thought that all the risks…(of travel and war in the early 19th century)
would prevent British financiers from simply outsourcing the entire industrial
supply chain to Portugal…. He also suspected that national patriotism would be
a limiting factor in the outsourcing of entire production systems.…Ricardo
himself realized that if capital were entirely mobile, his own theory (of
comparative advantage) wouldn’t hold up, and excess offshoring would lead to
job loss and economic decline. For a long time, the ‘laissez-faire’
approach held. But with the invention of the telegraph, the steamship, the
limited liability company, and global banking his theory began to break down. Between
1870 and 1900, the United States surged ahead of Britain in nearly every
sector.”
If you are a
liberal, the obvious answer to the last two problems is, “Why not change?” If
you are a conservative, then you might consider the words of English statesman
Edmund Burke (1790). In “Reflections on the Revolution in France,” he wrote, “A
state without the means of some change is without the means of its
conservation.” Its time to start talking about common
facts, and about a way to productively sort out disagreements,
How to sort
out disagreements? Professor Vaclav Smil, Professor at the University of
Manitoba, notes, “…the real world works on the basis of natural law and
thermodynamics and energy conversions….We need less
politics to solve our problems. We need to look at the realities of life and to
see how we can practically affect them.” But, in democracies, politics is
necessary to make things happen; because people have
different time horizons and interests. (So do investors.)
__
You can tell
the character of a society by how it treats its enemies.
The
following is an image of (a somewhat) authoritarian Egyptian society, from
around 1300 B.C. It shows a pharoh trampling his
enemy.
The
following reproduces a Hellenistic Thracian (now Northern Greece and Southern
Bulgaria) panel, from around 335 B.C. Note how the Greek sculptor depicts the
Persian, fighting manus ad manum, with the
Greek. The sculptor recognizes the humanity of both, and furthermore shows an
audience with the Persian king on the shield.
At the end of W.W. II, German Army units had a
choice of surrendering to the Americans or the Russians. Guess which side they
chose.
Now about
the American elections of 2022… In the 11/22 elections, the voters turned an expected
Republican red wave into a ripple. The American voters clearly signaled that
they don’t like political extremism, the politics of discord and division. What
they want is collaborative government, where both parties bring their own
perspectives to solve common problems. The U.S. government is supposed to work
by maintaining a balance of powers, ensuring a balanced viewpoint, dating back
to Madison and The Federalist 51.
President
Obama once wished (the loyal opposition) luck, but not too much.