Sunday, May 27, 2012

Torrents of Denial

The news on the financial front continues to worsen, as Europe careens toward a break-up of the Eurozone, and China faces a contraction of its hitherto torrid growth rate.  The United States remains mired in paralysis as the deadline to address the “fiscal cliff” of the expiration of the Bush tax cuts and implementation of the budget cuts agreed to during the last debt ceiling debate looms.  Here in California Governor Jerry Brown and the Democratic legislative leadership remain dogmatically committed to the Greek model of tax increases and budget cuts.

The common thread of all of these situations is the resolute and blind adherence to outdated political economic systems that are no longer able to stimulate the dramatic expansion of wealth that is otherwise possible.  What Professor Walter Russell Mead dubs “the blue state model” is commanding allegiance in defiance of the evidence that it has long since outrun whatever usefulness it may have had in its heyday in decades immediately following World War II.

The sad news is that, for the most part, this stubborn denial of reality is a bipartisan matter.  In Europe, commitment to the Eurozone has been spearheaded by Prime Minister Angela Merkel, leader of the center-right Christian Democratic Union.  While recent elections in Greece and France has strengthened leftist resistance to Merkel’s insistence on budgetary discipline as the way to right the euro’s ship, only the far-left in Greece has been willing to champion secession from the Eurozone.  Newly elected French President Fran├žois Hollande remains firmly committed to his country’s participation in the EU.  

In the U. S., the national Democratic Party is in the solid control of President Barack Obama, who has finally discarded his centrist, “post-partisan” pose to aggressively champion maintenance of the blue state model of increasing government interference in the private sector.  Unlike the two different approaches of the Eurozone partisans, Obama would increase taxation and federal spending.  While his Republican rival Mitt Romney denounces “Obamanomics,” he has yet to spell out in stark terms a compelling alternative that would unleash the entrepreneurial might of the United States.


California offers a more acute version of President Obama’s ideology.  The Democrats’ focus on tax increases, along with Brown’s insistence on expending billions of (unidentified) taxpayer funds for an unnecessary high-speed rail system, is a stark example of the unsustainable myopia that is accelerating our flirtation with bankruptcy.  (Brown’s commitment to magical thinking was on full view in his goofy comparison this weekend of the building of the Golden Gate Bridge to his pet rail project.) The California situation is exacerbated by the voluntary retirement of the state Republican Party from relevance, thus removing any political pressures that might moderate the Democrats’ commitment to policies that currently ensure economic stagnation at best.

The macro dynamics driving the world’s political economic doldrums are not mysterious.  We are experiencing an epochal phase-shift as we transition from the dominance of industrial production as the main engine of wealth expansion to the application of “knowledge capital” to every nook and cranny of the world’s markets.  The emerging world, building upon the enormous trade, energy, and communications infrastructure erected during the twentieth century, no longer requires huge agglomerations of capital to efficiently produce and distribute wealth.  With a PC or similar device and a connection to the worldwide web, any individual can enter the global market at a very low cost and compete for business from billions of customers.

The main contours of this new economy have been thoughtfully analyzed by such writers as Peter Drucker, Kevin Kelly, Chris Anderson, Jeff Jacoby, Ray Kurzweil, and Tom Hayes.  Kelly, in fact, authored a key book entitled New Rules for the New Economy in which he outlines ten significant ways that the Information Age differs from its predecessor.  

What’s happening is that this new system is forcing a complete revaluation of the world’s assets.  In relative terms things that held value in the industrial economy are worth less in the information economy.  This dynamic is a natural result of systemic change; it occurred in regular order in the previous shift from agriculture to industry as well.

However, our financial and credit systems resist devaluation of old assets and simultaneously have a difficult time accurately valuing the new ones.  (The Facebook IPO is just the most prominent example of this challenge.)  No one holding title to equity or debt instruments of underperforming or deteriorating assets wants to lose his investment. This is true of individuals as wells as private and public institutions.  The inertia created by this resistance is huge; its impact can be readily in the resistance to systemic change noted above.

This natural human desire notwithstanding, the 66 year old international financial system established at Bretton Woods, New Hampshire, to bring order to the postwar industrial economy has outlived its effectiveness.  But curiously no leaders of the world’s major powers have suggested creation of a new one to finance and support the Information Age global economy.  America’s silence on this necessity is especially striking, since we are the generators of the Information Age itself.  Obama has taken himself out of the game by his blind allegiance to the blue model, but what excuse does Romney have?

The “new rules” observed by Drucker, Kelly, Anderson, et al., form the foundation for a new world financial order.  This is not rocket science.  Accessing and distributing larger sources of energy production; strengthening and expediting trade infrastructure; keeping internet access free of regulation; and systematizing, securing, and expanding the global computer networks are among the priorities of the new system.

As writers like Matt Ridley, Walter Russell Mead, and Glenn Reynolds—among many others—have tirelessly pointed out, humanity is poised to produce a new burst of economic prosperity that will dwarf the postwar industrial boom.  

 
In an article published almost twenty years ago in Wired magazine entitled “The Long Boom: A History of the Future, 1980 - 2020,” Peter Schwarz and Peter Leyden presciently described what would happen if the global system did not adapt to the needs of the new economy.

In a nutshell, the key formula for the coming age is this: Open, good.  Closed, bad. Tattoo it on your forehead.  Apply it to technology standards, to business strategies, to philosophies of life.  It's the winning concept for individuals, for nations, for the global community in the years ahead.  If the world takes the closed route, it starts a vicious circle: Nations turn inward. The world fragments into isolated blocs.  This strengthens traditionalists and leads to rigidity of thought.  This stagnates the economy and brings increasing poverty.  This leads to conflicts and increasing intolerance, which promotes an even more closed society and a more fragmented world.  If, on the other hand, the world adopts the open model, then a much different, virtuous circle begins: Open societies turn outward and strive to integrate into the world.  This openness to change and exposure to new ideas leads to innovation and progress.  This brings rising affluence and a decrease in poverty.  This leads to growing tolerance and appreciation of diversity, which promotes a more open society and a more highly integrated world.

The United States, as first among equals, needs to live this concept in the coming decades.  One of the first great tasks will be integrating its former communist adversaries China and Russia into the world community, in much the same way that it once did Japan and Germany.  This will be the main geopolitical challenge of the next dozen years.  We'll know if we made it by 2010.  Then there's the need to create a complex fabric of new global economic and political institutions to fit the 21st century.  Though these need not take the bureaucratic shape they did in the past, a certain level of coordination of global activities will continue to fall in the public sphere.  In the technical realm, some body needs to mediate the setting of global technical standards and the allocation of what are, at the moment, scarce resources like airwaves.  In the legal arena, we need to find ways to protect the rights of creators and consumers of intellectual property.  In terms of the environment, the collective world community needs to get cracking on problems that endanger everyone: global climate change, loss of the ozone layer, and other cross-border problems like acid rain.  And then there are the issues that fall under security. We spent decades in excruciating negotiation to disarm and limit nuclear proliferation.  In an age of information warfare, we face a very different set of security concerns and a laborious process to find global solutions - starting with a workable accord on cryptography.

To date, the powers that be have chosen “the closed route,” which has indeed strengthened traditionalists (the adherents to the blue model) and led to rigidity of thought.  It has stagnated the economy, led to conflicts, and promoted intolerance.
Worse, the U. S. has refused to take up the challenge to promote the “open model” and inspired the world to adopt new institutions “to fit the 21st century.”

So we find ourselves lurching to an international crossroad.  We can put off the reconstruction of the global system only so much longer before significant damage is done.  In Europe, across America, and in California, we have increasingly less time to let go of the past and get busy supporting the future.  Human inventiveness and creativity is at an all-time high, yet our stubborn refusal to build a new financial system to appropriately fund the products and services available from this endless well of ingenuity is taking us in the wrong direction.

For the Recovering Bureaucrat, then, the essential question is how to apply the breakthroughs happening in the real economy to the challenges of our attenuated financial system.  The establishment politicians have an increasingly precarious hold on the situation, and they know people are growing restless.  

Various attempts have been made in the current American political season to undermine the hegemony of our two major parties in order to put the important questions on the table.  Most of these, from the Occupiers to Americans Elect, have gone by the wayside.  Only the Tea Party movement seems to have gained any sustainable traction.  The RB believes that this is because the Tea Party alone seems to get that a return to fundamental American principles is essential to counteracting the torrents of denial emanating from most of our current leadership.

The exciting innovations in the fields of biotech, social media, nanotechnology, and others occur precisely because their creators are free to invest, develop, and reap the rewards of their labor.  They are managing for now to remain off the radar screens of the clerics of the Church of the All Powerful State.  (Denial enables this!)  Because sooner or later the contained environment will be busted, all good citizens must be prepared to build the new institutions that will facilitate prosperity.  

Matt Ridley, in his powerful book The Rational Optimist, demonstrates how the prosperity of the 20th century exploded because of the dramatic increase in world trade of the previous century—and not simply trade of goods but more importantly of ideas like freedom and democracy.  And with universal access to the internet, this trade in ideas takes an exponential leap.  And so Ridley writes,

I forecast that the 21st century will show a continuing expansion of catallaxy—Hayek’s word for spontaneous order created by exchange and specialisation.  Intelligence will become more and more collective; innovation and order will become more and more bottom-up; work will become more and more specialised, leisure more and more diversified.  Large corporations, political parties and government bureaucracies will crumble and fragment as central planning agencies did before them. . . . Monolithic behemoths, whether private or nationalised, are vulnerable as never before to this Lilliputian assault.  They are steadily being driven extinct not just by small firms, but by ephemeral aggregations of people that form and reform continuously.

The RB believes that these “ephemeral aggregations” are already working on the universal institutions of the new economy.  It may just be that the more tenaciously our conventional leaders and institutions cling to denial, the greater the velocity of the coming transformation.  

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