7 Insights To Better Understand The World

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  1. How This All Happened by Morgan Housel. To know where we are now, we have to understand where we came from. Housel has written a characteristically clear and concise economic history since WW2. The question it raised for me is how much of the relative stability and prosperity of the developed world middle class was a product of unique postwar circumstances? Were the generally secure jobs and widespread home-ownership experienced by our parents and grandparents a relatively recent historical anomaly? ‘Part of the reason these expectations have stuck around for 35 years after they shifted away from reality is because they felt so good for so many people when they were valid. Something that good — or at least the impression that it was that good — isn’t easy to let go of.’
  2. The Four Global Forces Breaking All The Trends by the McKinsey Global Institute. The world is undergoing 4 almost incomprehensibly gargantuan disruptions simultaneously: mass urbanization, accelerating technological change, worsening demographics and significantly greater global interconnectedness. Because these shifts are increasingly tethered to each other through the same global network, they are being amplified, making them difficult or impossible to reverse. ‘Today our world is undergoing an even more dramatic transition due to the confluence of four fundamental disruptive forces — any of which would rank among the greatest changes the global economy has ever seen. Compared with the Industrial Revolution, we estimate that this change is happening ten times faster and at 300 times the scale, or roughly 3,000 times the impact.’ No wonder established systems are breaking down. MGI’s book No Ordinary Disruption is a good resource on this topic.
  3. The Local-Global Flip by Jaron Lanier. The information economy is destroying the developed world middle class, increasingly turning it into a winner-takes-all casino. ‘Basically, people can expect free stuff from the Internet but they don’t expect wealth from the Internet. It’s funny to say that because I’ll often get a lot of pushback and they’ll say, “No, no, no. There are all these people who are being empowered by all this stuff on the Internet that’s free”, and I’ll say, “Well, show me. Where’s all the wealth? Where’s the new middle class of people who are doing this?” They don’t exist.’ If your data is worth something like $16 a year to Facebook, the return of that value to you is virtually meaningless. But when Facebook has 1.7 billion users it’s of immense value to them.
  4. The Origin of Populist Surges Everywhere by Philip Auerswald. A lot of the winners of the information economy are concentrated in relatively few hubs: global megacities like Shanghai, New York and San Francisco. That leaves a lot of other places left behind. This is further exacerbated by an urban-centric media bubble. ‘The “rise of populism” is in fact the latest chapter in a mistakenly framed battle of city versus rural. It is ultimately the consequence of two inexorable trends that are driving change globally. First: continuing urbanization driven by the power of super-linear scaling. Second: population decline in rural areas and remote places and population aging throughout the advanced industrialized world, with first-order impacts on the macroeconomy’. J.D. Vance’s book Hillbilly Elegy is a great read on this topic. More on this below.
  5. Kinky Labor Supply and the Attention Tax by Andrew Kortina and Namrata Patel. What happens to young men exposed to these global trends? The addictiveness of entertainment has massively risen just as the cost has precipitously dropped. Meanwhile the marginal benefits of grinding away in a globally competitive economy have dwindled. I think “incels”, white nationalism and the rise of grievance politics have been powerfully exacerbated by this trend. ‘Unless the lottery or a new work opportunity vaults you into the top 20% of income earners or you’re fine spending the majority of your time crafting your online image like the Maya Millennials out there, you have little chance of breaking through. And if there is no meaningful signalling utility from the consumption goods, services, and activities you could buy with increased income, why work more than you need to meet your basic needs and fund leisure?’ Sapiens author Yuval Noah Harari brutally calls this cohort the “useless class”. Previously the top 1% needed the masses for armies and factories. There’s much less need for sheer manpower today.
  6. America’s New Religions by Andrew Sullivan. More philosophical than macroeconomic, but no less illuminating. Sullivan argues that the void left in American society by the decline of organised religion is increasingly being filled by political ‘cults’. ‘So what happens when this religious rampart of the entire system is removed? I think what happens is illiberal politics. The need for meaning hasn’t gone away, but without Christianity, this yearning looks to politics for satisfaction. And religious impulses, once anchored in and tamed by Christianity, find expression in various political cults.’ Postmodernism excels at stripping away unifying, transcendent truths, but doesn’t replace those foundations with anything else. I often think about this passage from George Steiner’s essay Nostalgia for the Absolute. ‘Like never before, today at this point in the twentieth century, we hunger for myths, for total explanation: we are starving for guaranteed prophecy. Unless I read the evidence wrongly, the political and philosophic history of the West during the past 150 years can be understood as a series of attempts — more or less conscious, more or less systematic, more or less violent — to fill the central emptiness left by the erosion of theology.’ Globalization brings foundational cultural stories into conflict with each other at a greater scale than at any other time in human history.
  7. Balanced Sheets by Alex Williams. I’ve spent a long time trying to understand Michael Pettis’ worldview regarding the link between global trade and inequality. He recently published a book with Matthew Klein called Trade Wars Are Class Wars. It seems to have immense explanatory power. It is also complex and counter-intuitive, especially with regards to dispelling cultural stereotypes of spenders and savers. This article from Alex Williams finally pushed me over the edge of starting to understand it. [This paragraph is long and may take more than one read to digest!] ‘The book argues that elites in all countries want to capture economic output while developing the capital stock of their economies. To do this, they invest massively, which mechanically creates savings. Rather than sharing those savings with the household sector in the form of wage increases, the elites hoard and move them offshore. This destroys local demand for the goods produced by their capital investments. At this point, they turn to the export market to make up for the missing local sales. The problem is that, to be competitive exporters, they have to produce tradeable goods at a lower unit cost than their competitors. Capitalists must then further suppress domestic wages to ensure those lower unit costs, and thus increase their dependency on export markets. The problem is, not every country — or bloc, in the case of the Eurozone — can be a net exporter. This spells trouble, if every country’s capitalists are dependent on the export markets to validate their investments. Absent a country willing to import everyone else’s surplus, this kind of arrangement would set the capitalists of all countries against one another before falling apart. It’s at this point, however, that the US steps in to backstop the global order as a hegemonic debtor, allowing nearly every other country to be a net exporter.’
  • We’ve just added hundreds of millions of people to the global economy in barely a few years. Many of their skills are fungible with the developed world worker and often at a minuscule fraction of their living costs. We’ve also pulled a vast proportion of the world out of dire poverty. This is shown in graphical form by “The “Most Important Chart in The World” from Branko Milanovich. It shows income increases from 1988–2008. The picture is great for the global bottom and middle, bad for the top 75–95% (DM middle classes) and awesome for the top ~1%.
  • Steven Pinker’s optimism about the rise of the global poor is justified: half the world is now ‘middle class’ or wealthier. But, I read a good article in Foreign affairs on the unintended consequences of EM rising so rapidly out of poverty & infant mortality before they have the urban infrastructure to support it. By 2030, the global population of slum-dwellers is expected to reach 2 billion people. Declining infant mortality means that, by 2035, more sub-Saharan Africans will be reaching working-age every year than the rest of the world combined. But possibly without the jobs or infrastructure to support them. All this obviously means accelerating emigration: between 1990–2013 the number of economic migrants leaving sub-Saharan Africa increased 6x. Here’s an excellent Time article on the human drivers of African emigration. This trend, and the substantial European political backlash, is going to be here for a REALLY long time. ‘We succeeded in reducing child mortality, but we forgot about what to do with those children once they become young men and women.’
  • Meanwhile the economic center of the world is shifting Eastwards. McKinsey estimates: ‘nearly half of global GDP growth between 2010 and 2025 will come from 440 cities in emerging markets — 95% of them small and medium-sized cities. 46 of the global top 200 cities will be in China by 2025.’ They have the cities, they have the people and they increasingly have the skills.
The world is shifting Eastwards. Source: Connectography.
  • In the developed world, the information economy has made our system increasingly winner-takes-all, further eroding the position of the developed middle class and knowledge worker. This impacts traditionally higher income populations as well, through “elite overproduction”- a term coined by Peter Turchin. ‘Every year U.S. law schools churn out about 25,000 “surplus” lawyers, many of whom are in debt….. The number of newly minted MBAs has expanded even faster than law degrees.’ Disgruntled elites are a root cause of historical instability.
  • As Pettis has observed, the small number of disproportionate winners haven’t been returning profits to workers. Even when unemployment was low, wages were still depressed. The NYT wrote a well-researched piece about America titled “Why do we pay people so little?” You’d think the solution is, well… “pay people more”…..
  • …..The rub is that rising wages will make American workers even less globally competitive, raising the temptation to further offshore production and discouraging foreign investment. Pettis’ suggestion is capital controls: if the free movement of capital is the cause of many of these imbalances (which Tyler Cowen suggests it is), then restrict its movement. This is obviously not at all easy to do.
  • Put extremely simply, globalization means that money is more mobile than people, especially poor ones. This was beautifully articulated by Jonathan Malesic in his essay on the drinking culture of rural America. “Our economic system depletes communities, and you can gain wealth and status within it if you’re willing to pull up your own roots again and again, even living suspended in the air, while others, more firmly planted, wither together.” Global inequality keeps being exacerbated by the shift from rural to urban, with younger, richer, smarter and more ambitious people moving to the cities. And then marrying people like themselves, doubling their incomes, and spending disproportionately more on education. Maybe our current circumstances reverse that a little, but I’m not confident.
  • I see the “casino economy” mentality demonstrated in the public rise of hyper-fortunate entrepreneurs, venture capitalists and social media influencers. These roles are now both ubiquitous sources of career advice and the focus of many young people’s ambitions. But these are mostly lottery-like propositions; they won’t sustain a middle class. Moreover, digital skillsets are easily transferable to lower-cost countries. They will also largely become obsolete at an ever-accelerating pace over our lifetimes. “Learn to code” may not be great long-run advice. Localized skillsets seem to be the solution, but ‘local knowledge worker’ isn’t something that seems especially lucrative. It points me to roles like specialized in-person sales, ‘trades’ and community lawyers. Demographics mean demand for nurses is secularly rising, but these are mostly low-paid roles.
Source: XKCD
  • The pervasive sense of precarity and uncertainty has been further exacerbated by the ubiquity of conflicting information and social media polarization. Meanwhile the central authority of religions have been replaced by myriad competing ideologies, both political and cultural. That’s obviously a much larger topic and I wrote about it here.

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