Thursday, September 15, 2016

THE NEW WORLD AND WHY BREXIT IS RIGHT


Everything operates in a system and as societies advance the system become increasingly intermingled and complex. Industries like the entertainment, media, film, financial services, retail, distribution and whatever you can think came to eminence in the decades since the second world war. In the last decade we see some of them demise while others are struggling to stay afloat. One thing that is manifested by the troubles is the interconnection of the industries and their demise that is slowly but surely happening. For now, though, leave these particulars to the side; I’ll return to them later.
The key takeaway, and my starting point, is the realisation that no single issue or company or industry or country stands alone: everything operates in systems, and both influences and is influenced by the system within which it operates. By extension, any change to one part of the system must impact and change other parts of the system: the greater the change, the greater the upheaval until the system can return to equilibrium. Sometimes, though, the change destroys the system completely.

THE OLD SYSTEM

During the 20th century, particularly the post-World War II era, the formation of a multinational systems that balanced the government, large corporations, and labour.
Major world government have been focused on creating markets for the massive industries that had sprung up during World War II, with an insistence on reducing trade barriers. This included initiatives such as GATT, NAFTA, EEA, OECD; there are dozens of regional versions of such organisations around the world. The latter two paved the way for the EU which has dual mission of peace through bureaucracy paid for with trade.
For their part, increasingly massive corporations built out advanced countries military power, manufactured most of the industrial and agricultural equipment, and produced all of the accoutrements of a booming middle class: said middle class worked at those massive corporations, building everything from tanks to cars to washing machines, and spending their money on the same.
The implicit deal was this: the government created markets for the corporations, who in turn provided not just employment but also security for their employees, funding health insurance and pensions, while employees (and corporations) paid for the government: in 1960 the lowest income bracket paid 20%, while the highest paid 90%, and the corporate tax rate was 52%. The system lived for half a century, expanding rapidly in the first two decades and maintaining equilibrium for the later three.  

HOW GLOBALIsATION UPENDED THE SYSTEM

Globalisation is by no means a recent phenomenon: the idea of trading goods with other groups, so as to realise the benefits of comparative advantage dates back to the earliest recorded human civilisations in the third millennium B.C. More pertinent to this discussion, the combination of the industrial revolution (which supercharged the idea of specialisation) and steamships massively increased trade.
Then, in the years leading up to the 1970s, three technological advances completely transformed the meaning of globalization:
  • In 1963 Boeing produced the 707-320B, the first jet airliner capable of non-stop service from the continental United States to Asia; in 1970 the 747 made this routine
  • In 1964 the first transpacific telephone cable between the United States and Japan was completed; over the next several years it would be extended throughout Asia
  • In 1968 ISO 668 standardized shipping containers, dramatically increasing the efficiency with which goods could be shipped over the ocean in particular
These three factors in combination, for the first time, enabled a new kind of trade. Instead of manufacturing products in the West (including Japan) and trading them to other countries, multinational corporations could invert themselves: design products in their home markets, then communicate those designs to factories in other countries, and ship finished products back to their domestic market. And, thanks to the dramatically lower wages in Asia (supercharged by China’s opening in 1978), it was immensely profitable to do just that.
It is difficult to overstate the positive impact of this particular period of globalisation. Billions of people were lifted out of abject poverty, especially in China but also throughout Asia, and the western countries became significantly richer as well; trade is absolutely a win-win. Critically, though, while everyone benefited from cheaper goods, the profits were not shared equally: the managers of multinational corporations and their owners reaped the vast majority of the benefits, even as their employee base effectively shifted from their domestic markets to Asia.
This undid the post-World War II deal: middle class jobs began to disappear, and along with them the economic and social security that had been provided by corporations. It took time, to be sure, but the ascension of China to the WTO in 2001 dramatically accelerated this shift, and while its full effects were hidden by a massive expansion in credit fueled by a housing bubble, once that came crashing down in 2008 the former middle classes of developed countries came to realize just how deep was the hole they fell into.

THE INEVITABLE FALLOUT

Remember, everything is a system. And, given the changes wrought by the post 1970s wave of globalisation, it is foolish to think that a core component of society — labour — can be fundamentally changed without there being knock-on effects on the other components of that system. Rise of the Tea Party, UKIP, Front National and many more on the right, and the Occupy Wall Street, Jeremy Corbin on the left. While the participants of the two groups couldn’t be more different — indeed, they loathe each other — both were outraged at “the System”.
Both movements have flowered this election cycle, an old-school leftist leads the UK’s Labour Party, and Bernie Sanders nearly nominated by the Democratic Party. On the right the Republican Party has nominated Donald Trump, while the U.K., in a campaign led by Conservative Party insurgents and the far-right U.K. Independence party, has just voted to leave the European Union with the support of many traditional Labour voters. In both cases there is a new cleavage: less right versus left, and more elites who have benefited from globalisation and a middle class that has been left behind.
Again, there are clear differences between the left and right: the former sees Wall Street or The City as the villain, while the latter blames immigration. Both, though, in their own way, want a return to the old deal: honest work for an honest wage, and an increasing sense of having nothing-to-lose until it happens.

THE NEW WORLD

A return to the old deal won’t happen, of course, nor should we want it to: the last thirty years have made both the world generally and developed countries in particular richer than ever. What is needed, though, is a new system, and here the tech industry has a critical role to play.
While the first twenty years of the modern tech industry (starting with the personal computer) primarily benefited corporations, the last fifteen years have dramatically improved the quality of life for consumers. The defining quality of technology, particular Internet-based companies, has been the generation of massive amounts of consumer surplus. How much is it worth to have access to all of the world’s information in the palm of your hand, or to be connected with friends and family wherever they are, or to make new connections with people you have never met? Far, far more than however much one pays for a smartphone and a data plan.
That this largesse is financially viable for tech companies is a testament to their tremendous scale. While the old order was about multinationals, Google and Facebook and the rest are supranational: their addressable market is the world. Moreover, consumers’ benefit is incumbents’ pain: as I detailed above the new world order is slowly but surely drowning the old one. The question is just how transformative will that new world order be? If the old system was defined by the government, big corporations, and labour, the new system should be about government, technology, and individuals.
The first implication of the supranational nature of technology is that unlike the old multinationals, there is no need for government support to open markets and guarantee trade; for the most part, the less government involvement the greater maximization there will be of the consumer surplus that is already being generated. Rather, it is the government that ought to take a much more active role in supporting individuals.

  1.  At the most basic level this should include security; the first step is universal and quality healthcare for all people.
  2. Second, instead of trying to recreate a 1950s fantasy of employment for life on an assembly line, the goal should be to create a far more dynamic labour market with a defined floor and significantly greater upside than the old system. 
  3. Third, a universal basic income, facilitated by the government, should be set at the lower bounds of what is necessary to escape poverty. Globalisation may have been the first shoe to fall on the middle class, but automation is the other, and it will affect just as many jobs as manufacturing, especially white collar ones.
  4. Fourth, the government should be loosening regulations on the “gig” economy: technology has dramatically increased the degree to which work can be segmented, and that’s a good thing. Moreover, these sorts of jobs provide the upside to a universal basic income’s floor: our goal should be to make it vastly easier for individuals to better themselves if they choose to do so (while the basic income provide protection against the gig economy’s inherent uncertainty).
  5. Fifth, there should be a significant loosening of the regulations and taxation around business creation. One of the many benefits of technology and the Internet has been to make all kinds of new businesses far more viable than ever before, but it is far too hard to get started, and the bookkeeping requirements are far too onerous. This sort of loosening, combined with the reduction in risk resulting from a better safety net and basic income, plus the possibility of building working capital through gigs, could lead to an explosion in creativity and entrepreneurial activity.
  6. Sixth, integrate people who are left behind by globalisation into the world trade system by building lasting institutions in countries with weak governments. The key component of a global trade system is state and where states have failed communities are stranded and left to fend for themselves, a task that has been proven time and again impossible. These communities are the victims of violence and extremism and not only represent a waste of human life but pose a security threat to the world order. This threat is not originated by the population of these poor communities but the groups that rule them with impunity. By supporting accountable governance in these countries and abandoning rhetoric of terrorism we will ensure improvement of life for many in the poor countries and security in the rich countries.
Each of these factors is critical: a universal basic income alone offers some degree of financial security, but it does not offer dignity to the recipient, or any return for society beyond a reduction in guilt. What is most important, and what offers the highest return, is enabling more and better ways to work and ultimately create: that requires fewer regulations and simpler taxation.
The payoff is equilibrium: the chance to build fabulously successful businesses that go with the current, not against it. The alternative is far worse: once automation arrives, guess who is going to be the scapegoat?

BREXIT: WRONG REASONS, RIGHT RESULTS

To be clear, this is a package deal: higher tax rates to fuel a misguided attempt to recreate the 1950s would be just as much of a disaster as undoing the old deal has been for the middle class. The world has changed.
Indeed, this is why I’m not quite prepared to join in the panic over Brexit, although I understand and acknowledge the very real downsides. I keep coming back to the fact that the European Union is a product of the old order — a world where government entities existed to enable trade for multinationals and rules for everyone else. Small wonder the EU has been the most hostile to the changes wrought by tech! There is no question that undoing 40+ years of integration will be extremely painful but given that the old order has already been disrupted, how much is to be gained by continuing to pretend that nothing has changed? Alternatively, might there be potential in building something new?
To be sure, there is no evidence that Brexit was driven by a vision of a new world order; quite the opposite in fact. And, unlike many Brexit voters, I am mindful of the elite consensus about the problems with a withdrawal: trade still matters, and the loss of access to the European market, are huge problems. But then again, the very definition of who is elite, and why, is as much a part of the system as anything else, and the fact there are so few voices even acknowledging the increased restrictiveness of the EU, or its complete lack of economic growth, much less grappling with why it is the EU came to be and how deeply entwined that is with the old system, is to my mind a missed opportunity to at least think about how things could be different.
Everything is connected, everything is a system — and a crisis is a terrible thing to waste.
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