The new world order...

“The human race is just a chemical scum on a moderate-sized planet, orbiting around a very average star in the outer suburb of one among a hundred billion galaxies…” Stephen Hawking

It is (always) easy to feel bleak about the future as investors, whatever your political persuasion. Even for a chemical scum, our collective appetite for self-harm often appears limitless. When not hurting each other (or the world we depend on) physically, we can be found spewing bile at strangers on the wondrous new communication networks. In any case, pessimism sounds cleverer and gets more attention and that, for many, is the name of the game.

Pithy though Stephen Hawking’s description of our place in the cosmos is, there are other perspectives. Our ability to accumulate useful knowledge during our lifetimes and, crucially, transfer that know how to future generations is a serially underrated superpower.[1] It is that growing knowledge of the world and universe around us that allows us to move beyond problems that made our ancestors lives so much nastier, shorter, and more brutish.

New problems will always be created by the solutions to those problems now past. However, the cures to those are the building blocks to the next stages of progress. Part of our perpetual funk is simply down to the fact that it is hard (and impractical) to care too much about the problems we and our forebears have already solved. As you brushed the crumbs of this morning’s pain au chocolat from your chin, did you stop to appreciate that you no longer have to go on a dangerous, exhausting and often fruitless hunt for your breakfast each day?

So how do we create new knowledge? You require both conjecture and criticism.[2] The more individuals there are on the planet, the more chances you should have of continuing to grow your knowledge base. However, it can’t just be a numbers game, there are surely some necessities regarding the intellectual climate - Economics is just one of many disciplines that needs to look harder at its high-handed treatment of fringe views and those who would venture them. The more aggressively defended these ‘citadels of orthodoxy’ become, the less enticing they will be to attackers.[3]

There are clearly chicken and egg problems here. Many of these ‘citadels’ of existing knowledge have become more fiercely defended precisely because the attacks have become more threatening - the barbarians are at the gate? In a culture so geared to persuasion and bounded by echo chambers, it can be fiendishly difficult to keep an open mind.

As we’ve pointed out before, finance suffers worse than many areas from these intellectual ills. Data on investment performance, the economy and a neatly unifying web of sub inferences and theory, provide an illusory octagon in which the ‘brains’ can battle it out. Those with the temerity to challenge the parameters are noisily shepherded out, accompanied by boos from those with nothing better to do.

All of this is important context (I think) for analysing the aftermath of both US elections and the recent UK budget.

US elections and UK budget

The scramble to find the killer word or phrase that can summarise this last US election – from inflation to woke-lash – is again detracting from the more nuanced reality. Certainly, the lingering scars from the post pandemic inflation shock, as we suggested in last week’s review, help us link the US election to other electoral swipes at incumbents this last year or so. However, as with the recent UK budget, it is worth taking in more perspective if we can.

No longer in Kansas…

The first and most important point to make is that whatever macro-economic tramlines the world was on previous to the pandemic, we appear to be on a different set now. The prospects for growth, inflation, the global economic pecking order and much more besides are up for grabs. It will take some time to orient ourselves, but the key if that paradigm shift is real is to keep an open mind and to avoid excessive reliance on the ‘rules’ of the recent last one.

For those sceptical of a change in the trend in productivity, there are a couple of points. First, remember not to get too caught up in the daily to and fro on the latest shiny thing – generative AI. A useful analogy for the moment we are in might hinge on the enabling emergence of transformers a few years back. Perhaps, as a famous technology investor recently observed, this will prove comparable to the Bessemer process’ ultimate influence on skyscrapers.

The first steel framed building didn’t astound anyone. However, within a few decades, buildings were soaring to previously unimaginable heights thanks to this earlier revolution in steel production. Generative AI has the potential to have a similarly discontinuous effect on the world around us, even if the current batch do not yet inspire widespread awe just yet.

More importantly though, generative AI is not the only game in town. Prior advances in machine learning among other technological advances are already making themselves felt in the productivity statistics in the US. We may see others follow.

Unintended consequences of policy

There is an oft told story surrounding something called the ‘cobra paradox’. During the British Raj, there was concern about the number of venomous cobras in Delhi. The British government offered a bounty for every dead cobra. Initially, this worked well - large numbers of snakes were killed for the reward. Before long however, savvy locals began to breed cobras for the income. On becoming aware of this, the government scrapped the reward program. The cobra breeders subsequently set their (now worthless) snakes free, leading to an overall increase in the wild cobra population.

This neatly encapsulates some of the challenge facing even the best-intentioned policy makers. Each action can stir often subtle and mostly unpredictable cultural, social and multiple other effects that ripple unpredictably through the months, years and decades ahead. The cobra paradox and other such parables, such as the Great Hanoi rat massacre of 1902, risk understating those problems if anything. In both of these incidents, the response for the population was guided by the desire for profit.

If only our actions were that simple to infallibly predict. The ‘optimising’ assumptions central to the many decisions in our days are mostly subjectively grounded. A glance at the American electorate’s sense of the economy below their feet by party hints at some of this. (Figure 1)

In such a context, be careful not to waste too much time minutely calculating the various effects this next administration in the US will have on the economy. Neither should you focus obsessively, as some are, on the 2029 forecast for the UK economy by the Office of Budget Responsibility (OBR). The OBR has to provide such forecasts, but we do not have to read them as confirmed facts. The way to solve the next set of problems is to further burnish our problem-solving capacity as a species. Knowledge is power as they rightly say.?

[1] https://www.ted.com/talks/the_ted_interview_david_deutsch_on_the_infinite_reach_of_knowledge/

[2] Popper, Karl (18 Sept. 1969) – Conjectures and Refutations - The Growth of Scientific Knowledge (Routledge Classics) Paperback

[3] Deaton, Angus (2023) – Economics in America – An immigrant economist explores the land of opportunity (Princeton University Press)

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