Capitalism without Capital and after COVID (#37)

Structural Shifts with Stian WESTLAKE, co-author of ‘Capitalism without Capital’ book.

Our guest is Stian Westlake, co-author of ‘Capitalism without Capital: The Rise of the Intangible Economy‘ and we discuss the implications of an economy built increasingly on intangible assets, even more so in the post-pandemic world. In this podcast, we discuss the four S’s that explain how intangible assets behave differently than tangible ones, why we’re not seeing more economic growth or higher productivity right now, even though intangible assets are more scalable, what governments need to do to mitigate the increased income inequality that’s occurring in part due to the rise of intangible investments, and more. Stian serves as the Chief Executive of the Royal Statistical Society. Previously, he served as an advisor to three British ministers for science, innovation, research, and higher education. He also led the policy and research team at Nesta - UK’s National Foundation for Innovation.

Full transcript
Structural Shifts with Stian WESTLAKE

Sometimes there are things that are very easy to measure at the big picture, but they get harder to measure the more granular you get — and intangible investment is definitely one of those things

[00:01:30.26] Ben: Stian, thank you so much for coming on the Structural Shifts podcast. We’re really delighted to have you on. I think there are a few structural shifts as profound as the one you’ve been investigating, most notably through your 2018 book, “Capitalism Without Capital”, which is the shift from a tangible to an intangible economy. This is a phenomenon which has been playing out over the last 40 years in developed economies, and which, as we’ll discuss, has likely been accelerated by the pandemic. It’s also a phenomenon, which, although it might seem slightly esoteric, is at the roots of or contributing to some of the biggest changes we’ve seen in society, such as inequality, as well as in business, such as the rise of big tech platforms. So if it’s okay with you, let’s start by just defining what we mean by an intangible economy. So, do you mind just kind of setting the scene and telling us the extent to which investment has shifted from tangible to intangible assets?

Stian: Yeah, of course. If you think about what the economy used to be like 40, 50, 100 years ago, the majority of the stuff that businesses, that governments invested in were stuff you could see and touch — what economists would call tangible capital. So, it was machines, it was factories, it was vehicles, it was buildings — all these kinds of things. One of the things that we’ve been noticing is there has been a really slow but pronounced change over time, such that now the majority of investments that businesses make — buying an investment, I mean, something that you incur a cost upfront, and it delivers you a benefit over time — most of the stuff is stuff that you can’t see or touch, things that you can’t stub your toe on, as it were. It’s things like investing in r&d to create new ideas, new patents, things like investing in marketing, advertising, customer understanding to build brands, it’s things like employer training. And it’s stuff that has this kind of fuzzy idea of things like organizational development. So if you think of a company like Apple, one of Apple’s competitive advantages is its remarkable supply chain. Now, the supply chain includes some things that you can touch — it includes factories — but Apple doesn’t own them. So those are to some extent tangible. The stuff that really creates value for Apple is these privileged relationships, the expectation of doing business, and their access to these suppliers, which allows them for example, to get products to market at volume, fast. These things are investments, they’re costly to acquire, they deliver benefits over time, but they’re very different from the world where your investments were the machines and the factories or the land that you grazed your cattle on.

For most of history, tangible assets represented a much bigger slug of the economy, than the investment in intangible assets. And about 10 to 20 years ago, depending on the country, those two lines crossed.

[00:03:59.18] Ben: The book is full of brilliant graphics but one of the ones that really stands out is the one that shows the acceleration in investment in intangibles and the point at which it crosses over. So intangibles now represent or comprise a larger proportion of overall business assets than tangible assets.

Stian: Yeah, that’s right. So if you think of these as a percent to GDP, so in relation to the size of the economy, for most of history, tangible assets represented a much bigger slug of the economy, than the investment in intangible assets. And about 10 to 20 years ago, depending on the country, those two lines crossed. The intangible line has been moving up and up and up, slowly but steadily for decades. They crossed. If you look in rich countries now, the intangible investment represents roughly 15% of GDP of national annual output, and tangible assets more like 10–11%. One of the nice things about these slow but steady changes is you can be pretty confident that these things are reliable. We have so much data on this. This is a change that’s been going on for a very long time.

[00:05:06.17] Ben: You say we can be confident in the reliability of the data. But, I mean, you used the term ‘fuzzy’ for some of these intangible assets earlier on. And that sort of suggests that there might be things that are quite difficult to define, and therefore quite difficult to value and capture on a balance sheet or in economic statistics, GDP statistics.

Sometimes there are things that are very easy to measure at the big picture, but they get harder to measure the more granular you get — and intangible investment is definitely one of those things in that national accounts do a kind of okay job of representing this.

Stian: So it’s a really good question. And it’s one of these things that have traditionally not been very well captured in either economic statistics — the kind that governments put together — or in business statistics, the kind of thing that your accountants would put together. And one of the interesting parts of this work, my co-author, Jonathan Haskell, along with many other economists, have really spent a lot of the last 20 years trying to work out ways of measuring this intangible investment at the level of the economy. And they used surveys, they’ve used fascinating historical data sets; it took quite a while to get a handle on this stuff but the results are pretty conclusive that this intangible investment is growing. Where things get tricky — you mentioned company accounts — sometimes there are things that are very easy to measure at the big picture, but they get harder to measure the more granular you get — and intangible investment is definitely one of those things in that national accounts do a kind of okay job of representing this. Nowadays, most countries will record their r&d investment and record some of their human capital investments. But corporate accounting standards don’t recognize this stuff. So, you will find very few intangible assets on a balance sheet. And I guess one of the interesting aspects of this is if you look at the job of people who try and value businesses with a lot of intangible assets — such as sell-side investment analysts, people who work for hedge funds or other investment funds; it’s really interesting, there was a whole bunch of research done on what these guys spend their time doing when they’re on CEO calls, CFO calls, and someone managed to code all these conversations. It turns out that most of these things are actually asking about intangible assets, to try and understand the value of whether it’s supply chains, whether it’s the r&d going into the new product line. And there’s a kind of an interesting opportunity here if you’re involved in investment because this stuff is harder to value — and if stuff is harder to value that’s good for the people whose expertise lies in valuation.

The reason why we should care about the change to intangible capital is that from an economic point of view, intangible capital behaves differently. And the four S’s are the four ways in which it acts differently: scalability, sunkenness, spillovers, and synergy.

[00:07:19.18] Ben: It’s true, I never… I suppose I had thought about it, but not like that exactly, which is it’s kind of an arbitrage opportunity there because I suppose superficially, things like return on capital might be understated, or profits might be understated because so much of this stuff should be on the balance sheet, but it is an expense to the p&l. And then, you know, just having a better understanding of the things that are not recorded in annual accounts or in the annual report potentially gives you an edge.

Stian: Yeah. And I guess, you know, if you think about the way things have always worked in, say, on the sell side, when you look at sectors like pharma. So pharma is a sector that has always been heavily based on intangible assets. The value of GSK is kind of the value of its pipeline of drug ideas. And I guess, if you’re an analyst in that sector, what you’ve always done is basically, you’ve done a bunch of valuations of what you know to be the product pipeline with some kind of option value based on what you think the individual capability of the firm is. And I guess in an economy where intangible capital gets more and more important, more of the task of investment analysis is going to look more like the pharma investment analyst or even a kind of an analyst of the VC house.

Intangible assets have a lot of spillovers, and that means that a company that makes them can’t always be sure that it will get most or even any of the benefits of an investment that it makes. […] It’s much harder to control those spillovers than it is with tangible assets, […]. And so, managing those spillovers becomes a really important part of what successfully managing business looks like in an intangible economy.

[00:08:30.22] Ben: Definitely. You talk about the four S’s of intangible assets. Do you mind just running us through it? Because I think it’s really critical that we understand the properties of intangible assets. And since they behave differently, that then, in turn, means that economies behave differently, and so on. Do you mind just telling us about the four S’s?

Stian: Yeah, totally. If you take away only one thing from the book, this is the thing to take away from it. So the reason why we should care about the change to intangible capital is that from an economic point of view, intangible capital behaves differently. And the four S’s are the kind of four ways in which it acts differently. The four S’s are scalability, sunkenness, spillovers, and synergy. So I’ll just quickly give an example of what I mean by each of those. So scalability: if you compare an intangible asset to a tangible asset, a tangible asset, you can only get a certain amount of use before you need to kind of invest in more of those tangible assets. If you own a fleet of taxis, if you want to carry more of a certain number of customers, you need to buy or lease more taxis. If what you own is an algorithm for dispatching private hire cars like Uber, you can scale that if not infinitely, then arbitrary. You can scale that across a very large number of taxis and a very large number of cities. So valuable intangibles go a really long way. And one of the implications that means that we can go on to talk about is that if you’re a big company with some valuable intangibles, you can get very big, you can create a lot of value.

Stian: The second S we talked about — sunkenness. So sunkenness refers to the economists’ idea of sunk costs — the fact that sometimes once you invest in something, you can’t recover the value of it. And that’s very much more true for intangible assets than tangible assets. So if you own, for example, an office building — a tangible asset — and you go out of business, you can very often sell that office building, you can recover quite a lot of the value from it, even if you’re in a distress sale. If you own a patent, you can sell patents but patents are very often worth almost nothing to anyone apart from a small number of providers. A brand of a company that’s gone bust is not worth a lot. As we can maybe come to talk on later, that’s got some really important implications to how you finance businesses that have a lot of intangible assets because debt investors do not like sunk costs.

Stian: The third S is spillovers. The idea of spillover is, intangible assets have a lot of spillovers, and that means that a company that makes them can’t always be sure that it will get most or even any of the benefits of an investment that it makes. So, there are classic examples all through the history of tech, but Xerox PARC — kind of one of the foundational stories of Silicon Valley — they invented almost every foundational computing technology, every desktop computing technology you can think of. They make no money from it. Most of the value was captured either by Apple, by Microsoft, or by a host of other companies. It’s much harder to control those spillovers than it is with tangible assets, where we’ve got a set of very clear rules around them, they’re kind of physical, they’re kind of easier to keep tabs on. And so, managing those spillovers becomes a really important part of what successfully managing business looks like in an intangible economy.

There is a lot of productivity growth, at the moment, it’s just not evenly distributed. So, if you run one of these companies that can benefit from the synergies and the scale of intangibles — i.e. own a bunch of valuable intangibles, you can scale them across a really big business, and you can combine them in ways that make it very difficult to compete with you. 

Stian: And then the fourth S — synergies — is this idea that intangible assets seem to be especially valuable when you combine them in the right way with other intangible assets. So, a classic example we talk about in the book is the EpiPen — the epinephrine injector for stopping allergic reactions and anaphylactic shock. And what we talk about in the book is how that isn’t really a typical pharmaceutical invention. In fact, it’s based on a drug with a patent that expired over 100 years ago. But one of the things that EpiPen’s owners have very effectively done is they’ve combined a whole bunch of intangible assets from the design of the injector, to their very privileged supply chains, to the various legal moats that they put around things to even the brand name — the recognizable brand name — of the product that you kind of want to be able to recognize when describing in an emergency. And together, all of those things, all of which are kind of intangible assets, combine to create a big competitive moat around the product, but ultimately kind of very profitable, very value-created product for them. And these synergies exist, you know, between talent and intangibles, between different intangibles. And again, it means that if you’re a company that has a bunch of these valuable intangibles, you can create a lot of value for shareholders.

[00:12:59.01] Ben: Fantastic. So I think the four S’s give us a really nice framework to dig into some of these other topics, right? So I wanted to move next to growth. You talk about the scalability of intangible assets, right? So if the economy is made up of more intangible assets, and those intangible assets are more scalable, why don’t we see more economic growth or, you know, or higher productivity growth than we do at present?

Stian: So that’s a really good question. It’s something that really ever since we started working at this, we’ve been wrestling with, and it’s a big subject of our follow-up book, which is coming out later this year. But I guess one of the things here is that there is a lot of productivity growth, at the moment, it’s just not evenly distributed. So, if you run one of these companies that can benefit from the synergies and the scale of intangibles — i.e. own a bunch of valuable intangibles, you can scale them across a really big business, and you can combine them in ways that kind of make it very difficult to compete with you. Those businesses, as far as we can see, are very profitable, their profitability is growing, they make a lot of money for their shareholders and their employees, and they’re kind of seen as iconic businesses. So, you know, your classic dominant internet platforms, Google and Facebook, and whoever would be examples of that. But, you know, we see this in other areas as well. So, you know, Domino’s Pizza — a classic example of a business that looks very old fashioned, but has totally killed it in terms of developing a very powerful internet platform. So you have a world where some businesses, because of the intangibles are doing really well. And one thing that we’ve been looking at is the fact that in an economy like that, because of these spillovers, you create kind of perverse incentive for the rest of businesses. If intangibles have quite a high spillover and if some firms are really good at getting the benefit of those spillovers, the rationale for investing, for your kind of laggard businesses, your runners up in industries is plausibly much less.

there’s been a ton of research over the last kind of 20 years now, looking at that gap between your so-called leader firms and laggard firms. And basically, in every country, in every industry, that gap is growing. And really, interestingly, it’s growing the most in the industries that have the greatest number and that have the greatest proportion of intangible assets.

Stian: You know, if you’re in a traditional — if you imagine a very tangible-based economy like an industry like, I don’t know, running a laundromat, let’s suppose the best laundromat has the best washing machines and the best building; if you run the second best and the third-best laundromat, you can catch up in due course. You can borrow money from the bank, you can buy better machines, it’s kind of pretty obvious what you need to do to catch up because you can visit the other businesses and look at what they’re doing. There you would expect to see over time the gap between the most productive, most profitable businesses, and the least, would shrink because you can just copy. Now, if you’re in an intangible economy, those dynamics change. Imagine you want to compete with Uber. Okay, you can try and develop your own dispatching app but the scale effects are such that you’re going to be up against vast fixed costs, it’s very unlikely you’re going to be able to compete with the huge amount of money that Uber can pour into their development. And because of scale, you won’t be able to kind of amortize that across a large business. Okay, so you say, “Okay, well, I’ll come up with some new product feature that Uber hasn’t come up with.” Let’s suppose you’re an absolute product development genius, and you come up with something. In this economy, because of the synergies and because of the spillovers that we talked about, you might not be very well advised to do that, because Uber could quite simply copy it, or, you know, they might buy you, which would be kind of a good story for you but in terms of the dynamic, your business goes away, and therefore the leader business grows more powerful. So, rather than the world of laundromats, where catching up with the leader is about copying, it’s about acquiring probably mass-produced tangible capital, where you can probably get a bank loan for it, in the intangible economy, it’s much harder to catch up like that.

Stian: And I guess this comes back to your original question about what might be going wrong with productivity. If you can imagine an economy where the best businesses are doing really well, they’re generating a lot of money for their shareholders, they’re being really productive but there’s huge disincentive for a large chunk of the economy to invest and to catch up. In aggregate, that could come to an economy where productivity growth is actually pretty slow. And in terms of the evidence for this, there’s been a ton of research over the last kind of 20 years now, looking at that gap between your so-called leader firms and laggard firms. And basically, in every country, in every industry, that gap is growing. And really, interestingly, it’s growing the most in the industries that have the greatest number and that have the greatest proportion of intangible assets.

One of the issues of spillovers is businesses will invest less than is socially optimal in R&D. If you’re in a world where you want more R&D investment, but businesses won’t do it, that probably means you need governments or research institutes to do it. Again, that’s quite a judgment-based process, so you’re sort of saying you’ve got to trust people in positions of authority to do this kind of thing, which is particularly challenging in today’s political circumstance. So that’s a real dilemma.

[00:17:23.07] Ben: Do you think there’s another thing at play as well, which is, in the world of tangible assets, economies of scale were eventually subject to diminishing returns, right? Whereas in the world of intangible assets, you know, where we have network effects, you could argue that a lot of times, you get just increasing returns to scale. You talked about Uber — I guess the more customers you have, the more drivers you can attract, the more drivers the more customers, and you get these virtuous self-fulfilling feedback loops, meaning that you get increasing returns to scale, whereas in the past that almost wasn’t possible in economic terms.

Stian: Yeah, that’s definitely true. And I think those network effects you talk about are a really important part of this kind of scalability of intangible assets.

[00:18:07.18] Ben: Do you think we should be using more antitrusts? So you talked about Facebook and when I think about Facebook, I think, you know, the initial platform was super successful, had very strong network effects, it delivered a lot of utility to its customers. But since then, you know, it’s copied features from other people like Snapchat, it bought Instagram. And I just wonder, you know, should we be using antitrust to stop the big platforms from getting even bigger through copying and m&a, for example?

Stian: Antitrust and competition policy clearly become very important in an era of intangible assets because of this kind of tendency of the best companies to do really well. The flip side is, I think a lot of the old rules become a lot harder to apply. So, traditionally, we’d look at an economy, and also we’d look at an industry and we’d say, if the kind of concentration ratios are above a certain level, then that’s a problem and we need to break up the leader firm or we need to block acquisitions. That becomes a lot harder in this kind of economy, I think, for two reasons. Firstly, because these synergies because there are so many crossovers between different types of assets, it becomes a lot harder to define an industry. So, for example, you know, are Facebook and Google in the same industry? I mean, on one level, they’re clearly not — one is a search engine, one is a social media site. But, you know, if you’re an advertiser, they might look a lot like they’re in the same industry. So it becomes a lot harder to make those distinctions. I think the other thing is that, you know, the kind of silver lining of scalability and spillovers, is that although businesses can thrive and grow and their dominance can get entrenched, the flip side is, when things go wrong, they collapse very quickly and your rivals can grow up very fast. So the kind of optimistic vision of competition in a world of intangibles doesn’t look like a market where there’s kind of, you know, seven or 17 or 70 competitors all in the same market. It might be a market where you have people who temporarily look a lot like very dominant, almost monopolistic players, but where there’s a lot of competition almost across industries, and where you have enough dynamism, enough opportunities for startups, that people like Facebook and Google occasionally get dethroned.

[00:20:29.04] Ben: I agree with that. I think there’s not enough documentation of negative network effects. Because, you know, on the way up, it’s exponential; potentially, on the way down, it can be exponential too. Are you saying that competitive or antitrust policy is difficult to execute, therefore, we shouldn’t try? Or are you just saying that we need to find new sort of yardsticks for anti-competitive behavior? Because similarly, you know, it’s difficult to look at concentration; it’s also difficult to look at price because so often these platforms lead to lower prices because they’re monitored indirectly.

Stian: I think the short answer is, it’s probably the latter of your two things. It’s more that we need to kind of come up with new ways of analyzing this new way of looking at it. And that’s really tricky because one of the nice things about the world of 20 years ago, if you were a competition regulator, your job — I don’t want to say it’s easy; it was a difficult job — was quite rules-based. There were ratios and there was a whole academic infrastructure of how you would think about the concentration ratio in a particular sector, although a lot of judgment needed to be applied to that. That was kind of some yardsticks. I think if you’re looking at this kind of thing now, it becomes much harder. And in the same way earlier that we were saying that to be a sell-side investment analyst, scale becomes more important and the job becomes harder. I think that’s also true if you’re a competition regulator, which I guess where that takes you, if you’re to say, “What does this mean for politics or for public policy?” is a really unfashionable position. Basically, it means you need to spend more money on people who’ve been derided as bureaucrats and pencil pushers, more money on their analytic ability, and be more willing to at least consider innovative approaches to how you do those kinds of things.

We shouldn’t use the intangible economy as an excuse to give up on doing just the basic stuff to make society fair.

[00:22:14.20] Ben: But it all becomes a bit less objective, doesn’t it? Because in the same way that… You know, a sell-side analyst you could sort of test in advance their ability to understand the company accounts, or you could test civil servants’ ability to understand a legal framework, or similarly, you know, financial information. It’s very difficult ex-ante to understand or to kind of determine how good people are going to be at those jobs, right? How much to pay them and so on, right?

Stian: Well, it becomes much more judgment-based. And one of the things that we know from, there’s, I think, a whole branch of Management Science, looking at this kind of thing, that if it’s harder to measure performance in these jobs and more discretionary and more judgment-based, that typically leads to higher salaries, and it’s a more costly process to run.

[00:23:03.07] Ben: But I think in the world of antitrust if decisions are taken more based on judgment, then I suppose they’re more open to legal challenges and so on.

Stian: Yeah, you’re absolutely right. I mean, it’s really interesting. We see that across the piece as a result of intangible, so it’s not just… I mean, we can come on to talking about this a little bit later, but this is also an implication of spillovers, for example. We are probably in a world where one of the issues of spillovers is businesses will invest less than is kind of socially optimal in stuff like r&d. If you’re in a world where you want more r&d investment, but businesses won’t do it, that probably means you need governments or research institutes to do it. Again, that’s quite a judgment-based process, so you’re sort of saying you’ve got to trust people in positions of authority to do this kind of thing, which is particularly challenging in today’s political circumstance. So that’s a real dilemma.

[00:24:00.21] Ben: Do we need stronger IPE protection? Because I guess that’s, again, a double-edged sword, which is, what’s the right balance to anything?

Stian: So I guess the things we’re trying to balance, the spillovers of intangibles would suggest that you want kind of tough clear IPE rules because you want to make sure that the stronger your IPE rules, the more the incentive to own IPE and to invest in it are. Now, the problem, the thing that complicates that is the synergy between intangibles. So, if you take a product like Spotify — it’s a great example of something born from the synergies of intangibles, because you’ve got music rights, which are kind of one intangible asset, you’ve got the software, and the network, and the customer insight that Spotify has. By combining those, they’ve created a really valuable product that many of us are very happy to use. Now, suddenly, what people at Spotify have always told me is that if the music rights industry had their way, if they had tougher IPE rules and kind of more political influence that Spotify would never have been allowed to get off the ground. They would have been sued and out of existence in their first year or two. Now, I guess that’s the kind of great example of if your IPE rules are too strong, you don’t have a problem with spillovers so people will very happily make lots of music because they’ll make lots of money from it. But you’ll never get an innovation like Spotify, because it will always get crushed. So, I guess this comes back to what you’re saying. You need to strike the right balance between the two.

One of the ways to tackling inequality in an intangible economy, surprisingly, is through a very tangible asset — it’s through housing. It basically means that making it easier to build housing, making it cheaper for people to move to places they want to move in, becomes even more important.

Stian: I guess one interesting — if we sort of say, well, what’s the current failure mode of IPE rules? I suspect there’s probably quite a range of IPE rules that would work okay. What doesn’t work okay is a set of rules where there’s a huge amount of opportunities for special-interest lobbying where things get very distorted. So I guess the US patent system is kind of notorious for this, where you’ve got specific jurisdictions where a lot of patent lawsuits take place because they’re particularly pro-rights holders. I think the East Texas courts for patents seem to be like that. Similarly, in the US, you’ve got quite a lot of uncertainty. So you might have come across the copyright lawsuit over Pharrell Williams and Robin Thicke’s song “Blurred Lines”. So there was a huge lawsuit where the estate of Marvin Gaye sued Pharrell Williams and Robin Thicke for basically creating a song that seemed very much like a song that Marvin Gaye had written. And what was really interesting about this case, is that Pharrell Williams says he actually set out to create a song that was inspired by the Marvin Gaye song, but didn’t breach copyright. And it turns out, you know, there is a whole industry of forensic musicologists who would advise you on whether your song breaches copyright or not. And what was interesting is, in this case, the case went to court and I think it was a jury trial, weirdly; the jury just came up with a totally unexpected ruling in favor of the Marvin Gaye estate, even though everyone thought what was going on was kind of probably okay, with the result that the music industry is still talking about this. They’re saying, “Oh, well, you know, in light of this trial, what are we allowed to sample? What are we allowed to be inspired by? So that’s a kind of example of where an unexpected, quixotic interpretation rule is especially damaging. In the same way that, you know, if your business owns a factory, and it is possible to repossess that factory, sort of, you know, 5% of the time based on the phase of the moon or something like that, it would create a lot less incentive to invest in fixed assets.

Stian: So I guess what that means, probably matters less about precisely how strict the rules are, as much as making sure they’re clear. It also means that if you’re a government, you need to spend quite a lot of effort resisting the efforts of either rights holders or lobbyists to make little exemptions and carve-outs in the rules in their favor. Having been on the other side of the table working for the government on IPE policy, it’s really difficult to do that. IPE lobbyists are really smooth, they’re very kind of effective, they’re very highly paid. So that’s a challenge.

[00:28:17.19] Ben: Okay, I want to move on next to inequality. Let’s start with the inequality between people, right? So you’ve already alluded to this that where you have the right skills, the payback is going up, remuneration is going up. What are the kinds of skills that are most in-demand in an intangible economy? The most valuable.

Stian: Some of them will be the skills that are probably obvious — the tech skills; if software and algorithms are really valuable, the ability to code, the ability to manage teams of coders, or the ability to kind of manage big scientific projects and research projects. Those are clearly going to be more important. But that’s probably obvious, everyone knows that. The things that may be a little bit less obvious, is that in a world where the spillovers really matter, where it’s really important to combine synergies, the ability to bring those things together, also matters a lot. And those are often kind of soft skills. They’re often skills of hustle and entrepreneurship or social skills, things like the famous reality distortion field that Steve Jobs was famous for creating. Those things potentially become even more important in an economy like this. The other thing that I guess is potentially troubling about this is a world where who owns these assets and who has the right to use them is less clear. You could be in a world where political influence or even soft social influence becomes more important — whether that is retired politicians taking on high-profile jobs, whether it’s Instagram influencers, those general soft skills probably become more financially valuable than they were worth 40 or 50 years ago.

[00:30:02.09] Ben: Who loses out? What skills are less valuable, less solicited in this new world?

Stian: Well, one direct effect is that in some cases, these intangible assets directly relate to making some more routine jobs even more routine than they already were. Kind of the proverbial example here is, say, working in an Amazon warehouse, where, compared to a traditional warehouse job, intangible assets allow you to be more monitored, they generate a quicker work pace, which I think most people say this makes these jobs less enjoyable and less well-paid than they would otherwise be. So there’s a kind of direct effect there. But I guess there’s also an effect where if what you’re seeing is social status, social privilege, educational opportunities become more important, the flip side is that the pain of not having those things gets higher. So, you know, if you are more socially excluded, if you’re in a place that doesn’t have these job opportunities, it’s kind of not surprising that you will feel more left behind and that your sense of social exclusion — which, you know, there has always been kind of a divide between the big city and the kind of small town or the countryside; that’s always been there culturally. But the fact that cultural divide gets kind of underpinned now by an even bigger economic divide, is kind of… You can see that playing out in our politics and our current society at the moment.

[00:31:24.22] Ben: We definitely see that bifurcation of society in things like the Brexit vote. 14–52. Are we seeing, do you think, in a way, more losers than winners? I mean, relatively speaking, right? Because, you know, we don’t see massive rise in unemployment but what we do see is potentially a big bifurcation in the quality of the employment and the remuneration of employment. And I’m just wondering, you know, since we can see inequalities rising, is that because, you know, there are increasingly a small number of winners, if you like, or big winners, and then the overall population is tending downwards, in a way, in terms of, you know, real income?

Stian: Yeah. I mean, I think it’s always hard to say what’s ultimately driving inequality, because you can always, even if you have an employment system that’s creating a lot of inequality, you can always tax, you can always redistribute to generate more equality afterwards. I guess the kind of an optimistic way of looking at this is that this intangible economy, as well, is generating some of these superstar jobs that are really prestigious and really highly paid. It also generates a lot of jobs that are potentially more satisfying, more fulfilling for people to do than your kind of traditional job 50 years ago — even if they’re not as highly paid. So, you know, there’s a lot of jobs in the creative industries that are not particularly highly paid but all the research that has been done on well-being suggests that people actually like doing these jobs much more than potentially some jobs in traditional manufacturing. So I wouldn’t be totally pessimistic, but it’s definitely something that we need to be aware of this bifurcation between these elite jobs, and the kind of more socially-excluded mass.

[00:33:09.24] Ben: What do we do about inequality in this way? Because we have, I suppose, a small number of superstar firms, a small number of superstar individuals earning, sort of excess rent, if you like, or whatever. Excess returns on their skills? Is the answer to tax that and redistribute it? Or is that an industrial age policy idea that doesn’t hold someone in the digital age?

Stian: I don’t think we should give up on tax redistribution yet. I think that is pretty important and is still worth doing. And, you know, for all the people who talk about international tax-avoiding companies, I think there’s still quite a lot of low-hanging fruit there. In a country like the UK, you can just employ more tax inspectors. And, you know, we kind of under-invest in that. There is probably a low-hanging fruit in just basic compliance. So we shouldn’t use the intangible economy as an excuse to give up on doing just the basic stuff to make society fair.

Stian: I guess what you then get is, I think there have been some interesting angles where aspects of the intangible economy maybe exacerbate unexpected problems of inequality. So, one thing that there’s been a ton of research on looks at the cities that do really well out of the intangible economy — researchers were both in the US and in the UK. One thing that’s really interesting, if you take the Bay Area, Northern California, a great example of a place that’s been very successful because of intangible assets; not just computers, even before that. And what research shows is that once upon a time, housing in and around the Bay Area was pretty cheap. It was easy to build more housing when you needed to, and therefore the cost of renting or buying a house nearby was kind of somewhat affordable. And what that meant is if you had people making a lot of money in, say, San Francisco, that money somehow got spread around, because it was easy to move from a poorer part of the US to San Francisco, even if you didn’t have high skills, and you could take a low-skilled job but because you’re in a place where there were lots of people making a lot of money, you would get a pretty high wage relative to what you would have got had you stayed where you were.

Stian: And what people like Enrico Moretti, an economist who looks at these things and documents it, is that that’s kind of changed because it’s become much, much harder to build new houses in places like San Francisco; it’s definitely true in the South-East of England as well. And what that basically creates is that creates a really hidden unfairness because if you grow up in a place where there aren’t a lot of great jobs, and for whatever reason, you’re lucky enough to have a good education, to have the skills where you can take advantage of the intangible economy, you probably have a high enough salary to make it worthwhile moving to London or San Francisco. You can afford the crazy rents, your landlord will suck up a lot of money. But it just makes sense and you can grow there. But if you aren’t in that position, you’re stuck where you are. So, the old world where — and it’s very unfashionable to talk about money trickling down or trickling out — in the old economy, it did that much more than it did now. And the real barrier, one of the real barriers was rent. So I guess what this means is, one of the ways to tackling inequality in an intangible economy, surprisingly, is through a very tangible asset — it’s through housing. It basically means that making it easier to build housing, making it cheaper for people to move to places they want to move in, becomes even more important.

[00:36:38.08] Ben: Yeah. So, I guess you can’t have social mobility without geographical mobility, or it’s much harder.

Stian: Well, it’s interesting. I mean, there was a very widely talked-about book a few years ago by David Goodhart, who talked about the idea that the world was divided into somewheres and anywheres and the anywheres were the kind of Metro elite who kind of went from New York to London and just kind of didn’t care and somewheres were kind of rooted in Pittsburgh or Grimsby or wherever, and kind of loved their city. But I think there’s another way of looking at that, which basically says, it’s not that people who David calls somewheres are unusually in love with one place and hate moving; it’s that we’ve made it so that even if they want to move, they can’t afford to, so mobility has become something that only the very privileged who are going into these high-paying jobs can ever hope to do. And in a world where a lot of this intangible economy is happening in particular places, that’s a very damaging burden to inflict on a country.

[00:37:41.21] Ben: Yeah, and I think you probably have great statistics on this but it seems to be also that the intangible economy maybe doesn’t throw up as many jobs as the tangible economy. And a lot of the job growth is in what we might call proximity jobs. And therefore, we’re sort of holding back the growth of those types of jobs by, again, not allowing geographical mobility,

Stian: Yeah, you’re totally right.

[00:38:05.08] Ben: It’s becoming more and more difficult for traditional lenders — you know, universal banks, corporate banks — to lend to corporates because it’s really difficult for them to get enough comfort over that kind of loan, where it’s made in the absence of collateral — you know, physical assets that a company can pledge to the bank in order to secure that loan. And I think, again, there’s another brilliant graphic in the book, where you show that, you know, despite everything we talked about the growth of intangible assets versus tangible assets, actually, the lending is going up against tangible assets versus intangible assets, which just seems perverse. Right? So is that the root of it? This absence of collateral?

Stian: Yeah, that’s right. So, I mean it’s been called ‘the curse of collateral’, the fact that banks, ideally, want assets that they can take a charge of if a business fails. That is the way debt finance works and most businesses in the economy rely on debt finance, most financial institutions provide debt finance. You know, if we talk about stock market or venture capital, those are modes of finance that apply to a very, very small minority of businesses. So, there’s a kind of real challenge here. On the one hand, how do you develop institutions to provide more equity-based finance to a greater range of businesses? But also, how do you make a rule system that doesn’t discriminate against that because obviously, the first rule of financial structuring for a business is that debt interest is tax deductible, but payments to shareholders are not. So, you know, you’d want to finance a business with that.

[00:39:45.17] Ben: So okay, there’s a lot to unpack. So the first question is, you know, should we change that? Should debt not be tax deductible?

Stian: The kind of wonkish answer, the ideal world answer is, yeah, you want to change that. You want a world where debt finance and equity finance are placed on the same footing. And, as I said, this is quite wonkish. This is something where economists and tax policy wonks have come up with 1,000,001 proposals for exactly how you do this and all the things like equity tax credits. The problem is this, politically, would be a really hard thing to do. I mean, if you were to try and change the economy like this, you’d immediately have the private equity industry up in arms, you would create a lot of challenges for the banking system, it would be a big change. So, you’ve got to think not just about what’s the ideal end-state, but also what’s the institutional basis for it and how do you get there without totally causing lots of unintended harm to the economy.

[00:40:45.20] Ben: Exactly. Because you then form policy in a vacuum away from all the subpart dependencies. But maybe a better question might be, then, how do we get more VC-type capital flowing to the economy?

Stian: So I think that’s a really good question. Germany is an interesting example here because if you look at the way German banks do business lending, they very often will take equity warrants in small businesses, which is effectively like a way of making your debt finance more equity-like. And one of the effects of that is, if you look at, say, a British small business lender — you know, British High Street bank making loans to small business — almost invariably, they will look to take charge on the owner’s or director’s house. And that caters to the idea that the owners own their own house, which is obviously quite an assumption anyway. So it kind of skews you towards lending to a certain type of person. Now, that’s basically a way of getting tangible collateral, in a business that’s mostly intangible because a house is kind of pretty tangible. Now, in Germany, probably partly because homeownership rates have always historically been much lower, and more people rent in Germany, banks are gonna have to find a way around that. So these equity warrants is something that they’ve always done. Now, it means the banks end up doing more due diligence into the businesses because you need to understand more about how the businesses work. But I guess, they figured that’s a worthwhile cost, because the upside of these equity warrants is quite high. So, I guess that’s one example of it being done well. I mean, if you look on the fringes of the venture capital sector, it’s really interesting to see different types of more kind of growth-oriented venture capital branching into more markets and I think it’s really interesting from that point of view. So, I think we’ll see a gradual growth there. But this is really hard. This is a 10-year project, and will probably require governments to get behind it, too.

[00:42:40.18] Ben: Now, a lot of these intangible businesses have become a bit better understood. And, you know, so you see people lending, for example, or putting debt into businesses that have SaaS revenues, or you see people putting debt into businesses where they understand the mechanics of a game, for example — you know, they know the points of which a game is going to get large pickup, and they’re happy to invest to allow the games provided to invest in paid advertising on Facebook or whatever. So I think maybe the idea that debt no longer works is perhaps too simplistic and maybe just debt needs an upgrade.

Stian: That’s definitely true. And I guess, obviously, you know, as anyone involved in that markets will know, some lending is against collateral, but actually, you know, a ton of debt is lent against cash flows and expectations of cash flow. But I guess, to your point, what that does, it requires a greater understanding of what those cash flows look like. And, again, this is another one of these things, where it advantages the smart money. If you can understand these streams of cash flows and get enough certainty to be able to lend against them, then knowledge is unusually valuable.

[00:43:49.14] Ben: Something that’s only really occurred to me lately, since I started a business, which is, if I invest capital on the stock market — this may vary jurisdiction to jurisdiction — I face a capital gains tax of x, right? And that capital gains tax is the same as if I take a much more risky stance of investing in a business that creates employment, generates intangible assets with spillovers. So do you think we need a separate treatment of people, depending on where the gains from capital come from?

Stian: That’s really interesting. We’ve got some kind of limited examples of that already. You know, there are some tax breaks for providing risk capital either in the UK — things like the seed enterprise investment scheme, venture capital trusts, and so forth. So, that principle is there already, but it’s a really interesting question. I think, broadly speaking, you know, if the spillovers are good, then ways of subsidizing those — whether that’s through direct funding or tax breaks — it seems like there’s a strong economic case of that.

[00:44:54.06] Ben: And then the last question I wanted to ask you in this section was really around the role of government here because you’ve probably seen it — you know, there’s Mariana Mazzucato. In her diagram where she said the constituents of the iPhone and how many of them were spillovers from government fundamental research. And I’m just wondering, you know, there’s been, I would say, a reduction in government fundamental research in lots of countries, right? Because, you know, there was this sort of ideology of that crowding out public, private sector investment, and so on. But do you think we should maybe shift the balance there and the debate and push more money towards fundamental research?

Stian: I think there’s definitely a really strong argument saying the government should be funding more things like r&d, because they have these spillovers. If you just leave it up to business, you will get less of that than you would otherwise get because businesses can’t be sure they will internalize the benefits. And I think one of the really important things that kind of Mariana’s book really made the case for that in a kind of very powerful way, which is really important. I think there’s a lot of questions on how you do that, what the best way of doing that is, and particularly doing it in a way so that businesses also invest alongside because obviously, what wasn’t told in that story of the iPhone, is that alongside lots of fundamental research, there was also a ton of often quite unrewarding r&d done by businesses, whether it’s gonna join Magnetoresistance, which is how you got the kind of hard disks that these devices rely on, to the actual turning these things into useful consumer-friendly products. All of that requires a lot of investment as well, which often has quite high spillovers. So, public investment, yes, we absolutely need more of it. And it’s quite well that a lot of governments, I think, are moving in that direction. It also becomes even more important to work out how it may not mesh well with what businesses want to do.

[00:46:44.17] Ben: So many people talk about this sort of K-shaped economy, where everything that was analog is really suffering and everything that was digital or intangible is kind of accelerating. And I’m just wondering, is that a too simplistic read of the situation? I wanted to start with how intangible assets fare during the lockdown, for example, because I’ve read a piece that you wrote on Medium where you made this somewhat counterintuitive argument that actually intangible assets might not be faring as well as you might think, during a lockdown.

Stian: Yeah, absolutely. I mean, I think the pandemic was very interesting from the point of view of what you said for the intangible and the tangible economy, because when it started out, I think there was a huge focus on whether we’ve got our tangible asset response right, the way I would describe it. So people sort of say, you know, “Can we build enough hospitals? Do we have enough ventilators? Do we have enough factories making personal protective equipment?” And you know, everyone was very impressed when in Wuhan they built this huge new hospital, and we would say, you know, “Will the UK be able to cope? Will the US be able to cope?” And then we built the Nightingale hospitals, this is great. Wow. So this was all about tangible assets, you know, physical things. But I think what people kind of rapidly realized is that, actually, that wasn’t the real challenge and it wasn’t the thing that people struggled with, because actually, what people came to realize was really important was what you could call intangible assets. So, first and foremost, it was, “Can we develop vaccines that are effective? And can we put in place the supply chains to get them out there?” Both classic intangible asset problems. “Can we put in place tests and trace systems?” Test and trace systems are made up of software, they’re made up of processes, they’re made up of data? You know, those were classic examples of intangible assets. And some countries did them really well and some countries did them maybe not so well. And I think if you look at the differential mortality rates in different countries, it was, in some ways, the intangible response that really, really explained the bigger gaps much more than the tangible assets. So, I think that was kind of one interesting aspect of how the focus changed. I guess another really interesting question here is the move on what many people’s part remote working has done. So, certainly, in the UK, the latest statistics, 35% of people are now working entirely remotely. The historical figures for that before the pandemic struck have been less than 5%. So, that’s a really big change. And of the 65% who are not wholly working remotely, a fair chunk of those people are doing some remote work. So although this isn’t the majority of the population, it’s a really big chunk of people, it’s a really big change.

[00:49:38.17] Ben: And what happens to spillovers in the world of remote work? Because, you know, I think, again, it was in the same article, which I very much recommend to people — it’s on Medium — which is you talk about how during Prohibition you could trace a reduction in the number of patents because people needed to meet in bars to come up with some really brilliant creative ideas. And I think there’s some element of that, which is, you know, even though, ostensibly, we’re still interacting with our colleagues in a very collaborative manner, it’s different, right? It’s different if you’re remote, and you can’t go for a beer or coffee, whatever, and have those brainstorming moments, those moments of serendipity. Is it your hunch that this is going to lead to fewer spillovers.

Stian: So I think this is the $64,000 question. So, no one really knows and I think, to some extent, it’s probably up for grabs. It’s almost certainly true that it’s going to have some effect on spillovers, because you’re not getting these, as you say, these casual interactions that maybe some ideas depended on. The question is, you know, to what extent can we replicate them? To what extent, maybe, can a lot of remote working work well? And to what extent can we come up with ways of doing more remote working that gives you just enough of what you need? I mean, there was that famous saying, where, I don’t know who said it, but it was, “50% of my advertising works, I just don’t know which 50%.”

Ben: Oh, yeah.

Stian: It’s probably the same. You kind of think, well, you know, there’s probably some really important part of the time you spend in and around the office with people but it might actually only be 10% of that time. And the question is, can you work out what that is, and focus on that more effectively? So I think if we can do that, there’s a huge benefit, because remote working is incredibly good for productivity. But you know, it’s a big forced experiment.

[00:51:34.29] Ben: Well, I think the thing is the experiment is going on for a very long time now. So I’m sure people are starting to codify some of those things that there’s moments of serendipity and putting them into the way that we do remote working. Because in the beginning of the pandemic, it was very much kind of everything just moved to Zoom. And now I think people are realizing, for example, that, you know, just doing things synchronously through Zoom is not great, and Slack sometimes can be a better medium, for example. I think people are sort of now adapting the way they do remote working.

Stian: I think that’s totally true. And it’s interesting, you know, there are some industries that have been doing this for longer. So, you know, huge parts of the tech industry have been very comfortable with aspects of remote working and having remote development teams, as you say, using asynchronous communication and text communication much more than video conferencing. And I guess the real question is, can we work out the lessons for that? And can we scale them up quickly? Because that could be really valuable.

[00:52:28.15] Ben: You started to talk about San Francisco earlier on, and I had to hold myself back from delving into that. But on a few podcasts ago, we had Ian Hathaway on, and he was talking about his idea that, you know, smaller and smaller cities, if you like, can learn from San Francisco to some extent — you know, replicate the playbook. And I’m just wondering, does that diffusion of the magic of Silicon Valley happened faster now? Because maybe that was less important than it was to be in physical proximity?

Stian: Yeah, I think this is a real opportunity for anyone that wants to compete with Silicon Valley to make the most of it, partly because it’s about getting new norms in place that will help these areas. So, if we can get more comfortable with remote hiring, if we can get more comfortable with remote VC funding — something that’s often driven proximity — then this is a sort of an opportunity, as you say. There’s a kind of two-year window where some of these new practices could get trenched and people could realize their worth. That’s a huge opportunity to make a step-change. I mean, I guess the other dimension talking about San Francisco — San Francisco has kind of an interesting story. So, you know, I worked in Silicon Valley at the beginning of the 2000s. And San Francisco wasn’t really a part of the Silicon Valley ecosystem back then. The idea that this one big city is kind of the epicenter of tech is, as far as I can see, kind of something that it’s the kind of last-decade phenomenon. Silicon Valley for a very long time was just kind of the suburbs of Palo Alto and Mountain View, and places like that. And so, there’s kind of an interesting question. Well, you know, maybe the move to really core cities — maybe we might take a step back from that. So I definitely think it’s a lot to play for. You know, if you’re a city leader, or you’re someone who wants to kind of build a cluster somewhere other than San Francisco or New York, or London, then this might be a big opportunity for you.

[00:54:35.14] Ben: One of the things I thought was interesting in that article you wrote is you said that a tangible asset during lockdown doesn’t get used, right? And therefore, the productive capacity of that asset is kind of frozen. And then once things get back to normal — whatever that normal looks like — it then becomes productive again. What you said about some of the intangible assets is they degrade much faster in the absence of being used, right? And again, it was something that I thought was quite interesting because I think there’s been this assumption that everything intangible is benefiting and everything tangible… You know, you wouldn’t want to be an airline. And it was just a more nuanced kind of view of tangible versus intangible assets.

Stian: Yeah, you’re right. I mean, there’s this kind of question we were thinking about what’s the economic cost of leaving an asset, a business unused for a while, and we were speculating that maybe for a very physically-intensive business, that cost was lower. So it was easier to kind of mothball a factory and turn it back on, again, than it is to mothball an advertising agency and turn it back on again. But that’s very speculative and I think that’s something that I don’t think anyone knows the answer to that. So, there’s lots of real-time economic puzzles kind of going on right now.

[00:55:51.10] Ben: Okay, and this is the only political question I will ask you, which is, do you think that the pandemic is kind of giving a backdrop, or a unique set of circumstances in which somebody like Joe Biden could introduce a massive set of policy initiatives — a new deal, if you like? Because one of the things that we’ve talked about, every sort of policy initiative we’ve talked about: we’ve talked about some really difficult politics around it. For example, you know, opening up planning restrictions, I’d imagine is a very difficult political thing, changing the tax relief on debt would be a very difficult thing politically to introduce. So, does it give the pretext for more ambitious political maneuvers?

Stian: I think there is definitely the need. You know, there is a platform of policies that would be really great to put in place, whether that’s more investment in r&d, planning reform, making sure that we create opportunities for people to take on these new jobs, investment in education. There’s definitely a need for that. I think the really difficult thing is that in an age of populism, all these things get harder to do. So I talked to you earlier about when we were talking about the competition policy, that really actually what you need is, you know, more bureaucrats, more pen pushers, and to give them more power. Now, that is a pretty hard sell in the age of queueing on and, you know, ramp and populism in most countries. So you have this kind of weird situation, the need for this kind of institutional reform is greatest at a time when the political dynamics push you in the opposite direction. You know, if you want to sort of say, “Let’s spend more money on r&d, because that will lead to good business opportunities and create economic growth and more jobs.” What does it mean, when you say, “Invest more in r&d”? It means you’re going to tax people more, and you’re going to pay that money to kind of liberal elite scientists. That’s the kind of paradox and I think it’s really interesting to see different people trying to negotiate that in different ways.

[00:57:53.25] Ben: And you don’t think that the pandemic gives kind of enough political capital to unlock the paradox? So you think it’s not as simple as that?

Stian: It might be, you’re right. You’re totally right. Maybe the pandemic will give the opportunity to do this. And maybe it’s the kind of thing where even if you can’t do the big push, you can get some of the way there and that will still make a difference. It’s definitely tricky, because the politics and the policy push in opposite directions.

[00:58:23.04] Ben: Would you mind sharing with us one of your favorite books?

Stian: A really interesting book I read recently, is a book called “The Hungry Empire” by Lizzie Collingham. And what’s fascinating about it is it’s basically a book about the history of the British Empire seen through the history of food. And what’s so interesting about this, it obviously speaks to a lot of issues around global history, around race, around the relationship between Britain and the rest of the world, all of which is super topical at the moment. But it does it through a prism that I think will be really interesting to anyone who’s interested in technology, in kind of economics, in kind of the business of how the world works. It’s a long way from technology, but in some ways, it’s a book that’s very much about technology and a lot of issues in the world today. So, it gets a strong recommendation from me.

[00:59:12.19] Ben: Okay, I’m gonna read that, and, for the listeners, we’ll share the links to all of these on our website. So the next one, a favorite recent article.

Stian: For me, I think something I would absolutely recommend here is the work of Enrico Moretti on cities. We talked a bit about it earlier, but he wrote a great book called “The New Geography of Jobs” and a few articles based on that where what he looked at was the way that we live in a world where great cities, dynamic cities are increasingly economically important. But one of the problems that we have is that the ability to live there, to afford to pay the rent there or move there is unequally distributed because we make it harder and harder to build in these cities. And he effectively made the case that it is totally kind of countercultural range where we like to talk about somewheres and anywheres but he talked about the fact that actually what lies at the heart of our problem is the fact we’ve made it harder to move. And this is not something that people actually want. There’s not something that makes people happy. So to me, it’s a very important and topical article right now.

[01:00:15.02] Ben: And then, the next one is a favorite thinker, somebody whose essays and articles you regularly turn to.

Stian: This may be — I don’t know if all of the people you have on say this, but I’m addicted to the blogger Scott Alexander, who used to write Slate Star Codex. He’s now gone on to Substack and the new version is called Astral Codex Ten. You may know, he’s a US-based psychiatrist, he’s kind of very involved in the rationalist community. He writes about technology, economics, psychology, about kind of almost anything. He has an absolutely incredible writing style. Everything he writes is an absolute breeze. But he does it with a kind of an incredibly good nature. So a strong recommendation from me.

[01:01:04.17] Ben: This is exactly why we ask these questions because I confess to not knowing Scott Alexander.

Stian: It’s amazing.

[01:01:11.03] Ben: Okay, the next one: a productivity hack, something that enables you to operate at scale in the intangible economy.

Stian: This is a very weak productivity hack because I’m very bad at it, but I do try and do 10 minutes of mindfulness meditation at the beginning of every day, and I’m probably the worst meditator in the world but either because of some kind of placebo effect or because it’s useful, it does make me feel a little bit more on top of things.

[01:01:39.28] Ben: Okay, and then the last question is a favorite brand.

Stian: My surprise favorite brand I think it would have to be Bovril. I rely on Bovril for my protein needs. It keeps me going in home working, kind of always have a mark of it on the go. It’s a remarkably nutritious food. And it’s got a retro appeal in the sense of it’s something that was very big 100 years ago, but has kind of come back into popularity in an age of high protein, low carb eating.

[01:02:09.29] Ben: Yeah. And I think it’s something that’s quite polarizing. So it’s good that you’ve taken a slightly controversial position there. That’s good.

Stian: I’d like to think so.

Ben: I guess many people that listen to this will not know what Bovril is. So that’s gonna be interesting to see and googling.

Stian: Yeah. A very affordable, a very accessible product as well.

Ben: Great. Stian, this has been an absolute pleasure. Thank you so much for coming on the podcast and sharing your insights around this structural shift from the tangible to the intangible economy.

Stian: Thanks so much, Ben. It’s been a real pleasure talking to you about it.

Transitioning to a Multi-polar World (#30)

with Michael O’SULLIVAN, author of The Levelling: What’s Next After Globalization

Your host, Ben Robinson, is joined by Michael O’Sullivan, author of ‘The Levelling: What’s Next After Globalization’ and former CIO of the International Wealth Management Division at Credit Suisse. Michael currently serves on the World Economic Forum’s Global Future Council on the New Economy. In this episode, Ben and Michael discuss what is the role central banks will play in the transition period to a post-globalization, multi-polar world; what international organizations should be completely reshaped to meet the needs of this new world, what new institutions should be created, and more.

Michael Recommends

 

  1. One book: “Putin’s People: How the KGB Took Back Russia and Then Took On the West” by Catherine Belton
  2. One influencer: Chris Watling of Longview Economics
  3. Best recent article: Work done by Lisa Sanders for the The New York Times
  4. Favourite brand: “La Femme sans Tête”, bières artisanales de Paris
  5. Productivity hack: be ready to say ‘no’, politely.

Globalization is ephemeral, it’s in the ether, in the sky, in the way that people tend to look at it. There’s no ministry for globalization. So, it’s quite hard to get a grasp on it.

[00:01:23.24] Ben: Michael, thank you so much for coming on the Structural Shifts podcast. I’ve been really looking forward to this because it has been delayed a couple of times, but we finally got to do the podcast.

Michael: Yes, thanks! It’s a great pleasure. I’m delighted to do it.

[00:01:36.27] Ben: I wanted to kick off by just testing a little bit the premise of your book, ‘The Levelling’. Is globalization really over? Or are we just in a period where it’s sort of temporarily in retreat?

Michael: No, I think it’s dead. I think it’s over. I think there are many people, I suppose, for good reason, whose fortunes are tied to globalization, who don’t want it to be over, who deny its passing. Maybe it’s been dwindling as a force — in the last two years, we have been storing up many of the side effects or the perceived side effects of globalization. And that, I think, it’s been dealt a fatal blow by COVID. And I should say, I’m in favor of globalization. I mean, it’s done so much good. Billions of people have risen out of poverty, it’s transformed cities like London, Dubai, etc, it has given us so many technologies. So, I’m in favor of globalization but my reading, as it were, of the situation is that it’s dead and going. We’re moving on to something else now.

[00:02:50.15] Ben: And how objectively can we show that it’s over? Because, again, might it not just be changing form because, if we look at financial flows or trade flows, sure, we can show that it’s in retreat, but what about things like the flow of data? Is it not just becoming more digital?

Michael: I think there’s maybe three things just to bear in mind. One is that globalization is ephemeral, it’s in the ether, in the sky, in the way that people tend to look at it. There’s no ministry for globalization. So, it’s quite hard to get a grasp on it. We do have the benefit of history that we’ve had a wave of globalization from 1870 to about 1912, which looks very like what we’ve seen in the last 30 years or so. And that wave of globalization came to a juddering halt with economic crises, nationalism, etc. So, all of the warning signs are there. And then, thirdly, if I debate globalization with people, what I try and do is bring that debate down to indicators — the movement of people, the flow of ideas, trade — and all of those have been coming to an end, they have been cut off in different ways. So one example I give is that globalization began with the fall of communism, the opening up of Eastern Europe — not just economically, but democratically as well — and now we have events like the shutting of democracy in Hong Kong, which is the bookend to what happened with the fall of communism. You mentioned digital globalization. I think that’s quite interesting because tech and digitization have played a really strong role in globalization but the channels of digitization are being funneled in different ways. So one example I give you is Google in the early 2000s had about, I think, a third of the search market in China. Now it has close to zero. So, what we’re actually seeing is we have more digital activity, but it is becoming more regional. You look at TikTok as another example — potentially global company now being shuttered in terms of how it can be used not just in the US, but also in China and other parts of the world.

One of the problems we have, there really is no Minister or Prime Minister for globalization. It is an interconnected, interdependent activity, and many of those interdependencies are breaking down. In our world, the role of the nation state is still very, very important —Michael O’SULLIVAN

[00:05:18.01] Ben: Why do you think is over? Because as you yourself said, it’s had massive, massive positive effects. It’s a positive that raises economic activity and wealth for everybody. So why do you think it’s overall coming to an end?

Michael: I think that the prime concern I would have is that the economic engine of globalization has slowed. So, in many emerging countries, the rate of growth is slowing. In the developed world, productivity has been slowing — notably so in countries like the UK, where it’s at multi-decade lows. The financial side effects of globalization, the negative ones have been rising, so the world is becoming more and more indebted, which will slow future growth. And then, there’s a range of economic problems that people associate with globalization, such as inequality. To my view, it has really, nothing to do with globalization, but rather the way individual countries have harnessed it. So if you look at the most globalized economies in the world — Ireland, Netherlands, etc. — the income inequality in those countries is actually reasonably well managed, because they use tax to distribute the benefits of globalization. If you look at the US, where inequality is really egregious, they have not used their tax system to spread the benefits of globalization, and that creates discontent with globalization,

[00:06:52.07] Ben: Had globalization been better managed, then it wouldn’t be coming to an end?

Michael: I think that’s largely true. And I think one of the problems we have, there really is no Minister or Prime Minister for globalization. It is an interconnected, interdependent activity, and many of those interdependencies are breaking down. In our world, the role of the nation state is still very, very important. I think COVID is a great example of this: different countries have managed and digested globalization in very different ways with different consequences.

The post-globalized world order will be a multipolar one. What I mean by that is you’d have at least three big regions: China, Europe, the US — for the reason of their size will be dominant but also who will do things increasingly differently — Michael O’SULLIVAN

[00:07:35.16] Ben: You talk quite a lot about Brexit in the book. I suppose we should see Brexit as being part of something bigger, i.e. the end of globalization. But can we really draw that conclusion? I mean, could Brexit not just have been a political mistake, a referendum that should never have happened, a unique set of circumstances? You know, the refugee crisis, etc. Can we not just see Brexit in those terms? I mean, does it have to be read as part of this end of globalization?

Michael: That’s a very good question. To give context, we’ve had two big waves of globalization. The first of the early 20th century, which was led by Britain from London. The second was an American wave of globalization. So, both waves have been led by Anglo-Saxon countries. And the two main Anglo-Saxon countries — the US and the UK — are now in political crises. That much is clear. And those political crises are also crises of globalization. In the case of the UK, I think there is an argument that the calling of the referendum, or the way it was constructed, was accident-prone and could have been done better. I think, however, the way I tend to look at globalization, it’s like a big block of ice that’s begun to fragment and the first really big crack in the world order was Brexit — something that many people thought would be inconceivable happened — and that respected was the first shock, and I think the first really big event that’s taken us into the post-globalization age. And why I’m convinced that it’s linked with globalization is that many of the underlying problems in the end of globalization argument — low productivity, inequality, a country dominated by one city, one elite — you find all of those in the UK. And I think what I’m also drawn to is this whole idea of the rise and fall of nations and the fact that nations go through cycles and globalization is doing the same. The UK is now in a cycle where it’s in, I think and I hope, it’s sort of a bottoming out phase. And in the next few years, we’ll begin to see things improve and be reconstructed. So there is that logic to it, I think.

We would probably feel the end of globalization more severely if it weren’t for central banks, but the cure is arguably storing up worse down the line — Michael O’SULLIVAN

[00:10:09.09] Ben: How does a country like the UK fare in a world that’s deglobalizing? Because, you know, it’s detached itself from a very large trading bloc and so, now it’s seeking, I guess, new alliances, new trading partners in a world that has become less interested in trading. So, how does that play out, do you think?

Michael: Yeah, it has a lot of risks. And one of the risks, I think, is that the discourse in Westminster and in London is not really focused on what’s happening to the world order. It’s really very inward-focused — and this is a risk that things shift outside the UK, and it doesn’t adapt. So I think that there are several things. The most important, I think, is that the post-globalized world order will be a multipolar one. What I mean by that is you’d have at least three big regions: China, Europe, the US — for the reason of their size will be dominant but also who will do things increasingly differently. So, if you look at the way the EU is imposing itself on the tech world in terms of regulation, that’s a good example. So the UK needs to ask, “Okay, first of all, do we want to be outside this very powerful block?” — and that decision is already made. So, then it becomes a relative decision: “How do we position ourselves between these big blocks?” And in particular, two of them, the US and Europe are very, very close political and trade partners. And my hope would have been that they pay acts to arbitrage these regions. It’s a sort of third independent, but not neutral party, whose upholding of the rule of law makes it more where people feel very secure to do business. So, in that plate, the declaration in Parliament that the UK would break the rule of law is extremely worrying. And I think the international consequences of this have not been thought out at all.

Coming out of the global financial crisis, central banks were like doctors who gave financial morphine to the economic patient — Michael O’SULLIVAN

[00:12:17.07] Ben: What role do you think central banks are playing? I mean, do you think their role is helpful or not? In the sense that are they smoothing the transition period by cushioning economies from some of the worst economic effects of the transition? Or do you think they’re prolonging the transition and exacerbating some of the ills of the current age, such as wealth inequality?

Michael: Yes, this is a very good question — quite a complex area. We would probably feel the end of globalization more severely if it weren’t for central banks, but the cure is arguably storing up worse down the line. So the way I tend to phrase that is that coming out of the global financial crisis, central banks were like doctors who gave financial morphine to the economic patient. You know, a doctor, if you’re injured, he or she may give you morphine for a couple of days to take the pain away, but they won’t do it every day for 10 years. And that’s what we’ve had. And to that end, markets, investors, many other players have become dulled and stultified to the reality of economics and what’s happening. So, we’ve had no inflation, except in asset prices, valuation for government bonds for many equities, the technology equities are at all-time highs. What we have is we have bubbles in financial markets, which potentially rob future generations of the returns they will need for their pensions. And I think, at the same time, what the cover of central banks has done is to make it much less urgent for politicians to address underlying economic problems. So, if you look at Europe, there’s actually been relatively little reform on things like capital markets union, banking reform — all these things that were super urgent nine years ago, where we had promises from finance ministers that they would be addressed — pretty much nothing has been done.

[00:14:27.09] Ben: Yes, slowing down reform. And also, I guess, it’s also removing some of the market censoring that happens to politicians and to political actions, right? So, you know, you might argue — I’m sorry, I don’t want to get into counterfactuals, but you might argue that in the run-up to Brexit, there would have been harsher market movements, because the central bank was intervening.

Michael: That’s absolutely true. And I think it raises many legal questions, too, as to what end should central banks go in terms of trying to intervene in markets and economies? And you now have a situation where central banks are trying to mandate themselves or justify themselves on a whole range of criteria. The European Central Bank is now adopting the mantle of the green economy; in the US, the Congress has proposed that the Fed do everything it can to reduce racial inequality, which is a just cause, but it’s much, much better left to politicians and lawmakers than central banks. I don’t know how they would go about doing that. What we want in democracy is we want parliaments and governments to address these problems, not central banks to, if you like, swamp the whole political economy in terms of what they’re trying to do.

[00:15:57.16] Ben: If we break those things down, then, so first of all, how do we sort of de-politicize central banks? Because as you say, it’s absurd to think that the body in charge of monetary policy could affect racial inequality. So, how do we de-politicize central banks?

Michael: So, the world went through — from the ’70s onwards, many central banks were politicized in that their governors or presidents had, in some way, ties to the governments who appointed them. And then we went through a phase where central banks were trying to crush inflation, which was politically very unpopular — the best example was Paul Volcker in the US. And we’ve gone through an era of independent central banks who are run by technocrats, civil servants, independent from politics. And that is beginning to change, I think. There is a sense that, maybe in the States, that the heads in the central banks are somehow siding with the mandates of individual governments. It’s been the case certainly in Japan. And I think that there’s several things we can do. I think the appointment process for central bankers is important, and also the people who populate the committees of the central banks; stressing their mandates, and narrowing their mandates is also very important. And maybe, I think, in future what we need — we probably need another crisis to get over this — is a curbing of extraordinary powers, like quantitative easing. That, when it was introduced, was something that was considered off the charts and now it’s normal. So, there needs to be a debate about the extraordinary powers that central banks have.

I would prefer a total reboot. I think some institutions have remained relevant, like the OECD, because they’ve had a good sense to attach themselves to a bigger framework in the shape of the G20. Others, I think should be completely reshaped — Michael O’SULLIVAN

[00:17:52.21] Ben: Yes, that was gonna be my second question, which is, how do we roll back the balance sheets? How do we de-leverage the central banks? Because I think in the book — you know, the book is already out for a year, so they’re even higher, particularly COVID — but you said they’re as high as they’ve ever been since the Napoleonic Wars. So how do we de-leverage central banks and get back to some sort of sensible level of leverage?

Michael: So the background picture to this is that world debt to GDP levels have been rising, they’re passing out the previous high of the Second World War, on course, as you said, to hit the highs of the period around the Napoleonic Wars. And that’s quite extraordinary if you think of the events associated with that. One of the reasons debt is rising is because interest rates are so low, governments, companies find it very, very easy to borrow and, in particular, government debt has been hoovered up by the central banks. Now, there’s a number of ways of walking back from this. One is the enlightened approach where policymakers decide, “Look, there’s just too much leverage in the world system. We need to pare it back.” And that’s done in a collaborative way across central banks. I don’t think that’s going to happen — that would be too ideal.

[00:19:20.20] Ben: This is what you refer to as the ‘New West Failure’, right?

Michael: It is. We need a reordering of finance in the world, along the lines of the Westphalia Treaty of 1648. That’s a very grand example. But, you know, the size of central banks, the size of debt in the world, is the biggest in centuries. So, we do need a grand setting for this. I certainly think that we are storing up the ammunition for the next financial crisis which will be a crisis of debt and ‘debtness’ and it will probably come about by, you know, additional QE from central banks not working or not functioning, a loss of confidence, and then, for the first time in some time, people begin to look to get the money they’ve lent back, either from governments or countries, projects, companies — and it’s just not there. You get a deep recession. Maybe central banks will try more QE and that won’t work because often, in a credit crunch, monetary power can — in a deep credit crunch, monetary policy can lose its power. So that’s sort of a negative, nasty scenario, which I don’t like to paint, but in the absence of enlightened policy, that’s a potential route for the future.

[00:20:51.26] Ben: And I can’t resist asking you this — I know we’re gonna go slightly off-topic here — because you used to be a CIO, so it’s too tempting not to ask this. But how does one position a portfolio for a world where there’s a massive governmental debt crisis on the horizon?

Michael: Yeah. So, I think you do a number of things. The first thing, I suppose is to figure out what really is a safe asset. So what government debt will you feel really safe holding? I mean, that’s why German bonds, for example, continue to trade-off at a negative yield, because it’s one of the true safe assets — maybe Dutch debt as well. So, if I had a portfolio and there were private equity in it, for example, I would switch that into things like distressed debt funds, long/short credit funds. I think what you can begin to do, as well, is to look at tail-risk strategies — that’s quite a technical term, and what it means is that these are strategies that would form a small part of the portfolio, but if an extreme, negative event happened, they would pay off quite handsomely, they would tend to be kind of derivative-based or derivative-type strategies. And then also, I think, you know, in other parts of a portfolio, you want to aim to hold companies that have got a lot of cash and less debt. Ironically, some of the big tech companies fall in that category, even though they have somewhat stretched valuations.

[00:22:33.13] Ben: So, just coming back to the book and the end of globalization, how do we get back to sustained organic growth? Because some of the things that you talk about in the book have become, I guess, slightly passé or old fashioned, which is you advocate for things like education and rescaling and things that don’t seem to be at top of the political agenda right now. So, is that what we need? Do you think we need to get back to education and re-boosting productivity? Because that’s the only route back to sustained organic growth.

We can continue with globalization as it is, which I think is unlikely. We can have a lapse into chaos and disorder, like the 1910s and ’20s. Or I think what’s much more likely is we’ll have a multipolar world, which I think the way to look at it is that it’s not so much a world dominated by big regions, as to the fact that these big regions do things increasingly distinctly or differently — Michael O’SULLIVAN

Michael: I think someone said — maybe it was Paul Krugman — for developed countries, in the long run, productivity is everything. And I agree with that because it’s the main — unless you’ve got rapidly changing demographics — it’s the main and perhaps the only way to boost economic growth. And I think the first step is that there needs to be a debate and a movement amongst governments to focus on productivity and focus on what I would call ‘trend growth’. So, what’s your sort of trend level of growth? And the best way to improve that is through productivity. As you said, many of the things that drive productivity — you know, rescaling education, careful investment in technology in country strategy — they have been forgotten. If you look at what’s happened to education and educational attainment rates in the US, that’s quite alarming. And many of the other factors around that, things like human development, are regressing. So you’re right. I mean, they’re worse than passé. They’re just being degraded. And there’s really no other way for developed countries to grow in the long term. You can do trade wars, you can try and convince countries to reshore investment, but that’s all one-off kind of short-term stuff. The real driver of growth is through productivity. I think the problem many politicians have with this is that we are in short, political cycles. So, by the time you’ve invested in the factors that drive productivity, you only see the benefits of that maybe 5–10 years down the line.

[00:24:58.03] Ben: I wanted to ask you about the US elections in November because you make the point in the book, you sort of draw the parallel with the 1980s and you say, you know, people were fixated with the end of communism, and they felt as bought what was coming next, which is this period of rapid globalization and internationalization of trade and everything. And to some extent, you say the same thing here. Now, we’re obsessed with a little bit the political circus, and we’re missing this bigger shift. But to what extent is Donald Trump and this US election, a circus versus being really important in determining how we transition to this new world, whether it’s a smooth transition, an elongated transition, etc.?

If there’s any doubt that globalization is over, four more years of Trump will entirely smash that — Michael O’Sullivan

Michael: He is very important. And I think what is important is that, you know, Donald Trump as an individual has a lot to be responsible for. But he has come at a time when that’s maybe apt in that it’s the end of an era and he is the human wrecking ball breaking down the old order. He is not going to be the person to build up the new order. And he has also been enabled by many people principally on the Republican side for whom it’s convenient to have him as President. I think it’s quite clear that, you know, four years of Donald Trump have broken many things. He’s broken America’s diplomacy with Europe, with parts of the Middle East, but not all; obviously, broken diplomatically with China, and sown general confusion. He’s also, I think, devalued many of the institutions in the US — the State Department, some of the financial institutions as well. And then, in that background, four more years of Donald Trump would make permanent all of these ruptures and it would cause the rest of the world to maybe ignore America. Europe in particular will tend to go its own way. I think countries like China will be more and more convinced that the US is in turmoil, and it is weakened, and Russia will probably have the same view. And they will act accordingly. And I think that will well and truly break globalization. If there’s any doubt that globalization is over, four more years of Trump will entirely smash that. Joe Biden, for his part, I think will not be a transformative president, but a restorative president in that he will restore the status quo, he will repair the State Department. His team, I think, is very strong on foreign policy, maybe less so on the economy. And he will, I think in particular, restore relations with Europe and try and rebuild the partnership with Europe, to the detriment, I think, of Russia, and maybe China as well.

[00:28:10.06] Ben: But I guess the point that many people would make is, as you said, he’s a wrecking ball. He’s gutting institutions domestically, globally. But, in a way, is that necessary? Do we need to break these institutions in order to remake them? You know, would a Biden presidency as you said, restore the institutions or, you know, other institutions still fit for purpose? So, I suppose the question is, do we need four more years of Donald Trump to hasten this transition to the new world? Or would it be a disaster and lead to a much, much more uncontrolled transition to the new world?

The level of denial amongst governments and companies that things can go on, as they were, I think, is still very, very high, and that denial needs to be broken — Michael O’SULLIVAN

Michael: I hesitate to recommend four more years of Donald Trump, but a lot of what you’re saying, which I accept, which is that we’re in the midst of a paradigm shift, which is a very overused phrase — and you only get paradigm shifts for a number of decades, maybe centuries, and you only get the rebuilding when a lot of the old order is broken down, there is chaos, and then people come forward with new ideas and new initiatives. And the reason I think we need more breaking is the level of denial amongst governments and companies that things can go on, as they were, I think, is still very, very high, and that denial needs to be broken. So, if you take as an example the debate over the World Trade Organization, which is potentially a defunct and irrelevant organization in the context of a multipolar world, the debate now is to whether we just have a new leader and someone who’s not from Europe, or the States and everything would be fine. And you have similar debates about the World Health Organization, the World Bank, and not about, you know, should these institutions be radically changed or displaced? And what institutions of the future do we need to have?

[00:30:19.06] Ben: And do you have a view on some of that or not? So, you know, I don’t want to run through the list of all the international organizations like the IMF, and so on. But, are some of them still capable of doing the job we need them to do or do you think it’s a total reboot?

Michael: I would prefer a total reboot. I think some have remained relevant, like the OECD, because they’ve had a good sense to attach themselves to a bigger framework in the shape of the G20. They’re sort of the think tank of the G20 now. Others, I think should be completely reshaped. The World Bank, I think should be relocated physically to Africa, which is the one part of the world that really needs the help of the World Bank. And then, I think there needs to be a debate on what the institutions of the 21st century need to be. Do we need, for example, an institution on climate change that has got the power to fine governments and companies in a forceful way for climate damage? Do we need an institution to govern cyberspace and cyber warfare and cybercrime? We don’t have that. We don’t have an international police force for the internet. So, there’s all these things that are beginning to crop up as future problems, and have not yet been framed either in philosophy and law or by institutions.

[00:31:48.20] Ben: Moving to what comes after globalization. So you’ve used the term ‘paradigm shift’, and you’ve also used the term ‘multipolar world’. Is that what globalization gives way to? Does globalization become a multipolar world?

Michael: I think so. I mean, there are many scenarios. We can continue with globalization as it is, which I think is unlikely. We can have a lapse into chaos and disorder, like the 1910s and ’20s. Or I think what’s much more likely is you’ll have a multipolar world, which I think the way to look at it is that it’s not so much a world dominated by big regions, as to the fact that these big regions do things increasingly distinctly or differently. So, again, coming back to the internet — I mean, the US has got the big internet giants, and they are stockmarket monsters. China has cut off its internet, but it has a thriving e-commerce sector. And then Europe doesn’t have any of these big internet companies, but it is becoming the regulator of the internet, looking to protect people from the ills of the Internet.

We’re in a world where lots of issues are emerging and lots of well-placed frustrations are being vented. So, it is definitely a period of turmoil, where democracy and rights and liberties are being contested — Michael O’SULLIVAN

[00:33:12.23] Ben: For how long can it seek to regulate the internet without those platforms? Because, to use an analogy from a previous podcast, it’s sort of trying to control the seas without a Navy or an infrastructure, right?

Michael: Yeah. It can because of its size and the power of its economy, and the fact that Europe in particular is very, very sophisticated in terms of policy, and regulation. So, if Britain were to try and come up with its own set of rules for the internet or how British people consume the global Internet, it may well not be able to do so. But Europe is obviously much bigger. I think the way we’re going now is we’re going towards a values-based, multipolar world. So what I mean by that is that when it comes to economics and politics and climate change, each of the big regions has got very different values and approaches- and those values will inform how they build out their economy. So, Europe wants to protect its citizens and their data. It’s also very strong on the environment, and many of the new policy plans we hear about from Europe, are focused on the green economy. Much less so in the States where there’s just a very different balance between society and the economy. And then China has its own very distinct set of values, which I think we don’t spend enough time trying to understand, in the West. And I think it has its own risks and its own complexities which are maybe not readily apparent in newspaper headlines. And if you look at the Chinese Communist Party, which is a very big machine, inside it you have lots of different groups and rivalries that effectively mirror what you have in western politics just that they’re all under the same big disciplined umbrella. But I think in China, the secret is not just the vision, but also the implementation. They can implement policy for such a big country in a very, very speedy kind of way.

[00:35:38.00] Ben: The gravitational poles are US, China, Europe. Will countries that aren’t in those countries or in those regions have to choose between them? So, you know, will Africa have to align itself with the USA? Or will India — and it looks increasingly like India is already aligning itself with the US — is that what it will be? It’ll be a question of choosing between one of these poles for everybody else?

Michael: Yeah. So, I think there’s maybe a few things here. So, I think countries who fall between the poles — so, Japan in Asia, Australia, they are between America and China; the UK, Russia, in Europe — they’re on different sides of Europe, obviously — they will potentially find life more difficult because they’re not as big as the three poles and they’re sort of mid-sized powers and they have to come to terms with that and reshape their own identity. I mean, Russia has its own crisis in that it’s a military power, but not an economic or financial power. I think other parts of the world are in the stream. India, if you add it on to the area of the Emirates, is potentially in time, another pole, but it has a lot to travel in terms of its development in order to get there. And then I think for countries like, you know, Nigeria, Bangladesh, who are populous and growing, I mean, they have lots of choices. They can sort of say, “Well, let’s co-opt ourselves to China and the Chinese model, or do we still follow what the Americans have done? Or what the Swiss or the Irish have done?” Or they can kind of say, “Well, look, we just do it our own way.“ So, I actually think that these countries — there’s maybe 10 of them — you know, big, populous countries in Asia and Africa, who have not yet really globalized or developed, where they go in the future and how they do it, and what templates they use.

[00:37:35.14] Ben: And you see them as potentially in a strong, almost bargaining position or arbitrage position, do you think, between those poles?

Michael: Not yet. I think what they need to do — and this is where some of the new institutions of the world order would come in — is that these countries perhaps need to collaborate better in terms of building up their own cooperative institutions so that they collectively have more power vis-a-vis the US or China, as it were.

[00:38:05.16] Ben: You’re a big fan of small countries, right? Because you just used the example of Switzerland and Ireland — so, small countries that are very globalized in the sense that they’re magnets for certain kinds of information, trade flows. Are you still as bullish about those small countries in this sort of de-globalizing world?

Michael: I am, obviously, as an Irishman who’s lived in Switzerland, quite biased. And how I got involved in the whole globalization debate is I wrote a book years ago on Ireland and globalization — at the time, Ireland was the most globalized country in the world. I’m still bullish about them because I think this has been shown by the Coronavirus crisis, is these countries in general, they have a resilience, and they have a robustness. So, by virtue of being small and being open to world trade, they’re also very much aware of what’s going on in the world and what they need to do to correct against some of the imbalances that they will suffer. And the countries I have in mind are the likes of Sweden, Switzerland, Norway, Ireland, Singapore, etc. They’re all very different in terms of their culture and politics, but they have similar problems, but also similar ways of dealing with them. They tend to be the best countries who have this mix of strong rule of law, very good institutions, trust in experts, investment in education, etc. So, that model for me is still one that’s really relevant today.

[00:39:52.01] Ben: And how do you align that or reconcile that with also being a fan of supranational bodies like the… I mean, would it not be a good thing for power then to be devolved down increasingly to sort of nation states or even cities within nation states. Because if small is better, small is more agile, if small is more resilient, then is now an argument for fragmentation?

Michael: I mean, you can call it ‘fragmentation’, you can call it ‘devolution’ as well. I think what you may see is you may see countries like France become a bit more devolved to its regions in terms of taking some of the power that’s concentrated in Paris and devolving that to some of the regions. That doesn’t mean that France is going to break apart or that Europe is going to break apart — quite the opposite, because all of these countries are still happy to have the umbrella of the EU and to enjoy its laws on data protection, etc. I think, also, that globally, we do need to look at governance. So, climate change is my favorite example here, where many countries signed up to the Paris Accord, but it doesn’t really have teeth and it’s not, in my view, really contributed anything in terms of lessening climate damage. What you find is many of the big cities in the world, however, are much more progressive, and much more green than their individual governments. So, my suggestion would be that you have a sort of Paris Accord between big cities that it has teeth. They can, for example, tax their hinterlands, they’re better in control of pollution in their economic hinterland, they tend to be more advanced in terms of infrastructure and green policy, than individual countries. So that’s maybe one way to look at governance, I think.

we are beginning to see a fracturing of political systems where dominant parties are being pushed aside — Michael O’Sullivan

[00:41:56.07] Ben: Well, practically for other issues, because you still need a sort of supranational accord, that the cities sign up to. Would you need the same thing when it came to cybersecurity, or what else is coming down the road — you know, genomics, or digital currencies? How would you simultaneously have global accords in a de-globalized world with city states taking more responsibility?

Michael: Yeah, so I think cities are probably apt for climate change. I think something like cyber, you know, you need a cyber accord probably between at least five countries — and most of those will be on the UN Security Council. They are the cyber powers of the world plus a bunch of others because they are the ones who are either initiating or defending many of the cyber attacks and cyberwars. You know, this is an area of activity where there are no rules. So there’s no template or rule that says, “If Russia hacks me, I’m allowed to fire back a missile, because hacking me or hacking my hospitals is a declaration of war. It’s an aggressive act.” So, I think you need increasingly to match the institutions to the locus of the problem, the locus of the issue.

[00:43:24.06] Ben: Who are The Levellers? And why do they matter? And one of the related terms is ‘The Agreements of the People’ — what are the agreements of the people?

Michael: Okay, so the Leveller is a somewhat obscure story, but probably one of the most important in British history. And I’m guessing many people haven’t heard of them.

Ben: I used to live in Putney, and I’d never heard of them.

Michael: So my starting point is that we’re in a world where lots of issues are emerging and lots of well-placed frustrations are being vented — you know, from gender inequality, you’ve got black lives matter, and you’ve got then democracy-based struggles in Belarus — and you can go on for quite a long time. So, it is definitely a period of turmoil, where democracy and rights and liberties are being contested. In some respects, I’m not a fan of a lot of this political debate on Twitter, and I wish a lot of it were more constructive and that they were more constructive channels. I look at a lot of these protests movements, and you ask yourself, you know, can we go beyond protesting? And how would you take a movement forward and make it concrete and begin to embed it in changes and in laws?

Michael: I recall reading a couple of books some time ago on the Putney Debates, which happened in the middle of the 17th century in Britain. So the king was captured by Cromwell’s New Model Army and with the king being captured people had an inkling of what a parliamentary democracy might look like and they began to debate this down in Putney — it was called ‘the Putney Debate’. And it was primarily a debate within the army, the soldiers, and the officers. And one very important cohort was a group called ‘The Levellers’, who effectively were kind of the social democrats of the day. And they and their leaders came up with a template called ‘The Agreement of the People’. Quite a short template, but it’s really, in tangible form, what the people wanted from government and from parliament. And I think that’s missing today. And that needs to be reconceived.

Michael: For lots of somewhat bizarre and interesting reasons, these agreements of the people were written down, but then not fully transcribed or rediscovered for another 200 years. So, it’s an example for a while lost to history, but it was the first popular expression of what a constitutional democracy would look like, at a time in Europe when Europe was just beginning to throw out some huge innovations in politics and nation states. So, a very important time. And I actually think that if people today could look at these agreements of the people and use them as a rough template for what they want — because they were very practical. You know, they talked about people being treated equally by the debt courts, they advocated limited political terms to reduce corruption — so, foreshadowing many of the things we have today. And I think the use of a template would be taking many dissatisfactions with politics and many movements and making them concrete and also constructive, which I think is largely missing.

[00:46:59.27] Ben: I really like your idea of getting off Twitter, because, first of all, you know, Twitter tends not to lead to anything that’s particularly concrete. But also Twitter tends to lead to massive bifurcation which is, it’s very difficult to hold the center ground on Twitter, because it’s the extremes that gain traction on a platform like Twitter. But I suppose the question is, how is this so different from electing representatives with well-defined mandates in the first place? Are you just saying that we, as constituents, would put forward our ideas, and then almost the political parties would be formed to then put those into statute and into place? Would that be the difference then? So, rather than the political class coming up with the manifestos that we then vote on, it becomes much more bottom-up?

Michael: I guess it should ideally be more bottom-up. I think there’s a sense also that many political parties are somewhat jaded in terms of what they represent. And maybe one question, which I think we haven’t seen yet, is whether we get new political parties, new political entrepreneurs coming through. And I think there is dissatisfaction — you know, what we are seeing as well, we are beginning to see a fracturing of political systems where dominant parties are being pushed aside. You’ve seen that in France, the two dominant parties pushed aside. It’s interesting, we haven’t seen it in the UK or the US yet; the two-party systems remain dominant. But I think there needs to be channels constructed for taking, you know, what I think are well-founded grievances, and getting those into law. For example, there’s a lot of work now being done in social media, such as petitions for parliament in the UK — a lot of work being done there, in social media to get people’s petitions into parliament. So there are changes beginning to come through, but certainly not as fast as I thought would happen.

[00:49:10.03] Ben: I like that idea, too, because I think there’s sort of contrast between Twitter — again, to use that analogy — and the way we do politics it has now become enormous. And the politics hasn’t kind of responded yet. Because, you know, I think what Twitter is doing is giving us the sense that we know as much as the political class. I think we really saw that during COVID, which is everybody thought they knew as much about how to cope with this crisis, as the political class did, because it gives that impression of the narrowing of, or this sort of information asymmetry disappearing, which is an illusion. But I think what would be good would be to sort of reboot politics to be more like social media, in the sense that, as you say, we could treat it like a platform, which is, you know, we could contribute all of our ideas, and then you could build new political parties on top of a platform, which would then be much more networked and responsive to changing ideas. Is that what you had in mind, then, that it will become more networked and responsive?

Michael: In a way it is. And again, one lesson I remark on in the book with The Levellers is that they were idealistic. And parties are a result of that. I mean, they were very good at things like pamphleteering. So they were the social media geniuses of their time, but they were totally outmaneuvered by the incumbents. So I think there is a cynicism required as to how the political system works, which needs to be matched with idealism and a desire to change things. You know, I use the example of Emmanuel Macron, who is seen as being a revolutionary political figure. But I think what he figured out was that the best way to do a so-called ‘revolution’ is to take the system from the inside, not the outside. Now, he had the help of many parts of the system and the institutions in doing so. But it seems to me that that’s sort of a speedier way to changing politics than trying to do it from the outside.

[00:51:18.15] Ben: I can’t resist asking the question, which is, how satisfied are you with Emmanuel Macron? Somebody living in France? How much do you think he’s really changed politics? Because he seems to be a bit like Obama or a bit like Donald Trump. He used digital means to campaign in a completely different way. But the governing has been almost very traditional. Do you accept that?

Michael: It has been traditional in that he — I mean, he has replaced one elite with another younger one, for sure. And pretty much all the people around him reflect the fact that France is still very much elitist in terms of politics, in that they all have the same formation, the men and women have the same views, education. I mean, it’s more stark than, say, the UK is. So he and the people around him are still very much a product of the French system, the French elite. They’ve just, I think, made a lot more fresh. I mean, I think there are areas where he stands out. I don’t think in any way he’s corrupt. I think he’s absolutely sincere in what he wants to do and he’s very, very driven, in that sense, in terms of implementing his vision. I think what he has changed, in my view, compared to the two previous presidents — Sarkozy, and Hollande — I think, with both of those, there was a sense that they were kind of filling a gap and that they might not be around for the next four or five years after. Whereas Macron, I think people have a sense that perhaps he will be here for another term, and that we will have a Macron era that he has the time to implement changes. And he, I think, before [00:53:08.12] he had already implemented quite impressive labor market changes. France needs more of those. I think also, one area that’s clearly open to him is Europe and European politics. And certainly, the energy for European politics and political initiatives in Europe is very much in Paris. It’s not in Germany. We will soon have the post-Merkel era, politics will be a lot more fractured, which will leave France as the dominant country driving policy in Europe.

[00:53:46.04] Ben: If Brexit was the first sign of the end of globalization, is TikTok, the first sign of the post-globalized world?

Michael: Actually, it’s an important sign because it shows how a service that should, I suppose in many respects, be harmless and that should be global, and that people in many countries can use it, but has been used for political ends, can become carved up in the manner of this multipolar world. So, you know, in the US and China, there are clear barriers around the use and the ownership of different parts of TikTok, which begin to, at the same time, sketch out the map of this multipolar world that’s coming.

[00:54:47.12] Ben: Last question. COVID: do you think that this is, again, laying bare the fact that we have reached the end of globalization? Or do you think it’s a reason to be optimistic because it’s a crisis that all countries face and really should galvanize us to work together?

Michael: It’s certainly been a test — a dramatic test. And I think what individual healthcare companies, universities have worked together. The absence of collaboration between countries and regions, for me, has been the litmus test — a litmus test that shows that we are at the end of globalization and heading into a more singular, maybe more selfish, multipolar world. In previous crises, you’ve seen countries and governments collaborate — global financial crisis being an example. And we just had an absence of that this time. They’ve squabbled over vaccines and masks, etc. So that’s the lesson that needs to be borne in mind.

[00:55:57.08] Ben: You would just argue, then, that COVID — again, exemplifying what the new world would look like — at the same time is probably bringing it forward faster?

Michael: I think so. I think it accelerated this whole thesis, for sure.

Ben: Michael, thank you very much indeed for coming on the podcast.

Michael: It was good!

The Internetworked Nation

In one the most notorious scenes from cinema history, Harry Lime, a racketeer played by Orson Welles in the The Third Man, compares the cultural achievements of Italy and Switzerland. He says,

“In Italy for thirty years under the Borgias, they had warfare, terror, murder, bloodshed. They produced Michaelangelo, da Vinci, and the Renaissance. In Switzerland, they had brotherly love, five hundred years of democracy and peace, and what did they produce? The cuckoo clock.”

Still image from Carol Reed’s The Third Man
Still image from Carol Reed’s The Third Man

It’s probably unfair to suggest that this stereotype of Switzerland as safe and sterile originates directly from the film, but it has certainly helped to perpetuate it. According to its purveyors, the stereotype holds that Switzerland is too rich to take risks, too boring to be creative, and officiously obsessed with petty rules governing everything from rubbish collection to toilet flushing — in short, the antithesis of innovation.

However, not only is this stereotype misplaced — Switzerland invented the internet, not the cuckoo clock— but Switzerland’s networked, outward-looking economic model sets it apart from other nations and provides a blueprint for how to succeed in the digital economy.

While it is high time to debunk some myths about Switzerland, Switzerland’s success should still be seen on its own terms. If we look at the start-up scene, for example, it bears little resemblance to Silicon Valley. Tech companies here tend to ramp up slowly. According to startupticker, Swiss tech start-ups take about 10 years to reach scale and grow almost twice as fast in their second decade as in their first. Without a large domestic (consumer) market to sell into, they look to sell to corporations and they seek to internationalize early, with the majority exporting within the first three years of their life. And, they tend to take comparatively little external capital with most businesses becoming stable, moderately growing SMEs rather than blow-out exits or IPOs.

Still image from Carol Reed’s The Third Man

Looked at on these terms, we could cast Switzerland as small-scale and parochial. It is a long way from blitzscaling and moving fast and breaking things. Instead, it is very much the slow and steady model of measuring twice and cutting once that leads to fewer unicorns and billionaire celebrity founders, but which also produces fewer negative externalities and inequality.

Should Switzerland be aiming to become the Silicon Alps?

The fact is that drawing a comparison with the US tech scene is wrong and Switzerland should resist portraying itself as “Silicon Alps” or the “Silicon Valley of [insert term here]”. Like Operation Libero, the Swiss political movement that punctured the rise of the far-right Swiss People’s Party by reframing the political debate, Switzerland should not define its credentials in terms set by others. Instead, it should present the uniqueness of its model: a complex, adaptive system that combines lasting quality with cutting edge innovation and that marries economic growth with inclusiveness.

Flavia Kleiner, of Operation Libero, on the importance of narratives

A complex adaptive system is one made up of a network of interdependent actors that collectively adapt quickly to changing environmental factors. For Switzerland, this system is made of a series of layers – from government to brand – each resilient and adaptive, which, as a whole, both reinforce the strength of the overall system and leave it well positioned to capitalize on the future.

Switzerland is a complex adaptive system
Switzerland is a complex adaptive system

A distributed political system. In Switzerland, political power is distributed between the federal, cantonal and communal governments. This allows for a high degree of adaptiveness by keeping government nimble and localized enough to respond to diverse needs. In addition, it encourages competition between the different cantons and communes that promotes good governance and which, in practice, results in policies which are both pro-business, such as low tax and low employment regulations, and pro-citizen, such as a strong safety net, and which overall create the conditions for entrepreneurial risk-taking and shared prosperity.

An inclusive culture. It is testament to its inclusiveness that Switzerland is able to seamlessly accommodate four different language groups and a population with 25% foreign-born residents. But, it is in its ability to meld the high-tech and the rural, the modern and the traditional into a coherent, confident whole that it really excels. In much of the world, digitization is leaving behind rural areas, but not so in Switzerland.

Switzerland Rural Modernist
Switzerland Rural Modernist

A robust industrial set-up. Switzerland has a unique ecosystem, spread across multiple cities as opposed to one single dominant center. In place of unicorns it has lions, top-of-the-food-chain organizations that act as key nodes in the network. These include multinationals (Switzerland has more per capita than any other nation), top class universities (one in the top 10, two in the top 25), NGOs (including the UN) and scientific research hubs, such as CERN.

The Rolex building at The École polytechnique fédérale de Lausanne

These organizations support a much larger network of SMEs, which form the backbone of the economy and middle-class employment, and attract key flows of capital and information. This last point is critically important since globalization is entering a new phase, one centered on virtual not physical flows. In practice, this means that big is not necessarily best, that the future probably doesn’t look like our popular imaginings and that small countries, like Switzerland, can have outsized impacts.

Switzerland, a landlocked country, is the second biggest shipping power in the world
Switzerland, a landlocked country, is the second biggest shipping power in the world

Cutting-edge technology. Switzerland didn’t invent the cuckoo clock, but it did invent acid. In a whole range of fields, from micromechanics and hardware to life sciences and pharma, Switzerland is world-leading. Its high-tech economy is supported at a foundational/high-risk level by strong government spending on R&D (as a % of GDP it is behind only Korea and Israel, the latter a big military spender) and then a combination of top universities, research centres and high-spending corporations take it from there: Switzerland tops the Global Innovation Index.

Climeworks, an ETH spin-off, commercialized the world’s first carbon capture technology

International connections. Its outward focus is symbolized through its international organizations as well as the annual Davos gathering, but it is supported bottom up through over 40 free trade agreements. International trade accounts for over 120% of GDP and the 2019 Freedom Index ranks Switzerland the fourth most open economy in the world, the most open in Europe. But its internationalism is also down to geography: if you draw a circle around Zurich into neighboring southern Germany and northern Italy, you realize it stands as the pinnacle of the global center for high-end, family-run design and manufacturing — everything from machine tools to Ferraris.

Which other country in the could attract all of the world’s leaders to a small mountain village

A world-renowned brand. Switzerland wraps this adaptive system with a timeless, global reputation for quality epitomized by precision engineering and intricate design; more Zenith watch than cuckoo clock.

Swiss Innovation
On the left, the precise mechanics of a Zenith luxury watch; on the right, Solar Impluse, a solar-powered plane attempting to circumvent the globe

One paradox of Switzerland is that it’s in the heart of Europe, yet not in Europe (the European Union, that is). But a greater paradox is that, though not in the EU, it represents the best model of how the EU should work.

Just as Switzerland should not compare itself to the US, nor should Europe. North America embodies a libertarian model where winners take all and corporations rule supreme.

Similarly, the Chinese model is not the European model, either. The Chinese model is one of planned economic activity. It can deliver fast growth, but at the expense of individual freedoms. Here corporate surveillance gives way to state surveillance, but the surveillance persists.

Technology makes it possible to design complex societies following series of recipes, not inorganic blueprints
Technology makes it possible to design complex societies following series of recipes, not inorganic blueprints

Europe seeks to forge a different path. A Goldilocks model of balanced freedoms and inclusive growth. The challenge is that Europe hasn’t yet found the recipe to make this happen. However, that recipe might well be the Swiss one: business friendly to promote growth, but with the welfare state to lift all boats; a federal model to allow for self-government and pooled sovereignty; a focus on science and lasting value that creates a prosperous middle class; and, an open model attracting the flows on which the next phase of globalization will be built.

While objectively a global success story, there could still be room to improve. A recent report from McKinsey highlighted, for example, that Switzerland is losing attractiveness as a home for MNCs, a key constituent of the ecosystem. Here are three measures that could help.

Unleash the capital. As should be clear, we would not advocate turning Switzerland into some sort plastic replica of Silicon Valley. However, that does not mean that more risk capital wouldn’t be helpful.

Last year, Swiss companies raised over USD1bn in venture financing, a 32% annual growth and the highest amount ever. Moreover, the money went to fund more companies in a more diverse range of sectors than ever before. But USD1bn is low relative to most other developed countries and very low relative to, say, over USD1 trillion that sits in the national Swiss pension pot.

Analog Flows vs Digital Flows
From “Swiss Made” to “Swiss Designed” | Pictured left — daily commuters from France to Geneva (c. 85,000 per day) | Pictured right — next level of globalisation is about digital flows

Furthermore, not only does venture capital have significant economic multiplier effect, but it is also filling the vacuum left by traditional lending which is not adapting to the increasingly intangible nature of modern economies. As such, it would highly beneficial to get dormant Swiss capital moving. This might come naturally from tokenizing illiquid assets like real estate, but it might also require the hand of the state by, for example, creating the conditions for a new financing vehicle to emerge —one that promotes long-term, sustainable investments.

Foster the holding company model. Our view is that this networked organization of the future looks a lot like Ant Financial or Amazon, operating what we call the “holding company model” . This model allows group companies to remain small enough to cater to specific customer demographics and agile enough to respond to market changes. But, the holding company structure leverages growing financial muscle, shares supply side economies of scale, like IT infrastructure, and shares data network effects via APIs. Given the structure of the Swiss economy — as the world capital par excellence of holding companies — as well as the importance of holding companies to attracting data flows, it is vital that Switzerland makes this model as viable as possible before Singapore and others usurp it. Part of this relates regulations on data, but at least as important are rules on tax, especially around how capital flows between entities get treated.

The future is invisible
Which view of the future looks more likely?

Scale the brand. The future is small and invisible. It won’t be the future of flying cars and Fritz Lang’s Metropolis. And for Switzerland, nor could it be. A country of 8 million people, its future always had to be true to brand: high-end and high-quality. But there is a way to make this brand do more and we believe it is by pivoting from “Swiss Made” to “Swiss Designed”, accepting its increasingly intangible asset future, placing manufacturing closer to consumers and scaling its addressable market in the process.

When you transit between terminals at Zurich airport, you are presented with a hologram of Heidi set against a mountain backdrop and accompanied by sounds of nature, yodeling and the Swiss horn. This is the manifestation of a society at ease with itself, the confident projection of a multi-faceted nation that can be at once modern and traditional, high-tech and rural.

The nature of our economies is changing. Our future will be increasingly networked. Switzerland as a complex adaptive system looks set to re-calibrate for this new phase of globalization.

While it might not have invented the cuckoo clock, it’s probably in for another five hundred years of peace and sisterly love.

An immersive image of Heidi in-between train stops at Zurich terminal