Transitioning to a Multi-polar World (#30)

Mike O'Sullivan on Structural Shifts podcast

Transitioning to a Multi-polar World, w/ Michael O'SULLIVAN

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.

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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!

When Software has Eaten the World (#29)

When Software has Eaten the World, w/ Belén ROMANA

There is a lot of anguish over what’s happening online these days from the rise of hate groups to media manipulation, the propaganda to interference with elections — are the positives of our digital world even worth it? Well, today, your host, Ben Robinson, digs into this question with Belén Romana García — Spain’s former head of Treasury, and an economist who has worked in both the public and private sectors. Belén is also a board member for several public companies and foundations. She says that people are primarily driven by three things: power, money, and knowledge — and she is especially driven by knowledge and curiosity and a desire to understand the world and its possible future. Today, she and Ben discuss, should our elected officials have to learn how to code to better understand the world that we’re living in? Should we scrap GDP as a metric since it’s not accurately reflecting our service economy? Does democracy mean equal voting? And how does the information and infrastructure of our online world affect our freedom or a sense of freedom in real life? And more. 

Podcast also available on:

Apple PodcastsSpotifyGoogle PodcastsAnchor.fmSoundcloudStitcherPocket CastsTuneInOvercast

Belén recommends:

  1. One book: A world without work, Patrick Susskind
  2. One influencer: Azeem Azhar
  3. Best recent article: The geopolitics of information, by Eric Rosenbach and Katherine Mansted (Belfer Center for Science and International Affairs)
  4. Favourite brand: Spotify
  5. Productivity hack: Never waste a chance to learn something new. Listen to podcasts while driving, flying, cooking or having a walk.

 


Information in itself is a huge good that we have in abundance. Of course, when you have any scientific advances or new ways of creating value or knowledge, that does not come without its flaws, and without its problems. It takes time for societies to understand the real implications — good and bad, by the way — of any advance. It’s sort of trial and error. We are understanding the implications, the advantages, the disadvantages, and it will take some time until we do understand the whole thing.

[00:01:32.14] Ben: Thank you very much for joining us! So, the key thing that we wanted to pick up on today is one that you talk about a lot, which is the notion that software is everywhere, and it’s this idea that, as software’s become more powerful, it’s proliferated, and it’s become much more pervasive in our lives, our communication, our politics, our industry — and I thought maybe a good jumping-off place might be the quote from Peter Thiel, the one where he said, “We wanted flying cars. Instead, we got 140 characters.” So, has this world of pervasive software delivered on its potential? i.e. Do you think that the world is now better for having so much software in it?

Belén: Definitely! I think that we are better off. We can communicate better, we can find more data, store that data, analyze that data, deploy that data. So, I think that information in itself is a huge good that we have in abundance. So that’s a much better world. Of course, when you have any scientific advances or new ways of creating value or knowledge, that does not come without its flaws, and without its problems. It takes time for societies to understand the real implications — good and bad, by the way — of any advance. So, I think that we are better off. It’s sort of a trial and error thing. We are understanding the implications, the advantages, the disadvantages, and it will take some time until we do understand the whole thing. And so, it will take some time until we get the world right. And we will try again and again and again. And finally, at some point, we will have a reasonably good set of rules. So, I think that we are better off but we should be quite modest in terms of we have to understand that this is a journey that started, as societies, and it will take us some time to really get it right.

As human beings, we usually get to understand, control, and react. So, the fact that some advances have dangers, that’s always the case; […] And reality leads us to think that once we get to understand, then things are much better after that advancement than before. The problem, of course, it’s always the transition period.

[00:03:44.01] Ben: If we think about some of the negative applications of digitalization, we might think about, you know, its scope for manipulation, for example, or we might think about, you know, some of the scary things that people say about where AI is headed, right? You know, that we’ll be controlled by software, rather than it kind of being used as a tool by us to improve, almost. But you believe that, on balance, overall, it’s been a force for the good?

Belén: I think so. Of course, it has many dangers. But that happens with anything that you can think of. When the car started, there were so many dangers around that and there were no roads. So, it took some time — decades — to set the rules and understand what is good, what is bad, what should be done, what shouldn’t be, who should be controlling that? How should the authority control that? How can we drive around the world? So there were a number of things that happened over decades. But finally, the car gives us many things — of course, good and bad — and if you understand the real implications in groups, for example, climate change, then you get to have a much better deployment of that advance. You know, as human beings, we usually get to understand, control, and react. So, the fact that some advances have dangers, that’s always the case; that happens with medicine, that happens with pharmaceuticals, that happens with anything you could think of, basically. And reality leads us to think that once we get to understand, then things are much better after that advancement than before. The problem, of course, it’s always the transition period. So, since this is a trial and error, and it will take time for us to get it right, there will be many things that will happen that won’t be good, and people that will be harmed. That’s absolutely the case. And that’s a very difficult point because, as I said, when it’s something new, we don’t fully understand the final implications. So, this trial and error… And you see that everywhere. So, we didn’t know that Facebook could be potentially dangerous for political institutions, the suffering, that outcome to understand, “Yeah, this may happen.” And now we are starting to think, should we do something? What can we do? What are the limits? So, does it mean that social networks should be banned? I don’t think so. They should be here for good. It’s like with cars. I mean, the fact that a car is a dangerous tool doesn’t mean that you shouldn’t control it, you shouldn’t regulate it.

We are on a very, very early stage and it’s very difficult for rulers to set the rules. One of the things that I worry about around this — setting the rules — is the fact that Parliaments understand laws, but they don’t understand codes. It turns out that codes are also ruling our lives. So, if we don’t get them to understand code, to understand that language, it will be very difficult for them to set the right rules. And I think that we’re far from that.

[00:06:38.21] Ben: And if we just continue for a second with that analogy of the car, where do you think we are in this transition? You know, it took a long time before cars had seatbelts, it took a long time before cars had emission standards. How far into this digital transition do you think we are? And how good a job do you think the rule setters are doing?

Belén: We are on a very, very early stage and it’s very difficult for rulers to set the rules. One of the things that I worry about around this — setting the rules — is the fact that Parliaments understand laws, but they don’t understand codes. It turns out that codes are also ruling our lives. So, if we don’t get them to understand code, to understand that language, it will be very difficult for them to set the right rules. And I think that we’re far from that. If you had a council of wise men, old men that couldn’t read, and they had to set the rules for the printing press, they would just say, “Okay, whatever is printed that I cannot read should be fair, balanced, whatever.” But they cannot enforce it, because they cannot read the book. I think we are in a similar situation where individuals setting the rules do not speak the language, cannot read the code and hence, all they’re doing so far is giving this open recommendation of should be fair and avoid bias and these things. But then, they are driven by the outcome, and they cannot prevent it from happening, because they don’t understand. So I think that we are at a pretty early stage. We need rulers that understand code.

because of the cyber GDP that we are not measuring, we are not taxing, we are not tracking. So, we don’t know whether we are getting richer or not, we don’t know whether we have a fair tax system or not. Basically, there’s a part of the GDP that is not there.

[00:08:30.29] Ben: I think the EU Cookie Policy is a very good example of a policy that’s set by people that don’t understand the nature of the digital world. What about economists? So, you’re an economist. How good a job do you think economists are doing at understanding the new world and changing their measurement tools? To make it more concrete, we basically live in a world where we don’t think we have any inflation, we think productivity growth sucks. But is that really the case? Because you know, there might not be inflation in the price of streaming music, but there feels like there’s a lot of inflation in other areas — healthcare and such. So, do you think we’re using the right measurement tools for the digital world?

Belén: We, economists are really struggling because we are all educated in an industrial world. So, if you take GDP — GDP nominal versus real is inflation, GDP is a very industrial concept in many ways. I mean, it started as one physical thing times the price, and that is GDP. And the evolution of both the number of physical things and the prices did see it to the GDP real and nominal. We started struggling with services. So, for decades, for example, financial services were not part of the GDP because no one thought it could be measured in terms of any value added. So, with services, which is something in the middle between digital and industrial, we struggle to understand productivity to measure; you don’t have a physical thing — you know, whatever the assets times the price. It’s services. And you know what that means, in a very industrial world. So, we tried to build this bridge with services — did a very good job, but reasonably good, I think. But, if you jump to digital, you don’t have this vertical approach to sector, which has been industrial. And there’s this huge debate now in the economists’ world, around inflation and productivity as you were rightly saying. There are now two camps: some people say we’re heading into a world of no inflation forever, and some people are thinking that we’re heading into a high inflation world because finally, monetary phenomena. But, as I said, I struggle with that, and it’s difficult to get the cyber economy into this, the cyber factor into the GDP.

Belén: Now, I’ll give you one example that I always think of: the value for Google of having Germany, where is it? Is it part of the German GDP? It doesn’t look like that because that value is not the revenue coming from the German part. But more than that it’s network — so, it’s part of the network that increases the value of the whole network. That’s not part of the German GDP. Where is it? My point is that probably it’s part of the Google market cap and that’s why, because of this cyber GDP, we are not measuring, we are not taxing, we are not tracking. So, we don’t know whether we are getting richer or not, we don’t know whether we have a fair tax system or not. Basically, there’s a part of the GDP that is not there. And you see that again, and again, and again. You gave the music industry as an example. That’s a perfect example of something like that. So, we used to have a music industry that could be measured in an industrial way — the number of LPs or the number of stores, or the number of concerts, and then you have tickets times price. Then all of a sudden comes streaming. Basically, in terms of GDP, the music industry has disappeared, because you don’t have much employment, you don’t have tickets, you don’t have LPs. So, you don’t have physical things that you can measure. However, we have never been able to access so much music in our lives. Not necessarily for free. You pay for that — Spotify, you pay for it. But you access a huge store of music that you can choose to confine whatever. That’s not part of the GDP.

The competition policy is basically based on the knowledge that if the prices are low, competition works because the prices are the final signal of a monopoly or oligopoly. It turns out that’s not the case because we’re not paying with money.

[00:13:06.14] Ben: Yeah, it seems to me that the problem that you talk about translates into consumer surplus, right? Which is, you know, by definition, not captured because it’s surplus. And I often wonder if we were able to better understand consumer surplus, and somehow feed that back into GDP, that might be a way of capturing some of the benefits. But I just wonder, in general, if GDP is just, you know, we should scrap it, if it’s just obsolete. And we should start again. Because you know what I mean? It’s like you’re saying, you know, it’s a bit like inflation — you have RPI minus x, RPI minus y. And it’s like, how many things can you augment a broken metric for, in the end, before you have to just start again.

Belén: But the fact that we are using not a perfect measurement does not mean that we should use none. So, for me, the key thing is understanding. Again, understanding that we’re missing part of the economic evolution, wealth — whatever you want to call that — and that we need to develop other means. We will still have a physical world, we will still have services. But we are missing digital. So I think that one of the key things for, first, universities and probably also statistical authorities, is developing that understanding of how to measure. This is a new thing. It does exist, it does create value. So, this is again, a very old debate: value versus price. And that impacts everything. So I’ll give you another example. It’s the competition policy. The competition policy is basically based on the knowledge that if the prices are low, competition works because the prices are the final signal of a monopoly or oligopoly. It turns out that’s not the case because we’re not paying with money. We’re paying with data, and data has no value, no price. So, they’re for free. So, all of a sudden, you have a competition policy based on a very industrial concept that needs to adapt to something different, which is we’re paying with our souls, so to speak — our data. So, I think that the key thing is for, firstly, universities to start thinking about this — and I think that some have already started — thinking of this concept of cyber GDP. And value versus price happens when you have value, but no price or a price that does not fit much with the value as in the case with data. So, I wouldn’t say, okay, we don’t use GDP anymore. But I think that we should, at once, develop other complementary ways of measuring and understanding the digital world.

when you have a huge concentration of power, you have a problem. And as a state, the concentration of power is always dangerous. So, one of the things that I really wonder is why people — that happens especially with younger generations — do not care about giving away their information to companies but they care about giving information to the state.

[00:16:03.20] Ben: I just wanted to return to that idea of regulating the digital economy, because, as you say, you know, in the past, the litmus test was, you know, our prices going up to the end consumer, therefore, there’s sign that the company has market power, and can manipulate pricing. How do we regulate networked businesses? And how worried are you about the increasing size and influence of some of the largest platforms?

Belén: Over the years, when you have a huge concentration of power, you have a problem. And as a state, the concentration of power is always dangerous. So, one of the things that I really wonder is why people — that happens especially with younger generations — do not care about giving away their information to companies but they care about giving information to the state. And if you live in a democratic state, you do have rules, you have a transparent system where you know your rights, and you have tools to defend your rights. That’s not the case with the large platforms. And there are millions of that; you have Facebook measuring video views and charging for it. So, it’s the same as the judge and the defendant is the same. Or you have no ability to prove that whatever video you’ve posted has been more or less than another one. So, you know, I’m starting to read articles on the corporation as a courthouse, because within the Amazon world, it is much more efficient to solve conflicts within Amazon, than using the courts. That’s, I think, hugely problematic, because, as a citizen, even though you know the rules, those are not the standard procedures. I mean, if you live in a democracy, and you don’t like the Prime Minister, you can vote against him or her, and at some point, the guy leaves. You cannot vote against platforms. So, you don’t have any access to understanding how it works, what your rights are, and how you can defend your rights, what kind of tools you have. Whereas democratic societies have all those things very clear. So for me, as a citizen, I would rather give my information to a democratic state than to someone I cannot access. I don’t know where I am.

The problem with data is that the value comes from the aggregation. So, on your own, you cannot get value from your data because your data or my data have no value on themselves. They have to aggregate and aggregation means something that goes farther than the individual.

Belén: So, these platforms have huge power in economic, financial, political, social, and they have no rules. So, I think that we do need to regulate those platforms. And they basically act as monopolists in different fields. So you have a set of monopolists. And that’s, by the way, nothing new. We had that in the late 19th century, where, in the US there were, again, a number of huge monopolists. And the state, at some point, reacted and they said, “Okay, hold on. We need to do something about the mobile or we need to do something about many different industries — the oil industry and then telecoms” — because the power was too much. I think we are exactly where we were at that point. And, in order to avoid that, the competition policy was born. Now, I think we need to think of another competition policy. But I don’t know whether that’s enough. All the states have a regulation for networked industries, but networked industries are something much more national. This is international, isn’t it? And we don’t have common rules. We have common rules on how do we rule the seas. And that’s similar. So, you know, there’s an international law around these. We don’t have an international law around digital and that means sometimes we don’t even have a national law about digital. So I think that we need to develop that.

[00:20:28.23] Ben: Yeah, I suppose the only good precedent there, you know, whether we think is a good piece of legislation or not, something like GDPR, even though it’s a law that’s imposed within one sovereign area, which is the EU, it does tend to have ramifications outside of that sovereign area. Because if you want to do business in the EU, you have to treat customer data in a certain way. And what tends to happen is those policies then tend to become globally applied. But I just wonder, in general, I think you said earlier on that we have politicians that understand the law, but they don’t understand code — I think is what you said — and that was never more evident than in the times that the big platforms are brought to Congress, for their annual grilling, right? And I’m just wondering, you know, if it’s difficult to impose regulation cross border, and if it’s difficult for our current generation of politicians to impose the right kind of regulation at all, is the answer maybe to devolve more responsibility down to us as individuals, and in some way try to give us more transparency so that we make better-informed decisions about the platforms we use and what we share with them and so on? So, i.e. you know, put more responsibility in our hands.

we are clearly moving into a world of fragmented internet

Belén: For a number of reasons. One is they are monopolists. So that’s the first point. The second point is the nature of data. The problem with data is that the value comes from the aggregation. So, on your own, you cannot get value from your data because your data or my data have no value on themselves. They have to aggregate and aggregation means something that goes farther than the individual. So, the combination of the two things makes it very difficult for individuals to really be responsible. So, you would be asking them for something they cannot do because they don’t have the means. I’ll give you one example. For me, GDPR is the first step. But I’d really like the right to be forgotten because that’s something that, you gave away your information, or someone gave away your information, in a situation when we didn’t really know the consequences of that. And then, you suffer those consequences. You know, the right to be forgotten was a concept that was born in Spain — it was a Spanish case that led to this thinking of ‘this is unfair’ because someone did something three decades ago, and the guy is suffering from it again, and again, and again. And the problem is, I’ll give you one example. If you have a public appointment in Spain, your number gets published. And, at the same time, it looks like that should be private. And, you know, years ago, I had an attack, and the police told me, “Everyone knows where you live, and your number.” And I said, “Yeah, but that came from the fact that I was a public official.” So, all of a sudden, you have something that was ruled thinking of a different world, and now all of a sudden becomes a threat. And you cannot do anything because that is not part of the right to be forgotten. That’s nothing wrong, but it’s part of my privacy. And even then, it’s there. So, as an individual, I cannot do much. I need infrastructure or authorities, courts, that help me protect my rights — understand and protect my rights. So I don’t think that individuals are the way out.

[00:24:18.08] Ben: So regulations are still a thorny issue. And the other issue I wanted to talk about was your idea of policing the seas, right? Because what are the seas? I think we’re getting lost slightly in the analogy, but like, you know, what’s the landmass? What’s the sea? And if Europe is a landmass and we don’t have any really large platforms, where do we stand? I mean, for example, for how long can Europe impose regulations like GDPR when it doesn’t have platform companies of its own? Because it’s a bit like, you know, we’re imposing legislation on companies that aren’t even in our jurisdiction.

This dream of an open Internet for every country I think it’s over

Belén: But that’s why I like the analogy of the seas because, in the international law, you do regulate companies that are not part of your jurisdiction. And I think that the internet has been almost a global ocean. I think it’s not anymore. The exception being, of course, China. Right from the beginning, the Chinese thought, “Oh, if this is an ocean, I want to control my ocean, I want to set the rules.” And I think that we are clearly moving into a world of fragmented internet, where we, again, have not an ocean, but different oceans or seas if you want. And you said that the Russians announced that at some point, they wanted to close their internet and have a sort of a narrow channel into their internet so that they can control both — their internet and the channeling. The Chinese, of course, control that. I think that the US is thinking also, we need to think of how we control and have a walled garden — that we know what’s going on, who’s doing what, and we can react to that. So this dream of an open Internet for every country, whatever, I think it’s over. And, of course, that worries me in terms of Europe. So Europe has advantages and disadvantages. The disadvantage is that, of course, we lack any sort of platform. That’s a huge disadvantage. The advantage is that we still are the largest market in the world. We are interesting. The problem is when you’re not interesting at all — then you’re done. But when you can add value, then you have some tools to regulate that value that you are creating. So I think that Europe has that right and that ability. And also, the tradition. I think that we do have the tradition. We may over-regulate sometimes, but we know how to regulate and we think of the individual as someone that has to be protected. That comes from a long, long tradition of European thinking, philosophy, political science, sociology, anything you can think of. So, from that point of view, Europe has a chance.

in the 21st century, those countries or regions or companies, for that matter, that will rule the world will be the ones that will be able to do the three things: produce, store, and analyze data, move around those data — the platforms — and then set the right rules.

Belén: The thing is, for me, that if we use another analogy, and we think of the late 19th century, and how the industrial power was built — and that means power or states or companies — there were three things: the ability to produce things, the ability to move those things — so you needed a physical infrastructure — and then the rules of the game. And if you look at the industrial world, the industrial powers what they did is, Okay, I produce, I build infrastructure — the train being the first one; if you look at how the trains were designed in the 19th century, you knew who was powerful in terms of countries, and who was losing the battle. And only looking at that map is clear. And then, the rules of the game, which is free trade. That, coincidentally only applied to industrial goods, not to agricultural goods. Okay, 100 years have gone, so then digital power — who can produce, store, and analyze data? Very few countries or companies. The infrastructure is the platforms — we lack the infrastructure. And then the rules. So far, we haven’t got any rules. No rules at all, not even this free trade rule. We didn’t have a rule because we didn’t think we needed it. So, in the 21st century, those countries or regions or companies, for that matter, that will rule the world will be the ones that will be able to do the three things: produce, store, and analyze data, move around those data — the platforms — and then set the right rules.

[00:29:14.16] Ben: So how worried are you about Europe? Because at the moment we’re trying to set the rules to some extent — you know, GDPR, for example, PSD2 — but we don’t produce or move the goods, right? Or we don’t have the infrastructure, so we won’t be able to set the rules very long in that case. So, where does that leave us? And do you think the game is over in terms of creating the infrastructure?

The European Union, as a project, is built on conflict, it has always evolved out of problems. It’s not when everything works, and it’s peaceful. Whenever there’s a problem and a crisis, right from the beginning, the inception, the European Union evolves and tries to build on that.

Belén: I think we’re really far behind but it doesn’t mean that we have to say, “Okay, we give up.” I think we should fight. And fighting means a number of things. One is if we could understand how to rule this right — how to read the code — we would have a huge advantage. And that’s something that we could develop. Another thing that for me is hopeful is the fact that we’re starting to listen to the European Commission talking about digitization, which is quite a new thing, in a much more thoughtful way. And I’ll give you one example. So the European authorities came to the conclusion I think — that’s my understanding, I have to say — they came to the conclusion that “Okay, we have lost the war on personal individual data, but there’s a huge wave of data coming, which is data coming from systems, physical things. We are an industrial power, why don’t we build on that?” I think that is great because, by the way, physical things you get to personal data. So even though we lack the platform for personal data, which is the case, we could build platforms around non-human data, if you want. It has stemmed from good systems. I thought this is good, because instead of wasting resources fighting something that’s going to be very difficult, because you’re on late, let’s try to build something that is not built anywhere else, and then we won’t be late.

Belén: So, for me, that’s a very useful way of understanding that. And I think that with COVID-19, that the European Union is using it in a positive way, so to speak. The European Union, as a project, is built on conflict, it has always evolved out of problems. It’s not when everything works, and it’s peaceful. Whenever there’s a problem and a crisis, right from the beginning, the inception, the European Union evolves and tries to build on that. I think that now is starting to happen that. I mean, Europe has a soft power, and Europe has someone that understands that there are two huge giants rising, which is the US and China and thinking that they don’t like each other as much as they did in the past — and Europe is in the middle; that could be a potential advantage if we are smart enough. So, for me, the worst part of it would be if we thought of it as when you have a castle on your right, another castle in your left, and you are on the plain, then whoever comes, you’re done. That is not the way to understand that, I think, because then we’re done. If we build on our chances, I think — and we do have chances — I think that’s quite clear. You know, with the cloud, we’re late, but still, Germany and France are thinking or are starting to create a cloud. Will it be like that? Will it be as competitive? We’ll see. But I think that’s the right move. We should have done that move long ago. But at least we’re starting. So, in relative terms, we are behind the US and China, but we are ahead of the rest of the world. So, I’m hopeful. And I think that Europe is built on this notion of the individual has his rights, which is differential, I think.

[00:33:34.17] Ben: It’s quite interesting what’s happening with Tik Tok because I think, you know, is probably a good way of thinking about this, which is you’ve got this Chinese castle, the US castle. Do you think what we’re now seeing is, you know, those two citadels are trying to now establish and define their spheres of influence? And so, you know, Tik Tok was a case of… That’s almost like an invading army and we’re not going to allow that into our Citadel. And then everything that’s happening with Tik Tok in India seems to be a bit like, you know, India’s kind of aligning around the US castle. And then, I think your current comparison of Europe as kind of no man’s land is quite accurate because Europe hasn’t yet, I don’t think, really decided which castle is going to align itself with. And, as you said, maybe, for a short period of time, that gives us a position of influence because we can arbitrage between those two castles. Is that the way you think about the world, which is that that’s where we are now? The idea of this, you know, Pax Americana kind of world that was global is over, and increasingly nations are gonna have to choose between which of these two castles they align themselves to — or do you think they’ll be more castles like the Russian castle, the African castle?

when we all have access to information, that does not give us knowledge

Belén: A long list of things, as you mentioned. One is India. I don’t think that India is aligning with the US. I think that India is thinking, “I’m large enough and I’m advanced enough, and I have the knowledge and human capital needed to build my own castle. So, what I think that they are doing is, “Okay, let’s create our own apps.” So then it’s much more the understanding of, this is exactly a backdoor that you can use to look around and I want you to have that. It’s not only the influence, but it’s also the information that you get. One of the things with digital, it looks like the network effects come with a huge amount of data and that huge amount of data, if we’re talking about personal data comes from large populations. India, which is a very large country has the means to create its own network effects. They don’t need to have anyone else. As it happens with China. They are large of their own, they don’t need to have anyone else to create network effects. So, I think that they have understood that and they want to build on that. And from that point of view, neither the US nor Europe, on our own, I don’t think we are large enough in terms of that sort of pool of population. Probably, we need to think of something that combines both, otherwise is very difficult. If you think of if the US thought, “Okay, I’m closing my castle, it’s only us”, that’s not enough. That’s clearly not enough. They need to think of other pools of population. And probably we will see, at least, I think that large countries will try to build their own castle. Brazil is another example of a country that thinks that they are large enough, that they have the means, they have the knowledge to do something on their own. And so, we will have that as it happens with it. If you think of the industrial world, of course, the first superpower was the UK, but then Germany reacted pretty soon and then the US. So, you end up having a short number of industrial powers, but a number of industrial powers. So I think that Google sees something similar. I think we will have a number of powers. And I hope that Europe will use that as a chance.

[00:37:36.17] Ben: I think what’s interesting about India is with Geo. They’ve almost sort of separated infrastructure from production, which is to say, “You know, since we own the infrastructure, we’ll allow foreign companies or American platforms to operate on the infrastructure, but we own the infrastructure.” So, they have a certain level of sovereignty, that Europe, for example, doesn’t have, because we need to have the platforms or the infrastructure, right? So, I wonder if that might be the model. You referenced Brazil. I wonder if that might be the model that is followed by others. At least, then, you have a stake in the digital world, whereas if you own neither the infrastructure nor the platform you have, nothing.

Belén: I agree. I think that at least you need to control the highway. And then, you get to decide which car can go through that highway and whether you have to charge or not and the whole thing. If you lack everything — if you lack the highway and the car, you’re done. So, as it was the case in the industrial world, you needed to have infrastructure for the trains that you built, controlled. Otherwise, if we didn’t have the money to build our own infrastructure in the 19th century, the British companies that built it, they did it for their own, not for the Spanish people. It was more to extract value out of mines, basically. So, we had exactly the wrong infrastructure that we did not own, not control, not design. You’re done. You cannot succeed in the industrial world, with those weaknesses.

[00:39:16.15] Ben: I want to speak of something that you talk about, which is that democracy does not equal voting. What do you mean when you say democracy does not equal voting and how is that sort of relevant to this digital shift?

Belén: People tend to think that if I vote, that’s fine, then I can defend my rights. But that’s not true. For example, you have certain rules to control propaganda or financing in a democracy or what kind of information you can give or how long — are you always in campaign or can you be bombarding people again and again and again, do you give them one day they have to think? Whatever. So a number of things that complement the voting. But I think that we have completely forgotten that that infrastructure of rules is key — and if you don’t have that, then voting doesn’t… Any dictator can organize voting. And, quite coincidentally, is always to his advantage, it’s always 95%. It’s not the voting. It is the whole thing that comes before the voting, that grants that that voting will be a legitimate exercise in terms of democratic access. So, that, for me is key. You can opt-out Facebook — that’s voting; you vote with your feet, which does not change much, perhaps, because you’re out, but that’s not much.

when information is for free, we tend to vote out of emotion

[00:41:02.27] Ben: So you’re arguing almost we’re succumbing to this illusion that because we get to vote more often and there are more referenda that we’re somehow more empowered and we have more control over our affairs, whereas you’re saying the opposite is true? Because if I understand what you’re saying, rightly, you’re saying a lot of the underpinnings of democracy as we think about it are being washed away or eroded by digitization. So, can we just delve slightly into that? So if we think about some of the things that are critical to a democracy, such as having accurate information, is that principally on information that you think that democracy is being eroded? Or do you see other areas where the waves of digitization are washing?

COVID-19 was the rise of nation states. They were reborn, and all of a sudden, people turned to them to be protected, in many ways — limiting the movement of citizens, offering healthcare, buying vaccines. So, the nation state has, again, become a key player in the economic and social world, which means that people, when in danger or in a difficult time, and in various situations, they turn to those that are closer to them and have the size to protect them

Belén: I’ll give you one example. I can access a lot of information. Does it mean that I can self-diagnose my illness? That’s completely wrong. I have information but not knowledge. So, the difference between information and knowledge now is quite clear. It has never been the case over centuries in human history. So, we need to understand this difference. And, you know, there was this very interesting exercise. IBM has this Project Debater and they created a machine that can debate with a person and they had this public exercise that you can watch on YouTube, of a guy debating with a machine.

Belén: And that exercise was arranged by Intelligence Squared US. And they have this mechanic whereby the public first says that they are against or for whatever proposition and then after the debate, they vote again. The party that has moved more wheels, if you want, or more opinions, wins. They did exactly the same. And their proposition was, “Should states finance, pre-schooling education?” And the machine was told to say ‘yes’, and why and the individual, ‘no’ and why. And the exercise was, for me, quite telling, because, of course, the machine came with hundreds of examples, of data, if you want. And the individual less, but some. But he, even though he voted he was against that proposition and most of the public was for the proposition at the beginning, he could move more opinions, because he could understand emotion. All of a sudden, when we all have access to information, that does not give us knowledge. That means that we can look at things that we would like. And, of course, you can always find data that justifies your prejudice. That’s always the case. You can look at part of the information, and that leads you to say, “Yes, I’m right!” Or the other part, which is, “I’m wrong.”

Belén: Finally, when information is for free, we tend to vote out of emotion. And when I saw that exercise that I found so interesting, I thought, “Now I understand Brexit.” So finally, is it, “Do I trust you or not? Do I think that you have an intention or not?” So, one of the things that I find quite interesting is that there’s this crisis in democracy, at least democratic states, that people are losing trust in institutions, being those private or public. And then comes COVID-19. And for me, it was quite a surprise because COVID-19 was the rise of nation states. They were reborn, and all of a sudden, people turned to them to be protected, in many ways — limiting the movement of citizens, offering healthcare, buying vaccines. So, the nation state has, again, become a key player in the economic and social world, which means that people, when in danger or in a difficult time, and in various situations, they turn to those that are closer to them and have the size to protect them. If it’s tiny, if it’s only a city, they don’t have the size to give me what I need. I need something larger. I think that’s good for democracy, of course. Any economic crisis raises the danger of populism and all these things. So, I’m not naive from that point of view. But the way I see it, I think that democracies with this huge crisis, have a chance to rebuild themselves. And, for example, the fact that the European Commission is now trying to get to buy enough vaccines, I think that increases their legitimacy. The problem was, in the beginning, the European Commission did not react at all. So it’s not only they lacked legitimacy, they lacked action. The fact that you need someone that can protect you, I think that gives a chance to democracies to react and rebuild themselves. But of course, they need to develop an understanding of the code, to control the rules. So, all these things that we have been mentioning, and of course, build your own infrastructures, as well.

[00:46:55.29] Ben: You often talk about how the conception of democracy is bound up with industrial age concepts, that I suppose the other question is, you know, if democracy depends on nation states, and nation states are with a long term view in trouble, and if democracy depends on the institutions of the industrial age, then is democracy in trouble from two sides?

Belén: The key distribution of wealth comes through wages to work, which is quite an evolution in terms of the history of the humankind. So if you work more, you get the chance to be wealthier. And that means that we are basically all the same because we can become the same over time. And so, why can you vote and not me? And you being first a landowner, then a man or a white man. So, if I am a woman, and black, and I am poor, I can become what you are. So, why can’t I vote? Now, with the digital world, it’s, again, if we find the way to assign prices to value, that can bring us again, to a situation where I can earn my living in a reasonable way, and hence, this whole structure can survive. If that’s not the case, if we cannot understand how value is created and distributed, and therefore, how fair our economies are — we don’t know how fair they are, because we don’t have the right measurement, again, so we will measure part of the fairness or unfairness; but the rest does not exist. So, if democracy is a key to grant fairness, then we need to have those tools. Some people will be helped by training. Some people won’t. So you need to think of how can you protect and help people that won’t be able to be retrained. You know, with COVID-19, I found quite interesting the fact that live sports have suffered so much, and then eSports are thriving. So, all of a sudden, you have a whole sector of eSports that is growing, and that entails employment, in many ways.

[00:49:25.12] Ben: Is that a positive? Because I absolutely 100% share your view. I’m an optimist, I believe that the world that awaits us will be more positive than the world that we leave behind. But I’m worried, like you are, about the transition, because this transition is now happening so much faster on the back of COVID-19. Does that somehow reduce the scope for wars or civil unrest or whatever nastiness that could normally come to because it’s happening now just, you know, at an accelerated rate?

Belén: In terms of the COVID-19 I’m worried about the short term economic effects it brings. That’s absolutely true. And it’s also true that is somehow accelerating these trends. But the positive side of it is that they’re becoming visible. If a problem exists, and it’s visible, you can tackle it. The problem that we have is that these trends have been there for 10 years, 20 years, and they weren’t visible at all. So, there was no public debate, public worry, nothing at all. Remote working has been there for a number of years and some companies were very good at using remote work, and some specific groups of people wanted to only work remotely. But it was sort of a lateral and receivable, but it was clear that it was a trend that at some point would affect many others. Why don’t we have an industrial organization with a service economy? That’s exactly the case. Now, all of a sudden, we have found that, indeed, we didn’t have an industrial organization. Well, now it’s visible. Now everyone is thinking of, “How can we do this? Should it be five days a week? How can we really apply this technology that we already had, but we didn’t use?” So, from that point of view, COVID is making many of these trends visible. I think that is, a tree that falls in the forest — is it falling? No one hears or sees it. It’s exactly the same with problems. And we only look at problems when they are big enough, as societies. Now they have become big enough. So, I think that that will also accelerate the transition in terms of their reaction.

[00:51:47.14] Ben: I almost feel like the furlough scheme, or you know, whatever it’s called in the country. Is, in some way, almost like an experiment in the universal income in a way, which is, how do we compensate people whose jobs are not going to exist in a digital world?

Belén: Yeah, yeah, absolutely. And instead of having the finish with this experiment, now we are all making it. And there will be things that won’t work, but we will find which ones do. So I think that’s another example of things that I think are accelerated. You will get to see that. If you use that analogy of the COVID and digital, some populations are suffering more than others. And so, they get isolated, so you need to protect them more, because they are isolated, because they need to be isolated.

we have the chance to understand better the world that we are already living in. I think that societies have stopped and are thinking — which is really, really helpful because it’s not just the elite thinking

[00:52:38.13] Ben: A lot of people use the war analogy for what we’re going through, which is, the enemy is the disease, it’s not another country. And that’s interesting in a couple of ways, right? One, because the government’s taking an unprecedented or warlike intervention into the economy to boost aggregate demand, and so on, which is interesting. But then, what a lot of people say is that won’t be the rebuilding exercises necessary after a war, which then sustains aggregate demand. But in a way, don’t you think that might also force governments to figure out how to redefine the tax base?

Belén: Not only the tax base but also the economic structure. If you look at the European Union Fund, it talks about two things. One is green, and the other one is digital, which is we need to rebuild the societies thinking of those two things, which is quite a novelty, I have to say. So, we have an enormous amount of money to rebuild the economic structure. And that, I think, is a unique opportunity. So, we don’t have physical infrastructures that have been damaged, as is the case in a war, but we have indices that have been damaged by the digital world, and they have not been able to react. And so, I think that’s a huge chance. It’s sort of a Marshall Plan effort in a different way. So, it’s not bridges and buildings, but it is platforms and data. I think that there’s no clear answer to that. It will depend on the society and how they feel that they need it and whether they have someone that will finance that.

[00:54:35.16] Ben: But that Marshall Plan, if I’m not wrong, that Marshall Plan is something that Europe is thinking about, but it’s not something… You know, whether we consider the UK in Europe or not anymore, I think in four months we’ll find out but the UK doesn’t have an equivalent of the green new deal or the digital Marshall Plan, and the US may or may not, depending on elections in November. So, do you think many countries will take this once-in-a-generation opportunity to rebuild?

Belén: Again, I think about that, and it depends on the country. But in terms of the nation states, we are seeing, again, states are not only regulating but owning and managing a large part of the economy. So, that’s more sort of the ’70-like situation where you had the state doing two things: doing things and regulating those things. And I think that model that looked completely over is back, and it has advantages and disadvantages. So, back to the network effect, much of the technological revolution in the US came from the collaboration between private and public institutions. We never had that in Europe. Now, I think we’re going to have that. And it’s a precondition. But you need to have both sides of the world collaborating. I think that’s key. When you lack both, you lack size or the ability to combine private and public forces, that country will struggle, I think. It’s not only the quality of the politicians, which is key, but also the tools that they have. Probably they won’t have the same tools.

[00:56:29.29] Ben: I want to finish on, if we can, on a really positive note. I think you started by saying that digitization has been a force for the good, right? We may not see it in our GDP statistics or our productivity statistics but we feel it. We feel it in particular as consumers. But then we got on some slightly more negative topics. So we talked about how democracy is struggling in the face of digitization, we talked about how digitization is kind of dissolving the global world into nation states, we talked a bit about how the transition is going to be tough. Maybe we started to get into more optimistic ground with how the pandemic may find a route to faster transition. But I just wanted, if you would, to finish by giving us your most optimistic projection of the future.

Belén: It’s difficult for me because, by nature, I’m not an optimistic person. I think that the problems that you don’t identify, you don’t solve. So, I tend to focus more on the problems than on thinking that there won’t be problems. So that depends on how you define an optimist. But, in my view, I think that we have the chance to understand better the world that we are already living in. I think that societies have stopped and are thinking, which is really, really helpful because it’s not elite thinking. I think the whole society is thinking. It happens — this crisis — at a time when we have already suffered some of the negative impacts of the digital world. So, we have either Facebook political things and things like that. So I think that awareness is higher and I think that’s very good at all levels of society. So, for me, an optimistic or a positive — much more than optimistic, a positive outlook into the future, would be democracies get stronger, because they understand the rules of the game. We get to measure track, and if needed, to control the value and impact of digital and hence, we really create abundance and give it away to us. I think that Europe has the size, the human capital, and now the understanding. So, we have the tools, so let’s use them.

[00:59:19.08] Ben: Belén, thank you very much for your time!

Belén: Thank you! Thank you so much!

Previewing post-Pandemic Finance (#18)

Previewing post-Pandemic Finance,
w/ David GALBRAITH, Thierry ZOIS, Martin McCANN

We have another special episode for you on how post-pandemic finance would look like. We are bringing back two of our favorite guests: David Galbraith — Partner at AnthemisMartin McCann— CEO of Trade Ledger; and a new guest Thierry Zois — VC at Finch Capital.

Full podcast transcript:

 

[00:02:02.17] Ben: Dave, welcome back to the Structural Shifts podcast. You’re a deep thinker anyway, and I can imagine that since you’ve been in isolation, since your role is to look at future investment opportunities, you’ve been thinking about the pandemic and the post-pandemic world a lot. So, we wanted to pick your brain and have you share some of your thinking. What’s the right place to start? As we look at the post-pandemic world, what’s the right prism through which to look at future opportunities?

the landscape of everything has changed and therefore there are new products and new opportunities. There’s a switch toward adaptability, but it doesn’t mean that all the insurance changes. It just means that the market for insurance has increased.

David: So, I think there might be lots of them. People were worried about automation and losing jobs and we’re now seeing a bunch of very underpaid people, like delivery workers or nurses, suddenly becoming proven to be utterly critical. So, I think you will see the relative importance of the premium pay for social proximity i.e. human caring professionals. So, then this will be part of the backlash — the value of human interaction will be at a premium. And so, how that plays out online in terms of online investment is that ordinary social media has remained largely flat but real-time social media — and that includes things like Peloton, and that includes Houseparty, and that includes people doing concerts live, that includes virtual busking by musicians — has increased by up to 75% because people will crave real-time experiences. And I think we’ll look back at this period when people were watching Netflix programs on their own, asynchronously, when no one else was watching the same thing and realize there’s been quite a lonely period of media, and so, I think that is something that’s highly investible in the future, is real-time shared experience.

Part of this whole acceleration of change that’s happening now, is that people can make decisions and not have to do six months of PowerPoint presentations to the rest of the company to make a decision to actually say, “We’re going to switch to Zoom video.” They can decide overnight — we’re doing this and this is the way it is. — David Galbraith

[00:10:43.03] Ben: Yeah, and I think one of the things that’s interesting is it introduces social network effects into businesses that we never thought had them, like Netflix. Netflix was a business that had some sort of data network effects in the sense that if they understood you better, they could make better recommendations, but had very few other network effects. But if we think that it really matters to watch Netflix at the same time as your friends and comment on it, then it brings a whole new level of value to it, a new level of locking in.

the number of people going to visit a doctor is suddenly going to reduce because doctors shouldn’t be exposed to lots of sick people at the moment — it’s actually dangerous for them — and so, telemedicine will increase massively at the general practitioner level, for that first interaction with healthcare services. A lot of that will go online. — David Galbraith

[00:14:15.25] Ben: So do you see more B2B than B2C opportunities then, in all those B2B FinTech companies that can help the incumbents to become more efficient and deliver a better digital experience — that might be where a lot of the action is?

The delivery of electricity is going to look more internet-like than it currently does. — David Galbraith

David: So, obviously, this is one of these areas where it requires expert knowledge to look at pure healthcare services. But, if you were to look at the business of healthcare or the structural changes it took, you can have a view and one of the possible views is that it decentralizes. There are two aspects of healthcare that might change. One is, the number of people going to visit a doctor is suddenly going to reduce because doctors shouldn’t be exposed to lots of sick people at the moment — it’s actually dangerous for them — and so, telemedicine will increase massively at the general practitioner level, for that first interaction with healthcare services. A lot of that will go online. And that sounds trivial, but I recently, during this process, went to the pharmacy to get a Ventolin inhaler for hay fever. I was told that I had to phone the emergency services because they wouldn’t fill the prescription and the emergency services in France told me that I had to see a doctor in person and when I told them I would just go on the internet, they said that wasn’t possible, but when I hung up the phone and I did go on the internet, within 15 minutes, I had the prescription and went back and filled it. So it helps the healthcare service to accelerate these changes, to decentralize.

the markets are irrational at the moment, not because things are going to be terrible or things are going to bounce back; it’s because we don’t know and therefore that isn’t priced in. — David Galbraith

[00:19:43.08] Ben: I just want to revisit something you said at the start, which is, there’s no consensus among experts about what this means or what the right response necessarily is. So, as you said, people have been making a big cause of shutting down the economy. I suppose implicit, in all the actions that have taken place so far is there’s a binary choice between human life on the one side and the economy on the other. I think the Italians have, in a way, set the precedent by standing up and saying, “We’ll put human life ahead of the economy.” But it’s not as black and white, is it? I just wondered if you had thoughts about the morality of the response we’ve seen so far in terms of shutting down the economy?


we have seen in the market that a lot of corporate VC pulled out on investments due to the whole uncertainty. — Thierry Zois

[00:25:01.11] Ben: Thierry, what we wanted to discuss was the report that you put out a few weeks back, which is entitled “The Future of Disruptive and Enabling Financial Technology post CV-19”. We’ll share the link to it for the listeners, but in essence, it’s a 26-slide presentation, jam-packed with interesting data predicting what might be some of the near and medium-term impacts of COVID-19. One conclusion that seems to jump out from the report is that there’s this clear dichotomy between consumer-facing FinTech companies that face lower volume, shrinking assets, etc. and the B2B FinTech companies whose technology is now in really strong demand because financial services see that they basically have little choice but to become more digital more quickly. Would you say that’s fair, that that’s this overarching conclusion?

We also expect that the road to IPO is going to be so much more difficult. It’s going to be really tough for companies to go all the way down that road, given that there is not, anymore, this hungriness as there used to be in terms of capital providers — Thierry Zois

Thierry: Now, if we look on the B2B side, I think it’s a very hard time if you’re planning on signing on new clients. The main reason is because they’re very old-fashioned type of sales and very long, so there are a lot of procedures in place and a lot of face-to-face is actually quite necessary, in order to build a certain trust; given that it is such a big animal, they really want to make sure that any technology or any person that they onboard is the right technology for them and the right cultural fit, so to speak. Therefore, in the current crisis, to sign up new clients at the moment is quite difficult, I must say. However, everybody’s working from home, like you and me, and also the ones that work at the incumbents, they work from home. And well, they will be working on existing portfolios or existing openings that they still have. If you had started already your sales a couple of months back, then the likelihood that you will close them is still quite high — it just obviously will delay a bit, but the funnel will come to it.


I’m not sure that the pandemic is the only driver in the change of global trade. I think there’s been a shift in the ethos of global trade now for a couple of years. — Martin McCann

[00:45:22.03] Ben: Martin, I just wanted to start by talking about trade finance. I think one of the things that the pandemic has demonstrated to us is that our supply chains are probably much more fragile than we thought. And, for example, I think something like 80% of PPE comes from China. And so, what a lot of people are saying is that this is going to lead to acceleration and reshoring of production. Do you agree with that statement? And if so, how will that affect global trade finance?

cost should not be the only factor in determining how you structure a supply chain. So, the security of supply chains is actually becoming front and center in the way that supply chains are being designed, and that’s most definitely going to change a lot of trade in the next one to five years. But also, the lack of transparency has come front and center as well — Martin McCann

Martin: I think what this pandemic has done is two things — which build on that emerging trend — and you can see it in the numbers. It’s shown that cost should not be the only factor in determining how you structure a supply chain. So, the security of supply chains is actually becoming front and center in the way that supply chains are being designed, and that’s most definitely going to change a lot of trade in the next one to five years. But also, the lack of transparency has come front and center as well. The fact of the matter is, most people didn’t know that most PP equipment came from China. Most people who buy PP equipment didn’t know that it came from China. They’re just buying equipment without any visibility into the further reaches of the supply chain. But I’d say this is something that has been happening for a while. If you look at the numbers in terms of trade, effectively, at the highest level, trade looks like it stalled in terms of growth, but when you unpack that look within it, actually, it’s not really stalled in terms of growth; the way that we track trade is really aligned to physical logistics chains, where actually, what’s happening is a rebalancing of global trade as the economy moves on to a new phase globally. So, with more and more of the former low-cost production countries not consuming more of those goods — that’s not showing up in the trade figures, obviously — they are now producing a lot more services-based exports than they were previously.

there’s actually a very, very rapid rise in global services export across borders, which is very, very hard to track by traditional methods and there’s less of a focus on the traditional logistics networks, which tracked physical trade previously. The main change that we’re going to see from this pandemic is there’ll be more of an insistence that supply chains are visible all the way through. So, I think what we’re seeing is just a natural evolution of trade. — Martin McCann

Martin: So, there’s actually a very, very rapid rise in global services export across borders, which is very, very hard to track by traditional methods and there’s less of a focus on the traditional logistics networks, which tracked physical trade previously. So, I think what we’re seeing is just a natural evolution of trade. I think trade volumes include services as well — more complex services particularly — and the gig economy is definitely increasing, just not easily trackable. And for me, the main change that we’re going to see from this pandemic is there’ll be more of an insistence that supply chains are visible all the way through, and that there’ll be proactive decisions made as to what products need to have more strategic owners in terms of understanding the complexity, globally, of how to get the final products shipped, versus things which are much more of a commodity where it doesn’t really matter whether or not they’re disrupted.

It’s mind-boggling to think that in 2020 — we’re talking about 15 years after the advent of the Internet — we’re still using the same documents and finance mechanisms as have been around for hundreds of years. So, I think what we’re about to see is a rapid product innovation cycle for trade finance, which is more suited to clients who’ve got less tangible assets, and to more of a gig and services driven economy where those services are being delivered across borders. — Martin McCann

Martin: Yes. So services finance is slightly different in two respects. One is the term for which you need financing for is probably shorter because it has more to do with the payment terms of your contracts. Whereas with physical trade, it has to do with, the manufacturer and the shipping generally are the longest period of the credit terms which are required. It also means that the types of products are different, whereas when you’re looking at physical logistics, you have goods or components of goods, physical goods, which can be taken as security or at least assignment of those goods and the control of those goods can be used as a securitization mechanism. Whereas with services that’s not really the case. What you need to do is really look at the class of open-account trade finance products, really looking at the inflows and outflows from the companies that you’re providing credit to, and looking the less tangible assets that are available for securitization, mainly things like receivables, and looking at the other creditworthiness factors of those companies, as opposed to the physical goods required for securitization in more traditional trade.

demand will always determine the shape of the market and in times of stress, you need to see rapid innovation in order to meet the changing demands of the marketplace — and if you don’t see that, you’re going to ultimately see a decline in your business and you’re going to see yourself replaced by nimbler, faster-moving, more digital innovation propositions. — Martin McCann

Martin: So, I use the UK example again: it’s 80% guaranteed, so the government’s taking 80% of the risk and the bank’s taking 20%. The bank is still going to do the same credit assessment as it always does, not 20% of the risk. The problem of technology is quite interesting. What we’re hearing from all of the banks that we talk to is consistent — none of the banks actually have the ability to do straight-through processing on applications for SMEs. All of the banks have paper in the system. In fact, we know of a bank — our own bank — who told us that they can’t put an overdraft facility in place which we’d agreed before the crisis because of a lockdown on one of their operations centers overseas, which means that nobody can go into the office and print out a physical piece of paper required to approve the overdraft. And that’s sort of symptomatic of where the banks are. I mean, they’ve moved from legacy systems, they’re moving at pace, but they’re not able to respond in a matter of weeks in order to deal with this unprecedented demand of credit applications.

I think there’s just going to be extreme pain by the SME sector, despite the goodwill and all the effort by the governments because they just don’t know how to deal with these problems and they’re using peacetime governance processes to try and deal with wartime situation. — Martin McCann

Martin: Whereas, if you look at new cloud-based infrastructure, it can actually respond. So, the consistent feedback that we’re getting is that overall, the banks don’t have the workflow orchestration and automation capabilities; they don’t have standard technical capabilities and automation capabilities such as centralized task management, role-based user management on all of their systems so that across different teams, people can see when stuff needs to be passed off. There’s not a dropping of the applications between relationship managers and credit managers and documentation. There’s no standard way of actually triaging documents and information through the entire system — stuff needs to be printed off from one system and then re-entered in another system, then documents need to be taken from one place and stored in a central place and then accessed from somewhere else. And in the meantime, they’re going back to the customer and asking them for the same information multiple times in many cases or asking them for information, which they’re not being precise about the requests and getting the information in a format which doesn’t suit the processing of the application automatically. So, these are the capabilities, which, you know, they’re not rocket science, but these are the capabilities the banks don’t have, because of the legacy of how the systems have grown up.

There are going to be winners and losers, just as in every other business situation. The winners are going to be the people who actually realize what the new reality is going to look like — it’s fully digital when you talk about lending, there is no paper, there’s no relationship bias — and if you don’t use this scenario, as a way to accelerate your adoption to fully digital lending processes based on new modern infrastructure and technology, you’re going to be one of the losers. It’s that simple. — Martin McCann

Martin: A couple of points around the FinTech sector. I mean one is, the FinTech sector is unusual. It falls outside the funding schemes of most governments because it’s high-growth and massively loss-making. So it’s not a good credit risk if you just look at the numbers and the inflows and the outflows. So, it hasn’t been addressed, for the most part, by the schemes that are already in place. So you need to have a separate scheme to deal with FinTech. I do think that there needs to be a role for FinTech to solve the problem. What I talk about is the national interest to create that distribution infrastructure capability. But how do you do it without choosing winners and losers? So, I think there’s been wide criticism of how governments tried to do that before and one example I’ll use is the British Competition Remedies Fund set up in the UK last year, where 450 million was distributed because it was deemed to be illegal stated to the RBS during 2008. This was set up as an independent body, which in theory sounds like a good thing, but practically what happened was, the BCR basically made winners out of thin air, and massively disadvantaged the rest of the industry, and the process was done in a very, very unusual way, which has been open to massive amounts of criticism. And today, 100 million of that has already been returned. But now that 100 million is sitting there, it’s like, well, there’s a pot of money, which could be distributed much more quickly to help FinTechs that can provide part of the solution, but there’s no mechanism in place for government or this independent body to actually do that.

Previewing the post-Pandemic World (#17)

Previewing the post-Pandemic world, w/ Nicolas COLIN, Laetitia VITAUD, Ian Charles STEWART

Previewing the post-Pandemic World,
w/ Nicolas COLIN, Laetitia VITAUD and Ian STEWART

Today, we have a special episode for you on how the post-pandemic world would look like. We are bringing back three of our favorite guests: Nicolas Colin — Co-founder and Director of The Family, which is a platform for European entrepreneurs; Laetitia Vitaud— renowned writer and speaker on The Future of Work; and Ian Stewart — Executive in Residence at IMD Business School (an co-founder of WIRED). 

Ben Robinson interviews them separately, beginning with Nicolas, who talks about why this pandemic is so different from other crises like terrorist attacks and recessions. He also goes into why the stock market is currently doing okay — at least as of this recording — even though the unemployment rate has skyrocketed, and he and Ben talk about what a safety net could look like for the entrepreneurial age.

Laetitia continues the safety net conversation going into how much are we going to continue to value and appreciate proximity workers into the future? We love them now — are we going to continue to show them the love after this pandemic? And what about new protections for freelancers? What are we going to see in that space? Laetitia, who taught American Studies and English for 10 years, also goes into a really interesting discussion on Roosevelt and how his New Deal helped pull the US out of the Great Depression and what the chances are of something similar happening in the US, today. I’ll give you a spoiler — spoiler alert — things are not looking good! Laetitia ends by talking about how companies need to act today if they want to succeed today, but then also in the future after the crisis ends.

Ian picks up the leadership question, answering Ben’s question, “Is this a time to be brave and contrarian or is it time to just keep everything going as normal as possible?” Is China a safe haven for investors? How is the pandemic affecting US-China relations? And the perpetual question, when will China become the largest economy in the world? And is that even the right question to be asking? At the very end, we will circle back to Nicolas for his closing snapshot vision of how the pandemic will accelerate the transition to digital entrepreneurship. Enjoy the show!

Full podcast transcript:

 

[00:02:42.19] Ben: Nicolas, would you say, one of the biggest differences between the Corona crisis and some of the other major crises over recent years — the major difference is that there is no global leader? The United States led the response to the financial crisis and the United States led the response to 9/11, and you see very much that we’ve had this sort of balkanization of responses, right? Because, the UK was going for herd immunity, Italy was in lockdown, the United States, at least initially, wasn’t taking this very seriously — and we’ve lacked that sort of coordinated global response.

Nicolas: So, the US is a country that I’ve studied for a very long time and I’m passionate about it. I’ve traveled there a lot and I read a lot of books about its history, especially. What I find is different this time. So, one thing that’s different is that they have Trump and he’s a very unusual kind of leader to have in these difficult times. But another thing that’s very different is that the US is used to respond to crises by doing two things: one is, send troops abroad to invade Afghanistan or to invade Iraq and topple the regime there or Vietnam — sometimes it works, sometimes it doesn’t, but sending troops is easy for them because they have the mightiest military in the world. The other thing that they do, usually, is that they close their borders, which is easily done when you’re the US because they’re isolated at the other end of the world, they have two oceans bordering them, they only have two borders to close, effectively — one with Mexico and the other with Canada. And so, basically, on 9/11 they did both things: they sent troops to Afghanistan, and then they closed the borders to prevent anyone from entering the territory.

Nicolas: For the financial crisis, well, they gathered a small group of politicians and experts and economists in the Treasury building in Washington, DC — that was basically all you had to do to solve the crisis. You had to take big difficult decisions, but in material terms, organizing to respond to the crisis was quite easy. This time, none of these works. Sending troops will not solve the problem; closing the borders won’t solve the problem because you have sick people at home on your territory, on US soil; and simply gathering experts in a building won’t solve the problem because, after two weeks, we know what should be done, but it’s all a matter of implementation now — and implementation on US soil, at that scale, with so much disruption for the way people live in the US is unprecedented. I don’t see a precedent of the US being confronted with such a crisis at home and they are not equipped as a government and as a country to respond to that.

[00:05:59.25] Ben: So you could argue that it is unprecedented and would be difficult for any US institution to manage. But, in addition to that, you’ve also said the fact that Donald Trump has been gutting the institutions that would be most able to respond. So, I read “The Fifth Risk” by Michael Lewis — I read it when it came out, and I think what am I going to do is reread it because it was so sort of prescient in highlighting the fact that what was happening was almost going unnoticed, and would go unnoticed, until all the institutions were suddenly needed, which is exactly where we are now is it not?

Nicolas: I’m French and you’re British, so we both come from countries with a very long tradition of strong and respected civil service. The reason why we used to have — maybe we don’t have them anymore — very efficient and effective civil servants is because we were countries confronted with many threats and we had a colonial empire to manage. Both France and the UK had a Global Empire to manage, which requires a lot of skills and a lot of capacities — you really need that to manage such an empire. In comparison to the French and the British, the Americans never had very effective governance when it comes to implementing policy at home. They’ve had for quite some time a very effective military, but when it comes to implementing policy at home, the US government is already lagging far behind those of other Western countries or China or Singapore, for that matter. And they’re used to it and they don’t really care because most of their government is done at the local or state level and most of the problems that Americans have on a day-to-day basis are solved by the private sector or by lawyers.

Nicolas: But, a striking example is that you can’t really manage your taxes without relying on a tax advisor in the US because the government won’t help you do that. They don’t have the resources, they don’t have the people to be able to respond to every question that every individual taxpayer has. So, that’s their tradition. Their tradition is that of a limited government and a government that nobody really needs in normal times, so no one cares about the government being underfunded or too small for this very big and large country to manage. And it’s only when such a crisis happens, that they realize, “Oh, maybe we should have the same kind of government that the French or the British or Singapore has.” But you can’t catch up in two weeks on doing that — it’s a whole tradition and a whole cultural matter.

[00:09:28.21] Ben: Donald Trump underestimated the threat and then he’s had some very public disagreements with governors. It doesn’t really seem to be affecting his poll ratings too much. Do you think Donald Trump will still be reelected in November or do you think this has materially changed the odds?

Nicolas: He’s been polling at 40% approval ratings forever and whatever he does, it never goes down. And so, people say, “Oh, he’s still popular because he was that popular when he won the election four years ago”, and so, he could do it again with such a low approval rating as a person and as a leader. But what I’ve been interested in is how low is polling in other ground states like Michigan, or basically the Rust Belt where he made a lot of promises about jobs coming back, factories reopening, supporting people, etc., and those promises have not been kept and people are feeling the pain. And so, they’ve probably already decided for many of them that they won’t vote again for Donald Trump this year, which will make a huge difference because he won Michigan with 10,000 votes, I think, in 2016. And so, it doesn’t take much for him to lose Michigan and then lose the presidency — even though he’s faring well in southern states and other conservative states.

[00:11:05.14] Ben: One of the things I wanted to ask you was — you know, this isn’t just from a US perspective — how bad do you think the economic consequences of this pandemic will be? I guess it’s a really difficult question to answer because we have no idea how long it’s going to last and so on, but, would you say that people are still underestimating how profound the impacts will be?

Nicolas: I think we’re underestimating it clearly. I’m not really sure what people are expecting in terms of impact, but clearly, after two weeks, people will look around and say, “Oh, life seems to go on. I’m stuck at home. In many cases, I still have my job. I still get my pay every week or every month and probably life will go back to normal.” But what’s normal? If you reflect on the 10 years that we’ve gone through after the financial crisis, yes, most of us did get back a job and recovered on a reasonable standard of living, but everything has changed, in a way — politically, economically, financially, it’s the rise of China, it’s Brexit, it’s Trump. So, we might have to expect radical consequences to the crisis we’re currently going through. We just don’t know what it will be about.

[00:12:39.26] Ben: Why is the stock market not more materially affected. The initial reaction was quite severe, but actually, it’s been ticking back up. And if you take the NASDAQ, for example, I just looked — I’d better timestamp this, just so we’re not completely wrong. So, it’s the 9th of April and the NASDAQ is down about 18% versus its peak. In a world where we’re potentially facing 30% unemployment, how do you reconcile those two statements?

Nicolas: I wrote a long piece about the stock market to try and explain why it was faring so well whilst many people think that the economy is going in the wrong direction. I think there’s a decoupling between stock market investors and most people. We’re way past the time when everyone was investing in stocks. That’s not true anymore. Most of the money that’s invested in the stock market is invested by large institutional investors and the main reason why it’s faring so well, even in the presence of such problems, is that those people simply don’t know where to invest their cash.

Ben: Yes.

Nicolas: They’re afraid of investing it in tech companies because they don’t understand innovation and entrepreneurship in an economy that’s driven by increasing returns to scale; they’re afraid of investing it in bonds because bonds bear no interest rate economy; they’re afraid of investing it in commodities and they’re afraid of investing it in emerging markets or any market that’s not the US because they prefer to invest at home. And so, what are you left with, when you want to invest in stocks in the US? Well, it’s a lot of investors chasing the same stocks. And what do you do? If you have too many investors willing to buy the same stocks, prices go up regardless of the fundamentals and the context. I think that’s what’s happening now.

[00:14:58.01] Ben: They have the quantitative easing taking place as well.

Nicolas: Yes, yes! It has brought so much money in the hands of so many large investors that they don’t really know what to do with all that money. And we should bear in mind, as well, that because the government and the central banks are pumping up so much money in the economy as of now, many people expect it to trigger inflation. And so, you don’t want to hold cash if inflation is coming around the corner; you would rather have that cash invested in stocks and count on an upside with stocks, as opposed to cash.

[00:15:41.15] Ben: But what is true of the stock market is not true of venture capital at the moment, right? We are seeing capital exiting from venture capital and it’s making it harder, particularly to invest in early-stage companies. So, what do you see is the short to medium term prognosis for venture capital?

Nicolas: In venture capital, at the moment, is very difficult to invest at the late-stage because at the late-stage, valuations are extremely dependent on the state of the economy — and now the economy’s in very bad shape, so you can’t really put a price on a late-stage startup. And so, that prevents late-stage investors from deploying capital and because late-stage investors don’t deploy capital, early-stage investors prefer to hold on their cash and keep it to further fund the startups they are already a shareholder of. And so, if you’re a new startup and you try to pitch an early-stage investor, they’ll probably respond, “Okay, but because no late-stage investor is investing at the moment, I won’t invest in your startup. I’ll keep my capital to deploy in my existing portfolio.” So, until the economy goes back on its feet in terms of predictability, we won’t probably see the engine starting again.

Nicolas: But, on the other hand, we’re already in a period where venture capital is diversifying in terms of how it deploys capital. More and more players are learning to design debt instruments to finance tech companies that are in fact part tech companies — part traditional companies. And so, what I expect is that it will probably put traditional venture capital to a halt, but then create room for designing hybrid instruments that mix venture capital with more traditional business financing.

[00:18:04.14] Ben: Do you think the government could take a bigger role in funding startups, at least in the interim period where funding has dried up?

Nicolas: The new generation of tech companies that were born right after the financial crisis 12 years ago, the two flagship companies of that generation are Uber and Airbnb. And so, there are a lot of discussions about what explains their success. Is it the macro context or the technological wave that was the iPhone and smartphones in general, or exceptional founders that were made grittier by the crisis? I don’t know. I think the three factors come into play, which would lead investors these days to look at companies that not only benefit from the macro context, but also surf a wave of technological change, and then are led by exceptional founders that are even more ambitious by the current context. What we’re seeing is radical change already happening, because of the lockdown, in education, healthcare, real estate, housing. I think people will reconsider their choices. I think fringe options when it comes to educating your children will become more mainstream — like homeschooling or part-time homeschooling.

[00:19:41.09] Ben: You don’t think people have been put-off homeschooling by having done it for a few weeks and trying to juggle it with everything else?

Nicolas: I think some people will be put off but others will realize that it provides them with more freedom.

[00:19:56.09] Ben: It is quite liberating to be unfettered from a curriculum. Like, one day, your children express an interest in something and you can spend the rest of the day researching that particular subject that’s much freer, more interesting for the kids than sticking to a rigid curriculum. But, it is thought to be very, very tiring for the

parents.

Nicolas: But what will be happening in those spaces? I don’t predict that every kid will be homeschooled soon or right after the crisis. What I predict is that the period that we’re going through, which will last for weeks or months or more, will provide an opportunity for parents to reconsider educating their children, will provide an opportunity for teachers to reflect on their own job, opportunities for entrepreneurs to make their case that they can provide a different approach to educating children. And then, when the crisis is over, most of those will go back to normal but some people will keep in mind what they’ve learned during this period and investments will have been made in new infrastructures, new products, and those investments will lead to higher productivity which will make it possible to lower the prices and to make the value propositions more attractive. So, we have a virtual circle that will lead everyone to reconsider, and the entire school system will reach a new stage, probably with more customization, flexibility, more of an online experience and so on. That will happen in education, obviously in health care — because the health care system will be profoundly transformed by the current crisis, with telemedicine becoming more of the norm, as opposed to being the exception — and also housing I think will be disrupted because people will reconsider where they live, and how they live and the kind of home or apartment they inhabit.

[00:22:18.05] Ben: You’re saying, almost like, what people were predicting about this post autonomous vehicle world is now going to crystallize because if we work from home, we might as well work in the most attractive surroundings we can because we don’t need to be very close to other people because there is a much less sense of office work.

Nicolas: Exactly! I’m sure many people are experiencing working from home, and realizing both that working from home makes them more productive, more creative, and realize that if they work from home most of the time or part of the time, they don’t need to live as close to the workplace as before. So, maybe that’s the unexpected event that will contribute to solving the housing crisis in large, dense cities.

[00:23:10.22] Ben: I don’t think we can have a podcast with you and not talk about the safety net. You’ve written extensively about creating a new safety net for the entrepreneurial age and your book was extremely prescient in spotting the need for this new safety net. And if the pandemic has done one thing it’s once again highlighted the absolute need for a safety net for digital workers because they’re so much more precarious. Are you more confident post-pandemic or during the pandemic that we’ll now take the steps to introduce the safety net?

Nicolas: I think there are several changes on the way — some countries, and we, as a society, will probably reconsider what it’s about to work in proximity services. Basically, those proximity workers are the only ones whose job hasn’t changed much because the nurses are still in hospitals, delivery workers still have a job. And also, for those who don’t work anymore, like in restaurants — restaurants are a powerful lobby, they have quite of a political clout. And so, I don’t know of a government that isn’t helping the restaurant industry as a whole because we expect them to reopen when the crisis is over, and so we don’t want all the companies to go down. But, in exchange for all that government money that will make it possible for restaurant owners to cope with the crisis, we’ll probably ask about how much are you paying your employees and what kind of safety net do they benefit from? Maybe we could make some progress on that form because those people were left on their own during the crisis. So, I think for the first time we’re reconsidering the safety net or the social contract for proximity workers. For the first time, some governments have been deploying mechanisms to help support self-employed people, self-employed workers, freelancers and platform workers and so on — which is a first — and then many, many startups will be lifted up by the crisis and will come up with innovative financial products or innovative approaches to managing benefits or innovative real estate products that will all contribute to revealing the new safety net.


[00:26:06.27] Ben: There’s no automatic reason why we should rebuild the safety net or create new institutions post-crisis. But that definitely could be one outcome, right? Because certainly, you see that many of the politicians right now have extra political capital and whenever we have this kind of shared experience, we start to have more empathy for various sections of society. So, it does seem like an opportunity to make some quite radical changes, post-crisis.

Laetitia: Yeah! It really does! Like, thinking about new collective bargaining institutions, if you think of the supermarket workers in France, they very rapidly obtained visibility and then there was this pressure on supermarket chains to pay them more and create new protections for them, so they built all those window panes to protect the cashiers from people’s droplets and then they decided they’d pay them 1000 euros more every month — which is not so bad. And once the crisis is over how can you go back to saying, “Okay, well, you’re actually worthless. Let’s just cut all this and go back to whatever it was before. I think that’s not going to be possible because they are united, they went through something so terrible that they think in terms of “We’re in this together — I mean the workers — and we’ll necessarily have more bargaining power and think collectively.”

Laetitia: So, it was this pressure. Carrefour in France, and Leclerc and Auchan — all those supermarket chains — one after the other, they added this special premium for workers so that they can get paid extra. This hasn’t happened in other countries, yet — or maybe in a few others that I don’t know of — but at least it’s a sign, that in terms of bargaining, something’s really happening.

Laetitia: And the second thing is that we’re understanding the rule of public services and how crucial they are and how completely helpless we are without those public services. If you think of the NHS, how, in normal times, it doesn’t have enough resources and how in spectacular times this lack of resources will cost so many thousands and thousands of lives, there is no politician in the UK tomorrow who will be able to attack the NHS — even Johnson, who is now at the mercy of the NHS, literally speaking. And so, the fact that in times of crisis we suddenly saw the possibility of boosting those public services and their critical role is something that will have a political legacy beyond the crisis.

[00:29:12.09] Ben: Do you think that plays out in the United States? Do you think there’ll be more pressure in the United States to create some form of public health care?

Laetitia: Well, the United States is such a mess! Such a mess! I’m not optimistic about the US. What I think will happen is a moment of reckoning with this epidemic. Everything, all their incentives are wrong, all their system is wrong. The fact that there is absolutely no safety net encourages people with no alternative to continue to work even after they’ve had the first symptoms of the disease, so the spread will be worse. And then, lots of people who cannot even go to a doctor — there will be more deaths than in any other developed nation. And then, the economic crisis will also be worse because there is nothing to cushion the impact of the crisis. And so, even with a $2 trillion package rescue plan, which seems like a lot, but if that rescue package is meant to compensate for the lack of anything pre-existing, it won’t be enough. It won’t be enough to cushion the country from something so deadly, that it will be a moment of reckoning. I’m very, very pessimistic about their ability to do anything before the worst happens.

[00:30:50.15] Ben: The way I see it is this juncture where the US could either turn left, metaphorically speaking, and kind of push towards creating a proper safety net to prop up the population at large, or it could double-down on individualism. And it’s not clear which way it will go. I think if they had potentially a different president, maybe we might be more confident.

Laetitia: Yeah. I’m unsure that anything massive or anything radical can be done in the current political context. Number one, the candidate, the official Democratic candidate now is Joe Biden — and Joe Biden is not a radical thinker. Number two, there are a lot of things that are completely deadlocked. There’s the Supreme Court that is durably conservative and that will strike down whatever ambitious proposal comes out of Congress — and that is if Congress is majoritarian in the hands of Democrats after the next election, which is absolutely not sure because the Senate is also likely to remain conservative. So, I don’t think anything can be done in the American political context today that will be radical enough or ambitious enough to make a difference.

[00:32:12.21] Ben: What were the political conditions at the time of the New Deal? Because this does feel like this could be analogous to the time that led up to the New Deal.

Laetitia: Yes. It’s interesting! This comparison is very interesting because Roosevelt had difficulties with the Supreme Court of his time.

Ben: He did, yeah! I remember that!

Laetitia: He did, and he came up with a plan that came to be known as the Court Packing Plan, and the idea was to nominate lots of new justices to the Supreme Court because there is nothing in the Constitution that says that you have to stick to nine — which it’s just tradition, it’s an unwritten rule or tradition. And he said, “Okay, they’re all old and conservative. Let’s appoint lots of new justices and pack the Court with friendly justices.” And that, of course, was very controversial and lots of Americans attacked Roosevelt for being so shockingly radical — and this Court Packing Plan probably wouldn’t have been accepted and wouldn’t have passed. But, luckily for Roosevelt, one of these old judges died and he could appoint a new one, and at some point, there was a turn and because they had felt so much pressure, some of the other judges sort of changed their minds and started being more flexible, and more liberal. And so, they eventually let the New Deal unfold, but it was a couple of years of very, very, very difficult institutional moment and a true battle between those two branches of power. And today that’s not going to happen because I don’t see how in a few years, the Supreme Court will change. It was designed by the conservatives to be made durably, durably conservative.

[00:34:22.07] Ben: So when the lockdown is finished, we won’t just go backwards to the way it was; one reason is because, first of all, millions of people aren’t literally going to be able to get back to work because they don’t have work. We’re going to have a much bigger appreciation for the proximity workers and appreciate how important they are in our day-to-day lives.

Laetitia: Including teachers!

[00:34:41.17] Ben: Including teachers! Oh, yes! Those of us that are homeschooling appreciate teachers. And a lot of those proximity workers will have more bargaining power and the same applies to many of the public services that we’ve maybe had underappreciated in the run-up to the crisis. What other ways do you think we won’t go back to normal and we’ll move to some kind of new normal?

Laetitia: Well, when it comes to remote work, and the digital transition of large organizations that suddenly overnight had to manage differently, choose different tools to work remotely, there’s no going back to before in terms of the flexibility of work, and the fact that you don’t need to prove to your manager that you’re perfectly able to do things without being watched constantly and without being physically present at the office. So, I think that’s something that will change. A lot more work will be done at home, and in co-working spaces — and that’s a small revolution in a way because when we think of workplaces, we usually don’t think of the home as a workplace, so I think that’s a big change. And the fact that we think of home as workplace has an impact of how we view housing and how we consider housing policies and housing inequalities; it has an impact for companies on how they think of the workspace in general and ergonomic solutions, and it has an impact on how you protect workers because a lot of the workers who work from home already and who’ve worked from home before were not necessarily considered in a lot of the institutions that were created for office workers or factory workers or field workers.

Laetitia: We talked a lot about American politics, but for example, Roosevelt’s 1935 Social Security Act did not include domestic workers, because these domestic workers were the descendants of slaves and for political reasons, it was safe not to include them so as to have the support of Southern Democrats who were racists. And that’s just one example of how domestic workers were never included in the institutions that were created to protect workers. And that’s something that’s going to change because these institutions include medical supervision, ergonomics, social protection, obviously, etc. And so, now, the home will fully enter the realm of the workspaces and it’ll have a number of consequences.

[00:37:43.08] Ben: If everybody can work from home or have more flexibility post-crisis, do you think this changes the relative attractiveness of being a full-time employee versus being a freelancer?

Laetitia: I’m certain that it does and it’s an interesting development that’s happened over the last few weeks. In the UK, as well as in France, for the first time ever, there’s been talk of creating new protections for the freelance workers who will lose all their gigs, and all their revenues because of the crisis. It’s millions of new freelancers who suddenly will find themselves without any revenue. It’s more than 5 million in the UK, and something like that in France — a little less, I think — and these are workers who could have been salaried workers under different circumstances. The French government in the Rescue Package that was created, created a new unemployment insurance — a crisis unemployment insurance — for freelance workers. That’s a first! And then, the British Chancellor did the same which is even more surprising in the British context that’s less protective of workers than the French tradition. The Chancellor announced that a new protection will be created for all freelancers, up to 2500 pounds a month on the basis of whatever you earned, on average, before that — and that will create a form of precedent.

Laetitia: What’s obvious is that there is a misalignment between workers and companies now, because companies faced with this unprecedented crisis realize they want most of their costs to be variable. They want fewer long-term salaried workers — for example in France where you can’t lay off people easily — they want fewer offices with fixed costs that can actually kill them and burn all the cash that they have left. Whereas workers, on the other hand, want as many protections as it’s possible, they will want to return to more traditional forms of employment that provide more protections, that come with a better bundle. They want unemployment benefits, they want health benefits, etc, etc. And because this misalignment is going to be a bigger problem than ever before, in the context of this crisis, new institutions in between will have to be created, so that the model will look more like Sweden — companies must be able to lay-off people whenever they need to, but people must be protected and helped to find other jobs in the future. And so, in between is a better safety net that makes it possible to have a better alignment of interests between companies and people.

[00:40:59.26] Ben: Do you think it’ll be necessarily the state that creates those new institutions? I suspect it might be a combination of both because if you think about the present context, people are firing their freelancers because they can, because they’re those that have the least protection, the shortest contracts. But, many of the best people are freelancers. Therefore, for anybody who’s willing to take a risk at this present time and be slightly contrarian, this is the time to go in and find those freelancers and create some sort of organization that arbitrages that risk between employers and freelancers.

Laetitia: That’s true! But it’s too many people right now. It’s a little bit like, you know, when you’re an insurance company, it’s fine to handle normal risks, but once you have a risk that’s as big as a natural disaster where you have either the entire country or an entire region that’s completely destroyed, that’s not something that one insurance company can handle. It’s too big. Only the state is big enough to handle a risk of that size. However, you’re right. In most cases, it’s a combination of the two that will be most effective. So, you’ll have lots of players handling smaller risks and the biggest of them all, the natural disaster, the huge crisis — that’s something for the state.

[00:42:34.15] Ben: So just to return to this, we’re in a situation where a small minority of people work from home in the crisis. Now, I don’t know what the statistics are, but probably it’s a small majority of people who are working from home.

Laetitia: It’s about half and half actually; or one third — one third — one third: roughly, one third of people are unemployed, one third of all people are working outside, in hospitals or in supermarkets or working in the supply chain, and one third work remotely. Depending on the country, the figures are different, but you get the idea. It’s roughly something like that.

[00:43:08.13] Ben: So we’ve got a situation where a small minority was working remotely, and now a third of the working population is working remotely. So, a massive increase from one day to the next. How do you think people are coping? What do you think are some of the unseen ramifications of that, in terms of gender inequalities, for example? And then, what are your tips? Because you’re somebody who’s been working remotely for a long period of time. And it’s difficult, right? For example, we find it’s difficult to know when to stop work, for example, in the evening because you could theoretically go on until bedtime and you can start as soon as you wake up. And so, how do you create new parameters for remote work?

Laetitia: Well, it’s an excellent question because the tips that are usually given to remote workers are not necessarily valid in today’s period when parents have their children at home, or they have other family members at home that makes it so much harder to find the focus or even just the physical space to do their work in normal conditions. So, these are very un-normal times for the tips for remote workers to figure out how to work. So, it’s more a crisis time and you do whatever works best for you; parents may need more flexibility because they will work early in the morning or late in the evening if they have young children or they will work in shifts. If there are two remote workers in the household, and the two of them need to work then the mornings will be for the mother and the afternoons will be for the second parent or vice-versa. They will have to find a system and unlike in normal times, it’s a system that works for the household. So, there is this merger, if you will, of the private sphere and the professional sphere in a way that we’ve never experienced before because in normal times you have other institutions, like daycare and schools and nannies and you have this organization where you fit your household with lots of other players and a lot more extra outside help.

Laetitia: So this is very, very different and I’m a bit irritated sometimes by the productivity pieces that we see today about remote work as if it was a normal time, as if it was business as usual. Also, we know that in terms of, as you said, you’ve mentioned gender inequalities and in some households it’s like going back to the 1950s because all the chores, all the workload that was more evenly distributed between a woman and the outside world — nanny, cleaning woman, whoever else came for help — is now reinternalized. And when you reinternalize it, it’s rarely evenly split. So, that’s a disaster for feminism — that was the title of an Atlantic piece that was very good; it was, “Coronavirus is a disaster for feminism.”

Laetitia: So that’s one thing. But another is that in normal times, no one would champion lockdown. No one would say, “It’s best when you work not to see anyone ever.” So we know that in terms of mental health, we are going to have to cope with extremely difficult moments and it’s not about being productive. It’s about surviving. So, I would say, the usual things that I write about managing scattered teams and how companies with no office, like GET Lab or Buffer or Basecamp have found solutions to help us do without an office — those things do not apply today because it’s so different from anything we’ve ever experienced before.

[00:47:30.26] Ben: But in a way, that’s another thing that won’t get back to normal, right? Because, I don’t know how much you saw this, but a lot of companies, when they first were forced to let people work from home, they tried to impose normal office hours, and then they figured that, as you said, people were managing multiple different priorities at home, and so, they had to be more flexible. So, that’s another way in which companies have had to seed more and more control.

Laetitia: Yes! And that’s a positive thing that may happen out of this — is that if they make flexibility the new default, and if there is actually more trust in their management, then it will benefit everyone, even in new normal times because parents still need flexibility and they still need to be able to handle the workload the way they see fit and incorporate all the constraints that they have. So, that’s something positive that could come out of this.

Laetitia: If you’re a pessimistic, you may see that a lot of the companies that are forced to work remotely overnight, are replicating the managerial culture that was theirs before and so they basically continue to watch their people and there’s this software to take pictures of your worker’s screen and verify what they’re doing. And then, you have lots of managers who want to be on Zoom all the time — and if you’re on Zoom all the time, when exactly are you supposed to do your work? Or how much flexibility do you have when you’re supposed to be in meetings all day on Zoom? And so, I think that there’s a big gap between the companies that have a more flexible managerial culture, more horizontal managerial culture, and those that are still very conservative and basically replicating online the culture, the managerial system that they had at the office.


[00:49:49.13] Ben: Ian, I wanted to ask you how business leaders should be responding to this crisis? Is this a time to be brave and contrarian or is this a time to make sure that you steward your company through a difficult time?

Ian: So, I’m afraid I’m going to give you a boring answer, and the boring answer — which I think is the right answer — is only if the evidence supports to be brave and contrarian. The trick with most difficult situations, whether you’re a kid in the playground faced with someone larger than you or a business leader trying to deal with the fact that 95% of your revenues have just died as is the case for friends of mine around the world today, is to try to look at things relatively unemotionally — it’s hard to be completely without emotion when people you know are dying — but to try and be relatively unemotional and work out what you can do. It’s clarity, its analysis, but it’s also the ability to make a decision relatively quickly. And in that sense, that’s brave. When you have to make a decision when the information isn’t clear because you have no choice because your business goes under if you don’t, that’s the bravery that’s necessary. It’s just making hard decisions when you have to, quickly. I think you don’t do one thing. I think the efforts to try and make sure that people don’t lose their jobs have been admirable in certain areas, but obviously impossible in an airline or a hotel industry where suddenly you have no customers at all.

Ian: Now, I say impossible. It’s not entirely impossible. Mark Greeven, a professor at IMD recently gave us a case study about the car company BYD in China, which overnight, within 24 hours, because they had to find something to do with their employees — they didn’t want to let everybody off — became the biggest producer of face masks in the world. This is a known case study now, but it’s only two months old. Then, there’s another company in China that I follow, that switched from being a 90% — 10% offline retailer with thousands of stores to online retailer — so they were 10% online and 90% offline — switched to 80/20 online/offline within 30 days and didn’t suffer either the employment losses or the revenue losses that people expected. So I think the bravery is in making tricky decisions in tricky times. Contrarian — only if the evidence supports. And try to look at things based on data, not based on just gut feel.

[00:52:26.25] Ben: And where do you see that there might be room to be contrarian? So, where do you see the opportunities that good leaders, prepared to make quick decisions, might capitalize on?

Ian: So that’s a very general question. It depends on the sector you’re in and the industry you’re in. So, at the moment, the problem isn’t so much decision-making because the decision-making is fairly clear. Right now, the issue is data. If you’re looking at markets, people are talking about the difference between a V-recovery, a U-recovery, an L-recovery, underlying that are estimates of when we go back to work, when customers start buying things again. I would suggest that one of the things that managers of retail businesses or managers of consumer business should be doing is trying to work out how much of consumer behavior changes over the next three to six months. Short-term shocks tend not to impact consumer behavior; consumers tend to go back to doing what they did before. Longer-term shocks, things that last longer, people get used to doing new things in new ways; maybe they don’t go back to doing things the way they did before. And trying to work out now, trying to pass that now and work out what people will do or won’t do, how much they will change, how much they won’t change — is a very interesting question. So, I think, at the moment, it’s more about trying to understand what data there is and what it’s telling us before we get decisions. Everybody, at the moment, is just trying to scramble — spend less money, find new customers, keep as many of the employees as you can because it’s hard to rebuild teams. It’s doing what they can in difficult environments. The tricky bit is what happens next, and when next is.

[00:54:05.26] Ben: Is China now a safe haven for investors?

Ian: China has never been a safe haven for investors. It’s always been tough. And this isn’t against foreigners or outsiders — it’s tough for everyone in China, local Chinese included. It’s probably the most competitive business environment in the world, and there’s a lot of money from lots of different sources aiming at the same projects. So, prices have gone up. It’s never been safe. Right now, in addition to that, we have a very clear anti-foreigner sentiment, partly exacerbated by the last couple of years, but it’s been there, frankly, pretty much since the arrival of Xi Jinping. So no, it’s not a great time for investors in China.

[00:54:44.06] Ben: Do you think more investors from outside China are looking for a safe haven for their money? Because China was first into the pandemic, is first out, and the economy is kind of getting back to normal. Is this a time for people to look at China with fresh eyes, from an investment point of view?

Ian: So, a lot of the conditions that make China a complicated place to invest in are still there. It’s still an environment where we aren’t terribly sure if they respect the requirements for reporting that we do in the West. We’re still not very sure about how much of actual activity is being reported in the books, what isn’t on the books, what’s slightly off-book, or what’s on a separate set of books. And even with public companies, this has been the subject of some debate amongst analysts. So I think those conditions have always been there. The second question, I guess, is whether or not China really is coming out of the cycle. I don’t believe that the COVID-19 cycle ends until there’s a vaccine. We’re already seeing second waves in different parts of Asia, in China as well. The Chinese government of course, is blaming us on people coming back to China — either foreigners or Chinese — but it seems likely that there’s been underreporting, so it seems likely there’ll be other waves. People forget that actually the whole question of this COVID-19 cycle, the only reason we’re getting flattening of the curves is because we’re all locked indoors wearing masks and staying away from each other. Any form of return to normalcy will involve greater human interaction, which will involve an increase in infection rates. So, I don’t think we’re out of China yet.

[00:56:25.02] Ben: In other words, there’s almost no safe haven until we have a vaccine.

Ian: So, two different things. One is, what’s safe for humans who want to live in a particular place? And the second is investment. I didn’t quite get to answer your question because I was creating my usual precursors, pre-conditions for answering. The answer is yes, I’ve been looking at companies like Tencent and Baba for investment, but that’s principally companies that are quoted overseas, so I’m reasonably sure about being able to trade, and it’s large companies where we have enough access to understanding what they do and how they do it — so it’s relatively easy to judge them or even then, I would suggest that we don’t really know anything about those companies. So yes, I started to look at investment in those areas. And if you look at how they’ve done, their shares, actually, haven’t come down in terms of public market shares — they actually haven’t come down as much as you might expect. If you look at the falls in some of the American stocks, the Chinese stocks, the top Chinese stocks simply haven’t fallen as much. So, again, your question, why the government isn’t above buying shares to support its own market and its own company? So, there is this element of lack of transparency in both private and public markets for investment in China. And so, it’s always going to be tough. So, therefore, the short answer to your question is no, it’s not safe.

[00:57:40.19] Ben: Do you think that China will suffer less, economically, than some other countries because it got on top of this quickly?

Ian: Because it depends to a degree upon foreign consumption, and because the manner in which it has dealt with the crisis affects people’s perceptions of China, that foreign consumption may change. It’s one of the questions we all have about what happens when we get out of this. What are people’s attitudes to China going to be? Because they tried to shift a lot of the consumption — their internal consumption — that makes them relatively speaking, less dependent upon foreigner views of Chinese production. So, that side of the economy should do better. Yes, they’re harsher on crackdowns, and there’s been some criticism of the fact that everybody has to carry this little app, which tracks them where they go and tracks who they meet, so the government knows whether they’ve done anything high-risk, which are elements which actually are starting to be talked about in the West but are generally presumed to be not acceptable to Western cultures. The harshness of the treatment of the areas that came under the virus notwithstanding, yes, I think China’s probably going to do a better job of managing the infections and therefore probably do okay coming out. But, as I said, we’re 18 months away minimum from a vaccine. That means nothing goes back to normal. It has to change. Economies and companies and ecosystems that want to keep transacting have to adjust the way they transact, which may not be a bad thing. A lot of people started talking about how this has become a big push for those companies not already online to try and do so. And so, that side it’s not a bad thing.

[00:59:19.13] Ben: So, I don’t know when the vaccine comes, but do you think in the period up to the vaccination or the availability of a vaccine, China is better able to manage in this unstable interim period?

Ian: So, I’d separate our period from China’s ability to manage. The Chinese companies are extraordinarily competitive and extraordinarily able and extraordinarily nimble. So, when it comes to adjusting business models or adjusting supply chains or adjusting customer interaction processes, there’s no business culture on the planet currently faster than the Chinese and better at adjusting. So, from that perspective, they’ll weather almost any shop better than most Western companies. This didn’t use to be the case. The Americans used to be the best of this, let’s say a generation ago, but the Chinese are definitely stronger at that now. So yes, I think they’ll probably do fine in many respects.

Ian: One of the reasons that I was excited by China in the North-East in the early 2000s, was the degree of innovation I saw in places like the Western provinces for telecommunications, because there was so little money out there, and yet the companies were trying to create an infrastructure and an ecosystem for transactions on the telephone. So, they had to produce systems that worked on very, very little. And innovation in early telecommunications technology at the time is part of what’s driven the success with Huawei and others recently. So, yeah, they will do well, they’ll do fine. The more interesting question is whether we, in the West, will trust what they produce and therefore, continue to purchase with the same alacrity as we have done in the past. That’s an open question.

[01:01:01.08] Ben: So just leaving that question for now, do you think that the pandemic will bring forward the moment at which China overtakes the US to become the largest economy in the world?

Ian: China was always going to become the largest economy in the world by dint of its sheer size. So, with 1.4 billion people, it was always going to pass a country that was 300 million people at some point. Does it speed it up? It depends on how you measure it, I guess. They’re growing, obviously, at a faster rate than anybody has — even slowing down to 6%, that’s double than anybody else’s speed by far. So, I’m not sure COVID-19 makes a material difference to that. The short-term slowdown of the West, yes, creates issues for certain sectors, but not everywhere. So I don’t think it’s material. I think China was always going to end up being the largest, relatively quickly, and I don’t think this materially changes. I would, again, add a corollary, which is, bigger isn’t necessarily best, bigger isn’t necessarily strongest. I remember, in the 1980s, people were afraid that Japan was going to be the biggest, strongest economy in the world, and it would dominate the global ecosystem. I remember books being written about the danger of Japanese dominance of the business environment at that time — and look what happened. So, let’s see how they do what they do, and I think that will, to a degree affect how everybody else receives them. But there’s no question they will be the biggest very soon, just in terms of size.

[01:02:31.06] Ben: And then, just to dive a bit into this notion of external perceptions of China, how do you think they are faring and how do you think they will change post-pandemic? Because, on the one hand, China was seen as getting on top of this very quickly, if you like, the consumer of last resort, they’ve been providing aid and PBU equipment all over the world to countries that couldn’t otherwise source them. So, that’s the positive part of the post-pandemic perception. But then, on the negative side, people see them as the source of this virus, they see them as having covered up the extent of the virus at least initially. So, where do you think we end up post-crisis in our views of China?

Ian: I think the largest problem, the largest challenge for China is its own insecurity about what other people say about them. The Chinese government representatives at almost every level are particularly thin-skinned when it comes to criticism and that tends to mean they overreact — and they overreact in ways that we might consider surprising for the biggest guy in the room. And until they, themselves, feel a sense of confidence about their place in the world and about how they can be received, I think they’ll continually misstep or misjudge important reactions, and we will, therefore, always find them slightly off-putting. So, I don’t think that’s necessarily changed, as implied in your question. We’ve seen that mix. They had the capacity to construct and build and react, they had the capacity to supply us with things we need, and although we have poor-quality goods coming out of China, we also have very high-quality goods coming out of China. It’s just a question of making sure you choose your supply correctly and manage quality control. So, you can get wonderful quality goods coming out of China.

Ian: As you said, though, we’re concerned about what we’ve been told, we’re concerned about how certain things were managed; we, in the West, have seen video reporting on Twitter, which people in China have not been able to see about what the lockdown was really like in Wuhan — and that certainly maintains our concern about the way the country is governed. So I don’t think anything’s changed from this. The same two sides — the capacity to do good and produce fabulous equipment, gear, products, and services remains, but the insecurity on the part of the governing group and their overreaction to criticism and their style of management of crisis, because it doesn’t necessarily fit with what we consider to be appropriate, will continue to encourage us to consider China with both those sets of lenses separately and empower.

[01:05:33.07] Ben: What do you think happens to US-China relations? Because they were already pretty tense in the run-up to the pandemic — they had an escalating trade war and a worsening narrative. How does the pandemic positively or negatively affect US-China relations?

Ian: Well, again, because China was the big kid entering the playground, it was always going to be some tension, right? The previous big kid, the United States, suddenly finds someone that’s twice his or her size and acting differently — not just a question of being larger, but their interaction in the playground has been different to everybody else. So, the cultural shocks are always going to create a problem. And of course, the fact that they’re bigger and the fact that they’re going to wield larger sticks means that everybody gets nervous. So this conflict was always going to happen, it isn’t just a question of the current leadership.

Ian: Having said that, leadership can make it better. On both sides, at least, when it comes to the US and China specifically, as opposed to the West and China, we have leaders who are happy to blame the other side for something, both arguably thin-skinned, both unhappy with a pint of criticism, and that doesn’t help. So, I think good leadership, leadership of the type we’ve sometimes seen in Europe, with Angela Merkel and others, I think would help others. So, let’s see what happens over the coming years. But the current situation has certainly not made it better. I’m not sure it’s made it a lot worse. I mean, even if we had a more able diplomat on either side, whether in the US or in Asia — it might have been better handled and things might be smoother, so I’m looking forward to that as leadership changes, but that isn’t going to happen immediately, and for the time being, it’s going to be awkward.

Ian: To counter that, of course, is the interdependency. The United States still manufactures a huge amount of sub-contracts or directly manufacture a huge amount in China, and even though China has done its very best to switch economic dependency onto local consumption, they still have a need for overseas customers. I think that independency is a basis for trying to create a relationship that works. It’s one of the reasons people tried to create Europe after the Second World War having an interdependent economy — it means you’re less likely to go to war with someone if you’re genuinely interdependent.

[01:07:58.10] Ben: Do you think some of those interdependencies will diminish? Because I think we all benefited from having these just-in-time supply chains, these geographically dispersed supply chains, because it meant that the cost of goods went down. But I think what we found is their supply chains are very fragile in the face of big shocks. So, do you think some of those interdependencies would just naturally be rolled back as we seek to make supply chains more resilient?

Ian: And again, the answer is in the question. You ask very good questions which provide their own answers.

Ben: Then they’re not good questions.

Ian: People are certainly beginning to realize the risks of relying upon others in difficult times and the risk of trying to get access to something when you need it in a hurry when a normal supply chain takes three weeks, and you need it in two days. So those sorts of things, those concerns are coming to the fore at a time like this. But the answer isn’t to decouple completely and roll globalization backwards as some people would prefer. The solution is to build redundancy into the supply chains. So, you need to make sure that you have more than one route to get anything that’s important. By all means, for economic reasons, we’ll still try to go to the low cost, high volume, reasonable quality producer, but we’ve got to assume on anything that’s important that we have an alternative in the event that either we have an argument with the supplier or there’s a need for a timeframe which is shorter, which means we could accept a higher cost — there have to be redundant sources for the supply chain.

Ian: Western Europe is currently slowly trying to do this with natural gas, to reduce their dependency on Russia. It’s an issue in a lot of things around the world. But yes, COVID-19, particularly on medical supplies, has made it a more acute, obvious challenge for specifically medical issues. But, remember, these trends have been happening for a while — partly that things like Trump’s bring-industry-back-home stuff, but also, in Europe, as people have realized the challenges of trying to maintain quality control in Eastern Europe, not just China. So, there has been a slight trend to think about whether we want to produce everything halfway around the planet and what happens when we can’t get it when we need it.

[01:10:11.26] Ben: So you’re involved with lots of different companies as board member, advisor, investor. What are you telling the companies that you’re speaking to every day? How do you think they should best plan and adjust for this crisis?

Ian: It depends on where. I tend to be involved in media and/or consumer tech and/or, to a lesser degree, arts and creative industries companies. So, for most of those companies, the big thing that’s happening right now is pushing to get digital faster, especially if they were traditional media companies — it’s very, very hard to get newspaper and magazine and book companies to do more online. When you have no bookstores or your distribution methods are constrained and people are stuck in their homes, then online is the only place to find them. So, that’s been a really quite interesting portion. So, resistant management teams are finally saying, “Okay, we have time to do this because our other methods of reaching out customers simply aren’t working. So, that’s a big plus, I think there’s going to be a real push in some areas to do more stuff online, and therefore, to understand how it is one attracts people online and keeps people online. It isn’t the same thing when you walk down a street. Once you’ve walked into the store, you tend to spend 10 minutes there because it’s hard to visit 20 stores in a day. Online, you’re a click away from changing so people are realizing that we just simply don’t have 10 minutes to grab someone’s attention. We’ve got seconds. And that changes the way people think.

Nicolas: This crisis is THE crisis that will accelerate the transition to a more mature entrepreneurial economy or digital economy or whatever you want to call it. That’s what crises do. There’s something that’s already happening, a trend that’s headed into a certain direction, but it goes at a slow pace until a crisis happens and the crisis accelerates the pace, it fastens the pace and we’re still going in the same direction, which is a more digital economy. Some countries are seizing it as an opportunity, other countries are missing the mark, and are sliding down in terms of economic development. Like everyone interested in long-term change, I’m thrilled by the acceleration that the crisis provides. I’m terrified by the consequences of the short-term and all the people suffering and dying, but I think it creates an opportunity for every nation to accelerate the transition to a new paradigm.

Europe is a Developing Economy. But so is the U.S. (#13)

Europe is a Developing Economy. But so is the U.S.,
w/ Nicolas COLIN

For this episode, Ben Robinson is joined into the conversation by Nicolas Colin — Co-founder of The Family — and we argue that developed economies are defined by two major characteristics: they are able to create and accumulate wealth via large, global tech companies and they are able to re-distribute that wealth to benefit their entire society. Through this lens, neither Europe, nor the U.S. are developed economies in the current techno-economic paradigm — and we assess whether the current politicians campaigning for or holding power are in the right flow to inspire the radical imagination that is required.

Full podcast transcript:

 

Ben Robinson (Ben): Welcome to the Aperture Podcast. For this episode we are very lucky to be with Nicolas Colin, who is co-founder and director of The Family, which is a platform for European entrepreneurs. Nicolas is also an author, he’s written multiple books including Hedge: A Greater Safety Net for the Entrepreneurial Age, a review of which you can find on the Aperture website. He also contributes articles to Sifted, and he writes a weekly newsletter called European Straits. Nicolas, welcome!

Nicolas Colin (Nicolas): Thank you.

Ben: You said that Europe is a developing economy, which I guess is a slightly controversial statement. What did you mean by that? And what do you mean when you talk about Europe having to navigate the narrow strait between the Americas and China?

the fact that Britain used to dominate and ceased to dominate because they missed the opportunity of one particular transition from the economy of railways to the economy of steel reveals that every region that dominates at a given time is in danger of losing it if they don’t do what it takes to embrace the new paradigm.

Nicolas: It’s a long story, but to make it as short as possible, what I believe in is the idea that we’re currently going through a transition from one world to the other, or what economists would call one ‘techno-economic’ paradigm to another techno-economic paradigm. So the world we’re leaving behind is that of the Fordist economy of the 20th century that was dominated by mass production, mass consumption, and the core of this economy was the car industry, the matrix after which every industry was modeled in the 20th century with the core principle of mass production governing everything. The new world we’re entering is that of the entrepreneurial age, as I call it, which is a world dominated by tech companies as opposed to car companies. And tech companies have a distinctive feature that is increasing returns to scale, which leads to companies overall being more fragile, and markets being more concentrated, dominated by one company at the expense of the others. And so that brings many consequences, but as in any transition of the sort, it redistributes the opportunities between the different regions of the world.

We used to race ahead in the Fordist age, but as for the Entrepreneurial Age, if you look around in Europe, we don’t have the large tech companies that determine if you’re racing ahead or lagging behind. We might have that legacy wealth and prosperity that we inherited from the past, but it will be exhausted at some point if we don’t build the growth drivers that we need to rebound and to succeed in the new paradigm, and that’s about building successful tech companies that dominate the global scale.

The first modern technological revolution was the Industrial Revolution, which triggered the rise of Britain as the dominant power at the time, and then, one century later, the rise of the Steel Industry shifted power from Britain to Germany and then to the US, and the US became the most potent economic power in the world at the time, and they still are in many respects. But the fact that Britain used to dominate and ceased to dominate because they missed the opportunity of one particular transition from the economy of railways to the economy of steel reveals that every region that dominates at a given time is in danger of losing it if they don’t do what it takes to embrace the new paradigm.

And I think that’s exactly what’s happening in Europe. We got used to dominating in the 20th century, not because we were the most developed economy in the world, but we were close to catching up on the US, emulating them in many respects, forging this very strong transatlantic alliance that came with sharing the wealth, sharing the techniques to grow successful companies, but also sharing parts of the social contract, so institutions that existed on both sides of the Atlantic. I think we got used to racing ahead, and we need to realize today that we used to race ahead in the Fordist age, but as for the Entrepreneurial Age, if you look around in Europe, we don’t have the large tech companies that determine if you’re racing ahead or lagging behind, and if we don’t have them, that means we’re lagging behind and we might have that legacy wealth and prosperity that we inherited from the past, but it will be exhausted at some point if we don’t build the growth drivers that we need to rebound and to succeed in the new paradigm, and that’s about building successful tech companies that dominate the global scale.

If you want a tech company to succeed — to overcome the many obstacles that exists at the seed stage and then to scale-up and reach a scale that makes it possible to dominate at the global level — you need that company to aggregate resources on different fronts. One front is that of employees — you need to hire a lot of talent. Another front is that of capital — you need to raise a lot of funds. And then a third front is access to the markets, — you need to sell your product to as many customers as possible. If on each of these fronts, you need to overcome obstacles that come with the fragmentation, then you are slowed down when your potential competitors in the US and China are accelerating.

Ben: And you’ve talked a lot about the reasons that Europe is lagging behind United States, and we can point to many factors, less VC money, for example, but one of the key ones is that… you talk a lot about fragmentation.

Nicolas: Yes.

Ben: And in that regard, Brexit cannot be a good thing for the European project, right?

Nicolas: No, it’s true. So the fragmentation is critical because if you want a tech company to succeed, that is to overcome the many obstacles that exists at the seed stage and then to scale up and reach a scale that makes it possible to dominate at the global level, you need that company to aggregate resources on different fronts. So one front is that of employees. You need to hire a lot of talent. Another front is that of capital, you need to raise a lot of funds. And then a third front is access to the markets, that is you need to sell your product to as many customers as possible. If on each of these fronts, you need to overcome obstacles that come with the fragmentation, be it about languages or culture or regulations, then you are slowed down by the fragmentation when your potential competitors in the US and China are accelerating at the same time, because then they don’t encounter the same obstacles as you. So an example is… you are in Paris, you’re struggling to raise money because VCs are not ready to support an ambitious venture like yours. You can still cross the channel and go to London and pitch London-based VCs that will realize that your venture has the potential to grow big, and they will invest.

Crossing the channel sounds easy, but you need to realize that if you’re an early stage startup, it costs a lot of money to buy a Eurostar ticket, then you need to spend several nights in London and hotels are extremely expensive. And then you need to pitch a VC in English, which is not your native tongue. And then even though you master some English and you can pitch your company, the fact that that you didn’t grow up in the same culture, maybe the VC in front of you is English or they are Indian or they are American but you’re French, and so the informal communication is not the same, the context, the interpretation of the context is not the same, and so there will be a high probability of a miss, not because your venture is bad or that VC is feeble, but because there’s been some misunderstanding between you due to the language and the culture, and that’s fragmentation.

if you immerse yourself in the world of startups, you realize that hard borders are not that much of a problem. It’s more soft obstacles like languages and culture that are the problem. I think that Brexit is irrelevant when it comes to soft obstacles.

Ben: And from here, it gets worse, presumably, with Brexit, because when you read your newsletter, it seems that you oscillate between sometimes being more bullish about Europe, sometimes a bit more pessimistic about Europe? Doesn’t Brexit make you more pessimistic?

Nicolas: I don’t know. The fact is, if you immerse yourself in the world of startups, you realize that hard borders are not that much of a problem. It’s more soft obstacles like languages and culture that are the problem. I think that Brexit is irrelevant when it comes to soft obstacles. It won’t make it harder to communicate across cultures and languages. The only problem that will have is that how do you solve the problem of fragmentation? You don’t solve it by enacting rules in Brussels that say now there is no border where there was one before.

You solve the problem of fragmentation by inspiring a common culture in which everyone from all across Europe can work together at building successful tech companies.

You solve the problem of fragmentation by inspiring a common culture in which everyone from all across Europe can work together at building successful tech companies. And we have a very interesting precedent in that regard, which is the financial services industry. If you go in the building of a large investment bank in London, you encounter people from all over the world who all speak English with very different accents, who obviously come with a very different cultural background, but yet they’re still able to work together because they brought together by a single culture that is the culture of the financial services industry. They have a common language to exchange information, i.e. Balance Sheets, P&L statements, Cash Flow statements. They have common tools that they know how to use — a Bloomberg terminal, Excel spreadsheet — and they have a common culture and everyone knows what they should expect when they joined that particular industry in terms of work ethics, relationships within the organization and so on. And that culture exists because it’s been shaped by successful ventures in the financial services industry. An industry that has grown so large that they’ve imposed the culture and passed it down to the next generations.

The problem we have in Europe is that we don’t have those large tech companies that would shape the common European culture for building tech companies and impose that culture on smaller startups. And because we don’t have that, we need to wait for that first generation of highly successful European tech companies and once they make it at great expense and with great pain, because they are still fighting against an adverse environment and trying to overcome the fragmentation. If they make it, they will crystallize the culture and that culture will spread out of the organization and impregnate entire ecosystems. In turn, that will make it easy for people from all over Europe to come together and build tech companies together, even though they don’t share the same language or the same cultural background.

So Brexit doesn’t really make a difference. Maybe it will make it a bit harder to build successful tech companies in Europe, because it will be harder for entrepreneurs on the continent to raise funds from VCs in London. But Brexit or not, we will still need to wait for those highly successful European tech companies for the culture to emerge and to make it easier for people to work together.

if you read history, you realize that the fragmentation of Europe has long been an asset, as opposed to the unity of countries. The fragmentation can be an asset because it fosters competition between different countries which experiment with building new institutions or creating different context for entrepreneurs to succeed.

Ben: So, the good news is that Brexit doesn’t make a material difference to the likelihood of a large European tech company materializing?

Nicolas: No. It can even make it easier actually, because there used to be a time, if you read history, you realize that the fragmentation of Europe has long been an asset, as opposed to the unity of countries such as the EU, China especially, also the US, even though it’s a federal system. The fragmentation can be an asset because it fosters competition between different countries which experiment with building new institutions or creating different context for entrepreneurs to succeed. And entrepreneurs can eventually shop around the different countries to find the right place for them to build that venture. And that’s what happened many times in the past and that was that’s what explains most of the prosperity that has characterized Europe over history. So Brexit maybe will reinforce, foster even more competition, because breaking free from the European Union will make it possible for Britain to invent their own institutions to support entrepreneurs, and that in turn will force countries on the continent to align themselves, and so maybe it will accelerate things.

Ben: So you’re starting to paint what could be a positive picture of post-Brexit Britain, and I think for many of us that didn’t want Brexit to happen, and we’ve sort of come to terms with it but haven’t yet thought about what might be some of the positive outcomes down the road. So, in addition to a slightly elaborating on what post Brexit Britain could be in a positive sense, I want to get your view on Dominic Cummings, because you wrote a very interesting piece about Dominic Cummings a few weeks ago, which was pretty critical. You were trying to answer the question of whether he could transform the British Civil Service, but regardless of whether he can or he can’t, do you think he might have some sort of Grand Master Plan for post-Brexit Britain? Because he may have many faults, but he does seem to be at least pretty good strategist or was at least when it came to winning the LEAVE campaign. So long question, but what could be the positive post-Brexit outcome, plus do you think Dominic Cummings has that kind of vision in light?

Nicolas: So, for context, Dominic Cummings is a special adviser to Boris Johnson as Prime Minister, and he used to be the chief strategist and campaign manager for the official LEAVE campaign before the referendum in 2016.

Ben: He came up with the slogan…

Nicolas: Take back control

Ben: Correct.

Nicolas: Yes. You can see that in a rather good movie with Benedict Cumberbatch, about Dominic Cummings.

Cummings is interesting because he used to study history. So he’s not a technologist per se, but he’s a nerd. He is interested in those new things and he’s probably dived quite deep into technology and the transition that technology is fostering at the moment, and so he understands what’s going on. And unlike many people that are for Brexit, I don’t think he has an ounce of racism in him. It’s not about kicking the immigrants out of Britain. For him, it’s mostly about, if we’re going through this transition, we need room to maneuver, and we need to be able to try as many different things and to experiment with new policies, new institution building, and for that, you don’t want to belong to the European Union, because supposedly the European Union imposes many, many constraints on what you can do as a sovereign country. So if you want to experiment in a radical way you need to unshackle what the European Union imposes, and to experiment and to innovate and so I think now he has the satisfaction of seeing Brexit actually happen, and he’s expecting that now Britain will be free to implement radical reforms, and to deliver radical transformation in the interest of the country and of its inhabitants.

The way you transform an organization is by re-positioning it around solving problems that didn’t exist before or that you couldn’t solve before

What I’ve been criticizing in my article is the fact that if you read the journalists— again, I’ve never met Cummings. I don’t know what’s in his head — but apparently, his obsession when it comes to implementing radical reform is about transforming the Civil Service, reshaping the state, turning the stage from what it is today, that is a very top-down, hierarchical organization entirely designed for mass production of public services, to a state that is more agile, more innovative, more responsive to the demands of the public, which are all good ideas and we can all agree with that.

But my article is critical. It’s critical because first, I know both worlds. I used to be a senior civil servant in the French government, so I know bureaucracy from the inside. I’ve seen generations after generations of politicians vowing to transform it from the top down. It never works, but I also know the tech world, probably even better than Dominic Cummings, because I’ve been working with entrepreneurs for almost 10 years now, so I know what it takes to transform an organization. And what it takes is not that you seize control of the organization from the top down and force everyone to change. The way you transform an organization is by re-positioning it around solving problems that didn’t exist before or that you couldn’t solve before, and so I think that’s what the British states should do at the moment. You shouldn’t try to transform the way the Civil Service works. It should focus on problems that have become so critical and that technology makes it possible to solve, and build new agencies, new organizations, new policies at the margin to solve those problems. And then if it’s successful, then you have a redistribution of resources that successfully absorbs the failing if you want.

Ben: Not to belabor this point too much because we want to move on to other things than Brexit, but in Cummings’ plan or at least what we know of Cummings’ plan — which isn’t that much — he is talking about new agencies. He is talking about a UK style DARPA organization. So why do you think that he will fail in creating new institutions and gradually making the state more agile and more responsive?

Nicolas: Yes, but gradually means 30 years. In 30 years, maybe the new agencies built by Dominic Cummings and others will have become so successful and so large that will become a model for the rest of the organization to reshape itself. But it’s 30 years is what it takes to change organizations as large and as old as Western states such as France or the UK, extremely centralized organizations that are huge and employ literally millions of people, and so I think he should prioritize. Does he want to build new agencies in which he gets to be the head of one of those new agencies, with all the resources and the autonomy that he needs to try new things? Or does he want to transform the entire organization from the top-down? And if you try to do both, there’s a high probability that you will fail on both fronts.

Being in the European Union or not, doesn’t really make a difference if you are a start-up in one of the non-harmonized industries, and for some reasons startups are mostly located in non-harmonized industries, because harmonized industries are those that are already dominated.

Ben: And then last question on Brexit, but is the flaw … because again, I think when you talk about creating a UK that’s more agile and able to respond faster to this new economic paradigm, that doesn’t sound like a bad thing, but is the flaw that in order to create the flexibility to do so, to reform the state or… we don’t know how quickly that can happen anyway, is the flaw that the UK is no longer part of the single market, so it doesn’t have this large addressable market for its new companies to sell into? Could there have been a better outcome where it was a softer Brexit with more autonomy, but with still access to the hundreds of million EU consumers?

Nicolas: Well, to be frank, I don’t think it makes a huge difference. There’s a thing called the Single-Market, which in theory provides you with a guarantee that if your company established anywhere in the EU, you can market and sell your product anywhere else in the EU. But in fact, the Single-Markets, few people realize this, it only exists in certain industries, such as manufactured goods, financial services, electricity, airlines, railways, and a few others. And so if you are a start-up in one of those industries, then you can enjoy the benefits of the Single-Market and Brussels will be here to provide you with the certainty that wherever you are established, you can compete in another country member state. If you don’t belong to one of those industries, well it’s much more difficult, because the regulations will be different and no Brussels-enacted legislation forces member states to harmonize their regulations in industries such as healthcare, public transportation at the city level.

And so, being in the European Union or not, doesn’t really make a difference if you are a start-up in one of those non-harmonized industries and for some reasons startups are mostly located in non-harmonized industries, because harmonized industries are those that are already dominated, extremely capital intensive. Like, you don’t want to compete on the market for electricity if you are a start-up. That’s simply too hard. You don’t want to come up against the incumbents in that particular industry. So you might, in theory enjoy having a single market for electricity, but in fact, it’s impossible to penetrate, to enter that market. So startups end up in more mundane industries, such as business services, health care, education, and all those industries, by coincidence, are very different from one country to another. So I don’t see Brexit making a lot of difference.

Ben: Listening to you, it sounds like you’re relatively sanguine about Brexit, and I guess at the heart of what you’re saying is you believe that entrepreneurship will harmonize Europe faster and better than politicians ever could, which I guess is inherently why you switched from being a civil servant to starting The Family.

if you tackle a big problem, if you harness the power of technology to solve that problem, and if you raise funds from venture capitalists, then you can deliver great things and make a real difference and a real impact. And so that’s where the power is.

Nicolas: Exactly. That’s the idea. Well, like many people working for government, I was disappointed by what I observed from up close, and the worst thing is in government is the politicians and the very low quality of the leadership. And then you encounter entrepreneurs and you realize that if you tackle a big problem, if you harness the power of technology to solve that problem, and if you raise funds from venture capitalists, then you can deliver great things and make a real difference and a real impact. And so that’s where the power is. Power is not only scale, it’s also agility and ability to experiment with new things having nothing to lose, which is definitely not the case in the government’s spheres.

Ben: Just a challenge that slightly, and let’s talk a bit about the U.S., because the U.S. doesn’t have Europe’s problem in the sense that it has several top of the food chain, massive tech companies, and for a long period of time, that was galvanizing the institutions in the U.S. There was alignment between tech, business and politics, particularly during the Obama years. But things have moved against those tech companies, and they’re not able to exert the influence that they were, and yourself, you’ve talked a lot about how damaging Donald Trump has been for Silicon Valley. I think you even had a piece that was called exactly that or something to that effect.

Nicolas: Yes.

Ben: So is it enough to just have massive tech companies? I mean, because …

Nicolas: No, it’s not enough. Definitely not. What I usually explain is that if you want to be a developed prosperous country in a given paradigm like the entrepreneurial age, you need to run a race that’s effectively divided in two parts. So the first part of the race is about building successful tech companies, capitalist organizations that generate increasing returns to scale at the largest scale possible. And then once you have that you have that wealth, that value that can be realized into wealth and that wealth can be reinvested in developing your economy by spinning out to other industries that don’t generate as high returns. But that doesn’t happen if that particular country is not provided with the right social contract, and so that’s the second part of the race. Once you have the large tech companies, you need to build the social contract to guarantee that the wealth they create and the power that they accumulate is used to developing the entire economy, as opposed to enriching just a small group of people.

Ben: So in the US, why didn’t that second part happens? So the US created massive, global, world-leading tech companies, but it didn’t put in place a social contract, but it looked for a time like it was going to. You had Obamacare. You had some sort of alliance between Silicon Valley and Obama. What went wrong? Was it a problem with Obama, because implicit in some of the things you write, you see him as a very good strategist but failing versus somebody like Roosevelt in terms of visibility to get stuff done? Was that his problem? Was he just not effective enough?

Obama was open minded and extremely charismatic and inspired a lot of respect all across the world and so Obama could vouch for Silicon Valley companies and say, “okay, trust them. I know them. They’re my friends. We’re working together. We’ll find a solution for them to pay a bit more taxes, but not too much. We’ll find a solution to regulate and protect your privacy, but please, let’s stay friends”.

Nicolas: Well, we don’t know whose responsibility it is, but it didn’t work. It didn’t deliver. I think that was the plan. Obama was clearly extremely supportive of Silicon Valley and Silicon Valley companies, including by negotiating free trade agreements with Asia and with Europe, to foster the growth and to guarantee that they would have access to those large markets outside of the U.S. In exchange, you can even say that Silicon Valley was extremely supportive of Obama in many respects, especially by providing a lot of money to his campaigns and providing a lot of talent to staff his administration. And so had another Democratic president being elected after Obama, they could have continued that stream of build up this alliance between the dominant capital-intensive companies of the day and the forward-looking progressive leaders willing to build a new social contract. That didn’t happen for many, many reasons. Part of them are completely random. But because it didn’t happen, the US is now losing ground, and you can see that by the day.

A very concrete consequence of Trump’s election is that Silicon Valley has lost support in Washington DC, especially when it comes to negotiating free trade agreements, because Trump has officially put an end to negotiating all of that. He effectively ceased negotiating on both sides of the U.S., and then he also closed the borders for immigration, which makes it harder to hire talent in Silicon Valley. Plus, he took the side of backward-looking incumbents in many industries, as opposed to supporting innovative entrepreneurs trying to transform those industries. And the result is that Silicon Valley has been slowed down, and not only have they been slowed down by the Trump administration, the Trump administration has also transformed how we view the U.S. from the rest of the world. So before that, people were a bit worried about large U.S. tech companies manipulating data and crushing competition from legacy players, and so on. But when you looked at the U.S., what you saw was Obama and Obama was open minded and extremely charismatic and inspired a lot of respect all across the world and so Obama could vouch for Silicon Valley companies and say, okay, trust them. I know them. They’re my friends. We’re working together. We’ll find a solution for them to pay a bit more taxes, but not too much. We’ll find a solution to regulate and protect your privacy, but please, let’s stay friends.

Today when you look at the U.S., you see Trump and everyone hates Trump, except for the fringe of Trump supporters in the US, and so Silicon Valley is not protected by its own government anymore. The government has become a liability, both in terms of what they do at home, but also in terms of the image that they’re projecting abroad.

Ben: Crystallizing a magnet on negative.

Nicolas: Yes, exactly, and so I think it’s not a coincidence if many U.S. tech giants have been renouncing competing at a global scale, precisely during that period. Uber renounced competing in China just a few months before Trump’s election, then they left Southeast Asia, sold their operations there to Grab. And what I see is more and more U.S. tech companies will retreat onto the U.S. market, and it’s now impossible for them to compete in China and it is lost forever. It will become more and more difficult for them to compete in India, another very large market in Asia. Africa is up for grabs but the Chinese are extremely aggressive on the ground and securing market shares and supporting local entrepreneurs with Chinese capital and Chinese platforms, and Russia is also out of grab for U.S. tech companies. So at some point, what they’ll have is the U.S. market, part of Latin America and maybe part of Europe unless we Europeans embrace Chinese products, or we Europeans build our own solutions that are adapted to the European context that is effectively very different from that of the U.S.

Ben: See, you are making out like this has changed the course of history. Listening to you it sounds like there’s some permanence to this new situation, but it could just be a blip. And I’m going to refer you to an article that you wrote, I think three years ago called President Trump, or the Twilight of the Conservative Gods, which for those of us that didn’t want Trump elected, we took a lot of heart from that because what you essentially said in the article is that Donald Trump is the last, the most extreme Republican before a reset towards an era of democratic control and the reconstruction of the state bodies and infrastructures, tuition. Do you still subscribe to that view? Could it be a blip?

the U.S. needs the world less than it used to in the past

Nicolas: So I still subscribe to that view with two caveats. One of them is that what we didn’t expect is how influential Trump would be in terms of reshaping the U.S. political system. That’s especially true for the judiciary. So he’s already appointed two justices in the Supreme Court. He will probably appoint one or two more, especially, or even more, if he’s re-elected. They’ve also appointed a lot of judges. So basically, if you control the White House and the Senate in the U.S. system, you can appoint as many judges as you want, and that’s the case for the Republican party at the time and judges are appointed for life in the U.S. system. So any Democratic president that comes back to power after Trump will have to deal with a judiciary that will be ready to strike down any progressive regulations or laws that are enacted by a new progressive majority, a Democratic majority. So that’s one thing.

The other thing, so the judiciary — Trump is also actively destroying the government in itself. It’s now understaffed, under-funded. A lot of people are traumatized. It’s riddled with corruption at every level, and that’s all because of Trump. And so you can say, Okay, we’ll erase all of that and rebuild. It takes time to rebuild a government once it’s been damaged like it is today. And the first thing is the U.S.’ standing across the world. There will be many relationships and many alliances that won’t exist anymore once Trump leaves power. And all of that in the context, that’s the other caveat, is that the U.S. needs the world less than it used to in the past, because they don’t have… well, China is officially a rival, but it’s not as frightening as the Soviet Union once was. They’re not officially at war, and they don’t have missiles pointed at each other. The U.S. are now almost independent in terms of energy. They have oil, gas, natural gas, and so they don’t need to be as present in the Middle East to secure oil supply for the economy to grow. And so many people expect the U.S. to just go back to the isolationist approach that used to exist before World War Two, and simply ignore the rest of the world. So if it’s a deep trend and long term trend, Trump will only have accelerated that one.

When it’s your time, it’s your time. It’s about being in the flow. So your best chance at winning is to be in the flow. Maybe that’s not enough, but staying in the flow is the best chance you have to go as high as possible. When you are in the flow, there’s something that makes a real difference and whatever happens to you, it makes you stronger.

Ben: You have a theory in politics, which I think we can summarize very simply as when it’s your time, it’s your time, and so it wasn’t Hillary Clinton’s time, but you think it’s Elizabeth Warren’s time? However, of late she’s been dropping quite a lot in the polls, do you still think it’s Elizabeth Warren’s time?

Nicolas: Well, the thing with the polls during a primary season is that as long as you’ve not reached the first primaries, you don’t really know where people stand. Because the two first states that hold the primary or caucus that is Iowa and New Hampshire are very weird and unrepresentative of the U.S. as a country. And so they usually can bring the whole pack in a direction that’s very different from national polls and change the nature of the equation because if you have a momentum building up in these early states, then you can recover.

So I know that Warren has been behind in the polls for a while or a close second. Now she’s receding because there have been several controversies, plus there is apparently redistribution from her to Bernie Sanders. I don’t know, but when it’s your time it’s your time. It’s about being in the flow. So your best chance at winning is to be in the flow. Maybe that’s not enough because being in the flow doesn’t guarantee that you’ll be at the bar at the day of the election. But staying in the flow is the best chance you have to go as high as possible. And again, maybe that’s highest at the bar, maybe it’s not, but when you are in the flow, there’s something that makes a real difference is that whatever happens makes you stronger. And the example I use to explain that is Obama. So Obama was obviously in the flow during the first campaign, the 2008 campaign.

But at some point during the primary, he was in a fierce competition against Hillary Clinton already, and there was controversy around raging speech by Obama’s pastor that was captured in video in which he was railing against the US and typically the image of the angry black men that frightens white voters in the US. And so the Hillary Clinton team said that’s over. That will ruin Obama and we will recover and win this race, and then she’ll be elected president. It didn’t ruin Obama because Obama was in the flow, and what he did after that was say, okay, that’s a very big problem, probably the major PR crisis that he had to overcome during that particular campaign. But what he said is, I’ll use this opportunity to make a big speech on race, which he did in Philadelphia. And that speech was so mind-blowing and was so eloquent and so deep that everyone forgot about the raging of the pastor, and then focused on that speech that Obama had made in Philadelphia. And that’s what being in the flow means is whatever happens even though it looks as if it’s very negative, then you can always recover from it, absorb the energy and then move forward.

We’re clearly at a point when Silicon Valley has been extremely successful at growing tech giants, and when the U.S. needs to enter the second part of the race that is building a social contract, and you can’t enter that second part of the race without putting bold ideas on the table.

Ben: So if Elizabeth Warren might not be in the flow, who is in the flow in the Democratic race?

Nicolas: I still see her as the most in the flow. You have some years where nobody’s in the flow like in 2004, if you remember that campaign. There was a very large pack that ended up being dominated by John Kerry who lost the election badly against George W. Bush because he had no exceptional charisma, no bold ideas, nothing. And so some years… that’s all you have. You have uninspiring candidates competing against each other, and no one’s using the flow. The one that’s in the flow is the one from the opposite side.

Ben: How much of a problem is it that Elizabeth Warren wants to regulate and break up big tech?

Nicolas: Well, I don’t think it’s a problem. I think it’s part of being in the flow. We’re clearly at a point when Silicon Valley has been extremely successful at growing tech giants, and when the US needs to enter the second part of the race that is building a social contract, and you can’t enter that second part of the race without putting bold ideas on the table, and she has bold ideas, and you know that’s the rules in politics and government. There’s a very long distance between the initial intent and what comes out of the many bargaining and negotiations at the end. But having someone that’s willing to open the conversation is very important. It’s a signal that says, we’ll get in that race for building a new social contract, and maybe that social contract will be the one that we need to have to have a more inclusive and more sustainable economy.

There’s a common thread that links Obama, Trump, Macron, Ocasio-Cortez. They came from the margins, were not identified as the prominent politician and overcame that obstacle by using technology to create a direct relationship with the voters, which is now possible. So all those politicians have been digital-age politicians when it came to campaigning. But campaigning and governing are two very different things, and I still have to witness a politician that masters the art of governing for the digital age.

Ben: Do you think Elizabeth Warren is a digital age politician, or do you think somebody like Alexandria Ocasio-Cortez is more of a digital age politician? And do we yet have any digital age politicians in Europe?

Nicolas: Well, that’s the thing. There’s a common thread that links Obama in 2008, Trump eight years later, Macron the following year, Ocasio-Cortez in 2018, and all those politicians… they came from the margins, were not identified as the prominent politician, as a front runner, and overcame that obstacle by using technology to create a direct relationship with the voters, which is now possible. So all those politicians, all highly successful by the way, have been digital age politicians when it came to campaigning. But campaigning and governing are two very different things, and I still have to witness a politician that masters the art of governing for the digital age. All of those failed at reinventing what government is about once they’ve won their election. Obama failed to do that. He was stuck in the gridlock of Washington DC and was unable to use the support, the massive popular support triggered by technology that he enjoyed during the campaign.

Maybe Trump is the most advanced for the worst, because he knows how to leverage the power of his supporters that are angrier and angrier by the day and retracts on government, but some people would argue that he didn’t achieve anything that really matters to him because nothing matters to him probably beyond being famous and wealthy, and so Trump has been a tool used by the Republican Party to achieve lower taxes and more conservative judges on the benches. That’s all but Trump himself didn’t achieve anything meaningful that matters to him in terms of policy outcome…

Macron has likely failed in terms of governing. He mastered the art of campaigning in the digital age but didn’t translate that into a new form of government, and Ocasio-Cortez, it’s still too early to say. But I think Elizabeth Warren, to come back to your initial question, is the best we can have in terms of a politician that’s been learning how to campaign in the digital age. She’s been pioneering new techniques to orchestrate network dynamics between her supporters, including the selfie lines. If you want to Google that…

But Elizabeth Warren, and that’s the key for why I think she’s in the flow. She’s a consummate professional when it comes to governing. She knows every detail related to the mechanics of government, how policy is designed, implemented and so on. She knows how important it is to appoint the right persons in the right positions, and so if she wins, and that’s a Big IF, but if the flow is enough to put her above the bar, then she wins, we will have probably the most expert president in a very, very long time when it comes to governing and to deliver policy outcomes. And I think voters sense that, and that’s very important to them. They can’t explain it because they don’t really know the art and science of government. But they can sense that she’s serious when it comes to government, as opposed to people that have just soundbites.

Ben: With the space that’s being left as the United States retreats from globalization and retreats from international diplomacy and international agreements, is it China’s moment? Will China rise up and usurp United States? There’s a great section in your book about the Belt and Road Initiative. Is China, through the Belt and Road Initiative, going to become the new global superpower?

Nicolas: Well, so the Belt and Road Initiative is a program designed to build infrastructures to connect China to the entire Asian continent and towards Africa and maybe in some parts of Europe. And it’s meant to support trade, and to strengthen the connection between China and the rest of the world. I think there are many precedents. It resembles the Empire that the Portuguese built the 16th century. It resembles to a certain extent the British Empire in the 19th century, with the exception that the British really wanted to govern entire countries, whereas the Portuguese a few centuries earlier, were not interested in submitting entire populations to their will. They just wanted outposts to be able to trade and to access the riches that were in the different parts of the world. And so I think the Chinese are more in that spirit. They’re not interested to submit other countries to their power. They are interested in developing their economy and to supporting their companies growing, and to strengthening their regime and they know because the regime has many adverse negative characteristics from a Chinese population point of view. It’s acceptable only if the economy is doing well.

Ben: Yeah.

Nicolas: And the Chinese economy will do well only if Chinese companies manage to expand abroad and do more business with other countries. So that’s why Belt and Road Initiative was designed. It’s to support and to sustain the continuous growth of the Chinese economy over the long term, even though most industries or companies are reaching a cap in terms of their capacity to grow on the domestic market. So what they’re interested in is more trade, more connections. And as such, they won’t be really comparable to the US in the 20th century. The U.S. was interested in security and matching the Soviet Union. Here the Chinese are interested in just trading and inspiring support in other countries for their regime. They don’t want to be bothered when it comes to domestic affairs.

When I wrote the book that was two years ago, it seemed as if China was succeeding on every front, especially because of Trump orchestrating the failure of the American Empire. Today I would say the current situation makes many people less bullish on China because the economy’s slowing down. Xi’s regime is tightening the bolts a bit too much.

Ben: When you say ‘tightening the bolts’, you mean …?

Nicolas: Well, imposing surveillance and…

Ben: Yes. Okay.

Nicolas: …repressing freedom of expression and there was a long time during which even Western media played along because everybody wanted to be friends with China. But now what we’re witnessing in Western media… it’s all out. Now we can write at length about Muslim people being forced to work and the Uyghurs and so on, which you didn’t read as much about that few years back because there was still…

Ben: Is that a Trump effect because of the trade war, and I guess the sort of indirect pressures he is applying around the world to do less with China?

Nicolas: I think it’s the Trump effect. I think Trump has precipitated the realization that maybe the U.S. will have to become self-sufficient, and maybe large US tech companies will have to renounce competing in China. And so if you don’t need to compete in China anymore, why bother trying to make friends with the regime? It’s useless. So it effectively becomes a mandate for those who are genuinely shocked by the treatment of the Uyghurs to write at length about that, because it doesn’t go against the economic interests of the U.S. as a nation, because they’ve renounced doing business in China. I’m not sure it’s true for every U.S. company, but I think that the radical change those past two years has been that well, it would be nice if we could do business in China, but since it’s too difficult, let’s just renounce it and reposition our entire economy.

Ben: You write a lot about how innovation is a three-player game, so you have the State, Capital and the Entrepreneurs, and you also talk about how the state best deploys resources when they are mission-oriented. Is the Green Deal, which I’m not sure something you’ve talked about much or written about much, is the Green Deal the mission to galvanize those three players? In particular, is it Europe’s opportunity to create something, our new industrial sector or a new group of companies that can be world beating?

I like to be a bit more radical and talk about ‘war’. What matters is that we must wage a war against something, because being in a state of war is extremely liberating for entrepreneurs. You don’t have to waste too much time explaining what you do if you’re in a state of war, as opposed to what many entrepreneurs do all the time, which is trying to explain what they’re trying to do and no one is understanding.

Nicolas: So to be fair, those are not really my ideas, but rather those of economists like William H. Janeway and Mariana Mazzucato. The idea that the entire thing that we call entrepreneurship, or VC-backed entrepreneurship, is in fact enabled by the state spending a lot of money in basic research, infrastructures, and so on. And that most of that world, the world of entrepreneurs, owe their biggest successes to the state having set a goal and having mobilized an entire nation towards reaching that goal.

And so, Silicon Valley can be seen as a byproduct of the US trying to best the Soviet Union on many fronts, including technology, and because it was a matter of life and death, the price that you had to pay was not really in a question. And so the U.S. Government was ready during the Cold War to spend whatever it took to discover new technologies, to implement those new technologies not only in the military, but also at a larger scale. And all those people who make fortunes in Silicon Valley were just piggybacking on that effort.

Mariana uses the concept of the mission. So we must be on a mission together if we want the state to provide the direction as to where entrepreneurs should go, and what kind of problems they should try to solve. I like to be a bit more radical and talk about war. What matters is that we must wage a war against something, because being in a state of war is extremely liberating for entrepreneurs.

First of all, war is preceded by speeches and explanations and slogans that everyone listens to, and so when you are an entrepreneur participating in the war effort, whenever you talk to anyone — an investor, a customer, potential customer, your mother, your friends — they all understand what you’re trying to do because it’s all part of an effort that everyone understands deep inside. So you don’t have to waste too much time explaining what you do if you’re in a state of war, as opposed to what many entrepreneurs do all the time, which is trying to explain what they’re trying to do and no one is understanding.

The other thing is that you don’t have as many enemies, as many obstacles in your way. You read a lot of stories about entrepreneurs trying to disrupt an industry and having incumbents against them, lobbying the government to enact stupid regulations that make it impossible for startups to enter that particular industry. But in fact, if you’re in a state of war, you can point out those incumbents that are lobbying the government to enact stupid regulation. Instead, they’re going against me that is part of the war efforts, and so as such they are enemies of the nation, and so it becomes more difficult if you in a state of war to resist the rise of startups and to slow down their success.

I think we need to find another war, and that’s why I’ve introduced this idea of Europe as a developing economy, because we have many examples in the recent past of countries that have managed to develop their economy by waging a war against under development, because being underdeveloped is humiliating. You see yourself as poor, lagging behind, and so each leader comes up and says, we’ll fight a war against this under development, and that will take a lot of effort.

Ben: So to reframe the question then, should Europe wage a war against climate change?

Nicolas: Well, I don’t know. I think Europe is not that impacted by climate change, too… Well, nobody knows. So far, it’s been a miserable failure. We’ve failed at inspiring a fighting spirit when it comes to climate change. I think in countries such as Australia that’s burning at the moment, it will become soon, quite easy to make people realize the connection between that abstract thing that is climate change or global warming, and what’s happening around them and actually threatening their life, and suddenly it becomes a matter of life and death. And that’s what war is about.

But in Europe, we were lucky in a way that we’re in the part of the world that will be the less impacted by climate change, except maybe for the Netherlands, who are in danger of disappearing altogether. So I think it’s difficult to inspire that fighting spirit in a region such as Europe where people see the world burning far away from them, but don’t feel really concerned, and it’s even difficult for them to realize the connection between the immigration waves and the fact that some of those immigrants are actually fleeing regions that are deeply impacted by climate change.

So I think we need to find another war, and that’s why I’ve introduced this idea of Europe as a developing economy, because we have many examples in the recent past of countries that have managed to develop their economy by waging a war against under development, because being underdeveloped is humiliating. You see yourself as poor, lagging behind, and so each leader comes up and says, we’ll fight a war against this under development, and that will take a lot of effort. And that will implement radical reforms like what happened in South Korea in the 1970s, or Taiwan in the 1960s. And then you deliver economic development as a result of having waged a war against under development. So you need to find something that resonates in people. It’s either problems that they experience on a day to day basis like housing is unaffordable in large cities where all the jobs and all the opportunities are concentrated. Maybe the French president that would wage a national war against housing and affordability would inspire that fighting spirit, and would manage to implement radical measures like expropriating real estate owners in dense urban cities. Maybe, I don’t know…

Twenty years from now, we are not sure we will still have prosperity because if we don’t have the growth drivers that are large, successful tech companies that accumulate value and realize that value into wealth, and a social contract that orchestrates redistributing that wealth at the scale of entire societies, then we will be lagging behind. And that’s the lesson of the history of technological revolutions.

Ben: So I understand better what you’re trying to achieve by calling Europe a developing economy, and I remember the newsletter that you had where it was called something like they had stopped celebrating sort of second tier IPOs because we shouldn’t dress up where Europe really is in terms of tech, particularly vis-a-vis the U.S. and vis-a-vis China.

Nicolas: Yes, exactly. That’s it. It’s still good to live in Europe. We have good public services, good infrastructures, good hospitals. Most things are affordable, except for housing in Paris and London and Munich, but the fact is, we have that today but 20 years from now, we are not sure we’re still have all those things because if we don’t have the growth drivers that are large, successful tech companies that accumulate value and realize that value into wealth, and a social contract that orchestrates redistributing that wealth at the scale of entire societies, then we will be lagging behind. And that’s the lesson of the history of technological revolutions. It’s not because you dominate in a given paradigm that you’ll be the dominant economy in the next paradigm. You need to do what it takes to reposition your entire economy, to redesign your social contract to make the most of the new technology of the day and Europe has been failing miserably on that front. And that’s why people like me like to insist on the fact that yes, there are some successes, some promising things happening, but we’re still lagging way behind the U.S. and China and we need to have more of a fighting spirit to catch up on them.

Ben: And so it’s been only one or two years, but it’s not quite two years but it’s getting on for maybe two years since you published HEDGE, and looking back on it, do you think you should have written a book first about how to build giant tech companies and then this should have come later how you redistribute the wealth dividend?

When you start talking to those politicians about jobs and opportunities, they realize that there’s a connection between the everyday life of their voters, their constituents, and those small startups are trying to scale up and you can have a conversation that’s more constructive and more serene.

Nicolas: Well, the idea of writing that book was not mine. It was that of one of my co-founders, Oussama Ammar, who told me one day like with Trump, so he had a sense that Trump’s election will amplify the tech backlash worldwide. So his intuition was that now the Americans will start experiencing what entrepreneurs are experiencing every day in Europe, that is hostility, widespread hostility towards what they’re trying to achieve. And because we are French, we built The Family initially in France. We have a technique to counter that. How do we fight the backlash in France? We fight the backlash by changing the conversation from tech companies are disrupting the world to… governments are failing us by not building the right institutions, in which the value created by tech companies will benefit everyone. And when you manage that it’s very effective because you talked to some Civil Servant or some Minister, who is raging against tech companies that oh, they’re not complying with the rules and destroying jobs and we will regulate them to death and you say, well, maybe the problem is not that tech company.

Maybe the problem is that you’ve been failing at the radical imagination that we need to design new institutions for a radically new world, and maybe that’s the key to creating more jobs and to provide more opportunities to people. And so when you start talking to those politicians about jobs and opportunities, they realize that there’s a connection between the everyday life of their voters, their constituents, and those small startups are trying to scale up and you can have a conversation that’s more constructive and more serene.

So Oussama’s intuition was that it’s starting in the U.S. — the tech backlash is crossing the Atlantic and will intensify in the US, and maybe we can share our playbook about changing the conversation from disruption to designing a new social contract with the Americans and HEDGE was written for that. The problem is that it didn’t, didn’t really resonate, because it’s not Silicon Valley’s impulse to switch to discussing social policy when they have problems with the government. But maybe it was a bit too early.

Ben: It was a necessary book, whether it was too early or not. It had to be written and I was just flicking through it in advance of this interview. It hasn’t aged. It’s still fresh.

Nicolas: It’s a very fundamental topic and a very important discussion to have. So I think the book will remain relevant for many years to come. And maybe at some point, people will realize that now it’s the new battle that we need to wage, imagining that new social contract. But had I started by writing a book about building tech companies, that wouldn’t have been of interest for Americans because they know how to do that. And I didn’t know enough about Europe at the time to explain how we should proceed in Europe to catch up.

Now it’s two years later, I’ve been living in London for many years. I’ve been crisscrossing the continent, speaking to many people, including in the U.S. and read many more books. So I have a clear view of how you build tech companies in Europe.

I think government policies have been misguided so far. Government has been focusing too much on how do we support companies, and how do we attract more companies in our local ecosystem, whereas most of the efforts should be on how do we force companies that are starting to grow in our local ecosystem to expand at the pan-European level.

Ben: And I mean, that’s the effort that you’re supporting across Europe with The Family, because it started in France, but you are in Berlin, you’re in the UK, and the proposition has changed too, because it was a platform into which entrepreneurs could plug in to get the support they needed to grow. And since then you are now providing capital into some of this companies, as well as a program to bring talent into Europe, particularly into Berlin. So what’s next for The Family in its mission to support European entrepreneurship?

Nicolas: Well, that’s a tough question because The Family is more than a mission-oriented organization. It’s also a business venture that needs to square up its ambition with the resources that we have. So what we have today is a growing portfolio of startups, some of which are getting quite large, reaching quite a large scale. And so we’re starting to be able to exhibit those as examples of what should be done, and reverse-engineer the best practices that we’ve been experimenting within The Family, but we are still dependent on the state of the pan-European ecosystem. If it doesn’t lift up companies as much as it could, then we’re taken aback by the entire ecosystem. We can race slightly ahead of the pack, but not that much ahead. We are still dependent on where the ecosystem is. So I think today on that front of thought leadership and reflecting on tech companies in Europe, the next stage is to foster that conversation that’s still not happening about building tech companies in Europe. What I see happening is local conversations about how to attract more startups to Paris or to London or to Berlin, which is not very promising, because that’s not the way to do it.

Ben: Is that almost zero-sum stuff?

Nicolas: It’s zero sum stuff, and it means that you resign yourself to rely on a single city for building startups, which cannot succeed because you might find capital you need in that city. You will struggle to attract all the talent you need in that city, and you will certainly not find all the customers that you need in this particular country. You need to be able to cross borders to find customers in other countries and so on. I think government policies have been misguided so far. Government has been focusing too much on how do we support companies, and how do we attract more companies in our local ecosystem, whereas most of the efforts should be on how do we support? How do we force companies that are starting to grow in our local ecosystem to expand at the pan-European level, which is part of the development playbook for South Korea and Taiwan, by the way, back in the 20th century?

You need to prioritize supporting companies that are strong on foreign markets, as opposed to companies that are stuck in your domestic market. So nobody does that because nobody realizes the common points between the current state of Europe and the state of East Asian countries as you did decades back, but I think there’s more and more interest the fact that we have a new EU Commission, the fact that we have the context of Brexit that inspires many questions. The fact that we, as The Family, have more of a platform now to voice ideas and to share them with a larger audience.

Ben: Do you have practical examples of companies and founders that are making those leaps, are crossing those borders?

Nicolas: Not that many. So in a recent newsletter, I mentioned the example of an entrepreneur that’s not part of The Family, but he’s a good friend called Vincent Huguet, so he’s the founder of Malt, which is a freelancing platform that’s very strong in France, and they’ve decided that the next opportunity for large scale expansion was Germany, and they reflected on how to conquer a market like Germany, because Germany is very different. Freelancers are not the same as in France. Corporations are not the same as in France. The geography is different. It’s a decentralized country, as opposed to France being extremely centralized in Paris. And what he decided is that he had to move there, to lead the efforts and be on the front line. And so he moved to Munich, he found someone to manage the French operation and decided to move to Munich to send a very strong signal that Malt is very serious on the German market. And so it’s a signal towards potential customers in Germany, if the CEO lives here, that means they’re serious, and it’s a signal to his organization. That is, if we don’t make it in Germany… I’m committing myself to conquering Germany by settling there with my wife and kids. So Vincent is a rare example. And don’t know of many others actually, but I think it’s too rare, and it’s explained again by cultural differences, problems with languages.

Ben: And a lot of friction.

Nicolas: Yes!

Ben: But you yourself have lived from France, to United Kingdom and now you’re going to move to Germany. So you are practicing what you preach.

Nicolas: Yes. Which is good.

Ben: It is good, yeah.

Nicolas: We’re doing that as a family, so my wife and kids, because both my wife and I have been shifting our work to a place where we can work mostly remotely. So The Family is an organization that is extremely welcoming to remote work. So I work mostly from home, except when I travel for important meetings and so on. Laetitia Vitaud, my wife, has her own company, and that can be operated from anywhere. And then we want our kids to learn many different languages. So we don’t have a problem with leaving France and putting it put them in English school in London and then leaving London and put them in a German school one year from now in Germany. We know that they’ll have the challenge of not understanding a word for a few weeks, and then, because they are kids, they learn extremely fast, and I think it’s the most valuable asset that you can provide children these days.

Ben: Because it’s not about language, it’s about culture.

Nicolas: Yes, language is only the practical tool that you use every day to communicate with others. But when you attend a school in a different country, you are deep inside a very different culture that you learn. You might not be able to describe it, but you learn it instinctively and it makes your brain more effective at adapting to different circumstances.

Ben: Fantastic. Nicolas, thank you so much for coming in to see us in Geneva and being part of this podcast.

Nicolas: Thank you for having me.

Ben: That was really fascinating and enjoyable. Thank you.

Nicolas: Thanks.