Game of ambitions

The third quarter UK GPD numbers are out and they don’t support the narrative. The narrative is that Britain is undergoing a post-industrial manufacturing revival. Smaller, nimbler firms are supposed to be using high-tech manufacturing and labour-saving devices to create Britain’s next boom. That’s the idea.

Maybe it’s true. Or will be true. In fact, after his stint on the show last week, Charlie Morris said he was heading up to Birmingham in November for a conference on manufacturing and innovation. He’ll report back with pictures and stories.

In the meantime, there are numbers. UK GDP was up by 0.5% in the third quarter. That was down from 0.7% in the second quarter. Services expanded nicely at 0.7%. That’s the great thing about having a world-class financial services sector. Boom times.

But manufacturing contracted by 0.3%. It makes up 10% of British GDP, according to the Office for National Statistics. The sector is in a technical recession. Construction also contracted by 2.2%. It’s only 6.4% of GDP. But between the two – building and making – it was enough to tap the brakes on the growth of Britain’s economy.

Rather than parsing the data, let me ask you a question I’ve been asking all my friends lately. Here’s the question, or really, a series of related questions:

Is representative democracy only possible when you have a large middle class? Is a large middle class historically anomalous? In the 20th century, was the middle class only possible because the industrial and energy revolutions lifted aggregate wages for unskilled and unskilled labour in ways that the technological revolution of the 21st century never can?

Put another way, as a claim, the wage gains from the labour-saving devices in information technology are not as widely distributed as the wage gains from manufacturing. A smaller group benefits to a greater extent from the automation and innovation from information technology. Everybody else not directly employed in the innovative industries gets stuck on lower wages in service industries.

You can’t have a stable political system when people can’t find meaningful work that pays enough to create ownership and capitalise the middle class.

What do you reckon? A bit much for a Tuesday? It’s worth thinking about. Having recently re-read portions of Adam Smith’s 1776 classic The Wealth of Nations, the key to civilisation (according to Smith) is the division of labour and increases in productivity brought about by labour-saving devices. For Smith, civilisation is the division of labour.

Voluntary trade promotes cooperation and wealth. That produces civilisation. Keep that in mind next time someone quotes US Supreme Court Justice Oliver Wendell Holmes, who said “Taxes are the price we pay for civilised society”. Holmes had it all wrong.

Free markets and free people create civilised society. The ‘rule of law’ preserves it. Taxation comes later, when other people decide they’re entitled to your money. If someone didn’t create wealth to begin with, there’d be nothing to tax. But I digress.

The more people trade and specialise and make, the richer the variety of goods and services we all have to choose from. And remember, our production (not consumption) is the source of our wealth. Because we make, we earn. And what we earn, we can trade for things we don’t make.

That formula has worked well for the last 300 years or so. Look at the average living standards of people in the western world and claim otherwise. Go on. Make a claim. But what happens when technology changes the structure of the labour market?

It always does that, of course. That’s why there’s an element of faith to the division of labour. You have to believe that the jobs lost in a specific sector due to innovation or competition (let’s say the steel industry, for example) will be replaced with other jobs that don’t yet exist. Because they don’t exist – they are ‘unseen’ in Frederic Bastiat’s terms – you can’t count them.

You have to believe that somehow, someway, they will ‘emerge’. The spontaneous emergence of new industries and new jobs is what the free market has done very well for a long time now. Joseph Schumpeter famously referred to the “gales of creative destruction” that force businesses to innovate and do better or perish from the earth.

There’s no reason to believe the ‘rise of the robots’ won’t lead to entirely new (and massively profitable) areas of productive human endeavour. Let’s hope so! The future is coming whether we like it or not.

Doing meaningful work with your life – not being ‘alienated’ from your labour as Karl Marx would have said – is a big element of human happiness. If you don’t think the work you do is good, meaningful and beneficial, it certainly affects your quality of life, as well as your sense of self-worth.

Technology is changing our relationship with work at ever faster rates. This creates structural dislocations in the labour market which show up in GDP numbers. As investors, our challenge is to understand this change, try and forecast it if we can, and then profit from it with some tactical risk taking.

 

The EU’s unstated ambitions

Thanks for the continued flow of comments on whether Britain should leave the European Union. It’s more than I keep up with. But the reading has been great. Not everyone, for example, thinks it’s surprising that under EU law, the UK will have to negotiate its way out of Union. It’s not like a party where you can leave when the punch bowl is empty and the conversation runs dry.

Whether the EU can survive the immigration crisis is another frequent subject. And really, no one is dealing with the elephant in the room. The cost of the crisis is a big issue. The German flouting of EU law is another one. But whether Europe can retain its identity and accommodate so many new immigrants at once is the subject people feel like they can’t bring up in polite society, less they get accused of being heartless racists who thrive on human suffering.

The politics of the identity issue will ‘evolve’. In the meantime, the other issue brought up by many readers is what the real motives of the EU are today. It may have started as a peace project. But it’s turned into a power project. To oppose the EU is not to be ‘Eurosceptic.’ It’s to be a realist about the nature of centralised power.

Bernard Connolly had it right back in 2008 in a paper he wrote called “Europe: Driver or Drive. EMU and the Lust for Crisis”. He correctly pointed out back then that to the centralising mind, any crisis is a chance to increase power. In a section called “What Europe Wants”, Connolly made it simple: to use global issues as an excuse to extend its power. He cited four instances.

• Environmental issues: increase control over member countries; advance the idea of global governance

• Terrorism: use excuse for greater control over police and judicial issues; increase extent of surveillance

• Global financial crisis: kill two birds (free market; Anglo-Saxon economies) with one stone (Europe-wide regulator; global financial governance)

• European Monetary Union (EMUI): create a crisis to force introduction of ‘European economic government’

What do you think? Paranoid? Accurate? Prescient?

The global financial crisis came of its own accord. Is the migration crisis the way to force the introduction of ‘European economic government’? Was it deliberate?

The answer to that question is beyond the scope of today’s Capital and Conflict. There is also an odd aspect of 21^st century life to attribute to conspiracy things which are more easily explained by mere stupidity or incompetence. Either way, we are where we are, regardless of how we got here. Where to next? Stay tuned.

South China Sea confrontation

Under President Barack Obama, the US has been ‘leading from behind’ all over the globe. That’s what makes the last 24 hours so intriguing. An Arleigh Burke-class US Navy guided-missile destroyer– the USS Lassen – sailed within 12 nautical miles of both the Subi and Mischief reefs near the Spratly Islands in the South China Sea.

Those reefs are now artificial islands on which Chinese military installations have been built. The US appears to be challenging China’s effort to control the sea lanes in the region by putting new islands where none existed before and planting a flag on them. The US claims it takes no side in the territorial dispute China has with its neighbours.

A guided-missile destroyer is not the same thing as an aircraft carrier. But it’s certainly a provocation. And it comes just after Chinese president Xi Jinping’s successful visit to London to create a better working relationship with the UK. Remember, “may you live in interesting times” is a supposed curse in China.

Category: Investing in Technology