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Author and Macquarie strategist Viktor Shvets on the impact of the Information Age and financialization, and how they are creating a different, new world

Author and Macquarie strategist Viktor Shvets on the impact of the Information Age and financialization, and how they are creating a different, new world

By Gareth Vaughan

Do we need to be free to be innovative, prosperous, or even happy?

This is one of the deep questions posed in Viktor Shvets' book The Great Rupture: Three Empires, Four Turning Points, and the Future of Humanity.

Shvets is Managing Director and Head of Asia Pacific and Global Strategy at Macquarie Group in Hong Kong. In a Zoom interview about his book, Shvets explains why he believes capitalism as we know it is dead, and that whatever emerges to replace it will be quite different, potentially dystopian or utopian. Shvets argues that capital is no longer behaving the way it's supposed to in a capitalist system, and that there has been a dissolution of conventional labour markets.

He argues forces unleased in 1971 through the dawn of the Information Age and financialization, after US President Richard Nixon ushered in an era of leverage and asset price inflation by moving to a floating exchange rate and ending US dollar convertibility to gold, effectively set the world on this course. The "self-re-enforcing merger" of technological disruption and financialization "is creating a brand new world." And instead of being merely an intermediary, the finance industry has become the world's largest industry.

"In a capitalist economy capital is supposed to be scarce. Capital is supposed to be allocated very carefully. That's why we have capital as a pricing model, we have discounted cashflow models, In our world today capital is abundant. In fact we are drowning in capital. Depending on how you define capital and to me there has to be a holistic definition, we have at least $300 to $500 trillion of capital. That's at a minimum five, maybe 10 times the global economy or global GDP. We are drowning in capital. It's not evenly distributed, it's not fairly distributed, but nevertheless there is no shortage of capital. And we continue to create more capital than we need," Shvets said.

"In industrial economies capital was created in line with economies. Today we're creating four or five times more capital than economies require every year."

'Increasingly we are irrelevant'

He says during industrialisation, the 18th, 19th and 20th centuries were periods of very high capital requirements for the likes of roads, factories and power plants. Now the world is primarily driven by intangible capital, not by tangible capital.

"It's IT, it's software, it's social capital, it's digital capital. Those areas do not require a great deal of capital investment, they're actually relatively capital light. And intangibles behave completely different to conventional tangible capital. For example, if you run a Coca-Cola bottler and you run out of capacity, you must build another factory. But if you're the Coca-Cola company producing the recipe, it can be multiplied billions of times without any degradation. And so intangible capital has a much larger scale," says Shvets.

"In the Information Age we have limited capital requirements and we are flooded with capital. So that's a major difference, - how capital functions. It's a much more intangible economy rather than tangible."

"The same has happened with labour. In industrial societies labour needed to be trained, it needed to be skilled. That's why there was a huge premium on college education. And the reason for that [was] as machines were improving we were their brains. In the Information Age increasingly we are irrelevant," says Shvets.

"So in a world where capital is not the same, in a world where labour is not the same, capitalism or liberal capitalism as we know it, tends to disintegrate. So the question then becomes how do you deal with that? What drives it is a mixture of technological evolution and financialization that we've done over the last four decades. And that leads us into a very different world. I call it the Black Hole because we are approaching a Black Hole. What lies on the other side of the Black Hole is unknown."

Shvets was born in Kiev, then capital of the Soviet Ukraine. He attended Kiev University of Trade before emigrating to Australia where he obtained a Bachelor of Economics degree from the University of Sydney and a Master of Commerce degree from the University of New South Wales. Aside from Macquarie he has worked for Baring Securities, Deutsche Bank, and Lehman Brothers in Sydney, Melbourne, Hong Kong, London, New York and Moscow.

Shvets says over the past 500 years societies that have granted their citizens ever wider economic and political freedoms, with an independent judiciary and independent adjudication of disputes, have had the recipe for success. This mixture has provided the freedom to exchange views, the freedom to explore, the freedom for people to do what they like in their own interests.

"[This] really underpinned our capitalist economies for five centuries. In the Information Age it might be different."

He argues that the leadership in China, Russia and Turkey now believe, that with the help of computers, the central allocation of resources might be better than a free market.

"So the view is we can actually do allocation of resources centrally and therefore the free market is not as critical anymore at generating free market signals."

Shvets says we're not quite there yet, but over the next ten or 20 years computational capacity will continue to improve.

 "For the first time we now have artificial intelligence (AI) making real contributions to science ...increasingly what we see, whether it's science, whether it's inventiveness, [is AI] playing a greater and greater role. Humans are still critical drivers of inventiveness, but [in] the next couple of decades that might not be so. And so the question then becomes if I restrict the professor of Beijing University from accessing Google Scholar or exchanging views with other people in his field, do I really suffer? And the answer increasingly [is] you might not be," says Shvets.

"So one of the key questions is in the next ten to 20 years is will we be in a position that technology will create illiberal, maybe even brutal societies that will no longer suffer from stagnation of ideas, stagnation of inventiveness, will no longer suffer from lack of prosperity, and maybe people will even be happy."

How to avoid 'the dark corner'

The way to avoid this "dark corner," Shvets argues, is to mimic Germany's so-called iron chancellor Otto von Bismarck who created the first welfare state in the modern world in the 1880s. Bismarck's unemployment benefits and pensions took a lot of sting out of social inequality, wealth inequality and income inequality, and pacified societies, says Shvets.

His policy recipe for today's world includes a universal basic income, changes to competitive regulations, an overhaul of education and skilling, and a massive new Marshall Plan for the least developed parts of the world. Alongside this Shvets says there needs to be a decreased reliance on pure monetary levers, which should be replaced with neo-Keynesian and potentially Modern Monetary Theory tools. These policies are needed to reflect humans' diminishing importance in the Information Age, Shvets says.

"On the margins humans and labour are contributing less and less. The labour component continues to decrease as a proportion of any product or service that we generate... Over the next ten to 20 years this process will accelerate even more."

He points out that we don't feel the pain of people who have been through similar massive changes in the past, but we are set to experience something similar ourselves, with some people already doing so through the rise of the gig economy.

"One of the examples I cited in the book if you were transported into early 1800s London and you found a group of Luddites just about to smash the loom, and if you were to have come to them and said 'look don't do this. Believe me in 30 or 40 years time it's all going to be okay.' I wonder whether they would've thought that you were kidding because 30 or 40 years was basically their entire life. So one of the problems that people tend to forget is that yes societies always adjust, but it's our responsibility over the next couple of decades to be the Luddites. It's our responsibility and misfortune or fortune to feel the impact of those changes," says Shvets.

Luddites were British weavers and textile workers who objected to the increased use of mechanised looms and knitting frames.

"The first Industrial Revolution was only cotton and steam railways. The second was much larger. It was chemicals, pharmaceutical industries, combustion engines, electricity, it was refrigeration, mass communication. Now the third Industrial Revolution or Information Age is even wider. It's everything we do, it's everything we look at, it's everything in our economies and societies. So when people say we've been through this before, true, but we don't feel the pain of the people who had to go through it because it was so long ago," says Shvets.

"And this time we're not just removing muscle we're removing brains as well. And so the importance of a universal basic income guarantee is to ensure that in a world where there is a diminishing contribution of labour and humans, humans are given dignity to pursue the life that they want to pursue and find alternative means of self satisfaction. If it's not work what is it, is it sports, is it religion, is it arts, is it doing something else?"

In terms of education and skills he argues that we need to move on from the industrial age creation of experts in narrow areas, and to create "human beings," people with a broader outlook.

"Everything we do in education and skilling needs to change including how we do it," says Shvets.

In terms of regulation, an important issue is how we manage data, how we manage data privacy, who controls data, and how it's used because AI and data are "morality free."

"They can be just as easily used for good as they can be used for evil ...So we need to change how we control the data, how we regulate the data. It should not be based on non-monopolistic rules of damage done to consumers or businesses. It should be done more to encourage 1000 flowers to bloom, thousands of ideas to bloom rather than trying to control and corral it." 

"Technologies can be used to control societies not necessarily give freedom," Shvets adds. "One of the essences of the book is to say do we actually need to be free to be prosperous, happy, to be innovative?"

In terms of a Marshall Plan for the least developed countries, Shvets suggests more than one billion people could potentially be on the move over the next couple of decades from Africa and other areas.

"We really only have two choices. Either we open our homes to them, or alternatively we'll try to make them stay at home. And the only way to make them stay at home is a massive Marshall Plan, very similar to what the United States did from the late 1940s to the early 1960s in places like Germany, Italy and Japan. It has to be enlightened, not commercially based transactions. This money will never get repaid. Its return is lower migration, lower social risk, lower geopolitical risk, and lower healthcare risk because these are the places where pandemics more likely than not will originate," Shvets says.

"In order to finance all of this increasingly we need to understand that Modern Monetary Theory, or combining or fusing fiscal and monetary levers, is the only way forward. As it is $500 trillion of paper that we already have outstanding globally will never be repaid anyway. All we're doing now is doing controlled default rates. At the end of the day connecting fiscal spending to central banks in some form and eliminating the connection with debt, is the only way forward. Not because it's necessarily the right capitalist answer, it's because capitalism no longer exists."

"A lot of policies that are being discussed today, whether it's higher corporate taxation, whether it's restrictions on share buybacks, whether it's restrictions on CEO compensation, whether it's a capital gains tax, wealth tax, they are not designed to finance governments in my view. Governments will be funded through central banks. They're primarily designed to create what people would believe to be fairer, or more equal societies," says Shvets.

"There are policy choices we have that can move us away from dystopia towards utopia." 

"Over the next several decades it's going to be a very difficult transition...There will be tensions within countries, between countries, it might lead to wars. But at the end of the day you can see that technology, the Information Age and financialization, might actually end up in the right spot. It's my hope that we will take those policies and use them," Shvets says.

Meanwhile Shvets sees the current COVID-19 pandemic as a dislocation that accelerates change.

"So the way I look at COVID-19 is it forces us now to accept that there has to be a fundamental change in the way in which our economy's operating, in the way financial markets are operating, and it paves the way, as they always do those dislocations, to quite a different world. Sometimes actually much better than the world that preceded it."

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39 Comments

13
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'Meanwhile Shvets sees the current COVID-19 pandemic as a dislocation that accelerates change'.

Totally agree. Second good piece hereabouts today; kudos.

I happen to disagree with the hypothesis that things will remain intact (a scenario required for IT-based continuance). I see war(s) over 'what's left', and more likely collapse of global trading, presumably cascading local collapses in varying degree. But this is the debate we need to be having; great stuff.

I think you are right. When any system changes there is always instability.

Not sure about War over whats left.

I'm thinking that it might be more along the lines of a civil revolution kinda war, that leads to a new system. A new Monetary system and hopefully a New Democracy better aligned with the ideas of sustainability, quality of life and a nice balance between individual freedoms and Community responsibility... Will need some wise and intelligent leaders for that..

10
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Economic war has been going on for some time now. Its the equivalent of past world wars, but more visible now with increasing inequality and enslaving of the masses it is delivering.

The parasite banksters have been eating their host for some time now, and tried to keep the party going with ever lowering interest rates. They are now bigger than the host, and are running out of feed; which is inevitable when wealth is so concentrated and there is no growth left to feed upon. Their ponzi scheme is on its very last legs.

A good example of how entitled these banksters think they are was on display in February Australia, where the Citibank Sydney CE decided he owned the plane. Maybe the bank he worked for did, however his ego got the better of him and he got dragged off. He blamed it on alcohol, though my knowledge of head office banksters suggests this is par for the course.

While no one is looking forward to the black hole, one can only hope the egos and over inflated profits and executive salaries of these parasite banks is popped.

Yeah, this is a very interesting article indeed. Recognises that simply continuing to confiscate the wealth of the young to prop up certain sectors or generations will ultimately have serious social impacts. Hence, different approaches are needed...(but what approaches, that's certainly an interesting discussion).

Yes, great piece. I often wonder why the true 'philosopher kings' of today never end up in positions of power/real ability to put such ideas into action. And I'm guessing because there are many vested interests in dystopia but none in utopia.

10
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Capitalism is indeed dead and we are drowning in capital with no resource base to plunder...

But to conclude data and MMT can now lead us to the promised land ...?
phhffft

It's a means of survival for several countries around the world. The US has a higher GDP per capita than some of the more industrialised Western countries such as Sweden, Germany and Austria. Remove speculation and excess capital from the equation and their fortunes would instantly reverse.
One of the 'so-called' most valuable companies, Apple couldn't procure screws to assemble a simple iPhone by itself in the United States.

Very few of such companies can actually produce anything of real value but they retain more of the returns by virtue of IP ownership, leaving chump-change behind for the productive participants of the supply chain. They need capitalisation to stay relevant as much as the world's largest economy does.

But we are talking about an aggregate system wide problem ... the fact that some companies can retain more of the pie temporarily through IP is neither here nor there...

The author is concluding i dont need a porsche, just a picture of one
But that doesnt help the car salesman

You’ll have to have the vax before entering the promised land.

Don't be so dismissive of MMT, have you even bothered to study it? It just describes how our present monetary system operates, all we need to do is understand it. Nearly everything that we are told by the mainstream is designed to mislead us, the idea that the government is just like a household and it needs our money, when in fact it is the source of our NZ Dollars.

The government is still like any household. Just on a much larger scale. That's part of the problem with MMT and why it's failing. Just like a Mum and Dad deciding to rob a bank to get ahead, they can live the life of Riley until they get caught. Governments can also print money (aka steal from future taxpayers) until they get caught by the generation of taxpayers who have been robbed.

Capitalism is likely to be replaced by Statism (State dominance in the market, etc) if the pandemic is not contained in the near future.

Politely, that's an oxymoronic statement.

Work it out.

Clue: https://tintin.fandom.com/wiki/Decimus_Phostle

16
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One thing I've struggled to reconcile in the last few years (no prizes for guessing why) is the constant compulsion to pay taxes and uphold civic duties on the taxpayer (especially wrt student loan repayments and excises) but there being almost no consequences for the political machinations of the state when they don't uphold their end of the bargain.

Indeed, if the state is not capable of delivering policy, then what reason is there for the state to exist, except to use taxpayer activity as a means of underwriting the inflation of its own balance sheet. Taxpayers have to foot the bill - they even have to foot the bill for inflation in their own wages. The state is acting as a rational consumer, but when the state consumes, it takes (by force) from all of us. If we don't get the things we were supposed to get in return, and there are no consequences for not doing so, then tax quickly becomes an unconscionable bargain.

The reason you're struggling is that you've framed it in a self-oriented way.

The state is us, and if it isn't going the way we want it to, there are ways to effect change (that's why I comment here). It is always set up (Wright, in Short History of Progress, mentions the meeting after 15,000 years of separate development - Spaniard meets Mexican; they both had priests, rulers, street grids, etc etc) as part of what we do when compressed. The deal is that the state does the big stuff, war, that kind of thing. Without it, I'm sorry but your neoliberalism falls over. It needs the state to enforce rules.

If I can't make mortgage payments, or get to work because of congestion, it's not the state that will be kicked out on the street. It's me. Blind statism because it *isn't* neoliberalism is setting ourselves up for absolute failure. People mistake the mere existence of the state for 'effective governance' which we have had proven that it is not. However, regardless of how ineffective or ineffective government is, even if it is just the basics (infrastructure is really a basic duty of the state and we do it terribly here) - the right to extract income from citizens endures - regardless of whether political or social contract is being kept by the State.

I accept I have to pay taxes. I accept it is the price I have to pay to live in a civilised and polite society. I do not accept there is a right of the state to fail to uphold its end of the bargain because it can't or won't.

The problem is that the state was us, and we believed a porky; eternal growth within a bounded system.

https://ourfiniteworld.com/2020/09/01/todays-energy-predicament-a-look-a...

Don't blame it for being unable to keep the show on the road, blame the show.

Well said PDK. Selling your vote to the highest bidder, without any rigorous contemplation of possible outcomes, is a systemic problem with democracy. In other news, National promises $3000 to expectant mothers.

Indeed, well put PDK

Is capitalism as we know it dead, and if so, what might replace it?

Less sociopaths?

No. There will always be the same proportion of sociopaths in society. Take away capitalism and they become less obvious. Im not convinced if that's a good thing though.

"Welcome to Elysium."

"Sorry folks, Party members and Bankers only, I'm afraid."

https://i.pinimg.com/736x/cc/b7/4f/ccb74f7f043be814c484db03a5025c69.jpg

Or is it Elysium for the elite few and the rest of us get to live on the New Benefit, aka UBI. Presumably with free weed, lest we become restless. Sort of Land of the Lotus Eaters.
https://www.poetryfoundation.org/poems/45364/the-lotos-eaters

Very good article, raises many interesting points most if not all will be picked up in the forum here. One that stood out for me is:"We really only have two choices. Either we open our homes to them, or alternatively we'll try to make them stay at home. And the only way to make them stay at home is a massive Marshall Plan, very similar to what the United States did from the late 1940s to the early 1960s in places like Germany, Italy and Japan." This is the kind of dreaming i like, although i am concerned that Africa is potentially very much a garden of eden and we should endeavour to preserve it. But then my bubble was pricked by his statement "It must be enlightened" referring to the application of the plan. Sad to say with political agendas this will never happen so the chaos of refugees will continue, probably unabated.

Maybe the China model is showing the way: surveillance, cashless, citizen rating, big government, big corporations, travel restrictions, atheism, Marxist education, along with a kind of possible prosperity.

Why take so long to describe the problem. It is Crony Capitalism. Capital is not misbehaving. The Crony Capitalists are misbehaving. They will always misbehave if rulemakers and regulators let them. In a lot of the world's societies they are the same people.

Stupidly low interest rates must be a factor too. When borrowing money is virtually free why not buy more and more assets / capital.

there went freemarketry - it needs rules.

JJ - the rates aren't stupid, they're all the system will allow, and the trajectory is down.

One State’s AI vs the other’s States’ AI. Coming soon to a planet near you. Utopia will decay in to dystopia from our natural competitiveness and ungodly desire to do better than the next person/state and sadly use up, destroy or do whatever it takes to survive and ‘thrive’. Hopefully we can rise above ourselves to something better.

When you end up with a few people who have individual wealth that rivals that of some countries (Jeff Bezos and co) then surely, it is game over for capitalism, it has reached its end goal, and it is time to tear it all down and start over.
It will, however, be difficult to storm a Cayman Island account,.

If the powerful really wanted no tax havens, it would happen within a very short time frame. The problem is, the powerful use tax havens.

If the British disowned the Caymans and the US parked a carrier group off the Cayman islands and said "No more tax haven, or else", it would be gone in a month. Hell, you wouldn't even need to resort to force, just make an international ruling that all tax havens are economic terrorists and they will receive major sanctions, plus all funds and assets will be forfeit if the tax dodger records aren't released. Pretty sure enough international pressure and they would cave.

Oh, that would include NZ and it's demented trust laws.

Those in charge of directing the ships, at the moment, probably have their own accounts there.

The tax havens were set up by the US and Britain during the cold war. They allowed the re-circulation of the wealth of favoured regimes into the US markets. This meant those in power had their wealth outside their own country in case things went wrong. In other words, tax havens are a feature not a bug. They are an essential part of the elite power structure of the USA. Why do you think they want to lock up anyone who publishes the details?

The anti money laundering legislation is an extension of the power of the elite, not a restraint upon it. Get a grip. It is the western equivalent of a communist purge. No dissent will be tolerated. We know where you live. We know everything about you. Ain't technology great?

Watch the video:
https://www.armstrongeconomics.com/international-news/australia-oceania/...

Fascinating article and thank you. Reminds me of Yuval Noah Harari's writing about whether democracy arose (in part) because people as labour were important, and then wonders whether when people as labour are increasingly irrelevant due to AI, will the tendency be not to bother giving people the vote, shift to some kind of big brother data technocratic non-democracy ...

There is already the inability to vote for those with the real power, ie, those with vast amounts of money, so that scenario is pretty much already here.

UBI is OK but I think we could do better with a jobs guarantee for the nice-to-haves. Pay people to create art, sit with the elderly, listen to children read, collect rock snot from lakes,... Lots of nice-to-haves even with automation.

Surprisingly good thinking from someone working for a corporate.

Whilst I understand MMT from a wholly self contained local economy perspective, how would one MMT system work in collaboration with another?

For example the state can print (issue) money to fund the labour and local supplies to build a new rail line from A to B. The local (say New Zealand) MMT entity does not have steel rail manufacturing capability. So it needs to import the steel rails from one that does (say India). How will the importers local MMT value be set against the exporters MMT?

Will the the importing entity have to "buy" from a "world bank" the exporting entities currency (or the exporting entity accepts the importers currency). Who and how will the value of the two MMT be set to enable a transaction?

I can see MMT working to stimulate the local economy, however no country is totally self sufficient enough to contain the MMT to the local economy only.

There is going to be interactions with other MMT entities.

Worth an article on how this will work?

Agree with most of this apart for the argument around a universal wage. Surely if the argument around technology taking all our jobs was correct, then we would have high unemployment. As it stands, we were at full employment prior to COVID and likely to be again in the near future. As technology takes jobs in certain sectors, then labor gets redeployed into other sectors, examples being the huge numbers now involved in F & B, tourism (not right at this minute of course) and health and leisure. A universal wage decreases the efficiency of the labor market and slows the transition of skills from one sector to another.

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