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Global Crisis Blog
Can We Trust the Intuition of Experts?
By Shlomo Maital
Nov. 10/2009
An article in the latest American Psychologist, by Daniel Kahneman and Gary Klein, addresses the key issue: When can we trust the intuitive judgment of experts? [1]
Kahneman is identified with the HB (heuristic bias) approach. His work, some of it done with the late Amos Tversky, shows how flawed our judgment is and how non-rational our decisions often are.[2] Kahneman won the Nobel Prize in Economics for his research.
Klein is identified with the NDM (naturalistic decision making) approach, which chronicles often-amazing successes of intuitive judgment. The article is an interesting dialogue between the two approaches, ending in “a failure to disagree”, i.e. broad agreement.
Here is what the two scholars agree upon:
- · An environment of high validity is a necessary condition for the development of skilled intuitions. Other necessary conditions include adequate opportunities for learning the environment (prolonged practice and feedback that is both rapid and unequivocal).If an environment provides valid cues and good feedback, skill and expert intuition will eventually develop in individuals of sufficient talent.
● Although true skill cannot develop in irregular or unpredictable environments, individuals will sometimes make judgments and decisions that are successful by chance. These “lucky” individuals will be susceptible to an illusion of skill and to overconfidence. The financial industry is a rich source of examples.
Let me translate. If the ‘environment’ of decision-making is stable and predictable (i.e. that of a chess game), experts develop startlingly accurate intuitive judgment. Chess grandmasters, for instance, can choose the best move quickly in complex situations when amateurs fail to even consider that move. But if the environment is unstable and unpredictable, expert intuition is flawed. True, such judgment will be right part of the time. But this is solely through chance. Those who ‘hit it’ by chance become overconfident, take excessive risk — and destroy their own businesses and the capital of others.
If “the financial industry is a rich source of examples” of flawed intuition, then those enormous bonuses the industry is again paying itself are not justified. Nor can we put our faith in investment advisors with superior rates of return over the past year. Probably, an accident. We can, however, better understand Warren Buffett’s surprisingly accurate intuition. It is based on investing from the outset ONLY in stable environments, i.e. basic products like food, drink, machine tools or railroads, and holding on to the equities for decades.
Kahneman and Tversky once investigated the phenomenon of the ‘hot hand’ in basketball (streaks of baskets, without misses, by star players) and showed statistically that there was no such thing — it was simply random. (Toss enough coins, and you will eventually get a dozen straight ‘heads’). Why, then, do we still believe in ‘hot hands’ among financial advisors? And why have they returned to paying themselves obscene bonuses? And why do we the people agree to it?
And finally, why in the world would anyone believe, in a world of overconfidence in flawed intuition in the financial services industry, that the 2007-9 global crisis will not recur?
[1] “Conditions for Intuitive Expertise: A Failure to Disagree”, American Psychologist, Sept. 2009.
[2] See S. Maital, “Daniel Kahneman: on redefining rationality”, J. of Socioeconomics, 2004.
Global Crisis Blog
Fall of the Wall: 20 Years Later
By Shlomo Maital
As I write this, I am watching German Chancellor Angela Merkel on CNN, in a sea of Germans, speaking informally about the extraordinary events two decades ago — events she personally witnessed and took part in, when she, then a young scientist crossed from East to West. Merkel chose not to create a formal diplomatic event with stuffy speeches, but simply stood elbow-to-elbow with thousands of Germans, some of whom had crossed with her on Nov. 9, 1989, after symbolically crossing from East to West again, as she did in 1989. Merkel thanked Mikhail Gorbachev, who was with her, for his policies that made the Fall of the Wall possible and eventually, on Dec. 25, 1991, led to the dissolution of the Soviet Union. When Poland’s Solidarity movement won the June 4, 1989, election, the Russian ambassador to Poland called the Kremlin in panic and asked, what shall I do? what shall we do? Gorbachev had a simple answer. Do nothing. Let the election stand. It was in part Gorbachev’s non-intervention policy that enabled the Wall to fall.
The Berlin Wall was erected in June 1961, after some 3.5 million Germans fled East Germany to the West. The Wall had concrete walls, barbed wire, guard towers and a death strip that had anti-vehicle trenches, spikes and other types of defense. Between 1961 and 1989 some 5,000 people tried to escape over the Wall; an estimated 150 people died.
Those most surprised at the fall of the Wall were the Germans themselves. Most of them who witnessed the dramatic events of Nov. 9, 1989, said they never believed the monolithic German Democratic Republic would crumble so rapidly.
Today we know that British Prime Minister Margaret Thatcher and French Prime Minister Francois Mitterand were both worried and displeased by the fall of the Wall, understanding that it would bring German reunification and create Europe’s largest and most powerful economy. Indeed, unification came quickly. On Oct. 30, 1990, the new reunited Germany was announced. West Germany was in such a rush to implement the unification, that it offered to buy East German marks at a price of one such mark for a West German mark — at a time when the buying power was about eight to one. The resulting flood of marks into the system caused inflation, led the Bundesbank to raise interest rates – and ultimately, caused Britain to leave the European Monetary System, as the British wanted to free themselves from the straitjacket of high European interest rates and float the pound. (On Sept. 16, 1992, George Soros’ massive sales of pounds caused Britain to leave the European Exchange Rate Mechanism). So ironically, the fall of the Wall may have ultimately been responsible for keeping Britain out of the euro system.
These events, from 1989 through 1992 and beyond, show how appropriate is the initiative taken by German students to visually demonstrate the impact of the fall of the Wall. The students created 1,000 styrofoam dominos, each three meters high, and placed them along the path of those who fled from East to West. As one domino toppled another, we saw clearly how the Fall of the Wall led to a chain of remarkable events that forever changed history.
Congratulations to those innovative German students!
Global Crisis Blog
Act Two: Which Country Will Be Smart Enough to Find a Happy End?
By Shlomo Maital
Oct. 31/2009
As the world breathes a sigh of relief — the global crisis has not become a decade-long Depression, and GDP growth is restored in the U.S. – there is room for gloom, or at least great caution. We are not out of the woods yet. Bad things still lie ahead. (What other message would you expect from an economist?).
The reason is simple. Both America and China, and to some degree other nations, spent their way out of recession, through massive fiscal stimulus packages and huge deficits, plus enormous credit expansions. America’s package exceeded $1.2 trillion. China’s was over $586 b. But as the Wall Street Journal’s widely-read column “Heard on the Street” notes, “It is going to be a challenge for Beijing to rely on stimulus spending to keep growth going.” And, WSJ might have added, for America, Israel, and every country.
America and China restored growth, or maintained it, respectively, by deficit spending. For America, this has created a huge debt overhang, because the money was largely borrowed. The deficits must be restrained, at some point. Otherwise, the debt burden will soar impossibly and inflation may result. But, what will replace government demand? Exports? We are seeing a wave of protectionism. Investment? No sign of that, only higher profitability will drive investment, and margins are down. Consumer spending? No way– with unemployment still high, and no signs that employment will revive any time soon, why would consumers spend, rather than save?
There is no replacement for government demand. But governments cannot continue to give the economy artificial respiration, or CPR, forever.
The near-term prognosis is for very very weak growth, in America and Europe, and in China, a difficult transition from export-led growth to consumer-led domestic demand growth.
Which country will be smart enough to write Act Two for its fiscal stimulus plans, and end the Act with a happy ending? America? China?
We are not yet out of the woods.
Innovation Blog
WHAT WOMEN WANT
Shifting Consumer Mindset:
Are You Tracking It? Part II
Oct. 31/2009
Boston Consulting Group expert Michael Silverstein and colleague, who head BCG’s global consumer practice, recently ran a web-based survey of some 25,000 women worldwide. They published their results in a recent book What Women Want. The results are important and revealing. They show a rapidly developing and changing market, based on women who are increasingly stressed and pressed for time, and whose needs are not being fully met. There is much room here for innovation. If innovation is largely managed, led and conducted by men, perhaps it is time to enlist women — unless men can suddenly become massively empathetic to the needs of half the world that has XX chromosomes. The female economy, we learn, is a quiet economic and social revolution.
Here is a brief summary, taken from Singapore’s Business Times, Oct. 29, written by BCG principals in Southeast Asia:
We are on the brink of a major business revolution. Over the next five years, women will have US$5 trillion in incremental earnings to spend and we see this as a commercial opportunity bigger than the rise of the consumer economies of China and India combined, and an economic stimulus far larger than any government bailout package. Women control US$12 trillion of the overall US$18.4 trillion in global discretionary consumer spending, and they will have an even bigger share in the coming years. These women increasingly earn a substantial portion of the household income and control up to 65 per cent of household spending. Taken from What Women Want – a Boston Consulting Group (BCG) global consumerism survey of more than 12,000 women in 22 countries around the world – these figures and survey analysis highlight their focus — the [need to] understand and serve this female economy.
Much of the research from the survey findings shows that women are dissatisfied with the products and services available to them. Companies fail to answer women’s needs and misunderstand the overwhelming demands placed on their time and the challenges they face when dealing with the myriad roles they typically play – as wives, mothers, sisters, daughters, partners, professionals, friends and colleagues. These dissatisfactions need to be addressed by businesses in many industries before they can truly win the trust and consistent purchasing power of women.
Specifically, companies fail to:
¨ address women’s need for time-saving solutions;
¨ design and customise products specifically for women;
¨avoid condescending and clumsy sales and marketing efforts;
¨align with women’s values or develop community; and,
¨increase their social initiatives and give back to society in more meaningful ways.
The women surveyed in Women Want More indicated they are most dissatisfied with financial services (73 per cent), health care (71 per cent) and consumer durables (up to 47 per cent).
Of the three, financial services is the industry that frustrates women most. In general, women indicated they don’t have a desire to accumulate money for its own sake or experiment with complicated financial instruments. A majority of the women value money as a means for caring for their families and themselves, improving their lives and assuring long-term security. Many indicated they want advisers and services that recognise their need for short-term simplicity and long-term stability.
For the most part, women aren’t getting the financial management solutions they want. Instead, many experience a lack of respect, poor advice, contradictory policies and an obstacle course of red tape and paperwork. Of the companies studied, very few understand the significance of the female economy to their business. If they respond to this economy at all, they do so by making small adjustments to their product line or to their organisations.
To better understand the female audience, companies must reconsider how they do research, how they develop products, how they sell and merchandise and how they add services to their value proposition. Companies must rethink how they segment the female audience and how these segments react to changes in consumer bahaviour. To facilitate broader analysis of what women want, we created six key female consumer segments -
¨ fast-tracker, ¨ pressure cooker, ¨ relationship-focused, ¨ managing on her own, ¨ fulfilled empty nester and¨ making ends meet.
Each archetype is defined by income, age and stage of life. Such segmentation proved useful for our research and is now successfully informing the development and marketing of offerings to women.
Understanding what women want can be done through a four-R approach -
¨ recognise, ¨ research, ¨ respond and ¨refine.
¨ Recognise the opportunity;
¨ research how a product or service is being consumed; and respond with new disruptive innovations that create new categories, new segments, or entirely new sources of products and services; and,
¨refine ideas in a way that creates lasting relationships with female consumers, builds connections and continually improves the offering to strengthen those relationships.
Balancing ‘work at work’ and ‘work at home’ : Women earn a substantial portion of the household income and yet they still do the bulk of the housework and home management. As a result, it is not surprising that women in every corner of the world are starved for time and many are stretched.
BCG’s research has shown that women are struggling to balance the ‘work at work’ with the ‘work at home’. At the same time, they have high standards and even higher expectations of themselves.
These expectations – combined with the responsibilities women shoulder for caring about good nutrition, education, health care and making money for the family – create tremendous stress.
Women hold approximately 50 per cent of university places throughout the world. Apart from the number of graduates entering the workforce, there is a global increase in the number of women going to work in full-time and part-time positions.
The facts cannot be ignored, and increase in significance as companies recognise the importance of the female economy. By systematically targeting this market and understanding women’s dissatisfactions, companies can holistically, rather than incrementally, participate in and profit from one of the most important commercial opportunities of the century. Women will benefit from and appreciate the outcomes too.
Source: Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.
Global Crisis Blog
Shifting Consumer Mindset:
Are You Tracking It?
Oct. 30/2009
Geophysicists tell us the earth is built on tectonic plates, that shift and slide — imperceptibly, only at the rate that fingernails grow, but, sometimes, when these plates collide, earthquakes and tsunamis result.
Consumers are similar. Their preferences change, often imperceptibly, but the changes add up to major shifts and trends — and unless we track them closely, we miss the boat.
Consider this. Singapore, the country, acts like Singapore Inc. Its leaders track the country’s global rankings carefully and at the first sign of slippage, react and act. For example, Singapore ranked only 17th recently in the World Economic Forum Global Rankings for “consumer satisfaction”. So Singapore initiated a large-scale survey of customer satisfaction (tourists and residents) across several industries.
The results are reported in the Straits Times, the leading Singapore newspaper, on Wed. Oct. 28. The results:
“Consumer Satisfaction Drops Again!” Across-the-board declines in consumer satisfaction in transportation, retailing, tourist services, etc.
Is this truly the case? In a country squeaky-clean with faultless customer service and Asian politeness, has customer service suddenly deteriorated — at a time when businesses know that in a shrinking market and global downturn, they must redouble their efforts to please their customers?
What has happened, I believe, is on the customer side, not the business side. In a global downturn, which has impacted Singapore too, people have new respect for money, even the wealthy, and demand greater value-for-money. Unless businesses work hard to create the perception that they are delivering more value, consumer satisfaction declines. What worked in 2007 and 2008 may not work in 2009.
The story is told of an old married couple…the wife complains, dear, we used to sit so close together in the car! The husband (driver) replies: Sweetheart — I haven’t moved.
Businesses haven’t “moved” in the way they treat customers. But the customers have. Businesses should have moved in response — marketing, advertising, packaging, product design, pricing, everything to build and strengthen the ‘value for money’ proposition, which has gained new importance in the downturn. This is the real message of Singapore’s survey.
Global Crisis Blog
China Gets It; America Doesn’t.
By Shlomo Maital
Oct. 26/2009
Nobel Laureate, and NY Times columnist, Paul Krugman once said that if you matched 100 top economists against 100 senior managers, the managers would be far far smarter. As an economist who works with managers, I agree totally.
But suppose you matched 100 Chinese political leaders against 100 American counterparts? Who would be smarter, more effective, more capable?
Hands down, the Chinese. China and its leaders get it. America is out to lunch.
America spent $1.2 trillion on its fiscal stimulus and bailout package. A great deal of it was wasted, going to banks and financial companies who today thumb their noses at American taxpayers by paying obscene bonuses á la 2001-6, and who kept bailout cash rather than lend it. America is now left with an enormous debt hangover and little to show for it.
China spent $586 b. on its stimulus package (less in absolute terms, but almost the same in proportion to GDP) and it worked beautifully. Some went to building a superb fast-train rail network across China. Some went to stimulate consumer spending on cars and ‘white goods’. Chinese banks increased their lending by 150 percent year-to-year. Why? Because the political leaders told them to, and because the banks are mainly state-owned.
As a result, China’s GDP will grow by 8 per cent this year. The latest quarter’s growth rate was a torried 8.9 per cent! China will soon replace Germany as the world’s largest exporter, and will soon replace Japan as the world’s second largest economy. China has $2 trillion in dollar assets and is using them cleverly to buy up real assets (companies, resources) all over the world, during a time when these assets’ prices are at bargain levels. Next year, China will produce over 10 million vehicles, surpassing America.
In contrast, America’s “recovery” is weak. While GDP growth is above water, job growth is anemic and unemployment remains high. But the major flaw in America’s business model is still unrecognized. It is this. American owners of capital made fortunes by sending their companies’ industrial plants to China. In doing so, they screwed American workers, by destroying millions of well-paying industrial jobs. And they also screwed themselves. Because, make no mistake, China’s business model is not based on “cheap labor”, as so many in the West seem to believe. Instead, it is based on replacing America and Europe at the top of the innovation food chain. “Created in China”, not just “Made in China”, is the goal. As China’s engineers invent their own great new products, China is able to produce them in state-of-the-art plants. They thus enjoy a double competitive advantage: Innovation, and cost.
Can anyone cite an Obama speech, or a House or Senate initiative, to take immediate effective measures to bring America’s manufacturing home from Asia?
Does anyone believe America can sustain its middle class with low-paying service jobs at McDonald’s and Wal-Mart?
Does anyone see any signs that America “gets it”?
Footnote: Perhaps my own blog opinions carry little weight. But those of America’s greatest economist alive or dead, MIT Professor Paul Samuelson, do. Here is what Samuelson, now 89, wrote in The New York Times on Oct. 24:
We begin now a new era in which China will increasingly make obsolete America’s 1950-2009 world leadership. Your children and my grandchildren will live in this new and challenging era. We’ll see China catch up and pass Japan as the economy second in total G.D.P. to the United States. Then, unless China’s one-party leadership explodes, the day will come when China’s total real G.D.P. will exceed America’s. Boohoo. But that’s the realistic expectation. However, don’t expect smooth and quiet rotation of the globe pace-setters. More likely, within the coming decade, there will be a massive run against the U.S. dollar. Why? Because ever since the year 1000 A.D., export-led growth has been the rule whenever an educatable low-wage population has begun to imitate the technology of a more advanced nation, and thus out-compete the industries of the affluent regions. So it was and so it will always be. Whenever a low-wage, educatable population can imitate the technology of a more advanced nation, it will do so.
Adair Turner — Lord Turner, a blueblood — is Britain’s chief financial regulator. Almost alone, he has been willing to tell the truth about the world’s banking and financial services sector and their role in the 2007-9 global crisis. In payment, according to a New York Times report, he has been called “crackers” “stupid” and “insulting”.
What did Turner say to deserve these epithets?
Mr. Turner is daring to ask the very question that many Britons, and indeed, many Americans, are asking themselves: What good are banks if all they do is push money around and enrich themselves? As he sees it, the City takes too much from British society and gives back too little. It has grown too big and too powerful. And, he contends, the bankers have co-opted many of the regulators who watch over them.
What remedies does Lord Turner propose?
• Tax financial transactions. • Increase capital requirements. • Shrink the financial industry, which, at its peak, accounted for roughly 11 percent of the British economy. Only then, he argues, can banks’ excessive profits — and bankers’ pay — be curtailed.
Turner says:
“We have begun to accept this idea that liquidity is the new God,” Mr. Turner said in an interview earlier this month. “The ideology of efficient markets became deeply embedded within the regulatory community,” he continued. “And if you are of the belief that we have to challenge this, then you can’t help not to make speeches about it.”
Turner became Britain’s chief financial regulator a year ago, right after the collapse of Lehman Brothers. Should the Conservatives win the next UK election, as expected, he will be out of a job and his proposals shelved. And his financial oversight agency will likely be merged into the Bank of England. But Turner will still have done some good, by almost alone, declaring “the bank empires have no clothes”.
I am an admirer of Frank Partnoy, now Professor of Law and Finance at the University of San Diego. His book Infectious Greed (2003) revealed financial thievery, scams and chicanery on Wall St. during the previous 15 years. Had we read it carefully and believed it, we would have sold all our assets at once, well before the 2007-9 crisis.
Partnoy was recently interviewed by CBS’ 60 Minutes team. His ‘take’ on the underlying cause of the global financial crisis is stark and simple. It is this: America legalized and deregulated gambling — but only on Wall St. Elsewhere gambling is closely regulated, and on-line gambling is still not legal. The gambles Wall St. took were concealed, huge and irresponsible. When they lost, so did all of us.
How and why did this happen? I’ve written about this in detail in our forthcoming book*. But Partnoy explains it very simply.
In the bubble leading up to 1907 (see my earlier blog on this), Wall St. was covered with ‘bucket shops’ — places where you could place a bet on a stock without actually buying that stock. Since stocks were always rising, mostly you won. So the bucket shops pulled in money like a huge vacuum cleaner. The Financial Collapse of 1907 was caused in part by bubble speculation driven by these bucket shops. After the crisis, tough legislation made such bucket shops illegal — permanently. This legislation also banned anything that resembled financial gambling…
….Until the year 2000. In its dying breath — the last day of the last session of the 106th Congress — the Commodities Futures Modernization Act was passed. Recall, Clinton was still President, but Congress was Republican and pro-free market. Page 262 of the Act, notes Partnoy, banned state governments from enforcing “bucket shop” laws against financial gambling. The same Act, I note in my book, made “swaps” and “derivatives” immune from any form of government regulation, including collection of statistics.
Now, credit default swaps (CDS, insurance against bond default) had been invented in 1994. They were called ‘credit default insurance’. Quickly the name was changed to ‘credit default swaps’, because swaps were not subject to regulation. (A credit default swap is in no way anything resembling a swap). After the 2000 Act passed, legalizing CDS gambling boomed, growing from $100 b. to a market totaling over $50 trillion (four times the US GDP). The bucket shops were back — only now, they were global and a million times bigger and more toxic. Blame Clinton and Greenspan, notes Harvey Goldschmidt, a former Securities Exchange Commission lawyer. Clinton permitted this. And Greenspan (Fed Chair) flooded the world with money to facilitate it.
Three companies — Bear, Stearns; Lehman Bros.; and AIG — made money on CDS’s, because in boom times, no bonds are in default, and the two percent premiums (a CDS cost roughly 2% of the face value of the bond) are licenses to print money. Their senior managers got enormous bonuses as a result. But when the security-backed mortgages collapsed, these companies could not pay their debts. Bear Stearns was acquired for pennies on the dollar, Lehman went bankrupt and AIG was bailed out by the US Treasury to the tune of a staggering $180 b.
Partnoy notes that many people became hugely wealthy by buying CDS’s, betting the bonds would collapse. They prefer, for obvious reasons, not to be widely known in public. Some were Saudis. Note that a CDS had nothing to do with insurance. It was a pure gamble. One hedge fund manager who invested in CDS’s got $3.4 billion (that’s billion, not million) in fees and bonuses in a single year.
How many senior managers in the financial services industry really understood the risks and intricacies of these CDS roulette wheels?
“At senior levels, I think they were only vaguely understood,” notes Partnoy.
How bitter life must be for these Masters of the Universe, who in a split second went from hero to villain, over something that they did not fully understand or bother to understand.
____
* S. Maital, D.V.R. Seshadri. Global Risk/Global Opportunity: Ten Essential Tools for Tracking Minds, Markets and Money. Forthcoming: SAGE 2010.
This week the Group of 20 leading countries, G20, met in Pittsburgh on Sept. 24-25, to address two key issues: climate change and the fledgling global recovery. This meeting is important, because on Sept. 25, this forum announced that it will be the main one in which global business and economic policies are shaped, replacing the G8.
The G20 comprises the finance ministers and central bank heads of countries that account for 85 percent of world GDP, 80 percent of world trade and two-thirds of world population. The countries are: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, UK, U.S. The European Union is also represented, hence the “G20″. Last April the group met at heads-of-government level in London — recall the TV shots of each Prime Minister entering 10 Downing St. with his gowned wife, one by one, in a fashion parade. Next year G20 will meet in Muskoka (a resort north of Toronto) and in South Korea.
Politicians, economists, pundits and others all proclaim the crisis is over and the recovery has begun. But managers are not so certain. And it is managers who are in the field, daily, producing and selling the goods and dealing with clients. Here is what McKinsey Global Research found in their recent survey of managers worldwide:
In early September, McKinsey surveyed more than 1,600 business executives around the world about their current views on and hopes for the economy. Only 20 percent believed that a “normal” recovery starting in late 2009 would be the most probable outcome. Some 42 percent thought that 2010 would be a year of flat economic activity. About a third believe that an extended period of anemic global economic growth (below 1 percent per annum) is likely for the next several years. The remaining 7 percent felt that something akin to a double-dip recession was probable.
I think the real story of the Pittsburgh G20 is Pittsburgh, not G20. My sister and brother-in-law live there and I have been visiting Pittsburgh regularly for 55 years. I watched Pittsburgh transform itself from a dirty steel town (I recall touring the steel mills along the Allegheny River), permanently coated in soot, to a sparkling clean modern high-tech city with great universities (University of Pittsburgh and Carnegie Mellon), entrepreneurial energy and excellent mayoral leadership. Located at the confluence of two great rivers, the Allegheny and the Monongahela, Pittsburgh has escaped the decay and decline other cities experienced when their heavy industry disappeared. As a city that successfully reinvented itself — one of very few — Pittsburgh merits careful study by innovators and deserves a visit by tourists. Come especially to see what they’ve done to the old Union Station — it’s amazing.
All eyes are focused on the struggling UK economy, and on each quarter’s GDP numbers. TIM recently completed a fascinating benchmarking program in Britain, and what we learned will be the subject of several future blogs. Meanwhile, let us put Britain into perspective — three centuries of perspective.
The 1800’s were the British century. We had Globalization 1.0. The British Empire, on which the sun literally never set, created a global trading system far more durable, far more global, than the present one. There were fewer government restrictions and impediments to trade. We had the Victorian Internet — the telegraph. The gold standard ensured no country could issue excess currency. Britain set up the system to profit, often at the expense of its colonies. And Britain grew wealthy.
But by 1900 the Empire was waning and America was replacing Britain as the world’s dominant power. The 20th Century was American. America learned to do industrial R&D from Germany and from Britain, and did it better. Two world wars ended Globalization 1.0. Bad politics, not bad economics. But at Bretton Woods, in July 1944, 65 years ago, Globalization 2.0 was born. It worked fantastically until 2007. But it was flawed. The world currency was the dollar. But America overspent, undersaved, flooded the world with dollars and ruined the system. In 2007 it crashed. The UK suffered even more than America, because its financial services caused, and profited from, the bubble as much or more than America’s. Bad economics ended Globalization 2.0. Bad American economics.
The UK chose to join the European Union but not to adopt the euro. It left the European Exchange Rate Mechanism on Sept. 16 1992, under PM John Major, and never rejoined. At first this appeared brilliant. The flexible pound gave Britain elbow room to stimulate its economy. But after the global recession this decision seems flawed. The Euro countries are recovering much faster than Britain — especially Germany.
Britain clearly needs to reinvent its business model. So far it has focused on short-term survival, rather than long-term competitiveness.
So which country will dominate in the 21st C.? Will Britain continue to wane or will it recover? With a likely shift from Labor to Conservative government in the works, Britain desperately needs transformative change. But will it happen? And how will Britain’s global companies endure and prevail within this atmosphere of uncertainty?
Perhaps the best way to understand the British is by listening to this song A British Tar (a tar is a sailor) from Gilbert and Sullivan’s H.M.S. Pinafore, 1878. Here is a portion of it:
A British tar is a soaring soul,
As free as a mountain bird,
His energetic fist should be ready to resist
A dictatorial word.
His nose should pant
and his lip should curl,
His cheeks should flame
and his brow should furl,
His bosom should heave
and his heart should glow,
And his fist be ever ready
for a knock-down blow
His foot should stamp, and his throat should growl,
His hair should twirl, and his face should scowl;
His eyes should flash, and his breast protrude,
And this should be his customary attitude,
His attitude
His attitude
Are there still “British tars”? Where? Will Britain’s attitude, energy and innovation continue to sink, behind China (#1?), America (#2) and even Germany (#3)? Or will the British tar make a startling comeback?
Stay tuned, and keep your eye on the long run.
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