Market Perspective – Protest or pendulum?

Kevin Gardiner, Global Investment Strategist, Wealth Management

Collectivism redux?

For the last half-century, the focus of global politics has been gravitating towards the individual, not the group. Is the recent revived interest in collectivist ideas in the US and UK - and in some Continental economies - a passing phase or something more profound?

So far, we've resisted the temptation to go for a 'Big Picture' view: we've seen the revival as essentially another strand of populism, a potentially short-lived wish to 'stick it to the man', the establishment. But if it's more durable, our worldview may need changing.

Regular readers will know that we are usually glass-half-full realists. We see worries about debt, deflation, demography, resource depletion, geopolitical danger and robots as overstated. We've seen 'secular stagnation' as largely an ex post rationalisation for economists' collective failure to spot the GFC in advance, and we've noted how structurally low real interest rates implicitly place a higher value on sustainability.

But one of the things that might change our constructive worldview would be a significant and lasting reversal in that political pendulum.

Having swung perhaps too far toward the libertarian, free-enterprise end of the scale in recent decades, is it poised to swing back? If it now overshoots in the collectivist direction, the longer-term investment climate - not just the short-term weather - may be more unsettled.

How big a reaction?

Many might agree, for example, that some near-monopolies belong in the public sector; that fiscal 'austerity' could have been more fairly distributed; that externalities are damaging the planet; that labour markets don't always reward potential - and more besides.

Capitalism benefits many, not just a few, which is why it has not collapsed as Marx said it would but has thrived. The average person has never been better fed, clothed and housed (and healthier, safer and longer lived). But its inequality and externalities can still be damaging, and the plight of even the smallest minority can be demoralising. (Ursula K Le Guin's The Ones Who Walk Away From Omelas offers a powerful, non-partisan fictional perspective.)

Value judgement alert: we think the least bad outcome for society (there is no utopia) would be for the pendulum to settle somewhere in the middle, pointing neither to unfettered markets nor to a collectivised, equal outcome economy.

Sixty years ago, Germany's Social Democratic Party (SPD) offered a description of such a mixed economy that arguably has yet to be bettered, and to which we'd happily sign up: “markets where possible, government where necessary”. Some intervention is indeed needed.

But sometimes, despite the best of intentions, such intervention can become excessive, and do more damage than the market failures and shortfalls it is meant to address.

Prosperity and/or equality

Economics is not science. But perhaps the nearest thing to an empirical law that we have yet discovered is that centralised, collectively controlled economies don't work well: they make people poor and miserable. China's recent success has occurred not because it is still communist, but because since Deng Xiaoping it has been allowing markets to develop.

As wealth management strategists, perhaps “we would say that, wouldn't we”. But the evidence is compelling. If anything, we are understating things: see Walter Scheidel's The Great Leveller for a reminder of the historical circumstances that have delivered greater equality. The collectivist experiment has been run many times: the results are always the same.

Unfettered free enterprise, as noted above, also does damage - it is arbitrary and unfair. But such extreme libertarian experiments have been fewer in number, and humanitarian damage has been smaller (particularly if you think poverty matters more than inequality).

Despite this painful history, the blogosphere and bookshops are newly full of fashionable critiques of capitalism, and urgent demands for alternatives. But they assume a historical determinism which clearly doesn't exist, or an altered human nature, one in which self-interest doesn't play an important role.

Self-interest is not a virtue, but it often works - unplanned, and paradoxically - to our collective advantage. Anyone who has worked in a group context, or read modern history, knows that individuals' incentives and appetites matter.

It is a fact of life: an economy without self-interest is no more imaginable than a physical world without gravity.

Acceptance - not veneration - of self-interest is the core of capitalism. And there is no alternative 'system' any more than there is an alternative to gravity. The point is the extent to which we try to use it to our advantage.

UK in the spotlight

Figure 4 judgementally places the big economies on a collectivist-individualist spectrum. Despite China's reforms, it remains by far the most centralised big economy (as events in Hong Kong perhaps remind us). Towards the other end of the scale, few of us might be able to name a Swiss politician, testimony to that country's tradition of small government.

November 2019 Market Perspective: Figure 4

Click the image to enlarge

In their different ways, the positions of the US and the UK on this spectrum are centre-stage currently. The US is by far the most important for global portfolios, but it is the UK where an election is now closest and where the opposition seems most determined to make significant changes.

As we've argued, there is a case for public intervention in markets: we subscribe to the mixed economy. Even the entrepreneurial and buccaneering US has relied on public sector support for technology and pharmaceutical research (see Mariana Mazzucato's The Entrepreneurial State), and US Inc recently may be widening its narrow emphasis on shareholder value towards a wider, stakeholder approach. But the UK opposition's current proposals for bigger government, state ownership, significantly higher taxes, increased regulation and (even) looser monetary policy go further, and are designed to deliver a big reversal in that political pendulum.

Conventional mixed-economy policies have not been exhausted. There is a strong case to be made currently for more government borrowing, for example. Real long-term interest rates are low: investors are queueing for even meagre yields. This is a good time for governments to use long-term funds to rebuild crumbling infrastructures.

Some of the UK opposition's proposals seem unconvincing, however. Using controls to tackle a housing shortage, for example, can reduce supply and make things worse. Asking the Bank of England to deliver a specified rate of productivity growth without giving it any new policy levers or analytical tools seems optimistic (and a productivity target alongside an inflation target would arguably make the Bank responsible for a pay policy too). Plans to redistribute a big stake in publicly quoted companies to their workforce and to the exchequer may not have been fully thought through (what about private companies and public sector workers?).

The proposals may not make it into the published election manifesto, or into office: the opposition party has been trailing an unpopular government in the opinion polls.

Moreover, it is often circumstance, not politics, that is the biggest driver of economies and markets, particularly for the larger democracies. Both red and blue governments have presided over good and bad outcomes that have had little to do with their policies, and a lot to do with global developments. (There can be exceptions - forceful personalities like Reagan, Thatcher, perhaps Macron, can be game changers - and in smaller countries the room for more dramatic measures is greater: the Venezuelan government has certainly made a difference.)

But some of the opposition's advisers reportedly favour more substantial changes, and we can't rule out the possibility that other, as yet unmentioned - or denied - policies would not materialise in government. And a big reversal of the political pendulum might swamp more circumstantial developments.

We hope we are mistaken, but domestic politics might have the potential to make a bigger economic impact than EU secession.

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