UnRisk 7

The Past, The Present and an “Unusually Uncertain” Future

Nicholas Phillipson (2010) Adam Smith: An Enlightened Life; Allen Lane

Matt Taibbi (2010) Griftopia: Bubble Machines, Vampire and the Long Con That Is Breaking America; Random House

Joe Nocera and Bethany McLean (2010) All the Devil’s Are Here: The Hidden History of the Financial Crisis; Portfolio

Hamish MacDonald (2010) Mahabharata in Polyester: The Making of the World’s Richest Brothers and Their Feud: New South

Jeff Kingston (2011) Contemporary Japan: History, Politics and Social Change Since the 1980s; John Wiley

The present is where the future crumbles into the past.

The “past” in this case is Adam Smith, the doyen of economic liberals. Nicholas Phillipson’s “An Enlightened Life” is an “intellectual biography”, forced by the paucity of factual details about Smith’s life. In a pre-FacebookTM and TwitterTM age, Smith jealously guarded his privacy and instructed his unpublished papers be destroyed upon his death. Little information of his private life survives.

The absence of the personal is, in part, the book’s strength, allowing exploration of the influences and cultural milieu, especially the commercial and academic life of Scotland, which shaped Adam Smith’s work. A key element of the book is the discussion of the interplay between Smith and David Hume as well as that between Smith and Quesnay and the French school of economistes.

The man that emerges from the book is somewhat different from the traditional portrait of the founder of modern economics. Smith saw himself as a moral philosopher. He saw his famed “Wealth of Nations” and his earlier “Theory of Moral Sentiments” as attempts to integrate history, jurisprudence, ethics, aesthetics and (incidentally) economics in a GUT (grand unifying theory) of “scientific man”.

In some respects, Smith was unmistakably modern. Mr. Phillipson’s description of Smith’s lecturing style reveals a streak of cunning vanity and recognition of the power of rhetoric in getting across his ideas. After unsuccessfully experimenting with extemporized unscripted lectures, Smith used written speeches with tangential flourishes and asides. The iconic reference to the “invisible hand” and the idea of “regard to their own interest” may have developed as a rhetorical flourish, that today would have been instantly transmitted around the world in a “tweet”.

While Adam Smith’s ideas about economic issues – the dynamics of economic activity, the role of government, taxation and regulation – are interesting, they are firmly embedded in the culture of Glasgow and Edinburgh at the time of the Scottish Enlightenment.

Smith’s influence over time may be because the ideas he articulated are so general that subsequent intellectuals have been able to read into them layers of unintended meaning and significance. For example, the invisible hand guided by self interest is capable of being turned into a variety of rhetorical ideas, including the efficient market hypothesis. Smith, hesitant about precision and the application of mathematics to human behavior, would have found that curious.

This opacity and ambiguity allows Smith to remain relevant for each subsequent generation, which can shape Smith to fit the times and their particular agendas. As the Argentinean writer Jorge Luis Borges insisted every writer creates his own precursor. Each economic movement has shaped Smith in their image.

Restrained in tone, “An Enlightened Life” is a sound and fine introduction to Adam Smith. It will hopefully inspire readers to delve into Smith’s frequently unread but oft quoted writings.

The “present” is Rolling Stone journalist Matt Taibbi’s “Griftopia”. If “restraint” is a word that Mr. Taibbi is familiar with, it is not evident in this book. “Griftopia” extends the author’s Rolling Stone article justly famed for the notable description of Goldman Sachs – “the vampire squid wrapped around the face of humanity”. In modern celebrity culture, 45 characters can explain just about everything, at least, to the satisfaction of the majority.

The writing is the “gonzo style” journalism, made famous by the former Rolling Stone contributor Hunter S. Thompson. Alan Greenspan is “The Biggest Asshole in the Universe”. Insult and high dudgeon is the preferred form of dialectic. Interest in one orifice in the alimentary canal is prominent throughout the text.

Mr. Taibbi marries Thomas More’s “Utopia” and the idea of the “Grift” (deception) into a phrase that is meant to describe all that is wrong with America. Mt. Taibbi sees a vast conspiracy by bankers, especially by Goldman Sachs, to take over the running of the state, enslaving and robbing its citizens. Mr. Taibbi clearly does not share philosopher Alasdair MacIntyre’s view: “One key reason why the presidents of large corporations do not, as some radical critics believe, control the US is that they do not even succeed controlling their own corporations.”

The argument has some validity, but the truth is far subtler than “Griftopia” would like to make out. The argument has also been made far more subtly with better supporting documentation in Simon Johnson and James Kwak’s “13 Bankers”.

Mr. Taibbi confesses to not knowing much about economics. The admission on a reading of the book seems largely correct. The use of numbers owes much to Mark Twain’s advice: “Get your facts first, and then you can distort them as much as you please.” It is difficult to know whether the first part of the injunction was complied with, as there is little detail or evidence of the basis of the numbers cited.

The book asserts that the American government’s total commitment to rescue the economy, estimated at US$ [insert a number a number of your choice] trillion, sufficient to pay off all US mortgages. The author misunderstands, at least, the support offered and its rationale. If the government had not guaranteed financial institutions then bank collapses would have destroyed the savings of the millions of Americans for whom Mr. Taibbi is the self appointed champion.

The guarantees and capital injections were backed by assets, some even had some value. Many of the loans or capital commitment have to and have been repaid. Many programs, like extended unemployment benefits, staved off penury for the people affected. All these facts are inconvenient to the narrative and therefore ignored.

In his analysis of infrastructure, Mr. Taibbi argues that American states sold their infrastructure to private investors too cheaply. They did. But American ideological reluctance to raise taxes to finance essential public services and assets forced governments to resort to these forms of financing. Investors were frequently pension funds who reaped the benefit of the reduced prices and high resulting returns on behalf of their investors – often teachers and other citizens.

“Griftopia” begins with the story of the rise of the Republican Tea Party movement. Mr. Taibbi sees the rise as a diversionary tactic, focusing the attention of the populace away from the real issues – the grifters, bankers and people that the author dislikes – towards tangential issues - immigration, foreigners and the role of government. But the book itself is diversionary. In resorting to crude “blaming” and “flaming” even the correct targets without a thorough and accurate understanding of the true issues, “Griftopia” cheapens its case and ultimately allows the hated “system” to continue unhindered.

“Griftopia” may fall into its own trap. Its rage and blame perpetuates a lack of understanding of the real causes of the problem. The Roman Caesars understood that the crowd needed bread and games. They also knew that when things went wrong, an occasional sacrifice and crucifixion was the key to maintaining power. The clever vampire squid may have suborned Mr. Taibbi into its service.

The present is also “All the Devil’s Are Here”, written by acclaimed journalists Joe Nocera and Bethany McLean (co-author of the definitive history of Enron “The Smartest Guys in the Room”). “All the Devil’s Are Here” is a well written, solid history of the crisis. Its strength is that it tries to cover several aspects of the crisis, which in part makes the history and theory superficial. As its central focus is the crisis, the book does not examine deeper social aspects of the events and essential drivers of the age of capital. The text is character driven making for a narrative, focusing firmly on the “devils”, which turns out to be the “usual suspects”.

The subtitle “The Hidden History of the Financial Crisis” is misleading as there is little new here. The root causes identified are unsurprising – political pressure to increase homeownership, the GSE’s, political and business failures, the process of securitisation, mathematical models and the familiar evil of “greed”.

“Griftopia” and “All the Devil’s Are Here” do not acknowledge the complicity of everyone in the body politic in the essential financialisation of modern life and the reliance on economic growth. They do not acknowledge the fact that while the grift worked and everyone got richer, everyone remained sanguine about the “system”. No one cared as long as his or her stock portfolios and houses rose in value. No one cared as his or her living standards improved or there was the possibility of improvement

“Griftopia” and “All the Devil’s Are Here” also never recognise that normal people abnegated all responsibility, both political and economic, to the financial superclass. The low voter turnout in American elections is ample testament to that problem. The book does not recognise the lack of financial literacy and the naïve belief in the ability of policymaker’s to control and engineer the economy. In this regard, neither title matches Joe Baegeant’s poignant portrait of American life and its problems in “Deer Hunting for Jesus”.

Both books are also silent on the role of the media which has fervently embraces a message that financialisation of economic life is an unqualified good. It is also silent on how the media itself fosters ignorance, through its treatment of issues in narrow and simplistic political terms. Laudatory biographies of business leaders helped create the all-knowing financial elite. The message of “stocks for the long run” and “increasing wealth” bears some responsibility for the global financial crisis.

Mr. Nocera and Ms. McLean draw the title of their book from the line in Shakespeare’s “The Tempest”: “Hell is empty, and all the devils are here.” The implication is that all would be well if the devils were rounded up and consigned back to the nether regions. Unfortunately, reality is more complex. Other observations from the Bard might be apposite. In “Julius Caesar”, Cassius tells Brutus: “The fault, dear Brutus, is not in our stars, But in ourselves, that we are underlings.” In “Othello”, the real “devil” Iago tells Roderigo: “Tis in ourselves that we are this and thus.”

If we live presently in “Griftopia” and amongst “All the Devils”, then the future, we are told, belongs to the emerging markets. Australian journalist Hamish MacDonald’s wonderfully titled “Mahabarata in Polyester” provides a tantalising insight into this future through the recent history of the Ambani business family and its rise in India.

The book details the progress of entrepreneur Dhirubhai Ambani, as he rises to dominate the market in polyester in India, eventually evolved into the Reliance empire, which has more facets than many Indian Gods have limbs. Rather than a hagiographic Bollywood narrative of a gifted and determined individual battling the odds and emerging triumphant, Mr. MacDonald undertakes a forensic and critical analysis of the growth of the Ambani business interests. In the process, he provides clinical and compelling insights into the nature of Indian economic and business life.

“Mahabarata in Polyester” documents rampant corruption, stock market manipulation, trading of political influence as well as the exploitation of the media to further business ends. It provides perhaps the most compelling documentation of the evolution of India’s business environment from the era of the “license raj” where favoured Marwari and the Parsi businessmen dominated to the current regime of entrepreneurial oligarchs.

Recent revelations of “anomalies” in the auction of mobile phone spectrum and construction projects associated with the New Delhi Commonwealth Games highlights the deeply embedded corruption of the system. As Mr. McDonald concludes: “One legacy of Dhirubhai Ambani is a dangerously suborned state.” However, in a world with “a shrinking moral universe” where business is concerned, India is the future. If Mr. Taibbi’s thesis is correct, then American business, especially Goldman Sachs, should be well placed to succeed in India.

An earlier edition of the “Mahabarata in Polyester” was not released in India after the Ambanis stopped its publication. Indian businessmen and leaders are generally delusional as to their methods and standing, with anything less than veneration, adulation and comparison to Mahatma Ghandi being unacceptable.

This new edition, which was released uneventfully in India, continues the story describing the split between the two scions, Mukesh and Anil, after the death of their father. It documents their continued accumulation of wealth, which embraces most aspects of the Indian economy. It also documents the continuation of their father’s business practices.

“Mahabarata in Polyester” provides readers with a glimpse of the “real” India and Indian business, in the unlikely event that they want to know the truth.

Japanese scholar Jeff Kingston’s “Contemporary Japan” provides an alternative view of the future, at least for the beleaguered developed economies of the world. Documenting the history of Japan from 1989 when the “bubble” economy collapsed, Mr. Kingston provides an insightful portrait of the evolution of society during the lost decades. Along the way, it challenges many conceptions about Japan, especially its industrial acumen, labor relations and social cohesion.

“Contemporary Japan” does not focus on the economic history, although it is the essential backdrop against which the changes that are explored take place. During the last decade, Japan lost approximately 3 times its annual GDP, equivalent to around $16 trillion. The economic collapse affected Japan’s middle class profoundly, destroying its egalitarian society ushering in the “kakusa shakai” (society of disparities).

Its once copied labour system of lifetime employment became unsustainable. Today, temporary and part-time workers total up to one-third of the labour force. Lacking training, career prospects and with low, uncertain income, the “preca-tariat” (a combination of “precarious” and “proletariat”) are disaffected and also disengaged from the political and economic system.

Mr. Kingston argues convincingly that the crisis exposed and exacerbated hidden social problem, such as high rates of suicides and domestic violence. It also exposed bureaucratic incompetence and dishonesty that the years of strong growth and prosperity had disguised. The resulting loss of faith in authority has created near paralysis.

Mr. Kingston argues that Japan’s problems cannot be addressed by resorting to the past and existing systems. Puzzlingly, in the light of his own analysis and the facts he musters in support of his thesis, the author remains optimistic that Japan will overcome its problems, eventually.

Throughout the global financial crisis, politicians, business and economic leaders have steadfastly refused to contemplate a Japanese future for the global economy, at least for the developed economies. As the problems remain unresolved and policy options dwindle, the prospect of “turning Japanese” is now openly debated. “Contemporary Japan” provides a detailed and important perspective on what the future may look like and prospects that await the underclass that “Griftopia” portrays.

Human history is the stuff of myth. Adam Smith, Goldman Sachs, Alan Greenspan, the Ambanis and Japan are icons that mask elusive truths. As with any myth, the real importance is in what it reveals about those who hold them important and self evident.

© 2010 Satyajit Das All Rights reserved. Satyajit Das is author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2010, FT-Prentice Hall).