Key Points from Book: Unknown Market Wizards: The Best Traders You’ve Never Heard Of

Jack D. Schwager is probably one of the best author on trading books that have ever been written. His first book, Market Wizards, published in 1989 has attained a cult status among market participants and helped them develop an edge and strategy that are important in money management business. In his latest book released this year, he interviewed 11 traders (6 futures and 5 stocks) and share the insights he gathered from the conversation. Below are the points made in the book, which do not do justice compared to reading the book itself, but serves as a personal reminder for me in the years ahead.

Every decade has its characteristic folly, but the basic cause is the same: people persist in believing that what has happened in the recent past will go on happening into the indefinite future, even while the ground is shifting under their feet. —George J. Church

While he was buying into weakness, he wouldn’t just put on a full position and hold it. He would probe the market for a low. He would get out of any trade that had a loss at the end of the week and then try again the next time he thought the timing was right. He kept probing, probing, probing.

“There are two parts to a trade: direction and timing. And, if you’re wrong about either one, you’re wrong on the trade.”

Yes, I saw that he took much smaller positions than he could. The lesson I learned from Dan was that if you could protect your capital, you would always have another shot. But you had to protect your pile of chips.

So it wouldn’t bother you going long at $1.50 after getting stopped out twice at $1.20? No, that has never bothered me. I think that type of thinking is a trap that people fall into. I trade price change; I don’t trade price level.

it is easy to believe in a trade that conforms to conventional wisdom. It used to bother me to be wrong on a trade. I would take it personally. Whereas now, I take pride in the fact that I can be wrong 10 times in a row. I understand that my edge comes from the fact that I have become so good at taking losses.

Nor does it make any sense to me that some people use their open profits on the trade to add more contracts. That, to me, is the most asinine trading idea I ever heard. If you do that, you can be right on the trade and still lose money. In my own trading, my positions only get smaller. My biggest position is the day I put a trade on.

Charts are wonderful in finding specific spots for asymmetric risk/reward trades. That’s it. I am focused on the probability of being able to get out of the trade at breakeven or better rather than on the probability of getting an anticipated price move.

I think there are things that the winners have in common. They respect risk. They limit their risk on a trade. They don’t automatically assume they will be right on a trade. If anything, they assume they will be wrong. They don’t get too excited about a winning trade or too bummed out about a losing trade.

They risk way too much. They don’t have a methodology. They chase markets. They have a fear of missing out. They can’t keep their emotions in check; they have wild swings between excitement and depression.

The essence of Brandt’s strategy is to risk very little on any given trade and to restrict trades to those he believes offer a reasonable potential for an objective that is three to four times the magnitude of his risk. He essentially uses charts to identify points at which it is possible to define a close protective stop that is also meaningful—points at which a relatively small price move would be sufficient to trigger a meaningful signal that the trade is wrong.

mathematically, by increasing position size, a method with higher return-to-risk can always be made to yield a higher return at the same risk level than a lower return-to-risk method (even if its return is higher).

Success in trading one’s own account will not necessarily translate to success in managing money. Some traders may be comfortable and do well trading their own money but may see their performance fall apart when trading other people’s money. This phenomenon can occur because, for some traders, a sense of guilt in losing other people’s money may impair their normal trading decision process.

If your portfolio is sailing to new highs almost daily and virtually all your trades are working, watch out! These are the times to guard against complacency and to be extra vigilant.

Brandt’s motto is: Strong opinions, weakly held. Have a strong reason for taking a trade, but once you are in a trade, be quick to exit if it doesn’t behave as expected.

It was like Jesse Livermore used to say, “You make your money in the sitting.”

We used to have a saying in Hong Kong, “Should’ve been up, but it’s down, so short it; should’ve been down, but it’s up, so long it.” That trading philosophy became the basis of what I wanted to do: When the tape is telling you something, don’t fight it; go with it.

The low of the reversal day will be my stop. I’m not going to argue with it. If I go long, and the market goes back to the low of that day, I’m out. I’m so disciplined with this stuff. It’s not just that I have a stop on every trade, which I do, but that I have a stop that is based on some meaningful market move. The news came out, the market gapped down, and then it closed up. OK, that low is going to be my stop forever. If that low is hit, I’m out.

By definition, everyone can’t make outsize returns. So if everyone is doing something, the only way to make outsize returns is by being on the other side. The great thing about the markets is that I can wait until there is a confirmation before taking the opposite position.

People fail, and they quit; they get scared. For some reason, I have a risk instinct. I hate failing, but I don’t mind taking the risk and then failing.

Markets bottom on bearish news and top on bullish news.

I learned that keeping losses as small as possible is critical to capital preservation. The most crucial thing in trading is mental capital. You need to be in the right headspace for the next trade. I find that when I go into a deep drawdown, my mindset is not right. I might start forcing trades to try to make money back. I might get gun-shy about taking the next trade.

When Brandt gets into a trade, he expects it to work straightaway if he is right. The best trades just go. If there is any sign that the market isn’t doing that, he tightens his stop for getting out. That approach fits the way I trade the fundamentals.

sometimes, when I did get out, the trade would then go to the target. When that happens, it teaches you to do the wrong thing, which is to hold on. The problem is that you only remember the times you got out, and the trade then went to the target; you don’t remember all the times when you got out, and it saved you money.

If there is an explosive upmove, I will tend to take profits because any meaningful stop would risk giving back too much of the open profits. If, however, the market has a steady trend, I will move my stop up gradually.

To be a good trader, you have to have a high degree of self-awareness. You have to be able to see your flaws and strengths and deal effectively with both—leveraging your strengths and guarding against your weaknesses. It doesn’t matter if I miss a trade because there will always be another opportunity. Mental capital is the most critical aspect of trading. What matters most is how you respond when you make a mistake, miss a trade, or take a significant loss. If you respond poorly, you will just make more mistakes. If you take a trade that results in a loss, but you didn’t make a mistake, you have to be able to say, “I would take that trade again.” Opportunities are dispersed. You might have an opportunity today and then have to wait three months for the next opportunity. That reality is hard to accept because you want to make a steady income from trading, but it doesn’t work that way. In 2017, nearly all my profits came from two weeks in June and one day in December. That’s it. The rest of the year amounted to nothing. Have a long-term focus and try to increase your capital gradually rather than all at once. You have to forgive yourself for making a mistake. For a long time, I would beat myself up anytime I made a mistake, which only made things worse. You have to accept that you’re human and will make mistakes. It took me four or five years to understand that. I don’t know why it took me so long. Staring at these screens all day long is like a casino inviting you to click. You have to guard against the temptation of taking impulsive trades. If a bad or missed trade destabilizes me, I have rules for bouncing back: Take some time off, exercise, go out in nature, have fun.

I realized that I was in a position, hoping for it to work. The second I realized that I was hoping and not trading anymore, I immediately liquidated everything.

the big trades are pretty simple. You don’t have to go looking for them, but you do have to wait for them. Trading opportunities in the market ebb and flow. There will be periods in the markets where opportunities dry up, and there will be nothing to do. In those nothing periods, if you are looking for something to do, that is when you can create real damage to your account.

A lot of losing traders I have known thought they had to make money consistently. They had a paycheck mentality; they felt they had to make a certain amount every month. The reality is that you may go through long periods when you don’t make anything, or even have a drawdown, and then have a substantial gain. Entrepreneurs understand that. They will invest in a company for a long time, and the payoff comes in one hit after many years of hard work. If you are looking for outsize profits, you can’t approach that goal with a mindset of consistency.

Successful traders take care of the downside and know that the upside will take care of itself.

The trades that Sall has the patience to wait for have two essential characteristics: They are trades he perceives have a high probability of moving in the anticipated direction. They are asymmetric trades: the potential gain far exceeds the risk taken.

If you ever find yourself in a trade based on hope, get out. You need conviction, not hope, to stay in a trade.

“I don’t have to be right all the time; I just need to be right in a big way a few times a year.”

I realized an unexpected event that ran counter to the news flow was present in every one of my big winning trades. Another characteristic of these trades was that my reason for entering was very clear; I didn’t confuse my short-term and long-term views. I also noticed that these trades were never down by much and usually tended to be profitable almost immediately, whereas the trades that didn’t work tended to go offside quickly and stay offside.

Always make sure your stops are set at a point that disproves your market hypothesis; never use a monetary stop—a stop point selected because it is the amount of money you’re willing to risk. If you are tempted to use a monetary stop, it is a sure sign that your position size is too large.

placing large bets when you had the right set up, and keeping bets small when you didn’t. My winning percentage on trades is way less than 50%, but I still do well because I can recognize the one or two times a year when all the pieces of the puzzle are in place, and I need to bet big on a trade.

How would you define your trading methodology? I look at trading like a puzzle; I have to get the four corners in first. What are the four corners? The first corner is technical analysis; you have to have the right chart pattern. The second corner is a clean share structure. What do you mean by that? The stock has few or no options or warrants, and preferably, there are fewer than 200 million shares. What are the other two corners? Being in the right sector and having a catalyst or story that will make the stock or sector move up. Once the four corners are in place, you can then fill in the pieces.

When you see a big movement in a stock price, there is a reason why that price change happened. In many cases, the price moved because there is some inflection point in demand for that company’s services or products. Was there a way to identify that change early? I knew those opportunities existed, but I couldn’t figure out how to capture more of them. The opportunities I was catching were very random and based on my physicality—where I was, and what I saw at that moment in time.

Don’t ever listen to anybody when you are in a position. Stick to your own approach and avoid being influenced by contradictory opinions.

One of the toughest dilemmas that face systematic traders is deciding whether an ongoing losing period for a system represents a temporary phase that will be followed by a recovery to new equity highs, or whether the system no longer works. There is no simple prescription for how to decide between these two opposite interpretations. However, the lesson systematic traders should draw from this chapter is that sometimes abandoning a system is the right decision. It is one of those rare instances where discipline in trading—in this case, following the system absolutely—may not be a good thing.

Any system—repeat, any system—can be made to be very profitable through optimization (that is in regards to past performance). If you ever find a system that can’t be optimized to show good profits in the past, congratulations, you have just discovered a money machine (by doing the opposite, unless transaction costs are excessive). Therefore, incredible past performance for a system that has been optimized may be nice to look at, but it doesn’t mean very much. Optimization will always, repeat always, overstate the potential future performance of a system—usually by a wide margin (say, three trailer trucks’ worth). Therefore, optimized results should never, repeat never, be used to evaluate a system’s merit. For many, if not most systems, optimization will improve future performance only marginally, if at all. If optimization has any value, it is usually in defining the broad boundaries for the ranges from which parameter values in the system should be chosen. Fine-tuning optimization is, at best, a waste of time and, at worst, self-delusion. Given the above considerations, sophisticated and complex optimization procedures are a waste of time. The simplest optimization procedure will provide as much meaningful information (assuming that there is any useful information to be derived).

“Michael is unique because he combines two very different approaches: long equities on one side and a unique short strategy on the other. His ability to do both shows how adaptable he is as a person, and adaptability is critical in the game of speculation.”

In a recession, the market will typically go down 20%–30%. Assuming my 60% long portfolio does no better than the market, it will lose approximately 12%–18%. I would expect my short-term trading and short positions to cover that loss.

Appropriate risk management encompasses two tiers: the individual trade level—limiting the loss on any single trade—and the portfolio level. At the portfolio level, there are again two components. First, analogous to individual trades, there are rules to limit the loss for the portfolio as a whole. Such rules might include a defined process for reducing exposure as a loss drawdown deepens, or a specified percentage loss at which trading is halted. The second element of risk management at the portfolio level pertains to the portfolio composition. Positions that are highly correlated would be limited to the extent feasible. Ideally, the portfolio would include positions that are uncorrelated and, even better, inversely correlated with each other.

It is commonplace for traders to get sloppy when they are doing particularly well. Beware of letting a period of strong performance go to your head.

I knew I wanted to find something where the success or failure would depend only on me, not my colleagues, my boss, or anybody else. If I make money, that’s great; if I lose money, it’s my mistake. Trading is great in this way. You can’t find many other activities where success or failure depends only on you.

Dhaliwal makes the critical point that protective stops should be placed at a level that disproves your trade hypothesis. Don’t determine the stop by what you are willing to lose. If a meaningful stop point implies too much risk, it means that your position is too large. Reduce the position size so that you can place the stop at a price the market shouldn’t go to if your trade idea is correct, while still restricting the implied loss at that stop point to an amount within your risk tolerance on the trade.

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Key Points from Book: The Great Demographic Reversal

The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival

Charles Goodhart, Manoj Pradhan

The summary below is key points from an excellent book discussing the outlook and challenges the global economy will face in the coming decades. This book is very well written, soundly research, and worth reading for all economic enthusiasts, strategists, and politicians to understand the global context of inflation and social factor that will impact asset prices over the long-term.

The increase in the working age population (WAP, aged 15–64) in China outstripped the combined increase in Europe and the USA from 1990 to 2017 over fourfold—China saw an increase of over 240 million while in the latter two WAP increased by less than 60 million and mostly in the USA. The participation of the working age population also tilted the scales heavily in China’s favour.

These two politico-economic developments, the rise of China, and the return of Eastern Europe to the world trading system, provided an enormous positive supply shock to the available labour force in the world’s trading system.

As a result, globalisation surged ahead, with trade flows over the years 1990 until 2017 growing by 5.6% per annum, compared to the growth of world GDP of 2.8%. In 2004, the share of world manufacturing output produced by China was 8.7%; by 2017, it had reached 26.6%.

Combining these two factors, the rise of China, globalisation and the reincorporation of Eastern Europe into the world trading system, together with the demographic forces, the arrival of the baby boomers into the labour force and the improvement in the dependency ratio, together with greater women’s employment, produced the largest ever, massive positive labour supply shock.

When such a positive supply shock to labour occurs, the inevitable result is a weakening in the bargaining power of the labour force. Especially in advanced countries, a fall in real wages has seen the economic position of unskilled labour as well as semi-skilled labour suffer relative to capital, profits and managerial and skilled labour remuneration.

No wonder that the deflationary forces have been so strong. During these 28 years, prices of durable manufacturing goods tended to fall regularly in most advanced economies, though perhaps slightly less so in more recent years. In contrast, services inflation in developed market economies, having initially fallen quite sharply in the 1980s, tended to stabilise from the 1990s onwards at nearer 2%,

First, the declining growth rate of the labour force will necessarily reduce the growth of real output, unless there is an unexpected and quite remarkable surge in productivity. Growth rates generally cannot be expected to recover, if at all, beyond the disappointingly slow levels of the years since the GFC (Chapter 3). Second, our highest conviction view is that the world will increasingly shift from a deflationary bias to one in which there is a major inflationary bias (Chapter 5). Why? Put simply, improvements in the dependency ratio are deflationary, since workers produce more than they consume (otherwise it would not be profitable to employ them in the first place), while dependents consume but do not produce. The sharp worsening in the dependency ratios around the world means that dependents who consume but do not produce will outweigh the deflationary workers. The inevitable result will be inflation. With the supply of labour shifting down, standard economics suggests that their bargaining power will increase, and that real wages and the relative income share of labour will start rising again. While this will have beneficial effects on inequality within countries, it will be inflationary as unit costs rise. Add on top of this an increasing tax burden on workers (which we explain below), and they may well raise their wages demands in order to secure a desired real wage after taxation.

Third, real, inflation-adjusted interest rates, particularly at the longer end of the yield curve, may rise (Chapter 6) because of the behaviour of ex-ante (expected) savings and investment. That the elderly will dissave is not controversial. Those who believe real interest rates are likely to fall or stay low clearly believe that investment will fall even further below savings—we disagree. There are (at least) two reasons to believe that investment will remain more buoyant than many believe. First, the demand for housing will remain relatively steady as the elderly stay in their houses and new households create demand for new construction. Second, the corporate sector is likely to invest in capital in a way that raises the capital-labour ratio, in order to boost productivity. In net terms, we believe savings are likely to fall by more than investment,

In effect, we are in a debt trap. Debt ratios are so high that increases in interest rates, especially at a time in low growth, may drive exposed borrowers into an unsustainable state. As a result, the monetary authorities cannot raise interest rates, either sharply or quickly, without running into the danger of provoking another recession, which itself would make everything worse. But that will leave interest rates, and the accompany flood of liquidity, sufficiently expansionary (accommodating, in Central Bank speak) that debt ratios are likely to increase even further.

Global capital was largely prevented from accessing China’s financial markets, while the early returns from China’s financial markets were not attractive enough for overseas investment to chase. As a result, global capital flowed into physical investment. Strict capital controls allowed China to maintain a competitive global advantage. That same strategy allowed financial repression to be pursued at home in order to direct the domestic pool of saving towards state-owned enterprises (SOEs) with government-owned banks as the conduit.

Pierce and Schott (2012) document the ‘surprisingly swift decline in US manufacturing employment’ over the 2000s (see Diagram 2.2), identifying the removal of the threat of future tariffs against China as the key driver of that decline. That changed, according to the authors, when the US Congress approved a Permanent Normal Trading Relations (the US equivalent of the MFN) status on China in 2000 and eliminated the threat of tariffs in the future. Without a friction like tariffs to justify the onshore presence of manufacturing jobs, the production of many goods left US shores for China.

manufactured goods are impossible to differentiate by their geographical origin. Regardless of where they are manufactured, these goods are usually tradeable, must match a global standard of quality, and must be cost-efficient relative to producers in other regions. If an economy manages to enlarge the share of the manufacturing sector in its economy at an early stage of its development, its labour productivity will converge with global standards faster and consistently.

Nabar (2011, IMF) finds a negative correlation between urban savings and the decline in real deposit rates. When banks fail to protect household savings, households tend to save more, not less, in order to achieve a ‘target’, whether that is for education or the purchase of a home. China’s household savings have also been linked to the lack of a social safety net, and importantly in the context of this book, to the life cycle of a population that is saving for retirement.

The excess of desired savings over desired investment in the AEs was driving the equilibrium real interest rate lower by itself, since the dependency ratio improved in the 1980s. The injection of excess savings from China and North Asia served to push interest rates even lower.

China’s working age population has been shrinking (Diagram 2.5), a reflection of its rapidly ageing population. The internal migration that had provided a seemingly endless supply of labour to the industrial zones has reached the ‘Lewis turning point’, a point at which the surplus rural labour supply no longer provides a net economic benefit through migration

On the capital side, China’s phase of rapid capital accumulation in the sectors that are connected to the global manufacturing supply chain has already drawn to a close. The collapse in the manufacturing complex and the property sector back in 2014–2015 has been followed by consolidation and capacity cutting rather than in more capital accumulation.

even though a substantial portion of the credit extended by state-owned banks to SOEs was linked to excess capacity, both banks and SOEs were reluctant to write them off. Even if banks could be recapitalised by the government, SOEs that wrote down substantial loans would not receive any further funding, and would probably have to lay off a substantial part of the workforce. Instead, banks ‘evergreened’ the loans granted to SOEs and allowed them to stay operational. The presence of ‘zombie’ firms in China is therefore at least partly a function of societal and political constraints. Instead of mass layoffs, workers voluntarily left for jobs in urban areas in the gig economy, or were let go in small numbers when SOEs merged.

As the labour force and population growth go into reverse, overall growth will slow down. Household savings are likely to fall, with consumption directed to ageing- and health-related services, in the absence of a full and proper social safety net. This may happen either directly, or indirectly via the government.

Japan’s government debt cannot be cancelled even if it is domestically held. Why? Because the ‘leakage’ via households is too big. The enormous stock of government debt is held almost entirely domestically, with a huge chunk held by pension funds. Let’s say Japan’s government decides to cancel its debt. That would impair the asset side of the balance sheet of Japan’s pension funds, which would make it virtually impossible for them to service the liabilities that are due to the household sector. Shocked by the loss of future retirement income, households would raise their savings immediately and the ‘paradox of thrift’ would then lead to a consumption collapse and push Japan into a depression. Thus, the ‘leakage’ of Japan’s debt cancellation via household spending is just far too big.

In China, both sides of leverage are on the same balance sheet (i.e. the government’s) since so much of the corporate debt in question was issued by state-owned banks to SOEs. The ‘leakage’ (i.e. labour employed by SOEs) is smaller. China’s state-owned banks have issued debt to domestic state-owned enterprises. If banks were to cancel the debt, it would create two issues. First, banks would have to take a hit to their capital in a discrete step—we will address this point just below. Second, it would be difficult to lend any more to SOEs. The SOEs would have to cut down operations and possibly fire a substantial part of their workforce. That’s the problem—this could lead to social unrest which the authorities do not want.

Once the ranks of labour in the SOEs thin out (a process that is already underway but will still take years to reach critical mass), cancelling the debt will cause far fewer negative spillovers.

the price for accruing a large stock of debt will be paid via a shortage of credit for consumption and for businesses in the services sector. Even though debt-equity swaps allow for a much smoother deleveraging, they will eat up bank capital as the value of swapped equity is slowly written down to match the realised value of the non-performing assets that had been financed by the debt in the first place. While bank capital is being eaten away, and while real wage growth finds lower support from capital accumulation, the ability and willingness of banks to lend will be lower. Thus, even though consumers and the private sector account for an increasingly larger share of the economy, they will not be able to draw upon future earnings to consume or grow faster today. In summary, the future holds a much weaker path for the Chinese consumer, but a stronger rebound in productivity (particularly for the SOEs that work aggressively to reduce non-performing assets and loans ). Debt run-off is likely to reinforce these trends—it will not create a crisis, but it will constrain the flow of credit in the future as banks digest the excesses of the past.

For China, the implications of everything we have discussed are threefold. First, China will no longer be a global disinflationary force. If anything, demographic pressures and the Lewis turning point imply that inflationary pressures, with which the economy has never had to deal until now, could materialise and catch us off-guard. Second, falling savings related to the ageing population and to the end of financial repression will push the current account into deficit. The capital account, as we discussed earlier, could push the current account back into surplus, but it is not clear how the contrasting flows in household wealth, financing of the Belt and Road Initiative and foreign investment within China will play out in net terms. Without the persistent ‘uphill’ flows of capital that China’s earlier current account surplus had engendered, USA and global bond yields (and in turn asset prices) will see a reversal of the support from this source they had in the past. Third, China’s ability to introduce labour-saving and productivity-enhancing technology depends on the not-inconsiderable innovations that can be generated at home. Without the help of foreign firms transferring technology, and with political sensitivities around the acquisition of foreign technology firms by Chinese firms, an organic improvement in technology will be more difficult.

The danger facing the global economy is precisely that the economies that have dominated global growth are facing the biggest demographic challenges. And that means even if the world as a whole still faces substantial population growth going forward, the economies that shaped global growth for the last 35 years are the ones which bear the brunt of the demographic headwinds . Put differently, if demography is to leave only a scar on the global economy, then the economies that have done very little for global growth in the past few decades are the ones that must do much, much more in the future. Seen from this perspective, it should be clear that the disruption from technology that many fear so much in the advanced economies is actually an imperative without which the damage to global growth could well be far worse.

Indeed, many have explained part of the slower recent slowing of productivity gains as due to the ageing of the ‘baby-boom’ cohort. But as discussed in greater length in Chapter 10, this view is being reconsidered. Even if productivity does not, in fact, suffer from higher participation of the elderly, there could be a problem over promotion. If we pressurise the old to continue in work, will it cause blockages for the young? Next, a comfortable retirement is perceived as part of inter-generational equity and fairness. Finally, the old have typically had a much higher propensity to vote than the young. It is politically risky to seek to remove benefits from the old that they had perceived as their just reward.

The harder it becomes to find and hire qualified workers, the more employers will be forced to raise the productivity of those that they can attract and maintain in order to remain competitive;

Next, some of the sluggish growth of productivity per worker in the last few decades may be due to a combination of technology, shifting jobs from semi-skilled to unskilled, as discussed subsequently in Chapter 7 on ‘Inequality and the Rise of Populism’, and, perhaps, the growing participation of older workers.

Finally, an ageing population tends to consume services, such as care and medicine, where productivity increases are harder to obtain than in manufacturing,

The basic problem is that ageing is going to require increasing amounts of labour to be redirected towards elderly care at exactly the time that the labour force starts shrinking.

In the old days, people were mostly free of dependency cares from around 40 until retirement, when their earnings were highest and the prospect of retirement coming into sight. That encouraged saving. Nowadays people will be most free of dependency caring in their 20s, when earnings are lower and the prospect of living until 90+ almost unimaginable. Not a good time for saving. Then from 30 onwards, in some cases continuously, until your own retirement, looking after your own children12 would be followed in short order by the need to help look after your parents. See Bauer and Sousa-Poza (2015, 2019). Looking after dependents, whether children or elderly parents, takes time, effort and money. Given a combination of immediate emotional ties and time discount, we tend to believe that support for dependents will take precedence over saving for an uncertain future. In other words, we see the changing life cycle as a force likely to reduce the personal sector savings ratio and to throw a yet higher fiscal burden on the public sector to provide acceptable standards of living and health care for the elderly.

Inflation is the outcome of several interacting forces. These include underlying structural trends, demography and globalisation, and the macro-economic balance between savings and investment, as well as purely monetary phenomena.

If we are right in our political economy assumption that the social safety net will remain in place, then the age profile of consumption will continue to be flat or even upward sloping. The elderly will depend on (and vote for) government support and continue to save too little for the longer life they have inherited. The ineluctable conclusion is that tax rates on workers will have to rise markedly in order to generate transfers from workers to the elderly. Workers, however, would not be helpless bystanders. Labour scarcity in AEs (and some EMEs) will put them in a stronger bargaining position, reversing decades of stagnation in AEs. They will use that position to bargain for higher wages. This is a recipe for recrudescence of inflationary pressures.

The renewal of upwards pressures on inflation stems from three interacting and interlocking viewpoints: An intuitive balance based on the dependency ratio; An exercise based on labour market demand and supply, otherwise known as the Phillips curve; and A consideration of the relative balance of savings and investment in the (non-financial) private sector, and the effects of this on the public sector, and its policies.

Almost by definition, an improvement in the overall participation rate is deflationary, as workers outstrip those who do not work. As the dependency ratio falls, the disinflation from more workers overwhelms the inflationary impact of dependents. By the same token, a rise in the dependency ratio will be inflationary (too many mouths chasing too little food).

Dependents (the young and the old) are purely consumers and hence generate an inflationary impulse, whereas workers can offset this inflationary impulse through production.

switching from a deficit to a surplus when age-related expenditures are going to skyrocket will be extremely painful, and we think not politically feasible. Inflation then becomes a way that macroeconomic balance is restored.

Ben Bernanke (2005) famously attributed the declining real rate of interest from the 1990s onwards to a ‘savings glut’. This was down to two drivers: first, baby boomers saving for their future retirement and, second, by the ageing, but increasingly prosperous workers in Asia (especially in China) saving for their old age due to an inadequate social safety net. The result was that household savings ratios were high. But as the baby boomers retired, and the ratio of the old (individuals who were dissaving) to workers (who were saving) rose, the household saving ratio started declining. We plot the personal sector savings ratio against the dependency ratio for a selection of countries below, indicating that as the dependency ratio worsens (i.e. rises), the household savings rate falls (Diagram 5.1). Diagram 5.1 The household savings rate falls as the dependency ratio worsens (Source OECD)

From the point of view of the young, staying at home means they can save on rent and other amenities. But they need to allocate those savings for the future use, e.g. for housing down payment, or indirectly by building up human capital. From the point of view of parents, these social changes will then be reducing the prime period of saving for retirement by a large chunk (reducing that period from, say, 45–65 to 52–67).

If so, then that would lead to higher profit margins, a greater share of profits in national income than otherwise, and lower investment. In a recent NBER Working Paper, Liu et al. (January 2019) have argued that the continuation of very low interest rates has itself led to greater market concentration, reduced dynamism and slower productivity growth.

The development of software, for example, requires a lot of human skills and effort, but relatively little fixed investment. Insofar as technology is shifting the balance towards human capital and away from fixed investment, the ratio of expenditures on fixed capital to total revenues and output is likely to decline, possibly quite sharply.

In any case, we claim that growing labour market tightness will raise wages and unit labour costs. For such reasons, we think it quite likely, though far from certain that, in future, investment per worker will rise.

Their main conclusions, with which we agree, are: overall growth and total hours worked will slow down as ageing advances (which we can see because β3—which represents the coefficient on the aged profile of the population—is negative for growth and even more so for total hours worked); both the proportion of young and old are inflationary for the economy—this can be seen clearly by the coefficients for inflation of β1 and β3; and both the investment and the personal savings ratios fall thanks to demographics—as seen by a negative value for β3 for both investment and the personal savings ratios.

Slower population growth will lower savings (assuming a constant dependency ratio), but will equally lessen the need for more capital, houses, equipment, etc. However, this doesn’t tell us whether the capital/labour ratio will fall or rise, thereby raising or lowering the marginal productivity of capital. With both ex ante S and ex ante I moving in the same direction, assessing the likely balance between the two becomes problematic. The behaviour of household savings according to the life-cycle hypothesis in the presence of a social safety net and the impact of ageing on China’s savings explain why savings will fall.

Almost inevitably, health expenditures will rise further (Diagram 6.2), while the retirement age simply hasn’t kept up with longevity. Both health expenditures and expenditures on public pension transfers (Diagram 6.3) will continue to rise along with the ageing of AE societies. So far, measures to enforce participation in the labour force by raising the retirement age have not materialised, except in a handful of places which have enforced a modest increase in retirement age. Longevity, on the other hand, has gone up significantly thanks to medical advances and might go up further if the science of ageing makes rapid advances. As a result, the gap between longevity and the retirement age has been increasing in line with increases in longevity,

The economic impact of China on the world economy has been great. One dimension of this has been to impart upward pressure on the price of raw materials including, notably, oil. Much oil has been produced in relatively sparsely populated countries (Saudi Arabia and the Gulf and Norway). With China’s growth declining, and with the need to shift from fossil fuels to renewables, the net savings and current account surpluses of the petro-currency countries are likely to erode.

There will be a rising cost of labour and a falling cost of capital. We cannot think of any other time in history when the prices of the two main factors of production will be moving as clearly in opposite directions. Even before demographics start pushing wage growth up, the price of capital goods has already been falling. As wages begin to rise, compensating for more expensive labour will be easier thanks to a lower cost of capital goods. The resulting increase in productivity will somewhat temper the increase in wages and inflation. The savings and investment lens gives us another way to view this response. Given significantly cheaper capital goods, the cost of accumulating a given stock of capital uses up a smaller amount of the economy’s stock of savings. To some extent, this can counter the savings deficit created by ageing demographics and somewhat temper the rise in both the interest rate and wages.

it highly likely that the fiscal position will not move sufficiently strongly into surplus to offset the larger deficits that we expect to see within the private sector. Because fiscal deficits were not sufficient to equilibrate the economy over the last 30 years, central banks were forced to do so by lowering interest rates, ‘the only game in town’.2 In the same way in future, we expect real interest rates to have to rise in order to play the same equilibrating role because the public sector will not save enough.

‘Why Have Interest Rates Fallen Far Below the Return on Capital?’ (2019), has been that aversion to risk and illiquidity has driven an increasing wedge between the return on capital and riskless interest rates. Because the required return on capital remained high, thereby deterring investment, riskless interest rates had to be lower in order to equilibrate the macroeconomy.

What does remain a serious question is why conditions in which profitability has been so high, and both equity prices extremely high and interest rates so low, has not led to a much greater demand for corporate investment.

During these last 30 years, central bankers have remained the best friends of Ministers of Finance. By bringing interest rates steadily downwards, they have enabled the debt burden of sharply rising debt ratios to be completely offset. In future, this is going to change, and in a way that will make life for both those parties more difficult. Rising nominal interest rates, at a time when the prospect is for continuing, and, in some cases, worsening fiscal deficits, and still sharply rising debt ratios, is going to make the life of Ministers of Finance, and Prime Ministers, considerably more problematical. Moreover, the rise in debt ratios in the corporate sector, outside of the banks, is going to mean that the attempt to maintain the inflation target may leave the corporate sector, and the macroeconomy, at greater risk of default and recession.

Although global inequality has started to fall, as inequality between countries has declined quite sharply, inequality within countries has in the vast majority of cases risen, in many cases rather strongly, reversing the decline that took place from about 1914 until about 1980. Thus, the earlier hypothesis, embodied in the Kuznets2 curve, whereby economic development would initially cause inequality to rise, but peak and then fall continuously, appears to have become refuted.

There are two main constituent reasons for such trends in inequality. The first, already discussed in Chapter 3, is that trend growth in the returns to capital have been much stronger than the increase in real wages over this same, three-decade, period. The second main constituent reason for the increase in inequality is that the return to human capital, as proxied by educational attainment, has risen alongside the return to fixed and financial capital. In contrast, the return to muscle-power and simpler repetitive tasks has stagnated.

The implication of all this, i.e. that the very poorest have been protected, whereas the return to human and fixed capital has soared relative to the return to the unskilled and semi-skilled, has been that the lower middle class, say between the 20th and 70th income percentile, has come out the worst. Another aspect of this same phenomenon has been that mid-skilled jobs have fallen relative to both low- and high-skilled jobs, see Diagram 7.4, so that those in the lower middle class who could not raise their human capital were forced back into lower skilled jobs,

why would such technological developments change the slope and/or position of the Phillips curve? With the same level of overall unemployment, why would the associated aggregate wage/price outcome be less? Here the suggestion is that workers in the unskilled (gig) economy may have less relative bargaining power, and are less unionised, than those who previously worked in semi-skilled areas.

Demand management, and full employment policies, greatly strengthened the bargaining power of workers and trade unions. The alternative to not agreeing to the employer’s wage offer would be another job elsewhere, rather than unemployment. Also, as noted in Chapters 3 and 5, demography led to an improving dependency ratio. Union membership generally rose until about 1980

The growing bargaining power (relative to employers) of labour between 1945 and 1980 meant that the underlying NRU was increasing commensurately, perhaps to as much as 5.5%. It is deeply ironic that Keynesian demand management led inexorably to a much higher NRU.

Thus the fact that the slope of the calculated relationship between unemployment (or the output gap) and wage (price) inflation appeared to become more horizontal in these later decades may be just an artefact of better monetary policies and fewer supply shocks, rather than representing any change to the underlying structural relationship.

This finding has several implications. First, as long as there remains a sizeable buffer of elderly still prepared to switch elastically between work and retirement, then the Phillips curve will appear to be more horizontal, since employers can fill job vacancies from that source (as well as from migrants) rather than having to raise wages. Second, the existence of a reserve army of elderly has meant that the NRU will have fallen, since one can run the economy at a higher pressure of demand so long as that reserve army acts as a safety valve.

the CSI index provides a new window on movements in the rate of inflation. Because the CSI index tends to focus its weights on sectors with locally determined prices, it provides a way to separate out prices that are domestically determined from prices that are heavily influenced by international conditions. By using both inflation components and filters that eliminate trends and focus on cyclical variation, a different picture of the stability of the Phillips curve emerges. Whereas the standard accelerationist relationship between changes in inflation and gaps has flattened, the relationship between the weighted cyclical components and cyclical activity is substantially more stable.

not only is the long-run Phillips curve vertical at the NRU (u*), but also the position of u* is continuously and systematically shifting owing to longer-run demographic, political and economic forces.

The wedge between the 1% growth rate of Japan’s total output and the 1% average decline in its workforce is the contribution of productivity. Diagram 9.1 shows Japan’s outperformance over almost every advanced economy when it comes to output per worker.

Japan’s corporates showed a dynamism in overseas investment that was in sharp contrast to the desultory performance at home. O-FDI appears to be a safety valve designed to escape headwinds from local demand and expensive labour in favour of the dual tailwinds of strong overseas growth and cheap labour delivered by global demographic tailwinds. O-FDI was strong even during the ‘lost decade’ and has continued its rich form since.

Corporate Japan aggressively reduced the leverage it had built up at home. The domestic debt/GDP ratio for non-financial companies fell from a peak of 147% of GDP in 1994 to 97% of GDP in 2015, offset by public sector leverage that rose throughout that period. From the point of view of the corporate sector, however, leverage had to be reduced. Basic math says reducing the pace of borrowing or paying back debt when revenues are not growing means that other spending has to be pared back. That is what domestic corporate investment in Japan shows

IMF estimates (IMF 2011, Japan Spillover Report) suggest that labour costs are the prime motivation when looking at the shifting patterns of location and production, while growth in the destination country comes in second. METI’s survey suggests the opposite order as a rationale, by a wide margin. Firms’ responses suggest that 70% think demand in the destination market is the key motivation, while the importance of qualified and inexpensive labour has fallen in recent years.

Investment: the Yen value of outbound FDI increased threefold between 1996 and 2012, while the ratio of investment made in foreign affiliates, as compared to investment at home by domestic firms, increased 10-fold between 1985 and 2013. Number of affiliates: Japanese companies owned around 4000 overseas affiliates in 1987. That rose rather quickly to around 12,600 by 1998 and stands at 25,000 in METI’s 2018 survey. Employment: Overseas affiliates employment stood at 2.3 million in 1996. That number was 5.6 million in 2016.

The overseas capital investment ratio (the ratio of capital investment made in foreign affiliates vs domestic companies) stood at 3% in 1985, quadrupled to 12% by 1997 and reached 30% by 2013. The recent decline in the overseas-domestic investment ratio is one of the rare occasions that domestic investment has risen and overseas investment has fallen. Over the critical period when Japan’s corporate sector was written off, overseas investment has handsomely outperformed domestic investment

Japanese companies with overseas operations produced nearly 40% of their output abroad, while the overseas production ratio (manufacturing sector production by overseas affiliates compared to production within Japan) stood at 25% in 2017 (Diagram 9.6). For the key transportation sector, that ratio stands just below 50%.

‘Only a fraction of the profits generated from overseas operations are repatriated to Japan and a significant portion is reinvested abroad for further expansion of overseas operations’ according to Kang and Piao (2015). Why were profits not repatriated? If the objective of Japanese firms was partly to exploit lower labour costs and an expanding market overseas, then an external expansion would almost require profits generated abroad to be retained there for further expansion. The dramatic increase in capacity and employment abroad seems to suggest this is, indeed, what happened. Moreover, Japan’s ‘dividend exemption policy’ meant that firms were disincentivised from repatriating profits back home

One reason behind the downward pressure on wages in Japan can be traced back to the receding footprint of manufacturing and the expanding role of services, and hence in turn to the importance of the global factors that led to this reallocation. The local dynamics behind that reallocation are relatively straightforward: The aftermath of the asset bust and the two headwinds, tepid growth and an expensive and shrinking pool of labour, led to an investment recession. The manufacturing sector, least able to protect itself at home, begins to raise its productivity in three ways. First, it freezes any further increases in the capital stock and then slowly reduces its labour input. In doing so, the capital available per worker (a basic measure of productivity) slowly starts to rise. Second, manufacturing production slowly starts to get offshored. Third, selecting which activities to offshore completes the process—corporate Japan keeps the design and very high technology parts of the production at home and moves the more mechanical parts of the production line overseas. The manufacturing sector was unwilling to absorb its historical share of workers, and the share of manufacturing employment to total employment fell. The services sector (whose role in the economy was kept steady by the steady nature of consumption) began to face an increasing supply of workers. The share of services in total employment then rose. In order to protect its profitability, the services sector then drove a wedge between prices and wages, but by pushing wage growth lower. This was in part due to the dynamics we have described just above, but also partly due to the changing nature of Japan’s labour market as it sought out ways to escape its institutional customs. Bottom line: activity and jobs were reallocated both outside Japan’s borders and within Japan as the corporate sector strategically and purposefully raised productivity to protect itself. Those efforts need to better recognised not only for delivering Japan’s exit from the lost decade, but also with delivering productivity per worker that outperformed almost every other advanced economy in the world.

In Japan, the loyalty of insider workers is mostly to their company, rather than to a trade union, and the counterpart commitment from the employers is to maintain employment during downturns. So, the Phillips curve in this respect is very flat, with more of the adjustment to cyclical forces being felt in hours worked than in either unemployment or wages. Japan’s local customs of long-term employment make mass layoffs and job destruction unviable options.

The role of part-time, i.e. non-regular, employees grew as cost pressures increased. Their share in total employment rose from about 13% in 1990 to just under 30% by 2018. From the firm’s perspective, a fall in the ratio of insiders to outsiders was important very simply because ‘outsiders’ were not given long-term contracts which made their wages easier to suppress. So strong was the incentive to change this ratio that even in periods when full-time employees were actually being laid off, employment growth for part-time employees remained positive and even rose. In a nutshell, dimming prospects for growth required that firms reduce costs to protect themselves. The customs in the labour market, however, would not allow for a rapid, Western-type adjustment in which layoffs pushed the unemployment rate higher rapidly. Instead, firms employed a far more complex strategy that changed the structure of employment and forced wages and hours to do most of the adjustment.

Japan is not alone in seeing higher participation rates among the pre-retirement cohort. There are at least two reasons for this general trend. First, many have realised that they will live longer so that their planned savings look inadequate. Second, there has been a general degradation of pension benefits (designed to reduce the government’s fiscal burden).

Ageing economies can try to offset demography at home and abroad. At home, ageing economies have three options. First, use technology to offset the negative shock from labour to the production function. Second, raise the participation rate so that people work longer as well. Third, advanced economies can use some labour from abroad, particularly from emerging economies. If importing labour from abroad looks politically unrealistic, then perhaps capital can be exported abroad. There it can be converted into goods and services and repatriated to the advanced economies, the ones exporting the capital. The role of India and Africa—the demographically endowed parts of the world—has been advanced in this regard,

Elderly care in its broadest sense is a labour-intensive process, but it doesn’t necessarily add to future national output growth in a way that other services sector employment does. Put differently, much of patient care is a consumption good rather than a capital good that creates value even in the future.

participation rates of the workforce have already gone up considerably, thanks to greater participation of the 55–64 cohort and especially women. How much further can this rise in the future? In other words, if much of the increase in participation needed has already been realised today, there is less room for improvement for the future when the size of the demographic problem becomes more severe

Net migration flows into the AEs and out of EMEs peaked in 2007 at about 24 million each. When normalised against the size of the population, however, these flows are far too small to make a difference

this more direct route of transferring labour between economies is unavailable, then capital can flow to the labour abundant economies. These flows of capital can be combined with the local supply of labour in the labour-abundant economies to produce goods and services which, in turn, can be exported back to labour-deficient economies.

We think India will beat China in global growth over the next decade, and perhaps even the one after that. However, it will not be able to lift world growth the way China did for three reasons: First, the global environment is materially different in two ways. The decline in nominal and real interest rates during (and caused to no small extent by) China’s ascent created benign conditions at home in the AEs so that the ascent of China was not seen as a zero-sum game.

India has had a rich history of trading over the centuries, aided by empires that stretched over the bulk of its mass, but its disjointed social structure has often been a hindrance in creating a solid economic foundation.

Third and most important, India will be able to attract global capital to its shores, but the lack of administrative capital and its system of democratic checks and balances will not allow a single-minded, China-esque model of growth to materialise.

Inevitably, that means the private sector is to be the vehicle that drives India’s growth. In turn, it is the extent to which the private sector is able and willing to grow that will determine the path of India’s growth. Unlike the growth of SOEs under state patronage, the private sector needs an effective and level playing field to thrive. Thus, a lot depends on how quickly and efficiently India’s administration can reform and deregulate the economy.

Africa’s population in 2019 stands at approximately 1.32 billion, almost identical to India’s 1.37 billion residents, but it hosts that population over an area that is almost ten times the size of India’s 3.2 million square kilometres of territory. Over that area, Africa is made up of 54 countries. A key problem that Africa faces, therefore, is its fragmentation. Fifty-four national policies, each with their own domestic frictions like India’s, will mean a much greater problem when it comes to coordinating policies for growth. It also means that migration within Africa is far more difficult because of national borders than it is within India’s state borders.

emerging economies that cannot transform themselves into advanced economies fail not because of the so-called middle-income trap but because of an administrative trap.

Not only have interest rates already reached the effective lower bound (we discount the likelihood of getting policies to abolish cash ), but also we argue that inflation, and with that nominal interest rates, will most likely rise again. The problem is that the key macroeconomic sectors now carry such elevated debt ratios that any sizeable or sharp increases in interest rates would put large chunks of the private sector into solvency problems and add to the fiscal difficulties of Ministers of Finance.

just as raising leverage in banks increases the risks for other stakeholders, including the public at large, in exactly the same way buy-backs in other corporates is a risk-shifting activity.

Fundamentally, a regime of low and falling interest rates makes default on fixed income obligations less likely even if revenue growth slows down. Financially, the low risk of default makes the purchase of high-yielding securities far more attractive when the ‘search for yield’ dominates investment strategies. A combination of the two naturally led to the rapid growth of the issuance of relatively more risky assets.

Of course, if advantage had been taken of the extraordinarily low interest rates to extend the duration of the public debt, then the forthcoming rise in nominal official short-term interest rates would have less effect. But the felt need for an ever more expansionary monetary policy has led instead to a significant reduction in effective durations. In particular, a combination of QE and a ‘floor system’ of paying interest on commercial bank deposits at the Central Bank has meant that the equivalent volume of QE, backed by such deposits, has an effective zero duration. Thus, public sector fiscal finances will feel the full pain of any increase in official interest rates almost immediately. With corporate sector finances having become increasingly fragile, and (populist) political calls for keeping interest rates low, the Central Bank will become under intensifying pressure to keep any increases in interest rates gradual and limited. But if such interest rate increases remain gradual and small, then the present incentives to extend and expand debt finance remain in place. That is the debt trap in which so many of our countries have now become ensnared.

Real interest rates have become exceptionally low, partly because demographic pressures, particularly in China, have led to savings ‘gluts’, while investment ratios outside of China, as earlier argued, have remained extremely low, partly under the influence of the globalised availability of additional cheap labour. Both these factors are going into reverse. As the dependency ratio rises, personal sector savings ratios are likely to decline, unless governments consciously restrict the future generosity of their pensions and medical assistance for the aged, which could be politically challenging. At the same time the recovery in the power of labour, as workers become scarce, and taxation rises to meet extra public sector expenditures, will lead to rising real unit labour costs. In order to offset that, corporates are likely to increase their investment demand. So, the likelihood is that the balance between investment and saving, i.e. the demand and supply of loanable funds, may well lead to a recovery in real interest rates. If so, forthcoming pressures may lower growth rates, at the same time as real interest rates rise, making it increasingly difficult simply to grow out of current high debt ratios.

Finally, during periods of stress around debt, an income stream of fixed payments that is supposed to protect creditors turns out to be a dubious asset at best. History is littered with episodes of default on debt that have gone hand-in-hand with macroeconomic upheaval. Thus, even the benefits to creditors from holding debt versus equity are not clear and obvious.

mainstream approach to inflation has been based on monetarism and Keynesian demand management. To a monetarist, or to a gold-enthusiast, the answer to explaining such trends is straightforward. Advanced economies moved from a gold standard regime to a fiat money regime. Fiscal dominance allowed politicians to bribe the electorate with their own money and inflation ensued. Then stagflation took over in the horrible 1970s, and conditions got so bad that a move to Central Bank Independence (CBI) restored some vestiges of monetary constraint on politicians.

A consequence of the strengthening of labour’s bargaining power was that the Natural Rate of Unemployment was rising in the background, an ironic side effect of the deployment of Keynesian demand management to raise the average level of employment.

Inflation, it is regularly repeated, is a monetary phenomenon, and Central Banks can create money. How, then, can we have a persistent problem of lower than targeted inflation? Of course, we are told that this problem is due to the zero, or effective, lower bound to nominal interest rates. But when inflation remains around 1%, as now in 2019, the ELB only becomes a serious constraint when the equilibrium real interest rate, r*, itself becomes negative, falling far below its prior typical values of 2.5 to 3.5%. And that is a real, and not just a nominal, monetary problem. The mainstream explanation of our times is precisely that, an r* that has indeed become negative. The secular stagnation thesis involves a variety of arguments (inequality and even the need for ageing societies to invest less are in the mix), to explain why r* has fallen and will remain low for the foreseeable future. Empirical estimates of r* regularly show estimates that are negative or very close to zero, backing up the claims of the secular stagnationists.

Our approach differs from the mainstream in this field on at least three important issues. First, we are not as sanguine about the future of personal savings as the mainstream. The consumption assumptions of their models simply do not match the consumption dynamics that an ageing society will display. Second, we are more optimistic on corporate investment when faced with a declining workforce. We agree with Andrew Smithers that a serious governance problem in capitalist economies has hindered investment, particularly in the USA. Finally, the mainstream view sees debt and demography singing from the same hymn sheet in driving growth, inflation and interest rates lower for the foreseeable future. We see the two in conflict, with debt a gigantic block that the irresistible forces of demography will eventually move out of its way. In turn, that will put monetary and fiscal policymakers in conflict with each other.

Part of the answer is that investment, like production, has been off-shored to emerging Asia, see especially Chapter 9 on Japan. If so, the curtailment of globalisation will bring some boost to domestic investment. Another part of the answer could be that the weakness of labour bargaining power has allowed employers in the non-traded services sector to raise profits by lowering wages in the gig economy, rather than going through the more difficult process of raising employee productivity, notably via investment

Inflation will rise considerably above the level of nominal interest rates that our political masters can tolerate. The excessive debt, amongst non-financial corporates and governments will get inflated away. The negative real interest rates that may well be necessary to equilibrate the system, as real growth slows in the face of a reversal of globalisation and falling working populations, will happen. Even if central banks feel uncomfortable with such higher inflation, they will be aware that the continuing high levels of debt make our economies still very fragile. And if they try to raise interest rates in such a context, they will face political ire to a point that might threaten their ‘independence’.

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Key Points from “The Elements of Style” by Strunk

– William Strunk Jr., Richard de A’Morelli

Good writing is a skill that is useful in many occupations, in his classic book written first in 1918, Strunk offers plenty of tips in writing that could improve the readability and conciseness of a text. Below are highlights I store for myself, as a reference for my work from time to time. Hope it is useful to you too.

Author George Orwell offered some poignant advice on grammar and style to writers in his discourse on Politics and the English Language. These suggestions are worth remembering and should be followed if you want to see an improvement in the clarity and quality of your writing. —Never use a long word where a short one will do. —If it is possible to cut a word out, always cut it out. —Never use the passive where you can use the active. —Never use a foreign phrase, a scientific word, or jargon if you can think of an everyday English equivalent to use instead. —A scrupulous writer, in every sentence that he writes, will ask himself at least four questions: 1. What am I trying to say? 2. What words will express it? 3. What image or idiom will make it clearer? 4. Is this image fresh enough to have an effect?
  Rule 1. Form the possessive singular of nouns by adding ’s. Follow this rule regardless of the final consonant. These usages are correct: Charles’s friend Burns’s poems the witch’s malice This is the rule followed by the U.S. Government Printing Office and the Oxford University Press. Exceptions are the possessive of ancient proper names ending in -es and -is; the possessive Jesus’; and such forms as for conscience’ sake, for righteousness’ sake.
  Rule 2. In a series of three or more terms with a single conjunction, use a comma after each term except the last. For example: red, white, and blue gold, silver, or copper He opened the letter, read it, and made a note of its contents.
  Rule 3. Enclose parenthetic expressions between commas. A parenthetic expression is a clause or phrase that is inserted within another clause or phrase. In a sense, it interrupts the flow of the first expression; usually, it can be omitted and you will still have a complete sentence, as, The best way to see a country, unless you are pressed for time, is to travel on foot.
  Rule 4. Place a comma before a conjunction introducing a coordinate clause. ✘ The early records of the city have disappeared, and the story of its first years can no longer be reconstructed. ✘ The situation is perilous, but there is still one chance of escape. Sentences of this type, isolated from their context, may seem to be in need of rewriting. They make sense when we reach the comma, and the second clause has the appearance of an afterthought. Further, the conjunction and is the least specific of connectives. Used between independent clauses, it indicates only that a relation exists between them without defining that relation. In the example above, the relation is that of cause and result. The two sentences might be rewritten: ☺ As the early records of the city have disappeared, the story of its first years cannot be reconstructed. ☺ Although the situation is perilous, there is still one chance of escape.
  Rule 5. Do not join independent clauses by a comma. If two or more clauses, grammatically complete and not joined by a conjunction, are written to form a compound sentence, the proper punctuation mark is a semicolon. ☺ Stevenson’s romances are entertaining; they are full of exciting adventures. ☺ It is nearly half past five; we cannot reach town before dark.
  Rule 6. Do not break sentences in two. In other words, do not use periods for commas. While it is acceptable to break a compound sentence into two shorter elements, where both form complete sentences, doing so often results in choppy wording. Especially avoid breaking sentences in two when one part or the other does not form a complete sentence,
  Rule 7. A participial phrase at the beginning of a sentence must refer to the grammatical subject. Walking slowly down the road, he saw a woman accompanied by two children. The word walking refers to the subject of the sentence, not to the woman. If you want to make it refer to the woman, you must recast the sentence: He saw a woman accompanied by two children, walking slowly down the road.
  Rule 8. Make the paragraph the unit of composition. Write one paragraph to each topic. A paragraph expresses a complete thought.
  The beginning of each paragraph is a signal to the reader that a new step in the development of the subject has been reached.
  Rule 9. Begin each paragraph with a topic sentence. Begin each paragraph with a topic sentence and end it in conformity with the beginning, although certain exceptions apply. Again, the object is to help the reader gain clarity and understanding of what you are writing. The practice recommended here enables readers to discover the purpose of each paragraph as they begin to read it, and to retain this purpose in mind as they end it. For this reason, the most useful kind of paragraph, particularly in exposition and argument, is that in which: (a) the topic sentence comes at or near the beginning; (b) the succeeding sentences explain, establish, or develop the statement made in the topic sentence; and (c) the final sentence either emphasizes the thought of the topic sentence or states some important consequence.
  Rule 10. Use the active voice. The active voice is usually more direct and vigorous than the passive:
  Rule 11. Put statements in positive form. Make definite assertions in your writing. Avoid bland, colorless, hesitating, non-committal language. Use the word not as a means of denial or in antithesis, never as a means of evasion.
  Rule 12. Use definite, specific, concrete language. Prefer the specific to the general, the definite to the vague, the concrete to the abstract.
  Rule 13. Omit needless words. Vigorous writing is concise. A sentence should contain no unnecessary words, a paragraph no unnecessary sentences, for the same reason that a drawing should have no unnecessary lines and a machine no unnecessary parts. This requires not that the writer make all his sentences short, or that he avoid all detail and treat his subjects only in outline, but that he make every word tell.
  Rule 14. Avoid a succession of loose sentences.
An unskilled writer will sometimes construct a whole paragraph of such sentences, using as connectives and, but, so, and less frequently who, which, when, where, and while, these last in non-restrictive senses
  Rule 15. Express coordinate ideas in similar form. This principle, that of parallel construction, requires that expressions of similar content and function should be outwardly similar.
  ✘ Formerly, science was taught by the textbook method, while now the laboratory method is employed. ☺ Formerly, science was taught by the textbook method; now it is taught by the laboratory method. The first version gives the impression that the writer is undecided or timid; he seems unable or afraid to choose one form of expression and hold to it. The second version shows that the writer has at least decided on the point he wants to make, and he makes it.
  ✘ The French, the Italians, Spanish, and Portuguese ☺ The French, the Italians, the Spanish, and the Portuguese ✘ In spring, summer, or in winter ☺ In spring, summer, or winter ☺ In spring, in summer, or in winter
  Correlative expressions (both, and; not, but; not only, but also; either, or; first, second, third; and the like) should be followed by the same grammatical construction, that is, virtually, by the same part of speech.
  Rule 16. Keep related words together. The position of words in a sentence is the principal means of showing their relationship. You must therefore try to bring together the words, and groups of words, that are related in thought, and keep apart those which are not so related.
  Rule 17. In summaries, keep to one tense. In summarizing the action of a drama, you should always use the present tense. In summarizing a poem, story, or novel, you should preferably use the present, though you may use the past if you prefer. If the summary is in the present tense, antecedent action should be expressed by the perfect; if in the past, by the past perfect.
  Rule 18. Place the emphatic words of a sentence at the end. The proper place in a sentence for the word, or group of words, that you want to make most prominent is usually the end.
  The principle that the proper place for what is to be made most prominent is the end applies equally to the words of a sentence, to the sentences of a paragraph, and to the paragraphs of a composition.
  Rule 19. “First Word” Capitalization Rules.
  Capitalize the first word of every quotation. Mark demanded, “Stop the car! Now!”
  If the first word of a sentence is a trademark, an acronym, or a proper noun usually written in lower case, capitalize it.
  Capitalize the first word of every numbered clause, regardless of how the clauses are structured in the paragraph. Consider the two examples below, where the first presents the clauses as a series of paragraphs, and the second illustrates numbered clauses in running text: The defendant claims that: (1) He did not attack the man; (2) The witness appeared drunk at the time; (3) In fact, the witness himself attacked the man. The witness asserts under oath that: (1) He saw the man attacked; (2) He saw him fall; (3) He saw the defendant flee.
  Capitalize the names of political parties, religious denominations, and schools of thought.
  Rule 21. Capitalize Days, Months, and Historic Eras.
Capitalize words that refer to significant events or periods in human history. Industrial Revolution Civil War Middle Ages Stone Age The Great Flood Magna Carta Vietnam War Ice Age
  Rule 22. When to Capitalize Landmarks. Do not capitalize words such as river, mountain, sea, etc., when they are used as common nouns. But when used with an adjective or adjunct to specify a particular location, they become proper names and should be capitalized.
  Rule 23. When to Capitalize the Names of Seasons. Capitalize the names of the four seasons when they are used as proper nouns, in a title or headline, and when used as a “personified” noun (see Rule 24). Otherwise, do not capitalize the names of the four seasons. These usages are correct: The summer was hot, the fall breezy, the winter frigid. The Winter of my discontent Will you be taking summer classes? Cindy enjoys baking pies and cakes in the winter.
  Rule 24. Capitalize “Personified” Nouns. “Personification” is a concept in which inanimate objects are represented as having life and action. A personified noun is a proper noun and should be capitalized. Clear-eyed Day broke on the horizon. The Redwood said to the Oak, “I am taller than you.”
  Rule 25. Capitalize Cardinal Points (Sometimes). The cardinal points (north, south, east, and west) are common nouns and not capitalized. But when used to distinguish a specific location or region, they are proper nouns and should be capitalized.
  Rule 26. Capitalize Most Words in Titles. Capitalize the first word and the last word of the title of a book, film, song, or other creative work. Capitalize all nouns, pronouns, adjectives, verbs, adverbs, and subordinating conjunctions. Capitalize prepositions only if they are used adverbially or adjectivally; otherwise, write prepositions lower case. Likewise, lower case articles (a, an, the), coordinating conjunctions, and the word to in an infinitive, such as “How to Play the Violin.”
  Rule 27. When to Capitalize Roman Numerals. Capitalize Roman numerals when they are part of a proper name, a title, or a chapter heading.
  Rule 28. Capitalize Trademarks and Service Marks. Trademarks and service marks are proper nouns and should be capitalized.
  Rule 29. When to Capitalize Relative Words. When relative (or family) words such as mother, father, brother, sister, and uncle are used as common nouns, do not capitalize these words;
  When a relative word is used with a person’s name, and no possessive pronoun is used, capitalize the word. I called Uncle Joe to ask for a loan, but he refused.
  When a relative word is preceded by a possessive pronoun (my, her, his, your, their), it is a common noun, so write it in lowercase, even if it is used with a person’s name. This rule conforms to Chicago Style; other style guides may offer different advice. I called my uncle Joe to ask for a loan, but he refused.
  Capitalize relative words when those words are substituted in place of a person’s name. You might not agree, but Father knows best. Her father Jake works hard to earn a living.
  Rule 30. Capitalize Some Religious Titles and Terms. Pronouns that refer to the Supreme Being should be written in lowercase, according to Chicago Style. But the Chicago Style website notes that some religious writers and readers may be offended by this practice. The best approach is to follow “house rules” of the publisher, or consider the audience and write pronouns that refer to the Supreme Being in uppercase or lowercase as appropriate for that particular audience.
  Capitalize proper nouns that refer to the Bible or to the scriptures of other religions, and to any parts of those texts.
  Rule 31. When to Capitalize Political Titles. Capitalize the titles of honorable, state, and political offices when used as part of a formal title. Otherwise, write these titles as common nouns and use lowercase. President Donald Trump toured the factory.
  Rule 32. When to Capitalize Educational Titles. Do not capitalize the words freshman, sophomore, junior, or senior unless used at the beginning of a sentence or in a headline. When referring to students, upper-division is preferred to upper-class. Capitalize the names of colleges and universities. But the terms “university” and “college” when used alone usually are common nouns and should not be capitalized.
  Capitalize the names of college and university departments, and official bodies of educational organizations. The School of Law is also called the law school.
  Capitalize educational degrees only when they directly precede or follow a person’s name; otherwise, use lowercase (Chicago Style); or capitalize all degree names no matter where they appear (AP Style). Chicago Manual of Style: Elizabeth earned a master of science degree from Harvard University.
  AP Style: Elizabeth earned a Master of Science degree from Harvard University.
  Rule 33. When to Capitalize Job Titles. The rules for capitalizing job titles can be confusing. Generally, use lowercase for titles when preceded by an article (a/an or the); and all titles used as common nouns. Mr. Carlson is the editorial director for the Los Angeles Times. Mr. Carlson, Editorial Director of the Los Angeles Times, spoke at the luncheon.
  Do not capitalize generic occupational descriptions, regardless of whether they precede or follow the person’s name. When writer Steven Clark met with publisher Jules Martinique, they decided to launch a new imprint devoted to cook books, led by editor Joe Wilson.
  When a person has an unusually long title, write the title after the name and in lowercase to avoid excessive capitalization that would look odd and be difficult to read.
  A sentence containing an expression in parenthesis should be punctuated, outside of the marks of parenthesis, exactly as if the expression in parenthesis were absent. The expression within is punctuated as if it stood by itself, except that the final stop is omitted unless it is a question mark or an exclamation point. I went to his house yesterday (my third attempt to see him), but he had left town. He declares (and why should we doubt his good faith?) that he is now certain of success.
  Formal quotations cited as documentary evidence are introduced by a colon and enclosed in quotation marks. The provision of the Constitution is: “No tax or duty shall be laid on articles exported from any state.” Quotations of an entire line (or more) of verse, are begun on a fresh line and centered, but need not be enclosed in quotation marks. Wordsworth’s enthusiasm for the Revolution was at first unbounded: Bliss was it in that dawn to be alive, But to be young was very heaven! Quotations introduced by that are regarded as indirect discourse; do not enclose these passages in quotation marks. ✘ Keats declares that “Beauty is truth, truth beauty.” ☺ Keats declares that beauty is truth, truth beauty.
  Grammar is concerned with how words are used, and how words are combined into sentences and paragraphs. Style refers to an additional set of rules writers and editors should follow to achieve consistency in the construction and tone of their writing. Simply put, grammar rules will help you to write sentences that make sense, and style rules will help you to turn those sentences into a polished final draft. Style is a term in writing that encompasses a wide variety of issues beyond grammar, such as questions on word usage, capitalization, how to abbreviate, how to write numbers and dates in running text, and many other quandaries. Style rules fill in the gray areas that exist because grammar rules tend to be broad. For instance, it might be possible to write a sentence in a dozen ways, and all might be grammatically correct; but one construction might be clearer and flow better than the rest. Style rules help to ensure that your writing expresses your ideas in the clearest and most effective manner possible.
  Dozens of writing style guides are available today. The most widely used, Chicago Manual of Style, is the bible of editors working in American English fiction genres, and some nonfiction editors. AP Stylebook is used by journalists and others who write and edit for news organizations and websites. APA Style and MLA Style are often used by college students for writing term papers and essays. In the United Kingdom, Oxford Style Guide is widely consulted for grammar questions.
  You can start a sentence with a conjunction. For more than century, grammarians have taught that you should never start a sentence with a coordinating conjunction. Seven of these conjunctions exist in English, and they are: and, but, so, yet, or, for, and nor. This prohibition may have developed out of grammar instructors wanting to help students avoid writing sentence fragments. But times have changed, and most style guides now advise that it is okay to start a sentence with a conjunction, as long as the practice is not overused.
  You can split infinitives. An infinitive is a verb form that almost always begins with the word “to” and ends with a simple verb. For example: to walk, to speak, to ask. A split infinitive is a short phrase in which a word, typically an adverb, is inserted between the “to” and the verb, as, to boldly go.
  Consider your audience. Identify your intended audience before you start writing. Think about what your readers want to know about your topic, or what they will expect from your story that will make it an interesting or enjoyable read. Take into account their level of reading comprehension, the depth of their interest, and what is customary in your particular genre. Avoid the pitfall of “dumbing down” your writing to reach a wider audience.
  Generally, avoid writing long paragraphs, and especially avoid the convoluted and verbose styles commonly found in early twentieth-century literature. Large blocks of text are daunting to readers and suggest that what is to come will be boring or difficult to grasp. Shorter paragraphs are more inviting and easier to digest. Try to limit paragraphs to four or five sentences, or about 100-125 words. A paragraph should discuss one main idea, not several. An idea might require twenty sentences to properly develop, but that doesn’t mean that you should write a rambling, twenty-sentence paragraph that spans an entire page. Look for logical places where you can break a large block of text into several paragraphs.
  Long or wordy conditions (such as the italicized words in the example below) should be placed after the main clause to improve clarity. In this way, you focus the reader’s attention on the major idea you are stating in the sentence, and then you explain the condition. ✘ If you own more than fifty acres and cultivate grapes, you are subject to water rationing. ☺ You are subject to water rationing if you own more than 50 acres and cultivate grapes.
  Contrary to the popular notion, which is not a more elegant way to say that. The two words are not interchangeable, and the choice is not a matter of style—following this rule is a right-or-wrong choice. Which is a pronoun that introduces nonessential information. Use a comma before a which clause. If a comma won’t work, then you should be using that. ➦ Reminder: f you delete the words in a which clause, the remaining words should still form a full sentence. That is a pronoun used to introduce essential information. Do not use a comma before that.
  Adjectives and adverbs are closely related in their forms and use, but do not confuse the two. When you want to modify a noun or pronoun, use an adjective. When you want to modify a verb, an adjective, or an adverb, use an adverb. George smells bad. ➦ Bad is an adjective describing George; that is, George needs a bath. George smells badly. ➦ Badly is an adverb describing smells; that is, George’s nose does not work well.
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A Man and His Watch: Omega Seamaster 1957 and Speedmaster FOIS

Two of my favorite Omegas, a 60th anniversary Seamaster 1957 and Speedmaster FOIS


My first watch was a Timex with Eeyore from Winnie the Pooh picture on the dial, paired with a grey leather band. It cost about $20 (non-inflation adjusted with current exchange rate) back when I was around ten years old in 2004, which was not a insignificant sum for me and my parents, to whom I nagged for a while before they caved in and bought me one. I forgot what happened to that watch, but I have been wearing a quartz-powered Timex ever since until my sophomore year in high school, when one day my mother took me to a exhibition in the city and bought me a Tag Heuer Aquaracer 300m with a blue dial. It was certainly a slippery slope, as in 2012, after my father purchased a Rolex GMT-Master II, I began to be fascinated by complications and higher-end brands, with Omega as the logical choice.

First, Omega is reasonably priced relative to the more well-known and flashier counterpart, Rolex. Back in 2013, a Seamaster GMT cost as much as $4000 while GMT Master II was more than double of that for the Stainless-Steel version. Second, the company seem to be more innovative in its product launch and core technology. Although the basic Seamaster GMT was still using a modified ETA movement in 2013, it has a co-axial escapement, which allow for improved precision and less frequent maintenance. The company had also been developing in-house movement for all its line and has since replaced most of its movement, except for the Speedmaster line that retains calibre 1861. Lastly, they have been doing great on marketing, from featuring Seamaster in Bond movies since 1995 to supporting the Olympic games, which resonates well with the youngster.

Over the years, I have added few more diver (Seamaster), chronograph (Speedmaster, Zenith), and dress (Reverso, Datejust) watches from different brands, but the Seamaster and Speedmaster have somehow managed to be on my wrist 75% of the time. It is versatile and rugged enough for me not to worry on getting it scratched, a feeling I do not have when wearing the Reverso, for example. Some readers have been asking me to compare these two watches together for some time, as they are unique in their 39mm size compared to the original Seamaster (41mm) and Speedmaster (42mm). In this post, I am going to share some of my thoughts on these two watches and highlight what differentiate them from the regular Seamaster and Speedmaster series. This is not a full review, so do not expect it to be thorough.

39mm Version of Omega Seamaster and Speedmaster Line

The Case and Dial

The Seamaster pictured is a 60th anniversary edition of the 1957 Seamaster 300 and limited to 3.557 pieces in production (3000 is being sold separately and 557 pieces sold as a “trilogy” bundle with a Speedmaster and Railmaster). The case and links are both brushed and polished, with the hand and dial featuring faux patina emitting bright, green luminova in the dark. Contrary to the traditional uni-directional bezel, Seamaster 1957 bezel could be rotated in both directions, allowing it to be used as a time marker or even a second time zone.

Meanwhile, the Speedmaster pictured is the “First Omega in Space” or Wally Schira edition of the Speedmaster line. It is a numbered edition, which is different from limited edition, as there is no cap on how many watches could be produced by Omega. I think the company originally thought this edition to be a nice complement to the original 42mm Speedmaster and decided to take a “wait and see” mode to gauge the demand for the watch, before deciding on their marketing strategy. As with regular chronographs, it featured small seconds dial, 30-minute recorder and 12-hour recorder, aside from the main chronograph hand. The bezel features regular tachymeter denoting the speed in Km/hour.

The Original CK2998 is One of the Most Famous Watch in History

The Seamaster 1957 is originally paired with a brushed and polished bracelet, while the Speedmaster FOIS comes with a brown leather strap. Although both watches have 19mm lug, the bracelet in Seamaster 1957 is not compatible for use in the FOIS, causing headache among fans who must scour at old Omega bracelet and end-piece. However, recently Uncle Seiko has manufactured a beautiful flat link bracelet that fit Speedmaster FOIS perfectly and at a reasonable price, which I have used for a month prior to this post.  

Having used both watches for an extended time, 3 years for the Speedmaster FOIS and 2 years for the Seamaster 1957, I noticed that the Seamaster is noticeably heavier and has a more solid feeling in it. It is also noteworthy to mention that the former is rated for only 50 meters water-resistance, while the later is designed to survive up to 300 meters. Although many people have swam with a Speedmaster with no problem, I personally hesitate to do so and would advised against it after reading cases of fogging after submerging from the water. However, I have been more than once caught in a heavy rain with my Speedmaster and notice no issue whatsoever afterwards.

The case back of both watches are also unique in the sense that Omega could have use a transparent one to show the movement, as in the original Speedmaster and Seamaster 300m GMT, but decided to go against it. Instead, both watches feature a seahorse logo (embossed in the Speedmaster case) that ties them back to their respective history.

Finding a watch that 1) I like, 2) I could afford, and 3) fit me well is difficult. I have a relatively small wrist, measured about 6.3”, meaning that a 41mm watch often looks too big and unbalanced on my wrist. Prior to the 1957 Seamaster, I had a 41mm Seamaster 300 that looks very similar but is noticeably bigger. Even after removing all the bracelet links to a minimum, it is still about 0.5” larger for my wrist. That is the reason I am very excited when Omega announced a 39mm Seamaster, albeit at a higher MRSP. Arguably, the smaller size of 1957 Seamaster and Speedmaster FOIS fit my wrist much better than another diver or chronograph.

Movement and Accuracy

Inside the Seamaster 1957 is a new Master Chronometer 8806 movement. Currently, this is the most advanced automatic movement Omega has installed in their watches, featuring 1.5 tesla anti-magnetic movement, +/- 2 seconds precision per day, and 55 hours power reserve on an automatic movement. The real-world precision is impressive, at less than +/- 10 seconds per month.

The Speedmaster FOIS housed 1861 calibre movement, which Omega has been using for decades after retiring its famous 321 calibre. The movement is not COSC certified and accuracy is much lower than more modern calibre. My copy runs +/- 10 seconds per day and sometimes deviate up to 2 minutes in a month. Being a manual-winding movement, the Speedmaster has up to 48 hours power reserve and requires 40 to 50 full winding every day.

The bottom line is that both watches housed an impressive movement, although the Seamaster wins hands down in this scenario. But acknowledging that the Speedmaster FOIS is a manual winding watch, the accuracy is probably not an issue for majority of collectors, as most of us probably rotate between 2-3 watches in a month anyway.

Price and Value

At the time of the writing, Omega MSRP for Seamaster 1957 and Speedmaster FOIS are US$ 7.000 and US$ 5.300, respectively. For comparison, Rolex Submariner MSRP is at US$7.500 and Daytona is at US$13.150. Meanwhile, Breitling Navitimer Chronograph is being advertised at US$ 8.680.

The Seamaster 1957 is on the higher price range of the Seamaster line, but considering the new and upgraded movement, and limited-edition series, the price point is not outrageous. However, I would not consider the watch as a success for Omega either. Currently there are many new and second hand Seamaster 1957 being advertised online at $6.500-7.500 range, meaning that despite being available for only 3.557 pieces, the demand is not very high. I am guessing that for a $500 difference, many first-time buyers are tilted to Rolex Submariner instead, which has a higher brand recognition.

The Speedmaster FOIS, however, is a steal relative to chronographs from other brands, which could be bought at as low as US$4.350 from watch dealers. There are few watches with 1) history, 2) brand recognition, 3) quality/finish could be purchased in the $4.000 price range, making it a perfect entry for beginners.

In 2020, Omega launched another flagship Speedmaster in 39mm with the famous 321 calibre, priced at sky-high US$14.100. I understand the lure and mythical presence of the 321 calibre, but personally I think that Omega has overplayed their hands on this one. At such a high price point, I believe they are not maximizing their profit potential (price x volume) and driving away collectors who would have bought them at US$8.000-9.000 range. Many said that this is Omega’s answer to Rolex Daytona. However, the problem is that there is no cheaper version of Daytona, but there is plenty of options for Speedmaster. Unless Omega start rising their MRSP for the regular 42mm Speedmaster and the FOIS, I think it would be hard for them to sell the 321 calibre as the price differences are just too high for such a similar model. For a budget of US$14.100, I would rather pick up Seamaster 1957 (US 7.000), Speedmaster FOIS (US$ 4.350) and took a week-long vacation in Cancun.

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Book Key Points: Capitalism, Socialism, and Democracy

The purpose of the compilation of quotes below is not for readers to skip reading the book, but rather to remind readers of the key points outlined in the classic text by Joseph Schumpeter. The book highlights reasoning behind the tendency for mature capitalism to slowly drift toward socialism, and whether democracy could work well within a socialist framework.

We always plan too much and always think too little. We resent a call to thinking and hate unfamiliar argument that does not tally with what we already believe or would like to believe.
  The economic interpretation of history does not mean that men are, consciously or unconsciously, wholly or primarily, actuated by economic motives. On the contrary, the explanation of the role and mechanism of non-economic motives and the analysis of the way in which social reality mirrors itself in the individual psyches is an essential element of the theory and one of its most significant contributions.
  What the theory really says may be put into two propositions: (1)The forms or conditions of production are the fundamental determinant of social structures which in turn breed attitudes, actions and civilizations. Marx illustrates his meaning by the famous statement that the “hand-mill” creates feudal, and the “steam-mill,” capitalist societies. This stresses the technological element to a dangerous extent, but may be accepted on the understanding that mere technology is not all of it. Popularizing a little and recognizing that by doing so we lose much of the meaning, we may say that it is our daily work which forms our minds, and that it is our location within the productive process which determines our outlook on things—or the sides of things we see—and the social elbowroom at the command of each of us. (2) The forms of production themselves have a logic of their own; that is to say, they change according to necessities inherent in them so as to produce their successors merely by their own working. To illustrate by the same Marxian example: the system characterized by the “hand-mill” creates an economic and social situation in which the adoption of the mechanical method of milling becomes a practical necessity that individuals or groups are powerless to alter. The rise and working of the “steam-mill” in turn creates new social functions and locations, new groups and views, which develop and interact in such a way as to outgrow their own frame. Here, then, we have the propeller which is responsible first of all for economic and, in consequence of this, for any other social change, a propeller the action of which does not itself require any impetus external to it.
  As we shall see presently, Marx tries to show how in that class war capitalists destroy each other and eventually will destroy the capitalist system too. He also tries to show how the ownership of capital leads to further accumulation. But this way of arguing as well as the very definition that makes the ownership of something the constituent characteristic of a social class only serves to increase the importance of the question of “primitive accumulation,” that is to say, of the question how capitalists came to be capitalists in the first instance or how they acquired that stock of goods which according to the Marxian doctrine was necessary in order to enable them to start exploiting.
  Supernormal intelligence and energy account for industrial success and in particular for the founding of industrial positions in nine cases out of ten. And precisely in the initial stages of capitalism and of every individual industrial career, saving was and is an important element in the process though not quite as explained in classic economics. It is true that one does not ordinarily attain the status of capitalist (industrial employer) by saving from a wage or salary in order to equip one’s factory by means of the fund thus assembled. The bulk of accumulation comes from profits and hence presupposes profits—this is in fact the sound reason for distinguishing saving from accumulating. The means required in order to start enterprise are typically provided by borrowing other people’s savings, the presence of which in many small puddles is easy to explain or the deposits which banks create for the use of the would-be entrepreneur. Nevertheless, the latter does save as a rule: the function of his saving is to raise him above the necessity of submitting to daily drudgery for the sake of his daily bread and to give him breathing space in order to look around, to develop his plans and to secure cooperation.
  Both Ricardo and Marx say that the value of every commodity is (in perfect equilibrium and perfect competition) proportional to the quantity of labor contained in the commodity, provided this labor is in accordance with the existing standard of efficiency of production (the “socially necessary quantity of labor”). Both measure this quantity in hours of work and use the same method in order to reduce different qualities of work to a single standard.
  where capital goods such as plant, machinery and raw materials are used in the production of a commodity, this commodity will sell at a price which will yield a net return to the owner of those capital goods. He realized that this fact has something to do with the period of time that elapses between the investment and the emergence of salable products and that it will enforce deviations of the actual values of these from proportionality to the man-hours “contained” in them—including the man-hours that went into the production of the capital goods themselves—whenever these periods are not the same in all industries.
  exploitation did not arise from individual situations occasionally and accidentally; but that it resulted from the very logic of the capitalist system, unavoidably and quite independently of any individual intention.
  The brain, muscles and nerves of a laborer constitute, as it were, a fund or stock of potential labor (Arbeitskraft, usually translated not very satisfactorily by labor power). This fund or stock Marx looks upon as a sort of substance that exists in a definite quantity and in capitalist society is a commodity like any other. We may clarify the thought for ourselves by thinking of the case of slavery: Marx’s idea is that there is no essential difference, though there are many secondary ones, between the wage contract and the purchase of a slave—what the employer of “free” labor buys is not indeed, as in the case of slavery, the laborers themselves but a definite quota of the sum total of their potential labor.
  This constitutes the value of that stock, and if he sells parts of it—expressed in days or weeks or years—he will receive wages that correspond to the labor value of these parts, just as a slave trader selling a slave would in equilibrium receive a price proportional to the total number of those labor hours.
  Moreover, it can be shown that perfectly competitive equilibrium cannot exist in a situation in which all capitalist-employers make exploitation gains. For in this case they would individually try to expand production, and the mass effect of this would unavoidably tend to increase wage rates and to reduce gains of that kind to zero. It would no doubt be possible to mend the case somewhat by appealing to the theory of imperfect competition, by introducing friction and institutional inhibitions of the working of competition, by stressing all the possibilities of hitches in the sphere of money and credit and so on.
  saving by the capitalist class ipso facto implies a corresponding increase in real capital.11 This movement will in the first instance always occur in the variable part of total capital, the wage capital, even if the intention is to increase the constant part and in particular that part which Ricardo called fixed capital—mainly machinery.
  When discussing Marx’s theory of exploitation, I have pointed out that in a perfectly competitive economy exploitation gains would induce capitalists to expand production, or to attempt to expand it, because from the standpoint of every one of them that would mean more profit. In order to do so they would have to accumulate. Moreover the mass effect of this would tend to reduce surplus values through the ensuing rise in wage rates, if not also through an ensuing fall in the prices of products—a very nice instance of the contradictions inherent in capitalism that were so dear to Marx’s heart. And that tendency itself would, also for the individual capitalist, constitute another reason why he should feel compelled to accumulate,12 though again that would in the end make matters worse for the capitalist class as a whole. There would hence be a sort of compulsion to accumulate even in an otherwise stationary process which, as I mentioned before, could not reach stable equilibrium until accumulation had reduced surplus value to zero and thus destroyed capitalism itself.
  Possibilities of gains to be reaped by producing new things or by producing old things more cheaply are constantly materializing and calling for new investments. These new products and new methods compete with the old products and old methods not on equal terms but at a decisive advantage that may mean death to the latter. This is how “progress” comes about in capitalist society. In order to escape being undersold, every firm is in the end compelled to follow suit, to invest in its turn and, in order to be able to do so, to plow back part of its profits, i.e., to accumulate.14 Thus, everyone else accumulates.
  It is sufficient that, as we have seen, the profit of every individual plant is incessantly being threatened by actual or potential competition from new commodities or methods of production which sooner or later will turn it into a loss. So we get the driving force required and even an analogon to Marx’s proposition that constant capital does not produce surplus value—for no individual assemblage of capital goods remains a source of surplus gains forever—without having to rely on those parts of his argument which are of doubtful validity.
  Marx undoubtedly held that in the course of capitalist evolution real wage rates and the standard of life of the masses would fall in the better-paid, and fail to improve in the worst-paid, strata and that this would come about not through any accidental or environmental circumstances but by virtue of the very logic of the capitalist process.
  Ricardo’s example presents another interesting feature. He considers a firm owning a given amount of capital and employing a given number of workmen that decides to take a step in mechanization. Accordingly, it assigns a group of those workmen to the task of constructing a machine which when installed will enable the firm to dispense with part of that group. Profits may eventually remain the same (after the competitive adjustments which will do away with any temporary gain) but gross revenue will be destroyed to the exact amount of the wages previously paid to the workmen that have now been “set free.” Marx’s idea of the replacement of variable (wage) capital by constant capital is almost the exact replica of this way of putting it. Ricardo’s emphasis upon the ensuing redundancy of population is likewise exactly paralleled by Marx’s emphasis upon surplus population which term he uses as an alternative to the term “industrial reserve army.”
  “Hand in hand with this centralization, or this expropriation of many capitalists by few, develops . . . the entanglement of all nations in the net of the world market, and with this, the international character of the capitalist regime. Along with the constantly diminishing number of the magnates of capital, who usurp and monopolize all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working class, a class always increasing in numbers, and disciplined, united, organized by the very mechanism of the process of capitalist production itself. The monopoly of capital becomes a fetter upon the mode of production, which has sprung up and flourished along with it, and under it. Centralization of the means of production and socialization of labor at last reach a point where they become incompatible with their capitalist integument. This integument bursts. The knell of capitalist private property sounds. The expropriators are expropriated.”
  Is it not the most natural thing in the world to conclude that crises or depressions are due to the fact that the exploited masses cannot buy what that ever-expanding apparatus of production turns out or stands ready to turn out, and that for this and also other reasons which we need not repeat the rate of profits drops to bankruptcy level? Thus we seem indeed to land, according to which element we want to stress, at the shores of either an under-consumption or an over-production theory of the most contemptible type.
  Since, on the one hand, capitalist society cannot exist and its economic system cannot function without profits and since, on the other hand, profits are constantly being eliminated by the very working of that system, incessant effort to keep them alive becomes the central aim of the capitalist class. Accumulation accompanied by qualitative change in the composition of capital is, as we have seen, a remedy which though alleviating for the moment the situation of the individual capitalist makes matters worse in the end. So capital, yielding to the pressure of a falling rate of profits—it falls, we recall, both because constant capital increases relative to variable capital and because, if wages tend to rise and hours are being shortened, the rate of surplus value falls—seeks for outlets in countries in which there is still labor that can be exploited at will and in which the process of mechanization has not as yet gone far. Thus we get an export of capital into undeveloped countries which is essentially an export of capital equipment or of consumers’ goods to be used in order to buy labor or to acquire things with which to buy labor.3 But it is also export of capital in the ordinary sense of the term because the exported commodities will not be paid for—at least not immediately—by goods, services or money from the importing country. And it turns into colonization if, in order to safeguard the investment both against hostile reaction of the native environment—or if you please, against its resistance to exploitation—and against competition from other capitalist countries, the undeveloped country is brought into political subjection. This is in general accomplished by military force supplied either by the colonizing capitalists themselves or by their home government which thus lives up to the definition given in the Communist Manifesto: “the executive of the modern State [is] … a committee for managing the common affairs of the whole bourgeoisie.” Of course, that force will not be used for defensive purposes only. There will be conquest, friction between the capitalist countries and internecine war between rival bourgeoisies.
  So far as colonial expansion is prompted by a falling rate of profit in the capitalist countries, it should occur in the later stages of capitalist evolution—Marxists in fact speak of imperialism as a stage, preferably the last stage, of capitalism. Hence it would coincide with a high degree of concentration of capitalist control over industry and with a decline of the type of competition that characterized the times of the small or medium-sized firm.
  The proposition that many protective duties owe their existence to the pressure of large concerns that desire to use them for the purpose of keeping their prices at home above what they otherwise would be, possibly in order to be able to sell more cheaply abroad, is a platitude but correct, although no tariff was ever wholly or even mainly due to this particular cause. It is the Marxian synthesis that makes it inadequate or wrong. If our ambition is simply to understand all the causes and implications of modern protectionism, political, social and economic, then it is inadequate. For instance, the consistent support given by the American people to protectionist policy, whenever they had the opportunity to speak their minds, is accounted for not by any love for or domination by big business, but by a fervent wish to build and keep a world of their own and to be rid of all the vicissitudes of the rest of the world.
  The attitudes of capitalist groups toward the policy of their nations are predominantly adaptive rather than causative, today more than ever. Also, they hinge to an astonishing degree on short-run considerations equally remote from any deeply laid plans and from any definite “objective” class interests.
  As has been stated before, all this means is that by virtue of its very logic capitalist evolution tends to destroy the capitalist and to produce the socialist order of things.
  Marx himself, while very wisely refraining from describing socialist society in detail, emphasized conditions of its emergence: on the one hand, the presence of giant units of industrial control—which, of course, would greatly facilitate socialization—and, on the other hand, the presence of an oppressed, enslaved, exploited, but also very numerous, disciplined, united and organized proletariat. This suggests much about the final battle that is to be the acute stage of the secular warfare between the two classes which will then be arrayed against each other for the last time. It also suggests something about what is to follow; it suggests the idea that the proletariat as such will “take over” and, through its dictatorship, put a stop to the “exploitation of man by man” and bring about classless society.
  Thus there are prolonged periods of rising and of falling prices, interest rates, employment and so on, which phenomena constitute parts of the mechanism of this process of recurrent rejuvenation of the productive apparatus.
  The difficulties do not seem to consist so much in the lack of surplus sufficient to blot out the darkest hues in the picture: they consist, on the one hand, in the fact that the unemployment figure has been increased by anti-capitalist policies beyond what it need have been in the thirties and, on the other hand, in the fact that public opinion as soon as it becomes at all alive to the duty in question, immediately insists on economically irrational methods of financing relief and one lax and wasteful methods of administering it. Much the same argument applies to the future—and to a great extent the present—possibilities held out by capitalist evolution for the care of the aged and sick, for education and hygiene and so on. Also, an increasing number of commodities might reasonably be expected, from the standpoint of the individual household, to pass out of the class of economic goods and to be available practically up to the satiety point. This could be brought about either by arrangement between public agencies and producing concerns or by nationalization of municipalization, gradual progress with which would of course be a feature of the future development even of an otherwise unfettered capitalism.
  From the standpoint of the economic analyst, the chief merit of the classics consists in their dispelling, along with many other gross errors, the naïve idea that economic activity in capitalist society, because it turns on the profit motive, must by virtue of that fact alone necessarily run counter to the interests of consumers; or, to put it differently, that moneymaking necessarily deflects producing from its social goal; or, finally, that private profits, both in themselves and through the distortion of the economic process they induce, are always a net loss to all excepting those who receive them and would therefore constitute a net gain to be reaped by socialization.
  Still it can be shown, within the general assumptions of the Marshall-Wicksell analysis, that firms which cannot by their own individual action exert any influence upon the price of their products or of the factors of production they employ—so that there would be no point in their weeping over the fact that any increase in production tends to decrease the former and to increase the latter—will expand their output until they reach the point at which the additional cost that must be incurred in order to produce another small increment of product (marginal cost) just equals the price they can get for that increment, i.e., that they will produce as much as they can without running into loss. And this can be shown to be as much as it is in general “socially desirable” to produce.
  Neither Marshall and Wicksell nor the classics saw that perfect competition is the exception and that even if it were the rule there would be much less reason for congratulation than one might think.
  And as regards practically all the finished products and services of industry and trade, it is clear that every grocer, every filling station, every manufacturer of gloves or shaving cream or handsaws has a small and precarious market of his own which he tries—must try—to build up and to keep by price strategy, quality strategy—“product differentiation”—and advertising. Thus we get a completely different pattern which there seems to be no reason to expect to yield the results of perfect competition and which fits much better into the monopolistic schema. In these cases we speak of Monopolistic Competition.
  In the general case of oligopoly there is in fact no determinate equilibrium at all and the possibility presents itself that there may be an endless sequence of moves and countermoves, an indefinite state of warfare between firms. It is true that there are many special cases in which a state of equilibrium theoretically exists. In the second place, even in these cases not only is it much harder to attain than the equilibrium in perfect competition, and still harder to preserve, but the “beneficial” competition of the classic type seems likely to be replaced by “predatory” or “cutthroat” competition or simply by struggles for control in the financial sphere. These things are so many sources of social waste, and there are many others such as the costs of advertising campaigns, the suppression of new methods of production (buying up of patents in order not to use them) and so on. And most important of all: under the conditions envisaged, equilibrium, even if eventually attained by an extremely costly method, no longer guarantees either full employment or maximum output in the sense of the theory of perfect competition. It may exist without full employment; it is bound to exist, so it seems, at a level of output below that maximum mark, because profit-conserving strategy, impossible in conditions of perfect competition, now not only becomes possible but imposes itself.
  If we list the items that enter the modern workman’s budget and from 1899 on observe the course of their prices not in terms of money but in terms of the hours of labor that will buy them—i.e., each year’s money prices divided by each year’s hourly wage rates—we cannot fail to be struck by the rate of the advance which, considering the spectacular improvement in qualities, seems to have been greater and not smaller than it ever was before.
  Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary. And this evolutionary character of the capitalist process is not merely due to the fact that economic life goes on in a social and natural environment which changes and by its change alters the data of economic action; this fact is important and these changes (wars, revolutions and so on) often condition industrial change, but they are not its prime movers. Nor is this evolutionary character due to a quasi-automatic increase in population and capital or to the vagaries of monetary systems of which exactly the same thing holds true. The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.
  This process of Creative Destruction is the essential fact about capitalism.
  In order to put the first into the strongest possible light, let us assume that an industry which refuses to reduce prices in recession goes on selling exactly the same quantity of product which it would sell if it had reduced them. Buyers are therefore out of pocket by the amount to which the industry profits from the rigidity. If these buyers are the kind of people who spend all they can and if the industry or those to whom its net returns go does not spend the increment it gets but either keeps it idle or repays bank loans, then total expenditure in the economy may be reduced thereby. If this happens, other industries or firms may suffer and if thereupon they restrict in turn, we may get a cumulation of depressive effects. In other words, rigidity may so influence the amount and distribution of national income as to decrease balances or to increase idle balances or, if we adopt a popular misnomer, savings. Such a case is conceivable. But the reader should have little difficulty in satisfying himself111 that its practical importance, if any, is very small.
  Progress entails, as we have seen, destruction of capital values in the strata with which the new commodity or method of production competes. In perfect competition the old investments must be adapted at a sacrifice or abandoned; but when there is no perfect competition and when each industrial field is controlled by a few big concerns, these can in various ways fight the threatening attack on their capital structure and try to avoid losses on their capital accounts; that is to say, they can and will fight progress itself.
  So far as the use of the old machines saves future costs as compared with the immediate introduction of the new methods, the remainder of their service value is of course an element of the decision for both the capitalist and the socialist manager; otherwise bygones are bygones for both of them and any attempt to conserve the value of past investment would conflict as much with the rules following from the profit motive as it would conflict with the rules set for the behavior of the socialist manager.
  It is however not true that private firms owning equipment the value of which is endangered by a new method which they also control—if they do not control it, there is no problem and no indictment —will adopt the new method only if total unit cost with it is smaller than prime unit cost with the old one, or if the old investment has been completely written off according to the schedule decided on before the new method presented itself. For if the new machines when installed are expected to outlive the rest of the period previously set for the use of the old machines, their discounted remainder value as of that date is another asset to be taken account of. Nor is it true, for analogous reasons, that a socialist management, if acting rationally, would always and immediately adopt any new method which promises to produce at smaller total unit costs or that this would be to the social advantage.
  Even railroads and power and light concerns had first to create the demand for their services and, when they had done so, to defend their market against competition. Outside the field of public utilities, the position of a single seller can in general be conquered—and retained for decades—only on the condition that he does not behave like a monopolist. Short-run monopoly will be touched upon presently.
  Even if the opportunity to set monopolist prices were the sole object, the pressure of the improved methods or of a huge apparatus would in general tend to shift the point of the monopolist’s optimum toward or beyond the competitive cost price in the above sense, thus doing the work—partly, wholly, or more than wholly—of the competitive mechanism,20 even if restriction is practiced and excess capacity is in evidence all along. Of course if the methods of production, organization and so on are not improved by or in connection with monopolization as is the case with an ordinary cartel, the classical theorem about monopoly price and output comes into its own again.21 So does another popular idea, viz., that monopolization has a soporific effect. For this, too, it is not difficult to find examples. But no general theory should be built upon it. For, especially in manufacturing industry, a monopoly position is in general no cushion to sleep on. As it can be gained, so it can be retained only by alertness and energy. What soporific influence there is in modern business is due to another cause that will be mentioned later.
  As a matter of fact, perfect competition is and always has been temporarily suspended whenever anything new is being introduced—automatically or by measures devised for the purpose—even in otherwise perfectly competitive conditions.
  traditional theory is correct in holding that profits above what is necessary in each individual case to call forth the equilibrium amount of means of production, entrepreneurial ability included, both indicate and in themselves imply net social loss and that business strategy that aims at keeping them alive is inimical to the growth of total output.
  Since the capitalist process always has been geared to a large amount of current investment, even partial elimination of it would suffice to make plausible the forecast that the process is going to flop. This particular line in the Marxist argument no doubt seems to agree well not only with some outstanding facts of the past decade—unemployment, excess reserves, gluts in money markets, unsatisfactory margins of profits, stagnation of private investment—but also with several non-Marxist interpretations. There is surely no such gulf between Marx and Keynes as there was between Marx and Marshall or Wicksell. Both the Marxist doctrine and its non-Marxist counterpart are well expressed by the self-explanatory phrase that we shall use: the theory of vanishing investment opportunity.2
  The main reasons for holding that opportunities for private enterprise and investment are vanishing are these: saturation, population, new lands, technological possibilities, and the circumstance that many existing investment opportunities belong to the sphere of public rather than of private investment.
  Technological possibilities are an uncharted sea. We may survey a geographical region and appraise, though only with reference to a given technique of agricultural production, the relative fertility of individual plots. Given that technique and disregarding its possible future developments, we may then imagine (though this would be wrong historically) that the best plots are first taken into cultivation, after them the next best ones and so on. At any given time during this process it is only relatively inferior plots that remain to be exploited in the future. But we cannot reason in this fashion about the future possibilities of technological advance. From the fact that some of them have been exploited before others, it cannot be inferred that the former were more productive than the latter. And those that are still in the lap of the gods may be more or less productive than any that have thus far come within our range of observation.
  capitalism—and not merely economic activity in general—has after all been the propelling force of the rationalization of human behavior.
  The capitalist process rationalizes behavior and ideas and by so doing chases from our minds, along with metaphysical belief, mystic and romantic ideas of all sorts. Thus it reshapes not only our methods of attaining our ends but also these ultimate ends themselves.
  The capitalist process, by substituting a mere parcel of shares for the walls of and the machines in a factory, takes the life out of the idea of property. It loosens the grip that once was so strong—the grip in the sense of the legal right and the actual ability to do as one pleases with one’s own; the grip also in the sense that the holder of the title loses the will to fight, economically, physically, politically, for “his” factory and his control over it, to die if necessary on its steps. And this evaporation of what we may term the material substance of property—its visible and touchable reality—affects not only the attitude of holders but also that of the workmen and of the public in general. Dematerialized, defunctionalized and absentee ownership does not impress and call forth moral allegiance as the vital form of property did. Eventually there will be nobody left who really cares to stand for it—nobody within and nobody without the precincts of the big concerns.
  Secular improvement that is taken for granted and coupled with individual insecurity that is acutely resented is of course the best recipe for breeding social unrest.
  politics is a profession which evolves interests of its own— interests that may clash with as well as conform to the interests of the groups that a man or party “represents.”
  As soon as men and women learn the utilitarian lesson and refuse to take for granted the traditional arrangements that their social environment makes for them, as soon as they acquire the habit of weighing the individual advantages and disadvantages of any prospective course of action—or, as we might also put it, as soon as they introduce into their private life a sort of inarticulate system of cost accounting —they cannot fail to become aware of the heavy personal sacrifices that family ties and especially parenthood entail under modern conditions and of the fact that at the same time, excepting the cases of farmers and peasants, children cease to be economic assets. These sacrifices do not consist only of the items that come within the reach of the measuring rod of money but comprise in addition an indefinite amount of loss of comfort, of freedom from care, and opportunity to enjoy alternatives of increasing attractiveness and variety—alternatives to be compared with joys of parenthood that are being subjected to a critical analysis of increasing severity.
  Thus the same economic process that undermines the position of the bourgeoisie by decreasing the importance of the functions of entrepreneurs and capitalists, by breaking up protective strata and institutions, by creating an atmosphere of hostility, also decomposes the motor forces of capitalism from within.
  the bloodless concept of perfect competition that economic theory has framed for its purposes turns on whether or not individual firms can, by their single-handed action, influence the prices of their products and of their cost factors. If they cannot—that is, if each firm is a mere drop in an ocean and therefore has to accept the prices that rule in the market—the theorist speaks of perfect competition. And it can be shown that in this case the mass effect of the passive reaction of all individual firms will result in market prices and volumes of output displaying certain formal properties that are similar to those of the indices of economic significance and volumes of output in our blueprint of a socialist economy. However, in all that really matters—in the principles governing the formation of incomes, the selection of industrial leaders, the allocation of initiative and responsibility, the definition of success and failure—in everything that constitutes the physiognomy of competitive capitalism, the blueprint is the very opposite of perfect competition and much further removed from it than from the big-business type of capitalism.
  we can readily convince ourselves by observing that one of the most important difficulties of running a business—the difficulty which absorbs most of the energy of a successful business leader —consists in the uncertainties surrounding every decision. A very important class of these consists in turn in the uncertainties about the reaction of one’s actual and potential competitors and about how general business situations are going to shape. Although other classes of uncertainties would no doubt persist in a socialist commonwealth, these two can reasonably be expected to vanish almost completely. The managements of socialized industries and plants would be in a position to know exactly what the other fellows propose to do and nothing would prevent them from getting together for concerted action.13 The central board could, and to a certain extent would unavoidably, act as a clearing house of information and as a coordinator of decisions—at least as much as an all-embracing cartel bureau would.
  It is often claimed that the socialist plan, by removing economic care from the shoulders of the individual, will release incalculable cultural energies that now go to waste in the struggle for daily bread. To some extent this is true—any “planned” society may do that as, for other reasons and in other respects, it also may smother cultural possibilities. It might be objected that public authorities as we know them are hardly up to the responsibility of discovering and nursing talent to the stage of fruition, and that there is no sound reason to believe that they would have appreciated Van Gogh any sooner than capitalist society did. But this objection misses the point. For public authority need not go as far as this. All that is necessary is that Van Gogh gets his “income” as everyone else does and that he is not worked too hard; this would suffice in any normal case—though, when I come to think of it, I am no longer sure whether it would have sufficed in the case of Van Gogh—to give the necessary opportunity for the assertion of creative ability.
  Even if any conceivable socialist economy were sure to be in our sense less efficient than any conceivable commercial economy, the majority of people—all in fact for whom the typical socialist cares—might still be “better off” or “happier” or “more content” in the former than in the latter. My first and main reply is that relative efficiency retains independent meaning even in such cases and that in all cases it will be an important consideration. But secondly I do not think that we lose much by adopting a criterion that neglects those aspects. This however is a very debatable matter on which it is just as well to be a little more explicit.
  One element of these costs should be mentioned specifically. It consists in the absorption of ability in merely protective activities. A considerable part of the total work done by lawyers goes into the struggle of business with the state and its organs. It is immaterial whether we call this vicious obstruction of the common good or defense of the common good against vicious obstruction. In any case the fact remains that in socialist society there would be neither need nor room for this part of legal activity. The resulting saving is not satisfactorily measured by the fees of the lawyers who are thus engaged. That is inconsiderable. But not inconsiderable is the social loss from such unproductive employment of many of the best brains. Considering how terribly rare good brains are, their shifting to other employments might be of more than infinitesimal importance.
  The friction or antagonism between the private and the public sphere was intensified from the first by the fact that, ever since the princes’ feudal incomes ceased to be of major importance, the state has been living on a revenue which was being produced in the private sphere for private purposes and had to be deflected from these purposes by political force.
  For instance, in a socialist society nobody could possibly doubt that what a nation gets out of international trade is the imports and that the exports are the sacrifice which must be undergone in order to procure the imports, whereas in commercial society this common-sense view is as a rule completely hidden from the man in the street who therefore cheerfully supports policies that are to his disadvantage.
  Marxian proposition that the economic process tends to socialize itself—and also the human soul. By this we mean that the technological, organizational, commercial, administrative and psychological prerequisites of socialism tend to be fulfilled more and more. Let us again visualize the state of things which looms in the future if that trend be projected. Business, excepting the agrarian sector, is controlled by a small number of bureaucratized corporations. Progress has slackened and become mechanized and planned. The rate of interest converges toward zero, not temporarily only or under the pressure of governmental policy, but permanently owing to the dwindling of investment opportunities. Industrial property and management have become depersonalized—ownership having degenerated to stock and bond holding, the executives having acquired habits of mind similar to those of civil servants. Capitalist motivation and standards have all but wilted away. The inference as to the transition to a socialist régime in such fullness of time is obvious. But two points deserve to be mentioned. First, different people—different socialists even—will differ from one another both in the degree of approximation to that state which will be satisfactory to them and in their diagnosis of the degree of approximation which has been actually reached at any given time.
  Second, even supposing that an unmistakable state of maturity be reached, transition will still require distinct action and still present a number of problems. The capitalist process shapes things and souls for socialism. In the limiting case it might do this so completely that the final step would not be more than a formality. But even then the capitalist order would not of itself turn into the socialist order; such a final step, the official adoption of socialism as the community’s law of life, would still have to be taken, say, in the form of a constitutional amendment. In practice however people will not wait for the limiting case to emerge. Nor would it be rational for them to do so, for maturity may to all intents and purposes be reached at a time when capitalist interests and attitudes have not yet completely vanished from every nook and cranny of the social structure. And then the passing of the constitutional amendment would be more than a formality.
  First the banking apparatus of England is no doubt quite ripe for socialization. The Bank of England is little more than a treasury department, in fact less independent than a well-ordered socialist community may well wish its financial organ to be. In commercial banking, concentration and bureaucratization seem to have done full work. The big concerns could be made to absorb as much of independent banking as there is left to absorb and then be merged with the Bank of England into the National Banking Administration, which could also absorb savings banks, building societies and so on without any customer becoming aware of the change except from his newspaper. The gain from rationalizing coordination of services might be substantial. From the socialist standpoint, there would also be a gain in the shape of an increase in the government’s influence on non-nationalized sectors. Second, the insurance business is an old candidate for nationalization and has to a large extent become mechanized by now. Integration with at least some of the branches of social insurance may prove feasible; selling costs of policies could be considerably reduced and socialists might again rejoice in the access of power that control over the funds of insurance companies would give to the state. Third, few people would be disposed to make great difficulties over railroads or even over trucking. Inland transportation is in fact the most obvious field for successful state management. Fourth, nationalization of mining, in particular coal mining, and of the coal and tar products down to and including benzol, and also of the trade in coal and in those products might even result in an immediate gain in efficiency and prove a great success if labor problems can be dealt with satisfactorily. From the technological and commercial standpoint, the case seems clear. But it seems equally clear that, private enterprise having been active in the chemical industry, no such success can with equal confidence be expected from an attempt to go beyond the limit indicated. Fifth, the nationalization of the production, transmission and distribution of electric current being substantially completed already, all that remains to be said under this head is that the electro-technical industry is a typical instance of what may still be expected from private enterprise—which shows how little sense, economically speaking, there is in standing either for general socialization or against any. But the case of power production also shows the difficulty of working a socialized industry for profit which nevertheless would be an essential condition of success if the state is to absorb so great a part of the nation’s economic life and still fulfill all the tasks of the modern state. Sixth, socialization of the iron and steel industry will be felt to be a much more controversial proposition than any made so far. But this industry has certainly sown its wild oats and can be “administered” henceforth—the administration including, of course, a huge research department. Some gains would result from coordination. And there is hardly much danger of losing the fruits of any entrepreneurial impulses. Seventh, with the possible exception of the architects’ share in the matter, the building and building material industries could, I believe, be successfully run by a public body of the right kind. So much of it already is regulated, subsidized and controlled in one way or another that there even might be a gain in efficiency—more than enough, perhaps, to compensate for the sources of loss that might be opened up.
  No doubt one might conceivably hold that, however criminal or stupid the thing that democratic procedure may strive to accomplish in a given historical pattern, the will of the people must prevail, or at all events that it must not be opposed except in the way sanctioned by democratic principles. But it seems much more natural in such cases to speak of the rabble instead of the people and to fight its criminality or stupidity by all the means at one’s command.
  The reduced sense of responsibility and the absence of effective volition in turn explain the ordinary citizen’s ignorance and lack of judgment in matters of domestic and foreign policy which are if anything more shocking in the case of educated people and of people who are successfully active in non-political walks of life than it is with uneducated people in humble stations.
  What we are confronted with in the analysis of political processes is largely not a genuine but a manufactured will. And often this artefact is all that in reality corresponds to the Volonté generate of the classical doctrine. So far as this is so, the will of the people is the product and not the motive power of the political process.
  Fifth, our theory seems to clarify the relation that subsists between democracy and individual freedom. If by the latter we mean the existence of a sphere of individual self-government the boundaries of which are historically variable—no society tolerates absolute freedom even of conscience and of speech, no society reduces that sphere to zero—the question clearly becomes a matter of degree. We have seen that the democratic method does not necessarily guarantee a greater amount of individual freedom than another political method would permit in similar circumstances. It may well be the other way round. But there is still a relation between the two. If, on principle at least, everyone is free to compete for political leadership6 by presenting himself to the electorate, this will in most cases though not in all mean a considerable amount of freedom of discussion for all. In particular it will normally mean a considerable amount of freedom of the press. This relation between democracy and freedom is not absolutely stringent and can be tampered with. But, from the standpoint of the intellectual, it is nevertheless very important. At the same time, it is all there is to that relation.
  Between socialism as we defined it and democracy as we defined it there is no necessary relation: the one can exist without the other. At the same time there is no incompatibility: in appropriate states of the social environment the socialist engine can be run on democratic principles.
  Democracy means only that the people have the opportunity of accepting or refusing the men who are to rule them.
  Every system can stand deviating practice to a certain extent. But even the necessary minimum of democratic self-control evidently requires a national character and national habits of a certain type which have not everywhere had the opportunity to evolve and which the democratic method itself cannot be relied on to produce.
  it should be clear that the labor movement is not essentially socialist, just as socialism is not necessarily laborite or proletarian.
  socialist parties could not be advised to watch bourgeois politics in silence. Their obvious task was to criticize capitalist society, to expose the masquerade of class interests, to point out how much better everything would be in the socialist paradise and to beat up for recruits: to criticize and to organize. However, a wholly negative attitude, though quite satisfactory as a principle, would have been impossible for any party of more than negligible political importance to keep up. It would inevitably have collided with most of the real desiderata of organized labor and, if persisted in for any length of time, would have reduced the followers to a small group of political ascetics. Considering the influence that Marx’s teaching exerted, right up to 1914, on the great German party and on many smaller groups it is interesting to see how he dealt with this difficulty.
  Thus that great sociologist, the man in the street, has been right once more. He said that socialism and socialists were un-American. If I catch his meaning, it amounts pretty much to what, less succinctly, I have been trying to convey. American development practically skipped the phase of socialism which saw the career of unadulterated Marxism and of the Second International. Their essential problems were hardly understood. The attitudes appropriate to them existed only as sporadic imports. American problems and attitudes occasionally borrowed these imported articles. But that was all.
  Marx had visualized the conquest of political power as the prerequisite of socialization which was to be taken in hand immediately. This implied, however, as in fact Marx’s argument implied throughout, that the opportunity for that conquest would occur when capitalism had run its course or, to use our own phrase again, when things and souls were ripe. The breakdown he thought of was to be a breakdown of the economic engine of capitalism from internal causes.18 Political breakdown of the bourgeois world was to be a mere incident to this.
  Washington economists have veered round to recommend balanced budgets, but budgets balanced at a very high level of taxation, the taxes to be highly progressive so as to eliminate the high incomes from which the menace of saving primarily proceeds. This accords with the slogan that (owing to the saving done by the receivers of high incomes) “in modern societies, the ultimate cause of unemployment is the inequality of incomes.” Thus the high level of national income to which we have looked for the solution of a good many economic and social problems is itself made out to be the most serious problem of all. Since high income means high savings and since these savings will not be entirely offset by investment expenditure, it will not be possible for the economy to keep on that high level of income and employment— unless fiscal policy keeps it there—if indeed this high level can be reached at all.
  Normally people save with a view to some return, in money or in services of some “investment good.” It is not only that the bulk of individual savings—and, of course, practically all business savings which, in turn, constitute the greater part of total saving—is done with a specific investment purpose in view. The decision to invest precedes as a rule, and the act of investing precedes very often, the decision to save. Even in those cases in which a man saves without specific investment purpose, any delay in coming to an investment decision is punished by the loss of return for the interval. It seems to follow, first, that unless people see investment opportunities, they will not normally save and that a situation of vanishing investment opportunity is likely to be also one of vanishing saving; and, second, that whenever we observe that people display “liquidity preference,” that is to say, a desire to save unaccompanied by a desire to invest—a desire to hoard—this must be explained by special reasons and not by appeal to any psychological law postulated ad hoc.
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