Tune in to financial TV, read financial news, listen to financial radio and most of what you watch, read and hear is noise. Cable TV increased the number of channels from several to hundreds, and new media increased it from hundreds to tens of millions. More channels means more space, more space means more need for content, more need for content means more noise.
But when one takes a step back and looks at the broad sweeps of economic and financial history, then speculations about whether this manager is in or out, or this company will beat or meet or miss expectations, or what will be in this month’s ISM or GDP revision all sort of fade away, and a bigger picture emerges.
And in this big picture, only three questions really matter to long-term national prosperity. Here’s the first:
1. How Many People are There?
This is the demographic question, and unfortunately very few analysts have it in their models. It is seldom mentioned in commentary. Yes, once in a while in discussions about European and American public pension systems someone might mention some nebulous threat solvency bobbing around on some distant horizon. But people matter more than anything else, because people create wealth. Yes, there are ‘natural resources,’ but that phrase really is a misnomer. If they’re natural, they’re probably not resources; if they’re resources, they’re probably not natural.
Other than air and sunshine, everything else in our environment needs to be transformed by us in order to become a resource. At the very least, the apple must be picked to become food. As an amateur apple grower, I can tell you that we are far from Eden: in order to get even a halfway decent apple a great deal of work is needed. As Steinbeck has said, we are indeed East of Eden.
But the moment we transform it, it is no longer nature, it is artifact. Even simple resources like water have to be toted. Many ‘natural resources’ were at one time anti-resources. Oil was a pollutant oozing in the streets of Cleveland, its stinking mass shoveled and carted away by workmen until a chemist told John D. Rockefeller that it could be turned into a valuable commodity.
People do that sort of thing. And people manage to create huge sums of wealth even if they live on a rock sitting in the ocean in tiny prosperous city states like Hong Kong, Singapore and Taiwan with very little by way of natural resources, because they have something better: they have people, the unnatural resource.
Demographics is not just about pension plans. Nations need growing populations to have rapid growth. Take Japan (someone will have to.) Its stagnation over the past decade is a byword in international economics, but did you know that the growth in GDP per capita in Japan is very close to the growth of GDP per capita in the U.S.? It’s hard to get decent growth without growing both the number of units of output per capita and growing the number of capitas, too.
2. What’s Inside of Them?
People are complex clusterings of motivations centering in on a person. At the core is what is commonly called the heart, and I don’t mean cardiac muscles in the center of the chest. I mean the heart of the self. What do you believe about God, man and the world? Do you believe you should live entirely for today’s pleasures or defer gratification in the interest of future prosperity? Is virtue the true measure of mankind, or simply an arbitrary set of rules invented to keep us down? Is the sweat of current work worth the sweet of future reward?
Edward Banfield in his book The Unheavenly City argued that the principal difference between the classes was time preference. Okay, kids, one candy bar today or two candy bars tomorrow? Underclass kids choose the former, middle and upper class kids choose the latter. Ludwig von Mises and Friedrich Hayek put time preference in the center of the economic equation, a thermostat setting either toward the future or the present, expressing itself in an interest rate.
Like Hayek and Mises, Sydney Homer of Solomon Brothers and History of Interest Rates sees interest rates as an indicator of civilizational health.
But let’s call this stuff what it really is: culture, philosophy, world-view, religion. The great sociologist Peter Berger told me recently that after his long life of studying human societies he has concluded that culture is simply religion externalized into the community (more on that interview in a future column), and that not all religions/cultures have been equally conducive to economic growth. Far from it.
If this offends you, then I suggest you just deal with it. Religion is a hugely important factor in national growth and prosperity and if you have any interest in understanding which nations will and won’t prosper, you’d be better off not allowing personal views or political correctness speech code sensibilities to screen it out as a factor.
3. What’s Outside of Them?
In truth, there is a lot of overlap between question two and question three. After all, societies are the result of human interaction, so of course our individual heart and family issues come pouring out through culture and end up forming societies. In this sense, what has come to be called institutions theory in economics or in short, institutionalism, is not independent of sociology of religion. But it is a factor in its own right.
Do you get to keep what you make? Will government confiscate your property, or tax away the proceeds of the sale of your labor? Do you have control of what you own, or are there regulatory takings which render the pond on your property technically yours, but ineligible for you to tap for irrigation purposes? Do you have to pay an additional tax in order to get fair government services in the form of a bribe or coerced campaign contribution?
If you are fortunate enough to live in a nation which allows you to labor and to exchange that work for currency and not have most of it taxed or grafted away, will that currency hold its value? If not, how severe will devaluations prove to be? When you devise business plans can you count on at least some price stability or are future budgets, already murky enough, made more fallible due to fluctuations in the value of currency? Will those currency and interest rate manipulations create boom and bust cycles and how do you know whether the booms are real or bubbles?
How do you plan for a world in which legal institutions create more flux rather than more stability? Will there be a change in administration? Will there be a change in regime? Can I build for the long term when the institutions are built on a foundation of sand?
I’m convinced that in order to screen out the noise you need a filter which helps you distinguish between what is important and what’s a shiny, backlit distraction. What’s important is people; the way they think and act; and the way their society treats them. How could things possibly be otherwise?