While so many of us are watching the US from afar, ricocheting off feelings of being bewildered, amused, and concerned, others of you are caught in the “muzzle shot” of initiatives or, as the Trump team also talks about, their strategy of “flooding the zone”. So, if you are in the line of fire, how you should respond is the real question. Despite not having anything resembling a coherent strategy for the country, or a cohesive plan for implementing their incoherent strategy, what Trump administration do know is how to engage and negotiate locally, by picking off the influential weak and then systematically moving onto the next equivalent target.
We have seen Trump, and his obedient servants, pick off weak industry leaders and convert them to the new ideology. This has happened now with the largest law firms, starting with Paul, Weiss, and is now targeted at the universities, beginning with Columbia. We have also seen the most prominent tech firm leaders bow to the President and, in financial services, Goldman Sachs pledge silence. Are leaders brave only when their enemy is on the shores over 3,000 miles away?
American leadership is known for their competitive focus based on a zero-sum gain view of the world. This has always been a strength, but for today is it an achilles heal? Surely, the right response of a sector under threat is collective action. Fire a muzzle shot back and flood their zone as a group. Shift the focus to have them react and defend rather than attack. Play team chess against their game of isolating poker. We have seen the reaction when the market for US treasuries pressured Trump and he buckled. Now, every critical sector — universities, finance, pharmaceuticals, law, technology, automotive — must find a way to stand together.
Tragically, we have seen the capitulating response of the leadership of the largest legal firms, who have now committed over $1bn of pro-bono work in favour of the Administration. Do they really think they have a say on what work this will cover? Is this a Donald Trump war chest to respond to muzzle shots coming in his direction? If I were a client of one of these firms, I would either request a similar discount on fees or look for a high-performing, smaller firm that stands with their principles, beliefs in the importance of the legal system, and aligns with the standards of the profession. The Fortune 500 and all others need to pressure these firms to get back into line.
Thank God Harvard has shown leadership in its sector. All other universities should now figure out how they are going to join arms, help each other, and defeat this insurgency.
Who and how will the financial sector step up? Should you join hands with Jamie Dimon or Goldman Sachs?
For a moment, forget your market share and focus on a bigger prize – a healthy sector and a vibrant country. This will also be how you generate the long-term optimal value and legacy of your business. Oh, and I forgot to say, do something you may be proud of to tell your children and grandchildren what you did at a time of real adversity in the country.
The United States has initiated a tariff-driven economic confrontation with China, banking on its apparent strength to win. On paper, the US seems formidable: it boasts the world’s largest economy, valued at $29 trillion, with imports accounting for just 10.5% of GDP and imports from China’s only comprising 1.8% ($524 billion) of US GDP. By contrast, China’s economy stands at $19 trillion, although 27% larger than the US on a purchasing power parity basis, with exports comprising 19% of its GDP and the imports from the US representing 0.7% ($143 billion) of its GDP. So, China’s economy is more vulnerable to the tariff war; although, exports to the US are only 2.7% of China’s GDP, which is well below China’s annual GDP growth rate.
However, this initial advantage may be deceptive. The US relies heavily on critical imports from China, including minerals, semiconductors, industrial machinery and equipment, solar panel and EV batteries, pharmaceuticals, as well as consumer goods. As an example, China provides the US 73% of smartphones, 78% of laptops, and over 40% of generic drugs. In addition, China will play an important part in most of the US’ critical supply chains.
China’s Long-Term Resilience
China also depends on imports from the US, including semiconductors (some already sanctioned) and related design tools, aerospace engines, pharmaceuticals, refining technologies, LNG, soybeans, and seeds. However, unlike the US, Beijing has been implementing a multi-year strategy to reduce reliance on American goods and has already made significant progress.
China’s ability to endure short-term pain may prove decisive. They are capable at playing the long game, Beijing can afford to lose a few hands of poker while maintaining its focus on broader strategic goals. In contrast, internal pressures in the US have already tested Washington’s resolve during previous trade confrontations.
Alienating Allies: A Strategic Misstep?
One critical flaw in America’s approach is its simultaneous alienation of all allies. By employing a tariff war against all nations — who collectively account for 74% of global GDP—the US risks isolating itself in a world where China’s economic influence continues to grow. This miscalculation could ultimately undermine Washington’s ability to rally international support against Beijing.
On Wednesday, it looked like Trump temporarily backed down after significant external pressures and now appears to be trying to isolate China. If the rest of the world is smart, they won’t let Trump put the toothpaste back in the bottle and successfully isolate them. All other countries need China not only for its capabilities and what it currently produces but also to offset this reckless use of power by the US.
Who will win the tariff poker game and not just the first few hands?
The United States and China are locked in an escalating tariff war, with the latest round seeing U.S. tariffs on Chinese imports soar to 104% as of April 9, 2025. How will China respond? They have said they will not back down! What is at stake for each country?
This unprecedented move, part of President Donald Trump’s “reciprocal tariffs” strategy, has pushed the world’s two largest economies into uncharted territory. China, for its part, has vowed to retaliate “to the end”, setting the stage for a protracted conflict that could reshape global trade dynamics. But beneath the surface of tit-for-tat tariffs lies a deeper strategic clash—one that mirrors the contrasting philosophies of poker (short-term bluffs, uncertainty, and self-belief that they hold a better hand) and Go (long-term, interconnected influence). Which player might ultimately prevail?
The Games: Poker vs. Go in Geopolitical Strategy
The U.S.’s Poker Strategy
The U.S. approach mirrors poker: high-risk bets, psychological warfare, and managing incomplete information. Trump’s abrupt tariff hikes—first 10% in February 2025, then 20% in March, and now a 50% surge to reach 104%—are classic poker moves. By escalating rapidly, the U.S. aims to force China into folding (withdrawing retaliatory measures) or revealing weaknesses.
Bluffing: Trump’s threats of even higher tariffs (e.g., a proposed 50% on pharmaceuticals) keep opponents guessing.
Short-Term Leverage: The U.S. prioritizes immediate economic pain for China, betting that Beijing will capitulate before domestic industries (e.g., agriculture, tech) suffer irreversible damage.
Unpredictability: The White House’s erratic tariff announcements—often via social media—create market chaos, destabilizing China’s export-dependent economy.
However, poker strategies carry risks! If China calls the bluff, the U.S. could face stagflation, supply chain breakdowns, and alienated allies.
China’s Go Strategy
China’s response aligns with Go, a game of gradual territorial control and interconnected moves. Instead of matching the U.S. dollar-for-dollar, Beijing is weaving a web of countermeasures designed to erode American dominance over time:
Non-Tariff Retaliation: Export controls on rare earth minerals (critical for semiconductors), sanctions on U.S. defense firms, and antitrust investigations into tech giants like Google.
Global Realignment: Expanding the Belt and Road Initiative (BRI) to reduce reliance on U.S. markets while deepening ties with the EU, ASEAN, and Global South.
Domestic Fortification: Accelerating “dual circulation” policies to boost self-reliance in tech (e.g., semiconductor manufacturing) and energy.
Erosion of the US dollar’s dominant use in world trade and as the core currency for reserves.
While the US has been unconsciously unwinding it positioning as a leader of the free world and the key influencer on the world stage, China has been stepping in to these gaps and highlighting the lawless and reckless style of the US under Donald Trump.
Unlike poker, Go rewards patience.
The US is trying to short-term readjust the trade balances with China, while China is trying to improve their global position on all fronts, including trade, and reduce the influence of the US as a global power. Who will win in each of these two games?
It is difficult to understand what was truly achieved at COP 26. After pre-weeks of media to COP 26 and then the concerted media campaign during the week of COP 26 how do we sort the wheat from the chaff or the greenwashing from the truth.
Fundamentally, there is still a long, long way to go. COP 26 was not the breakthrough that was needed. Both the public and private sectors did not step up and demonstrate the urgency that was needed.
Here are my 10 key thoughts:
1. COP 26 was more than blah, blah, blah, as Greta Thunberg said; but, it fell far short of what was needed. It was inevitable that we would fall short of 1.5 degrees Celsius, the question was really how far? The best guess seems to be that the commitments added up to about a 0.3 degree Celsius improvement moving our current likely outcome tracking from +2.7 Celsius warming at 2050 to 2.4 degrees (per Climate Analytics Tracker or CAT). In Climate Actions latest publication, they noted that not only do the commitments fall short of the +1.5C target of the Paris Climate Agreement, there is no single country that has put short term policies in place to put itself on track to its net zero target.
2. Out of Glasgow, there is recognition that this push to improve commitments cannot just happen every 5 years. This is a good move. They are now asking countries to each year look at ratcheting up their targets and actions. For most countries, setting 2030 targets rather than earlier targets is also a way to delay the need to address the problem to the next leadership group whether in the political or private sector arena. Given that the carbon emissions problem is a cumulative problem there should be a further goal of each country committing to a set of annual activities and targets; and, couple this with ‘naming and shaming’ of those that fall short. Ramping up public pressure is fundamental to proper progress.
3. COP 26 recognised that it is vital to solve the biodiversity issue as part of the climate problem even though it has a set of other issues. The reduction of deforestation pledge by 118 countries by 2030 is a start in the right direction. This should be enacted much faster. Nine more years of deforestation is a problem. The devil will be in the detail of the agreement; including, the addressing of illegal logging and the need for reforestation. The three regions of particular concern are the Amazon, the rainforests of Indonesia and the Congo Basin.
4. The announcement of GFANZ (Glasgow Financial Alliance for Net Zer0) having 450 organisations that manage $130tn of private wealth saying they will participate in the financing of the climate challenges is a good start. Mark Carney has made good progress to pull this together. The cynic would say that if there was $100tn of investment opportunities (the size of the climate challenge) that will add 2% per annum of economic growth and they were presented as good investment opportunities who wouldn’t want to be part of the club. The key question is in reality will this result in large scale material changes in investment allocations and what will it also take to make this happen in terms of reporting, policy and regulatory changes, carbon tax, last mile of risk security, etc. The reality is this is a step in the right direction; but, there is a long way to go.
5. COP 26 forgot the oceans which is the biggest carbon sink. Where is the equivalent pledge to deforestation for the Oceans. What never seems to be included in the Net Zero discussion is that the goals required do not consider any indirect impacts of carbon emissions (including other GHCs) that are in carbon sinks on land and in the oceans. Only a very small percentage of GHCs are in the air vs. absorbed in the land and oceans and their biodiversity. The melting of ice and permafrost, the warming and acidification of oceans, and the equivalent of ocean deforestation from over fishing are likely to release GHC’s into the air. There are also other indirect sources of warming that have also not been considered.
6. COP 26 needs to get away from the sole narrative of clean energy and focus on the reality of a practical transition to clean energy. The coal and methane pledges are helpful but are really subsets of existing pledges that should already have been made or identified in terms of carbon emissions reduction to meet the 2030 targets that each country committed to. Countries should be solving not just the optimal future state of energy provision but also the economics of transition vs. the related cumulative impact of emissions. Optimal transition will require continued fossil fuel extractions (hopefully focused on the least climate damaging approach), being realistic on the ideal role of nuclear power and other credible low emission sources, and ensuring there aren’t economically disruptive shortages on the way. Governments have a big role to play in this in terms of creating the right economics of alternative energies (through carbon taxes, subsidies, other policies) and their own commitments to ensuring the appropriate energy grids are in place to maintain steady supply.
7. We still need more discussion on adaptation not just carbon emissions reductions. It has been good to hear that there are now some more realistic discussions on climate that are appropriately also talking about adaptation. The short to medium term economic benefits of dealing with climate change come from adaptation while the longer term benefits are from reaching Net Zero. Developing and underdeveloped countries are primarily concerned about adaptation to deal with the economic consequences of extreme weather. The first things they need are economic assistance to social and economic development to help deal with the ravages of droughts, increased heat, floods, etc. resulting from climate change. These include factors such as access to water, crops which are more resistant to the new climate reality they are facing, and access to 24/7 low cost energy ( and ideally low emission energy) for development. Given that a significant proportion of those in extreme poverty are subsistence farmers specific targeting of assistance programs will be essential.
8. Carbon tax hesitancy. It could be argued that the one thing that would indicate how governments are taking climate change seriously would be the agreement of a global carbon tax, or cap and trade, system. This also includes dealing with addressing the issue of heavy subsidies on fossil fuels in many countries including the United States. The shifting of the relative economics of alternative energies is vital to accelerating the investment in and adoption of new energy consumption habits. There has been no apparent progress on a global carbon tax program.
9. Global North and Global South was not properly recognised in COP 26. In the climate conferences, the Global North refers to developed countries; and the Global South are the developing and underdeveloped countries. The Global North completely dominates both the emission of GHCs and the use of fossil fuels. The global south has a small fraction of per capita consumption of energy; although, they do contain the large and growing proportions of the population. These countries have primary priorities on social and economic development which involves growth in energy consumption before achieving net zero is even considered. Very different programs of climate action should be targeted for common clusters of countries; rather than the chasing of universal agreement on a common set of actions. Why do we keep chasing all countries to sign up to the same agreements?
10. The increased level of stakeholder activism and engagement needed to drive change was not properly incorporated into the conference. There needs to be a much higher level of activism by stakeholders to drive change and hold politicians and private sector leaders accountable. The activism needs to include the public voting out of politicians, the boycotting of companies and withdrawal of funds from irresponsible companies by investors and insurers. In the same way that there needs to be activism there also needs to be proactive engagement of stakeholders in changing their own behaviours with respect to both the shift to Net Zero and addressing adaptation requirements. This means that every individual, town, municipality, city, province, country and region, as well as every other organisation in any form, has the simple requirement of acting themselves. This was completely missed at COP 26 as they tried to focus on newsworthy narratives vs. practical solutions.
As an optimist, I do think that we have the wherewithal to succeed. To do this we need to face the truth, deal with reality, and stop greenwashing problems and challenges. Transparency is essential, programs must be put on the ground and managed to time, results must be monitored, and actions must be taken against shortcomings.
“If we are to have peace on earth, our loyalties must become ecumenical rather than sectional. Our loyalties must transcend our race, our tribe, our class, and our nation; and this means we must develop a world perspective.” Martin Luther King Jr.
Hans Rosling said how can you solve major challenges if you don’t understand the facts. He was a Professor of International Health at the Karolinska Institute and Founder and Chairman of Gapminder Foundation. As a well known and influential speaker on global issues, he used to systematically ask 10 questions to his audience about the state of the world. To his dismay he found that no matter the intelligence of his audience their true understanding of the world fell well short of being even adequate. In fact, their overall scores were worse than what a chimpanzee would score with random picks. His final book, “Factfulness – Ten reasons we are wrong about the world – and why things are better than you think”, dealt specifically with this issue. He was on a mission to save people from their preconceived ideas.
This is the tenth and last blog of this World View series. This series came about as I felt that it was vital to be up to date with the current state of the world across a number of dimensions and develop an integrated world view of where we are and where need to be going. This series was the result of over 18 months of extensive research across a broad range of subjects learning from the works of Nobel prize winners, professors, researchers and well respected individuals. It also involved analysing different databases, reading research and using the power of the web to capture information, understanding and alternative perspectives. I have tried to look at our world in an integrated way and explore a range of perspectives and not just confirm cognitive biases I already had. It is safe to say that my view of where we are and what we need to do going forward at the global level is different from my initial thoughts. What is unchanged is that I remain optimistic. To be an effective leader going forward I believe having a grounded world view is essential. Building successful sustainable businesses cannot be done in isolation anymore.
In the first blog, I laid out what I thought were the three big global challenges that needed to be addressed. Although being more tightly defined, not surprisingly they were consistent with the UN Sustainable Development Goals and the World Economic Forum Global Risk Report. The three challenges as I defined them were:
Decarbonisation and Biodiversity Regeneration
Inclusivity and Fairness
Digital Privacy and Collective Truth
In the second blog, I analysed the components of successful societies. The third blog, set the scene for thinking about the challenges going forward in the context of what should be the social contract for citizens of a society. The next three blogs covered off different aspects of delivering against the social contract – democracy and the role of government, the market economy and capitalism, and the nine waves of technology innovation. Blogs 7 to 9 each explored in more detail one of the three challenges, including thoughts on how to solve them.
This tenth blog explores the keys to unblocking one of the most critical barrier to success, urgency and alignment. It is not a case of not understanding the challenges, shortcomings in our scientific knowledge, a lack of potential solutions; rather it is a lack of urgency and alignment that will make us fall short. And, don’t forget the consequences are immense! Together the challenges are solved by underpinning them with policies, incentives and appropriate stakeholder pressure provided on a timely basis. Given where we are, we know that the current governmental policies and the outcomes of our market economies and capitalism have been inadequate, and therefore, need to change. As Albert Einstein said, “The definition of insanity, is doing the same thing over and over again, but expecting a different result”.
Getting the right balance of incentives, carrots and sticks, across participants that need to change is the biggest challenge. The shaping of them must take place from the supra-national level, to national/regional/local governments, to the private sector, the third sector and to the public itself.
In the last few weeks, we have seen some critical indicators that we are making progress on this topic of urgency at the governmental level. In late April, Germany’s Federal Constitutional Court made a judgement on Germany’s 2019 Climate law which set as a target to cut 2030 carbon emissions by 55% from the level of 1990 and emit no net greenhouse gases by 2050. The Court ruled that the younger and future generations are entitled to “fundamental rights to a human future” and the current legislation results in a “radical burden” post 2030 on future generations that would drastically reduce their freedoms. The government now wants to lift the 2030 reduction target to 65%, and to bring forward the net carbon-neutral date to 2045. In a similar vein, in 2019 the Supreme Court of the Netherlands ordered the government to substantially increase its ambition after it watered down its carbon reduction target.
In Asia, there has been increasing legislation focused on digital censorship, including fake news, coming from a number of countries including Singapore, Malaysia, India and most recently Indonesia. Although, the focus includes dealing with the critical issues of national security, disturbance of public order and the conduct of elections; it can be said that much of the legislation is overreaching.
In the private sector, there is also progress. In a landmark climate case in late May 2021, the Dutch court ordered Shell to reduce its carbon emissions by 45% by 2030 from 2019 levels. This is in comparison to their current targets of 20% by 2030. In the same week, a small activist hedgefund, Engine No. 1, managed to replace two existing board members at Exxon with its own candidates to drive the company towards a greener strategy; and, Chevron shareholders rebelled against the Company Board by voting 61% in favour of forcing the group to cut its carbon emissions. Investors are increasingly taking these challenges seriously.
The cornerstone for making this happen is at the country level where government policies, taxes and incentives set the tone for the kind of society that needs to be built. They need to raise expectations for the private sector, and more diligently think about the social contract which they have with their citizens.
Supporting this are supra-national pressures to get all countries on board with the overall goals of fighting climate change and environmental degradation, and inequality. The UN Climate Change Conference in November 2021, COP26, will be a critical indicator of the level and urgency of ambition to tackle climate change at both the governmental level and by the private sector. There is also the 76th Session of the UN General Assembly in September 2021 which will be looking at the progress against the 2030 Sustainable Development Goals. In addition, ongoing pressure needs to be coming from the G7 and G20 conferences.
In addition, it is the involvement of financial markets, investors and asset managers that control the flow of funds to and from different sectors. The broad pressure points are coming from central banks, organisations such as Climate 100+ and ESG reporting requirements. Momentum is growing; however, the rate of change of aligning investment and financing decisions is too slow and the pressure for faster progress by the companies they are investing in is too light.
As long as boards and executive management are driven by short term strategies, thinking and incentives, change will be too slow. In large US corporates, changing the momentum from a continuously growing level of CEO compensation, from 30-40 times average worker compensation in the 1980’s to the current day level of 300-400 times, based on short term corporate performance to more challenging longterm performance with clear and ambitious impact goals is not in the self interest of these leaders. Boards must be willing to rapidly align the structure of compensation with long term sustainability. The Boards must be motivated to do this by the investors and asset managers; and where appropriate or needed by governmental policies, taxes and incentives. If leaders don’t adopt the need and urgency then nothing will happen. This is both a question of ensuring they are aligned with the priorities and they are leading with the right time horizons.
Finally, there are the citizens, who are also employees and customers, who need to use their voice and actions to drive change and must also change themselves. To do this they need transparency on the environmental and social behaviour of the company that is captured within the ESG reporting requirements. As noted earlier, both the court judgements and the shareholder actions were all triggered by stakeholder activism. More than ever stakeholders (employees, consumers, public, investors, etc.) are increasingly powerful voices that are requiring changes to corporate behaviour and a fundamental shift to responsible capitalism.
If you look at the private sector challenges, at its simplest level there are three dimensions to getting the incentives right and driving impact. Firstly, rewarding value and impact creators. Too much of our economy overly rewards value extractors, including profiting from trading and financial engineering, which adds little to the economy and nothing towards addressing these challenges. The question is, are you adding value and moving towards meeting the outcomes required by the challenges, or are you not contributing or falling short of the outcomes required. For any company or organization, if you have no measurable and relevant impact goals you should be seen as a value detractor regardless of what you are doing. Value creators should benefit in terms of governmental policies, tax levels and incentives in comparison to value detractors. Mariana Mazzucato, a leading economic thinker, has written a seminal book on this topic, “The Value of Everything – Making and Taking in the Global Economy”
Secondly, ensuring a proper balance of priorities across the short, medium and long term horizons. The challenges of climate change, biodiversity and inequality cannot be solved and be properly addressed in the short or medium term; however, investment in factors that have vital long term outcomes are required now. Achieving Net Zero for most companies and all countries will take more than 10 years; but, investment almost certainly needs to start now. Longterm investment behaviour should be rewarded vs. short term profit taking and extractive behaviour. Once again, policies, taxes and incentives are needed to assist in biasing investment returns towards impact focused investments.
Thirdly, addressing the challenges with the right urgency. This defines whether organisations own goals are in line with the timing of the needed/agreed collective achievement of the challenges.
To create urgency and alignment in incentives there are a few key principles. Firstly, the goals and related incentives need to be as simple as possible. Incentives must cover both value creation and impact in a balanced way. Secondly, the goals need to be clear, transparent, timely, measurable and auditable. Thirdly, programs and incentives must be adjustable to new and preferable technological solutions. Although overall long term targets are clear, interim targets and the set of actions to achieve them are not. Finally, incentive design must understand the heavy human bias towards focusing on easier short term goals and rewards vs. not comprising long term targets. It is a natural inclination to back end load change which often is beyond the work horizon of the existing leadership team. Early investment and impact gains are essential for success.
At the governmental level, it is vital that they set the tone in terms of level of ambition, timing and responsibilities. As I often say, uncertainty is the enemy of progress. Clear forward looking and stable policies, taxes and incentives will accelerate the commitment of investment by the private sector. These programs need to create alignment of the private sector with the goals and urgency of them; bias scale investment to meet these challenges; secure government financing to meet their own commitments; and, ensure the right research, development and innovation is happening to solve challenges where no economic solution currently exists.
Rightly so, there are concerns about overbearing and overly complex involvement of governments. However, it is also important to note that pure capitalism does not have a track record of solving these types of problems without the right involvement of governments. Policies, regulations, legislation, taxes and incentives need to set the direction towards outcomes and define the urgency; but not, specify the exact set of solutions. Marianne Mazzucato has defined this as “mission oriented” governmental programs. These activities should be designed to unleash the market power, speed and innovation capacity of the private sector to be the major contributor to the solution of these challenges.
In the second week June 2021, the senate broke their partisanship and agreed a mission oriented spending bill, the US Innovation and Competition Act, of a quarter of a trillion dollars focused on key technology sectors. This was achieved by defining it very much as a way the US can strengthen their competitive and adversarial position with China in key sectors. China has successfully had mission oriented programs to achieve leadership in specific technology sectors, including areas such as solar and electric cars.
So much can be achieved by just putting these frameworks in place, and then allowing innovation, financing and entrepreneurial energy to drive change towards the goals in the most effective way.
Without solving alignment and the creation of appropriate incentives using both carrots and sticks, it is highly unlikely that these challenges can be met on a timely basis.
I hope this series has been insightful to help you build your own World View. In this rapidly changing world, politically, economically and technologically staying abreast of where we are and what is possible is vital for leaders. There are also increasing requirements and expectations in terms of responsibility to have an impact on the key environmental and societal challenges. The need for boards and executives to be on top of the context in which they operate will be an essential component of long term sustainable success. Our collective success and sustainability will be linked to solving the three challenges of Decarbonisation and Biodiversity Regeneration, Inclusivity and Fairness, and Digital Privacy and Collective Truth.
“Big brother is watching you”, George Orwell, 1984
Tim Cook, CEO of Apple, said that privacy is “one of the top issues of the century” and that it’s important to put “deep thinking” into that to figure out how to “leave something for the next-generation that is a lot better than the current situation.” Cook said privacy “should be weighted” like climate change, another huge issue the world is facing.
This is the third of what I call the three big challenges. The first being ‘Decarbonisation and Biodiversity Regeneration” and the second is “Inclusivity and Fairness”. “Digital Privacy and Collective Truth” sits among these challenges; but, it is the third priority. It is also a priority that would not be agreed with across the world, in particular in non-democratic countries. This challenge is not captured among the UN SDG’s, however, it is captured in the World Economic Forum Global Risks Report 2020 on both technological and societal dimensions.
We are living in a surveillance world. Something you will have read in George Orwell’s “1984”, or watched on “Black Mirror “ or some other dystopian science fiction movie or box set. That world where virtually everything you do is tracked, monitored and then attempts are made to adjust your behaviour either by governments or corporates.
The most advanced mass infringement of personal privacy is China’s Digital Social Credit system. Based on a cultural norm of monitoring individuals the Chinese have now turned to digital as the means for this. The focus is on measuring trustworthiness of an individual and then rewarding or punishing them for trust violations. Trust ranges from financial and legal trust to how you behave in public (eg. jaywalking, playing loud music, make reservations at restaurants and not showing up, etc.) and what you say. You can lose points or gain points on your starting score and you can benefit or lose freedoms depending on your overall score. As an example as of June 2019, 27 million air tickets and 9 million high speed rail tickets had been denied to citizens deemed dishonest. It also affects your access to certain jobs and your children access to certain schools. China leads this trend to monitoring; but, other countries are moving in this direction as governments get more and more access to personal information through governmental ID cards and digital records, and corporate data cooperation.
In the democratic world, the level of data gathering is no less. It is just the use, and abuse, of the data is different. As well as potentially overreaching use by governments, there is a massive issue in the corporate use of information for profit. The leaders in the data gathering, use and abuse of information are Facebook and Google. Facebook and Google are the companies whose income is dominated by advertising revenues. For Facebook about 97.9% of their revenues comes from ad revenue, and for Google it is about 83%. They will only be successful longterm if they are able to help change your behaviour – shopping, travel, entertainment, socialising, voting and all other behaviours that might have an economic value to a company, government, organisation, group or individual. If digital advertising revenues are their engines for profitability then personal data is their fuel.
Given that Facebook and Google’s core business models are built off customer data and their core source of their profitability is from taking advantage of the data they collect, what really are their strategies. Is Facebook’s mission to “Give people the power to build community and bring the world closer together”. Is Google’s mission “To organize the worlds information and make it universally accessible and useful”. Why do they need all this customer data and why do they need to do it without you knowing the extent of their data gathering, use and sharing. The answer is that these aren’t really their strategies. Both of their core strategies are to dominate the world of personal information and to maximise the profitability of that information – clearly this is not a publishable strategy for the public. It is the idea that the winner in the data race on consumers will achieve an unassailable position of power, control and profitability. They both just come at this from different positions as set out by where they started from.
If you look more closely at them, their real executional strategies are:
Be a witness to everything in as close to real time as possible.
Collection of all data of everyone, and their context, that allows perfect (real time or delayed) predictability of any combination of individual, group and society based behaviours and actions.
Addiction based, dopamine generating, continuous generation of information and interaction.
Create consumer products to enable data collection that are ubiquitous, become essential and are irreplaceable. These include search, maps, social communities, marketplaces, mail, calendar, contacts.
Optimize the opportunities for profit through individual and group behavioural modification achieved either directly or through the sale of information.
Lock in competitive position by building asymmetry of knowledge, authority and power over all stakeholders; including, getting governments dependent on their data.
Retain trust and legitimacy by Privacy of Intent through misdirection, misinformation and swarming (overwhelming the truth with alternative information).
At its core, this is a strategy of misleading users, data exploitation without user knowledge, and the theft of individual privacy and freedoms. This will be their achilles heel!
Microsoft, Amazon and Apple aren’t innocent; but, their dependence on advertising revenues is at a fraction of Facebook and Google. Apple, led by Tim Cook, is the first of the big five tech companies to change their strategy on data. This appeared to start around the time of the 2016 US election and the Facebook/Cambridge Analytica affair. I expect Microsoft and Amazon to sheepishly, or hopefully boldly, also change their strategies. Bold strategies from the three of them will help reset the agenda on data privacy within the tech and internet based world. If not, let’s hope that it will be done by the attrition of GDPR (General Data Protection Regulation) and equivalent legislation, the escalation of lawsuits, multi-billion dollar fines and stakeholder revolt.
The EU leads the way on privacy and hopefully other parts of the world will follow. The EU GDPR was a big step in moving in the right direction. Implemented in May 2018, it is a legal framework that sets guidelines for the collection, processing and use of personal information. The EU has set a maximum fine of €20m or 4% of annual global turnover – whichever is greater. This couples with the right to be forgotten or right of data erasure. In the US, progress has been slow and primarily driven at the state level, with California leading the way.
In January 2021 at the Computer, Privacy and Data Protection Conference (CPDP 21), Tim Cook in the opening speech said, “As I’ve said before, if we accept as normal and unavoidable that everything in our lives can be aggregated and sold, we lose so much more than data, we lose the freedom to be human.” He also then said, “Together, we must send a universal, humanistic response to those who claim a right to users’ private information about what should not and will not be tolerated.” He laid out four core principles for privacy – data minimisation, user knowledge, user access, data security. The first three of these are at odds with current practices of virtually all companies with significant customer data.
Core elements of Apple’s shift include increased privacy protection through Safari, Maps, Photos, iMessage and Facetime, and Apple Pay. In addition, they have just introduced App Tracking Transparency and App store privacy labels in the IOS 14.5 operating system for smart phones.
Facebook CEO, Mark Zuckerberg said, during the company’s recent earnings call that “Apple has every incentive to use their dominant platform position to interfere with how our apps and other apps work, which they regularly do to preference their own. This impacts the growth of millions of businesses around the world, including with the upcoming IOS 14 changes, many small businesses will no longer be able to reach their customers with targeted ads.” Mark Zuckerberg’s comments about targeting are fallatious. Customer targeting does not require egregious collection and use of data. Reasonable and transparent collection and use of data can be highly effective in reaching customers with targeted ads.
An invasive and exploitive model of data collection and use looks something like what I have outlined in Figure 9-1. The level of knowledge that is gathered and interpreted from video, audio and text is completely intrusive. The only way to collect this information is without your full knowledge. It is the idea that if you dominate data collection, then you should be able to dominate behavioural change and therefore also profitability.
Figure 9-1
Both Facebook and Google, through combinations of their websites, links to other websites, ad platforms, technology integrations with other websites, web crawling, analytics, and other sources can collect an extraordinarily high level of all your behaviour across the web and they take information off the files on your computer. They also have other activities such as Google street mapping, where they have been caught downloading home information and computer files as they map your home. There will be many other sources such as information gathered from satellites and other third party sources.
If you want to understand this more, I suggest you watch two movies, “The Great Hack” and “The Social Dilemna”. For a simple description, there is Apple’s April 2021 recent communications called “A Day in the Life of Your Data – A Father-Daughter Day at the Playground”. There are also two interesting books, “The Age of Surveillance Capital” by Shoshana Zuboff, and “Privacy is Power” by Carissa Véliz. These sources also talk about the issues of fake news, which I have dubbed the need for collective truth.
Collective truth, as I have defined it, is the need for the dominance of a common base of facts for all key societal events and activities where lies, misinformation, noise and conspiracy theories can materially affect decision making. This requires giving, and if necessary regulating, real responsibilities to all potential sources of mass dissemination of information.
Fake news is not new. For decades, communist and fascist countries have created and controlled false narratives of life at home and life in other countries. With the rise of the digital age, for these countries the opportunities for surveillance and control are much higher; however, there is also the need for more comprehensive generation of the narratives to in many cases overwhelm the truth.
One area where micro-targeting and fake news are used is in elections. Since 2016 the number tech ops groups from countries that have a mandate to help disrupt the election processes in countries has grown dramatically. Vladimir Putin, in particular, has a clear focus on damaging the credibility of democracies by, among other things, influencing the outcome of elections. Their involvement in the 2016 US Presidential elections being the prime known example.
Clearly fake news is also not new in democracies. With mass media and journalist requirements to validate the news they provide, historically it has in large been that the truth has risen to the top and overwhelmed the lies. However in the US in 1987, the US FCC (Federal Communications Commission) abolished the Fairness Doctrine. The Fairness Doctrine was a policy that required the holders of broadcast licenses to present controversial issues of public importance in a manner that was honest, equitable and balanced. This abolishment paved the way for Rush Limbaugh to build his conservative radio station focused on entertainment, not truth, and established an enormous audience of 20 million listeners per week at his peak . The scale of his influence helped drive the partisan strategy of the Republicans and spawn the success of Fox News.
Digital technology and social media companies have taken partisanship to new levels. The dangerous combination of micro-targeting and fake news has combined to help disrupt elections and fuel populism. The movie documentary, “The Great Hack” illustrates how data mining and algorithms can be used to undermine individual liberty and democracy. The ability to build alternative versions of the ‘truth’ through individualised and ideologically based uncensored newsflow is removing the ability to have voting from the same base of facts. We can see the turmoil this created in the US 2020 Presidential elections.
Facebook and Google/Youtube are two of the critical platforms used to manipulate and change the behaviours of large groups of people, one person at a time. Government and stakeholder pressure is mounting for these groups to behave in a socially responsible manner – including blocking fake news where there can be material impact, eliminating all forms of hate speech and the ability to incite violence, and the blocking of foreign groups ability to interfere in elections through troll accounts. Social media groups have been slow to respond; although, more recently as an example we have seen Donald Trump’s Twitter, Facebook, Instagram, Snapchat and Youtube accounts were disabled during and now post the 2020 US Presidential election.
Governments are responding to this threat as they see fake news as a potential national security threat and a clear and present danger to social harmony. They are increasingly focused on holding these companies accountable based on the editorial control of what information is pushed to individuals. The companies are being asked or forced in some jurisdictions to identify and close troll accounts, to monitor, block and remove inappropriate content, and to abide by strict rules of information dissemination surrounding elections. Once again, the EU is leading the way on regulating the behaviour of the tech industry. They introduced draft legislation in December 2020 proposing fines of up to 6% of turnover if they do not do more to tackle illegal and harmful content and reveal more about advertising on their platforms. The social responsibility requirements of these social media companies will only increase going forward.
Other stakeholders including employees, consumers and the court of public opinion are also forcing change. Both Facebook and Alphabet have to regularly deal with their employees, or employee union in the case of Alphabet, and manage the public consequences of their statements. They also have to engage with civil rights groups, hearings before government committees and public interest groups. The topics range from collaborating with repressive governments, providing assistance to intelligence services, dealing with hate speech and incitements to violence, BLM and false information related to elections, to inappropriate sale of data and use of social platforms for mis-selling.
The toxic combination of over collection and abuse of private information and fake news for any profit has to be addressed to provide the human right of digital privacy and the need for collective truth. Without addressing this with some urgency the loss of privacy and allowance of the destructive use of fake news will become institutionalised and too complex to reverse. The power of big tech not harnessed for social good is dangerous. It is easy to forget the enormous economic and market power of Facebook and Google. For Facebook the total number of active user accounts across their four platforms (Facebook, WhatsApp, Instagram, Facebook Messenger) is 7.3 billion. Google on top of their 92% global market share of search have 2.3 billion YouTube active users. It may well be that anti-trust action by the EU and US focused on the potential break up or curbing of monopolistic powers of Facebook and Google may also affect their data domination strategies.
Addressing these combined challenges of digital privacy and collective truth is complex. At the heart of digital privacy is the return of ownership and control of personal data back to the individual. This is a fundamental part of the social contract that should be expected by the individual.
GDPR and the right to data erasure in the EU is good progress but does not go far enough. What really needs to happen to respect the fundamental right to privacy is that the control of personal data that is being used is put in the hands of the individual. This as much as anything is a technological challenge to create a model of data control that governments can then enforce.
Tim Berners-Lee, the inventor of the world wide web, is now working on this. He understands the dark side of surveillance capital and is focused on taking the internet and personal data to a sustainable place and remove the invasive data harvesting by governments and corporations. He refers to this as “data sovereignty” which is to give individuals the power to control their data. He has set up a company, Inrupt, to create a solution based on a technology, Solid, for organising data, applications, and identities on the web.
Inrupt plans to do this through a new system called “pods” – personal online data stores. Pods work like personal data safes. By storing their data in a pod, individuals retain ownership and control of their own data, rather than transferring this to digital platforms. Under this system, companies can request access to an individual’s pod, offering certain services in return – but they cannot extract or sell that data onwards.
I do believe that the combination of Apple, Microsoft and Amazon could not only help build a system that worked but they have the combined necessary market power to drive the adoption of a true data privacy solution. The addition of a proactive Google of course would make a massive difference as they with Apple effectively manage the app world. Governments would have to be involved to oversee all the related issues of monopolistic power.
The ambition of collective truth has its own complexities. The core objective of this is to arrest the increase in partisan behaviour related to groups of people with their ‘own versions of the truth’ and the use of fake news or disinformation to poison effective discourse on material issues. Post the US 2020 Presidential election, we are still in the position where the majority of Republicans believe the election was stolen! The effectiveness of a democratic system is violated by voting based on lies. Individual governments need to ensure public trust in the government and the political system. As such, appropriate rules, regulations and monitoring of the conduct of elections is essential; and, part of this is solving how to ensure the integrity of information that voters rely on and use to decide how to vote. To a large extent, this requires real focus on social media companies where the combination of individual targeting with the provision of fake news has been allowed. Social media companies, are clearly media companies given that they push information to their consumers though algorithms. They need to be held to account, along with all other major violators, for the mass provision of fake news. In February 2021, India set out guidelines to large social media companies like Facebook, Google and Twitter which will require them to remove any content flagged by authorities within 36 hours and set up a robust complaint redressal mechanism with an officer being based in the country. The pressure to solve this is building rapidly.
Collective truth is intertwined with the rights of freedom of speech and expression. There are already many limitations and boundaries relating to libel, slander, obscenity, pornogragphy, incitement, classified information, copyright violation, trade secrets, food-labelling, non-disclosure agreements, the right to privacy and dignity, the right to be forgotten, public security and perjury. The justifications are linked to the principle of ‘harm’.
This hornets nest of trying the get the optimal balance of the right to free speech and the limitations based on the principle of harm is not helped by a cancel culture. Limitations on research, discource and debate, and the narrowing of acceptable views, especially in University environments, will only slow down our progress. Restrictions need to be judged by looking at the combination of harm and materiality.
Actions must be taken on both digital privacy and collective truth before it becomes overly complex to reverse; and, governments have become too reliant on all the data access they have with the large tech companies. This is fundamental to the social contract with citizens and the effectiveness of the democratic form of government. Failure to address these issues can only be damaging in terms of loss of trust in the government and political process, increased social instability and rising partisanship.
In my tenth and final blog of this series, I will talk about the importance of appropriate policies and incentives to get beyond words to achieve financial commitment and action with urgency to hit targeted deadlines. The Paris Climate Agreement and the UN Sustainable Goals are bold and there is an enormous target of what needs to be achieved by 2030 to be successful.
Inclusivity and fairness is the second of the three challenges identified. The previous blog covered the first challenge, “decarbonisation and biodiversity regeneration’. The next blog will cover the third challenge of ‘digital privacy and collective truth’.
Can you imagine having a life expectancy of 52 years, 1.5 years of schooling and an average income of $661 per year? And for your children, looking at a 12.7% mortality rate under the age of 5 and only 4.9 years of expected schooling. In addition, you may have no shelter, you are undernourished, no clean water and virtual no access to health services. Is it any consolation that you are better off than the average person in 1800 on a number of dimensions? This is the worst of inequality – born in the wrong place on the wrong side of the street.
The climate crisis maybe the most existential crisis we have ever face but it does not stand-alone. Solving the challenges of inequality through a set of initiatives focused on inclusivity and fairness also need to be addressed. Probably, the best place to capture the overall goals that we need achieve are the United Nations Sustainable Development Goals (SDGs). In 2015, the United Nations adopted 17 SDGs (Figure 8-1) which then had 169 sub goals. This is effectively the global consensus on priorities. Strong societal foundations and a fair social contract are critical components of the SDGs.
Figure 8-1
Why is it that we need to talk about inequality now after all the developments in the last 50 years? We have the technologies and the capacities to solve these issues and as I have noted before almost all the trend lines of progress have been going in the right direction with the major exceptions of income and wealth inequality.
Just looking at extreme poverty, the reduction in the number of poor has been incredible since 1990 (Figure 8-2). The number of people in extreme poverty have dropped from 1,895m to 736m in 2015 and is now below 10% of the population from 36% of the population in 1990. However, looking behind the numbers we can see that this has been primarily a story of China; and, more recently India has also been making progress. In fact when you move from extreme poverty of $1.90 ($2011 ppp) per day to lesser levels of $3.20/day and $5.50/day China is also making significant progress. The region of most concern is sub-Saharan Africa where across all poverty levels noted above, the number of people is growing dramatically in this high population growth region. In fact, at $5.50 /day there are 895m people in the region in poverty. So overall, trends are not expected to continue and solve the problem of poverty. Additional interventions are required.
Figure 8-2
The core issue as I mentioned in the previous blog is the lack of commitment and pace to solving these issues and the hope that if we just keep on moving forward, as we have been doing in the past, the problems will go away.
Inequality manifests itself in the context of extremes in distribution of income and wealth and the shortfall in access to the basic necessities of life – food, clean water, energy, shelter, clothing, health, education and technology access. We see the reality of these inequalities in different forms whether in sub-Saharan Africa, China or the US. Today, 71 percent of the global population live in countries where inequality has grown. In 2018, the 26 richest people in the world held the equivalent wealth of 3.8bn of the poorest people, half of the global population. Since 1990, inequality has increased in most developed countries and a number of middle income countries including China and India.
It is important to note that although there are growing levels of inequality within countries, particularly developed countries, the bigger source of inequality is across countries. This is contrary to the source of inequality 200 years ago when 80% of inequality was found within countries as opposed to 20% today.
Class Inequality (within a country)
Location Based Inequality(across countries)
1820
80%
20%
Mid 20th Century
20%
80%
With growth in incomes in the developing world exceeding those of the developed world there has been some narrowing of the inequality gaps between countries especially in Asia and parts of South America; however, there has been little progress across sub-Saharan Africa.
Traditionally, there has been the belief that inequality over time follows Kuznets Curve (Figure 8-3). Kuznets Curve argued that income inequality tends to increase at an initial stage of development and then decrease as the economy develops, implying that income inequality will fall as income continues to rise in developing countries.
Figure 8-3
Conceptually, this curve appears to make sense; yet, it does not appear to happen in reality (figure 8-4). In the upward sloping part of the curve, the shape depends on where the developing country was starting from. In the case of China with communism, they started from a low level of income inequality (low GINI score) and the income inequality has risen; however, in South America many countries started with very high GINI scores, perhaps linked to their previous colonial situations, and the levels of inequality have been slowly declining since about 2000.The downward shaped curve for developed countries does not also bear truth. In the Western world, this did appear to be possible until about 1980 when the curves started to rise again for key countries such as the US, some countries in Europe and overall, in particular, in the English speaking countries. The down-curve only appears to happen when there are appropriate progressive taxes on income, when tax rates on wealth are not less than taxes on income, and the income growth rate exceeds the average return on capital.
Figure 8-4
In countries, such as the US, which are now more resemblant of plutocracies than democracies these conditions are not being met and therefore inequality will continue to grow. In the US, tax cuts are primarily for the top 10%, and especially the top 1%, who benefit from lower income tax rates and lower capital gains tax rates. As an example, the wealthiest 400 families in America in 1960 paid as high as 56% in taxes, by 1980 it was 40% and in 2018 it was 23%. The bottom 50% of households in America in 2018 paid an average rate of 24.2%. Figure 8-5 shows the increasing concentration of income in the US mirroring the declining share of the bottom 50%. In terms of wealth, in the US the top 1% have over 40% of total wealth and the top 10% comprise about 80% of all wealth. Both of these percentages of wealth are continuing to grow.
Figure 8-5
We have not seen this disturbing trend in many of the successful countries in Europe where across all dimensions their levels of inequality, or lack of inclusivity, are much lower; and, their average GDP/capita is higher than the US.
Inequality is also reflected in freedoms, access to opportunities and economic mobility, and the rights of safety, security and equal justice. We see these issues every day in the news whether it is about the Uighurs in China, the Rohingya in Myanmar, Black Lives Matter in the US, the unequal treatment of women and girls in Afghanistan, the Middle East and most other countries.
Growing inequality and mistreatment of groups of people builds political instability and is the antithesis of what is required of building a strong and stable society. The historic metrics have been focused on watching the growth in averages. Growing average income, average expected life, average years of education is only good in a society if the growth has some form of distribution. If most of the benefit goes to the top 10% of society and none reaches the bottom 50% then the average is misleading. What is needed is a focus on inclusiveness where no one is left behind.
This is not about being driven by minority interests, it is about practically being inclusive. It is the practice or policy of providing equal access to opportunities and resources for people who might otherwise be excluded or marginalized, such as those economically disadvantaged, having physical or mental disabilities, or belonging to disadvantaged minority groups.
Inclusivity and fairness is about ensuring that of primacy there are minimum standards and principles that countries need to focus on. This is about not being left behind and it is about having a minimum set of opportunities for a good life at birth. It is about minimising the differences in access and treatment across the basic requirements of a strong functioning society including equalising the access to quality education, equivalent outcomes for healthcare (eg. life expectancy), and equal opportunity. It is about ensuring that we are addressing the unacceptable and then moving forward. The definition of these items are not my views, they are those articulated within the UN SDGs. The SDGs articulate where we need to get to nationally, regionally and globally.
The outcome of inclusiveness and fairness should be social mobility. As can be seen in Figure 8-6, there is a strong relationship between inequality of opportunity and global social mobility.
Figure 8-6
In the World Economic Forum’s new Global Social Mobility Index, 17 of the top socially mobile societies are in Europe with Denmark being the overall leader. The US is 27th, while China is 45th and India is 76th. In Figure 8-7, you can see how the US ranks across the different mobility factors. The set of factors illustrated shows just some of the complexity of what needs to be addressed.
Figure 8-7
An important context to the solutions is to also address potential negative impacts from changes in how society is developing. There are five critical dynamics to consider. Firstly, changes in the nature of globalisation affects both where companies are sourcing their labour and where demand will be generated. We have seen recently with the Covid 19 crisis and increasing geo-political tensions that the dynamics are changing. There is also the inevitable shift in economic power towards China and ultimately India away from the US and Europe.
Secondly, the impact of technology on labour markets. Technology and innovation are increasing the interchangeability of labour and capital. The innovative use of robotics, AI and autonomous vehicles will have profound effects on labour markets. This will cause the need for more comprehensive social security programs and the need for increased levels of continuing education to improve labour mobility. Without addressing this, there will be further pressures on the decline of the middle class.
Thirdly, the propensity for increased concentration of income and wealth within countries. Unless countries address the increasing concentration of income, wealth and power, increasing social unrest is inevitable. The importance of the use of both progressive taxes and taxes on wealth is an essential component to addressing this problem. This will also provide critical financing for deeper programs to address inclusivity and fairness.
Fourthly, the changing composition of populations within countries. In the last 40 years, there has been dramatic changes in the composition of populations within countries. The mixes between pre-work, working, and retired populations have changed dramatically. In particular, in the developed world solving for managing in situations where the retired population is a major part of the mix of a country raises real challenges. Post 2050, other than sub-Saharan Africa virtually all other countries will have peaked in populations and will be ageing.
Finally, climate and environmental crisis. All the evidence points to the developing world, especially sub-Saharan Africa and India, being particularly affected by increased temperatures, which impacts food production and water access. In addition, we know that the increase in droughts, floods, fires, etc. will impact the most disadvantaged.
Moving towards a more inclusive and fair world with base standards of living, freedoms and opportunity can be broken down into 2 areas to address. Firstly, in-country inclusiveness which is about thinking about the problem within a country at the individual level. Secondly, across country fairness is about policies and programs that are required to help underdeveloped and developing countries make an overall shift upwards while they solve their in-country problems.
Starting with in-country inclusiveness, the commitment to this form of social contract starts with governmental programs and policies and then ripples through to the private sector. In most of the developing world this should include inclusive and affordable access to quality health and educational programs. Educational access needs to include tertiary education and life long learning and skills development. There is also need for strong social services programs, for the retired, disadvantaged and those in-between jobs. There needs to be a continued movement from minimum wage to living wage programs and clear policies for Gig economy workers. Finally, ubiquitous equivalent access to the internet for all, through mobile devices such as smart phones, is one of the vital components to help move towards equality of opportunity. Financing of these programs can come in different forms including a proper approach to progressive taxes and taxes on wealth.
Small and medium businesses are vital for employment levels. SMEs (small and medium sized enterprises) comprise 60-70% of jobs in most OECD countries. They also provide a disproportionate number of new jobs creation. In the US, businesses with under 500 employees comprise 48% of all employees. Solving the failing of financial markets for small businesses is critical in a number of countries such as the UK. Governments should also be looking at providing a fair share of their sourcing and outsourcing expenditures to support small and medium sized businesses. It is a false economy for governments to focus disproportionate levels of their spend on large companies. In all of the developed economies, a significant portion of private company revenues is from procurement and outsourcing activities by governments at the federal, regional and local levels.
There are multiple examples of countries that have made progress across a range of the inclusiveness issues. There is the healthcare system in Singapore, Finland’s success in education, Scandinavia’s over all progress on gender equality, Denmark’s model of social security and mobility, and Switzerland’s strength on life-long learning. Of the larger countries, Japan and South Korea have very high scores on health and technology access and Germany is a strong performer in social protection and work opportunities. Good references for this are the WEF Global Social Mobility Report 2020, and R. James Brieding’s book “Too Small To Fail”.
Improving inclusivity and fairness in underdeveloped and developing countries is a big challenge. At the national level, countries must understand that consistent development support from the developed world is earned through strong political, economic, and social structures. Dictatorial behaviour and increasing concentration of wealth damages economic and social development.
Accelerated progress will only happen with external support. This includes foreign government policies on aid and assistance, financial support from intergovernmental organisations such as the IMF and Worldbank, and philanthropic assistance to tackle big problems such as what we are seeing by The Bill and Melinda Gates Foundation.
In the private sector, from multi-nationals there needs to be more rapid progress on progressing proper employment practices with fair pay, education and health support. In more remote locations, there is often also a need to engage more actively with the overall communities. Secondly, consideration should be given to special pricing, such as in the health sector, to increase the accessibility of critical goods and services. Finally, technology and innovation investment needs to be focused on solving both development and climate challenges. This includes ubiquitous access to clean water and sanitation, access to low cost continuous energy (ideally green energy) and quality internet access with smart devices. Social impact needs to be high on the corporate agenda as well as achieving a Net Zero carbon position.
Financing of the SDGs and in particular meeting the needs of the developing world is clearly a challenge. The UN Secretary General’s “Roadmap For Financing The 2030 Agenda For Sustainable Development” published in 2018, estimated a short coming of $2.5tn – $3 tn per annum to achieve the SDG’s in developing countries. This is against a context of global GDP being $88 tn and global wealth of about $215 tn. It is particularly challenging in the context of the need for post-Covid financial recovery and for the developed countries to set and meet their own climate and SDG goals. A majority of this financing will need to come from the private sector.
To achieve this, new financial thinking is required and alternative financing instruments are needed to improve the flow of finance to these needs. The current global situation of climate warming and increasing stakeholder response to inequities is changing the context of investment decisions creating the need to incorporate related economic and risk factors into long term financing decisions.
Global, national and local policies and programs drive change and where there is large scale change there will be broad sets of investment opportunities. The higher the level of clear and certain policy directions the bigger the opportunities in the private sector. Uncertainty is the enemy of growth and investment.
Increasing transparency on the risk and return of not engaging in driving impact will be a vital contributor to shifting investments towards solving these social and environmental challenges we are facing. The increasing requirements for ESG reporting and the movement towards consistent, comparable and auditable measurements will help embed impact into business decision making. However, what is also needed is growing stakeholder pressure to accelerate the incorporation of impact into strategies and business models. Consumers and employees need to help business leaders see that without impact their businesses will not flourish and be leaders in their markets. It needs to become clear that social and environmental leadership can be vital components of competitive advantage.
In addition, the potential of existing and emerging technologies to solve large global issues is real. There is no reason that this should not attract significant investment. Passionate impact oriented entrepreneurs with the latest technological know how have massive opportunities to create great businesses. Probably the most visible company in this space is Tesla which is focused on shifting the world to clean energy through electric cars, solar technology and battery storage. I am sure there is more to come from them. Other opportunities include the creation of low cost clean energy solutions for remote communities. Slingshot and Skysource are great examples of companies working to improve the availability of low cost clean water. Zipline, the leader in drone medical deliveries, developed their business in Rwanda where there was a critical need for remote and timely delivery of critical medical supplies. Elon Musk, Facebook and Jeff Bezos are all looking at building large satellite networks that have the potential to vastly improve internet access in remote areas. The business opportunities are immense.
There is already a $31 tn ESG and impact investment pool, which is about 15% of global investable assets. This level of money is already increasing the focus on companies that are creating impact as well providing shareholder returns; although, many of the companies in the pools are focusing primarily on ESG reporting first and only just starting on the journey towards to Net Zero carbon emissions and social impact.
New forms of financing at scale are also essential to contribute to filling the financing gap. The term used for the specific new forms of financing focused on generating impact is impact investing. Impact investment financial solutions work on the basis of risk-return-impact equations. A key proponent of this is Sir Ronald Cohen who has recently published a book talking about this, “IMPACT – Reshaping Capitalism To Drive Real Change”. Sir Ronald Cohen is a preeminent international philanthropist, venture capitalist, private equity investor, and social innovator.
The market for impact focused investment products is small today; but, it is emerging. Green bonds in the market today are valued at about $750 bn. These green bonds are being followed by blue (ocean), education, social and gender bonds. The DIB/SIB (Development and Social Impact Bonds) market will become more substantial through the scaling of Outcome funds. To achieve scale this will require some of the growth coming from the $5 tn investment pool comprising private equity, venture capital, real estate and infrastructure investing.
We understand the challenges of inclusivity and fairness. Through the UN SDGs there is global recognition of what needs to be done. It is now up to political commitment coupled with supporting governmental policies and programs, philanthropic support, and most importantly, private sector commitment to move towards risk-return-impact business models and investment criteria.
My next blog will cover the third challenge of ‘digital privacy and collective truth’. This is an emerging and critical challenge that unaddressed affects the conduct of democracies, the level of social instability across all countries, and the violation of the rights of individuals.
In the last blog, I talked about the critical interlinking of economic growth with technological progress.
There are 3 key themes linked to technological development today. Firstly, the general need for continued investment in research and development. This has driven higher levels of economic well-being and overall economic growth. Economic growth and the level or research and development are inextricably linked. Historically, the majority of investment funding in basic research is provided by the government and other non-business sources. In applied research, the spend is more evenly split between business and non-business sources. Development is dominated by the business sector as they have clear sight on potential economic returns.
Investment in both research and development are needed to continue to drive economic growth. Continuous breakthrough research as well as development spend to innovate new products and services is sustains growth over time. Concern over the reduction in investment by governments is legitimate as the business sectors primary focus is on the later stages of R&D and not on fundamental breakthroughs, such as the invention of the internet.
Secondly, the impact of technology to drive dematerialisation and help solve our challenges of driving our existence on the earth to a Net Zero position in greenhouse gas emissions and address the need for biodiversity regeneration. We need to continue to overcome the Malthusian view of disaster scenarios from exponential population growth coupled with only arithmetic improvement in the utilisation of scarce resources that would periodically cause major crises for the human race – often in the form of major population corrections. In 1968, Paul Ehrlich’s best seller “The Population Bomb” warned of mass starvation and societal upheaval. He warned that the battle to feed all humanity was over. This was coupled with the 1972 Limits to Growth warnings. Technological progress helped to ensure that these major corrections and catastrophes did not happen. However, many of these challenges continue and there is still a lot more progress needed to solve these challenges to move in to a position of some form of balance.
Thankfully, we are now seeing a decoupling of economic growth and resource use, slowing population growth, and an increasing ability to fully overcome the challenges that Malthusian thinking predicted. Along with the dematerialisation, is the current, near term and in sight availability of technologies that can help us shift to a carbon neutral footprint and a declining ecological footprint on land and in the seas.
Thirdly, the development of new technologies vital to contributing to providing inclusivity and fairness across the world. We have made great strides in reducing the levels of extreme poverty which are now below 10% of the worlds population from a level above 40% in 1980. Inclusivity means access to food, shelter, energy, quality health services and education, and to economic opportunities for all. New technologies have and must continue to provide cheaper and more abundant access to products such as high yield drought/flood resistant grains, clean water, continuous provision of energy, new vaccines and medications, internet (included access devices) for remote working, education, telemedicine, etc.
There is a long way to go to providing an improving way of life for the billions falling far short of the basics, let alone addressing the growing issues of inequality. Technology and innovation focused on creating abundance in key areas is an essential ingredient for this this quest. Fundamentally, a core role of technology is the conversion of what’s scarce and making it abundant – eg. energy, water, health, learning, time, money, expertise and resources. The critical components of abundance are dematerialisation, demonetisation and democratisation of technologies. These factors are also drivers of economic growth.
Innovation waves have contributed to economic growth by reducing cost, adding choice, improving the performance of a product, improving the value for money, growing existing markets and opening up new market opportunities; all of which contribute to growth. There are different ways to think of the drivers of growth; but, I like to think of these innovation waves of growth driven by additional forms of value add to the consumer rather than by the specific technology type. I have defined these innovation waves by the benefits they provided rather than the name of the sets of technologies behind the waves. Underpinning these benefits driven new innovation waves has been an increasing availability of finance to further invest in the technologies and related market innovations, and in businesses overall to create and build the markets. I have defined nine innovation waves that we have seen to date. (see Figure 6-1).
Figure 6-1
Each wave has a point where the initial technologies become robust enough to be converted into economic products, and then through further research and continuous innovation they continue to expand market opportunities and drive growth. Perhaps the most well known example of this is Moore’s law on the development of integrated circuits. Moore’s law is the observation that the number of transistors in a dense integrated circuit (IC) doubles about every two years. Aligned to an increase in performance of a transistor has also been the remarkable drop in cost. The combination of the two has driven the affordability of computing power, the capabilities of it to grow and impact almost every market sector and in multiple ways. Computing power is now moving to being ubiquitously available through smart phones. Continuous improvement requires both research and development. In the case of transistors, as noted in Figure 6-2, this requires new technologies to continue to drive the wave. As with transistors, they moved from electromechanical technology through to solid state relay, vacuum tube, transistor and integrated circuit technology.
Figure 6-2
These innovation waves that provide new and different forms of economic growth, effectively layer on top of each other. Innovation then also happens vertically through the integration of different technologies into new solutions.
Starting with the first wave of energy. Energy comes from many primary sources, including coal, steam, oil, hydro, gas, nuclear, geothermal, solar, wind, hydrogen (See Figures 6-3, 6-4). About 27% of this energy is then converted to electricity and delivered through an electricity grid. Energy effectively underpins all economic growth as it allowed the development of industry for mass production and provision of products from consumption. It provides key factors of production such as heating, cooling, lighting, the development and use of production lines. Continuously available energy underpins economic growth. It is what is required to power all other technologies and innovation waves.
Figure 6-3
Figure 6-4
The second technology wave was affordability which was driven by industrialisation (Figure 6-5). This transformed the production of goods from masses of artisans with cottage industries to the mechanisation and use of steam energy to produce goods more efficiently and then on to mass production with assembly lines. This transformed the availability of a product as well as dramatically reducing the cost of the product to create economic affordability. Industry 3.0 saw the introduction of computers, automation, and electronics into production, and Industry 4.0 continues the trend towards automation and data exchange in manufacturing technologies and processes which include cyber-physical systems (CPS), IoT,[31]cloud computing, and artificial intelligence among other technologies.
Figure 6-5
The third innovation wave, I have coined as connectivity which is comprised of two vital components. Firstly, transport which has driven the mobility of resources, people and products which has dramatically transformed the local ability to produce products and source resources and products; and, for the consumer to personally access new products and services. The evolution of mobility has transformed markets and created many new markets (see Figure 6-6).
The second part of connectivity has been the development of communications technology, which has opened up markets from the ability to transmit information to, or market to, larger and larger numbers of people cost effectively. Although, the telephone was invented in the 1876. The mass adoption of the analog telephone did not really start until post 1900. The evolution of communications has been particularly visible post 1980 (see Figure 6-7).
The combination of being informed of what products and services are available and being able to increasingly access and cost effectively purchase them has created dramatic economic growth.
Fourthly, the productivity wave started with the invention of the computer. This began with the mainframe, then the mini, micro, portable computer, tablet and now the smart phone. The driver of this has been Moore’s law (see Figure 6-1). Aligned with the increase in computing capacity there was also the reduction of cost which drove the adoption of computers from a few to making them ubiquitous across companies, large to small, and individuals. The initial focus of computers was on mass replication of simple tasks often related to administration. The use has now moved to all areas of a business including manufacturing, supply chain management, customer service and relationship management, human resource management and enterprise resource planning. Much later in this wave has been the availability of hundreds of applications that sit on our ‘always on’ smart phones and drive our personal productivity.
The fifth wave of de-materialisation has come in many forms from simply reducing material usage, to miniaturisation, to transformation of physical product to digital products, shifts to lower cost and better performing substitutes, to a consumer focus on services and experiences.
The pathways to de-materialize a product include:
Optimize – maximize resource effectiveness by reducing the mass or changing the material types in the product, or improving the utilisation of a product
Digitize – sell and/or deliver the product electronically or virtually
Servitize – sell the utility of the product as a service
A simple example of product dematerialization is the transition in music from physical CDs to digital MP3s to a mobile application for music such as Spotify.
The 6th innovation wave is access. This is the first wave of value derived from the emergence and adoption of the internet with common protocols for communication, connectivity and sharing. In many ways, the internet was seen as an opening up of the world and carried the potential to be a great equaliser. This was the birth of Google with their early mission “to organize the world’s information and make it universally accessible and useful”. Low cost, or no cost, access to information and knowledge from across the world, visibility of goods and services from anywhere in the world and the decline in the limitations of geographic boundaries expanded market opportunities. As a great example, we have seen the Khan Academy and MOOCs (Massively Open Online Courses) such as Edx, Coursera and Udacity delivering education remotely across the world. We have also seen the mobile wallet, such as MPESA in Kenya, transforming the vibrancy and economic opportunities within the slums and for the lives of the ‘unbanked’.
Probably, the best measure of where we are today on access is the global penetration of smart phones (see Figure 6-8). Great progress has been made; but, there is still a long way to go. From today, there will be continuous development of devices, new ways to deliver internet access to more and more remote areas of the world, new generations of cellular networks to change the power and value of access to the internet, and continuously reducing costs of access and usage.
Figure 6-8
The 7th innovation wave is surveillance which is the name that I have ascribed to what many would think of as customer data and big data. Surveillance recognises that the ability to create value is closely linked to the use of data on a timely basis. Real time delivery of value related to product performance, the behaviour of people and changes in their context provides much higher value than lagged delivery of responses. In fact, preventative based services in response to predicted potential outcomes are likely to be of the highest value. A simple example of this would be the automated breaking of a car to prevent an accident. In the health sector, early or at risk identification of cancer vs. later stage identification is transformative in terms of life outcomes.
A broad array of technologies are involved in this wave, starting with observational technologies related to video, audio, text and sensors which could be gathered from devices ranging from smart phones to space satellites. Secondly, there are technologies such as data storage, computing power, and AI that need to take the data, analyse and interpret it and decide what actions, if any, need to be taken. Finally, there will be technologies related to the integrated delivery of the service, such as IoT, to create the value.
The concept of surveillance can be seen from both a positive and negative perspective. On the positive side, it can for example help improve food yields, improve responses to potential tragedies, improve the performance of products and help drive better health and longevity for people. For consumers, it can also improve the timely delivery of information, provide product suggestions, personalise the delivery of news and entertainment, and in general generate value into almost all parts of our life.
The negatives side of surveillance technologies has become particularly visible through the behaviour of Facebook and Google. This is the unknowing gathering and use of private data of private citizens. We have all experienced how apparent private conversations seem to trigger related product offers or serving of content in social media platforms. We have also seen how this deep pervasive knowledge of individuals coupled with fake news is used to attempt to mass manipulate voters on a one to one basis. There is also the potential misuse of genetic information to drive decisions such as the cost of insurance. Surveillance raises complex moral, ethical and legal questions linked to rights to privacy, access to information, use of information and the ability to generate and distribute different forms of false information.
The 8th technology wave is community. This is the recognition of the benefits to the individual and society from thinking and behaving in the form of community. Community comprises three variations – crowd based developments, asset sharing, and community based technology applications focused on solving climate, environment and inequality challenges.
Crowd based applications include crowd sourcing, crowd financing and crowd solving. Crowd sourced applications and open IP are increasingly popular. Examples include the linux operating system, Wikipedia, and GitHub. Github is where over 56 million developers work as an open source community.
Crowd financing is the practice of funding a project or venture by raising small amounts of money, often through the internet, from a large number of people. In 2019, the estimated global market size of crowd funding was $14bn and it is projected to grow to $40bn by 2026.
Using crowds to help solve complex and/or time consuming tasks is increasingly prevalent. This can range from taping into the global community of stargazers to find new stars and constellations, to Elon Musk’s recent $100m prize competition to fight climate change.
The idea of sharing the use of an under-utilised asset is not new. What is new is focusing this idea onto converting private assets into scale businesses such as Uber and AirBnb. This transforms the cost of access to a range of assets and services. Another application is where businesses can benefit from sharing the use of an expensive or complex asset. Cloud, app and SaaS (software as a service) platforms are a great way to do business in a way you couldn’t afford to do on your own, or to reduce the cost of use or cost effectively manage highly variable or unpredictable scalability requirements. These platforms have transformed the costs of starting a new business. In August 2020, Research and Markets issued a report saying that the global cloud computing market was expected to grow from $371bn in 2020 to $832bn in 2025.
With the focus on solving climate, environment and inequality challenges there is increasing attention on serving the underserved and providing real solutions for remote locations. Community oriented solutions will often be the answer. These applications will help address climate based challenges, water access, improving health outcomes, access to continuous energy supply and internet access and use.
The 9th and final wave is customisation. This may sound like a reversion to artisanship; however, it is the concept of mass customisation that can be done at increasingly lower costs over time and reach large potential markets. It is also not personalisation, as in “what colour would you like” or “would you like it gift wrapped”. Rather it may well be something truly unique and relevant. This is the last phase of the trend from mass production to segmentation to specialisation to personalisation to mass customisation. Examples range from precision medicine based on each person’s specific genetic make-up, full configurability of personal products such as Nike’s custom building of shoes (see Figure 6-9), cost effectively digital printing truly unique products, or truly customising SaaS software for the unique requirements of a company.
Figure 6-9
3D printing provides extraordinary opportunities as it moves into even more materials and can produce cost effectively products of different scale. It is already being used in products such as prosthetic limbs and body parts, clothing and fashion, building products, furniture, products for space and aircraft parts.
There is no reason to think that the innovation within each wave has to crest and fall. Continuous R&D will cause new surges of opportunities within each wave. As new technologies are developed within one wave they may well apply to a number of the other innovation waves. We have seen how digital technologies and the internet now touch all the waves. Each new layer of technology can create multiple new opportunities and those opportunities only expand as combinations of technology are put together to create new products and services. The autonomous car movement, that is developing, combines multiple technologies that were developed within different waves – clean energy, electric engines, battery storage, robotics, AI, scanning technology, GPS, etc.
The importance of the inter-relationship between economic growth and technological innovation should be not be underestimated. They both provide fuel for each other. This should not be forgotten as we look to solve the climate, environment and inequality challenges. New technologies and innovation creates solutions and economic growth finances them and creates accessibility.
In my next blog, I am going to talk in more depth about the first of the three challenges I identified in the first blog of this series – decarbonisation and biodiversity regeneration.
“You know capitalism is this wonderful thing that motivates people, it causes wonderful inventions to be done. But in this area of diseases of the world at large, it’s really let us down.” Bill Gates
In my last blog, I tried to emphasize the importance of the role of government in society. Its legitimacy comes from the people; and, to maintain its legitimacy it has to have a clear view of the social contract it needs to deliver against. However, the governments ability to deliver against a credible social contract is underpinned by economic development and growth to drive its financial capacity to provide infrastructure and public services. The main driver of all successful economies has been the market economy and capitalism.
All the strong economies in the world are market economies. The China miracle with a market economy has created consistent high levels of economic growth. It has averaged 9.45% GDP per annum growth rate from 1978 to 2019 driven by the remarkable entrepreneurial spirit and focus on wealth creation of the people. This has been supported by a real commitment to infrastructure development and a strong focus on public services by the government.
A market economy is an economic system in which the decisions regarding investment, production and distribution are guided by the price signals created by the forces of supply and demand. The major characteristic of a market economy is the existence of factor markets that play a dominant role in the allocation of capital and factors of production. Capitalism is a concept integrated with a market economy. It is directed towards making the greatest possible profit for private people and organisations.
Creation of a market economy is one of the key initial roles of a government. There are 7 components to the framework for a market economy.
Profit seeking companies
Free market entry and competition
Strong property rights and enforcement
Absence of central planning, control and price setting
Private ownership of most things
Voluntary exchange
Correction of market failures
Within this framework, there are 5 factors that drive a market economy as shown in Figure 5-1. Firstly on human consumption and wants, Alfred Marshall a leading economist captured the nature of demand, in his 1890 book, Principles of Economics, “Human wants and desires are countless in number and very various in kind….. every step in his progress upwards increases the variety of his needs together with the variety in his methods of satisfying them. He desires not merely large quantities of those things he has been accustomed, but better quality of those things. He desires a greater choice of things, and things that will satisfy new wants growing up in him”
Secondly, technological progress helps address the new and growing desires of a person and where there are new opportunities with customers there are new ways to make more money or openings for new entrants. The profit making goal and opportunity is what drives this technological progress. It helps make products cheaper and better, as well as driving the innovation of new products and services. I will talk in more depth about technology and innovation in my next blog.
Figure 5-1
Thirdly, critical to underpinning the effective operation of a market economy is the efficient movement of capital to where there are opportunities to create value and provide a return to investors. There is clearly significantly more fluidity of finance to opportunities now in the 21st century. Although, the current financial system does have its weaknesses. Returns and rewards are very short term focused and the prime focus of investing and lending is cycling around the financial sector rather than investing in the productive economy. It is estimated that only about one fifth of finance in the US and UK goes into the productive economy. In the S&P 500 today approximately 90% of profits are used for share buybacks and dividends with only 10% invested back in the business. This extractive focus of finance does not help to drive economic growth.
Fourthly on limits to resources, a core part of the effectiveness of a market economy is the efficient movement of factors of production towards producing the most productive goods. The prevailing theory has been that with limits to resources, market driven pricing and the profit motive, these factors help drive the efficient use and allocation of resources. Interestingly, we are now starting to move into a new phase of economic growth that is becoming decoupled from resource use.
Historically, technological progress helped to create more efficient use of resources for any good or service; however, rather than creating a reduced use of resource it resulted in additional consumption in other ways. There was a direct relationship between economic growth and resource consumption. There are now two themes emerging that affect this thinking and the conversation. The first is that we are moving into a world of abundance away from resource scarcity; and the second, is the decoupling of economic growth and resource consumption in developed markets.
Abundance, an idea championed by Peter H. Diamandis a leading thinker on technology and innovation, is the optimistic view that technology and innovation can make rare things plentiful. He cites extensive research where through the use of new technologies costs are dropping 10 to a 1000x based on following innovation curves, such as Moore’s law in the digital space. Energy is becoming more abundant and cheaper as we move to solar and wind technologies. Safe clean water is becoming more plentiful as we are able to desalinate sea water, which is 97.5 of all water, and clean polluted water cost effectively. Food is being produced with less water, less pesticides and less fertiliser. A smart phone is now a communications device that also give you access to the worlds information, books and music. It provides medical diagnostics, it is a camera and video player, a calendar, an atlas and the list goes on. And most importantly it is moving rapidly to be available to everyone.
Linked to and associated with how technology is changing how we live, is the emerging net dematerialisation of economic growth. Importantly, it is the combination of technology and capitalism that is driving the continuous movement of creating new and improved goods and services to sell to as many people as possible. So many people believe the world is getting worse because our brains which are survival oriented focus on the negative things. Yet you just have to look at almost any area and the trend lines are improving (See https://ourworldindata.org which was founded by Max Roser, or research by Peter H. Diamandis).
In research conducted by Jesse Ausubel, Iddo Wernick and Paul Waggoner, they did a detailed study of the use of 100 commodities in the US from 1900 to 2010. Ausubel wrote, “…we found 36 have peaked in absolute size…Another 53 commodities have peaked relative to the size of the economy, though not yet absolutely (see Figure 5-2). Most of them now seem poised to fall”. Similar results have been found in research in the UK. This decoupling of material consumption and economic growth is also happening in energy consumption, co2 emissions, farming and water use. This is the power of technological progress and a market economy driven by a profit motive. It is worth reading “More From Less” by Andrew McAfee to learn more about this.
The combination of dematerialisation and abundance should help allay fears of the need to curb economic growth to address climate change. In fact, driving technological progress and economic growth, which go hand in hand, will be critical contributors to addressing the combination of decarbonisation and biodiversity regeneration with inclusivity and fairness globally.
Finally, and contrary to what many people want to think, the government has an important role in the development and maintenance of a market economy. Capitalism alone is insufficient to ensure the well-being of all members and legitimacy of a society. There is a good reason that there is no example of a successful society based solely on capitalism – a model with a sole profit motive cannot stand on its own in building a society.
Material deviations in any of the first 6 components to the framework of a market economy requires the 7th component – correction of market failures by the government. The break down of free market dynamics will inevitably happen without corrections or response. Examples include competitor concentration, restrictions on market entry, use of economic power to control resources, price fixing, imbalances in supply and demand power, taking advantage of factor labour, disregarding consumer safety and security, etc. To date capitalism has not made moral and ethical judgements on what should and should not be done; governments and the law do have the responsibility for these judgements on behalf of society. Capitalism has also not been concerned with inclusivity and fairness which is a fundamental part of the provision of public goods.
It is worth noting that one key area where capitalism does not work is in sectors where there is asymmetry in information and power between the supplier and the customer. A clear example of asymmetry of power is in markets that are monopolistic in structure. Competition laws are designed to help prevent this. As important are markets where there is asymmetry in information, where the value of information is a critical component of decision making. The classic examples of this are in the pharmaceuticals market and consumer financial services. In the pharmaceuticals market, companies are able to egregiously price their drugs to take advantage of consumers who have limited medical knowledge, coupled with health fears, and limited choice because of intellectual property rights. In the financial services’ sector there are too many examples of banks being involved in mis-selling and taking advantage of the complexity of financial products and the difficulty of many consumers in understanding them. Finally, a new emerging area of asymmetry is in digital and social media sectors, where consumers are not able to comprehend the extent to which they are under surveillance and the ways in which their data is being used. This is about the cost of privacy. All sectors where the consumer is seriously disadvantaged as a result of asymmetry need attention in terms of oversight, regulation, legislation, pricing management and consideration of intellectual property rules.
The nature of government involvement in capitalism is important. Reducing the power of capitalism to create economic growth is not in societies interest. Rather it is about harnessing the power of it to drive the overall well-being of society. Governments should be concerned with red tape, and they need to think carefully about the balance of incentives they provide (carrot and stick) and the mix of regulation and legislation. Keeping government interventions as simple as possible, to achieve the desired outcome, requires continuous adjustments.
There is growing thinking that governments need to move more from reacting and responding to market based problems to shaping outcomes proactively. This shaping can be to ensure there is appropriate attention focused on topics such as climate and inequality, to helping the market drive progress in specific areas such as the shift to clean energy and electric mobility. This mission oriented approach can be seen in Denmark and UK with wind power, the US with solar and the development of electric vehicles (and previously the development of the shale energy sector), and Germany with their Energiewende program to transition to a low carbon and nuclear free economy. China has shaped multiple markets linked to their long time horizon plans ranging from the elimination of extreme poverty to being leaders in electric vehicles and wind powered electricity.
At the same time, it is often in industry’s interest to get out ahead of the government and solve problems that if not dealt with will inevitably involve government intervention. We are now starting to see this more actively especially in the areas of waste management and pollution. For example, the Alliance To End Plastic Waste is made up of nearly fifty major global companies. They have committed over $1.0 billion with the goal of investing $1.5 billion over the next five years to develop, deploy, and bring to scale solutions that will minimise and manage plastic waste, and promote post-use solutions. We are also seeing major groups of investors and asset managers driving ESG reporting and starting to allocate their investments aligned to climate and UN sustainable development goals.
The intense focus on pure short term capitalism that has occurred from the 1980’s is starting to shift towards more aligned goals with society, such as climate and inequality, and creating what has to date been defined as ‘compassionate’ or ‘responsible’ capitalism. This will intensify as corporate behaviour is held to account by stakeholder groups and by escalating government agendas on climate, biodiversity, pollution, inequality and the societal impact of technology. It is also being driven at an accelerating rate by investors and asset managers wanting not just ESG reporting but strategies that integrate action on climate and the UN Sustainable Development Goals.
I don’t believe that there is any reason to think that a longer term focused alignment of corporate objectives with those of customers and societies cannot be as profitable as the long term profit outcomes of corporates with their current short term optimization thinking.
In my next blog, I will look more closely at the importance of technological progress and innovation.
#market economy #capitalism #dematerialisation #abundance #free markets #competition #limits to growth #technological progress #ESG #climate change #UN SDGs @Bill Gates @ Peter Diamandis #Alliance to End Plastic Waste
In the last blog, I explored the need for societies to be citizen centric and not government or corporate centric. In addition, the need for a clear social contract was defined. I now want to explore the role of a democratic government in a citizen or individual centric society.
I will take the liberty to deviate a bit from this topic just to reflect on the state of democracy after the unbelievable showing in Washington on January 6. I am still amazed at how the Trump supporters were able to infiltrate where all the key Federal representatives, except for the President, were sitting to finalise the announcement of Joseph Biden as the next President. Clearly, there are challenges in a democracy as there is in any political structure. It reminds me of Winston Churchill’s quote in 1947, “Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time.…”.
The rise of democracy has stalled (Figure 4-1). We have seen rising populism and the growing visibility of authoritarian leadership including Xi Jinping, Vladimir Putin and Recep Tayyip Erdogan. In the background, we have also seen a rapid growth in government run tech operations groups, such as in Russia and China, manipulating social media news in democratic countries to influence and discredit the democratic process.
Figure 4-1
In the US, thankfully we have hopefully seen the end of Trump’s authoritarian style attempt to thwart of the role of democracy. In the New York Times, 11 December 2020, Michael McFaul, the U.S. ambassador to Russia under President Barack Obama, described the president’s “refusal to accept the results of the election” as “his parting gift to autocrats around the world.”
The V-Dem Institute attempts to assess the commitment of political parties to democracy around the world. They use 600 political scientists to help them with these assessments. According to them, the US Republican party has been on the slide since just before 2000 (Figure 4-2). This is reflected by the growing partisan gap that the party’s actions have been largely responsible. Trump has taken it to another level and this was before the latest refusal of his to accept the election results and the subsequent impeachment process related to the insurrection activities on Capitol Hill.
Figure 4-2
This partisanship in America is unlikely to go away anytime soon. In the US, we can see that from the 1960’s, there has been a massive decline in overall trust from above 75% trust at the Federal level to below 20% (See Figure 4-3). This compares with about a 38% average trust level in OECD governments in 2014. Surely, this decline must also be related to the increasing partisanship of politics in the US in the last 20 years. The legitimacy of a government comes from the people. With declining trust comes declining legitimacy. This is the importance of having a clear view on the social contract the government needs to deliver against for legitimacy.
Source: Pew Research Centre Figure 4-3
The social contract “North Star” that was defined in the last blog had 5 components. The first three components were linked to the themes of basic needs, well-being and decent work. The fourth component was the right to live in a climate and environmentally sustainable world. The fifth component included the right to privacy (including digital privacy) and access to facts and truth.
The role of government has evolved over time. There are responsible for three categories of activities (Figure 4-4). Firstly, core roles linked to the basic functioning of a country. Secondly, the delivery of public services. Thirdly, contributing to economic development and stability, and the sustainability of society and its environment. It has also included to a lesser extent the management of multi-lateral and long term issues such as climate and environment, humanitarian issues, cyber and nuclear security.
Figure 4-4
Firstly, the core requirements for a country include:
Defense, protection and justice
Infrastructure for transport, energy, water access, sanitation, etc.
Market development and protection – the creation of a market based economy
These factors are the most essential areas of investment of government for the basic functioning of a society. The maintenance of borders and safety of citizens; a justice system for both social order and ownership of assets; infrastructure for basic health, such as clean water and sanitation, and for the distribution of goods; and, a market system to create economic growth. I will talk more about the government in its role in a market economy in the next blog.
The second phase of services are very much focused on public services for the citizens. These include education, health and the full range of social security services including unemployment, pensions and disability coverage. The top countries focus on education and health is a national issue, and their goal is inclusivity and quality for all. Finland has now been regarded as a top country for education for a long time. They combine high rankings with only a narrow performance difference between the top schools and the weakest performing schools. The leading countries also extend their thinking to affordable education for all in post secondary/high school and an emphasis on reskilling of workforces over time to maintain employment and mobility.
In the US, the local tax intake very much drives the quality of education and the facilities within the school. Wealthy communities have schools that access the best teachers and have the best facilities. The US is also renowned for the prohibitive cost of university and the lack of access to the key universities which are vital for strong job opportunities. Cost is an access and fairness issue. The level of debt from education in the US exceeds all credit card debt and for many locks them in the poverty cycle. The university participation rate of the lowest decile of income is about 20% vs. the highest decile where participation is at 90%.
In health, Singapore is often identified as a strong model for low cost – high quality Universal Healthcare. They blend the understanding of how some paying for services drives efficient use with a primarily employment funded health system. Their health costs per person are about one quarter of the US and are fully inclusive.
For social services there are many different models. The key factors seem to be an employment system that pays fair wages, understands the need for increasing mobility within the workforce, and the need for proper income protection between jobs. They also understand the need for gender balance in wages, maternity/paternity time off, and pensions which is a growing need as populations age.
The third category of state involvement is contributing to economic development and stability, and the sustainability of the society and its environment. Unfortunately, these challenges are not declining over time. Historically, the thinking has been that economic spend by the government should be counter cyclical in order to smooth out economic cycles in the private sector. The 2008 great recession, or sub-prime crisis, required unprecedented levels of quantitative easing. The current pandemic has required economic interventions at levels in excess of 20% of GDP so far, as well as massive interventions in health delivery, education and freedom of movement. Overall, there has been a growing trend of material disruptions to society over time from a mix of sources including climate, health, economic and cyber.
One of the areas overlooked within society are the commons. The commons are the resources that should be accessible to all members of a society including clean air and water, and a habitable earth. These resources are held in common and not owned privately. Government investment in electric mobility, and wind and solar energy, is linked in to the managing of the commons. The critical right of society to live in a sustainable environment drives the need to deal with climate change, biodiversity destruction and growing levels of pollution. This requires urgent attention, investment and multi-lateral coordination.
Another part of the commons that has developed over the last 20 years is the need for ubiquitous access to the internet as a great leveller. This means full quality coverage of the internet across all countries and fair access and use (including the need for devices such as smart phones). The internet has already proven to be a great economic enabler in developing countries and the pandemic has reinforced the value of the internet for the economy and also for remote health services and education.
The other part of driving economic growth and societal development is government role in research and development. The private sector that is understood to being the source of great innovation, such as we see coming out of Silicon Valley, has not been the core source for research which has driven new waves of growth, such as the internet. Government investment dominates the discovery of new technologies and early stage market applications. The private sector tends to drive the innovations once there are visible timelines of economic returns from new technologies (Figure 4-5).
Figure 4-5
In the US, Federal Government R&D expenditures was a as high as 2% of GDP in the mid 1960’s and now has dropped to about 0.6% of GDP. The US is no longer the dominant leader in cutting edge research in many areas. China is increasingly the leader in a number of areas of research that drive economic growth, and are expected to become the overall leader in research output in the next decade.
Overall, the total R&D expenditure as a percent of GDP in the US was 2.84% in 2018. This compares to Japan and Germany who spend 3.26% and 3.09% respectively and South Korea which spends 4.81% of GDP.
Research spend in the US, underpinned by the government, has generated the internet, and been a major contributor to the nanotech, biotech and the clean energy sectors. Almost all the core technologies behind the Apple smart phone have started with government spend. Core government spend has been driven through focused agencies in the US such as DARPA (Defense Advanced Research Projects Agency), ARPA-E (Advance Research Projects Agency – Energy) and the NIH (National Institutes of Health) which is the largest biomedical research agency in the world.
Mariana Mazzucato through her book ‘The Entrepreneurial State: Debunking Public Vs. Private Sector Myths’ and through her work at the UCL Institute for Innovation and Public Purpose, has been championing mission oriented innovation such as the US has historically been doing. Mission oriented innovation combines research and development expenditure, funding and tax incentives. This approach is taking shape in the UK and EU. A great example of this currently is in Denmark, who has become a world leader in offshore wind energy generation and is now the lead external partner helping China cement their position as the largest offshore wind energy market in the world with a capacity goal of about 450 times that of Denmark.
Aligned to, and integrated with research spend, is the overall need for governments to step up in addressing key global and national issues such as climate change, inequality and digital privacy. Governments provide the essential leadership on these factors to drive coordinated responses, urgency, risk mitigation, continued economic development and appropriate social protections. The current state of market economies, and capitalism, on their own have not and will not solve these issues without the right market sector frameworks and economic opportunities visibly in place. Government policies, regulations, legislation and economic incentives create the conditions to solve them. The private sector then has the scale, impact and innovative capacity to deliver the bulk of any major solution.
As an example, in November 2020 the UK government announced a 10 point plan to move onto the next phase of addressing climate change towards a 2050 Net Zero target. This program will mobilise £12bn in government investment and is expected to generate 3 times the amount from private sector investment.
With the current pace of technological innovation and monetization of it, we are seeing major cracks around the collection and use of private data. The social concerns linked to the gathering and use of personal data, especially by the dominant technology companies, will only get bigger as everyone is increasingly tracked and manipulated in real time. The abuse of data can only grow as you add genetic, neurological and increasing levels of contextual data as technology becomes embedded in our lives. The moral and ethical parameters of technological innovation and privacy of information protected through regulations should be have been dealt with a long time ago. Slow reactions driven by growing social unrest related to privacy cannot be the answer.
The final area in this category is humanitarian/development aid without which many countries cannot address specific crises and create the initial momentum required to create economic growth. It is also an essential component of addressing the UN Sustainable Development Goals and the Paris Climate Agreement.
With these responsibilities it is no wonder the best performing countries tend to have higher government involvement in society, and higher taxes, than lower performing and less developed countries (Figure 4-6). As countries develop, they are able to finance the provision of additional services. There is clearly a strong relationship between economic prosperity and the three categories of government activities – core requirements, public services, and economic resilience and growth.
Figure 4-6
Despite the cynics view that the government is a necessary evil and they are bureaucratic and inefficient, the governments play a critical role in the welfare and wealth creation in a society. Strong infrastructure, a well educated and healthy society, good social services, the right to work, economic support in down cycles, and research and development investment all contribute to drive economic growth and well being. Critical questions relate to whether the services are inclusive and fair; is there proper control over the dark sides of capitalism and freedom for the strengths it provides; and, are the services delivered in an efficient way. And, overall is there progress towards delivering the “North Star” social contract.
The market economy, and capitalism, may contribute to some of these requirements; but, they don’t solve them against societal requirements. It is a myth that for example outsourcing services to the private sector is always more efficient than direct delivery of services by the government. The US healthcare system which is the most privatised healthcare system of the leading countries is by far the most inefficient healthcare system of the successful economies in terms of cost per person and overall health outcomes. There are many examples of efficient infrastructure and public services systems run by governments. Of course, that is not to say that there aren’t many opportunities to improve what is done, just as there are in most companies.
In the UK, privatisation of many of the public service sectors has only caused higher prices, reductions of service levels and imbalanced delivery of services across the whole of society. The motivations of private companies are not aligned to the needs of society. Unprofitable customers are ignored or excluded from service provision. Investors add significant debt to their companies causing high interest costs and then also take significant dividends before any reinvestment. The short-term time horizons of investors do not match the long-term thinking required for the development of infrastructure or public service delivery. The UK government privatised sectors without creating the proper rules and regulations for inclusiveness and fairness, price control, and the right number of service providers to get the benefits of free markets. Finding the right balance of involvement of the private sector in infrastructure and public service delivery is not an easy equation; but, having a principle of outsourcing where ever possible is certainly not the right answer.
Operating a government well to deliver on their social contract and creating the right conditions for a highly vibrant market economy to drive economic growth is a quantum more complex than running a company; especially, with companies primarily with a short term profit optimisation focus. Solving the financing of government service delivery is also a complex issue with many views on fiscal and financing policies. Getting the right balance of legislation and regulations, funding and fiscal policies to move a society forward is a game of continual adjustments interlaced with political agendas. This complexity is then also exacerbated by all the globalisation, multi-lateral issues and the geopolitical challenges that need addressing. There will never be one model to do this; however, that does not preclude looking for best practices to help on the journey forward.
In the next blog, I will explore in more detail the role of the market economy. It is the dominant part of an economy and is the engine for innovation and economic growth.
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