Our days in power are numbered

Capitalists are not capitalist enough

Photo by Evangeline Shaw on Unsplash

Hello,

Welcome to Known Unknowns, a newsletter that will never undermine your freedom—even if my days in power are numbered.

Notes from my week among the illuminati

I went back to the World Economic Forum (WEF) last week. It was my second year, so I don’t have many data points to infer much of a trend. But the vibes did seem different this year. First, in the expert welcome reception, one of the speakers urged us to have more epistemic humility. At Davos! At the expert welcome reception!

And then there was the Milei speech. Five years ago, Greta Thunberg called out WEF’s participants for being hypocrites for not taking more action on climate change while talking a good game yet flying on private jets. To her credit, although it did not change anyone’s behavior, people now readily acknowledge their hypocrisy while telling us the world will soon end if we don’t do something.

Now the news maker is calling out the world’s capitalists for not actually being capitalist enough. The hypocrisy is wanting to micromanage the economy that made them super rich to their benefit. Could it be that Greta-style environmentalism is out and anarcho-capitalism is in, just like crypto is out (at least at Davos) and AI is in?

The economics profession the last several years has been more micro-managey. We tell ourselves we are supposed to be more like plumbers, instead of trying to understand the big questions such as what causes inflation (and based on the American Economic Association meetings this year there is no consensus whatsoever on that one). We are supposed to find evidence of market failures in small places and fix them with big policies.

Perhaps we too are the ones benefited by the affluence that markets delivered, only to use our influence and education to tinker with the economy in the name of making people better off, but instead make people poorer from all the unintended consequences. If so, maybe economists will go back to studying what causes growth and inflation, and not searching for evidence of market failures under every rock. Or maybe we won’t stop, and we will just be ironic about it.

Or it could be that having someone call you out for your hypocrisy is just part of the Davos experience, no different than going to parties, elite dinners and trudging through the snow to a high-powered bilat, and then we go about our lives. But it was not just the Milei speech. In one of my panels, on what a Republican (Trump) President will mean, one of my fellow panelists also said we were a bunch of elitist hypocrites destroying the freedom of the people we claimed to want to help. He said none of us would be part of the Trump administration, our days in power are numbered. I must say, I did enjoy that panel. I like a spicy discussion, and he has a point.

I was also on a panel about taxation and another on the outlook for inflation. They were also good—we could not agree on inflation, but it was much more restrained than the Republican outlook panel.

The other vibe was to not bet against the United States, even if everyone was terrified of another Trump Presidency. The economy just seems too resilient and is producing much of the AI that is rapidly changing things. The CEOs I spoke to said it is already widely used throughout their corporations, and that it is changing how work is done and has made them much more productive. Though no AI-layoffs yet; in fact, many of the innovations so far have been labor augmenting rather than replacing. But there was plenty of hunger to regulate the daylights out of AI.

The more things change, the more they stay the same, I guess.

Virtue economy bubble

Speaking of micromanagement to ill effects, I wrote about the popping of the virtue bubble. Between the disenchantment with ESG investing and its HR cousin DEI, it seems like virtue in our portfolios and offices is on the way out. I actually agree with the intentions. Who does not want a clean environment and a discrimination-free workplace? The problem was the execution. And, as many of you know, I am a big believer in efficient markets, so I don’t really believe in bubbles, let alone the idea that you can call their top. But I do think virtue became a bubble, and I did call its top. The reason I could this time was because the economics were always off. A justification for these efforts was that you can do good and get more for less. ESG investing was supposed to beat the broader market. And it did for a while (mainly because of tech investing), but then it underperformed when the market fell (and how a strategy does in a down market is how you judge it; anyone can replicate high beta).

There was also this strange narrative that if you got a bunch of people in a room who looked different, you’d have a diversity of opinion and wise judgement, and better outcomes too. And hey, there is something to the idea that you can invest in companies that reflect your values. Some people have been overlooked, and diversity of opinion is valuable. But in practice, the execution just created a new constraint. A constraint in investing, and a constraint in who you can hire. These constraints turned out to be fairly aggressive—especially DEI—and it undermined diversity of thought.

As anyone who studied optimization can tell you, a constrained optimization means less output than an unconstrained one. So the whole premise was bound to implode. The question now is if we can salvage what was useful and noble about the intentions. Or can we implement them in a way that acknowledges trade-offs and makes informed decisions?

Or maybe we are just a bunch of busybody technocrats who undermine freedom, and we should just let people do what they want while they still let us.

Until next time, Pension Geeks!

Allison