Along with all the pundits, I underestimated the British–a common enough error, which puts me in the distinguished company of the whole of the mainstream media, the vast majority of hedge funds, not to mention Philip II of Spain, Napoleon, and Hitler. In a May 2 dispatch from England I wrote that the British had lost their appetite for risk, as a modest post-Imperial power with a lot to be modest about. On the contrary, the British took the plunge, and that by itself is a good thing. The outcome of Brexit is uncertain, yet the British chose to bet on it. Betting on uncertain outcomes is the key to success in economics–as well as love, war, art, and life.
Europe is dying of risk-aversion. Its unabated economic misery stems from its refusal to embrace uncertainty. The propensity to bear the burden of uncertainty does not stem from economic policy alone. First and foremost it is a cultural trait. That was the substance of a paper I gave at the Oxford-Martin Centre’s April 25 conference on the Future of Europe, co-sponsored by Columbia University’s Center for Capitalism and Society. The British monthly Standpoint was kind enough to print a version of the paper. Some extracts are below: the entire article can be found here.
I agree (at least in the short term) with the assessment of Financial Times contributor Wolfgang Munchau (another presenter at the Oxford-Martin conference) that “Brexit’s consequences will be neutral to moderately negative for the UK.” In the short run, and in a static framework, leaving the EC will cost Britain some investment and trade. But there is something much more important at work. For both good and evil, the British once were the world’s preeminent risk-takers: inventors, tinkerers, entrepreneurs, builders, as well as adventurers, traders and Imperial conquerors. Their enterprising spirit put nearly half the world under their rule before their empire crumbled. One can find odious apologies for the British Empire (for example by Niall Ferguson) and nonetheless acknowledge that the British had real grit. Perhaps they will get it back after their long post-Imperial slumber.
Extracts from my Standpoint essay, “Why Only Countries Willing To Take Risks Will Survive And Prosper.”
Culture is inherently hostile to innovation. T.S. Eliot famously defined English culture as the regatta, the Glorious Twelfth, Wensleydale cheese, beetroot in vinegar, vestments, bishops, the music of Elgar — the minutiae of daily life accreted over generations. Culture is what does not change. There are rare exceptions, that is, cultures that foster innovation, or cultures that during brief time spans favour innovation.
Oswald Spengler called the great epoch of 19th-century innovation “Faustian,” in the literal sense of Goethe’s masterpiece: Faust will lose his pact with the devil if he is shown a single moment that satisfies him. His dying words, “Only he deserves freedom as well as life who must conquer them every day!” could have served as the century’s motto.
That was Europe once. When Goethe published his drama in 1807, he had God tell the Devil that human beings wanted unconditional rest, and that Faust was the only exception. By the end of the 19th century everyone wanted to be Faust.
What Oswald Spengler called the Faustian spirit of the 19th century gave us all the great inventions that inform our daily lives: electricity, the automobile, the aeroplane, and so forth. The latter part of the 19th century was the most fecund period of human history, and Continental Europe contributed disproportionately.
That is true no longer. Consider the 24 employees of France Telecom who committed suicide in 2009 and 2010 after reassignment to new jobs. One employee in Marseilles left a suicide note stating, “Overwork, stress, absence of training and total disorganisation in the company. I’m a wreck, it’s better to end it all.” He was healthy, ran marathons, had enough money, and had no family problems, but was evidently terrified of change. For some, sameness and security are so precious that life is too frightening to bear without them.
France remains a very wealthy country — it ranks third on Credit Suisse’s table of net average wealth per adult — but the main wealth-acquiring activity practised by the French today is waiting for one’s parents to die. The French once were a paradigm of ambition; Napoleon said that every private soldier carried a field-marshal’s baton in his rucksack. Today, French entrepreneurs move to the US, the UK, Canada or Israel. A 2014 New York Times feature entitled “Au Revoir, Entrepreneurs,” quoted a French transplant to London who heads a Google enterprise saying that in the UK, “it’s not considered bad if you have failed.” He went on: “You learn from failure in order to maximise success. Things are different in France. There is a fear of failure. If you fail, it’s like the ultimate shame. In London, there’s this can-do attitude, and a sense that anything’s possible. If you make an error, you can get up again.”
Incentives and disincentives to entrepreneurship surely influence the willingness of individuals to take on uninsurable risk, for example taxation of corporate income and capital gains, bankruptcy laws, patent protection, and the cost of regulation. There is a vast literature on these matters. It is also fair to ask whether there also a cultural propensity for risk-aversion and risk-friendliness? If so, where does it come from and what informs it?
If venture capital investments and startups are a gauge of risk-friendliness, Israel is a unique case: according to KPMG, $3.4 billion was raised by 688 Israeli companies during 2014. That’s about $425 per capita, compared to about $160 per capita in the US and only $20 per capita in Europe. It is noteworthy that Israel’s bureaucracy is among the world’s most stifling, the legacy of its socialist founders. Israel ranks number 53 on the World Bank’s index of ease of doing business (versus six for the UK, seven for the US, eight for Norway and nine for Sweden). Nonetheless, risk-friendly entrepreneurs flourish despite an apparently hostile environment. It is a reasonable conjecture that cultural factors are responsible.
Several years ago a Jewish magazine asked me to report on the success of Israeli classical musicians, whose disproportionate success compares to that of Israeli entrepreneurs. I interviewed many performers, and observed that they threw themselves into their music with the same sense of risk that they must live with in everyday life. All the virtuosos I met had served in the Israeli Army and took their service seriously. At scholarship auditions, it is common to see young musicians performing in uniform. In America and Europe, we tell our most promising students that to have a career they must win a competition, and the way to win competitions is to make the fewest mistakes. In short, we train them to be risk-averse, which is alien to the spirit of their art.
It is no longer fashionable to say this, but there is a strong affinity between art and war. Thomas Mann wrote during the First World War: “Reliability, exactitude, discretion; boldness, steadfastness in confronting trials and defeat in contention with the resistance of the material; contempt for that which is called ‘security’ in bourgeois life: All of this is in fact at once military and artistic.” The European experience with risk-taking was bound up with wars, which in the past century had less than satisfactory outcomes. There is no risk less insurable than that of war-fighting.
Israelis may be reluctant warriors, but war for the most part has brought them success. An April 2016 survey found that two-thirds of Israeli 11th- and 12th-year students agreed with the statement, “It’s good to die for our country,” surely a far higher proportion than we might find in Europe or the United States.
War is associated with entrepreneurship in one obvious way: it creates an urgent demand for new technologies and trains large numbers of practitioners who bring their skills into the private sector. Veterans of Israel’s signal intelligence unit, for example, have founded numerous important technology firms.
Again, it is unfashionable to draw the connection between preparations for war and productivity growth. We are more inclined today to believe that entrepreneurship promotes world peace and understanding. Accepting an award for entrepreneurship from Springer Verlag in April, Mark Zuckerberg said, “Facebook’s mission, and what we really focus on giving everyone, is the power to share all of the things that they care about, what they’re thinking about, what they’re experiencing on a day-to-day basis. And the idea is that if everyone has the power to share those things, then that makes the world more understanding.” Zuckerberg’s view is similar to Norman Angell’s 1910 vision of an end to war through economic interdependence in his bookThe Great Illusion. The contrary was true: innovation arose from the same risk-friendliness that made Europe amenable to war.
The prevailing sentiment among the educated classes of the West is what we hear in John Lennon’s song “Imagine,” that is, for a world without countries or religions to divide us, in which all will be free to define and express their own identity, in the words of Supreme Court Justice Anthony Kennedy. In this world there will be nothing worth fighting for. There is more than a bit of Brave New World in this dystopia, with the difference that unlike Huxley’s fictional future, we do not yet mass-produce babies in bottles. In fact, we do not produce many babies at all. Europe’s total fertility rate stands at about 1.5 children per female. Germany, its most important economy, already suffers a chronic labour shortage in consequence.
Risk-averse cultures that eschew self-sacrifice seem to settle into a hedonistic lifestyle that leaves little room for children. It is interesting that the US and UK, once again, show much higher total fertility rates than Japan and Germany. (France is the odd man out in this comparison, with very low productivity growth and relative high fertility, but the special circumstance of high fertility among a large immigration population makes the French data hard to evaluate.)
I am not suggesting a causal link between fertility and productivity. But the cultural traits that influence both variables may well be linked. Young men will not lay down their lives for the good of generations to come if their country fails to bring the next generation into the world. Conversely, one might argue that if you have nothing worth dying for, you have nothing worth living for.
It appears that we cannot have it both ways: cultures that produce large numbers of individuals ready to embrace uninsurable risk also manifest risk-friendliness in all areas of life. The same kind of people who start innovative businesses also go to war, raise families, and endeavour to create art that evinces a sense of existential risk. The Jewish sages of antiquity spoke of the “evil impulse,” or yetzer ha-ra, a term that refers to ambition, assertiveness and sexual desire. A parable in the Talmud says that the rabbis once captured this evil impulse and confined it to a large pot. The next morning no one went to work and not a single egg was laid in all of Israel. The rabbis had to let it go.
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