An Indian Civilizational Perspective

Zakaria's GPS talk with Martin Wolf and the coming crises

Watching GPS where Zakaria is talking to Martin Wolf. And he is predicting a long and bad economic times.. where the consumption and GDPs will fall a lot over the years. According to one stat he cited – the stock markets have lost $40 Trillion in this downturn around the world…. and somebody has lost that! Its a loss of wealth that is not going to come back.

The loss in home prices according to him will be “permanent” or for a very long time. And so the bankruptcies need some kind of strong decisions by the Government. There are only two ways – either put money in for the homeowners facing the bankruptcy or have the creditors face the music. Both have their costs, but one has to see what the social cost is of either decision.

This is definitely a very serious situation and times.. and there is no way that the economy is going to come out of this by half baked measures. Wolf is faulting Obama’s team on being timid on pushing the changes through. Well, he is not factoring in the politics that Republicans and the “free enterprise” brigade creates.

The world is indeed in very serious crisis and despite how it affects me personally, I can clearly say that this economic crisis will persist for between 5-10 years. In fact if the effects of this crisis end in 10 years, then we should be very happy. But I don’t think it will be so. It is a generational shift. And that is so for these reasons:

1. Risk Affinity will change: Past successes brought up the ability for people to take risks. Risks taken often translate in to losses but also step changes in economy and world of business due to innovation. Innovation is not possible without risk taking.

Either the risks come from people despite the situation outside – like those in say rural India where the poor do not have enough leverage and still can bring out innovation. But this innovation is not sustainable or scalable. That is its biggest weakness.

Or, the innovation comes from a place where there is infrastructure for innovation like Silicon Valley. Where the rewards for innovation are so high that it compensates for high and daring risks.. which ultimately end up creating Step Change innovations. It is that innovation that is at stake. The rewards for the high risk taking is not going to be coming easily.

2. Social costs? The world is just talking of economic costs. As if this a two player game like a session of chess… where you have to duel with just one brain and mind. The world of politics and economics is all intertwined. Social changes and Economic changes affect each other. The loss in economy will see high social costs. It may start riots. It will certainly take people more to religion. And that has its own mal-effects. The distance from religion to fanaticism is very short!.

You can almost see all that here in the US. Rush Limbaugh, a hard core conservative and vitriolic speaker and radio host has now become a major force in the Republican party. In fact he is on road to being a viable faction or group in the party. His thoughts can and may inspire a substantial number in the next generation of the Americans. So, in some sense, Limbaugh is in direct confrontation with Obama’s idealism. The same holds true of Islamic world and the other religions. Such fanaticism will create schisms, that I believe will be very tough to fill in the coming generations. We are looking at a major fault line in midst of globalization. All the work of last 60 years is about to be torn apart right in front of our own eyes.

3. Failure of an economic model. With this economic crises, what has failed is an economic model of unbridled capitalism. Now, the way people are characterizing this is as if GREED was the major villain, and in my eyes, those people have little appreciation of capitalism. Capitalism does not shun greed, but embraces it. It says, YES, people are greedy. Let’s channelize their greed into more productive direction.

That requires, (i) laws and regulations that creates those “channels”. And second, (ii) a will to implement those laws. Without these two ingredients, greed runs amock. THAT is the issue here currently.

With the faulty analysis of the situation where the culprit is deemed to be greed, the chances are that there will be a counter movement towards socialistic and communistic tendencies. Which, in my mind, is another challenge. For that is making thinking, action and production all captive to the benevolence of a few. It is like replacing the stock market with a bunch of people who decide on a minute by minute basis as to who will invest how much and who makes a profit and who makes a loss.. and how much! And worse, the people who are the helm of such decision making cannot even solve a simple LInea Programming optimization problem themselves (probably havent even heard of such a thing)… and they are given a problem to solve that has hundreds of constraints and challenges! It is a mockery of human insecurity.

So, where are we headed? Dire and serious crisis. We will have to find ways to change the way we live and think. It is a relief in the US, that you have a person as bright as Obama at the helm. But that is not true for the rest of the world. Be ready to live by the day in the coming years.

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