Author and Macquarie strategist Viktor Shvets on the impact of the Information Age and financialization, and how they are creating a different, new world

By Gareth Vaughan

Do we need to be free to be innovative, prosperous, or even happy?

This is one of the deep questions posed in Viktor Shvets' book The Great Rupture: Three Empires, Four Turning Points, and the Future of Humanity.

Shvets is Managing Director and Head of Asia Pacific and Global Strategy at Macquarie Group in Hong Kong. In a Zoom interview about his book, Shvets explains why he believes capitalism as we know it is dead, and that whatever emerges to replace it will be quite different, potentially dystopian or utopian. Shvets argues that capital is no longer behaving the way it's supposed to in a capitalist system, and that there has been a dissolution of conventional labour markets.

He argues forces unleased in 1971 through the dawn of the Information Age and financialization, after US President Richard Nixon ushered in an era of leverage and asset price inflation by moving to a floating exchange rate and ending US dollar convertibility to gold, effectively set the world on this course. The "self-re-enforcing merger" of technological disruption and financialization "is creating a brand new world." And instead of being merely an intermediary, the finance industry has become the world's largest industry.

"In a capitalist economy capital is supposed to be scarce. Capital is supposed to be allocated very carefully. That's why we have capital as a pricing model, we have discounted cashflow models, In our world today capital is abundant. In fact we are drowning in capital. Depending on how you define capital and to me there has to be a holistic definition, we have at least $300 to $500 trillion of capital. That's at a minimum five, maybe 10 times the global economy or global GDP. We are drowning in capital. It's not evenly distributed, it's not fairly distributed, but nevertheless there is no shortage of capital. And we continue to create more capital than we need," Shvets said.

"In industrial economies capital was created in line with economies. Today we're creating four or five times more capital than economies require every year."

'Increasingly we are irrelevant'

He says during industrialisation, the 18th, 19th and 20th centuries were periods of very high capital requirements for the likes of roads, factories and power plants. Now the world is primarily driven by intangible capital, not by tangible capital.

"It's IT, it's software, it's social capital, it's digital capital. Those areas do not require a great deal of capital investment, they're actually relatively capital light. And intangibles behave completely different to conventional tangible capital. For example, if you run a Coca-Cola bottler and you run out of capacity, you must build another factory. But if you're the Coca-Cola company producing the recipe, it can be multiplied billions of times without any degradation. And so intangible capital has a much larger scale," says Shvets.

"In the Information Age we have limited capital requirements and we are flooded with capital. So that's a major difference, - how capital functions. It's a much more intangible economy rather than tangible."

"The same has happened with labour. In industrial societies labour needed to be trained, it needed to be skilled. That's why there was a huge premium on college education. And the reason for that [was] as machines were improving we were their brains. In the Information Age increasingly we are irrelevant," says Shvets.

"So in a world where capital is not the same, in a world where labour is not the same, capitalism or liberal capitalism as we know it, tends to disintegrate. So the question then becomes how do you deal with that? What drives it is a mixture of technological evolution and financialization that we've done over the last four decades. And that leads us into a very different world. I call it the Black Hole because we are approaching a Black Hole. What lies on the other side of the Black Hole is unknown."

Shvets was born in Kiev, then capital of the Soviet Ukraine. He attended Kiev University of Trade before emigrating to Australia where he obtained a Bachelor of Economics degree from the University of Sydney and a Master of Commerce degree from the University of New South Wales. Aside from Macquarie he has worked for Baring Securities, Deutsche Bank, and Lehman Brothers in Sydney, Melbourne, Hong Kong, London, New York and Moscow.

Shvets says over the past 500 years societies that have granted their citizens ever wider economic and political freedoms, with an independent judiciary and independent adjudication of disputes, have had the recipe for success. This mixture has provided the freedom to exchange views, the freedom to explore, the freedom for people to do what they like in their own interests.

"[This] really underpinned our capitalist economies for five centuries. In the Information Age it might be different."

He argues that the leadership in China, Russia and Turkey now believe, that with the help of computers, the central allocation of resources might be better than a free market.

"So the view is we can actually do allocation of resources centrally and therefore the free market is not as critical anymore at generating free market signals."

Shvets says we're not quite there yet, but over the next ten or 20 years computational capacity will continue to improve.

 "For the first time we now have artificial intelligence (AI) making real contributions to science ...increasingly what we see, whether it's science, whether it's inventiveness, [is AI] playing a greater and greater role. Humans are still critical drivers of inventiveness, but [in] the next couple of decades that might not be so. And so the question then becomes if I restrict the professor of Beijing University from accessing Google Scholar or exchanging views with other people in his field, do I really suffer? And the answer increasingly [is] you might not be," says Shvets.

"So one of the key questions is in the next ten to 20 years is will we be in a position that technology will create illiberal, maybe even brutal societies that will no longer suffer from stagnation of ideas, stagnation of inventiveness, will no longer suffer from lack of prosperity, and maybe people will even be happy."

How to avoid 'the dark corner'

The way to avoid this "dark corner," Shvets argues, is to mimic Germany's so-called iron chancellor Otto von Bismarck who created the first welfare state in the modern world in the 1880s. Bismarck's unemployment benefits and pensions took a lot of sting out of social inequality, wealth inequality and income inequality, and pacified societies, says Shvets.

His policy recipe for today's world includes a universal basic income, changes to competitive regulations, an overhaul of education and skilling, and a massive new Marshall Plan for the least developed parts of the world. Alongside this Shvets says there needs to be a decreased reliance on pure monetary levers, which should be replaced with neo-Keynesian and potentially Modern Monetary Theory tools. These policies are needed to reflect humans' diminishing importance in the Information Age, Shvets says.

"On the margins humans and labour are contributing less and less. The labour component continues to decrease as a proportion of any product or service that we generate... Over the next ten to 20 years this process will accelerate even more."

He points out that we don't feel the pain of people who have been through similar massive changes in the past, but we are set to experience something similar ourselves, with some people already doing so through the rise of the gig economy.

"One of the examples I cited in the book if you were transported into early 1800s London and you found a group of Luddites just about to smash the loom, and if you were to have come to them and said 'look don't do this. Believe me in 30 or 40 years time it's all going to be okay.' I wonder whether they would've thought that you were kidding because 30 or 40 years was basically their entire life. So one of the problems that people tend to forget is that yes societies always adjust, but it's our responsibility over the next couple of decades to be the Luddites. It's our responsibility and misfortune or fortune to feel the impact of those changes," says Shvets.

Luddites were British weavers and textile workers who objected to the increased use of mechanised looms and knitting frames.

"The first Industrial Revolution was only cotton and steam railways. The second was much larger. It was chemicals, pharmaceutical industries, combustion engines, electricity, it was refrigeration, mass communication. Now the third Industrial Revolution or Information Age is even wider. It's everything we do, it's everything we look at, it's everything in our economies and societies. So when people say we've been through this before, true, but we don't feel the pain of the people who had to go through it because it was so long ago," says Shvets.

"And this time we're not just removing muscle we're removing brains as well. And so the importance of a universal basic income guarantee is to ensure that in a world where there is a diminishing contribution of labour and humans, humans are given dignity to pursue the life that they want to pursue and find alternative means of self satisfaction. If it's not work what is it, is it sports, is it religion, is it arts, is it doing something else?"

In terms of education and skills he argues that we need to move on from the industrial age creation of experts in narrow areas, and to create "human beings," people with a broader outlook.

"Everything we do in education and skilling needs to change including how we do it," says Shvets.

In terms of regulation, an important issue is how we manage data, how we manage data privacy, who controls data, and how it's used because AI and data are "morality free."

"They can be just as easily used for good as they can be used for evil ...So we need to change how we control the data, how we regulate the data. It should not be based on non-monopolistic rules of damage done to consumers or businesses. It should be done more to encourage 1000 flowers to bloom, thousands of ideas to bloom rather than trying to control and corral it." 

"Technologies can be used to control societies not necessarily give freedom," Shvets adds. "One of the essences of the book is to say do we actually need to be free to be prosperous, happy, to be innovative?"

In terms of a Marshall Plan for the least developed countries, Shvets suggests more than one billion people could potentially be on the move over the next couple of decades from Africa and other areas.

"We really only have two choices. Either we open our homes to them, or alternatively we'll try to make them stay at home. And the only way to make them stay at home is a massive Marshall Plan, very similar to what the United States did from the late 1940s to the early 1960s in places like Germany, Italy and Japan. It has to be enlightened, not commercially based transactions. This money will never get repaid. Its return is lower migration, lower social risk, lower geopolitical risk, and lower healthcare risk because these are the places where pandemics more likely than not will originate," Shvets says.

"In order to finance all of this increasingly we need to understand that Modern Monetary Theory, or combining or fusing fiscal and monetary levers, is the only way forward. As it is $500 trillion of paper that we already have outstanding globally will never be repaid anyway. All we're doing now is doing controlled default rates. At the end of the day connecting fiscal spending to central banks in some form and eliminating the connection with debt, is the only way forward. Not because it's necessarily the right capitalist answer, it's because capitalism no longer exists."

"A lot of policies that are being discussed today, whether it's higher corporate taxation, whether it's restrictions on share buybacks, whether it's restrictions on CEO compensation, whether it's a capital gains tax, wealth tax, they are not designed to finance governments in my view. Governments will be funded through central banks. They're primarily designed to create what people would believe to be fairer, or more equal societies," says Shvets.

"There are policy choices we have that can move us away from dystopia towards utopia." 

"Over the next several decades it's going to be a very difficult transition...There will be tensions within countries, between countries, it might lead to wars. But at the end of the day you can see that technology, the Information Age and financialization, might actually end up in the right spot. It's my hope that we will take those policies and use them," Shvets says.

Meanwhile Shvets sees the current COVID-19 pandemic as a dislocation that accelerates change.

"So the way I look at COVID-19 is it forces us now to accept that there has to be a fundamental change in the way in which our economy's operating, in the way financial markets are operating, and it paves the way, as they always do those dislocations, to quite a different world. Sometimes actually much better than the world that preceded it."

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