Learning from our mistakes: a review of Jared Diamond’s book Collapse

I am getting towards the end of a fantastic book: ‘Collapse,’ by Jared Diamond (who is also the author of one of my all-time favourite books, ‘Guns, Germs and Steel.’) 

Collapse is both a historical discussion of past societies that have collapsed due to the environmental damage they caused, and a forward-looking discussion of how to utilise what we know about the past to prevent similar things happening in the future. Like ‘Guns, Germs’, Collapse draws upon Diamond’s wealth of knowledge across a wide range of disciplines as diverse as ornithology, anthropology, social psychology and marine biology. It is written with the wise perspective of someone who ‘sits outside of time’ and is able to place today’s problems in the context of what has happened in the past and may happen in the long-term future.

Collapse is primarily concerned with environmental problems. It recounts how the once thriving population of remote Easter Island continued to fell their trees until there were none left. The knock-on effects were devastating for their society, as agriculture failed and the population shrank to a fraction of its former size through starvation and violence. The Anasazi Indians and Greenland Norse perished in a similar way because they failed to anticipate the effects of their mining and farming on the environment. But it is not all bleak tales of failure. Diamond describes several positive stories of proactive response. For example, the Tokugawa shoguns of Japan realised that land was being used unsustainably and instituted wide-ranging laws which successfully reversed the damage.

Diamond analyses the reasons why some societies failed and others survived, and how the decision-making apparatus of various societies proved disastrous or essential for their prosperity. He goes on to relate this analysis to environmental problems today, in a discussion that every government today should make note of.

His writing reminded me of the disastrous way we as a society seem to fail to learn from our mistakes, not just ecological ones but in many walks of life. This year is the hundredth anniversary of the sinking of the Titanic – and yet we still manage to have an unthinkable maritime tragedy, the sinking of the Costa Concordia, caused by navigational error combined with failure to evacuate a ship safely. 2008 saw the collapse of Lehman Brothers, which was directly related to the use of ‘off-balance sheet’ finance mechanisms that should have been prevented following the failure of Enron (for structurally similar reasons) in 2001.

A failure to learn from the past seems to be an all-too-common feature of both historic and modern societies, but in Jared Diamond’s book we have an excellent tool to help us adopt thought-processes and decision-making processes that are more robust and less prone to failure. If every decision-maker was as keen to learn from historical mistakes as Diamond is, the world would be considerably better off.

How Long Before we see the World’s First Trillionaire?

In the news in the UK last week was the latest Sunday Times Rich List, which highlighted the widening gap between the super-rich and the average person. Amongst the one thousand wealthiest British citizens, wealth, on average, rose by 5%. Meanwhile, average incomes are falling. A similar pattern is seen in the US. The growth of wealth among the super-rich is a global phenomenon. And the extremes of wealth are extraordinary: the 5 wealthiest people in the world collectively own $252 billion, equivalent to 10% of the UK’s GDP.

An interesting question, I thought, is how long before we see the first trillionaire? So with a bit of help from Forbes and Wikipedia, I’ve done some research and very simple modelling on the subject.

The first dollar-billionaire was apparently John D. Rockefeller, who made a fortune in the oil industry, surpassing the billion dollar mark in 1916. As of 2012, there are 1,226 billionaires with a collective wealth of over $4.6 trillion. Having examined historical data, the evidence points to an exponential trend in the wealth of the very rich, which shouldn’t surprise us as compound interest and GDP are both (exponential) driving factors.

How might we forecast the year in which the first trillionaire will appear? I’ve taken three simple approaches. The first involves just two data points: Rockefeller’s first billion, occurring in 1916, and the record for individual wealth, set in 1999 by Bill Gates at $101 billion. In 83 years, ‘Max Wealth’ went up two orders of magnitude. To reach a trillion, it only needs to go up one more, so let’s say this takes 41 years from Gates’ 1999 record and we’re left with 2040, i.e. as soon as 28 years’ time.

My second approach is to use compound annual growth on today’s ‘Max Wealth’, which is $69bn belonging to Carlos Slim. Historical rates of growth of the wealth of the billionaires are highly variable, but smoothed ten-year CAGRs range from c.3% to c.9%. Taking the midpoint of 6% as my compound growth rate suggests a trillionaire will appear in c.2058, though of course volatility means it is more likely to happen before this.

Thirdly, I have run a simple exponential curve-fitting analysis on the data published by Forbes for the world’s richest person over the last 25 years (shown above). Extrapolating the trend this produces into the future suggests the first trillionaire can be expected in 2052, though again volatility will likely bring this forward (and I haven’t tried to model volatility here).

This is just theoretical number-crunching, so can we validate or sense-check these numbers? How about thinking about sources of wealth. Some of the most frequent sources of wealth are natural resource stakes, software and ecommerce, fund management and telecoms. Something these all have in common is ‘scalability’ as I explained in an earlier blogpost. Importantly, most billionaires gained their wealth through the growth and flotation of a large business. 

The largest listed companies are now worth several hundred billion and their founders tend to be multi-billionaires, so before we see a trillionaire we will first likely have to see a company with a multi-trillion-dollar valuation, with an individual still owning a substantial stake in it. This is would be eminently possible if the Saudi Arabian National Oil Company ARAMCO ever decided to list. Alternatively, a trillion-dollar company might be the result of pushing a new technological frontier. When this occurs, a company can grow so fast that competition law can’t keep up, and hence it can build a de facto monopoly as Microsoft and Facebook have each done in turn. Each tech boom is generating new companies with higher flotation values, so the first multi-trillion dollar IPO could occur within the next 2 or 3 tech cycles.

Can we conclude anything useful from all this hypothesizing and number-crunching? I have five key observations. The first is that the super-wealthy are likely to get richer faster than the average person, unless something fundamental changes in the way our economies or taxation systems are organised, or a systemic financial disaster/ bout of deflation effectively ‘resets’ the world economy. Second: the world might produce a trillionaire sooner than most people would probably guess, inside of 2 to 3 decades. Third, that traditional macroeconomics does not include the super-rich as a variable, even though the wealth of a few individuals is now comparable to the size of entire economies. Fourth, that the ever swelling wealth of the ‘top 1%’ will structurally change how of the top end of most consumer industries run, as huge buying power is concentrated in a few hands (think luxury apartments, hotels, flights, education). Fifth, that the ‘bottom 99%’ will become increasingly dismayed at the rising disparities – and the sentiment of the Occupy movement will reach the political mainstream across the world.

If you liked this post please leave comments below 

You can follow me on twitter: @david_clough1

Three simple policies to nudge the UK economy back to growth

Yesterday the news broke that the UK’s GDP shrank in Q1 2012, meaning the country is back in recession. Given the scale of public sector spending cuts a double dip recession was rather predictable. Put in perspective, the 0.2% decrease in GDP represents stagnation more than serious decline, but it is worrying nonetheless. However the negative growth was so small that even some relatively small policy changes might be able to reverse it. 

While I often write about quite abstract ideas, in this post I will put forward three concrete, low-cost, easy-to-implement policy proposals which would help to improve the economy. 

1.) Regulate the Scrap Metal Industry 

To me, this one seems like a ‘no-brainer.’ When a scrap metal thief steals electrical cable from a railway to sell for £60 to a scrap metal merchant, he causes thousands of commuters hours of delays. The economic value of that lost time is tens of thousands of pounds, plus thousands more for repairs. These thefts happen all over the country on a daily basis, costing the economy tens of millions every year in lost productivity. Furthermore, scrap metal thieves desecrate our monuments, our churches, our public artwork, destroying our cultural heritage as well as costing large sums of money. Some thieves stoop so low as to rip cables from a generator at a hospital, thereby endangering lives. 

Much of this damage could be swiftly curtailed if we required scrap metal merchants to keep records of the origin of all the material they buy and who they buy it from. Stolen goods could be traced to their seller, and strict enforcement would, I believe, deter many would-be metal thieves. Any metal thieves who persist should be subject to severe legal penalties. 

The increased burden of this system would fall largely on scrap metal dealers, and given the trouble that this industry causes for the rest of society, I would see it as completely justified. 

2.) Accelerate the issuance of licences for 4G mobile spectrum*

Why is the UK set to be one of the last countries in Europe to get 4G mobile? Why are we so far behind the USA and Japan? Norway and Sweden have had LTE since 2009. Up to the end of 2011 there were over 40 deployments of LTE worldwide, in 24 countries, including Uzbekistan, Belarus and the Philippines. In the UK, the auction of 4G spectrum has not even occurred yet, after repeated delays. The valuable spectrum which is being freed up by the switch-off of analogue TV will be sitting mostly idle for at least a year. 

 Issuing licences would have multiple economic benefits. First of all, it would trigger a wave of private sector investment in telecoms infrastructure (and Vodafone’s purchase of Cable & Wireless will start to look pretty smart). Second it would increase the productivity of people (such as myself) who use mobile broadband as their main internet connection. Third it would position the country for the next generation of mobile handsets and tablets, which will be powered by 4G technology and be capable of things that will make the iPhone4 look like a 1980s ‘brick.’ Fourth, it would position the country for an explosion in Machine-to-Machine (M2M) communications which could revolutionise our power grids, our roads, our medical devices and much else (much of which has yet to be invented). 

The next generation of smartphones will make the iPhone4 look like this

3.) Deregulate Sunday trading hours for shops 

This may be the most controversial of my three suggestions, but I believe a review of our archaic laws on Sunday Trading Hours is long overdue. For any readers from overseas, I should mention that British stores larger than a local corner shop are currently allowed to open for no more than 8 hours on a Sunday. 

At one level, my views on this are guided by personal frustration at going out to shop on a Sunday and having to head home at 6pm when I’m only half done because everything has closed. But I doubt if I am alone in my frustration. There are plenty of people who Monday to Friday at their desks, for whom Saturday and Sunday are the only opportunities for ‘shopping as leisure,’ who would welcome longer hours. I believe that if stores opened longer, people would buy more, and stores would make more income.

The major resistance to longer trading comes from shop workers themselves. The unions believe Sunday evenings should be ‘family time’ and resistance to changing the rules is so strong that even a temporary waiver during the Olympics caused an outcry. 

But retail workers who oppose change are being short-sighted. The retail industry is in crisis. High streets up and down the country are becoming increasingly deserted as retailers go bankrupt. Tellingly, new shops are not taking their place. It’s important to remember that by freeing up the rules the government would not be forcing any shops to open longer than they currently do, just giving them the choice whether or not to. And business flexibility is something retailers need more of if they are to increase their contribution to the economy instead of continue in their decline.



A lot of options for stimulating the economy are bigger, bolder and more expensive than the ones I’ve outlined. But the strength of these three is that they require little cost to implement: they simply unlock the potential of the economy that was there all along. 

*I realise that accelerating the auctions at this stage may be impossible, in which case the key point is that the auctions must not be delayed again, as they have been many times in the past 

The Infrastructure Dilemma: How a shock for visitors to London hints at greater changes to come

The hot weather in London the weekend before last got me thinking about how unpleasant the London Underground can be at the height of summer, and what a surprise this might be to visitors coming to London for the first time to attend the 2012 Olympics. The London Underground is one of the oldest subsurface railways in the world, with deep and narrow tunnels that are impossible, as yet, to keep cool. The carriages are not equipped with air-conditioning and even if they could be, the existing tunnels don’t allow sufficient ventilation to dissipate the heat to the surface.

In contrast, many ‘developing’ countries have modern metros with fully functioning air-conditioning. They also have wider tunnels and wider trains, which do not require that tall passengers stoop to fit in. Unlike the London underground, many of these metros also support underground mobile phone reception. Visitors from Beijing, Bangkok, Kuala Lumpur and Shanghai may get a shock to find themselves disconnected and in sweltering conditions as they travel on the Central and Bakerloo Lines this summer.

This particular example seems to me to be part of a broader problem facing the ‘developed’ world. Countries in Western Europe and North America were comparatively early in building a lot of the core infrastructure that supports our daily lives. Roads, railways, water networks, sewerage networks, and electricity grids were installed decades or centuries before the rest of the world. This is a big part of the reason ‘developed’ countries got a headstart on the rest of the world in developing industrialised economies. Economic growth theory suggests that a country’s asset base is a key determinant of its labour productivity, so a large asset base (of both physical assets and knowledge) has a positive feedback effect. A classic example is factory tools: investment of capital can improve the tools, which makes the factory more productive and so increases the capital available for further investment.

For most kinds of physical and knowledge-based capital, this dynamic allows whichever country is in the lead to stay at the forefront. However with infrastructure things are different. Unlike other kinds of assets, such as factory tools, computers or science textbooks, infrastructure cannot simply be ripped out and replaced when a new, better version becomes available. Our roads, railways and water networks are in constant use, and in the case of water pipes and the London Underground are buried beneath our streets so that they are costly or impossible to access. For this reason, countries which put in place infrastructure later will have a distinct advantage: they will be able to build better networks than we have. As a result they will gain greater productivity advantages from it – and since they can also upgrade non-infrastructure assets, the ‘emerging’ countries which are currently underdogs could end up leapfrogging the West. They may end up with higher productivity, higher GDP per capita and higher standards of living than what we currently call the ‘developed’ countries.

This process has already begun. Already, Singapore has among the highest GDP per capita in the world. And already, the high costs of maintaining and upgrading hundred-year-old infrastructure are weighing heavily on the city of London. As I’ve previously argued, developed countries need to come up with innovative solutions to their infrastructure dilemma. Furthermore, government planners and civil engineers in less developed nations must learn from what is happening in the West, and design their infrastructure with future change in mind. 

Are the Youth of Today the ‘Betrayed Generation?’

‘Years of struggle for a jinxed generation’ was the headline on the front page of last weekend’s Financial Times. The necessity of  ‘averting a lost generation’ was talked about at Davos this year. It is important that attention is being given to the massive intergenerational wealth transfer created by the Western world’s past borrowings. However I’m not sure the terminology is quite right – a point I will return to in a bit. 

 The article in the Financial Times explains, ‘for the first time in half a century, young Britons embarking on their careers cannot expect to be any better off than their parents.’ The FT’s analysis shows that disposable incomes of young people have stagnated for years. What’s more, for our parents, many things that we have to pay for came for free. The biggest item may be University education; now young people will have to take on massive debts before their mid-twenties to get an education. These are debts which (as I discussed back in 2010) few of them will ever pay off. What’s more, until this month nearly all the burden of austerity in the UK was felt by the young and working age people and almost none by retired or nearly-retired people. 

It is pleasing to see that the government is finally starting to address this. Some newspapers jumped on the removal of the Age Related Allowance as a ‘granny tax,’ exaggerating the impact the changes will have in a transparent attempt to sell more copies by inducing outrage in the public. But George Osborne’s move was long over-due. The Age Related Allowance is an unfair distortion of the tax system – and because income tax allowances are going up anyway its gradual removal for new pensioners will only have a small effect on a small number of people. Further distortions that favour older people need to be looked at. Also, more generally, increasingly progressive taxation will help young people in low-paid jobs. 

Many older people in the UK don’t seem to realise how angry the younger generation really is. The London riots of 2011 were not just mindless criminality, as many seem to think. They were an outburst of the tension that is simmering, mostly under the surface. The same anger led to the trashing of the Conservative party headquarters. The same anger led to the occupation of St Pauls. Much of the press expressed puzzlement at these events (and misrepresented the Occupy movement by calling it ‘Anticapitalist’). But while I find the first two of these examples of expressions of anger deplorable and regrettable respectively, I can at least partially understand why they occurred. 

When newspapers and politicians use words like ‘jinxed’ or ‘lost’ to describe my generation they seem to imply no one is to blame (much like Nick Frost’s use of the word ‘Accident’ in Hot Fuzz). In reality, it is the financial mismanagement of previous governments for several decades that has resulted in the current situation. Perhaps the next time the Financial Times prints and article on the plight of young people today, we would be more accurately referred to as the ‘betrayed generation.’ 

Will the Circular Economy be dominated by entrepreneurs or big business?

Two of the big environmental problems that exist today – the high amount of waste we produce, and the vast amount of raw materials we consume – would appear to have a fairly straightforward, complementary solution. We need to re-use more stuff.

While this is easy to say, it is not so easy to do. Our products were not designed with re-use in mind. With a few exceptions, it is normally more profitable to let people throw away the old so they can purchase something new. Dismantling an old product to re-use the materials is often more costly than getting fresh raw materials for your manufacturing process.

Having said this, recycling of raw materials has become ever more prevalent due to a mixture of legislation and rising commodity prices. But environmentalists have long argued that we need to take matters to another level: instead of decomposing waste into raw materials that resemble our current commodity feedstock, why not design products in such a way that at the end of their lives they can be dismantled and the components re-used without extensive materials processing.

For example, you might want to dispose of a bicycle once the seat and gear mechanisms are worn out. On the one hand, you might take it to the tip, where the steel frame would be used as scrap to help manufacture fresh steel, and the rest would end up in landfill. On the other hand you might give it to a small business which would overhaul the bike, fitting a new seat, a new gear mechanism, giving it a new lick of paint, and then selling it on. In a world where raw materials and landfill space are increasingly scarce, it makes send to do the latter – and this is what the hypothetical ‘Circular Economy’ is all about.

Last week’s New Scientist contained a small but notable article highlighting the publishing of two high profile reports into the potential of the Circular Economy. The reports are well worth a read in their own right, but the most important message is that the idea of the Circular Economy is gaining traction.

Over the next few decades, the Circular Economy has clear potential to be a disruptive force in almost every manufacturing industry. Big companies need to ask themselves where they will fit in the circular value chains of the future. If they don’t take a lead in the move towards ‘remanufacturing’, they risk allowing a new generation of industrial entrepreneurs get a head start. Economies of scale should give established businesses a clear advantage in moving towards a new economic paradigm. But organisational inertia – the natural preference for maintaining the status quo – could hold back companies even when some of their managers understand the need for change. It has happened many times before and it could happen again. For entrepreneurs there are valuable opportunities for building businesses with the circular economy in mind.

It will be fascinating to watch the transition to a more circular economy. I expect it to occur gradually, and it may not even be complete in my lifetime, but the next 10 to 20 years should begin to reveal who will be the winners and who will be the losers.

Why I no longer question the portion of my taxes that supports the military

It’s a while since I last posted, not because of a lack of stimulating books, articles and conversations but more down to a lack of hours in the day. But a book I have just finished reading, Paul Collier’s The Bottom Billion, made me revise the way I think about military spending. It made me question one of my long-held beliefs: that to make the world more peaceful Western nations should reduce what we spend on the military. This, I thought, is worth sharing.

Paul Collier is an economist who is tackling one of the world’s toughest problems: how can economic development get started in the poorest nations on Earth where growth has been absent for decades. He identifies four poverty ‘traps:’ conflict, natural resource dependency, being landlocked and bad governance, and explains why these lead to self-perpetuating poverty. He takes a pragmatic view in admitting that the scope for Western assistance is limited and much of the impetus for change in these countries has to come from within. But he also identifies four instruments the West has at its disposal that can make a difference: aid, international laws, trade policy and military intervention.

This last one got my attention. Having observed the war in Iraq, I and many of my generation would associate intervention with resource imperialism. But Collier makes a case for intervention based on the consequences of a lack of it. He explains how the US entered Somalia in 1993, but withdrew after 18 American casualties caused a wave of bad publicity. In Somalia, he points out,

‘by 1995 around 300,000 people had died… but the biggest killer consequent upon the withdrawal was not what happened in Somalia but the lesson that was learned: never intervene. It took only months to prove how disastrously wrong this lesson was. Remember that 1994 was the year of Rwanda. We didn’t want another Somalia, with another eighteen American soldiers killed, so we got Rwanda, in which half a million people were butchered, entirely avoidably, because international intervention was inadequate.’

Collier explains how the British operation in Sierra Leone in 2000 dispersed a rebel army with a few hundred men, very likely averting a civil war. He articulates very clear circumstances when military intervention is warranted, and warns us from being put off the idea by the calamity that occurred in Iraq – or else we may have another Rwanda on our hands.

For one thing, the historical perspective on military interventions is crucial when considering the events in Libya last year and the ongoing conflict in Syria. For another I no longer question the value of the proportion of my taxes that go towards paying for the UK military. The important thing is to be vocal about how the military is used. Very few situations warrant the violence of a military incursion, but when they do we should not be afraid to use force.

If this topic interests you, this TED Talk gives some further (more rhetoric-driven) arguments for the importance of Western countries’ armies.