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Welcome to the Desert of the Real

“Truth, of course, must of necessity be stranger than fiction, for we have made fiction to suit ourselves.” Gilbert K. Chesterton

As a child I would spend large amounts of time playing with mirrors. I know, I know. It’s a strange choice of entertainment but the game that my cousins and I invented became a classic and for a good reason. The game was to hold a small, 20cm wide by 20cm deep, mirror directly under your eyes on the bridge of your nose. The effect of this would be that instead of seeing the floor and what was directly in front of you, you would see the roof. Making it seem like the light fittings and roof joins were sprouting from the ground all the while concealing what was actually there. This usually resulted in awkwardly running into objects, or trying to navigate over light fixtures. The game was great, simply because it was a game and would obviously only be perilous if you truly believed that the roof was on the ground and that what was up, was down.

This effect I imagine would be similar to trying to navigate through the real world while wearing a pair of virtual reality glasses.

Which, despite the somewhat interesting fashion statement it would make, is fun at first. That is while you experience the butterflies and dragons, but I  imagine it would eventually end in this.

That is, possibly without the costume… possibly.

In another post, I expressed a concern that the leaders of our financial system (the RBA) are in fact highly intelligent, high functioning lunatics. That is the very people we entrust our future wealth and prosperity too, are often closer in function to modern day rain dancers, than mathematicians. This was somewhat built on the idea that we’re all, to some extent mystics, trying to control the uncontrollable through “magical thinking”, the internal thoughts affecting the inexorable world of the real that exists beyond our own minds. This way of thinking, which disconnects real-world events from internal beliefs, seems to define the very economic novel which we’ve created. Modern economic and cultural focus seems to be on the virtual, financial, service and nominal world, rather than the real. Meaning we’re living in a world where the most valuable corporations create their revenue channels, not through producing any ‘real’ material goods but rather through the ordering of 1’s and 0’s. Tech corporations who build massive user bases with the belief that other corporations (who still make things) will eventually pay for the right to advertise to us through these platforms… but not yet.

And, we’re now teaching the youth in our world that this is the only way for the developed nations to progress. Save for the German Mittelstand, youth across the developed world are being increasingly encouraged to pursue careers in fields that simply didn’t exist 5 years ago, that don’t create anything tangible today, and due to advances in artificial intelligence, probably won’t exist in 10 years time. The result of this change in culture? To us a son is born and to us, a son is given, and he will be called the texting, emailing, posting, tweeting economy and upon him shall our future rest, and he shall be named the digital service economy.

Service economy graph

But it’s not just this digital economy that has taken over. Supply of service labour in law, teaching, medicine, finance, accounting & retail has swelled faster than our economy can accommodate with the number of graduates in certain fields far exceeding available job openings to such an extent that in 2015, AFR reported:

The number of law graduates has reached a record high with 14,600 graduates entering a legal jobs market comprising just 66,000 solicitors.

With the result being that if little Jimmy, hasn’t gone to Harvard, got a perfect grade point average, and isn’t related to the Queen, then he probably won’t get a job… in law… and medicine doesn’t look much better with current forecasts predicting graduate supply to outpace demand in 2017. And, I might remind you this is all happening while we stand on the precipice of a potential 4th industrial revolution, where the “brain” based, service-based jobs are now coming under threat from advances in computing. But, to think that the future problems with a service based economy are associated with oversupply of labour, and an undersupply of jobs, I think misses the major point. As one writer from the RDANI notes

 “you might conclude that the services sector (wholesale & retail trade, mechanical repairs, accommodation, cafes, transport, communications, finance, legal, accounting, marketing, government, education, health) dominates, but those sectors largely exist to service the needs of the other five ‘production’ sectors, of which agriculture is the largest.”

– David Tompson, RDANI

The main problem, with a reliance on the service economy, is that it ultimately does little to improve aggregate wealth or aggregate standards of living. That is we can’t tweet a hamburger into existence, or argue in a court of law until a car appears. What’s more, the reliance on the service economy as an export is teetering due to increasing competition from overseas providers. The reality is that the service economy rides on the back of the agriculture, mining and the manufacturing economy. The income to service the service sector, the non-production side of the economy ultimately rests on the shoulders of the production economy.

With automation the need for manufacturing and food production labour is declining, but, the one thing that the market seems to overlook, is that the value and welfare of our economy is not tied to the number of tweets per day, or legal cases run yearly, or bones fixed after a natural disaster (although health care is incredibly important). It is tied to the amount we pay for fuel, power, food, water, housing, travel, manufactured goods and our ability to continue to afford these things. The “real” things that are becoming increasingly unaffordable.

So how has Australia responded to these changes?

Firstly, we need to accept the fact that we’ve lead to the demise of our manufacturing industry, regulated it out of existence and set the culture against the glories of production, explicitly conveying to our children “you can be anything you want to be!… so long as you go to university and become a doctor or lawyer”. By this, I’m not saying we want sweet shops, we don’t want those; but rather, high tech, highly skilled production. It is a lie to think that production doesn’t belong in developed nations, but once gone, it is unquestionably difficult to return it once that knowledge is gone. Secondly, we’ve created a culture where failure is considered “uncool”. Those who fail, are failures, all the while the government is trying to encourage kids to be “innovative”. When in reality, no one thought their way to success, they thought and then they fought. That is with guaranteed failures along the way.

Failure is not an option, on the path to success, it is a necessity. Yet instead of teaching children that life is tough and they will need a stiff upper lip in the face of all kinds of trials and adversaries, we’re giving them participation awards! Meanwhile, the west glorifies, Facebook, Instagram, Twitter, Youtube as the future of western economies. All of which can be argued are natural monopolies with limited benefit to the wider economy.

What does this amount to? The very income generators for the west that have made their middle class service based economy viable in the first place, may be eroding and in the meantime, the tech industry (in whom we now trust) bubbles with one analyst writing:

“As in the lead-up to the dot.com crash, investors chasing revenue and earnings growth have pushed up sectors such as technology. More than 80 per cent of new IPOs are for companies with no earnings” – Satyajit Das

Companies including Amazon, Twitter, Uber, Netflix, Shazam, Tesla, Snapchat, Sony, Spotify, who run at zero profits and even massive losses.

And our response has been to set our sights on the virtual world of virtual value, while the sinkholes are appearing before us.

We’ve been living in the virtual world, believing it’s an oasis, while we’ve walked ourselves into the middle of a desert.

So what’s the answer?

Firstly, and sadly we cannot ‘guarantee’ the perpetual ongoing wealth and affluence of the middle class. The change needed to continue improvements in the standard of living may be too painful to be seriously adopted by our politicians. But, we can certainly try, and I think the greatest tool we have to enable that is; once again empowering the middle class with the same blessings that grew it in the first place. Consisting of:

  1. Breathing as much life into SMEs as possible. Not in handouts but in removing at least some of the hurdles required to get a business up and running. I know this is a long shot, but regulations on the regulators requiring them to remove regulations before introducing new ones, which has recently been enacted by the current republican administration in the US, is a great start, and one which the late Packer articulates well. Start at 45 seconds:
  2. Change the culture to one that encourages the courage of taking risks. Essentially, teach the youth to fail, well.
  3. It is impossible to predict with any degree of accuracy what jobs will exist 10, 20 or 30 years down the track. I think the key to equipping children for future jobs, isn’t about sending them down a set career path as much as it is about setting them up for a job path. That is instilling our youth with the attitude that a job is what you do 9-5 to put bread on the table and contribute to society.
    This consists of 1. They see a need which people are willing to pay to have fulfilled 2. They fulfil that need. 3. They are monetarily rewarded for it.
    It has been a sick joke to convince past generations that their worth, status and validation comes from the career that they pursue regardless of the people that they have to tread on or the relationships that they forgo to achieve it.
  4. Drive businesses to be radical. Throw away the virtual reality glasses (not literally because I’m sure they are expensive) and build on the real economy that actually creates wealth.

 

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