deus ex machina
I don’t know if there’s something cranky about me today or what. I found lotsa things funny. And this wikipedia entry is one of it:
In fiction writing, deus ex machina has been extended to refer to a sudden and unexpected resolution to a seemingly intractable problem in a plot-line, or what might be called an “Oh, by the way…” ending. Some critics think that a deus ex machina is generally undesirable in writing and often implies a lack of skill on the part of the author because it does not pay due regard to the story’s internal logic and is often so unlikely that it challenges suspension of disbelief, allowing the author to conclude the story with an unlikely, though more palatable, ending. A well-known modern example of deus ex machina occurs in the Michael Crichton book The Andromeda Strain: the pathogen referred to in the title is suddenly rendered non-lethal by a random mutation which apparently affects every existing virus particle instantaneously.
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In an episode of the animated television series The Simpsons, in which Homer is the only human being to ascend to Heaven after the Apocalypse, he begs God to undo what he did, and in doing so, God exclaims “Deus ex machina!” as a magical incantation and literally reverses the end of the world. The Simpsons has been known to end many of its episodes with a deus ex machina.
A New Epoch
In the last 18 months, there has been the emergence of a breed of capital that is vast, secretive and powerful.[i] The very mention of its name evokes mixed feelings of excitement and fear, however, whether you rave about its tremendous potential in transforming enterprises or you caution against its growing (perhaps insidious) incipience, sovereign wealth funds (hereafter SWFs) all over the world are rapidly changing the geo-politics of international economy. In the aftermath of the sub-prime mortgage crisis, SWFs such as the Abu Dhabi Investment Authority, Government of Singapore Investment Corp and China Investment Corp owns on average 11.43% of four major financial institutions in the United States.[ii] Such sizable investments are hardly missed by the international community and consequently, a ferocious debate broke out in Washington and European capitals over whether SWFs should be allowed to buy up swathes of corporate west. More often than not, these talks boil down to fears over national security. Nevertheless, the mood with regards to SWFs has changed considerably as the full scale of financial malfunction in the West is unveiled and SWFs are seen as potential lenders of last resort.
Our concern in this essay is of course not the exact machinations of SWFs. Rather it marks an attempt to discern the broad trends that are unveiled in such developments and an effort at understanding how the changing landscape of geopolitics is impacting on economic activities in the global arena. I believe that what we are about to see is the beginning of another epoch in world’s history. The previous epoch, characterized by a jubilant effervescence over the promise of globalization and permeated by the belief that distance is increasingly an anachronistic variable in thinking about multi-national structures and collaboration, seems to be entering its twilight. Welcoming us instead is an epoch where the state is assuming an urgent mandate in becoming a major player on the global economic stage. Quite understandably, the state is in a state of considerable shock as it finds itself with the previously-abducted prerogative to mete out regulations thrusted back onto its lap. As it bails out banks after companies and companies after banks, the state is suddenly the greatest capitalist in town. This bodes well, and bodes ill. Let’s hear the bad news first, so that we will not leave on a cheerless note.
The Bad News
The bad news is that as we all know, when it comes to the state, there is a perennial jealousy about maintaining sovereignty and observing boundaries demarcation. Hence, it might not be preposterous to suggest that the current trajectory of development would lead us back to the days where states wield immense power over deciding the destiny of industries, a time which harkens back to the mercantilist paradigm that characterized the 16th to 18th century. It may sound far-fetched but it is definitely plausible if we consider the scale and type of bailouts that had happened recently. Billions were pumped into saving banks which are the penultimate determinant of macro-industrial planning – the boss who decides which firms get loans and which does not. And guess who becomes the boss now?
Such a trend is necessarily regressive as it reverses the work of generations of economic liberals who believes in the efficacy of a freer market. While unquestioned liberalisation might not work, as searingly elucidated by Joseph Stiglitz in his discussion of the Asian and Russian Financial Crisis in Globalisation and its Discontent, on the whole, massive state intervention in economics had been simply disastrous. The triumph of the market had been fully demonstrated when we consider the flow of immigrants from East to West Berlin during the Cold War and the undisrupted economic reforms that the Chinese undertook thirty years ago. It is therefore critical that businesses must constantly ensure that the state does not overstep its boundaries and issue onerous legislations that would cripple the normal functioning of the firm in the name of ‘regulation’, which has become a byword for any state action against the firm.
When Adam Smith wrote the Wealth of Nations in 1776, he expounded how the free market, while appearing to be chaotic and unrestrained, is actually guided by the so-called ‘invisible hand’.[iii] He believed that while human motives were driven by self-interest, the competition in the market would tend to benefit the society fundamentally because everyone gets what he wants and can demand. Adam Smith was however wary of businessmen and argued against the formation of monopolies for he is deeply aware of the asymmetry in information and power that these agents would create in the market, and consequently the distortion that would result from the arbitrage and high barriers of entry. Yet, from where he was, he did not foresee how governments do not have to directly intervene in the market by means of regulation, but could instead evolve into market agents and introduce new confounding variables into the whole business of market equilibrium.
It is clear from the SWF example given above that when it comes to the state, they are not always purely economic incentives driven. There is the new, added dimension of state sovereignty which confounds market sensibilities. If we were to accept Benedict Anderson’s famous argument of how the nation is a community that is socially constructed, imagined by the people who perceive themselves as part of that group, we must then realise that as part of the citizenry in business corporations, we ought not be bound by such artificial concepts. Money is fungible, but currency is not. The former is an instrument of the market which recognizes only price signals and incentives, while the latter is essentially a political innovation to reinforce the national identity. Nevertheless, with the increased role of the state, the firm is now vulnerable to its idiosyncrasies which include not wanting to accept money from another country, though these money may at times be even denominated in the same currency. SWFs are often awashed with cash due to their stellar exports of oil, gas or commodities, and hence represent a cheap source of loans to many companies with liquidity problems. However, if the state gets a say in it, it might just starve firms of such resources in the hallowed name of ‘national security’.
The essay’s aim is not to issue a value judgment on whether the state or firm is right in such an instance, it merely wants to elucidate the plausible conflicts of interests that might arise due to fundamental differences in the perception of risk and opportunities. When such clashes happen, it is vital for the firm to then maintain its own sovereignty against the encroachment by the state and defend its corporate interests against crippling legislations as well as ‘less-than-rational’ risk evaluations with regards to the source of capital.
In addition, it is clear from recent events that the era of dirt-cheap loans from financial institutions and rampant investments on basically nothing is over. The model of building businesses like castles in thin air without real economic activities has seen its inevitable demise on Wall Street. As nations begin the long process of soul-searching on what had happened, one thing is certain and that is business have to go back to the basics and adopt some good old-fashioned rules such as creating value for customers, having returns which are proportionate to the risk undertaken for projects and being hungry for opportunities but not too hungry. Interestingly, a quote from American activist and labour organiser, Cesar Chavez, rings salient as we take stock of our current economic malaise, “we cannot seek achievement for ourselves and forget about progress and prosperity for our community… Our ambitions must be broad enough to include the aspirations and needs of others, for their sakes and for our own.” Corporate top-guns must learn how to share their wealth with the masses and not simply exploit public trust and then later public funds (much of the bail-outs went to saving the top personnels in rogue institutions which created the problem in the first place). There is a whole system of values that is missing out in this era of financial management and it is vital that we create it for the next.
The Good News
While the state and businesses seem to be strange bedfellows, they are not necessarily doomed to fail. There is a role for the state in the market. Smithsonian fears of monopolies and oligopolies will not dissipate on its own, given enough first-movers advantages, these colossal entities can get themselves well-entrenched into the capitalistic order of their days. Similarly, the collapse of the entire financial system will not right itself if there is no able agent to facilitate its recovery; the market is seldom lauded for inching out of a recession itself. John Maynard Keynes remind us of the critical role that states can play to ensure macro-economic stability, even Adam Smith himself was prepared to accept government’s intervention if it is judged that their net effect would be beneficial and would not undermine the basically free character of the system.
As men rave and sigh at the promises and failings of the market in the past years, they are manifestating symptoms of Keynsian much feared ‘animals spirits’ which can groom or doom a market on basically nothing but expectations. We need more coherent policy directions than simply market mania. In March, free market guru Martin Wolf, chief economics commentator at the Financial Times, announced the death of the dream of global free-market capitalism, and quoted Josef Ackermann, chief executive of Deutsche Bank, as saying “I no longer believe in the market’s self-healing power.” Evidently, we cannot expect the patient to do a shake-out here, we need a qualified doctor. Can we look to the state for coherent policies and to be a qualified doctor? Probably not, but it’s a Hobson’s choice anyway. The state is not always businesses’ best friend but it is the only one that we got now and it has demonstrated its willingness to help.
Conclusion
It is now up to the state to decide for itself how it wants to balance the desire to stay true to the goals of market liberalisation and the compulsion to preserve national security by adopting a more mercantilistic outlook. It is inevitable that as each state begins its domestic initiatives to combat the recession, they will become more inward-looking. Nevertheless, it is also at this juncture, where the states themselves are becoming important market players, that there is a greater need than ever for states to foster greater trust amongst themselves. For one, SWFs need not always be viewed in such negative light, Singapore’s GIC and Temasek Holdings investments in the American banks while strategic, can also be viewed as an attempt at promoting goodwill and earning some honest interests on their capital.
Perception is of paramount importance in international relations and with perceptions come norms, therefore, it is vital that we start on the right page, with the right expectations. With hope, we might not have to witness the revival of political and economic barriers. As we have seen in the creation of the United Nations, which occurred in the aftermath of a terrible, cathartic WWII that finally convinced the world that we are not of many races but one, it could be in time of adversity like ours, that we see the harbingers of extraordinary efforts at building multi-lateral cooperation in the economic sphere as well. As there is only one race instead of many races, there should also only be money instead of currencies.
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