Global capitalism has hit a rough patch. Not since the 1970s has dissatisfaction with the status quo been this obvious and this profound.
Britain’s decision to exit the European Union, the gilets jaunes protests in France, and mass demonstrations in Chile, Colombia, Argentina and Hong Kong testify to a surging, worldwide level of anger with existing economic and political arrangements. In all probability, the coming U.S. presidential election will intensify the questioning of a system many protesters think is falling short.
Two books – one recently published, another that will hit bookstores this spring – offer insight into a couple of key aspects of this discontent. The first book tells a fascinating tale of how financial markets can create prodigious levels of wealth for some. The second explores how some of those same market forces are condemning a swath of the U.S. working class to lives of misery.
The Man Who Solved the Markets by Gregory Zuckerman profiles Jim Simons, a chain-smoking mathematician who has amassed a fortune estimated at US$23-billion. (Yes, that’s billion with a “b.”) Mr. Simons’s great achievement? Pioneering new ways to exploit tiny inefficiencies in financial markets.
In stark contrast, Deaths of Despair and the Future of Capitalism explores why death rates are climbing among working-class, middle-aged, white Americans. Written by the wife-and-husband team of Anne Case and Nobel laureate Sir Angus Deaton, it paints a frightening picture of how life is deteriorating for many people without advanced education.
Reading both books, back to back, stirs qualms about a system that is distributing its rewards eccentrically, piling extravagant rewards on some and withholding a decent existence from others.
Consider, for example, Mr. Simons and his all-star team of mathematicians and computer experts at Renaissance Technologies LLC in East Setauket, N.Y. Since 1988, their flagship Medallion Fund has generated average annual returns of 66 per cent and amassed total trading profits of more than US$100-billion. Even mid-rank employees routinely walk away from a career at Renaissance with tens of millions of dollars.
The only problem with this happy picture? It is awfully difficult to figure out exactly what the crew at Renaissance is doing to justify its extravagant rewards. Most defenders of stock-market profits begin by arguing that the market exists to funnel capital to deserving companies. But there is no obvious link between what Renaissance does and the nitty-gritty of real companies or real entrepreneurs.
As Mr. Zuckerman makes clear, Mr. Simons and his team pride themselves on knowing little, if anything, about the actual businesses that underlie their stock-market bets. Instead, they view what they do as solving a mathematical puzzle.
The exact magic behind the Medallion Fund’s amazing results remains a secret, but, from all available hints, its process begins by hunting for faint but statistically significant patterns among stocks. The pattern might be as simple as the tendency of GM and Ford share prices to move together. Usually, though, it is far more subtle and involves a myriad of factors.
Renaissance bets on these patterns to manifest themselves in predictable ways over periods of a few hours or days. Its edge in these situations is often tiny – it may, for instance, place bets it is confident of winning only 51 per cent of the time. But that is fine. So long as Renaissance can place a multitude of such bets, and leverage the returns through borrowed money, a minuscule but reliable edge can generate huge profits.
All of this is undeniably brilliant. It’s not clear, though, why the economy should be rewarding Renaissance’s achievement quite so generously.
Its process generates no product or service for other people. It gushes cash for Medallion investors – all Renaissance insiders – simply because it can predict market blips slightly better than the next guy. Any contribution Renaissance makes to the broader economy is hard to pinpoint. One former Renaissance computer scientist laments that all the software he has built has simply gone to make rich white guys even richer. “It pisses me off,” he tells Mr. Zuckerman.
His qualms are not shared by most of his co-workers. “Many of the scientists and mathematicians [Renaissance] hired were … brilliant, driven and seemingly detached from human emotion,” Mr. Zuckerman writes.
Consider the group of Renaissance scientists who were waiting to board a return flight from a corporate getaway in the Bahamas some years ago, when they were asked to clear the way for a pregnant woman. Some of the Renaissance contingent refused. If the woman truly wanted to board early, she logically should have arrived earlier, they said.
The extraordinary wealth at Renaissance has allowed some of its principal players to express their opinions in grand fashion. Many of us might applaud this tendency in the case of Mr. Simons, who made breakthroughs in geometry as a young man, then built a university math department and served as a code-breaker for U.S. intelligence before becoming a full-time investor at the age of 40. At the age of 81, he is still going strong, helping to fund autism research and subsidize salaries for thousands of public-school math and science teachers. He is also a major contributor to the Democratic Party.
Robert Mercer, one of his key executives at Renaissance, is a far more controversial figure. He is an investor in the far-right Breitbart News and a major financial backer of Donald Trump. He also offered key support to Nigel Farage and the Leave campaign in the 2016 vote on whether Britain should leave the European Union.
His example may help explain why so many average citizens feel that money has come to dominate politics. It has, especially in the United States.
In their book, scheduled for publication in March, Dr. Case and Sir Angus, both economics professors at Princeton, calculate that more than 11,000 registered lobbyists now clamour for the attention of 535 members of the U.S. Congress. In 2018, those lobbyists spent US$3.46-billion to plead their cases to a few hundred elected representatives.
The increasing clout of business heavyweights is one factor that is driving an increase in what Dr. Case and Sir Angus call deaths of despair – suicides, drug overdoses and alcoholic liver disease – among working-class white Americans. For decades, thanks to improved medical care and better nutrition, mortality rates steadily fell in developed countries. But in the late 1990s, that progress stopped in the U.S. Deaths of despair began to drive down life expectancies for working-class white people, especially those without a university degree.
Falling life expectancy in a developed country is a shocking reversal of the global trend toward longer, healthier lives. And it is no small matter. “When we add up these numbers from 1999, the critical point where the decline began, to 2017, we get a very large total: 600,000 deaths of midlife Americans who would be alive if progress had gone on as expected,” Dr. Case and Sir Angus write.
So far, falling life expectancies because of deaths of despair are visible only in the U.S. Perhaps the trend reflects that country’s spectacularly dysfunctional health-care system as well as its early exposure to the opioid crisis. But Canadians and others shouldn’t feel too much confidence in their own somewhat brighter pictures.
As Dr. Case and Sir Angus make clear, some of the most powerful forces driving working-class despair are global – notably the shrinking prospects for people without a bachelor’s degree. In an increasingly automated world, where management is focused on generating returns for shareholders and where corporate power is largely unconstrained by unions or government pushback, “the worlds of the more and less educated have split apart,” they write.
People with the right skills – say, the mathematicians at Renaissance – get to enjoy secure, lavishly paid employment in challenging and interesting jobs. Others, including many working-class Americans, have to wrestle with increasingly uncertain employment, often in the gig economy or in temporary jobs subcontracted out by big corporations. They have little hope of finding anything better.
The widening gulf between the two groups will generate strife – and for good reason – unless society agrees to a more equitable arrangement, Dr. Case and Sir Angus argue. “Capitalism does not need to be abolished,” they write. “But it should be controlled and regulated in the public interest, not solely in the interest of stockholders or profitable businesses.” Anyone who reads their book, and Mr. Zuckerman’s, is likely to agree.
Ian McGugan