TiB 112: Is Singapore too efficient? Network epistemology and VC. Where does the money of the rich end up? And more...

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Antonis Polemitis makes an interesting observation: coronavirus exploits any societal or governance weak spots. The example he points to is Singapore, which initially looked to have one of the best coronavirus responses, but has now seen cases spiral following outbreaks in migrant worker dormitories. This is an excellent thread on the topic, which explains both what’s happening now and the role of migrant workers in Singapore’s economy.

It’s worth placing this in the context of the broader efficiency vs resilience trade-off that the pandemic is exposing. The FT has a good piece on the shift from “just-in-time to just-in-case” thinking in corporations and this is an excellent discussion of how engineers think about the problem. One way of thinking about Singapore is as a country optimised for efficiency, as measured by GDP per capita (Government ministers are literally paid a bonus based on citizens’ income growth). Relying on migrant workers reduces the denominator, but arguably leaves you less resilient.

This is a good excuse to retell my favourite Singapore anecdote (previously recounted in November): I once expressed admiration for Singapore’s excellent performance on a range of indices to a very senior government figure there, who responded by saying, “Ah, but London’s numbers would also look very strong if it could simply re-label the rest of the UK, ‘Malaysia’”. It turns out, alas, that coronavirus is stubbornly indifferent to human labels. 

Kevin Zollman, a professor at Carnegie Mellon, has been teaching a class on “Network Epistemology” (i.e. how we learn in and from groups) and posting the class notes as tweets. The material is generally fascinating, but last week’s session on “Pluralistic Ignorance” was particularly interesting. The core idea is that groups often end up in scenarios where the collective public professed belief is one thing, but individuals’ private belief is the opposite (The proverbial example is the Emperor’s New Clothes). 

Zollman explains how this happens and draws out some of its less obvious implications. One that seems particularly important is a variation of the friendship paradox - the fact that in a network of people, it can be the case for most people that most of their friends have a particular belief, even if that belief is rare. How? 

It’s interesting to speculate about how, because venture capital is a tightly networked industry, this might contribute to (until recently) ever rising startup valuations. If the best investors are both (a) the best networked and (b) investing in the best, and so most expensive, companies, it might lead most of the industry to believe that valuations are rationally increasing across the board. Of course, that’s not the only explanation, but it’s a useful nudge to pay attention to what we we think we know about what others believe. 

One stylised fact of the US economy over the last few decades is the rapidly growing income of the richest 1%. Atif Mian, an economist at Princeton, and his co-authors have an interesting new paper (see here for a helpful summary in tweet form), that’s almost an economic detective story, in which they track down some of the second-order consequences of growing inequality.

The basic puzzle is this: since 1980, (a) the richest 1% has gained a larger share of US national income; (b) the richest 1% has a very high propensity to save; but © investment in the US has actually declined. So what’s happened to “the savings glut of the rich”? The authors follow the flow of funds and conclude that the saving of the 1% has largely enabled ever higher borrowing among the bottom 90% - which largely went to consumption growth. This fact is disguised when households are considered only in aggregate.

Why does this matter? Mian’s co-author Ludwig Straub argues that it makes the economy dependent on today’s abnormally low interest rates. If maintaining consumption depends on most people borrowing at increasing levels, central banks can’t raise interest rates without a brutal recession. That’s not high on the agenda at present, as we’ve discussed recently, but it’s nevertheless a worryingly unstable engine for the world’s largest economy.

Thanks to everyone who replied asking for a copy of Smoke and Mirrors last week. There were lots of you, so I picked at random and was only able to get back to those selected - sorry!

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Until next week,

Matt Clifford