The Arctic

An interesting article from Geopolitical Futures on the Arctic and the factors to consider when determining its relevance in geopolitics.  From an economics standpoint, this region presents two opportunities: (1) new trade routes that will expedite transportation of goods between various points on the globe; and (2) potentially vast untapped oil & gas reserves.  But both such benefits come with important caveats.  For the time being, unless significantly greater amounts of ice melt, it is a very expensive route to take, nor one that can currently be used year round.  And, as oil prices have swooned, the reserves are not economical since the typical project has a breakeven price of $100 per barrel.  Lastly, where we have previously discussed choke points in the South China Sea, the Arctic Ocean is even more vulnerable, and any powerful navy (wink, wink) really can dominate sea activity at will.

Overall, a good primer on the metrics to think in terms of this area.

Revisionism?

George Friedman:

"In making the decision to use a nuclear weapon, the U.S. faced some tough choices. It had to balance its moral responsibility to American troops and those who were still being slaughtered by the Japanese against the lives of those who would be killed in a nuclear attack. But the idea that Japan was ready to surrender is a myth. It was ready to negotiation a peace deal; it wouldn’t accept unconditional surrender. This could have opened the door to another war, allowing the slaughter of Americans who had already fought and survived a long war."

Scale

The subtitle is The Universal Laws of Growth, Innovation, Sustainability, and the Pace of Life in Organisms, Cities, Economies and Companies and the author is Geoffrey West (2017).

The author is a theoretical physicist focused on complexity science and emergent systems, but became intrigued by the question of why humans age and die.  And through his work, he came to the unexpectedly fascinating result that all organisms scale with size in mathematically predictable ways.  Then, taking it a step further, he was able to translate the science of his discovery to a methodology that was applicable to cities and companies as well.

With all that as prelude, it really is an interesting book that has new and insightful ideas on practically every page.  I would do a disservice to try and write one of my standard, pithy summaries.  So, I will try to encapsulate some of the main ideas, with the disclaimer up front that much of meat is still probably getting overlooked.

As it relates to organisms, whether a shrew or a blue whale, the fundamental building blocks of cells, mitochondria and capillaries are appreciably the same in each.  And as the mass of any such animal grows, the related metabolic process tied to these parts grows at a 75% rate, while the relative strength grows a two-thirds pace.  Succinctly, as an animal grows bigger, its metabolic process becomes more efficient and the ratio of mass to strength decreases.  To wit: “the pace of biological life decreases systematically and predictably with increasing size: large mammals live longer, take longer to mature, have slower heart rates, and have cells that work less hard than those of small mammals, all to the same predictable degree.  Doubling the mass of a mammal increases all of its timescales such as its life span and time to maturity by about 25 percent on average and, concomitantly, decreases all rates, such as its heart amount, by the same amount.”

In looking at circulatory networks in groups as diverse as humans and plants, the author notes that all have commonalities: “they are space filling, have invariant terminal units, and minimize energy needed to pump fluid through the system.”  They are all largely fractal in nature.  And one of the interesting takeaways from the structure of this system is that it helps to explain why organisms can have a resulting size cap; because as the space between capillaries (the invariant terminal units) grows, the ability to feed oxygen to the end cell users becomes more challenged; therefore, the size of the specific creature finds its limits when the chance of hypoxia increases.  Explained a little differently, because metabolism has a sublinear growth rate (increasing at 75% relative to increases in mass and total cells), the body reaches a point where the ability to repair and service new cells (the interface between capillaries and cells) goes to zero because there are not enough terminal units.

In applying these concepts to cities, there is a similar pattern discovered: within any national system, as the population doubles, the infrastructure needs only increase by 85%, but the socioeconomic factors (like wealth, pollution, patents produced, crime, GDP) increase at a 115% rate.  Scaling applies, just as it does with humans.  And in cities, the socioeconomic activity grows at a superlinear rate, while infrastructure is more efficient, which lends to the general precept that cities enhance social interaction and lead to agglomeration effects.

One point that the author makes is that humans always die, but rarely does it happens to cities.  And in thinking through this reality, he points to these differing sublinear and superlinear growth rates as an explanation: “…the energy available for growth is just the difference between the rate at which energy can supplied and the rate that is needed for maintenance.  On the supply side, metabolic rates in organisms scales sublinearly with the number of cells…while the demand increases linearly.  So as the organism increases in size, demand eventually outstrips supply because linear scaling grows faster than sublinear, with the consequence that the amount of energy available for growth continuously decreases, eventually going to zero.”  It is not just about growth, it also about repair and maintenance.  Every metabolizing moment in our body creates entropy, and as we get older, the wear and tear makes us less resilient, particularly as the units responsible for recovery grow at a sublinear rate.

Quickly, West points out that companies tend to suffer from the same phenomena as humans, which is why the large, large majority will disappear over time.  While the revenues and profits tend to grow linearly, it leaves very little room for the inevitable perturbations and disorder, and the resiliency of the company wanes.

In some respects, the author uses this work to sound the alarm on sustainability, particularly as cities grow and grow as a function of human innovation.  He believes that there is likely to be some sort of singularity as a result, and suggests that we need to figure out a way to tamp back the damage we’ve done to our planet if we want to prevent the inevitable disruption.  He clearly is speaking to climate change, and without sounding like a Luddite, he believes that the answer exists in harvesting solar power and desalination.

The Predator's Ball

The subtitle is The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders and the author is Connie Bruck (1989).

If Wall Street in the ‘80s holds a special place in your heart and seems like a mythical time, then reading about the story of Michael Milken and Drexel should be on your list of things to do.  There are several well-regarded books out there on the topic – this version by Bruck, who was a journalist at the NY Times, is one of the better ones.

Milken was arguably the innovator of junk bond financing that was used to fund LBOs and hostile takeovers, or simply could be raised by non-investment grade issuers as a blind pool for future acquisitions.  And through its development as a product, and with support from Milken even more so, guys like Nelson Peltz, Ron Perelman and Carl Icahn became household names.

Ultimately, we know that the story does not end well.  Milken, in his quest to win every piece of business and control the market, was guilty of insider trading and a multitude of other securities law violations.  Even worse, he used his position of power to bully and gouge his own clients.  Simply a fascinating time and episode.

Asia's Cauldron

The subtitle is The South China Sea and the End of a Stable Pacific and the author is Robert Kaplan (2014).

I first got introduced to the author through his prior work at Stratfor, and subsequently read one of his books last summer about Romania and Eastern Europe.  This book looks at the dynamics at play in the South China Sea region and why so many countries have contesting territorial claims over that body of water – the list of states includes China, Taiwan, Vietnam, the Philippines, Malaysia, Borneo, Singapore, Brunei and Indonesia.

Depending on your perspective, any number of explanations could suffice.  For starters, there are some estimates which suggest that there are 130 billion barrels of oil to recover, which would put it behind only Saudi Arabia in terms of hydrocarbons.  If that were true, the necessity to import fuel from the Middle East, which requires travel through the Strait of Malacca, would be reduced.  Another view focuses strictly on business and trade – it is the meeting point of Southeast Asia and India, and having control over this sea would enhance any one of the mercantilist economies of the region.  One move past that, and thinking strictly in terms of the largest and most powerful country in the area, one might consider it to be China’s Caribbean.  Thus, in the same way that America felt that controlling the main maritime thoroughfare in its backyard was critically important, and thereby opened it up to become a global hegemon once it was secure, China feels the same way about the South China Sea.

The interesting wrinkle that Kaplan notes is that because all of these explanations speak to commerce, it does not garner the attention of humanists and the media.  And because it is about contested waters, the likelihood of war is further reduced.  Nevertheless, this contest lies at the heart of the fastest growing region in the world, and its evolution will have ramifications that should not be ignored.

Wealth, Poverty and Politics

It is the Revised and Enlarged Edition and the author is Thomas Sowell (2016).

I found this one to be special.  Even if it falls under the category of a book that confirms my priors and where the last 75 pages were fairly repetitive.  The author is a PhD economist at Stanford who is African American and loosely affiliated with libertarianism and Austrian theory.  That makes him a unique bird, and it follows that his perspective is illuminating and insightful.

The book largely refutes what we think we know about income inequality.  His “opponent” is the intelligentsia who ascribe disparities in wealth to a sinister force of rich people who exploit the poor to achieve their ends.  What the author provides in response is all of the various factors of time and space that lead to another way of understanding unequal outcomes, all without having to enlist social justice warriors to the cause.

For starters, “geography is not egalitarian”.  For those who live in the mountains, or in a country where the national river system is not as robust or as deep or as navigable because of waterfalls and cascades (interesting fact: Africa has twice the landmass of Europe, but Europe has a longer coastline), or where the climate leads to land that is less fertile, or where there is extreme linguistic diversity even between neighboring towns and villages, there is a resulting isolation and lower standard of living that is not sinister or otherwise avoidable through policy.

Beyond geography, there are also cultural realities which result in unequal outcomes and are not a function of one group exploiting another.  Put differently, Sowell describes “cultural heredity” which is passed from generation to generation within ethnic groups and leads to values that prioritize education, for example.  And not every group shares the same ethos.  Moreover, some societies are more receptive to other cultures, which enhances advancement and develops human capital.  Where there is greater cultural isolation, the advances of others are less likely to be introduced.  Again, all of these contribute to disparities and gaps between countries on an international basis, and within national borders themselves.

There are also countless examples in history of countries where foreign minorities or different ethnic groups are demonized when they outperform the majority population, even where these groups introduced industries that had not existed before and which were net positive to productivity and the well-being of all citizens (think Jews in Eastern Europe or the Japanese in Peru).  Ultimately, these groups left and take the human capital with them, to detriment of the entire society.

Now, in response to these various differences which can lead to unequal outcomes, there is usually a chorus of academics and politicians who try to romanticize the lagging groups and suggest that some group of “rich” exploiters is to blame.  What they focus on is efforts to equalize outcomes, glossing over the empirical realties and negative consequences.  They also tend to ignore that there is a difference between equal opportunity and equal probability of achieving a particular outcome.  Striving for the latter is to disregard the preferences of millions of consumers who have chosen to part with their incomes to purchase a certain good or service.  Moreover, as Sowell points out, since the advent of the welfare state in America in the 1960s, there has actually been a retrogression within the very groups that were targeted for assistance and support.  If that is the result, and clearly it is by the numbers, then to continue down that path is to focus on optics rather than actual outcomes.  And, in fact, these visions have dissuaded many groups from actually developing the human capital that allows groups to rise out of poverty over time (Jews, wherever they have settled, are a great example of such a phenomena).  Out of challenge and response comes progress.

In more recent times, there has been even greater focus on income inequality and what to do about it because of work by Thomas Piketty and Paul Krugman, amongst others.  And in this work, the notion of income distribution commonly takes for granted the production part, ignoring how if incentives are skewed, production will not necessarily remain constant.  Moreover, this work seems to treat income quintiles and the “rich” and “poor” as static monoliths.  In fact, there is tremendous turnover amongst these different segments – in part, because the richest incomes in any given year are commonly a result of capital gains, which are not necessarily recurring; but also because the lowest to highest quintiles tend to reflect the progression of workers as they rise up the ladder, with the youngest and least experienced in the lowest rung, and those with years and lengthy careers under their belts at the highest rung.  That makes sense and is how it should be in an upwardly mobile society where there is equal opportunity to succeed.  In addition, even as the richest take an even greater share of the pie, that hasn’t precluded everyone else from seeing greater productivity and increased incomes as well.

In the end, economic success is not just a lottery of luck.  It requires an investment in human capital, and from that is where the opportunity lies to increase the size of the pie.

porcelain

A memoir by the DJ and musician, Moby (2016).  It tracks his life in NYC in the 1980's and 90's, when being in SoHo, Tribeca and Chelsea might mean taking your life into your own hands.  I have a reverence for that period in NYC, and kind of caught the tail end when I was in college and law school.  Needless to say (I use that term of phrase quite a bit, I think), I enjoyed this one.