It was Herbert Spencer, the Victorian prophet of laissez faire capitalism, who first coined the expression “survival of the fittest” in his book, “Principles of Biology”, brought out in 1864.
During this time, the period of Enlightenment, prominent thinkers such as Hume, Kant, Voltaire and Smith espoused universal values of human dignity and rationalism that spread throughout the world. However, this sometimes misplaced belief in the power of free markets — most recently seen in the financial crisis of 2008 — has led to persistent economic disappointment.
Those in favour of the free markets have failed to provide a new narrative to explain the looming disappointments. Economists themselves have struggled to explain why productivity and investment growth has lagged forecasts. What we do is this: financial assets increasingly contribute a disproportionately large percentage of economic growth.
Often referred to as the “wealth effect”, this theory advocates capital formation through the accumulation of assets. This process of capital formation is what led the US to achieve its economic prowess. Central to this thesis is the concept of the small investor channelling his or her savings towards these assets such that it can contribute towards growth, both at the micro and macro levels.
In the last decade, globalisation, and its symbiotic relationship with technology, has increasingly been viewed as a one-way street. We know for example, that technology has a darker side, with the rise of the phenomena known as “fake news”. The proliferation of such news is laced with political ideology, but at other times, it is simply the result of errant practices in market microstructure.
For example, in Dubai, a market where off-plan sales have dominated those of ready properties for the last decade, prices are not reflected in the indices. Now in a market where the two diverge by more than 25 per cent — especially with developers playing the role of financiers — this “price discovery” needs to be part and parcel of the overall market measurement system.
Yet, perplexingly it is not. In capital markets, it is imperative that to foster a wider investor base, not only is there to be greater frequency of communication by the companies themselves as well as the regulator, there should be the formation of think tanks that publish white papers for academic as well as for professional journals. On a broader scale, the information revolution that has supposedly engulfed us has had the perverse impact of increasing anxiety, which spills over into the asset markets.
This is due to the problem of asymmetric information and thus impacts growth. This suggests that regulation needed in this area. Western sensibility argues against such sensibilities, yet it is their disillusionment with the process of globalisation that has led to the current trade wars. The erection of barriers becomes the easiest narrative to generate.
They would prefer sanctuaries away from the insecurities of globalisation, despite all the evidence suggesting that this is a dangerous game to play. In the US, there are more people employed by the sports industry than they are in the agricultural sector, yet the efforts expended in protecting soyabean exports clearly reek of political ideology, itself suggesting that the current trajectory of globalisation is not working anymore.
Dubai and the UAE are clearly committed to globalisation and to benefit from a young immigrant population that fosters an environment of dynamism and vibrancy, fusing the best of East and West. However, there are multiple paths to globalisation, and the “enlightenment” version — one that clearly argued for western superiority — is not the only way to economic bliss.
Government guidance and intervention is periodically needed, especially to counter the economic angst that comes part and parcel with technological progress. This does not automatically lead to Huxley’s “Brave New World”. Rather it inspires a model of coexistence, one where the diaspora needs social protection, more so than economic protectionism.
It is in this context that a holistic regulatory oversight committee can help, both citizens as well as residents navigate the increasingly complex world that we live — from unemployment to margin calls and from data protection to health initiatives. Each of these issues implies a greater degree of dialogue, not only to quell anxiety but to foster a road map that is easily communicable.
This has to take cognisance of asset price fluctuations, and where possible, intervene, both directly — through economic and social reforms — as well as indirectly, through the process of regulating information flows, to mitigate the effect of volatile asset price movements. This has to be done through active measures with greater frequency and alacrity such that the investor base expands steadily, leading to capital formation in years ahead.
Sameer Lakhani is Managing Director of Global Capital Partners.