The real lesson from Lehman Brothers collapse: tech disruption, not global debt, could spark the next crisis
Lee Howell says experts worrying about global debt are on the wrong track. The biggest development of the past decade is the dominance of tech firms and digital platforms, and regulators’ failure to keep up with the emerging winner-take-all market
We are hardwired to try to make sense of events that shock us, and this often involves recasting them as having been predictable. This heuristic, in turn, leads us to overestimate our ability to predict the future under what we perceive to be similar circumstances.
Watch: Chinese firms crash America's biggest tech party
From a broader historical perspective, stock markets always experience boom and bust. Although mean reversion is not a scientific law, there has seldom been an occasion when rising asset prices did not eventually return to their long-term average.
Arguably, the 2008 financial crisis was different because, as theorist Geoffrey West writes, it was “stimulated by misconceived dynamics in the parochial and relatively localised US mortgage industry”, and thus exposed “the challenges of understanding complex adaptive systems”.
In 2018, this status belongs to the so-called FAANG cluster: Facebook, Amazon, Apple, Netflix, and Google’s parent company, Alphabet.
Against this backdrop, it is no surprise that the Kansas City Federal Reserve’s annual symposium in Jackson Hole, Wyoming, last month focused on the dominance of digital platforms and the emergence of winner-take-all markets, not global debt. This newfound awareness reflects the fact it is intangible assets like digital software, not physical goods, that are driving the new phase of global growth.
Bill Gates, the founder of Microsoft, recently explained this profound shift in a widely shared blog post. “The portion of the world's economy that doesn't fit the old model just keeps getting larger,” he writes. And this development “has major implications for everything from tax law to economic policy to which cities thrive and which cities fall behind”. The problem is that, “in general, the rules that govern the economy haven’t kept up. This is one of the biggest trends in the global economy that isn’t getting enough attention”.
The digitalisation that Gates is describing should not be confused with the digitalisation process that created online trading systems and partly enabled the 2008 financial crisis. The latter converted data from an analogue to a digital format.
By contrast, digitalisation is when the adoption of digital technologies – and the accompanying mindset – leads to rapidly changing business models and value creation, through network effects and new economies of scale.
Digitalisation demands less in the way of assets, and more in terms of talent. Thus, as Klaus Schwab of the World Economic Forum observes, the “scarcity of a skilled workforce rather than the availability of capital is more likely to be the crippling limit to innovation, competitiveness, and growth”.
Instead of looking for the Minsky moment, when today’s bull markets run out of steam (for they definitely will), we should perhaps give more thought to this trend, which Schwab calls the Fourth Industrial Revolution. The great lesson to be learned from the collapse of Lehman Brothers is that technology should be designed and used to empower people, not to replace them. The goal should be to improve society, not disruption for its own sake.
Lee Howell is a member of the management board of the World Economic Forum. Copyright: Project Syndicate