15 Interviews To Read This Summer

Fortnightly Thoughts
July 23, 2015
Special Issue
15 interviews to read this summer

From our very first edition four and a half years ago, interviews have been at the core of
Fortnightly Thoughts. Over 91 issues, we have spoken to more than 140 experts including
CEOs/CFOs of global firms, authors, academics and investors. And in response to popular
demand, weve rummaged around in our archives and handpicked 15 interviews worth
revisiting this summer. This curated selection is best read at the foot of an old tree to the
soundtrack of breaking waves or clicking crickets.
WORDS OF WISDOM ON
The rise of EM competition
Gordon Orr, Chairman, McKinsey Asia, on Chinas hidden innovators
Dr. Andrew Ng, Chief Scientist, Baidu, on Chinese tech keeping pace
2
5
The evolution of nations

Stan Druckenmiller, Chairman, Duquesne Family Office, on Chinas rebalancing
Prof. James Robinson, of Harvard and co-author of Why Nations Fail, on success drivers for countries
Joe Studwell, author of How Asia Works, on the evolution of Asian economies
8
11
14
The ubiquity of technology

Prof. Raj Rajkumar, of Carnegie Mellon University, on the future of autonomous cars
Paul Brody, ex-Partner, IBM Global Business Services, on the shift to software heavy manufacturing
Tim Bunting, General Partner, Balderton Capital, on the rise of private technology companies
David Epstein, author of The Sports Gene, on the technification of sports
17
20
23
25
The forces shaping consumption

Jeremy Rifkin, author, The Zero Marginal Cost Society, on the rise of the sharing economy and more
Andrew McAfee, co-author, Race Against the Machine, on what tech means for jobs
Prof. Michael Sandel, of Harvard and author of What Money Cant Buy, on the issues in market societies
29
33
36
And some timeless insights on investing

Prof. Daniel Kahneman, of Princeton and author of Thinking, Fast and Slow, on behavioural biases
Howard Marks, Chairman, Oaktree Capital on his investment philosophy
Prof. Bruce Greenwald, of Columbia Business School, on competitive advantages and value investing
Hugo Scott-Gall
hugo.scott-gall@gs.com
+1 (212) 902 0159
Goldman, Sachs & Co.
Sumana Manohar, CFA

sumana.manohar@gs.com
+44 (20) 7051 9677
Goldman Sachs International
39
42
45
Megha Chaturvedi
megha.chaturvedi@gs.com
+44 (20) 7552 3305
Goldman Sachs International
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be
aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this
report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see
the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not
registered/qualified as research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc.
Goldman Sachs Global Investment Research
Special Issue
Interview withGordon Orr

About Gordon Orr
Director and Chairman of McKinsey Asia, and founder of the Chinese-language edition of The McKinsey Quarterly. Previously he was
responsible for establishing McKinseys China practice and led the Strategy and Business Technology Practices in Asia.
How has the quality of Chinese production evolved over time?
Chinese manufacturing has absolutely improved in quality. As China has transitioned to become a very large
middle-income country, its consumers have also become increasingly demanding in terms of product quality.
This has partly contributed to the improving quality of Chinese produced goods. Chinese mid-sized companies
have also learnt lessons from MNCs, given decades of foreign competition in many sectors, and this has
reshaped their mind-set in terms of how they approach multi-national customers. As a result, everything from
R&D to marketing have all improved significantly for many Chinese companies. Its hard to identify the
nationality of some of these firms by looking at their websites for instance, as they are often in English and
have sophisticated interfaces, very much comparable to the websites of their American and European peers.
Many even sell directly to customers worldwide. And international expansion is becoming possible mostly
because Chinese companies are increasingly becoming adept at delivering a well-marketed, sleek package of
products and technologies.
Which sectors is this most evident in?
Chinese construction equipment manufacturers have been one of the earliest to reap the benefits of the sheer
size and growth of the domestic market and they have evolved to become internationally competitive in their
domain. They are already significant exporters to Africa, and Southeast and Central Asia among other regions.
More recently, many robotic and automation companies are also emerging, clustering around Dongguan.
Water processing is another area within industrials where Chinese firms are active in everything from sewage
treatment plants to reverse osmosis membrane technology. Even in areas like packaging, one of the few
competitors to Tetrapak globally is a Chinese company. There are also many companies in the Shanghai and
Shenzhen regions which compete aggressively against each other in the B2B industrial domain and I expect
them to become much more visible over time with the through-train investment opportunities that are present
now (through-train or Shanghai-Hong Kong Stock Connect allows foreign investors to trade Shanghai A
shares through the Stock Exchange of Hong Kong, and mainlanders to trade eligible Hong Kong shares
through Shanghai Stock Exchange, subject to quotas).
Not only are

western MNCs facing
stiffer competition in
China, but Chinese
companies are also
penetrating other EM
markets I believe we
will see a rapid growth
in the export of middle
income product
categories from China
to markets like
Malaysia, Thailand,
Indonesia and South
Africa
Another area where Chinese brands are becoming increasingly dominant in the local market is the med-tech
industry local brands account for c.75% market share for coronary stents in China for example. Similarly,
domestic firms hold more than 50% market share in orthopaedic and trauma products. Even within pharma
and biotech, Chinese companies are increasingly developing genuinely innovative molecules in partnership
with universities. One can argue that there is an element of being in the right place at the right time to their
success, but the main reason that they are being prescribed is that they deliver on the quality front as well.
What is driving this success for Chinese companies?
At some level it was bound to happen as companies climbed up the production curve, but the pace and scale
at which it is occurring is unprecedented and unique to China, and there are a few reasons driving this. Firstly,
we often see that dozens of companies enter a particular subsector in China and only the best ones survive.
So there is definitely some survivorship bias at play when we look at successful Chinese companies.
Secondly, they also tend to employ a very rapid improvement cycle approach to production, wherein they first
introduce a product in the market and then quickly roll out improved versions if the product is well received.
This, I believe, has been a very effective way to expand, especially within industrials.
There is also a tipping point that China has reached in terms of improving the R&D output and sophistication.
With SOEs reducing the number of people they used to hire from top universities, millions of graduating
engineers and other skilled personnel are entering the private sector and joining start-ups instead. This has
certainly helped.
And finally, the improvement in marketing, particularly in the online space, coupled with the availability of
capital, has allowed many Chinese companies to extend their presence globally. In this context, it is important
to note that the mid-sized Chinese companies that we are talking about never really borrowed at 5% or 6%
interest rates. Rather, these companies borrowed at rates close to 15%. So, the rise in interest headline rates
actually benefits these companies by creating a more even playing field.
With all these factors at play, mid-sized Chinese companies are increasingly trying to break themselves away
from the dependence on other multi-billion Chinese giants for growth and expansion.
Special Issue
Does this means that scale and higher quality are becoming sources of Chinas advantage as opposed
to just cost arbitrage?
Absolutely. The relative exchange rates over the last four years made it possible for China to export anything
to North Asia or Europe and even to South Asia to some extent. But the shift in exchange rates have exerted a
significant pressure on Chinese firms to move up the value chain. Many of them realised that B2B firms were
no longer going to buy cheap and cheerful products. Chinese exports to India for example have held up as
well as they have, not just because of Chinas cost advantage. Rather, it is because the perception that Indian
industrial companies have of Chinese goods has shifted from being low quality at the cheapest price to the
best price for value.
In the domestic market, some people credit the buy local phenomena for the success of Chinese companies,
but I think it only had a modest impact. Being able to match rising consumer expectations has been the key
success factor for Chinese companies. China has an automotive industry thats churns out 19 million vehicles
a year for example, three quarter of which have some global OEM influence on them, and such competition
has definitely driven up expectations. So, the fact that local firms responded to the rising expectations of
quality, fit-for-purpose products as China became a middle-income country is definitely central to their
success.
All this has also meant that not only are western MNCs facing stiffer competition in China, but Chinese
companies are also penetrating other EM markets. The success stories of international expansion by Chinese
companies are setting examples and they are increasingly willing to compete against MNCs in new markets
just like they found a niche to compete with them at home. I believe we will see a rapid growth in the export of
middle income product categories from China to markets like Malaysia, Thailand, Indonesia and South Africa.
Many Chinese companies already view Southeast Asia as a safe backyard to expand internationally. And
success will be a function of whether they are able to deliver Chinese products at much more competitive
prices than exist in these markets currently. Plus, while there have been a modest number of Chinese
acquisitions internationally, most of the global expansion is happening organically at this stage. And this further
reflects that Chinese companies are confident about their capabilities to develop internationally recognised
quality products.
Taking share
by moving up the innovation curve
Share of Chinese companies in the total sales of top 50 companies in

each sector by sales (based on Datastream universe only)
Patent applications per capita versus GDP per capita, 1980 to 2013
18%
16%
45
S. Korea
40
Japan
Patent applications per 10,000 people
14%
12%
10%
8%
6%
4%
2%
35
China
US
Japan
Germany
UK
India
25
Germany
20
US
15
10
China
Oil &
Gas
Telc.
Indust.
Basic
Mats.
Tech
Health
Cons.
Goods
Cons.
Svcs.
Source: Datastream, Goldman Sachs Global Investment Research.
2013
2000
2013
2000
2013
2000
2013
2000
2013
2000
2013
2000
2013
2000
2013
2000
2013
2000
2013
2000
0%
Fin
Svcs.
Utils
S.Korea
30
UK
5
India
0
100
1,000
10,000
GDP per capita (current US$)
100,000
Source: WIPO, World Bank.
What are the constraints that Chinese companies face?

In the short term, volatility in the exchange rate certainly affects these companies. But more broadly, attracting
and recruiting high-quality talent remains an issue for them as they expand in foreign markets, especially in
areas where they are not well recognized. And this is partly why they are trying to build up their online
presence - to portray themselves as a sophisticated international company, not just to customers, but also to
potential recruits. Intellectual property rights-related issues on the other hand are not as common a constraint
as a lot of people believe them to be, and most of these Chinese companies actually operate legitimately.
Special Issue
How are DM companies likely to respond to growing Chinese competitors?

Rolling five years forward, investors in DM companies might find themselves surprised by the impact that
Chinese competitors can have in a broad range of sectors. It is likely that DM companies will be creating new
products to compete with Chinese companies, especially in the low- to mid-range segments. We may also see
some acquisitions of Chinese companies that are still at a relatively small scale, but which have the capability
and momentum to grow to their potential value. This will be true in particular if there is an economic slowdown
in China, as cheaper asset prices will provide a good entry point to investors. I believe that investors will also
increasingly have a more balanced portfolio with companies that compete in the same sector, some of which
would have originated in DMs and some in EMs.
In which sectors are Chinese companies lagging in terms of international competitiveness?
Chinese food and agricultural companies are still lagging to a certain extent, as is the autos industry, where
exports are still quite insignificant if you compare them against absolute volumes. And this is because things
like cars, photocopiers etc., require a complex blend of multiple technologies that are hard to pull together and
maintain an advantage in. And so, it is going to cost Chinese companies a vast amount of money if they
decide to become dominant in these sectors. The semiconductor industry is also quite interesting in this
context. Besides the focus in the five-year plan, the Chinese government has a $40 billion programme to
develop semis domestically. Although the prospects of achieving this are reasonable given that these
subsidies are being distributed in a concentrated fashion across some regions and companies, it is still
important to understand that it will be quite hard for Chinese companies to catch up in sectors like semis which
involve a huge learning and experience curve, and the benefits of being in a regional cluster that companies
like Intel, Samsung and TSMC enjoy.
Have things changed in terms of the sophistication and penetration of automation in Chinese
companies?
the labour-tocapital substitution is

now becoming
apparent in factories.
And increasingly, the
automation
technology being
used is home-grown,
with basic robots
being manufactured
out of the cluster
around Dongguan
Yes, the incredibly rapid rise in the cost of labour has really forced companies to focus on automation as a
means to improve efficiency. I think it was broadly underestimated just how quickly companies would respond
to rising wages, both through hiring experienced people from MNCs and by using leading edge automation
technology. But the labour-to-capital substitution is now becoming apparent in factories. And increasingly, the
automation technology being used is home-grown, with basic robots being manufactured out of the cluster
around Dongguan. Of course, the lack of a legacy asset base plays an important role in determining how
quickly companies embrace technological advancements.
And this applies to many new technologies. Since many Chinese companies are young and dont have an
established asset base, the shift towards an online business model, more automation or even 3D printing is
not very expensive (versus their Western peers) and also coming down rapidly given the improvements in
these technologies. That enables rapid innovation, in my view. And that not only applies to companies that use
say, 3D printing to produce goods, but also producers of 3D printers, given the market size and potential rate
of adoption in the economy.
But that can also be disruptive to Chinese cities that have been built on labour-intensive models or
around few traditional industries...
Yes, some cities face the Detroit risk of being overly dependent on one industry. For instance, some cities in
Northeast China are excessively dependent on the steel sector and some in the southern regions have
focused too much on textiles, and they are definitely headed in that direction. Changchun similarly has been
very dependent on a few SOEs in the automotive sector. Further, in many fourth or fifth tier cities which have
one dominant industry, end demand is now flattening as wealthy individuals and talented people are moving to
first or second tier cities and other wealthier regions. And so, while auto OEMs are still expecting reasonably
healthy single-digit growth in China as a whole this year, most of the growth is coming out of wealthier cities,
with fourth/fifth tier cities expected to deliver flat growth at best.
Originally featured in issue 87 on Chinese innovation (Fortnightly Thoughts: How innovative is China?, April 6, 2015)
Special Issue
Interview withAndrew Ng
About Andrew Ng
Chief Scientist at Baidu Inc. in Silicon Valley, Co-founder and Chairman of Coursera and Associate Professor of Computer Science at
Stanford University. Previously, he founded and led the Google Brain project which developed massive-scale deep learning algorithms.
What is driving the revival in interest around artificial intelligence worldwide?
The idea of deep learning, which refers to computers simulating the brain to learn from data, has been around
for at least 20 years. However, it was not until the last few years that advancements along Moores law and the
development of computing capacity provided the necessary scale to put these deep learning algorithms to
work.
Today, companies have access to a huge pool of data from user activities - the webpages that they click on,
the kind of voice searches that they do on their mobile phones etc. And this is allowing deep learning
algorithms to make more accurate predictions. So naturally, a lot of value from deep learning is being created
within the leading tech companies that have access to a lot of data, along with access to capital and the
knowhow required to build massive neural networks. In fact, a lot of exciting innovations, particularly in the
software space, are being driven not by start-ups but by large companies as they are the ones which often
have better data as well as High Performance Computing technology.
But having said that, constraints in both software and hardware are still limiting what were able to do from a
research perspective, which is why we constantly try to push our limits on both fronts. To draw an analogy, just
like we need both a big engine and plenty of fuel to launch a rocket ship, deep learning requires access to data
- which is like a rockets fuel - and huge neural networks, which act as the engine. So, while the digitization of
society has been driving up the amount of data or fuel that deep learning has access to, we have only
recently been able to build bigger engines thanks in part to Moores law, but also through specific advances
being made by companies like Baidu.
What kind of applications of AI is Baidu interested in?
Silicon Valley
is still ahead of
China in many
areas, but there are
definitely many
bright spots where
Beijing is driving
innovation
Until recently, most internet communications have been focused on text. But as we see the transition to mobile
devices, we are also likely to witness a shift away from text-heavy webpages. We believe that within five years,
about 50% of web searches could be through speech and images rather than text inquiry. This is why the
ability of computers to understand speech and images will be fundamental to our ability to service users. And
deep learning is by far the best technology for this today. Recently, Baidu announced a breakthrough in
speech recognition using deep learning to achieve substantially better performance compared to current open
Application Program Interfaces, especially in noisy environments.
Further, speech and image recognition abilities are not only critical for the existing lines of businesses, but will
also be increasingly important in the future transformation of the internet. I truly believe that speech recognition
is among the technologies that will mature over the next several years and will potentially change the way we
interact with mobile devices altogether. For instance, currently we tend not to use our phones in noisy places
like cars. However, once speech recognition becomes more accurate, and moves from say 98% accuracy to a
99.9% accuracy, there will be a transformation in which using mobile phones even in noisy places will become
a natural thing to do. And it will not only change the way we interact with mobile phones, but also how we use
all sorts of technologies, from telling the TV what we want to see, to talking to the thermostat or commanding
the microwave.
So while we realise that understanding text still remains extremely important for a web search engine, voice
search is rapidly growing as well. And the reason why we are interested in AI is simply that things like image
and speech recognition are likely to be extremely transformative in the future.
When do you expect these technologies to become commercial?
Baidus speech recognition is already powered by deep learning, which in the last two years has brought about
substantial gains in performance. So, in some ways it is already commercialized. And what we announced in
December was a complete re-architecting of how deep learning is used, which should open up even more
avenues for gains over the next several years.
But it is important to understand that while the adoptions of these technologies appear to suddenly pick up out
of nowhere, the explosion in penetration is often driven by incremental, steady improvements in the usability of
these technologies. So, for an insider like me who has been working in this field, the adoption may seem to be
growing slowly and steady. Yet, from the outsiders perspective, often there will be a point on the demand
curve, where the use of these technologies seems to suddenly explode. It is difficult to know exactly when we
will hit that point, and hopefully it is imminent, but we will have to wait and see.
Special Issue
Who is most active in the field of AI, is it the start-ups or the dominant tech companies?
Deep learning has become so popular these days that everyone in the tech domain seems to be interested in
it or working on it in some form or the other. But most of the genuine progress is currently coming out of
clusters around Beijing and California. Baidu was one of the early entrants in the space and it was one of the
first companies to build a new High Performance Computer cluster for deep learning. It also built an internal
deep learning platform that empowered the engineers across the company to try and apply these tools to their
problems, which unleashed a lot of creativity and brought about new imaginative applications of AI. Google of
course, is another notable player with a strong team in this area and Facebook, Netflix, Amazon and Microsoft
have been building their presence in the field of deep learning as well.
While start-ups can be very successful in exploring niches and specialized deep learning applications, I think it
will be very hard for them to challenge big tech giants in areas that require a lot of data or where a clear
economic value is already incentivizing the large players to invest.
Is talent hard to find in this field?
The supply of good deep learning talent and specialists is vastly smaller than the demand. And so, there is
what you can call a talent war going on in the Silicon Valley to hire people with the specialized knowledge
required in this area. And to an extent, this had made hiring AI talent difficult for all companies in this domain.
However, there are very few genuinely attractive companies that can provide their employees with credible
deep learning labs and also the capital and infrastructure that is critical to pursue advanced AI. In this context,
Baidu is committed to provide the best environment for its employees to execute on its mission, which is to
develop AI technologies that impact millions of people, and this is what sets us apart as an attractive employer
to people with a similar vision.
Leading from the front
Real interest in Artificial Intelligence
Top patent applicants under Patent Cooperation Treaty (international)
Total patent grants by the USPTO by field of technology
2012
6000
2014
4,000
Computer Graphics Processing
3,500
5000
Image Analysis
3,000
4000
2,500
Database Management*
2,000
Financial, Business Practice*
3000
1,500
Vehicles, Navigation*
1,000
2000
Speech Processing, Translation*
500
1000
Source: WIPO. (Note: 2013 instead of 2012 for Tencent; Chinese firms in blue).
Artificial Intelligence *
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
Tencent*
NEC
LG Elec.
Sharp
Bosch
Toyota
Samsung Elec.
Siemens
Philips Elec.
Ericsson
Microsoft
Intel
Panasonic
Mitsubishi Elec.
ZTE
Huawei Tech.
Virtual Machine Task
Note: all *marked categories relate to data processing; Financial, Business

Practice includes things like cost/price determination
Source: USPTO.
Has the emergence of new Chinese tech dominators slowed the talent outflow from the country to the
more developed regions of the world?
I genuinely believe that talented individuals increasingly want to move to China to work, and this includes not
just the Chinese diaspora of immigrants settled across the world who are choosing to return home, but also
Americans and people of other nationalities that want to spend time working in China.
And often, what differentiates Chinese tech companies like Baidu from other large Silicon Valley firms is the
sheer intensity and velocity with which the core internet companies work in China. Despite being a $70-80
billion company, Baidu for example, is able to adopt the behaviour of a small start-up when needed and we
regularly make decisions in hours rather than weeks.
Is this also reflective of Chinas growing innovativeness, more broadly speaking?
Yes. Ten years ago there was a perception that Chinese companies were copying from American companies,
and while it wasnt 100% true even back then, it certainly isnt anymore. The picture has changed today and a
lot of things are being invented in China, many of which are yet to be made available in the US. Take Baidu for
example. We were the first to build a GPU (Graphics Processing Unit) cluster using the new generation of High
Performance Computing hardware and now other companies, many of which are in the US, are following. We
also pioneered applications of deep learning in advertising and were first in many other areas as well.
Special Issue
One reason why I think this misconception around the lack of innovation from China exists is that people often
attribute the first version of what they see to be the original. So, for people living in the US who use the
American version of apps for instance, its natural to think that the similar app in China is a replica of the
original US one, but often that is not true at all. Take for example the Chinese dating app MoMo, which is
sometimes referred to as the Chinese version of Tinder, even though in reality MoMo came first. Similarly, the
new press to talk feature that just made its way to iOS 8 has almost been a standard in Chinese mobile
communications for years now.
Of course, Silicon Valley is still ahead of China in many areas, but there are definitely many bright spots where
Beijing is driving innovation. It is also important to note that Chinese tech clusters are often very different from
the US ones i.e. Silicon Valley. The market forces that affect individual companies are very different in China
and so, often Chinese internet companies have to compete in a different manner versus their US peers.
Take the case of Google and Baidu in the early days when they were competing in the Chinese market. Since
there werent many existing Chinese language webpages, Baidu chose a strategy of getting user generated
content by proactively setting up information-rich websites with original content (such as PostBar, which is
similar to Reddit) and then indexing all that content.
What happened as a result was that if someone did a search on Google, very often they were directed to one
of Baidus properties, and so Baidu could serve the users and keep them in its ecosystem. This is one of the
reasons Baidu won market share in China. Even today the Chinese internet ecosystem is in some ways more
and in other ways less developed than the West. This is why Chinese companies behave or compete
differently, or take a different direction when it comes to innovating.
So from the software perspective, Beijing and Silicon Valley have both developed very healthy ecosystems of
innovation and overall Silicon Valley is still a bit ahead, but China is learning very rapidly. Even in the case of
hardware, a lot of innovation is coming out of regions like Shandong, some of which has yet to be made
available in other parts of the world including the US. To sum it up, I believe that we are now living in a world
where a lot of unique innovation is coming from both sides of the world.
Top 15 websites based on browsing, December 2014
UK
Germany
Spain
Japan
S.Korea
Indonesia
India
Brazil
1 Google
US
Google.co.uk
Google.de
Google.es
Yahoo.co.jp
Naver.com
Google.com
Google.co.in
Google.com.br Yandex.ru
Russia
Google.co.kr
China
Baidu
2 Facebook
Facebook
Amazon.de
Facebook
Google.co.jp
Facebook
Google.com
Facebook
Vk.com
3 Amazon
Google.com
Facebook
Google.com
Amazon.co.jp Google.com
Youtube
Facebook
Google.com
Google.ru
Qq
4 Youtube
Amazon.co.uk Ebay.de
Youtube
Fc2.com
Amazon.com
Blogspot
Youtube
Youtube
Mail.ru
Sina
Youtube
Daum.net
Yahoo
Yahoo
Uol
Google.com
Weibo
Google.co.id
Flipkart
Globo
Tmall
Wikipedia
Yahoo
Youtube
Ok.ru
Amazon.in
Live
Facebook
Sohu
Tistory.com
Twitter
Gmarket.co.kr Kompas
Blogspot
Aliexpress
360.cn
Indiatimes
Mercadolivre
Wikipedia
Avito.ru
Baidu
Clien.net
Detik
Snapdeal
Adcash
Rambler.ru
Gmw
Liputan6
Linkedin
Wikipedia
Livejournal
People.com.cn
Aliexpress
5 Yahoo
Youtube
Youtube
Amazon.es
Youtube
6 Wikipedia
Ebay.co.uk
Google.com
Live.com
Google.com
7 Ebay
Bbc.co.uk
Wikipedia
Yahoo.com
Rakuten
8 Twitter
Yahoo.com
Web.de
Twitter
Nicovideo
9 Reddit
Wikipedia
Yahoo.com
Wikipedia
Facebook
TOnline.de
Gmx.net
Marca.com
Elmundo.es
Twitter
Bild.de
Milanuncios
Wikipedia
Elpais.com
US
Nondomestic
10 Linkedin
Live
Domestic
11 Go.com
12 Imgur
Twitter
Theladbible
13 Craiglist
Dailymail
Spiegel.de
14 Tumblr
Paypal
15 Netflix
Linkedin
GoogleadserviceLinkedin
Aliexpress
Xhamster
%globalpopulation
%internetpenetration
%globalonlinepop'n
4%
87%
10%
1%
90%
2%
1%
87%
2%
1%
74%
1%
Livedoor
Facebook
Wordpress
Ppomppu.co.kr Kaskus
Ameblo
Donga.com
Cliponyu
Twitter
Twitter
Dmm.co.jp
11st.co.kr
Lazada
Jabong
Naver
Blog.me
Wikipedia
Amazon.com
Youradexchang Sberbank.ru
Rbc.ru
Xvideos
2%
86%
4%
1%
92%
2%
3%
17%
1%
18%
19%
8%
3%
53%
4%
2%
59%
3%
Taobao
Hao123
Xinhuanet
163.com
Soso.com
Amazon.cn
19%
46%
22%
Source: Alexa, UN, World Bank.
Originally featured in issue 87 on Chinese innovation (Fortnightly Thoughts: How innovative is China?, April 6, 2015)
Special Issue
Interview withStan Druckenmiller

About Stan Druckenmiller
Chairman and Chief Executive Officer of Duquesne Family Office. He founded Duquesne Capital Management in 1981 and previously
worked at Soros Fund Management, where he served as Lead Portfolio Manager of the Quantum Fund and CIO of Soros
What are the risks of investing in China that are not well understood in your view?
The growth in credit at a time when GDP growth is slowing is a problem for China. And I think this is the 2009
11 stimulus coming back to bite. I understand that it had to be done to fund entrepreneurs and the private
sector, but its easier said than done if youre channeling funds through local government investment vehicles.
Im a believer in markets. A few men sitting around a table and deciding how to allocate capital goes against
everything Ive ever believed. Not only are they not great at capital allocation, such an exercise also needs to
deal with a lack of property rights and corruption. In essence, the frantic stimulus China put together at the end
of 2008 sowed the seeds of slower growth in the future by crowding out more productive investments. And
now, the systems building enough leverage and misallocation of resources to warrant risks of a financial crisis,
but the timing of that is still uncertain in my mind. What weve seen in China since 2009 is similar to what
happened in the US in 2005, in terms of credit growth outpacing economic growth.
I think ageing demographics is a bigger issue in China than people think. And the problems it creates should
be become evident as early as 2016.
You also need to keep in mind that for China to grow and evolve further, it will need to compete with a more
innovative Korea and now a more competitive Japan. I dont think China can do that with where its exchange
rate is today. I think productivity is a key concern too. And I think that could be one of the reasons why the US
has been so supportive of Abenomics.
I see
expensive
apartments in empty
cities that 300 mn
rural Chinese are
expected to migrate
to. That looks very
unbalanced to me.
People mention lack of infrastructure as a constraint. But when I go over there, it looks like they have a lot of
infrastructure. It seems ahead of the population, not behind. I see expensive apartments in empty cities that
300 mn rural Chinese are expected to migrate to. That looks very unbalanced to me. Nobodys ever had
investment to GDP at 47%. Japan and Korea peaked at 36%-38%, so as a result I think capacity is way ahead
of demand in some areas in China.
If China slows its fixed asset investment, will that have a knock-on effect for its commodities demand
and thus commodity prices?
When I started in 1976, I was taught by my mentor that when cash flow rises equities go up. But commodities
are driven by the cost of extraction 90% of the time, and over the long run, technology makes extraction
cheaper, pushing the cost curve down and with it commodity prices. But that hasnt always worked, if Id
followed that advice over the past few decades, Id be in trouble.
About five years ago, I bought into the peak oil thesis. But then, along comes shale oil and shale technology,
reminding me of what my old mentor said 35 years ago. Now Ive come to think that the oil price is not as
vulnerable to China slowing down as it is to ongoing shale supply growth. I regard the ramp up in investment
by China as a 10-year aberration, making the last two years more normal and more representative than the
previous decade.
Diminishing returns
GDP and credit growth in China, 4-quarter moving average
45%
GDP growth
Credit to private sector
40%
35%
30%
25%
20%
15%
10%
5%
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
0%
Source: BIS, Datastream.
Special Issue
I do think China is serious about rebalancing, which means infrastructure investment is going to slow. And
obviously, there's been a huge ramp-up in supply around the world in response to the 2009-11 stimulus, which
in my view is a massive misread by the suppliers of these commodities. So thats not good for commodity
prices. And then you have innovation. Can technology progress in iron ore and copper, the way it has with
shale energy? My guess is it will.
If you look at food, theres now technology that allows seeds to be drought-proof and disease proof. Yes, there
is a demand-supply argument for food prices rising, but the impact of technology on food supply is greater than
you think. On the other hand, we are using up more and more good arable land to build cities in China and
there is a water problem too.
Do you think we underestimate the role of innovation in resolving these global constraints?
Even with all the progress we have made in technology in the recent past, I think we are only scratching the
surface in terms of innovation. We havent seen half of the practical applications of big new technologies yet.
And the cost of these technologies will come down too, whether its robotics or driverless cars. That has to
provide a productivity boost.
But there is a downside to technology-driven productivity surges too. There is improved efficiency, but at the
cost of fewer jobs. I think the impact of technology on manufacturing jobs is easy to overlook because of the
huge surge in services jobs. But were now at a point where the impact of technology is hitting the services
sectors too. And not everyone understands this. I recently brought up the possibility of driverless auto
technology resulting in zero jobs for truck drivers within the next 20 years and there were gasps of disbelief
from the audience of investors. When I mentioned it to a high-tech company CEO from Silicon Valley a few
days later, his response was exactly the opposite. The point is that the problem with a tech-driven productivity
surge is that the benefits of that are going to accrue to a smaller, narrower group. Already, computer engineers
have benefitted from computing and the internet a lot more than the broader population.
Can
technology progress
in iron ore and
copper, the way it
has with shale
energy? My guess is
it will
You could draw similar conclusions on the impact of technology and automation on investing. I believe that
good investors are successful not because of their IQ, but because they have an investing discipline. But, what
is more disciplined than a machine? A well-researched machine can make many average investors redundant,
leaving behind only the really good human investors with exceptional intuition and skill. And what happens
when machines really take over investing? Do the markets get really efficient? Or will there be competing
systems trying to out do each other? All of this is depressing because there wont much left to do for humans
once machines start doing more and more.
If machines do everything well, including allocating capital and resources efficiently, can that be deflationary,
can that eliminate poverty? I dont know. Its hard to be very optimistic if you look at how humans have
behaved historically. All in all, I dont think robots and greater automation can bring about a utopian world as I
imagined it would as a kid 50 years ago.
If you combine the prospect of fewer jobs with an ageing population, it doesnt look very good for
many economies...
Apart from India, most of the other major economies have worsening demographics to worry about. Its a big
problem for the US too, especially given that relative to many other economies, including Japan, its fiscal gap
is much wider.
You can look at the US debt stock in a few different ways. The official estimate of the total debt may be US$11
tn, but if you include what the Fed has bought (which you should), then the number if closer to US$16 tn. But a
better measure of US debt would include some of the off balance sheet items. Laurence Kotlikoff, who is one
of the top economists in his field of generational accounting, estimates the present value of US debt including
what has been promised to senior citizens, adjusted for the projected tax revenues and the fiscal gap, to be
about US$211 tn. Thats staggering.
The US needs to resolve its debt problem politically, otherwise it is headed towards default. I believe the
estimates suggest that the US needs to raise all taxes by about 64% in order to be able to support its older
population. Thats raising payroll, capital, dividends and income taxes by 64%. The other option is to cut all
government spending by 40%. Neither one is a viable option and a combination is not easy either. In 20 years,
those numbers will become even tougher. The US will need to raise taxes by 75% or cut spending by 46%.
There has been vigourous debate on the veracity of Rogoff and Reinharts research on the consequences of
countries exceeding 90% debt-to-GDP. But it doesnt take away from the fact that historically, such levels of
indebtedness has resulted in extreme implications. Countries tend to go into a full-blown monetisation or a
default or inflation on average 23 years after they cross the 90% threshold according to their research. So
these debt levels are less relevant for you and me today, but will be extremely crucial for our children. If we
continue to borrow and spend like we do now, this can become a serious problem in 15 years.
I understood the need for QE1 because the US economy faced a potential meltdown then. But further easing
brings problems of its own, that only come to light with hindsight. All that easing and prolonged negative real
interest rates have gone beyond resolving the core issues the economy faced and has led to re-leveraging. Im
not worried about inflation as much as misallocation of investment.
Even with all

the progress we
have made in
technology in the
recent past, I think
we are only
scratching the
surface in terms of
innovation. We
havent seen half of
the practical
applications of big
new technologies
yet
Special Issue
Another consequence of todays monetary policy is that the US government is not getting any price signals. In
any other society, at some point in the next 15-20 years, the markets will give a price signal and the politicians
will need to respond. But currently, there is no such impetus for politicians to act. What adds to the problem is
that young Americans don't vote. Old people not only vote, but also have incredibly powerful lobbying groups
behind them. Entitlements in 1960 were 28% of government outlays, today it is 67%. And the baby boomers
have only now begun to retire. Another debate is that this is a huge reason to accelerate immigration, but
current policy is moving in the opposite direction. But even with immigration, the US needs to fix this pay-asyou-go system or the consequences could be quite drastic.
Do you think investing is becoming harder now with more government intervention and regulation
interfering with market price signals?
It has become harder for me, because the importance of my skills is receding. Part of my advantage, is that my
strength is economic forecasting, but that only works in free markets, when markets are smarter than people.
Thats how I started. I watched the stock market, how equities reacted to changes in levels of economic activity
and I could understand how price signals worked and how to forecast them. Today, all these price signals are
compromised and Im seriously questioning whether I have any competitive advantage left.
Ten years ago, if the stock market had done what it has just done now, I could practically guarantee you that
growth was going to accelerate.
Now, it's a possibility, but I would rather say that the market is rigged and people are chasing these assets,
without growth necessarily backing confidence. It's not predicting anything the way it used to and that really
makes me reconsider my ability to generate superior returns. If the most important price in the most important
economy in the world is being rigged, and everything else is priced off it, what am I supposed to read into other
price movements?
Originally featured in issue 56 on Chinas rising challenges (Fortnightly Thoughts: The consequences of Chinas price discovery, June 13,
2013)
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Interview withJames Robinson

About James Robinson
David Florence Professor of Government at Harvard University and co-author of Why Nations Fail. Previously he was a Professor in the
Departments of Economics and Political Science at the University of California at Berkeley.
How do you think about the success of nations and what role do institutions play?
When I talk about success, Im referring to GDP or income per capita, though there are other concepts of
success such as happiness and political freedom. What helps countries grow faster and become economically
successful is innovation, better productivity and better forms of organisations. So, its important for a society to
manage and harness the talents, skills, ideas and creativity of its people, which the US, for example, managed
to do in the 19th century, when innovation in the US came from every corner of the social spectrum the elites,
non-elites, farmers and artisans, as early patent records suggest. This was only possible because of its
inclusive institutions, which provided incentives and opportunities to harness societys potential. The British
industrial revolution in the 18th century was a consequence of Britain moving towards inclusive institutions, and
if there is another industrial revolution, its more likely that it will happen in the US than anywhere else. Were
already seeing massive innovation taking place in fields such as consumer electronics and biotech in the US.
On the other hand are extractive institutions, which do not allow such innovation. Throughout history, peoples
incentives and opportunities have been restricted, as that allowed others in power to take advantage of them.
Take slavery. If we compare how the US and Latin America developed over the last 500 years, one of the
critical factors that explains their divergence is the extent to which Latin America used labour coercion to build
its societies. That was excellent for the people who were extracting rents from the slaves, but that did not allow
the talents of its people to be harnessed for the greater good. This is the fundamental difference between
extractive and inclusive institutions.
What causes a society to move from extractive institutions to inclusive ones?
First, we should remember that both systems tend to be rather persistent. There are lots of feedback loops
which keep societies extractive or inclusive over long periods. So how do you get a transition from an
extractive to an inclusive society? The first thing is that theres always a conflict over the organisation of
society. A majority may desire a move away from extractive institutions, but the people running the regime
usually have vested interests that stop them from changing the way society is organised. So whats necessary
is a big redistribution of power.
To have
economic growth in
the long run, one
needs to have an
inclusive society,
and inclusive
political institutions
which underpins
inclusive economic
institutions, which
are critical for
incentives and
resource allocation
Now, while we can imagine a situation of gradual changes accumulating for that to happen, the more realistic
scenario is for such a transition to come at a critical juncture, when a shock to the system causes
disequilibrium. And that shock can be triggered by a small event. The Arab Spring started in Tunisia when a
market trader, who was being harassed by the police, tried to kill himself. That somehow solved the collective
action problem for Tunisian society, which was opposed to the regime. So a set of small events can
accumulate into a much larger movement and even spread to other parts of the world. At the same time, a
large shock to the system that leads to a redistribution of political power does not necessarily lead to inclusive
institutions. It could just create a different set of extractive ones. That is what seems to be happening in Egypt
now. So it is not a straightforward process.
Do you think that if a society genuinely moves from being extractive to inclusive, then innovation and
creativity will follow and that will lead to sustainable success?
Yes. Of course there will be noise, but if we ignore business cycle dynamics and remain focused on the long
run, inclusive institutions do succeed. There may be macro economic recessions and financial crises like the
ones we have seen in Europe and in the US, but if you look at the long-run growth trend, even the Great
Depression of the 1930s, which was much worse than the current recession, did not affect the American
economy greatly. It was a disaster, with big political consequences even in other parts of the world, but the
long-run trend of economic growth wasnt affected by that period. This may seem like an outrageous
downplaying of business cycles, but the difference between a rich and a poor country isnt that one is in a
boom and another is in a recession. While macro economic instabilities are real and important, the long-run
growth rate of an economy remains unaffected by these. And thats why, even now, if we focus on the long
term, we remain optimistic about the US. The innovativeness of its private sector is heavily underestimated.
Do you think that a well-intentioned, benign government can become extractive when it becomes too
big and damage entrepreneurship?
That could be true. But if you look around the world youll find the opposite relationship. For most Latin
American and sub-Saharan countries, the size of the government relative to that of the economy is much
smaller than in Europe, but thats not necessarily good. Columbia, for example, has a very small state which
lacks the resources to control large parts of the country, to build infrastructure or provide security. On the other
hand, states can definitely become too large and too regulatory, and that can be an impediment to economic
growth as well. While there are lots of interesting variations within the European countries, they are all mostly
inclusive relative to most other societies. For all its faults, the EU does play an enormously important role in
improving the inclusiveness of the institutions of its member countries and those that aspire to join. In the
Eastern European countries, the EU, at least partially, stimulated reforms in the 1990s, and after that as well,
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Special Issue
which has been good for them. In fact, I think the problems in Greece pre date its accession to the EU and run
much deeper into the fundamental way that Greek society and politics functions.
This institutional variation within rich countries, even if it is different from that between poor and rich countries,
can have interesting sources. For example, while the US appears to have greater incentives and higher
inequality, Scandinavian countries prioritise social insurance and equality, but face lower incentives, at least in
a monetary way. But then, these societies interact and the innovativeness, technological change and ideas
spill over from the US to the rest of the world. So, I dont see any reason why rich countries cant have
asymmetric situations, with some countries having inequalities, being cut-throat and innovative, and other
countries benefitting from innovation spill-over, which allows them to have more insurance and less inequality
by free-riding on innovation elsewhere.
Can the institutions in inclusive countries become too big or powerful, and eventually hinder
progress?
In my book I give multiple historical examples, one of which is of the robber barons in the late 19th century.
They attempted to take over politics in the US, which created a backlash in society and led to the introduction
of several political reforms to get them under control. This is a classic example of the private sector and elite
becoming too powerful. In the 1930s, Roosevelt even tried to emasculate the Supreme Court! There were also
times when the central state was trying to override the checks and balances in the US political system. In
short, there are many groups in society which can set up an extractive society for their benefit if given too
much power. Venice started with relatively inclusive institutions in the medieval period, but then fell through
coup dtat, and the whole society went from being open and mercantile to closed and extractive. So yes, that
has happened.
Institutions matter
GDP per capita versus confidence in national institutions
$110
Norway
$90
GDP per capita. in '000s
Switz.
$70
Australia
Sweden
Belgium
$50
Japan
$30
S.Korea
Hungary
$10
Mexico
35
40
US
Spain
Brazil
45
UK
S.Africa
Turkey
50
Finland
Netherlands
Poland
Chile
Russia
Denmark
Israel
Portugal
-$10
Ireland
Germany
Italy
Greece
France Austria Canada
55
60
65
70
75
80
85
Confidence in national institutions index
Source: OECD, World Bank.
Where in the world do you see countries with inclusive institutions beginning to erode?
Different people emphasise different things. There are people who say that some US politicians have too great
an influence on the corporate sector and vice versa for example. There is a famous study by an economist on
the Indonesian President Suharto, which notes that the share prices of certain companies linked with his family
and associates fell sharply each time he had a heart attack, because their profitability was based solely on
public sector favours they received from him. The US is far from that. It is much less corrupt than people claim
it is. In Europe, perverse incentives may have been built into the way the EU works, which have made Spain
and Greece more extractive over time, but I doubt that Greece was ever very inclusive compared to Germany
or the Scandinavian countries.
How do you see China and India evolving?
To have economic growth in the long run, one needs to have an inclusive society, and inclusive political
institutions which underpin inclusive economic institutions, which are critical for incentives and resource
allocation. Since the agricultural reforms in the 1970s, China has moved a lot towards becoming an inclusive
economic society, but the political system has stayed extractive. While it has been possible to generate
transitory economic growth with this model, sustaining that growth will be much harder. This is similar to where
the Soviet Union was.
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Special Issue
When people talk about China overtaking the US, its important to remember that 30 years ago, there were
similar discussions about the Soviet Union overtaking the US, and that did not happen. China has certainly
been more successful in making its society more inclusive than the Soviet Union was. When Gorbachev tried
to do it, the whole system collapsed under him. The Soviet Union was economically successful for 40 years.
But prior to the Russian revolution, people barely produced anything. The government then took a lot of people
out of the rural sector and employed them in factories, which generated huge productivity increases for a long
time and fooled people into thinking this was sustainable growth. Even Argentina was claimed to be as rich as
the US before the First World War. Thats another example of unsustainable growth facilitated by favourable
market opportunities. Thats why its important to study history.
I believe Chinas equilibrium remains very transitory, and while its difficult to predict the direction in which
China will go, the current situation is unlikely to persist. Even South Korea in the 1960s and 70s is an example
of extractive growth in some sense, but it managed to make the transition to a much more inclusive political
system, which is why it could sustain growth. North Korea, for example, couldnt do what China did as its
regime is much less institutionalised. Its just not confident that it can keep control of society while liberalising
the economy as China has done.
Overall, while
the growth in India
has been much
slower than in
China, it has been
much more
sustainable and is
supported by the
gradually improving
nature of institutions.
And hence, if asked
which of the two
countries was likely
to be doing better in
50 years time, I will
pick India
At some point, when the pressure from the people gets too much, the political institution will clamp down on
economic liberalisation in China. Many academics once wrote that people in the Middle East willingly sacrificed
political rights in exchange for subsidies and handouts, but the reality was just that people couldnt organise
collectively to demand greater political rights and openness in the system. I think the sames true for China.
Growth alone isnt going to keep people happy. Theres certainly a demand for more political rights, and that
could come out as open conflict. Yes, theres a chance that a conflict could just lead to a different type of
extractive system. But I think there is a higher likelihood that China converges to become more stable, richer
than it was in the 1970s, but doesnt try to take over the world as many seem to believe.
In India, theres been liberalisation and a movement towards political inclusiveness. In fact, the improved
economic success of India seems largely correlated with the disintegration of the political dominance of one
single party. This not only meant more political competition, but that steps like the deregulation of the License
Raj implied higher competition in the economy too. While there are still many dysfunctional and extractive
elements in Indias political system, it has gradually moved towards becoming an inclusive society. Overall,
while the growth in India has been much slower than in China, it has been much more sustainable and is
supported by the gradually improving nature of institutions. And hence, if asked which of the two countries was
likely to be doing better in 50 years time, I will pick India.
Do you think geographical location and the physical attributes of a country have a disproportionate
impact on the success of nations?
No, I dont think that is true. Africa has low agricultural productivity because its never seen a green revolution.
And thats because of massive predation by governments on farmers, against rural people and rural interests.
Nobody uses fertilizers because property rights are weak, and people dont want to spend money investing in
raising productivity if theyre not going to benefit from it. So its not about the climate, its about layers of
dysfunctional institutions that keep agricultural productivity low in Africa. Europe once used to be a very
unhealthy place. There was endemic tuberculosis, bubonic plague, cholera, but Europe became much
healthier because of the fruits of its economic development, and the same will happen in Africa. As they
develop, theyll be able to implement the public health measures necessary to eliminate diseases too. They
just need better institutions.
Originally featured in issue 40 on countries success drivers (Fortnightly Thoughts: Where countries succeed companies follow, September
20, 2012)
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Special Issue
Interview withJoe Studwell

About Joe Studwell
The founding editor of the China Economic Quarterly and a freelance journalist in Asia for over twenty years. He is the author of How Asia
works, The China Dream and Asian Godfathers and has also written for numerous journals
You talk about the three phases of the evolution of a country - agriculture, manufacturing and financial
systems in your book. Where would you place the different Asian economies on this curve and who
has got it right so far?
First of all, its important to understand that the major resource of a developing country is its people. So when
countries begin to develop, their aim is to maximise returns from the low-quality human capital that they have.
The three-stage argument, which is largely based on historical observation of countries that have succeeded,
is primarily a framework through which this goal can be achieved. The first and extremely important step is to
reform agriculture, which may employ as much as 80% of a poor countrys population. The best way for this to
be done is through a micro-farming approach, i.e., turning agriculture into large scale gardening, where people
spend inordinate amounts on maximising output. This is more effective than large-scale agriculture when
labour is abundant and very low-cost. This way, by producing six to seven tons of rice per hectare in a country
like China, instead of two to three in Thailand, despite the latters more favourable agronomic conditions, a
country uses all its labour and generates an initial surplus. In East Asia, successful land reform programmes
and micro-farming support systems in Japan, Korea, Taiwan, China and Vietnam generated a 50%-75%
increase in crop output in seven to ten years. These countries saw an enormous increase in yields despite
relatively inferior soil and climatic conditions compared to south East Asian countries like Thailand or the
Philippines where land reform programmes were never successfully implemented.
While such an increase in agricultural output is helpful in itself, it also triggers demand for basic industrial and
consumer products by raising rural incomes. Take Japan after the Meiji restoration, or China in the 1980s: it
was the incremental capital generated across the entire population through agricultural reforms which created
the initial demand for basic goods that can, and should be produced domestically as part of the industrial
learning process. With increased income, farmers started buying farm equipment and constructing buildings,
creating demand for cement, steel and glass among other materials. Unsurprisingly, successful companies like
Great Wall Motors of China and Wanxiang, one of the biggest auto components companies in China today,
were both started as agricultural machinery and repair businesses. A strong agricultural economy creates the
best possible foundation for development.
Is this when the manufacturing phase starts?
Yes. Consistently in East Asia the countries that have succeeded have created explicit industrial policies
focused on manufacturing. And several things explain why this succeeded. For one, acquiring knowledge and
a technological capability is the next big priority for countries which have reformed agriculture, and this makes
learning through trade extremely important. It makes a lot of sense to focus on manufacturing as its much
more freely-traded than services. Moreover, machines really help countries maximise returns on a low-skilled
population as they allow far more value to be extracted than a service-oriented strategy of development can.
Manufacturing has a steady learning curve. People can learn on the job while simultaneously adding value for
the employer and earning income. In effect, factories act as secondary schools for developing economies. In
services, by contrast, you often have to train people up before you can extract any value from them. Think of a
call centre operator or a software code writer. They cant start from near zero and learn English or software
code on the job.
With just 14% of the population in manufacturing, India is an example of the disadvantages of a more servicesector oriented approach. While it has created some very competitive IT companies globally, the entire Indian
IT sector employs just 3 mn people out of a population of 1.2 bn. So, while it may be great for the people
involved in these sectors, the depth of impact that it has on the overall economy is far less than it would have
been if these people were involved in managing manufacturing plants.
Another reason why Japan, Taiwan, Korea and China could successfully transition themselves to become
huge manufacturers is what I call export discipline. To ensure that the subsidies and tariff barriers that were
used to nurture manufacturers in these economies did not result in sub-quality goods being produced solely for
the domestic market, any firm that was subsidised by governments was pressured to export. Much of the
pressure was applied by rationing credit, forcing companies to be competitive in the world market and creating
information feedback that showed governments whether they were getting a return on the subsidies. It is this
export discipline which separates the industrialisation programmes carried out in the successful countries like
Korea from the ones done in the Philippines, Malaysia, Indonesia and Thailand. The latter states remained in
the tradition of so-called import substitution industrialisation which lacks the export discipline and also
produced poor returns on industrial policy in Latin America.
Before one starts blaming less successful states, however, it is worth noting that the successful economies are
all contiguous Japan, Taiwan, Korea, China, Vietnam. There was a transmission of ideas which helped these
nations emerge as manufacturing giants. A big part of their success has been nothing more than transmission
effects, to use the economists term, most of which have their roots in Japans breakout performance in the
19th century. Unfortunately, the transmission of ideas broke down in south-east Asia outside of Vietnam.
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Special Issue
Mahathir Mohamad tried hard to learn the lessons of Japanese and Korean development in Malaysia in the
1980s, something I discuss at length in How Asia Works, but he failed to grasp a couple of the simplest
points, including the need for export discipline in industrial policy. The two fundamentals that define success in
East Asia have been getting agriculture right and getting an acute focus on manufacturing. The third area is
the policy of financial repression that is used to obtain these objectives. This means that a developing country
needs to mobilise its financial resources and point them at the necessary targets. The easiest mechanism to
control is the banking system. Japan and Korea, for example, used central bank rediscounting to manipulate
commercial banks, which were rewarded for lending cheap to exporters and favoured industrial sectors. China
has not used much rediscounting, but has built up a huge industrial policy bank in the form of China
Development Bank. The other side of financial repression is capital controls. To be honest, I just cannot see
any argument in favour of not having capital controls to develop an economy. A developing state has to have
discretion over domestic capital in order to run effective policy.
Doesnt that discourage foreign investment?
China has controlled its capital account very strictly and is only beginning to open it up very, very slowly.
Despite that, it has broken all records for incoming FDI. No, I dont think that capital controls discourage FDI so
long as a developing country has growth and the promise of an interesting new market. On the portfolio
investment front, its not surprising that equity investors prefer Anglo-Saxon financial systems, because theyre
designed to reward third-party investors. But its also important for investors to have something substantial to
invest in. And so, the fundamental problem for investors is that the policies which produce substantial
economies like those of Japan, Korea, Taiwan, or China are often profoundly unfriendly to equity investors.
Returns remain appalling in the fastest periods of growth and only come much later, when financial
decompression takes place. So, while it may be upsetting to the equity investor that they cant generate a
return on the current growth, its in their best interest to allow these policies of to build a substantial economy,
allowing them to reap returns later.
I suspect that
China will roll
forward through
another investment
cycle, albeit with
reduced growth,
before really running
up to the limits of its
existing growth
strategy in a decade
or so.
In the end, I believe that there are at least two kinds of economics, the economics of learning, where you forgo
short-term returns to invest in learning, and the economics of efficiency, which Adam Smith describes as
maximising efficiency and producing short-term results, but without abandoning the economics of learning.
Weve already witnessed the change of economics in Korea since 1997, because the IMF went in as a result
of the Asian financial crisis and forced substantial change. In Japan, we havent seen that change, which
explains why for two decades Japanese equities have continued to underperform. Despite creating a highlycompetitive economy technologically, Japan failed to understand the need to then move to the economics of
efficiency. Now of course, we are all hoping Mr. Abe is going to liberalise the labour market, break down
monopolies and oligopolies, end remaining policy support and subsidies, and so on. In short, do the Adam
Smith thing.
Does Chinas size and dominance make it even harder for smaller emerging Asian economies to
follow?
In my view, it's easy to over-emphasize the role of Chinas size in its success. Looking around, we see
examples of small countries that have succeeded: Taiwan, Korea, Sweden, Denmark, Finland, New Zealand
etc. Theyve all done extraordinary things. Developmental success is more about systems and human
organisation than endowments. And size also creates problems for China, in terms of running effective
development policy. The main thing that central government officials moan about is that their policies are
constantly ignored in the provinces and that this has high costs for instance when central government efforts
to close down sub-scale and inefficient industrial capacity are resisted.
Whats next for China?
Chinas shadow banking system has seen rapid growth and the country needs a lot more investment to
generate an incremental dollar of GDP than before. The government gets this and realises that financing must
be more efficient. However, while money has to be increasingly allocated by the market going forward, the
government is still struggling to keep its industrial strategy in place. So were entering a period of financial
decompression in which financial system risk increases. There are parallels in Japan in the 1970s and 80s,
and Korea or Taiwan in the 1980s. With capital controls in place I dont see short-term risk. The recent panic
about Chinas outlook was overdone and I think markets are realising this. What concerns me more is that now
is the time the government should be seeking to make real progress on institutional reform in everything from
the judicial system to education to political pluralism. But I dont see any evidence this is going to happen. So I
suspect that China will roll forward through another investment cycle, albeit with reduced growth, before really
running up to the limits of its existing growth strategy in a decade or so. I dont think China is going to fall off a
cliff short term, but nor have I ever thought it would set any records for qualitative performance in economic
development. Chinas clout comes from its 1.3 bn population, not because it does development better.
15
Special Issue
Can China disrupt large Western firms?

For me, big companies are more important than big countries, and developing these big companies is
therefore extremely important. I agree with the argument that high levels of concentration can make it harder
for EM companies to gain global competitiveness.
But, on the other hand, the acquisition of IP is probably easier today than it has ever been. So there are
swings and roundabouts. Overall I think it is perfectly possible for EM firms to disrupt Western ones. As to the
extent to which China will do this, we must be patient. So far weve really only seen Huawei make the grade.
But I would expect other firms to do so in the next decade, so long as the central government can maintain
macro-economic stability and avoid financial crises. Even today, becoming a global leader takes time. In the
next few years well see a firm like Great Wall Motors launch a major assault on world markets, we will see
what Lenovo is really capable of, we will see if any of the Chinese new energy businesses can become a world
leader.
Chinese firms, then, can disrupt Western ones, although in some businesses the heavy role of state firms is
problematic. State ownership is not always disastrous, but its very hard to find examples of where it works in
consumer-facing businesses. In Chinas auto industry for instance, the continued presence of the state automakers and their joint ventures makes life for the private ones like Great Wall much more difficult than it
need be.
What is your view of Japan in this context?
Japans an extraordinary country which made all the intellectual breakthroughs in East Asia with respect to the
means to economic development, including the first land reforms in 1873. In the 19th century the Japanese
went around the world on long journeys to see how stuff worked and talked to as many people as possible in
order to understand it. They were the society that brought rapid development to East Asia. Despite this
demonstrated capacity for change, however, Japan has become stuck in a rut because of failure to change.
Its just extraordinary that a country which produced such path-breaking developmental performance in the 19th
century, and again after World War II, could do so little to avoid the malaise that it went through for the past 20
years. So will Japan make the necessary changes? Much will depend on the extent to which Mr. Abe can play
the role of the outsider. He doesnt really have outsider credentials, so one fears that key structural changes,
particularly to the labour market, will not be delivered. But he has certainly had a very positive effect on
morale.
Originally featured in issue 62 on dominance (Fortnightly Thoughts: Concentrating on dominance, September 26, 2013)
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Special Issue
Interview withRaj Rajkumar

About Prof. Raj Rajkumar
Professor in the Department of Electrical and Computer Engineering and Co-director of the General Motors-Carnegie Mellon Autonomous
Driving Collaborative Research Lab. He is the CEO of Ottomatika, Inc., and previously worked at IBM T.J. Watson Research Labs
When do you expect to see completely autonomous vehicles on roads? What are the key milestones
between now and then?
I expect completely driverless cars to be feasible only in the 2020s, and even then it will first be offered in
some developed countries, where the infrastructure is more advanced and traffic rules are generally obeyed.
Autonomous vehicles will take longer to appear in developing economies because: (a) their driving etiquette
tends to be very aggressive with very thin error margins, and (b) higher costs will initially be a deterrent.
These issues will likely continue in the 2020s too. We can also expect that some rich, developed city-states or
small countries like Singapore or Qatar, which are forward-looking in terms of adapting cutting-edge
technologies, to become earlier adopters.
In terms of milestones, there are two very different ongoing paradigms. The first is the so-called Holy Grail
approach exemplified currently by companies like Google, which has been experimenting on fully autonomous
vehicles. Here the milestone is really one capability - the vehicle will be able to drive to its destination all by
itself. But, another approach is the paradigm of incremental automation adopted by todays carmakers. Most if
not all car companies expect a human to be part of the driving process for quite some time to come. Even if
the human is not necessarily driving, manufacturers expect a human driver to be present in the drivers seat,
engage and take over control from the self-driving mode as and when necessary. That is still an advance from
cruise control, where right now, the driver gives up control over the accelerator pedal, but still operates the
brake and steering wheel. Most importantly, the driver has the responsibility of cancelling cruise control and
taking back full control when there is a vehicle driving at a lower speed ahead.
So, in this second paradigm, the first milestone - and its very imminent - is an autopilot capability on the
highway, allowing drivers to engage in a driving mode where the vehicle steers, brakes and accelerates in the
current lane. The next development is a highway pilot capability with lane changes, where the vehicle can also
change lanes to pass a slow-moving vehicle in its lane. Another milestone is a self-parking feature, with yet
another being traffic jam assist (TJA) capability where the vehicle drives itself while in a traffic jam. When the
traffic jam clears the human needs to take back control. Production cars available for purchase will reach
these milestones in the next three to five years. My belief is that by the time vehicles become completely
autonomous, people would hardly notice it because they would have slowly, but steadily, given up control for
most of the driving functions before that final step.
Does transportation infrastructure like roads and traffic lights need to change to facilitate the
development of this technology?
My belief is
that by the time
vehicles become
completely
autonomous, people
would hardly notice
it because they
would have slowly,
but steadily, given
up control for most
of the driving
functions before that
final step
It is very unlikely that infrastructure will change broadly enough to accommodate this technology in the
foreseeable future. As such, autonomous vehicles are being built on the assumption that there will be no
special infrastructure for driverless cars. That being said, infrastructural enhancements would be extremely
beneficial for self-driving cars.
A wireless communication device which can be added to traffic lights can transmit the location and current
status of the traffic light to a receiver implanted in a vehicle, allowing a self-driving car to react appropriately.
Similarly, this wireless system can also facilitate vehicle-to-vehicle (V2V) and other vehicle-to-infrastructure
(V2I) communications. For example, a car can communicate to the traffic light about where it is going, so that
the traffic light can adjust its timing, turn green and let a car pass when there is no traffic in other directions.
This should significantly reduce delays and pollution. Furthermore, such technologies will become available on
smartphones to enable vehicle-to-pedestrian (V2P) communications, automatically alerting vehicles and
pedestrians, when a pedestrian is crossing the street. It must be borne in mind that the cost of upgrading traffic
lights involves significant inertia.
Fortunately, these communication technologies exist today, and cars will be able to dynamically plan routes
and co-ordinate with other vehicles. However, changes in infrastructure will only happen incrementally. We are
beginning to see mandates in the US, in Europe and in Japan to implement the wireless technology. Starting in
about 2017 or 2018, the US government is expected to require that all newly manufactured vehicles carry this
technology. But even so, given the whopping 250 million cars that can operate in the US and assuming that
roughly 15 million new cars are sold every year, it would take 16 to 17 years to replace the current fleet of
cars. So, it will take time.
What are the societal and economic benefits of self-driving vehicles?
Every year an estimated 1.2 million people die and hundreds of millions of people get injured due to
automotive accidents, taking a huge toll on society, both emotionally and economically. Imagine the potential
benefits if we could take human error, which accounts for more than 90 percent of these accidents, out of the
equation. Unlike people who are prone to distraction, computers are not and they will be able to drive a lot
safer. Another value-add of autonomous vehicles would be an improvement in productivity. Youd agree that
being stuck in traffic is a very common urban phenomenon. In the US, the normal person commutes about 51
17
Special Issue
minutes per day to and from work, and thats unproductive time. Over time, when the technology has proven
itself, if the vehicle was driving itself, that time could be used to catch up on email, texts, or doing something
more productive including taking nap! I believe that would have a global impact on economic productivity in
time it is no longer a question of if, but when. Thirdly, people lose their driving ability and license when they
age. If older people are living all by themselves, they would have lost some of their independence, self-esteem
and their quality of life would be declining dramatically too. In this case, autonomous vehicles would help them
regain their mobility and could drastically improve their living standards. This is true for the disabled too.
What are the highest value-add components in an autonomous car?
An autonomous car comprises four sub-systems. The first one is a set of sensors, things like cameras, laser
scanners and radars. These act as the eyes and ears of the car. The second subsystem is actuators, which
operate the steering wheel, the accelerator, the brake, and transmission; so, basically they act as our hands
and feet. Thirdly, there is a set of computers that process all the information gathered by the sensors and then
generate commands to the actuators; in other words, this is the brain of the vehicle. And fourth is a
communication system that is similar to the human nervous system; this receives sensory inputs from sensors
and also communicates the commands from the brain to the actuators.
Now, actuators are becoming cheaper and my view is that by about 2020, they will be broadly available and
affordable. In terms of the sensors, cameras have already become very cheap and radars are rapidly getting
there, however lasers and scanners wont be as affordable for consumers for a few more years. Essentially,
the costs of a cars hardware components are subject to the same downward trend that is also evident in the
computer and smartphone industry. They are constantly becoming cheaper, faster and smaller. So the key to
autonomous technology is really in the software which controls all these four subsystems. Driving is one of the
most complex activities that human beings engage in on a daily basis and so, any firms that become leaders in
developing software for it will play a big role in deploying this technology, and that is where the bulk of the
value will lie. And this situation is similar to the Windows OS in PCs or Android in smartphones. There is also a
major role for someone who can vertically and smoothly integrate the different function and capabilities of
technology. So, looking again at smartphones, Apple obviously does this very well in terms of integrating
hardware (design), software and brining together other related products, like the iPod and iPad. One can
imagine something similar evolving in the autonomous car space as well.
On route to autonomy
The spread of connected cars
Automated driving development roadmap and changes in core

technologies
Connected car global penetration rate and ADAS sensor market size
(US$ bn)
Phase
1980~
2000~
2020~
Passive Safety
Active Safety
Semiautomated
driving
2030~
Fullautomated
driving
12
70%
60%
10
50%
8
Airbag
Core tech ABS
ESC
ADAS
ACC
AEB
Note:
ABS:AntilockBrakingSystem
ACC:Adaptive CruiseControl
AEB:Autonomous EmergencyBraking
ESC:ElectronicStabilityControl
LKA:LaneKeepingAssistance
Drivermonitoring
LKA
ParkingAssistance Night vision
Linked
ConnectedCars
V2V(VehicletoVehicle)
V2I (VehicletoInfrastructure)
40%
6
30%
4
20%
2
10%
0%
0
2011
Source: Goldman Sachs Global Investment Research.
2012
2013
2015E
2020E
Source: Goldman Sachs Global Investment Research, Japan Patent Office.
What happens when autonomous cars come across a new scenario on the road? Are they capable of
adapting or have they begun to self-learn and improvise in new situations?
In pretty much every project that is working towards autonomous cars around the world today, there is always
a person in the drivers seat when the car is being tested on public roads, to act as the final authority and take
over control if needed. The number of scenarios that one needs to test is very extensive. And multiply each
individual scenario with different conditions in terms of weather, lighting, quality of roads, traffic, crowd
densities and special situations like a fire truck or an ambulance going by or a heavy truck right behind you.
Driving really is a very complex activity for humans, but even more so for machines when they encounter
unusual or unique scenarios. Someone has to teach these self-driving vehicles the right action to take, and in
that sense they are not yet self-adapting or self-learning. Think about it this way - when we were young, we did
learn by ourselves, but we were taught a lot more by our parents, our families and teachers. Eventually,
because our brains are structured that way, we were able to learn things ourselves just by observing what was
happening around us, based of the underlying principles that we were taught. My view is that it will be a long
18
This in fact
would have a major
impact on the
demand for cars,
and could
dramatically change
the industry as we
know it now.
Substantially fewer
cars could be sold
every year but they
may be replaced
much more often
Special Issue
time before self-driving vehicle technology can get to the position where it is able to teach itself what to do in
different scenarios. We are still in the teaching phase.
What regulatory challenges to autonomous car adoption do you foresee?
A lot of progress has been made on all these fronts. In the US, regulations have been implemented at the
central (federal) level; there is a very clear awareness at the federal level that this technology is progressing
rapidly, and the government wants to facilitate this work, but ensure that it is safe. A few states in the US are
also issuing their own rules to facilitate the testing and deployment of automated vehicles. In fact, these states
are competing with each other to be perceived as the leader in this technology by being very receptive to
companies that want to build and test self-driving vehicles. In return, they expect those companies to set up
businesses, proliferate their tech environment and bring more jobs to their states. So competition has been a
catalysing force and that is a very good thing.
There are also very interesting developments occurring on the insurance front. As we previously mentioned,
the rate of automotive accidents, injuries and fatalities would go down with this technology, which means that
pay-outs for insurance claims would drop. Subsequently, this would lead to lower premiums in a competitive
landspace. So, of course, insurance companies have to worry about the reliability of self-driving technologies,
while being aware that the overall revenue and the market size could shrink significantly. If that happens, only
the most nimble and forward-looking companies are likely to survive or thrive.
How do you see the use cases for wireless cars developing? And what does that mean for aggregate
car demand?
Interestingly, Uber recently announced a strategic relationship with us here at Carnegie Mellon University, to
build self-driving cars for the car- and taxi-sharing market. And, almost immediately, Google responded saying
it was looking into the ride-sharing market independently. The fact that two forward-looking giants are eyeing
this space can be an important catalyst to realise this driverless car technology, and I expect it to advance very
rapidly. Of course, we dont know yet when exactly well start to see self-driving cars as taxis, but I believe that
other players will quickly join the game too, and this on the whole will accelerate this technology.
A long-term impact of this sharing paradigm perhaps is in the ownership model of cars. A common observation
is that an average car sits idle for more than 80% of the day, representing a big chunk of dead investment.
Instead, if there is a smaller subset of self-driving cars which can simply be fetched or summoned by a
smartphone for a task, which, when finished, then drives away to service the next person, then resources
would be utilised much more efficiently. This in fact would have a major impact on the demand for cars, and
could dramatically change the industry as we know it now. Substantially fewer cars could be sold every year
but they may be replaced much more often due to the additional wear and tear incurred. Subsequently, fewer
cars and better efficiency should have a meaningful impact on total resource and energy demand. And given a
completely different user paradigm, car designs would evolve as well. More streamlined, efficient cars would
contribute to greater energy savings. So, these are truly exciting times for self-driving vehicle technology. Only
a few years back, people still perceived it as a long-term development i.e. that it is 20-25 years away. Now, we
are talking about what is going to be available to consumers in the next five years. And that has been because
multiple milestones have been achieved in the past three years, and more companies are jumping into the
fray. Remarkable advances happened recently not just in terms of the technology, but also social awareness,
social acceptance, insurance and the legislative sides.
Originally featured in issue 85 on artificial intelligence (Fortnightly Thoughts: The real consequences of artificial intelligence, February 18,
2015)
19
Special Issue
Interview withPaul Brody

About Paul Brody
At the time of the interview, Paul Brody was Partner with IBM Global Business Services and the leader of the global electronics industry
strategy practice. Previous to that he held executive supply chain positions at ClearCross and I2 technologies, as well as consulting for
McKinsey & Co. Currently, he is with the EY Advisory Strategy group at Ernst & Young.
Could you explain the idea of the shift from hardware-constrained to software-defined manufacturing?
This is very much the idea that technology is everywhere. Certain technologies are reshaping manufacturing,
and the common theme is that manufacturing processes are becoming increasingly software defined. This
means changes to manufacturing can now be made through software, rather than through costly and time
consuming physical changes.
Today, if you want to change an aspect of a production line you cant just click a button, you need to
reconfigure the assembly line. This may mean moving a piece of capital equipment, changing an injection
mould or a stamp in a stamping machine. In the future, you could simply make a change by amending a
software file, thereby changing the instructions that go to a robot. Likewise, you could change the behaviour of
a product by changing the software on the embedded chip within it. When you combine all of these things, the
amount of physical hardware constraints in the manufacturing process are far lower.
Software will fundamentally give us the ability to configure, customise and adapt products very quickly. If you
think about hardware life cycles they are usually months or years. Software on the other hand is upgraded in
days or weeks, as new versions are released so quickly. This illustrates the potential shift for product life
cycles.
What technologies are changing manufacturing?
I would say there are two revolutionary technologies changing manufacturing today. One is 3D printing and the
other is advanced robotics. When thinking about these technologies the big questions to ask are what kinds of
business models can exist with these technologies, and how will they change the economics of
manufacturing?
My theory is that these technologies will firstly make manufacturing much cheaper, but more importantly they
will reduce the required scale for efficient production. With current technologies, high volume is needed to
make products at a price competitive level. However, these new technologies will reduce the price-competitive
volume by up to 90% which is transformational, and implies a reversal of a century-long trend of focusing on
scale. The era of manufacturing companies that make standardised components through a repeatable process
may be coming to an end.
We will see a
revolution where
standardisation is
replaced by
customisation.
I believe that we will see a revolution where standardisation is replaced by customisation. Today, many
products are slightly customised, i.e. standardised components that have been adapted a little. In the future,
we will see far more customized products. Components which can be easily 3D printed will be highly
customised, and things that cant easily be 3D printed will remain standardised. However, the combination of
these two things will produce far more unique products.
The implication of these trends is that if you build a factory today that is not using 3D printing and advance
robotics, then theres a very real risk that your capital investment will never live to see a decent return. It will be
obsolete long before youve finished paying for it.
How fast will we see companies adopting these technologies?
I expect it will be fastest for small companies that do not have a legacy of using more traditional production
techniques. Similarly, companies which have a high mix of products and produce a low volume of each of
them will be quick to uptake these technologies. This is because they will be some of the first companies to
see a return on investment in these technologies.
Large established enterprises on the other hand will likely be more reluctant to abandon their current
processes. Standardised techniques have been lucrative for them in the past and will have received vast
capital expenditure, so moving away from these traditional methods will not be easy or painless for them.
During our research at IBM, we found that about 70% of companies are either unprepared for these
technologies or not using them. The other 30% have only recently started to use these techniques and they
are very much in the first phase of implementation. They are buying one or two 3D printers to test out, and see
how they compare like-for-like with injection-moulded or stamping techniques. The second and third phases
are to reshape your design and manufacturing processes to take advantage of the technology.
I expect well see Chinese companies adopting these technologies quickly, I certainly see lots of evidence
when I travel there.
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Special Issue
What do you think the challenges are for 3D printing and its uptake?
The big question for 3D printing is how tolerant people will be of a less-than-perfect finish. Standardised
methods such as injection moulding or stamping provide a very high quality finish, and weve got used to this.
The question is if people are willing to sacrifice a little quality in return for increased customisation.
I see this as very analogous to mobile phones. Originally mobile phones were viewed as only being good for
using on-the-go because the voice quality was seen as far inferior. Today, weve come to accept that the
quality is good enough for what we need, particularly given the freedom they provide. I expect the same will be
true for 3D printing, where the flexibility they provide will outweigh the slightly inferior fit and finish, versus other
tools.
In terms of uptake, the existing gating factors are starting to melt away. Some key patents which have
restricted the flexibility of entry in this space are expiring, and as a result the industry is becoming far more
competitive. Additionally, in the past companies have tried to connect the feedstock with the device, but this
has been decoupled and so the price has fallen. As a result, we are seeing both the printers and feedstock
becoming far cheaper. Simultaneously, we are seeing huge developments in software. The consequence of
these changes is that a lot of the things that were slowing down uptake are now subsiding.
Is open-source software a key development that will complement this software-defined manufacturing
trend?
Certainly, the rise of open-source hardware design is important. In the past, to write new software code was
very time consuming, whereas today you can string together the equivalent of millions of lines of code in a
matter of days by accessing open-source libraries and pulling pieces together.
Currently this is prevalent in assembly, integration and design, and we think this will happen in manufacturing.
As an example, you will be able to start manufacturing with an open-source product design, an open-source
component design and some open-source software, all of which can be run on a standard system chip. The
implication of this is that a manufacturer in the future will be able to start with a design thats 80%-90% done.
This means that what will differentiate manufacturing companies is not simply the manufacturing technology,
or the designs, but customisation, marketing and servicing.
Will these trends make competitive advantage harder to obtain and defend?
I expect we will see the basis of competition shifting away from capital, labour or manufacturing capacity to
product development, design, servicing and support. Research suggests that open-source software saves only
3%-5% of total software operating costs. The remainder of the costs when developing an enterprise
application are around servicing, support, training etc. Manufacturing could become similar to this; the costs of
materials and making the product could become low, but the value will be in the packaging, marketing,
distribution, servicing, support and brand. As an example, this is true in a box of breakfast cereal; the cost is
not in the cereal but the other things.
I think what we will see is competitive advantage going to countries with very strong creative and design
environments that support entrepreneurship like the US, the UK and the Netherlands. This is because it will
become much easier for designers to create and kick-start their own little product. Certainly this has been true
with the hardware renaissance in Silicon Valley, and things like the rise of Tesla. This is very significant
because for the first time in 20 or 30 years we are seeing expensive products being manufactured in high-cost
markets.
Software eats hardware
Digitisation at play
Traditional capital goods equipment vs. software as percentage of total

investment in fixed assets in the United States
Software as a percentage of gross fixed capital formation for various

sectors in the United States
25%
Software
40%
Traditional capital goods
35%
20%
30%
25%
15%
20%
15%
10%
10%
5%
5%
Source: BEA, Goldman Sachs Global Investment Research.
Mining
Construction
Utilities
Healthcare
Food processing
Manufacturing
(consumer)
Transportation
Retail
Transport
manufacturing
Other Processing
industries
Machinery
manufacturing
Financial services
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
0%
Electrical Equip.
manufacturing
0%
Source: BEA, Goldman Sachs Global Investment Research.
21
Special Issue
On the other hand, emerging markets which have benefited from their low-cost productive capabilities i.e.
labour will likely lose their competitive advantage. I am actually not very optimistic about emerging market
multi-nationals. They have succeeded by building bigger factories and out capex-ing competition, but I think
this trend is coming to an end for the reasons I have explained.
How will supply chains and the flow of goods around the world change?
Our models tell us that the optimal supply chain is going to shift from one that is complex and global to one
that is small and local. So, not only will it become economical to make small batches of product for local
consumption, but you will also need far fewer moving parts.
As an example, if you have 60 parts in a washing machine, instead of needing 60 suppliers of parts, you really
need 60 3D printers that can each turn out one part or one that could do all 60 parts. Overall, this leads to a
vast simplification of supply chains as you have fewer moving parts, and fewer suppliers.
In terms of local versus global, I doubt we will see companies bringing production back because whats gone is
gone. However, for companies that are furthest along this technological development path, it may no longer be
beneficial for them to take manufacturing offshore. What this means is that low-value production which has
moved offshore will probably remain in low-cost economies, as many large companies will not change current
production. However, many companies will choose to start new manufacturing operations very close to their
design centres because it will not be worthwhile moving the manufacturing process.
Are there any other key technology and digital trends you see?
I think the impact of the internet of things is currently under appreciated. Of course, technology will hugely
affect manufacturing in terms of what we make and how we make it, but it will also impact how much of it we
need. Through increased digitisation of all products we will likely see a tremendous growth in asset utilisation.
If you look at asset utilisation across the global economy, what you see in terms of the amount of stuff we need
could decline enormously. This could be cars, office space, manufacturing equipment etc. At IBM we have
reduced our office space hugely in the last 10 years, by perhaps upwards of 50%. This is because we started
sharing offices, and asking people to work at home or with clients. This is a very simple example of the sharing
economy and the internet of things and this is a trend we will likely see grow.
Originally featured in issue 64 on tech ubiquity (Fortnightly Thoughts: Tech is everywhere, October 31, 2013)
22
Special Issue
Interview withTim Bunting

About Tim Bunting
General Partner at Balderton Capital, a UK-based venture capital firm that invests in early-stage technology and internet start-ups. He was
previously a partner at Goldman Sachs where he spent 18 years, latterly as Vice-Chairman of Goldman Sachs International (2005-06)
What are your thoughts on the role technology plays in shaping consumer business models of the
future and where are start-up firms placed in this sea of change?
The best companies are already shifting their business models to be data driven, adaptive to mobile and
provide a better purchase and delivery experience for customers. These changes will to some extent define
the winners and losers in the long run. I suspect that even the best incumbent companies will struggle to keep
pace with the speed of change. Consumers are changing the way they search, how they shop, and when and
where they want fulfilment. Fueled by new devices, better information and higher expectations, they realize
they are now THE BOSS.
For larger companies, adapting to this demanding consumer is very complex. Most have seized on the lowhanging fruit of social-media and mobile. However, real change will require a review of their whole business
model: front to back, to get the customer what they want and where they want it. This means changing your
front end customer experience and radically improving logistics and fulfilment processes. Coordinating this
change is hard, expensive and requires expertise that many senior managers/directors may lack. For new
start-ups the web allows start-ups/young companies to potentially acquire customers faster, learn from them
and iterate their product faster and cheaper than before. As a result younger, more aggressive, customerfacing business models, have a chance to build and scale businesses in the midst of giants. The playing field
is levelling.
Do private companies have better access to capital now? Are you seeing larger sums being allocated
to venture capital and private equity firms to invest in start-ups?
Absolutely. Firstly, most new companies need less capital to get initial traction. The costs of setting up and
scaling infrastructure through cloud technologies are falling rapidly. Increasingly there are data points as to the
potential returns from the best entrepreneurs and their companies meaning capital to scale great businesses
will follow. While the average size of a deal in venture capital is stable, the number of deals is rising rapidly,
and is being supported by other private capital, accelerators and selected institutional investors. Larger
institutional investors are becoming increasingly attracted by private companies. Many of these will elect to
stay private over doing a smaller, earlier IPO. We expect this to continue.
The venture
capital industry exists
because investors
believe the
combination of
business models and
cost structures found
in incumbents are
relatively inefficient
and can be competed
away by new firms
If access to capital is not going to be the big constraint, what then do you think will limit the growth
and success of these firms?
The scarcest resource is finding entrepreneurs with the right talent to build these companies. The long-term
pipeline is building but the number of role models is too scarce. Many start-ups are hiring graduates straight
out of the very top universities including Oxford and Cambridge in a way that they never did before, but are still
competing with the top financial institutions to attract them. There are perhaps too few role models, and those
there are, are not celebrated enough. It is imperative for all to celebrate their success.
Which industries are yet to see the impact of these changes you have highlighted?
We are yet to see meaningful disruption from tech companies in areas like healthcare, education, financial
services, and insurance. They continue to have traditional business models, but they are all open to disruption.
The potential for web-services and big data in these sectors is huge, and the tools that will enable such
disruption are emerging fast. Even in areas that the markets think have changed, such as online retail in
Britain, there is still a long way to go. E-commerce penetration is only about 11%-12% of total sales. Indeed
you can make a strong case that as penetration increases to say 20 percent in e-commerce there will be an
acceleration in changes required to adapt business models.
While many disruptive companies create a lot of value for consumers, they can also negatively impact
employment. In this context, how do you see governments responding?
Across Europe, governments are trying to develop policies to support innovation, even if they are disruptive.
Logically, they understand that in a competitive world, these businesses are going to be built somewhere and it
is much better to have them built within their economy. It's hard to tell what the net impact on employment is at
this point in time, but start-ups do employ a significant number of people. They also harness in a positive way
the intellectual capital which grows economies. The UK government is certainly doing more to support the
entrepreneurial ecosystem. There are instances of some complexity, especially when disruption takes place in
a politically sensitive sector or geography - taxis in France, second homes in Paris. My view is that putting up
walls and trying to defend incumbents against competition is not going to work in the long term. Consumers
are savvy and they like choice, and policy should be ahead of this trend.
23
putting up
walls and trying to
defend incumbents
against competition
is not going to work
in the long term.
Consumers are
savvy and they like
choice, and policy
should be ahead of
this trend
Special Issue
As privately-backed companies make inroads into industries what are some of the challenges
incumbents face?
The venture capital industry exists because investors believe the combination of business models and cost
structures found in incumbents are relatively inefficient and can be competed away by new firms. The
challenge for many public companies is they react too slowly to these changes. Even if they are aware of what
they need to do, share prices get whacked if people issue a warning over increased investment as investors
hate the profit and loss u-turn. Imagine what would have happened to Morrisons share price if they had tried to
build Ocado themselves
The challengers are also often younger and have a different skill sets based around mathematics, sciences,
and technology. There may be many people in incumbent companies who are capable of driving these
changes, but I am doubtful that they sit very high up the corporate ladder.
Where there is and isnt an equity culture

Number of private companies with more than $2bn in sales versus market cap of
listed companies by country
No. of private companies with sales > $2bn
Market capitalisation (US$ bn), RHS
800
9000
700
8000
7000
600
6000
500
5000
400
4000
300
3000
200
2000
100
1000
0
India
Brazil
Japan
HK
S. Korea
Sweden
Italy
Canada
France
Mexico
S. Africa
Singapore
Netherlands
UK
Australia
Germany
US
China
Note: US market cap (US$24.5 tn) not shown due to scale; as of 3 July 2015
Source: Bloomberg.
Originally featured in issue 68 on private companies (Fortnightly Thoughts: The rising importance of private companies, February 7, 2014)
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Special Issue
Interview withDavid Epstein

About David Epstein
Author of the bestseller The Sports Gene and a former Sports Illustrated writer. He holds Masters degrees in geology and journalism. He
was a national level 800-meter runner and his TED Talk has been viewed nearly 2 million times
The nature versus nurture argument is relevant in many fields, not least our industry; whether
someone can be trained to pick the right stocks consistently, or if it is an innate ability that only a few
possess is still up for debate. Has research helped us answer this question in sports? What makes a
successful athlete innate traits and physical attributes or acquired skills and good training?
Until some time ago, most people thought that athleticism was all nature, but it never was. Yes, 100 years ago,
any athlete who was talented, or an athlete who was the only one who knew how to prepare well could win a
medal at the Olympics. But more recently, sport has become global and there are many more competitors in
each field, and weve done a much better job of figuring out which variables matter for success. This has not
only led to performances becoming much better, but also to greater convergence in performances; the
difference between a top 10 competitor in a sport and a number 1 competitor is now much smaller than it was
in the past. And that has probably happened in almost every industry where performance is measurable. So
now, both the innate abilities and the preparation are required. More competitors are screened out either by
not having the right genes, or by lacking the appropriate training.
Many more people are now screened out by their genes from the get-go because we have determined which
body types are better suited to undertake long-term, high-level training. But its not just about physical
attributes. Take the results of the Groningen talent studies in the Netherlands for instance, which has been
tracking 10-14 year olds since 2000 and is one of the best studies conducted in this field; many of the initial
subjects have now grown up to enter the professional and Olympic level in sports like soccer and field hockey.
The findings suggest that there were certain physical characteristics evident even at the age of 12, like
acceleration for example, which made a difference, and the kids without it never caught up. But personality
traits were factors too. No matter what sport the future pros entered when they grew up, traits like selfregulatory behaviour stood out even when they were 12. These kids, who eventually grew up to be successful
athletes, were the ones who asked the coaches why they were doing a drill or telling them a drill was too easy
for them. They were taking accountability for understanding their own training and for the quality of their own
training and were able to assess their strengths and weaknesses sooner, eventually working with their
coaches to avoid performance plateaus that many athletes get stuck in. So its not just nature, but personality
traits and habits that keep performance improving.
But that isnt to say that nurture is the dominant factor either. And this is important to understand. The 10,000
hour rule based on the notion that 10,000 accumulated hours of training or practice in a particular field is
necessary and sufficient for success has led to the conclusion that a head start really matters. So instead of
letting young athletes build broader physical skills and allowing them to reflect on their training and
experimentand even fail in productive waysthe tendency for coaches to tell them exactly what to do and
push them to specialise very early on is worryingly prevalent. And it is backfiring in the US. Weve ended up
having very good teams for 10-year olds, but much weaker 20-something teams when athletes specialize too
early.
Today, most of the pro-athletes in the US are coming from places where schools dont have technically
proficient coaches and thats because no one pushed them to specialise really early on and they were able to
learn and develop more broadly. Take the NBA for example. There is a misperception that players mostly
come from inner-cities, but actually they are 11 times more likely to come from towns of 50,000-99,000 people
than large cities. Athletes need to learn skills early on just like a baby learns a language, making sense of
chaotic data through immersion and striving and small chunks of words and phrases first, and only learning
grammar later. And this appears to be true in other fields too. Young people need to be allowed to experiment,
fail and experiment again. Technical education should come later. You want to learn like a baby when it
comes to skills, experimentation and immersion firstthat is, implicit learning--and technical training later, not
the reverse.
How do you reconcile this evidence against specialised training at a very young age and a better
understanding of genes which are allowing future winners to be identified at much younger ages?
Despite the emerging science against early specialisation, the 10,000 hour rule fervour is still pushing us
toward early hyper specialization, particularly in the US. And one of the reasons is that sports training is quite
balkanised in this country, with everyone running their own youth leagues, and the science isnt being
disseminated. But some other countries have done a better job of managing these issues.
In Australia for example, theres a centralised sports science institute with scientists evaluating a huge
database and getting their message out to the development pipeline much more easily than we can, here in
the US. In fact, in Australia, athletes who go on to become pros in the future, have limited technical training in
their eventual sport until they are 14-15 years old. Roger Federer is a typical example of this philosophy; his
parents ensured that he played badminton, basketball and soccer through his teens. Steve Nash, the two-time
NBA MVP, similarly didnt even own a basketball until he was 13, but played a variety of other sports. He was
eight years behind me! In Australia, young athletes undergo whats called a sampling period earlier on and if
25
Special Issue
they are thought to have potential they are trained in a broad base of sports until they cross over and
specialise in their late teens. Australia replicated the success of this programme for adult athletes before they
hosted the Olympics in Sydney in 2000. Their talent transfer programme picked athletes who had played a
variety of sports, but were not great at any particular one, and let them try a bunch of different sports to see
where they might fit in. In the end, they had picked a bunch of gold medallists out of people who had never
tried the sports they were eventually successful in. Australia ended up winning ten times as many medals per
capita as the US did when it last hosted the Olympics. Great Britain did something similar for 2012 too and had
its best Olympics for a long time. This was done expressly by going against the 10,000-hours and
specialization idea, and helping those with a broad base find the right niche. It turns out that niche-finding is
actually more important and effective later, not earlier.
So, the best scenario is when we identify a few key determinants for a sport, apply them to narrow down the
potential field of athletes early on and then allow them to develop a broad set of skills rather than push them to
specialise immediately. The Chinese diving programme does this very well. In China, the diving dynasty puts
any New York Yankees dynasty to shame. Its mind blowing. To select future divers, they ask kids aged 5 or 6
to stand with their arms over their heads and if their elbow joints dont touch above their heads then they are
instantly selected out (because it leads to a bigger splash when entering water). Everyone else stays and is
encouraged to do a variety of things on land and in water, just general athleticism. It really challenges Western
stereotypes about Chinese sports programmes; after that selection process, no team has as much fun training
as the Chinese divers.
There has been a big move towards Big data in sports recently. Many teams are now being run by tech
entrepreneurs versed in big data and analytics. But in most cases the huge reams of data are good at
describing whats going on, but not always good at identifying the few variables that truly matter. What we
need more of is what I call small data. For example: before the 2012 Olympics, UK scientists set out to
identify determinants of performance for every sport. Let me give you the most simple example: shot-put, it
has only three determinants: the height, velocity and the angle of release of the shot. At the time, the number
two in the world had a better height and velocity but had lost because he had released the shot 1.5 degrees
lower than the gold medallist. That was it. Long jump is another sport with just three determinants: speed down
the runway, force into the jumping board and angle of jump. Its really that simple. So UK Sport appointed a
PhD biomechanistof which there are precious few in the worldand made her the Horizontal Jumps
Specialist. She just watched athletes jump and tried to figure out which of the variables she could change.
She realised that they couldnt change the speed or the force at that level, but could change the angle of jump.
So she worked with the UKs best jumper, and despite not having either one of the fastest approaches or the
highest forces into the board, he jumped at the precise angle and won the gold medal. That was about finding
first what mattered, and then, most importantly, what you can change. And Ive seen many small data
success stories, in much more complex tasks as well.
% contribution of cities/towns by size of population, to total population and
major sports leagues, US
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
> 5mn
2.5 - 5mn
1 - 2.5mn
0.5 - 1mn
250k - 500k 100k - 250k
Population
NHL (Hockey)
NBA (Basketall) NFL (Football)
PGA (Golf)
50k - 100k
MLB (Baseball)
Source: Jean Ct, Queens University.
26
this is perhaps
where sports differs
from investing. An
investor doesnt need
to react as quickly as
an athlete does. So
there is a greater
opportunity to turn on
the prefrontal cortex
in the brain, which
can overrule the parts
of the brain
responsible for
intuition
Special Issue
Identifying the right determinants, the optimum body type and training mechanisms, should mean that
we get very similar competitors on the field and converging performances, as you mentioned earlier.
Can this decreasing diversity or shrinking element of surprise pose a risk to the popularity of certain
sports?
There are some risks. For sports like bobsled for example, there are some who argue that the physiological
factors are so dominant, that teams can pick an athlete with particular characteristics and more or less
determine his or her chances of success even before the race is run. The adoption of tech can mean that a
sport becomes more of a science than an art, and while in some cases enthusiasts embrace that as a part of
the creative endeavour (like NASCAR in the US), in others it risks depressing the human element. In baseball,
for instance, despite the many tracking systems deployed today which let the viewer at home know in an
instant where a pitch went, we still have a guy standing behind home plate and often making the wrong call.
Thats a decision Major League Baseball has made, because it adds a human element that viewers enjoy.
The other angle to this phenomenon is that increasingly the average viewers at home cannot see themselves
competing the way athletes do. The technology, the physique, coaching and other aspects risk alienating
modern sports. Theyre simply too structured. I still find it incredibly exciting to watch a bunch of elite
swimmers - all with short legs, long torsos, large hands and feet compete at a high level. (You want a long
torso in swimming, its like the long hull of a canoe, for speed over the water.) But that may not be true for
everyone.
One of the things that makes a really successful investor is good pattern recognition. There is a lot of
information to deal with and those who subconsciously know which bits to disregard and what the rest
actually mean when taken together, do well consistently
Its exactly the same in sport the focusing in on the information that is important for decision making,
extracting and organising it with unconscious speed. Thats how athletes are able to do things with seemingly
superhuman speed, its really information processing. You know the baseball or cricket advice to keep your
eye on the ball? Nonsense, we dont have a visual system capable of tracking an object when the angular
position is changing that rapidly as it nears our head. You could close your eyes when the pitch is halfway in if
it werent psychologically upsetting. Elite athletes have already extracted the information they need from the
pitchers body. And that applies to a surgeon, a pilot and to a chess player. In cricket, if you hide a bowlers
wrist, even the most skilled batsman will struggle. Where a novice is overwhelmed by information, the expert
picks out patterns. But this is perhaps where sports differs from investing. An investor doesnt need to react as
quickly as an athlete does. So there is a greater opportunity to turn on the prefrontal cortex in the brain, which
can overrule the parts of the brain responsible for intuition; more information and more time can make you
think like a novice again. You can see that at times in a golfer who is putting. There is a lot of time to think and
sometimes youll see a star player overthink and ignore their expertise and intuition.
In chess, only 22 players have reached grandmaster status before the age of 15 in history and the oldest one
on that list is 35 years old today. In other words, this is a fairly new phenomenon and it has coincided with the
rise of computer chess. Its not technical coaching, but kids today have much better exposure to immersive
game experience and they are learning pattern recognition much earlier. But in other, more physical sports,
tech hasnt made that difference so far; video games are more prevalent, but that pattern learning actually
requires on-field experience.
How close are scientists to understanding which genes are important and if they can be manipulated
to produce perfect athletes?
There is some interest in real gene manipulation, which is basically next generation doping. While most traits
are influenced by large networks of genes, which would be very hard to manipulate, there are exceptions. Two
I write about are an EPO receptor gene mutation and the myostatin gene mutation. The latter is a target of
important research right now. Its early stages, but the myostatin protein is like a muscle stop sign, and drugs
that block it will have huge applications, not just for athletes, but the ageing population in general. And some of
those drugs are showing early promise. I believe that we will need to have society-wide discussions about the
ethics of such gene therapy very soon.
The mental aspects of someones life is a lot more complex; its driven by both genetic and non-genetic
components. What makes someone a good short-term investor, but not a great long-term one for example is
hard to determine, but there is research that identifies personality traits that are better for one than the other.
Extraversion, for example, is associated with more successful long term investors, and emotional stability with
short-term investors. Identifying which traits are important and which ones are genetic is key, because if it has
a heritable component, it can be bred. And, frankly, so far all personality traits have some heritable
component, its just a question of how large that is. We wanted a different psychology for our wolves and so
we bred for dogs. Then we wanted dogs that respond to us in a particular way and we bred for that too.
27
Special Issue
Several generations of Yao Mings forbears were brought together by the Chinese basketball federation. That
worked, but its rare. Some breeding may happen naturally. In sports, like in many other professions,
opportunities for women have increased only recently. And so we are seeing the first real generation of young
athletes emerge whose parents were both elite-level athletes. That should happen in basically every other
profession.
My hope is that before breeding for perfect athletes and perfect investors, genetic science will be used this
way: to understand what differences between people are both real and important, and how we can use those
to get the best outcomes for every individual. For instance, many coaches today mistake talent for what they
can see immediately and dismiss those that have potential to be trained well for something; baseline ability
and trainability are not the same and for some skills the correlation between baseline and trainability is zero! In
those skills, coaches and managers essentially always misjudge potential. I hope that genetics will be used to
understand why and how people differ and develop customised programs to equip people, not just in sports,
but in other industries too.
Originally featured in issue 82 on skills (Fortnightly Thoughts: People make the world go round, November 28, 2014)
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Special Issue
Interview withJeremy Rifkin

About Jeremy Rifkin
Author of The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism. Mr. Rifkin is a
senior lecturer at The Wharton School and an advisor to the European Union and to heads of state around the world
Can you explain what you mean by Zero Marginal Cost Society and how it can change the way things
are made and consumed?
Were just beginning to glimpse the outline of a new economic system emerging onto the world stagethe
sharing economy on the Collaborative Commons; a system where markets partially give way to Commons and
ownership of goods becomes less important than access to goods. This is the first new economic system to
emerge since capitalism and socialism in the early 19th century, so its a remarkable historical event. At
present, this sharing economy on the Collaborative Commons is flourishing alongside the exchange economy
in the capitalist market. But by 2050, I expect market capitalism will be profoundly transformed. Companies in
key sectors (construction, telecommunications, power, electricity transmission, ICT, electronics, transport and
logistics), will still exist, but increasingly will become aggregators of the Commons, much like how Google,
Facebook, and Twitter function on the internet today.
Whats precipitating this transformation is a move towards zero marginal cost in many industries. Marginal cost
is the cost of making an additional unit of a good or service after fixed costs are absorbed. The shift towards
zero marginal cost is a manifestation of a paradoxpreviously undiscoveredthat lies deeply embedded in
the heart of capitalist theory. According to classical economics, the invisible hand of the market owes its
success to the continual pursuit of new technologies that can increase aggregate efficiency and productivity
and reduce the marginal cost of production and distribution, allowing sellers to put out cheaper goods and
services, which, in turn, increases their market share and profits. But, what has never been anticipated is the
prospect of a technology revolution so extreme in its productivity that it can reduce the marginal costs for some
goods and services to near zero, making them potentially free and abundant and beyond the constraints of a
profit-motive market system.
Companies in
key sectors
(construction,
telecommunications,
power, electricity
transmission, ICT,
electronics, transport
and logistics), will still
exist, but increasingly
will become
aggregators of the
Commons, much like
how Google,
Facebook, and Twitter
function on the
internet today
To grasp the enormity of the economic change taking place, we need to understand the technological forces
that have given rise to new economic systems throughout history. Every great economic paradigm requires
three elements, each of which interacts with the other to enable the system to operate as a whole: a
communication medium, a power source, and a transportation mechanism. Without communication, we cant
manage economic activity. Without energy, we cant power economic activity. Without transport and logistics
we cant move economic activity across the value chain. Together, these three operating systems make up
what economists call a general purpose technology platform. In the 19th century, steam-powered printing and
the telegraph, abundant coal, and locomotives on national rail systems meshed in a seamless general purpose
technology platform that gave rise to the First Industrial Revolution. In the 20th century, centralized electricity,
the telephone, radio and television, cheap oil, and internal combustion vehicles on national road systems
converged to create an infrastructure for the Second Industrial Revolution.
Are we now on the cusp of a Third Industrial Revolution?
Yes. The Communication Internet is converging with a digitalized renewable Energy Internet and a digitalized
Transportation and Logistics Internet, creating a super Internet of Things (IoT) platform for a Third Industrial
Revolution that is going to fundamentally alter the global economy in the first half of the 21st century. Billions of
sensors are being attached to every device, appliance, machine, and contrivance, connecting everything with
every human being in a digital neural network that extends across the entire economy. Already, 14 billion
sensors are attached to resource flows, warehouses, road systems, factory production lines, the electricity
transmission grid, offices, stores, homes, and vehicles, continually monitoring their status and performance
and feeding Big Data back to the Communication Internet, Energy Internet, and Transportation and Logistics
Internet. By 2030, it is estimated there will be more than 100 trillion sensors connecting the human and natural
environment in a global distributed intelligent network. Connecting everything and everyone via the Internet of
Things offers enormous economic benefits.
Assuming that we can deal with issues like net neutrality, privacy, data security, and cyber terrorism (and I
know these are big ifs), the IoT enables us to build a new general purpose technology platform that, for the
first time, provides a transparent picture of virtually everything going on in the economy at any given moment.
This means that small businesses and large firms, non-profit organisations, and consumers can all leverage
the IoT to do things that were previously impossible. About 40% of the human race is connected today, but
that should be close to 100% by 2025. Anyone, anywhere will be able to mine a particular sheath in the
Internet of Things database and use freely available analytical tools, algorithms, and apps to dramatically
improve their productivity, reduce marginal costs, and produce and distribute an array of virtual and physical
goods at low marginal cost in the market economy or at near zero marginal cost in the sharing economy.
29
Special Issue
Cisco Systems forecasts that by 2022, the Internet of Things will generate US$14.4 trillion in cost savings and
revenue. A General Electric study published in November 2012 concluded that the efficiency gains and
productivity advances made possible by a smart industrial Internet could resound across virtually every
economic sector by 2025, impacting approximately one half of the global economy.
What is the timeline you foresee for this phenomenon to take shape?
The rigid labels

of seller, buyer, owner
and worker are
already breaking
down as hundreds of
millions of young
people become
prosumers.
All of this may sound very futuristic, but its already happening in a big way today. Starting with Napster,
millions of young people and I suspect everyone else connected to the Internet has at some point become a
prosumerproducing and sharing their own music, YouTube videos, news blogs, knowledge and other
content with their peers on the World Wide Web at close to zero marginal cost. Wikipedia is the obvious
example here, but so are MOOCsopen online courseswhich is beginning to change the nature of
education globally. So the rigid labels of seller, buyer, owner and worker are already breaking down as
hundreds of millions of young people become prosumers. The zero marginal cost phenomenon has
undermined some of the biggest vertically integrated industries of the 20th century in the last 15 years,
including the recording industry, television, newspapers and magazines, and book publishing. We have
democratised large segments of communication. And, while new capitalistic enterprises have emerged in
these sectorsGoogle, Facebook, and Twitteras aggregators of the sharing economy on the Collaborative
Commons, they have disrupted other industries.
Now, the merging of the digital communication Internet with the fledgling digital Energy Internet, and the
nascent digital Transport and Logistics Internet is allowing the zero marginal cost phenomenon to cross over
from soft goods in virtual space to physical goods in the bricks and mortar world. For example, the bulk of the
energy we use to heat our homes and run our appliances, power our businesses, drive our vehicles, and
operate every part of the global economy will be generated at near zero marginal cost and be nearly free in the
coming decades. Thats already the case for several million early adopters who have transformed their homes
and businesses into micro-power plants to harvest renewable energy on-site. After the fixed costs for the
installation and storage of solar and wind are paid backoften as little as 2 to 8 yearsthe marginal cost of
the harvested energy is nearly zero. Unlike fossil fuels and uranium for nuclear power, in which the commodity
itself always costs something, the sun collected on rooftops and the wind travelling up the side of buildings
never send a bill. They are nearly free. The emerging Energy Internet allows millions of prosumers to produce
their own green electricity and share it with others.
In Germany, 27% of electricity is already generated by solar and wind, and by 2020, 35% of the electricity will
be green. Most of that electricity is being produced by famers, consumers, and small businesses that have
come together in electricity cooperatives and secured low interest loans from banks to install solar panels and
wind turbines. The big four power companies in Germany are producing less than 7% of the green electricity
and are seeing losses similar to those suffered by the music industry, television, newspapers and magazines,
and book publishing in the wake of the zero marginal cost phenomenon. This is the democratisation of
electricity. In the future, hundreds of millions of people will generate their own renewable energy and share
green electricity at near zero marginal cost with others. Todays electricity companies in turn will increasingly
manage the Energy Internet just as Google, Facebook, and Twitter manage the communication Internet.
Similarly, hundreds of thousands of hobbyists and thousands of start-up enterprises are printing their own
infofactured products using free software and cheap recycled plastic, paper, and other locally available
feedstock at near zero marginal cost. The additive manufacturing process uses one-tenth of the materials of
traditional factory production, resulting in a qualitative reduction in the use of the Earths resources. By 2020,
prosumers will be able to share their 3D-printed products with others on the Collaborative Commons by
transporting them in driverless electric and fuel cell vehicles, powered by near zero marginal cost renewable
energy, facilitated by an automated Transport and Logistics Internet. President Obama wants every school in
the US to have a 3D printer, just like when the first computers were introduced into schools during the 1980s.
In 10 to 15 years, an entire generation will be learning how to write code and share free software, creating
sophisticated physical products just like their millennial parents a generation earlier became savvy in making
and sharing free software to create their own entertainment, media, and knowledge. The democratisation of
manufacturing will change the equation in the production of physical goods. Millions of young people are
beginning to share automobiles. In my book, Age of Access, which I published in 2000, I wrote that the next
generation would prioritise access over ownership. And now were seeing that happen, particularly with cars.
Young people are abandoning car ownership for access to mobility. Thats the new mind-set. In 25 years from
now, car sharing will be the norm, and car ownership an anomaly. Studies show that for every car shared, 15
cars are eliminated from production. If you extrapolate that across the billion vehicles currently on the road
around the world, the consequences for the automobile industry are far reaching.
What else can young people share in the sharing economy?
Young people are ready to share everything. They are already sharing their homes and apartmentswe are
all familiar with Airbnb and Couchsurfing. A younger generation is also beginning to share clothes, tools, and
even sporting equipment. Sharing toys is particularly poignant. Traditionally, when a parent bought a toy for a
toddler, the child was introduced to property relationships and the status that accompanies ownership; he or
she owned something exclusively that did not belong to another sibling. But now, young parents are going to
toy sharing websites, which have thousands of toys to choose from for all age groups. A subscription fee
30
Special Issue
allows them to have any toy sent to their house for a fixed period of time, after which they can exchange it for
something else. (Twenty years from now, those toys are likely to be shipped by driverless electric and fuel cell
vehicles or delivered by drones at near zero marginal cost.) Children are now taught that the toy they are
playing with will someday go to another child and then another. It is no longer a property that confers
possession and status, but, rather, an experience to access. Shared toys teach children responsibility and
stewardship. They are taught to share from very early on, and that its the experience that matters not
ownership. Children grow up becoming comfortable with a sharing economy on the Collaborative Commons.
The young are willing to share
lots of things in local communities
% willing to utilize/rent products or services from a share community
% respondents willing to share or rent these devices for a fee globally
Under 20
21-34
35-49
50-64
65+
Electronics
50%
Lessons/ services
45%
Power tools
40%
Sports equipment
35%
Household items
30%
Clothing
25%
Bicycle
20%
Car
15%
Outdoor/ Camping gear
10%
Furniture
Home
5%
Motorcycle
0%
Global avg.
Asia pac
ME/ Africa
Latam
Source: Nielsen 2014 study.
N.America
Europe
0%
5%
10%
15%
20%
25%
30%
Source: Nielsen 2014 study.
How can todays companies survive and thrive as this new ecosystem takes shape and capitalism
becomes less dominant?
Many companies will be able to manage the transition. For example, IBM was a market leader in the Second
Industrial Revolution, and it is now actively engaged in erecting an Internet of Things platform to phase in a
smart, digitalized Third Industrial Revolution. The build out of the Third Industrial Revolution Internet of Things
infrastructure will necessitate the active engagement of virtually every commercial sector. The communication
network will have to be upgraded with the inclusion of universal broadband and free Wi-Fi to accommodate the
growing volume of Big Data. The energy infrastructure will need to be transformed from fossil fuel and nuclear
power to renewable energies. Millions of buildings will need to be retrofitted and equipped with renewable
energy harvesting installations, and converted into micro power plants. Hydrogen and other storage
technologies will have to be built into every layer of the infrastructure to secure intermittent renewable energy.
The electricity grid will have to be transformed into a smart digital Energy Internet to accommodate the flow of
energy produced by millions of green micro power pants. The transport and logistics sector will have to be
digitalized and transformed into an automated GPS-guided driverless network running on smart roads and rail
systems. The introduction of electric and fuel cell transport will require millions of electric refuelling outlets,
connected to the Energy Internet. Smart roads, equipped with millions of sensors, feeding real-time information
on traffic flows and the movement of freight, will have to be installed.
The power and electricity transmission companies, the telecommunication industry, the construction industry,
the ICT sector, the electronics industry, transportation and logistics, the manufacturing sector, the biotech
industry, and retail trade will all need to be brought into the process. Many of todays leading companies, as
well as new commercial players, will help establish and manage the Internet of Things platform, allowing
millions of otherssmall and medium sized businesses, non-profit enterprises, and prosumersto share
renewable energy, transport and logistics, and a panoply of other goods and services at near zero marginal
cost in the sharing economy. Millions of semi-skilled, skilled, professional, and knowledge workers will need to
be employed to construct and service the three Internets that make up the digital platform of a Third Industrial
Revolution economy.
Erecting the Internet of Things infrastructure for a digital Third Industrial Revolution economy will require a
significant investment of public and private funds, just as was the case in the first and second industrial
revolutions. Increasingly, the question being asked is where the money is going to come from? Every year,
governments spend vast sums of money on infrastructure. For example, the European Union invested 740
billion euros last year in infrastructure-related projects, much of it to shore up a Second Industrial Revolution
general purpose technology platform that is outmoded, and whose productivity potential has long since been
reached. If just twenty five percent of these funds were redirected and earmarked to assemble an Internet of
Things infrastructure, a fully digitalized EU single market could be phased in between now and 2040. Every
country should reprioritize infrastructure investment to facilitate the transition to a Third Industrial Revolution
economy.
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The scale up of a smart digitalized Internet of Things infrastructure will put millions of people back to work,
generate new business opportunities in the market economy and on the Collaborative Commons, dramatically
increase productivity, and create an ecologically oriented post-carbon society. The employment of millions of
workers will also stimulate purchasing power and generate new business opportunities and additional
employment to serve increased consumer demand. Infrastructure investment always creates a multiplier effect
that reverberates across the economy as a whole.
Are we seeing a game changing shift in the way young people view economic activity?
Erecting the
Internet of Things
infrastructure for a
digital Third Industrial
Revolution economy
will require a
significant investment
of public and private
funds, just as was the
case in the first and
second industrial
revolutions
In the digital economy, social capital is as vital as finance capital, access is as important as ownership,
sustainability supersedes consumerism, cooperation is as crucial as competition, and exchange value in the
capitalist market place is increasingly supplemented by shareable value on the Collaborative Commons.
Recent surveys underscore the broad economic potential of the Collaborative Commons. A comprehensive
study found that 62 percent of Gen Xers and Millennials are attracted to the notion of sharing goods, services,
and experiences in Collaborative Commons. These two generations differ significantly from the baby boomers
and World War II generation in favouring access over ownership. When asked to rank the advantages of a
sharing economy, respondents to the survey listed saving money at the top of the list, followed by impact on
the environment, lifestyle flexibility, the practicality of sharing, and easy access to goods and services. As for
the emotional benefits, respondents ranked generosity first, followed by a feeling of being a valued part of a
community, being smart, being more responsible, and being a part of a movement. The younger generation
that is coming of age in a hybrid economypart capitalist market and part Collaborative Commonsis also
transforming the nature of entrepreneurship. While studying at the Wharton School in the 1960s, we
unquestionably accepted Adam Smiths notion that every individual pursues his or her own self-interest rather
than thinking about the common good. The younger generation, by contrast, thinks of themselves more as
social entrepreneurs. For them, the pursuit of self-interest is best optimized by freely sharing their talents to
promote the good of the Commons. The sharing economy is also forcing us to rethink the value of GDP as a
measure of economic well-being. The current measures of GDP do not account for entertainment, news, and
other content created at near zero marginal cost by prosumers and shared with others on the Collaborative
Commons. Nor does GDP capture the improvement in the quality of life or the democratisation of the economy
brought on by zero marginal cost. More people sharing fewer goods and services reduces GDP, but enhances
economic and social wellbeing.
What does this mean for governments and geopolitics?
The community aspect of the new economy will change the way we view the world. The digital generation is a
lot less xenophobic and much more cosmopolitan. The world today is experiencing different levels of
consciousness; on one hand, we have people fighting tribal blood wars, fundamentalist religious wars, and
ideological wars, while, on the other hand, young people are crossing borders and connecting with ease,
Skyping in global classrooms, making friends on Facebook, and chattering away on Twitter. They empathise a
lot more with each other and perceive issues like climate change as global problems that they need to solve
collectively. Even as the world seems to be falling apart, it appears like the young are joining together and
learning how to share both their lives and the resources of the planet. They are coming to think of themselves
as a single extended human family whose wellbeing depends on stewarding the common biosphere that is our
indivisible community.
Does the Zero Marginal Cost Society impact the escalating ecological crisis, and especially climate
change?
In a near zero marginal cost digital economy, extreme productivity decreases the amount of information,
energy, material resources, labour and logistics costs, necessary to make, distribute, and recycle economic
goods and services, once fixed costs are absorbed. The shift from ownership to access also means more
people are sharing fewer items, significantly reducing the number of new products sold, resulting in fewer
resources being used up and less global warming gases being emitted into the earths atmosphere. In other
words, the headlong push to a near zero marginal cost society and the sharing of nearly free green energy and
redistributed goods and services on the Collaborative Commons is the most ecologically efficient economy
achievable. The drive to near Zero Marginal Cost is the ultimate benchmark for establishing a sustainable
future for the human race on earth.
Originally featured in issue 81 on young consumers (Fortnightly Thoughts: How the young are shaping future consumption, October 23,
2014)
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Interview withAndrew McAfee

About Andrew McAfee
Principal research scientist at the Center for Digital Business in the MIT Sloan School of Management. He was previously a professor at
Harvard Business School and a fellow at Harvards Berkman Center for Internet and Society.
In your book, you write that we have only now begun to see the long-term impacts of technology on
employment. Why now and whats the tipping point?
There are two reasons why I believe were in the second half of the chessboard. The first is Moores Law the
steady doubling and accumulation of computing power. Over time, its allowed us to do an array of things that
were previously impossible. So today, we have high-definition video capture, and also have enough
processing power and storage to execute meaningful work with the video data, not with major corporate or
government R&D budgets, but at basic consumer price points. Thats just the economics of technology
becoming much more attractive and widely available.
The second reason is the capability of new machines. Im not just talking about the speed and processing
power of computers, but rather about the kind of things weve been able to train computers to do in the past
few years. In a way, it seems like science fiction is turning into reality extremely quickly these days. Weve got
computers today that can drive cars and play Jeopardy! better than human players. That means that
computers are increasingly more capable of recognising patterns across a huge body of information. Theyre
also able to understand language, what people are saying, translate at a reasonable level and respond with
quick, accurate answers. Some of them can enter into a room and map it out very accurately. All of these were
drawing-board technologies just a decade ago, and have already grown beyond research labs and become a
part of the real economy. Theyre diffusing very quickly, and I dont think weve begun to see the complete
impact of these technologies, let alone the wave of robotics, artificial intelligence and big data technologies
which are yet to come.
Where can things go from here?
If theres a
head-to-head choice
between relying on a
human decision or a
human prediction
(even if it comes
from an expert) and
one generated by a
machine that is
completely
automated, in most
cases its better to go
with the machine
If you look at the ability of an intelligent computer, like IBMs Watson, it seems fairly likely to me that
professions like law, medicine and financial advice will be deeply changed by technology. Earlier, we needed
very highly educated, trained and experienced people to do these jobs, but today, we have massive bodies of
digital information, be it the assembled body of medical knowledge, laws, or the characteristics and past
performance of every financial instrument present in the world. And we can use this vast pool of knowledge to
make diagnoses and predictions, and deduce answers in the blink of an eye. That reduces the need for all
those skilled people, because algorithms should be able to do the job better than them very soon. Were also
seeing a lot coming out of the genomics revolution; its caused a profound shift in the way we think about
cancer by categorising tumours on the basis of the genetic origin of their mutation, as opposed to where they
manifest in the body. At the same time, as Moravecs paradox suggests, progress in the physical world has
been much slower. In other words, its a lot easier to automate things that a Ph.D. can do than it is to automate
things like walking, picking up a pen and recognising human beings, all of which a three-year-old can do. That
said, by the very nature of technology, there will be innovations and ideas that take everybody by surprise. So
its hard to predict where we go from here.
Previously, we interviewed Daniel Kahneman who said that if he was running an investment
management company, it would be very machine-intensive...
Yes, if theres a head-to-head choice between relying on a human decision or a human prediction (even if it
comes from an expert) and one generated by a machine that is completely automated, in most cases its better
to go with the machine. Its a deeply uncomfortable and weird conclusion, but a lot of work convinces me that
it is indeed the right answer.
Whats the first thing that the CEO of a standard manufacturing company should do in order to race
with machines?
The first thing that Id suggest would be to scan the technology landscape again, to look at the latest crop of
industrial and warehouse robots, the latest automated voice response systems available for their customer
service centres, and other things like that. Technology changes so rapidly that its immensely important to
keep abreast of the latest generation of technology. So, the first task would be to revisit assumptions.
Is the role of technology in this great restructuring well understood?
Techs becoming a bigger part of the discussion, and many more economists are talking about the twin forces
of globalisation and technology on the workforce. But technology is still underemphasised, and I think there are
two reasons why.
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First, in mainstream economics to think that we have technological unemployment is a fallacy. The standard
model has historically assumed that the pool of labour freed up by one wave of technology is used by the next
wave of entrepreneurs and innovators, who are needed to create new companies and new industries. But Im
not with the mainstream economists; I think the scenario is different this time. Future entrepreneurs and
innovators will surely create new organisations and blow us away with their creations, but I dont think theyll
need to hire many people to build those large influential companies. Look at Amazon, Apple, Google,
Facebook and the likes. Theyre all astonishingly important but very light when it comes to employees.
The other reason tech is underemphasised is that the strong claims of technologists have not been borne out
until quite recently. So, while weve been talking about computer vision, machine learning, speech recognition,
production and translation and other such things for some time, the results have been laughably bad until very
recently. But now, as we have entered the second half of the chessboard, the results have evolved to become
strong from a commercial sense, in a short period of time. And so, we need to revisit our assumptions about
what technology can and cannot do.
Is technology also widening the profitability gap within industries between the best and worst
companies?
Yes. When given a choice, people always opt for the best of processes and services. Technology allows
companies to replicate those very business processes, and thereby has a homogenising effect inside
companies. Take Starbucks. By using technology, it can ensure that a cup of coffee it serves in London is the
same as in New York. And then it can use it to propagate best practice, figure out how the best cup of coffee is
made, and ensure that it is made in every location. And its this consistent good quality that helps it gain share
from non-standardised competitors, whose average cup of coffee isnt great. So yes, technology can widen the
gap between the best and the rest, and this is especially pronounced in technology-intensive industries. If I ask
people to name the worlds best cello player, almost everyone says Yo-Yo Ma. But its a lot tougher for them to
name the second-best. Technology ensures that we no longer have to settle for second best in a world where
it can reproduce things more easily. And while technology is not the only cause, it is certainly a driver that is
accelerating our shift towards becoming a superstar economy.
That means inequality rises...
Unfortunately yes. It amazes me that as opposed to the active and violent protests that we saw in some of the
southern European countries like Greece, America has been a relatively calm society despite the challenges it
faces. Weve recently seen an increase in inequality and a decrease in social mobility, but the strongest
reactions weve seen have been the Occupy movement on the left, and the Tea Party on the right. We did see
a horrible recession, followed by austerity, but I dont see the trends on inequality spontaneously reversing
themselves as technology becomes more and more powerful and pervasive. Inequality of opportunity and
decreased social mobility are issues that need to be addressed.
Technology eats labour
Driving income inequality higher
Expenditure on tech as a percentage of expenditure on labour, US
Ratio of average income of top 10% to that of bottom 90%, 1916-2012
Autos
10x
Machinery
9x
Oil & gas
US
Switz.
Japan
Norway
UK
Sweden
Germany
Denmark
France
China
8x
Other manufacturing
2012
1998
7x
Food
Chemicals
6x
Education
5x
Wholesale trade
4x
Utilities
3x
Construction
Retail
2x
Warehousing
0.05
0.1
0.15
0.2
0.25
0.3
Note: Incl. tech hardware, software, design services, information, data processing
Source: Datastream.
1916
1919
1922
1925
1928
1931
1934
1937
1940
1943
1946
1949
1952
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
1x
Mining
Source: Alvaredo, Facundo, Anthony B. Atkinson, Thomas Piketty and Emmanuel

Saez, The World Top Incomes Database,
http://topincomes.parisschoolofeconomics.eu/, March 24, 2014.
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Which jobs are at risk of being made redundant by automation and which ones are relatively safe?
I dont think that every job is at risk. There are things that computers cant do yet, and areas where I havent
seen them making much progress. One such is ideation or innovation, creativity in other words. Computers lag
behind in these areas, and this is why the creative industries have not suffered as badly as some of the others
when we compare employment levels. Coming up with something new, recognising an opportunity, is still a
very human skill, and I think that translates into continued employment. The other area where progress of
computers remains patchy is complex communication. Were yet to see computers that can write a compelling,
long report or novel, or compose music, or that can effectively manage and motivate a team to do
extraordinary things. So management and leadership will remain human arts for some time.
However, in the real economy, most people arent involved in these areas. Instead, a large group of knowledge
workers is involved in a combination of fairly routine process executions, some level of communication, and
some level of pattern matching or pattern recognition. And all of those tasks are being automated very, very
quickly. As David Autor, one of my colleagues at MIT has documented, the people whose wages and
employment prospects have been hit the hardest are the classic middle class workers, and I believe that this
hollowing of the economy will only accelerate. At the same time, unless robotics progress manifests in a way
that I cant foresee, physical jobs like those of hairdressers, cooks or a busboy, often at the lower end of the
income and skill spectrum, should remain relatively safe. So, I think were headed towards an even more
hollowed out economy than todays.
The people
whose wages and
employment
prospects have been
hit the hardest are
the classic middle
class workers, and
this hollowing of the
economy will only
accelerate
Will the labour force be able to retool itself quickly enough to counter the impact of the mechanisation
of jobs? Or will there be fewer jobs to go around despite that?
Well, thats the dire scenario, but its certainly a plausible one. If we look at previous waves of automation and
technology, they didnt really encroach on the human skill bundle in its totality. In other words, while we didnt
need people to lift heavy objects as a result of automation, we always needed people to talk to each other, to
write and understand requests, and to meet the requirements. The scary and pessimistic view of the future is
that we wont need people for these jobs. Computers are quickly improving all these tasks, and in many cases
are getting better than the best of people, which is why rational employers will start choosing digital labour in
more and more circumstances.
Is education too slow to change and adapt itself to the required skill set, or should the change come
from companies and recruiters, in terms of how they assess a candidates skills?
What our education system has been successful at so far is churning out people with a defined skill set, like
line workers or accountants; those that are excellent at following instructions. But computers possess all those
skills today. So, its critically important to retool a lot of what we do, up and down the educational systems. We
particularly need to get rid of the rote memorisation mode of learning and the three Rs and focus on ideation.
We need to teach people in a way that makes them more able to recognise and solve problems, and spot
opportunities, because these are the skills which will be valuable in the future.
Coming to your second question, I absolutely agree that people overly emphasise degrees and other
credentials. Skills that are actually needed may not always be so easily pigeonholed and compartmentalised.
Employers often use degrees as a sorting mechanism and I believe its a fairly bad one, probably worsening
over time. This is why Im really excited about some of the alternate mechanisms to signal the quality of talent
in the world.
Do you think we miss capturing the productivity improvements from ideas like Wikipedia and
Facebook, or is GDP all-encompassing?
GDP and productivity growth may be directionally correct, but I dont think theyre perfect measures, and in
reality, were underestimating GDP and productivity growth. Wikipedia is clearly a phenomenally valuable
thing, but its very hard to capture its benefits in dollars. A lot of research has been done on the impact of
technology on companies, industries and economies and the basic conclusion is that with technology, a lot of
really good things happen. Its an extremely powerful force in the economy and some of the benefits it brings
are very, very broadly distributed.
Originally featured in issue 54 on jobs (Fortnightly Thoughts: What is everybody going to do?, May 10, 2013)
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Interview withMichael Sandel

About Michael Sandel
The Anne T. and Robert M. Bass Professor of Government at Harvard University and the author of "What Money Can't Buy: The Moral
Limits of Markets"
Your book, What money cant buy, focuses on the moral limits of markets. Has market thinking in
society gone too far in your view?
Yes. Over the last three decades, market thinking and market values have extended their reach into almost
every aspect of life. From personal relations and family life to health and education, criminal justice and
environmental protection, civic life and political campaigns, even the way we fight our wars. In Iraq and
Afghanistan, there were more private military contractors on the ground than there were US military troops.
We have drifted, almost without realising it, from having a market economy to becoming a market society. The
difference is this: a market economy is a tool, a valuable and effective tool, for organizing productive activity.
Market economies have brought rising economic growth and prosperity to countries around the world. But a
market society is a place where everything is up for sale. Its a way of life in which market values dominate
every sphere of life. This can be damaging, for two reasons.
First, against a background of rising inequality, putting a price on everything sharpens the sting of inequality.
The more things money can buy, the more affluence, or the lack of it, matters.
Secondly, market values can crowd out important non-market attitudes and norms. Here is an example: Some
American school districts have been experimenting with trying to motivate students by offering cash for good
grades and other forms of academic achievement; US$50 for an A, US$35 for a B. In some Dallas schools,
they offer 8-year olds US$2.00 for each book they read. The goal is admirable, to promote academic
achievement, especially by students from disadvantaged backgrounds. But the danger is that offering a cash
incentive may actually convey the message that reading books is a chore to be done for pay. If this is the
lesson students learn, then, even if they read more books in the short run, they may stop reading once no one
is paying them to do so. Students who read just for the money may never develop an intrinsic love of reading.
Whenever we use a market mechanism, or a cash incentive, we have to ask what attitudes and values the
monetary reward cultivates and promotes.
This shift to a market society has happened with relatively little public debate. It might be argued that the
dominance of market thinking proves that this is what people want. I disagree. In most democracies around the
world, citizens are frustrated with the terms of public discourse. People are hungry for a larger debate, one that
addresses big ethical questions, including the question of what should be the role of money and markets in our
societies.
How concerned are you about widening inequality?
In most
democracies around
the world, citizens
are frustrated with
the terms of public
discourse
Very concerned. Recent decades have brought with them a growing gap between rich and poor. And during
the same period, access to social goods has come to depend more on ones ability to pay. From the late 19 th
century to the post-World War II era, the development of welfare states represented an attempt to ease the
effects of inequality. Providing all citizens a decent level of essential human and civic goods such as
education, health care, and retirement security was seen as a public responsibility. Today, we seem to be
returning to a time when the provision of certain public goods was left to markets. Consider police protection.
Once considered a private function, police protection came to be seen a public, municipal responsibility. But
this is gradually changing. Today, in the US and the UK, more people are employed as private security guards
than as public police officers. And we see the rise of for-profit prisons, for-profit schools, for-profit hospitals.
The main argument of What Money Cant Buy is that we need a public debate about where markets serve the
public good, and where they don't belong.
Do you think there is sufficient debate around this?
In most democratic societies today, public discourse is impoverished. It's empty of larger meanings and big
ethical questions. We are not debating questions of justice, the common good, and what it means to be a
citizen. I think this partly reflects an era of unquestioned market faith. By market faith, I dont mean the belief
that markets are useful tools. I mean the belief that markets are the primary instruments for achieving the
public good. I think one of the deep appeals of this market thinking is that it seems to spare us the need to
reason together, in public, about hard ethical questions. We shy away from engaging with ethical questions in
politics because we know that we are likely to disagree. Markets seem to offer a way of outsourcing moral
judgment. But I think this is a mistake. The result of our reluctance to debate big questions has been a
hollowing out of public discourse, which has become largely managerial and technocratic.
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But this way of conducting democratic politics is unsatisfying and uninspiring. I think there's a real hunger for
something better, for a more elevated kind of public discourse, one that engages more directly with questions
of justice and the proper role of markets in a good society. I'm not optimistic that political parties will introduce
a better kind of public discourse anytime soon. But Im hopeful that the hunger and yearning I see, in countries
around the world, especially in young people, for a better, more morally robust public discourse, will eventually
find expression.
How might we find our way to a better kind of public discourse, particularly on a global level? Surely if
China, for example, chose to follow only economic goals, the rest of the world would have to follow
suit?
If we try to imagine where a more substantive public discourse might come from, I don't think we can look to
government or to established political parties. Established parties and politicians have a stake in the existing
terms of debate. They seek to avoid controversy. I think we need to look more towards associations and
movements within civic-society.
The media can play an important role. For the most part, the media today does a poor job of fostering serious
public debate. We should experiment with new media models, including foundation owned and other non-profit
models. I also think higher education has a big role to play. Colleges and universities have a responsibility to
equip students with the capacity to think critically about large public questions, and to engage in reasoned
public discourse about justice, the common good, and what it means to be a citizen.
If we look at China we see two striking things. First, there is a widespread recognition, even at the top levels of
the government, that GDP isnt everything. There's a clear recognition, even by party leaders, that growing
inequality threatens social cohesion. There is also a growing awareness of the need to do something about the
environment. The Chinese government realises that it needs to take inequality and environmental degradation
seriously.
The second observation is that the younger generations in China are very alive to the issues we have been
discussing. They are eager and impressively well-equipped to debate questions of justice, equality and
inequality, and the role of markets in society. Ive been moved and impressed by the intellectual energy and
passion I have seen among the students Ive encountered in China. I find the same yearning for public
discussion of ethical issues in Japan, South Korea, India, and Brazil, and other places Ive been recently. It will
be very interesting to see what path the younger generations in these societies choose to pursue; whether
they continue to seek alternatives to the unquestioned faith in GDP and market values that has predominated
in recent decades.
Income inequality has risen
Some countries stand out
GINI co-efficient (measure of income dispersion)

2004*
GINI co-efficient versus per capita GDP, 2013 or latest

70000
2013 or latest
0.50
60000
Sweden
0.45
US
50000
GDP per capita, USD
0.40
0.35
0.30
Germany
UK
France
40000
Norway
EU
Japan
Italy
30000
Spain
Greece
20000
Russia
0.25
10000
Norway
Denmark
Finland
Sweden
France
Germany
Italy
S.Korea
Japan
Australia
Greece
UK
Spain
US
Portugal
Russia
Turkey
China
Mexico
Note: For countries without data for 2004, nearest year has been considered
Source: OECD, World Bank.
S. Africa
China
0.20
India
0
0.2
0.25
0.3
0.35
0.4
0.45
GINI co-efficient
0.5
0.55
0.6
0.65
Source: CIA Factbook.
Clearly GDP is not a perfect measure. But what solutions or alternatives to GDP do you see?
I think there are two ways in which we need to supplement conventional GDP measures. One way is to come
up with an index that measures a broader range of contributions to well-being. Some people have proposed
indices for human development and others have proposed indices for happiness. What these efforts share is
the attempt to find a quantifiable metric that does a better job than GDP of measuring a societys happiness or
well-being.
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A second way in which we need to supplement GDP as the measure of a good society goes beyond any
quantifiable index. The common good, broadly conceived, involves many things that cant be reduced to a
number or captured in an index. One involves the extent and kind of equality and inequality. It's true that
indices, like the Gini coefficient, try to measure equality and inequality. But what ultimately matters are the
social and civic consequences of inequality. This varies from place to place, and cant readily be measured by
a quantitative index.
If we are to come to grips with the growing inequality in societies around the world, I think we have to go
beyond quantitative indices. We must analyse and debate the human and civic consequences of inequality
directly, as an ongoing part of public debate. It is a question for citizens, not just social scientists.
Another aspect of social well-being that does not lend itself to a quantifiable index is social cohesion. One of
the most corrosive effects of excessive market thinking has been the degradation of social cohesion. When we
put a price tag on everything, we erode the public spaces and common experiences that make us fellow
citizens, participants in a shared way of life.
It will be very
interesting to see
what path the
younger generations
in these societies
choose to pursue;
whether they
continue to seek
alternatives to the
unquestioned faith in
GDP and market
values that has
predominated in
recent decades
The marketisation of everything has brought a growing separation between people of affluence and those of
modest means. Increasingly, we live and work and shop and play in different places. We send our children to
different schools. There are fewer and fewer public spaces and occasions where people from different walks of
life encounter one another.
This matters for the health of democracy. How to cultivate commonality and a sense of shared citizenship is
one of the great challenges facing democratic societies today. This is something that even an improved index
of GDP or well-being can't fully capture.
Having been a pioneer in online education, with your Justice course having become a global
sensation, how do you see technology changing the public sphere and where can we expect to see it
having greatest impacts?
Many people believe that new technologies of online education and distance learning will transform education,
making it far more efficient. I think technology does present exciting opportunities for innovation in teaching
and learning. But I think some of the grand techno-utopian expectations will be disappointed.
It is clear that new communications technologies offer tremendous possibilities for education. As you
mentioned, we did an experiment several years ago with my Harvard Justice course. It became the first
Harvard course to be made freely available online and on television. (You can see it at
www.JusticeHarvard.org.) We were astonished by the response. Tens of millions of people around the world
have viewed the online lectures and many have joined in online debates about justice, fairness, equality and
inequality, and various ethical dilemmas. Today, many universities and some private companies are
experimenting with various models of online education.
For me, whats most exciting about online education is creating open access to the classroom, so that higher
education can truly be a public good, not just a private privilege. This, I believe, is the greatest promise of this
new technology.
Some people believe that online courses will replace in-person instruction and make education more
affordable. Im sceptical about this. It would be a great loss if online education leads to a situation in which only
a small elite group has access to in-person teaching, and everyone else watches videos online. Having
attempted to create an online course that comes as close as possible to bringing distance learners into the
classroom, I am keenly aware of the gap between what can be offered online, and the learning that takes
place when students and teachers gather in one anothers presence.
Technology will surely improve to permit discussion and dialogue at a distance. In fact, Ive recently
experimented with a live, video linked global classroom, in which students in China, India, Brazil and Japan,
joined my Harvard students for classroom debates about justice, the role of markets, and the meaning of
citizenship. The technology, and the discussions, worked very well. Im hoping to build on this experiment, to
see if it can enable us to develop a platform for global public discourse. That would be exciting and worthwhile.
But I don't believe that online education will or should replace the personal encounter between students and
teacher
Originally featured in issue 60 on governments (Fortnightly Thoughts: The changing State of affairs, September 2, 2013)
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Special Issue
Interview withDaniel Kahneman

About Prof. Daniel Kahneman
Recipient of the 2002 Nobel Prize in Economics and author of Thinking, fast and slow. He was named as one of the 50 most influential
people in global finance by Bloomberg in 2012 and is currently Professor Emeritus of Psychology and Public Affairs at Princeton University
Hypothetically, if you were running an investment management company, how would you do it
differently from the average investment management company?
Quite frankly, I would be a terrible manager for a financial company, so Im glad that this is a purely
hypothetical question. But if Im asked to improve the rationality of decision making as a consultant, I would try
to institute better quality control. An organisation, particularly a financial organisation, is a factory that produces
decisions. And as decisions are made under uncertain conditions, we cannot institute quality control like we do
when we are making a widget. But, we can certainly look at the processes that led to the decision being made
and ask if they were correct. Of course, we would need a balance to avoid excessive analysis. Ideally, Id like
to balance the requirements of quality control with the need to make decisions with reasonable speed. I
believe that this can be done and this is the direction I would want to explore further if I got that job.
That sounds like a more machine-heavy investment firm. In this context, how would you explain some
of the quant driven funds failures? Were they just a result of feeding the wrong history or information
into the machine?
It would definitely be machine-heavy. It does depend on the market, but the rule that I would broadly follow
would be this: if an algorithm can be developed to process a good fraction of the information humans have
access to for solving a problem, then it is very likely that the algorithm would do a better job in solving that
problem. We have found that repeatedly in a lot of research and there are very few exceptions. My direction
would be as algorithm-driven as possible.
If an algorithm
can be developed to
process a good
fraction of the
information humans
have access to for
solving a problem,
then it is very likely
that the algorithm
would do a better job
in solving that
problem
Coming to your question on the failures of some quant funds, I agree with your reasoning, but I think its
possible to deal with such situations. Id really want a machine capable of recognising the regimes that it isnt
programmed to work in. The question then would be who has the final word. This often arises in vehicles. For
example, in an accident, should a car that steers itself automatically override the driver, or should the driver
override the car? The answer would differ from context to context, but I think a properly programmed machine
might respond to extremely rare surprise events better than a human. Aviation is another example planes
almost land themselves today. This is happening everywhere and I view the implications for the job market
with bemused concern. Its difficult to imagine how people will interact with robots when artificial intelligence
moves as quickly as it is moving these days.
In your most recent book, you show that the odds of success for entrepreneurs are low. So one could
argue that its quite rational not to become an entrepreneur...
Fortunately, true optimists and people with entrepreneurial spirits will simply deny it. They may believe the idea
in general but they will be emotionally convinced that it doesnt apply to them. This is a genuinely important
psychological point. People can be aware of something being true, and yet feel that the rule doesnt apply to
them in particular. This is widespread in the financial world and is also true in the case of entrepreneurs. Most
people who start a restaurant in New York are fully aware that the success rates for restaurants are not very
high because they have seen restaurants come and go, but they do not think that those odds apply to them.
And so, Im not worried about the impact of my book on the state of entrepreneurship. I dont think Im going to
dissuade anybody from pursuing an idea that gets them excited.
Do you think that human behaviour is changing and we can correct our mistakes? What will drive this
change?
I think organisations in particular have a huge opportunity to learn. If they collect and analyse the relevant data
as some disciplined firms already do, organisations can successfully eliminate some of the sources of errors
by looking at their past decisions. So, the quality of decision making could and should improve within these
organisations.
Even at an individuals level, it is possible to train people to adopt certain rules or to recognise states in which
they should not trust themselves. Drunken driving, for example has been greatly reduced over the past decade
in many places because people realise that they shouldnt drive in that condition. I can imagine similar rules in
the future that would directly or subtly prevent us from the common biases that we are likely to fall prey to in
particular situations. Again, this is more likely to happen within organisations.
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Does this mean organisations and governments will use nudging a lot more to influence consumer
behaviour?
Nudging has been with us for a long time in the form of marketing, and as governments and organisations
become aware of it, we should see even more of it in the future. One of the contributions of the nudging
literature that I find most interesting is choice architecture. This involves designing the choices that people will
be asked to make, to understand what most individuals would do upon reflection (which may or may not
coincide with his notion of right and wrong). We can control the number of options and analyse the alternatives
and how they should be presented, and provide a reasonable default option that people are likely to choose
when they dont want to work too hard. Richard Thaler and Cass Sunstein are among those who argue that
there always is a choice architecture, but it is often not designed thoughtfully. For example, when someone
has to decide whether or not to donate their organs, the choices must be presented to the person in a
particular manner. Making the donation option the default will greatly increase the number of donations. One of
Richard Thalers ideas is to push companies selling mortgages or insurance policies, for example, to present
the information about the costs and benefits of what they sell in a way that allows people to understand and
compare them. A unified format will allow quick and effective comparison of different alternatives and thereby
help decision making.
Previously, nobody thought about the effect of biases often induced by choice architecture, but theres a much
greater awareness now. Instead of forcing people to spend a great deal of time making a decision, today we
can have a choice architecture that encourages the more superficial choosers to choose what they would
choose if they spent more time. This is my perception of nudging and I support it.
Algorithmic trading cheaper, better?
Fee rates of different types of brokers
1.0%
0.9%
0.8%
0.7%
0.6%
0.5%
0.4%
0.3%
0.2%
0.1%
0.0%
SMID Brokers
Wirehouses
Revenue Rate (ann.)
eBrokers
Automated invest. rev rate
Expense Rate (ann.)
Notes: "Wirehouses" include: BAC, MS, UBS, WFC; "SMID Brokers" include RJF, SF, LPLA,
AMP, "eBrokers" include: ETFC, SCHW, AMTD
Source: Goldman Sachs Global Investment Research.
Do you think how people vote reflects rational decision making?

One of the strangest phenomena that I see in politics is that a great deal of voting doesnt seem to be
motivated by self-interest, i.e. people dont necessarily vote for whats best for them. We see a lot of that in the
US. Rationality is particularly difficult to achieve in the context of reforms. Its true that every reform has certain
losers and certain winners and so, in every reform, the potential losers are likely to fight against the reform. It
is also true that losers fight harder than winners. This is the reason why so many reforms fail and why those
that succeed are often sub-optimal. The losers have simply been influential enough to mitigate their losses in
some way.
Do you think people can train themselves to override loss-aversion bias and become better equipped
to deal with a loss?
As an industry, I think you have already been trained to overcome loss aversion to a substantial degree.
Probably the best cure against loss aversion is a broader, outside view. So, it would help if the person is
capable of reminding himself that you win a few, you lose a few. Another way in which people can maintain a
more neutral attitude towards risk is by combining small outcomes into larger ones. This will help them be less
emotional about every individual outcome. This is probably happening already and is one of the advantages
that professionals enjoy over individuals in the market.
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It has been argued that the financial industry has been, or is, too risk-seeking. However a lot of your
work suggests that the majority of people are too risk averse. How do you reconcile that?
They could both be true because the population that is drawn to the financial industry isnt really the average
population. The risks that people take for themselves in the financial industry are not the same as the risks that
they impose on others and so, the willingness to take large risks when somebody else is going to pay the costs
gets significantly inflated. Nassim Talebs famous point about skin in the game may be exaggerated, but the
point is that incentives are often not aligned and so the risk appetite may seem very high from the
shareholders or societys point of view but not from the point of view of the individual who is making those
decisions.
In lots of organisations there are often high rewards for conforming with the group. How can we alter
that, keeping in mind the career risks associated with doing something different?
Its true that

every reform has
certain losers and
certain winners and
so, in every reform,
the potential losers
are likely to fight
against the reform. It
is also true that
losers fight harder
than winners. This is
the reason why so
many reforms fail
and why those that
succeed are often
sub-optimal
I believe incentives can be tailored as per the goal in mind. And these may not necessarily be monetary
incentives. For example, if decisions are made in situations of extreme uncertainty, and you want to curb
exaggerated risk aversion, this can be achieved by sharing responsibility. This way, as the individual
promoting the decision shares the responsibility with the group, he is less liable to be unduly risk averse or
unduly loss averse. In the case of financial firms, aligning the incentives of decision makers with the objectives
of the firm may be quite difficult, as the incentives of the agents may not necessarily be in sync with the
incentives of the shareholders. How to design a more appropriate fit in these cases is a very interesting
problem which I hope has solutions.
Can behavioural finance really help us become better forecasters, and does the knowledge of the
biases in the investment industry offer an opportunity?
People can definitely improve the quality of their forecasting to some extent with behavioural finance. But, I
believe that the knowledge acquired in this field may be helpful in predicting some things but not necessarily
others. For example, knowing about the overconfidence of individuals may help predict how much they are
likely to lose in equity markets. This knowledge is interesting, and if someone had immediate awareness of
what individuals are likely to do on a particular day, this information can possibly be exploited. However, I
doubt if behavioural finance can be used to predict market prices. There are small effects of almost irrelevant
details like the name of the company or the popularity of the symbol, but we cant really make real money on
these. Similarly, we cant make real money by judging if and how the weather influences equity prices.
Biases exist in the investment industry, but to understand if we can exploit them, the question we need to
answer first is whether the biases have already been exploited. If there are enough people exploiting this
opportunity, there isnt anything significant to be gained. If everyone or even if some of the people in the
market improve, then the possibilities for improvements will negate themselves. Equity markets, in particular
are characterised by a large number of participants and immediate reactions. There is very little insider
information, most of which gets exploited quickly anyway. Thats just the way markets are supposed to work.
Having said that, I think there are many long-term opportunities in the private equity and hedge fund space,
and there exist many markets where a lot of money can be made by being the first to exploit the opportunities.
Finally, how would you invest personally?
Im extremely conservative. I lived through a period of very high inflation in Israel and in order for me to enjoy a
comfortable retirement there arent many threats as severe as inflation. So, I look for inflation hedges and
thats my main investing principle. Im really not interested in getting richer and this makes me atypical. I am
also old, so I think there is very little to be learned through my personal investment practices.
Originally featured in issue 49 on behavioural biases (Fortnightly Thoughts: The unforced errors of behavioural biases, February 14, 2013)
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Special Issue
Interview withHoward Marks

About Howard Marks
Co-founder and chairman of Oaktree Capital Management. Prior to this, Mr. Marks led the groups at The TCW Group, Inc. and was with
Citicorp Investment Management. He is the author of The Most Important Thing: Uncommon Sense for the Thoughtful Investor.
How can we understand investor psychology and use it to make investment decisions?
It's the swings of psychology that get people into the biggest trouble, especially since investors emotions
invariably swing in the wrong direction at the wrong time. When things are going well people become greedy
and enthusiastic, and when times are troubled, people become fearful and reticent. Thats just the wrong thing
to do. Its important to control fear and greed. Another mistake that people often make is that they compare
themselves with others who are making more money than they are and conclude that they should emulate the
others actions ... after theyve worked. This is the source of the herd behaviour that so often gets them into
trouble. We're all human and so were subject to these influences, but we mustnt succumb. This is why the
best investors are quite cold-blooded in their professional activities.
We can infer psychology from investor behaviour, and that allows us to get an understanding of how risky the
market is, even though the direction in which it will head can never be known for certain. By understanding
whats going on, we can infer the temperature of the market. In my book, I give a list of characteristics that
can give you an idea whether the market is hot or cold, and by using them we can control our buying patterns.
They include capital availability, the eagerness of lenders and investors, the ease of entry for new funds, and
the width of credit spreads, among others.
We need to remember to buy more when attitudes toward the market are cool and less when theyre heated.
For example, the ability to do inherently unsafe deals in quantity suggests a dearth of scepticism on the part of
investors. Likewise, when every new fund is oversubscribed, you know there's eagerness. Too little scepticism
and too much eagerness in an up-market just like too much resistance and pessimism in a down-market
can be very bad for investment results.
Warren Buffett once said, "The less prudence with which others conduct their affairs, the greater the prudence
with which we must conduct our own affairs." I agree thoroughly, and in order to understand how much
prudence others are applying, we need to observe investor behaviour and the kinds of deals that are getting
done. In 2006 and 2007, just before the onset of the financial crisis, many deals got done that left me
scratching my head. That indicated low levels of risk aversion and prudence. We can't measure prudence
through a quantitative process, and so we have to infer it by observing the behaviour of market participants.
We can have a
lot of information
without much
knowledge, and we
can have a lot of
knowledge without
much wisdom. In
fact, sometimes too
much data keeps us
from seeing the big
picture; we can miss
the forest for the
trees
The fundamental building block of investment theory is the assumption that investors are risk averse. But, in
reality, they are sometimes very risk averse and miss a lot of buying opportunities, and sometimes very risk
tolerant and buy when they shouldnt. Risk aversion isnt constant or dependable. That's what Buffett means
when he says that when other people apply less, you should apply more.
Why do behaviour patterns and mistakes recur despite the plethora of information available now? Are
we doomed to repeat our mistakes?
Information and knowledge are two different things. We can have a lot of information without much knowledge,
and we can have a lot of knowledge without much wisdom. In fact, sometimes too much data keeps us from
seeing the big picture; we can miss the forest for the trees. It's extremely important to know history, but the
trouble is that the big events in financial history occur only once every few generations. The latest global
financial crisis began in 2008 and the one before that in 1929. Thats a gap of 79 years. So, while memory has
the potential to restrain action and induce prudence by reminding us of tough periods, over time as memory
fades the lessons fade as well.
In the investment environment, memory and the resultant prudence regularly do battle with greed, and greed
tends to win out. Prudence is particularly dismissed when risky investments have paid off for a span of years.
John Kenneth Galbraith wrote that the outstanding characteristics of financial markets are shortness of
memory and ignorance of history. In hot times, the few who do remember the past are dismissed as relics of
the old, lacking the ability to imagine the new. But it invariably turns out that there's nothing new in terms of
investor behaviour. Mark Twain said that history does not repeat itself but it does rhyme, and what rhyme are
the important themes.
The bottom line is that even though knowing financial history is important, requiring people to study it wont
make a big difference, because they'll ignore its lessons. There's a very strong tendency for people to believe
in things which, if true, would make them rich. Demosthenes said, "For that a man wishes, he generally
believes to be true" Just like in the movies, where they show a person in a dilemma to have an angel on one
side and a devil on the other, in the case of investing, investors have prudence and memory on one shoulder
and greed on the other. Most of the time greed wins. As long as human nature is part of the investment
environment, which it always will be, well experience bubbles and crashes.
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Special Issue
Is it volatility thats made people scared of equity markets, particularly since 2000?
As long as
human nature is part
of the investment
environment, which it
always will be, well
experience bubbles
and crashes
Volatility goes in both directions but its declines that people dislike, not volatility. The equity markets of the last
50 years tell a long and meaningful story. Owning stocks wasnt very popular back in the 1950s, until the
brokerage houses popularised equity investing. People started buying equities and they went up, encouraging
more people to buy them. This is the usual self-feeding spiral. So equities rose in nearly a straight line from
1960 to 1972. After this they had a bad decade, but then they did even better from 1982 to 1999. Overall, for
30 out of those 40 years, equities rose breathtakingly and people fell more and more in love with them. By the
end of 1999 everyone had more equities than ever before and maybe too much of them. So, equity
performance, equity prices, investor attitudes towards equities and equity allocations within portfolios all
reached their acme in 2000, after which equity prices collapsed under their own weight. In 2000-02 we had the
first three-year decline in equities since the Great Crash, and people started to fall out of love with them. This
made them sell, driving prices down further and prompting even more selling. The same spiral, but now in
reverse. And as investors fell out of love with equities, they fell in love with bonds.
The mantra in the last four decades of the 20th century was growth and the mantra in the last 12 years has
been safety and income. And so, from 2000 to very recently, equity allocations have been going down, equity
prices have been unchanged overall, equity returns have been close to zero, and weve seen people chase
safety and income through bonds instead. But people often forget to look at the price theyre paying for the
concept theyre buying into. In 2000, people pursued growth but forgot to ask themselves at what price? And
in recent years they've been pursuing safety and income while ignoring the same question. Today the price
being paid for the safety and income of bonds is among the highest in history.
What things in your skill set have served you well?
While knowing financial analysis and accounting is essential, almost any smart person can acquire those skills
and get a rough idea of the merits of a company. Superior investors are those who understand both
fundamentals and markets and have a better sense for what a given set of merits is worth today and what it
will be worth in the future. I don't think I became less able to do financial analysis over time, but I engaged
much more in understanding and sensing markets and values: the big picture. A lot of my contribution comes
from understanding history and investor behaviour, from inferring what's going on around me, and from
controlling my emotions.
Success in our industry often leads to overconfidence. How do good investors avoid that?
Mark Twain once said, "It aint what you don't know that gets you into trouble. It's what you know for sure that
just aint so." And I totally agree with that. One of the chapters in my book is about the importance of knowing
what you don't know. People who are smart often overestimate what they know, and this tendency can grow,
particularly if they are financially successful. And eventually you get to the master of the universe problem that
Tom Wolfe identified in The Bonfires of the Vanities.
I believe theres a lot we dont know, and its important to acknowledge that. Im sure I know almost nothing
about what the future holds, but a lot of people claim to know exactly what's going to happen. I consider it very
dangerous to listen to them. As John Kenneth Galbraith said, "There are two kinds of forecasters. Those who
don't know, and those who don't know they don't know." I'm proud to say Im a member of the first group.
Amos Tversky, who was a great behaviourist at Stanford University, said that, its frightening to think that you
might not know something, but more frightening to think that, by and large, the world is run by people who
have faith that they know exactly whats going on. That is particularly true for investing. I'd much rather have
my money run by somebody who acknowledges what he doesn't know than somebody whos overconfident.
As Henry Kaufman, the noted economist pointed out, "We have two kinds of people who lose a lot of money;
those who know nothing and those who know everything."
Have you always been this way, or did you learn to be self-aware and emotionally disciplined?
I'm inherently unemotional, and I've also observed for 45 years that emotions swing in the wrong direction and
learnt that it's extremely important to control it. In the market swoon of 1998, I had an employee tell me he was
afraid the financial system was going to melt down. I heard him out and then told him to carry on with his work.
I dont compare myself or my colleagues to them, but battlefield heroes arent people who are unafraid; theyre
people who are afraid and do it anyway. And so we must keep investing; in fact, we should invest even more
when it is scary, because that's when prices are low.
Walter Cronkite once said if you're not confused you don't understand what's going on. In the fourth quarter
of 2008 I paraphrased that to say, "If you're not afraid you don't understand what's going on. Those were
scary times. But even if youre afraid, you have to push on. In the depths of the crisis in October '08 I wrote a
memo that I'm particularly proud of, called The Limits to Negativism. It touched on the importance of
scepticism in an investor. In good times scepticism means recognising the things that are too good to be true;
thats something everyone knows. But in bad times, it requires sensing when things are too bad to be true.
People have a hard time doing that.
The things that terrify other people will probably terrify you too, but to be successful an investor has to be
stalwart. After all, most of the time the world doesnt end, and if you invest when everyone else thinks it will,
youre apt to get some bargains.
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Do you calculate estimates of fair value in advance for the things you want to buy, and do you wait to
buy until those are reached in a market downdraft?
We can try to do analysis in advance, but opportunities often arise unexpectedly. For example, if everyone
gets scared due to some sudden bad news about a company, that can give us an opportunity to respond
spontaneously and buy its debt cheap. So we cant plan everything and follow a neat pattern, as a lot of what
we do is very opportunistic. We can have estimates of value for some companies, but we cant know which
companies will show up on the troubled list on a given day, or what bonds are going to come up for sale. Most
of the inquiries are incoming to us rather than outgoing, meaning we try to buy the things that they want to sell.
We have to be generally ready but also be responsive to opportunities to be self-aware and emotionally
disciplined?
How do you think about the current very low interest rate regime?
Yes. The point is that today you can't make a decent return safely. Six or seven years back, you could buy
three to five-year Treasurys and get a return of 6% or so. So you could have both safety and income. But
today, investors have to make a difficult choice: safety or income. If investors want complete safety, they can't
get much income, and if they aim for high income, they can't completely avoid risk. Its much more challenging
today with rates being suppressed by governments. This is one of the negative consequences of centrally
administered economic decisions. People talk about the wisdom of the free market of the invisible hand but
theres no free market in money today. Interest rates are not natural. They are where they are because the
governments have set them at that level. Free markets optimise the allocation of resources in the long run, and
administered markets distort the allocation of resources. This is not a good thing... although it was absolutely
necessary four years ago in order to avoid a complete crash and restart the capital markets.
Looking at the current scenario, is your level of caution and concern as high as it was during 2006-07?
The worst things that occurred in 2006-07 are not happening as much today. The amount of leverage in
investment banks, the magnitude of highly leveraged transactions, the widespread ubiquity of covenant-lite
debt; we're not seeing those things at comparable levels. Qualitatively we're getting there; but quantitatively
we're not. I was very worried in 2006-07, but currently Im just cautious, like I was in 2004-05. And some
people might easily argue that I turned cautious too early.
People seem to be getting excited about a rotation from credit to equities.Do you think it will happen?
Theres no free
market in money
today. Interest rates
are not natural. They
are where they are
because the
governments have set
them at that level
The pendulum of popularity which swung toward equities for 40 years and then toward bonds in the last 12
may swing back. You certainly can't make much money in credit or bonds today. Stocks are less constrained
on the upside, and at some point, investors who want or need to make money may conclude that the yields on
debt are low, the possibilities on stocks are higher, and equities are more under-loved and under-owned than
they should be. The ratio of the earnings yield (the inverse of the P/E ratio) of the Standard & Poors 500 to
interest rates is at one of the highest points it has been in our lifetime. Having said that, we need to be wary of
the fact that the attractiveness of that ratio comes from the current lowness of interest rates, meaning that if
interest rates are freed to move up, that comparison can become less attractive.
If its human nature that causes the bubbles and crashes, do you think asset management should be
done with more machines and fewer people?
No, I disagree strenuously. People who doubt the existence of inefficient markets and the ability to profit from
them may disagree with me. But if you think you're operating in an inefficient market like I try to do, a lot can
be accomplished by getting great people, developing an effective investment approach, hunting for
misvaluations, keeping psychology under control, and understanding where you are in the cycle. I am not
saying that everyone should try this. In fact, an algorithm or an index fund may work best for a lot of people.
But at Oaktree, we don't make heavy use of machines. We are fundamentalists and ours is a "non-quant
shop." As long as there are people on the other side making mistakes failing to fully understand assets,
acting emotionally, selling too low and buying too high well continue to find opportunities to produce superior
risk-adjusted returns. This is something I'm very sure of.
Where would you want to be if you were starting your career as a contrarian today?
A market being interesting in the long term and being cheap at the moment are two different things. Credit and
debt investing is still very, very attractive and interesting to spend time in, even though it may not be especially
rife with great bargains today.
Originally featured in issue 49 on behaviour (Fortnightly Thoughts: The unforced errors of behaviour bias, February 14, 2013)
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Special Issue
Interview withBruce Greenwald

About Bruce Greenwald
Robert Heilbrunn Professor of Finance and Asset Management at Columbia Business School and the academic Director of the Heilbrunn
Center for Graham & Dodd Investing. He is also the author of several books including Competition Demystified and Value Investing
Corporate profits are high versus GNP and yet corporate investment is quite low. What is the reason
behind this disconnect?
I think a lot of it is due to an underlying shift in the economy. Basically, there are only two economic factors
that sustain profits in the long run: assets and barriers to entry. If $10 billion worth of capital investment is
needed to support a business with an 8% cost of capital, it is this $10 billion of assets that ultimately protects
$800 million of annual earnings. However, increasingly companies are reducing investment so asset protection
is not the source of increased profit. On the other hand barriers to entry appear to be increasing significantly.
Sustainable barriers to entry come from economies of scale which come, in turn, from dominating markets.
Today there are a lot more opportunities for dominating markets than there were in the past. Service
businesses, in contrast to manufacturing or raw materials businesses, are local in nature. They consist of a
collection of local markets each of which is susceptible to domination by a strong local competitor. Large global
markets, in which firms can be viable with 2%-3% share, are much harder to dominate and sustainable
barriers to entry in such markets have always been rare. The shift to a service economy is, therefore, a shift to
a higher profit economy and that trend is likely to continue.
But scale doesnt always refer to large, global companies...
Big global markets or industries with relatively low levels of repeat business, and customer captivity, are very
hard to dominate. This is true for most manufacturing industries. When buying a car, for example, people dont
reflexively buy from a particular company. They tend to look carefully at all the available alternatives. This
makes it difficult for car companies to protect market share. At the same time a car company in the big global
market can be viable with 5% market share. Taken together these two factors enable entrants to penetrate the
market relatively easily and barriers to entry are low. On the other hand, services tend to have higher purchase
frequencies and thus more habit formation. This makes it harder for entrants to acquire customers. At the
same time, in order to be viable in smaller local service markets, entrants have to be able to capture 20% or
more market share. These two factors allow a service company to dominate its market much more strongly
than a global manufacturer. This is why Vodafone makes much more money in Germany and Italy, where it's
got a dominant 40% share, than it does in the UK, where the market is more fragmented and it has a 25%
share only. Its global size is irrelevant.
This has been visible within the PC industry as well. Customers do not buy a Dell or an HP computer
reflexively, but go for the company offering the best price. Therefore, hardware players have had an
increasingly competitive environment to operate in. On the other hand, customers were tremendously captive
to user interfaces like Microsofts. Adopting Windows came with big front-end fixed costs, including training,
and almost zero incremental costs. Huge switching cost, along with the enormous economies of scale,
benefitted Microsoft immensely. More broadly, technology has led to a reduction in captivity and entry barriers
for sectors like online retail which are more competitive today as its easier for consumers to compare between
and switch to other players. Overall, the fundamental change going on in the world is that manufacturing is
shrinking just like agriculture did in the old days. Further, with labour intensity of manufacturing decreasing, the
advantages of low-wage manufacturing are falling as well. i.e., manufacturing too is becoming more local in
nature. This shift towards services and niche focused manufacturing should shrink the size of relevant markets
for companies, but at the same time, increase barriers to entry and profitability.
We have already seen the impact of this shift in the tractor industry for instance. As productivity improvements
have brought down the cost of manufacturing tractors, the role of regular servicing and repairs has become a
relatively more important part of the overall product. People now buy tractors more on the basis of the service
provided by the manufacturer than on the upfront cost. In such a case, a company with an 80% share in a
particular region is able to support a far better local service organization than the relatively unprofessional
service provided a competitor with say 5%-7% share in that market. As a result it will dominate sales in that
region increasingly strongly over time. This is what has enabled companies like Deere which concentrate on
building a service organization and sales in one region at a time to increase margins more successfully than
their competitors when expanding internationally. The density of markets also impacts competitive intensity. In
high density markets like New York City or China, companies can be viable at 2%-3% market share. Barriers
to entry in these markets are consequently low and, not surprisingly profits have been disappointing.
Where is the internet facilitating disruption and which industries are likely to remain immune to drastic
change?
It is true that the web is facilitating disruption by enabling better comparison between competitors, but the
disruption is very industry specific and not economy-wide. Take automobile insurance for example. Previously,
when an insurance company signed up a customer, they effectively booked them for life, because searching
for or switching to an alternative policy was extremely difficult. Training customers, like GEICO is doing, to
spend 15 minutes to save 15% or more, is going to create customer behavior that undermines customer
45
Special Issue
captivity, and this should hurt the industry as a whole. Coming to your second question, the three areas where
consumers spend most of their disposable income all point to big service industries and I dont think any of
them are likely to change dramatically sometime soon. The biggest is housing services; the second is medical
care and then it is education. I dont think people will be comfortable having robots take care of them for a long
time. So, we may get expert systems, but they will only improve care and will still be embedded with human
training.
Can you give an example of a near-perfect business?
The right way

to think about
investing, and value
investing in
particular, is that
even though markets
are not efficient in
the academic sense,
they are efficient in
an absolutely
inescapable
arithmetic sense
I think Nestle comes quite close. It enjoys a lot of customer captivity for its products (people are highly brand
loyal in Nestle products like pet food) and big economies of scale advantages in countries where it has
dominant distribution. It is in businesses which by nature have high local fixed costs. It is expensive to
distribute frozen food for example. The huge fixed cost infrastructure needed ensures that scale is very
important. Plus, physical distribution is quite immune to technological changes as well. And given that human
tastes for food are unlikely to change drastically, it operates in a naturally good, stable business. Finally, it is
well diversified across many geographic and product segments each of which is highly stable. A few other
businesses also enjoy customer captivity, but the reasons behind their dominance are much harder to
comprehend. For example, two toothpastes P&Gs Crest and Colgate-Palmolive dominate both the US and
many foreign markets, but when it comes to shampoos, there are hundreds of them. Similarly, while people
are interested in variety when they drink beer and tend to try Japanese, Chinese and Mexican beers when
they eat the respective foods, nobody drinks Chinese, Japanese or Mexican Colas under these circumstances.
Customer preferences are hard to explain, but they allow for some businesses to be more resilient than others.
We also spoke to Professor Greenwald about value investing
How is the current low growth, low interest rate environment impacting value investing?
If we look at commonly used measures like the Shiller P/E, which is the ratio of price to average 10-year
historical earnings, stocks, particularly in the US, look expensive. But these measures dont fully capture the
extraordinary profit performance that we have witnessed in recent times. Corporate profits as a fraction of US
national income stood at about 14.5% last year. This compares to roughly an 8%-9% level pre-1990, about
12% just before the crisis and a little below 10% during the 2009 recession. Now, whether high profit margins
are sustainable or not is a different question but, given current profit levels, equity prices do not look terribly
overvalued. In fact, under reasonable assumptions about sustainable earnings and earnings growth, many
stocks yield well in excess of 8% at today's prices. And so, for investors who believe that the cost of capital
has gone down to about 6% and that interest rates will stay around current levels for a long time, there are
value opportunities to be found.
Also, despite the market rally, we are still nowhere close to the 2000 highs or Japans 1990 highs. And so, I
dont think value investors should feel that there arent any opportunities at all. It is just that there are fewer of
them now than there were before the recent rally and they are concentrated in places where we havent seen
them traditionally. For example, currently there is value in safe, large-cap, franchise stocks like Deere and
Nestle, which have phenomenal growth records, boast powerful franchises and have management teams with
a good understanding of competitive advantages. Such stocks have historically traded at multiples of earnings
that have precluded purchases by value investors. However one thing that is clear is that in the current
environment, no value investor has any interest in buying long-term debt. This is not just a result of
extraordinarily low current interest rate levels and therefore high bond prices, but also a function of the unusual
compression that has occurred in interest rates across risk categories and durations. For instance, investors
are being rewarded with as little as 100 basis points for all the added interest rate risk and inflation risk that
comes with buying a 30-year bond versus a 10-year bond.
What do you think of cyclicals in the current environment?
Cyclical stocks, like auto parts companies, have recently traded at prices that are high by historical standards
both in terms of multiples of sustainable earnings and relative to market valuations in general. Thus, investors
must be counting on higher future values of these stocks, presumably driven by growth associated with a more
robust recovery from the 2008-09 recession. However, the standard view of some investors is that any
company that grows its top line is creating value. And that is just wrong. While it is true that a growing earnings
stream - which presumably depends on revenue growth - is more valuable than flat earnings, there is also a
downside of revenue growth in the form of investments needed to support that growth. This means that at
every moment in time, less of the growing income stream remains distributable.
Further, if a market is competitive like most cyclical sectors are, firms cant earn more than their cost of capital
over a long period of time, and so, growth creates no net value to the original shareholders of most growing
firms. The cost of added investment to support growth fully offsets the growth in earnings. It's only in cases
where the environment is protected by barriers to entry that a firm can earn above its cost of capital and hence
truly create value through revenue growth. That hasnt typically been the case with cyclicals. And so, if a
cyclical is trading expensively, it doesn't really matter how fast it is growing because historically growth hasnt
created value for cyclicals. Absent growth, value cyclicals dont look like good investments.
46
Special Issue
% of stocks with P/E below the 25th %tile P/E over the past 10 years
S&P 500
STOXX 600
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0%
Source: Datastream.
So, for investing, you believe much more in the value of the franchise, rather than screening stocks on
asset or valuation based metrics?
Absolutely. But I think its essential to look at industries one at a time, in a specialized manner for two reasons.
First, because of the increasing importance of local franchises, which in turn makes it important to understand
who dominates a particular market, and second, because of the heavily intangible nature of assets in service
oriented companies that is often not captured in balance sheets. By expanding its customer base, for example,
service companies can tie-in a lot of repeat business that doesnt become visible instantly. And so, it's
conceivable that we are perhaps underestimating earnings potential in case of many growing service
companies.
The right way to think about investing, and value investing in particular, is that even though markets are not
efficient in the academic sense, they are efficient in an absolutely inescapable arithmetic sense. Put simply,
average return made by all investors before fees has to be equal to the average return on all assets. Every
time someone buys a security, thinking it's a bargain on some appropriately risk adjusted basis, somebody
else is selling that security believing that it's not. And one of them is always wrong. So when thinking about
investing, every investor needs to ask why he or she is the person who's going to be on the right side of a
trade? And the answer often lies in specialization. If you're not a specialist in an industry or geography and
someone else is, you're not going to be on the right side of that trade. Warren Buffett has done consistently
well over time because he is very smart, but if you look closely he has done significantly better in the four
sectors where he has specialized knowledge developed over many years banking, consumer nondurables,
insurance and media than elsewhere. In the move towards services, where markets will become increasingly
local and niche, both in the form of products and geography, specialization will matter even more.
Further, whats peculiar about the current market environment is that, just like the late 90s, individual
irrationalities like over confidence, lottery ticket preference (buying growth stocks with big potential upside
returns) and loss aversion arent creating opportunities the way they do in normal times. Instead, what we are
seeing more of now are institutional irrationalities. Trillions of dollars that used to be invested by bank trust
departments and insurance companies in large-cap, blue chip franchise stocks are now being invested by
alternative asset management firms, which cant cover their fees by buying the same large-cap stocks. Given
that almost everyone else is, in some form or another, investing in the index, what this means is that there is
no natural source of demand to make up for the trillions of dollars that have exited those stocks. It is because
of institutional distortions like these that a company like Nestle which is trading at around a 5% earnings yield
distributes about 80% of earnings and is realistically growing at 5% to 6%, can generate a 9% to 10% overall
return. You have to ask why a big and safe company like that can still generate those sort of returns and the
answer is that alternative asset managers can simply not justify their fees by investing in companies like that.
That has created a truly peculiar environment, where value opportunities are being found in unusual sectors.
Originally featured in issue 77 on disruption (Fortnightly Thoughts: Lets talk disruption, July 16, 2014)
47
Special Issue
Our list of issues

Issue
Date
Topic
91
July 7, 2015
Buzzwords
No more buzzword FOMO*
Interviewees
90
June 16 2015
Info asymmetry
FAQ: Why does shrinking information asymmetry matter?
89
May 21, 2015
Convenience
At your convenience
88
May 6, 2015
Capex
FAQ: Why isnt corporate capex higher?
87
April 6, 2015
China innovation
How innovative is China?
Gordon Orr of McKinsey Asia and Prof. Andrew Ng of Baidu
86
Mar 24, 2015
Scarcity
Scarcity in a sea of abundance
Peter Diamandis of XPRIZE and Matt Ridley, author of `The Rational Optimist'
85
Feb 18, 2015
Artificial intelligence
The real consequences of artificial intelligence
Prof. Raj Rajkumar of Carnegie Mellon, Rodney Brooks of Rethink Robotics and Manoj
Saxena of The Entrepreneurs Fund
84
Jan 28, 2015
EM competition
The globalisation of competition
Prof. Philip Lane of Trinity College Dublin and Prof. Pol Antras of Harvard
83
Dec 17 2014
100 best charts
The best of Fortnightly Thoughts 2014
82
Nov 28, 2014
Skills
People make the world go round
Bernard Liautaud of Balderton Capital and David Epstein, author of 'The Sports Gene
81
Oct 23, 2014
Young consumers
How the young are shaping future consumption
Jeremy Rifkin, author of 'Zero Marginal Cost Society' and Rory Sutherland of Ogilvy Group
80
Oct 3, 2014
EM reforms
The many forms of EM reform
Ruchir Sharma, author of Breakout Nations
79
Sep 10, 2014
Capex
The capex conundrum
Ola Rolln, CEO of Hexagon
78
Aug 14, 2014
Old consumers
Grey anatomy: How older cohorts spend and save
77
Jul 16, 2014
Disruption
Let's talk disruption
Prof. Bruce Greenwald of Columbia University
76
Jul 1, 2014
Industry repair
The value in repair
Nick Kirrage of Schroders
75
Jun 10, 2014
Buzzwords
Buzz! 22 things you need to know
74
May 27, 2014
Pollution
The eolution of pollution solutions
73
May 1, 2014
GDP
GDP: Forecasters' freiend or foe
72
Apr 14, 2014
Future materials
Material changes in the material world
Benedict Evans, Partner at Andreessen Horowitz
Prof. Sam Fanknhauser of Grantham Research Institute and Debra Tan of China Water
Risk
Diane Coyle, author of 'GDP: A Brief but Affectionate History' and Prof. Erik Brynjolfsson of
MIT
Prof. Chris Grovenor and Prof. Peter Edwards of Oxford University, Ray Giibs, CEO of
Haydale
Prof. Branko Milanovic of City University of New York Graduate Center and Prof. Greg
Mankiw of Harvard
Sir John Chisholm of Genomics England, Dr. Peter Bach of Sloane-Kettering Cancer
Center and Sir Michael Rawlins of UK's Royal Society of Science, ex-NICE
71
Mar 27, 2014
Income Inequality
Unequal income, unequal consequences
70
Mar 6, 2014
Healthcare
Healthcare Innovation on the mend?
69
Feb 21, 2014
Key Questions
15 questions that need to be answered
68
Feb 7, 2014
Private Companies
The rising importance of private companies
Prof. Clayton M. Christensen of Harvard, Tim Bunting of Balderton Capital and Prof.
Hermann Simon of Simon Kucher and Partners
67
Jan 23, 2014
Customer Loyalty
To have and to hold: Cutomer stickiness and tech
Bernard Charls, CEO of Dassault Systemes
66
Dec 11, 2013
100 best charts
Charles Himmelberg, GS US Credit Strategist
65
Nov 21, 2013
Cities
Brighter lights, bigger cities
Prof. Edward Glaeser of Harvard
64
Oct 31, 2013
Tech
Tech is everywhere
Paul Brody of IBM and Brian Mukherjee, CEO of Blinkx
63
Oct 14, 2013
Europe
The changing parts of Europe
Prof. Otmar Issing of Center for Financial Studies, Dr. Dieter Wemmer of Allianz and Jose
Abad of Instituto de Crdito Oficial Madrid
62
Sep 26, 2013
Dominance
Concentrating on dominance
Prof. Peter Nolan of Cambridge University and Joe Studwell, author of 'How Asia Works'
61
Sep 12, 2013
Habits
The compounding habits
David Halpern of the UK Government Behavioural Insight Team
60
Sep 2, 2013
Governments
The changing State of affairs
Prof. Mariana Mazzucato of University of Sussex, Prof. Michael Sandel and Prof. Cass
Sunstein of Harvard and Prof. Larry Kotlikoff of Boston University
59
Aug 1, 2013
Renewables
Time to renew interest in renewables?
Ditlev Engel of Vestas and John Searle of Saft
58
Jul 18, 2013
Commodities
Pedalling through commodity cycles
Jeff Currie, GS Global head of Commodities Research
57
Jul 4, 2013
Logistics
Movers and shapers: Why logistics matters
56
Jun 13, 2013
China
The consequences of Chinas price discovery
55
May 24, 2013
Stocks
The global stock take
54
May 10, 2013
Jobs
What is everybody going to do?
Andrew McAfee of MIT and Jeffrey Joerres of ManpowerGroup
53
Apr 25, 2013
Women
Why women working works
Gro Brundtland, former Prime Minister of Norway, Melanne Verveer, ex-US Ambassador for
Global Women's Issues and Jacqueline Novogratz of Acumen Fund
52
Apr 11, 2013
Capital Intensity
How to capitalise on rising capital intensity
Huw Pill, GS Chief European Economist
Bruce Edwards and Ken Allen of DHL, Dr. William Fung of Li & Fung and Jeff Schwartz of
GLP
Stan Druckenmiller of Duquesne Family Office, Gorden Orr of McKinsey and Prof. Victor
Nee of Cornell University
51
Mar 14, 2013
Security
Tinker, tailor, hacker, spy
Richard Vary of Nokia, Mark Parsons of Freshfields and Nigel Inkster of IISS
50
Feb 28, 2013
Energy Efficiency
More energetic efforts needed in energy efficiency
Dr. Alex Claus Heitmann of Lanxess and James Tyler of Telecity Group
49
Feb 14, 2013
Behaviour
The unforced errors of behavioural biases
Prof. Daniel Kahneman of Princeton and Howard Marks of Oaktree Capital
48
Jan 31, 2013
Shale
Where will the shale gale blow next?
Paul Wogan of GasLog and David Demers of Westport
47
Jan 17, 2013
Manufacturing
Making things faster, stronger, leaner, better
Peter Marsh of the Financial Times, Prof. Neil Hopkinson of Sheffield University, Avi
Reichental of 3D Systems and Jonathan Flint of Oxford Instruments
46
Dec 13, 2012
100 best charts
48
Issue
Special Issue
Date
Topic
Interviewees
45
Nov 30, 2012
Restructuring
Changing shape and shaping change
Michael Garstka and Alan Bird of Bain & Company
44
Nov 15, 2012
Food
Meaty problems, simmering solutions
Dr. Werner J. Bauer of Nestle and Karim Bitar of Genus
43
Nov 1, 2012
Growth
When growth is not enough
Jim O'Neill, Chairman of GS Asset Management

Peter Ayliffe of Visa Europe, Alastair Lukies of Monitise and Sarah Friar of Square
42
Oct 18, 2012
Mobile payments
Money, money, money in a mobile world
41
Oct 4, 2012
Banks
Banking on change
Guillermo de la Dehesa, former Spanish Finance Minister
40
Sep 20, 2012
Countries
Where countries succeed companies follow
Prof. James Robinson of Harvard
39
Sep 7, 2012
Asset Management
The business of managing the worlds savings
Marc Spilker of Apollo Global Management, Gavin Rochussen of J. O. Hambro and Ralph
Mupita of Old Mutual
38
Aug 16, 2012
Housing
All quiet on the home front?
Doug Yearly, Jr of Toll Brothers and Rob Perrin of The Berkeley Group
37
Jul 26, 2012
Sports
Sport: The worlds favourite growth industry
Herbert Hainer of Adidas, Ralph Topping of William Hill and Jon Sigurdsson of Ossur
36
Jul 12, 2012
Small-Mid Cap
The big small cap issue
Nick Robertson of ASOS, John O'Higgins of Spectris, Julian Diaz of Dufry and Gerald
Grohmann of Schoeller-Bleckmann
35
Jul 12, 2012
Automation
The automation revolution
Dieter Manz of Manz and Anil Menon of Cisco
34
Jun 28, 2012
Quality/Value
Some value in quality, some quality in value
Dominic Barton of McKinsey
33
Jun 14, 2012
Russia
How much is Russia changing?
Oleg Tinkoff of Tinkoff Credit Systems, Alexander Novak, Energy Minister of Russia, Mark
Gyetvay of Novatek and Igor Levit of LSR Group
32
Jun 5, 2012
EM infrastructure
Digging the EM infrastructure story
Marcelo Haddad of the Investment Promotion Agency of Rio de Janeiro
31
May 17, 2012
Data
The Big deal about data
Mark Read of WPP, Michael Tobin of Telecity and David Rowan of the Wired UK
30
May 3, 2012
DM Infrastructure
Can the West's infrastructure keep up?
Ian Tyler of Balfour Beatty
29
Apr 19, 2012
Dividends
The dividends of cash deployment
Peter Oppenheimer, GS Chief Global Equity Strategist
28
Mar 29, 2012
Shale
On the shale trail
Aubrey K. McClendon of Chesapeake Energy and Daniel Yergin of IHS CERA
27
Mar 16, 2012
Africa
Africa's turn
Thushen Govender of Tiger Brands, Runa Alam of DPI, Peter Schmid of Actis and Simpiwe
Tshabalala of Standard Bank
26
Mar 2, 2012
Value
The value of looking up
25
Feb 16, 2012
Innovation
Innovation, the crown jewel
Dr. Andreas Kreimeyer of BASF
24
Feb 2, 2012
Europe
European stocks and Europe are not the same
Peter Sutherland, Chairman of GS International and Pierre Kosciusko-Morizet of

PriceMinister
Jan 20, 2012
100 best charts
23
Dec 15, 2011
Bifurcation
Another year of bifurcation beckons
Prof. Ian Morris of Stanford
22
Dec 2, 2011
Middle East
MENA: In the middle of economic realignment
Wassim Younan, CEO of GS MENA
21
Nov 18, 2011
Education
Growing education and educated growth
John Fallon of Pearson and Prof. Anthony Grayling of New College of the Humanities
20
Nov 3, 2011
BRICs
Not everyone can be a BRICs winner
Paul Walsh of Diageo
19
Oct 20, 2011
Global trade
Is global trade set to fade?
Dr. Ian Goldin of Oxford and Reinhard Lange of Kuehne + Nagel
18
Oct 6, 2011
Japan
Some hope for Japan, some echoes for Europe
Masa Mochida, President of GS Japan
17
Sep 22, 2011
Mining
Time to dig deep for the miners
Evy Hambro of BlackRock
16
Sep 8, 2011
Banks
Around the world in nearly 80 banks
Alexander Scurlock of Fidelity
15
Aug 26, 2011
Food
Rain and grain, hard to sustain
Robert Berendes of Syngenta
14
Aug 11, 2011
Quality stocks
Time to discriminate in qualitys favour
13
Jul 28, 2011
Germany
Germany's time, Germany's challenge
Joe Kaeser of Siemens AG
12
Jul 14, 2011
Credible growth
The incredible story of credible growth
Jim ONeill, Chairman of GS Asset Management
11
Jun 30, 2011
Power
Power plays amid power surges
Rupert Soames of Aggreko and Rudolf Hadorn of Gurit
10
Jun 17, 2011
Demographics
Aging angst or demographic decoys?
Matin Wolf of the Financial Times and Lars Srensen of Novo Nordisk
Jun 2, 2011
BRICs
Why the differences in the BRICs matter
Martin Wolf of the Financial Times and Ivan Tong of Sparkle Roll
May 20, 2011
Smart devices
Technological disruption equals economic eruption
Warren East of ARM
May 5, 2011
Winners
Why you need to buy and hold industry leaders now
Anthony Ling, GS Global CIO
Apr 14, 2011
China
The rise and rise of the Chinese consumer
Anthony Bolton of Fidelity
Mar 31, 2011
Nordics
Northern Soul - unlocking Nordic secrets
Arne Karlsson of Ratos
Mar 18, 2011
Luxury
Brands deluxe redux
Sir Martin Sorrell of WPP
Mar 3, 2011
Capex
The consequences of consensus-busting capex
Bill McDermott of SAP
Feb 17, 2011
M&A
M&A and the new world order
Feb 7, 2011
UK
The UK; from first to worst?
Dr. Ben Broadbent of the Bank of England
Note: Interviewee profiles are as of the date of respective publications
49
Special Issue
Disclosure Appendix
Reg AC
We, Hugo Scott-Gall, Sumana Manohar and Meghar Chaturvedi, hereby certify that all of the views expressed in this report accurately
reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our
compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research
division.
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group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed
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The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:
Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective
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Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global coverage universe
Rating distribution
Global
Investment Banking Relationships
Buy
Hold
Sell
Buy
Hold
Sell
32%
53%
15%
46%
38%
33%
As of July 1, 2015, Goldman Sachs Global Investment Research had investment ratings on 3,248 equity securities. Goldman Sachs
assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments
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Price target and rating history chart(s)

50
Special Issue
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15 Interviews To Read This Summer

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15 Interviews To Read This Summer

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Fortnightly Thoughts

July 23, 2015

15 interviews to read this summer

The evolution of nations

The ubiquity of technology

The forces shaping consumption

And some timeless insights on investing

Sumana Manohar, CFA

Goldman Sachs Global Investment Research

Interview withGordon Orr

Not only are

Goldman Sachs Global Investment Research

by moving up the innovation curve

Share of Chinese companies in the total sales of top 50 companies in

Patent applications per 10,000 people

Source: Datastream, Goldman Sachs Global Investment Research.

Source: WIPO, World Bank.

What are the constraints that Chinese companies face?

Goldman Sachs Global Investment Research

How are DM companies likely to respond to growing Chinese competitors?

the labour-tocapital substitution is

Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research

Real interest in Artificial Intelligence

Top patent applicants under Patent Cooperation Treaty (international)

Total patent grants by the USPTO by field of technology

Computer Graphics Processing

Financial, Business Practice*

Virtual Machine Task

Note: all *marked categories relate to data processing; Financial, Business

Goldman Sachs Global Investment Research

Source: Alexa, UN, World Bank.

Goldman Sachs Global Investment Research

Interview withStan Druckenmiller

Credit to private sector

Source: BIS, Datastream.

Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research

Even with all

Goldman Sachs Global Investment Research

Interview withJames Robinson

Goldman Sachs Global Investment Research

GDP per capita. in '000s

France Austria Canada

Confidence in national institutions index

Source: OECD, World Bank.

Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research

Interview withJoe Studwell

Goldman Sachs Global Investment Research

Can China disrupt large Western firms?

Goldman Sachs Global Investment Research

Interview withRaj Rajkumar

Goldman Sachs Global Investment Research

The spread of connected cars

Automated driving development roadmap and changes in core

Source: Goldman Sachs Global Investment Research.

Source: Goldman Sachs Global Investment Research, Japan Patent Office.

Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research

Interview withPaul Brody

Goldman Sachs Global Investment Research

Traditional capital goods equipment vs. software as percentage of total