The Rational Optimist
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One of my great and increasing pleasures is the Wall Street Journal Weekend Edition. I have grown to really look forward to reading Peggy Noonan, maybe my generation’s most gifted essayist. That would be enough reason to pay the subscription price. To read her wordsmithery (is that a word?) is a sublime joy to this humble journeyman writer.

And the Review section in the WSJ has become a revelation over the last few years. The essays are getting better and better. And the book reviews make me weep, because there are so many great books and I will just not be able to get to them all. But at least I can read the reviews and remind myself of what I should have learned. I spend a few hours every weekend trying to get through the treasure in those pages – on the treadmill, at the coffee shop, or at brunch. I commend it to you. And getting the Journal online here on the ocean is cool. (www.wsj.com)

Today’s Outside the Box is two essays, by Matt Ridley and Bill Gates, from the Review section of the WSJ. Ridley has written a book called The Rational Optimist, which I have downloaded into my iPad and will read on the Forbes cruise this week. Bill Gates writes a longer essay to say why he thinks Ridley has some things wrong, while overall giving the book high marks. This is one of the more thought-provoking exchanges I have read in a while.

I am on the Forbes cruise and we are at sea on the way to Cabo. Heard Steve talk this morning. I always feel better after listening to him speak. I just like the optimism. For whatever reason, my phone is working, as is the internet. You gotta love it. But I will get a little play-time in.

And I’m already working on this week’s e-letter. This one may be somewhat controversial, but it will be fun. Have a great week. And now enjoy this week’s Outside the Box.

Your ready to catch up on some reading analyst,

John Mauldin, Editor

Outside the Box


Africa Needs Aid, Not Flawed Theories

Bill Gates

The science writer Matt Ridley made his reputation with books like "The Red Queen: Sex and the Evolution of Human Nature" and "Genome: The Autobiography of a Species in 23 Chapters." His latest book, "The Rational Optimist: How Prosperity Evolves" is much broader, as its title suggests. Its subject is the history of humanity, focusing on why our species has succeeded and how we should think about the future.

Although I strongly disagree with what Mr. Ridley says in these pages about some of the critical issues facing the world today, his wider narrative is based on two ideas that are very important and powerful.

The first is that the key to rising prosperity over the course of human history has been the exchange of goods. This may not seem like a very original point, but Mr. Ridley takes the concept much further than previous writers. He argues that our success as a species, as opposed to earlier hominids, resulted from innate characteristics that allowed us to trade. Not long after Homo sapiens emerged, we were using rare objects, like obsidian blades, far away from the source materials needed to produce them. This suggests that large numbers of commercial links were established even at the hunter-gatherer stage of our development.

Mr. Ridley gives many examples of how exchange allowed groups to thrive, by enabling them, for example, to acquire fish hooks or sewing needles. He also points out that even the most primitive human groups today are open to exchange. I've always thought this openness was surprising, considering the risks involved, but Mr. Ridley convincingly describes its adaptive value.

Exchange has improved the human condition through the movement not only of goods but also of ideas. Unsurprisingly, given his background in genetics, Mr. Ridley compares this intermingling of ideas with the intermingling of genes in reproduction. In both cases, he sees the process as leading, ultimately, to the selection and development of the best offspring.

The second key idea in the book is, of course, "rational optimism." As Mr. Ridley shows, there have been constant predictions of a bleak future throughout human history, but they haven't come true. Our lives have improved dramatically—in terms of lifespan, nutrition, literacy, wealth and other measures—and he believes that the trend will continue. Too often this overwhelming success has been ignored in favor of dire predictions about threats like overpopulation or cancer, and Mr. Ridley deserves credit for confronting this pessimistic outlook.

Having shown that many past fears were ultimately unjustified, Mr. Ridley finally turns his "rational optimism" to two current problems whose seriousness, in his view, is greatly overblown: development in Africa and climate change. Here, in discussing complex matters where his expertise is not very deep, he gets into trouble.

Mr. Ridley spends 14 pages saying that everything will be just fine in Africa without our worrying about negative possibilities. This is unfortunate and misguided. Is his optimism justified because things always just happen to work out? Or do good results depend partly on our caring and taking action to prevent and solve problems? These are important questions, and he doesn't answer them.

In discussing Africa, Mr. Ridley relies on critics who say, essentially, "Aid doesn't work, hasn't worked and won't work." He cites studies, for instance, that show a lack of short-term economic benefit from aid, but he ignores the fact that health improvements, driven by aid, have been a major factor in slowing population growth, which has proven, in turn, to be critical to long-term economic growth. I may be biased toward aid because I spend my money on it and meet with lots of people who are alive because of it, but even if that were not the case, I would not be persuaded by such incomplete analysis.

Development in Africa is difficult to achieve, but I am optimistic that it will accelerate. Science will come up with vaccines for AIDS and malaria, and the "top-down" approach to aid criticized by Mr. Ridley (and by the economist William Easterly) will fund the delivery of these life-saving drugs. What Mr. Ridley fails to see is that worrying about the worst case—being pessimistic, to a degree—can actually help to drive a solution.

Mr. Ridley dismisses concern about climate change as another instance of unfounded pessimism. His discussion in this chapter is provocative, but he fails to prove that we shouldn't invest in reducing greenhouse gases. I asked Ken Caldeira, a scientist who studies global ecology at the Carnegie Institution for Science, to look over this part of the book. He pointed out that Mr. Ridley celebrates declining air-pollution emissions in the U.S. but does not acknowledge that this has come about because of government regulations based on publicly funded science, which Mr. Ridley opposes. As Mr. Caldeira rightly observes, "It is a wonder of development that our economy can grow as air pollution diminishes." What is true of the U.S. case, I'd suggest, can be true of the world as a whole as we deal with the challenges posed by climate change.

"The Rational Optimist" would be a great book if Mr. Ridley had wrapped things up before these hokey policy discussions and his venting against those he considers to be pessimists. I agree with him that some people are overly concerned with potential problems, and I hadn't realized that this pessimism was so common in rich countries over the last several centuries. As John Stuart Mill said in 1828, in a quote from the book that I especially enjoyed: "I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage."

The most obvious instance of excessive pessimism in Mill's era was the "Communist Manifesto." In one of history's great ironies, Karl Marx used the profits from the German textile mills of Friedrich Engels's father to support the writing and distribution of a political philosophy based on pessimism about capitalism.

Pessimism is often wrong because people assume a world where there is no change or innovation. They simply extrapolate from what is going on today, failing to recognize the new developments and insights that might alter current trends. For too long, for instance, population forecasts have ignored the possibility that population growth would ease as the world became better off, because people who are wealthier and healthier do not feel the need to have so many children. (For more on this issue, see the excellent presentations on the "Gapminder" website of the development expert Hans Rosling.)

A lot of the rhetoric about sustainability implicitly assumes that we will exhaust our natural resources, as though there will never be any substitution of one commodity for another in the future. But there has always been such substitution. The late economist Julian Simon made a famous wager with the biologist Paul Ehrlich, author of "The Population Bomb." In response to Mr. Ehrlich's prediction that population growth would lead to resource scarcity and mass starvation, Simon bet him that the cost of a basket of commodities, including copper, chromium and nickel, would actually decrease between 1980 and 1990. Mr. Simon won the bet because he believed that, despite increased demand, increased supply would win out. And in fact, to take one example, fiber optics soon took the place of copper wire in many communications technologies.

There are other potential problems in the future that Mr. Ridley could have addressed but did not. Some would put super-intelligent computers on that list. My own list would include large-scale bioterrorism or a pandemic. (Mr. Ridley briefly dismisses the pandemic threat, citing last year's false alarm over the H1N1 virus.) But bioterrorism and pandemics are the only threats I can foresee that could kill over a billion people. (Natural catastrophes might seem like good candidates for concern, but I've been persuaded by Vaclav Smil, in "Global Catastrophes and Trends," that the odds are very low of a large meteor strike or a massive volcanic eruption at Yellowstone.)

Even though we can't compute the odds for threats like bioterrorism or a pandemic, it's important to have the right people worrying about them and taking steps to minimize their likelihood and potential impact. On these issues, I am not impressed right now with the work being done by the U.S. and other governments.

The key question that Mr. Ridley fails to address is: What's wrong with worrying about and guarding against threats that might become real, large problems? Parents worry a great deal about their children's safety. Some of that worry leads to constructive steps to keep children safe, and some is just negative emotion that doesn't help anyone. If we all agree to join Mr. Ridley as rational optimists, does that mean that we should stop worrying about trends that might cause problems and not take action to anticipate them?

Mr. Ridley devotes his attention to just two present-day problems, development in Africa and climate change, and seems to conclude, "Don't worry, be happy." My prescription would be, "Worry about fewer things while understanding the lessons of the past, including lessons about the importance of innovation." This might qualify me as a rational optimist, depending on how stringent the criteria are. But there can be no doubt that excessive pessimism may cause problems with how society plans for the future. Mr. Ridley's book should trigger in-depth discussions on this important subject.

Like many other authors who write about innovation, Mr. Ridley suggests that all innovation comes from new companies, with no contribution from established companies. As you might expect, I disagree with this view. He also seems to think that innovation involves simply coming up with a new idea, when in fact the execution of the idea is critical. He quotes the early venture capitalist Georges Doriot as saying that as soon as a company succeeds, it stops innovating. A great counterexample is Intel, which developed over 99% of its breakthroughs after its first success.

Mr. Ridley describes the economy of the future as "post-corporatist and post-capitalist," a silly throwaway phrase. He never explains what will replace all the companies that figure out how to make microchips or fertilizer or engines or drugs. Of course, many companies will come and go—that is a key element of capitalism—but corporations will continue to drive most innovation. It is a dangerous and widespread problem to underestimate the ongoing innovation that takes place within mature corporations.

In his quest to highlight exchange as the key mechanism in the success of our species, Mr. Ridley underplays the role of other institutions, including education, government, patents and science, all of which, especially since the 19th century, have played a central role in the improvements that humanity has experienced. Too often, when Mr. Ridley finds an example that minimizes the contributions of these institutions, he seems to think that he has validated the idea that exchange deserves all of the credit.

I am always amazed by scientific possibilities. Electricity, steel, microprocessors, vaccines and other products are possible only because of our efforts to understand the world and how it works. The scientists and tinkerers who investigate these mechanisms are engaged in a profound process of discovery. Without their curiosity and creativity, no amount of exchange would have produced the world in which we now live.

—Bill Gates is co-chairman of the Bill & Melinda Gates Foundation and serves as chairman of Microsoft.


Africa Needs Aid, Not Flawed Theories

By Matt Ridley

Bill Gates likes my book "The Rational Optimist." Really, he does. Even though he dislikes my points about Africa and climate change, these take up, as he notes, just one chapter. The rest he summarizes fairly and intelligently, and I appreciate that. It's great for an author when anybody reviews a book "well" in both senses of the word.

It is worth explaining why I chose Africa and climate change as the "two great pessimisms of today." The answer is simple: Whenever I speak about optimism and someone in the audience protests, "But surely you cannot think that we can ever solve..." the subjects that most frequently cross their lips next are African poverty and global warming. Mr. Gates also mentions potential threats from super-intelligent computers and pandemics. Maybe he is right to worry about them, but I have yet to be persuaded that either is more than a small risk.

Mr. Gates dislikes my comments on climate change, which I think will be less damaging than official forecasts predict, while the policies designed to combat climate change will be more damaging than their supporters recognize. I argue that if we rush into low-carbon technologies too soon, because we think the problem is more urgent than it is, we risk doing real harm to ecosystems as well as human living standards—as the biofuel fiasco all too graphically illustrates. The rush to turn American corn into ethanol instead of food has contributed to spikes in world food prices and real hunger, while the rush to grow biodiesel for Europe has encouraged the destruction of orangutan habitat in Borneo.

I also argue, however, that it is highly unlikely, given the rate at which human technology changes, that we will fail to solve the problem of man-made climate change even if it does prove more severe than I expect. For example, the world is on a surprisingly steady trajectory toward decarbonization. The number of carbon atoms we burn per unit of energy we generate is falling as we gradually switch from carbon-rich fuels like wood and coal to hydrogen-rich fuels like oil and especially gas. At current rates, we would be burning almost no carbon by about 2070, though I suspect that point will never actually be reached.

The question that I pose in the book is whether optimism is likely to be right. In essence, neither Mr. Gates nor I think that the problem of man-made climate change is going to prove insoluble or fatal to civilization. We disagree only on how urgent it is to devote massive expenditures to dealing with it, which would put poverty reduction at risk. I think that direct spending to alleviate malaria, which now kills a million people a year and whose incidence is likely to increase as a result of global warming by less than 0.03% per year, is a far higher priority. So does Mr. Gates, judging by his foundation's spending.

It is on Africa that Mr. Gates throws his sharpest barbs. Yet, once again, I think that we agree on the most important point, namely, that Africa can have a good future. "Development in Africa is difficult to achieve," he writes, "but I am optimistic that it will accelerate."

Yes! I don't believe that "everything will be just fine in Africa," but I do think that Africa's real and profound problems can be overcome. My targets are the ubiquitous pessimists who say that, whatever we do, Africa is doomed to remain stuck "in deepest, darkest poverty," in the words of one environmentalist.

Yet, with exceptions such as Somalia and the Congo, economic growth is gaining momentum all over the continent, birth rates are dropping and poverty is falling, as the Spanish economist Xavier Sala-i-Martin has documented. Lots of people deserve credit for this, among them Bill Gates. His foundation, as far as I can tell, does exactly what I suggest in the book by concentrating on solving real medical and humanitarian problems.

*************************************************************

AID TO AFRICA

$44 billion
Official development aid given to Africa in 2008

$3.3 billion
Official development aid given to Ethiopia, Africa's top recipient of aid, in 2008

41% Aid to Africa that went to social services, including education and health care, in 2008

19% Aid to Africa that went to economic development in 2008

$7.2 billion
Amount of development aid given by the U.S. to Africa in 2008

58% Africans living on less than $1.25 a day in 1996

50% Africans living on less than $1.25 a day in 2009

$510 Gross domestic product per capita in sub-Saharan Africa in 2000 (in 2000 dollars)

$623 Gross domestic product per capita in sub-Saharan Africa in 2008 (in 2000 dollars)

Sources: Organization for Economic Cooperation and Development, World Bank

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Far from saying that aid "doesn't work, hasn't worked and won't work," I actually say this in my book: "Some of the most urgent needs of Africa can surely be met by increased aid from the rich world. Aid can save lives, reduce hunger, deliver a medicine, a mosquito net, a meal or a metalled road."

I go on to say that "statistics, anecdotes and case histories all demonstrate that the one thing aid cannot reliably do is to start or accelerate economic growth." Now here I admit that Mr. Gates does have a point. Unintentionally, I have given him and perhaps other readers the impression that, in my view, combating malaria or AIDS does not pay economic dividends. It does.

What I do take issue with is economic aid designed to stimulate economic growth. For example, a 2006 study by Simeon Djankov of the World Bank (now deputy prime minister of Bulgaria) and his colleagues concluded that "foreign aid has a negative impact on the democratic stance of developing countries and on economic growth by reducing investment and increasing government consumption." Economic aid diverts resources into projects that fail, puts money into the pockets of corrupt government officials and crowds out the efforts of entrepreneurs. In one example, only 13% of educational aid to Uganda reached schools; the rest was siphoned off by rent-seeking officials.

I am disappointed that Mr. Gates is so defensive about "top-down" aid. Just as everything from software design to education can benefit from bottom-up crowd sourcing in which elites no longer determine what happens, so surely humanitarian aid can benefit too, however much vested interests in governments and in big agencies dislike this trend.

Likewise, Mr. Gates takes issue with my assertion that the economy of the future will be post-corporatist and post-capitalist. I know that these radical ideas are not to everybody's taste, and he is right that most innovation takes place within existing companies. But it is very striking that some of the most far-reaching innovations over the past several decades have come from driven, visionary outsiders like Mr. Gates, Mark Zuckerberg and Sergey Brin rather than from corporate research and development departments. What is more, these innovations have been achieved with much less capital investment up front than in the days of Andrew Carnegie and Henry Ford.

It is true that there is still a vast amount of work needed to bring ideas to market, and this requires cash and corporate organization. But increasingly, corporations are turning themselves into virtual entities, arranged around flexible networks of suppliers, retailers and researchers, rather than monolithic bodies sitting in fixed plants. That seems to me to make the word "capitalist" somewhat misleading.

Mr. Gates thinks I underplay the role of education, government, patents and science in the innovation that drives economic improvement. Maybe, but I make a carefully argued case that most of the existing commentary overplays the role of these institutions and that innovation is sometimes hindered by these institutions, too, especially by patents and government monopolies.

Am I saying that we should cease worrying about trends that might cause problems? Of course not. I am arguing that we should worry about real problems, including Africa's plight, but that we should do so in the knowledge that we have solved many such problems before and can do so again. I am certainly not saying, "Don't worry, be happy." Rather, I'm saying, "Don't despair, be ambitious"—though I admit it's not nearly as snappy a song lyric.

—Matt Ridley's many books include, most recently, "The Rational Optimist" and "Francis Crick." His website is rationaloptimist.com.


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John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.

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Posted 11-29-2010 4:48 PM by John Mauldin