Ninety degrees

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Ninety degrees

 

DECLINE AND FALL

Europe’s traditional parties are faltering. While centre-right Christian Democrats witness slow but steady decline, centre-left Social Democrats are collapsing dramatically.

Explanations have been put forward for the phenomenon that include the erosion of traditional voter segments such as christian churchgoers and socialist labourers. And yet, demographics are only a part of the story, since they take decades to unfold. It’s the same thing for refugees—Western Europe always had waves of mass migration, from dictatorial Turkey in the 1960s to war-torn Yugoslavia in the 1990s and ultimately, ravaged Middle Eastern and Northern African states in the 2010s.

None of those are the main drivers of political realignment. What we are witnessing instead is the entire system shifting by ninety degrees. The classical “left” vs “right” debate is being replaced by a different set of fundamentally opposed values: “open” vs “closed”.

 

EVOLUTION

Before diving into that, it’s worth taking a look at the evolution of the political left vs right. Based on this we will examine how the debate was transformed under the pressure of globalisation and digitisation, triggering the ninety-degree shift that is about to complete.

At the root of the traditional Western political system is the combination of seemingly contradictory positions. Those inconsistencies have their origin in the manner in which the conservative and socialist movements became dominant forces in politics.

Conservative parties were founded to maintain (ie ‘conserve’) the economic privileges of the upper class. This was achieved through low taxes and free-market principles that put no restrictions on capital accumulation. Open markets, such as the European Economic Community, allowed capital owners to capture economies of scale.

The problem was that conservatism couldn’t win elections based on upper class votes alone. A second source of voters had to be captured: social conservatives. The common denominator between economic and social conservatism was its foundation on authority: bosses and factory owners had to be obeyed in the economic sphere, and priests and politicians in the social sphere.

In social conservatism, “ordinary” people could still feel “special” despite a lack of wealth, if they were part of the “right” nation, prayed to the “right” god, sang the “right” (traditional) songs, wore the “right” (traditional) clothes and voted for the “right” (ie conservative) party. Conservative identity politics relied on closing national borders to immigrants since the “purity” of the national identity and traditions had to be upheld.

As a result, conservatism and its preaching of subservience to authorities brought free markets but an unfree society.

The founding principle of socialism, on the other hand, was defiance. Originally, it was based on the need for labour to organise against capital owners. Only together could workers defy their bosses to achieve a fairer distribution of economic gains. Socialists pressed for higher wages through strong unions and introduced state-sponsored social benefits for the working class, funded by taxes on companies and wealthy individuals. Trade barriers were erected to protect workers from foreign competitors that achieved unfair advantages by paying their workers lower wages.

And yet, socialists soon found out that they also needed support in the well-educated layers of society in order to govern effectively. Thus social liberalism was born. Intellectuals who travelled the world realised that no nation was really ‘better’ than any other, rejecting conservative claims of national superiority. Exposed to various faiths, they concluded that every religion was equally fictitious. Free from material concerns, they were not worried by economic redistribution, but they rejected social conservatism in favour of an open-minded approach. Sex and drugs and rock’n’roll did the rest.

Consequently, socialism led to unfree markets but a (relatively) free society.

 

BREAKING WAVES

A wave-like pattern materialised in Western countries, driven by variations in productivity growth—the driving engine of the economy. It started with capital owners investing in new machinery and landlords building new houses. New capital boosted productivity and revenues, benefiting capital owners disproportionally. After a while, the working masses felt cheated against. They voted the left into office, securing higher wages and more generous social benefits. The higher taxes required to finance those provided a disincentive for capital owners to invest. Productivity sagged when factories and houses were left to rot. Countries descended into malaise and workers got laid off. As a result, they voted the right back into power to “fix” things. Lower taxes and economic deregulation laid the foundation for the next wave of investment and productivity growth. The cycle started anew.

But then came globalisation and digitisation, disrupting the unnatural alliances of the conservative as well as the socialist camp. So…how exactly did that happen?

During the 1990s, globalisation reshuffled global value chains by shifting mass production (mostly) to China and office services (mostly) to India. The wages of Western factory and office workers came under pressure, angering the core clientele of the left.

Western economies didn’t crash, however. They supplanted lost manufacturing value-add with high-tech products and complex services that could be provided by fewer, but more qualified staff. Since many Western workers were not trained to provide those, immigration laws were relaxed to attract highly skilled foreigners. However, this was (mostly) done in a manner that also allowed lower skilled foreigners to enter, putting additional pressure on the wages of Western cleaners, waiters, bartenders and other low-skilled professionals. Productivity rose, but it solely benefited capital owners.

 

POPULISM

The relative decline of the socialist clientele allowed populists to sweep the low-income segment, which had lost faith in socialists to protect wages and in conservatives to protect national identities. Similar to 1930s national socialism, populists ran a programme that combined conservative and socialist elements: conservative on closed borders to protect from immigration as well as from an erosion of traditional values; socialist on closed borders to protect from economic globalisation and free trade to prevent wages from going down further. Its philosophical simplicity proved hugely popular with older, less educated voters.

On the other hand, open borders were appreciated by a new generation of voters, such as those who had enjoyed higher education and seen various countries such as during the Erasmus programme. It offered them access to a global network of opportunities that would never have been available to them without open borders and open markets.

The arrival digitisation escalated this trend but with a crucial twist. Suddenly, skill meant everything and capital meant nothing. Fully globalised by nature, digitisation allowed Silicon Valley garage firms to devour entire categories: retail (amazon), TV (netflix), advertising (google), phones (apple), transport (uber), hospitality (airbnb), news (facebook). Next will be banks (revolut) and health (calico)

The dominance of Silicon Valley bred a new upper class, which wants no part of the conservative values of the traditional capitalists it swept away. The economic battle turned from “the haves vs the have-nots” to “the know-hows vs the no-clues”. Suddenly, avowed free market capitalists in retail and publishing clamoured for state intervention to keep out digital attackers. Not all of them are as determined as Siemens, for example, which is selling most of its business units but the “digital factory” or SAP, which has cloudified most of its traditional enterprise software business.

On a societal level, it’s a new generation of well-educated, younger workers, who appreciate digitisation not only as consumers but also proactively shape the trend with a skill set that is lacked by older, less savvy voters. Not only do the youngsters want a liberal society but also open borders across which to travel, trade, and even settle. They are today’s equivalent of the student movement of the 1960s.

 

NINETY DEGREE SHIFT

As a result, conservative and socialist voter camps have completely realigned in a ninety-degree shift of the entire political spectrum.

It is no longer the “blue corner” (conservatives and christian democrats) vs the “red corner” (socialists and social democrats).

It is now the “orange corner” (open model) vs the “violet corner” (closed model).

The former unites socially progressive intellectuals with skilled entrepreneurs and plucky immigrants aiming to disrupt the status quo in business and society. The latter contains displaced factory and office workers deploring their loss of national identity together with fallen titans of industry that have waited too long to transform. Orange stands for open borders, open markets, innovation, individual responsibility, free trade, tolerance and an international outlook. Violet stands for closed borders, closed minds, trade wars, collectivism, nativism, religious zealousness, intolerance and bigotry.

It’s a free society and a free economy (the orange model) versus a restricted society and a restricted economy (the violet model)

Times may be confusing for voters that are mentally stuck in the left-right rigidities of the past. For avowed conservatives it’s hard to imagine how free-market economics mix with open borders for immigrants, although this is a much more consistent philosophy from the one they hold. For old-line socialists, it’s difficult to accept that a more tolerant society is not ushered in by a redistributive nanny state, but by digital innovation.

Politicians like Merkel, Macron, Rutte and Rivera have confused mentally rigid voters by refusing to adhere to traditional left-right dichotomy, when in fact their political philosophy is much more consistent than either the left or the right. They are simply living the open model, and their success is based on implementing it effectively.

 

THE ENDGAME

So who will win the epic battle that saw the 2016 populist victories of Trump and Brexit but also the 2017 counter-revolution of Macron and Rutte? The answer, again, lies in the crucial factor of productivity.

The post-financial crisis period from 2008 to 2016 was marked by the worst productivity growth since the 1800s with stagnant wages that allowed populists to prosper. Gross fixed capital formation fell to all time lows, putting a brake on economic development. A sentiment of stagnation—even decay—gripped some of the less well connected areas in Eastern Germany, Eastern France or Northern England, especially when the remaining economic spoils had to be divided with immigrants.

However, productivity growth picked up again in 2017 driven by digital innovation and a renewed propensity to invest. The remaining question is how quickly this will pick up to let a broader population partake in the upswing. Because once a country is stuck with the closed model (such as Britain’s Brexit), it will take decades to undo the damage from severed trade ties and revoked multinational agreements.

But it’s only a question of time for the orange corner to prevail. Its victory is assured by its exclusive grasp of the twin engines of today’s prosperity: globalisation and digitisation. Just as capitalism swept the world after the onset of the industrial revolution, the open model will conquer region after region, leaving those covered by the dust of oblivion who fail to adopt it. 

 

THE FUTURE IS ORANGE

The only question is how long it will take for the violet interregnum to fade and orange to take over. Optimists point to the 2020 as the moment to defeat the closed model at U.S. ballots by ousting a disgraced President Trump and potentially even roll back Brexit. 

2020 also happens to be the Chinese Year of the Rat—a plucky, nimble animal that has a knack for finding its way into enclosed spaces.

 

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