Economics can become overly complex subject with esoteric mathematics and charts that subterfuge the underlying fundamentals. I think this is sometimes done on purpose to make the plebs to fall in line with mumble about macroeconomic factors and sometimes it is done in good faith to create greater understanding about hugely complex phenomena. Still the basic pillars to understand the tectonic shifts in societies will become easier to understand and to see what the future will hold, if you understand these four pillars that carry the brunt of our economic activities: Demography, Geography, Institutions and Trust.
Demography: It’s about people
You might have heard about the retirement time bomb. That after the second world war lots of people had lots of babies and after that the amount has dwindled to sub recurrence rate of population. This mean that in most countries population will start to shrink. In the west this is already beginning and in the the developing world this will still take some decades. Of course there are still countries with reproduction rates above the recurrence rate (2,1 child / woman).
So if you were wondering why Russia attacked now, it was basically because soon they can’t field an army big enough to get the job done.
Demography is the most prevalent factor in economics. If you have lots of young people then you will have lots of industrious hands that you can utilize to get shi… stuff done. Now you might think that why isn’t all the developing countries then rolling in cash since they have the most young people? Well this just mean they have the potential to grow – and grow they do, but the starting level is still very low.
The world is growing grayer by the day and no where is this more acute than in Russia. It is one of the most rapidly aging countries in the planet! This is mainly due to low birthrates, especially in the 90s´, pretty high mortality rates even among young people and negative net immigration. Russia is losing one citizen every 30 seconds and with the current Ukrainian war that number is getting even faster since some young men are dying, but even bigger factor is the exodus of the most able minds and bodies from the failing state.
You can see a big dent on the blue side of the graph (see big arrow). After the collapse of the Soviet Union there was a huge drop in fertility rates in Russia. Turn the ahead clock for twenty years and you can see that Russia is running out of young people, especially men that could serve as soldiers. So if you were wondering why Russia attacked now, it was basically because soon they can’t field an army big enough to get the job done. Though at the moment it does seem their corrupted military isn’t doing too well anyway (see Institutions).
We’re not running out of people. We’re running out of young people! Soon there will be a droves of silver foxes and cougars searching for the nearest bingo parlor and not too many young people to run those places. Young people are the driving force of any economy and without them it will be a slow (or as in Russia’s case fast) decline to oblivion.
Geography: Land & Sea
People often disregard the importance of geography in economics. It’s like we don’t need arable land, resources, sea ports, rivers, defensive elements like mountains or oceans and many more features that the land under our feet provides us. We become blind to the obvious so it loses it’s meaning in our calculations about how the worlds works.
And this is where we come to the crux of the current clusterfuck we have landed – Russia is a very hard country to defend!
The land provides the basics of any economy to get started. What kind of features and bugs does it hold? How self sufficient can the country be with just the resources within the country’s perimeter? For example the United States have almost the perfect geography for a nation. Lots of resources, like minerals, arable land and energy – check. Two easily defensible moats (oceans) in both sides – check. Two militarily minuscule neighbours in north and south – check. Big rivers and lakes to transport stuff around – well this is ok considering how big the place is. So the US can be quite isolationist if it want’s to be because it can produce most stuff without the help of its international partners.
Geography is the best and worst part of Russia’s economic equation. Let’s start with the positives. Russia has huge reserves of minerals, energy, arable land, forest and you name it. Russia is also connected to four different seas / oceans spanning from Saint Petersburg in the Baltic Sea to Vladivostok in the Pacific Ocean. In South it spans from Novorossiysk in the Black Sea to Murmansk in the Nordic Ice Sea. Though only one of these sea ports is a warm water port open all year round.
Then we turn to the negatives. As you see Russia is pretty big. The distances between places are so vast that it makes governing, mining, defending and almost everything very hard. Most of the country is so sparsely populated that you can’t utilize most of the resources in remote locations because there is no infrastructure nor people to uphold any industrial endeavours. And this is where we come to the crux of the current clusterfuck we have landed – Russia is a very hard country to defend!
Mr. Fukuyama was wrong: history didn’t end, it just took a nap.
You might think that this is ludicrous! Every major army in last centuries that tried to invade Russia has failed miserably. The Swedes, Napoleon and Hitler threw strong armies at Russia and they all were vanquished! Well most nations would have taken those wars and considered them lost, since the amount of land destroyed and people killed were staggering, but not the Russians! They consider each and every one of them a victory. Well anyway the point stands – Russia is very hard to defend. Considering the huge landmass it entails there are huge gaps that need to be plugged to defend the country.
As you can see the Russian heartlands are quite near to its European neighbours. Here you can see that if Ukraine would join Nato, then Nato forces could throw rocks to Russian industrial and agricultural centers. They deem this as a existential threat and act accordingly. Since the fall of the Soviet Union, Russia has had to defend a gap 2000 km in width and very flat terrain (tanks go brrrrrrr) in their western border which has taken quite the toll in man power and economic resources. The Russian military budget has been a whopping 4 % of GDP and probably will increase quite a lot in the upcoming months since their GDP is falling and military expenditures are rising.
There are seven main gaps that would help in the defense on Russia. The Soviet Union held all of them and Russia held only the northern gap from the White sea. After 2014 annexation of Crimea Russia plugged the second gap and now they’re on their way west to plug the rest of them before they run out of young men and capability to do so.
Russia is a empire in its death throes. The eastern parts will probably be taken by Chinese migrants and after the West has completed its green transition and oil and gas wont be as valuable as they are today it will diminish Russias main revenue streams and its strength to hold on what ever is left.
Institutions: Man vs. Machine
In their book “Why Nations Fail” Daron Acemogly and James Robinson came to the conclusion that nations that have strong inclusive institutions would be more resilient to turmoils of history. Nations with weak and exclusive / extractive institutions would become failed states more easily from inside coups or outside influence since the population wouldn’t have any incentive to defend the ruling class which mainly just extracted value from them. Most countries like this would just become kleptocracies no matter who would be on top since the system would perpetuate the enslavement of the masses.
Why work when you wouldn’t benefit from it?
Institutions are the backbone of the “system”. You might want to think about democracies and its core idea: the separation of three distinct powers – legislative, executive and judiciary – into different branches to create checks and balances so that no one institution nor one man could exert his will on the society. When you read or hear that judges or members of parliament are being harassed, their powers diminished or they are incarcerated lets say by the president (krhm Poland, Hungary, Turkey, etc…) you should be worried. This of course usually starts from softer target, like journalists, and then moves on to harder targets like judges, MPs and generals.
Institutions create the stable conditions that economic actors really, really like! Think about Switzerland. Why is it so goddamn prosperous? Is it because of the chocolate and cuckoo-clocks? No, it’s because it’s so stable and reliable that everybody trust their money with them. When thinking about economic incentives you can’t overemphasize how precious stability is to investors, business owners and other actors in a world filled with turbulence and instability. These kinds of safe havens are far and apart.
Now turn your gaze towards east and behold a giant with defunct institutions. I don’t really know where to start my assessment of Russian institutions since none of them seem all that functional. The whole system from top to bottom seem to be corrupt to boot. One of the most important features of a well functioning economy is the right to own property and the laws that defend that right. Countries that have a poor record of this have really hard time incentivising its citizens since any strong man could just swoop in and steal your hard earned wealth. This is one the main reasons why technical innovation and its adaption has been so slow most of history. Why work when you wouldn’t benefit from it?
The Russian system is a hierarchical kleptocracy. Depending of which rung of the ladder you are in this mafia organization, dictates how much you can steal and from who. Of course Mr. Putin is capo di tutti in this perversion of democracy that they claim they are.
Russians never really got their act together after the fall of the Soviet Union. Most of its former satellite countries have made strides towards more inclusive democracies and therefore more economic stability and growth, but Russia has been mostly degenerating for the past decade. There were hope that Russia might make the leap towards democracy in the early 2000s’, but now those dreams just seem naive and sad. Mr. Fukuyama was wrong: history didn’t end, it just took a nap.
Trust: The oil of economics
In God we trust – everyone else pays cash. That has been the mantra all through history. Ever since the inception of capitalism and banking Trust has become more widely distributed commodity. With more than a few hiccups along the way (some world wars, economical crashes and country defaults) the Game has changed from zero sum power games to win-win game that actually can generate additional value to all members of the game. Even if you wouldn’t participate in any economic transactions you would still benefit through taxes, infrastructure, technological innovation, improved healthcare, etc… The benefits have been countless!
Trust is the oil that lubricates the wheels of any economy. The more we have Trust, the more it decreases transaction costs. If we have high amounts of Trust we can trust that people will hold their end of an agreement even without anything in writing (yes this happens a lot in Finland). The less Trust we have the more safety measures we need to deploy to make sure that all the participants will hold on to their end of the agreement. The East India company had an armada of warships for this. The US corps have an armada of lawyers for this. The Russian federation has 4400 nuclear warheads for this. Us Finns mostly have a naive trust that the other fellow wont screw us over and somehow most of the times it works. Trust is a beautiful, but a fragile thing.
Trust is like a ledger, one of those blockchain-thingies, that all transactions with in a system are recorded. Personal transactions will become your fame. General transactions, that other people do within a system, will become the culture of business. If you hold true to your word you will be trusted. If most people will hold true to their word then the culture will generate Trust surplus. If some people transgress against the goodwill of others and they are punished, only a little Trust is lost. If those transgressions are not punished a lot of Trust will be lost. This is why it is of utmost importance to have proper institutions in place to root all kinds of transgressions against degradation of Trust. No matter who is the transgressor, even if they’re rich or powerful.
The border between Finland and Russia has had one the biggest GDP / person gaps in the world. Finland has been historically very, very poor country. 160 years ago 8 % population starved to dead. Then we got rid of one thing and have become one of the most affluent peoples in history. That one thing was Russia.
Russians generally think Finns are quite naive, since were so trusting. In Finnish thinking a thing is either right or false. In Russian thinking there are more shades in truth and even multiple words for “truth”. Some of which actually mean “tactical lies”.
“Every lie we tell incurs a debt to the truth. Sooner or later that debt is paid.”
Valeri Legasov, The leader of the investigation of the Chernobyl disaster
Lies and untruths are poison to economic prosperity. Unluckily it’s one of Russia’s main exports. It is very hard to do business with people that you don’t trust. People have very shallow understanding of what the concept of Risk means. When I was in university we had a class about risk management and we talked about country risks and Russia especially. The professor had different numbers on different countries. They were additional risk premiums that you would have to get in order to borrow money, invest, etc in different countries. This is where risks actually bites you in the butt. People think history as a linear sequence of events. They have hard time considering discontinuation points. A lot of times nothing happens. Then there are the hours, days and weeks when everything happen and we move into a new reality. Paradigms shift. All of your investments can be viewed as nothing but reckless gambles. This is why stability is so great – it diminishes the probability of these kinds of shifts and softens the edges of those black swans that do happen. So that instead of a cataclysm you’re burdened with inconveniences and a bit longer work day.
The economic equation: It’s not either / or its the sum
So here we are: Looking at the pillars that hold economies in place. The one were peering at the moment seems to have flag that has three colors for the three pillars that are still there:
White Pillar is for Geography which has it’s strengths and weaknesses.
Blue Pillar is for Institutions which are drowning in that cold, bitter sea of delusion and power hungry games.
The Red Pillar for the Demography which is dying in droves in the fields or Ukraine.
The Non-existent Pillar is for Trust since there isn’t any left. Not within the country nor internationally.
The economic, value adding game that we have become accustomed to play is a great game. A lot better that the old Power Game. Just make sure that the foundation is is order and you can build a great hall on top of them. Neglect them at your own peril!
thetuomas 