In many, if not most areas of life and business (including (re)insurance) there are certain constructs or approaches that are considered axiomatic or fundamental. They can appear in many guises- the inevitability of business cycles, the superiority of democracy or capitalism, and the need to manage aggregates.
However, sometimes it pays to re-examine and re-assess what amounts to a paradigm, in case something has changed.
For example, those familiar with Marx and Das Kapital (published in 1867), will recognize the paradigm of the 3 factors of production- land, labour and capital, with much of the resulting argument being not about the components, but about their relative importance, and which one should or must dominate.
However, as Louis-Vincent Gave (of Gavekal Research) recently posited (in an excellent note entitled The Knowledge Revolution and its Consequences), a fourth factor must now be added- knowledge. One could argue that knowledge has always been important, even if not specifically delineated as a factor. However, as Gave emphasizes, real power now belongs to those who can best organize knowledge: the accumulation of capital thus being a derivative. “Knowledge is Power” (attributed both to Sir Francis Bacon and to Imam Ali) encapsulates the point.
Historically, the possession of knowledge was tightly and deliberately controlled- confined to those (almost invariably males) who were literate and had received a formal education- a prior form of extreme inequality. Power depended upon controlling the levers of taxation and coercion through violence or the threat of it.
Now, of course, mass education and the fruits of information technology have expanded access to knowledge to levels where the paradigm has seemingly shifted to a model based on essentially universal access in most of the world.
Yet, diffusion of knowledge is not the same as diffusion of the understanding of it; nor of how and by whom it should and can best be used. “Should” may be contentious, but (as Alexander Pope said) “a little learning is a dangerous thing”.
What if, as a result, the diffusion of knowledge has caused the economic paradigm to shift, but the political superstructures have yet adapted? Possession of or access to knowledge changes the expectations of those who were hitherto less able to make comparisons or exert influence; and one only has to look around the world to see the increasing tensions between citizens and governments.
For a risk manager, all this begs the question of whether it remains reasonable to assume the medium- to long-term continuation of the nation state in something resembling its current form as the basic unit of government, ruled in a hierarchical manner (whether autocratically or democratically). Given the increasing fiscal and budgetary strains that result from demographics, longevity and at least a perception of an increase in inequality even in the face of the above-mentioned rise in expectations, it is a question worth considering.
Logically, something has to give. Will it be the economic or the political side of the equation, or both? Smoothly and predictably, or violently? Just because relative peace has been maintained, in most developed countries at least, since the end of World War II, that does not mean it is rational to project such an underlying premise far into the future.
Of course, it is easy to dismiss such thinking as absurd. Yet, no economic or political system is immutable; and we are really only starting to grapple with the consequences of the diffusion of and access to knowledge.
At Awbury, this is just one factor in the scenarios that we ponder when trying to understand the macro and idiosyncratic risks posed by any of the large, complex transactions on which our franchise is built. We believe in taking the long view!
The Awbury Team