What Did I Learn? 3/27
We should ask this question more often
Russia may be an energy superpower but Taiwan is a semiconductor superpower, and semiconductors are harder to replace than oil. Therein lies a critical insight about the emerging Cold War between Russia and China on one side and the West—the U.S. and its democratic allies—on the other. This Cold War will be much more of an economic contest than the first, and the balance of economic power favors the U.S. and its allies. And it’s not even close.
So the lesson of the Ukraine war is. . .the more advanced economic power wins? I do not see that as a solid deduction.
People seem to have a hard time opening their minds when a novel event takes place. In the aftermath of the 2008 financial crisis, I was dismayed by how many economists and pundits wrote commentaries to the effect that “this shows that my pet economic theory is even more right than I had realized.” There were far fewer who admitted that they were puzzled by what took place, so that they were in the process of revising their theories and assumptions.
In my case, I had assumed that “franchise value” was an important element in decisions by large financial institutions. If you were the CEO of Freddie Mac or Fannie Mae, the value of your firm as an ongoing concern was really high, and that should have been uppermost in your mind. Even though you might be able to squeeze out a little more profit by taking on more risk, you would be loathe to do so. I was convinced that fallout from the collapse of the housing boom in 2006-2007 would only take down inexperienced, fringe players in the mortgage industry —not Freddie or Fannie. It turned out that the mortgage giants had taken on many more low-quality loans than I would have expected. I had to reduce my emphasis on franchise value as an influence on executive behavior. I started to put more emphasis on the Suits vs. Geeks divide.
Also, before the crisis, the possible adverse uses of financial innovations were not uppermost in my mind. Yes, they might be used to exploit rigidity in regulatory rules or accounting rules. But I thought that financial innovation was basically a good thing, and it ought to be encouraged. One lesson I drew from the crisis is that the potential adverse effects of innovation in finance deserve more attention.
If every event, no matter how unexpected, increases your confidence in your model of the world, then chances are that you operate in what Julia Galef calls Soldier Mindset, defending your opinions against any perceived threats. If you were operating in Scout Mindset, then you would approach a novel event by asking. “What did I Learn?”
Many experts were surprised that Russia invaded Ukraine. What did they learn that will change the way they view the world going forward?
Even more experts were surprised by the failure of the Russian military to win a swift, decisive victory. What did they learn?
Again, it seems to me that one thing we did not learn is that what matters in international conflict is GDP. Perhaps the Russian advantage in GDP was offset by western aid, although I think this is unlikely. Perhaps it was offset by our sanctions, but this is even more unlikely—economic sanctions could not have affected war capability so quickly.
It is more probable that we learned something about information warfare, including propaganda. It is probable that we learned something about the effect of morale. It is probable that we learned something about the relative capabilities of tanks and anti-tank weapons. It is probable that we learned something about offensive and defensive tactics in the 21st century. It is probable that we learned something about military weakness in a kleptocracy.
We should be asking ourselves about the psychological effect of nuclear weapons in the hands of an unpredictable autocratic regime. That could turn out to be by far the most important lesson to get our arms around. And I, for one, do not know what to make of it.
But I would wait a few years, until the outcome has become clearer, before reaching any conclusions. I am reading a lot about how the war has bolstered western unity and dampened populist sentiment. I see this coming from the same social media and establishment media that told me that the Hunter Biden laptop story was disinformation. Again, I would wait before drawing any conclusions.
Am I stuck in soldier mindset if I stress my 'folk priors,' which find ample confirmation in the Russia-Ukraine crisis, and which remain crucial takeaways? See my list, below. I trust that readers can readily supply illustrations from the concrete history of the crisis.
a) It's complicated.
b) Most people don't think it's complicated.
c) Competition among States raises the stakes and intensity of decision-making under uncertainty.
d) The great man theory of history is half right.
e) History is the result of human action, not any human design.
f) Statesmen are prone to illusion of control.
g) Statesmen often overestimate the rationality of their enemies.
h) Statesmen often underestimate the rationality of their enemies.
i) Politics is about status.
j) People care a lot about status.
k) It's very risky to poke a bear.
l) Consensus about red lines is elusive in the shadow and crucible of war.
m) What is unthinkable today can become righteous tomorrow.
n) It's hard to see through the fog of war.
o) Social desirability bias compounds the fog of war.
p) War is hell.
One thing I think I learned is that Russia isn’t particularly important economically.
Everyone at the company I work for was concerned about the impact of the sanctions, but when we looked at the numbers, we found that our revenue from Russia was trivial… and “trivial” might overstate it. The complexity and risk of navigating the sanctions regime, and the challenges of getting money out of the country given the financial industry sanctions, were much greater than simply cutting off all sales to Russia. This was surprising. I suspect everyone realizing “selling to Russia isn’t worth the hassle” is why you saw so many western companies simply stopping sales to Russia.
In contrast, I spent a good bit of time over the prior year trying to get trade licenses to sell to Huawei. Huawei was much more important economically than the entire country of Russia. By a lot.
Perhaps a corollary is that Russia seems more dependent on its energy exports than Europe is dependent on importing energy from Russia. I had thought Russia’s ability to cut off energy supplies to Europe was going to be an “Ace up Russia’s sleeve”. But it doesn’t seem to be playing out that way.
Given the above, I think people (myself included) need to be more thoughtful about what lessons we export from Russia to China. The interdependency of the Western and Chinese economies is enormous, even setting aside semiconductors and Taiwan. The consequences of a similar dust up with the Chinese would be extremely different than what we’ve seen here.