Bretton Woods, Mont Pèlerin and Safety
You cannot connect the dots looking forward, you can only connect them looking backwards
In the book Homecoming, author Rana Foroohar ends the chapter on Exorbitant privilege, exorbitant burden with the ominous warning by the economist John Maynard Keynes “by giving the dollar too much power in the new financial system, policy makers would ultimately be sowing the seeds of global dysfunction.”
The throughline associated with notional economic prosperity in the past half a century is the line of Financialization1. There was a realization that when you distill everything of value down to an asset and a liability, it leads to a creation of a framework that allows for relentless optimization. And as with all optimization algorithms, you need an objective function that is mapped into a unit that is universal - and it was currency, and thanks to what some creative thinking at the Bretton Woods conference, which Valéry Giscard d'Estaing, the French finance minister once called an exhorbitant privilege - The dollar.
So what does the dollar have to do with safety? and how is all of that connected to the idealogy of free markets that originated in the in Mont Pèlerin on the banks of Lake Geneva?
Fundamentally, it slowly but surely led to the realization that when you mate the idea of financial value to free markets, you end up with the idea of capital that is almost effortlessly fungible - translation - the goal is to move money as efficiently as possible so that it can make more money & as it should be with all private enterprise, the goal is to always allocate capital to opportunities that maximize the growth of this capital.
So how does this attribute of a world of fungible capital get mapped to the real world which consists of people who want things, to make their lives better?
The relentless march towards efficiency, primarily cost efficiency led to an unprecedented development of highly productive industrialization which relied on scale, centralization, and arguably the ability to transfer risk under the cover of free trade.
The abstraction of risk transfer becomes very real when it meets the world of industrial production and manufacturing technologies, and starts the creation of the modern supply chain, which acts as a grease to allow for production to be centralized, to achieve scale and be co-located in places, where the risk for capital is minimized.
Interestingly, the minimization of risk for capital does not automatically lead to safer systems to protect the investments of capital, but rather it leads to the development of constraints on the downside with a complex web of limiting liability, using what can only be seen as an incredible victory for policy & legal engineering.
As this transformation was happening, we also saw an interesting seemingly aleatory development, whereby the rising environmental movements post the second world war, combined with an increased awareness of issues around pollution, and focus on quality of life, served as a boon for furthering this risk transfer model.
The direction of risk transfer was generally opposite the direction of movement of goods, and it led to the development of a world where consumption & production started to separate both at a global level & for that matter even at a local level.
Farm to Table was no match for the efficiency of raising livestock, and growing feed at scale thousands of miles away & delivery it at pennies on the dollar through a remarkable level of efficiency (The greenhouse gases, and consequences of industrial farming apart).
If we stay agnostic to every other aspect of this system, and follow the dots from this finanicialization juggernaut - what was the result? Did it work?
Well, if we mapped it in our original unit of optimization (the US dollar) - this result seems clear (look below for what industrial efficiency does to the gross domestic product)
Now, what was the cost of the risk transfer? Well plain & simple - it is safety.
Risk transfer is not risk mitigation.
In what can only be described as out of sight, out of mind, the decentralization of consumption & the centralization of production has abstracted away the practices & the individualization of just about every product we purchase.
Although it might seem as a gross approximation, the general trend of migrating production to places with limited regulatory oversight & lower cost can be seen as a proxy for the ability of capital to generate more capital, by cutting down those pesky expenses for safety - and mostly the safety of the involuntary stakeholder (pretty much everyone except for the profit seeking shareholder).
So, why does the system work? Well, it helps to have a world with extreme levels of economic inequality since the ability to feed oneself and have a livable quality of life, acts as a pretty heavy thumb on the scale of risk perception, and makes it saleable to accept what can objectively be seen as a higher risk choice in a part of a world with people of means, as compared to a population with a lack of access to the same quality of life.
The moral of the story here is fairly simple - we cannot disconnect or for that matter discount the direct impact of economics - money on safety. Engineers work & build things within the constraints imposed by Nature (physics) & People (regulations) but only one of these are available to be changed for better or worse.
The ideology & systems that originated in the conferences of Bretton Woods and Mont Pèlerin have culminated to what is a system of effective risk transfer, though it seems to prioritize capital over people…and the question to you, to us, to all of us, is what are we going to do about it?
To read more of Pranav ‘s writing look at the scholar profile or website.
Financialization is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes. Financialization transforms the functioning of economic systems at both the macro and micro levels (https://www.levyinstitute.org/pubs/wp_525.pdf)