This report will argue three points:
- Bubbles are not anomalies or mistakes. They are an unavoidable feature of markets where investors with different goals compete on the same field. They would occur even if everyone was a financial saint.
- Bubbles have less to do with rising valuations and more to do with shrinking time horizons among people playing a different game than you are.
- Protecting yourself as an investor is mostly a function of understanding and acting upon your own time horizon, accepting that other people’s goals are different than your own.
The instability hypothesis basically goes like this:
- When an economy is stable, people get optimistic.
- When people get optimistic, they go into ever increasing amounts of debt.
- When they pile on debt, the economy becomes unstable. Minsky’s big idea was that stability is destabilizing. A lack of recessions plants the seeds of the next recession. Which is why we can never get rid of them.
- Of course small h ‘history’ continues after the End of History, but Fukuyama is actually fairly pessimistic about what happens next. He suggests that, although we have had great progress in creating more productive, egalitarian societies in the past millennium, imperfect liberal democratic capitalism is the least inherently contradictory form of society possible by human nature. He suggests that from this point in time forward, a series of forces will move us away from and back towards this political equilibrium. (Hegel believed this about 19c Prussia, so it is still an arguable thesis- just not the strawman it’s usually painted as.)
- Fukuyama frequently returns to the concept of thymos [basically, ‘pride’, the need for recognition and respect] in human society. He thinks that in its own twisted way, late capitalist modernity is relatively good at capping and directing this human drive towards productive (or at least less destructive) ends. If some people do not feel appropriately respected or engaged, they will resort to breaking things and pushing society back ‘down into History’, i.e. creating more inherently contradictory and less rational societies.
- Humans don’t just exhibit thymos, but also ‘megalothymia‘: “a desire not just for respect and proportionate recognition, but a need to disproportionately dominate over others in ostentatious and spectacular ways.” This is the driver, he thinks, behind empires, great art, and also obviously vicious and oppressive events.In the early 90’s, when he expanded his essay into a book, Fukuyama decided to use a pop culture reference as an exhibit of megalothymia in the empty future of the Last Man. He namedrops Donald Trump.
- “The Last Man”: This part of the title is a Nietzsche reference. After the death of God, there is no replacement, and [article:] “The vast majority of modern human beings would now be small-minded, stunted, pathetic creatures, possessing no sense of how to achieve greatness, only of how to accrue petty comforts and easy pleasures in a materialistic, self-obsessed world. In other words, if megalothymia went out of human life, so would greatness. Only base mediocrity would remain.”
- The Last Men at the end of history can either lay about in the sun like dogs, or (as Fukuyama believed) become hungry for megalothymia that was denied to them in the egalitarian abundance. They’d want to try to climb to a new (nonexistent) plateau in history. Especially those who used to be at the top of the social hierarchy and now feel cheated. Since the Far Left (as Fukuyama saw it) was discredited, the biggest threat would come from the right, “relying on human impulses for mastery and domination that the hollow comforts of consumer capitalism could not hope to appease.”
Even here, I don’t read irrationality into the games we play at the end of Fukuyama’s cultural evolution towards liberal democracy. The values that push us away from his proposed equilibrium are common human values. People pursuing their interests and seeking higher ground in the fitness landscape will cause pain in pursuit of a better life. In Cowen’s framing, Ages of Complacency sow the seeds of Ages of Dynamism. In Howe and Strauss’ framing, each subsequent generation responds to the problems and blindnesses of their age and move the pendulum back between building, sustaining, and deconstructing institutions.
Idiots exist, but idiots are not necessary.