Law as Collective Agreement: A Civilizational Strategy

Studying the systems of law originating in the British Isles in their ancient, medieval, pre-modern and modern forms, an odd consistency of approach seems to emerge, in contrast with most other European systems.  That approach is the compact, the collective agreement of one part of society with another.  It reappears with strange consistency from the earliest recorded laws to the present day.

The Brehon laws of ancient Ireland, which were remarkable in many ways for their humanity and moderation in an era characterised elsewhere in Europe by capital punishment for the most trivial of crimes and judicial procedure based upon the ordeal, operated entirely on this principle.  When Ireland had High Kings, they would call a feis or gathering of all the educated people and leaders of the country every three years to discuss matters of law.  The promulgation of laws was not a monopoly of kings; in order to pass a law, the king had to call together a council of at least nine people of particular stations, including a teacher of law, a teacher of history, a bard, clergymen and so on.  The king himself was bound by certain specific laws.  The laws themselves were essentially the product of and guide to the negotiations of the different parts of society with each other, each part having certain rights. 

That this process of negotiation was ongoing can be seen in the advancement of women’s rights in recorded laws.  Despite a low status in the earlier law tracts, by the late "Dark Ages," Irish women were the freest in Europe, able to divorce as well as to own, accumulate and transmit property.  The very legal process itself took on the aspect of a negotiation mediated by the jurist, and the consequences for even serious crimes were often shockingly lenient in modern eyes.  The process of negotiation within the society over time leant the Irish laws a remarkable humanity, mirrored in the other Celtic law systems for which we have evidence, and arguably in the Anglo-Saxon laws of Alfred the Great, who, likely due to centuries of Irish missionising, seems to have adopted many similar legal concepts. 

The laws of Norman England were by far the darkest in British history, reverting to trial by ordeal, not to mention hanging for offenses ranging from adultery to petty theft to killing the King’s game.  The nobility and the Church had their own courts, and the power of life and death over their serfs.  Of the legal systems in play, the king’s law was, for the average person, perhaps the least significant.

Rivalry between kings and nobles led to the collective agreement (soon broken) known as Magna Carta, and later to a particularly interesting rebellion led Simon de Montfort, Earl of Leicester.  Simon, whose anniversary of death was this past week, was responsible the first directly-elected Parliament, also the first which had substantial rights of government and in which commoners had a substantial role, and was one of the first pioneers of democracy in England.  Simon was one of the first to see beyond the rights of his own class and to try for a constitution beneficial to the nation writ large.

It was around this time (the 13th Century) that the English monarchy smartened up.  Royal law had enjoyed minimal presence in the Shires, and to lend it credibility, the idea of indictment, and later trial, by a jury of freemen was introduced.  The former kind of jury seems to have been a significant influence on the abandonment of the ordeal system, and there are records of accused persons throwing themselves "on the verdict of the country" before the trial jury was introduced.  The free farmers and the burgers of the growing charter boroughs, the minority of the non-noble population directly affected by the King’s law, would henceforth be judged firstly by the fair mind of the community (your mileage may vary) and secondly by the distillation of the fair mind of the law (ditto), embodied in the precedents of the Common Law.  The power of the jury was of great help to the non-noble classes in resisting the nobility on certain points, such as the noble monopoly on game.  A jury composed of poachers and those sympathetic to poachers was unlikely to uphold an unfair noble privilege when one of their peers was caught.

The negotiations and arguments around the role of the jury have a fascinating history, (almost every argument made against juries today is at least four hundred years old), with many vicissitudes, but it was in the early modern period, with the disappearance of serfdom, an educated middle class and juries willing and able to defy the letter of the law to preserve the spirit of justice that the jury came into its own.  Notably in the trials of Quakers, juries refused to convict and withstood judicial sanctions including fines and imprisonment for it.  It was this issue which ultimately forced the law to fully recognise the right of jury nullification, which had in practice been occurring since the dawn of the jury trial.  The fair mind of the (property-owning male) community could overturn unjust laws, such as those restricting the freedom of worship.

English history is often read as a process of negotiation between the classes: the king and the nobility, the lower nobility and the higher, the nobility and the middle class, and so on.  The markers of these negotiations- Magna Carta, the English Revolution, the Restoration, the Glorious Revolution, th 19th Century reforms, the extensions of the franchise, each represent a renegotiation of the rights and privileges of particular classes and of the monarchy.  The negotiated nature of law is inherent in the Westminster system, as every written law is a signed agreement between the monarch and the representatives of the people.  In that way, the monarch gradually became the embodiment and guarantor of the constitution, rather than a lawgiver, in a way that gives the whole system an incredible resilience. 

The intervals between the Saxon and Danish invasions, the Norman Conquest in 1066 and the reforms of the 19^th Century in Britain can be read as a gradual amelioration of the legal concepts brought by the invaders, through the extension of the right of collective bargaining to ever-wider portions of society.  It is from this process that our most treasured legal principles, from Habeas Corpus to the presumption of innocence to the right to legal council, gradually emerged. 

Even so, it is striking that until the parliamentary and legal reforms of the 19^th Century and the extensions of the franchise to most of the population, the system seems scarcely recognisable.  Until that time, we see mainly a sort of theatre of justice, quick trials conducted with private prosecution and easily decided by the prejudices of judge and jury, and culminating too often in the spectacle of a public hanging for offenses ranging from the trivial to the unrecognisable.  Only when women and the lower classes were included in the conversation did the law start to become more human and less a system for the defence of the upper-class male and his property, social and sexual rights.

Despite all its disadvantages- a slow learning curve and tendency to periodically forget the lessons of the past- the principle of collective agreement as the basis for law is the irreplaceable foundation of modern democracy.  In place of a lawgiver and a rigid code of penalties policed by force, this ideal places the monarch and the people, the rich and the poor, the state and the citizen, and each section of society with every other, in negotiation and seeks a credible collective arrangement.  The system is admittedly imperfect.  But it does not stand for perfection.  It stands for humanity and legitimacy, and imposes a series of time-tested speed bumps on any one force of state or society running roughshod over any other.  That is why, whenever I read a comment by police or crown lawyers decrying the fact that juries, unlike judges, are not inclined to take police testimony uncritically and are likely to demand a high standard of proof (I can produce studies on both points), I think, “Great!  An example of the system working!”

None of this is to say that the law in the UK, here in Canada or down south in the US is anywhere close to working right.  Trivial offenses fill dockets and prisons while violent criminals are paroled early to make room.  Political priorities and not the safety of the people apportion the resources of the law and the police.  The right to speedy trial is a sick joke, as is the right to effective representation.  Laws are tangled, criminally lengthy and totally inaccessible to the citizen.  The bar and the judiciary are self-selecting interest groups with no interest in cleaning up the situation.  The police in many places are disturbingly occupied with questions of public order and paramilitary training and disturbingly unoccupied with community relations and catching serious criminals, not to mention the training and behaviours of their own officers which too often bring the administration of justice into disrepute.  Corporate and white-collar crime is remarkably unchecked, while small-time street crooks are the focus of every political campaign. 

As we ponder these and other problems, the subjects for the next great renegotiation of the law and the social compact, we the people could do worse than remember this heritage of collective negotiation, its lessons, and the ways in which it empowers us.  The law and the legal system stands or falls on the legitimacy we give it.  If we refuse to put up with the status quo- well, that is what workers and women did in the 19^th Century, the slave-trade abolitionists before that and the jury and its supporters before that.  That is how the social compact and the laws which embody it get renegotiated in a democratic society.

Surface Combatant Role Definition for Middle Power Navies

The purpose of this article is to propose a new distinction in classifications which will be useful to middle power navies in more clearly defining their requirements.

The navies with which this series is primarily concerned operate combatant vessels (for purposes of this article, we will define the latter as missile-capable vessels only) of three general classes.  These are destroyers, frigates, and corvettes or patrol vessels.  The trend has been to blur and confuse these categories, as capabilities of area air defence traditionally associated with destroyers have been incorporated into hulls with frigate classification, and the capability distinction between frigate and destroyer hulls has become economically unsustainable for all but a few navies (the Royal Navy with the Type 42/45 and Type 23/26, Japan, China, India and South Korea are the only nations currently producing or planning to produce both classifications in the future, given that the LCS designs of the United States are insufficiently armed in any configuration to match modern frigate designs and given that the Royal Canadian Navy’s future frigate/destroyer distinction will likely be one of armament rather than hull).  At the same time, corvette and patrol boat classes are in some cases becoming more capable, as with the Scandinavian Skjold and Visby classes and the Russian Steregushchy class.  In any case, many navies continue to see the cost effectiveness of leveraging small, stealthy, fast and heavily-armed small vessels against larger targets (most notably the Chinese Type 022 Houbei class stealth catamarans). 

In order to do this, we must face one of the fundamental contradictions of naval procurement: navies purchase surface combatants for shore support, anti-piracy, anti-terrorist, humanitarian relief, goodwill and littoral roles for which they are both too expensive and manifestly ill-suited.  Navies, like churches, endeavour to show that they are relevant, and carry out such missions in order to gain funding, which is then used to build surface combatants, which go forth and perform Operations Other than War throughout most of their service lives, ad nauseum.  The rationale for not building dedicated ships for such missions is often to keep up numbers of surface combatants.  Because the projected operational requirement for surface combatants is calculated factoring in OOW, however, the requirement becomes inflated artificially and precious funds are dispersed over a larger number of already expensive hulls at the expense of capabilities included in the design. 

 

In order to avoid this situation, it may be advisable for navies to make a clear distinction at the level of operational requirements between operations requiring fully capable surface combatants and those requiring something in the class of the United States’ High Speed Vessels.  The latter concept has much to commend it.  High speed ferries currently in service have proven extremely useful in cheap, rapid deployment of troops, equipment and vehicles, disaster relief and goodwill missions.  In the form of the Sea Fighter prototype, there is potential for such a design, using largely Commercial Off-The-Shelf components, to undertake interdiction, anti-piracy, coastal patrol, shore support and low-risk missions such as coastal ASW and minesweeping, using containerised, removable equipment.  The capabilities of such a ship in humanitarian roles could include conversion into containerised hospital facilities.  As such, and with their greater cargo and transport capacity, they would represent a substantial and significant contribution to a broad range of operations, potentially far in excess of what a surface combatant could provide.  Their military usefulness in transporting and supporting troops is equally clear. 

This absolutely requires that the two major mistakes of the Littoral Combat Ship program not be repeated.  This means that the design should privilege available empty space in the form of a large Ro-Ro deck and helicopter pad/container space above installed systems and/or warship-like appearance, and that there should be absolutely no military requirement creep with regard to the design, materials or installed systems apart from basic anti-missile defence, basic search radar and damage control.  These ships do not need to be stealthy.  If a program incorporating containerised armament and other military-specific features proves too expensive, simply buy an entirely COTS design, remembering that the main purpose of this hull is not to provide military capability, but to alleviate the operational tempo of militarily-capable platforms.  Once again, avoiding feature creep is key to success.

 

This will allow surface combatant requirements, including hull numbers, to be confined to purely military needs.  To reduce costs, all large surface combatants should share a common hull design, making use of modular systems to vary armament and equipment.  Both Area Air Defence capable and non-capable ships would be of the same hull design.  The keys to ensuring sufficient space and flexibility in armament are twofold.  The first is to avoid the main avoidable mistake of every major European surface combatant program in the last decade by including sufficient (and sufficiently flexible) VLS tubes (64 tube minimum- this ensures a good mix of medium and short range SAMs capable of handling at least one saturation missile attack, plus room for anti-ship, ASW and land attack missiles without modification).  There is no flexibility boost greater than a large number of Mk. 41 VLS tubes. 

The second key to flexibility is a flex deck, which is simply a flat surface with the ability to attach containerised weapons, a concept used to great success by the Danish Navy.  The ability to procure a number of hulls and, separately, containerised weapons systems on a Standard Flex- type model and using the inherent versatility of Mk. 41 VLS tubes, would create both savings and flexibility within a program, allowing hulls to be repurposed and allowing hulls and weapons systems to be procured on a flexible schedule.  Given the rapid turnaround time for swapping StanFlex modules, a cash-strapped navy could conceivably swap weapons from ships returning to port to other hulls about to deploy.  The catamaran hull form is ideal for this type of ship, as it provides the abundant surface area which maximises the potential of the modular concept.

 

The third and final type to identify is the corvette/ patrol vessel.  It is well known that the LCS program was heavily inspired by the Scandinavian Skjold and Visby classes.  The absurd cost and lacking armament of the LCS ships result from attempting to turn a concept for fast, extremely sea-worthy and well-armed single or dual purpose corvettes into a combination FFG replacement, Minesweeper replacement, War On Terror and OOW mutant and jack of all trades.  Separating some of these roles into a seperate HSV design is therefore critical.  What makes even more sense is a clear distinction between frigates, corvettes and high-speed vessels, multiple cheap and individually-capable classes being preferable to an expensive hybrid that is designed to do everything. 

Taking the superb Skjold design as a basis, something not much bigger could, by containerising the NSM missile armament (which is conveniently placed aft), substitute basic ASW equipment such as a towed array, sonobuoys, USV and torpedoes (Skjold’s basic characteristics of speed, lateral manoeuvrability, low torpedo vulnerability and low radar cross-section lend themselves to this role, in much the same way that the RCN once contemplated for the hydrofoil Bras d’Or).  Skjold is also a superb craft for littoral covert operations, and may be adaptable to minesweeping (better to have a purpose-built minesweeper, but better a modular capability than none at all).  With its extremely low crew requirements and impressive capabilities, Skjold is a benchmark by which to measure craft of its size, an exceptional solution for any navy looking to rapidly and cheaply boost their capability.

 

This demarcation of roles between Major Surface Combatant, High Speed Vessel and Corvette may seem like a political risk, but it fairly neatly avoids several of the major pitfalls inherent in naval procurement programs today.  Above all, it avoids the distortion of surface combatant roles and the stretching of resources to favour number of surface combatant hulls over the capabilities incorporated, by providing a relatively cheap solution for missions other than naval combat.

Adam Smith, the Wealth Gap and How Wealth Monopolies Are Broken

By the time Adam Smith laid out the reason for the decline of the feudal aristocracy in An Inquiry into the Nature and Causes of the Wealth of Nations, the writing was already on the wall.  Smith was a philosopher and one of the founders of a sub-field of philosophy called Political Economy.  Unlike modern pure economics (a fruit of the 19^th Century craze for applying mathematics to every study of human endeavour), political economy relates social, political, historical, legal and even moral trends (the latter being one of Smith’s particular interests) to economic activity.  Even the word “economy” was then interpreted in a way much closer to the Greek original, meaning roughly the equilibrium or mode of life of the national household, and thus encompassed far more than business.   The distribution of wealth was of particular interest to Smith, as it is to us today.

In Wealth of Nations, Smith puts forth a compelling theory of the change from feudal to modern political economy, and it had to do with freeing captive wealth and dissolving the feudal wealth gap.  In the chaos of the post-Roman world, wealth was the land you could defend and the number of followers who supported you.  In the pervasive violence between nobles, nothing else really mattered.  However, as the skilled artisan class slowly recovered under the protection of emergent national states, the nobility suddenly had an abundance of things to buy.  They began to rent out their previously serf-tended land, or even sell it outright in order to raise capital.  As they sacrificed their former sources of power to support conspicuous consumption and keep up with ever-changing fashion, the nobility in effect transferred their wealth in two kinds to two different classes.  Their money went to the rising artisan class.  Their land went to a rising class of free farmers, who for the first time had an incentive to improve their land and methods of production.

This kind of phenomenon, the disappearance of a wealthy class, has occurred throughout history, beyond Britain and beyond the Enlightenment, often with different details.  Louis XIV dislocated his nobility by giving them court positions and enslaving them to opulent fashions, both of which alienated the rural and urban lower orders.  The Prussian state centralised by giving its Junkers military and official positions while inculcating a sense of noblesse oblige, which helped to ensure that Germany would not experience a French-style revolution.  Farther back, Ivan the Terrible wiped out his entire noble class through a system of and installed more compliant replacements, incidentally ensuring that the first steps toward constitutional government would be impossible in Russia.  But these are all essentially the strategies of centralising monarchs. 

What should be more interesting to us are the super-rich classes of history who fell without the aid of a central authority.  The vast wealth of the British Empire dried up in the course of a single generation, owing both to the World Wars and the hubris of British administration.  The Spanish Empire, the greatest cabal of treasure thieves in history, perished because it did not plant sustainable economies in its possessions.  Without more resources, all the extra silver was simply inflation.  The Russian Revolution was the end result of a long and futile attempt of an unbearable landowning aristocracy to hold on to their positions.  The more they held on, the worse the fall they were in for.  Such classes may perish from internal causes, popular dissatisfaction, or a combination of the two.

The problem today is not one of captive capital (if anything, capital is far too mobile for its own good- marginal lending and derivatives are both devices which allow banks and investment companies to create money that simply isn’t there), but of misallocated capital and the social illegitimacy which follows- and this, I think, is a problem that Smith could easily understand.  The half-life of an economic class is arguably proportional to the social legitimacy of the distribution system which creates it.  Capital allocations on the basis of blood and race almost always seem to fail- that is one explanation for the fall of the Babylonian Empire to the more meritocratic Persian Empire, and of course for the end of the European global empires.  By contrast, the Chinese Imperial Examination system established a meritocracy that survived the falls of several dynasties. 

The point is that in today’s system, it is not the entrepreneurs and real economic creators who are begrudged their share.  It is the financial class who profit by moving other people’s money around and are paid obscenely large bonuses and benefit packages regardless of their profitability, and the upper managerial class who likewise recieve compensation disproportionate to their value, and are likely to retire with millions or billions in their pockets regardless of how badly they fail the people dependent on them.

We are trained to look down on economic systems based on patronage.  The only thing worse is a patronage system in which the modern patron completely denies any responsibility for the people affected by their activities.  By doing so, the current economic order is setting the stage for its own obsolescence.  The only question is whether the change will open up new possibilities, as the demise of the feudal aristocracy did, or whether it will drag everyone down.

US-Russian Relations in Post-Cold War Retrospective: Could the United States have won Russia over?

Whether the United States “won” the Cold War by spending the USSR into the ground, or whether it was won for them by the great awakening that spread across Eastern Europe in the 1980s is a matter of continuing debate; that the end of the Cold War was a complete shock to exactly that group of scholars which now embraces the former theory is not.  Whichever the case, one thing that is clear in retrospect about that historical moment is that the United States and its European allies failed to secure the peace as well as they should have.

By now, we are all used to seeing the weekly Russian-American spat.  Yes, there are historical and psychological factors behind this, going back as far as Ivan the Terrible, who taught his successors to unite Russia through fear of the West.  And yes, Putin is a masterful manipulator of this psychological tendency.  But the West made it easy.  How many Russians after the humiliating decline and poverty of the 1990s looked back to the Soviet Union with nostalgia, the good old days when poverty at least had a defined bottom?  And how easy to blame the change on the West, which gained everything by Russia’s decline and no doubt stood by laughing.  And then, how tempting to look back on the military might of the Soviet Union and think, “They were afraid of us then!” 

From there, militarisation and nationalist bellicosity become embedded in Russian politics, and with them the price that Ivan the Terrible and Peter the Great and Lenin and Stalin have all taught their people to accept: a strong boss at the top of a strong state which will tax the people in order to defend them and spy on them and repress undesirable elements in order to keep them safe.

Could this regression have been prevented?  Could the West have prevented it?  No one can answer that question.  But the West certainly could have done more.  Consider the following scenario.

In the early 1990s, after the fall of the Union, American economic advisors were sent to advise Russia on how to manage the transition to capitalism.  From the perspective of these advisors, the Russian political establishment was so caught up in its internal problems that it implemented their advice haphazardly and clumsily.  From the Russian perspective, the Americans were suspect representatives of a foreign ideology who gave a lot of advice and did little besides. 

Suppose the United States had sent a high-level envoy to Russia with a whole package of economic incentives, including trade concessions and widespread industrial collaboration.  Many Russian industries which simply could not compete on an open market could have been easily updated through industrial partnerships rather than sold off in bulk to corrupt predators.  Above all, the United States should have tried to sustain the existing economic structure, and advised the Yeltsin government to do so, until it could be consciously and carefully privatised, rather than the disastrously rapid sell-off that actually occurred.  The concessions on offer would have been the guarantee of the government’s attention.

The United States, realising that Russia’s massive military industrial complex represented its only sound manufacturing industry and that it could easily represent a threat to the peace if left to itself, could have invested in industrial partnerships designed to convert large parts of this sector to civilian use, giving Russia the incentive of access to up-to-date computers and electronics.  The remainder of this sector could have been safely sustained by giving it US defence contracts (in partnership with US firms).  This would have benefitted the US military enormously by giving them cheap access to the systems they are most likely to face in future conflicts, as well as advances in areas such as ground-based surface-to-air and supersonic anti-ship missiles, artillery and so on in which the United States has always lagged behind.  Imagine a defence establishment with the insight to redirect the billions of dollars wasted in the past two decades on cancelled and overbudget programs into partnerships with Russian industry, which had the foresight to buy Su-30s to supplement the USAF’s ageing F-15 fleet, which bought Sovremenny-class destroyers before China could get to them, which for a fraction of today’s defence budget had unlimited access to cheap, highly-effective systems.  Russia would gain access to the world’s biggest defence market, all for the low, low price of first crack at every product they made and the occasional under-the-table veto of a purchase to a hostile country.

All of the above could have meant that American aid dollars, rather than doping the Russian economy, could have been used to sustain it until it reached profitability.  Even if the project failed (and since trying to keep a lid on Yeltsin, let alone his various governments, would at best have been an exercise in bull-riding, it very likely would have), the United States could have bought itself enormous capital, and given Russia enormous face, by placing such importance in the project.  Blame for any failure would have more than likely landed in Yeltsin’s lap, as long as the US were smart enough to make a point of deferring to him on a regular basis.

Face is the important quantity here.  Russia’s abiding inferiority/superiority complex is one of the more prominent and remarked-upon aspects of its national character.  The country that built the world’s biggest submarine, biggest nuclear-powered cruiser, biggest ICBM, biggest strategic rocket force and biggest bomber has a burning need to be recognised as an equal among equals, to be respected. That is precisely what it did not feel during the 1990s, and it is that omission for which we are now paying.

As for Europe, giving Russia face could have been as simple as an offer of access to the Internal Market, probably combined with an intimation that EU membership was a future possibility.

Of course, very little of the above would have been politically possible.  Asking the US Congress to abandon pork-barrel politics long enough to place major defence orders overseas, asking the US to actually build up an economic competitor, asking France and Germany to risk adding Russia to the list of their competitors for EU leadership- it’s all quite impossible.  So, you may ask, what is the point of this indulgence in counterfactual history if it couldn’t have happened? 

The point is that the sort of strategic short-sightedness demonstrated by the United States in its relationship with Russia arises from the same political defects that continue to diminish its position in the world today.  Anyone remember the Asian Financial Crisis back at the turn of the millennium?  That was America’s golden opportunity to make friends in Asia.  The US wasn’t paying attention, and it was China that swooped in and bailed out its neighbours, gaining very substantial goodwill and laying the groundwork for the China-ASEAN Free Trade Agreement.  That agreement came about because China was willing to make substantial unilateral economic concessions, tailored country by country, on the basis of a principle called “giving six, taking four.”  It was about the long game.

The entire scenario spelled out above was inspired by the strategies of the Chinese Communist Party, both in its internal economic policies and in its so-called “Charm Offensive.”  These people are incredibly smart, enjoying the world’s oldest and most sophisticated strategic culture, and unlike the United States political establishment, they play the long game as a matter of habit.  And yet, the West remains predisposed through political dogma to regard the Party as a relic, an impediment to China’s progress, rather than the architect thereof.  All that the Party needs to continue winning in international politics is to continue being underestimated.  It has found a basic weakness of the American system, and is both exploiting it directly, and profiting by the fruits of it- the Sino-Russian arms relationship has been a prime example.  So long as the United States lacks the political will to address the strategic shortcomings of its current lucre-greased electoral system, any great power lacking that liability will be able to exploit it.

Global Financial Crisis Through Chinese Eyes- The Atlantic Interview

One of the best reflections out there on the Global Financial Crisis comes, unsurprisingly, from China.  It is clear to anyone who has read the literature on the course of China's economic development that the economic strategy and learning curce of China's political class is quite formidible, and ironically immune to many of the ideological blinkers that hamper Western economics.  Deng Xiaoping was the one who famously remarked that it doesn’t matter if the cat is white or black so long as it catches mice.  This interview in the Atlantic with the American-educated Gao Xiqing, President of the Chinese Investment Corporation (which is heavily invested in the American economy) contains some of the most interesting insights into the Chinese view of the crisis I have seen, and many things which we ought to take to heart.

Gao points to the skyrocketing leverage ratios of investment banks as evidence of a disturbing economic trend.  “Thirty years ago, the leverage of the investment banks was like 4-to-1, 5-to-1. Today, it’s 30-to-1. This is not just a change of numbers. This is a change of fundamental thinking. People, especially Americans, started believing that they can live on other people’s money.”

As for financial derivatives- repackaged debt- he thinks this is an instance of collective irrationality for the economy.  When called to give a presentation to the State Council under Premier Zhu Rongji, he explained derivatives using the metaphor of mirror images.  You have a product with value, a book, and you sell that.  Then you sell a mirror image of the book- the stock- in order to get money to make more books.  Then you sell a mirror of that stock debt, and a mirror of the mirror of the mirror.  Each individual product seems to make sense; collectively, the whole enterprise is inflationary.

Gao also sees a big problem with the compensation scheme for the financial sector: “People in this field have way too much money. And this is not right.”  “It distorts the talents of the country,” since the allocation of compensation has the power to incentivise the expenditure of talent, in this case redirecting it from productive activities to ancillary activities.  He cites friends of his who could have gone into productive scientific fields choosing finance or law instead, because they pay so much better.  The result of this distortion of the country’s talent market is a whole culture of geniuses finding ever new and better ways to repackage debt into complicated financial products.

American power, he says, depends entirely on people telling the truth about the American system and the American ability to accept that truth and change in pragmatic ways.  On the global level, America must accept responsibility for the system which supports it, and renegotiate that system.  But, Gao warns, world confidence in that eventuality is waning.