Reading the Future: Five Books for a New Age of Investing

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Stacie Jacobsen: Thanks for joining us today on The Pulse by Bernstein, where we bring you insights on the economy, global markets, and all the complexities of wealth management. I'm your host, Stacie Jacobsen.

Today we're joined by Inigo Fraser-Jenkins, Co-Head of Institutional Solutions at Alliance Bernstein, to talk about five thought provoking books that sit at the crossroads of capitalism, technology, politics, and social order, some of the most critical issues shaping investment strategies today. Inigo and his colleagues recently shared their insights in an essay titled Machines, Democracy, Capitalism, Feudalism, five books for a different age and what it means for investing.

And we're excited to explore these ideas even further with him today. What I find especially interesting about these books is their diversity of perspectives, from staunchly capitalist to modern Marxist viewpoints. Despite their differences, they converge on some key themes: the shifting nature of labor, the evolving relationship between capitalism and liberalism, the real implications of AI on productivity and jobs, and then what all this means for inflation and growth in the long run.

Perhaps most intriguing, they encourage us to view today's political and technological landscape through a historical lens, which sharpens our strategic thinking for the future.

Inigo, thanks for joining us to discuss what really feels like a paradigm shift in thinking about some of these topics. I want to say I very much appreciated you recommending these books, and I'm thrilled to dive into some of these issues today.

Inigo Fraser-Jenkins: Well, yeah, thank you for having me on the show, and I'm very happy to talk about them.

Stacie Jacobsen: To set the stage, we know your title is Co-Head of Institutional Solutions at Alliance Bernstein. What does that actually mean?

Inigo Fraser-Jenkins: Yeah, it's a good question to ask. So I guess my role is to write research on and then go and speak to the client base about some of the really big picture investment issues that people face, such as the kind of forces at work on big macro variables over strategic horizons, and really how that affects people's views of the capital market returns, the efficacy of different kinds of return streams, what people mean by risk, and then ultimately, but I guess the question is what people should, could do about that in terms of changing their asset allocation.

Stacie Jacobsen: It's a very, very big picture on what the future may entail. All right, Inigo, so before we go into discussing the books, what are the five books that you recommend?

Inigo Fraser-Jenkins: Um, so the first one we covered was a book by Robert, uh, Skidelsky called The Machine Age, uh, with a subtitle of An Idea, A History, A Warning, but that's a book really just about the role, uh, of machines, um, in contemporary society and what it means of the future of labor.

So, uh, second book is The Machine Age: The Crisis of Democratic Capitalism by Martin Wolf, are really sort of thinking about the failures, particularly from a social perspective, that have come about through the growth of capitalism in recent years, and where the limits to that might perhaps be. Then a book by John Gray called The New Leviathans, that's quite different from the others, it's more overtly a piece of political philosophy, but really on the interaction of of the state and individuals and capitalism and really sort of offer some thoughts on this balance of power between governments and corporates.

And then a book called Scorched Earth by Jonathan Crary, which is very much focused on the planetary limits to the growth of capitalism. And the final book is quite a different one called Technofeudalism by Yanis Varoufakis. That's, I guess, different because it's a piece of contemporary Marxism, which I'm aware the listeners of the show probably don't normally read, but instantly touches on the same kind of issues of the efficacy of capitalism and the potential for that to grow productivity in a world where the growth drivers have shifted in an age of big tech.

Stacie Jacobsen: What piqued your interest in these particular titles?

Inigo Fraser-Jenkins: I guess as part of our research, we like to go deeper into some of the drivers of markets that go beyond the usual policy and economic kind of conversations that normally dominate the industry and really kind of think about some of the. uh, underlying drivers of contemporary capitalism, how AI touches on that and the role of labor, and all of these books in very different ways, uh, touch on those issues.

So while the books kind of come at them from their own, uh, idiosyncratic point of view, uh, we think that by covering all of them and then drawing out the common themes across them, it allows us to think more deeply on really important macro forces, such as growth, inflation, uh, and the role of labor.

Stacie Jacobsen: Yeah, okay. So, I wanted to start with the role of labor. That's certainly one theme that stands out across these books. And it's really that the shifting nature of labor in the context of technology. So can you elaborate on some of the arguments That both supported the euphoria and also challenged the prevailing orthodoxy around, let's say like AI and how it relates to growth and productivity.

Inigo Fraser-Jenkins: That's one of the central questions that kind of comes up across these books. I mean, I guess we should see it in an even broader context, which is in other work that we've done, we showed that the effective size, the global labor force is going to shrink because of the twin forces of demographics. and deglobalization.

So other things equal, one would have thought that might increase the bargaining power of labor, which have implications for wages and inflation. Because AI is a very different kind of force at work here that has the potential to reduce the bargaining power of labor. I guess this is part of a long running argument about the future need for labor and what labor looks like.

The optimists on this would point out that we've seen at least, um, 200 years of continuous evolution, automation, and technology improvements, and yet as far as we can tell, we still have pretty close to full employment, so surely there can be no problem. And I guess, but the pessimists would point out, uh, that perhaps AI seems different from this in terms of its scope and the ability to, uh, quite rapidly change the nature of labor, um, and the needs of labor.

Now these matter for two huge themes that run through really all debates about the long run future returns and what kind of returns investors need because on the one hand it touches on the level of inflation that people expect and you know is there a greater bargaining power of labor and should we be protecting ourselves against a higher inflationary path and the other angle is that if we do have a future of fewer workers, a fragmented workforce and deglobalization, those are downward forces on growth and we really need to see a growth of productivity is perhaps the only attractive way out of a future where there's a need to generate returns to fund people's retirements and also a need at the macro level to see growth to meet government debt payments far into the future.

Stacie Jacobsen: So, do you think that the consensus idea that AI is going to be a net positive in the aggregate is warranted? Or do you take a different point of view?

Inigo Fraser-Jenkins: So, I mean, it's clearly a very positive narrative that can be laid out and we can all point probably already to individual kind of qualitative cases where AI has led to some kind of productivity improvement.

I have to say I'm somewhat skeptical about the Ability of that to change the aggregate level of productivity. I mean, something that's got nothing to do with AI specifically, just the observation, there's been a real inability, uh, for people to make effective forecasts about aggregate productivity growth for decades.

And if you look back over the last 20 years, say in the US but also in economies like South Korea, which are high Capex, heavily automated economies. There's been no increase in labor productivity over the last 20 of which the internet was invented but has changed everyone's lives. So, I guess the proponents of AI really have to come up with a good argument as why AI is different in a fundamental way from the rollout of the internet.

And okay, there are possible arguments that can be given for that, but it's quite a tall order. So, I guess. In our core work, what we tend to do is turn the argument around the other way, and I tend to start with the position that I am probably incapable of coming up with a forecast for the aggregate productivity improvement that AI could give.

I just don't know what I would base that on. Instead, what we can do is say, well, we have these other big forces at work, be it deglobalization and demographics and climate change. And we can come up with at least a guesstimate of what that might do to aggregate growth 10 years and 20 years hence. And our best guess of that happens to be that this shows about one and a half percentage points of growth rates at that stage.

So, AI would have to come up with an improvement in productivity growth of that same order. And I guess the question is, is that a doable number or not? And if one goes back and looks at productivity growth in the US since the war, there have been periods of higher productivity and lower productivity.

And it turns out that that peak to trough change in productivity growth has been about 1.5 percentage points. So that's required. Increasing productivity is doable, but it's really the top end of the historic achieved range. So, I guess it leaves us with a view that yes, it probably helps directionally and can somewhat offset these other forces downward on growth, but it seems unlikely the one would want to build in as one's base case that it can completely compensate for other downward forces on growth.

Stacie Jacobsen: Right. I think one of the arguments was the duration of productivity growth. How long is it going to take in a world of AI versus, you know, when we were talking about the Industrial Revolution or even the internet for that matter, I think it was Skidelsky book that really asks, you know, what is the, the speed and breadth of job dislocation and how will that impact labor and growth? What do you think about the timing of AI versus what we've seen over the past even 200 years?

Inigo Fraser-Jenkins: Yeah, so I think there's a case that the more positive aspects of AI, uh, things that one perhaps can be a little more tangible about and could potentially be faster than previous changes in productivity.

Having said that, it's the negative aspects of it in terms of displacement of labor that, uh, things that the market finds, I think, much harder to kind of price in. And I, I guess that some of the lessons from these books of going back and looking, uh, at previous episodes is that, yes, you know, over very long-time horizons, Yeah, we do still have full employment, so these technological changes do create demand for new kinds of jobs and services eventually.

But in the process, in the transition, it can be incredibly painful. And you can see prolonged periods, i.e., multiple decade periods, where there's a stagnation of real growth rates. And I guess one of the themes that comes up across a few of the books is, although there's been an extraordinary level of growth in aggregate terms in the last 40 years, really, that has been very unevenly shared.

And we're seeing that in terms of social limits that people are willing to, you know, accept on the structure of growth that we've seen, and that median real incomes haven't kept track with aggregate growth rates. So, I guess the fear around AI is that could perpetuate that pattern that has already been built for some decades.

Stacie Jacobsen: Now, I wanted to move into another complex theme that these books dive into, and that's that relationship between capitalism and liberalism. Each author is approaching this from a different perspective. So, what would you say are the key points that each author makes in that evolving relationship between capitalism and liberalism?

Inigo Fraser-Jenkins: Yeah, I guess the issues addressed most directly by Martin Wolf in his book, and he comes to the quite stark conclusion that laissez-faire capitalism is simply not compatible with democracy in the end. And the reason for that, he would say, is about this unequal sharing of wealth, and that he thinks that that is one of the reasons why we've seen this period of stalling productivity growth, and that therefore a shift in the structure of capitalism is required in some way.

Coming at this from. a completely different angle, uh, is Yanis Varoufakis. He also starts with a very, uh, bold conclusion, which is that capitalism is actually dead. And what he means by that is that it's no longer the capitalist driving force of profit that is driving the show here. His view is that the emergence of big tech platforms has effectively replaced profit by rent.

And so, it's not the mechanism of capitalism that is actually directing capital, uh, and driving growth anymore. And he, being no fan of capitalism, but is making the point that anyone who kind of cares about markets as a tool for allocating capital, um, should profoundly worry about the shift that's taking place in society.

Stacie Jacobsen: Do you think that the traditional structure of capitalism is going to be unrecognizable in the, call it, relatively near future?

Inigo Fraser-Jenkins: I'm not sure unrecognized will be right because calling for a very abrupt paradigm change, um, you know, can be very difficult things to go and do. But I do think there are some norms that people have assumed continue that perhaps it should be questioned.

I think that's particularly relevant for investors, when they think about what level of inflation, what level of equity returns, what level of bond returns, but they should be expecting over five years and ten years forward. But we have lived through a really extraordinary period in the last 30 or 40 years when there have been a series of forces that have come together to drive down the level of inflation and raise level of growth.

Now, some of these are to do with the issues raised in these books, and some are other forces as well, such as the decision of China to join the global economy and demographic kind of forces with the unusual size and wealth of the baby boomer kind of cohort. But it does kind of point to a future that implies that this sort of plentiful real growth is really attacked from two sides.

You know, one is a lower ability of growth to be generated and the second would be a higher levels of inflation. Now that doesn't mean one should be bearish about the future. I. don't think that capitalism actually is dead, despite the concern that Varoufakis has raised. But I think it actually does raise some profound questions, which actually, bizarrely, are kind of common across the capitalist and Marxist kind of critiques of contemporary capitalism, which is that if it's a decline in the efficacy of competition, which has really been Responsible for this low period of productivity growth.

And actually, AI is not going to be the answer here. And it requires some shifts in regulatory and market structure to bring that about.

Stacie Jacobsen: You touched on this a little bit. Can you talk a little bit more about the philosophical implications of the changing social order and the value of labor? As much as it seems like investing is just about the numbers, there's obviously a real human dimension to all of this.

Inigo Fraser-Jenkins: Yes, I think that really touches on this sort of overlap between, I guess, the role of labor, um, and the prospect for a productivity growth for labor through investment in technology, but also, I guess, the role of labor in giving, uh, satisfaction. We have a work perspective, and one of the issues that comes up several times in Skidelsky's book, as he refers back to the work of John Maynard Keynes, because he's a Keynes, and he comes back to this famous proposal that Keynes made, which was by the year 2030, all of us would only be working a 15 hour week. Now, obviously, that forecast is spectacularly wrong, and he's sort of analyzing the book for why that was. And he really kind of comes up with, you know, three answers. One is a kind of obvious one, really, which is the conflating of needs versus wants and us not wanting to live at a 1930s standard living in today's society.

But the other ones are this point that we've touched on a few times already in the show that the gains of productivity that we have seen have been very unevenly shared. And the third one is work is not only a cost, but also kind of gives meaning. So, there is this, I think, I guess, concern around AI in the bearish interpretation, if it strips some of that meaning away from work or leaves people in an environment where there isn't sufficient work, people have voiced the option that that could be replaced by universal basic income, but that would not address that need for work as giving meaning to people aside from a whole host of other kind of physical constraints on that kind of proposition.

Stacie Jacobsen: So that goes into the concept of de-skilling, right, and the role of AI in mere automation rather than raising overall productivity. Can you talk more about that?

Inigo Fraser-Jenkins: Yeah, that's again a fear that comes up in a few of these books. I think that comes down to who's in the driving seat. And as new technology is developed and released, um, who decides what kind of technology that is. Now, so far in the brief history of AI so far, it's really been corporates that are very clearly in the driving seat.

Governments will be running to kind of catch up. Now, if that's the case, it probably implies that the focus would be on automation to drive an even further expansion of corporate margins and some of the concerns that these books raise more around, well, are there other ways to think about that growth of technology and so choice of technology paths that focus more on productivity growth rather than necessarily straight automation?

Stacie Jacobsen: Was there anything in particular that you read that surprised you so much to the extent that it may have made you change the way that you think about the future and the economy?

Inigo Fraser-Jenkins: I guess one of the most surprising inclusions was the one in Varoufakis’ book, but the idea of this huge irony that from, from his point of view, capitalism has been killed, but not killed by organized labor.

It's been killed by the privatization of the internet combined with a lowering of the cost of capital in response to the financial crisis. But that was certainly a very surprising read, uh, which I haven't really kind of thought about before as an explanation for the setup that we find ourselves in today.

I think though, If I reflect on these books and then link it to all the client conversations I've had with investors over the last six months or so, but the extent of those conversations dwell on these more strategic issues, they really do touch on the, on the same kind of problems. I mean, there is this huge open question around where is growth going to come from, both from its need to drive the returns of risk assets, but also given this enormous buildup of government debt, not just in the US but across all the G7 countries, and it's just really stark how that's a topic again and again drives people's views on belong when market returns. And so, it's interesting that these books, although coming perhaps from a somewhat deeper and more long horizon perspective, do seem to touch on some very live concerns that strategic investors face.

Stacie Jacobsen: In the book Technofeudalism, there's this concept that profit has been replaced by rent. And I think they dive in further to say that we should be profoundly worried about the replacement of profit by rent. So, what does that mean? And is it something that, you know, we as investors should be concerned deeply with?

Inigo Fraser-Jenkins: Yes, really, it's this idea that big tech and platforms, but could derive a large share of their revenues and people having to pay for access and essentially having no kind of choice. And this coming, you know, from the idea of this huge network and scale benefits that come from intangible as opposed to tangible capital.

And the idea is just in the book, and in fact actually just in some of the other books from very different angles, is that that seems to have demoted I guess the role of traditional competition between kind of companies, um, and hence kind of competing for profits as the sort of key driver of the winners, at least from an equity market kind of perspective anyway.

I mean, yes, I think that it's something that investors should be concerned about from a long run perspective because there is this hope on one narrative that AI drives productivity higher and we can all think of reasons why that might be, as we've talked about at the same time, if the thing that's really held back the growth of productivity is a lack of competition, then actually, in that case, a further run out of AI in the same lack of competitive construction, but that would still be a problem and would point to a future where you just see essentially further growth of profit share of GDP, but not actually a growth in the overall size of the pie.

Stacie Jacobsen: Another theme that may not be so overt but is certainly in the background of many of these works, is the risk of an overall system collapse and the geopolitical issues that relate to market returns.

So, what is the perspective of each author? And if you could weave in what your opinion is as well.

Inigo Fraser-Jenkins: Yes, I mean, that idea of a system collapse lurks in the background of quite a few of these books. I mean, from slightly different angles. The Crary book really addressed it from the point of view of the planetary constraints that we face and certainly in our own work on that, we take the view that an energy transition, if it's possible, will take a lot longer than people are expecting, probably with worse climate outcomes and that's it just becomes very hard to forecast what the impact of that is on growth rates.

So that's one angle. There are other angles in terms of the potential for a social backlash against the way that profits have been kind of shared out and whether that leads to a starkly kind of different kind of future. I guess those are the two kind of real constraints here. They are things that I think investors struggle with in terms of putting them into kind of forecast because markets do an incredibly bad job, uh, trying to price existential risk in that kind of way. So, when we're forming 10 years forward views of markets, you know, I don't think it's really right to, you know, address those kinds of risks in the actual forecast itself and more kind of raise them as concerns people need to think about. So, they address sort of elsewhere, really, in terms of thinking about, uh, liquidity needs or other kind of risks that people might kind of face rather than the central forecast.

So, yes, it's a topic that certainly, you know, almost inevitably lurks in the background. As soon as people are talking about a planetary constraints and social constraints equally, I think it'd be very wrong to have that as the driving force of one's forecast of capital markets.

Stacie Jacobsen: Yeah. Yeah. The confluence of AI and climate change certainly does seem to be a different kind of risk than one that we've dealt with in the past.

Inigo Fraser-Jenkins: Indeed. I mean, I'm always hesitant about the statement of the future that was risky because surely one could have always said that in any, uh, at any point back through time, the future always looks risky, and you always point to politics or sort of social constraints. I know I tend not to take the view that politics and geopolitics, uh, makes the world radically more risky in a different way than it has been in the past.

But AI and climate change, I think, are candidates to be very different. And it's telling in the way they, you know, enter in the way we think about actually coming up with tangible forecasts for inflation, growth, equity terms, et cetera. Because we can do at least a reasonably good job, I think, of trying to model what the 10 years forward impact is of demographics and perhaps of deglobalization as well.

But what climate change and AI do, is not so much change the mean level of the forecast, but bring in a radical level of uncertainty into that forecast. So, the way you think about that from the point of view of an investor is not so much that it changes your central view, but it brings in the idea that one perhaps has to have a more radical approach to diversifying and diversifying across some potentially very different paths.

And that is a change from the past, the last 20 or 30 years when we've had, I guess, a more sort of technocratic-led economic environment where, for example, consensual banks have managed to manage the business cycle in a way that people have become used to.

Stacie Jacobsen: What does this all mean for growth and inflation and how it impacts an investor's portfolio?

Inigo Fraser-Jenkins: Yes. I mean, obviously it's all very well to have these intellectually interesting conversations, blah, blah, blah. But, actually, what does it actually mean for investors? We're taking together the points we've talked about, um, here in terms of structural capitalism, I guess the role of labor, the ability or not to see productivity improvements along with other broader macro forces such as demographics and climate change, etc.

I think it points to a future of lower growth, still positive growth, but lower growth, a higher equilibrium level of inflation, and probably a higher volatility of inflation. Now, in that environment, one would expect investment returns across asset classes to be lower in real terms than the ones that people have become used to but still positive um, I guess the challenge is what is the target?

What's the goal that the end-investor is trying to achieve here? So, this kind of environment You know, I think it really focuses people's attention on the need to produce positive real returns, i.e., to protect the purchasing power of investments far into the future. And so, in that kind of environment, it suggests a need to, uh, if anything, take somewhat more investment risk in order to mitigate that bigger risk, a risk of loss of purchasing power and saying this, fully aware the market valuations across asset classes are at high levels compared to history.

But that's, you know, for us implies a need to have that great exposure to kind of growth and risk assets, really to finding a way of focusing more on protecting against long run inflation, perhaps in quite different from what we've seen in recent decades.

Stacie Jacobsen: And is there anything that you'd like to leave our listeners with today?

Inigo Fraser-Jenkins: I guess just this idea that, yes, all of us are swamped for obvious reasons by, uh, questions of the economic cycle, politics, uh, near term, great concerns around market valuations, et cetera. And of course, it's right that those should be front and center of the way people think about making investment decisions.

But there is a case to be made, I think, that investors do face a real paradigm shift in the setup. And there's this danger, I think, of recency bias. And by recency, I mean, really the last 30 years. And that looking back over the long horizons, things aren't always like this. Now it's very easy to be a Cassandra about this and be very bearish, but I don't think that's right.

I think there's a path here for investors to find a range of assets and give positive real returns, but it's a different future, a harder future. And it implies to me, there's, there's going to be more obvious tension, if you like, between the level of risk that people expect measured in terms of volatility in their portfolios versus the risk of a loss of purchasing power, which is a much harder outcome.

And that hasn't really been a tension that people have to face probably most of their investment careers. Something that I think does need to be addressed as the books they give, um, albeit a long horizon view on it, but a view on some of the driving forces behind that.

Stacie Jacobsen: What's the next book that you plan to read?

Inigo Fraser-Jenkins: So I guess there are always a few on the agenda, but there's a very interesting book by Susskind on the nature of growth, which is something that I would contend to, to get through, uh, because I touched on a host of these issues. Another one is on tokens, uh, by Edouard, because I think there's an interesting topic, which is different, but not totally unrelated to this, which is on the nature of the future of money, uh, and the future of a risk-free assets and whether they exist or not.

Stacie Jacobsen: well maybe we'll have to have you back on and you can talk us through those too as well. Ingo, thank you so much for being here with us today.

Inigo Fraser-Jenkins: Thank you so much.

Stacie Jacobsen: Thanks to everyone for joining us today. We'll be back in three weeks with a new episode. In the meantime, please check out Ingo's essay, which we'll link in the show notes along with the titles of the five books he recommended.

I'm your host, Stacie Jacobsen. Wish you a great rest of the week.