FEATURING:

Patrick Foulis
Business Affairs Editor
The Economist

04
Trending: Slowbalization, Big Tech, Political Pendulums

October 17, 2019 | 40:52

Patrick Foulis, business affairs editor for The Economist, discusses the top global economic trends to watch and gives us a glimpse into the inner workings of the 176-year-old publication. See how the sausage gets made, including the importance of hiring intellectual rebels and writing good puns.

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Hugo Scott-Gall
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SHOW NOTES
04:14 Slowbalization was coined by The Economist to describe the gradual reversal of globalization economically and financially.
08:08 Some of the best performing businesses in the world are domestic American companies with profitable home markets
11:45 A competitive system drives productivity, which drives wealth. On many measures, the United States seems to have become less competitive.
13:00 We don’t yet know if we are in a window of excessive profitability, which tempts better business models to blow apart today’s superstar firms.
14:24 Two areas of worry within Big Tech are the assumption that they are perpetual profit machines and the predatory behavior of taking over rivals that could prevent their disruptive process.
16:02 Digital companies are inherently different in that they can get to 2 billion users in 10 years, like Facebook, and consumers are paying for goods with data rather than money.
20:36 What comes next for capitalism: culture wars in companies, new left-wing policies that attack capital, and shareholders demanding businesses to act more responsibly (e.g., with respect to the environment).
28:30 There are quite big changes coming as to how the economy is run, which are supported by looking back in time to the large political pendulum swings of the past.
30:14 It’s worth looking at the extremes because they tell you where the center bends toward.
33:11 The Economist keeps true to its roots but also expands to include broader opinions, diverse populations, and current trends.
Transcript

Hugo Scott-Gall: Today, I’m delighted to have with me Patrick Foulis from The Economist, where Patrick is the business affairs editor. Previously, he wrote the Schumpeter column, was New York bureau chief, and set up the editorial bureau in Mumbai. Before all of that, he was the deputy editor of the Lex column at the Financial Times, and before that, he was a telecoms analyst at UBS. Patrick, welcome, and thank you for joining me.

Patrick Foulis: Hi, Hugo. Great to be here.

Hugo Scott-Gall: Now, I’m assuming you’re in a good mood because we’re doing this on a Friday, and it’s Thursday night, so you go to print, and I imagine that’s pretty manic.

Patrick Foulis: Yeah, so we have this weekly cycle. So, this is the most relaxed part of the week for us. The edition has just been published. It’s circulating around, and we haven’t yet got to the point where we have to dream it all up again for next week.

Hugo Scott-Gall: Yeah, I was gonna ask, when does the agitator start? When does the next deadline horizon begin to bite?

Patrick Foulis: Certainly, the weekly cycles, there’s a relaxed chat on Fridays about what the news is; what stuff we’ve got cooking, and then on Monday, it all gets deadly serious on Monday morning because everything has to be tied down, reasonably firmly, and then there’s a couple of days when everyone is writing, and then we start again. So, it’s a very, very distinct weekly cycle.

Hugo Scott-Gall: Yeah. And so, actually, before we get into the big topics, I thought we could talk a little bit more around process. Just how do you, as an organization, really decide what to write about and when to write about it? How does that longer-term, we just talked about the weekly cycles, but how does the longer-term process work?

Patrick Foulis: Yeah. I mean, so in the abstract, and there is, I think, probably a bit of a parallel with investing here, but you’ve got to identify where we might have an edge as a publication. And it usually comes from one of three areas. One is where we feel we are simply ahead. So, we have thought of something that no one else has, and that’s interesting in its own right if our judgement is correct. The second interesting article is, when it’s very contrarian. So, there’s a, sort of, accepted wisdom about a subject, maybe an accepted empirical view of it, and we disagree with that strongly. And again, that’s gold dust if you’re right.

And then the last edge for us, I think, is where we have a different kind of information from the competition, and that could be some sort of data exercise, or it could be, potentially, that we got interviews, or spoken to people; have fresh information. So, typically, it comes from one of those three things. But you then also have the issue of timing, and as you intimated, journalistically, it’s possible to be too early with an idea. So, what you think is a fantastic intellectual breakthrough, the timings not right; it’s not on people’s minds.

So, that’s a very subjective judgement, but absolutely crucial. And the Holy Grail is the combination of a piece where we have some sort of edge, but also where it’s perfectly timed, so that readers are keen to look at it at that particular day.

Hugo Scott-Gall: In preparing for this, I looked at the covers from the last 50 editions to see what you’ve, actually, written about. And maybe there are no surprises for guessing which person features the most frequently, which is President Trump, but thematically, technology, both big tech firms and the disruptive impact to technology was the most regular thematic area that I saw, whereas, actually, banks and finance only featured once, which was a surprise to me, as well. So, I want to come on to technology in a minute, but first, maybe, we can delve into what you dubbed, “Slowbalization.” So, slowbalization, what do you mean by that, and what’s the evidence for it?

Patrick Foulis: Well, what we mean by that is the big global trend of the last 25 years of greater global integration, economically and financially, going into reverse. We call it slowbalizaiton because it’s not quite high-speed reverse gear. It seems to be fading a bit, gradually. It’s interesting, there are different measures, but if you look at, say, trade, cross-border lending, cross-border portfolio flows, those are the measures which really clearly seem to be going backwards.

I should add to that investment by multinational companies across borders. There are some other metrics, which are going the opposite direction, most notably digital flows, which is something McKinsey, the consultancy, have picked up, but I think the overall picture is having spiked very dramatically over 20 years, we’re now in mild reverse gear on most of these measures, and it has quite big implications, I think, for how the global economy works.

Hugo Scott-Gall: And is that inevitable, or is it more political policy driven? In terms of, is it inevitable because emerging market countries are getting better at making things for themselves. As technology’s diffused globally, they become available to everyone; there’s more, I guess, easier to do things for yourself. Or you could also argue that, actually, western economy’s become more services driven. That is a slightly de-globalizing trend, as well. So, is it an inevitable thing, or is there some policy making which is causing it?

Patrick Foulis: Well, one answer to that is if you look back over the last 20 or 30 years, what stimulated globalization. And there’s no question, part of it is technology driven. So, things like the containerization of shipping in the 1980s, cross-border telecoms, the price collapsing over the same time period, that had a big impact. But on the other hand, liberalization of finance, the collapse in tariffs, the entry of China into the WTO were also very significant events.

So, I think, inevitably, you are left with a balance of both the kind of commercial and technological impulse of the world, and I think you’re right there, some of the things which pushed for integration on that are domesticating a bit. But you’ve also got the policy side of things. And I think there’s no question, this big rupture to the global system will, ultimately, I think, have quite a profound impact on how companies and investors work. And it’s not one that’s very easy to judge at the moment, but I think is probably the big question in economics over the next decade.

Hugo Scott-Gall: Yeah, and I guess that’s the difficult thing when something you’ve grown up with and used to sees a step change. There’s a regime shift. That’s a difficult thing to process and discount, particularly when you’re unsure what it looks like, but maybe one consequence, or maybe the big consequence of slowbalization, deglobalization, is balkanization.

And balkanization would have all sorts of impacts, but, certainly, when you think about investing and investing globally, if the world is being divided up in to quite, not necessarily hermetically sealed parts, but with less movement between these spheres, whether it’s, as you said, good people capital; ideas; IP, if there are high frictions, that definitely has to have some quite serious implications for, certainly, when you think about multinational companies which were in many ways the poster children of the era of accelerated globalization.

Patrick Foulis: Yeah. And one of the complicating factors, which I think is underappreciated, is the performance of multinational companies was, actually, pretty lousy well before the trade war kicked off. So, if you look at the kind of returns on capital that very global businesses were generating in 2005, 6, 7, and then two or three years after the crisis. Actually, there was a very clear deterioration profitability, and that, actually, clouds the question a bit because some of the best performing business in the world have been domestically focused American companies with very profitable home markets, rather than the globally active business.

But not withstanding that, I think longer term, the unwinding of global supply chains and businesses that work all around the world is a process that’s really just begun. And if you look at the world’s biggest companies by market cap, both the tech firms, and some of the very big more traditional companies, almost all of them have some sort of global business integration that’s key to how they operate, and often, we actually, just don’t know what’s gonna happen.

And Apple is the fantastic example, right, where it should be dramatically affected by this, but it’s a question that’s almost too hard to answer, and as a result, in some ways, I think the stock market has just given up trying to answer it until the evidence becomes a bit clearer.

Hugo Scott-Gall: Yeah, well that makes sense. It’s very hard to precisely to identify these consequences, but maybe sometimes it’s worth just look at what were the benefits, and just subtract the benefits rather than trying to exactly work out what it looks like.

My next question, really, is a follow on from that, which is you’ve written extensively, and were early in my view, around the increased concentration of corporate profits, especially in the U.S. And I think there’s now pretty much consensus that definitely has occurred, that there has been a greater concentration of profits that more industries have looked like winner-takes-all kind of industries. So, what do you think are the reasons for that? Why did that occur, and then we’ll go on to what should be done, and what could be done, which are not necessarily the same thing.

Patrick Foulis: Some of it is related to an enormous M&A wave, over 20 years, and that happened, partly, I think, if one’s being honest, because the antitrust regime in the U.S. became much laxer, so there was a big intellectual shift in the judicial system and the regulators in the ’80s towards a more laissez-faire kind of attitude, and then the second underlying factor, which is clearly most pertinent in tech, is the emergence of these big scale digital businesses, which in some respects, I think are really natural monopolies. And that’s a technological change, which I think explains some of the monopolistic tendencies in the U.S., as opposed to some kind of policy mistake.

Hugo Scott-Gall: This is what capitalism supposed to do, that big companies get bigger, either acquire their competitors or put their competitors out of business. Is it necessarily bad if you look at inflation? Corporate profits may have gotten more concentrated, and big companies may have got bigger, but I don’t see an inflation problem; big increase in the cost of goods, or is it, actually, it’s not the rate of change, some things cost more than they should do because of concentrations?

Patrick Foulis: Well, there’s a set of economics problems that have been around for 10 years, and they include very low productivity growth, inequality, and the relatively high share of profits that flow to capital, which by definition means less flows to labor. You know, economists have been struggling to understand some of the explanations for that, and the various views like secular stagnation. And I think in a way competition and monopolies is the kind of super theory that would appear to explain quite a lot of this.

So, I think in terms of does it matter, you could look at it statically and say, well, the high profits firms generate today, what if we gave a chunk of those profits to workers, the world would be more equal, which might or might not be a good political goal. The thing to think about, I think which is more important is the relationship between competition and productivity. So, if you have a very competitive system, I think that ultimately does drive productivity, which is ultimately what drives wealth.

And on many measures, the U.S. seems to have become less competitive. You know, the birth and death rate of firms, the level of dynamism, the volatility of returns on capital, the persistence of returns, as well as the concentration argument, and I think that overall picture is not great. Now, you do raise a very good question, like, isn’t this supposed to be what the purpose of business is? Right? You come up with a better business model; you crush the competition; you make money.

The most interesting view on this, I think, is, actually, Joseph Schumpeter, the Austrian economist, after whom The Economist column is named. His view of competition was rather than a day to day process. This is his famous creative destruction, but you had windows where monopolies were created, and then someone just comes up with a better idea that blows away those incumbent companies. So, there are moments of monopolistic behavior and the high-profit pool eventually tempts in a new generation of competitors.

So, I think if you look at it in a more static sense, things have deteriorated quite a lot in the U.S.. The big question is whether this is a window of excessive profitability, which tempts in a whole new generation of business models, which blow apart today’s superstar firms, and we don’t know the answer to that.

Hugo Scott-Gall: Yeah. Because you could argue there’s a pattern from history that when you have a meaningful number of new technologies or new technologies are just beginning to be diffused through the economy, you do have supernormal profits, but they, then, either get competed away by the market, which is the technologies are fully diffused in their abundant, and so everyone has access to, say, excellent communication; technology; it could be transportation, and so the market finds solutions. Or you do need some extra intervention, which comes from government regulatory. And usually, when you get greater competition, you get a productivity surge.

And certainly, as an argument now that we’re pregnant with productivity; there are lots of new technologies, but they haven’t fully diffused yet, and they haven’t fully adopted and adapted, but they will be soon, and therefore, there could be a productivity surge. So, this is just one of those periods where the market’s catching up with some supernormal profits that are the early fruit from new technologies.

Do you have faith in the market solving this, or do you think it needs intervention?

Patrick Foulis: I think what you describe is right. And in fact, the productivity figures in the U.S. have picked up more recently after a pretty dismal decade, although, they’re still quite sluggish by historical standards. I mean, I think there were two reasons to be worried. One is, actually, the valuations placed on the tech stocks themselves because I think the market, if you assume it has some kind of insight, is not pricing in the idea that these things are disrupted over any reasonable timeframe. So, they’re viewed as perpetual profit machines. That’s very striking. I mean, the market is essentially discounting the share of corporate profits will rise pretty significantly.

The other thing is that the behavior of the big tech firms themselves, I think, you could argue has become defensive and, to a degree, predatory in order to avoid the disruptive process you described. And in particular, this idea of the kill-zone, where the big tech firms take over small competitors that might pose a threat in adjacent industries. And if you look at what might happen with regulation, I suspect in the U.S. it’s not going to be turning Facebook or Google into utilities that are the government regulates, but it probably will try and restrict that kind of predatory behavior, for example, by banning the big tech firms from doing takeovers of rivals.

Hugo Scott-Gall: And do you think the rules are slightly different for the characteristics of a digital economy, versus a physical, analog economy? That, actually, the rules are a little bit different, whether it’s the speed of adoption; speed to whatever; whether it’s a billion users; 500 million users, the digital scale is a different thing, and that’s a harder concept to try at regulate, or even to try and apply existing rules to?

Patrick Foulis: Yeah. Well, there’s several things that I knew. I mean, one is the idea you can get a 2 billion-person customer base in roughly 10 years, which is what Facebook’s done. The other is, of course, the way you pay for goods is different than in the past. So, we pay with our data rather than with money, and that’s something the anti-trust regime in the U.S. finds incredibly hard to deal with; it just doesn’t fit in to its doctrine.

But at the end of the day, I think the test that should be applied to these businesses is, actually, one of economic size; the gross value added, for example, which is profits before labor cost. But there are some pretty obvious tests that one should apply, and there’s also pretty obvious group of four or five companies that tip over that threshold of becoming extraordinarily large by any historical standard.

And actually, we at The Economist looked back a while ago comparing the size of the big tech firms to previous monopolists: the East India Company in Britain; Standard Oil; US Steel at the turn of the century in the U.S.; IBM; Microsoft in the later half of the 20th century. And it’s pretty clear, the tech firms will tip over into that territory over the next few years if evaluations are correct. Therefore, one doesn’t need to believe in a new system of measurement of monopolies to be worried about their size.

Hugo Scott-Gall: If a company’s so big that it can issue its own currency, does that make it not a company, but almost a country?

Patrick Foulis: Yeah, I mean, I think you’d find the technical experts would question whether Facebook’s Libra is a currency or maybe it’s more like an ETF that holds underlying assets, and itself is tradeable. But I think the bigger point you’re making is totally right. I mean, it’s interesting, in the U.S., the two big concentrations of business power have been Wall Street and Silicon Valley, over the last 20 or 30 years. And what you might see is the kind of combination of Wall Street and Silicon Valley embodied in one firm. You know, JP Morgan plus Amazon.

And I do think that probably is unprecedented. It does have, weirdly, some parallels in the emerging world, you know, Korea’s Chaebol or the kind of classic Asian conglomerates that cross several different sectors, and I think have posed quite big problems politically in those countries because of their scale of power.

Hugo Scott-Gall: Taking the other side, though, if you look at big tech, they’re big employers, they’re very big spenders on research and development, they’re, actually, as a percentage, extremely big, relative to other public companies. Their share of capital investment is very high. They’re hiring a lot of people; they’re spending a lot of money, they’re a positive pulse for the economy.

Patrick Foulis: I think that’s right, although it is interesting that, again, going back to the same point with the stock market valuation, I think the stock market’s love affair with these businesses is, essentially, the monopolistic properties of their core activities, rather than applying some huge valuation to some of the speculative stuff they’re up to. You know, I mean all the bets of the bets division, which included experimental, more innovative activities, I’m not sure it’s something that people accord an enormous value to.

The one interesting thing, which is worth dwelling on, is the complaint from economists is these companies have surplus profits. In economist speak means, they save too much. They’re a source of excess saving, which might depress demand, among other things. And it is interesting, actually, the free cashflow of the big tech firms has not been growing because they’ve been reinvesting very heavily in the last three or four years.

So, you had a surge when the free cashflow become a significant share of GDP, or at least registered as a number. But instead of growing, that’s actually flatlined over the last two or three years because of the reinvestment, and reinvestment is probably one of the strongest offenses the companies have. Investment is good.

Hugo Scott-Gall: Yeah. Just cycling back to something we were talking up before, which was this idea that maybe capitalism can help save capitalism by being more competition. So, more competition could, actually, resolve the high concentration of profits, and it could, certainly, resolve some of the issues we touched on. So, if capitalism is, do something of a reset to make the case for it, what could that reset look like? If short-termism is on the way out, then what comes next? Instead, if the idea of a company exists solely to maximize profit for shareholders is now, as it is, I think its 40 years ago that was written by Friedman, if it is out of date, what comes next?

Patrick Foulis: There’s different threads of that. There’s one thing that’s happening is a cultural revolution at companies where the pressure from society to change, the be fairer, to be, perhaps, nicer is articulated through a culture war where companies are expected to display certain standards on political issues, cultural issues, at values, which is very different from what Karl Marx predicted. Right? The big threat, supposedly, to capitalism was, let’s smash up the companies, let’s take the profits. Now, the pressure is, well, does the CEO say the right thing in response to a particular controversy in the culture wars in America?

And in a way, if that’s all it is, I think that’s great for big business because they can handle that, no problem, the signaling and PR, basically, required to cope with that, I think, is slight. But on the other hand, I think there’s a couple of other strands. I mean, one is what you might call new left-wing policies that clearly attack capital. So, Elizabeth Warren has talked about workers on boards in the U.S. In Britain, you’ve got the labor party, which supports giving workers a share of the equity of big companies, and nationalizing some assets. And I think that’s the second thread, which is a more conventional attack.

But there is this really interesting question, I think, of, if the political system is broken down and is ineffective, whether it’s legitimate for people to peruse their political aims through the corporate sector. So, if you like, society is at the top; comprised of 10s of millions of people, and they vote, but many of them also own shares. And if it’s okay for them to ask for a certain set of objectives through the political system, why shouldn’t they use their votes in companies to push business to do the same thing? And, particularly, if the political system is not effective, which seems to be the case in many places.

So, I do think that’s the really tricky question. What if the ultimate beneficiaries; the ultimate shareholders in business want business to do something different; want business to behave more responsibly towards the environment, for example? I think it’s quite hard to argue they shouldn’t be allowed to express that through the corporate control system.

Hugo Scott-Gall: Yeah. And that makes a lot of sense. So, do you think that it will be an increasing part of any investment thesis that, actually, this company, is it good; does it do good; is what it sells good; is how it makes it good; is the whole broader footprint around it good, that this being seen to be good and being good will become important, then it’s not just going to be one thing; it’ll be the whole, how the company fits together, and all the things it touches. Do you think that’s gonna become a much bigger part of, for an investment, the investment thesis, and for a company, the sustainability of its business, business model, and its returns?

Patrick Foulis: Absolutely, and I think the tempting but foolish thing to do is look at the kind of ESG movement, and point out its obvious hypocrisy, and nonsense, of which there is an enormous amount. And we have lots of companies coming through The Economist, and we almost always ask them, you know, do you take ESG seriously? Do you feel that investors who have an ESG mandate say anything coherent? And quite often, the answer is incredibly critical.

But having said that, I do think you could construe a case that it’s really worth paying attention to. And one is because thinking about the social context of business is probably a proxy for good governance. Thinking carefully about the world is what good companies do. Secondly, because I think you can make more money if your customer base is, ultimately, interested in greener products, or more safely produced products, then maybe you can sell more things.

And then lastly, to go back to your Milton Friedman point, the key thing, I think, a profit-maximizing business should do is operate within the law today, but also anticipate how the law and rules change. That’s, actually, a sort of shareholder value maximizing thing. So, it was a bad idea to have been in the coal industry 10 years ago, and well run, profit-maximizing businesses would have anticipated the rules around coal would have changed.

Hugo Scott-Gall: My favorite Charlie Munger quote, of which there are many is, “Show me the incentives; I’ll show you the behavior.” Is that an issue of incentives still aren’t quite right? The incentives still are, inherently, short-termist for most companies, CEOs, boards, and that you do need a shift in a sentence? Or, actually, is it just sound strategic practice, to think longer term?

Patrick Foulis: Well, you’ve raised Charlie Munger. I should tell you my favorite quote, which I hope I get this right, but he was asked what he thought of pay consultants, and he paused and then said, “I cannot begin to express my contempt.” But yeah, incentives, I mean, I think big companies are very aware of this, and are balancing the kind of fashionable demands, perhaps, with a more realistic view of how the rules around business will change.

I do think there is a time horizon issue, which most savers are or should be interested in a decade-plus timeframe to their investments, and yet, the intermediation layer of finance, partly for cynical reasons; partly because the customers don’t do what’s in their own best interest, has shortened the timespan or the holding periods of a loss of investments. And that is particularly relevant for climate, I think, where if you believe the analysis, we’re looking at a 20-year to 30-year timeframe for carbon emissions to fall, and it is simply a fact that falls beyond the horizon of most institutional investors, and finding a way to fix that incentive problem, I think, is probably quite important.

I mean, in other words, if the ultimate savers in system had real control over the time horizon, I suspect they would be quite concerned that the terminal value of the oil and gas industry might be zero by 2045, but it doesn’t seem to be a problem the institutional investment world is too concerned about yet.

Hugo Scott-Gall: One last theme, and then we’ll get on to some economist specific questions. So, The Economist magazine’s been around, I think you’re in your 176th year now. You’ve seen the political pendulums swing multiple times. How far do you think it has swung, or is going to swing this time around? And what I’m really thinking about there are things like MMT, modern monetary theory, the potential politicization of central banks. So, that’s a direct economic implication and finance implication, but it feels like the pendulum is definitely swinging, and pendulums are heavy things, and they don’t just stop.

Patrick Foulis: I think that’s totally right. I mean, The Economist was, actually, founded to promote free trade. That was our original purpose, and something we’ve held true to. And internally, I think we’re very aware that while our editorial line on certain subjects, particularly, the idea of openness economically, and its benefits, while our line has been relatively consistent, we’ve been in and out of fashion. So, The Economist in the 1970s was a heretic, rebel voice on economics and politically, and then in the late ’80s, ’90s, and early 2000s, we were completely mainstream.

So, what we said was what the world’s elites already thought. And there’s a sense now, again, in which our editorial lines are, again, more in tension with what the political system produces. So, these ebbs and flows over time, I think are definitely there, and maybe there’s 20- or 30-year cycles. I mean, it is interesting, you’ve had a very stable low-growth period, with the economy trundling a relatively steady trajectory.

Yet, at the same time, the possible parameters of economist policy have been blown apart, and you have, obviously, on the left, there are things like MMT, and The New Green Deal, which seems to be a recipe for massive state intervention in the economy, and then on the right, you have, Donald Trump is indeed on the right, but his protection is disrupting institutions like the Fed, and so on. And I think there’s further to go.

And I think if you look back in history, there are these moments. I mean, the collapse of the Bretton Woods system in the late ’60s/early ’70s; the emergence of monetarism as a way of running the economy in the early ’80s. After that, inflation targeting becoming fashionable. So, we think of the existing economic policy making framework as quite a fixed thing, whereas, in fact, if you look back in history, there’ve been enormous changes, and I expect we have really quite big changes to have the economy as run coming.

Hugo Scott-Gall: And so, if the pendulums swinging, some things that were thought impossible or highly unlikely 5/10 years ago, now seem possible that you may well see in western economies: central bank; financing of fiscal expansion. That would be quite a big change, and would have many investment applications. Is that something there just because it’s being talked about you feel you need to weigh in, or is that something that when you talk about it, it’s because you think, actually, this is a increasing possibility, if not a probability?

Patrick Foulis: Well, sociologically or anthropologically, it’s really quite interesting to watch that debate in particular. So, what you have is, clearly, there’s a fringe, which has a really extreme position. So, The Green New Deal, or MMT, which is, essentially, throwing out the textbook completely on economics. But if you look, actually, nearer the center, there’s definitely been a clear shift among the U.S. economic establishment, that maybe fiscal deficits are okay. there is a body of thought that you should run bigger deficits, real interest rates are really low, spend the money of infrastructure; investment. It’s worth looking at the extremes because they tell you where the center bends towards.

And we’re in one of those phases now. And fiscal policy is a good illustration. I mean, it hasn’t hit continental Europe yet, the idea of going on a big fiscal stimulus, but I think whereas the U.S., clearly, has quite a high deficit at the moment. But I think again, if you see another recession, that’s when all of this stuff is gonna kick off, and suddenly, the idea of a big fiscal expansion as an alternative to another QE session, I think, will become totally mainstream.

Hugo Scott-Gall: Yeah. Yeah. So, I wanna slightly shift gear a bit and ask some questions, really, about you guys at The Economist, and where you cover changes over time, and the economy changes, and as the world grows at different speeds. So, how do you achieve diversity of thought and experience that is relevant to your whole addressable market? And what I mean by that is, as you write more and more about Asia, or as you write more and more about China, you definitely need different voices in the room, and different life experiences, specialization, et cetera.

How do you achieve the diversity of thought and experience, but at the same time, staying true to the founding principles of The Economist?

Patrick Foulis: Well, there are these big cycles, and if you look back over our history, and in fact, quite near where I sit, we have every copy of The Economist since the first one in a huge bookshelf, which you can go back and flick through, and it’s clear there are these moments. I mean, we were really focused on the cold war in the 1980s. That was really, really important, and what people wanted to read about. In the finical crisis, for two years we had almost saturation coverage of the economy and finance. In the last couple of years, it’s clearly been populism driven; the idea that the political system’s changing. So, there are these shifts.

In terms of how do you have the self-discipline to make sure that you were covering the world properly, and not being driven by an internal agenda, and I think part of that’s how you hire people, and there needs to be relatively independent-minded people, as well as people, hopefully, from lots of different backgrounds around the world. And we’ve always been quite good at that. And the ideal journalistic hire is someone who’s a bit of an intellectual rebel, and wants to challenge consensus, and not necessarily a kind of analyst. There is a difference between the two.

We changed the composition of the paper over time, as well. So, we didn’t used to have a China section; now we do. We didn’t used to have a China column; now we do. And by tilting the balance on that, you can force yourself into a different area. And then, the last thing is the kind of thing all organizations need to do, but having a self-critical mindset, which is by and large, a matter of culture.

The Economist anonymity as a publication is very helpful because everyone has a collective sense of responsibility, which in turn means that the people feel it’s perfectly okay to speak up if you think something rubbish, or crap, or wrong. We’re not siloed, so there is a sense of being broadly accountable to each other, both for getting things right, and if we’re making mistakes, being told so.

Hugo Scott-Gall: And when you postmortem, when you wrote about this, we thought it was gonna be very big, how do you then say, well, actually, we might have got that wrong. In our industry we’re not wrong, we’re just early. Do you do that as a dissident to say, well – do you look at outcome or process?

Patrick Foulis: The test is different in journalism. So, one of the most common complaints you’ll hear about The Economist is, particularly with the prices of assets, that when the housing crisis is just bottoming out, that’s when The Economist will run a cover on housing. Or when India’s boom is peaking, that’s when The Economist runs a cover, you know, look at India’s boom.

So, the test is a bit different because we’re not there, necessarily, to anticipate asset prices. We’re there to cover, intelligently, the things people are interested and need to know. So, I think that in terms of getting asset prices right and wrong, it’s just a different situation. On the bigger questions of the big economic trends and political issues, yeah, we get things wrong, but I think ultimately our purpose is to inform and engage our readers, rather than perform like an asset manager does.

And I think it’s where the analogy breaks down a bit. I think if we felt we were being very boring or simply tedious in our analyses, that’s a really big failure. Being interesting, rigorous, and wrong is not a problem for us, ultimately. It would be clearly better to be interesting, rigorous, and right, but we should be taking some risks intellectually. That’s our job.

Hugo Scott-Gall: Can you talk a bit about how technology has changed, if it has changed, what you do and how you do it. And maybe the provocative question is, will there ever be a machine writing; machine learns how to write like an economist writer, which is a very high bar, but does learn it is the end, and you’ll have articles written not by humans.

Patrick Foulis: Well, it’s already the case that parts of journalism have that, and elements of financial journalism, instant reporting of statistics and things on the wires already, basically, use computers. And we do the exercise quite regularly of getting a program to write an economist article, and we’re always relieved it’s still largely incoherent.

But technology changes, I think, really what customers; readers want, and how they consume information, and clearly, a bit of that is the shift to a very mobile phone centric way of consuming information, which is partly about the device, but also the pattern of how people read things. And I suspect over the next few years, more customization is the way things go.

So, your phone knows that you’re interested in Asia, and mergers and acquisitions, and Canadian politics, and feeds you that. But really, of all of the publications around, I think we’ve always aimed to be a kind of concise, clever snapshot of the world, rather than a device that spews what you think you want to know at you. So, the idea of a package of content, a bit of luck when you read it; a bit of spontaneity; unpredictability is quite important to us. And I suspect that that will never disappear. So, the idea of The Economist as a package rather than just as a flow of random articles about subjects.

Hugo Scott-Gall: Final question: is it true that the most important meeting of the week at The Economist is when you all sit down and compare your headlines, captions, and puns?

Patrick Foulis: Well, you can always tell someone who’s a born journalist because they find the process of having punning headlines or photo captions, just, basically, the most important and enjoyable part of their job. So, we spend a lot of time pouring over this. But yeah, we have two big weekly meetings, which are partly about process and partly about ideas. And usually, often at those, the good puns are raised and widely admired. So, one week we had Christin Lagarde moving from the IMF to the European Central Bank, and the pun of the week was, our story on the future of the IMF, which was called, “Changing of Lagarde.”

Hugo Scott-Gall: That’s very good. Very good. I’d say it’s almost punbelieveable. Patrick, thank you very much for joining me today. It’s been a pleasure to have you, and it’s been extremely interesting, particularly in learning a bit more about how the sausage gets made, so thank you very much.

Patrick Foulis: Thanks for having me.

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Hugo Scott-Gall
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