Few will argue with the idea that bigger is better. Modern capitalism places the highest premium on the ability to achieve scale. Small means failing, or not yet a success. Hardly anyone today even remembers EF Schumacher’s 1973 essay collection called Small Is Beautiful: A Study of Economics As If People Mattered. Small hasn’t been beautiful for decades. Big is beautiful. Global is gorgeous. The world has long rewarded those who figured out how to make something a billion times and sell it to anybody anywhere – Cokes, Big Macs, digital music, toys, smartphones, and software. Globalization is all about scaling. Size matters.
The trick is that the larger an entity is, the harder it is to retain human faith and confidence in the reasons for its expansion. As nations and companies get larger, they lose their ability to serve the needs of their constituents and customers. You can have a billion customers (like McDonald’s) or citizens (like China), but they won’t be able to reach anybody when there is a problem. Chatbots can’t deliver like a person on the phone. How long can an entity sustain loyalty after the lines of communication start breaking down? Not very long. This is why it is quite possible that the superpowers – Russia, China and even the US – may break into smaller, more manageable groupings after the current leadership move on. Size matters. Nation-states and global companies have become too big to manage. Smaller is becoming better.
It all starts with a promise. Every nation-state and every company makes a promise about the future that people buy into. America offers the American dream. It is a belief system. If you work hard, you can succeed in a generation, own your own home, and live free from invasive rules and regulations. Of course, this promise has never played out very well for many. But most still believe it’s a possibility. China made a different promise. It was, ironically, more commercial. Work hard, and you can become rich. Personal freedom was never on offer, but history has made the Chinese public comfortable with the idea of centralized control. Russia had a very different promise. After the demise of the Soviet Union, Russia was never able to deliver wealth or progress except to those who learned how to organize crime. The intelligence community, meaning the KGB and its successor, the FSB, specialized in making things work. They aligned with crime gangs. This led to a situation where you could become rich and be protected if you chose your personal alliances well. If the head of your crime gang got into trouble, you got into trouble. In China, the price of failure is that you disappear and are never found, or you end up in prison. In Russia, the price of failure is that you disappear, and your mangled body is found a few days later. In America, when you fail, you just start again.
This is one reason Americans tend to be naïve about the realities of superpower geopolitics. They treat foreign leaders as if they are the same as an American leader. They find it hard to understand that an organized crime gang can gain control over a state. Although these days, many Americans speak of the current President or the former President as if they are a criminal who illegally gained control over the state as well.
The bottom line is that the superpowers are going to become smaller states. The superpowers are breaking up into smaller constituent parts.
Who is on the shortest timeline? Maybe it’s President Putin. His blustery threats to deploy nuclear weapons terrify all observers. But, even Russian State television is starting to question his strategy given that whatever it is, it’s not working. Russia is not winning in Ukraine, and the economy is not winning either. His organized crime community may be getting higher cash flows, but not enough Russians are beneficiaries of that process to change hearts and minds. Meanwhile, the bodies of his former oligarch friends keep ending up on the front page after particularly gruesome deaths. They fall off buildings, and boats and often die slowly from some weird biological weapon that no one can identify or cure. Meanwhile, Russian demographics were already bad. Now Putin has put the youth of the country in a hail fire of bullets. The mothers of Russia are mad. How long will the youth and their mothers support a losing situation? Not long. This is why local political powers are starting to speak up and sanction President Putin themselves. Look at Dmitry Palyuga, from the St Petersberg Smolninskoye local council. He co-authored a petition which demanded that Putin step down on the grounds of treason. Sixty-five other council members signed it too. Putin’s response? Arrest them all and shut down the council. Can Putin really destroy all local political opposition? Can he arrest every Russian who expresses disgust at the cost of his adventure in Ukraine? North Korea has managed it, but it’s not easy. North Korea is a lot smaller.
Size matters. Can Russia really retain control over its vast landmass while depriving citizens of their voice? No. Not for long.
Russia is already becoming smaller anyway. The organized crime gangs that control everything now are no longer exclusively Russian. More and more, its Chinese crime gangs that control everything East of the Urals. Does Putin already work for Xi? Arguably yes. Does Xi use Putin to help mete out rewards and opportunities for his organized crime community? Yes. Are Russia and China’s leaders now arguing about who gets the cash flows out of organized crime and commercial activities in the space between them, in Central Asia? Yes. That’s why Xi is making his first visit outside the country since COVID to Kazakhstan and Uzbekistan. Xi’s first statement there was basically a warning to President Putin. Russia and China may have a “no limits” friendship but China is in control of places like Kazakhstan and Central Asia. Russia is clearly being told to back off. After all, central Asia is the heartland of China’s Belt and Road Initiative. China will not allow anybody to interfere with its supply chains in this part of the world. All this is awkward for Russia especially given its dependence on young men from the East of Russia who are needed on Putin’s battlefields. The Russian youth in the West of the country are too sophisticated to buy into what seems to be a losing proposition. So, can Putin keep delivering better outcomes to his own team if he cannot expand organized crime activities into Central Asia? Probably not. Again, size matters. In the world of organized crime, either a gang can deliver more cash flow or it can’t. The bottom line is ruthless. Can Putin simply keep arresting or killing off all opponents? Size matters. The prisons can’t hold all the citizens, especially if you are arresting people simply for holding opinions you don’t like. It still costs something to take out an opponent. How much does it cost to push somebody off a boat or a building? Something.
So, unless you are betting that Russia can become North Korea, then at some point, Putin will come under attack from the Russian establishment. It seems obvious that there has been a long-brewing fight between the old-line military leadership and the former KGB/FSB/Putin/organized crime community. It increasingly looks like the military wants to restore the old order. They’d rather stay in power and keep Russia whole. That means eliminating the intelligence community/organized crime relationship that brought Putin to power. How will the world respond if we end up with a peaceful Russian military dictatorship at the end of all this? Probably with delight. The US military can work with the Russian military. Once Putin is gone, the diplomatic dialogue will return. Americans and Europeans will flood into Russia, but this time more savvy and wary. Will Russia have to repeat the mistakes it made after the Soviet Union collapsed? Can the economy be made to work better and more fairly? Yes. Will it be a race between the US and China to see who gets to dominate a Post Putin Russia? Yes. Might China become more aggressive in its efforts to control Russia East of the Urals? Yes. Russia in the future might be a smaller place.
China’s Xi is also an admirer of North Korea. He has long wanted the Chinese to walk in lockstep like the North Koreans. He too has tried to contain his population in various ways. Instead of putting people in physical prisons, he and China’s leadership opted for a digital approach. The Social Credit System allows China to incarcerate its citizens digitally. If you express a view the government does not like or hang out with people they disapprove of, suddenly your credit cards stop working, and you won’t be able to access your bank account. In one respect, COVID was highly convenient for China. It allowed for blanket lockdowns at the very moment that the public began wanting to protest the weakening economy. China’s core promise has been broken for a few years now. Nobody believes they are getting rich before they get old anymore. This is why the Communist Party looks set to diminish Xi’s authority at the next party congress in November. He’ll keep his titles. But, we’ll see the Politburo reasserting its power and authority. They want to keep China whole. They still believe that bigger is better. But power and food shortages are going to test the Chinese public. Will they simply go home and be quietly cold and hungry? Can China arrest everybody for protesting the lack of heat and food? They can, but the economy will keep deteriorating. Can China turn itself into North Korea? Can you really control a billion people through fear and threats? Could China see power revert to local authorities more than before? Yes. Size matters
.Both China and Russia have become too big to manage, given a world where there isn’t enough food and energy to keep everybody warm and fed.
The US has its issues with size too. Slowly but surely, the states have begun to challenge Washington’s authority. States have always had more power than the Federal Government, but now they are exercising that local power where it matters – on social issues. The state-level abortion bans now involve state-level enforcement. You can try to leave the state for an abortion, but the state will use your digital evidence trail to pursue you well past state lines now. The US used to be a federal nation. It is reverting to being a collection of local states that each has and deploys more authority than the Federal Government. The US has arguably become too big to govern. America’s businesses and banks have also become so large that no authority in the US has the jurisdiction or the reach to contain them. Years ago, Alan Greenspan began to say that America’s banks were not too big to fail but too big to save. Then people began to realize they had become too big to manage. No single person at the world’s largest banks or tech firms really knows what is happening to the institution. Twitter does not seem to know how many of its users are legit and how many are bots. Size matters.
And so, after decades of mergers and acquisitions and expansion of superpower nations, the world is now reversing course. Things are about to get smaller. Spin-offs and break-ups will now dominate the corporate news. EY is breaking up but also specializing in helping others get smaller too. The global audit industry is readying for a world where they have fewer clients. Investment banks will make more money from advising on spinoffs and breakups than from mergers and acquisitions. Militaries too are shrinking. As the proposed new Head of the US Space Force implied in his recent Congressional confirmation hearings, efficiency requires smaller units. People are moving into smaller dwellings as inflation picks up and certainty about the future drops off. Food will come in smaller portions. Candies are getting smaller too. Size matters and smaller will be more highly valued than bigger going forward. Small is beautiful now. As the current deck of leaders leaves the stage, whether in the US or China or Russia, we can expect to see a newfound focus on making things better by making things smaller. This is an investable trend.
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Excellent article, Dr. Malmgrem. As always, a pleasure to read what you write.
The following has been stuck in my mind for a while. I am well aware how how conspiracy-theory it sounds! I would be very honoured if you were to give it some thought, even if (or especially if) you concluded that it is baseless.
First I need to establish two premises:
1) Is there actually a plan? Or is the West being led by a senile old man and a gaggle of power-hungry clueless millennials? To make any arguments, we must presume there is actually a plan, otherwise it's chaos all the way down.
2) Was the current war in Ukraine intentionally instigated by Washington? This is a direct product of premise number 1, and seems to me blindly obvious, although no justification of Moscow's actions (but you cannot back a wounded bear into a corner and then get offended when it launches itself at your dogs. The answer is to not be one of Washington's dogs, easier said than done).
If these two premises are roughly accurate in concept, then a coherent explanation to events may be sought.
If there is a plan, then we must presume that this plan extends to the destruction of Germany's (and, therefore, Europe's) industry, since in the run-up to the final bear-baiting in Ukraine, the Nord 2 was finally shut down on Washington's determined insistence, despite Europe not having anywhere nearly enough LNG capacity to substitute cheap Russian natural gas for American LNG, nor will have (for industrial purposes) for some years to come, after which any industrial capacity would have to be rebuilt, not just restarted.
I will go so far as to posit that this - the second American destruction of German industry - might well be the whole point of this exercise (if, as premise 1 posits, there is indeed a plan at all). What on earth was to be gained by bleeding to a premature death a demographically dying yet nuclear-armed Russia? The Russian Federation was already mainly and increasingly a source of raw non-value-added material to the global industry, and - due to massive corruption of the oligarchy - not at 'risk' of re-industrializing in a serious way. If this, a second American destruction of German industry, was the whole point, then the added loss of Chinese industrial inputs and market would seem to be the logical next step, although arguably not necessary, given the severity of the damage caused by loss of cheap Russian natural gas.
In this light, the provocation of Beijing regarding their open wound of Taiwan makes perfect sense. (Again, not defending Xi nor Putin, just trying to see things from their perspective. I have not an ounce of love for Russia or China, for very concrete reasons). This - the end of German (ergo European and partially UK) industry - in the light of the ongoing American political deglobalization, would seem to point towards a reestablishment of imperial commercial boundaries, as before WWII.
Parallel to this, but not necessarily dependent upon it, might be the forcing together of Russia and Beijing into an alliance, to be the dearly-missed bogeyman that the American Military-Industrial complex so badly needs to continue justifying its existence, and that the regime de-jour needs to continue justifying foreign adventures (although the overlap would seem to be great, and growing). This latter is a bit too close to conspiracy theory for my comfort, but not necessarily wrong.
Perhaps the implication of these thoughts is that a (mostly) civil Civil War is ahead for the experiment that is the USA while China takes de facto control of Russia. The bipolar world returns with the two poles in slightly different forms.