Prof. Reuven Brenner | On March 16, 2013

If there is validity in the parallels drawn in my previous articles, China should prosper, though  we do not know how long it would take. Recall Shakespeare’s Shylock. Below its dramatic surface, that play is about trust versus contracts. Members of a society who know that they must rely on contracts (Jews, surrounded by a hostile Europe), find themselves in opposition with Christians, who think that contractual agreements must have an escape clause by just saying: “trust me”.

Shakespeare captured the transition from customs, enforced by family, tribe and religion to one where lawyers and formal dispute resolution mechanism would have the last word. Only at that time, to him it seemed that customs should have the upper hand, and guide the courts too. He did not anticipate the necessary adaptation to a world of growing and more mobile population, where “trust” becomes an expensive capital to create and sustain.

Societies that do not succeed creating institutions to substitute lost “trust” with enforceable contractual agreements, will fall behind. And the slower these institutions are being created, the slower will society prosper.

I do not want to venture into making a prediction about the shape and form of the intellectual, neurotic prosperity so many single kids – the “little emperors” of anxious Chinese mothers – would bring about.

But let there be no doubt. A country filled with 1 million variations on Freud, combined with 100,000 variations on Woody Allen and Marx, and 700 million falling between the cracks during the transition from paternalist China to a variation on 18th/19th century lacking-safety-nets-type society, brings about a very neurotic prosperity.

When millions of people, who have nothing to lose, bet on crazy ideas, expect much volatility. It may be interesting to watch, and – no doubt – some will make fortunes from this volatility. Just remember the Chinese curse: “You should live during  interesting times.”

One thing the US could do in order not to contribute to this volatility, is let the Chinese keep their currency stable, and pegged to the US dollar. Monetary mismanagement combined with hundreds of millions of people who would have nothing to lose, and a few neurotic millions can be a lethal combination.

A version of this article originally appeared on Asia Times Online.

Prof. Reuven Brenner

Reuven Brenner holds the Repap Chair at McGill’s Desautels Faculty of Management, serves on the Board of the McGill Pension Fund and is member of its investment committee.

He worked with Bank of America, Knowledge Universe, EEN, Bell Canada, Repap Enterprises and with investors in Canada, Mexico, the US and Europe. He has been involved in the private equity markets as partner in Match Strategic Partners, has been investing in start-ups across Canada, as part of an “angel group,” and also created his own start-up, “e-mortal.com.” He has also been serving on boards of companies and institutions.

He was expert witness in cases covering anti-trust, bankruptcy and financial matters. In other spheres, Quebec’s government asked him in 1995 to be member of a commission whose mandate was to examine all aspects of Quebec’s possible separation. He was also asked to testify before US Congressional Commissions and Canada’s Senate’s Banking and Finance Committee, and worked with Poland’s central bank during the recent crisis.

His recent books are A World of Chance (2008) and Force of Finance (2002). His regular columns appeared in Forbes, The Wall Street Journal, Asia Times and other financial press around of the world. Forbes’ journalists put two of his earlier books in their all time recommended list, and Forbes Global dedicated a cover story, titled “Leapfrogging,” to his works and endeavors. Brenner also received the Killam Award (1992), the Royal Society elected him as “Fellow”(1999), and he received a Fulbright Fellowship Grant (1976).

Brenner was born in Rumania and immigrated to Israel in 1962. He served in the Israeli army between 1966-69, during the Six-Day War, and again during the 1973 Yom Kippur War. The Fulbright fellowship brought him in 1977 to Chicago, after completing his PhD at the Hebrew University and working at the Bank of Israel, where he received the First Prize from Israeli banks (for work with Saul Bronfeld, designing indexed securities). He lives in Canada since 1980. He is fluent in English, French, Hebrew and Hungarian.