The Local System Builds Community, The Global System Destroys It

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Ray Dalio, author and CEO of the hedge fund Bridgewater Associates, was recently interviewed by Tucker Carlson. Dalio addressed many topics, but his comments on the irreplaceable value of community are what stood out to me.

Dalio noted that power and wealth have zero correlation with happiness beyond our basic material needs. The highest determinant of happiness is community, and those nations with strong communities consistently score higher in their populace's happiness, regardless of their GDP, which reflects the size of the economy and its financial wealth.

What kind of system builds, strengthens and maintains community, and what kind of system erodes community?

I often discuss the essential role of community in terms of self-reliance, agency, stability, security and physical / mental health--what we might summarize as the foundations of happiness / life satisfaction. I also often note that the quality of our lives depends largely on our local community and governance, as all the distant events and machinations that dominate the "news" and social media typically have little real-world influence over our day-to-day lives.

Let's start by sketching out what kind of system builds community, and what kind of system erodes and ultimately destroys it.

The foundation of community is the population of permanent residents who have a stake in the place, economy, governance and culture. What separates transients and tourists from the permanent residents is accountability and consequence: permanent residents suffer the consequences, and so they're accountable for whatever actions generate those consequences. This is what Nassim Taleb calls "skin in the game," and having skin in the game is the core of community.

In my recent post on the unaffordability of housing, I suggested banning non-resident-hosted short-term vacation rentals (STVRs). This drew immediate accusations of being a "Marxist" (whatever that means, as those tossing the accusations never seem to have actually read anything Marx wrote).

The root accusation is that limiting STVRs is limiting "the free market," which the ideology / mythology of "markets" holds up as the one mechanism that solves all problems via "the invisible hand" of buyers and sellers and is therefore self-regulating. Limiting "the market" in any ways inhibits its ability to solve all problems and self-regulate.

I discuss this mythology at length in my book The Mythology of Progress, and the irony that the faith in "markets" as the solution to all problems is the mirror image of the faith that state control of everything is the solution to all problems, a.k.a. Communism. Both blame the failures of their faith / mythology on those meddling with the purity of their solution.

This boils down to: if only people were saintly, "the market" or state control of everything would be Utopia.

But alas, people are greedy, short-sighted, dishonest, and prone to offloading risk and consequences onto others as the means to self-enrichment.

The reality is there is no "free market," and never has been, as markets are begging to be dominated, distorted or controlled. These are not bugs of markets, they're features. The irrepressible temptation created by a market is to gain control via monopoly or cartel or brute force (the Warlord model) or game / manipulate it via subterfuge, regulatory capture, deceit, fraud, or any of the other ways markets can be influenced to maximize private gain at the expense of the environment and other participants..

Though his analysis is far more extensive, this is the core conclusion of Karl Polanyi's analysis of market forces in the 19th and 20th centuries, The Great Transformation: The Political and Economic origins of Our Time. Rather than ushering in Utopia, Polanyi held that the ideology of the self-regulating market would "annihilate the natural substance of society," which we can take as shorthand for community.

According to Adam Smith, per his 1759 prequel to his better-known The Wealth of Nations (available free here), The Theory of Moral Sentiments (available free here), people have a natural tendency to care about the well-being of others for no other reason than the pleasure one gets from seeing them happy.

This is the moral foundation for Smith's theory of what we typically call capitalism: self-regulating, open markets, which includes the Invisible Hand (the pursuit of self-interest is the ideal distributor of everything of value) and comparative advantage (whatever is made cheaper elsewhere will be advantageously imported and whatever is cheap locally but dear elsewhere will be exported advantageously).

Believers in "markets" hold that every community becomes Utopia if the state vanishes and the market reigns supreme. Any governance mechanisms that limit the market is communist anathema, i.e. "Marxist."

The problems with "free markets" can be briefly summarized:

1) Costs, risks and consequences are offloaded onto the environment and subservient populations as "externalities." That industrial waste was dumped into The Commons without regard for future costs, risks and consequences was perfectly fine with "free market" industry, and the result that America's rivers were dead and even caught fire was of no interest to industry: costs were lowered by dumping waste in public rivers, end of story.

That's a pig carcass floating in a dead Midwestern river. Welcome to the "self-regulating market" with no accountability for externalities and no local control of the market or its consequences.

There were no "market mechanisms" to counter this reliance on externalizing costs and consequences to boost private profits, any more than there are "market mechanisms" that will clean up the mass of floating plastic waste the size of Texas in the Pacific, the Great Pacific Trash Gyre, just one of the floating islands of industrial waste in the seas.

2) Costs and values "discovered" by supply and demand / buyers and sellers are "discovered" in the present, without any forward-looking assessment of future costs, risks and consequences.

Hence dumping industrial waste into public Commons (including the air, water and health of the public) was an excellent cost-saving strategy. The "self-regulating market" saw nothing wrong with this, and fiercely resisted public demands to clean up the toxic waste (via the mechanism of state governance).

3) The "self-regulating market" only recognizes and prices commoditized goods and services. The price of a condominium or dwelling can easily be "discovered" since dwellings are commodities, interchangeable in terms of the measures of enclosed space, amenities, etc.

What is the "price" or "value" of a functioning, vibrant community? Since the attributes that make up a community cannot be reduced down to commoditized goods and services, the "invisible hand" cannot "discover" the price, nor can "self-regulating markets" factor those (in Dalio's view) most valuable attributes into its calculation of "price" and "value."

Which brings us to the kind of system that erodes and ultimately destroys community.

Let's start with what's now called Over-Tourism, the degradation of permanent residents' lives and community due to the impacts of tourism--specifically, the impacts of housing multitudes of partying tourists in residential neighborhoods (i.e. STVRs) and the strain on infrastructure and daily life generated by millions of transients and visitors.

One In Three Spaniards Say Their Area Suffers From Over-Tourism.

Drunk visitors, rocketing rents and homogenized cafes: living in Europe’s tourist hotspots.

I recently visited the island of Kauai to see mainland friends who were visiting the Garden Isle. The house my friends rented for themselves and their sons' families was in a neighborhood that was largely STVRs. The only locals (i.e. permanent residents) I saw were behind a cash register. Everyone else was a well-heeled tourist.

According to statistics collected by the University of Hawaii, the median household income of Kauai residents is $86,000 and the median home sale price is $892,000--more that 10 times annual household income. This is the acme of unaffordability.

Of all single family homes sold, 40% are purchased by out-of-state buyers, and 65% of condominiums sold were bought by out-of-state buyers, and 16% of the island's entire housing stock are STVRs.

These percentages typify the outer islands of Kauai, Maui and Hawaii.

Here are the "market" dynamics of globalized financialization, a.k.a. "self-regulating markets," one symptom of which is over-tourism:

1. The number of wealthy individuals and corporations in the global economy is far larger than the pool of local, community-centric wealthy.
2. Any organic (i.e. non-commoditized, non-globalized economy) has a Pareto Distribution of wealth in which the top 20% hold the majority of the local income and wealth.
3. The local "wealth" is an order or two of magnitude (i.e. 1/100th) lower than the wealth of the global wealthy and corporations, both of which can easily outbid locals for assets such as land, housing and political influence.
4. Global capital has no interest in community except as a "resource" to tap for private profit. The non-financial costs of maintaining community that are borne by permanent residents are "mined" (or stripmined) by outside capital as the foundation of the "value" being offered to tourists.
5. Outsiders buy a commercial property, and rent space to the highest bidder, which is a corporate chain. Local small businesses that supported the community are priced out and the "community" devolves to a commoditized, corporatized, homogenized version of everywhere else.
6. Outsiders buy houses from locals that were family homes for short-term vacation rentals, with the sole goal of maximizing private profit. That drunk, rowdy, noisy tourists ruin the neighborhood is of no concern to the owners or managers. There is no "market mechanism" to counter this decay.
Adam Smith's axiom underpinning his entire concept is wrong; drunk vacationers out to have a good time do not care about the well-being of the permanent residents.
7. Outsiders who favor the beauty of the locale and what hasn't yet been debauched in the local community outbid locals for housing. Global wealth is rich enough to own properties that are vacant most of the year. Housing that once housed permanent residents (or could house permanent residents) is vacant or used as informal STVRs.
8. To maximize profits from the local community / culture, the souvenirs are imported from Asia, fake "spectacles" to attract more tourists are ginned up from local traditions, and whatever was organic and authentic is reduced to a simulacrum, a fake, phony, debauched "product," "spectacle" or "experience" that can be commoditized to maximize private gain, i.e. packaged and sold as a commoditized product or service: a tour of the "secret" beaches (now not so secret), the local cuisine debauched into high-cost "fusion" offerings to wealthy tourists, and so on.
9. These same mechanisms of financialization / commoditization / globalization play out everywhere in the world.

In summary: when "price" is all that matters, local communities cannot match the financial resources of global capital, which outbids locals for assets which are transformed into means to extract profit from the intangible "assets" of the local community. The quality of life for locals decays as drunken tourists disrupt once-quiet neighborhoods and the organic economy is commoditized to serve global tourism and the offshore owners of mostly empty homes.

Empty dwellings is what you see everywhere in globally desirable locales: huge buildings with only a few lights on night after night, nobody entering or exiting, empty corridors and silence. The owners live half a world away.

The failures of "the state controls everything" model are well-known and need no elaboration. But the failures of the "self-regulating market" are equally catastrophic but less well understood and often denied or obfuscated out of self-interest.

The core dynamic of the system that builds community is that the permanent residents of the community maintain control because they're the only participants with permanent skin in the game, and this control must have the power to limit the self-serving predation of global capital or it means nothing.

Unrestrained global capital erodes community because it has no skin in the game and no interest in the non-commoditized "value" of community other than profiting from exploiting it. ("Aloha means good buy.") Its interests are limited to maximizing private gain and externalizing / offloading costs and consequences onto the permanent residents. It sells out and moves without regard for the community it stripmined.

The non-financial assets of the community milked for private gain were the equivalent of a stock IPO or bond, a financial asset to be milked and then sold.

Yes, market dynamics can play an important role in a community, but only within the limits set by its permanent residents who must bear the long-term costs, risks and consequences unleashed by decisions made in the present.

And no, enabling locals to limit the destruction of their community by global capital isn't "Marxist": it's merely common sense.

One system builds community, the other system destroys it. It takes an extraordinary blindness not to see this reality playing out around the world.

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