This is one of a series of columns that were produced for Moneyweb Investor in which Stuart Theobald explores the intersection of philosophy of science and finance. This followed an earlier series for Business Day Investors Monthly on the same theme. May 2016.
The American economist Paul Krugman recently coined a useful phrase: “the politics of epistemology”. He was writing about the way American politics has distorted what it means to claim something is true. The primaries process has seen all sorts of bizarre claims from all sides. It struck me as a good way to make sense of South African politics right now.
Philosophers talk about epistemology as the as the study of what we know. It is contrasted with ontology, which is the study of what there really is. Ever since Descartes and Berkeley, we’ve been worried about whether what is inside our heads is at all related to what is actually in the world. That remains the case. For example, one live debate in the philosophy of science is whether a concept like a “quark”, and abstract entity proposed by theoretical physics but which we have never observed, is purely an epistemic concept or whether it is something that actually exists in the world – an ontological fact. It may be that theories in physics use concepts that are instrumentally useful like quarks and strings, because they allow for good predictions, but that don’t actually exist in the world.
The politics of epistemology concerns how political power can weigh in on what we see as true or false. So some in South Africa apparently believe a respected, high-achieving finance minister can have committed espionage (a crime which doesn’t actually exist under South African law), while a president who faces 783 counts of fraud and corruption has done nothing wrong. No one seems to care about what is actually true, but rather with what is politically useful to think is true. So we can all think president Zuma never said he wouldn’t pay back the money. Where your political colours are nailed determines what you think the facts are, and what you want others to think the facts are, and reality doesn’t matter. Sadly, some in the media are useful instruments in this effort at fact-making, faithfully reprinting unquestioned what they are fed, and then helping to make other people think they are true.
What has all this got to do with investing? Two things. First it helps to understand that in the political process, the facts don’t always matter. Second it helps to not be distracted and remember that it is the ontology of our economy that really matters to investment performance.
Making up facts works only to a point. The judicial system provides a line in the sand, a point at which epistemology has to meet ontology. Partly this stems from the political strategy of claiming things are contingently true up until a court rules. This is double edged sword for the erstwhile political epistemologist. It allows them to straight-facedly claim something is the case – say that Pravin Gordhan should be investigated – because ultimately it is a court that will decide whether he did anything wrong. That buys them space to spread the belief that he did wrong as part of a wider effort to discredit him, assisted by using the investigating resources of the state to intimidate him and add credibility to their efforts. But then, when a court does rule against them, a rapid damage control exercise has to be launched. So in the long run, as long as our judiciary remains independent, reality does matter.
But for investors, cold hard reality is what matters all of the time. South Africa’s unemployment rate has never been higher. Our economy will grow only half a percent this year, meaning we are poorer per head than we were last year, and significantly poorer in dollar terms. That has serious political implications – with everyone, on average, getting poorer, many social ills that were being tolerated suddenly won’t be.
But, on the other hand, the slight uptick in resources prices is shifting the economics of production for a large part of our economy. The tough recent times faced by mining companies have forced them to dramatically improve their efficiencies. They are now positioned for a sharp upswing in performance. The sharply weaker rand, helped down by the reality of our political dysfunction, has a strong stimulatory effect on some substantial parts of our economy, including what’s left of our manufacturing base. Despite a dramatic skills constraint, our services sector is also in rude health and can improve its own export capability.
The ratings agencies are keenly watching these facts. They are focused on whether South Africa will meet its debt obligations. That depends on the willingness to do so, and on the ability to do so. The first depends on our politicians while the second depends on our economic performance. So far, government has managed to convince the world that we have every intention of maintaining a sound fiscal stance and continuing to keep our debt serviced and under control. Moodys this month said it thinks economic performance will pick up next year. It well might, and the true facts are what we need to keep focused on to be able to tell. So despite the politics of epistemology, you are best served by keeping an eye on the numbers. And those are not all negative.