The end of the era of optimisation

A focus on maximising returns has made economies too fragile, says Edward Chancellor.

Worker in a Japanese factory
Japan has retained more of its manufacturing base
(Image credit: © Noriko Hayashi/Bloomberg via Getty Images)

In recent decades, we have lived through an era of optimisation, which was enthusiastically embraced by American executives, in particular. Under the banner of delivering shareholder value, companies contracted out manufacturing to suppliers on the other side of the world, ran down inventories – operating instead on a “just-in-time” basis – and replaced equity funding with debt. Optimisation boosted the components that determine return on equity (ROE): corporate profit margins, asset turns and leverage. US public firms boasted the highest returns in the world, reporting a 17% ROE last year, compared with just 9% for Japanese firms.

However, as Nassim Nicholas Taleb pointed out in his 2012 book Antifragile, the pursuit of optimisation creates instability. Thus, in recent years, we’ve witnessed a succession of “optimisation crises”. The global financial crisis of 2008 showed that undercapitalised banks were overly dependent on capital markets for liquidity. When Covid-19 struck many countries discovered their public health systems had too few hospital beds and inadequate staffing levels to cope with the pandemic. Vladimir Putin’s invasion of Ukraine has further exposed weaknesses in Europe’s energy system; not only was Germany hopelessly dependent on Russian oil and gas, but the country had also underinvested in its military.

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Edward Chancellor

Edward specialises in business and finance and he regularly contributes to the MoneyWeek regarding the global economy during the pre, during and post-pandemic, plus he reports on the global stock market on occasion. 

Edward has written for many reputable publications such as The New York Times, Financial Times, The Wall Street Journal, Yahoo, The Spectator and he is currently a columnist for Reuters Breakingviews. He is also a financial historian and investment strategist with a first-class honours degree from Trinity College, Cambridge. 

Edward received a George Polk Award in 2008 for financial reporting for his article “Ponzi Nation” in Institutional Investor magazine. He is also a book writer, his latest book being The Price of Time, which was longlisted for the FT 2022 Business Book of the Year.