Featuring Charles Darwin, Ayrton Senna, Strawberry Fields, Steven Hawking, Shaka (King of the Zulus), Steve Wozniak and Karl Marx.
There is a healthy dose of blue-sky thinking in this article. I have included some provocative thoughts in the spirit of stimulating a coffee-house style debate and have consciously permitted some naivety to freely explore the essence of each idea. The intention has not been to present a robust paper, but to open the discussion more broadly and, by trying to consider relevant issues from a holistic perspective, to explore without constraint how the new economy could be shaped. In the book ‘The Road from Ruin’, by Matthew Bishop and Michael Green, the authors describe very eloquently the major problems which led to the Financial Crisis which started in 2008 and has still not ended. They also point out the key issues which will need to be borne in mind going forwards. Where will this road take us?
Anatole Kaletsky uses the nomenclature of Capitalism 4.0, in his book of the same name, to frame the new economy; including its principles, behaviours, components and overall architecture. Giving something a name is always a useful starting point. Kaletsky argues that the first version of Capitalism was the laissez faire era in which politics and economics were separated; it ended with the Great Depression. The second version subsumed economics as a function of politics and it ended with the stagflation of the 70’s. The third version inverted this arrangement with politics being a function of economics and it ended on the 15th September 2008 with the collapse of Lehman Brothers. Version four, which he argues we are now entering, will accept that both governments and markets can be wrong but both are important. We will need to accept a milieu of increased complexity, uncertainty and unpredictability if we are to realise a new blended economy which seeks to balance social and financial outcomes. This aligns strongly with the roadmap put forward by Bishop and Green in ‘The Road from Ruin’, and also the precepts underlying their previous book ‘PhilanthroCapitalism‘.
I would like to weave together seven themes in this article which relate to various conversations I have recently had and the thoughts they triggered. When combined, they should have resonance (albeit obliquely and hopefully entertainingly) in formulating the architecture of the new economy; the place where the Road from Ruin will take us – destination Capitalism 4.0 if you will.
- Scene 1: Charles Darwin – explores how evolutionary theory may be relevant in understanding the financial system;
- Scene 2: Ayrton Senna – extends a motor car metaphor to infer a regulatory framework for the financial system;
- Scene 3: Strawberry Fields – evaluates how non-hierarchical structures and networks organise themselves;
- Scene 4: Stephen Hawking – considers the pursuit of the ‘Theory of Everything’ in the field of theoretical physics and explores whether we should consider an economic equivalent.
- Scene 5: Shaka, King of the Zulus – looks at pre-colonial African currency and modern fiat currency;
- Scene 6: Steve Wozniak – explores the world of printing your own money (it is legal for communities to print their own money for use in local stores – Brixton in London does it)
- Scene 7: Karl Marx – touches on the critique of capitalism by Marx and the world’s rejection of socialism;
- Extra Scene: The Directors Cut – what can we take forwards about how the new economy could be shaped?
Scene 1: Charles Darwin
Charles Taylor, Head of the Financial Reform Project of the Pew Trusts in Washington, is exploring an idea about how Darwinian evolutionary theory may be relevant in devising the new rules for macro-prudential financial regulation, in other words the regulation of the global financial system. Notably, he is being listened to by the major banks and rule-makers, notably the Chicago Federal Reserve Bank and IMF at a conference entitled ‘Macro-prudential Regulatory Policies: The New Road to Financial Stability’. He argues that the current Basel 2 regulatory approach tends to support homogeneity of organisational characteristics and thereby creates a system which is ‘a vector of contagion’. Flowing from this classification are the ensuing patterns of herd instinct and irrational panic within markets after experiencing a shock, like the collapse of Lehman Brothers.
The Darwinian metaphor suggests that we can consider financial organisations as ‘species’ or ‘subspecies’, akin to the genetic diversity within nature. By evaluating the stability of the financial system through this lens we can explore how it might react to shocks in a comparative way to how the ecological system might react to sudden environmental change.
In a scenario where change is too rapid to accommodate slow evolutionary mutation, it may happen that existing and dominant species can no longer survive and more suitable or adaptable species rise to the fore – the system adjusts. The warning is that if there isn’t sufficient genetic diversity within the system to accommodate such a rebalancing, that the stability of system as a whole may be jeopardised. In the world of economics this is equivalent to a depression turning into a global financial crisis.
The system requires two things to adjust without failure or cataclysmic consequences during the stage of flux. First, the future dominant organisational types need to already be in existence when the crisis hits (having not previously been made extinct through winner-takes-all competition) and they need to be ready to fill the void. Secondly, the vector of contagion needs to be limited through clear information about the interconnectedness of the elements within the system and adequate firewalls need to be in place.
The fatally infected elements can be rapidly and effectively destroyed. The curable elements can be quarantined until they have been treated for infection. Those not infected can go about business as usual without jeopardising the system as a whole.
Taylor argues that we need to track heterogeneity as a measure of system resilience within a regulatory environment which promotes heterogeneity of organisational characteristics. He adds that we need to improve the nature and quality of data which we collect on financial institutions, and organise it so that we are able to identify with sufficient forewarning those parts which are unstable and which threaten the system.
Taylor’s thesis behind the characteristics of homogeneity and heterogeneity align very strongly with group behavioural tendencies of conglomeration and confederation respectively, which I have been using to aid my analysis of private sector and third sector organisations. Private (commercial) financial sector organisations tend toward conglomeration and the crowding out of competition (through unproductive innovation in a winner-takes-all model). Regulation seeks to temper this somewhat. The interconnectedness and co-dependence of these organisations within the network may tend toward stability in normal conditions, but with a build up of systemic risk, out of the ordinary shocks can result in a potential ‘vector of contagion’. What is most concerning is that when this escalates into a situation of ‘too big to fail’ combined with ‘too big to bail out’ – an impasse where only the state can rescue the situation at taxpayers’ expense.
Scene 2: Ayrton Senna
In the UK edition of Road from Ruin, the authors compare the financial system to the motor car:
“Both are useful and can get us from A to B more quickly… Both are also prone to crashes… In the early days of motoring these risks led to the now unfathomable rule that a car needed to travel at no more than four miles per hour and be preceded by a man carrying a flag. Happily, this structural approach to risk reduction was soon dropped, and instead ways were found to make cars safer and drivers better. Not all accidents are prevented but a tolerable balance has been achieved between the risk of accidents and the wider benefits of driving.”
If we extend the metaphor – hopefully not stretching it too far – one might suggest that the lucrative investment banks are to racing cars like retail banks are to passenger cars. In this context, breaking up the banks would be akin to banning the companies involved with the production of family cars (Renault, Goodyear et al) from motor racing. Clearly we don’t want them to race on public roads during the school run, but we accept that under certain conditions, such as a race track with extra safety equipment and rules in place, the risk of racing is deemed manageable and we all benefit from the innovations which are ultimately incorporated into family cars but originate from motor racing. In the world of finance, we must find a way for investment banks and retail banks to have a mutually beneficial relationship, whether they are separate or not.
When a fatality occurs in motor racing, as in the unfortunate death of the Formula 1 driver Ayrton Senna, the motor industry reacted not by banning motor racing or the companies involved, but to pursue culpability for the accident and insist on higher safety standards as a result. Similar accidents have happened subsequent to Senna’s fatal crash, but these days drivers often walk free of the wreck and get into the spare car to continue racing – we need to find a way to do the same for the financial sector when a financial organisation hits the proverbial wall. Motor car drivers and passengers after all do not have safety equipment because they know that they are going to have an accident, they need the safety equipment precisely because they don’t know if, when or where they may have an accident. The new economy will need enhanced safety measures which reflect an economic paradigm of increased complexity, and which accepts unpredictability and uncertainty as par for the course.
We will need to balance social and financial dimensions within a blended economy which, given the complexity of the system, has attributes more akin to organic systems than linear systems. In addition to Taylor’s idea of applying evolution theory to macro-prudential regulation, we should also consider which types of organic systems are inherently better at managing risk.
Scene 3: Strawberry Fields
The latter part of the 20th century brought with it a general acceptance that human behavioural dynamics does play a role in economics. It was a healthy rebalancing of the neoclassical economics which introduced the concept of homo economicus, a term used to describe the supposedly very rational and well informed financial decision makers who made up the system. Given this behavioural component, it is attractive to look at how Gilles Deleuze and Félix Guattari, in their in their Capitalism and Schizophrenia project between 1972 and 1980, postulated a philosophic theory to describe how social networks organise themselves. They studied plants such as strawberries which grow and propagate via rhizomes. These plants send out horizontal stems which grow roots and shoots from nodes, thereby forming non-hierarchical patterns. Deleuze and Guattari consequently described social networks which form along these lines as rhizomic structures. These structures are exactly opposite to the hierarchical, vertical and linear patterns of the arborescent model used to describe the root, trunk and branch patterns found in trees. The theory even allows for trans-species connections, with multiple and non-hierarchical entry and exit points for information.
The non-hierarchical infrastructure of the Internet resembles these rhizomic structures. This is an important precedent demonstrating our knowledge and ability of being able to construct systems which self-organise and which are inherently resilient to shocks. The Internet infrastructure has been designed so that multiple nodes and communication links can be destroyed without causing the system as a whole to crash. There may be localised outages, but the system is able to dynamically redirect information traffic in order to maintain stability and optimum performance. There is no reason why the financial system of the new economy cannot be designed in a way that reflects the cybernetic society it serves.
Not all countries where equally badly affected by the recent financial crisis, some countries were only been mildly affected by the contagion. The ‘non-established’ countries did reasonably well, particularly those which exported foodstuffs rather than manufacturing products. It would be misleading to say that their financial systems were less sophisticated in comparison to those of countries most affected, but it is fair to say that they had fewer financial linkages to the rest of the world. In a business confidence survey undertaken in 2009, international business people of 24 nations where asked to identify which countries they believe where surviving the crisis the best. Australia, China, India and Singapore scored highest. More robust analysis in 2010 by Berkmen, Gelos, Rennhack and Walsh (all of the IMF) concluded that there are distinct policy lessons which can be drawn from the crisis. Typically countries which fared well had: exchange-rate flexibility to dampen the impact of large shocks; good prudential regulation and supervision to focus on preventing the build-up of vulnerabilities that are particularly associated with credit booms; and a solid fiscal position during the ‘good times’ to create buffers with which to conduct countercyclical fiscal action during shocks.
In blunt terms, the countries which largely escaped the contagion elsewhere in the system were not mutually co-dependent on the same brand of ‘pass the parcel’ finance. By being sub-systems which opted out of this game and not simply replicating policies of other countries, they demonstrated heterogeneity as well as resembled components within a rhizomic structure.
There is no doubt that we need better regulation. Version three of the Basel Accords is an attempt at this, but the proposed amendments are not yet up to scratch. The focus should not be on more regulation or magic ratios, but on more effective and smarter regulation. The lesson seems to be that there is no need to remove the sophistication from the system per se, but rather to develop a much more flexible system which is able to dynamically respond to shocks. This will encourage and allow the financial system to promote innovation but with checks and balances so to avoid exploitation. We need to strike a balance between over-regulation and so much deregulation that the sector is effectively self-regulated – neither extreme will deliver value for society. We need to regulate the system in a way which allows it to self-organise if it is going to adapt to change we cannot predict.
Scene 4: Stephen Hawking
There has been substantial work undertaken in the field of theoretical physics to develop a ‘Theory of Everything’ which could unify all existing but currently disparate theories (from general relativity, through electromagnetism, to gravity). The objective of this pursuit is to be able to fully explain in a single model all known physical phenomena, and predict the outcome of any experiment that could in principle be carried out. It is tempting to think that perhaps, with better information and more computational power, that we could develop an economics equivalent which would allow us to predict and avoid the next financial calamity.
Stephen Hawking was initially a strong advocate for trying to develop a ‘Theory of Everything’, but famously changed his mind after reading Gödel’s incompleteness theorems, and concluded subsequently that a ‘Theory of Everything’ is probably not possible.
The first incompleteness theorem states that no procedural mathematical system (essentially, a computer model) is capable of proving all facts about the natural numbers within it, and that there will always be statements about the natural numbers that are true, but that are unprovable within the system. The second incompleteness theorem shows that if such a system is also capable of proving certain basic facts about the natural numbers, then one particular arithmetic truth the system cannot prove is the consistency of the system itself.
Computational models and simulations can never be more than abstractions of reality, and are therefore prone to error through the omission of key variables, false assumptions or incomplete and incorrect data. These models lull us into a false sense of comfort because they are able to accurately predict nearly all eventualities – except of course the next big crisis event. The limitations with all models are manifest at the margins, where the information is unreliable and as a consequences, outcomes unpredictable.
Improved data collection on financial organisations and enhanced information modelling of the system can be no bad thing. In my view, what it not being sufficiently explored is specifically how the financial system as a whole can be better prepared for the unpredictable and uncertain. We may not be around to experience the next crisis, but somebody will be. There is no need to be fatalistic or attempt to develop an economics ‘Theory of Everything’, but we will be well advised to improve both how the system is organised and how we access and interpret information about what is happening, particularly when the financial system itself is in flux or unstable.
In 1865 Rudolph Clausius coined the word ‘entropy’ from the Ancient Greek entropia, which literally means ‘a turning towards’. These days the word has a number of subtly varying meanings. In thermodynamics, it is a measure of the amount of energy in a physical system that cannot be used to do mechanical work, a measure of the disorder present in a system. It is also commonly used to refer to the tendency of a system that to descend into chaos if left on its own.
Lord Tuner, Chairman of the Financial Services Authority, famously used the term ‘socially useless’ in 2009 to describe much of what the banking sector did. In this context, it would be interesting to explore definitions of entropy with respect to the world of finance. In the financial system, would the measure of activity which cannot be used for social benefit be a similar concept to the amount of energy in a physical system that cannot be used to do mechanical work?
Chaos may be too strong a word to describe the recent financial crisis or the underlying dysfunction which caused it. However, we should be mindful that even Nouriel Roubini, the man who has been credited with best predicting the systemic instability in the run-up to the financial crisis, was unable to anticipate how extreme the fallout would be. It is clear that instability or disorder of the financial system, call it entropy if you will, has grave consequences for the real economy and society more broadly. It would therefore be advantageous to work out, in the context of economics, what an appropriate measurement of entropy would be.
Scene 5: Shaka, King of the Zulus
Money doesn’t grow on trees, but today it can be fabricated almost out of thin air because debt can be created with effectively nothing but sovereign goodwill to back it up. What is the difference between Zimbabwe printing money and the USA or UK doing similarly through Quantitative Easing? Nothing and everything. The USA and UK possess the trust of the markets to back their actions. A problem arises if the trust is eroded, Zimbabwe demonstrated this.
Paper and minted money is a relatively new phenomenon, so it may be helpful to pause and look back to a world which preceded paper money and gold-backed currency (but not necessarily preceding markets). Let us consider the world of the revered Chieftain Shaka Zulu where the medium of exchange and measure of wealth were quantified in head of cattle. In reality we could study anywhere in pre-colonial Africa. Currency varied regionally depending on what was available locally. It was a pro-market environment where items suitable as a medium of exchange were inherently a ‘store of value’, these included iron, salt, blankets, axes, beads, cattle, goats, concubines and slaves. Most notably, these items possessed high social value because the currency itself had a direct use value in sustaining the basic needs of a community as well as improving and developing the lives of its people.
Gold is different. Whether as a medium of exchange itself or to back a currency, gold does not have direct social value or use value in the way that food, an axe or a concubine does. Gold does have many useful attributes of course. It is difficult to extract and therefore difficult to come by without mobilising a society through mining or warfare, and thereby demonstrating socio-economic, military and political power. Gold is shiny and can be easily worked into jewellery to display wealth. More importantly it is a useful representation of wealth due to its rarity, durability, divisibility, fungibility, and ease of identification.
Gold is also inconveniently bulky to store and transport. The gold standard resulted in the inconvenience of nations having to ship gold between themselves to adjust their balance of payments when they experienced either a trade deficit or trade surplus. Today most national currencies are no longer backed by gold (or any other commodities) and hold their value because it is issued by the state as legal tender. It is worth something because it is backed government decree – this is known as ‘fiat’ money. The Latin word fiat literally means ‘let it be done’.
In this abstract world of fiat money, where the value of the currency is relative and worth no more than the word of the government which backs it, sovereign debt is arguably a measure of a nation’s stored goodwill. It could therefore be argued that a comparative indicator such as the debt to GDP ratio, or any other ratio, is irrational and arbitrary. That is not to say that the debt is meaningless.
We know that markets are driven by irrational decisions and by human behaviours, good or bad. There are conflicting opinions about whether countries should limit their debt to 60% of GDP or 90%, 100% or some other ratio in order to avert, or be prepared for a crisis. It is difficult to reach a consensus on calculations which try to work out the cost to future potential GDP for every 1% of increased debt to GDP. When indicators such as debt to GDP reach a subjective ceiling such as 100%, it could mean nothing at all, provided that the debt markets are not spooked and the country maintains sufficient goodwill enabling it to continue to borrow affordably. Alternatively it could trigger a wave of panicked speculation about whether the amount of a nation’s debt is more than the corresponding degree of goodwill, or future potential GDP.
The USA is highly indebted. We have seen currencies collapse before, and as traumatic as it was for those involved, it did not bring about the sort of crisis which might prevail if the USA was unable to honour its debt or if the markets anticipated this. The elephant in the room, notwithstanding the Smithsonian Agreement of 1971 to end the international fixed exchange rate regime, is that the US Dollar has remained the de facto reserve currency of the world. A US Dollar crisis of this magnitude would inevitably force the world into another global financial crisis if it is forced to decouple from the US Dollar before it was ready to.
China is becoming increasingly outspoken about trying to get the world to decouple from the US Dollar as de facto reserve currency. It has been vocal about preferring the IMF’s synthetic currency (Special Drawing Rights) as a new global reserve currency. There has also been a precocious yet not implausible suggestion that the Yuan/ Renminbi be considered as future reserve currency. China may not yet posses the world’s trust to be the issuer of a global fiat currency, but the underlying point is clear – it wants to decouple from the US Dollar and China continues to test the water in search of a new global currency. We would be wise to ask ourselves what China’s endgame is. Dambisa Moyo, author of ‘Dead Aid’ and ‘How the West was Lost’, postulates the possibility that the Chinese hope to re-establish their position of global primacy which, from a dynastic view spanning millennia, has simply stumbled a little for the last few centuries. We should take note of what China is doing, because they have the most to lose if the US Dollar collapses, they also have the most to gain if they play their cards right.
It is interesting to explore this scenario. What would happen if a calamity struck which was so costly that the debt markets baulked at the idea of highly indebted sovereign states (i.e. the western developed world) borrowing more? If there is no magic number which stipulates the maximum debt to GDP ratio then this may be a non-event. If other factors combine then the providers of credit, primarily China, may take the arbitrary and perhaps irrational decision not to lend the money. If the calamity does not strike, then we have nothing to worry about. Moyo rightly says in her latest book that we should at least consider the possibility of the USA making a calculated choice to default on its debt. Equally I suggest that we should consider the possibility of China deciding in a similarly calculated manner that it might be in its own interest to stop the line of credit. This may seem extreme, but we should not rule out a variant of it. On a state visit to Washington in January 2011, President Hu of China said that “The current international currency system is the product of the past.” Even Martin Wolf, Chief Economics Editor of the Financial Times pointed out to China that “to escape from the tyranny of the dreadful dollar, stop buying.” For now we can find comfort in the fact that China’s economic prosperity is too dependent on the West (specifically the USA) buying its goods. We only need worry when they begin to decouple their economy – or the long-term benefits outweigh the short-term pain.
Conventional wisdom tells us that in times of crisis the world would revert back to the gold standard. Some economists are actively arguing for us to do this now, but it hasn’t been seriously supported by any major country since the First World War. Plus, we can’t eat gold, it can’t keep us warm or dry, it can’t nurture our children, and we can’t rebuild a devastated community with it. Gold can do no more than represent all of those things because we choose it to have value.
This route of enquiry might encourage us to explore contemporary ‘stores of value’ – just like the Germans who, in 1923 when the Mark collapsed after their money printing efforts, even swapped bread, sausages and jam for tickets to the circus. Interestingly, this is not too far removed from the world of Shaka Zulu. In the scenario of the US Dollar collapsing, or a variant of it, history has demonstrated that it is possible, if not probable, that we revert back to treasuring those things with high use value and social value, the very things which have a direct benefit in sustaining the basic needs of our community.
Scene 6: Steve Wozniak
It may seem both attractive and a fantasy to print one’s own money – it is certainly attractive, but it is not a fantasy.
Steve Wozniak, the maverick co-founder of Apple Computer Inc in 1976 with Steve Jobs, recently entertained the audience of an Engadget interview by showing a pad of Dollar bills and explained how he prints his own $2 bills at home. He described how he regularly uses the bills as currency and that it is not technically illegal, although he does warn the audience that they might be arrested for doing it.
I am not arguing in favour of counterfeit money but what many people do not realise is that in many areas there are alternative currencies in circulation alongside the legal tender issued by government. There are a number of communities worldwide who have opted for their own local community currency – something which is perfectly legal to do. The argument in favour of doing this is to stimulate the local economy by introducing a medium of exchange for local services and goods. The idea is that it keeps cash in the community and supports local trade. All that is required is for local businesses to accept the new community currency as a medium of exchange, and for local banks to exchange the community currency into legal tender.
Returning briefly to the quaint example of the Germans who, in 1923, exchanged bread, sausages and jam for tickets to the circus. Yes this was bartering, but the bread, sausages and jam became a local community currency which could be exchanged for other goods, services and (as in this case) entertainment. No doubt the circus performers found the foodstuff useful!
Community currencies (with high social value) and bread, sausages and jam (high use value) clearly do provide people with benefit in certain conditions. Not only are these currencies perfectly acceptable, but people are drawn to them in specific situations because they can offer them greater value than the legal tender of the day.
Scene 7: Karl Marx
Marx stood vehemently against capitalism and began his seminal work “Das Kapital” with a narrative about ‘use value’, a concept which emerged in the previous section. It is relevant therefore to reflect upon Marx’s economic philosophy and what the world has concluded about it. He argued in favour of socialism as the best medication for capitalism, having considered in great detail the attributes of capital and labour as well as the relationship between them, namely productivity. A century and a half of economic experimentation later, there is a global consensus that socialism is not the preferred model; even China is evolving its own hybrid of communist-capitalism as their preferred option. Capitalism and markets, in some shape or form, are here to stay.
The new economy needs a new construct which reflects an economic paradigm of increased complexity which accepts unpredictability and uncertainty. To do this, we need to identify the fundamental socio-economic building blocks which we would consider able to generate genuine and sustainable value and hard-wire them into the new economy.
In this context, we might allow ourselves wonder what the primary ‘stores of value’ would be and what taxonomy may be appropriate, like:
- Physical environment: land on which to build settlements for people to live, spaces to interact in, and quality agricultural systems with which to produce food and sustain human populations;
- Social fabric: the ability of a society to rebuild itself after a catastrophe, to organise itself for the proper functioning of society, and facilitate the wellbeing of individuals; and
- Enterprise capacity: the ability to add ‘real’ value to things, ideas, or services, and to improve the length, quality or delight of people’s lives.
Reassuringly or otherwise, these concepts do not seem very different from the concepts of capital, labour and productivity used by Marx. Importantly however, this revised taxonomy is a much more nuanced way of describing them and concentrates the mind in a fundamentally different way by focusing on different attributes. What is most striking about this reframing of the Marxian concepts, is the strong alignment with the ideology of triple bottom line evaluation of environmental, social and economic aspects.
China is acquiring land across the globe, including its derivatives of minerals, natural resources and agricultural output. We know that the political and governance system of China is able to harness and control its people with formidable potency. It is able to suppress cultural and ethnic stresses across its diverse people, and it is able to convince the Chinese people to accept the prioritisation of long-term, collective and dynastic objectives over democratic freedoms and the rights of individuals. China is also able to consistently achieve economic growth rates of around 10% per annum. Combined all of this with their controversial position on intellectual property rights and their huge appetite for importing technological know-how, there are few countries growing their enterprise capacity faster.
In the unlikely but technically possible scenario of the US Dollar collapsing, or the more plausible scenario of it losing its place as the de facto reserve currency at some point, the impact on the financial system would range from the extreme of another global crisis to relatively innocuous recalibration of the system. A slow adjustment would be more easily managed than a rapid one, but to properly prepare for the more probable scenario of something in the middle, we should stress-test an extreme and sudden adjustment. Without the US Dollar as a safe haven, or the desire to price goods in US Dollars, would another currency automatically evolve as the new de facto reserve currency or would people seek out other important measures of value? Although people would find comfort in gold, it is unlikely that it will meet all the needs of the moment for the reasons mentioned previously. If the adjustment was so rapid that it tended toward a shock, what would be of greatest store value and use value in the ensuing confusion? Equally, would the absence of things with high store value and use value result in strife, eventually escalating into conflict? This is not the place to study the causes of all conflicts, but enough have been caused by the pursuit of more or better physical environment, social fabric or enterprise capacity to know that conflict of some form is a plausible outcome of rapid adjustment for which we are unprepared. Naomi Klein, in her book ‘Shock Doctrine’ elaborates at great length about the interrelationship between shock and conflict, as well as the socio-economic consequences thereof.
Extra Scene: The Directors Cut
I have brought together a number of disparate ideas in this article which at face value do not seem to make the situation easier to understand, if anything they tend towards obfuscation. We must simply accept that this as part of complexity, so too is uncertainty and unpredictability.
It is a fallacy to think that a complex system can be broken down into its constituent problems in order to ring-fence each individual risk as an effective risk management strategy. It is tempting to think that doing this collectively for all risks, and managing them independently, will have the same effect as properly managing the system as a whole. That is not to say we should give up.
The best countermeasures for uncertainty and unpredictability are adaptability, flexibility and agility. We must accept that things will sometimes go wrong and we need better safety equipment for when they do. The financial system needs smarter regulation and improved rules which will provide sufficient freedoms so that it can improve its ability to dynamically self-organise and to frequently adjust. These freedoms are not the same as deregulation, we must prevent the financial sector from tending towards self-regulation as it was in the run-up to the recent crisis. The ability of the system to continually optimise will reduce the likelihood of systemic risk building up. It will also give the system the ability to rapidly respond to a cataclysmic event. This will only be possible with increased diversity (heterogeneity) as a countermeasure to potential vectors of contagion. We need the associated behaviours of confederation and healthy competition to flourish, rather than those of conglomeration and monopolistic or cartel-like tendencies.
We should not attempt to develop a ‘Theory of Everything’ for economics and foolishly rely too heavily on imperfect simulations. It may be more useful to consider a measure of entropy in relation to finance and economics. Innovation must be encouraged and we should accept that there will be elements of the system which will prioritise financial return above all else. It is important that the system is kept in check and that we continually seek to balance the amount of socially useful finance and the amount of socially useless finance, both will prevail.
In addition to taking on board these highfalutin concepts. There are also some practical steps which we can take. We know that in certain conditions, whether in crisis or to promote local social agendas, people are readily willing and able to accept alternatives to legal tender. If we are unprepared for the next crisis, we may find ourselves using bread, sausages and jam as a measure of value and medium of exchange. We do not need to.
It may be possible to develop a global community ‘currency’ or index; not necessarily a real currency or synthetic currency, but a universally accepted measure of use value, social value and store value. It would be a measure of the goodwill inherent in goods, organisations or the prospective outcome of investments – and specifically the future potential for something to provide for the needs of society. This would only be feasible if we are able to evolve a commonly agreed taxonomy and set of standards so that we can compare organisations, stocks, shares, investments and even sovereign states with each other on an equal footing.
There are a number of organisations who currently evaluate the broader social value of outcomes, although there is currently no accepted standard amongst the plethora of initiatives. Many organisations undertake triple bottom line analysis in varying forms. The Global Impact Investment Network is developing its own Impact Reporting and Investment Standards (IRIS), and a number of organisations are attempting to quantify the Social Return on Investment (SROI). This is not dissimilar to the original variation which existed between the approaches of the credit rating agencies which measured risk. Agencies such as Fitch, Moody, and Standard & Poor all originated around 1900 or in the period thereafter, but the credit rating industry only became recognisable as it is today with the introduction of Nationally Recognised Statistical Rating Organizations (NRSRO) in the 1970’s. Financial institutions who sought to soften their capital and liquidity requirements would seek to obtain favourable ratings from NRSRO accredited rating agencies. Today a rating from one of these organisations is an essential component in the comparative assessment of risk and return.
It is an ambitious challenge, but maybe the time has come to introduce a comparable standard with respect to measures of social value. If, similar to the convergence which took place with credit and risk rating agencies, a globally recognised rating could be achieved for social value and use value, then we would be very close to having a socio-economic measure of everything relevant. It could comfortably sit alongside and augment similar global equivalents for pure financial value, risk and risk-return metrics. If this rating was universally accepted and applied, then we may just have the emergence of a global version of a new community ‘currency’ – or more accurately, a social index.
The argument against local community currencies is often that they can interfere with economies of scale and comparative advantage, but a global equivalent would counter this. When the next crisis hit, we would at least have a very useful indicator, apart from financial value, in determining real social value, use value and store value. We wouldn’t have to revert to gold, sausages or axes. It would not be a reserve currency per se but would provide a common measure of future socio-economic potential – in a time of crisis, many may find comfort in that. It may even result in us being less focused on financial value which, as we have learned in the recent crisis, is sometimes a relatively arbitrary measure, can be inflated in bubbles, and doesn’t really tell us how worthwhile anything is.
It may be that the appropriate taxonomy for this new global community index could start with the headings of physical environment, social fabric and enterprise capacity.