“It will have to change in order to stay the same.”
- Daniel Greenstein
In the century between 1690 and 1790, political innovations triggered the financial innovations that gave birth to capitalism. More democratic governments gave birth to modern financial markets.
In this century, financial innovations can trigger business innovations that will give birth to a new entrepreneurial economy. Financial innovations can help to fund a period of entrepreneurship that will transform corporations.
I am going to state this as simply as I can:
The reason for the financial crisis has far less to do with financial markets than with the capacity of corporations and communities for entrepreneurship. Financial markets did their job – they created money, credit and a host of financial products. The problem is that this money went to bidding up the price of what already exists (e.g., stocks and real estate) rather than financing the creation of something new (e.g., new business ventures and the infrastructure for new transportation and energy technologies).
A series of bubbles have burst. First in stocks in 2000. Then in real estate in 2005. Again in stocks this year. Too much money was chasing too few possibilities. There are actually more mutual funds than stocks. Huge sums of money was seeking higher returns, bidding up the price of financial products and trying to enhance returns through leverage.
Too little of it – as a percentage – went into the creation of something new, went into infrastructure like public works or the creation of alternative fuels, or new businesses or new products.
The corporate world did not adapt to these innovations in financial markets – remaining a relatively staid place where little innovation is expected to occur (at least within corporations), particularly innovations that would demand the sums of money generated by the recent spate of innovations in financial markets.
This has a parallel from about 1690. First the Dutch and then the English made innovations in politics that triggered innovations in finance. The Dutch and British were the first to adopt constitutional monarchies and first to invent modern stock and bond markets. It is no coincidence that these two went together.
Constitutional monarchies – the political innovation of the Dutch and English - made kings and queens subordinate to laws and a constitution. Monarchs could no longer just tell their subjects to give them money – to simply tax them. Under this new form of government, Parliament had power to resist. When the king said, “Pay me a million in taxes,” Parliament could say, “Why don’t we loan you the money instead and you can pay us back. We’ll buy bonds that pay interest.”
Figuring out how to finance this prompted the emergence of modern bankers and bond markets. Innovations in politics – the constitutional monarchy and Parliament – triggered innovations in finance – the birth of bond markets and the gradual popularization of investing. This was huge because it laid the foundation for the birth of capitalism.
What is the parallel for today?
Innovations in financial markets have created our predicament today. We’ve leveraged our way onto a precipice and governments are now trying to talk credit markets down off the ledge before they jump.
As easy as it is to dismiss this “excess” in financial markets as proof of greed and madness, these financial innovations have created a huge capacity for credit and expansion. The problem is not that we’ve created more money, more capacity for financing. The problem is that we’ve used that money to bid up the price of existing things – stocks and homes – rather than to create something new. More specifically, we failed to apply this new credit and expansion to the creation of new ventures.
The innovations in finance can turn out to be as wonderful as the innovations in politics were hundreds of years ago. To properly work, though, we’ll need to see innovations in business, a transformation of the corporation.
Right now, corporations are set up to – for the most part – be founded by entrepreneurs and then run by employees. In order to properly use the money financial markets are capable of producing, the corporation will have to become much more entrepreneurial – a place where a growing percentage of employees behave more like entrepreneurs.
Transforming the corporation into an entrepreneurial place is going to turn corporations into net users of cash rather than net producers. Properly done, turning corporate employees within the corporation into entrepreneurs will require lots and lots of cash: perhaps as much as the recent spate of financial innovations has generated.
We are facing a great moment in history. Going back to the Great Depression, however, will suggest only some needed regulations. It will not suggest the innovations that are most likely to take us into an economy as different from this information age as capitalism was from the agricultural economy.
The ability to create money and credit ought not to be considered a bad thing. And if we can again use innovations in one major institution (finance this time instead of politics) to trigger innovations in another (business instead of finance), we can move towards a new economy.
The idea is not to perfect the old world with these innovations. Rather, the idea is to create a new one. This has always been the theme of progress. There is no reason to believe that the way of change has changed for our own time.
Showing posts with label finance. Show all posts
Showing posts with label finance. Show all posts
Friday, October 17, 2008
Wednesday, May 16, 2007
The DNA of Social Evolution
DNA is coded by the sequence of four bases. I'd argue for a parallel in social development. At a high level, any society is defined by social order, its dominant institution, economy, and worldview. I'd argue further that a change in one of these has the potential to trigger changes in all, just as the purchase of a new software application might trigger the purchase of a new operating system which might trigger the purchase of a new computer system.
Social Order
The simplest indication of how a society is defined might be seen in its tallest buildings. In medieval Europe, the tallest buildings were cathedrals and churches. Later, castles, parliamentary buildings, banks, and corporate headquarters followed.
Since about 1300, there has been a succession of dominant institutions: church, state, bank, and corporation. In various times and places, the dominant institution is not necessarily the one that has the most physical power but, rather, the one that most structures and shapes the attention and goals of the average person. In 1100 AD, most people conformed their daily lives to the church. Today, it is no longer church bells but, rather, corporate advertising and employment to which most conform their lives.
Dominant Institution
A society dominated by the church is very different from one dominated by the corporation. But how power is distributed within the church or corporation also makes a difference. Quite simply, there are two extremes in the distribution of power within any institution: power held by elites or power distributed to the masses. It is one thing to live in a society dominated by the state, by politics; it is quite another to live in a dictatorship or democracy.
Economy
Agricultural, industrial, information, or entrepreneurial economies are very different, but all are market economies. An entrepreneurial economy is just now beginning to emerge. This emergence will have a sweeping influence, just as did the emergence of the information economy in about 1900 and the industrial economy in about 1700.
Worldview
This is perhaps the most subtle yet most defining of the four elements. How we make sense of the world defines so much else. And a worldview, like glasses, is made to be seen through rather than seen.
Since about 1300, the worldviews that have defined the West are the Renaissance, Enlightenment, and Pragmatism. Systems thinking is the set of glasses being adopted by more and more people.
Revolution
We rightfully call the change from agricultural to industrial economies an economic revolution. Intellectual, social, and institutional revolutions characterize the change of each of these elements. Western Civilization has thus far been defined by a pattern of revolutions, described in the table above.
Social Order
The simplest indication of how a society is defined might be seen in its tallest buildings. In medieval Europe, the tallest buildings were cathedrals and churches. Later, castles, parliamentary buildings, banks, and corporate headquarters followed.
Since about 1300, there has been a succession of dominant institutions: church, state, bank, and corporation. In various times and places, the dominant institution is not necessarily the one that has the most physical power but, rather, the one that most structures and shapes the attention and goals of the average person. In 1100 AD, most people conformed their daily lives to the church. Today, it is no longer church bells but, rather, corporate advertising and employment to which most conform their lives.
Dominant Institution
A society dominated by the church is very different from one dominated by the corporation. But how power is distributed within the church or corporation also makes a difference. Quite simply, there are two extremes in the distribution of power within any institution: power held by elites or power distributed to the masses. It is one thing to live in a society dominated by the state, by politics; it is quite another to live in a dictatorship or democracy.
Economy
Agricultural, industrial, information, or entrepreneurial economies are very different, but all are market economies. An entrepreneurial economy is just now beginning to emerge. This emergence will have a sweeping influence, just as did the emergence of the information economy in about 1900 and the industrial economy in about 1700.
Worldview
This is perhaps the most subtle yet most defining of the four elements. How we make sense of the world defines so much else. And a worldview, like glasses, is made to be seen through rather than seen.
Since about 1300, the worldviews that have defined the West are the Renaissance, Enlightenment, and Pragmatism. Systems thinking is the set of glasses being adopted by more and more people.
Revolution
We rightfully call the change from agricultural to industrial economies an economic revolution. Intellectual, social, and institutional revolutions characterize the change of each of these elements. Western Civilization has thus far been defined by a pattern of revolutions, described in the table above.
Sunday, March 18, 2007
The Swinging Pendulum of Social Evolution
The Rothschild brothers didn’t seem like elites when they began their career. Mayer Rothschild began his life living in a Frankfurt ghetto, forced to leave the sidewalk when even a young child ordered him to “Step aside, Jew!” He had the vision to send four of his five sons to the most important cities in Europe.
Mayer's son Nathan Rothschild was in London when the English began their war against Napoleon. This war was incredibly expensive. Coordinating efforts with his brothers, Nathan was able to raise huge sums of money for the British by selling war bonds throughout Europe – primarily through his brothers in Frankfurt, Paris, Vienna, and Naples. Nathan not only raised money for the British – he made the Rothschild brothers rich and famous. By the time of his death in 1836, he might have had more liquid wealth than anyone in the world. Because they helped to invent modern financial markets, the Rothschild brothers rose from the German ghetto to become elites with power enough to dictate terms to kings.
The Rothschild brothers and others like JP Morgan helped to pioneer modern financial markets and then, in the next century, philosophers like Keynes, policy-makers like FDR, and business visionaries like Charlie Merrill and Dee Hock “democratized” financial markets, creating access to credit and investment markets for the people. Alan Greenspan or Ben Bernanke is supposed to manage interest rates and reserve rates so as to do what is best for the general economy and the average person – not just a few powerful bankers. Access to financial markets is now considered a right.
Martin Luther, John Calvin, Huldrych Zwingli, and John Knox were among the revolutionaries who wrested control of the church away from the elites and helped to put it into the hands of the people.
Later, Louis XIV and Henry VIII help to pioneer the nation-state and then, centuries later, revolutionaries like Jefferson and Franklin wrested control away from the elites and into the hands of the people.
The swings between power held by the elites and the people seem to me inevitable. The elites pioneer and prosper. They are the social inventors who create the great institutions like church, state, and corporation. But once those inventions have become an integral part of the social fabric, along come revolutionaries who turn control of these inventions over from the elites to the people.
Next up for Western Civilization? Wresting control away from the CEOs, the last of the monarchs, and putting power into the hands of the investors, employees, and communities whose fate is so inexorably tied up in the actions of the corporation.
Am I a populist or an elitist? A Republican who wants the people’s interest represented by a trusted group of elites or a Democrat who wants the people to directly represent their own interests? At this point in history, I’m a populist, a Democrat ready to see the power of the powerful corporation dispersed.
Mayer's son Nathan Rothschild was in London when the English began their war against Napoleon. This war was incredibly expensive. Coordinating efforts with his brothers, Nathan was able to raise huge sums of money for the British by selling war bonds throughout Europe – primarily through his brothers in Frankfurt, Paris, Vienna, and Naples. Nathan not only raised money for the British – he made the Rothschild brothers rich and famous. By the time of his death in 1836, he might have had more liquid wealth than anyone in the world. Because they helped to invent modern financial markets, the Rothschild brothers rose from the German ghetto to become elites with power enough to dictate terms to kings.
The Rothschild brothers and others like JP Morgan helped to pioneer modern financial markets and then, in the next century, philosophers like Keynes, policy-makers like FDR, and business visionaries like Charlie Merrill and Dee Hock “democratized” financial markets, creating access to credit and investment markets for the people. Alan Greenspan or Ben Bernanke is supposed to manage interest rates and reserve rates so as to do what is best for the general economy and the average person – not just a few powerful bankers. Access to financial markets is now considered a right.
Martin Luther, John Calvin, Huldrych Zwingli, and John Knox were among the revolutionaries who wrested control of the church away from the elites and helped to put it into the hands of the people.
Later, Louis XIV and Henry VIII help to pioneer the nation-state and then, centuries later, revolutionaries like Jefferson and Franklin wrested control away from the elites and into the hands of the people.
The swings between power held by the elites and the people seem to me inevitable. The elites pioneer and prosper. They are the social inventors who create the great institutions like church, state, and corporation. But once those inventions have become an integral part of the social fabric, along come revolutionaries who turn control of these inventions over from the elites to the people.
Next up for Western Civilization? Wresting control away from the CEOs, the last of the monarchs, and putting power into the hands of the investors, employees, and communities whose fate is so inexorably tied up in the actions of the corporation.
Am I a populist or an elitist? A Republican who wants the people’s interest represented by a trusted group of elites or a Democrat who wants the people to directly represent their own interests? At this point in history, I’m a populist, a Democrat ready to see the power of the powerful corporation dispersed.
Thursday, March 8, 2007
The Post-Capitalist Corporation
The corporation will soon undergo a transformation akin to the change of the nation-state during the age of Enlightenment.
Once the medieval church lost its grip on Europe, the modern nation-state grabbed power. For centuries, religious wars defined European politics. Huge swaths of the population were murdered by competing religions that used monarchs and rebels to compete for ascendancy. It was not until religion was made a personal matter and nation-states focused on issues of politics that warfare became less frequent. Governments could focus on quality of life instead of imposing religion through force.
Today, power has shifted from capitalism, from "the bank," to the corporation. JP Morgan sat on corporate boards and formed corporations like General Electric and International Harvester. The purpose of these newly formed corporations was financial gain. The aims of the bank, financial returns, still define the aims of the corporation just as the aims of the church to impose a homogeneity of religious belief first defined the modern nation-state.
Talking about the aims of the corporation today without talking about profit is about as odd as it would be to talk about the aims of the nation-state in 1650 without talking about which religion it ought to enforce on its subjects.
The idea of financial gain within the corporation being a matter left to individuals may seem foreign to us, but our grandchildren will accept it as easily as we accept transcontinental flights or leaving the matter of religion to individuals. It is yet another dimension of turning employees into entrepreneurs, of giving the individual more autonomy.
Once the medieval church lost its grip on Europe, the modern nation-state grabbed power. For centuries, religious wars defined European politics. Huge swaths of the population were murdered by competing religions that used monarchs and rebels to compete for ascendancy. It was not until religion was made a personal matter and nation-states focused on issues of politics that warfare became less frequent. Governments could focus on quality of life instead of imposing religion through force.
Today, power has shifted from capitalism, from "the bank," to the corporation. JP Morgan sat on corporate boards and formed corporations like General Electric and International Harvester. The purpose of these newly formed corporations was financial gain. The aims of the bank, financial returns, still define the aims of the corporation just as the aims of the church to impose a homogeneity of religious belief first defined the modern nation-state.
Talking about the aims of the corporation today without talking about profit is about as odd as it would be to talk about the aims of the nation-state in 1650 without talking about which religion it ought to enforce on its subjects.
The idea of financial gain within the corporation being a matter left to individuals may seem foreign to us, but our grandchildren will accept it as easily as we accept transcontinental flights or leaving the matter of religion to individuals. It is yet another dimension of turning employees into entrepreneurs, of giving the individual more autonomy.
Wednesday, February 7, 2007
You and the Future of the Corporation
Now
You go to work inside of a corporation. The corporation's policies are formulated by senior managers. Goals are set for your department for the year. Your department head translates those goals into your goals. It may well be that you and your peers can see a number of problems with the overall plan as it applies to you, but your attempts to point that out are largely ineffectual. You have little control over the direction of the company. You can leave the company if you are unhappy with its direction, but you would have to find a company run differently or start your own, both uncertain prospects.
Meanwhile, you contribute money each year to a pension fund. By this point in your career, your retirement account is worth about $200,000. Collectively, with accounts ranging from about $1,000 to millions, you and your fellow American workers "control" $6 trillion in funds. Although you and your peers own the companies in which you invest, you aren't particularly happy with their policies. The companies' policies seem to most obviously benefit senior managers. You can take your money out of the company, but you would have to find a company run differently. The way tax laws are set up, you cannot shift your investment funds into a company you would start up.
You are pleased that your employer has created jobs in your community. This generally helps. But you also know that these jobs and your potential are not the aim of your company. If and when these jobs can be done for less in places like the Ukraine or Mumbai, they will be. It is not just your community you are concerned for: you are worried about your planet and don't really know what, if anything, your employer is doing about climate change.
What is the quip of Ackoff's? It's like a fly riding an elephant who thinks he is steering the elephant. The elephant doesn't mind and it makes the ride more interesting for the fly. The individual has choices but those choices seem to have little influence over the corporation.
Later
By the year 2020, our concept of corporation will be transformed. It will become a tool for individuals, a real departure from today when the individual is the tool for the corporation.
You go to work inside a corporation. Just as there are inside of a national economy, there are regulations, opportunities, and natural consequences. No one defines your goals. What you do is a product of some intersection of where you see opportunity for making money, what you enjoy doing and what you think would best realize your potential. Opportunities inside of the corporation arise organically. Employees - maybe 1% or maybe 50% - within the corporation act like entrepreneurs, putting forth business plans that capitalize on connections, technology, markets, or capital and know-how within the corporation (and without - the walls of the corporation are porous). Fellow employees vote in two ways - by signing on to an entrepreneurial venture that they see as promising. This takes advantage of two things - widespread expertise and natural markets. (If employees are uninterested in a particular venture, it suggests serious flaws with it - flaws that might never come to light until after the fact in the world of corporate dictatorship.)
The second way in which employees vote is through their pension funds. Employees have the opportunity to invest in ventures at the ground-floor level, helping to fund their own projects or the projects of fellow employees. Employee money could be invested in company stock or in the startups underway within the company. This, too, would be a market signal about where experts familiar with the market, technology, and people involved thought it best to direct resources.
The community would benefit as well. Policies organically emerge from the actions of dozens, hundreds, or thousands of employees. They are no longer top-down directed. People making policy rarely choose to put the smoke stacks upwind from their houses and the more that policies arise from the actions of more individuals, the less likely corporations are to pursue policies that degrade the environment of people "over there." The dispersion of power within the corporation will make "over there" effectively disappear. Such employees are unlikely to adopt policies that shift their jobs overseas. They will be at least as interested in opportunities that allow them to realize their own potential as they are in opportunities that maximize .... what is it, exactly, that current corporate policies maximize?
Dispersing power within the organization is not just idealistic. It acknowledges current reality. And the current reality is that expertise, information, and control of capital is already dispersed. Changing how corporations are managed to align with this new reality only makes sense.
Finally, the dispersion of power within the corporation will help us to overcome the new limit to development. No longer does land, capital, or even knowledge work limit progress. We are, today, limited by entrepreneurship. Just as the last century popularized knowledge work, so will entrepreneurship be popuarlized in this century. That is the topic for another posting.
You go to work inside of a corporation. The corporation's policies are formulated by senior managers. Goals are set for your department for the year. Your department head translates those goals into your goals. It may well be that you and your peers can see a number of problems with the overall plan as it applies to you, but your attempts to point that out are largely ineffectual. You have little control over the direction of the company. You can leave the company if you are unhappy with its direction, but you would have to find a company run differently or start your own, both uncertain prospects.
Meanwhile, you contribute money each year to a pension fund. By this point in your career, your retirement account is worth about $200,000. Collectively, with accounts ranging from about $1,000 to millions, you and your fellow American workers "control" $6 trillion in funds. Although you and your peers own the companies in which you invest, you aren't particularly happy with their policies. The companies' policies seem to most obviously benefit senior managers. You can take your money out of the company, but you would have to find a company run differently. The way tax laws are set up, you cannot shift your investment funds into a company you would start up.
You are pleased that your employer has created jobs in your community. This generally helps. But you also know that these jobs and your potential are not the aim of your company. If and when these jobs can be done for less in places like the Ukraine or Mumbai, they will be. It is not just your community you are concerned for: you are worried about your planet and don't really know what, if anything, your employer is doing about climate change.
What is the quip of Ackoff's? It's like a fly riding an elephant who thinks he is steering the elephant. The elephant doesn't mind and it makes the ride more interesting for the fly. The individual has choices but those choices seem to have little influence over the corporation.
Later
By the year 2020, our concept of corporation will be transformed. It will become a tool for individuals, a real departure from today when the individual is the tool for the corporation.
You go to work inside a corporation. Just as there are inside of a national economy, there are regulations, opportunities, and natural consequences. No one defines your goals. What you do is a product of some intersection of where you see opportunity for making money, what you enjoy doing and what you think would best realize your potential. Opportunities inside of the corporation arise organically. Employees - maybe 1% or maybe 50% - within the corporation act like entrepreneurs, putting forth business plans that capitalize on connections, technology, markets, or capital and know-how within the corporation (and without - the walls of the corporation are porous). Fellow employees vote in two ways - by signing on to an entrepreneurial venture that they see as promising. This takes advantage of two things - widespread expertise and natural markets. (If employees are uninterested in a particular venture, it suggests serious flaws with it - flaws that might never come to light until after the fact in the world of corporate dictatorship.)
The second way in which employees vote is through their pension funds. Employees have the opportunity to invest in ventures at the ground-floor level, helping to fund their own projects or the projects of fellow employees. Employee money could be invested in company stock or in the startups underway within the company. This, too, would be a market signal about where experts familiar with the market, technology, and people involved thought it best to direct resources.
The community would benefit as well. Policies organically emerge from the actions of dozens, hundreds, or thousands of employees. They are no longer top-down directed. People making policy rarely choose to put the smoke stacks upwind from their houses and the more that policies arise from the actions of more individuals, the less likely corporations are to pursue policies that degrade the environment of people "over there." The dispersion of power within the corporation will make "over there" effectively disappear. Such employees are unlikely to adopt policies that shift their jobs overseas. They will be at least as interested in opportunities that allow them to realize their own potential as they are in opportunities that maximize .... what is it, exactly, that current corporate policies maximize?
Dispersing power within the organization is not just idealistic. It acknowledges current reality. And the current reality is that expertise, information, and control of capital is already dispersed. Changing how corporations are managed to align with this new reality only makes sense.
Finally, the dispersion of power within the corporation will help us to overcome the new limit to development. No longer does land, capital, or even knowledge work limit progress. We are, today, limited by entrepreneurship. Just as the last century popularized knowledge work, so will entrepreneurship be popuarlized in this century. That is the topic for another posting.
Tuesday, January 30, 2007
National Debt & Global Warming
Here is a fascinating graph from the folks at swivel.com
Accumulating debt and accumulating carbon dioxide are both driven by the advance of capitalism. What is the quip? Things that can't go on forever tend not to?
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About Me
- Ron Davison
- Working in the basement on the Escher Expressway (every direction down hill for fuel savings) and Mobius Strip DNA (for immortality).