Thursday, May 3, 2012

The New Stewards of Our Personal Wealth and Prosperity

People are a paradox.

We are at once hoarders and sharers: selfish, and generous; caring, and careless; short-sighted, and long-dated; prescient, and reactionary; egoistic, and altruistic.

For most of us, a good life includes a proper measure of both, each in its own proper place and time.

If we listen to Madison Avenue, however, commercially, there are only two motivators: fear and greed.

On Wall Street, the only motivator is Growth.  According to Wall Street, the only way that we as savers can be turned into investors is if we are convinced that our investments will grow in value, not just incrementally, but exponentially.  Of course, investments don't always go up in value, not along the straight line of constantly accelerating growth that Wall Street wants us to believe they will.  Sometimes they go up.  Sometimes they come down.  Sometimes they go up a lot, sometimes they go down a lot.  It's really hard to predict.

Wall Street doesn't mind this unpredictability.  They see it for what it is: both the cause and the effect of all the buying and selling that generates the transaction volumes on which the Exchange which is Wall Street earns its money.

Growth is so important to sustain the volume of transactions on the Exchange, that Wall Street has fostered an almost religious fanaticism about the matter.  It has become an unassailable axiom among professional Economists that without Growth we cannot have Prosperity.

Of course, that isn't true. Not entirely.

As parents, who among us does not what their child to grow up strong and healthy?  But who would want their child to grow and grow, at a constantly accelerating rate?  No one. They would become freaks of Nature, unsupportable and unsustainable.  Unable to fit in.

At the cellular level, when we have unbalanced growth, we call it cancer, and work to put a stop to it, because if we do not, it will kill us.

Everywhere in Nature, we see growth within limits.  As the limits are reached, growth slows.  If the limits are surpassed, catastrophe ensues: stars explode; trees fall over; populations starve; people develop cancers, and die.

Consider Einstein's famous axiom: e=mc2.  The more energy we put into a thing to drive acceleration, the more massive that thing will become, with a theoretical limit to acceleration being reached at the speed of light, beyond which energy becomes mass, instead of motion.

This happens everywhere, except one place: the growth in human knowledge.  As far as we can see, this process of human cognitive construction is open-ended and unlimited. No matter how much we learn, there is always, it seems, even more that we can know.

This is true also for the economy, when the economy is viewed as the application of human knowledge to alter the way things are to make them work better for us.  The more we know, the more we can do.  And the more we can do, the more we can learn.  It is an open-ended, self-sustaining, intergenerational evolution of knowledge, work and wealth.

This is the true story of our history, the true engine of our prosperity.  Growth is part of it, but only a part.

All through history, and long before we had a Stock Exchange and the Gospel of Growth, people have learned new things, and applied that knowledge to build new choices that have increased their wealth which supported new learning and the invention of new knowledge.

Before there was Growth, there was Prosperity.  And as long as there is Prosperity, there is Investment, Invention and Enterprise.

There has also always been booms and busts.  Knowledge, work and wealth increase in fits and starts.  And the paradoxical construct of the human personality has also always gyrated between scarcity and excess.

Always there has been this safety valve for our excesses: there has always been more land: more places to go, more resources to appropriate.

To be sure, there have also always been borders and boundaries, but our borders have always been porous, and our boundaries only provisional.  For a time, they may appear inviolate, but over time, they have always been re-drawn.  The rhythm, to be sure, has been ebb-and-flow.  Periods of prosperity have alternated with periods of scarcity, and calamity.  Sometimes of our own making.  Other times not.

Always, that is, until now.

In our time, we have traveled to the ends of the Earth, and found that it closes back in upon itself.  We have even escaped the Earth, and travelled out into the infinite reaches of Space.  But there we have found that really there is nothing out there for us.  We went to the Moon, and all we found was rocks.

Does this mean we have reached The End?

I don't think so.  I think the evolution of knowledge, work and wealth will continue apace.  I think there is still much for us to learn, so much so that for all practical purposes, there is no real limit to our learning.  When we finally know all there is to know, then we will really get to know God.  After that, maybe nothing else will really matter!

Certainly, we have not yet reached Paradise in economic terms.  Much has been achieved, but the is still too much lumpiness in the distribution of choice, both from place to place, and over time.

But now we have to worry about something that up until now was not really a concern.  We have to worry about limits.  We can no longer deal with our excesses as we have in the past, by expanding out into a New Frontier.  For us, the New Frontier is learning to live within limits.

This does not mean that things will stagnate.  It does mean that we have to become more mindful of our choices, and more careful to manage our excesses so that they do not become too excessive.

It also means that we can no longer drive investment on the principle of growth without limit.  We have to start looking beyond growth, to the larger dynamic of displacement that is, and always has been, the underlying rhythm to the evolution of knowledge and the expansion of choice.

Expansion of choice.  That has to become our new paradigm, the new principle by which we drive investment, the new standard against which we measure our prosperity.

With the expansion of choice there is a more or less continual re-balancing of relative value between competing alternatives.  Established choices will decline in popularity as new choices are invented and made available through investment in enterprise that empowers us to enjoy an even higher level of prosperity under the circumstances prevailing at the time.

What does this mean in simple, practical terms?

It means we can no longer architect Investment in Enterprise on the model of the Exchange, which requires that the Investor must sell out, in order to get its money out, along with its share of the profits earned by the Enterprise invested in.  This only works if each new buyer believes that past growth will be repeated out into the future, only at a faster rate.  It will not work if everyone knows that at some point a limit will be reached, and growth will slow, and eventually begin to reverse.

Investment must now be made more with an eye to harvesting of returns as profits are generated by Enterprise, mindful that the level of profits earned by an Enterprise will rise and then fall over time, as the choice around which that Enterprise is organized gains and then loses popularity within the community as new choices are invented in the open-ended evolution of knowledge, work and wealth that is the real engine of our prosperity.

This means that trading will become less popular as a strategy for realizing investment returns, and the economy will become less vulnerable to the volatility and instability associated with Exchange-trading as a solution for bringing Investment into Enterprise.

Trading will continue to add value as a source of liquidity to Investment, but liquidity will no longer be the only, or even the primary, strategy used by Investment to realize its returns.  Instead of the norm, it will become the alternative; available to be used only occasionally and opportunistically, if and as necessary or appropriate to respond to changing circumstances that affect investment at a programmatic or portfolio level.  Investment itself will provide its own liquidity; it will, in a sense, be made self-liquidating.

This is not a future event.  It is happening right now. New stewards of our personal wealth  have already emerged to take the place of bankers and traders.  These are the institutions that we use to provide us individually, with programmatic benefits: Pension Funds, Endowments, Insurance and Annuities.  All of these Institutions are engaged primarily in running some form of actuarial risk pool to apply the law of large numbers to socialize the cost of certain major financial events in the lives of each of us as both individuals and as members of society.

Each of these Institutions is expected to invest the personal wealth we entrust to them to build more wealth, as part of their strategy for delivering to us the programmatic benefits that are their reason of being.

Such Institutional Investors do not need an emotional reason for making an investment.  Making investments is part of their job.  To do their job well, they must invest programmatically, executing an programmatic investment strategy that is properly aligned with the underlying benefit program that is their reason for being.

Such programmatic investors will favor investments that perform programmatically.  Except to the extent that they need the liquidity that is the special value of the Exchange, given the alternative of participating in investments that are programmed to perform in line with their own programmatic purposes, they will not choose to expose themselves to the volatility, instability and unpredictability of the Exchange.

Instead, they will choose sustainability.

Which is good, because although our economy will always need a modicum of liquidity, it will also, increasingly become important that we monetize sustainability.

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