The collapse of the investment banking industry is bad stuff, but reactions to it (and to the problems with Freddie and Fannie) show that I’ve been right about how to begin approaching these issues.
I don’t know much about economics, and I know next to nothing about finance, but I know as much as anybody about human systems on a more general level — how society works, why crises happen and how to avoid them — and how to manage the way we learn and think about this stuff, especially when we really have to think about new challenges that aren’t adequately addressed by old practices and ideas.
It’s a bold claim, but consider what I wrote a little over a year ago, roughly a week after the sub-prime crisis began:
“It would be easy to blame the system, but of course the system could be better: the problem is that these crises are caused by circumstances that are so new that the existing ways of doing things just aren’t adequate. What is needed is for the people involved to be continually diligent and responsible for improving the system, to help it evolve with emerging needs. Now who should take responsibility? Everybody? I think we know that won’t happen. And if we create another regulatory body, we would just be creating something else that will cause problems that will need to be regulated down the road. We might consider consolidating and centralizing control of the system — but let’s not forget that the market is already a kind of regulatory body, which is supposed to help us avoid the problems caused by centralized control…
“And we can’t just say these problems are about emotions like fear, avarice and greed either – nor even a matter of irrationality. It might be ok to discuss these abstractions in undergraduate philosophy courses, but in practical situations, the only justification for mentioning them is to preface further discussion of particular conditions, causes and consequences. ‘Greed’ is not a real thing, neither is ‘irrationality,’ nor ‘altruism’ for that matter; they have no real existence or efficacy in the world; they are merely abstract ideas that help us distill complex realities. So while certain behaviours and actions, which might be labelled “irrationality” (or fear or greed or whatever), are undoubtedly part of the problem, those labels don’t really tell us much about possible solutions.”
Based on much of the commentary coming out in recent days, my thinking last year was already ahead of where a lot of “experts” (not to mention politicians) are at now. I find that a lot scarier than the trillions of dollars in wealth being destroyed.
The conversations we should have been having in earnest for the past year are just now beginning to come up in the general public discourse. Only in the past week have significant numbers of people started to really grasp the scope of this, the historical implications, and the need for fundamental changes in the way we work and live.
The past decade has been one of the most exceptional periods of all of human history. People never lived like us before and will never live quite like us again… even we won’t live like us again — not after this year.
It would be despicable for me to say all that without following up with solutions or proposals for ways to cope. I can do even better than that. I’m not just talking about coping, I’m talking about thriving.
I have no specific solutions or proposals, but my general solution is to begin by appreciating that any specific solution can only be temporary. Every ideology, practice, or regulatory scheme will eventually lead to new problems. Societies can’t make long-term plans for history, there are too many unknowns. We can make successful plans for our careers and day-to-day lives, but that doesn’t justify the analogy of assuming that societies can be planned, designed, or controlled.
History loves nothing more than disproving that assumption.
That doesn’t mean we’re helpless, not at all. The defining quality of human nature is our ability to learn and create. Our ability to discover and adapt is what brought us this far in our cultural evolution. Any solution to our big challenges must begin and end with the understanding that people will continue to discover and adapt.
Some people are blaming the crisis on innovation, which is somewhat valid but unproductive when it comes to trying to go forward with actual solutions and improvements. It isn’t merely the innovations themselves to blame, it’s the fact that they didn’t tend to create a good platform for further innovation. All anyone could do creatively with sophisticated financial instruments was make them even more sophisticated. The irony (or tragedy) is that financial interconnectedness was coeval with intellectual disconnectedness. Financial innovation went into a closed feedback loop, with almost no inside knowledge getting out and little outside knowledge getting in.
An field can only feed on itself for so long before it creates fissures in the larger systems that support it.
There’s a lot of talk now about the hazards of interconnectedness and counterparty risk (I must admit I was one of the people a few years ago who, like Greenspan, thought that sophisticated forms of trading and risk distribution would make the economy more stable and resilient). As with blaming innovation, it isn’t accurate or helpful to blame interconnectedness. The problem wasn’t interconnectedness but that an interconnectedness of knowledge didn’t develop with it. New connections created new ways of making money, but (it seems to me) people working with the new connections didn’t adequately update their professional assumptions.
Sure, technical knowledge advanced, but rating agencies continued to rate according to the old assumptions, lenders continued to lend according to old assumptions, regulatory agencies continued to regulate according to old assumptions, insurance companies continued to insure according to old assumptions, boards of governors continued to govern according to old assumptions… Or rather, new technical knowledge and the wealth it created tended to reinforce the old assumptions, making them even more dangerous.. Meanwhile, automated trading and quantitative finance was radically changing the fundamentals of the entire financial industry.
For people like me who love to learn, this crisis is an incredibly fruitful opportunity. The financial landscape has already been radically altered — in the past two weeks alone — and will almost certainly continue to shift and take on new forms, creating new institutions, conventions, and assumptions.
My “general solution” is to conceive the practice of re-creating institutions, conventions, and assumptions, as a discipline itself. This is what I’ve been working out for the past year (after working on it for several years prior, since germination of the idea in 2000). The discipline I have in mind is a kind of ‘conceptual accounting and development’ — a mode of doing philosophy with an especially practical bent.
The purpose of the discipline is to nudge innovators to innovate in ways that tend to facilitate future innovation and learning, rather than degenerating into closed feedback loops that lead to intellectual disconnectedness and disaster, as we are witnessing in finance today. This ‘solution’ takes advantage of what makes us human and what makes life worth living, rather than trying to suppress or deny our creative qualities — the strengths that made our economy and society so great — and the inevitability of innovation.
Related: too many to list… so just email me or leave a comment if you’re interested.
