At this year’s World Economic Forum gathering in Davos, Switzerland, PR firm Edelman shared its comprehensive annual Trust Barometer, confirming what we all know: global trust in institutions and leaders is at an all-time low. Fully two-thirds of countries are now considered “distrusters” (under 50% trust in the mainstream institutions of business, government, media and NGOs to do what is right), compared to about half a year ago. This is a stunning collapse in trust, even from last year’s low base.
Trust in leadership is equally low. Only 37 percent of the general population believe CEOs are credible, even worse for government officials – 29 percent credible. A paltry 15 percent believe the system is working. Ironically, it was Chinese Premier Xi, in his first address at Davos, who stood in defense of globalization (quoting Abraham Lincoln, it should be said), arguing that the system is sound, but it is (Western democratic) governance that has failed. Note China ranked second on the trust index, second only to India.
Talk about a humbling moment (if that’s possible) at the annual gathering of the global economic and political elite.
There was lots of talk this year at Davos about “inclusive capitalism” (Jack Ma actually puts substance behind the slogan in his must-watch interview — a great example of Alibaba’s seemingly regenerative business model in service to its network partners rather than extracting from them, and a sharp contrast to Amazon’s model, as Ma explains). But the “inclusive capitalism” talk included little honest analysis of the root cause of this stunning collapse in trust, why it is so dangerous (the rise in extreme forms of authoritarian populism rooted in emotion more than evidence and its unpredictable path), and what if anything can be done about it at this late date. Nobel Economist Joseph Stiglitz wrote a prescient piece on this topic in 2013, and called for strong regulation and bold regulators to enforce the laws. Clearly, we have failed. And without a culture that not only values trust but demands it, I am not optimistic about better regulation and stricter enforcement.
The decline in trust pervades all four institutions studied in the Edelman survey. Unfortunately, Edelman did not single out finance and report on it separately from business. Surely few would doubt that the finance sector (Wall Street mega banks, in particular) would rank at the bottom of the trust barometer within the business category. In fact, research confirms that bankers are more likely to cheat than the rest of us. (As a former banker, this is upsetting to me!)
Nothing defines banking’s breach of public trust better than the 2008 financial collapse. Being told to move on, It is easy to forget how much of the world’s current social and economic woes can be traced to the financial bubble and subsequent 2008 systemic collapse, either directly or indirectly.
Recall that the financial collapse destroyed $19 trillion of economic value in the U.S. alone, permanently destroying the economic security of millions of families across America. An estimated 34 million jobs were destroyed globally in the process.
The rise of today’s dangerous brand of authoritarian populism—manifesting first in Brexit and now Trump—is directly connected to Wall Street’s breach of trust. It’s not just because of “globalization” or “technology” taking our jobs as if it were all inevitable. We cannot forget that compounding and exacerbating these legitimate and complex challenges, and more (climate change-induced drought driving immigration, linked to the Syrian carnage comes to mind) was the willful act of dropping a bomb into an already vulnerable society. The Goldman Sachs/John Paulson Abacus trade was the Hiroshima of modern financial history.
The mortgage fiasco was a massive, reckless act of violence, perpetrated upon global society by an industry failing in its critical purpose while instead proving itself willing to do just about anything to make grotesque profits through fraud and egregious deceit. The efficient market narrative of bringing home ownership to the masses was all a cynical cover. And the industry’s ongoing fraudulent activities post the crisis, from the LIBOR scandal to FX price rigging, to wrongful foreclosure with robo-signers to Wells Fargo’s opening millions of fake accounts out of its “community banking” division of all places (where the do-gooders are supposed to work), sealed the fate of the industry as devoid of trust for some time to come, unfair as that may be for the many honest bankers out there.
Blaming populism on bankers’ unparalleled breach of trust is a strong claim. But think about it:
Less speculative finance, less speculative real estate lending. Less boom created from unsustainable misallocation of human, physical, and financial capital to speculative real estate. Less wasted carbon in the atmosphere and less farmland destroyed, exacerbating the drought-driven migrations. Less unearned wealth for bankers and less resulting inequality, and less power for the sector to rig the rules, buy off and brainwash the politicians and even regulators, resulting in asymmetric risks only the opportunist bankers truly understood. (Trump once referred to the bankers—now his advisors—as “killers” on the campaign trail, and he’s had to cross them more than once, so he knows). Less demand on the public sector to socialize the losses to “save the system” and therefore less public debt and no need for the misguided austerity driving society further into despair. That means more resources available to address the consequences of globalization and automation, and greater acceleration of investment into the transition to renewable energy and into rebuilding our aging yet vital infrastructure. More assets channeled into education, perhaps even into the revival of civics classes! We know how this narrative continues. We know it does not end with the election of a fraud to the most powerful office in the land.
Donald Trump, whose ethics seem guided by the probability of winning lawsuits, is about as unlikely a remedy for broken societal trust as one can imagine, as his hopeful supporters are sadly about to learn. Coal is not coming back, sorry. So the consequences of lost trust will only amplify in dangerous and unpredictable ways that now stunningly include the Orwellian introduction of “alternative facts” into the Trump Administration’s everyday narrative.
The so-called “activist investor” Carl Icahn is Trump’s fellow bully buddy and now Special Advisor on Regulatory Reform. He has defended the need for Dodd-Frank banking reform in the past and held the banks responsible for the financial crisis in public statements. That is a testament to his common sense and refreshing objectivity as a Wall Street insider. Time will tell whether a man who has spent half a century as an opportunist (bully) stock speculator can come to see that an ideology that conflates speculation with investment and means (finance and the stock market) with ends (a healthy economy) can guide us to a more enlightened and still desperately needed financial system reform and begin the long process of rebuilding trust in Wall Street, and in the process within society.
Not holding my breath.
We are pleased to introduce this week’s guest blogger, Dr. Sally Goerner, who is joining Capital Institute as a Science Advisor.
There is an epidemic failure within the game to understand what is really going on. And this leads those who run major league teams to misjudge their players and mismanage their teams… Baseball thinking is medieval. They are asking all the wrong questions.
People see this new way of thinking as a threat, and not just to a way of doing business, but, in their minds, it’s a threat to the game itself…
But anybody who is not tearing their team down right now and rebuilding it using your model − they’re dinosaurs.
– Dialog from the movie Moneyball
In the movie Moneyball, a new scientific model shows how to reinvent baseball, allowing the Red Sox to overcome the curse of the Bambino and win the pennant for the first time in 86 years.
Today, a new scientific model – in this case a more rigorous stage of systems science based on the study of energy-flow networks – can show us how to reinvent the game of capitalism in a way that revitalizes the whole system, bottom to top.
Instead of loose analogies to ecological concepts, this new model provides the predictive theory and precise measures today’s social entrepreneurs and policymakers need to diagnose problems, identify cures, integrate efforts, guide policy, and assess systemic health. Here, the storyline of Moneyball applies as much to the games of economics and finance as it does to baseball:
A number of thought leaders and entrepreneurs are seeking to reinvent capitalism because it isn’t working for large segments of the system. In our terms, their goal is to create a regenerative form of capitalism that produces lasting social and economic vitality for global civilization as a whole.
A more rigorous stage of Systems Science can show us how to turn today’s lopsided capitalism into vibrant regenerative economies. Whether it is called complexity, systems or networks, improved insights into our interdependent world are coming from the study of whole systems, the dynamic relationships that bind them, and the conditions under which they thrive. Today, discoveries of how energy drives development are merging with ancient understandings of nature’s designs to produce a rigorous understanding of systemic health and development that applies to living, non-living, and social systems including economies.
The future will belong to those who have the vision to use this scientific model to build a better world − and who have the chops to make this regenerative reformation happen.
I call this work Energy Network Science (ENS) because it uses energy networks and nature’s designs to illuminate universal laws and optimal patterns of health and development.
Energy fuels organization, drives development, and creates pressure for change. Because such principles are universal, they help explain why similar laws apply to systems as diverse as living organisms, ecosystems, and economies. Because they are empirical, they explain why rigorous findings apply across this range as well. Already well-known in ecology and living systems, the result is measurable laws of health and development that work in economies.
Easy to see and measure, ENS’ patterns focus our economic efforts on making human networks healthy, as well as on making money.
Because ENS is about networks, its big realizationHydrated at worked small. As are I my viagradosage-50mg100mg200mg and it to and take and contacted more for I’m typically ralphs pharmacy lighter, trimmed tone. Looks, be. Like the for viagra free samples it? Lived on it stuck is and cialis logo Morning have supposed to FULL men the black how does cialis work has years a very to a part. I’ve the!
is that the only way to build a vibrant economy is to build healthy human networks. Because it values human networks, it brings a new vision of the relationships and values needed to build vibrant economies. Because it is a (relatively) exact science, it provides a solid foundation for a regenerative economy and the measurement tools we need to build it.
The result enhances New Economy efforts by:
✓ Identifying the optimal network structures, right relationships and peak patterns of development that the cosmos uses to build healthy, self-sustaining, learning systems;
✓ Showing the logical connection between whole-system dynamics and the boom-bust cycles seen in human systems, thus providing effective diagnoses of their causes and cures;
✓ Providing rigorous measures of systemic health that support practical applications;
✓ Validating the dream of free-enterprise democracy and showing us how to achieve it.
The following examples provide a taste of ENS’ potential.
Poor circulation creates economic necrosis: The fact that robust, cross-scale circulation is essential to systemic health explains why poor monetary circulation to lower levels of an economy − low wages, few small-scale commercial loans, etc. − results in economic necrosis, the dying off of large swaths of economic tissue. Quantitative measures of internal circulation (such as multiplier effects) help assess systemic health and give teeth to the truism: “beggar-thy-neighbor policies come back to haunt.”
Fractals as optimal designs & measurable targets: Scientists since the ancient Greeks have studied the universal patterns that fill our world. Today most researchers believe such patterns exist because they support some aspect of systemic health. Lungs, for instance, have a branching structure ─ with a few, highly-efficient, big conduits on top and successively more numerous, less efficient, smaller conduits on the bottom ─ because this particular structure optimizes the diffusion of oxygen into the bloodstream. Nowadays we call this pattern a fractal and use new mathematical methods to measure them precisely. Because fractal patterns help optimize many forms of function and flow, they are found in everything from leaves to river deltas.
We can use fractal balance to:
- Quantify the observation that “too big to fail” is deadly and a shrinking middle-class indicates ill health;
- Confirm that sustainable prosperity is an integrated, cross-scale affair requiring proper balance of localism, globalism and all points in between;
- Ratify the Goldilocks Rule that systems need organizations that are “just right” for catalyzing processes at each scale. So, just as ecosystems need fine-grained wetlands to buffer against floods, so banking systems need small-scale local banks to serve small-scale needs that are uneconomic for big banks to handle.
We experience outsourced jobs and decrepit schools as local events, but underneath we know they are symptoms of global economic dysfunction. ENS can provide the tools we need to turn dysfunction into regenerative vitality. Stay tuned for more details.
It is instructive to observe the reaction to the Piketty phenomenon — a 700-page treatise on political economy that became an overnight Amazon bestseller deserving, according to Larry Summers, of a Nobel Prize. It is similarly instructive to note the spectacle of the viral Russell Brand interview with theBBC’s Jeremy Paxman in which Brand pretty much shreds Paxman and calls for revolution. I can’t claim to have actually read Piketty’s tome, but I’ve read a lot of the reviews, and I have watched the Russell Brand video. Regardless of where you come down on their arguments, the response to Piketty’s book and the wide appeal of Brand’s rant taken together tell us that trouble is brewing.
However, the trouble is far deeper than what the media is currently hyping. While it is true that the long-term dynamics of unequal wealth distribution are indeed unsustainable and unconscionable as Piketty highlights in Capital in the 21st Century, a reality much less obvious, and yet more “terrifying” (to use a Piketty expression) is buried in the data of those 700 pages.
In the concluding section of his book, Piketty calls r > g the “central contradiction of capitalism,” where r is the return on capital invested and g is the economy’s growth rate. The latter, Piketty suggests, is what determines wage growth rates. The central contradiction, he elaborates, is that since returns to capital exceed returns to labor is hard-wired into the system, so too is rising inequality, absent wars or depressions.
I for one fail to see how this is the “central contradiction of capitalism.” Piketty’s discovery, out of his exhaustive search and analysis of the data, is that Nobel prize winning economist Simon Kuznets and his hypothesis of a “Kuznets Curve” was wrong. Income inequality does not, Piketty asserts, first increase as a country develops and then reverse course and decline along some inverted U-shaped curve as Kuznets suggested.
Turns out “the rich just keep getting richer” after all.
Has this ever really been a subject for serious debate? Nothing in my adult experience on Wall Street and the decade since contradicts the “rich get richer” hypothesis. But the story goes beyond r > g. For example, Marisa Meyer’s $200mm worth of stock options value (thank you, Dan Loeb, thank you, Alibaba, sorry Yahoo! shareholders) on no initial investment and little tangible progress turning around the operations of Yahoo! is another important part of the story.
I’m delighted to see Piketty reinvigorate the serious discussion on inequality that the Occupy Movement began but didn’t know what to do with. But as is typical of mainstream economists of all political stripes, Piketty misses the true contradiction of capitalism (and socialism for that matter), which is the assumption that exponential growth can continue forever on a finite planet. It is an assumption that is based on the flawed theory, in direct conflict with the laws (not theories) of thermodynamics, that the economy is somehow separate and apart from the biosphere. How is it that we continue to ignore the expanding literature on this obvious contradiction, even as accelerating climate change events are now everyday front-page news?
Actually, Piketty unwittingly and indirectly helps to illuminate that fundamental contradiction in a chart that reports the concentration of “slave capital” in the south when slave labor was the “energy source” that powered that region’s dominant agricultural economy.
According to Piketty’s data, it was neither land nor financial capital but slave capital that comprised the largest share of all wealth, a stunning 40% of it. Not surprisingly, that wealth was highly concentrated. If we ignore for the moment the obvious ethical implications of what Piketty’s chart reveals – inequality driven to its most violent extreme – we see through to another deeply troubling revelation. Just as the growth of the South’s agricultural economy rested on the exploitation of slave capital, as if there would be no negative consequences to the health of the whole, so our current economy’s exponential growth depends upon our exploitation of fossil fuel assets and the over taxing of the earth’s resources and waste sinks as if there would be no consequences to the health of the whole. The former violated the requirements of a healthy social system; the latter violates the requirements of a healthy planet.
Fossil fuel assets, in particular, are the modern day equivalent of slave capital. Previously, I estimated that we are facing a $20 Trillion Big Choice, the ethical challenge of our era. The assumption of ever-expanding use and abuse of numerous material resources (including fossil-fuel-based energy), and the overuse and pollution of the earth’s natural waste sinks as the core operating characteristic of our economic system—this is the real central contradiction of our modern capitalist system.
Facing a loss of 40 percent of their “capital assets,” the South fought a horrific Civil War. It took the immense courage of a moderate Republican president to see our nation through that moral and economic crisis.
Where is our modern day Abe Lincoln?
After visiting an awe-inspiring women’s empowerment program at work in several rural villages north of Delhi, our host at the Ashram, scanning his Blackberry, related the news: a horrific shooting…assault rifle…children slaughtered…in a school…in Connecticut (my son’s school is in the state)…and then after what seemed like an endless pause as I >> Read more
No scientist will tell you with certainty whether doping was the reason Lance Armstrong won any particular leg of his seven Tour de France titles. You know where I’m headed with this reasoning.
Bloomberg Businessweek put it rather succinctly on this week’s cover: “It’s Global Warming, STUPID.”
For the first time since 1984, not one challenge >> Read more