evolving the next new form of capitalism, by design

We are taught to think of Capitalism as just one system.

Increasingly, we are hearing pundits tells us we need to save it.

But…

there are actually many different forms of capitalism,
each performing the same two basic functions,
each in its own unique way:

1.

aggregating surpluses saved by individuals, and

2.

deploying those aggregations to sponsor enterprise.

consider how the economy has evolved

from the sailing ships of

the Free Enterprise Economy

to the railroads and factories of

the Mass Market Economy

to our modern

Adaptive Networks Economy

and the financial system has evolved in lock-step

What was there, before there was free enterprise?

Time Traveling Through the Evolutionary History of the Capitalisms

Journey with us back in time,
to the earliest days of pre-history,
when Man first picked up a stick and lit a fire,
simultaneously inventing enterprise, technology, the economy and prosperity.

And also finance.

And capitalism.

Travel forward with us from there, and see if you can see what we see: the adaptive evolution of at least six major forms of economy. Beginning with the aboriginal economies of subsistence technologies, we see the invention of large-scale, irrigated grain agriculture leading to palace systems of craftsmanship leading to voyages of exploration, discovery, colonization and trade leading to industry and in our own day, adaptive networks.

For each of these forms of economy, we can identify six corresponding forms of capitalism, beginning with the consensus building of social relations that continue in our time as Family & Friends, evolving into the centralized authorities that governed agricultural economies that now continue as Church & Charity, evolving into the palace systems of martial law that continue in our time as governmental Taxing & Spending, evolving into the banking systems of free enterprise exploration and discovery that continues today as Banking & Lending, evolving into the corporate system of Securities Trading (what we know today as the Wall Street system).

In our time, we see evolving the newest and next form of capitalism, as superfiduciary stewardship of society’s superfunds set aside for social benefit, investing in enterprise cash flows, directly, to generate adequate fiduciary cash flows, forever. Beginning with pensions.

giving us today the most powerful financial system ever

showing us how all investment begins with surpluses saved by individuals
that pass through one or another of various different logic gates for financial decision-making
into enterprise for evolving prosperous adaptations to life’s constant changes
to create opportunities for new learning that supports new earning, new spending, new saving and new investment in new enterprises
in a process of change and evolutionary adaptation to change that is automatically self-regenerating and endlessly ongoing

something has gone wrong

we have trapped our superfiduciaries inside the tyranny of the trading tape

How do we set things right again?

A Copernican Revolution: Reforming Finance by Changing the Form of the Financial System

making Abundance the center of finance and the economy

Why do so many people find the topic of finance so intimidating?

Two reasons.

  1. It is an abstraction. Finance is about money, and money is a way of turning all the rich complexity of technologies traded within an economy into a single point of shared value: currency. This transforms the practical realities of everyday living within a physical network of connections between people for doing work and sharing wealth through enterprise and exchange into an exercise in counting and calculating. For many people, much common sense gets lost in this transformation.
  2. It is mythology. Like all myths, modern conventional orthodox thinking about economics and finance is built upon a kernel of truth that is wrapped up inside a whole lot of nonsense. The kernel of truth we all get. It is the nonsense out of which we struggle to make sense.

The fault lies not with us. The fault lies with the nonsense.

Like Ptolemaic astronomers in the days before Copernicus, our modern economists draw the economic equivalent of cycles and epicycles in order to “save the appearances”, constructing all manner of Rube Goldberg contraptions to make our actual experiences seem to fit into their pre-conceived notions of what the economy is and should be.

Like our modern economists, the Ptolemaic astronomers had lots of good data. They had very precise and accurate equations. Their math was impeccable. But we don’t have any Ptolemaic astronomers anymore.

This is because Ptolemaic astronomy starts from a pre-conceived idea that the earth is the center of the universe. It denies all evidence indicating this may not be the case, and refuses to engage the possibility that, even though the earth is the center of our experience of the universe, the sun is actually the center of our solar system. And the universe, itself, has no center.

So, their models of the Heavens become increasingly complicated, convoluted and incomprehensible to all except those who are expertly trained in those models.  The experts loved this. It put them at the center of social power. The people, not so much.

Before there was Free Enterprise, this was not such a problem. People relied on astronomers mostly for the keeping of the calendars that predicted the seasons of the years.  The Ptolemaic system proved remarkably effective for building calendars. The fundamental flaw at the heart of the system – that the heavenly bodies do not actually revolve around the earth as the center of everything – was so small that it took many centuries for the errors to build to meaningful levels. Then, the more efficient solution was to simply re-set the calendars, and start the slow process of accumulating the same errors all over again.

When intrepid explorers from Portugal started out into the Atlantic Ocean, heading south around the tip of Africa, to break into the lucrative spice trades that for long had been monopolized by the Venetians trading with Muslims, across the Mediterreanian Sea, this created a new purpose for astronomy. That new purpose created the need and the opportunity for a new astronomy. That new purpose? Navigation.

The early Portuguese explorers discovered many things. One thing they discovered was that they could navigate by the stars; they could tell, from the way the stars appeared in the sky at night,  the position they occupied out on the featureless oceans. Another thing they discovered is that the stars at night in the southern skies do not appear the same as the stars at night in the northern skies.  This was very disconcerting to the then currently conventional and orthodox astronomy of the Ptolemaic system.

Portuguese merchant mariners could not use the complicated system of cycles and epicycles of the Ptlomaics to figure out what the stars were telling them about where they were on the surface of the earth.  It was just too unwieldy and unworkable.

So when an obscure monk named Nicholas Copernicus, working in a remote part of Eastern European, came up with a vastly simpler model of the movement of the planets by putting the sun, not the earth, at the center, the merchant mariners liked this much simpler model so much better.

The story of Copernicus comes down to us as the story of a battle, between Science and Religion.  What if a deeper truth, a more useful truth, is not in the struggle for social power between the priestly Ptolemaics and the secular Copernicans (remember, Copernicus was himself a cleric, as was his great champion, Galileo, and Galileo’s great protector, Cardinal Bellarmine), but in the evolutionary history of technology as practical knowledge of how the world about us works, and how we can change the way the world works in order to make it work more a way we choose it to?

It may feel a little odd  to call astronomy a technology. It is, to be sure, practical knowledge of how the world about us works, but we don’t use that knowledge to change the way the world works. Not directly, in the sense of changing the way the heavenly bodies actually move relative to each other. We do use that knowledge, however, to change how we work in the world, such as in the sailing of a ship upon the open sea, where there are no landmarks by which to navigate.

Consider, in our own time, Google maps.  We can find driving directions in unfamiliar places, just by typing the address into our iPhone.  This is possible because we have a Copernican model of a sun-centered planetary system in a universe without a center. It would not be possible if we still used a Ptolemaic model of a universe with the earth at its center.

What if we shift our focus of inquiry, form astronomy to the economy as our “universe”? How do we conceive of this economy?

One word. Growth.

We aren’t really sure what Growth is, but it sounds great. Like the earth as the center of everything.  We know of growth as more, and more is better, right?

Not right.

Because things change, and some times what we need is not more of what we already have, but something new, that is better.

The merchant mariners of the Free Enterprise Economy did not need more Ptolemaic cycles and epicycles. They did need the new Copernican system of planetary orbits around a sun in a centerless universe. Because it worked for them.

If Growth is not really what we always want, because sometimes things change, and when they change what we really need is not so much more as different, then conventional thinking about the economy cannot give us what we need, because conventional thinking is centered on Growth. It starts from Growth as a pre-conceived idea that it never allows itself to question.  Growth is good.

The practical wisdom of everyday experience teaches that Growth is not always good. What is always good is balance, proportion, fitness for purpose. This is not one thing, but the right configuration of many things.  And things change. They just do. This is not a pre-conceived notion. It is physical, experiential fact. When things change, the configuration of things also has to change, in order for things to remain balanced, proportional and fit for purpose.  What is it that remains right even though all else changes? Abundance. We have enough, with a little extra to spare, just in case, of whatever we need at the time and in the place that we need it. And what we have in abundance changes, as times change, and we adapt to changing times.

Adaptive abundance.

What if we make this the center of our Copernican economy?

The economics of Growth cannot lead us to Adaptive Abundance. The economics of Growth lead us into booms that always, eventually, go bust. A boom is just a bust that has not happened yet.

We need a new economics, an economics of prosperous adaptation to life’s constant changes.

We do not need our pensions to do our speculating for us.

We do need them to do the negotiating we cannot do.

Evolving the Standards of Fiduciary Prudence for Pensions and other Superfiduciaries

40 years ago, almost everything our pensions are doing today was against the law.

That law is the law of fiduciary duty. It requires persons entrusted with discretionary authority over other people’s money to exercise prudence in the choices they make with that money.

For hundreds of years, the common law of fiduciary duty held that speculation by fiduciaries with other people’s money entrusted to their good judgement was a violation fiduciary prudence, and therefor against the law.  Trading in stocks, bonds and other securities is by definition, speculation (look it up; it’s in the dictionary). So trading in securities by pensions as fiduciaries was against the law.

In 1972, a committee of lawyers decided to overrule the dictionary – and hundreds of years of common law and common sense – and write a model law intended to become a uniform state law – the Uniform Management of Institutional Funds Act – that declares as a matter of legislative fiat that if it is reasonable for individuals to use portfolio diversification to manage speculative risk when trading in securities with their own money, for their own account, then is it also reasonable – and therefor within the bounds of prudence – for fiduciaries to trade in securities with other people’s money if they do so through a proper program of portfolio diversification.

After a slow start, vast sums of pension money began pouring into the Wall Street system, and a whole new profession of Asset Managers has grown up to provide professional portfolio management of this pension money. So much so, that a new professional elite now dominates the trading markets. This might sound like a good thing, until one considers that the Wall Street system is actually designed for the masses; not for the elites.

While the movement of pension funds into the trading markets has clearly been a boon for the elites, it is a lot less clear whether pension-funded elites taking over the trading markets has been good for the rest of us.  Since the 1970s, we have lived through the collapse of the Savings & Loan industry, the collapse of the dot.com bubble, the collapse of Long Term Capital Management and the somewhat euphemistically named Global Financial Crisis of 2008, which very nearly brought about the collapse of civilization as we know it. Over this same period, we see evolving patterns of wealth concentration that many interpret as a devolution towards elitism in society and the economy, more generally.

There is another way that pensions can invest in the economy, to generate the cash inflows they need to keep their risk pools properly full and flowing, without driving our economy towards a new elitism. Pensions can negotiate. They do not have to speculate.

As individuals, we cannot negotiate. Our best choice is to speculate.

Our savings available for investment are small, relative to the capital needs of commercial enterprise operating at mass market scale.

Our purpose for investing is opportunistic.

We are indiosyncractic in the nature and timing of our own individual life events.

As participants in a pension pool, we are not so limited. And remember, as taxpayers, we all participate in the pension system, even if we are not, individually, a current or future retiree in any single, specific plan.

Through the pension pool, we already aggregate vast sums of individual surpluses that are, some individually, and all taken together as a group, as large or larger than almost any commercial enterprise operating at even the most massive of mass market scale.

As a pension pool, the pool fiduciaries who have the authority and the responsibility to act in our best interests have a very specific purpose for which they are investing, which is to generate adequate fiduciary cash inflows as required to keep their pension pool properly full and flowing, forever.

Also, as a pension pool that just keeps going, always being invested to always be generating adequate cash flows, forever, commitments for financing can be constructed that match the needs and the opportunities of the enterprise being financed.

This is something that is UNIQUE TO PENSIONS, and a uniquely powerful feature of the design of an investing system that is purpose-built to fit the powers and purposes of pensions as perpetual investors. The investment can be tailored to fit the needs of the enteprise. THE ENTERPRISE DOES NOT HAVE TO BEND AND TWIST TO FIT THE NEEDS OF THE INVESTMENT.

This is not possible in the Wall Street system. In that system, the enterprise has to grow its future value, because growth in future value is what lets the trading markets deliver on their promise of instant liquidity, on demand.

This brings to top-of-mind a fundamental truth about enterprise and the economy that gets buried inside the growth mythology of the Wall Street system. Times change, and people adapt to changing times. We adapt by evolving new technologies – understood in the orginal Greek meaning of the word, as “practical knowledge of how the world about us works, and how we can change that world to make it work more a way we choose it to” – that give us new choices. And we organize new enterprises through which we evolve those new technologies for making prosperous adaptations to life’s constant changes. Enterprise and the economy are really about change, and evolutionary adaptation to change.

Every enterprise starts out small and unpopular, grows in popularity for a time, continues strong as choice that remains popular for some time and eventually fades away, as times change, and people make new and different choices in adaptation to those changes.

Pensions have the power to construct investments that ride the life cycle of enterprise and technology that is the real pulse beat of prosperity, investing in enterprise cash flows, directly, to generate adequate fiduciary cash flows, forever – not from a single investment in a single enterprise that is designed to never end, but through an open-endedly evolving historical timeline of investments in different technologies being evolved through different enterprises for making prosperous adaptations to life’s constant changes, as times change, and people adapt to changing times.

evergreen cash flow
waterfall financing

the new way that pensions invest

evolving the next new form of capitalism as Fiduciary Capitalism