Institutional Failure: A Future of Finance Worldview

A week or so ago, I laid out some preliminary thoughts on the agenda for Exchange, the conference we’re hosting in Miami Beach, Florida, on February 5th–8th. (You should come! It’s going to be swell.) One of the sessions I’m hosting is a 100-minute block of content on the future of finance. That’s a big fancy title, one that might make you think we’re going to talk about regulation or crypto or so on but if there’s one thing the pandemic era has taught me, it’s to think both bigger and smaller at the same time.

This is Fine: The PolyCrisis

In 2013, KC Green published this famous panel from his Gunshow comic, and one of my favorite internet memes was born:

It’s a great meme precisely because it speaks to just about any situation. Sitting in Twitter HQ?

Worried about global warming?

Or your preferred political candidate losing, thus ensuring the collapse of civilization?

But part of the reason the meme also has a special place in my heart is that it seems like a daily occurrence that something dramatic, important, and problematic sits right in front of me and honestly, I’ve just sort of learned to live with it. Pandemic? Economics? Politics? Climate? AI? Clean Water? War in Ukraine? Violence? Civil rights? Rule of law? Whatever.

It actually doesn’t make any difference whatsoever what your particular reality tunnel looks like or what party you donate money to; there’s just no question that the dominant form of political/economic structure — democratic capitalism — is facing a polycrisis, a term likely popularized by historian Adam Tooze from Columbia University. As Tooze recently put it in a Financial Times piece:

What makes the crises of the past 15 years so disorientating is that it no longer seems plausible to point to a single cause and, by implication, a single fix. Whereas in the 1980s you might still have believed that ‘the market’ would efficiently steer the economy, deliver growth, defuse contentious political issues and win the cold war, who would make the same claim today?

I think he’s right. The solution to “climate change” isn’t just innovation, nor is it just conservation, nor just changing behavior, nor just political policy. Any “solution” will actually be 100 different interconnected solutions, each coming from all sorts of different actors with different agendas, resources, and appetites. You can say the same thing about whichever crisis you believe is most important right now: the answers all require complex solutions that seem impossible.

So it makes sense that on my worst days, I fall back into the same retort: This is fine.

However, at Exchange, we’re not going to pretend “this is fine.” We’re also not going to leave you feeling ineffectual and helpless about it either (or so we hope). We’re going to investigate and discuss the “whys” and the “what next” of this global polycrisis we face. That’s the introduction to the Future of Finance.

Responding to the PolyCrisis: Why Institutions Matter

The human species has gotten good at solving big problems. Whether it’s taking down a woolly mammoth by working as a group or giving commands to a robot exploring a foreign world, scientists refer to this capability as “collective intelligence” or “distributed cognition.”

However, humans rarely form into spontaneous groups for any period of time. (For example, if you’ve ever been first at the scene of an accident, you know both how quickly a helpful group forms, and how quickly it disperses when “authorities” arrive.) Instead, when we, as a society, decide something needs to get done that requires collective problem-solving and effort, then we create an institution to do it. We form governments and write constitutions — which are in turn the results of countless delegations that came beforehand. (In the case of the U.S. Constitution, a subset of wealthy landowners initiated the institution of the Constitutional Convention, which then created more institutions via the Constitution, which empowered more groups of people to create even more institutions, and so on.)

Through these endless layers of delegation, we can do and achieve incredible things. For example, “we” — that is, the citizens of the U.S. — decided to go to the Moon, so “we” created and funded NASA, which in turn gathered resources and delegated some more. The result: Buzz Aldrin’s bootprint in the regolith.

The problem is, seemingly just through the passage of time and concomitant increase in complexity, our collective faith in these institutions, to which we delegate authority every day, is in the toilet:

This creates the fundamental tension of the now: We desperately need the power of collective intelligence and distributed cognition (not to mention resource management) that functional, positive-sum institutions can provide, at the same time few of us believe those institutions are functional and positive-sum.

So instead, we turn to the one form of “institution” that seems to exist exogenously: the corporation.

Despite the “down and to the right” nature of the sentiment chart above, there’s no question that the power of corporations is on the rise, and perhaps at a kind of local maximum. In democratic capitalism, we’ve made the societal decision that money is how we project power. Once you want to make, invent, move, or destroy something larger than a car, chances are there’s money involved, and it’s extremely rare for money to change hands without a corporation in the mix somewhere.

Whatever your personal politics suggest about whether this is good or useful is just that: a matter of personal politics. In the post-Citizens United world we live in, money equals political speech. Decades of media consolidation and monopoly power have led to a shockingly small number of media companies (and, increasingly, social media companies) acting as our filters. The return on lobbying dollars is one of the best in finance, suggesting regulatory capture of non-corporate entities is endemic.

Yet cynicism isn’t always warranted. Corporations are where Big Things seem to happen. Make electric cars a thing? Tesla did it (with lots of taxpayer help). Energy independence? The oil business made it happen (with lots of taxpayer help). MRNA vaccines in the middle of a novel pandemic? Healthcare companies pulled it off. Sometimes, the corporate system really does get Big Things done.

However, we’re also captives of the same system. Retirement? Healthcare? For most folks in the U.S., that depends solely on your employer, often a corporation, which in turn pays a series of corporations to provide the necessary services.

Is it any wonder, then, that so much ink has been spilled on ESG investing, both for and against? I’ve certainly made my arguments about ESG as a natural reaction to corporate power, but the very idea of stewardship, voting rights, and alternative institutional structures was absent from most discussions a decade ago. It’s everywhere now.

At Exchange, we’re hoping to present a rational, reality-based, apolitical look at the rise of corporate power and what it means for you as a citizen, investor, and steward of client capital.

How We Got Here: Wisdom & Profit

The problem with corporations is that, like all institutions, they are not themselves inherently intelligent. The other problem with corporations is that they are a structure that exists not with a mandate to make the world a better place but to make money for shareholders. In fact, most companies explicitly have in their charter that they exist to make money doing a thing. There’s nothing wrong with that mandate, but it does fall short of another function that institutions have traditionally held: projecting wisdom forward through time.

Depending on your context, the word “wisdom” can have lots of definitions, but here’s the one I like: Wisdom is knowing the right thing to do at the right time. So when we say we want “wise” leaders, we mean that we want them to make the best decisions possible, at the moment where they are most needed.

The purpose of many non-corporate institutions — e.g., academic, religious, governmental, scientific, etc. — is to collect all the knowledge we’ve gained that helps us make positive, species-level decisions and build on it. Disseminate it. The point of institutions is to preserve and propagate wisdom.

With the decline in our non-corporate institutions, we’ve had a concomitant decline in this kind of wisdom, which is a big problem.

Because corporations are designed to maximize profits, they’re constantly facing multipolar traps. One classic example is pollution. If a company can pollute without cost, and chooses not to, thus incurring a cost, then it will be undercut by the company that chooses to pollute and externalizes the environmental burden. This will lead to a race for the bottom in terms of societal outcomes while racing for profit in terms of system gains. Making matters worse, corporations are by design blind to the wholeness of their situations. In cognitive science terms, corporations are almost entirely “left-brained” in the Iain McGilcrist/Master and His Emissary sense, focused on separateness, rationality, and detail (as McGilcrist argues pretty much all of modern capitalism is), while blind to the “wholeness” of the world and systems in which they operate.

So we can hope that Tesla, as an institution, exhibits “wisdom” and does the right thing for the planet, but we should expect that in the end, “whole blindness” will win out and the company will always devolve into that which is most profitable. Meanwhile, we can hope that the Fed, the CDC, or the U.S. military, as institutions, exhibit “wisdom,” but we should expect that our lack of faith in them will hamper their ability to do so.

At Exchange, we’ll dig into the role our most important institutions play, how the role of the corporation is shifting, and the rise of alternative collective structures like DeFi protocols, AI projects, and Decentralized Autonomous Organizations.

From Wisdom to the Meaning Crisis

If we can’t rely on our corporations to be wise, or other institutions to be effective, then how do we respond to the myriad challenges facing us?

The most interesting approach comes from Dr. John Vervaeke, a cognitive scientist from the University of Toronto, who would suggest there’s a root crisis that needs to be addressed first, and one that’s a bit more personal: the “Meaning Crisis.”

The Meaning Crisis is at the root of modern crises of mental health, the response to environmental collapse, and the political system. We are drowning in bullshit – literally ‘meaninglessness’. We feel disconnected from ourselves, each other, the world, and a viable future…. Many people are talking about The Meaning Crisis, but what I want to argue is that these problems are deeper than just social media problems, political problems, even economic problems… they’re deeply historical, cultural, cognitive problems.

It’s easy to read what you want into a paragraph that broad. Depending on the context, Vervaeke is talking about the cause of a current mental health crisis in democratic democracies, the rise of social media, or how our economic systems work.

But if there’s one word that Vervaeke and his colleagues regularly use to describe it, it’s “B.S.” Increased B.S. in everything. Increased “fakeness” in every realm of human endeavor. Increased abstraction and separation.

Put another way: the meaning crisis is the result of a disconnect between what we perceive and what’s important. That cognitive dissonance messes us up at a profound level.

[Note: The key concept to bring into this discussion from the realm of cognitive science is the idea of “Relevance Realization.” Tom Morgan at KCP wrote about this as his “idea of the year,” and I can’t disagree; it’s consumed an enormous amount of my reading time in 2022 as well. Any misinterpretations below are solely my fault, and all the smart bits are Dr. Vervaeke’s.]

It turns out that the thing humans are particularly good at — the thing our brains do that keeps us at the top of the food chain — is recognizing what’s important. Hand a toddler a sippy cup with a handle and they’ll just mess around with it until they figure out that there’s this loopy bit they can grab onto. Maybe, by watching adults, they’ll figure out you can use the loopy bit to bring the yummy juice inside to their mouth. That toddler’s recognition of the cup handle as a useful piece of reality to interact with is far from obvious, however. As they focus on the cup, they’re simultaneously tuning out an inordinate amount of sensory input and internal thought processes that aren’t relevant to the task at hand. They’re not focused on the TV, their parent’s face, or the odd shape of the couch cushion, because those features of their phenomenological experience aren’t relevant to their goal, or their functioning, as a thirsty toddler.

The toddler sorting out, from all the many inputs into their brain, that the cup handle is useful and important is “relevance realization.” It’s ignoring the infinite to focus on the important. (If you’re looking to get deep in the weeds on relevance realization and how it seeps into and explains an enormous amount of human-ing, I recommend starting with Brett Andersen’s recent work.)

If that’s a bit weird and fringe-y, well, strap in. Because the framing of “relevance realization” is incredibly powerful. For example, why is TikTok so addictive? Because it hijacks the very system our human-ness relies on; it convinces us that some things are important, when they most assuredly aren’t, making us expend our only true solipsistic resource time through an addictive dopamine loop. It captures not just our attention (which a loud discordant siren can do just fine), but also our relevance filter. By keying to our existing positive associations (be they sea shanties or pottery or dance memes), the algorithm both captures our attention and feeds our sense of relevance.

Why is fake news bad? It hijacks relevance realization. Sugar? Alcohol? Financial Television? Twitter fights? All entertaining, perhaps. But really, truly important? Probably not.

The good news is that it seems likely that relevance realization — and the sense of meaning that comes from focusing on what’s important — is observable and trainable. It’s both a way of better understanding a complex world, and acting in it more effectively.

At Exchange, we hope to give you a vocabulary that goes behind just “behavioral finance” and helps articulate how humans make all kinds of decisions, both to better understand the world and to act more effectively in it.

So What, Big Deal

The argument I will make on stage — with ample help from people much smarter than me about this stuff — is that in the run since the Industrial Revolution, the system we’ve invented is now remarkably detached from the collective intelligence that solving the polycrisis will require. Institutions compete in a world of multipolar traps, where the benefit of the species as a whole is rarely the stated objective and often is shuffled aside, in favor of the success of the institution itself.

We hope to leave you with several playbooks of “what to do” about a world in polycrisis, with disparately functional institutions, hijacked relevance realization, and declining global mental health. Some of those components will involve a better understanding of where things have gone “wrong,” while others will take a look at what we can and should do to get it “right.” This includes things like the role corporate stewardship can play in creating and executing solutions, or how to make sure your view of the market isn’t itself being hijacked by the meaning crisis. We’re not just going for a sense of dread, chased by an invitation to cocktails.

Specifically, we hope to answer:

  • How do you invest with all this in mind, knowing that the very institutions you invest in, through, and with are as much a part of the problem as they are the solution?
  • What are the global implications? Where are the hidden pockets of volatility and opportunity?
  • What real-world practices can make you and your clients better at cutting through the noise and finding real wealth — time and resources — to contribute to the solutions?

At Exchange, we want you to be part of this conversation. Challenge us. Bring your ideas. Let’s keep the conversation moving. After all, the world is as it is. There is only now, and there is only us.

Dave can be found on Twitter and LinkedIn at @DaveNadig

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