In the past I have often used Alford Korzybski’s much quoted “A map is not the territory” when I have hit situations where our perceptions or models don’t seem to accurately reflect what is going on or what a situation is.
It was only very recently I came across a fuller version of this quote that seems much more interesting; “A map is not the territory it represents, but if correct, it has a similar structure to the territory, which accounts for its usefulness”
If we think of the world of finance as a kind of map of the world of people creating, making, building, buying, selling, exchanging goods and services I am beginning to wonder how well the map represents the structure of what is going on. I have a growing sense of a disjunction between the two. And, if there is, may be we have to question how we think about finance, economics and the real world of productive human activity.
Let’s start with some figures drawn from a number of different sources:
In 1975, about 80% of foreign exchange transactions (where one national currency is exchanged for another) were to conduct business in the real economy and about 20% of transactions in 1975 were speculative. Today, the real economy in foreign exchange transactions is down to 2.5% and 97.5% is now speculative.
At the end of the 1970s, the stock of financial assets in the world’s leading economies was worth about the same as the “real” assets that underpinned them; today, financial assets are valued at three times real assets.
The use of derivatives has grown exponentially in recent years. The total value of all unregulated derivatives is estimated to be $127 trillion — up from $3 trillion 1990.
Chief executives now earn more than 280 times their average employee, compared with 42 times in 1982.
The United Nations estimates that world GDP grew at an annual rate of 5.4% in the 1960s, 4.1% in the 1970s, 3% in the 1980s, and 2.3% in the 1990s.
And as C.K. Prahalad and Stuart L. Hart write “According to the United Nations, the richest 20 percent in the world accounted for about 70 percent of total income in 1960. In 2000, that figure reached 85 percent. Over the same period, the fraction of income accruing to the poorest 20 percent in the world fell from 2.3 percent to 1.1 percent.”
And go on to say:
“At the very top of the world economic pyramid are 75 to 100 million affluent Tier 1 consumers from around the world. This is a cosmopolitan group composed of middle- and upper-income people in developed countries and the few rich elites from the developing world. In the middle of the pyramid, in Tiers 2 and 3, are poor customers in developed nations and the rising middle classes in developing countries.
There are 4 billion people in Tier 4, at the bottom of the pyramid. Their annual per capita income ? based on purchasing power parity in U.S. dollars ? is less than $1,500, the minimum considered necessary to sustain a decent life. For well over a billion people ? roughly one-sixth of humanity ? per capita income is less than $1 per day.”
At the same time there is a general consensus that almost every industry is plagued by excess capacity. Nearly five years ago Lester Thurrow wrote, “The world is awash in excess capacity. Take any product, estimate how much the world could make if all of the world’s factories were running at capacity, subtract expected 1999 sales, and there is at least one-third excess production capacity for everything.”In the following years little seems to have changed.
These fragments look like a pattern to me and show a gap between what our world could be providing for our people and what it actually does. For some, no doubt, the pattern will look like the same old story of the rich and powerful grabbing what they can and undoubtedly there is some truth in that. What I wonder is whether there is another kind of story? Whether the spectacle of the pigs with their snouts in the trough is a transitory phenomenon as we pass from one kind of economic world to another?
Maybe, lurking in this pattern, this very crude map I have drawn there are some other possibilities. At some point the world of finance and the real economy have to reach some kind of equilibrium, anything else in unsustainable. And, maybe the route to that equilibrium involves a shift from thinking about problems and thinking instead about capabilities.
To use a quote I have returned to over and over again for many years:
“The great landscape gardener, Lancelot Brown, when confronted with a client’s estate, did not say “what is your problem??, he asked “what are the capabilities of this piece of land?”. Optimism, generality, and scope flowed where otherwise all would have been pessimism, specificity, and narrowness. That is what is wrong with conventional wisdom: not enough Capability Browns and too many Problematic Tom, Dicks and Harrys.”
Perhaps its time we found a few Capability Browns to look at the territory and to construct some new maps of what they find. Conventional wisdom seems to be heading us in a downward spiral, maybe some unconventional wisdom will help us move in an upward direction.