Information as Currency: 'Managed By The Markets,' by Gerald F. Davis

“Citigroup is moving further away from its 11-year focus on marrying brokerage and banking by outsourcing some investment services offered to US branch customers to outside advisers…Under the new plan Citi will begin referring some wealthy customers…to independent financial advisers…Under the new strategy, Citi will receive a referral fee for each customer they direct to an independent adviser.” -- Francesco Guerrera, Financial Times, October 6, 2009

This is exactly the type of corporate behavior that Gerald Davis, the author of Managed By The Markets: How Finance Re-Shaped America (Oxford University Press: 2009), attributes to the business world of today. The new corporate model is one in which “the tasks of making and delivering physical goods are done by contractors.” Davis relates this model to the “original equipment manufacturer,” the OEM, in which the supplier of the final product relies upon others to actually do the manufacturing. All the parts are then brought together and assembled into the final product which is sold to the ultimate consumer. This model, as Davis goes on to show, can also be applied to service industries like banking.

As a consequence, the corporation can be considered to be a “nexus of contracts” and “a network of affiliations” where “the nodes in the corporation’s nexus—its law firm, accounting firm, investment bank, alliance partners, investors, directors, top executives, major customers, and so on—implicitly provide their imprimatur for the firm.” The network is the business.

Welcome to the service (or post-industrial) economy in the United States. And, who is responsible for this economy? Finance. Davis states that, the “service economy in the United States has been decisively shaped by finance.”

But, finance did not do this all alone. “Information and communication technologies (ICTs) have also revolutionized the practice of finance. It is now much cheaper to rely on financial markets for many kinds of financing that banks used to handle, from the short-term cash needs of businesses to thirty-year mortgages. ICTs have also opened up opportunities for innovation in products and businesses from the mundane (mortgage brokerage) to the macabre (insurance payoffs for the terminally ill).”

Finance and Information are a deadly combination, it seems. Davis is at the edge of what many feel is happening in the world but he has not quite captured the full picture. To many, finance IS information. This approach, however, is what Bob Shiller has discussed in books like “The New Financial Order” and “Macro Markets," and it is what economists are talking about when they discuss the new subject of information Markets. Many economists are stretching the limits of information technology to build markets for physical goods that are based on the foundation of the financial markets.

In essence, all things can be converted into information. This is easy to see in the case of a mortgage. There is the amount of the mortgage which is information. There are the cash flows of principal and interest that extend for the maturity of the loan which are pieces of information. But, once people abstract from the actual payments that are made and put everything into the context of information, then these people can do just about anything they want to with the information flow that is related to the specific mortgage.

This argument can then be taken to the extreme. Anything (and I mean anything) can be broken up into pieces of information so that the information related to these “things” can be packaged in whatever form that people want and will pay money for.

The author is saying that this is what has happened in America and, to a lesser extent, the rest of the world. As a consequence, the world has changed. Knowledge has become human capital. Bowling leagues have become social capital. “Entire categories of social life have been securitized” and “turned into a kind of capital. Individuals have become investors, in stocks, in houses, in education, in social relationships. By the beginning of the 21st century, almost everything and every relationship in society has been transformed from what it actually is, into information."

Davis argues that this is not good. He concludes that the problem in the world today is that “societal institutions have not yet adjusted to the new post-industrial, post-corporate economy. “ And then he adds on his value judgment: “Instead, we have made a collective wrong turn, creating a set of institutions that fail to take care of basic needs at the societal level.” That is, the innovations and transformations of the last sixty years have not been good for America.

It is here that I strongly disagree with Davis. Information technology is going to continue to improve and information will continue to spread. This phenomenon has been particularly noticeable since the advent of moveable type and modern printing in 1450. The spread of information has resulted in reformations, renaissances, enlightenments, modernisms and post-modernisms. And, humans are constantly searching for ways in which information technology can be improved…from books, to typewriters, to adding machines, to computers, to main-frames, to desktops, to laptops, to whatever.

Finance is important in this progression because it is information. Modern financial theory really took off when the improved computing power of the 1960s connected with the massive amount of data that had been collected on the stock market. Rarely had such a massive amount of data been available to researchers who now had new tools to work with. Now, data crunching is applied to all fields (e.g. see the book “Super Crunchers” by Ian Ayres).

But Davis argues that we need a “re-constitution of America’s social institutions. The Great Depression yielded a stable set of institutions that worked well for generations during the ascendancy of the corporate-based manufacturing economy.” He looks to President Obama to pull off another such transformation.

In this I believe that he is very wrong. Information technology will continue to improve. Information will continue to spread. Innovative and creative people will produce the economy of the future and the way others perceive it. This process is called “Self-Organization” and it will result in the "emergence" of the new environment. All I can say is, hold onto your hats, you ain’t seen nothin’ yet!

Comments

[chap08:]

John, it sounds like you should have written this book instead. I think that you are right to emphasize ICT. The author is partly right, on the other hand, that "the innovations and transformations of the last sixty years have not been good for America".

To me, the essential point is that ICT has resulted in information and power being spread down thru society and across international borders. Other countries have benefited more than us from this because they can cheaply leverage existing technology, knowledge and information. With this, they can plug themselves in to our economy in a way that simply wasn't possible even 30 years ago.

Domestically, we haven't even begun to think thru the impacts of these changes. One example is our political system, which really comes from another age. The system involves elected officials, at all levels, "acting on our behalf". This was absolutely necessary in the past because we couldn't all be there to vote. Now we can. We can do it electronically if we want to. The current system is based on "contributions" and leads to a lot of pork and waste. On the other hand, democratizing the budget process in California doesn't seem to have worked very well. We need to at least start thinking about the possibilities.

Oct 10 07:43 AM

[Gary A:]

John I hope you don't fancy yourself as the Buckminster Fuller of finance! That is what we don't need!

Information that causes bubbles is really what we are talking about, right John? It is called piling on. Go where the momentum is. Of course it has nothing to do with reality, or with real capital formation, but rather is a manifestation of the great new casino.

I don't really see that this information leads to any efficiency at all. i think that bubbles are very inefficient. I don't think that bubble creation is very creative at all. I view it as mass, harmful speculation.

Buckminster Fuller would likely have taken my view.

Oct 11 11:34 PM

[Deumlaokeng:]

What a load of croc. Problem is that when everything is "converted into information" all you are left with is noise. These financial gurus need to be given a primer on what is information, they need to understand what real information gurus like Claude Shannon had to say. They need to accept the fact that information is not knowledge. Then they can begin to understand how too much information within the financial world did not reshape but destroyed the American dream.

Oct 11 11:42 PM