Finance 2.0 and fictitious capital

Cross-posted on the Made By Many blog:

Not enough people in this industry talk about the economy. Charles Frith wrote an interesting post on this a while ago. On Wednesday, I spotted two more pieces that discussed the ongoing financial crisis but in completely different ways (not from the media/communications industry exactly), that got me thinking. One was Umair Haque’s piece on the Finance 2.0 manifesto. Two points in his post particularly stood out for me: how the edge fund economy should replace the hedge fund economy, and the issue of open source modeling. He elaborates on the edge fund economy by clearly defining it:

An edge fund is the opposite of a hedge fund. Where hedge funds are opaque, edge funds are transparent. Where hedge funds are closed, edge funds are open. Where hedge funds are run for near-term gains, edge funds are in it for the long run. Where hedge funds create artificial book value, edge funds create value that accrues to real people and society. Where hedge funds focus on long and short transactions, edge funds focus on relationships. Think Marketocracy on steroids.

Read these bits again: ‘edge funds create value that accrues to people and society’ and ‘edge funds focus on relationships’. If relationships took priority over corporate greed, we wouldn’t be facing this mess. The economy needs to become more human, simply put. That would automatically push its case by motivating people to invest more because they’d be happy to invest more. (More after the jump)

About open-source modeling, Haque says:

Every bank built the same models. Every bank built the same flawed models. Every bank built the same flawed models on similarly erroneous assumptions. How dumb is that? Incredibly. Unleashing the power of open source to vaporize this black hole of incompetence is going to be a tremendously powerful path to innovation. The peer review, voluntary contribution, and always-on negotiation at the heart of the open source model create powerful incentives for quality — which is exactly what the hare-brained quants at banks lacked.

I’ve been thinking along these lines off and on – not with specific reference to the economy, but with reference to services. If the public had a mechanism by which they could rate banks, wealth managers and advisors and give instant and clear feedback on why or why not they provided utility or not, they wouldn’t be able to get away with using taxpayer’s money for things they shouldn’t. This kind of a mechanism should ideally be bolstered with transparent accounting for public money held by banks (like some governments are forced to disclose courtesy a Right to Information Act). 

The other post was on Boing Boing, where Richard Metzger spoke about how he thinks Karl Marx’s principles are ‘ultra’ relevant to what is going on now, because Marx spoke of ‘fictitious capital’ way back before the Industrial Revolution was even on the horizon. I grew out of my fascination for principles like socialism and Marxism once I left university, but when I read about it, I felt like the concept of fictitious capital was indeed like a suddenly revealed nugget of gold from a knowledge point of view, and does explain the link between human nature and greed, and consequently the current condition of the economy, rather succinctly. This again, though, links back to Umair Haque’s points about the edge economy and open source modeling. If we are to control the growth of fictitious capital, we need to make sure it can’t be created. And for that, we need capital to be audited in an open source manner. 

Someone needs to create that system now.

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2 thoughts on “Finance 2.0 and fictitious capital

  1. Good post. It is fair to say that the last time I immersed myself in Marx, wait, the second but last time. It felt irrelevant. But as soon as putting people first it starts to look pretty robust.

    I’m not sure the banks should operate in the way they do. I’d urge you to check out Douglas Rushkoff as he’s the man when it comes to defining what went wrong and how we could hack the system a bit. He’s in to hacking. The nice kind.

  2. Hey Charles – thanks for the comment. Banks need to change the way they operate, and the more I think about it the more I’m sure. Will check Rushkoff out-thanks for the tip.

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