What if there's a better way?

This week's wild stock market roller coaster reminds us of many things, including the ability of very lucky, very savvy people to make a rapid fortune without adding any value whatsoever to a product, our society or the economy. I say that as an observation, not a judgment. These are the rules, and these are the results.

But isn't it interesting that as the markets take a breather this weekend, even professional traders are still frustrated by their generalized confusion over what just happened? It's not just non-investors like me who don't understand this new automated, high-speed, rule-bending global network of markets. 

To free-market champions, the resulting risks and rewards look like the balance sheet of progress, and I don't disagree. But what if this wild, jittery period is part of a transitional phase from traditional ideas about finance to a new global system that will be much harder to game -- and much, much harder to knock off its axis?

Stock markets were early adopters of information technology, but the increase in available information hasn't translated into greater understanding. To date, the primary result of computerized trading has been a faster pace to the high-wire act of stock trading, not a better picture of what is happening to the world's wealth. Things happen, and months later we get some perspective on them.

Here's what I suppose. Over time, the people with the most to lose will begin wondering why they continue to let their wealth be subject to the arbitrary rules that turn markets into casinos. Markets are traditionally dynamic because of information scarcity, a condition that is being bleached out of modern life. The new question, then, is how to preserve the dynamism that drives innovation and progress, while limiting instability that threatens everything we've worked to build.

Traditionalists will scoff at these ideas, but I suspect these principles will eventually shape our new normal. For all our talk about the high-end technologies that drove progress in the 20th century, a more mundane explanation for our prosperity in the last century is that we produced history's first stable food supply. The foundations of that system can make for interesting discussions, and I certainly have my issues with some of the results, but I certainly don't hope for a return to a world where famine was a constant threat.

So while capitalists argue against regulation as if by habit, two forces push back against them. The first is democracy, which gives weight to economic interests that have no stake in the stock market. The second is the profit motive. Yes, uncertainty leads to opportunity, but wise investors recognize that unquantifiable risk is always a brake on value. Ultimately, stability and transparency -- the forces of credibility that produce faith in the integrity of systems -- will trump the speculator's impulse.

Eventually, capitalists will understand that they have more to gain from a relatively stable market system than they do from an erratic one, and once they figure out how to use information technology and government regulation to build such a marketplace, we'll see it spread like a crystal lattice in a prepared solution. Call it a hunch.

Comments

[Dan]

For the record, a friend who is much smarter on these subjects than I will ever be opened an email dialog with me after this post, and has been politely educating me ever since.

The first result of this education has been to remove whatever calm smugness I felt about things "working out" in the financial sector. Market believers can be overly smug about their "invisible hand," and while I'm not vulnerable to that particular error, I've clearly become overly smug in my belief that democratic capitalism would eventually provide its own magical correction.

Part of my error was in reading the comments of traders quoted in the NYT and elsewhere as indicative of systemic befuddlement. I assumed that if the people within the established systems were befuddled, then the cause of the confusion must come from outside. Bad assumption. It precludes the possibility that the swing was not inflicted on those institutions by outsiders and disruptive technological change, but created by those institutions deliberately.

The analogy of a global economic system akin to a stable food supply is a seductive one for me. It reveals my optimism, my theory of history that suggests that no matter how hopeless things look, the outcome is always a little better. Whether we deserve it or not.

There's nothing wrong with that as a personal attitude. It helps me get through the day and makes me a bit more enjoyable as social company. But it's sloppy, bullshit thinking, and I can do better.