A Wealth of Exchanges. A New Paradigm for Prosperity As Choices, and the Ability to Choose.

This is another in a series of posts that build on things I have learned from Art Bardige.

This time, the focus is on a powerful cognitive construct of Unique Artifacts.

A difficult construct to appreciate within the current orthodoxy of corporate capitalism, I offer Unique Artifacts as the foundation of a new economic orthodoxy of prosperity defined as a wealth of choices, and the ability to choose. 

The full story of the paradigm shift to this new paradigm of choice, and the ability to choose, can be summarized as follows:

1. That Which Is Chosen: Unique Artifacts
2. Those Who Do the Choosing: People With Needs, and Money
3. Enterprise as the Nexus between Chooser and Chosen
4. Change and Changing Choices 
5. Investment as Anticipating Choice, and Changing Choices
6. Aggregating Savings to Fund Investment
7. The Conundrum of Corporate Savings
8. The Invention of Stewardship Savings
9. Putting New Wine Into Old Skins
10. Empowering a Direct Connection Between Capital and Wealth Creation

In this blog post, I write about the first three chapters in this story.

That Which Is Chosen: Unique Artifacts. 

For Art Bardige, and his philosophy of knowledge, artifacts are human constructions in their most generic form, the work of human hands, whether that is a drawing, a carving, an utterance, a tone, a poem, a writing, a crop, a building, a tool, a decoration, an idea, and so on.

Uniqueness means singular, and special. The opposite of random. For Art, singular means individual, and distinct. Special means that it resonates with meaning and truth.

As a philosopher of knowledge, Art paints with a very big brush, on a very big canvas.

I write here as a philosopher as well, but a philosopher of economics and prosperity. This, too, is big, but not as big as all of how we know and how we learn.

When I take Art’s insight into Unique Artifacts and apply it in the more narrow context of economics, it becomes three things: singular, special and surplus. Singular comes to mean physically capable of being granted to some and denied to others, such that it can be transferred for a price, in an exchange. Special means that its possession and use has value to others, such that they are willing to pay a price to acquire the rights to its possession and use. Surplus means there is more than is needed by the people who made it to satisfy their own needs, so that they are willing to transfer some to others, in exchange for a price.

The price may be paid in money, or in other artifacts of value. We will abstract for present purposes from the possibility of completing exchange through barter, to focus only on exchanges completed for money, because the use of money empowers an open-ended network of exchanges that supports an equally open-ended portfolio of artifacts for exchange to form a robust, resilient and regenerative economy that evolves through change and adaptation to change.

Those Who Do The Choosing: People With Needs, And Money

Taking the exchange of unique artifacts as the fundamental process of economy reveals that the size of the economy is a function of the volume of exchanges that can and do take place at any given time and over time. 

This, in turn, is a function of two things. One is the volume and variety of artifacts available for exchange. The other is the number of people able and willing to participate in the regular and recurring exchange of artifacts for a price paid in money as the measure of wealth previously created through participation in prior exchanges.

Can you feel the paradigm shifting?

In the current orthodoxy, prosperity is about scale, about production and about perpetual growth in the scale of production.

In our evolving, new orthodoxy, prosperity is about maintaining a wealth of choices, and an equivalent ability to choose, within a network of exchanges that convert surpluses from waste to wealth.

The current orthodoxy focuses on production, and assumes wealth creation will follow as a matter of course. The new orthodoxy focuses on wealth creation, and manages production accordingly. Since wealth is measured in money, this becomes a true Copernican Revolution in our paradigm for prosperity, from production-centered to monetization-centered.

This changes our theory of enterprise. That changes our theories of investment.

Enteprise: The Nexus Between Chooser and Chosen

Wealth is created through exchange. Exchange requires surplus. Surplus is created through work: a concentration of time and effort that results in more artifacts than those who construct those artifacts can use to meet their own needs. Surplus that cannot be stored is waste, unless it can be monetized through exchange. Enterprise is the vehicle for monetizing surpluses, and transforming waste into wealth.

The integrity and authenticity of enterprise is a function of the completeness and cohesiveness of its:

• knowledge of the patterns to apply in constructing a surplus of artifacts, and converting that surplus into wealth through exchange with others;
• networks of connections to all the different participants in the monetization process, including suppliers of consumables, suppliers of durables, suppliers of capital, suppliers of time, effort and expertise and the customers who, through repeated and recurring exchanges, supply the revenues that reward the efforts of all, and keep the enterprise robust, resilient and regenerative; and
• routines for effectively and efficiently constructing and re-constructing the surpluses that are exchanged to generate the revenues that get the whole thing going and keep it flowing.

The scale and longevity of enterprise, and so its value for investment, however, is a function of the popularity of its artifacts, as this popularity changes over time, as circumstances change, and new choices become available.

This will be the topic of my next post.

Literacy +

I am reflecting again today on a conversation I had last week with my friend Art Bardige, the philosopher of teaching and learning, among other things. Art is on a mission to radically rebuild the American educational orthodoxy, and he was describing the need to end the belief that education should be about literacy.

When Art first said that, it did not resonate. However, I have learned to listen and to think about what Art says. He is a deep and innovative thinker who does not say things that are not worth saying, and hearing, and thinking about, and making one’s own.

Like all deep and innovative thinkers, however, Art struggles with the impossibility of putting “new wine into old skins”, that is, of expressing new insights using old words.

Words have meaning only in context, and familiar words bring with them their own familiar context.  When we use old words to convey new meanings, we often create false dissonance because the new meaning is being received in an old context, a context into which is really does not fit. Words that would resonate if they were received with the meaning they are intended to convey instead dissonate, The meaning gets lost. The message gets garbled. Communication fails. Instead of novelty that is interesting, we get noise that is annoying.

So I pressed Art, and learned that by literacy he meant working with a codex: written letters organized into words strung together to form sentences grouped into paragraphs, sections and chapters bound together in a book, starting with a table of contents and ending with an index.

In this context, Art’s words do resonate.

It takes hard work and specialized skill to store knowledge and information in book form. It takes hard work and specialized skill to retrieve and make one’s own the knowledge and information that is stored in book form.

Art’s point is that in the 21st Century we now have a broader portfolio of technologies for constructing and communicating knowledge and information than just the codex. We have video, that doesn’t even require the skills of reading and writing, but also a proliferation of written-word based technologies for email, the Internet, the World Wide Web, blogging, tweeting, texting and so on.

With wireless technology and digital media combined, we now can communicate through reproduced images, spoken sounds and written words, anytime, from anywhere, synchronously and asynchronously. This is powerful stuff, and it is still powerfully new.

For Art, it opens up radical -- in the Latin sense of “going to the root” -- possibilities for education and how we teach and learn the skills of creating and communicating information so that meaning can be effectively expressed and received, expectations aligned and choices and actions integrated.

For me, it opens up equally radical -- also in the Latin sense -- possibilities for how we direct capital into wealth creation.

In both cases, it also brings into focus for reconsideration that other ancient architecture for information storage and retrieval: the self-perpetuating bureaucracy.

Bureaucracies exist to collect data that gets fit into context to create information that guides choice and drives action across successive generations of a large and diverse population of people united by some shared experience. They also perpetuate the patterns of knowing that are common to that shared experience and that provide the context into which data is placed to create the information that is the lifeblood of that bureaucracy and the source of its value to the people who support it and who it serves, when it functions properly.

Successfully self-perpetuating bureaucracies are adaptive and evolving, both in the data they collect, and in the patterns they preserve.

A good example of a successful self-perpetuating bureaucracy is the Roman Catholic Church. This is one of the longest-lived of all the currently extent bureaucracies, tracing its history back almost 2,000 years.  This bureaucracy is founded on the shared experience of faith in the crucifixion and resurrection of Jesus of Nazareth, who is called the Christ, and it has endured and prospered over the millennia by constantly adapting that message so that it continues to resonate with different people, in different places, across different times.

The bureaucracy of the Catholic Church is, of course, built upon its own codex. The Bible. Essentially, the message never changes, while contextually, it constantly evolves.

A less long-lived, but equally important, currently extent bureaucracy is the government of the United States of America. It was founded a scant 200 years ago “by the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity”. That is from the Preamble to the Constitution of the United States. Quite a remarkable codex in its own right.

Like the Catholic Church and all other successful, self-perpetuating bureaucracies, the US Government has adapted over time to changing circumstances in the lives of its people, and evolved as society and the economy has evolved.

Today, we are seeing the emergence of two new classes of self-perpetuating bureaucracies that are beginning to rival in both scale and importance both the US Government and the Catholic Church. The first is the publicly-traded multinational business corporation.

At least in its US incarnation, the modern business corporation starts out, like the US Government, as a representative democracy. It’s citizens are its shareholders who vote in elections for directors who come together as a board, like Congress, to hire officers to execute their decisions about what business is to be conducted, and how that business is to be carried on. The codex of the modern business corporation is the public law under which it is formed, and the by-laws that it adopts for itself. Both are very general in purpose. The purpose of the corporation is to carry on whatever business it chooses to conduct, as long as it operates within the law.

This legal construct of general purpose corporate republican democracy then gets transformed through financialization into the temporary ownership of transient trading positions in financialized assets that are bought, held and sold on expectations for future price movements within an exchange-based liquid asset trading market. Although in theory, and in law, the corporation is accountable to its shareholders, in practice, and in practical reality, the financialized corporation is really only accountable to its share price. Its codex does not give a financialized corporation its identity. Instead the financialized corporation exists only to be always driving its share price up, however it may choose to do that.

The power of the financialized corporation is its ability to let everybody have a share, and as long as individuals are its primary shareholders, the financialized corporation serves that function well. As individuals, we are all time-limited. So there is a match between our temporary ownership of transient trading positions in corporate shares as financialized assets, and our time-limited capacities to invest. But the story does not stop there.

In addition to the corporation, we are also seeing today the evolution of another class of large, purposeful and powerful self-perpetuating bureaucracies that are primarily economic, as opposed to being either religious or governmental, in purpose. These are pension funds, who together with other stewards of perpetually entrusted funds, such as insurance companies, commercial banks, university endowments, charitable foundations, sovereign wealth funds and even family wealth funds, have come to control a large percentage of the total wealth within our economy that is saved from current circulation and therefore available for investment in new wealth creation.

When these stewards of perpetual trusts invest their entrusted funds in self-perpetuating corporate bureaucracies, there should be a good alignment of perpetual to perpetual, but there is not.  One reason is because the connection is not made directly, through negotiation, but only indirectly, through financialization. These new “big boys” of stewardship investing, especially the pension funds, buy and sell shares over an exchange, just like us little guys, only more so. The result is the rise of Casino Capitalism: buy-and-hold becomes buy-low-to-sell-high becomes buy-high-to-sell-higher in a zero sum game played by paid professional speculators of value extraction from other speculators that drives an ever-accelerating cycle of asset pricing booms that always eventually go bust.

Herculean efforts are made to sustain these booms, but that just lets them get that much larger until they bust, as bust they must, with consequences to society and the larger economy that are increasingly catastrophic. Think 2008. 

Before that, think 1929. 

Before that, think 1897. 

We have seen this all before.

It may be that we can continue propping up the booms and suffering through the busts, but why do we want to?

The very technologies that are empowering both business corporations and stewardship investors to achieve scale can also be applied to make a more direct connection between capital and wealth creation. This can replace the boom and bust cycle of an inauthentic pursuit of perpetual growth in corporate share price with a more authentically sustainable prosperity of organic growth built on an expectation that investment is constant, but commerce, and enterprise, is changeable. 

Stewardship remains a self-perpetuating bureaucracy grounded in the purposes of its codex, or governing charter of trust: to socialize the costs of catastrophic loss of life; to maintain the integrity of our money system for keeping count of our wealth creation and exchange transactions; to provide income security in retirement to successive generations of current and future retirees; to support the university; to give back where it is needed most; to invest in the future of knowledge and innovation; to align profitable investment with social values. 

Enterprise, however, is not perpetual, but time-limited, rising and then falling in size and importance over time as the popularity of its value proposition within the economy rises and then falls over time, as the economy itself evolves through change and adaptation to change. Investment is constantly committed to enterprise, but not constantly committed to the exact same enterprise. The stewardship portfolio evolves as the economy evolves, moving investments into and out of different enterprises as enterprises change in adaptation to change.

In this way, the chartered purposes of good stewardship are perpetuated, while the vitality of a robust, resilient and regenerative economy that evolves through change and adaptation to change is also sustained.

The technologies that empower this organic investing in self-organizing and self-liquidating enterprises for a direct connection between capital and wealth creation are the same digital technologies that expand our choices for constructing and communicating information beyond the cumbersome codex, the even more cumbersome bureaucracy and the fundamentally place-based, and therefor non-inclusive, in the sense of not being scaleable, in-person conversation.

These include video, audio, computerized spreadsheets, computerized word processors, computerized image processing, computerized printing and copying, the Internet, email, the World Wide Web, blogging, tweeting, texting and other wireless technologies for creating, sending, receiving and de-coding digitized signals that represent data, context and information as data-in-context.

Art is right. We need to radically reform education to integrate all of these new technologies for teaching and learning and for knowing and communicating knowledge and intention. We need a new educational paradigm of Literacy +.

That will empower a new prosperity of direct connections between capital and wealth creation that is built on this new paradigm of Literacy +.

Zones of Proximal Development

I was in Harvard Square yesterday for a meeting, and took the time to catch up with my old friend, Art Bardige. Art was holding forth at Tamarind House in Porter Square, as he sometimes does. When I arrived, Art was discussing music with his friend Steve Bayle (Steve is developing a new app called Endorfyn at www.endorfyn.com). Art and Steve were agreeing that what makes music great is novelty: the note you didn't expect, musically, even when you've heard the piece many times before and intellectually know that it is coming.

Steve started telling about his experience with British Blues, which he discovered while living in England some years back. He told how he was disappointed that he could not find any recording by these great artists here when he got back to the US.  That got him wondering why the English could relate so strongly to what is generally considered a most authentically American musical experience. He got this answer from an Irish musician, who offered this view. In the UK, they have a class system that can feel as oppressive to those underclasses, as the American system of racial discrimination feels to the Blacks in America who express those emotions in the Blues.

That lead to a discussion of this idea about learning from educational philosopher Lev Vygotsky: Zones of Proximal Development. Art, among other things, is a philosopher of teaching and learning. Novelty must be close to what we already know. Otherwise, it is not novel. It is just noise.

Zones of Proximal Development is a powerful idea for Evergreen Private Equity, and this in two ways:

1. As a guide to understanding the evolution of ownership structures for investment by stewards of perpetual trusts. 
2. As a guide to understanding the evolution of ideas and innovation, more generally.

People learn only along frontiers of what we already know. Development has to proximal to what we already do. Ideas that are outside the zone of proximal development are not novelties that are surprising and rewarding, like the novelty that makes great music great. They are just noise that has no meaning, and can be distracting and annoying.

So what is the history of proximal development for stewardship investing?

It starts with the republican democracy of corporate shareholding that gets transformed through the financialization of corporate shares into the temporary ownership of transient trading positions in perpetual enterprise.  When financialized corporate shares are bought, held and sold by us as individuals, we are fundamentally time-limited as investors. So, there is a match between the temporary ownership for investment and the temporary nature of our capacity to invest. 

The importance of this matching of ownership to investment horizons was not realized until pensions and other stewards of perpetual trusts became dominant participants in the financialized asset trading markets, beginning with the changes in the standards of prudence for investment by perpetual trusts that were made in 1972.  Now, we have trusts that are perpetual becoming temporary owners of transient trading positions issued by enterprises that are, in theory, also expected to be perpetual. That is proving to be not such a good fit. Quite unsatisfying, actually.

The nearest zone for proximal development of a better experience has been the length of the perpetual investor's holding period. Private Equity has emerged as an alternative to Public Equities. In Private Equity there is no quoted price for the shares in an enterprise being invested in. It is not traded on an exchange. But the standard Private Equity paradigm is done on a managed fund structure with a ten-year limit to the life of each fund.  That means that every investment made by any fund must be sold before the ten year anniversary of that fund.  This is in many cases creates an artificial sell-by date. It has no directly engineered connection to the underlying economics for the enterprise being sponsored. 

Experience has been mixed.

So, we are seeing a new frontier for proximal development being explored through the Canadian Model. Lead by bold innovators like Leo deBever at AIMCo in Edmonton, many Canadian pension funds are embracing the Private Equity construct, but letting go of the managed fund concept. Instead, they are investing themselves, directly. This eliminates the complications that arise with the artificial sell-by dates of the managed fund construct.

The experience thus far seems to be better. This seems to be mostly because of the cost-savings being realized by not having to pay fees to outside managers, but also because of the more direct connection being made in this way between capital and wealth creation.

However, this connection, while indefinite and open-ended, is still fundamentally time-limited. That is because the investment is still being made in reliance on exit-by-sale for return realization.  At some point, the pension investor still must sell, in order to actually realize its return. The timing of that sale is more organic, which takes some of the stress out of the system, but still they bought to sell, and so at some point sell they must.

It is too early to tell if this will actually become problematic, but logically it should. It is still a temporary investment by a perpetual investor in an enterprise that is also expected, at least in theory, to be perpetual. 

Will our experience with the bold experiments of the Canadian Model bring us to the next new zone for proximal development?

Will pensions and other perpetual trusts drop the exit-by-sale strategy, as well as the artificial sell-by dates, in favor of sharing directly in cash flows flowing to equity within each sponsored enterprise, in perpetuity? That would be a more complete alignment of perpetual investors investing perpetually in a perpetual enterprise, each realizing profits on an ongoing basis through wealth creation to the limits of commercial competitiveness.

This feel tight. It feels sustainable.

It does, however, sharpen our focus on the expectation that enterprise is perpetual. Maybe this will become the next new zone for proximal development?

But that's a topic for another post!

The New "Big Boy" Rules

The current "big boy" rules hold that large, purposeful and powerful stewards of perpetually entrusted funds -- like pensions, endowments, foundations, sovereign wealth funds and family wealth funds -- don't need the consumer protections of required disclosures that the little guys get under the Securities Laws.

The new "big boys" agree. Only the little guys financialize. The "big boys" don't speculate. They negotiate.

The first bold steps towards these new rules are already being taken, as was reported yesterday in the New York Times on-line article by Nathaniel Popper:   Public Funds Take Control of Assets, Dodging Wall Street

The article reports on the proceedings of a recently completed meeting of the Institutional Investors Roundtable to which Wall Street was not invited. It details the first important moves being made by public pension funds and other stewardship investors to take control of their private equity investments.

The focus of the article is on fees, but one or two more changes, to transform standard private equity into more perpetually prudent Evergreen Private Equity, will expand the list of empowerments to include all these:

• engineered portfolio performance;
• simplified portfolio design;
• internalized portfolio management;
• reduced portfolio costs;
• controlled portfolio impacts.

All of the above empowerments will come from negotiating direct investments directly with values-driven enterprise leaders. To achieve the full benefits of this negotiated approach to enterprise investment, our large, purposeful and powerful stewards of perpetually entrusted funds need to make these two small changes to the standard PE model:

1. eliminate all artificial sell-by dates
2. de-emphasize exit-by-sale to re-emphasize cash flow sharing, currently and in perpetuity.

These two small changes will radically transform the relationship between capital and wealth creation, and popularize the new "big boy" rules of direct participation through perpetually prudent negotiated investments constructed on the patterns of Evergreen Private Equity.

In an attempt to cut-off this move to the new rules, proponents of standard private equity are warning stewardship investors against trying to internalize portfolio management, as in this quote from Steve Judge, president of the Private Equity Growth Capital Council, as reported in the article:

“Those investing outside of traditional private equity partnerships will find it very challenging and expensive to recruit the talent and experience necessary to replicate those results.”

That may be true under the old rules of standard PE, but under the new rules of Evergreen PE, it won't be. Internalizing portfolio management is truly empowered by EPE.

However, the more important of the empowerments of EPE that cannot be achieved through standard PE  are engineering performance and controlling impacts. That's how stewardship investors generally, and pension plans in particular, will maintain the balance in funding their plans while meeting their multi-generational fiduciary duties.

The Choice to Engineer a New Paradigm of Negotiated Prosperity

There are many stories here. They are interlaced, but they are not the same.

The common thread that weaves through them all is the excesses of excessive financialization.

Financialization is an architecture for aggregating savings to form capital and then directing the investment of that capital into enterprises for the creation of wealth through commercial competition. Its paradigm is the public corporation. In that paradigm, savings are aggregated from large numbers of individuals by breaking large-scale enterprise down into bite-sized shares that can be bought, held or sold between individuals, as investors, without the participation, consent or even necessarily the knowledge of the corporation that issued those shares.

There are two reasons financialization has become excessive. One we have seen before. The other we never have.

The first is participation not by individuals investing their own savings, for their own proper purposes, idiosyncratically and episodically, but by stewards of perpetually entrusted funds, investing other people's money under a governing charter of trust to accomplish the purposes of that charter.

In the hands of perpetual trusts, financialization becomes speculation. When this happens, we get miscreant market manipulation, misalignment of interests, concentrations of wealth that stifle the innovation that drives the competition that is the engine of capitalist prosperity, and a recurring pattern of financialized asset pricing booms that always eventually go bust, growing in size until the bust is catastrophic.

We have seen this before, in the late 19th Century, at the dawn of financialization, with the Panic of 1897, and again in the the early 20th Century, with the Crash of 1929. We are living through it now, again, in the early 21st Century. The first time, it was life insurance companies speculating with life insurance premiums. The second time, it was banks speculating with customer deposits. This time, it is pensions speculating with employee retirement savings.

Truly it is said, those who do not learn the lessons of history are destined to relive them.

The second reason financialization is becoming excessive today is that Manifest Destiny has been achieved.

Do you remember Manifest Destiny? The philosophy in America in the 19th Century, that it was our destiny to expand into a Western Frontier that was so large and open as to be, for all practical purposes, unlimited. Powered by steam, electricity and the internal combustion engine, all fueled by the combustion of fossilized carbon, 19th Century American industry expanded relentlessly into this seemingly infinite horizon.

Inspired by the relentless regularity of motorized machinery, perpetual growth along an historical trend line became the common paradigm for economic prosperity. Enterprise became the corporation. Investing became corporate shareholding. Everyone could participate, because the price of shares would always go up.

This is the romanticized version of corporate shareholding that has become the entrenched orthodoxy of our day. The reality is, and always has been, a little more complicated. First, share prices do not always and only go up. Underneath the surface measures that seem to support our expectations for perpetual growth lies the deeper reality of change, and adaptation to change that is the real story of human history, and the true engine of our prosperity. When belief in perpetual growth along an historical trend line collides with the realities of change, and adaptation to change, we get a bumpy ride. There is the ebb and flow of the business cycle in the commercial markets. This gets exaggerated by pricing booms in the financialized asset trading markets that always, eventually go bust. Corporations fail, and go bankrupt. Investment is lost, and so are jobs. Earnings are the most authentic engine for the circulation of wealth within a capitalist economy. When people cannot earn, wealth cannot circulate. The economy seizes up. Like an engine that has run out of oil. The consequences can be catastrophic.

These booms can only get so large when individuals are driving the financial markets. They get much larger when the markets come to be dominated by perpetual trusts. Then, the bubbles can get so large, that almost everybody feels the impact when they pop. Isolated disasters become widespread catastrophe. The entire market grinds to a halt. Scarcity replaces surplus. Prosperity becomes a memory.

In the 19th Century, when the markets went bust, people went West.

In the 20th Century, when the markets went bust, people went to war.

The frontiers were filled up. There was no place to go. People were already everywhere. We had already spread to the ends of the Earth, and found that it is a sphere. It closes back in upon itself. There is no endless frontier. For a time, we thought we could just keep going, on out into Space. But we did that. We left the Earth, and ventured into Space. When we got there, all we found was rocks. No food. No water. No life. For us, Space is not a Paradise, like the New World was. It is a harsh and inhospitable place. We cannot live there. Not unless we take everything we need with us when go. In which case, why go?

War is not an invention of the 20th Century, but war on an industrial scale is. It is not the Sport of Kings. It is a horror beyond imagining.  If we do it again, it will be Armageddon.

So, in the 21st Century, when the markets fail again, what will we do? We can't just pick up and move. There is no place to go. We can't go to war. That will kill us all. What else can we do?

Already we have tried to socialize the cost of the market bust of 2008. That is straining the limits of society, but maybe we can make it work. We tried before. In the 1930's. We couldn't make a socialization solution work then. Maybe we can now. Maybe we can find a way to sustain a prosperity of boom-and-bust. But why do we want to?

Rex Tillerson, CEO of Exxon, says that climate change is an engineering problem. He is right, and we have a choice. We can choose to act now, and engineer a new energy economy that will avoid a climate catastrophe. Or, we can choose to do nothing, and leave it to those who come after us to engineer a way out of the mess we have bequeathed to them.

The same is true with the economy. We can engineer a new paradigm that will bring an end to the cycle of boom-and-bust. Or we can just keep on booming and busting.  Maybe.

If we do choose to make a change, the heroes of our new paradigm will be the stewards of our perpetual trusts. Insurance and banks, yes, but mostly pensions, endowments, foundations even sovereign wealth and family wealth. These are aggregations of savings held for investment that are large, purposeful, powerful and perpetual. They do not have to speculate. They can negotiate.

Of course, they have to have someone to negotiate with. So, we need values-driven enterprise leaders who also choose to negotiate, rather than feed the fires of speculation.

To catalyze this change, we need the passion of social and financial market reform advocates, to power us past our inertial resistance and carry us through the bumps and bruises of starting up within a brand new paradigm.

Depositary lenders will be important incidental beneficiaries, because if we can get the equity right, the debt will be right, too.

Then there are government and policy that can be radically transformed by the new possibilities for engineering sustainability in a negotiated prosperity.

Many different actors. Many different achievements. One enabling change. A change in the standards of prudence for investing by stewards of perpetually entrusted funds. Don't speculate. Negotiate.

Perpetual Prudence. Making a Difference at the Core

I learned today of an admirable group called Nexus Europe. On its website, it describes itself as:

"an international network of more than 1000 young investors, philanthropists, social entrepreneurs, influencers, and allies who work to increase and improve philanthropy and social impact investing. The network collaborates to advance the potential of next generation leadership across nations and sectors as well as to bridge communities of wealth and social entrepreneurship for dialogue, group problem solving and education."

Energizing and inspiring stuff. But like so many of these world-change convenings, this group seems to be focused on the limit, not at the core.

Which leads me to ask the question, How can we expect to make a difference at the limit, if our system is so unbalanced at its core?

The imbalance I am directing your attention to is the way our large, purposeful, powerful stewards of perpetually entrusted funds, like pensions, endowments, foundations, sovereign wealth funds and even family wealth funds, invest as if they were small (relative to enterprise), idiosyncratic, leverage-limited, and time-limited, individuals. They speculate.

These stewards of perpetually entrusted funds are not small. They are large.  Collectively, they control something like 20-25% of all the capital held for investment in the global economy today. Maybe more.

They are not idiosyncratic. They are purposeful.  They are organized by a charter that is designed to use money to achieve some other goal, not just to use money to make more money. A pension is chartered to provide income security in retirement. An endowment is chartered to support a college, university or other institution of knowledge and learning. A foundation is chartered to give back. There are many different missions, but they all share this one thing. They are all about others, and about the future. They are all responsible not just to themselves, not just for themselves, but to and for successive generations of entrusted beneficiaries under their governing charters of trust.

They are not leverage-limited. They are powerful. They have scale. They have purpose. They have time. That gives them leverage.

They are not time-limited. They are long-lived. Perpetual, really. Unlike individuals, who invest when they can, hold while they can, and sell when they need the money, the stewards of these perpetual trusts never need the money. 

Stop for a moment, and let that sink in. 

For many of us who encounter this thought for the first time, this is a paradigm shift. We are not used to thinking that you never need the money. Most of us, at some point, do.  So, this is a shift in paradigm.  It takes time to make this shift.

OK? Now, ask yourself this question. If a perpetual trust never needs to sell, because it never needs the money, why are they doing all this buying and selling?

For the answer, follow the money. That is how Wall Street makes its money. The largest of our perpetual trusts have become the biggest gamblers at the highest stakes tables in the biggest gambling halls of what has become the great game of Casino Capitalism. Brought to us by Wall Street.

Why are we doing this? We take trillions of dollars of entrusted funds put aside specifically to provide for the future for ourselves and others, and we turn them over to paid professional speculators who use these funds to play a zero-sum game of psyching the other guy out. It's like the high-stakes poker game in the James Bond movie, Casino Royale. Then we wonder why we have lost the balance in our financial markets. Why there is such an excess of bad behavior. Why banks are too-big-to-fail, but the rest of us have to pay the price for their miscreant market manipulations. Why the rich are getting richer, and the poor - and the not-so-poor - are getting kicked to the curb. Why the booms are getting bigger, triggering busts that are ever larger, and more devastating.

We don't have to be doing this. Perpetual trusts don't have to speculate. They have another choice. They can negotiate. They can sit down directly with values-driven leaders of wealth-creating enterprises, and agree the terms of their investment.  And they don't have to sell out in order to get their money out. They can stay in, and take their agreed shares of the cash flows flowing to equity within the cash flow waterfalls of the enterprises they sponsor, for as long as those enterprises continue to generate cash flow, earning returns in increments, over time, as their fair share of the physical wealth being actually created in the real economy by the enterprises they are sponsoring as capital providers. Think of it as Evergreen Private Equity. It's a better fit for their fiduciary obligations than all this buying and selling, back and forth, between each other. It's better for them. It's better for us. It's better for business.

Right now, however, the standards of prudence for these perpetual trusts are the same as for personal trusts, which are the same as for us when we invest as individuals.  But perpetual trusts are not the same as personal trusts. They are not the same as us. They are different. They are larger. Larger in scale, larger in purpose, larger in leverage and larger in longevity.  Larger in possibilities, in capabilities, and in responsibilities.

When it comes to investing, size matters. We need standards of prudence that are sized to what matters. We needs standards of prudence that are sized to perpetual trusts. We need standards of perpetual prudence.

It is not prudent for perpetual trusts to speculate. It is prudent for them to negotiate.

When we make this one, small change at the core, when we replace speculation with negotiation by perpetual trusts, we will restore the balance we have lost in our financial system.

Think of the possibilities that will open up for making a real, lasting, sustainable difference at the limit.

Empowering People to Behave Differently

There is a widely popular perception in the world today that the current financial system is not working the way we need and want it to work. Specific causes for concern focus on a range of issues, from climate/environment/energy to economic inclusiveness/elitism to global community and endless shades of grey along the way.

There is, however, no consensus yet forming about what is to be done to make things better.

Many who are passionate about the need for change are really only interested in changing the way people behave within the system as it is currently constructed today. They are closed (hostile?) to any suggestion that we explore the possibilities of actually changing the way the system is constructed, in order to empower people to change the way they behave.

So this becomes perhaps the first, threshold question on which a consensus must be formed.

Is it enough to change the way people behave within the system as it now is, or do we need to change the system in order to empower people to behave in new and better ways?