Thursday, October 31, 2013

Enterprise. Finance. Choice.

Enterprise is a physical reality. It is people coming together to do work that creates wealth for themselves by contributing to the wealth of choices available to others.

Finance is a specialized form of enterprise. It does the work of aggregating savings from individuals to form capital for investment in enterprise.

Finance is a fundamentally extractive activity. It extracts value from the enterprises it funds. This extraction has to be restrained. Otherwise, society, the economy and the environment within which we all live cannot flourish.

There are many forms of finance, each with its own methods of aggregating savings, sponsoring enterprise and restraining its extractive activities.  The list includes: household finance; communal finance; religious/theocratic finance; secular/aristocratic/democratic finance; commercial/bank finance; partnership/mercantile finance; corporate/industrial finance; and the newest form of finance, which is pension/retirement finance.

Pensions are an invention of the 20th Century, but they are really only just coming into their own right now, today, in the 21st Century.

A pension is a form of what may be called an evergreen investment trust. It aggregates savings from, or on behalf of, individuals who come in and out of the plan according to the rhythms of their own lives. It invests in enterprises that flourish and fade over time according to the rhythms of choice and change. Across the generations and the innovations, the plan itself endures. It continues, ongoing and open-ended. Evergreen.

The corporation is also a form of evergreen investment trust. It too aggregates savings from individuals who, as shareholders, enter and exit the corporation according to the idiosyncratic rhythms of their own, individual lives. It too invests in enterprises, as business units or subsidiaries, that flourish and fade according to the rhythms of choice and change within an open-ended and evolving economy. It, too, endures across the generation and the innovations. At least in theory. In practice, innovation can be a challenge to the longevity of the corporation.

Pensions and corporations are both forms of evergreen investment trust, but each is formed for its own purpose. The pension is formed for the purpose of providing income security in retirement across the generations. The corporation is formed to finance growth.

Pensions should be investing directly in enterprise, in competition with corporations, offering enterprise a choice.

Instead, they are investing in corporations, denying enterprise a choice. In the process, they are not achieving their mission of providing income security in retirement across the generations. They are also releasing the restraints on the extractive processes of the corporate form, so that society, the economy and the environment are suffering from an excess of wealth extraction by the corporation.

This has to change.  And so it will.

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