8.5 Financial Techniques in the New Economy

The importance of financial techniques to the success of an industrial-based economy cannot be stressed too much. Without the means of collecting together many smaller savings and then loaning large sums, the capital-hungry companies of the industrial age could never have grown as they did. The next era will have its own kinds of capital requirements and thus its own kinds of financial institutions. To see what these may be, it is necessary to consider current trends in the handling and transmission of money (the medium of exchange), stocks (the instruments of equity), and bonds (the instruments of debt).

Money and its Equivalents

Among the early hunter-gatherers, the medium of exchange was generally something that had intrinsic value. That is, it was valuable because it was useful in itself. Beaver pelts, buffalo hides, and flints are examples of intrinsically valuable exchange media. Because value was tied to use, the rates of exchange fluctuated with both the supply and the perceived need of the valued object but were capable of long-term stability--and prices were as likely to go up as down. In late hunter-gatherer and early agricultural societies, the medium of exchange shifted to objects with symbolic or decorative value, such as pieces of metal. These also gain their status because they are used, but the use tends to be by the upper classes and for ornamentation rather than being universal and necessary. When such use is widespread enough, the state eventually organizes the minting and distribution of coins in order to provide a guarantee of weight and purity and to lend some authority to the practice of using such coins for settling all transactions involving goods and services. Thus, money passes from being an object of concrete value to that of an abstraction known as "legal tender." As is often the case, the abstraction that no one needs to think about is more useful, more universal, and has a wider scope than the concrete object it represents.

The metal in question, such as gold, is still often said to have an intrinsic value, but this is only true to the extent of its direct usefulness--already inherent in such a medium of exchange is a considerable degree of abstraction from tangible wealth. As the economy grows in complexity, the supply of metals with symbolic value eventually becomes inadequate to serve the needs of industrial capitalization, and a second abstraction takes place, this time to paper money. A certain level of technology is required--advanced printing presses and an art of paper making and engraving that can prevent counterfeiting--but this second abstraction is necessary once the money supply reaches a certain size. At first, the fiction may be maintained that gold backs the currency, but gold too is only an abstraction for real wealth--which lies in the resources, productivity, inventiveness, and enterprise of a people who are behind the value of their money. Eventually, the monetary abstraction becomes more obvious when alongside the cash economy there grows up the practice of writing notes or checks to cover larger settlements--for paper money is also inadequate to meet all the needs of the industrial age. Once more, a certain level of technology is needed to maintain an efficient and large-scale cheque clearing system; beyond a certain level of use, it is next to impossible without computing machinery.

Plastic Cards

Credit cards, a more automated equivalent of checks, are also impossible to implement without sophisticated record keeping. The number and percentage of all commercial transactions presently covered by credit cards is growing rapidly with each passing year and exceeds those represented by the cash economy by a wide margin. Debit cards in turn represent a slight refinement of this system, for they are used at the retail level in an identical fashion to the credit card. The difference is that the account to which the billings are posted is the user's bank account, not a credit account. The user is directly debited for the transaction, and the writing of a month-end check is eliminated. Meanwhile, cash itself is more easily obtained with a card by using bank machines than by waiting for office hours and speaking with a human teller. An third alternative is the smart card, which carries its own balance electronically encoded and debits that whenever it is used for a purchase. All this automation results in efficiency at the cost of some jobs. It also makes for more mobile capital, for money can be transferred internationally as well as locally. It can be moved instantly instead of with substantial delay. Both of these further contribute to the ability to accumulate larger capital pools than ever before.

Taking the Next Step--Abstracting Money Altogether

Another level of abstraction has already taken over for a significant portion of transactions. This is the electronic transfer of funds. Here, there is no paper trail whatsoever, just a message sent from the machine managing one account to the one managing the other. Once the two are agreed on security measures (correct password and electronic signature) the one account is credited and the other debited, with an electronic record of the transaction entered into files at both ends.

The end result could well be a cashless economy--there isn't enough of it anyway--with automated record keeping of salaries, purchases, services, and taxes. Such a system has the advantages of efficiency and accuracy, and as Ellul points out, such considerations are often decisive. Whether the potential for the loss of personal control, freedom, and privacy is a price that people are willing to pay for such efficiencies remains to be seen. If enough are convinced that such a trade-off is worthwhile; however, the rest will not have the choice of remaining in a cash economy, because in that event, the latter would disappear. Black markets, criminal activities, and other economic undergrounds will all have to find other means than cash to keep track of their enterprises. However controversial the cashless society is to some, it may come about so gradually that its advent is scarcely noticed. Even now its greatest critics generally use checks if not credit cards, rather than cash. This development in itself is not at issue; it is the potential use of financial records for control and direction of individuals by the state that creates ethical issues. Those issues will be considered in more detail in the next Chapter; it is time to move on to other financing means.

Stocks and Bonds

Money, however abstracted, represents services, whereas the instruments of equity and debt represent collective ownership and financing. These, like paper money, are abstractions for wealth, but the wealth represented, while of monetary value, is of a different and less tangible sort. The value of an industrial-age company lies only partially in its assets of money, land, machines, buildings, and inventory. Value is also found in the skills of the employees, the company's ability to capture and hold market share or good will, its efficiency, and its ability to change. It is these latter assets that are the most important in an information and service economy. In fact, if key employees depart, the good will of customers evaporates, or the company cannot adapt to changing markets, the machines and inventory may be worthless. How all these values are perceived is reflected in the trading patterns of its shares and bonds, which move up and down with the willingness of people to buy and sell.

In a sense, the currency of a country reflects the same kinds of perceived values for the nation as a whole, as it also trades up and down on the market. The flow of information affects such trading, and the assumption of the currency marketplace is that when information availability is perfect, the trading price will reflect this. On the other hand, when information is free to flow in near zero time, the volatility in such markets may increase, especially if only part of the system is automated, and other parts have a restricted information flow.

The existence of both speculators and options to purchase currency, bonds, and stocks at a later date adds to this volatility, especially when the volume of trades rise and the current prices do not immediately reflect the actual information. This occurs when the transactions are executed more slowly than information is acquired. If the information is negative, the price of the option may drop faster than that of the actual stock or currency, whereupon dealers will sell the underlying instrument and buy the option. This selling should in theory immediately drive down the price of the actual stock or currency, but if volume is high and execution time lags, the gap may get larger and the activity accelerate. When the buy-and-sell decisions are made by computers, this acceleration can cause enormous gaps and very high volumes to develop, resulting in dramatic price declines. Prices can rise in a similar fashion if the reverse situation takes place. Market volatility (or at least its appearance) can be exacerbated when an index is based on capitalization and one company's valuation dominates the entire index, such as Nortel did on the TSE before its collapse.

Stock markets have therefore been forced to automate in the same way as some investors have, so that all orders are executed immediately by computers and no one part of the system runs out of control, as it has done at times past under only partial automation. Eventually, this may mean that brokers and floor traders will be unnecessary, for there would be no reason why individuals could not buy or sell shares in their own names without professional intervention. There is sure to be no shortage of professionals offering advice, however, so the people working in the investment industry today may only be slightly displaced.

Once this point is reached, there would be no reason to maintain trading on a 100-share or 1000-share block basis as traditional rules require. Individuals would be able to execute buy-and-sell orders on a per share basis directly from their own homes and offices with the centralized trading facility. Indeed, equity and debt could be expressed in any fraction of a single stock or bond as long as computing facilities are large enough to keep the records. A section of the Metalibrary could eventually be devoted to this function. Because market participation would become so easy, it could be almost universal. Indeed, mutual funds and the ability to day trade have already taken us partway down these roads. Professional fees could be paid in share fractions of the company, and the payee could order those to be automatically converted to other shares, bonds, or uncommitted reserves--anachronistically known as "cash." Again, there are advantages implied in such abilities for individuals, organizations, and even for society as a whole.

Individual professionals could incorporate as personal services companies and might pay some bills in shares of themselves. The advice of counsellors and investment specialists--all stored on line in a subsection of the Metalibrary--would become sought after and extensively used (electronically). One's investment portfolio could be intensely personalized and entirely tailored to individual desires. Of course, if everyone were an incorporated entity, there would be a tendency to abstract the value of a person by the value of his or her equity instrument. Greater worth as a person might be attached to an individual whose shares traded at $100 than at $1. However, people already do this today when they ask "how much is she worth?" when they mean "how many possessions has she at the moment?" Still, a universal investment registry such as this would allow anyone to attempt to finance projects by equity or debt--provided it was possible to convince enough individual investors to subscribe. Bankruptcy would remain possible, with all participants taking part of the loss. Just as is the case now, there will probably be both the "doers" and the financiers, but there may well be more of both.

The same broadening of investment instruments would make the financing of large projects possible. State involvement could add some guarantees to such undertakings, making them more attractive opportunities than they might otherwise be. Such financings could be undertaken without wholesale discounts to middlemen, for they could be advertised directly to consumers, who could purchase them like loaves of bread, boxes of cereal, or a new dress.

Banks and Credit Unions

While the size of large banks has, as expected, grown in the late 1990s with a number of high profile mergers, many people are not comfortable with this trend. Thus, while large business and large banks have formed a natural alliance, so have individuals and small businesses with credit unions. Once again the collectivizing and individualizing trends can be seen--this time defining who puts their money into or borrows from what kind of institution. If the trend to large bank mergers and the proliferation of small to medium size Credit Unions continues, it would not be difficult to predict that banks will eventually see very little of the retail money trade in personal loans and mortgages, and will instead confine themselves to the wholesale or commercial trade. However, there is no reason to suppose that the formation of temporary project-oriented pools of capital would not be just as good an idea as the same kind of flexible working partnerships.

Controlling Enterprise

The scenarios of the previous section may not come to pass exactly as described here; but whatever the means, there will have to be broader participation in debt and equity as the working population becomes more professionalized, corporate ownership broadens, and the size of the largest projects increases. Along with ownership comes responsibility and a degree of power. At present, voting by shareholders of a company is done mostly by proxies signed over to one or more representatives to a firm's annual general meeting, at which time a board of directors is elected. They in turn hire the operating officers and seldom intervene otherwise in the everyday affairs of the company. Except in the rare cases where a large shareholder votes herself into the directorship or holds a key operating position, corporate owners are usually removed two or three steps from actual control. For practical purposes, small shareholders of large enterprises, even if they may collectively own 80 percent, can be ignored by the operating officers; there is no means for such small fry to influence company decisions. They also have no channel for communicating their dissatisfaction to or even locating each other and thus cannot organize their dissent.

If corporate information were disseminated and voting collected through the Metalibrary or a similar facility, things could change dramatically. Such a facility offers broad possibilities for the formation of alliances, the developing of voting strategies, and the influencing of decisions. Although many shareholders might still elect to automatically turn over their proxies to the directors, dissident shareholders would more easily be able to organize an opposition, combine interests, and force changes. A larger percentage of the outstanding shares would be required to maintain effective control.

Of course, this innovation, like the cashless society, would not necessarily come about just because it is efficient, desirable, or possible. Social response to such technologies is highly unpredictable, and there are certain to be people who would want to prevent these developments or to lead real events in different and unforeseen directions. However, even a limited implementation of these ideas in which only some people participate would still enable some of the economic activities described to take place.

Because of the high value people tend to place on economic interests that directly affect them, any scheme for personal involvement in corporate affairs is likely to draw interests and loyalties away from the state and toward the company or group of companies in which they participate. Such ventures will not need to respect geographic boundaries, and eventually some may not even be based on Earth. The result may be a gradual diffusion and internationalization of economic power and interest. The potential loss of individual freedom implied by joining a completely centralized record-keeping facility may therefore be offset by at least a perception of increased individual power over the international economy, a greater ability to raise capital, and a possible shift of power away from the state and to the professionally owned corporations. Such developments are not necessarily good or bad in themselves. There are some alarming potentials here, just as there are some interesting potential benefits, and such potentials lead naturally to the discussions of the next section.

The Fourth Civilization Table of Contents
Copyright © 1988-2002 by Rick Sutcliffe
Published by Arjay Books division of Arjay Enterprises