Davos Reflections and Capitalism 4.0

The Davos webcasts tell a story. If the World Economic Forum is a gauge of the current global economic mindset, it tells us that decision makers are in “Stage two” and in part “stage three” of the five stages of grief – they are in the anger and blame phase and beginning the bargaining phase.

The grief framework originally pioneered by Kübler-Ross includes Five Stages:

1. Denial – This is the shock phase.
You think: “This can’t be happening, not to me! Not to us!”
The global economy was in this stage back in September. Some investors are still in denial.
2. Anger – This is the phase of screaming and blaming.
You think: “It’s not fair!” “NO! NO! How can this happen!”; It’s the fault of…”
That’s what we are seeing in Davos this week.
3. Bargaining – This is the phase of irrational desire (and attempt) to resurrect what has been and is no more.
You think: I’ll do anything if you give me back what I had.”
There is evidence for such irrational “Bargaining” on the global stage too. The attempt to save the banks and the big three has Denial, Anger and Bargaining in tow.
4. Depression – This is the hopeless bottom of complete despair.
You think: “There is no hope, why bother with anything?”; “What’s the point?”
Leaders will do anything to avoid this phase. Modern economic theories hope to accelerate, skip or avoid this societal calamity. We hope they are successful.
5. Acceptance – In this phase one finds a new agreement and settlement.
You think: “It’s going to be OK.”; “there is no need to fight, I can enjoy or come to terms with what there is.”
In economical terms, this is the reemergence of a new cycle of growth.

Masters of the economy prefer to skip phases and move in a V shape recovery. But it is not always possible to V everything in life. Even a massive stimulus package cannot solve everything. To make informed decisions, it is critical to understand what has happened. Crisis is how we come to know that an existing framework can no longer support the confluence of dynamics active within the system.

Before answering the question “what will a new framework look like?” we must ask – what are the imperatives? A new more moderate paradigm needs to appear. The framework needs to adaptively support global needs with principles of transparency, fairness and sustainability. The new framework needs to support sustained growth and local, national, regional and global imperatives. But before a new framework can emerge the system needs to moves beyond the point of anger and blame.

Capitalism is a framework for realization. Ideally, the best ideas, innovations, strategies, commitment and hard work win the greatest support and reward, and are therefore realized. Lack of creativity, bad decisions, and ineffective execution fail to gain support and die. At core this is not a man made idea but a universal principle that has governed nature long before modern market theories were popularized.

If the system works right, it incentivizes and benefits innovation, performance and delivery of the best solutions. The systemic breakdown we are witnessing brings to focus the challenged capacity of the system to self correct, heal and self regulate. Incidentally, this nature of crisis tends to take place every 60-80 years, which is enough time for both an institutional memory loss and a fundamental shift requiring a system upgrade.

There are four potential scenarios to emerge in the global monetary system:
1. Patch the Bretton Woods dollar centric system. (That is what the powers to be hope to be able to master.)
2. Create a new universal currency backed by the G8 or G20. (A dream for some, but the fear of many.)
3. Create a new equilibrium of three or four regional currencies – Euro, North America, Asia. (Russia and Latin America could constitute a fourth and a fifth currency if they do not feel accommodated in this framework.)
4. Fragmentation with each nation operating on its own, backing its currencies by its precious assets and commodities.

The major effort underway now is to find a path to scenario one. Politicians always try to preserve an existing paradigm. What would likely be the result?

No one knows. It will be difficult to preserve Scenario (1). Scenario (2) is highly unlikely right now and scenario (3) is unlikely too. Unfortunately, there will have to be much more pain for such arrangements to take place. Bretton Woods took place following two decades of tremendous global strife and pain. Let’s hope we do not have to go through so much strife again.

The next three to five years may be a transitional period – a battle royale between scenario (4) the growing fragmentation of the global monetary system, fueled by protectionism, nationalism and patriotic demagoguery, and the opposing forces trying to hold on to a unified global system of scenario (1).

There will be those who will push to scenario (2), but it is highly unlikely they will prevail. A new paradigm of scenario (3) may emerge in three to five years (2012-2014).

© Aviv Shahar