Paul Wilkinson, former senior advisor to Chairman Cox at the SEC teases out some very interesting thoughts in his recent blog post on A Great Recovery (http://paulwilkinson.com/2009/03/08/why-not-a-great-recovery/)?
As I think through Paul’s comments and the scenario in which we find our economy today, I can’t help but be struck by the following thought. When our economy transitioned from an agrarian society to an industrial one, what did a citizen in the UK, the United States and so many other countries think was occurring? Looked at in a rear view mirror, there were no analogies which were relevant, since they were not seeing the duplication of a past event but the beginnings of a completely new era.
Without a doubt, the period must have been very disconcerting, and similar to our policymakers today, an effort to use traditional policy and financial tools to stabilize the sudden changes in their fortunes must have occurred. However, I have to think that they didn’t work or at least, not for the reasons they were adopted. The transformation that was underway was bigger than monetary policy; a whole new foundation for our industrial economy was being established.
As 2009 unfolds, we may believe we are in the midst of simply a recession (a severe one, of course), but we are instead in the midst of a similar economic reordering to a knowledge economy. As Alvin Toeffler so aptly discussed in his book, PowerShift, published in 1990, this shift is based on a variety of factors, including the substitution of knowledge for capital. Without the transparency that Paul highlights in his blog and which we have discussed extensively together, our capital is untethered to the knowledge that must go with it. That lack of a full tie between knowledge and capital destroys trust and leads to the massive revaluation of assets that has been underway in the past year. Transparency is a critical step to tying knowledge to capital.
The Great Depression of the 1930s is much discussed by the media but overlooks a variety of other panics in the 1800s that may provide a better construct for understanding the current situation. The Panic of 1837 is a case in point, and I think has many similarities to our current recession. One of those similarities is that it occurred due to a loss of confidence in the financial system. We may debate Fannie Mae/Freddie Mac, derivatives trading and a myriad of other causal factors for this recession, but it does ultimately come down to confidence.
The question we must ask, however, is what is the answer. Is it a standard set of policy tools or something new? The current wave of massive spending as the solution presupposes capital over knowledge. I would argue that it is the latter because our Great Recovery will occur as a consequence of understanding that we are actually in the midst of a PowerShift or in my words, a Great Reorienting.