Economic Cycles – Understanding the Crash

December 22, 2008

Kim has a good acronym for the current financial meltdown; GFHF or Global Financial Hissy Fit.  I was out to dinner the other night with a renowned pessimist who was quite outspoken in relating the various tales of woe and impending doom (his name is not Hanrahan by the way).  And so to the Review of 19 December and the lead article sourced from Prospect on the popping of the bubble in the contemporary art market.  I know nought about this market but it appears to have links to other bubbles that are popping (and they are not from champagne bottles!).

In his book Manias, Panics and Crashes, Charles Kindleberger observed that manias typically start with a “displacement” that excites speculative interest.  It may come from a new object of investment or from the increased profitability of existing investment.  It is followed by positive feedback as rising prices encourage less experienced investors to enter the market.  Then, as the mania gets a grip, speculation becomes more diffuse and spreads to other types of asset.  Fresh assets are created at an ever faster rate to take advantage of the euphoria and investors try to increase their gains by borrowing to buy assets or using derivatives.  Credit ultimately becomes overextended, swindling and fraud proliferate, and the mania ends in panic as investors seek to liquidate their positions.

The authors comment that the art market has adhered spookily to this model.  It seems that the sub-prime fiasco in the US is the “super-prime” example of such mania.  The markets work when asset prices are increasing so long as you are not the one holding the lemon at the end of all the wheeling and dealing.

That paragraph reminded me of a great book that I read about 5 years ago by Carlota Perez called Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages.  She describes the process of going through the following stages of a cycle commencing with the discovery of a new technology:

  • Maturity: Financial Capital Planting the Seeds of Turbulence at the End of the Previous Surge
  • Irruption: The Love Affair of Financial Capital with the Technological Revolution
  • Frenzy: Self-Sufficient Financial Capital Governing the Casino
  • The Turning Point: Rethinking, Regulation and Changeover
  • Synergy: Supporting the Expansion of the Paradigm across the Productive Structure

The main described by Kindleberger contains the particular stages in the irruption and frenzy components of Perez’s cycle.  We were enamoured with the book as we were reading it after the dotcom and telco crashes of the 1999-2001 period while working in an information economy area of the Australian government.  Little did we know that the financial excesses and losses of that period are minor in comparison with what is happening now.  It is clear that while billions of dollars were lost at that time, there was no turning point in rethinking and regulation.  There was still too much loose money sloshing around in the finanical system seeking short-term returns.

What we did like about the book was the expression of hope in the synergy phase where after the losses of financial speculation, money continues to be invested in the productive use of the technology.  Unfortunately, we are yet to see this period as more regulation is still required and the bodies on the shore as the tide washes out still need to be exposed before credit becomes available once more.

Delaminate to create a stupid and neutral network

July 7, 2007

It was a pleasure to read the recent post by David Weinberger on “Delaminate the Bastards“.  It took me back to when I started in the National Office for the Information Economy (R.I.P.) back in 1999 working on the Convergence Review.  One of the articles that I distinctly remember is that of the Stupid Network by David Isenberg who has recently written another great piece on making network neutrality sustainable to celebrate the 10th anniversay of his seminal paper.  

Weinberger makes the point that the telecommunications companies (the bastards!) that supply us with access to the Internet should not also be selling us services over the Internet (this is the whole notion of structural separation).  In the old days, we used to have ISP’s that provided the connectivity between the telco access and the content but they have by and large disappeared.  Structural separation means that you have a one company providing access to the Internet and a different one the content and services over the Internet.  This is important for network neutrality so that all services on the network are treated equally.  Vertically integrated companies providing both Internet and content could provide preferential treatment of their content over other company’s content – which would stifle innovation in service offerings. 

Isenberg’s stupid network idea is quite simple.  It is that the traditional telecommunications service is smart in the middle (the switch) with the ends (the telephone) being dumb.  The Internet on the other hand has the smarts in the terminating equipment (your computer) with the network itself being dumb – all the network does is transfer packets of data.  Its beauty is that this encourages innovation in the services at the periphery and away from the centralised service provider.  Clayton Christiansen’s Innovator’s Dilemma demonstrated how dominant incumbents tend to stifle innovation to preserve their own profitable business model. 

This is why the way that the structure of the information economy develops is so important.  Interoperability, net neutrality and service innovation are what will drive the democratic and free (as in free to access, not free as in free beer!) evolution of the Internet.  The current debate about broadband somewhat misses the point as while fibre-to-the-node or the home is important, what matters more is who owns it and whether access will be restricted or made preferential in any way.

My personal preference (as I have declared to friends previously) is for a structural separation solution – particularly for the dominant incumbent – for the provision of Internet infrastructure.  I like the ideas of former colleague Ross Kelso in a paper he completed with John Murphy and John Burke in their submission to a senate inquiry.  This would require a radical rethink of current government policy and would impact on lots of mums and dads shareholders.  But this would be a great first step to get the structure of the information economy right so that we can then move on to developing Australia’s knowledge economy.

Nancy White Workshop – Melbourne 11 October – Report

October 12, 2006

Yesterday, I attended a workshop conducted by Nancy White and assisted by Shawn Callahan here at work coordinated by VPSCIN.  Nancy is a specialist in online interaction and distributed communities of practice.

Some of main points from the workshop included:

  • That communities at their core work improvisationally
  • That communities drive the use of technology and technology drives the formation of online communities – it works both ways symbiotically
  • Australians naturally understand issues of distance better than Americans
  • That collaborative technologies upset established power bases (must be why I like using them so much!) but that some technologies can amplify existing community power relationships (hub and spoke models as an example)

Nancy talked about four tensions that need to be lived with (and importantly not resolved) when working with communities.  These tensions exist in both online and offline communities and different communities at various stages of their lifecycle will be at different points along the continuum of these tensions.

  1. Individual versus the Group – communities are designed for the group but experienced by the individual
  2. Participation versus Reification – belonging and acting and conversation in the group’s relationships versus the artifacts and trails that get left behind from the group’s activities
  3. Togetherness versus Separation in Time and Space – what is the minimum amount of togetherness required to generate community yet at times people will want to do their own thing
  4. Control versus Emergence – which cuts across all three preceding tensions.

Another tension that I thought about was similarity versus difference.  At times some communities might want to exclude differences to forge a common identity while at other times that might want to incorporate difference and expand their points of view. 

A critical aspect is the notion of identity in communities.  Each individual could have a different type of identity in various communities (active/passive) while also, communities themselves might have their identity change over time.