Financial crisis and the organization of knowledge

Posted: 30 April 2011 in Uncategorized
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It will come as no surprise to readers that I’m no fan of the work of Hernando de Soto. However, he’s on to something when he argues that, in the lead up to the financial crisis of 2009, a great deal of economic knowledge was destroyed.

Basically, de Soto starts from the presumption that “reliable economic knowledge” is crucial to the functioning of capitalism.

To prevent the breakdown of industrial and commercial progress, hundreds of creative reformers concluded that the world needed a shared set of facts. Knowledge had to be gathered, organized, standardized, recorded, continually updated, and easily accessible—so that all players in the world’s widening markets could, in the words of France’s free-banking champion Charles Coquelin, “pick up the thousands of filaments that businesses are creating between themselves.”

The result was the invention of the first massive “public memory systems” to record and classify—in rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of account—all the relevant knowledge available, whether intangible (stocks, commercial paper, deeds, ledgers, contracts, patents, companies, and promissory notes), or tangible (land, buildings, boats, machines, etc.). Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: “economic facts.”

However, something fundamental changed in the last 20 years or so: North Americans and Europeans destroyed many of those facts.

The very systems that could have provided markets and governments with the means to understand the global financial crisis—and to prevent another one—are being eroded. Governments have allowed shadow markets to develop and reach a size beyond comprehension. Mortgages have been granted and recorded with such inattention that homeowners and banks often don’t know and can’t prove who owns their homes. In a few short decades the West undercut 150 years of legal reforms that made the global economy possible.

As a result, neither bankers nor the bank regulators, much less customers of bank loans or those who purchased simple and complex financial products, had the appropriate “economic facts” about the financial system.

If the destruction of knowledge played a role both in causing the crisis and in creating a weak recovery, we then have to ask what is in capitalism as it developed during the last 20 years allowed this to happen. In particular, what role did the complex interplay between the anarchy and policing of capitalist markets, between private and public knowledge, between creating and shifting risk play in the way knowledge was both organized and destroyed both before and during the financial crisis that begun in the fall of 2008.

What de Soto seems not to understand is that the same capitalist interests that govern the world economy create the conditions in which “arbitrary interests can trump facts and paper swirls out of control.”

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