I believe in realism
I dispelled the economics taught in high-school in the same way I dispelled my early Christian upbringing. Beautiful stories to listen to, but I never believed any of them were true. Nor did I think religious and economic assertions were an accurate reflection of the aspirations of its people.
Classes full of dutiful followers quickly made me realize the mounds of resistance those who think different will face. Not just because economic theories are often as vigorously defended as religion, but also because those who preach the doctrines of personal betterment and economic freedom are, in reality, often their most prominent opponents. Wars are fought over the submission to a single religion or economic theory, rather than avoided because of our intrinsic respect for the beliefs and aspirations of others.
Classical economics is the disease, not the cure
I have always had an eye for the bigger picture, the causal connection of anything. Still, my interest in economics was sparked progressively over the last eight years when I noticed how financial systems alone had determined much of economics’s evolution. A fatal flaw since financial systems is, at best, a derivative of the renewable value that defines human development.
One does not need to soak in classical economics’s full depth to understand that it hinges on some crucial concepts that are just not, or no longer, applicable.
Because of its lack of innovation and some 200-years of merely a downstream optimization, classical economics has morphed into the greater-fool economics we know today. Since finance has been allowed to rule much of the roost of economics, greater-fool economics deployed by finance do significant damage to our economy.
Too fooled to fail
Greater-fool economics are prevalent across the financial sector and especially rampant in private-equity and venture-capital financial systems (or asset classes) where the growth of highly in-transparent private companies is supported by an excessively fragmented chain of investment rounds, with a plethora of investment groups participating in each.
In investment terms, greater-fools are the new investors in an investment round for a company that – sometime after investment – the growth ratio between value (not always revenue) and valuation (price-per-share) declines, and thus fails to promise the expected investment return.
Investment firms are protected from that risk by investing in many, called a portfolio, of companies at a given time, spreading the risk caused by a few bad apples. The real problem starts when the investment portfolio contains more bad apples than good ones, and the future of the investment firm or fund is at risk.
Then, since terminating the company will not recoup the impending investment losses, every attempt is made by the initial investors to engage a new chain of greater-fool investors (and new bottom-feeders like debt financiers, “secondary funds” or private brokerages) to extrapolate the ill-fated valuation until an exit occurs.
Under the veil of false positivity, the eventual sale to a desperate corporate entity unable to reinvent itself, or an initial public offering (IPO) to the unknowing public, crowns the latter as the new reigning king of greater-fools. The consummation of the final transaction, supported by investment bankers, may still bring the early investors some riches and an exit plaque to save face.
A man makes, a thief takes
In the end, we, the public, are the last of the greater-fools, stuck with overzealous valuations that do not match their value and “innovation” that should have never have reached the marketplace. Not as a product pretending to impact our lives, nor as an investment attempting to secure our savings.
Many have called this phenomenon a bubble and shamelessly passed the blame for the failings of financial arbitrage on its investable asset, innovation. But it is nothing more than an elaborate scheme to cover up the impending losses of the many underperforming investment firms, that despite a massive adoption greenfield of innovation, fail to see the forest through the trees, in the domain in which their general partners claimed to be the experts.
Not only does this now common practice indicate the absence of a meritocracy in finance, but worse, it provides the systemic proliferation of failure we, as the implementors of greater-fool economics, allow to flourish.
It is high time for economics to be invented anew.