Knowledge Musings

Musings about knowledge management as I go about my daily life

Wednesday, March 19, 2008

The Virtual Economy

With all the turmoil in finanical markets, I recall an article written by Peter Drucker in the mid 1980s. Credited with coining the term 'knowledge worker' Drucker has been very perceptive on many management issues. He wrote back then that the financial economy was becoming too disconnected from the real economy in that the amount of trading of financial instruments (e.g. foreign currency) was 30x more than that of foreign trade itself. He said that some multiplier, say three times, was OK and needed for liquidity, but 30x he really questioned.

As I was returning from a day with a client in London yesterday, I read an article that trading in oil was running at 2 billion barrels a day, yet only 85 million barrels comes out of the ground - thus re-emphasising Drucker's point.

In my book Capitalizing on Knowledge (2001) I wrote that financial intruments were examples of knowledge products, being purely the fruits of human creativity. I even cited Enron as an example of creative innovation in knowledge products. But you can take creativity too far - especially in financial accounting - and we now know what happened to Enron! Even earlier in Knowledge Networking (1999) I wrote about the need for better knowledge ethics and governance. At that time Long-Term Capital Management had just collapsed, having traded heavily in financial derivatives. I asked:

"What value does such trading bring to furthering a true knowledge society where desirable outcomes are successful businesses of all sorts and quality of life for citizens? ... Intervention is needed in financial markets to halt computer trading when price swings get too violent. Will knowledge markets evolve in the same way, needing bodies to govern them, analagous to the Securities and Exchange Commission?"

The fact is that trading in such highly leveraged financial instrument is really just betting on future prices. Even betting on horses, it seems, is less risky! And who are the losers in such heavy derivatives trading? Usually those in the real economy - who trusted their hard earned money to banks in the first place!

Will the gap between the real and virtual economy identified as an issue over 20 years ago ever narrow to sensible levels, or will we keep repeating the mistakes of the past and present?

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