(Grindelwad, Switzerland) I don’t know what this has to do with the topic but I just had to put it up

I was in Geneva a couple of days ago presenting at a conference organized by the Observatoire de la Finance. The keynote speaker for the conference is Stephen Marglin, the Walter S. Barker Professor of Economics at Harvard University. His research tackles interesting problems caused by the discipline of economics. Prof. Marglin argues that economics is not just normative or positive; instead, it is constructive. The way economics is taught is meant to build the world in the image of economics, not just to predict results or to advocate policies. The obsession economists have with efficiency as the purpose and method of society reveals this compulsion.

Prof. Marglin’s speech also reminded me that markets as we know it today are not the natural state of human organization. Rather, it is but just one of the several methods we have for organizing human society. He cites the example of the Amish community - a society that lives in what we would consider a ‘primitive state’ - in Philadelphia. The Amish community chooses which technology or innovations to accept based on how it contribute to or detract from community building.

They reject modern insurance by arguing that this innovation replaces community support with a faceless market-based system. If a house burns down, the neighbors chip in to rebuild. This form of ‘insurance’ is fundamentally different from that of a larger aggregated corporate-run insurance system. While he does not advocate the Amish way of life, Prof. Marglin cites this to explain how markets can replace communities.

He goes on to explain how this creeping marketization is related to the subprime crisis by bringing in the concepts of ‘algorithmic knowledge’ and ‘experiential knowledge.’ Algorithmic knowledge reduces decision-making to a set of numbers. For example, in making a loan, banks try to reduce each customer to a set of statistics that determines their payback rate. Experiential knowledge instead depends on the holistic knowledge a banker might have of the clients he deals with on a consistent and long-term basis, and taps this depth and width of information to make a decision. And its not just stuffy academics who think this is a problem. Investment banking legend Joseph Perella, whom I met three years ago in Philadelphia, also raised this issue.

I suspect that the scaling up of organizations is part of the reason why the algorithmic approach has become the norm. As organizations become larger, rules and heuristics become more important for running the system. Perhaps innovations in organizational forms are necessary if experiential knowledge is to be made consistent with large-scale organizations.