Robin Matthews is professor at universities in London and Moscow; consultant with international companies; writes on business, economics; and finance: creative imagination techniques in management.
the eurozone as a koan
THE EUROZONE AS A KOAN
- · The EZ problem is a subset of the great recession, a balance sheet recession that is likely to persist until 2017/8: self inflicted problem, brought about by an obsession with reducing government debt when there is deficient demand (in the EZ and the UK and globally), resulting from deleveraging in other sectors; households and firms.
- · It is likely that peripheral economies Portugal, Ireland, Italy, Greece and Spain will quit the EZ leaving a core of nations including Germany France and the Netherlands. The real question is when and how orderly.
- · The EZ problem is something of a koan; full of paradoxes and contradictions that cannot be understood in terms the prevailing orgrammar (organizational grammar).
- · By orgrammar I refer not only to a dominant discourse, or manner of speaking, thinking and responding to things, but also formal and informal ways in which they are expressed or represented in society, organizations, institutions and policies.
- · A koan is a statement that appears to be paradoxical or contradictory, an antinomy or riddle. A few well known koans are; What was your original face before you were born? What is that which makes you answer when you are called? There are other examples below.
- · One aspect, the most important is that koans are meditative practices. Another aspect of koans is cognitive: a statement that is paradoxical within a particular orgrammar. The paradox is resolved by adopting an alternative orgrammar. Here we concentrate on cognitive aspects.
- · Recent globalization and the information revolution resulted in an unprecedented degree of interdependence.
- · The cognitive aspect of the koan arises because ideas, concepts, statements that are thought to be independent in one orgrammar, are seen to be interdependent in other orgrammars.
- · Policies towards the EZ are currently targeted at restoring competitiveness and competitive advantage of states individually. Policy makers have failed to see interdependence. Business and governments are transfixed on individual competitive advantage: an orgrammar (including a business model) that has failed.
- · Success in the EZ is like failure in the mirror. Germany is apparently successful precisely because Greece and Spain are apparently unsuccessful.
- · The failure of the EZ should not be taken as a failure of the European project of which it is a part. Not the least success of the European project is that it has halted the European habit of murdering each other.
One aspect of a koan is that it is a statement that appears to be paradoxical or contradictory, an antinomy or riddle.
Although associated with Buddhism, koans appear in many contexts; in Sufism, all forms of mysticism, in the arts, poetry painting and literature, in myths and fairy tales, in philosophy, mathematics and logic: and in business, management and economics.
In myths and fairy tales riddles and problems are solved by children, animals, those thought to be simple, but those brave enough to adopt another orgrammar.
Holding the paradoxes and contradictions of the koan in mind is a route to creativity; entering an alternative orgrammar.
We distinguish between complete koans and koan type statements. Complete koans have an element of the ineffable. Koan type statements have a cognitive element that requires looking at things and organizing things through an alternative orgrammar.
Whether the examples in the box are complete koan, I leave for the reader to decide.
Seeing the koan in the EZ is a way of escaping from a failed orgrammar, a failed business model
- · The single currency which was supposed to equalise competitiveness of members, increased differences in competitiveness.
- · Core economies in the EZ succeed because peripheral economies (Portugal, Ireland Italy Greece and Spain) fail. So which are successful and which are failures?
- · Private risk becomes sovereign risk because of bailouts and hence sovereign becomes private risk. Then private risk increases sovereign risk and in turn..... a carousel.
- · Performance of governments is judged by the institutions, the banks and ratings agencies, that helped to cause the problems in the EZ (and the great recession).
- · The EZ is part of a bigger problem; there is the koan that estimated cost of the great recession is somewhere between $60 trillion and $200 trillion; a considerable part being a windfall gain to people who caused it.
- · The great recession is the duplicate of countless identical recessions previously; that will reoccur.
By orgrammar, I refer not only to a dominant discourse, or manner of speaking, thinking and responding to things, but also formal and informal ways in which they are expressed or represented in society, organizations, institutions and policies.
Scientific statements, when they first appear, often seem koan like and this gives us a clue to their foundation. Koans arise within a particular organizational grammar (orgrammar) and their paradoxical nature can only be resolved by adopting an alternative orgrammar.
Some examples of the koan are given below.
Holding koans in mind, preserving their paradoxical nature, is a route to thinking creatively.
Not trying, as is so with current from loaded strategies in the EZ, to reconcile them within the prevailing orgrammar. We have found using the koan in teaching and consulting, to be fruitful in evoking creative approaches to business problems.
What do koan type statements have in common? Interdependence.
Koans express interdependence and relationships between actions, objects, issues and so on, that look distinct, separate and thus paradoxical within one orgrammar, but are seen to be inter- related in another.
If we think of a spectrum ranging from, at one end, complete interdependence, at the other, absolute unity; understanding koan type statements leans towards recognising interdependence, via an alternate orgrammar.
The complete koan is represented as complete unity; absolute interdependence An inconceivable situation of no orgrammar whatsoever.
Recent globalization and the information revolution resulted in an unprecedented degree of interdependence.
The new phase of globalisation is distinctive, because population growth and urbanisation has been exponential and worldwide and dominant business model, capitalism has permeated almost the entire globe.
From new media and technology has emerged a new information age that is revolutionary, unpredictable and is leading to the development of a machine intelligence that will challenge the common understanding of decisions, leadership and what it means to be conscious.
Interdependence means that there are potential gains from co-operation, increasing joint benefit or avoiding harm. Currently interdependence, especially the existence of joint causation and the need for joint solutions, is ignored in the EZ. Instead, the onus rests entirely with deficit countries, fiscal and structural reforms that can only extend the recession, increase unemployment and paradoxically debt.
Stability contagion (percolation) and singularity
Interdependence opens up systems to feedback and instability. Systems become unstable as the number and strength of interdependence increases. As the complexity increases there is risk of contagion within systems. The great recession spread throughout the global economy.
Contagion or spread of a shock (internal or external) throughout a system or to other systems depends on its connectedness or modularity within, or in relation to other systems. Risk of contagion from one system to another, especially in an era of informationalism; events like the Arab Spring are no doubt connected to economic and financial events in the wider world. The current EZ problem is the result of the EZ being a subset of the great recession that affected the entire global economy. Connectedness within the global financial system is expressed by the too big to fail (TBTF) problem. The real problem is that the global financial sector is too big.
Whether feedback results in such extensive instability that it merits being called a phase transition or singularity depends on this question: Do critical variables in the EZ behave according to a power law?
If so, the EZ situation opens up to possibilities of disruption way outside those conceivable if they are governed by a normal (Gaussian) distribution.
The fundamental paradox at the roots of the EZ problem lie orgrammar that has prevailed globally over the last thirty or more years. It is based upon:
- · Firms and nations seeking individual competitive advantage.
- · A mistaken notion of risk and the related arbitrage pricing model (APT), a model that has become the reality.
- · Ignoring the dependence of capitalism for growth and stability upon demand rather than supply.
Highly interdependent systems require cooperation between organizations and institutions rather than competition. Unless this happens, great recessions will continue to recur.
- · Policies towards the EZ are currently targeted at restoring competitiveness and competitive advantage of states individually via export led growth. Clearly not all countries can have export led growth: internationally imports equal exports.
- · Demand is always critical for the survival of capitalism. An important root of the great recession was the risk of deficient demand. Dirty floats of currencies such as the reminbi were designed to stimulate export demand. Most economic growth models focus on supply.
- · Currently there is a balance sheet recession in developed markets. As firms, households and governments deleverage, excess supply increases. China, for example exacerbates global excess supply demand in an effort to sustain growth by raising China’s investment/GDP ratio to 50% (2010), in the absence of customary world consumer of last resort, the USA, which is currently deleveraging in its own balance sheet recession.
- · The mistaken notion of risk in the current orgrammar originates in the idea that risk can effectively be diversified without increasing systemic risk. Alternative orgrammars demonstrate that as the degree of interconnectedness increases (as is the case with the evolution of the financial sector), individual risk diminishes, but systemic risk increases.
- · The arbitrage pricing theory (APT), part of the current orgrammar is flawed. As the complexity of financial systems increases through increases in the number of instruments and the strength of their connectedness, individual trades affect prices and volumes and brings instability.
Specific contradictions (in addition to those noted above) inherent in the EZ
- · Its variety and the inability of adjustment mechanisms imagined by the discourse of the prevailing orgrammar to introduce convergence.
- · The ECB fails to be a lender of last resort but compounds the debt sovereign problem by enabling private institutions to collateralise their holdings of sovereign debt at unrealistically low interest rates.
- · If competitiveness in the periphery countries is low and decreasing as it has been since the 1980’s, and if there is a debt fuelled asset bubble making loans available, what can deficit countries do but import debt. How else can they use debt, but to create employment and demand if export markets are closed because of non competitiveness and a fixed euro exchange rate?
- · Central fiscal authority is absent as recent elections demonstrate. In this respect the electorates of France, Greece and most likely other peripheral states are ahead of the game.
An alternative orgrammar and the resolution of the koan of the EZ?
- · Contrary to the current orgrammar, capitalism requires a substantial government sector and government spending to maintain demand. This requirement is likely to become more and more acute, if vast unemployment is to be avoided as technological change increases potential output.
- · Reduction in the taxes of the rich, diminution of the power of organized labour (blue collar and middle class), and growth in the power of large organizations, has led to a shift of income and wealth to the rich, who simply earn far more than they can spend. A more equal distribution of wealth would increase demand.
- · Not only do banks need to shrink in size (the TBTF) problem, the entire financial sector needs to be smaller. This is difficult, because of the political patronage of financial markets. Thus the current orgrammar has enormous.
- · In the current orgrammar, assessment of government performance and of many firms performance is determined by asset prices generated in by financial markets, which largely operate as casinos.
- · An alternative orgrammar would recognise the fact that that only around 5% of the activity of the financial sector is devoted to directing saving to productive investment.
- · The current strategy of designing capital reserve requirements for the multitude of financial assets is far too complex a project to succeed.
- · The balance between equity and debt needs to be addressed and some kind of risk sharing be introduced universally.
- · One recommendation is that business schools should stop teaching the wrong things.
The idea that deficits can be reduced and growth restored at the same time is not a koan. It is just wrong headed.
 For a fuller version of this paper see recent publications on this website robindcmatthews.com