November 1st, 2011

"All is not well" (*). Coming after his searing analysis of capitalism as commonly practiced, Martin Wolf's conclusion is a litotes.

For centuries, Greece has excelled as the premier supplier of words. In comparison, Germany tends to manufacture nouns too heavy to export. If words had ever received even a fraction of the protection enjoyed by factory-produced goods, Germany would run a trade deficit with Greece.

Returning to Martin Wolf's understatement, I admire how he managed to squeeze so many ills in so few sentences. "We have promoted an insider form of capitalism". "The role of money in politics is disturbing". "Instability is inherent in the game of betting on the future". Unfortunately no remedy seems to be in sight as "the left does not know how to replace the market".

The same rigorous pessimism informs Philip Stephens' survey of international relations (**). While "citizens expect national politicians to protect them", "governments have lost much of the capacity to meet the demands". Himself borrowing from the Greek, he forecasts "a new crisis of states".

In both columns, no exit is offered to such existential situations. It is not an oversight. To conclude her equally gloomy column about how US banking reform has led to an explosion of law and rule writing, Gillian Tett defies her readers to "make sense of this complexity cubed" (***).

Considering her own expertise and her condition, i.e. that "suggestions [be] clear... and short", still assuming Greece continues to finance such impecunious importers as I am, I strongly suspect Gillian Tett's call for help was but a rhetorical device.

This chaotic rise in complexity surprises no one who has worked in a large company. He or she probably reported to both an operational and a functional boss, say to the US director and also to the head of R&D. Needless to say, this so-called matrix organization is a monster to manage.

The fact is we live in a matrix whose scale is the whole world, where states stand for operational divisions and non-state actors for functional ones. And while most CEO's prove unable to tame their own, the global matrix is not necessarily better run without one.

What we do witness is a logical increase in overhead. Non-state actors beef up their external relation departments to define and defend what Michael Skapinker does not hesitate to call a "foreign policy" (****). He singles out "telecoms and internet companies". How "American" indeed are Amazon and News Corp when they play in "home" politics the same self-interested, divisive game as Philip II of Spain in XVIth century France?

Were I content to add my feeble voice to that of well established commentators, I would be irrelevant. Were I to suggest a solution to our ills, I would be delusional. What experience, what revelation can an expert in eprivacy possibly bring regarding economics, foreign policy and finances?

Allow me at least to stress the obvious. On the world stage, actors are important. Listen to Richard Waters on Steve Jobs' hagiography (*****). He talks about "a deep public need for heroes at a time of widespread economic uncertainty and disillusionment". But non-state actors alone seem to attract our admiration. Read Simon Kuper on the "political class" (******). "Today's leaders are shrunken figures".

Whether state or non-state bodies, whether saints or sinners, actors act in a self-interested way. According to Jim O'Neill, chairman of Goldman Sachs Asset Management, quoted by James B. Stewart, "the problem is that European actors don't act in the interest of Europe" (*******). True indeed but why should they? Does Goldman Sachs act in the interest of anyone but itself?

In a world of selfishness, what works are what we call, the Greek quasi monopoly on expressing one's thoughts being what it is, mechanisms.

Capitalism is but a mechanism, free floating currencies another, global supply chains, asset securitization yet others. Nobody likes mechanisms. Enraged populists prefer conspirations whose strings are pulled by real, if hidden people. Fundamentally faceless, their hands reputed to be invisible, mechanisms yet get results as, called upon by actors to regulate relations, they reduce their frictions and let them focus on their own purposes.

The problem we face is not that too many actors are too powerless or too self-interested. It is that new mechanisms need to be invented to fit changing circumstances and that, falling under the control of select actors, even the best of them require perpetual policing and periodic reforms.

Bloomberg News' report on "Pipeline Trading Systems, an alternative trading platform" is a case in point (********). Promising privacy to its clients, Pipeline allowed "the research director at [its] parent company to access certain trading information". That at least is what the SEC alleged. But this is also what I observe everyday. Self-interested actors simply cannot be trusted to keep confidential data from their insider games.

Beware though of mechanisms of the Rube Goldberg variety (1). They showcase their architects' ingenuity and yet their very complexity favors those they are supposed to rein in. The bigger the castle, the likelier the discrete postern actors count on finding. That's my answer to Gillian Tett.

I know only two ways for a mechanism to work, both ruthlessly simple. At the top factual independence, actual decentralization at the bottom.

With personalized Internet interactions, the mechanism I have designed denies access to confidential data to anyone but its legitimate owner. In another domain, isn't Mr Bernanke's current impopularity in certain quarters of the United States a sure sign of his frustrating independence?

Contrarywise, whenever over powerful participants or our own collective illusions gain too much influence, it ruins it all, starting with markets.

Worse, it may hide a real issue. A dominant voice may want us to ignore it, as Google over the objectivity of recommendation engines. Or too big a voice tries to tackle it, like China against those who spread "harmful information". One may complain of "increasingly strict and swift censorship", as reported by Sharon LaFraniere, Michael Wines and Edward Wong (*********). But does it follow we must overlook that Internet can kill?

Throw away the key to the mechanism. Cut participating actors down to size. I might as well advise rattled rats to attach a bell to the tail of the cat.

Yet we should respect those who try. Much maligned, the Euro is a mechanism in dire need of maintainance. Humbled by today's challenges, perhaps self-interested states and banks can agree to fix loose lending in a way serviceable enough and better overall than competitive devaluations.

Like the current handling of our privacy, a mechanism corrupted by participating actors takes the last word from the Greek: it's a catastrophe.

Philippe Coueignoux

• (*) ................. The big questions raised by anti-capitalist protests, by Martin Wolf (Financial Times) - Oct 28, 2011
• (**) ............... A return to the world of Hobbes, by Philip Stephens (Financial Times) - Oct 28, 2011
• (***) ............. Dodd-Frank takes paper chase complexity to new heights, by Gillian Tett (Financial Times) - Oct 28, 2011
• (****) ........... Business needs a world view of its own, by Michael Skapinker (Financial Times) - Oct 27, 2011
• (*****) ......... Generation Jobs, by Richard Waters (Financial Times) - Oct 29, 2011
• (******) ....... Let's stop bashing politicians, by Simon Kuper (Financial Times) - Oct 29, 2011
• (*******) ..... A Spotlight Now Shines On Italy, by James B. Stewart (New York Times) - Oct 29, 2011
• (********) ... Trading Company Will Pay $1 Million to Settle S.E.C. Case, by Bloomberg News (New York Times) - Oct 25, 2011
• (*********) . China Reins In Entertainment And Blogging, by Sharon LaFraniere, Michael Wines and Edward Wong (New York Times) - Oct 27, 2011
• (1) for more details, see Rube Goldberg in the wikipedia.