Computers and Capitalism

Financial Services is one of the most important sectors for investment in IT. It employs a very large number of skilled individuals and makes a huge impact on the UK and global economy for good or ill.

The complex financial instruments traded on the world markets would not be possible without both global networks and advances in computing.

Occasionally we see interesting issues with the interplay of computing and finance. An individual trade can trigger a market fall. Program trading has to be suspended under certain circumstances because markets can herd on sharp movements and create crises.

One of the fall outs from the economic crisis in 2007-08 was that we discovered that some economists modelled the financial economy without having banks in their models. Organisations were apparently uninteresting to such economists.

We often talk about how computing is impacting on all aspects of society and economy. Yet my research finds little theoretical work or understanding of how advances in IT are impacting on financial markets in terms of risks or practice.

This line of thought was triggered by seeing Lord (Cecil) Parkinson, a Minister in the Thatcher government, talking about banking bonuses. He said that he thought Thatcher would not approve of the high pay and that ‘the capitalists seem to want to kill capitalism’.

That phrase has a history for me (though I am not a Marxist). Indeed, I first heard that phrase from a very right-wing economist back in 1983.

It was in 1983 that my (professional) interest in the future was first realised. I attended a workshop in London on the theme of ‘preparing for the 21st century.’ I found it fascinating to find groups of people who made a living out of studying the future. Many topics that are now mainstream were discussed that day; climate change, terrorism, peak oil, China and so on.

One respondent made a big impact on me. I wish I could credit him, but I have long lost the notes. The meeting was held under the Chatham house rule, so I suspect I still shouldn’t.

His opening remarks included the following:

‘Communism will collapse because of its similarities with capitalism. It will collapse first because of its differences’.

That quote, among other observations, has been etched in my mind since that extraordinary day.

In questions, he was of course asked about the collapse of communism, but then asked if he was predicting the collapse of capitalism. He affirmed and was asked why.

He gave a one word answer; Computers.

To the best of my memory, this was his detailed response.

Economists assume that perfect information will create stable equilibrium in financial markets. He thought that it would create unstable equilibrium.

Markets make money by taking a margin on transactions. Low cost computing financial networks would reduce transaction costs towards zero.

To make money, financial markets would need greater volatility and more complex transactions.

Interconnection of organisations would create contagion because of the volatility. Shocks would permeate faster through computer networks than organisations could respond.

Hence, his considered view that ‘capitalists would destroy capitalism’.

Since the onset of the credit crunch, I have watched the developments with these observations in mind.

Given that computers are blamed for everything (especially in the public sector), it is perhaps surprising that we haven’t so far been blamed for the credit crunch and its aftermath. So I’ll apologise for opening the possibility...

When Cecil Parkinson made me think about that analysis and insight from so long ago, I searched to find some economic research that would update or contradict the analysis above. Given that economic jargon is one field that makes IT jargon seem transparent I haven’t been able to find anything helpful.

My experience in over 30 years is that IT is both part of the problem and part of the solution, especially at the leading edge.

Reading the FT in my Stockholm hotel before writing this piece, the challenge that sprung to mind is as follows:

‘How could IT contribute to the understanding and management of systemic risk in financial markets?’. Arguments over the governance of finance and the form of regulation in an increasingly borderless world don’t feel to have moved forward since 2007.

As systems thinkers and practitioners, how could we contribute to supporting a ‘safe fail’ as opposed to a ‘fail safe’ system?

Your Nobel Prize awaits you.

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    Chris Yapp wrote on 11th Jul 2011

    This was pointed out to me after the initial; post. Andrew Haldane of BoE Stability elaborates on the points:http://www.bankofengland.co.uk/publications/speeches/2011/speech509.pdf

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About the author
Chris is a technology and policy futurologist. Chris has been in the IT industry since 1980. His roles have spanned Honeywell, ICL, HP, Microsoft and Capgemini. He is a Fellow of the BCS and a Fellow of the RSA.

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