Abstract
Our financial system has been analyzed, dissected and examined through many lenses. However, two major contributions of Western thinking—systems theory and the field of psychology—have not featured prominently in these analyses. In this chapter, we will first try to answer the following questions: firstly, what are the components required to make a system more sustainable? And secondly, how can we better deal with the unknown, with uncertainty and complexity? Nature serves as our example: living systems have an astonishing capacity to stay within a window of viability over extraordinarily long periods of time. This chapter will demonstrate that beyond the various schools of economics and finance, systems theory can provide a more comprehensive approach. Besides systems theory, findings in psychology and neuroscience then help to support the idea that humans have the capacity to access and operate within two systems simultaneously. This is because we have two cerebral hemispheres that represent two different ways of interacting with our environment. This dual capacity of the brain and of the mind is reminiscent of the Yin and Yang of Taoism. In conclusion, we will refer to six components that can help us to change our behavior on a personal level.
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Notes
- 1.
Empirical findings in the Western psychology of wisdom basically confirm major ancient findings of Eastern mysticism. What makes a human wise? It is the capacity to tolerate uncertainty, accepting the relativity of values and norms, adopting a longer-term perspective, allowing more complex and contradictory emotional states, developing the capacity to distance oneself from one’s ego state and becoming more mentally balanced towards day-to-day experiences while remaining curious about the miracles the world has to offer. We should take account of these parallels when talking about redesigning the financial system; see for example Sternberg and Jordan (2005).
- 2.
See D. Meadows (2002).
- 3.
- 4.
In fact, open-flow network systems operate with many more variables: they generate fractals, i.e. scale-independent isomorphic states. Such systems are best understood first through fuzzy logic, then through discrete and clear figures: it is not black and white, nor 0 and 1, but everything in between that counts. Most open-flow network systems are further characterized by non-linear, non-reductionist and complex features. Such systems mainly develop crossover scale modalities, meaning that they generate new emergent qualities from one scale to the next. And finally such open-flow network systems are able to learn from failure, disaster, losses and crisis. This is called “anti-fragility”. These systems have the tendency to create more inner order and act negentropically (e.g. like a cell compared to sub-cellular components). However, despite all the parallels that most if not all systems have in common, there is at least one component that differentiates biological systems from social ones: social systems are able to reflect upon themselves. If we do not take all these components into account in our attempts to better understand the complex financial system, we run the risk of misinterpreting fundamental economic data and drawing the wrong conclusions from it. See Meadows (2008), Soros (2015), and Taleb (2012).
- 5.
Goerner et al. 2009.
- 6.
See Laeven and Valencia (2013). Anti-fragility is more than resilience, as a system that is exposed to shocks not only resists, but improves through exposure to volatility, randomness and stressors. In this understanding, a parallel currency system is an anti-fragile feature. In finance, this is known as the Barbell strategy: “A dual strategy, a combination of two extremes, one safe and one speculative, deemed more robust than a ‘monomodal’ strategy; often a necessary condition for anti-fragility” (p. 428).The heterogeneity of capital structure and additional optionality increase this form of anti-fragility. More options (optionality) means that errors cause less harm. We start to benefit from uncertainty. The more complex a financial system, the higher its uncertainty, the higher the preference for optionality rather than predictability, teleological thinking or the creation of additional information. All this is expressed and favored in a parallel currency approach to creating a more sustainable future: creating positive feedback loops by gaining from disorder.
- 7.
The exact balance varies depending on the system under investigation. Therefore, we propose a working definition of sustainability as the optimum balance between efficiency and resilience.
- 8.
For data see food and land use coalition (2019).
- 9.
See also the work of Beinhocker (2006), where the author demonstrates the fallacy of modern economics being misclassified as closed systems.
- 10.
Instability is like a house of cards. From a speculator’s perspective, it might be interesting to bet against the next financial crisis. From a systemic perspective, where most parameters are interlinked in a complex, non-linear manner, the next collapse of that house of cards could be caused by anything. Nobody knows what this will be in advance, although everybody will have known better in hindsight.
- 11.
This is extremely expensive, requires 3–5% in direct and indirect costs (over three to five years) to partially restore, reshape and stabilize the system so it can fulfill its function of serving the real economy (risk allocation, intermediate function, maturity transformation). These costs are borne exclusively by present or future taxpayers. This money is then not available for social and ecological projects. See Laeven & Valencia (2013); Lietaer et al. (2012).
- 12.
- 13.
Just as a reminder: at the 1992 Earth Summit in Rio de Janeiro, the global community decided to invest 0.7% of global GDP in foreign development aid. Apart from some of the Scandinavian countries, no country has ever achieved this ratio in the last 35 years (Grubb et al. 2019).
- 14.
Regulatory efforts normally increase the homogeneity, contagion effects and co-linear amplification of market behaviors (like mark to market-effects). Additionally, we are regulating a complex system of which we are not fully in control. This fact must be taken into consideration to adjust our expectations concerning the extent to which our monetary system can be regulated. Regulation remains limited and it might be more beneficial to shed this illusion of control and simply start learning how to deal with uncertainty. See McDonough and Braungart (2002).
- 15.
Currently there are over 4000 complementary, parallel currency projects in operation worldwide (Lietaer and Dunne 2013). None of them have any macroeconomic significance, but they all demonstrate that such dual systems work: from B2B, Lets, local barter, to regional money, B2C, C2C etc., they all have a social, sectoral or ecological target built in and are able to solve concrete, local problems. For example, the Bristol Pound is a regional currency with an exchange rate of one to one with the British Pound. The mayor of Bristol is paid completely in this currency, a fact that seeks to demonstrate at least two aspects: users can pay local taxes with the Bristol Pound, and the wealth created in the region stays in the region. The payment of taxes is crucial to any money system, as it closes the loop between state, households and corporate sector.
- 16.
- 17.
See Haldane and May (2011), where the authors state that “homogeneity breeds fragility” and a financial ecosystem requires “system-wide characteristics of the network” (pp. 351–355).
- 18.
If we take interconnectedness seriously and apply it to the financial sector, a systemic view requires us to confess honestly that we need to stop bashing the corporate and political worlds. For example, corporates and investors are managing the money of millions of workers who waive parts of their salary for their future pension, which is invested in corporates and state funds. And in Western democracies, politicians represent the average will of their citizens. In short: we ourselves are the politicians and the investors we are criticizing. A systemic view requires a systemic change that includes all of us.
- 19.
Another way of looking at this phenomenon is the so-called “opportunity–cost approach”: these are the costs of non-realized alternatives. Money could have been spent on something else more valid instead of repairing damage. When a roof is broken, we have to repair it. The same is true of any damage control costs. We only see where we have spent the money, but do not see where we could have spent the money instead. As damage control has become tremendously expensive and will be even more expensive in future, we might have to look for a mechanism that prevents us from causing further damage. For detailed theoretical explanations of the concept of opportunity costs, see Buchanan (2008). For example, the cost of ending poverty in 20 years is 175 billion USD per year (Sachs 2006). The opportunity costs of unrealized human potential are at least 10–15 times higher. The general counter-argument is “better than nothing”, meaning it is better to transfer 0.5% of GDP than nothing at all. As true as this argument is, it is irrational in economic terms, because the cost of not financing the commons will be higher in the long run. See Brunnhuber (2015).
- 20.
From an evolutionary perspective, this is the result of a developmental process in which analytical, logical, critical, perspectival, ego- or self-centered thinking is the product of an ontogenetic and phylogenetic process. In short: the mind evolves, and this process is not random, but follows predictable steps and stages. Volumes of empirical evidence prove that this applies to all properties of the mind (motivational, cognitive, affective, learning, sensomotoric, kinesthetic, spiritual, social etc.). One of the core findings is that ego- or self-centered thinking is not the last evolutionary step. There is more to come. Psychologists sometimes call these states of consciousness integral, holistic, transpersonal, post-conventional or transrational. See Wilber (2000) or Brunnhuber (2016, 2018).
- 21.
- 22.
Daniel Kahneman (2011; Kahneman and Tversky 1982) classified this way of thinking as “reference class forecasting” or “external view” bias: as humans, we tend to look at the future too optimistically and classify risks and probability incorrectly. Potential risks are systematically undervalued, whereas potential gains are overestimated. We mainly follow a “confirmation bias”, tending to stick to what we know and extending this information in a linear way.
- 23.
See Darwin (1859).
- 24.
Additionally, behavioral science describes at least six factors that increase the likelihood of sustainable behavioral change. If we look at behavioral changes from a personal perspective, we should consider what we call the “big six” or “six Ps”: Pleasure, Purpose, Positive intermittent reinforcement, Prosocial commitment, Profit and the by-Proxy effect: First we start identifying a “purpose” in what we are doing, we draw “pleasure” and satisfaction from it, operating within an environment that enables “positive” intermittent reinforcement instead of sanctions, and providing a rewards for “pro-social” commitment, which goes beyond an ego-centric view; empowerment and “profit” will help us to gain control over what we are doing and get a return from it; and finally, the change requires a mechanism in which not abstract theory, data or metaphysical beliefs, but a “by-proxy”, step-by-step approach guarantees transformation. Any future financial engineering needs to take this into account.
- 25.
- 26.
- 27.
McGilchrist (2009).
- 28.
See Kahneman (2011).
- 29.
This is especially prominent in the left prefrontal cortex. The prefrontal cortex provides humans with the capacity to distance themselves from the world instead of acting through mere reflex. This generates control over evolutionarily older neuroanatomical systems through mental probing, reasoning, the use of tools and language. This allows us to investigate ourselves and the world without an automatic and immediate reflex loop following a given stimulus. For the first time, we have the possibility to avoid, refuse and negate things. Besides these cognitive properties, we have evolved the capacity to feel empathy, creating a social brain that allows us to better understand the other. See LeDoux (1996, 2000).
- 30.
See De Giacomo and Fiorini (2017).
- 31.
See Miller and Cohen (2001).
- 32.
We should note that system 1 and system 2 are not identical with the right and the left hemisphere. However, they do demonstrate a general finding that can be adapted usefully to finance: a dual processing or asymmetrical, lateralized entity with two optional sub-systems that interact with one another, each offering different features for problem solving, is superior to a monoculture, one-brain or one-mind feature. See Kahneman (2011), McGilchrist (2009), and Taleb (2012).
- 33.
To note: most scientific findings occur where it has become possible to connect unconnected, ambivalent components, such as objects and the law of gravity (I. Newton), electricity and magnetism (J.C.Maxwell), or acceleration and gravity (A. Einstein).
- 34.
This design is like a master and his emissary (see McGilchrist 2009): the operating system provides an impulse, an idea, a command or a drive. It is a master who never intervenes in the world, never manipulates, but rather retains a helicopter view. The master requires an emissary who transmits the message or does the job. And it is the linear, sequential system that does this. We could assume that if such a duality is in place, there must be kind of a third system, integrating system 1 and 2 or the left and the right hemisphere. This system 3—so to speak—is not about fast or slow, rational or intuitive, parallel or sequential, but about a mode that offers a multi-directional, multi-perspectival, complementary and non-dual way of perceiving, thinking, acting, deciding and living, prior to any differentiation into two systems. For thousands of years, the world’s mystical traditions have provided empirical evidence of such a third system.
- 35.
Most thinking happens within a given conceptional framework, and most (if not all) scientific discoveries occur when this rule-based conceptual thinking is questioned and transcended. Irregularities, ambiguities, anomalies and paradoxes are dissolved and new connections and insights become visible. W. Byers calls this state “deep thinking” (2014): opposites and irregularities can be contained, and complementarities, fractal correlations, creativity and new learning occur. If we replace outdated technologies but our thinking remains the same, and if we change our government but our thinking remains the same, these new technologies and this new government will be just the same as the old ones as long as our consciousness stays the same. A change in consciousness towards greater mindfulness, grace, grit and detachment allows us to regroup and dissolve some of these ambiguities and generate a new paradigm, a new thinking and a new way of managing problems.
- 36.
We are aware that the two mental modes (S1 and S2) and the two hemispheres (right and left).are not identical, but overlap to a large extent. However, each psychological property—such as thinking, feeling, perceiving, decision-making or motivation—always requires both separate hemispheres and ultimately both mental modes to be successful.
- 37.
It should be noted that the following argument for a parallel currency system responds to basic findings in psychology which show that positive reinforcement seems to lead to better results than continuous punishment or aversive incentives. It is simply easier to steer behavior through positive than through negative reinforcement. With negative reinforcement, each time something has to be corrected the agent has to change course. By contrast, the reward mode is more attractive and motivational, meaning that we exert more effort to achieve a specific goal. Each time a green dollar or Euro is invested, each agent can be sure that he or she is contributing directly to a better future. Positive reinforcement therefore enhances the probability of a specific desired behavior, event or result. Historically, see Pavlov (1927) and Skinner (1990). For a more recent work, see Schultz (2015). The carrot is more effective than the stick—however, in the meantime we might need both.
- 38.
Personal thanks to Daniel Kahneman for his personal feedback on this topic.
- 39.
The more complex a challenge is—and living in the Anthropocene represents such a challenge—the more humans need to access both systems. In an era of paradigm shift, the most efficient way to deploy the two systems (and the two hemispheres respectively) is to first apply system 1, which is fast, fuzzy, non-linear, contextual and holistic, in order to evaluate the main strategies, risks and challenges ahead. Once they are identified, system 2 is more appropriate to re-evaluate, analyze, focus and dissect the next sequential and linear steps.
- 40.
We are realizing that we have “oversold globalization” (Stiglitz 2017a). The process of further global integration increases the productivity and efficiency of resources, but does not necessarily create new jobs. In the standard model, any free trade will create cheaper imports (with losses of domestic jobs) and potentially create new jobs in the export sector. Empirically, however, globalization generates at least four imperfections: 1. imperfect risk management (e.g. loss of energy supply or loss of jobs), 2. an imperfect competitive advantage, which generates spillovers and externalities that are not priced in (e.g. cars, solar panels); 3. imperfect competition, where market power and monopolies distort price and regional supply; 4. imperfect distribution of income and wealth, where the winners take all. All four imperfections go hand in hand with a loss of domestic jobs, wealth and lifestyle. This all started with a change in market rules at least a decade (1970s) before the disruptive impact of digital technologies. A global corporate flat tax, trade unions, minimum income, and antitrust laws are conventional measures to regain control over the process of globalization. A more extensive analysis of the issues addressed here is provided in Stiglitz (2017b).
- 41.
Among the other effects causing this form of inequality (differences in taxing capital versus labor), corporates have been using up to 50% of their revenue to buy up their own shares. Another 40% are dividends for the shareholders (Lazonick 2014). Taken together, this means that 90% of the profits go to their owners. As most of the shareholders belong to the upper 10% of society (Wolff 2017), this mechanism increases the wealth gap rather than closing it and does not help us to solve the problems ahead.
- 42.
This Jevons paradox (Jevons 1866) has been empirically verified and further specified. Over a dozen different forms of rebound effects have been found. For example, Santarius (2015) distinguishes financial, motivational, industrial, economic and structural forms of rebound effects, which in part reinforce themselves. See also Sorrell and Dimitropoulos (2008).
- 43.
Four taboos dominate our modern society: sex, power, death and money. A taboo is something that is not discussed but always remains indirectly present. Overcoming a taboo requires a critical mind, an expanded consciousness and a corresponding social agenda. In this text, we are trying to overcome the taboo of the monetary system only.
- 44.
For example, during the “green revolution” in India, hybrid seeds were able to strongly increase the crop yield of rice and wheat in the 1970s and therefore allowed India to feed its hungry growing population. Similar attempts to introduce a green revolution in Africa have been less successful due to a lack of infrastructure, corruption, and other failures of the existing system (Oladele et al. 2010). After all, the success of a green revolution to end poverty and hunger requires not only technological innovation, but also an adequate political, a social environment and a suitable infrastructure (Griffin 1979; Paarlberg 2009; Rosset et al. 2000).
- 45.
Events for which we do not have words in consequence are not fully mentally available and semantically represented. Behavioral science classifies such states as “hypo-cognitive states”. However, not having a proper word for an event does not mean that it does not exist. It will still affect us even if it is underrepresented in our mind. Market failures or policy failure are examples of such effects. See Lakoff (2004), Wu and Dunning (2018).
- 46.
Complex is not complicated, is not contingent: complex simply means that a system has so many variables that we cannot fully grasp it. Complicated means that a procedure is manageable, but requires a lot of training—for example, a neurosurgical intervention or a complicated mathematical equation. But both are fully intellectually and practically accessible. Contingent by contrast means that an event happens randomly and was unforeseeable within a given scenario. Each setting—complex/complicated/contingent—requires a completely different mindset. In a complex situation, we need greater tolerance for uncertainty, in a complicated situation we require endurance, training, talent und discipline. And in a contingent state, we might require luck and serenity, because sometimes shit happens!
- 47.
Bermejo Carbonell and Werner (2018).
- 48.
Complementarity defines a relationship between two components that are incompatible yet mutually required, both necessary to describe one and the same thing. The opposites do not cancel each other out, but are both needed to describe an event, a thing or an item. Examples include location and momentum, energy and time, wave and particle, determinism and chance, physical and mental, structure and function, substance and process, autonomy and interconnectedness. In this sense, the two currency systems described in this text are intertwined; they lead to multiple positive feedback loops and operate in such a complementary manner. See Bohr (1966); Meyer-Abich (1965); Walach (2010).
- 49.
- 50.
We can take the topic one step further. In order to have a person change their behavior, they require contradictory information that builds up their tolerance for ambiguity. This is well known in clinical psychology, especially when it comes to lifestyle changes. Studies have shown that people need not just the motivation to change, but also information to evaluate the difference between changing and not changing: this is called the mental preparedness for change (Miller and Rollnick 2012).
- 51.
See Scott and Cogburn (2017).
- 52.
- 53.
Even if this number is a “fatal calculation”, where we risk underestimating the costs of climate damage, the argument still holds: we don’t know whether we will, but we could adapt to this new reality and one way to do this is changing our mindset and our monetary system. See: Spratt et al. (2020).
- 54.
For data, see references and further empirical findings in Lomborg (2020), which includes UN MOSAICC modeling, Nordhaus’ DICE models, EMF (Stanford’s Energy Modeling Form), IAM (integrated assessment models) and SSPs (shared socioeconomic pathways) as well as latest IPCC recommendations. In fact there is a subtle, but significant trade-off between the costs of rising temperatures (which are real) and the costs of our climate policy. Both are relevant. The challenge is to strike the right balance between T (temperature rise) and GDP (economic activities), between avoiding temperature rise and adapting to temperature rise. Qualified economic growth—mainly the SDGs —, investment in research and development, a wise CO2 tax, lifestyle changes, infrastructural investments, new forms of social security systems (collective health coverage, basic income), and an adaptation of our monetary system providing new incentives are such creative components.
- 55.
For example: Poverty and inequality are increased through global warming, but the causal link is weak, there are other more important factors causing poverty and income inequality. Take wildfire or pandemics: Both are correlated to global warming, but up to four fifths of wildfires are human made and the loss of original habitat causing pandemics is causally linked to the expansive economic activities. Both are only indirectly linked to global warming. Expansive economic activities built upon renewables would cause the same loss of habitat. Loss of biodiversity is a severe challenge for humanity, but only 15% is causally linked to global warming, the rest again is due to expansive land grabbing. The same weak link is true for urban air pollution. Or take rising sea levels: The Netherlands has shown over the last century how to deal with high sea levels. Schiphol Airport is 3.4 meters under sea level and the income per capita in the Netherlands is one of the highest in the world. Another one is water stress, a severe life-threatening challenge for millions of people. Israelis are living in the desert and can, due to innovative water irrigations systems, export water. The point is: global warming is probably the most threatening challenge for humanity, but we as humans can get back into the driver’s seat. Besides technology, lifestyle changes, R&D , taxations schema, we have to come up with wise, differentiated adaptation strategies for all these associated problems. A redesign of the monetary incentive is one of them.
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Brunnhuber, S. (2021). Western Thinking at Its Best: Systems Theory and Psychology. In: Financing Our Future. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-64826-8_3
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