When Social Capital Becomes More Valuable Than Financial Capital

Financial capital--money--is the Ring that rules them all. But could this power fall from grace? Continuing this week's discussion of the idea that those extremes lead to reversions, let's consider the bedrock presumption of the global economy, which is that money is the most valuable thing in the Universe because the owner of money can buy anything, as everything is for sale. The only question is the price.

Reversion to the mean is a statistical dynamic but it is also a human social dynamic: for example, once the social/financial/political pendulum reaches Gilded Age extremes of wealth/income inequality, the pendulum swings back. The more extreme the inequality, the greater the resulting extreme at the other end of the pendulum swing.

In the heyday of the postwar boom in the early 1960s, finance--banks, lending, mortgages, loans, investment banking, derivatives, futures, FX, all financial market trading, research firms, hedge funds, mutual funds, etc.--was about 5% of the economy. It now exceeds 20% of the economy, and its actual role and impact is much larger than 20%. Finance is now the dominant force in the economy in terms of wealth creation and influence.

(This parallels healthcare, which went from less than 5% of the economy to 20% in the same time span.)

While finance creates some jobs, it is essentially extractive: it produces no goods, it extracts wealth from the goods-producing economy via debt and speculation.

Thus a reversion that reduces finance back to 5% of the economy can be expected. How will this reversion to a much more constrained and modest role in the economy play out?

There is much to be said about such a complex and consequential process, but today I want to focus on one potential dynamic: the idea that social capital--our connections and loyalties to groups and other people--will become more valuable than financial wealth, i.e. "money".

The past 45 years can be characterized as the ascendance of finance: finance rules everything. Most people would say this has been true for all of human history, but it isn't quite so simple.

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Disclosures: None.

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