Tag Archives: Financialization

How The Individual Creates Value When Knowledge Is Almost Free

Educational Credentials Are Over-Supplied Yet Problem-Solving Skills Remain Scarce.

How do we create value in an economy that is increasingly dependent on knowledge? The answer is complicated by the reality that knowledge is increasingly digital and “unkownable” and therefore almost free.

Financialization as a substitute for creating value has run its course.


The crony-capitalist answer is always the same, of course: bribe the government to create and enforce private monopolies. This process has many variations, but a favored one is to deepen the regulatory moat around an industry to the point that competition is virtually eliminated and innovation is shackled.

Businesses protected by the regulatory moat can charge whatever they wish, becoming monopolistic rentiers that are parasites on the consumer and economy.

State-crony-capitalism destroys democracy and the economic vitality of the nation. I’ve covered this many times, and there is no solution to this oppressive marriage of state and monopoly other than innovations that open wormholes in the monopoly.

This is where knowledge comes in, as new forms of knowledge (not just technical innovations, but new business models), once digitized, can be distributed at near-zero cost.

This almost-free knowledge creates another problem: how do we create value in a knowledge economy when knowledge is increasingly free?

Correspondent Dave P. offered one answer: static knowledge is indeed increasingly free, but dynamic information (such as market conditions) generates value to those who need actionable, timely information.

One example of this might be a Bloomberg terminal, which delivers a flood of information for a monthly fee.

Another source of value is generated by firms offering a warehouse of free knowledge–for example, YouTube. The instructional videos are free to the user, but YouTube skims an advertising income from every view.

I would add a third type of value: curation of almost-free knowledge/ information. What is the value proposition in blogs and media outlets, when “news” is essentially free? The value is created by the curation of insightful commentary, charts, histories, etc.

Anyone who successfully curates the overwhelming torrent of free info/knowledge into useful, manageable troves has provided a very valuable service.

A fourth type of value is created by systems such as bitcoin which are structured to keep transactional information transparent: add in that there are a limited number of bitcoins that can be mined, and this digital information (the blockchain) becomes valuable.

Correspondent Bart D. recently described another source of value in a world in which knowledge is nearly free: the social capital of who you know, and what all the people in your social-capital circle know.

A person could perform well in school and obtain a university degree signifying acquisition of knowledge, but their successful leveraging of that new knowledge often boils down to the social and cultural capital they acquired in their home, neighborhood, city and wider social circles.

Disadvantaged people tend to stay disadvantaged not just from a lack of knowledge but from a lack of cultural and social capital–habits of work, ability to sacrifice today to meet long-term goals, and access to a successful circle of people who can act as mentors or collaborators in a knowledge-based economy.

I describe the eight essential skills needed to build social and cultural capital in my book Get a Job, Build a Real Career and Defy a Bewildering Economy.

So How do we create value in an economy that is increasingly knowledge-based? There is no one size fits all answer, but we know this:

1. Value flows to what’s scarce. Unskilled labor and financial capital are both abundant, and hence have near-zero scarcity value: cash in the bank earns nothing.

2. Experiential knowledge that cannot be digitized will retain scarcity value even as knowledge and expertise that can be digitized become essentially free.

This is the basis of my suggestion to acquire skills, not credentials. Credentials are increasingly in over-supply; problem-solving skills remain scarce.

By Charles Hugh Smith | Of Two Minds



The Real Reason Our Wages Have Stagnated

Our Economy Is Optimized For Financialization

Labor’s share of the national income is in free fall as a direct result of the optimization of financialization.

The Achilles Heel of our socio-economic system is the secular stagnation of earned income, i.e. wages and salaries.
 Stagnating wages undermine every aspect of our economy: consumption, credit, taxation and perhaps most importantly, the unspoken social contract that the benefits of productivity and increasing wealth will be distributed widely, if not fairly.
This chart shows that labor’s declining share of the national income is not a recent problem, but a 45-year trend: despite occasional counter-trend blips, labor (that is, earnings from labor/ employment) has seen its share of the economy plummet regardless of the political or economic environment.
Given the gravity of the consequences of this trend, mainstream economists have been struggling to explain it, as a means of eventually reversing it. The explanations include automation, globalization/ offshoring, the high cost of housing, a decline of corporate competition (i.e. the dominance of cartels and quasi-monopolies), a failure of our educational complex to keep pace, stagnating gains in productivity, and so on. Each of these dynamics may well exacerbate the trend, but they all dodge the dominant driver of wage stagnation and rise income-wealth inequality: our economy is optimized for financialization, not labor/earned income.
What does our economy, is optimized for financialization mean? It means that capital and profits flow to the scarcities created by asymmetric access to information, leverage and cheap credit–the engines of financialization.

Optimization is a complex overlay of dynamically linked systems:
 the central bank optimizes the flow of cheap credit to the banking/financial sector, the central state tacitly approves the consolidation of cartels and quasi-monopolies, and gives monstrous tax breaks to corporations even as it jacks up taxes and fees on wage earners and small business.
Financialization funnels the economy’s rewards to those with access to opaque financial processes and information flows, cheap central bank credit and private banking leverage. Together, these enable financiers and corporations to get the borrowed capital needed to acquire and consolidate the productive assets of the economy, and commoditize those productive assets, i.e. turn them into financial instruments that can be bought and sold on the global marketplace.

These commoditized assets include home mortgages, student loans, and specialized labor forces
 which are “sold” with their employers or arbitraged globally. Once an asset is commoditized, the profits flow to those who process the transactions of packaging and marketing these assets globally.

Take auto loans as an example:
 the big money isn’t made from collecting the interest on the auto loans; the big money is made by processing and assembling the loans into tranches that can be sold to investors globally.

One way of understanding financialization is to ask: what’s the quickest, easiest way to make $10 million in our economy?
 Is it building a business based on the labor of employees over a decade or two?

You’re joking, right?
 The easiest way to make $10 million is to be part of the investment banking team overseeing a $10 billion corporate buyout or merger deal, or investing seed money in a tech company that subsequently goes public.
How about the easiest and quickest way to make $100 million? The answer is the same: working a vein of financial wealth based on commoditized instruments, leverage and credit.

Labor’s share of the national income is in freefall as a direct result of the optimization of financialization.
 The money flows to those with the capital, credit and expertise to optimize financialized skims. As for selling one’s labor in an economy optimized for capital and the asymmetries of finance–there’s no premium for labor in such an economy, other than

technical/managerial skills required by finance to exploit markets.

This is the driver of the rising income-wealth inequality this chart reveals: