Intellectual Ponzi Schemes: The Good, The Bad, The Ugly

Part of Ponzidom is surely the confidence trick to get people to come to you in the first place; and to keep coming long enough for it to look credible. This is the character of all Ponzness.

The Good Ponzi

Imagining a parallel between business projects and other projects, what would it mean to start up a Ponzi-style outfit in science? It would mean that you began developing ideas that actually were wrong - they did not ‘work’ - but people believed in them enough such that they were prepared to come and ‘invest’ in them. This, of course, might be very good.

There’s some evidence that Chomksyan, syntax-based, linguistics is in this category, at least in the sense of historically of what that project was. Originally, Chomsky wanted to so deeply code the sentence-forming processes of the mind, that he could trace language back to the conceptual machine underpinning the generation of any linguistic utterance. He has a big point: human minds are not different in the US and Pakistan, or anywhere.

He hasn’t done this; the programme hasn’t worked. If it had, we would have ‘machine translation’ which back-step from a finished sentence to a symbolic description of the the content core, and roll out its meaning again down a different path of transformations, morphological inflections, phonological/orthographic articulations, lexical codings, etc; and presto, from English to Urdu (or what-you-like-speak). Instead, in fact, machine translation uses more corpus-based methods; brute force methods based on surface regularities between already-done translations, cross-applied to new texts, buffered with statistics, and with tweaking on weird stuff by manual labour.

But the Chomsky-Ponzi essentially brought a profession together around scientific methods, and lots of success in elements of the approach has been experienced. Above all the linguistics community has massively grown since the 50s. This Ponzi creates value by instigating a community of interest around a problem, not by solving a problem itself. Linguistics may have been taken up a blind alley by the universalistic posturing of the 1950s linguistic ‘revolution’ (but also it might). Even so, a lot of ground has been covered, and mapped.

Imagine a comparable Ponzi, say, in the area of computers, called say Pear Computer in the early days of computing (1950s) - “invest in this small computer company and make 10% annual return guaranteed” - and let’s assume there is no actual working computer on offer, it’s all images of boxes with wires and screens and smiling men with ginger hair in fawn sweaters.

Sure, the Pear/Chomsky Ponzi creates a lot of losers: what about the legions of PhDs in Universal Grammar? It creates such a cluster of talent and interest and good questions that generate new knowledge. If an intellectual Ponzi scheme brings people around a concept, it’s very likely something is going to happen for good at some point. Computers that are fake are not good investments; but this doesn’t mean the whole industry, and the whole concept of personal computing, is a bust. Imagine all the suppliers who prepped up their activities, getting investment them, on the basis of an uptick in sales to this hot-rod, Pear Computer!

Indeed, someone in John Lennon specs hears of the of Pear Computer thing and thinks, I can do that, I can do it better; and makes the whole thing actually work. So while Pear Computer’s exec goes to jail, Apple Computer’s exec makes history. (Note: Pear Computer does not exist. This example is for illustration purposes only. No liability is accepted for actions taken on the basis of this information. Investments may go up or down. Idiots run the world. Etc.)

Remember that this is not pure abstract hypotheticals. Ponzification of an industry is only possible if intelligent people believe it could work; it’s only one step away from a Ponzi to Public Offering, Apples and Pears are not so different after all.

The Bad Ponzi

The bad side of intellectual Ponzihood is obviously economics, and financial management. The silly, innocent version of this is momentum investing. If the stock is going up, invest; if it’s going down, sell. Cattle know better than this - but it would be hard to say it isn’t one of the dominant forces, perhaps the dominant force, in the global market. What does anyone really know about how successful a company is going to be?

The less innocent version of economics is the principle of economic growth in general. From what is the additional value being generated? This is one of the most complex and philosophically intense phenomena of theoretical economics - and yet is almost entirely ignored. There are two production-side classic views, and a demand-side view: profit comes from technology (endogenous growth theory) unpaid labour value (Marx), in the production-side analysis; and from the perception of relatively increased welfare (that Manohlos are better than Start-Rites), in the demand-side view.

This is a shit-storm of bad thinking, in my view, and massively implicates sustainability (because without knowing where value comes from, or what it is, we cannot cost environmental resources or Nature, properly). These ideas about value I call Very Bad Ponzi.

In my humble view, Very Bad Ponzi is not likely to be solved using current methods - or rather current assumption about where value comes from (clue: it doesn’t coming from investors, or the whole trough-feeding machinery of ‘enterprise’, but then it doesn’t come from labour or tech either). In fact, the answer seems to be that economics-based enterprise, Very Bad Ponzi, is at large a grand eco-Ponzi in which more and more /resources/ are brought into play to underpin value-growth ideas (clue 2: chart historic use of fossil-fuels against economic growth, and ask which is the cause of which; okay, clue 3 the cause of energy use is not growth, energy is a cause of ‘growth’). I.e. again, little if any ‘real’ profit, just resources pumped in.

But for the sake of argument let’s just assume the value generation problem has been in some sense solved. (Very Bad Ponzi is put in big drawer, even bigger than those at the SEC, which are pretty big.) What then is left? We have productive economic activities, like making shoes and selling journalistic services, and the investments involved in that (or not, in the case of newspapers); and the machinery of all other economic activity including the finance and banking category. Is there then a Ponzification - Where’s Ponzzy? - in this image of the less theoretical aspect of the economy?

I think it is there, and it is in the very part of the economy that Madoff was operating - banking and finance. How does banking and finance making profit, beyond direct investment in and returns from productive activity? Why do markets fluctuate so wildly (on the basis that real companies are not changing quite that fast)? How above all do speculators, ‘traders’, and ‘fund managers’ make profits? They do it, they say, through observation of the comparative values of the same commodity in different markets, i.e. if a dollar is more expensive in Japan than in London, “BUY THAT SUCKER IN LONDON AND SELL IT IN JAPAN”. This is called arbitraging.

What these middle-men say they are doing is ‘capturing excess value’ from the totality of markets, at a cost to no-one. Now, my response to this is Intellectual Ponzi Alert! Intellectual Ponzi Alert! Intellectual Ponzi Alert!

For what is The Essence of Ponz? What is - indeed - the Ponzessence? The Ponzessence - the ineffable truth of Ponzi - is making money from nothing. That is what all these vast networks of ‘investment’ were getting for ‘their money’. Zero risk, 10% return.

What does it matter, substantively, whether Madoff was capturing ‘profit’ from incoming investors (pretending it to be profit from economic productivity), or ‘profit’ from market differentials (pretending it to be profit from economic productivity)? Either way Madoff and his beneficiaries were not doing anything productive. In the same way that the Good Ponzi creates wealth from a mistake, the Bad Ponzi creates wealth from a mistake.

The Bad Ponzi, however, does not redistribute wealth in any way back to actual productive activity, and does not otherwise stimulate, as per Good Ponzi, productive activity. There is an answer to Bad Ponzidom, in this form (there is no easy answer to to Very Bad Ponzi), and it is to tax such economic activity so highly, and redistribute it to original producers or society, that arbitrageurs are simply no more significantly wealthy than the average agent in the productive economy. Because, after all, it is not wealth they create. Whatever excess wealth is in the economy, it still should not be the preserve of those with privileged access - be it money of their own, or education, or intelligence - to cream it off. If there are apples (or pears) at the top your tree, that you cannot yourself reach, and someone is slinky enough to climb and get them, does mean they should be theirs? I think not. By all means let them climb, and keep a few - but if the apple magnates of this world are those who merely skim the tops of trees - and never have to manage trees themselves; or, if the hyper-rich of this world are those who never run companies or countries, they merely cream off wealth that companies and countries are unable to access themselves - then we are in topsy-turvy land.

The Ugly Ponzi

Another intellectual Ponzi is sustainable development. I don’t think this is so good; or rather, it has been good, and is going bad.

The big noise of the Agenda 21 mandate created a rhetoric and policy negotiation space that many people find compelling. Certainly it’s better than a North-South global standoff over conservation and development.

But the way it is now playing out in practice is genuinely problematic. Never would one have predicted that the human race might perish from an excess of priorities, but this is what sustainable development brings on: such a vast glut of wish-lists, that almost nothing of a structural sort gets done, even while congratulations are sloshed around at the political level, for ‘new’ ‘commitments’ made.

What is going on here? Well, sustainable development is a ‘belief in solutions’ to a very big problem - historically, on the global scale, the problem of a) damage to nature and resource limits, and b) scads of poor people across the globe wanting to be, um, not poor.

What has happened is that the original belief in solutions has not really panned out: it was not very systematic in the first place, and was in any case a political compact between global North and South; and it has now been massively loaded with a huge range of additional enthusiasms (additional to the issues of environmental degradation and international development).

So it’s like a Chomsky Ponzi - Good Ponzi - but it has turned ugly. Not because of the obvious reason that piling into the action are all the cynical motives that got us into the problem, but because we haven’t’ worked out how to solve the problem, and yes we have ‘investment’ in the form of new people, ideas, money, and political coming in, but we also have ‘payouts’ required in the form of results for the environment/development/whatever.

What we have not solved is chiefly two things: how to achieve a growth economy - the paradigm political requirement - while achieving resource sustainability (or some other economic regime); and how to achieve a huge shift in business practice, social structures, behaviours and attitudes, and built environment structures, in a short period of time.

Some of the eco-Ponzi leaders are doing okay. John Elkington, who perhaps more than anyone helped to get sustainable development going as an intellectual Ponzi, has somewhat skipped out onto a new intellectual Ponzi: social enterprise. His ideas have been hugely influential and successful - metaphors that change minds, like the ‘triple bottom line’, of enviro, social, financial accounting. But this is still Ponzi-hood: for who can say what a ‘social bottom line’ actually is? If it was thought through, it would surely conclude that a good ‘social bottom line’ is one in which there is not sufficiently unaccountable behaviour that business have to ‘voluntarily’ account for their social bottom line (which is part of the basis of the idea, CSR).

Sustainable development is an ugly intellectual Ponzi, this is to say. If this is like linguistics or Pear Computing - a bunch of brilliant ideas like Universal Grammar, a bunch of puffy business claims - which gets stuff moving, then fine. But right now, I question whether we can see the post-Chomsky linguistics, or the Apple Computer, of sustainable development. (Disclaimer: I suppose I mean rather plus-Chomsky, not post-Chomsky, since we will I hope, never lose the logico-syntax part of the linguistics tradition, which will always be his; he is the Copernicus of linguistics, or perhaps the Galileo; we are still waiting for our Kepler and perhaps Newton. And I am not even sure myself we have seen the collapse of the Universal Grammar hypothesis; it’s just too compelling on genetic grounds, language as an human organ like sight or any other.)

Ponzi schemes do collapse. The real ones do (of course, it is only a matter of time). The intellectual Good Ponzis do, but their legacy lives on. The intellectual Bad Ones do, eventually - when the environment stops underwriting ‘growth’ at least, in the case of the Very Bad; and when society wakes up to a form of theft and starts regulating arbitrage, for the Bad.

Let’s hope the intellectual Ugly Ponzi of sustainable development gives way to a functioning concept platform soon enough: exciting claims about sustainable economic performance, and mass social transformation can bring in a lot of interest. But, then again, Ponzi schemes collapse by being too successful: too many people wanting too much ‘results’, and asking too many questions about how it really works, bring the show down.