John Kay’s criticism of excessive financial ingenuity

201604-pexels-johnkayJohn Kay is a famous British economist. He posts new, short articles weekly on his website. The articles are for a lay audience, and they’re consistently good reads. I recommend checking them out.

Only yesterday did I see a post of his from a couple of weeks ago, titled “Investment opportunities abound but we must get over the barriers”. His argument is that the world has negative interest rates, in part, because we block ourselves from making productive investments. He notes the self-imposed “institutional, political, and economic” barriers that constrain our economy.

My favorite line is his last sentence:

We need less financial ingenuity and more common sense.

Bingo! I’ve written about this topic twice in the past week:

  1. Last week I wrote about negative interest rates. I argued that, while we may get low, or even negative, returns trying to make money with money, we have tons of opportunities for real, technology-driven innovation.
  2. Yesterday I wrote about Neel Kashkari’s criticism of the big banks. I argued that “financial trickery can quickly be taken to excess”, which can threaten our social institutions.

In both cases, my argument is that we’re trying to outsmart ourselves with elaborate financial engineering. I’ll admit, I was relieved to see John Kay echo this sentiment.

John Kay and I are coming to the same conclusion from different angles. In his case, he argues we’re building needless obstacles between us and attractive investment opportunities. If we block enough of these opportunities, interest rates have no choice but to diminish, and possibly turn negative.

My argument is that we’re commoditizing all the ways to make money with money. There’s little additional value to reap there. We need to turn to different, more substantive, forms of innovation to capture meaningful returns.

Like I mentioned yesterday, I keep bringing these topics up, because it’s an important message for STEM professionals to internalize. Innovation is exciting in any context. But in today’s world, technology-driven innovation is essential.

We live in a world that still incentivizes crazy financial innovation, the kind that brings little to no social value. The global economy has changed drastically since the 2008 financial crisis. Now, more than ever, we’re starving for real innovation.

It’s a great time to be a scientist or engineer. Our largest companies are struggling to earn acceptable returns. The limitations of financial engineering are becoming more clear by the day. We owe it to the world to pursue, and commercialize, our best ideas.

You’re hearing more people speak up. John Kay is an important advocate in this regard. You’ll stumble across more and more of these critiques in the future. It’s our time to shine, as STEM professionals. We need to take the reins of leadership and usher in a new era of global prosperity, with technology-driven innovation as the centerpiece.

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