As money becomes completely digitized, infinitely transferable, and friction-free, it will again revolutionize how we think about our economy.[From The Future of Money: It’s Flexible, Frictionless and (Almost) Free | Magazine]
OK. But how do we think about the future of money in a structured way? I was challenged to do this for the fabulous LIFT conference this year in Geneva, and I decided to do it by taking some scenarios for the world economy in 2050 and trying to speculate on what each of those scenarios might mean for money.
This was because I’d spent very interesting morning with the Long Finance chaps discussing their report “In Safe Hands? The Future of Financial Services”. The discussion was framed by a presentation from Gill Ringland, who set out a useful framework for scenario planning for 2050. To do this she used an interesting pairs of axes to set out a 2×2 matrix: the “Washington consensus” vs. “Community-based values” on one axis and “mundane” and “virtual” (essentially) on the other axis to reflect the extent to which real or virtual communities come to shape the economy and therefore financial services.
The term Washington Consensus was coined in 1989 by the economist John Williamson to describe a set of ten relatively specific economic policy prescriptions that he considered constituted the “standard” reform package promoted for crisis-wracked developing countries by Washington, D.C.-based institutions such as the International Monetary Fund (IMF), World Bank, and the US Treasury Department[ subsequently it] has commonly come to be used in a second, broader sense, to refer to a more general orientation towards a strongly market-based approach (sometimes described, typically pejoratively, as market fundamentalism or neoliberalism).[From Washington Consensus – Wikipedia, the free encyclopedia]
Looking at this and its alternative “The Community Consensus” This gives four scenarios which are summarised below (please note: these are my summaries, and my spin).
“Second Hand”. This is the scenario where we remain rooted in the physical world and geography still matters, the Washington consensus holds and we manage to muddle through. (Interestingly, the report suggests that this “muddle through” scenario might be the best one for London, because it would retain it’s place as an international financial services centre some way ahead of competitors.) The international structures (e.g., the IMF) begin to decay as they do not reflect the rise of the BRICs or the next generation of growing economies (e.g., Turkey).
“Visible Hand”, where the Washington consensus proceeds in a world of “rugged individualism”, superficially the world of Adam Smith’s invisible hand made manifest, the report sees a breakdown of international institutions and regard this scenario as most unlikely, largely because it is insufficiently diverse and homogeneity means it is unable to resist shocks. Since it ends in chaos, it will collapse into one of the other scenarios. I think you can see some elements of this scenario in place already: knowledge workers who connect globally and generate value online, what Galbraith labelled private affluence and public squalor as the “real world” is abandoned to the underclass, alternative and non-bank financial services in niches.
“Long Hand” sees a breakdown of the Washington consensus and its replacement with agreements between what the report calls “affinity groups”. There’s a certain amount of tiptoeing here, because no-one wants to offend affinity groups that may coincide with ethnic or religious divisions, but I think we can all see that that virtual communities mean that there is a potential balkanisation of the Net here. This may not necessarily be bad for business, because global commerce within (for example) the Chinese e-disapora or the Islamic e-caliphate would be substantial and might actually have reduced transaction costs (because I think that trust infrastructures may evolve within these communities).
“Many Hands”, which I can’t help feeling is the most likely, sees society reform around city-states. This panders to my long-held appreciation of Jane Jacobs work on “Cities and the Wealth of Nations“. This scenario explores the impact of parallel shifts in power away from nation states toward cities and away from “the West”. The report talks about a system of 50 or so global city-states (including London, Istanbul and Singapore in the first rank) forming the backbone of not just the economy, but society.
So what does all this mean for financial services in general and money in particular? The report suggests that ICT will reduce the size of the financial sector overall, perhaps even doing away with some sub-sectors altogether (insurance being specifically mentioned as being under threat). It also, to my mind, supports the idea the regional, rather than national, currencies are a more likely medium-term vision than some sort of global currency. Here I added some “bubbles” to jot down my (shorthand) thinking about the possible impact on money and payments. These aren’t scientific analysis, but notes to start conversations. I also suspect that by 2050, payments may not be part of the financial services sector at all, but more part of the utility sector, but that’s another story.
Incidentally, I found Gill’s presentation so thought-provoking that I have asked her to come along to this year’s Digital Money Forum in London on 28th-29th March to share these scenarios with the delegates and, hopefully, lead to some focused and informed debate.
For the LIFT conference I’ll be exploring that “Many Hands” scenario and looking at what it means for the future of money. In a world where regional currencies issued by private companies based on the economies of city-states come to dominate (but there will be plenty of niches for other community-based currencies) will we ascend to a new renaissance in our 21st-century re-creation of medieval Italy or endless competition between the C50 (the organisation of the richest 50 cities that will replace the G20 as the basis for “managing” the global economy) for resources?
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