Capital, like our too-tricky-to-prove-but-too-critical-to-ignore-quantum-physics-friend the graviton, exhibits certain qualities that have gravitational effects on external parties. Specifically, the more capital that aggregates together, the greater the attractive gravity it has on other external capital (mediated through human decision making). Likewise, the faster capital moves through the channels of a business operation, the more gravity the operation exerts on other capital, so the velocity of capital flow is also entangled with its gravitational effects. In capital flow, large quantities frequently beget yet larger quantities, just as in gravitational physics, the more massive a physical body becomes, the greater its gravitational influence on the surrounding field.
To bring this into the realm of everyday economic life, if an amount of capital grows steadily faster than the rate of inflation, then it elevates, takes off, soars upwards and away from the baseline rate of economic growth. Unmanaged capital gravity carries an inherent risk of gratuitous continuous compounding and “soaring too high”, to an untenable height, becoming virtually unmanageable by any one entity. When it grows too large, its effects (particularly its harmfully extractive effects) on its sphere of influence become multiplied, entrenched, and are less-well understood. With the ever-growing internet of things, this sphere of influence has become a cripplingly entangled web of complex interrelationships and algorithms whose fluctuations may ripple through seemingly unrelated parties and industries. In other words, the larger something gets, the more impossible it becomes to predict the complex ramifications of unpredictable events in the tails of the distribution of possible outcomes.
As it applies to Andrew Lo’s Adaptive Markets hypothesis, humans having to deal with this increase in complexity (i.e. highly correlated, highly precise, actively collected and electronically shared business and financial data) and the tight coupling of component parts, is a recipe for disaster. Sure, we have the ability to adapt to new conditions eventually, but what amount of fallout from disaster are we willing or able to survive? Or, as in the land of physics, the more mass something has, the more gravity it exerts on its neighbors. When gravity reaches extreme levels, so do its effects. When capital flows coalesce and aggregate into extreme levels, they create wealth inequality and promote patrimonial capitalism.
Just as the effects of physical gravity are strongest nearest to the physical body, so are the effects of capital on objects within its (today: computerized, digital) reach. But let us not forget that though the gravitational object of the sun sits alone at the center of the solar system, its gravity reaches out infinitely. Is there an end to where capital can reach? Have you considered what this looks like for your future?
- The credit here is certainly due to Charles Perrow who originally developed the Normal Accident Theory (Normal Accidents, 1984) and how interactive complexity and tight coupling produce hidden fragilities in complex systems.