Saturday, January 21, 2023
Desai: The crypto crash and the end of magical thinking that infected capitalism
New York Times Op-Ed: The crypto collapse and the end of magical thinking that infected capitalismby Mihir A. Desai (Harvard Business School and Harvard Law School; Academic google):
I have come to see cryptocurrencies not just as exotic assets, but as a manifestation of magical thinking that had come to infect part of the generation that grew up after the Great Recession, and American capitalism, more generally.
For these purposes, magical thinking is the assumption that favorable conditions will continue forever regardless of history. It is the minimization of limitations and trade-offs in favor of the technological utopia and the exclusive emphasis on positive results and novelty. It is the fusion of virtue with commerce. …
For the past decade, being a finance professor meant being asked questions about cryptography or novel valuation methods for unprofitable companies, and being smiled at (and ignored) when I responded with traditional instincts. Every business problem, they tell me, can be solved in radically new and effective ways by applying artificial intelligence to ever-increasing amounts of data with a dash of design thinking. Many graduates coming of age in this period of financial turmoil and ever-increasing corporate ambition have been taught to chase these shiny objects with their human and financial capital rather than invest in sustainable paths, a habit that will be more difficult to instill in later ages. …
The end of magical thinking is upon us as cryptocurrencies and valuations crash, and that’s good news. Vested interests will resist that trend by continuing to propagate fictions. But rising rates and a return to more routine business cycles will continue to provide the rude awakening that began in 2022.
What comes next? Hopefully, a revitalization of that great American tradition of pragmatism will follow. Speculative assets without any economic function should not be worth anything. Existing institutions, flawed as they may be, should be improved rather than displaced. Risk and return are inevitably linked.
Corporations are socially valuable because they solve problems and create wealth. But they should not be trusted as arbiters of progress and should be balanced by a state mediating political issues. The tradeoffs are everywhere and inescapable. Navigating these trade-offs, rather than ignoring them, is the recipe for a good life.
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