Seeing the FULL Continuum of Capital
When it comes to Finance,
all Money is not created equal.
Money is a legal construct. A negotiable instrument. It is used to complete transactions for trade across distances of space, time and social connection/caring. We don’t need to trust our counterparty if we trust the currency.
Finance is the logic through which we make decisions about money. About how we earn, and what we spend; what we save, and how we invest.
Wealth is earning more than we need to spend, so that we can save, in order to invest, giving us a voice in social decision making about financing for enterprise in order to be able to participate in shaping the economy in which we all live.*
The social narrative of Neoliberalism wants us to define poverty as not earning enough to spend on the basic necessities of life, which leaves us, whenever we confront the issues of poverty, squabbling with each other about what we, individually, think is “necessary” for “them” (not what we think is necessary for us; what we think is necessary for others).
The new social narrative of The Fiduciary Way wants us to define poverty as not earning more than we spend, so that we can save enough to invest, so that we have a say in how Finance shapes the economy in which we all live.
Conversations about finance within the currently popular social narrative of Neoliberalism can be confusing, because Neoliberalism does not recognize that when it comes to Finance, all Money is not created equal.
Neoliberalism teaches that Money doesn’t matter. Finance doesn’t matter. The institutions of Finance that decide, institutionally, where the money can, should and will be made to go to finance enterprise to shape our economy do not matter.
Within the social narrative of Neoliberalism, all that matters is us, as individuals, making our own individual choices, according to what we individually consider to be in our own self-interest.
It’s not so much about selfishness, as it is about self-determination.
All decisions in society are just the sum total of the individual choices that we all make, as individuals.
Except that the Neoliberal social narrative strategically fails to mention that individuals do not make choices in the markets for money. Shares do. And money buys shares. So the people with the most money have the most say:
“He who has the gold, makes the rules.”
And the narrative of Neoliberalism also fails to mention the truth that the most money in society today is held by institutions, so that it is the people who control our institutions that really make the rules in the Neoliberal social narrative.
Which shows us that Neoliberalism is actually a narrative of a new aristocracy of the wealthy, those who understand and control Finance: Market Makers Making Money Making Markets, that falsely, dishonestly and disingenuously misrepresents itself as a narrative of individual self-determination.
In the new social narrative of The Fiduciary Way, money for finance is seen as being shaped by these three considerations:
- where the money comes from;
- where the money can, should and will be made to go as financing for enterprise to shape the economy; and
- how the money gets from where it came from to where it can, should and will be made to go.
All money for finance ultimately comes from surpluses saved by individuals. Not all surpluses are saved for the same reason, and different architectures of finance have been innovated by humanity to aggregate surpluses saved for different reasons. Each of these different architectures has its own unique logic for deciding where its aggregations can, should and will be made to go, and their own unique legal contracts through which that money is deployed.
There are six such different architectures in the innovative, new social narrative of The Fiduciary Way. That gives us the FULL continuum of capital.
In the prevailing narrative of Neoliberalism there is no such continuum. As in so many other domains, Neoliberalism speaks here with a lack of precision in language and logic. We talk about Government and Markets, Public and Private. Sometimes, Debt and Equity. Recently, in the context of climate and at the instigation of Foundations, there is an evolving conversation about a continuum of capital. But that continuum, still has only three parts: Public/Government, Private/Markets and Philanthropy/Grants. Impact Money from rich people with a social conscience, and mission-aligned investing by endowments for foundations are sometimes talk about a kind of Blended Finance. Pensions & Endowments are only talked about as Asset Owners, whose only job is to provide financing to Asset Managers, so they can speculate on share prices using our social superfunds as Market Makers Making Money Making Markets. There is mot as yet a fully developed theory of the continuum of capital.
The Fiduciary Way gives us that theory.
The theory of The Fiduciary Way teaches us to recognize Finance as a social structure for social decision making that is itself a whole made of parts.
Six parts, to be precise.
Each part features its own unique incarnation of the same three subparts:
- the PURPOSE for which it aggregates surpluses saved by individuals;
- the DEVICE through which it deploys those aggregations as financing for enterprise;
- the LOGIC by which it selects enterprises for financing.
This gives us six different kinds of Money for Finance, or Capital that forms the Continuum of Capital:
- Family & Friends aggregations savings to provide for their own, and deploying those aggregations through patronage for IMPACT (where impact is whatever the family and its friends decides what is good for the family and its friends);
- Church & Philanthropy aggregating surpluses saved to care for others and deploying those aggregations as grants for MISSION;
- Taxing & Spending aggregating surpluses saved (if by force of law) to contribute to the public costs of public health, public safety and the public welfare, and deploying those aggregations as subsidies for POLICY;
- Banking & Lending aggregating surpluses saved to manage money and deploying those aggregations as the temporary monetization of PROPERTY;
- Exchanges & Funds aggregating surpluses saved to put money to work making more money, idiosyncratically and opportunistically, and deploying those aggregations through securitization for speculation on PROGRESS (but within the Neoliberal social narrative, speculation on PROGRESS [which implies a social benefit] has degenerated into speculation on GROWTH in share prices, in complete disregard of whether that growth is socially beneficial or socially detrimental); and
- Pensions & Endowments aggregating surpluses saved to programmatically provide certainty against certain of life’s future financial uncertainties, and deploying those aggregations through negotiation for SUFFICIENCY to the program for delivering certainty against uncertainty.
This gives society a powerful continuum of structures for social decision making through Finance for directing money into different enterprises, to fulfill different social purposes.
as financing for enterprise
to shape the economy
caring for our own
caring for others
the public weal
Family & Friends
Church & Philanthropy
Taxing & Spending
Banking & Lending
putting money to work
making more money
Exchanges & Funds
against certain of life’s
future financial uncertainties
Pensions & Endowments
Once we have this new theory of a complete continuum, we can begin to see how Neoliberalism is bending that continuum to fit a narrative that is not a good fit in our times.
Economies are an essential part of our uniquely human way of being in the world.
For as long as there has been people, people have lived and prospered through enterprise for the concentration of effort to put learning into action collaboratively co-creating and sharing surpluses for taking the world about us as we find it, and changing it to be more a way we choose to make it.
Enterprise always needs capital to pay the costs of concentrating efforts that can only be recouped after surpluses have been collaboratively co-created and shared.
So people have always had social structures for aggregating surpluses to form capital for investment in enterprise.
History (and pre-history) shows that at different times people have evolved different social structures for enterprise design through investment decision-making as fit to ways people lived in those times.
All these different historically evolved social structures continue in our time, in forms adapted to our times, as from time to time, new structures are evolved fit the changing needs of changing times.
Now is one of those times, when a new social structure needs to be evolved.
Except that in the currently popular Neoliberal narrative of social decision making through Finance, the intergenerational fiduciary money owned institutionally by Pensions & Endowments is being financialized: the fiduciary logic of SUFFICIENCY is being overwritten by the market logic of GROWTH.
This is not good for Pensions & Endowments.
It is not good for Exchanges & Funds.
It is not good for Enterprise and the Economy.
Which means it is a problem for all of us.
Solving this problem is our Moment of Innovation in the history of the Continuum of Capital.
Family & Friends
Church & Philanthropy
Taxing & Spending
Banking & Lending
Exchanges & Funds
Pensions & Endowments
Neoliberalism breaks this continuum in two ways.
It replaces the authentic logic of securitization for share price trading over Exchanges & Funds of PROGRESS through technological innovation and economies of scale (more for less is better) with an inauthentic of unqualified quantitative GROWTH in transaction volumes measured in prices paid in money from one period to the next. The logic of progress is a logic of social benefit. The logic of Growth is stripped of all considerations of social consequence. It is reductionist, extractive, externalizing, dehumanizing, uncaring and recklessly unreckoning with the consequences of present choices on future possibilities.
It overwrites the authentic logic of SUFFICIENCY for Pensions & Endowments with the inauthentic logic of GROWTH for Exchanges & Funds, transforming Pensions & Endowments into Asset Owners whose only job is to hand the fiduciary money they own, institutionally, over to market professionals (self-named Asset Managers) to use making money making markets by speculating on growth in share prices.
is the financialization of fiduciary money that the new narrative of The Fiduciary Way is being innovated to stop
- by reasserting the authentic logic of Sufficiency for Pensions & Endowments as institutional fiduciary owners of Intergenerational fiduciary money, setting them free form The Growth Imperative of Neoliberalism; and
- returning the share price trading markets to individuals, and to the logic of PROGRESS.
We started building a new institution for fiduciary finance in the 20th Century, but didn’t finish.
We need to finish building it now, in the 21st Century.
- aggregating money for fiduciary purposes, as a social good ✔︎
- deploying aggregations faithfully to socially good fiduciary purpose ✘
In the 19th Century, the vast personal fortunes being accumulated by industrialists in the newly industrialized, urbanized and monetized economy of the Industrial Age, adapted the time-honored legal construct of ownership in trust, commonly used for widows and orphans, for use as ownership structures for endowments to support foundations for giving to public charities and civil society cultural institutions, including universities, museums and others.
Early in the early 20th Century, this trust structure was further innovated and adapted as the ownership structure for actuarial risk pools created to use the Science of Statistics, the Mathematics of Probabilities and the Laws of Large Numbers to average across a statistically significant population of statistically significant individuals, the actual costs of providing retirement income security to working people after they could no longer keep working in an even more industrialized, urbanized, monetized and globalized economy.
These trusts, for philanthropy/civil society and retirement, are unlike the family trusts that they evolved out of, in that they became very, very large, operating very programmatically, and were self-perpetuating across the generations.
As trusts, these legal forms of ownership fell squarely within the well-established legal rules of fiduciary duty, and are bound by well-established principles of prudence and loyalty going back 1,000 years, or more.
This means that the fiduciaries who control these fiduciary ownership constructs, and exercise plenary authority over how the money aggregated into these legal constructs can, should and will be deployed as financing for enterprise that shapes our economy, are burdened under the law with the duty of prudence in the exercise of their fiduciary powers in undivided loyalty to their fiduciary purpose.
Here’s where things get complicated.
These social constructs of Pensions & Endowments are large, they operate programmatically, and they are ongoing. That gives them the powers of size, purpose and time that family trusts just do not have. This gives them a power to negotiate that family trusts also do not have.
And their purpose is to continue, and to continue delivering the benefits of dignity that comes with future income security in retirement (pensions) or for civil society (endowments) now and in the future, both equally, across the generations, forever.
Family trusts are only for one generation. They are not ongoing.
This means the nuances of fiduciary duty developed in the context of alter-ego generational family trusts must be updated to reflect the unique power and the unique purposes of Pensions & Endowments as institutional fiduciary owners of intergenerational fiduciary money.
These extraordinary fiduciaries have the power to negotiate, so they must also have the duty to use that power, and to use it prudently, in undivided loyalty to THEIR fiduciary purpose.
Again, their purpose is to be there, providing the dignity of future income security across the generations. Which means they must also have a duty to negotiate for income security in a dignified future.
This also means that the evidentiary standards of what is properly prudent and loyal for Pensions & Endowments, as superfiduciaries, must be upgraded to reflect, and to conform to, the uniqueness of their power, to negotiate, and their purpose, to negotiate for income security into a dignified future.
Standardizing On The Prudent Person
The first time the law revisited the standards of fiduciary duty as they apply specifically to Pensions & Endowments was in 1972.
In that year, in the United States, the National Commission on Uniform State Laws, at the end of its annual meeting in Phoenix, Arizona, in August, promulgated something they called The Uniform Management of Institutional Funds Act.
The National Commission on Uniform State Laws is a volunteer organization of lawyers who study the idiosyncrasies between the laws of the several states of the United States to find differences between the laws of the several states that appear to have no real substantive importance to state policy and so create unnecessary complications for citizens and businesses living and working in a single national economy that crosses across state lines.
A uniform law is what is called a model law, or piece of legislation, that is recommended to the several states for their adoption, so that the laws of the several states are uniform across state lines, That is, they are the same in the different states.
A uniform law is not actually a law unless and until it is enacted into law by the legislature of a given state.
The Uniform Management of Institutional Funds Act is an interesting case because it does not seem to actually have been written to resolve idiosyncratic differences in the law of fiduciary duty across the several states.
Rather, it addresses a long-running flip-flop within the common law (that is, court made law, as opposed to laws made by legislatures) between the Legal List and the Prudent Person as the evidentiary standards of faithfulness for fiduciaries.
The Legal List is a rule applied in some decisions, through which the judge decides what investment choices will be accepted as prudent for a fiduciary. These are historically limited to interest-bearing loans to governments and real estate, which are considered “safe”, and not speculative.
The Prudent Person is a rule applied in other decisions, through which the judge does not make the decision about prudence, but instead looks to the actual experience of reasonable people of relevant knowledge and experience as the standard of what is prudent for a fiduciary.
These differences are not idiosyncrasies of different state law histories. They are very different expressions of a core principle of jurisprudence.
Nonetheless, this difference in juridical standards was taken on, in 1972, as a proper subject for solution through a uniform law.
The explanation may be that interest rates alone were not sufficient to support the pension promise. They were certainly not sufficient to support the new federal income tax rule for foundations, passed in1969, requiring a 5% annual payout in a 3% interest rate environment.
It was this new rule for foundations that inspired Ford Foundation to commission a study of the law and the lore of fiduciary duty, the conclusions of which show up codified in the new Uniform Act., which was quickly passed into law in at least 43 different states, making the Prudent Person standard the law of the land.
An Innocent Mistake
that has Become an Opportunity
The Prudent Person looked to under the new standard of fiduciary prudence was the reasonable business person of ordinary business skill and experience, when making investment decisions with their own money for their own account, as individual investors.
This is a mistake that passed unnoticed because, truth be told, at that time, in the early 1970s, the investment choices available to individuals and institutions were pretty much the same.
Having made that mistake, however, the law never looked back. And THAT is the mistake we now must correct.
Harvard Management (not Ford Foundation) was first to explore the possibilities of the new lore that it was fiduciary for them to speculate on share prices as long as they diversified to manage risk.
Since Harvard Management did not at this time have any expertise at managing diversified portfolios of share price trading positions, they contracted with a recent graduate of Harvard Law School named James Bailey, who founded a new investment management firm called Cambridge Associates to provide portfolio management services to the various endowments for Harvard University, that the University administered through Harvard Management.
The arrangement was a success. Cambridge Associates proved skillful at managing diversified portfolios of share price trading positions. Harvard re-upped. And Cambridge Associates “took their show on the road”, signing up other college and university endowments as institutional investor clients for its innovative, new institutional investment portfolio management services.
The business we now know as Institutional Asset Management – or just Asset Management – was born.
This new business of Institutional Asset Management for institutional fiduciary investors grew in popularity quickly, and by the 1980s vast amounts of fiduciary money owned by university endowments, endowed foundations and defined benefit pension actuarial risk pools were pouring into the share price trading markets, creating a seemingly insatiable demand for corporate gigantism and the financial innovation of acronyms: LBOs, MBOs, CMOs, MBSs, ABSs, and all manner of securitized loan portfolios, mostly of consumer debt: credit cards, auto loans and home mortgages.
Venture Capital took off during the 1970s, soon followed by private equity, derivatives, infrastructure and real assets.
All of this portfolio design innovation was driven by the growing demand from fiduciary institutions for institutional grade investment options. But none of these financial products were actually designed with the fiduciary duties of institutional fiduciaries to negotiate for fiduciary minimums in a dignified future in mind..
None of these products were, or are, fiduciary.
An opportunity to correct this mistake appeared in 1983, when Lotus released its 1•2•3 software suite for IBM desktop computers running Microsoft DOS.
This suite included spreadsheets, that gave financial experts the power to model expectations for future enterprise cash flows, iteratively, in real time.
This meant that Pensions & Endowments could now use their institutional fiduciary power to negotiate to negotiate agreements on formulas for sharing in enterprise cash flows, directly, designed to realize fiduciary minimums from fiduciary-grade cash flows that prioritize social and environmental justice in the conduct of commerce, for dignity and longevity.
But nobody noticed.
Next Up: The Need for New Words, New Frames, a New Vocabulary