Meaning | The crypto collapse and the end of magical thinking
The real economy could not escape contagion. Businesses flourished by increasing their scale and ambition to fuel the desire for magical thinking. WeWork, a mundane business that provided flexible workplaces, was portrayed as a spiritual business that would recreate the human condition. The valuation rose, obscuring the dubious activities of the founders. Facebook and Google perceived themselves as technological powerhouses, and changed their brand names to Meta and Alphabet respectively. They sought broad capabilities that they could use at will in the metaverse or with their “moonshot projects” when in fact they are prosaic (if extremely effective) advertising enterprises. They are now struggling with many of their wonderful efforts.
Broadly speaking, many companies have begun to embrace broader social missions in response to the desire of younger investors and employees to use their capital and employment as instruments of social change. Another manifestation of magical thinking is believing that the best hopes for progress on our greatest challenges—climate change, racial injustice, and economic inequality—are corporations and individual investment and consumption choices rather than political mobilization and our communities.
I admit that this screed reflects my own experience. For the past decade, being a finance professor meant being asked about crypto or about new valuation methods for unprofitable companies—and being smiled at (and ignored) when I wanted to counter traditional instincts. Any business problem, I’m told, can be solved in radically new and efficient 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 economic giddiness and rising corporate ambitions have been taught to chase these glittering objects with their human and financial capital rather than invest in sustainable avenues – a habit that will be harder to inculcate later ages.
Embracing novelty and ambition in the face of enormous problems is laudable, but the unhinged variety of these admirable qualities that we’ve seen so much of in recent years is counterproductive. The fundamentals of business have not changed simply because of new technology or low interest rates. The way to progress is still by solving problems in new ways that sustainably deliver value to employees, capital providers and customers. Over-promising the scale of change brought about by technology and the possibilities for business and finance to a new generation will only lead to discontent as those promises falter. All the new investors and crypto owners may harbor a grudge against capitalism, instead of understanding the perverse world they were born into.
The end of magical thinking is upon us as cryptocurrencies and valuations collapse – and that’s good news. Vested interests will resist that trend by continuing to propagate fictions. But rising interest rates and a return to more routine business cycles will continue to fuel the rude awakening that began in 2022.
What comes next? Hopefully, a revitalization of the great American tradition of pragmatism will follow. Speculative assets with no economic function should be worth nothing. Existing institutions, flawed as they are, should be improved rather than supplanted. Risk and return are inevitably linked.
Companies are socially valuable because they solve problems and generate wealth. But they should not be trusted as arbiters of progress and should be balanced by a state mediating political issues. Trade-offs are everywhere and inevitable. Navigating these trade-offs, rather than ignoring them, is the recipe for a good life.
