THE PERCEPTION REALITY DIVIDE REVISITED’


In one of the earlier editions of the Ghost in the Machine back in 2016 (click here to read) I wrote about the disconnect between the financial and the real (non-financial) economy.


I noted that it was anything but a new phenomenon, but the disconnects are in no small part attributable to a deep-seated human yearning for stability, in which the familiarity of the ‘status quo’ is generally perceived as preferable to the uncertainty of change. This is known as ‘stasis’ or ‘inertia. I also noted the applicability of Hirschman’s ‘Hiding Hand’ which argues that creativity is the key problem-solving tool when we face unexpected situations; and that it is only via the experience of impotence when faced with the unexpected that we develop the innovative knowledge to solve problems, and that ‘rational choice’ dogma often stifles innovation and creativity. Alternatively one could also look to Einstein, who correctly observed that ‘we cannot solve problems with the same kind of thinking that created them’. In the current context, AI is and will be a very helpful tool in both problem solving and innovation terms, but the ultimate arbiter will be whether we ask it the right questions, above all from a systemic perspective.


I cited the examples of how financial engineering (or ‘Zaitech’) led to Japan’s lost decade, and the NIRP, ZIRP and QE ‘remedies’ deployed in the wake of the Global Financial Crisis. I noted that the lack of what might be termed ‘joined up thinking’, both in respect of crisis causes and crisis remedies, may prove with the benefit of hindsight, to be ‘primus inter pares’ in the ‘Reality Perception Divide’. I noted that most theories and many phenomenological investigations falter on their assumptions about what is a constant and what is a variable. In theory, ZIRP, NIRP and a deluge of liquidity should have dis-incentivized saving and incentivized spending, while low debt servicing costs should have facilitated and encouraged borrowing for investment of all forms, as well as extending existing financing for longer periods with significantly lower debt servicing costs. However, as has been the


case with psychology’s yearning for recognition as a ‘science’, the empirical directive too often attempts to ‘iron out’, or even exclude, the contextual ‘noise’ (in this case the broad realm of supply chains) which, later in the post hoc historical evaluation, frequently proves to be the element that is highlighted as (often politically expedient) a display of wilful blindness, or dogmatic wishful seeing, predicated on the comfort of a stability born of inertia, and rejecting change and above all conflict.


The final observation of the prior article related to price formation and debt. ‘Financial market participants’ are ex-ante always more interested in the demand side of any economy, rather than the supply side, outside of the obvious interest in supply/demand mismatches. These mismatches are however primarily seen through the lens of demand ‘growth’ and (maximizing) ‘pricing power’ in the hope of high levels of returns. All too often, and above all at that juncture (ca. 10 years ago), this results in insufficient attention to the changing dynamics of supply, above all with respect to production (in all sectors). There can be little doubt that what has been termed the ‘fourth industrial revolution’ or the marvels of the technology (in the very broadest sense of the word) boom has a very profound effect on price formation. Situationally it was similar to the profound shift in underlying processes that was seen in the late 19th century, a period in which the economies at the forefront of the then ‘industrial revolution ‘ experienced protracted periods of deflation. I noted that the ‘dotcom’ technological boom had a much lower demand for capital, raw materials, facilities and labour than previous boom cycles associated with the arrival of trains or motorized vehicles, (and that it is also true that many associated new products very often have a short business cycle).


THE FOURTH INDUSTRIAL REVOLUTION PROFOUNDLY IMPACTS PRICE FORMATION, ECHOING LATE 19TH-CENTURY SHIFTS, AS FOCUS ON DEMAND OFTEN OVERLOOKS THE EVOLVING DYNAMICS OF SUPPLY AND TECHNOLOGICAL CHANGE.


18 | ADMISI - The Ghost In The Machine | Q4 Edition 2025


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