POSIWID: the purpose of a system is what it does

The history

In the Thinking Ahead Group we have spent well over a decade thinking about investment as a system. We are at least as interested in the macro behaviour of the industry, as we are about the micro behaviours of the various agents. Then we formed the Thinking Ahead Institute with the stated purpose of changing the investment industry for the benefit of the end saver. In effect we wanted to encourage the industry to (re)align itself to better serve a social purpose – to strengthen its licence to operate.

The painful recognition

In 2017 one of the Institute’s research streams was investment as an ecosystem. We held a couple of topical days as part of the exploration. One of my personal goals was to understand whether an ecosystem could have a social purpose. Professor Mark Pagel was very clear that biological ecosystems had no intrinsic purpose. The fact that they happen to produce oxygen, tasty protein and recycle waste (amongst other ‘ecosystem services’) is very convenient for us humans. But nothing in a biological ecosystem is aiming towards those goals. He therefore suggested that this, ie an absence of over-riding purpose, was the starting point for considering human-made ecosystems, such as the investment industry.

Even with this helpful guidance, I still didn’t get it. It has only been in pursuing our research this year into value creation that I have run into the acronym POSIWID – the purpose of a system is what it does. I think I get it now. But the realisation that I am a slow learner has been painful.

What does it mean?

The essence of POSIWID is to counter the notion that we can infer the purpose of a system from the intentions of those who design, operate, or regulate it. The originator of the phrase, Stafford Beer, stated that it gave a better starting point for understanding (rather than attributing good intentions, moral judgements or even knowledge to the system). In turn, for the investment industry, this means two things:

  1. It is beyond the power of any agent, even a regulator or a government, to impose a social purpose on the industry, and
  2. If we want the investment industry to pursue a better social purpose, then we need to change what the industry does.

Where to from here?

I believe that POSIWID is powerful insight for us and the working group to consider in the value creation research this year. For example, in response to the first point above, we should accept that no single agent can impose a purpose – but that doesn’t mean an absence of influence. Could a sufficient number of purposeful investment professionals influence a sufficient number of investment organisations to change the industry? How large might that coalition need to be, to be successful? How much effort should be spent persuading regulators or governments to add their influence?

And the second point above is potentially deep, and throws off a number of questions, such as: what do we think our industry does? What does our industry actually do? If these answers are different, why is that? (Spoiler alert: I think the answers will be different, because we think our industry still does what it once did, such as allocate capital, but the passage of time and the adaption of the system means what we actually do is now different (listed equity markets are now net returners of capital)). What should our industry be doing? And what would we need to change to accomplish that?