The real economy could not escape infection. Companies flourished by inflating their scope and ambition to feed the desire for magical thinking. WeWork, a mundane business that provided flexible work spaces, was portrayed as a spiritual enterprise that would remake the human condition. Its valuation soared, obscuring the questionable activities of its founders. Facebook and Google reconceived themselves as technological powerhouses, rebranding as Meta and Alphabet, respectively. They sought broad capabilities that they could flex at will in the metaverse or with their “moonshot projects” when, in fact, they are prosaic (if extremely effective) advertising businesses. They are now struggling with many of their fantastical efforts.
Most broadly, many corporations have come to embrace broader social missions in response to the desire of younger investors and employees to use their capital and employment as instruments for social change. Another manifestation of magical thinking is believing that the best hope 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 confess that this screed reflects my own experience. For the past decade, being a finance professor meant being asked about crypto or about novel valuation methods for unprofitable companies — and being smiled at (and ignored) when I would counter with traditional instincts. Every business problem, I am told, 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 giddiness and widening corporate ambition have been taught to chase these glittery objects with their human and financial capital instead of investing in sustainable paths — a habit that will be harder to instill at later ages.
Embracing novelty and ambition in the face of huge problems is to be lauded, but the unhinged variety of these admirable traits that we have seen so much of in recent years is counterproductive. The fundamentals of business have not changed merely because of new technologies or low interest rates. The way to prosper is still by solving problems in new ways that sustainably deliver value to employees, capital providers and customers. Over-promising the scope of change created by technology and the possibilities of business and finance to a new generation will lead only to disaffection as these promises falter. All those new investors and crypto owners may nurse a grudge against capitalism, rather than understand the perverse world they were born into.
The end of magical thinking is upon us as cryptocurrencies and valuations are collapsing — and that is 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 be worth nothing. Existing institutions, flawed as they are, should be improved upon rather than being displaced. Risk and return are inevitably linked.
Corporations are valuable socially because they solve problems and generate wealth. But they should not be trusted as arbiters of progress and should be balanced by a state that mediates political questions. Trade-offs are everywhere and inescapable. Navigating these trade-offs, rather than ignoring them, is the recipe for a good life.
