Value = f (Innovative Education, Efficient Intermediation)

Amid the billions of $ wasted in the financial industry in forecasting financial asset values based on historical prices and financial statement analysis, two basic principles seem to have been forgotten.

(a) Financial assets are a mechanism to divide real asset values and transact

(b) Financial asset values are driven only by the underlying real asset values

Since financial asset values depend both on the current and future expectations of real asset values, any forecasting of the future, if need to be undertaken, has to start in the real markets. In real markets, value increases only by innovation and entrepreneurship. Contrary to popular belief, the behemoths of the industrial era, churning out yesterday’s products at a faster rate, aided by a low currency and the temporary appetite for status quo products from developing countries, add little value to the real economy. To improve real asset values, innovation rate has to increase and market conditions for entrepreneurship have to improve.

There are two major problems here for the economy – one strategic and the other tactical. On the strategic side, we have to create conditions that nourish innovation. Education is an important component of it. However, status quo designs of education systems rely on ideas from the last century – when prescriptive syllabus aided by physical experimentation was considered best. Such education may not improve innovation and may create a generation of educated people looking for jobs when no such jobs are available. A modernization of the education system and significant investment in this area will ultimately improve innovation and real asset values.

On the tactical side, we have to remove the impediments that currently exist for efficient flow of capital to those who seek to advance ideas. Arrogance from getting lucky in the 90s and related incompetence is prevalent in financial intermediaries, who are supposed to be helping this process. Printing money and giving it out to large institutions in the hope that they will spread it around efficiently is a bad policy. A new financial system has to take shape – one that is much smaller and nimble and one that understand value is actually created in real markets and not in bank vaults and trading floors.

Unless we focus on both improving innovation through a redesign of the education system and improving capital flow by a redesign of the financial system, any short term gains seen in financial assets will remain, short-term.