Is what’s shaking the economic landscape just a simple banking crisis? Or is there – as so many feel, and as the tremors indicate – something more hidden just beneath the surface?

Let’s begin with a quick explanation from the ever-incisive Tyler Cowen. He notes:

“What is distinctive today is the drying up of market liquidity — the inability to buy and sell financial assets — caused by a lack of good information about asset values…Market prices have been drained of their informational value.”

Bolding’s mine - that’s an excellent beginning.

But Tyler doesn’t talk about root causes: why have prices been drained of meaning, especially to an extent never seen before?

To a very large extent, because that’s exactly what orthodox strategy tells firms to do.

Competitive advantage is fundamentally about making markets work less efficiently. One catastrophically effective way to do that is to hide and obscure information – to gain bargaining power relative to the guy on the other side of the table.

In finance, those lessons achieved a profoundly perverse apotheosis: it was, ironically enough, Wall St itself that finally succeeded in making markets fail faster, harder, and more intensely than anyone dreamt possible.

How? By building what Nouriel Roubini and Paul Krugman have aptly called a shadow financial system: a parallel value chain created to actively obscure and trap information.

The shadow financial system reached its inevitable - and absurd - endgame with the rise of dark liquidity pools – trading networks set up to explicitly and actively hide information, and prevent true price discovery from taking place. A healthy financial system, of course, needs dark pools about as much as a fish needs a bicycle.

Dark pools, the shadow system - all these elaborate ruses of orthodox strategy, of course, have gotten finance players nowhere but directly into deep losses and strategy decay. Witness a once-proud Bear Stearns catastrophically blown up with frightening speed and ruthless precision.

So what do we do when orthodox strategy has taught even the market-makers to subvert markets – but still no advantage is to be found? Is the answer simply more regulation? Nope. No amount of regulation can lock interaction down when I can trade from on any beach in the world from my iPhone - and no amount of regulation can put advantage back into broken value chains.

There’s only one real answer: rethinking strategy itself. A world of cheap, abundant, always-on interaction, where value is shifting to the edges, demands a fresh understanding of what’s truly strategic and what’s not.

Here’s a quick example. Where orthodox strategy advises hiding information and making things less liquid, what does edge strategy advise? Exactly the opposite: release information bottlenecks and make things more liquid.

Why? An edge principle: we’re both always and everywhere better off not dealing in lemons at all - because what goes around comes around. If I sell you a lemon today, you might hack it, tweak it, remix it, and sell it back to me slightly altered tomorrow. Sound familiar? It should - it’s essentially the story of why structured products are imploding.

But there’s a much deeper point here; a much bigger reason we need radically different approaches to strategy built for today’s new economics.

It’s simple: orthodox strategy doesn’t stop at finance. Strategy as shadow-making, moral hazard, and market subversion is rife across the economic landscape, from food, to pharma, to autos, to media. It’s what the industrial-era firm has hardwired into its stale, tired DNA.

If you really want to see the bankruptcy of orthodox strategy in action, click those links - and spend a few minutes thinking about how those industries (and more besides) have spent the better part of a century and countless billions creating more and more elaborate shadows to hide behind.

As in finance, the victimizer is becoming the victim: as interaction accelerates, these industries are increasingly falling victim to the games orthodox strategy so earnestly taught them to play.

Orthodox strategy was made for an industrial massconomy. And that, I think, is the real root cause of the macro crisis: the exploding divergence between today’s economics, and strategy trapped in a distant, faded, rusting past – consigning firms to act out, like mute players on a stage, moves bereft of imagination, meaning, and purpose.

The macro crisis isn’t really just about Bear Stearns and a handful of banks: rather, as we’re all belatedly discovering, orthodox strategy itself is no longer sustainable. For society, for people, and most of all, for the corporation.

This was a tough post full of dense issues, which we’ll explore in much greater depth – for now, let’s kickstart some discussion. Do you see places in your industry where strategy by the book limits value creation? What do you think edge strategy for finance players might look like? What do you think is toxic about orthodox strategy – if anything at all?
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