A review of “The Great Transition” by Emmanuel Daniel

A intellectual foray in the accelerating pace of change — and shape — of financial services

“Study hard what interests you the most in the most undisciplined, irreverent and original manner possible.” — Richard Feynman

Late November of 2015, a message popped-up in my email inbox. In it, an opportunity to speak at a Hong Kong FS innovation-themed event was eloquently expressed. It was organised by a premier FS publication, The Asian Banker.

Being a no stranger to taking interesting eye-opening opportunities and learning from them — it paved a road to an introduction with a noble character of a founder behind the Asian Banker.

Learning from Emmanuel and his (almost always) youthful — and daring - worldview on FS concepts was a breath of fresh air — stifled by a polite conference-speak about the (often hollow) notions of a need for change.

It still is and with pleasure I’ve decided (dusting off the web panel of this Book review blog of mine) to review his book he published in 2022.

It’s a provoking read — showing the intellectual prowess of the author and his detailed understanding of regional trends w.r. to regulation, its application by traditional players, the irreverent disruption of these rules by new entrants, as they re-interpret the meaning of finance — and the ensuing fast evolution of both regional and global financial services fabric.

The Great Transition may sound pompous as a title — as numerous authors believed in their respective eras — in the monumental change that happened there and then:

• Be that in the medieval times of Florence as it and Venice scaled the adoption of double-ledgers used by the banker’s guild as they got access into aristocracy that ruled the spice-monopolies;
• Or at the times of the Dutch and then England’s East Indian Companies, that liberalised though the legal model of a public companies the mobilisation of credit — and lowered the cost of capital (and risk of losing it);

The pomposity feeling arrives as Emmanuel is great in providing dazzling amount of examples that manifest the change — but the sceptic would look for proof if these provided cases are here to stay for the long-term.

Talking about change and declaring its being irreversible without the explanation of the underlying trends that allow them to exist — is important, since some of the heralded examples fizzled out after the book’s been written: the evaporation of (cheap) capital, that became almost the norm between the Great Recession and the COVID stimulus , — terminated the Axie Infinity’s experiment on the Web3 front, dented FTX and Binance, rocked Creditease and Coinbase— and even dismantled Silicon Valley Bank and Signature Bank.

Those who look for practical guidance (as often practitioners who follow professional literature would) might be dissapointed.

There are still numerous vital examples of new models around mobilising capital, deploying it effectively, conscripting either cheap labour or utilising industrialised tech — all these happened because of the underlying availability of capital — and it enabled a pond for experiments (just like at the times of the talented John Law, who, while becoming advisor of the French kind Louis XV, proposed to stimulate the economy with paper money and implement private-public partnerships to lower debt burden of the French Crown).

Without this back-bone, at least in my view, the book is more of a artfully-built reference to all the changes that happen — from top of the trends that we see — to the very operational detail, listing operators that use the waves formed by the forces of financial physics.

The arc of “personalisation of finance” and “financialisation of industries” that money serve —connects with the models that depict evolution of industrial tech: monikers of Finance 1.0/2.0/3.0 evoke similar designations by Klaus Schwab (mentioned by Emmanuel) of Industry 1.0/2.0..4.0 , or that of Web 2.0 / Web3. Of course, these trends are often connected: the evolution of finance happens in parallel with new mediums it populate. It might look that the various examples used to prove the point the author use in passing. Nerds would argue, for example, if the industrialisation of information happened in 1980ies with Bloomberg, but not with Robert Lucas Nash who did the same dissecting and proposing accounting methods to study British railways in the 1840ies, or with Henry Varnum Poor, who, a decade later, while being editor of the American Railroad Journal, started analysing railroad stocks and management /operational techniques used by them.

What is important, is that Emmanuel’s knowledge of the listed concepts is not theoretical, but based on first-hand knowledge and personal connection with the leaders behind them.

In a way, the book looks like a practical discourse ensuing from the economic treatise on the alchemy of capital — and how the process of capital formation was impacted by state policies during the last 2 decades — well described by Mervyn King in his book (below):

Financialisation we witnessed in all aspects: the acceptance of broad debt-fuelled economic expansion: quoting from McKinsey Global Institute’s “MGI “Global Balance Sheet series: The future of wealth and growth hangs in the balance”:

During the last three decades, each USD 1.00 in net investment generated USD1.90 in net new debt.

In aggregate, the global balance sheet grew 1.3 times faster than GDP, consisting of USD 610 trillion in real assets, USD 520 trillion in financial assets outside the financial sector, and $500 trillion within the financial sector.

Debt rose faster than net investment, as did paper wealth.

During 2020 and 2021, global wealth relative to GDP grew faster than in any other two-year period in the past 50 years. The creation of new debt accelerated to USD 3.40 for each USD 1.00 in net investment.

That provided ample fuel for experimentation.

What I loved about the book in particular was the model seen through nearly all examples given (both practical cases in financial services, and in reference cases from different industries / timelines):

• Change often starts with the power of individuals — who inspire new models to form;
• They often accumulate solid following around them — and its through the power of the collective models / networks — that they both scale — and accumulate data formed by societal usage;
• The late addition to the equation is the growing power of algorithms — sifting through the collective / collected data — reinforcing the outcomes or defining completely new ones. Especially with the arrival of LLMs that went onto the headlines after the book has been published — this is a new paradigm shift with how information is treated — and even (re)formed.

What is probably lacking — and that is also seen in the book: is the audit model — formed out of verifiable trust in the algorithm or via established procedures, since, again, several lauded experiments came to naught because of vanity or failty motivations of those parties promoting them.

As the world became one global village — the veracity of messages shouted in it is being tested by both malign political actors and by speculators.