VideoUnless Y2K turned out to be a much bigger catastrophe than most experts predicted, this issue of CFO reaches readers with 1,200 months to go until year-end 2099. No one can say for sure, of course, what the heirs of today's finance professionals will face by the next fin de siècle. But the future of the capital markets in the new decade certainly is fair game for informed speculation. And who better to weigh in than the intellectual pioneers who helped shape finance and investment in the 20th century? CFO invited thoughts from a select few, asking what senior finance executives face in the next 10 years. Responding were four Nobel laureates--Paul Samuelson, Harry Markowitz, William Sharpe, and Robert Merton--and the country's preeminent economic historian, John Kenneth Galbraith. Happily, these great minds do not think exactly alike. Except for some tweaking from Galbraith, though, they generally express optimism about the finance world ahead.
Paul A. Samuelson
Besides fostering the development of static and dynamic economic theory, Paul Samuelson secured a place for rigorous analysis in the field of economics. For these far-reaching achievements, in 1970 Samuelson became the first American to receive the Nobel Prize in Economic Science. Now 84 years old, he is the Institute Professor Emeritus at Massachusetts Institute of Technology.
FATE SOMETIMES CONTRIVES A SILVER LINING in the dark clouds. U.S. productivity fell in the early 1930s, and by 1940 was back only to our 1929 previous peak. That meant a whole lost decade. But as John Maynard Keynes predicted when he came to wartime Washington, D.C., there had accumulated during the depressed decade new but unused knowledge. It was proved that Keynes was near the mark when, by 1945, U.S. productivity had reached to as much above 1930 as 1930 had been above 1915.
I suspect a similar surprise may be in store soon for Euroland and Asia. If their slump is indeed behind them, then by 2005 they may find themselves at a level of living and a pace of progress that the pre-1990 trend statistics would have predicted to take place, in the absence of (1) the land bubble and the stock bubble that affected Japan so mortally, and (2) the post-1997 Asian flu.
There is no magic or miracle in this sanguine hypothesis. It rests only on good sense.
- Persistent stagnation has been putting effective pressure on corporations everywhere to break out of the careless habits formed during the easy bubble years. Inefficient practices must be modified under the ruthless, competitive forces of the modern global economy.
- A store of new technologies is constantly accumulating. When given a chance by a return of macro prosperity, that store will increasingly be drawn on.
- Knowledge is spreading everywhere. People in still-underdeveloped regions have become clever importers of new knowledge wherever its origin.
The worldwide golden age I am envisioning for most societies depends on how well the macro global economy holds up in the next five years. Here, too, the objective signs look favorable.
None of what I am writing is guaranteed to happen. Economics is not a predictable science like the astronomical motions of the several planets. International recovery efforts could falter. A Wall Street collapse could ignite a turn-of-the-century global panic. The European Monetary Union could explode or implode.
The art of judgment in political economy is not to deal primarily with possibilities. Worst-case scenarios can always frighten. Probabilities and plausibilities are what prove useful in the long run.
Harry Markowitz
Harry Markowitz realized around 1950 that notions of expected return on stock constituted only a portion of the information investors require in an uncertain world. The need to account also for risk--the beta factor- -gave rise to his doctoral dissertation, the first building block in what is called modern portfolio theory. For demonstrating the link between diversification and investment risk reduction, Markowitz, who is now 72 and professor emeritus at City University of New York, shared the Nobel Prize in 1990.
I VIEW THE CURRENT STATE of portfolio theory with a sense of accomplishment and humility. On the one hand, thanks to the contributions of many, we have a much better understanding now of the sources of risk for a portfolio of assets and liabilities. On the other hand, there is no demonstrably correct way of estimating the inputs required for a risk- return or value-at-risk analysis. In particular, those responsible for financial risk control should periodically ask themselves whether there is some source of systematic risk that they are overlooking, and how this risk should enter their analyses and actions.
As to the future, the world is getting faster and no less risky. The need for risk analysis and control will not diminish. Certainly E- commerce is here to stay, and it will revolutionize many important aspects of our lives. But it will still be true, as before, that entrepreneurs will try to make money. Some will win, some will lose; it is just part of the free enterprise system.
Risk has been the same since the caveman. Modern portfolio theory has developed apparatus for risk evaluation and control. This apparatus, subject to further enhancement, will carry forward into the risk world of the future.
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