The Powers and Paradoxes of Paradigms

The idea of “paradigms” is itself a very useful paradigm.

Confused? Read on – I’ll try to explain why the idea is a useful one despite the fact it’s become such a cliché of management speak.

And then I’ll suggest how it can be useful for investors and others in financial markets in the age of Paradigm-Buster-in-Chief Donald Trump.

The word “paradigm” came into widespread use after the philosopher of science Thomas Kuhn published his ground- breaking book “The Structure of Scientific Revolutions” in 1962.

Kuhn had a new vision of how science works. Before Kuhn, science was widely conceived of as a predictable evolutionary process. It was seen as making smooth, linear progress toward a deeper understanding of the natural world.

Scientists made observations, built theories to explain them, and then confirmed – or disconfirmed – them through experiment and observation. Those theories were then fleshed out incrementally over time.

Kuhn saw something very different.

He believed science alternated between long periods of stability interrupted at times by revolutionary change. Paradigms were the force responsible for that pattern of growth.

In Kuhn’s theory, paradigms were dominant ideas or networks of ideas that guided research. He described them as “universally recognized scientific achievements that, for a time, provide model problems and solutions for a community of practitioners.”

 One of the best and most frequently used examples is Ptolemaic astronomy, the complex model of the skies that basically defined how astronomy was understood in the West of hundreds of years before the Renaissance.

During that period, astronomers added to and refined the Ptolemaic model, but didn’t question its basic assumptions. One of those assumptions was that other astronomical bodies revolved the earth – the sun, the planets and the stars.

The Ptolemaic house of cards eventually came crashing down. It was replaced by another paradigm, the Copernican, built on the premise that the earth revolved around the sun.

The transition from Ptolemaic to Copernican was a scientific revolution, where one paradigm was abruptly replaced by another.

You may be wondering how any of this is relevant for businesses, investors and others who have to navigate through today’s volatile market and economy. But being aware that your perceptions and actions are governed by paradigms can be a useful tool.

There’s an event that illustrates that point vividly – Hilary Clinton’s defeat by Donald Trump.

Clinton and her team were trapped in a paradigm, a vision of the economic and political worlds that didn’t resonate with enough voters.

The underlying vision of the Clinton campaign was “business as usual.” They assumed the neo-liberal policy framework that guided the US in the last few decades would continue to work, and required at most some policy tinkering on the margins rather than fundamental change.

It was a vision that was rejected by enough Americans to hand the White House to her rival Donald Trump, once the numbers were processed by that peculiar institution known as the Electoral College.

How did it happen?

That’s another area where Kuhn’s theory can be helpful.

Kuhn believed paradigms don’t exist in isolation. Instead, they are associated with something he called a “disciplinary matrix.” That’s the network of people, ideas and institutions that spring up in the wake of a new paradigm. Think of all those ancient astronomers whose life work was buttressing Ptolemy’s model of the universe even as the data increasingly suggested something was wrong.

Kuhn believed such institutions could be powerful conservative forces standing in the way of paradigm change. That’s a very practical reason for that. Scientists and researchers have a vested interest in defending the paradigm they’ve nurtured – it’s the basis of their own success and position. Keeping it intact can be essential for job security.

Novelist Upton Sinclair put it more bluntly, saying “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”

 The paradox is that a paradigm’s power – its ability to explain facts and generate new ideas – at a certain point flip it over into something very different. As more and more people have a vested interest in defending it, it becomes an orthodoxy, with its adherents ignoring new facts and suppressing new ideas to protect it.

It’s interesting that both of Clinton’s opponents – Bernie Sanders in the Democratic primary and Donald Trump in the general election – were political outsiders.

Their distance from the political establishment likely helped inoculate them against the paradigms behind the Clinton campaign, enabling them to understand what was going on out in the “real world” and devise campaigns that were more attuned to that.

Realizing that you’re in the grasp of a paradigm that may need changing isn’t easy. Getting out of one can also be difficult. There’s often a temptation to tinker with an investment thesis or a business model when it starts to misfire, but such tinkering often doesn’t amount to a paradigm change.

The Slovenian philosopher Slavoj Zizek has drawn attention to that point, writing that when a paradigm is in crisis “attempts are made to change or supplement its theses within the terms of its basic framework.”

A true paradigm shift takes place when, “instead of just adding complications and changing minor premises, the basic framework itself undergoes a transformation,” he writes.

 “Sticky” paradigms are certainly evident in financial markets. One good is example is the period in 2010-11 when the “risk on/risk off” paradigm was a key driver in foreign exchange for and other asset markets for months – so much so that some analysts called it the “World of One Trade.”

The “Trump Trade” that drove up the value of US stocks and the greenback and other assets in the wake of Trump’s electoral win is a good example of how rapidly a paradigm can become entrenched – and overthrown. It may already be reaching its best-before date; the U.S. dollar has relinquished much of the gains it made on the Trump Trade, and the stock market now seems to be at least partially retreating from it, as well.

“Trumpflation” and “risk on, risk off” aren’t exactly on the same level of depth and sophistication as the “universally recognized scientific achievements” that Kuhn cited in his groundbreaking work.

It may be that the paradigms in the financial world tend to be more slapdash and shorter-lived then their equivalents in science, reflecting the difference between the worlds they emerge from.

But that just creates opportunities for those who can in front of the curve in identifying emerging weakness in paradigms and “shorting” them.

Making transformations stick sometimes requires changes to the institutional “infrastructure” that supports the existing paradigm.

Gillian Tett makes a similar point in her influential book Silos – sometimes the silos within a corporation or other organization need to be replaced in order to bring real change.

But as she documents in that book, the payoff to such transformations can be immense.

Just think of what the world gained when astronomers abandoned the Ptolemaic paradigm – and finally embraced the idea that the Earth actually revolves around the Sun.

Don Curren