While paradigms are broadly defined as an example or model for what we think about a particular topic, it has taken on a more detailed definition as a result of Thomas Kuhn and his seminal work, The Structure of Scientific Revolutions. In its most distilled form, a Kuhnian paradigm is the way in which a group of scientists define a common problem, the tools to address that problem and the organisational structures to police their activity and to educate others in how to “do” the discipline.
While Kuhn was notoriously uncomfortable with applying paradigms to other disciplines, I am less hesitant. My PhD looked at copyright law through a paradigmatic lens in order to gain insight into the particular disruption the field was going through in the 1990s and 2000s. As a result of my research and experience in what can broadly be called “digital transformation," I argue that a paradigmatic framework, derived from Kuhn, is a potent tool for understanding periods of disruption and uncertainty.
One of the key characteristics of paradigms is that they exist on different levels in a network of relationships. There are large-scale paradigms, like American-style capitalism, which shape large swaths of population. Within that paradigm, there are more focussed paradigms, such as fintech.
The two paradigms interact with each other. Capitalism is the environment within which fintech operates. At the same time, what happens in fintech can have an impact on the larger capitalist paradigm. A recent study looked at how fintech supported the development of “green growth,” thus supporting an important shift in the nature of capitalism.
The nested, relational aspect of paradigms is important as we look at how paradigms change. These changes, or paradigm shifts, are essential to understand the nature of disruption, innovation and uncertainty. Once we understand the process of paradigm shifts, we can then adapt our businesses to the current context while preparing for the next one.
Paradigm shifts are part of the larger life cycle of paradigms. They emerge, mature and collapse. A paradigm shift covers the collapse of one paradigm and the emergence of a new one. This transition is chaotic and unpredictable. At the same time, all paradigm shifts follow the same steps. Identifying where we are in this process is the key to setting an organisation’s strategic direction.
The beginning of a paradigm shift is the recognition that there is a problem that cannot be solved by the available tools and methods. While there are always novelties and challenges, most can be answered by paradigmatic means.
To return to our example of fintech, the automation of various processes opened up the possibility of new, cost-effective services. This has disrupted the banking sector, forcing changes in business models, processes and legislation. While there is certainly disruption and some existing companies face collapse as a result of cheaper alternatives, business process automation does not fundamentally change the banking paradigm. Adjustments can be made. Incumbents adapt their business models and new “challenger” banks appear and become established.
Another problem that fintech accentuates is virtualisation of currencies. With the development of virtual money, like cryptocurrencies, traditional monetary policy and economics is fundamentally challenged. Even the IMF acknowledged the challenge virtual currency posed. They note that virtual currencies
question the paradigm of state-supported fiat currencies and the dominant role that central banks and conventional financial institutions have played in the operation of the financial system.”
None of this challenges the fundamental framing of what banking, and the wider financial sector does. It is, as Kuhn would describe it, “normal science”. This is regular advances that are made in the course of the people in the paradigm working in the field.
Virtual currencies, on the other hand, do pose a profound challenge to the entire system. If currencies are no longer controlled by a national bank, and rather by borderless and stateless algorithms and market forces, then the entire banking system is called into question.
Once a sufficient percentage of the field recognises what Kuhn called an “anomaly”, a problem that cannot be either ignored or answered within the rules of the paradigm, we have entered the first stage of a paradigm shift. It is difficult to determine the length of this period as it overlaps the next two: exploration and polarisation.
This period is characterised by growing unease. Papers such as the IMF one quoted above, appear with more regularity. There is a growing acceptance that there is a problem that needs to be addressed in some way. There may even be some disagreement as to what exactly the problem is. The IMF note on virtual currencies summarised this phase succinctly:
As a starting point, it is important to note that the VC [virtual currency] landscape is still new and rapidly changing. It is therefore not possible to fully predict the future direction and importance of these evolving technologies or to identify specific longer-term policy responses. The paper is therefore intended as a first step and a platform for further research and analysis. Many of the questions it raises are left for future discussion.”
The recognition of a paradigmatic problem naturally leads toward an exploration seeking out a new solution. What is different about exploration during a paradigm shift as opposed to the exploration that is part of the normal activity paradigm is that the explorers step out of the existing paradigm. They begin to look at novel ways of addressing the problem.
Some of these can be seen as attempts to stretch the paradigm beyond what it normally does. For example, given that virtual currencies are not tied to a specific country, there are efforts being made to extend national regulatory environments for them. This poses challenges around jurisdiction and the legality of one nation regulating activity of multinational companies who may be using virtual currencies, or expatriates who are legally transacting in another country.
Another kind of exploration is attempts to create a new paradigm. From Bitcoin to IBM’s efforts to create an open source international payments system on the blockchain, nontraditional players are attempting to develop solutions that not only utilise new technologies, but also address wider issues around globalisation, trust, autonomy and sustainability.
In the exploration phase of a paradigm shift, there is a great deal of noise and confusion as new models, technologies and businesses rise and fall. It is the moment where innovation is at its maximum, yet it is impossible to determine who the winners will be.
If we take a historic example, in the late 1600s to early 1700s, copyright was going through a paradigm shift. During that period, Lyman Ray Patterson, in his classic history of copyright, notes there were roughly four different versions vying for dominance: a publisher monopoly version, a common law understanding a statutory, author-focused copyright as well as the vestiges of the original censorship version of copyright.
The exploration phase comes as a result of the realisation that there is a profound crisis in the paradigm, one that cannot be solved by the tools and practices of the paradigm, nor can it be ignored. This exploration leads to candidates for the new paradigm and the beginning of polarisation as propaganda intensifies for the new candidates. At the same time there is also a polarisation between those who maintain that the old paradigm can, and must, solve the crisis and those who believe the old paradigm is the problem that needs to be swept away.
Returning to virtual currencies, we can see the polarisation around decentralisation, for example. The general manager of the Bank of International Settlements gave a talk at Stanford University in 2021 arguing that the only solution for digital currencies was to place them within the current paradigm of control by authorities, such as BIS, with access based on identity, not on knowledge of a cryptography key.
In contrast, proponents of decentralised finance (defi) argue for exactly the opposite. Ethereum, one of the new cryptocurrency environments, define defi as:
[A]n open and global financial system built for the internet age – an alternative to a system that's opaque, tightly controlled, and held together by decades-old infrastructure and processes.”
The lines between BIS and Ethereum are stark (polarisation). One is based on a central authority managing transactions and providing trust for all parties. The other is based on a distrust of these central authorities and the needs for a global, transparent platform for financial activity.
The exploration and polarisation cannot go on indefinitely. At some point, consensus starts to form around what the new paradigm’s problem is and the ways of answering that problem. This new paradigm begins to attract more converts. The alternative contenders gradually fade away, along with the adherents of the old paradigm. At this point, the future becomes clearer. The problem that needs to be solved is agreed and, more importantly, so are the tools and methods for solving that problem.
Emergence of a paradigm is a gradual process. To return to copyright, it took almost a century for the current copyright paradigm to establish itself fully (from 1691 when the new statutory copyright law was introduced to the last unsuccessful challenges to the new paradigm in the late 1700s).
During the consolidation of a new paradigm, new educational institutions are developed, new professional bodies emerge to regulate the paradigm and to maintain its authority. A new language is also created. It may involve importing new concepts from other fields, such as those around sustainability, from environmental science into economics. It may also involve redefining old terms in new ways. For example, copyright has gone through a number of redefinitions from the Middle Ages, when it first entered the English language to today. Originally it was the right given by the king to copy a book. This was part of the legal regime that was focused on protecting subjects from heretical and seditious ideas. With the advent of printing, it became the right to print a book and then shifted to the right an author had to gain economic benefit from their creativity.
This new language, along with the new problems and tools, points to a key characteristic of paradigm shifts: the radical break between one paradigm and another. The new paradigm is not simply a continuation of the old paradigm, but a completely new direction.
This is especially evident when we look at large-scale paradigms like industrial capitalism. If we were to go back in time before the Industrial Revolution, it would be like going to a different planet. The agrarian world view and organisation is so different from the industrial world that we would have a hard time understanding what was happening.
Understanding the characteristics of paradigm shifts is more than just an academic exercise. It is critical that business leaders are aware of the paradigm shift process in order to adopt the appropriate strategic tools and frameworks for the given context.
In order to understand what tools and strategies to adopt, it is necessary to identify where we are in the paradigm shift and where all signals, such as virtual currency, are in their evolution. We need different approaches if we are in the early stages: awareness and exploration, as opposed to the later stages of polarisation and consolidation.
As part of our 3A framework, we have adapted tools from strategic foresight to help us gather the signals, map patterns, and plan to move forward to realise a future facing competitive advantage, given the context as to where we are in the paradigm shift.
Once we have a good sense of where we are in the process, then we can begin to develop potential scenarios and, based on the overall vision, determine the actions that are needed to navigate the business toward the future we want to achieve.
