Friday, April 11, 2014

Meet the new boss. Same as the old boss? - The Sharing/Collaborative Economy

Their has been a lot of news recently about the great successes of the sharing/collaborative economy rockstars.  Uber and AirBnB have been out front and I think these are great companies but I think it is important we question their credentials as truly disruptive - disruptive of the economy as well as disruptive of their industry.

Here are some quotes about Uber.

From Matt Stoller's Blog (Thanks to Steve Andersen for the link!): "Uber controls all of the information in this so-called ‘market’. One of the premises of a market is relatively balanced information on the part of both the buyer and the seller. But Uber is neither a buyer or seller, it’s a broker. And as a broker, it shows the buyer and seller only what it wants to. Its algorithm is not regulated nor is it transparent, so neither the buyer or the seller has any credible information. This isn’t a market, it’s a monopoly. It’s a special type of monopoly, an algorithmic monopoly. It may mimic market-style pricing, or it may not. That’s up to Uber."

From the description at the P2P Foundation website (): "Uber drivers run a companion version of the smartphone app that Uber customers use. This app allows them to bid on pickups, but *does not* reveal the location of any of the limousines around them, competing for the same business. Uber’s drivers have less information than Uber’s customers. As a consequence, limousines tend to cluster, because drivers don’t know that they’re all converging on the same small – and presumably lucrative – area."

Without clear definitions of the value provided and the values guiding the movement, the sharing economy will go the way of rapaciousness. Certainly transparency needs to be a non-negotiable aspect, right? The whole idea of technology injected in to sharing is that something akin to barter can occur across distance and time. Uber was given as a prime example of the sharing economy just two days ago on Shareable.net on On October 4th at the Collaborative Consumption site. But Uber is intentionally opaque to the ones who are sharing/collaborating. Uber seems to be a deeply disruptive company and it is disrupting an ancient and flawed business model with a very smart strategy and technology. But there is a HUGE so what. As far as I can see it is only a company. There is nothing about Uber's business model that guarantees or even makes more likely a sharing/collaborative economy. Again, Uber is intentionally NOT sharing as an essential aspect of their profit motive.

The criticisms in this article are just like those that have been levied at AirBnB. Again, brilliant and disruptive business model. The interesting thing about AirBnB is that there were actual home sharing businesses in place already and I have used several of them. My all time favorite is VRBO. Talk to renters on these two platforms and you will find that they like VRBO and don't like AirBnB with the exception that AirBnB seems to get them more attention but at a greater cost. And what about my favorite - house swapping! We are going to Ecuador for a month this summer because some one in Ecuador wanted to come here. I pay a yearly fee to the house swapping service and they provide some technology to facilitate the connection. That's sharing! Add in the fact that we paid for the plane tickets with and alternative currency (airline miles), we have an extremely valuable opportunity and a radically reasonable price.

Interesting to note that the language of the movement is moving from "sharing economy" to "collaborative economy". What it comes down to for me is, how do we know - by what measure, by what logical framework - how do we know that this disruption is not just email disrupting snail mail but is the disruption it is touted to be. Their must be measures or logical frameworks that demonstrate not just greater net value to the sharer/collaborator but greater agency leading to greater equity for participants in the collaborative economy. This is not a new criticism but the current examples of collaborative economy success are really not very interesting - great companies, maybe even well run etc - but not disruptive to our wealth maximizing rapacious capitalist economy.

I'm probably wrong about all of this, or asking too much, but I am some one who tries very hard to pay close attention and I'm generally a bit of a fan boy about this stuff. My impression is the old stuff (VRBO, House Swap, Transition Network, Barter, love...) was better than this shinny new techno-stuff.

Tuesday, February 25, 2014

Arizona and Missouri legalized discrimination laws

I read the Arizona law and it is really vague, simply saying the government can't make a law that forces someone to do something against their religion.  No group is mentioned.  No religion is mentioned. The crux of it is
"... STATE ACTION shall not substantially burden a person's exercise of religion  ..."
It's very short and the bill even makes room for the state to indeed burden a person's exercise of religion if there is "compelling governmental interest".

The Missouri bill is largely the same, sharing much of the same language - which seems to have come from legal precedent - but adding this bit of detail:
"As used in this section, 'exercise of religion' shall be defined as an act or refusal to act that is substantially motivated by religious belief, whether or not the religious exercise is compulsory or central to a larger system of religious belief."  
Again, no specific group is mentioned and no specific religion is mentioned.

<A wikipedia research moment>
I've heard these bills described as addressing the erosion of the free exercise clause of the 1st amendment.  Some examples of this erosion is from 1879 when the Mormons fought the outlawing of polygamy and in 1990 when it was unsuccessfully used to defend native Americans right to smoke Peyote. Seems unlikely reinstating polygamy is the goal here. In another precedent, we see the opposite of erosion.  The great irony here is that it was the Warren Court in the 1960's that took the most expansive view of the Free Exercise Clause actually protected a 7th day Adventist who was denied benefits for refusing to agree to a 6 day work week.  That view was narrowed (eroded) over time to an understanding that as long as a law does not target a particular religious practice, it does not violate the Free Exercise Clause.
</Wikipedia research moment>

Looking at the bills, they have explicitly adopted the Warren Court language that the state must have a compelling interest to limit the religious conduct. Given the political context of these bills and the firestorm around them, it seems reasonable that these bills were put in place explicitly to discriminate against particular groups. (Well, maybe it is to reinstate polygamy and legalize peyote?) The grand irony here is that these ultra-conservative governments are using liberal, human rights informed precedent to violate human rights.

Saturday, February 8, 2014

A Snarky look at Free Markets and the Exploitation Inherent in Economic Rents

I believe in free markets. And so do the wealth maximizing Rapacious Capitalists that are killing our communities and limiting our capacity to love. So, what is a free market? Last night I sat up in bed at 3:30 am, jet lagged after a week in Uganda, with an epiphany so I donned my armchair economist cape and started typing.  (Yup, I have a cape.)

The Rapacious Capitalist's definition of freedom is characterized by exploitation - the freedom to exploit. Exploitation has a negative connotation. In economic terms, negative exploitation is defined as rent-seeking or using one's position to extract wealth without creating commensurate value. However, exploitation can also be positive simply meaning to use fully and to derive benefit. Most examples of this have to do with a failure to exploit.  For example, not funding education and health care reduces the the total pool of human capital that is available to "exploit" or damaging natural resources creates an inability to exploit those resources over time. This line of thinking quickly moves to amelioration through regulation and regulation is always fought by the Rapacious Capitalist as impinging on his freedom to exploit.  Vicious circle.  (There is another post here about stewardship and common pool resources and Elinor Ostrom....)

I would like to propose a different way to understand the free market where freedom is characterized by agency or the freedom of opportunity. Agency is what economist Amartya Sen calls substantial or positive freedom. Agency can be defined simply as the capacity to pursue a livelihood.  By focusing on agency we eliminate the vicious circle and we are compelled to invest in human capital which is the raw material of any economy. Additionally, by having more capable economic actors we get a more vibrant and more resilient economy.  This is not an opposite or counter definition to exploitation.  It is wholly different.  It states that in order to have a free market all actors must be free to participate.  The role of government is not to govern abuse but to ensure agency.

To be fair, what the rapacious Capitalist would say is that he is not limiting anyone's agency - he is not limiting any one's ability to be a capable economic actor.  This is true and it is what Sen called negative freedom or the freedom to not be constrained by others.  So, how would a focus on agency in free markets be different than a focus on exploitation? I think the answer lies in the concept of economic rent.

Economic rent is defined as the amount one pays for an input to production that is in excess of the opportunity cost of that input.  The classic example of this - and the source of the more common use of the term rent - involves a landowner and a farmer.  Imagine the landowner has some land she is not going to farm.  She would like to rent it to a farmer.  In order to set a price she figures out how much she might have profited if she farmed the land herself.  This is her opportunity cost.  It may be that the landowner is a sucky farmer or she might just be lazy.  She may be an excellent farmer but has more land than what she can exploit.  Maybe she has decided to give up farming and become a poet. Whatever the specifics, she sets the price at what an excellent farmer would make by farming the land and negotiates with the farmer to try and get that price.

Now imagine that our landowner is the only landowner in town or the town is very isolated and she also owns all of the transportation routes to market or is able to limit the information that gets to the farmer about seed and fertilizer price or even lies to the farmer about  market prices.  With this added control of the economic environment, through monopoly or fraud, she can demand a price for her land that is above her opportunity cost.  This excess cost above her opportunity cost is an economic rent. Essentially, the landowner is using her position to extract wealth without creating additional value and in so doing, she is limiting the agency of the farmer.

We have laws against monopoly and fraud that are designed to address this issue; however, we understand these laws in terms of how they limit or regulate the actions of the landowner and less so in terms of how they limit the agency of the farmer.

Now let's replace the agricultural context of our example with the context of financial services.  Instead of access to land, we are concerned with access to the economy.  In this case, the definition of rent-seeking - working to extract wealth beyond the opportunity cost without adding commensurate value - could double as a job description for many professionals in the financial services industry.  The Rapacious Capitalist might respond with a hearty "So what?" arguing that they are not impinging on anyone's right to do exactly the same thing.  More to the point, the Rapacious Capitalist (aka Sam Zell) says everyone should be just like them.

Let's go back to the farmer. I was just in Uganda where I met with small holder farmers.  Small holder means less than about two hectares.  These farmers were skilled and industrious.  At Grameen Foundation, through our Community Knowledge Worker program, we equip local leaders with smart phones connected to an agriculture data base.  These trusted farmers - Community Knowledge Workers or CKW's - help their neighbors with critical information about managing and selling crops.  However, the one thing that they can't get is financing.  (We are working on this.) The global economy has made access to credit so precious that we have broken down the fundamental physics of the market.  Our global financial gatekeepers blather on about risk and exits and hedges and the like while, at the economic foundations of humanity, people who could be growing more food cannot.  They cannot because the the rent-seeking oligarchs demand tribute in order to access their casino.

Ooooh, this did go down snarky Blvd, didn't it.

Next post I hope to break this down a bit more methodically...


Saturday, October 12, 2013

Can brands maximize profits and be a force for good?

I submitted this "essay" a while back to a contest put on by an advertising firm with the prompt "Can brands maximize profits and be a force for good?".
+++++++++++++++++++++
No.
The legal requirement to maximize profit eclipses the opportunity to be a force for good. To make this case convincingly it is necessary to define the terms.
Profit Maximization: Maximum profit is the greatest possible difference of total cost from total revenue. To achieve maximum profit, a corporation must not only maximize revenue, it must also minimize cost.  
Force for Good: Being a force for good entails designating something specific and superlative – measurable progress toward solutions to well-defined social problems.
Brands: This essay will use the  terms “brand” and “corporation” interchangeably and in both cases be referring to the sum total of a corporation’s activities and impact.
What limits a corporation's ability to be a force for good?
Not only is profit maximization required by law but creating good can be illegal. In 1914 Henry Ford stated that:
It is better for the nation, and far better for humanity, that between 20,000 and 30,000 should be contented and well fed than that a few millionaires should be made. (Thomas A. Edison, ”Henry Ford Explains Why He Gives Away $10,000,000,” The New York Times, Jan. 11, 1914)
However, in Dodge v. Ford Motor Company (1919), “The Court held that a business corporation is organized primarily for the profit of the stockholders, as opposed to the community or its employees.”  
In a more recent (2010) but very similar case, eBay won a decision against Craigslist, where Craigslist was explicitly trying to codify and sustain its unique corporate culture.  According to an article in Forbes, “Craig [Newmark] does not want eBay to change Craigslist’s mission and practices from a focus on creating public  good to a focus on creating private wealth.” The court held that:
Directors of a for-profit Delaware corporation cannot deploy a [policy] to defend a business strategy that openly eschews stockholder wealth maximization – at least not consistent with the directors’ fiduciary duties under Delaware law.
A third example, Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., ruled in 1986 that a corporation’s board of directors is required to accept any purchase offer that would maximize shareholder value. Subsequently, in 2000, Ben and Jerry’s was forced to sell to Unilever.  These cases and others set the explicit precedent that:
  1. A corporation has a legal responsibility to maximize profit
  2. If creating “good” has an associated cost that does not increase profit, then creating that good is actually illegal.

CAN FINANCIAL MARKETS BE GOOD?

This was originally posted at Skoll World Forum and Forbes.
In the Impact Investing industry we have been agreeing-to-disagree for a while now. The debate tends to take the form of investment priorities: financial-first vs. impact-first. Do you prioritize financial impact or do you prioritize social impact? I will argue that this debate is irrelevant and is an example of what Jed Emerson calls bifurcated thinking.
“I coined the term Blended Value (in 2000) to reflect what I felt was the reality that value was whole and that what all of us were bumping up against was a bifurcated world which asked us to accept that one had to be either for-profit or non-profit; an investor or a philanthropist. In contrast, I felt what we should really be focused upon was maximizing the total value of our companies, communities and capital.”-Jed Emerson, BlendedValue.org
So what are the implications of a shift in perspective away from bifurcated thinking (financial vs. social) towards total value? To answer this we must understand the resultant value we seek and how maximizing total value differs from maximizing profit. A good place to start is the language we have used to make our social impact peg fit into a financial impact hole.

Love and Money

This is a talk I gave at this year's SoCap Conference. The theme was Love and Money and the central idea was to find a way to value love as community vibrancy to compete with profit as evidence of success.



Tuesday, September 24, 2013

Executives are Optimistic

Evidently, according to McKinsey, executives are optimistic about the global economy! However, we've also recently learned nearly 40 percent of the CEOs on the highest-paid lists from the past 20 years were eventually "bailed out, booted, or busted." And, according to the world's largest CEO sustainability study most companies are not integrating social, environmental and governance issues into their core strategies. And to add insult to injury, evidently the banks, private "security" firms and university police departments colluded with the administration, the FBI and Homeland Security to attack the peaceful protests of the Occupy movement which, coincidentally, was focused primarily on the nefarious activities of the now pleasantly optimistic executives. So, bizarrely, I guess I find myself standing with the Pope who in Sardinia threw away his prepared remarks to declare "The world has become an idolator of this god called money."