A New Capitalism (p1): The Platform

Volatile, inequitable and corrupt are all accurate descriptions of Capitalism as it exists today. Most people agree that the system is to some degree broken. However, I believe that Capitalism, or market based economics, is the best possible engine but we need to make some fundamental changes to ensure that our economy serves us all. Because any substantive change will challenge the current economic winners who benefit from our reductionist, profit maximizingeconomy, this shift can only be successful as a disruptive innovation - a fundamental change in the structure of our economy that will happen because it makes sense and because it is a better way to equitably and sustainably exchange value. This should not need to be a revolution. This should be simply be a correction brought about by free market activity.

I have tried to describe the changes that I think are necessary. Much of what is needed is more of a shift in perspective than it is a change in the structure of our economy; however, some fundamental changes need to be made to the underlying infrastructure. Again, these changes are compelling not for ideological reasons. These changes are compelling because they will enable a more equitable and sustainable version of Capitalism.

Below is the first part of a three posts. I have written about these things before.  In these posts I hope to connect disparate ideas in to a reasonably cogent whole. Advice and comments are greatly appreciated.

Section #1: Foundation

  • An Equitable Infrastructure
  • A Vibrant Ecosystem
  • The Commons as Economic Unit

Section #2: Transactions

  • Markets are Conversations
  • Collaboration is Developmental
  • Impact Is Product

Section #3: Humans

  • Business is People
  • Agency Makes Us Free.

Section #1: Foundation

An Equitable Infrastructure

We hear a lot about the sharing economy these days, especially the most disruptive and controversial companies like Uber and AirBnB. While I have always thought that describing these companies as “sharing” is at best disingenuous, these companies do owe their success to a shared platform - the Internet. The Internet is the equitable infrastructure that powers 21% of GDP growth in world’s mature economies. (Internet matters: The Net’s sweeping impact on growth, jobs, and prosperity, McKinsey)  Not only is the Internet a freely available, shared platform, the Internet is a peer to peer network which means it has no center and it has no owner.  The Internet is us, connected.

Verizon, Comcast, AT&T, Deutsche Telekom, and 中国电信 do not own the Internet. Facebook, Google, and Amazon are not the Net’s monarchs, nor yet are their minions or algorithms. Not the governments of the Earth nor their Trade Associations have theconsent of the networked to bestride the Net as sovereigns. - New Clue #3

Yochai Benkler wrote a brilliant book - The Wealth of Networks - where he described “commons-based peer production” for which the archetypical examples are Wikipedia and open source software. (Maybe he should have called them something more catchy like The Sharing Economy?)  These things would not be possible without the Internet because the Internet’s nature, its topology, enables far flung individuals to exercise personal agency and co-create valuable assets that can then be made available to virtually anyone.

This is what we need for our financial markets. I recently wrote a blog post about the blockchain and the potential for inherently more equitable financial markets. Currently, the networks on which our financial markets reside have a hub and spoke topology. Hub and spoke means that each user or client is out on the end of a spoke and all transactions must pass through the center. In the hub and spoke topology, equitable transactions are possible; however, perverted or corrupted transactions are also possible because a third party is required to sit at a privileged position at the hub to “clear” all transactions. In a blockchain network there is no hub, no single place where transactions must be cleared. The blockchain resides on a peer to peer network where value is sold and cleared simultaneously. Additionally, on blockchain data bases all transactions are public, transparent and easily accessible. These attributes should provide a more equitable infrastructure for financial transaction and the exchange of value in general.

It is important to note that a peer to peer network does not guarantee equal value (equality) to each node in the network and that is because of the dynamics of how value is discovered. The “natural state” of a peer to peer network is not perfectly random but instead is scale-free.

In a scale-free network some nodes attract more traffic and are therefore more valuable. Through a process called preferential attachment, the more valuable the node is, the more likely it is to attract traffic. So any network will have inequality. The trick is to build networks that:

  1. encourage equity by limiting benefit acquired as a privilege of position in the network
  2. are neutral (as in network neutrality) so that new value can be easily discovered and old value isn’t perpetually valuable.

In this way, markets can be more readily concerned with true and relevant value and ecosystems can more readily find an optimal balance.

A Vibrant Ecosystem

The quality of our existence is dependant on the vibrancy of our ecosystem.  A vibrant ecosystem is sustained via an optimal balance between efficiency and resilience. I am using the term ecosystem not in an empty, metaphorical, hand-waving sort of way. I am referring to ecosystems in a very literal sense. Humanity exists in an ecosystem and a healthy ecosystem is required for humans to be healthy. Robert E. Ulanowicz is Professor Emeritus of Theoretical Ecology with the University of Maryland's Chesapeake Biological Laboratory. He has an amazing body of work in the field of Ecological Economics. In one particularly brilliant paper (Quantifying economic sustainability: Implications for free-enterprise theory, policy and practice) he describes how ecological and economic ecosystems have some fundamental similarities.

“Ecologists, for example, have long known that an ecosystem's ability to maintain its own vitality over long periods—that is, its “sustainability”—depends largely on the layout and magnitudes of the trophic pathways by which energy, information and resources are circulated. As early as 1951, Leontief showed that economic structure can be effectively modeled as a similar flow-map (input–output map) of goods, services, money or value circulating across a network of businesses (Leontief, 1951). [Measures of healthy economic development], therefore, are based on the layout and magnitudes of flows from any node i to node j, where flows can represent biomass going from prey i to predator j, or money or materials going from business sector i to sector j or from country i to country j.”

In the graph you see vibrancy as an optimal balance between efficiency and resilience. On the ‘Y’ axis is sustainability. This is not the glossy annual report type of CSR sustainability. This is actual sustainability simply defined as existence over time. For an ecosystem to be sustainable, it must maintain a balance between efficiency and resilience over time. On the ‘X’ axis is diversity. This is a metaphorical and literal condemnation of a colorblind approach to the world. Diversity is choice. Diversity is multiple pathways. Diversity is possibility. To maximize output, efficient systems optimize one or very few pathways but these systems are brittle because when the optimized pathways fail there are no fall-back alternatives. Resilient systems have many choices or pathways through which output can be routed so they are unlikely to fail; however, redundancy and excess capacity reduce total output and lead to stagnation.

“Since resilience and efficiency are both necessary, but pull in opposite directions, nature tends to favor those systems that achieve an optimal mix of the two. Furthermore, a system's balance of efficiency and resilience can be calculated via its configuration of diversity and connectivity. This allows the system's sustainability to be captured in a single metric that establishes its place in the continuum from brittle (insufficiently diverse) to stagnant (insufficiently efficient).”

The Commons as Economic Unit

In an economy, production, consumption and exchange are carried out by three basic economic units: the firm, the household, and the government. - Wikipedia

This is insufficient from the ecosystem’s point of view.  In order to maintain the balance required by a vibrant ecosystem, we must understand The Commons as an essential component of economic production, consumption and exchange.

Elinor Ostrom won the Nobel Prize in Economics in 2009 (the only woman to do so) for "her analysis of economic governance, especially the commons".  In her brilliant work - Governing the Commons - Ostrom is concerned with the agency of individuals to self-organize and sustain a vibrant ecosystem especially when that ecosystem provides the resources that each person needs to make a living. These resources as called “common pool resources” and are characterized as being finite but replenishable, valuable, unowned and freely accessible.

She begins by exploring prevailing metaphors including the Tragedy of the Commons and the Prisoner’s Dilemma which conclude that individuals will behave contrary to their long term best interests by depleting ecosystem resources to secure maximum short term gains. While citing these metaphors as informative, Ostrum declares that they needn’t be predictive.

Instead of presuming that the individuals sharing a commons are inevitably caught in a trap from which they cannot escape, I argue that the capacity of individuals to extricate themselves from various types of dilemma situations varies from situation to situation. The cases to be discussed in this book illustrate both successful and unsuccessful efforts to escape tragic outcomes. Instead of basing policy on the presumption that the individuals involved are helpless, I wish to learn more from the experience of individuals in field settings. Why have some efforts to solve commons problems failed, while others have succeeded? What can we learn from experience that will help stimulate the development and use of a better theory of collective action - one that will identify the key variables that can enhance or detract from the capabilities of individuals to solve problems?

Ostrum identified some basic structures for binding contracts that commit commons members to cooperative strategies. With work, this can be done without costly and bureaucratic government regulation or arbitrary and inequitable privatization.  Specific examples include community run fisheries.

Conclusion

I believe the blockchain will be a truly disruptive innovation that will not only enable value to be more equitably exchanged; the blockchain will also enable value to be more democratically defined. Simply put, value will be defined by the fact that it is exchanged. If we value the maintenance of vibrant ecosystems then we can exchange resources in a way that will enable the maintenance of common pool resources like clean air, water, fish, pasture lands, etc. The choices that I make as a consumer can be directly tied to the positive or negative externalitiesthat the product generates. Historically, we have tried to do this via marketing and telling a story about a product and its impact. A more equitable market will enable a product to be understood in the context of the process that brought it to market. What resources were used? Which companies were involved? this could serve to justify a higher price for a product that is verifiably “better” for the ecosystem or question a low price for a product that has multiple negative externalities. The critical aspect will be to ensure that both positive and negative externalities are accounted for in terms of how they are realized by the consumer.