Reimagining Value For A Post-Crisis Economy

Originally on March 14, 2009

(Social) Value: Love
"Money can't buy me love" is both cheesy and true

The reason why money can't buy love is because, ultimately, love is the value that money represents. Money is a proxy for value and value is that which holds us together and makes us relevant, love. This feels cheesy or even embarrassing because we have broken our social contract with value. Specifically, we have inappropriately imbued money with a value of its own, disassociating money from its role as an intermediary, as a temporary representation of value in a chain of transactions. Money has become the object as opposed to the expedient. It is my thesis that value creation must be the frame within which wealth creation fits; that our humanity can no longer be subjugated to our economy due to a false primacy of our intermediary for value, cash. I believe that our economy should serve our humanity.

Proxies for Value
In order to have an explicit currency we need to believe

A dollar is not a standard in the same way a foot or a meter is. (Or at least it hasn't been since we left the gold standard.) While there is broad agreement that one dollar represents an approximate or relative amount of value, that amount is far more mutable than is the distance that correlates to one meter. If I buy a house, the appropriate total value would be derived from the sum of the values that comprise the house; the materials, the land, the labor, etc. The seller can then take the currency she earned from the sale and exchange it for goods or services that she needs, and so on down the chain. This works because we have agreed on a currency to act as a proxy for value between disassociated transactions.

In order to have an explicit currency we need a social contract. We all have to agree and, more to the point, we all have to believe. From this perspective, currency is simply a device to make barter more efficient, more expedient. I don't have to have something you need to get from you something I want. Currency enables barter between two people that could not otherwise trade value. This is beautiful as long as the value chain remains intact, as long as each hand that owned the dollar earned that dollar by exchanging it for something valuable.

By now everyone knows the sad tale of Bernard Madoff's duped investors. They looked at their statements and thought they were rich. But then, one day, they discovered to their horror that their supposed wealth was a figment of someone else's imagination.

Unfortunately, that's a pretty good metaphor for what happened to America as a whole in the first decade of the 21st century.
- Paul Krugman, Decade at Bernies

I am greatly appreciative of Krugman's populist frame here. It lies in sharp contrast to the most common frame for our current economic crises where the problem is banks not having enough money. When banks had enough money (enough of what is now more clearly understood to be my/our money) they took it to the race track and placed bets on things like currency fluctuationsmortgage backed securities andcollateralized debt obligations. The value that stood behind my dollar was exchanged for an imaginary or (best case scenario) potential value that could only be realized if a bank's horse won. And what was done to mitigate the risk of these investments? Additional bets were placed as hedges which further distanced the currency from any real value. The proxy didn't actually represent anything. At best it was an IOU and at worst what was thought to be an asset became a debt.

Bernard Madoff intentionally defrauded his clients but the calculus of what he did is no different than what our global financial institutions have done to all of us. Their sole concern was how money could make more money, completely divorced from creating anything real. To be sure, the new money could then been used to build, hire, educate, serve, etc, but, as is my thesis, that is the tail wagging the dog.

One of the outcomes of the collapse of this global ponzi scheme of an economy is that barter, value exchange without the intermediary of currency, is on the rise. Barter is not possible without at least the perception of something valuable, something real, changing hands. In contrast, our current system offers no guarantee that anything valuable is involved in any transaction. Recently, Malaysia bought fertilizer from Korea and Russia with palm oil. They were able to calculate relative value of the real goods but were unable to find a currency to act as a proxy for that value so barter was the only way to get the deal done. Again, the role of currency is to be an expedient for disassociated transactions. Had Korea needed cement and not palm oil, they couldn't have participated in this transaction with Malaysia.

Value Discovery
The Resonance of Social Enterprise

If it is true that humanity-as-society has been redefined to humanity-as-economy and if it is true that this is a bad thing then, to fix it, we need to learn to embrace interaction with the same rigor as transaction.

I am positing that our current system for facilitating trade by assigning transitory value to an intermediary object is broken. What we have seen recently is that this system is too susceptible to corruption, collusion and greed. Too much is lost in the translation of value from one transaction to the next or, more to the point, having lost the connection to the value that it represents, currency becomes desirable as valuable in and of itself. Thus, it becomes easier to gamble on exotic instruments and inflate currency because that currency's value is derived without consideration for anything real.

So, what does effective value transmission look like? A scale-free network is an interesting way of thinking about human networks, specifically how we interact and transfer value.

"...the most notable characteristic in a scale-free network is the relative commonness of vertices with a degree that greatly exceeds the average. The highest-degree nodes are often called "hubs", and are thought to serve specific purposes in their networks, although this depends greatly on the domain."

In the image, imagine the circles (nodes) as individuals or organizations and the connections between as interactions, or transmissions of value. This is an idealized way to think about human networks and value discovery. The popular nodes (hubs) are centers of activity or attractiveness and they represent the discovery of value. Hubs become more or less attractive as value moves through the network. What if we could discover and move to root value in a natural state or, dare I say, in a free market? What if a free market, instead of focusing its defining freedom on selling, could increase our freedom to discover a more complex and nuanced value, a value that is sourced from constituent parts like raw materials, resources, skills, knowledge, relationships, productivity, reliability, efficacy, desire, love, etc.

Our current system with its overly abstracted and evidently exploitable assignation of value constrains the network to have fewer and inflated hubs and any nuance or complexity in the definition of value is lost in the translation through currency. Value creation should be a market design principle. Wealth creation is a market participant motivation. An effective market should ensure value creation while facilitating wealth creation, not the other way around. Additionally, an effective market would leverage our social (human) network defining "valuable" more accurately by harvesting connections to what we value. Again, the reason to have an economy is to serve humanity.

So, with this idealized lens on human networks where value acts like a sort of gravity to which we are attracted, we can concentrate our economic efforts on creating value instead of creating demand. We can prioritize health over consumption. We can leverage truth instead of marketing. In this sort of system, the modifier "social" (social enterprise, social impact, social network, social economy) connotes relevance.

If we follow the argument that the dynamics behind a system being "social" may actually increase the efficacy of that system then it is reasonable to consider that a social enterprise is more efficacious than it's sibling, the enterprise. It does not seem like a radical statement that an enterprise that creates Value -- not just cash but universally recognized and communally realized value -- should be considered particularly successful. The modifier "social" is not a burden that limits or restrains an enterprise's ability to create revenue, it is instead a paradigm that increases an enterprise's ability to create Value.