A New Capitalism (p2): Transactions

Markets are Conversations

In 1999, Chris LockeDoc SearlsDavid Weinberger and Rick Levine wrote the brilliant Cluetrain Manifesto in which they argued 95 theses the preeminant of which was "Markets are conversations".  They went on to describe the nature of these conversations and how they are inherently human and, because of the disruptive nature of the Internet, these conversations cannot be controlled - and that is a good thing.

Nothing is amoral, least of all something so pervasive and dynamic as business. What the Cluetrain Manifesto declares is that business and markets exist in a moral context - a human context. Morality is always part of human interaction, to deny that is to deny our humanity. In the pedestrian world (where we all live), we are each individual humans interdependent by virtue of our humanity and connected across space and time via the Internet. Even as we are employees of corporations we are still individual and interdependent humans.

Milton Friedman addresses these issues very directly in his 1970 essay - The Social Responsibility of Business is to increase its profits - published in the New York Times Magazine. He says:

"...the doctrine of "social responsibility" involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses."

"... there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

Here is the problem. First and foremost, it isn’t a game. But fine, I’ll accept that it’s an analogy. If business is a game then it has rules and friedman states that the most critical of those rules are “open and free competition without deception or fraud.” Evidently, the rules have changed since 1970 because the after tax income of the top 1% increased 200% since 1979, well over twice as much as any of 5 other quintiles. As I discussed in the previous post, it is not actually the inequality that is the problem. Inequality is inevitable and normal. It is the inequity of the system that generates the inequality that is the problem.

Wikipedia, income inequality in the United States

The wealthiest Americans are able to use their money to influence policy which in turn makes the system even more inequitable and results in more money for those with the most influence. The game is rigged.  

First of all, the top 1% want different things than do the rest of Americans.

We report the results of a pilot study of the political views and activities of the top 1 percent or so of US wealth-holders. We find that they are extremely active politically and that they are much more conservative than the American public as a whole with respect to important policies concerning taxation, economic regulation, and especially social welfare programs. Variation within this wealthy group suggests that the top one-tenth of 1 percent of wealthholders (people with $40 million or more in net worth) may tend to hold still more conservative views that are even more distinct from those of the general public. We suggest that these distinctive policy preferences may help account for why certain public policies in the United States appear to deviate from what the majority of US citizens wants the government to do. If this is so, it raises serious issues for democratic theory.
 Democracy and the Policy Preferences of Wealthy Americans, Benjamin I. Page, Larry M. Bartels, and Jason Seawright, Northwestern University

And the top 1% get what they want.

Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. The results provide substantial support for theories of Economic-Elite Domination and for theories of Biased Pluralism, but not for theories of Majoritarian Electoral Democracy or Majoritarian Pluralism.
-  Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens, Martin, Gilens and Benjamin I. Page, Princeton University

The problem is not the one Friedman warned us about - that “social” goals, the work of the political realm, would pollute the business realm. The problem is just the opposite, the false amorality of business and the resulting permission to pursue profit at all cost has resulted in “business” goals polluting the political realm. Capitalism is now a type of government that assigns not just value but worth to those with the most money. Anand Giridharadas recently published a more eloquent and personal take on this. 

This may sound strange at first, because the winners of our disruptive age are arguably as concerned about the plight of the losers as any elite in human history. But the question I’m raising is about what the winners propose to do in response. And I believe the winners’ response, certainly not always but still too often, is to soften the blows of the system but to preserve the system at any cost. This response is problematic. It keeps the winners too safe. It allows far too many of us to evade hard questions about our role in contributing to the disease we also seek to treat.

No where has there been a more clear admission that our virulent strain of profit maximizing Capitalism is broken than Alan Greenspan’s mea culpa as his deregulated markets crashed around him.

Mr. Greenspan conceded: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”
On a day that brought more bad news about rising home foreclosures and slumping employment, Mr. Greenspan refused to accept blame for the crisis but acknowledged that his belief in deregulation had been shaken.
He noted that the immense and largely unregulated business of spreading financial risk widely, through the use of exotic financial instruments called derivatives , had gotten out of control and had added to the havoc of today’s crisis. As far back as 1994, Mr. Greenspan staunchly and successfully opposed tougher regulation on derivatives.
But on Thursday, he agreed that the multitrillion-dollar market for credit default swaps , instruments originally created to insure bond investors against the risk of default, needed to be restrained.
“This modern risk-management paradigm held sway for decades,” he said. “The whole intellectual edifice, however, collapsed in the summer of last year.”
Greenspan Concedes Error on Regulation, NY Times

Collaboration is Developmental

Competition is essential. I believe in Friedman’s vision for “open and free competition without deception or fraud.” I also believe that we need a layer of collaboration that rests on top of competition.  Competition forces us to be among the best and in the process of open and free competition a business or an individual will create better products that are more specifically suited to market demand. It is also true that collaboration, especially self-organized collaboration without the cost and spectre of government regulation, can be a market based evolution. 501(c)6 organizations or business leagues like the Edison Electric Institute and the Security Industry Association,  are examples of competitors collaborating to improve their industry. Additionally, in the previous post I talked about The Commons and Common Pool Resources.  This is another very practical example of how collaboration across stakeholders can further Capitalist goals.

The reason we need collaboration in addition to competition is because the problems that we need to solve demand more than any one organization can accomplish. And yes, this does indeed fit squarely within the doctrine of social responsibility that Friedman condemned so the question must be answered why is this the work of business and not government or civil society. The answer is that business has the only engine powerful enough to create the change we need and that engine is currently creating many of the problems that we need to solve.

Businesses will suffer just as will their constituent humans if we deplete our resources human and natural.

In order to work well together, we must pay attention to more than just our own self-interest which got me thinking about a hierarchy of collaboration - stages of moral development where we learn to weigh personal benefit against collective benefit. The apex of collaboration is emergence - the moment when the whole becomes greater than the sum of its parts. Here are the four stages of this development as I see them.

  • Stage 1: Commitment - a staking of one’s reputation via public declaration of intention
  • Stage 2: Partnership - an equal give and take between parties
  • Stage 3: Vulnerability - letting go of my success as a prerequisite of oursuccess
  • Stage 4: Emergence - independent and unordered parts coming together to form a pattern or an identifiable whole.

I wrote a longer version of these four stages at the Stanford Social Innovation Review in a post titled The Tactics of Collaboration.

Impact Is Product

In the Oct 2001 issue of Business 2.0, management guru Peter Drucker was interviewed by Erick Schonfeld and he said this:

No financial man will ever understand business because financial people think a company makes money. A company makes shoes, and no financial man understands that. They think money is real. Shoes are real. Money is an end result.

For me, this is a central truth that we have learned to ignore. Shoes are real. We often talk about shoes in more general terms as value or impact but usually we do this to obfuscate the real. Shoes are real. Education is real. Tea is real. Health care is real. Financial services are real. Money is in service of these realities.

I believe that social enterprise is a disruptive innovation that can turn our focus away from profit as the endgame and towards value inherent in the solution to a problem. Social enterprises are required, by definition, to produce products and services that are designed to solve a problem. Social enterprises prioritize value to the customer over profit to the enterprise. The impact of a social enterprise is the aggregate value delivered to customers by products. Impact is product. Impact is shoes. By obeying the laws of supply and demand, social enterprises innovate to deliver this value sustainably. Put simply, where success in a financial enterprise is defined as the ability to make a profit, in a social enterprise success is defined as the ability to create impact - to solve a problem. (When it Comes to Social Enterprise, It's Time to Take Ourselves Seriously)

Conclusion

Last January two of the Cluetrain authors - Doc Searls and David Weinberger - published 121 New Clues.

If we want to know the truth about your products, we’ll find out from one another. (New Clue #54 )
We understand that these conversations are incredibly valuable to you. Too bad. They’re ours. ( New Clue #55)

Markets are conversations and these conversations are happening between humans. Amorality doesn’t exist. There is a spectrum from Moral to Immoral and all businesses land somewhere on that spectrum. Immoral business will always exist and they will always be legal. That’s how free markets work. However, a moral business is one that accounts for its negative externalities, works across partners and competitors to create positive externalities and delivers products with inherent value.