Posts tagged economics

Economics is a very young discipline; it emerged alongside the Industrial Revolution as observers tried to make sense of the rapid growth in commerce and technological development as well as the ensuing social changes. It is important to remember that there is a legacy of industrial thinking engrained deeply into the stance and assumptions that underly economics. As I begin my studies in macro- and microeconomics, there are a few tensions that are beginning to present themselves.

The “gut feel” I get from main-stream economics is that it is rooted in a reductionist materialist worldview, and makes awkward attempts to distill forces that lack a material presence into “things” that are expected to behave much like balls on a billiard table. Social relationships, knowledge and even money are non-physical entities that don’t answer to the laws of physics.

Let’s take a look at some of the awkward ways economics tries to wrap its hands around ether:

1)  Tangible vs. Intangible Assets

On a company’s balance sheet, you’ll usually see tangible assets like equipment and real estate listed along with intangible assets like patents, distribution rights and industry knowledge. You can really only claim an intangible asset that has some formal contract around it so that it behaves like discrete private property. The skills, knowledge and managerial agility of your employees can’t be claimed on your balance sheet. In the software industry, this issue is exemplified by the “talent wars” among the likes of Facebook, Google and Microsoft. These companies are constantly trying to grab up the brightest developers, and will pay them an inflated salary before they’re really worth the price because it is justified as a long-term investment in productive capacity. Coding skills, not machines, are the true “means of production” in software. These companies are willing to shell out higher salaries for promising talent because over time their skills and productivity will appreciate to the point where they will produce code at a superior rate, thereby turning a profit for the company. (There is an extensive Fast Company article from 1999 looking into these questions.)

2)  The Finite vs. The Indefinite

Corporations operate under an explicit assumption of immortality. In other words, the finances of a company are structured in such a way that there is always a distant tomorrow on the horizon. The monetary system also works under an assumption of indefinite exponential growth. Classical economics also assumed infinite natural resources. Now that humanity has conquered the globe, the latest economic hubris is to assume that free-market driven technological development has infinite potential to solve environmental inconveniences. It seems that we should be very careful about what variables we replace with infinity signs.

3)  Objective vs. Subjective Realms of Value

When looking at the triple bottom line of a company, the financial metrics are completely clear, objective and fairly straightforward to account. The environmental metrics are a bit harder to quantify because the environment is a complex whole system and so technically a company’s actions ripple out to affect every atom in the world (the butterfly effect). So the question becomes how many degrees of separation you’re going to include in your analyses, and whether to log something as a net positive or negative environmental effect when it has complex repercussions. Luckily, there are generally-accepted goals like improving stocks of natural capital like soil, air and water quality, and measuring carbon is becoming easier to do as more people in your supply chain start reporting their own metrics. But what is social impact? We know it has something vaguely to do with “helping people” and “improving the community” but when we doff the warm-and-fuzziness and try to get down to brass tax, there’s nothing objective to look at. Some people might like a new community center while others will call it gentrification. How to you rigorously measure an improvement in the human experience? Sounds like something that the Germans and the French should join forces to figure out!

4)  The Multiple Forms of Capital: Natural, Human, Social, Financial, Manufactured

The basic equation of economics is that humans (social + human capital) take raw materials (natural capital) and make it into stuff (manufactured capital) so they can make money (financial capital). The humans with the greatest ability to “make it rain” then shower themselves in money, rinse and repeat, ad infinitum. Is this really all an economy is or can be?

As far as economics is concerned, natural capital includes both the raw material resources available for human plundering and the health and vitality of the biosphere to maintain the conditions amenable to human life. However, the earth is not yet incorporated as an economic entity, so its no one’s responsibility and everyone’s problem that we are maxed out on our “natural capital credit card.”

Manufactured capital is industrial stuff. Pretty straightforward. In fact, economics seems to be optimized nicely for manufactured capital to do its thing. Kindof like American cities are designed for cars, not people, economics works really well for manufactured capital, but not necessarily the other forms of capital.

Financial capital includes money and other financial instruments that convert real value into a virtual, objective and widely accepted form. Economics admits that financial capital isn’t actually wealth itself, its just a representation of wealth, but honors that it behaves much like the real value it represents. Although a traditional, agricultural society’s economic story may begin with the land, industrial societies seem to be preoccupied with a need for financial capital to solve the delay between the moment of production and the moment of sale.

Social capital includes all the invisible human stuff like relationships, knowledge, education quality, social norms, etc. As we enter the hyper-connected digital age, social media is helping us see and measure what was once a murky, invisible realm. The current economics has systematically converted natural and social wealth into manufactured and financial wealth. What might an economics look like that uses financial and manufactured capital as tools to increase the health of ecosystems and vitality of social interaction?

Trying to fit the whole universe into five types of wealth is a fools errand.

5)  Money’s Legacy as a Commodity Currency

Money started off as an actual physical commodity, like metal, that could be traded for other goods or services. Over time, it became clear that universal acceptance and portability extended the reach of money and made its use more convenient. So the metal went in a vault and we traded around paper representations of the metal. Money evolved further and further into a virtual flow of an abstract notion of value, to the point of today when its value is simply based on the universality of its acceptance and the scarcity of its quantity. It is actually backed by debt– money is created when a bank enters a debit against their account and a credit into your account when you take out a loan.

Despite the fact that money is really a social agreement (which should be considered a form of social capital) we treat it like it’s a tangible “thing” that should behave like billiard balls. Money is actually information, and that information is programmed with a reinforcing feedback loop that results in exponential growth of the money supply. An economy may require a unit of account, a medium for exchanging value and a lossless way to store wealth, but it does not dictate that these must all be performed by the same “thing.” When these three important functions are all rolled into one, the dynamics of wealth storage effect the availability of a medium of exchange, and this means our unit of account is a moving target rather than a stable constant. Money does not need to be designed the way it currently is. A replacement for money could be a tool for whole-system accounting that factors in real-time information about the stocks and flows of all four forms of capital, not just the financial component.

6)  The Incongruences of the Information Age

Economics is designed for an Industrial economy that was focused on the throughput of physical stuff. This economics followed the Newtonian physics. When one person bought and ate an apple, that meant that another person could not buy that same apple again. But when a software company writes a program, they can sell the identical program to an infinite number of people with no loss of quality. And furthermore, the distribution cost is negligible if the virtual goods are downloaded rather than bought in a box.

The amount of free and open-source code available is staggering. Most web designers essentially take freely-available code and just hack it together into a website. Industrial economies use paid labor and private infrastructure to produce wealth for individuals. Information age economies like Wikipedia leverage volunteer effort on a massive scale to produce a knowledge commons that makes everyone richer. Perhaps the new equation for the throughput of an economy is, as Dan Robles suggests, Data -> Information- > Knowledge -> Wisdom. Each step along the way is an opportunity to help convert raw data into the final goal of true wisdom.

One of the biggest challenges of our our time is to end the millennia-long philosophical argument between cultures that seek progress in the immanent, material world and people who seek peace in a transcendent, formless sense.

My intuition is that the five disciplines Peter Senge talks about help us head in this direction. (Personal Mastery, Systems Thinking, Mental Models, Building Shared Vision and Team Learning) I’m excited to continue trekking forward on this journey, develop mastery in each of those five disciplines, and co-invent a new operating system for Humanity 2.0!

Economics is a very young discipline; it emerged alongside the Industrial Revolution as observers tried to make sense of the rapid growth in commerce and technological development as well as...