A little more on credit economies
As I wrote some time earlier, in my note "My trouble with GDP", I've felt for a while now that the ways in which we measure output, value, success are inherently flawed, and generate some big problems.
I went into some detail on why I thought GDP was flawed -- basically an output-focused framework that relied on consumption for succcess, which implicitly forced the transition from a consumption-based economy in the early 1900s, to a credit-based economy in the late 1900s, to a derivative and instrument-focused economy in the late '90s and early '00s. (Implicit in that transition is the changing socio-economic structure of society, some of which I listed out in the aforementioned essay, and more of which you can read in McAffee's Race Against the Machine, form which I've shared one relevant excerpt here.)
The implications for this transition oftentimes came up when we were looking at corporate/portfolio strategy for clients.
At some given point, for most firms, a question that will come up is, "why are we not a bank?" / "why aren't we using our money in market-side instruments?"
If you look at the tetrad model, you ask yourself what any particular form or framework will evolve into, as it progresses. And if the primarily defined purpose of a firm is to make money, that implies maximizing output and minimizing input. And few frameworks allow you to do that as abstract moneymaking (read investment banking) does.
This is not to say that it was ever recommended to a client that they start up a bank -- a strategist/org. planner's job is partly that of making the firm money, but also of helping a firm develop its natural industr(ies). What we would recommend is in developing financial instruments that take better care of the firm's assets and money.
If any of what I'm saying seems outlandish, note that Apple -- yes that bastion of industrial design and incredible products, in its last filings with the SEC indicated $82bn+ were held in marketable securities, bonds, derivative instruments, and so on.
My trouble with GDP. Or, why @UmairH's #Betterness is one of the most important essays you'll read this year.
I finally got down to reading Umair Haque's Betterness this weekend.
It raises important questions about economics as we know it, and about how firms are set up to create value.
Two bits I shared via Kindle I captioned as "on the trouble with the expedient" and "on the need for 'meaning' organizations"
Reading it raised a couple of very obvious points on how we measure value today, and what's needed to build a better future. For Umair's take I would suggest reading the book itself, and also dropping by his HBR blog.
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What I want to explore here is a key point that's troubled me for ages now. The notion of GDP, and what our metrics of "prosperity" are based on.
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Now, basically, GDP is Gross Domestic Product -- i.e. the total amount of output produced by a nation. And GDP/head is a metric that I was taught to use as a kid to compare the prosperity of countries. GDP per person being the total amount of "stuff" produced per person in a country.
What troubles me about this is obvious, I suppose.
GDP per person gives me a number that every person in a country must theoretically consume in order for the economy to break even.
So if the US has a GDP/head of $50,000; it implies that every person in the country needs to be consuming $50,000 of stuff every year for the national economy to break even.
That is, for companies to make money -- and therefore to pay the bills, hire employees -- every employee needs to spend $50,000, just to keep the cycle going.
Now, if you look at the bifurcation in how firms have evolved over the past 50 years, you'll see the bifurcation into ideas and executions.
Some kinds of firms leverage innovation and ideas -- basically "brands" to make money, and other kinds of firms leverage scale and low cost manufacturing / back-end services to make money.
A similar kind of extrapolation can be made in how we structure employee remuneration within firms.
This altogether accounts for factors like growing income inequality, and then you realize that most people likely don't have $50,000 to spend on stuff every year.
Which is how you move from (1) industrial to (2) service economies, and then further make the transition into (3) credit economies.
Because if the majority of people can't spend $50,000 a year, you're going to have to extend lines of credit to get the "poorer" people within the populace so that they can consume their "required share" of GDP.
But at some point, the difference between debt and equity gets so large for people that they simply can't be lent to under proper rules. So we move up to the next level of credit economies -- welcome sub-prime lending and CDOs.
And today we're talking about the app-economy, micro-manufacturing, collaborative consumption, as the next stage of the economy.
We should remember that these are all still systems that require consumption. And the right balance needs to be found between profit and value, regardless of which system we choose.
Remember, economies, institutions and firms alike are not structures, they are systems. Which means they are not entities, but tendencies.
The system we have today tends towards maximizing output (corporate/institution-level sales and profits) and maximizing consumption (individual-level consumption).
In a system of limited resources, only one of those can succeed, unless we find the aforementioned balance. And all this against the backdrops of decrepit politics and the challenges of environmental sustainability to boot. I can't say there are any easy solutions here, but evolving businesses as they exist today is probably not the right answer.
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For Umair's suggestion on how to tackle the challenges of tomorrow, read Betterness. And then figure out how you're going to restructure the firms you run or work for cognizant of the trap we've built for ourselves. I'm going to do the same.
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Two concepts that come to mind, (1) diminishing marginal utility; and (2) non-competitive game theory, which I will elaborate on at a later date.
Also, is it just me or does the system we have today then sound like "Supply-Side" / "Trickle-Down" economics -- something I thought we weren't really fans of?
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On the non-competitive game theory wiki, there was an interesting quote by Clinton from 2000
"The more complex societies get and the more complex the networks of interdependence within and beyond community and national borders get, the more people are forced in their own interests to find non-zero-sum solutions. That is, win–win solutions instead of win–lose solutions.... Because we find as our interdependence increases that, on the whole, we do better when other people do better as well — so we have to find ways that we can all win, we have to accommodate each other...."
Nice thought, but extending credit lines seems to have been the answer to this, and that's categorically not it.
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P.S. Pardon any potential typos, wrote this on my phone. ^^
"Because mischief is in the backseat" has to be my favorite line of any campaign I've worked on.
Taken at Saatchi & Saatchi
Jean-François Lyotard on Knowledge, Economics and the State - The Postmodern Condition, 1979
"For the merchantilisation of knowledge is bound to affect the privilege the nation-states have enjoyed, and still enjoy, with respect to the production and distribution of learning. The notion that learning falls within the purview of the State, as the brain or mind of society, will become more and more outdated with the increasing strength of the opposing principle, according to which society exists and progresses only if the messages circulating within it are rich in information and easy to decode. The ideology of communicational "transparency," which goes hand in hand with the commercialisation of knowledge, will begin to perceive the State as a factor of opacity and "noise." It is from this point of view that the problem of the relationship between economic and State powers threatens to arise with a new urgency.
Already in the last few decades, economic powers have reached the point of imperilling the stability of the state through new forms of the circulation of capital that go by the generic name of multi-national corporations. These new forms of circulation imply that investment decisions have, at least in part, passed beyond the control of the nation-states." The question threatens to become even more thorny with the development of computer technology and telematics. Suppose, for example, that a firm such as IBM is authorised to occupy a belt in the earth's orbital field and launch communications satellites or satellites housing data banks. Who will have access to them? Who will determine which channels or data are forbidden? The State? Or will the State simply be one user among others? New legal issues will be raised, and with them the question: "who will know?"
Transformation in the nature of knowledge, then, could well have repercussions on the existing public powers, forcing them to reconsider their relations (both de jure and de facto) with the large corporations and, more generally, with civil society. The reopening of the world market, a return to vigorous economic competition, the breakdown of the hegemony of American capitalism, the decline of the socialist alternative, a probable opening of the Chinese market these and many other factors are already, at the end of the 1970s, preparing States for a serious reappraisal of the role they have been accustomed to playing since the 1930s: that of, guiding, or even directing investments."
The God that failed - Uncertainty, the new certainty / AdAsia Blog, September 2011
AdAsia had asked me to write a note on "marketing in uncertain times", you can find the original blogpost here.
Figured I'd post it here, too, for posterity's sake.
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The God that failed
Uncertainty, the new certainty
“You begin saving the world by saving one person at a time; all else is grandiose romanticism or politics.” ~ Charles Bukowski
In Leviathan, his 1651 treatise on man’s civic existence, Hobbes refers to the State as “mortal God under immortal God”, alluding to the two drivers of constancy and meaning: Religion and the State.
With the accelerated inter -connectedness of societies on the one hand, and attritional (and largely unnecessary) wars and the abdication of forward-thinking by the State on the other, a third ‘institution’ arose in the late 20th century that could be tasked with the job of giving us a semblance of constancy and meaning – the free-market.
It’s not as outlandish as it might seem. In the developed and developing world, identity is as easily cued by what shoes you wear or what car you drive (i.e. access and taste, = choice), as much as by where you’re from or which God you worship (i.e. birth, = fate.)
The biggest ‘thing’ firms produce today, regardless of what it is they produce, is “meaning”. It goes for any major brand you could think of. Meaning is implicit in the design of a product or a service. But quite often design ends up being “clever” packaging of a feature-set, rather than its elegant core. When you think about it, this analogy explains why the iPod succeeded where better-featured mp3 players didn’t, or why Facebook and Twitter have little to fear from Google+ in its present avatar. Good design reimagines behavior; it doesn’t merely add a layer to existing behavior.
With the challenges the World faces today, we have an opportunity to take meaning-making further, and help build what Thoreau called ‘corporations of conscience’. There is a mandate to help answer the bigger questions of environmental, economic and social sustainability through meaningful design and meaningful business. To lead and build culture, not just mimic and recycle it. To make a genuine difference in the lives of people, instead of merely figuring out how to sell more to them.
We can only do this by focusing on the individual and the family, the human beings at the heart of it all, remaining cognizant of the social, political and economic braids that surround them.
The path to love is illuminated by solutions based on helpfulness, understanding and feeling, not communication based on apps, ads or activations.
In an uncertain world, that much, at least, is certain.
Aditya Anupkumar
Saatchi & Saatchi – The Lovemarks Company
"God is a metaphor for that which transcends all levels of intellectual thought. It's as simple as that." Joseph Campbell
I revisit Joseph Campbell's "The Masks of God" every now and then. Always enlightening and inspirational. This is his Power of Myth series. Good to watch if you've got a few hours on hand, and are *really-really* fascinated by mythology and, more specifically, comparative mythology.
It's a six-part series, I could only find part 1 on YouTube.
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The Hero's Adventure
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The 21st Century "Anchor" For Leadership
"Power is the ability to produce intended effects." Bertrand Russell
For most of human history, up until the end of the 20th Century, this has involved controlling the factors of production. Governments, Lobbies, Conglomerates.
In the 21st Century, Competitive Advantage may well continue as is, but I suspect a secondary politic and economy will emerge, with more nimble and adaptive participants. Whether these new structures will, in their own way, tend towards larger systems remains to be seen. I certainly hope not.
Maybe the 21st Century "anchor" for leadership will be thought leadership, not resource ownership (don't let tech cos fool you, patents are, for example, "resource ownership".)
Some firms will, through resources / patents / cloud services become utilities companies -- much like we have power or water today, Google, Microsoft or anyone else who succeeds at cloud services will join this list. Which implies that at some point, they'll have to be regulated/restricted by governments. Will they become utilities / allow governments to regulate them?
What will the modern firm look like? What will the modern utility look like? What will be the model of their existence? Same old? Or something new?
Fascinating times of flux ahead.
#FridayMorningMusics
