On a New Economy - Part I
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By JordanGreenhall   |   Watch
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Published: May 28, 2012
Part I - The Problem

Lets start at the very beginning (a very good place to start).  When we design an economy, we have a few specific problems to solve:

* To identify the best ideas and experiences
* To identify the most capable individuals and groups
* To motivate the most capable individuals to form the most effective groups to deliver the best ideas and experiences
* To allocate resources to the most capable individuals and groups to most effectively deliver the best ideas and experiences

In addition, and crucially importantly, in an environment where some resources are scarce (i.e., there is not enough to go around) also

* To allocate those scarce resources such that the most deserving get at least what they need and only the least deserving are deprived.  

Now, of course, different social/economic systems have done a better or worse job at one or more of these objectives.  Different approaches perform differently in different actual conditions.  Our current system (which might be called 'capitalism' but that would raise too many issues so I will simply call it 'our current system') has been effective enough to have out-competed almost all other systems over the past half a millenium or so and has come at some very clever ways of elegantly solving these problems largely as a result of private property, money and price.  

We identify the best ideas and experiences simply by observing those that command the highest price (or, more specifically, generate the highest profits).  If a toyota sells more successfully than a chevy, we conclude that the toyota is 'better' than the chevy.  If Bob's pizza consistently commands a higher price than Sally's pizza, we conclude that Bob's is better.  (A given product or service may not be worth the average price to every given potential customer, but that is a different part of the story).

We identify the most capable individuals and groups by virtue of their ability to generate profits (i.e., to make money).  If we see that Apple is generating more profits than Dell, we conclude that Apple is more capable than Dell.  If we see that Bob is making more profit than Sally, we conclude that Bob is better at making pizza.

We motivate the most capable precisely by virtue of the reward associated with their profitable behaviour: Steve Jobs was able to do more of what he wanted and have more of what he desired than most precisely because his stewardship of Apple was capable and delivered high quality experiences - resulting in him making a lot of money.  Importantly, and this will be a major point later, we also motivate using the stick to the degree that *failure* to generate profits leads to lack of scarce resources (i.e., going hungry).  This is conventionally thought of as the "who is going to pick up the garbage and sweep the floors" piece of the economy.  The carrot is used to motivate the most capable to constantly refine their efforts towards the best ideas and experiences.  The stick is used to motivate everyone to contribute somewhere (including the dirty jobs that they would otherwise prefer not to do), lest they be left out in the cold.

And we allocate resources both directly (through market transactions and the generation of profit) and indirectly (through investment) to those most capable individuals and groups so that they have what they need to continue to deliver the best ideas and experiences.   

Its a clever system.  The circulation of money simultaneously evaluates quality and competence, rewards excellence, motivates behaviour and allocates resources.  When it works, it works.  It is, of course, riddled with holes, but over the past 500 years or so, it has generated impressive results.  However, all things pass and recent changes in conditions are beginning to indicate to a growing population of observers that our present system might be due for a replacement.

The first thread goes back to this problem of allocating scarce resources - determining who is affluent and who is impoverished.  For the long history of our current system - really up until the middle of the 20th Century, this was a (very) necessary evil.   The simple fact was that we didn't consistently have enough (food, houses, cars, etc.) to go around and so we needed some way to decide who got and who went without.  But by the turn of the 20th Century in the Western world and the middle of the 20th Century in the world at large, this started to shift.  Many (although never all) scarce resources began to become abundant.  By the early part of the 1900's, the United States produced more than enough food for every American to have enough to eat.  By the late 1960's, the world produced enough food for everyone on the world to have enough to eat.  Hunger was no longer a simple function of lack - it had become a function of our operating system.  This change gave rise to the (continuing) debate between two groups.  Those who began to see unfairness in some going hungry when we had more than enough to feed them (the progressives) and argued for a reform of our system so as to provide resources outside of the private property, money price system (the rise of the welfare state).  And those who argued that removing the signal of price and the motivation (both stick and carrot) of resource allocation based on profit would fatally undermine the functioning of our system - leading to deprivation for everyone.  This debate has waggled back and forth over the past century and a half and the answer is, of course, that both sides are correct.  Our current system does result in substantial inequity.  And removing the profit signal and the carrot/stick motivation will break the machine that has enabled (and supported) the rise of the human population from 1 to 7 billion in 200 years.  

As it goes, this first thread is something we can deal with.  We can pull back and forth between fairness and effectiveness twiddling the dial as conditions change as we have done for the past century.  We might do well, we might do poorly, but we will muddle through.  But this first thread is now being joined by several others - the result being that we need to (reasonably quickly) invent a quite new system that is simultaneously more effective and more just than the current system.  

Let us return to the problems that we want to solve:

* To identify the best ideas and experiences.  The current system is fundamentally tone deaf in three deep ways.  The first is that price (and profit) are rather dull instruments.  That restaurant A charges more money than restaurant B actually tells me very little about the quality of the experience I can get at either.  Hence the rise of curation and recommendation engines.  Yelp provides an entirely different currency than money to help us identify the best ideas and experiences.  Amazon does the same for books.  Rotten Tomatoes for movies, etc.  Of course, as these new information currencies flow and help us better identify the best ideas and experiences, price and profit start to provide a better signal as well - after Yelp, better restaurants get more business.  But we can see that price and profit are more of a result or a residuum than a cause or a driver.  The second (and equally important) problem is that having money does not necessary relate at all to being able to identify good ideas and experiences.  Just because the Walton family was able to figure out a better way to profit from delivering retail goods, does not mean that they have any particular insight into restaurants or art.  But, in our current system, because they have more money, they have more "votes" in the economy and their opinions will carry more weight. The final problem is related to the first - the low fidelity of the "profit" signal.  In this case relating to the many negative values that can get lost as some activity is resolved down to price and profit.  If shoe company A uses low cost child labor and shoe company B does not, the former might very well show a higher profit than the latter.  This does not reflect the notion that using low cost child labor is a better idea - only that the price/profit function loses a lot of important information and can, therefore, give us very poor results.

* To identify the most capable individuals and groups.  Here, again, the current system fails because of the low fidelity of money.  If I encounter two people with one million dollars, I can tell very little, really, about their virtues or merits.  "Gold hath no smell".  Person A might have made her money doing innovative and valuable work.  Person B might have made his stealing it.  Without access to the higher order information, the simple fact of their wealth tells me very, very little about their capability as individuals or groups.  This might sound like a frivolous problem, but it has played a great role in the (ongoing) financial crisis - if the rule of virtue is 'the activity that nets the most profit (including potential fines or penalties associated with law and regulation) is the best activity', then, well, the kinds of behaviors that we have seen (and continue to see) will happen.  Is group A capable and innovative?  Or are they just good at gaming the system?   This is a question that the current system cannot well address.

That the 'gaming of the system' has reached terminal levels should be evident to anyone who participates in the system.  Whether it is the by now unabashed use of manipulation and dissimilitude that is used in marketing and promotion to cause the price/profit signal to have little to no relation to quality of experience;  or the equally unabashed notion that one is almost obliged to work every loophole, angle and obfuscation that one can in order to 'appear' excellent (i.e., profitable) regardless of the real cost or value of your activity, our current system now does an inadequate job of accurately identifying the best ideas and experiences or the most capable individuals.   Any future system must solve these two problems better.  And it can - using higher dimensional currencies, reputation networks, etc. to layer in much richer signals about the true merit and the true costs of different activities, individuals and groups.    

The next two functions are more fun.  

* To motivate the most capable individuals to form the most effective groups to deliver the best ideas and experiences. Obviously, to the degree that our current system does a poor job identifying the best ideas and the most capable people, then out motivational architecture will be exacerbating the problem - by rewarding the wrong behaviours and the wrong people.   (This, by the way, is more or less the center of the fiscal conservative critique of the welfare state and the Austrian critique of Keynesian economics).  Of course, we can fix this problem to some extent using higher dimensional currencies as described above to better identify the best ideas and individuals.  However, the problems of our current motivational system run deeper: the system was designed to (and is effective at) motivating a class of behaviours that is becoming less and less important; and it quite ill suits the classes of behaviours that are becoming more and more important.  It turns out that carrot and stick (reward and punish) motivation works quite well for low creativity tasks - like harvesting crops or doing repetitive jobs on an assembly line.  Until the 1960's when these sorts of tasks dominated the economy, the current motivational system was reasonable.  However, technology changes everything and the story of the 20th Century has precisely been the story of the continuing replacement of human with machine labor in precisely these low creativity functions.  This is one of the great open secrets of the jobs debate circulating these days.  The manufacturing jobs that fled the industrial midwest for Asia (and the textile jobs that fled New England for the South for Asia) are not coming back.  Automation is proceeding apace and even as I type these words, Foxconn (the biggest private-sector employer in China) is working to replace their human workers with robot workers.  Artificial Intelligence, 3D printing, nano-fabrication, etc. - all of these major themes of the 21st Century speak to the continuing obsolescence of precisely the kind of work that our current motivational system is designed to motivate.  

By contrast, behavioural economists have been able to establish that our carrot/stick motivational system works quite poorly for creative and innovative tasks. Rather than the promise of reward and the threat of punishment, it turns out that the creative individual seeks autonomy (control over her own direction), mastery (the ability to become great at what you do), and a sense of meaning (emotional, spiritual and community connected value).  This is a whole different ball-game and one that the current economic system is poorly designed to deliver.  What's more, the necessity of shifting our motivational structure follows not only from the obsolescence of non-creative labor - but also from the recognition that creativity and invention is where all the value really comes from.  When we begin to realize how much the productivity increases of the 19th and 20th Century were the simple consequence of core innovations *and* how poorly our current system promotes and cultivates real creativity and innovation (Tesla anyone?) we realize how much has been left on the table - and how easily a new system could surpass our current system simply by unleashing the creativity that is being stifled in the current system.  Roomba and its descendants neatly and forever solve the problem of who is going to sweep the floor.  The real problem now becomes - how do we optimize for creativity?

This, of course, links to the final problem - resource allocation.  If we come to understand that our task is no longer to motivate non-creative activity, but to unleash creative activity, then we also are able to (and forced to) rethink how we allocate resources.  And one of the first rocks we stub our toe on is the (as yet) largely unheard-of problem of "rivalrous vs. non-rivalrous goods".  As it turns out, the world is made up of two fundamentally different kinds of things.  There are those things that are rivalrous - things like food, water and oil that if you have it, I don't have it and once consumed cease to exist for everyone.  And then there are things that are non-rivalrous - things like ideas and networks where not only can you and I have them simultaneously, their value for both of us increases as more people have them.   Traditionally, virtually all economic systems (from Sumeria to Neo-Liberalism) focus on and are built around rivalrous goods.  For the very good reason that food and water are important.  In the context of rivalrous systems, non-rivalrous goods have to be 'converted' to rivalrous through legal means: the invention of intellectual property.  If I can make my song or my work of art or my innovation something that I can exclude everyone in the world from (by copyright or patent) then I can treat it as if it is any other rivalrous good like corn or oil and slot it into the rivalrous economy.  And by participating in the rivalrous economy, I am able to benefit from the price/money/profit signal - identifying me as a capable creator of good ideas and experiences and then providing me with the resources I need to live and continue doing what I do.  

But, just as this approach to motivation is sub-optimal, so also is this approach to resource allocation sub-optimal.  The value of non-rivalrous goods increases (exponentially) the *more* people who have them.  The current system motivates me to keep my creative ideas scarce - when in fact it is (much) better for me and for everyone else if I spread them as far and wide as I can.  At this moment now, as you read this, there are hundreds of thousands of incredibly innovative and beautiful ideas that are lying fallow just because the right people haven't been connected to the right ideas.  If I write a song that could provide an enriching experience to ten million people, the world is a poorer place until all ten million have had that experience - many of whom will be inspired  to then go on and create richer experiences for everyone else, etc.  The only problem, of course, is that of resource allocation.  In the current system, I get the food I need and the things I want as a result of my delivering rivalrous goods into the rivalrous system.  The new system must be able 'to (better) allocate resources to the most capable individuals and groups to most effectively deliver the best ideas and experiences'.  This means crafting an economy that (for the first time in history) is *centered* on non-rivalrous goods, on creativity and innovation, on the motivational mechanisms that maximize creativity and on the resource allocation mechanisms that optimize for creativity.  While at the same time, providing for the production and the allocation of the scarce rivalrous goods (food, water, energy, ferraris) that will always be a minimum requirement of any effective economic system.
anonymous's avatar
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darthgaul's avatar
I've been thinking about this article and had to write more. :)

The is another difference between rivalrous and Non-rivalrous goods:

Th value of non-rivalrous goods is more likely to be subjective. The value of water is obvious to everyone, you need water to live. But the value of and idea or piece of art is subjective. One person can take and idea and turn it into an even better idea but another will not realize the potential. For example Linus Torvalds taking the GNU components and integrating them into LINUX. Not many could have done that. The other example happens everyday here in Deviant art one persons "Art" is another "Porn" or "totally worthless piece of junk". The value of non-rivalrous goods is much more likely to be "in the eye of the beholder."

Just a thought, but I think it should be a part of this new economy.

Thanks again for a thought provoking piece of non-rivalrous goods. :)
Watyrfall's avatar
WatyrfallHobbyist Traditional Artist
I agree there are flaws in our current system. It is so ingrained, I find it difficult to imagine a different system. Some of my ideas coincide with yours. We are on the same wave length, and my hope is that is a good thing.

I'm writing a setting (for tabletop gaming and/or novels) and have been working on a resource based economy. What does that look like for an everyday person? It's tough to imagine, but also very fun.

Thanks for the article and I hope you get around to writing (and posting) part two. :D
JordanGreenhall's avatar
Resource based? Referring perhaps to the folks over at TVP?

I've met a fellow named Chris Cook who has some excellent ideas around energy based currencies. Not part of my part 2, but excellent.
Watyrfall's avatar
WatyrfallHobbyist Traditional Artist
Yes, TVP is where the idea came from, and I've been chewing on it for a year or two. My version is imaginary, in a future universe with aliens, magic and technology, but I really want to make it without money. It's hard to imagine living day to day without money. The reason I feel so strongly about it is because our current economic system feels so... icky (for lack of a better word.)

Thanks for the reply :)
JordanGreenhall's avatar
There is a long book by David Graeber called Debt: The First 5000 years. It is an anthropological/historical work that I think would be highly useful to someone who is trying to imagine worlds without "money" as we know it.
Watyrfall's avatar
WatyrfallHobbyist Traditional Artist
Thanks for the recommendation :) I bookmarked that book for future consumption :)
darthgaul's avatar
Amazing article I look forward to Part 2!
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