By David Harlley
CEO, ThirdWay Capital
Introduction (A Complex Global Economy)
The two most recent global financial crises have resulted understandably in an increase in conversations about the need for a “New Economy”. The general consensus is that there are a number of issues that such an economy would need to solve for: massive and growing inequality; Environmental degradation; Financial risk mitigation; Erosion of communities; and so on. This is by no means an exhaustive list, but does seem to include the issues most apparent, and most urgently in need of solving.
There have always been those that have questioned whether or not capitalism is the best way to organize labour and resources. Generally, these conversations have remained on the fringes of economic policy and thinking and have been dismissed as mostly impractical. Today however, there is a significant accumulation of ideas around how else we might organize economic activity. There are ideas like donut economics, circular economy, happy planet index etc. All of these ideas are very useful tools to help us imagine what a sustainable economy might look like. Now imagine trying to implement one of these ideas, trying to pull in a sea of metrics and regulation, and make them implementable amongst the thousands of cultures and marketplaces that make up the global economy, and you can see why they have failed to gain traction. The truest thing about the global economy is that it is complex. Here is a definition of complexity that I like “A system in which large networks of components with no central control and simple rules of operation give rise to complex collective behaviour, sophisticated information processing, and adaptation via learning or evolution” (Complexity: A guided tour). If this is true about the global economy (and it is), then it is immediately clear why capitalism as we know it has the appeal and staying power that it does. Capitalism provides us a great basis for complexity.
First, a little more on complexity. Complexity theory generally asserts that complex systems can only be built based on a limited number of very simple rules. These rules give the components of the system the freedom to act in a variety of different ways as long as their actions follow those rules or guidelines. Complex systems therefore are incredibly dynamic, resilient, and in some cases spontaneous and generative, able to create new realities. A few examples of complex systems are ant colonies, the human immune system, weather, and warfare. All these systems have as their building blocks, very simple components, which if taken on their own could be considered basic. As an example, think about an army ant wandering around on its own, detached from its colony.
We have a limited understanding of the underlying principles by which a lot of complex systems work. We do not understand for instance, what set of rules an individual army ant is following, that allows it to cooperate with its fellow colony members to forage for food, protect the queen, build homes, and perform all the other very coordinated tasks that the colony needs to perform to survive. The field of complexity concerns itself in part with trying to understand what some of these drivers are. However, when the components of the complex system are humans (as is the case with global economics) we can have a bit more insight.
Re-writing the Rules of the Global Economy
In the case of capitalism and our global economy, the simple rule is self-interest. Self-interest is the underlying principle that governs the lion share of transactions, strategic decision making, financial market and investment activity, product innovation, marketing and sales. Whatever aspect of the behemoth we consider, clearly the gears keep grinding because everyone in the system either acts in self-interest or on the expectation that other actors in the system are acting in self-interest. This is what allows capitalistic economies to do what planned economies could never do. This is the beauty of capitalism, why it is so resilient, and why it is so difficult to move away from. Capitalism may be elegant in its ability to create and sustain complexity, however we appear to have assumed erroneously that an elegant means would guarantee a beautiful end. Unfortunately, complex systems are not in and of themselves good or bad. If the immune system is a complex system, so is the system that governs the spread of disease. If warfare is complex, so is terrorist activity. The outcomes of the system are what really matter, and in the case of capitalism, the outcomes are troubling to say the least.
In response to a global economy that has shown itself to be sub-optimal we have had to apply hundreds upon hundreds of regulations to curb capitalism’s excesses and make up for its deficiencies. In essence we have applied a complicatedsolution to a complex problem. This rarely works well. As a case in point, consider that the biggest free market in the world, the US economy, is ironically kept at bay by one of the biggest, most expensive and most convoluted government infrastructures there is, and that the size and reach of this infrastructure is a central point of tension and division in the country.
To create a different organism, a different global economy with different outcomes, we will need to create another rule, either to replace that of self-interest or add to it. The philosophical argument will invariably be, can humans be reliably led by an instinct other than self-interest? “True capitalists” argue that the answer to this is no. However, the field of psychology disagrees. Psychological profiles of humans indicate that self-interest is simply one of four areas that are natural, hard-wired drivers for humans in society. These four drivers are actually two domains that exist in tension. The self-interest driver is in tension with the drive for community and “concern for the other”. Capitalism simply emphasizes the drive for self-interest at the expense of concern for the other. The other area of tension is between the desire for novelty and the desire for tradition or continuity and reliability. Again, capitalism emphasizes the drive for novelty (the consumer impulse) at the expense of the drive for tradition.
What we have are four basic drives, the potential for four basic rules, and importantly we do not have to get rid of self-interest. We only have to add to it. We do not have to emphasize the community at the expense of the individual, but of course some concessions will need to be made to achieve this paradox of both, and. In southern Africa the word “ubuntu” means “I am because we are”, crucially accepting the reality of the I, while emphasizing the necessity of the “we”. The next economy if it is to be complex yet sustainable, if it is to produce an organism that reflects and embodies the deep needs of humans and the environment we need to flourish, will need to pull from all of these areas, and satisfy each of these drives.
Some Ideas for Change
I would suggest that the first step is to incentivize less aggressively, the drive for self-interest (profit) by reviewing incentives that are already in place like quarterly reporting for public companies, and short-term incentive packages that are currently dominant both in corporations and in the capital markets. In other words, a good start would be to quit incentivizing bad, short-sighted (unsustainable) behaviour in the pursuit of self-interest. Most managers I have worked with would gladly consider employee well-being, if they had the time, if they were not constantly chasing quarterly projections.
The next step is not so much to incentivize the other drivers. We should not incentivize the creation of a better workplace for employees, we should trust that for a lot of people, this is an incentive in itself (care for the other). The key is to create opportunities for these other drives to be satisfied and to not penalize actions taken in their pursuit. For instance, employee ownership is a great way to provide employees with added purpose, agency and wealth, and probably the biggest reasons it does not happen are a lack of information, and a lack of financial agency on the part of the employees to buy stakes in their company. The drive is there, it is natural and innate in people, but there are several barriers. We could invest in reducing these barriers, thereby creating opportunity for employee ownership to flourish.
For anyone that thinks it is impossible for humans to make this shift from self-interest to embracing a more holistic vision for ourselves and the economies we live in, remember that scarcely a 100 years ago, most people married for practical and often financial reasons. It may have been unthinkable then that we would undergo such a massive cultural shift towards marrying for love in such a small space of time, and yet here we are. There was no regulation required to implement this, human beings just decided. Improved economic conditions helped (the barriers were reduced), but it might be argued that the chief barriers were mental and cultural.
If we do go down this path of holistic incentives, the chief danger will be in shifting too extremely (like some might argue we did in marriage), we must embrace a paradox, and believe that we can hold our different needs in tension… as a race, we must accept that we ourselves are complex.
(First published at dogoodbusiness.net)