Creating a Values-based Economy

A. The way we usually talk about the economy is based in denial of 2 crucial facts:

1) The government is massively involved in the inner workings of the economy.
2) Power also massively shapes the economy.

This denial tilts the playing field towards people with power — big corporations and the rich — by stacking the odds in favor of their values:

• If we don’t acknowledge the massive role government plays in the economy, we won’t have a real conversation about the values we should encourage, so people with power are more likely to call the shots.
• This denial lets them shape what is vs isn’t counted as “government.” Example: if Medicare becomes too popular to touch, we go from “Medicare is Socialism ” to “keep your government hands off my Medicare “

What if we stopped being in denial?
Then maybe everyone could get a real say in which values shape the economy.
(a.k.a. democracy)

B. In practice, what would that look like?

To figure it out, start with Krugman’s critique of “command and control”: “direct regulations,” or laying out in detail “what will or will not be permitted,” works for some problems, but not for many:

• It’s impossible to think of every exception
• It doesn’t allow for flexibility
• It doesn’t unleash people’s and organization’s creativity

So, how do we give everyone a real say in which values shape the economy in a way that encourages flexibility and creativity?

1) Stack the Odds in Favor of the Good Guys
Shape government intervention in the economy so it creates an environment that supports and encourages our values.

• Can use incentives, but not a simpleminded “put a price on it and it’ll all work out” approach — People aren’t Calculators
• Can use markets, but it’s one of many tools, not the entire toolkit

2) Everybody Gets a Real Say (Power and the Economy)
Reshape power in the economy so that:

• Everyone has a real chance of having a say in which values shape the economy
• The system supporting our values is sustainable — it isn’t easily undermined by powerful actors.
• What happens when it isn’t: the 1990’s Wall Street “deregulation” that led to our financial meltdown

How we make it happen:

• Checks and Balances
• Instead of individual action — e.g., “if we all just pony up” — mobilize folks to choose and act together
• Deal with complexities of power & compromises instead of playing the game, “I’m pure and corporations are evil”

3) We Aren’t As Smart As We Think We Are
Market cheerleaders: “government regulation/bureaucrats can’t be smarter than the market — the economy is too complicated.”

Reality: market-based solutions run into the same problem — e.g., cap and trade

If there’s no way to get it just right right, then we need a framework for handling the uncertainty:

• A little humility — acknowledge we aren’t as smart as we think we are
• Accountability — e.g., if banks are supposed to be helping to create good jobs, make sure they actually are
• Feedback loops
• Get Real: we can’t get everything we want — choosing values is usually about making trade-offs

A few thoughts about this framework:

The Intro

• Not light and frothy like the Game metaphor
• But not as snappy as “the middle class was no accident“
• Maybe use a metaphor to describe the denial and its impact?
• Maybe reorder the beginning so I start with values rather than with denial? I can do that easily with government intervention, not sure how to do it with power

The Mechanics

• With some fleshing out, I buy the argument made in the individual pieces.
• But it still needs more powerful language and a much clearer connection with the intro. At this point, feels disjointed.

Where Next?

Maybe revisit the idea of market-based versus values-based framework. If I can combine some of the energy of that piece with some of the pieces from this brain dump, it might take me to the next step.

The case I’ve laid out over the last six posts is not an argument against using markets as a tool. As I’ve said, for example, despite all the problems with cap and trade it’s certainly possible that this usage of markets could be an important piece of a larger solution. What I’ve been arguing against is the idea of using a market-based framework.

I think it’s also important to be clear that I’m not arguing that many of our solutions won’t be embedded in or operate alongside of a market. They will be — and so would an approach that relied primarily on regulations.

I’m still struggling with defining what exactly a values-based framework is. But after playing with values-based vs. market-based frameworks for a few weeks, I think it has some real potential. And making the comparison sets some useful boundaries on the scope of what I’m trying to do — which is a really good thing when tackling something this complex.

Finally, I think my first draft of a values-based framework gets around one of the issues I have with some of the other attempts to put values at the center of talking about the economy. These approaches often get off to a strong start, but they run out of gas/bio diesel pretty quickly; they don’t do a good job of handling the inherent challenges of acting on our values in something as complex as the economy.

All in all, not a bad “stumbling towards.”

One of the fundamental principles underlying a market-based framework is that through consumer choice, everyone gets a say. Some bureaucrat doesn’t decide what shoes you get to wear, you do. If you decide hot pink ballerina slippers or combat boots — or hot pink combat boots — best express who you are, you get to make that call. If you have the cash, that is, and if it’s profitable for someone to make hot pink combat boots. For this kind of freedom, the argument goes, the market is pretty effective.

But as Krugman said in Building A Green Economy, there are limits to how much real freedom markets can provide for all.

Now, efficiency isn’t everything. In particular, there is no reason to assume that free markets will deliver an outcome that we consider fair or just. So the case for market efficiency says nothing about whether we should have, say, some form of guaranteed health insurance, aid to the poor and so forth. But the logic of basic economics says that we should try to achieve social goals through “aftermarket” interventions. That is, we should let markets do their job, making efficient use of the nation’s resources, then utilize taxes and transfers to help those whom the market passes by.

The “aftermarket” approach runs into two problems. The first is what almost happened in Chula Vista. In Chula Vista, the fuel plant’s owner planned on spewing toxins close to folks’ homes and their kids’ schools. Doing something about it afterwards would be too late. And although there was a city plan that should have protected these folks, the owner of the fossil fuel plant simply ignored it He knew that unlike my or Krugman’s neighborhood, politicians wouldn’t crush him. He figured these folks didn’t have enough political power to protect themselves.

We can see the same market calculus at play with BP. BP figured it didn’t have to worry that not paying enough attention to safety would wipe out the company, because in 1990 Big Oil got Congress to cap their liability at $75 million (although there’s a chance there may be a way around the cap).

The same is true for the finance industry, which back under Clinton managed to gut the rules stopping them from taking insane risks without getting rid of their bailout safety net.

In short, a market-based framework gets into trouble because it doesn’t take power seriously enough. It pretends that power isn’t at the heart of markets, that it isn’t central to the shaping of markets. It doesn’t deal with the critical question, who gets to define what counts as “efficient”? One person’s market “failure” may be another person’s market success.

That’s also why many folks who are fans of the market-based framework end up proposing fairytale solutions. Take people like Tom Friedman, who says the best way to stop the climate crisis is create a carbon tax and then let the market do its magic. Even if the word “tax” wasn’t political suicide for Republicans now, there is no way a carbon tax large enough to do any good will happen in the US. Suburban folks who live far from their jobs and rural folks will stomp any politician who votes for it because it would devastate their lives.

A values-based framework puts power at the center. If you’re going to talk about what values should shape our economy, you’ve got to talk about who gets to decide which values. And if you believe in fairness and justice and freedom, that leads you to say, everybody should have a real say.

There are some great side benefits to this approach. If you empower many voices, more likely to explore a broader range of solutions. It also acts as a check on policy mistakes — if everyone has a real say, it’s harder to hose people.

Mind you, figuring out what “everybody should have a real say” means isn’t always straightforward. You could probably get most Americans to agree, big corporations shouldn’t be the ones who get to make all the big decisions — few people would argue the fuel plant’s owner should have been able to run over the folks in Chula Vista. On the other hand, I don’t want to live in a world where every decision is ground through a never-ending series of neighborhood community meetings. It’s hard to see how you end up with a world filled with interesting startups if you did. Ditto for NIMBYists, who essentially argue that people who live in a place today have veto power over the people who might live there tomorrow.

But pretending the complexities of power in the economy don’t exist doesn’t make them go away. All that gets you is the crazy, dysfunctional mess we have today. Better we own up to the difficulties and stumble towards a better answer.

Up next: conclusion

It’s easy to understand why economists love market-based frameworks: they’re elegantly simple. Set the right prices and everything follows. Or as Krugman wrote about solving the climate crisis:

Econ 101 tells us — probably correctly — that the only way to get people to change their behavior appropriately is to put a price on emissions so this cost in turn gets incorporated into everything else in a way that reflects ultimate environmental impacts…. [For example,] When businesses decide how much to spend on insulation, they will take into account the costs of heating and air-conditioning that include the price of emissions licenses or taxes for electricity generation.

But as we saw in Getting Green Done, price incentives often aren’t enough. Even when Schendler could show that switching to compact fluorescent light bulbs would save his company a lot of money, he lost that battle. Part of the reason: “Hotel managers don’t believe they make money by saving — they make money by selling” even though a huge amount of profit gets eaten up by overhead. In other words, people and organizations aren’t calculators.

That’s why, as we saw last year, behavioral economics may be doing well in the press but still isn’t making much headway with most economists — it makes building elegantly simple models close to impossible. Better to pretend it doesn’t exist:

“Behavioral economics has identified a dizzying array of human foibles. We clearly can’t incorporate all of them, and because of that, people feel that incorporating one error into your model may be just as unrealistic as incorporating none,” says Ed Glaeser, a professor of economics at Harvard University.

If we can’t afford to just throw our hands up and say the economy’s too complicated, what do we do? I say, place our bets. Markets can be a great tool, but there are plenty others — many of which also encourage flexibility and creativity:

• Prime the Pump by funding experiments
• Work together like the folks in Chula Vista’s Environmental Health Coalition, New York City’s WE ACT, Kentuckians for the Commonwealth, and the Miami Workers Center did to create a collaborative vision of where we want to take our community
• Use the power of non-market based competition and friendly rivalries like CityFlight 2010
• Run global corporate accountability campaigns
• Focus on a particular sector of the economy, such as Architecture 2030 — a campaign by architects whose goal is to ensure that by 2030 all new buildings and major renovations are carbon neutral

And these are just tools for taking on the climate crisis. There are plenty of examples from efforts to solve other problems. Take the case of open source software. If you surf the net, odds are many of the sites you visit it use open source software — an incredibly flexible, creative ecosystem where folks create and give away software and the means for modifying it. It’s one of our economy’s great success stories, and it’s not a market-based solution.

Markets are a good tool, but they are only one of many. If we focus just on markets, we’ll miss out on a lot of opportunities for tackling the major problems we’re facing.

If you’re concerned these other approaches won’t value flexibility and creativity the way markets can, I think you’re missing the point of a values-based framework. If we value flexibility and creativity not just because it’s effective in solving problems but because we intrinsically value it, then there’s no reason why we can’t decide it’s one of our critical values. I don’t know about you, but I want to live in a world where when we take on complicated problems like the climate crisis, we look for solutions that are effective, just, and that allow for flexibility and creativity.

In coming months, I’ll flesh out ways of structuring/chunking these tools and what’s involved in placing our bets. But for now, perhaps a simple way of thinking about the difference between a market-based framework and values-based framework is the difference between a model and heuristics. Economists love simple, clean, elegant models — and I don’t blame them. But if you live in the messy real world, they aren’t enough of a guide. That’s why in my sector of the economy, we tend to use heuristics instead. They aren’t as satisfying, but they get the job done.

Up Next: making sure everyone gets a real say.

If you’ve ever heard someone preach the joys of a market-based solution, odds are at some point they’ve said, government regulations/bureaucrats can’t be smarter than the market — the economy’s just too complicated. But as we saw last week, creating a market-based solution runs smack into the same problem. In case you need a reminder, here’s one last example:

On India’s Bhilangana river, local farmers run a finely-tuned terraced irrigation system that provides them with rice, wheat, mustard, fruits and vegetables. This ingenious, extremely low-carbon system of agriculture is threatened by a new hydroelectric project designed to help power India’s heavy industry. Villagers may have to leave the valley, losing not only their livelihoods but also their knowledge of a uniquely sustainable modern technology.

Is carbon trading stepping in to support the villagers’ piece of the solution to global warming? On the contrary. It’s supporting the hydropower company, which has hired consultants to argue that their dam will result in fewer carbon emissions than would have been the case if it had not been built. The firm plans to sell the resulting carbon emission rights to polluting companies in Europe. The example is typical of the way carbon markets are undermining positive approaches to climate change everywhere.

I’m guessing that’s not what the designers of carbon emission trading markets had in mind.

So what do we do? There’s a simple solution, used every day in software development (my little corner of the economy), industrial design, and many others: you deal with it head on. You start from the assumption that you can’t possibly figure it all out in advance and you go from there.

If I’m trying to build a complicated database, for example, I start by assuming that I won’t really understand what users want, users may not understand what they want, and what they need tomorrow will be different than today. So, I build software iteratively, so my users and I get to find out for real if we are on the right track. I start with mockups rather than actual code; knowing you probably won’t get it exactly right the first time is a lot less scary when you’re throwing away a paper prototype instead of lots of labor-intensive programming. And I use risk management. I come up with a list of things that might go wrong and what we’ll do to mitigate the risk. Then I watch like a hawk for signs of trouble and move aggressively when I see them.

A lot of the same lessons apply when trying to shove the economy closer towards our values. We start from assuming we won’t get it right and then build tools and systems to help us stay out and get out of trouble.

Take the idea of priming the pump from Auden Schendler’s Getting Green Done. Schendler writes:

government needs examples of how to be environmentally progressive and case studies from which to build policy. Every individual and business matters because we need labs for determining what’s worth pursuing and how best to do it.

So before we know enough to write smart regulations, we can “prime the pump” by funding experiments. That’s how Schendler’s first success at the Aspen Skiing Company happened — he got a grant to fund his pilot project. Later, once we’ve gained enough experience, we can do things like write the first versions of green building codes. But even this will take trial and error to find the right balance.

There are two keys to this approach: holding folks accountable and feedback loops. Instead of assuming that markets will automatically lower emissions, we watch carefully to see if it is actually lowering emissions and then tweak the rules and incentives as we go. Instead of assuming that if Wall Street has plenty of capital and shareholders are happy corporations will automatically create lots of good jobs, we keep a close eye out on what capital is getting used for and whether it’s actually creating good jobs.

It’s not a simple answer. Then again, life isn’t simple. If we start from the principle that we aren’t as smart as we think we are, we are a lot more likely to get to where we want to go.

Up next: placing our bets

Topos’ Promoting Broad Prosperity framework avoids a major problem with my approach. For the past few months, I’ve been focused on understanding how the nuts and bolts of the economy’s engine works. I think I’ve started to figure it out. But I haven’t yet figured out how this engine is connected to the steering wheel or the breaks, let alone how to connect the system’s aerodynamics — the shaping of a body to help it go faster — to its styling. And ultimately I think choosing an economic framework is like choosing a car. You don’t want it because of its engine or aerodynamics. You want it because it’ll get you to where you want to go and because it makes a statement about what matters to you.

I think Topos’ “the middle-class is no accident” frame is the first step in helping me figure out how to connect the engine to what folks really care about. There’s no preamble. They don’t start with “the economy.” They go straight to what matters to most U.S. folks — the “middle class,” by which most Americans mean building a society where everybody can make it. Then Topos immediately connects it back to how the economy really works. Their framework never goes into the depth or nuance I think we’ll need for a truly powerful way of thinking about the economy. But that’s not what they’re trying to do. They’re trying to hit people where they live — and do it quickly.

The frame also sets you up nicely for slapping down a counterattack. If somebody says to you, “you just want more big government,” you can say,

So you think giving 4.4 million veterans a college grant after World War II was a mistake? Or FHA loans so for the first time millions of Americans could own their own home? Are you saying that didn’t happen? Or are you against the middle-class?

Who wants to be on the receiving end of that?

The frames of the Intentional Middle-Class and Public Structures also keeps the conversation focused on the whole. If Topos just talked about, say, schools, somebody could play the Exception card — I mostly don’t want government, but it’s okay for education. If they just talked about healthcare, some folks might say they think healthcare should be up to individuals. But having a strong middle-class? It covers so many facets of government that it’s the rule, not the exception. And it doesn’t come in individual servings; it’s something we’ve gotta Choose Together.

The conventional economic framework, a.k.a. Econ 101, says the economy can be broken into 3 layers:

• People are calculators: they rationally pursue their self-interest given near perfect information about the world
• Organizations are calculators
• The Market is mostly efficient (with some help from the government)

The RTE framework says, that’s not how the economy works. The economy is like a game with complex rules that shape folks actions at different levels of the economy. In other words, the real world looks like this:

• People Aren’t Calculators: Behavioral Economics / Psychology / Anthropology / Sociology
• Organizations Aren’t Calculators: Organizational Development / Sociology of Organizations
• Political Economy: government sets many rules of the game, so players can try to win by:
  • Playing by the rules
  • Changing the rules

So if you want to make the world a better place, a simple, clean Econ 101 model won’t cut it. You’ve got to get your hands dirty and understand how the economy actually works. To do that, you need 2 perspectives on the economy:

• Practitioner’s Perspective: Understanding the rules that shape the actions of individuals and organizations in a particular niche of the economy.
• Movement Perspective: Stepping back, looking at the bigger picture, and forcing yourself to ask not what the most personally satisfying or most comfortable act we can take but what’s the most effective action.

Here’s how the 2 perspectives are related to the 3 levels of the economy:

• The 3 levels of the economy
• The metaphor of economy as a game with rules
• The ideas/principles embedded in the 2 Perspectives

What’s missing or needs work:

• Now that the idea of Perspectives has been rattling around in my head for a few weeks, it doesn’t feel like it’s working. I’m not sure why. It might make more sense to focus on the principles underneath the Perspectives rather than the Perspectives themselves. I don’t want to lose the impulse behind the idea of Perspectives. But I need something more fundamental, more bedrock.
• Issues like the role of race in the economy are implicitly in the framework, but they feel like they are getting buried.
• There isn’t a clear connection between understanding the mechanics of how the economy works and what really matters to us — our dreams, desires, fears, and overcoming feelings of helplessness. For example, where does a feeling like “we want our country to work again” fit in the framework?

A quick overview of where we’re headed in the next few weeks.

1. What Are Our Values? What Trade-Offs Are We Willing to Make?
• Are These Choices We’ve Got to Choose Together? (Principle #2)
• Caveat: We Can’t Control the Economy (Principle #1)
• Chocolate Cake Diets Are a Bad Idea (New Principle, #5)
2. Push the Economy Towards Our Values (Stack the Deck , Principle #3)
1. Understand the Actors & their Ecosystem (Assumptions #1, #2, #3)
2. Create a Strategy Map
3. Use 3 Strategies for Change
• Make It Visible
• Make It Easy
• Make It Worth Doing (Carrots & Sticks)
4. Make It Sustainable (includes Checks and Balances, Principle #4)
5. Rinse, Repeat (feedback loops, see also Principle #1)

Since the basics of the first part — figuring out our values — are pretty straightforward, I’m going to start by just briefly discussing them. After I’ve gone through the second part, I’ll round back to some of the nuances of the first.

I’ve never tried to think out loud online, so this is a little nerve-racking for me. So, one last caveat. Obviously, this isn’t the model I’m going to end up with. But the only way to get there is by laying out some model, warts and all, then working on it.

Up next: taking this model out for spin using the issue of work-life balance.

You might ask, did these economists ever have a real job? If so, were they taking Acid or Ecstasy most of the time? How did they get the idea that what was going on was even remotely rational?

Now many economists will freely admit that sometimes organizations make decisions that aren’t entirely rational. But over time the competitive pressures of the market will smooth out the effect of these irrational blips — the more rational companies will outcompete the less rational ones. So, it’s safe for your model to assume that organizations act like calculators.

If only it were true. Sometimes in the world of IT, where I work, it feels like life inside corporations is a reality show called Survival of the Least Stupid. Sure, if a company keeps making crazy decisions it can wipe them out (or, in the case of GM, get them bailed out by the Feds). But for any decent sized company, there’s plenty of give to recover from astonishingly irrational decisions.

Also, managers in organizations make a lot of their decisions based on what their peers in their industry are doing. If all your competitors are making the same mistakes, you can do some pretty stupid stuff and still compete quite nicely.

It’s also not uncommon for organizations to be extremely rational and efficient in one part of the business while throwing their brains out the window in another. I once worked as a contractor for a company that calculated to the penny how much money they could squeeze out of their janitors while on the IT side listened attentively to their inner child, who was screaming, “I want that shiny new red bike NOW!!!!”

Even when organizations have made rational decisions, implementing those decisions can be really hard. Organizations are their own mini ecosystems, with different units having different types of resources that shape their behavior in different ways, making them more or less resistant to certain changes.

Then there’s backbiting, turf wars, and all the other festivities known as office politics that can easily kill a rational decision before it ever leaves the crib.

Sometimes even knowing whether our rational decision has been implemented can be challenging. Take what the HBO series The Wire called “juking the stats.” From police precints to schools, The Wire showed how decent people were forced to distort reality to get the optimistic statistics the Top Brass demanded.

The difficulty of actually implementing rational decisions once they’re made is why we have the industry known as Organizational Development. It’s devoted to churning out scads of books, seminars, and consultants that try to explain how to go about changing your organization — or, to put it another way, getting your organization to act the way economists say organizations act.

Pretending that organizations or people are calculators doesn’t make sense. If we start from assumptions that are based in the real world, I think we’re going to end up with a much more useful model of economy.

Next up: a concrete example.

All models have to make assumptions to simplify the world. But when you start from an assumption that is obviously flat-out wrong, that’s a problem.

For example, how do you explain the multibillion-dollar industry of advertising? Does Budweiser spend millions on advertising filled with hot models and/or silly men because they think it’s a rational argument for buying their beer? Or maybe people buy Bud because they enjoy the commercials and are drinking Bud to subsidize making more commercials — sort of like supporting the arts.

And then there’s the financial world. After last year, does anyone really need convincing that what goes on in Wall Street isn’t entirely rational?

In the last few years, a small but growing band of researchers have argued we should stop pretending people are always rational and study how they actually make economic decisions. Go to a bookstore these days and you can find plenty of titles in the burgeoning field of “behavioral economics” — Predictably Irrational, How We Decide, and Nudge to name a few. These books are filled with real-world examples of how people make decisions using a mix of of rational calculations, unconscious cognitive biases, habit, and emotion. It seems like a hell of a better assumption on which to build a useful model of the economy.