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Intervention by Denise Caruso Read Intervention by Denise Caruso, Executive Director of the Hybrid Vigor Silver Award Winner, 2007 Independent Publisher Book Awards; Best Business Books 2007, Strategy+Business Magazine


by ~ March 16, 2010.
Permalink | Filed under: Hybrid Vigor, Social Trust Online.

Imagine a friend invites you to a dinner party. This year, the invitation goes, the party will be catered so you’ll need to pay $40 per guest. Maybe you’re not too excited about the catering idea, but you figure you want to support your friend, so you decide to attend and bring your spouse. At the party, the general consensus is that it’s fun to see everyone, but the catered food wasn’t nearly as good as the traditional potluck approach. Later, word’s passed around that your friend decided to do some cost-cutting on the catering, which explained the below-average food. Then news breaks that because of these cost-cutting measures, your friend actually turned a nice profit on the party and was able to buy her kid a new Nintendo DSi (apparently the kid got mad while playing with the old one and threw it against a wall).

Would you feel happy for your friend? Or would you feel used? After all, your friend took the initiative; she took the risk (after all, what if someone got sick and decided to sue her?); she organized the event; she provided the venue. In short, your friend was the entrepreneur; she “owned” the party. And if that’s not to your liking, what’s stopping you from throwing a party of your own?

But you may still experience a sense of betrayal that comes from feeling obliged to attend an event for friendship’s sake—an event that ostensibly was just a party but turned out to be a fundraiser for your friend’s spoiled kid. In addition, your attendance at the party mandated the attendance of your spouse, prompted you to buy a new dress, and encouraged your mutual friends to attend as well. So you also unwittingly marketed this fundraiser for an over-privileged kid. And of course, since the food was sub-par, you feel taken by your own friend.

Stone Soup 2.0

This modern retelling of the Stone Soup fable is a commentary on capitalistic society, one in which the Pot & Stone owners walk away with most of the soup. Or more literally, American capitalism is a system that distributes the greatest rewards to owners of infrastructure. In this economic arrangement, business owners have much greater control over the value created by the business than do the contributors. This reward structure is said to encourage private enterprise and competition, which eventually will produce the greatest good for the largest number of people.

But the Law of Relational Symmetry tells us that the party in control of the relationship will exploit the other participants. In today’s businesses, owners control the most important aspects of the relationship, such as the ability to set compensation, benefits, and terms of employment. Contributors usually have to sign away their rights to any intellectual property they create to their employer. And often, contributors sign non-compete agreements that restrict their movements after refusing to work under unfavorable terms. With no ability to hold property (intellectual property in this case) and an acute need for income and healthcare, workers in today’s society need jobs the way Victorian women needed husbands.

So while capitalism is undoubtedly the best system practiced on a massive scale for producing wealth, it is nonetheless a system of exploitation and produces less than optimal results for all parties.

Who Benefits when the Masses Believe in Capitalism?

Choosing an economic system isn’t an academic discussion for much of the world. When confronting the difficult realities of capitalism, emerging economies often choose another route. Even the EU had to face sobering statistics in capitalism’s approach to wealth while forming its economic policy. The Guardian recounted many of the challenges the EU faces in adopting capitalistic ideals:

Today, while corporate profits are soaring around the world, 89 countries find themselves worse off economically than they were in the early 1990s. Capitalism promised that globalisation would narrow the gap between rich and poor. Instead the divide has widened. The 356 richest families on the planet enjoy a combined wealth that now exceeds the annual income of 40% of the human race. Two-thirds of the world’s population have never made a phone call and one-third have no access to electricity….

Our business leaders decried the corruption that permeated the old centralised communist regimes, while many engaged in equally egregious corporate corruption, bringing down some of the world’s “most trusted” companies….

Left to its own internal logic, the unfettered market leads not to a bigger share of the economic pie for all but a “winner takes all” endgame….

But capitalism does not fairly distribute the fruits of economic progress. That’s because the logic in the boardroom is always to cut production costs in order to maximise profits and shareholder value. This means reducing, whenever possible, the share of the gains that goes to workers, as well as cutting the expense of preserving the natural environment upon which all future economic activity depends.

In short, capitalism works really well for a small portion of the population. The “surplus value,” as Marx described it, always goes to the owners of infrastructure.

But the fact that capitalism makes some people richer than others isn’t really the issue. If contributors all benefit from an enterprise and if access to ownership is open to everyone, then societies generally welcome such an economic arrangement. But when wealth is transferred to a select few either institutionally or by outright deceit, trust erodes and the basis for prosperity vanishes.

The Velvet Rope and the American Dream

In American society, who are the owners? Is business ownership really open to anyone with an American dream? Can anyone be an owner? Can everyone be a business owner?

The prerequisites for ownership are said to be egalitarian, but in practice they’re not. The seeds of ownership require opportunity and circumstance, but maintaining ownership requires something else entirely. And the nature of business ownership makes owners a self-selected group. The most successful business owners are those who know how to inspire fanatical contribution to “the dinner party” while maintaining a stingy budget. Not everyone is cut out for that.

Economic systems that predate capitalism were of course overtly exploitive. In feudal society, the lord could simply coerce the peasantry to surrender goods and provide service. But in a society with government of the people, by the people, and for the people, economic coercion is subtle (or rather, more passive aggressive, as shown in the movie Office Space).

The “Stone Soup 2.0” fable also portrays how natural instincts for trust are first institutionalized and then exploited for someone else’s gain. Some business owners use friendship or tribal connection to inspire contribution, as in the party example above. Some create a sense of “family.” Some create the illusion of ownership (“son, as project manager, you own this product!”) Some create the aura of grandeur. All of these methods draw contributors into a narrative that helps them believe they are doing something important, rewarding, and fun. The narrative also distracts contributors’ attention away from the fact that they are simply taking part in a fundraiser for an over-privileged kid. This is the way of the world.

Of Owners and Contributors

In most of today’s enterprises, contributors deliver much more value than the owners. Most of the value in Facebook comes from ordinary users and from thousands of engineers now working on the platform. The code that the original owners developed has long since been replaced. In the NFL, where salaries seem fantastic compared to a middle-class incomes, it’s still the franchise owners who profit the most. Similarly, in Hollywood, actors make much less than the studios (also see a similar article in USA Today).

Nothing draws into focus the differences between ownership and contribution like a corporate acquisition or public offering. The classic example is that of Jim Clark, who took Netscape public—which enabled Mr. Clark to build his dream boat Hyperion, but left everyone but a select few at Netscape with almost nothing. (For more detail on this story, see Michael Lewis’ book, “The New, New Thing: A Silicon Valley Story.” Ironically, one of Clark’s motives behind founding Netscape was to fleece venture capitalists and bankers who had devoured most of the profit from his previous company, Silicon Graphics.)

I think of the 50-or-so startups I’ve watched in the digital identity industry as they’ve gone through various phases. And I think of Burton Group, a company I worked at for eight years, as it was acquired by Gartner for $56 million. In every case, contributors and inventors were lured by the idea that they were part of something great and that they would find riches at the end of the trail. But in every case, the spoils of acquisition went to only a select few—those with a stake in the business and those arranging the financing.

The Effects of Capitalism on Trust

The roles that contributors, customers, and owners are obliged to assume in a capitalistic society strain and erode bonds of trust. The hopelessly co-dependent nature of owner-contributor relationships makes the relationship durable, but strained. This type of relationship engenders obsequiousness of Lilliputian proportions.

Perhaps this situation is a natural outcome of the human condition, because exploitation certainly wasn’t introduced by capitalism. James commented on this very issue 2,000 years ago:

Suppose a man comes into your meeting wearing a gold ring and fine clothes, and a poor man in shabby clothes also comes in. If you show special attention to the man wearing fine clothes and say, “Here’s a good seat for you,” but say to the poor man, “You stand there” or “Sit on the floor by my feet,” have you not discriminated among yourselves and become judges with evil thoughts? … But you have insulted the poor. Is it not the rich who are exploiting you?

But as trust in society’s institutions erodes, revolution isn’t far off. Yeats said it better:

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

Solutions for Trust and Collaboration

The solution for sustainable trust isn’t simply to shuffle ownership from one group to another, or to shift ownership onto government or to the proletariat. Unless the game itself is altered, the names will change, but the roles will remain the same. Instead, our aim should be to mature the game of American Capitalism rather than to supplant it.

To make societal structures trustworthy, they must be fitted with features that promote trust. Just as modern buildings are designed to be resilient to earthquakes and to suppress fires, society’s institutions can be fitted with fail-safe mechanisms that improve confidence. We can also design features that promote sociality and collaboration, while thwarting gaming and corruption.

Elinor Ostrom proposed a theory of the conditions that improved the likelihood of multilateral, durable collaborative action (or what I like to call “trust”). Ostrom claimed that trust greatly improves under the following conditions:

  1. Participants perceive they will be harmed in some way if no action is taken (shared conflict)
  2. A fair solution can be found through which all participants will be affected in similar ways by the rules (symmetry)
  3. The durability of the relationship is believed to be high (low defection rates among participants)
  4. The cost of participation is reasonably low
  5. Most participants agree on norms for reciprocity and trust
  6. The group of participants is stable and, preferably, small

Ostrom further claims that ongoing governance of a shared resource is sustainable if the following design principles are adhered to:

  1. Exclusion – The group must be able to guard the resource from free loading, theft, or vandalism.
  2. Rationality – The agreed upon rules must be attuned to the context of the resource
  3. Involvement – Members have avenues to participate in modifying operational rules
  4. Monitoring – Effective monitoring and auditing or policies
  5. Enforcement – Sanctions can be imposed on violators of the rules
  6. Arbitration – Appropriators have access to low cost, but effective conflict resolution
  7. Autonomy – The rights of appropriators to devise their own institutions are not challenged by external governmental authorities

(The above lists are adapted from “Governing the Commons: The Evolution of Institutions for Collective Action” Ostrom, Calvert, Eggertsson)

Such principles enable pro-social behaviors to emerge in individuals, creating the cohesion necessary for collaboration.

This post is already much too long to discuss practical application of these principals. However that’s the topic of many past and future posts, so keep reading and commenting!

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