Social capital and the trust deficit
Some examples. The main obstacle to creating a new manufacturing company in the 1900s was capital. You needed a lot of money to buy the machines. The main obstacle to creating a new information company in the 2000s is people and social connections and finding a place in the psychological environment. Think about a classic social enterprise like news (or, ta da!, banking). The value of a newspaper has always relied on its reputation and its occupying a particular niche in the psychology of a region. But whereas it used to be that sufficient cash could buy the presses and distribution systems, and those were the main obstacles, today those obstacles to creating a news organization are much smaller. There are still the barriers of building a good reputation, which are high ones, but the point is, the decrease in capital barriers for information economy businesses means that the social aspects are relatively much more important.
Even a classic manufacturing thing like making shoes looks far different. Nike is mainly a branding/marketing company, which outsources the apparent content of its entire business. The value Nike is adding is around patents, licenses, knowledge, connections, marketing and branding. In similar ways, the outsourcing of manufacturing has impacted other industries as well, rendering their social dimension more important than their capital-dependent dimension.
A standard way of talking about this is the "U of value" -- the observation that in modern American product companies, most of the value (in terms of where the profits go) come at the beginning of the development cycle -- in product design and building the connections for manufacturing -- and at the end, where the marketing and branding are. That is, the economy in the 2000s is much more dependent on the ability to coalesce brilliant teams of design experts, build networks of supply and distribution, and field marketing campaigns than it is about TQM on the assembly line.
Fair enough. But what this means all around is that the economy is much more dependent on something which policy-makers have a harder time getting a handle on -- social capital. When capital is the main bottleneck to economic activity, then financial operations with the money supply are a great lever. When the main economic activity bottlenecks are people talking at parties, building trust, making connections, traveling to visit their counterparts and bonding with them, gelling with teammates, and such, it is much harder to get a handle on that economic engine through monetary means.
The banking system is a good example. Banks have always relied on their reputations for a big part of the value they provide. That's not news. But as with anything else, falling capital barriers means that actors which might not be big, but with a lot of social capital, can have tons of influence. The bubbles we've seen could be described as ills of socially-organized economies. People follow each other. They rationalize actions relative to what they see others doing. They choose who to trust. (Or, perhaps more accurately, they shop around for someone to tell them what they want to hear and then trust that source.)
The point isn't to say that people weren't important to the economy in the 1900s, but to point to the banking industry as a key initiator of the current problems as evidence that these kinds of more social and psychological issues of trust, risk tolerance, and personal connections are now not just peripheral features of the most esoteric parts of the economy, but are a lot more deeply embedded in the economy than they used to be.
The primary mode of transmission of this crisis -- credit -- is an indication that psychological factors are key. Credit is basically the financial representation of trust. If there's a trust shortage, there'll be a credit crunch.
Which means that when this economy is sick, the ways we learned to cope with a sick economy whose principal engine was capital may not work as well. We need new schemes. More psychological schemes. Schemes tailored more towards trying to make sure that trust can be safely bestowed. ¶ 9:07 PM
Tuesday, March 3, 2009
I think part of the story of the 2008-2009 financial problems are the ills of the rising importance of the social aspects of the organization of the economy. There have obviously long been important social aspects to the economy and how business is organized, but it seems to me that our economy in the past few decades has come to rely more and more on the social or psychological dimensions of value than it has in the past.
Some examples. The main obstacle to creating a new manufacturing company in the 1900s was capital. You needed a lot of money to buy the machines. The main obstacle to creating a new information company in the 2000s is people and social connections and finding a place in the psychological environment. Think about a classic social enterprise like news (or, ta da!, banking). The value of a newspaper has always relied on its reputation and its occupying a particular niche in the psychology of a region. But whereas it used to be that sufficient cash could buy the presses and distribution systems, and those were the main obstacles, today those obstacles to creating a news organization are much smaller. There are still the barriers of building a good reputation, which are high ones, but the point is, the decrease in capital barriers for information economy businesses means that the social aspects are relatively much more important.
Even a classic manufacturing thing like making shoes looks far different. Nike is mainly a branding/marketing company, which outsources the apparent content of its entire business. The value Nike is adding is around patents, licenses, knowledge, connections, marketing and branding. In similar ways, the outsourcing of manufacturing has impacted other industries as well, rendering their social dimension more important than their capital-dependent dimension.
A standard way of talking about this is the "U of value" -- the observation that in modern American product companies, most of the value (in terms of where the profits go) come at the beginning of the development cycle -- in product design and building the connections for manufacturing -- and at the end, where the marketing and branding are. That is, the economy in the 2000s is much more dependent on the ability to coalesce brilliant teams of design experts, build networks of supply and distribution, and field marketing campaigns than it is about TQM on the assembly line.
Fair enough. But what this means all around is that the economy is much more dependent on something which policy-makers have a harder time getting a handle on -- social capital. When capital is the main bottleneck to economic activity, then financial operations with the money supply are a great lever. When the main economic activity bottlenecks are people talking at parties, building trust, making connections, traveling to visit their counterparts and bonding with them, gelling with teammates, and such, it is much harder to get a handle on that economic engine through monetary means.
The banking system is a good example. Banks have always relied on their reputations for a big part of the value they provide. That's not news. But as with anything else, falling capital barriers means that actors which might not be big, but with a lot of social capital, can have tons of influence. The bubbles we've seen could be described as ills of socially-organized economies. People follow each other. They rationalize actions relative to what they see others doing. They choose who to trust. (Or, perhaps more accurately, they shop around for someone to tell them what they want to hear and then trust that source.)
The point isn't to say that people weren't important to the economy in the 1900s, but to point to the banking industry as a key initiator of the current problems as evidence that these kinds of more social and psychological issues of trust, risk tolerance, and personal connections are now not just peripheral features of the most esoteric parts of the economy, but are a lot more deeply embedded in the economy than they used to be.
The primary mode of transmission of this crisis -- credit -- is an indication that psychological factors are key. Credit is basically the financial representation of trust. If there's a trust shortage, there'll be a credit crunch.
Which means that when this economy is sick, the ways we learned to cope with a sick economy whose principal engine was capital may not work as well. We need new schemes. More psychological schemes. Schemes tailored more towards trying to make sure that trust can be safely bestowed. ¶ 9:07 PM
