Monday, October 9, 2017

WTF?: A New, Better, Warm-Blooded Capitalism -- Linking Profit to Human Values

We can start now, one company at a time. What company will take that step? -- to shift from the cold-blooded zero-sum logic of dinosaurs, to the more dynamic and cooperative logic of mammals? All it takes is one imaginative business to lead the way (most likely starting in digital).

I just finished an advance copy of Tim O'Reilly's important new book, WTF?: What's the Future and Why It's Up to Us.* My focus was Tim's perspective on how we are now confronting "the beginning of the end of a failed economic theory," because my work on FairPay is aimed at a simple change in how we structure customer relationships that can enable individual companies to lead toward "an economy where people matter, not just profit."

Tim's WTF? provides a sweeping and insightful synthesis of how technology has been reshaping all aspects of our civilization -- not all for the best. It paints a compelling picture of the forces driving the problems we now face, and of the wide variety of hopeful vectors for change that are emerging. But it only hints at the idea that there are simple things that companies can do now on their own initiative (with the aid of consumer support) to begin to change the game unilaterally, in a way that can begin to shift perspectives more broadly. Just as Eastern sages say "there is nothing you must do first to achieve complete and perfect enlightenment," there is nothing we must do first to allow companies to align profits with human values (at least to a far greater degree than we do now, in some contexts).

First some initial comments on why Tim's book is important and compelling, then some observations on how FairPay highlights possibilities now at hand that promise to enable us to change direction even faster than Tim seems to suggest.

WTF?: What's the Future and Why It's Up to Us

Tim draws on his established position as thought leader with ties to the increasingly broad range of "alpha geeks" and entrepreneurs that have shaped our digital world, and his perspective as a publisher and communicator concerned about the broad human effects of technology on our civilization. He richly explores the double-edged effects of technologies such as platforms, automation, algorithms, and AI, and how they seem to be making life worse in many ways, even as they work miracles.

Tim makes his case in terms of a fitness function, the quantified objective function that guides the evolutionary optimization of an organism (or a system) to fit an environment. Through a wide range of contexts and examples, Tim suggests that we need to change the rules and incentives of our markets -- not only markets for goods and services but also financial markets -- and layers of internal and governmental rules that regulate them -- to better address the conflicts between people and profit, to turn the invisible hand to guide corporations fairly. On the long-term effects of algorithms and automation, he wisely observes that we need to not only manage these to protect and augment people (rather than simply replace them), but also to shift our focus to not simply protect jobs, but to the guide ourselves to the work that needs doing.

Tim points not only to emerging problems, but also to many signs of hope, and to how to build on that. He draws our attention to the many vectors of change (forces characterized by both intensity and direction) that shape the future. He points to both the urgent need, and the rich potential, that we have at this pivotal time, to remold the world closer to our heart's desire.

WTF?: What steps can a business take now to jump-start  that future?

My focus here is to synthesize and build on some of the vectors that are already pointing to ways to do this without waiting for systemic change in the underlying rules and regulations of our markets. There are already shoots we can build on, to work within the logic of our markets, to be more focused on human values.

There is nothing we must do first: we have already entered an age where profit can be increased by better serving customer values. Just be customer-value-first. 

What does that mean? Many businesses are realizing that it is not enough to be customer-centered (just seeking to extract maximum value from customers). We are entering an age of relationship capitalism -- most visibly in the emerging subscription economy where it is now understood that the key metric is not quarterly profit but customer lifetime value (CLV). Companies of all kinds are looking to customer journeys and loyalty loops, and seeing the need to be customer-value-first -- to work with each customer to maximize the value they perceive (and thus get the most from them in return). CLV is maximized when the company looks not to what its customers can do for it, but what it can do for its customers.

Value-based pricing has emerged in the B2B world as a way to align the business with the value it co-creates with its customers, to share fairly in that value surplus, and to drive that directly to the bottom line of pricing and thus profits. Less need for multiple bottom lines that tack on social values, if those values are priced in to the financial bottom line. Less need for external controls to manage externalities, if those are baked into value-based prices. Less conflict with investor demands, if prices and profits are aligned with customer values.

Translating that value mind-set into the B2C world has lagged because doing value-based pricing in a scalable way for mass-consumer markets has seemed so impractical that few even think about it. But we are seeing hints of a sea-change. Tim mentions Patreon and other new crowdfunding strategies for consumer funding of creation as "having a lot to teach us about [the economy's] future direction." Similar shoots can be seen in the move toward membership models in which readers fund journalism (or other services) that they care about. Behavioral economics has studied such participative pricing models (including the often-too-extremely customer-value-first model of pay what you want) to find that they are surprisingly effective, and that the classical economic model of a purely financially motivated homo economicus misses the actual behavior of real people. (Tim also mentions cooperatives, like the Green Bay Packers, REI, and Vanguard, and how they succeed at better aligning profit with human values.)

It is encouraging that a theoretical base for deep changes in corporate mind-set has been coalescing in the work of some marketing scholars and businesses who are re-examining the “goods-dominant logic” of the past, versus the “service-dominant logic” that we now are faced with. This meshes with recognition that value is not created by “producers” and purchased by “consumers,” but that “actors” in ecosystems work together to co-create value, which flows in multiple directions. Customer-value-first thinking is just one aspect of that (and platforms are another).

Tim quotes William Gibson, "The future is already here -- it's just not evenly distributed." My work on FairPay seeks to build on these shoots of a more participative, win-win future, to drive simple changes to the structure of the game that a business offers to play with its customers, changes that can make that relationship far more cooperative in seeking a fair sharing of the business and consumer surplus.

FairPay and the invisible handshake

Tim describes how the invisible hand of competition in our markets does its work to balance supply and demand. The invisible hand works by rationing scarce supply against demand. But, increasingly, we have markets in which supply is not scarce, but essentially infinite (especially markets for digital goods and services). Furthermore, increasingly we expect our markets to work for goods and services that are not commodities, but experiences that have very different values to different people.

We still think with the economic logic of the invisible hand, but it no longer works so well in many domains (especially digital). For example, many digital businesses feel driven to create artificial scarcity, in an effort to prop up the invisible hand to maintain their profits under this obsolete fitness function. Customers easily see through that, and wonder why they should pay what is demanded (or anything at all) -- they resent being manipulated in ways that they see as patently unfair. Even publishers are realizing that information wants to be ubiquitous (except in special markets like time-sensitive financial information in which customers want scarcity and are willing to pay a premium for that). Furthermore, artificial scarcity is an enemy of the economies of scale that benefit business, customers, and society alike -- it limits the fruits of creation to those with high ability to pay.

Tim says "I am a strong believer in the social value of business done right. We should aim to build an economy in which the important things are a natural outcome of the way we do business, paid for in self-sustaining ways rather than as charities to be funded out of the goodness of our hearts." I agree completely -- that is the objective of FairPay.

Tim is concerned about how capital markets get distorted to focus on the narrow interests of shareholders (and management), and looks to ways to change that. That is a deep and urgent concern -- I do not mean to suggest any weakening of Tim's points regarding that. But I suggest there are complementary ways to make our fitness functions work better -- for businesses, customers, and society -- from inside our businesses, in the current market environment. Let's do what we can to change from inside, now!

FairPay builds on the recognition that many businesses are now much more strongly a matter of relationships. Subscription businesses are beginning to see that they are living a new kind of social contract with their customers. Customers rightly question why they should pay for existing content (since it can be provided at negligible cost). They understand what they need to pay for instead is the continuing creation of more such content. (The recent dramatic increases in news subscriptions is an example.)

A business applying FairPay makes this social contract explicit, in the form of a repeated game that motivates cooperation. "I will be more flexible (and give you more say) in how I price my services, as long as you are fair about paying for the value you receive" (as explained in FairPay Changes the "Game" of Commerce). Instead of an invisible hand, think of this social contract as an invisible handshake that drives pricing toward equitable sharing of the value surplus, however that varies in any specific context (including widely varying abilities to pay). (This is explained in An Invisible Handshake for The Digital Wealth of Nations and Harnessing the Demons of The Digital Economy.)

No one else needs to change any rules to apply this invisible handshake -- it is just a matter of a single business being clear about the structure and intent of the game it offers to play, and being smart about framing its offers, learning what the customer values and working to deliver it, and nudging the customer to accept and hold up his end of this social contract. This can be done in many market sectors, among selected segments of users who (1) value the service, (2) want more flexibility in pricing and offers, and (3) are willing to make an effort to be fair about it.

Businesses of all sizes using current emerging models like Patreon and membership are pointing in this direction already. (And effective SaaS platforms can facilitate this to make it easy for small businesses and even individuals -- with significant scale economies and data network effects -- a major entrepreneurial opportunity there! Think not just of CRM, but of pricing and relationships as a service.)

Tim emphasizes the importance of tight feedback loops to achieve fitness functions, and to ensure product-market fit. FairPay is driven by an adaptive feedback loop that underlies every touch-point between the customer and a business and its products/services, to seek to jointly measure and maximize value at all levels -- as both the business and customer agree to define it.

Tim explores the dark side of business models that seek engagement (like Facebook and other ad- or commerce-driven businesses). FairPay fosters a form of consumer engagement that is win-win for all of us.

Tim suggests thinking of the economy as a game. FairPay shifts our micro-economics to see commercial relationships as a repeated game that works not for single transactions, but over a relationship, to align business and customer incentives to produce what we want, when and how we want it, for everyone who values that -- and to divide the surplus value so that both profit well from doing that. That harnesses the law of attractive profits to incentivize companies to profit from competing on creating customer relationships that maximize human values. That in turn leads to a macro-economics in which bottom-line revenues and corporate profits correlate with the creation of real human value.

A vector to broader human values (and other WTF? improvements)

Taking this farther will take skill and continuous learning and refinement, but, if done with care on the part of the business, customers will increasingly see that it delivers the value they seek, on terms they are be happy with. That value can include not only the narrow aspects of value addressed by the invisible hand, but whatever human and social values the customer wants to factor in (including people, planet, and purpose, to the extent the business will agree that is reasonable).** All of the vectors that Tim describes support and facilitate moving in this direction. Early success will lead to wider use across broader segments of consumers. Even costly real goods can be partly amenable to this logic, especially if they are based on human creative work (which Tim points to as another important vector).

Seeing this invisible handshake work will help create a climate for the more broadly systemic changes in business (and how it is regulated) that Tim points to. Businesses and the capitalist system will find themselves driven closer to our heart's desire. That will reduce the need for external remedies, and will create a more cooperative climate in which those remedies that are still needed will be seen as less objectionable.

...All it takes is one company to give this a try. (...Maybe O'Reilly Media?)

On a personal note -- as one who has spent his career watching, developing, forecasting, and inventing the future since the 1960s -- I very much relate to Tim's perspectives. I hope many will think seriously about this future and "why it is up to us." Now, more than ever, our future depends on that.


For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at There is also a guide to More Details (including links to a video).

Even better, read my highly praised new book: FairPay: Adaptively Win-Win Customer Relationships.

(FairPay is an open architecture, in the public domain.)


*A preview of WTF? is provided in Tim's August post on Medium (which I commented on). A sample chapter is also available. Publication date is tomorrow, 10/10/17.


**[UPDATE -- comment from Tim O'Reilly] 
Thanks very much Tim!  To your very relevant point of concern, I should expand on how FairPay enables customers to have a much greater say about that...

FairPay seeks to define value to "include not only the narrow aspects of value addressed by the invisible hand, but whatever human and social values the customer wants to factor in (including people, planet, and purpose, to the extent the business will agree that is reasonable)."

When pricing is sufficiently participative, through a process like FairPay, customers can nudge businesses to have their price factor in whatever aspects of value they want it to include. That can be soft customer values like service and support, but can also include broader social factors like how a company treats its employees, sources its goods, supports its community, and protects the environment. It can include bonuses to journalists or musicians or other contributors. It can factor in credits for being a good corporate citizen (much as some companies already enjoy a level of premium pricing because of their good reputation), and, conversely, can factor in debits for bad behavior (much as the market now punishes known bad actors). Just as old fashioned negotiation or tipping often factor in such broader considerations, the new invisible handshake of FairPay can do that in a way this is more explicit and powerful.

This is not to suggest such "customer nudging for good" will fully address all important aspects of human and social values, but that it can lead to enough of a shift in how prices reflect such values to have dramatic effect -- and thus can reduce the need for external measures (and "multiple bottom lines").

This is expanded on in my post, How Market Commerce Can Become More Cooperative, Fair, and Human.

[UPDATE 1/16/18] 
An interesting complement to WTF? is Niall Ferguson's new book, The Square and the Tower: Networks and Power from the Freemasons to Facebook. It provides interesting historical perspective, which I explore and expand on in a review on my other blog: "The Square and the Tower" — Augmenting and Modularizing the Algorithm (a Review and Beyond)


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