Hacking Society: It's Time To Measure The Unmeasurable

Innovation

from the value-and-benefit dept

I was lucky enough to attend a small gathering of great thinkers put together by Union Square Ventures earlier this week for an event they called Hacking Society — which was designed to be a one day open conversation on the economics and power of networks, and how to use that as a force for good, in solving economic and social challenges. There were lots of great thoughts that came out of the event (which was live streamed over the web for people to listen in and participate via Twitter — as many did). It would be impossible to sum up all of the great points in a single blog post, so I’m just going to discuss briefly the larger themes that hit me and helped to connect a few disparate ideas in my own mind.

The first issue was the role of incumbents (of all kinds) in trying to block innovation. As Clay Shirky amusingly repeated the so-called “Shirky Principle” (not named by him, but for him) on command a few times, “institutions will try to preserve the problem to which they are the solution.” Economics professor Luigi Zingales made a similar point, but from a slightly different perspective, noting that “All entrepreneurs want a free market when they enter and don’t want one after they win.” That’s just another way of showing the nature of incumbents under crony capitalism. Rep. Jim Cooper also made a similar point, noting that “The past, in general, is over-represented in Washington. The future has no lobbyists.”

These are all variations on the same basic theme — which all of us know is a significant problem. Of course, we’ve seen this many times over — and it’s certainly true on one of the key issues we talk about, intellectual property. If you look through the history of intellectual property expansion, it tends to slow innovation. That is, you get areas where there is great innovation, often with little to no protections, and it’s then that incumbents demand protectionism in the form of greater IP laws and enforcement. It’s a way to lock in their success, and limit disruptive upstarts. It is, as Zingales was saying, a case where the free market is useful until they’ve won — and then they use the laws to try to protect their position.

But how do we deal with this problem?

That’s where things (not surprisingly) seemed to get bogged down. Some suggested having to play the game the way it’s done today — setting up a SuperPAC, hiring lobbyists, and having “the future” represented in DC. That idea didn’t go over too well with the rest of the room, who felt that the power of networks might enable something different and something new. I’d argue that it’s even more than that. Because of the power of the incumbency, there’s simply no way that anyone could effectively represent “the future” long term from a traditional lobbyist role. You’d always have some who could do it some of the time, but it wouldn’t be sustainable — either due to a lack of true funding to the level of the incumbents, or (worse) having the “representatives of the future” get “captured” by the incumbency.

However, as the discussion danced around this question, something interesting happened. Fred Wilson, from Union Square Ventures, suggested that Craigslist went against the traditional “capitalist” model of maximizing revenue. And while Craig Newmark (in his usual fashion) wouldn’t make a direct statement on this, I challenged the assumption — as I did in writing many years ago — noting that this claim ignores the function of time. Those who think capitalism is about maximizing all revenue at this second are missing out on what it means to maximize revenue over time. That is, if Craigslist raised rates on everything to maximize revenue in the short term, it would almost certainly lead to an untimely death in the long term. That’s because it would open up all sorts of opportunities for others to come in and undercut them and take away their business. That gives them the ability to keep customers happy and keep making revenue (and lots of it) in the much longer term. To me, that is true capitalism.

Wall Street thinking is maximizing revenue today — without consideration for how that impacts revenues over time. That’s not strategic and it’s not smart. Smart capitalism is recognizing the importance of the time function. It means actually aligning your own best interests with the public’s — because if you don’t it just opens up an opportunity for others to better serve the public. So when people suggest (as they did) that companies like Craigslist and Kickstarter are not “maximizing revenue,” I disagree completely. They absolutely are, because they’re providing so much consumer value, that they’re able to continue to make a ton of money themselves, because the public wants to come back and wants to support them. Not because they have no other choice.

In effect, what companies like Kickstarter and Craigslist have shown is the way in which a more strategic player avoids the trap of the incumbent. By thinking that they’re not trying to maximize revenue, they actually do end up maximizing revenue, because they take more of a public-first mentality, which drives more business and more opportunity… in part because so much of the value flows back to the public.

And therein lies the challenge of measurability. There is all sorts of economic activity that isn’t properly measured today. When people look at Craigslist and say it’s not maximizing revenue, that ignores the massive value that it has created, in part by leaving money in the pockets of others (who used to have to pay for similar services) while at the same time providing a tremendously useful service. But, because it’s not a direct transaction, it doesn’t get “counted” in the traditional sense. Tim O’Reilly really drove this point home in the discussion, talking about how we need to better measure that “hidden economy.” That is, we need to measure the true value of something over time, rather than the limited value of just the direct cash transactions.

To some extent, this is a fault of economic linguistics. We measure economic value in monetary value — even when it doesn’t involve money directly. And, yet, because of this, we often forget that non-monetary transactions have tremendous costs, price and value as well. Thus they get ignored. Economics is supposed to be (in part) about that intersection of cost and benefit — but a very, very large percentage of the economy is not about monetary costs and benefits, even if that’s how it’s often measured.

The end result, then, is that we’re not properly recognizing the benefits (or, indeed, the costs), because we’re ignoring the vast majority of those in assuming that anything that doesn’t involve monetary exchange has no benefit or cost.

If one thing comes out of this discussion is that I think it’s time we start looking for ways to change this. I’d like to start. We’ve already been doing some research that hopefully highlights costs and benefits in ways that weren’t clearly stated previously, but that was very narrowly focused. I’m hoping that as we move forward, we might be able to start to construct new models and new research that really explores the true value of all the benefits and costs of such things. If that, alone, can help companies recognize that the path of incumbency is actually not the best one for long term maximization of benefit, then perhaps we can get more companies to act like Craigslist or Kickstarter — where even they don’t think that they’re maximizing revenue, because they choose not to seize the largest possible percentage of the pie today, knowing that by allowing much greater consumer surplus, they’re actually expanding their own opportunity for tomorrow.

There was a lot more discussed during the day (and into the evening over drinks and dinner), but this is the line of thinking that has me most interested, and it’s an area that I hope to continue to explore — with your help.

Filed Under: clay shirky, craig newmark, fred wilson, hacking society, wall street
Companies: craigslist, kickstarter