#circularity is the new economics. Why? Turns everyone into #prosumers.
Why is this so critical a topic? The fundamentals from the housing crisis to tapering to emerging economies to metrics such as GDP/PPP are not really relevant. What’s more relevant is theta economics needs a paradigm shift in fundamentals, behaviors and metrics that will alter the very pivot on how we operate as communities, people, governments and business.
This is a simple note to explain the principles and without the data and analytics, for you can beat data to tell it what you want to hear. The principles matter first.
At the Stanford Peace Innovation Lab, as a team, a few colleagues (Margarita Quihuis, Mark Nelson and Benjamin Warr (INSEAD)) and myself as a team are working on a whole new framework.
Inequality stems from “Linearity” of capitalism, which accelerates dichotomy of behaviors of inventory ownership around “Futures” income as inventory return on time, all things being equal (Ceteris paribus). Linearity leads to extreme concentrations of have and have nots.
We know the basis of economics and market. Time and time over governments step in to invest time and capital so ensure that society and current state of capital does not break down such an extent that everything around us collapses. Too Big to Fail theory. http://en.wikipedia.org/wiki/Too_big_to_fail
In economics, the invisible hand of the market is a metaphor used by Adam Smith to describe the self-regulating behavior of the marketplace. Individuals can make profit, and maximize it without the need for government intervention. http://en.wikipedia.org/wiki/Invisible_hand
Paul Krugman wrote an interesting piece, “Why economics failed”which is self explanatory and brilliant, as always of Paul’s work.
According to wikipedia “Economics is the social science that studies the behavior of individuals, households, and organizations (called economic actors, players, or agents), when they manage or use scarce resources, which have alternative uses, to achieve desired ends.”
Economics was built on four fundamental premises.
1. People behaviors are Rational
2. Ceteris paribus .“all other things being equal or held constant” http://en.wikipedia.org/wiki/Ceteris_paribus
We know the following;
1. People are Predictably Irrational
2. Goto 1. All things are not equal
3. Not about Demand-Supply, but behaviors of demand and supply
4. Consumption is based on Futures ability to pay for inventory
The focus of economics ever since Adam Smith and there all that followed was “Linearity” . The basic of demand-supply and the pivot of all rational thinking. Linearity created behaviors that lead to extreme dichotomies of supply to those who demand and then we are out of that “transaction” which lead to the next transaction until a point where someone was left holding everything and the other nothing. This lead to two fundamental inventories, Scarcity and Abundance.
Thus the definition of consumption, a linearity where inventory was created looking for demand and thus became the other actor’s inventory holding costs to a point where the cost of inventory holding was higher than the cost of price of sale of the inventory. This lead to the disruption of value, i.e. the price/cost >= 1. Simply put the cost of the product was $300 to manufacture, store and distribute and the utilization of the inventory by consumption as a model was $270, leading to a deficit of -$30. This then lead to the creation of capital as inventory to step in and support the product inventory of -$30 as difference to yield 5% return on capital inventory for the seller and the buyer another $1.5 added cost and less in value.
Result. Inventories that had no utility greater than 1 and thus the wealth gap.
Look at what we do as inventory.
1. Credit Card
6. Everything around you
Apply the principles of inventory and supplychain and over 95% of all we have would be a liability (<1 return) and need accounting or tax breaks to hold on to or irrational behavior that over time this inventory would be paid by futures earnings and all things being equal!
Step in #circularity and #prosumer
The belief we have for economics and it’s around #circularity and #prosumer, where behavior as inventory is a pivot.
1. Behavior of people are the inventory
2. Inventory has a production and consumption cycle that is circular in nature, the producer is at one time the consumer and vice versa
3. The utility of inventory is >=1, i.e. what one produces and what one consumes is the basis and vice versa.
4. Accounting of asset and liability is simply where prosumption is either >=1 or <1
Adapting from what Mahatma Gandhi said, “It is not mass production but “production by the masses” that would make a society sustainable. Apply this principle of economics and you see that the entire www is based on this.
Every time we do a Google search or post on FB or IM on WhatsApp or search on Amazon or eBay, etc. we are producing by the masses?
What is the paradigm shift in economics that is disrupting economics itself.
1. Behavior is right, economics is a social science.
2. People are Predictably Irrational
3. #prosumers are the foundation (production/consumption >=1, ex: Debit Card)
4. #prosumers create #circularity (Upstream – Midstream – Downstream connect back via “Adjacencies”
4. # Theory of the Visible Hand, Behaviors that are Predictably Irrational, but the rationality is in the Control Loop system like a fighter aircraft
So now this alters the fundamentals of economics and the metrics that measure. We are working on the framework that we can evaluate any individual, company or governance that can actually capture and unlock the real value. On a side note, during one of these exercizes one of our team members said he should probably liquidate the entire stock of a company he owns and understood what would it take to alter the course of a few random companies we picked. After that he also said maybe we should sit in the room and do pizza till the next day after the earnings call was over so we did not publish this and send the stock crashing. 🙂
BEHAVIOR IS DISRUPTING EVERYTHING, FROM MARKETS TO ECONOMIES AND GOVERNMENTS?
Behavior is the API! Airbnb, the API was “Trust” that is disrupting a global hospitality industry creating new value in a very old industry
What has behavior got to do with rational policy, business models, balance sheets and how consumers buy? Everything!
Our work is getting ready for publishing and we are in the process of creating the algorithms so we can map the models the way we understand and actually apply these principles from you and me to startup and listed company investing to policy making and fundamentals of capitalism. Will keep you posted.