Thursday, May 11, 2017

Making and Taking - Part 1

Why would a for-profit business freely disseminate its trade secrets?  Why would it intentionally undermine its own competitive advantage?  These are variations on a question I'm often asked when I describe the objectives of Sage Garden Ecovillas.

To answer that question, I want to talk about a blind spot in our "Business as Usual" or mainstream understanding of business.  This particular blind spot comes from our financial metrics.  I'll describe a way to broaden one of the core values underlying our concept of finance, and then see what specific re-thoughts and un-learning are suggested by this broadened perspective.

Every idea and every practice in our financial body of knowledge serves the objective of owning more.  Financial accounting starts by drawing a boundary around an entity (an individual, a household, a firm, a government), and from there on, it's all about what assets are assigned to that entity through our concept of ownership.  Once the identifying line is drawn, it becomes difficult to answer one deep, self-reflecting question: "What's the point of owning?"  It may sound like a rhetorical question, but I think it's worthwhile to try to answer it.  If you can imagine for a moment dissolving that identifying line, it's easy to see that the point of owning things is material well-being, i.e. access to material goods and services that make our lives better.

I should clarify a few things.

Thing one: Material well-being worth paying attention to.  Eating food, using shelter, receiving healthcare - these are all aspects of material well-being that can improve lives.

Thing two: I'm not denying the benefit of understanding and applying our financial body of knowledge, any more than I would deny the benefit of food to feed our biological bodies.  When I'm hungry, seeking out and eating food improves my life.  Analogously, when my income and expenses are out of balance, financial analysis can improve my material well-being and thereby improve my life.  (But just as it would be unfulfilling to spend my life focusing exclusively on amassing and consuming food, staying stuck on a financial mode of thinking - or any mode based on exclusive ownership - would mean missing vastly more meaningful and beneficial ways of relating to material well-being.)

Thing three: This blog might start to sound like a critique of an economic system or systems.  It's not.  I suppose I'm describing attitudes toward economy that may be more encouraged in some economic systems than others.  However, the empowering point to get is that an individual's attitude is her or his own either to choose or to yield to outside influences.

So this is the broadening I mentioned in the beginning - from assets to material well-being.  But this is more than a matter of vocabulary policing.  If you can use the word "assets" and not mean something about exclusive ownership, be my guest.  It's just easier for me when I use the term "material well-being" to think of something other than exclusive individual ownership.  The words "material well-being" sound more to me like something that could refer to the global population than "assets."

Here's the gist of the blind spot I mentioned earlier.  Our way of understanding and measuring finances is blind to the difference between making and taking.  You can't determine from any numbers in a budget, balance sheet, profit & loss statement, or ledger how much material well-being is created vs taken away from someone else.  My assets and income carry no memory of how the material well-being of others was affected in the transactions when I obtained them.  Stay with me, because this is something we're not used to acknowledging, but every transaction in which I gain assets can be divided into a making component and a taking component.  You know what?  Some pictures will help me explain exactly what those components are, and why they are invisible in our current methods of financial accounting.

Let's look at the case of personal finance.  Personal financial accounting measures material well-being in the form of net worth, which is one dimensional.  Therefore the net change in material well-being associated with any ledger entry is also one dimensional, whether it's a positive change (a gain), a negative change (a loss) or zero change.  Whatever the change, it can be represented as a point on a number line.

For the purpose of financial accounting, that one dimension is enough.  But we start to see some interesting things (including what I mean exactly when I say "making" and "taking") when we add a dimension for the net change in material well-being of others.  Every entry in the ledger can affect the material well-being other people.  We can total up all the effects on other people and come up with a second number that represents the total change in material well-being of everyone else.  Now the effect of any entry in the ledger is represented by a two-dimensional value, that could be plotted as on point on a plane like so.

Any change plotted in the upper right quadrant has a win-win effect on material well-being; any change in the lower right, a win-lose (a personal gain and a loss for others).  The lower left is lose-lose, and the upper left is lose-win.

Finally, I can show exactly what I mean by "making" and "taking."  (Notice I chose a point in the win-lose quadrant, so I can show an example of a non-zero taking component.)

The extent to which the total material well-being of the global population (including myself) is increased - that is the making component.  The extent to which my material well-being is increased by reducing the net well-being of everyone else - that is the taking component.

Notice this distinction transcends all customs, laws, morals, and other systems of rules.  Such systems often endorse taking under specified circumstances.  That endorsement can make it hard for us to apply the word "taking," because we give the word "taking" an unjust connotation, and anything endorsed by an accepted system of rules is considered just.  But the senses of the words "making" and "taking" that I'm using are unaltered by any legal system, or social norms, or religious doctrines.  Taking is taking.

This is probably a good place to take a break.  I'll continue in a future post and talk about why the making-taking decomposition is so important, what it has to do with sustainability, and why our obsession with money and ownership-based accounting encourages unsustainable habits.