The Green Gap

In the Cold War, we feared a Missile Gap was a strategic weakness. Nowadays, we must awaken to the fact that the Green Gap is true strategic weakness: the nations whose economies will thrive in the coming years will not be those with the biggest factories, but those with the most sustainable, efficient, and ecological markets. What we require is a Strategic "Green Reserve" of ecological design to weather the coming changes that both climate and resource scarcity will force on the international economy.

Thursday, 31 March 2011

Fiscal Responsibility - Part 2: Markets and Innovation, Chapter III: Runaway Leader Problem

A great deal of Libertarian thinkers have highly seductive theories about social order stemming from the complex interactions between interested stakeholders. As a believer in the power of capitalism myself, Libertarianism has some natural draw. However, we must remember that when the government keeps out of the business of business, bad things happen. As much as I would like to say that the Invisible Hand works, it simply does not. If we are fine with an economic life that is "brutish and short" for the majority of the people that inhabit the wilds of near unrestricted capitalism, then the laissez-faire capitalist ideal of Libertarianism is for us. As it stands, my belief in capitalism is the same as my belief in the power of Mother Nature: Her Laws are immutable. You diverge from the laws to your own detriment. You cannot defy the laws of nature just as you cannot defy the laws of money. Nature seeks energy from niches, business seeks profit from margins. Any and all economic thinking must take these simple immutable laws into account.

I will go further and say that companies that fail to follow the laws of the market should be allowed to die. It is only by clearing their niche and letting the little companies vie for their place in the sun that the economy renews itself. Those companies that have trouble deriving profit from the environment should pass away, and better-suited companies will follow. The key, then, is to make companies die for reasons that fit national policy, and let new companies grow for reasons that fit national policy. The market will handle the rest. National policy should, instead of regulating and restricting, make unethical and inefficient business practices inherently more costly than efficient and ethical practices. By hampering the ability of inefficient companies to derive profit from the market, policy is able to guide existing immutable market forces rather than trying to stand in their way. It's much easier to guide the flow of a river than dam it up. Even from a dam, water must pass through or the dam will overflow. When the river's direction is changed, the natural flow of water works to the advantage of the engineer rather than to her disadvantage.

All this is to say that I believe the death of companies that are unable to take profit from the market is a good thing for the economy. Subsidies are inherently flawed in application, as constant subsidy only rewards bad behaviour and inefficient business practice. This may sound Libertarian, but it's simply good business sense. Arguments could be made that subsidies destroyed the cod fishery in the east because it encouraged overfishing. If the fishery had been allowed to evolve without subsidy, there might still be cod fishermen on the east coast (assuming, also, that we had a Lord Admiral Brian Tobin at the helm of Fisheries and Oceans to protect the catch from Spanish overfishing).

The problem currently is that the climax community corporations of each industry tend to be able to squeeze out up-and-coming new companies attempting to make a niche of their own within these industries. This is something we call the "Runaway Leader" problem in game design: the person who starts leading gets a stronger position, and from this strong position has a greater ability to keep on leading. Naturally, companies with more money can stand to make more money, and newcomers to an industry are more or less at the whim of the established companies there. To use another game analogy, spawn camping is both an effective way to play a deathmatch first-person shooter but it also punishes new players. Established companies are able to choose to "spawn-camp" new companies because of their established positions. This decreases competition based on innovation, and instead encourages competition through other more Machiavellian/minimax business practices. The solution must allow for one of three things to happen in the economy: allow for the large companies that stifle innovation to die under the weight of efficiency-minded taxes and feebates; force large companies to spend money on taxes, feebates, and upgrades so that they are rendered financially unable to engage in minimaxing behaviour, thereby allowing the development of unprotected niches in their industry that newcomers can fill; or simply force large climax community businesses to advance and innovate in order to hold their apex position in the industry rather than doing so through more Machiavellian means. If the market is like nature, then we must treat both the life and death of companies with reverence, for both things happen for a reason. National policy allows a government to intervene in how natural selection occurs in the market, and the rise and fall of companies in response to natural selection must be allowed to proceed, uninterrupted by subsidies. This is how to solve the runaway leader problem, and go from monopoly to competition.

Combating the Runaway Leader Problem - from monopoly to competition.

As we've already discussed, big companies are able to make advantages for themselves through their sheer size. There's a teaching in Kendo (Japanese swordfighting) that says there are "three things to kill" the opponent: his sword, his technique, and his spirit. In a similar fashion, there are three things to kill in the business world in order to quash competition: the marketing, the product, or the money. Of these three, money is the easiest thing for big corporations to attack. Unless the small company has a superior marketing strategy, or a game-changing product, they will inevitably lose when fighting a monetary battle of attrition. In some cases, they will still lose even with better marketing or products. He who has the gold, in effect, makes the rules.

This is sad, because it would be far better for the consumer if the product was the most important or effective deciding factor in competition. The logic of money being the supreme arbiter of commercial success is that we presuppose that the best product will invariably succeed on the market. This is simply not true. Often, the product that succeeds is simply the one that has a lapsed patent, or that is well-branded, or that has the most caffeine in it. Since we are on the topic of game design, Yahtzee was a game developed by a couple to play while out on their yacht (now the name makes sense, no?). They sold it to a marketer lock, stock, and barrel. The marketer was keen to promote it because all the profit from the idea from that point on would be his. Would he have tried as hard to make it a success if the yachting couple still owned the rights at the end of the day? In a word, no. Yahtzee is not a good game, but it sells like hotcakes. Did it sell because it somehow was appreciated by a huge number of people who play it every weekend, or did it sell because a good marketer got a hold of the rights to something he could sell to lots of people who would play it once or twice and then put it in their closet? I think we know the answer to that question.

Consumers do not make rational choices to purchase the product that will best fulfil their existing needs. There is no chance that a consumer, who purchases a faux FabergĂ© egg on the home shopping channel at 2 a.m. after a long night alone doing crosswords and listening to soppy love songs, is buying a product because the product itself fills a need. Utility maximisation and the rational consumer being a myth, the idea that the company with more money makes a better product is also recognised for a myth. We are reduced to seeing the market cynically as a place where - since value is subjective - the art of selling is actually a process of perception manipulation rather than a game of who makes the product best suited to the real needs of the consumer. The market, therefore, doesn't choose the best product, just as it does not choose the most efficient process, or the least wasteful manufacturer. It is up to national policy to define these traits as desirable through financial penalties and rewards. Competition is the only way the market improves, and innovative new companies must be given a fighting chance to establish themselves so that competition is increased. More companies means more competition.

The big box stores also eliminate entire ecologies of little shops. Businesses buy more "stuff" than most consumers do, and business to business purchases are far more lucrative than selling to individuals. It makes sense that the more businesses there are, the more purchasing there will be. Big box stores can cut costs and streamline - they pay minimum wage, buy in bulk, and can derive benefit from economies of scale. They have logistical networks and dedicated sources to get all their supplies in the most efficient and cheap manner possible. Mom and pop stores can't. The little shops may each individually make less money, but they also keep more money in the local environment. Their lack of continental supply chains makes it necessary for them to spend locally for what they need. They have to pay their workers (mom and pop) a living wage and they can't normally benefit from economies of scale. Keeping the big stores from establishing control over a market niche therefore not only increases competition, but increases overall consumption as well!

A couple previous discussions play directly into this topic. One, the "national labour law", and the other, feebates. The national labour law we talked about before was about two things. It was mainly about wage equity and freeing workers from being simple expendable pawns in the great game of profit maximisation. A knock-on effect that comes into play here is that it cuts into the scale advantage that large companies have. The larger the company, the more specialised it can make its workers, and the more efficient it can make its processes. This efficiency means profit, because a larger company typically pays less dollars of salary per dollar of income than a smaller company does. This is a contributor to the runaway leader problem, and wage equity just happens to cut into the ability of any leader to "run away". Second, feebates will penalise inefficient companies that are unable to improve their wasteful processes and practices. Letting the big companies hit by this double-whammy fail is part and parcel of the program: through the death of the inefficient, the efficient are given the chance to grow. If the big companies adapt and improve, the result is the same: both wage equity and efficiency is enhanced, and innovation flourishes.

A large part of this plan isn't "doing" something so much as it is about doing nothing. The key to this part of the policy is not to bail out that darling company of the swing constituency simply because it's politically expedient. We all know it happens. Strathcona gets a hospital, and Shawinigan gets a national tax processing centre... the swing and home ridings get disproportionate attention. If a company that accounts for a lot of jobs is about to perish, often the government will find funds in order to make certain those jobs survive - even if it encourages poor business practice. Well, I'm a prairie boy. The grass grows up lush and green after a prairie fire. It's a natural form of renewal. There will be a black spot there for a year or two, but the patch will grow up healthier than ever in no time. Stress the big companies, let the small companies develop, and it will be harder for the big companies to compete with them using money alone.

One final thing that is a little off topic, but still along the same lines as the runaway leader problem. Big stores have a great capacity to raise capital through keeping their shares high-priced and raising funds by releasing more shares to the market. If need be, they still have this ability to out-spend their smaller competitors at their fingertips. One way some companies keep their share prices high is, well, through lying. The corporation has evolved into an entity that somehow makes lying (called fraud) a crime without a perpetrator. This seems a little unfair, because with accountability comes responsibility, and responsibility tends to increase self-discipline. I propose, as my final recommendation along these lines, that CEOs, CFOs, and COOs be held accountable for the illegal actions of the corporation as a whole through the doctrine of command responsibility as enshrined in the Geneva Convention. Put simply, it means that if an atrocity is committed under your command, and you didn't try to stop it, you're responsible for it. The end. Lack of knowledge is not a defence (and shouldn't be) because as a commander, it's your damn job to know what's going on. With that happy thought, I will leave you with a short selection from the - rather well-written - Canadian Criminal Code:

Sentencing — aggravating circumstances
 (1) Without limiting the generality of section 718.2, where a court imposes a sentence for an offence referred to in sections 380, 382, 382.1 and 400, it shall consider the following as aggravating circumstances:
(a) the value of the fraud committed exceeded one million dollars;
(b) the offence adversely affected, or had the potential to adversely affect, the stability of the Canadian economy or financial system or any financial market in Canada or investor confidence in such a financial market;
(c) the offence involved a large number of victims; and
(d) in committing the offence, the offender took advantage of the high regard in which the offender was held in the community.
As the saying goes, take care of the pennies, dollars can take care of themselves. With a bit of protection for the small companies, competition is improved and the little guys have a change to become big companies. By letting failing companies die, we not only rid ourselves of inefficiency, but allow for new ideas to fill the niche left by the departed. By increasing accountability, we make it less likely that big companies can game the market, and encourage stability in the national economic system.


  1. "The Law of Diminishing Returns" is a lovely piece of negative feedback found all over in natural systems. The first bite of food is the most flavourful, and the more full one becomes, the less one wants to continue eating. A system without negative feedback controls is liable to collapse. Unbalanced systems do not inherently have negative feedback controls built in, which is why deer left without predators will graze an island to nothing, and die of hunger.

  2. That's a great point, and allowing for that negative feedback is just as important as allowing for the growth itself to occur. They are part and parcel of the same process of evolution. Just because we artificially input a deer feed "subsidy" into the system doesn't mean the deer will eventually regulate themselves and return to a balanced ecosystem... it simply postpones and worsens the crash as you correctly state.

  3. One problem is of course the fact that the big fish rule the political realm too. In order to make these changes you have to legislate, and it's at that point where the Runaway Leader really has an advantage over the small businessman. The trick, of course, would be to make the penalty for going against your political mandate greater than any benefit the big fish could provide. This requires engagement from all citizens, but to get that a mountain range of apathy has to be crossed. A tough hike.

  4. Right again, and that is a task that would take a person with the charisma of a thousand Rick Mercers. I'm going to be talking about this in a later part, but something I fundamentally believe is dysfunctional with our democracy is that the public only really have an election as a sanctioned "feedback" to the ruling government. If (as I have alluded to in other entries) there was a method by which civil society groups were given a specific mandate - but more importantly a bureaucratic mechanism - to make moderate but ongoing changes in the ways certain legislation was applied, the public would get used to being listened to. Democracy must be responsive. The mayorship of Naeed Nenshi has already proven this point - direct engagement and getting the job done brings life back to the civil discourse. Sadly there is the catch-22 of needing to be in power to bring in the legislation that will drive the citizens to appreciate the need for the legislation... still, I think Canada is in the process of giving itself a good shake and getting the cobwebs out. If not this election, perhaps in the next election, there will be enough will for change.

  5. I.K. (not the Ik, I hope)2 April 2011 at 10:49

    Agreed. As Daniele Archibugi writes in "The Global Commonwealth of Citizens" (part of my current reading list), the journey to democracy is endless. That is to say, we can't say "we've found a democratic system. That's it, we're done". History, by which I mean the myriad dimensions of human existence on Earth, moves on, transforming, and confronting people with new realities.

  6. There is also the question of enforcing existing legislation. By all rights, the pollution caused by the Tar Sands, and the inability to restore previously mined areas to their natural state makes the whole operation illegal, but you would be hard pressed to get anyone to actually enforce those laws.

  7. This is why I believe there should be given areas in which civil society groups can initiate processes in government which force the government to act. Specifically, that force the government to act in very detailed and proscribed ways. Nonsense example: if a publicly recognised civic society group presented a quorum of members, the majority of whom believed the truffula trees needed pruning, then the department of truffula trees would have to send out a squad of elite truffula census officers to determine if, in fact, that was the case. The standards by which the truffula trees would be judged would be set in stone, so no grey area would be possible. Just cause and effect. The more feedbacks like that we have, the more of a democracy we have. If a given level of public interest mandated a given action, then people would probably be pretty satisfied.