Today I’d like to discuss an article I read some time ago on listverse (full article). The article describes 10 economic issues that we are less familiar with. I will quote the article for a short description of these issues and try to situate them in the context of sustainable entrepreneurship.
10. Paradox of value
Also known as the Diamond-Water Paradox, the paradox of value is the contradiction that while water is more useful, in terms of survival, than diamonds, diamonds get a higher market price. This paradox can possibly be explained by the Subjective Theory of Value, which says that worth is based on the wants and needs of a society, as opposed to value being inherent to an object.
The Diamond-Water Paradox is an extremely important and difficult problem when sustainability is involved (which it always is). At the moment we’re using our planet’s reserves at an enormous pace. The real cost of this use (and therefor the need as communicated by our society) will only be visible once the reserves are depleted or largely used. Relying on the Subjective Theory of Value, it will be only at that point that we’ll start looking at biodiversity and the limits of our planet. If we start experimenting with steady-state-economics now, we might counter this effect (partially) or have an answer ready once the need is pertinent.
9. Khazzoom-Brookes Postulate
Increased energy efficiency can increase energy consumption by three means.
- Increased energy efficiency makes the use of energy relatively cheaper, thus encouraging increased use.
- Increased energy efficiency leads to increased economic growth, which pulls up energy use in the whole economy.
- Increased efficiency in any one bottleneck resource multiplies the use of all the companion technologies, products and services that were being restrained by it.
This effect is also known as the rebound-effect. As an organisation this effect is hard to influence since this effect is the result of a habit which is deeply embedded in our society. By growing awareness and better education you can try to alter this effect.
I believe that the creation of a community-supported local economy with an aim on local resources and self-sufficiency might help with this.
8. Bounded rationality
The basic idea of economics is that people act in ways to maximize their self-interest. We do things that will increase our “utility”, or happiness. It seems logical that we would make rational decisions in order to accomplish that. Unfortunately, information asymmetry (described below), cognitive biases and other factors conspire to bound our rationality, and people often make choices that lead to outcomes that go against their desires.
I would like to refer to a post of mine from before where I talked about the paradox of choice. More choice doesn’t always lead to better decisions. In the traditional approach to sustainability, it’s the shopper’s choice and power to define the course of the economy by buying better and more sustainable products. But the concept of bounded rationality combined with the paradox of choice might put a brake on this approach.
In light of this I would like to refer to a recent new movie from the story of stuff where the makers talk about how citizens (not shoppers) can make a difference. With the economy as a supporting system for a society, citizens should actively participate in the bigger story. This story then should be translated by entrepreneurs on a local scale to products that match this vision. In this way it is possible to partially tackle the issue of bounded rationality.
7. Lipstick effect
The idea is that people buy luxury goods even during economic hardships, they will just choose goods that have less of an impact on their funds. Other less expensive luxury goods besides cosmetics include expensive beer and small gadgets.
This effect can explain the succes of the organic and green hype even though it’s more expensive. One thing to keep in mind though is that making a Common a Luxury will narrow down your audience. Ask a fair price for your product, but don’t make sustainability something for the happy few.
6. Tragedy of the Commons
The tragedy of the commons is a situation in which multiple individuals, acting independently, deplete a shared resource, even when it is not in anyone’s interest to do so. The best current example of this is fishermen. Nobody owns the earth’s fish populations, indeed, they are a shared resource. Fish are a good that people the world over consume, and as a result, there are multiple fisherman competing for these fish.
The tragedy of the commons is one of the most obvious paradoxes that make the creation of a sustainable economy a really complex concept (if we don’t change the concept of competition as a base for economy that is).
5. Tragedy of the antiCommons
The opposite of the above mentioned tragedy of the commons, the anticommons is a situation where too many owners (and bureaucratic red tape) discourages accomplishment of a socially desirable outcome. The classic example is patents.
Bureaucracy and the excessive use of patents and intellectual property are one of the main reasons why innovation is slowed down at the moment. Since a sustainable economy tends to focus on a steady-state economy, open-source could help in creating the best product, combined with service to improve the experience offered by the product. By opening up production-processes, innovation and experimentation will flourish, allowing communities to build different versions of a product, adaptable to the local situation, materials and needs.
4. Perverse incentives
A perverse incentive is an incentive that has an unintended and undesirable effect which is opposite to the initial interests. A historical example illustrates the problem: 19th century paleontologists traveling to China used to pay peasants for each piece of dinosaur bone that they presented. It was later found the peasants found bones and then smashed them into many pieces, which significantly reduced their scientific value, to get more payments.
In traditional organisations, incentives are often used to improve productivity. In the Youtube-video embedded below, Dan Pink talks about what truly motivates us. It’s these kind of company-cultures that will have a future in the long-term.
3. Information Asymmetry
Adverse selection is a market process where information asymmetry causes negative results. An information asymmetry example is the “Market for Lemons”, a term coined by the economist George Akerlof. The used car market is the classic example of quality uncertainty. A defective used car (“lemon”) is generally the result of untraceable actions, like the owners driving style, maintenance habits and accidents. Because the buyer does not have this information, their best assumption is that the vehicle is of average quality, and therefore will pay only an average fair price. As a result, the owner of a car in great condition (“cherry”), will not be able to get a price high enough to make selling the cherry worthwhile. End result: the owners of good cars will not sell their vehicles in the used-car market. This reduces the quality of cars in the used-car market, this reduces the price buyers will pay, this further reduces the quality of cars sold. You get the idea.
The problem with several ‘green’ products that are on the market today, is that they’re not equally good as their unsustainable alternatives. Because of this, going green is considered difficult and a cutback in your wellbeing. Shifting this paradigm is probably the hardest challenge we’re facing in the green economy.
2. The Cobra effect
This is when the solution to a problem actually makes the problem worse. The term is used to illustrate the origins of wrong stimulation in politics and economic policy. Unfortunately, some of the crises facing our world are the result of honest attempts to solve problems.
This effect is also covered in the above video on what drives people.
1. The Samaritans dilemma
This is the idea that giving charity reduces an individual’s incentive to help themselves. Here’s the problem: it is hard to know how the person you are giving the dollars to will use the funds, so people might instead opt to not give to any homeless people. Now the individuals who would have used the money to improve their situations suffer.
This dilemma is an often recited dilemma in debates on charity or government influence in certain social or economic issues. I think this dilemma essentially has the same problem as the “economy-discussions” (for my opinion on those discussions, check my conclusion in this post). Just as in discussions on theoretical economic frameworks, there’s no one-size-fits-all solution for this dilemma either. there’s no such thing as a system where it’s impossible to cheat, where you’re always certain what’s going to happen and how everyone else is going to react.
The biggest issue here is (in my opinion) the fact that we’re constantly focusing on the downsides of a system or model. If you initially focus on the strong, positive points of a system, the system will evolve in a positive way and then become a better system. As far as sustainable business models are concerned, I think it’s time we start experimenting with them, even though there are some flaws still. By trying, you will experience hands-on what works and what doesn’t, but (and more important) you will discover the positive points of the model, emphasize them and therefor make them bigger and more present in the model.
If the positive points of a system are clear and appealing, we’ll be tempted more easily to try it out, even though there are some errors left to fix.