Oikonomics: a social life of money

We make the markets we deserve...

We have been having sex for some weeks now – what about starting a relationship?

I found myself talking about the social life of money in two very different forums last week.  The first was on the topic of ‘promoting a savings culture’ in the UK at the CSFI, a no holds barred, lively debating forum MC’d by the incorrigible Andrew Hilton.  The second was at the invitation of the Finance Lab at ICAEW who ran a workshop on ‘Preventable Surprises’ with a select group of stakeholders and opinion formers about the financial crisis – applying the lessons of the Deepwater Horizon disaster.
In many respects, both sessions were a great confidence boost for the point of view that underpins Abundance Generation and what it is trying to achieve in the world of financial services and sustainability. Aviva’s ‘Big Picture’ think piece has much in common with Abundance’s own manifesto and even its language was very similar which generated some new friends and contacts amongst the CSFI audience who also think the time has come to rethink the way we ‘make’ money.

The core philosophy of Abundance; that we need to move from a world dominated by what you can ‘get’ with money (which fits with a world obsessed and addicted to all forms of cheap credit) to what you can ‘do’ with money (which requires a long term investment view of money and a more balanced perspective on risk) was something which helped simplify the complexity of ‘what do we do’ in the face of a crisis not just in our financial system (that is just a symptom of a deeper problem) but in the very values and use we ascribe to money in our society.

New thoughts coming out of the cut and thrust of CSFI and the more collaborative atmosphere of the Lab centre brought my own focus back to the problem of markets.  In particular, the idea that it is the State (or more pertinently in a democratic context ourselves as ‘the people’) that make markets and we make the markets that we deserve.  This instantly attracts attack from passive/implicit neo-liberal acceptance of the reality of markets as somehow universal and immune from the society or culture in which they operate – regulated by rational not social or cultural physics.  The idea that markets are ‘created’ or performed out of a social or cultural context challenges ideas of efficiency and objectivity despite copious evidence to the contrary coming out of the crisis itself and the success of socially produced and embedded markets such as Zopa or eBay.

The energy market in the UK is a case in point. It is a dysfunctional market, created by the State yes, but dysfunctional because of a lack of regulation and intervention from society to ensure the decisions it makes are right for the long term investment we need to make if we are not going to be held hostage to the price of high marginal cost fuels in the future (high marginal cost in economic as well as environmental terms).  Markets and the information they use and value have limits.  They “know” the price of everything but the value of nothing (to re-purpose a phrase) because markets seek to reduce the forces and costs of change – social, cultural and environmental – to a price at a particular instant and constantly discounts future cash and value flows which include economic  as well as the familiar ‘triple bottom line’ benefits.  To explain the slightly cryptic title to this post (taken from a cartoon in this week’s Private Eye) it is like deciding the value of marriage and family on the basis on the quality of the first time you kiss or have sex with your prospective partner. Or even perhaps the quality of restaurant choice for a first date... 

The recent decisions on Feed in tariffs by the UK Department of Energy and Climate Change reflect that blind belief that ‘price’ is somehow a signifier of “value” and that markets are the best arbiter of economic and political decisions about how we generate energy in this country for the next 50 years or more.  This is to miss entirely the point of subsidies for renewable energy sources (of whatever technology) which is to protect those technologies from the short term vagaries and volatility of a market which is driven by the high marginal cost of fuel (compared to renewable energy which has high set up costs but zero marginal cost apart from the discount rate on the money required to build the infrastructure something which requires market confidence to keep the price down, confidence which has been eroded by the current behaviour and signals coming from a department struggling with a arbitrary and short sighted decision not to make FiT part of the annual managed expenditure).

The economics of renewable energy makes its cost highly predictable and stable which limits the potential of the casino side of energy companies (betting on the rise and fall of energy prices – rather like those other well loved utilities our high street banks) to make money from speculation.  Spending on FIT and ROC’s now is about encouraging a more stable (and green) future where businesses can plan and grow in an economy with more stable (and based on evidence from Ireland and Germany were renewable energy installation is ahead of the UK slow and cautious tiptoeing forwards – one that reduces energy bills for ordinary consumers once a critical mass is reached due to something called the ‘Merit order effect’.)

The start of something new with www.abundancegeneration.com

I have been away from this blog for a long time but for a good reason.  After more than 2 years of effort, energy, bloody mindedness, up's and down's, battles, victories, set backs, surprises and not small amount of coffee, Leon lunch boxes and falafel consumed Abundance is finally ready to born into the world.

Abundance is a new way to think about investing money which aims to go to the next step after the likes of zopa and others in establishing an alternative way of using money that is fundamentally social democratic (i.e. open to all especially those with smaller amounts to invest) and sustainable, and like zopa, competitive in the mainstream financial services market.

Abundance is a community investment platform which allows retail investors to invest in renewable energy projects.  It is the product of the unlikely meeting of an anthropologist, environmentalist and an ex-banker, which sounds like the start of a joke, but has actually produced the first really new regulated financial product in more than a decade...

Exact timings of the launch are yet to be confirmed but you can sign up for email updates at our website which is www.abundancegeneration.com.

Because Abundance is regulated and authorised by the FSA you can find more details on the website and sign up for email updates directly there.

 

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Sign of the times

After a thought provoking start to the week, debating the meaning of "shared social responsibility" here I was brought back to reality as I queued for a cash machine in a branch of my bank (conoisseurs of wallpaper financial advertising will recognise the figures stretched along the bottom of this missive).

I am glad that they have identified that the role of the branch is to create a 'queuing experience' which can be enhanced,  if I feel the need to flex my neo-liberal volition, by choosing the 'fasttrack' lane. Of course, I would then face the paradoxical experience of queuing in my fastrack lane with all the other individualists who like me would be asking what function qualified as 'fasttrack'.  

If it means that I won't be cross sold to while I try to pay in a cheque ("have you reviewed your finances in the last 6 months?") then great, but I can see it being so popular that they will soon be advertising the 'collective queueing experience' at tills 1-5. 

Claus Offe (speaking at the Council of Europe conference) provided a telling reflection on the predicament of the individualistic consumer when recounting being stuck in a traffic jam and looking across at a sign which read, "you are not stuck in a jam, you are the jam."

So a big thank you for my bank providing the Alex Ferguson route to financial satisfaction as an alternative to standing with my fellow consumers in a more involved "queuing experience" in the slow lane. Freed of my social ties to my fellow customers I am liberated to enact my authentic self and carry out whatever mundane task I can't do online and go on my way to my next frictionless transaction. Well in Marx's terms at least we know where we stand with the banking crisis, we have had the tragedy now bring on the farce.

A magna carta for money?: reflections on a week of talking about 'the long now'

 
Many of the questions being raised by discussing 'the long now' of money and finance at SIBOS are existential ones.  Unfortunately I am not convinced that many if any banks are willing to consider existential problems; despite that being the elephant in the rather big room that is SIBOS.

It is hardly surprising, seeing how the most of the banks present at SIBOS seem to be feeling somewhat existentially challenged; reduced as they are to considering mainly short term issues of liquidity, capital (or lack of it), risk (see the previous two issues) and focusing on making money from the bread and butter of banking (payments).  The Long Now team will be prefacing their summary to the plenary session today with a video which points out how and why banks are doomed in the style of Hitch Hiker's Guide, only without the "Don't Panic" reassurance that there is a manual of 'how to get out of this hole".

I am not sure that this will elicit 'engagement' as such from an audience of bankers, which is a shame because asking these sort of questions might help them see beyond the present crisis and work out what sort of banks we need in the future - based on the binocular hindsight of the long now approach.

Our own long now conversations, detailed by the ubiquitous Chris "I know where the next party is" Skinner on his blog, shifted the emphasis back to what is happening "in the real world".  As individuals, we are looking for institutions who can make money solid and tangible, not merely in terms of seeing cold hard cash (although that is a start), but in terms what we do with money and constructed in a way that fits with its Long Now role of being a function of its social utility rather than its narrow economic definition and usage.

By framing wealth in terms of concepts like legacy and immortality (or at least of guarantees of succession) which expanded what we thought really constituted 'wealth' in a world of uncertainty, our discussion began to look at the motivations of individuals to use money for good works (one form of legacy).

The problem here is that modern money in its current incarnation cannot adequately convey the 'spirit' of a gift.  Modern Money reduces a transaction to a question of economic value (like leaving the price tag on a birthday present) which leaves no legacy or lasting imprint - it merely reflects the price of a thing at a particular time (it does not signify for example whether I was generous in the price I offered or stingy).

If banks are to maintain their position as the 'producers' of money (as opposed to just the pipes it flows and is stored within) then they need to work out how to construct money products which can confer permanence and legacy on the giver and communicate that also to the receiver.  Which I guess is one million dollar question coming out of the long now (for me at least).

Perhaps a bit frustratingly one of the best ways of thinking about money in the long now was presented by Paul Saffo who in 90 seconds summarised the concept of the legal 'long now' and raised questions of whether the crisis was the prelude to a change in schema (i.e. a new money akin to a new common law), constitution, legislation, regulation, enforcement regime or merely fashion (i.e. will this be solved by bloody revolution or a marketing refresh at the extremes)? You might argue that neo-liberal capitalism has been regulation masquerading as a schema or constitution and as such should expect competing forms of regulation of markets (and therefore different forms of market) to emerge from the crisis and challenge its claim to natural hegemony as merely a function of legal precedent and entrenched power relations.

In other words, who are the barons who will force the signing of a magna carta for money?

Beyond the fringe

I spent a fair amount of time working with a leading Israeli food and coffee company in the 1990’s.  At the time, everyone talked about living in the bubble – Tel Aviv – which was renowned for having the fastest adoption curve of any new technology in the world.  Working and living in the bubble was a heady and addictive cocktail of constantly changing bars and restaurants serving fantastic culinary experiences.  Change was truly was the norm.  As were the girls with guns on the street corners, the Scuds and Hezbollah missile strikes.

I then spent time working on some interesting brands in the UK drinks market, such as Sailor Jerry and Hendricks Gin and my own co-creation Monkey Shoulder Whisky. What was interesting (or perhaps ‘authentic’) about these brands was that they were positioned as an antidote to life in the bubble. The world of the London cocktail bar and mixologist bore little relevance to what people were drinking in the ‘real world’.  In fact, new ideas in the bubble were instantly devalued as soon as their ‘newness’ wore off, and as I began to ‘deep hang out’ in the bars of various towns and cities in the UK, the views of the bubble were largely irrelevant to the so-called regions.

Starting a brand outside of the bubble required new ways of working – lead by an innovations manager at Grants who has since gone on togreater things but who was ruthless in looking for ways to stay one step ahead – and new ways of branding.

We now face the same problem with our money.  The world outside of the City has been largely excluded from the debate about how money should be produced and used as a result we have created a ‘bubble’ from which we must now venture forth into the unknown of the ‘real economy’.   Bankers are the mixologists of money – creating ever more expensive cocktails of heady liquors and flavours which only the rich and well connected can access but which leave even them as distinct hangover.  By the time such products make it to the supermarkets of our retail banks they have not only lost their freshness and value – they are almost completely alien to the world which the retail customer lives within.

So now the essay question which is being asked in various circles – sociological, political and economic – how will the world of money outside of the bubble lead the recovery and how can we balance the relative importance of what happens inside the bubble of the City with what happens in the real economy?

Answers on a postcard gratefully received. : )

Maximize or optimize?

Paul Mason at Newsnight has been asking what will bring about the recovery in the UK, saving the current system or building a new ‘post-industrial’ system. Zopa was used as an example of what Philip Blond calls ‘de-centralized capital’ or the ‘re-localised economy’. More interesting for me (aside from the cheerleading for my one and only shareholding….) is the challenge to the idea that philosophy of maximizing, be it efficiency, profit or growth is the only strategy for business success. What Paul called ‘a bunch of Hippies in West Wales’ would assert that optimizing for your environment and your values is the more sustainable strategy and they cited strategies for survival in nature which utilize this approach.

But this is more than financial engineering, it is also about decentralizing the political economy too. Not through the creation of more quangos and institutions, or perhaps even a new bubble forming in the so-called "third sector", but through the creation of new and more sustainable networks of individuals who can do much more than just create a new way of borrowing and investing money (although of course that is a good start). The problem is that just as in banks there is a significant and powerful vested interest in the pyramid-like structures of power which organize both our financial and political capital – propped up by their own forms of bail out for whether it be unions or non-doms.

Perhaps something which Paul missed in his commentary was the implicit challenge to the idea of competition and self interest as the maxims for success which in turn will generate the wider social goods which our society arguably needs to survive. It doesn’t take a genius to recognize that this model has its limitations but as yet there is relatively little being created as a cogent alternative. Giles at Zopa used the word ‘collaborative’ to describe the zopa market – but the important thing to note is that this is not some form of Soviet collective setting prices for the greater good, but a collaboration in which everyone is equal in their ability to influence the market and set prices because price is not a function of some competitively driven index but a function of individual decision on how much is ‘enough’. It something that needs more study, but my theory would be that as a zopa lender I have an ‘interest’ in being competitive versus banks (which in the current climate is relatively easy) and also an interest in creating a sustainable and affordable (by borrowers) return on my money.

Perhaps it is timely that the Spectator was handing out free copies of Adam Smith’s Invisible Hand this week!

Do free markets destroy everything? A response to ResPublica, "red tories" and Philip Blond

Philip Blond, the new, fashionably disheveled, poster boy of the conservatives seems to have something against free markets. I am variously labeled ‘slightly mad’ to ‘not making sense’ for suggesting that markets and communities can exist together because there is no such thing as ‘A market’ (free or otherwise) or ‘A community’. To talk in abstract terms about them being ‘good or bad’ is meaningless without context. The terms can be interchangeable for me depending on your context and perspective, a community needs exchange to exist and adapt, a market needs community to establish rules for exchange and avoid free riders taking over. You can legislate for both to be run on principles of equality, rationality, liberty etc although in reality this gets lost in translation from legal principles to social practice.

Perhaps this is what ResPublica are mean when they say that free markets destroy society? Do they mean 'free markets' as currently constituted and institutionalised within the City? Arguably our modern ‘free market’ for investment and finance is anything but. It is a relatively closed club of investors who only trade with those in the club – in part for solid economic reasons (they can maintain margins and avoid the spiraling costs of servicing lots of small customers which so troubles retail banks) and partly out of tradition and convention. They expect and maintain ‘status’ in society through their subsidies and personal rewards – a new aristocracy (and equally cut throat and competitive within their own class) who finds it hard to imagine a world without them.

I am probably therefore being unfair to Respublica and their ability to get attention to their ideas through careful political soundbites – but I would also caution that their ideas don’t become merely slogans for other political agendas which may conveniently edit some of the nuances of their analysis of what makes societies and markets tick.

The Ethics of Bankers

Is being good the same as being good with money, or rather someone else’s money? The FSA have been keen to publicize the numbers of individuals who have been rejected as worthy of running banks (18 in the last year apparently), what is less clear is how the ethics of an individual will affect the culture of the company which they run?

Certainly, banks are more hierarchical and rule driven than most organizations, however, by making it an issue of ethics rather than management competence or control is a continuation of the theme that banking crisis was not a failure of the system but a failure of morality. I find this analysis somewhat dangerous because it assumes that with the right people the system will work just fine, thank you very much. There is very little evidence that any system, however perfect it may be in theory, has any hope of controlling the practices of money in everyday life.

It paints a picture of the bank executive as a guardian or philosopher king guiding his citizens based on some higher understanding and once more centralizes responsibility rather than placing it in the hands of the individuals who in reality "make money" in every sense.

Can we blame an individual for the sales culture within RBS and HBOS? Was it a failure of individual ethics or merely a mistaken collective belief in certainties and truths which have been found wanting? Alan Greenspan was certainly repentant for his error of faith in markets, but aren’t we just replacing one philosophy (the overly deterministic, positivist materialism of economists) with another (a strange mix of social and technological idealism - which Chris Dillow critiques as ‘managerialism’ in his book "The end of politics").

I would be intrigued to know how these interviews are conducted and more importantly who is the judge of these ethics of bankers. I doubt that the FSA employs someone schooled extensively in Socratic method so I imagine it is something of a Q&A approach with a measure of ‘fitness for banking’ scored out of 20 perhaps? Answers on a postcard. Given the ability of individuals to subvert the fact finds and interviews which regulate our usage of money (essentially a measure of knowing the right answer rather than an enquiry into the truth of things).

Perhaps they can learn from the apocryphal stories about Cambridge interviews and their esoteric lines of questioning, which various Dons are very keen to avow but personal experience suggests have a very small element of truth about them. Personally I wouldn’t be asking them about their ‘ethics’, nor would I be asking them to imagine life as a cow or answer the question – "is this a question?" (answer, "yes, if this is an answer"). What about a short 1000 words on ‘being good with money’ – what it means and how they see their organization’s role in the everyday practice of money? Or my personal favourite, what would be the first thing you would do after winning a personally significant sum on the National Lottery? (best answer to date from the poor guy who thought he had won the Euro millions jackpot - he borrowed £1000 instantly and wanted to move next door to Alan Shearer! - liquid modern ethics writ large!)

Is it better to be a customer of a big bank or a small bank or both?

The plan to break up the state subsidized Lloyds and RBS is being positioned as in the interests of competition and safety for the retail banking market – things which should, on paper at least, be beneficial to the consumer.  Will customers hived off in these new banks be happy to be a small fish in a small pond or will they shift their accounts back to the parents whence they came?  Given the experience of smaller institutions in the mutual sector and the mantra of efficiency of scale which created these behemoths in the first place are we merely turning the clock back to a time when ‘banks were boring’ and part of that boredom was to be less competitive and rely on customer inertia and apathy to maintain margins.

Perhaps the energy market is a good analogy here.  There is little evidence which I have observed that ‘choice’ and ‘competitiveness’ run hand in hand.  There is in reality a limit to the number of choices a consumer is prepared to consider and much of the vaunted ‘switching activity’ which is used as a signifier of competition is driven by a small number of people who if they are honest actually like to switch – it makes them feel thrifty. There is quite a large alternative segment of that market and the financial services market for whom switching is seen as rather pointless (better the devil you know) and it takes quite mind boggling stupidity, rudeness and sheer bloody minded cheek to get a customer to switch their allegiance to another brand.  Smaller brands also tend to be disadvantaged in the switching process even if they are competitive in terms of price because customers decide to go with the ‘next best biggest’ as a trade off between price and trust (trust in this sense means being able to blame someone if it all goes wrong).  Rather than being a signifier of competition and better deals, switching is a signifier of almost catastrophic failures of customer service.

That said, many people have more than one bank account now (the better off because of the limit on savings guarantees, others as a result of chasing deals).  Perhaps these mini-banks will specialize into specific product segments? The problem is that each one will be saddled with a branch network of (heaven forbid) the second choice branch locations which their parent may be only too happy to get shot of.  Given Lloyds in particular stepped back from the brink of closing its C&G branches, I can see one or two of those heading back under the auctioneer’s hammer before too long.

What will make banks competitive is for banks themselves to see the benefits of competition and for one of the bigger brands to adopt a more forward looking and challenger mindset – i.e. to be anything but a boring bank.  A co-conspirator of old and bank innovator Richard Duvall would have jumped at the chance offered by the current banking market stasis to start his version of the individual revolution.  I hope that others stand in the wings  to fill his big shoes and emulate some of his big ideas.

Is subsidy the best way of starting a real recovery?

Now that Northern Rock has spawned its evil twin, (Northern Wreck?), can we expect a boost to the economy as its good twin spreads its angelic wings?  Is a lack of bank lending really at the root of our relatively sluggish exit from this generation’s “when I were a lad, we were so poor that…” experience?

 

In theory, the ability of banks to leverage deposit money through their status of institutions which inspire confidence should be wealth creating and efficient as they make a little capital go a long way.  However, as has been commented passim, you don’t become a banker out of an altruistic desire, you are in it to make money.  We have pumped close to a trillion pounds into the banking system on the basis that this is the best way of allocating capital to where it is needed in the economy.  What is less clear is what effect that state subsidy will have on banks and their ability to deliver on that promise of efficiency. 

 

The problem that I can see is a cultural one.  By privileging one form of making money (lending through institutionally rigid (rule based) organizations) over others we make that form of production intrinsically less competitive with the universe of wealth creation  as a whole.  The improved margins created by the subsidy remove the need to compete for every ounce of lending available and for every basis point of advantage.  Banks like Northern Rock start to resemble institutions like the Royal Opera House, Museums, Art Galleries etc who cannot exist without funding from the state because not to have them would, it is perceived, leave us less well of culturally or economically speaking.

 

An example closer to home is the proliferation of incubation and venture agencies (from the lottery sponsored NESTA to the individual university organizations) which are trying to play an increasing role in helping graduates and entrepreneurs (in particular social enterprises, but also technology ideas).  On balance the effect these organizations is to place subsidizing forms of capital into the very DNA of these start-up companies which then affects the way in which that company views and uses money from that point on.  There is nothing written in stone about a company needing a business plan, working capital, lawyers, accountants, hangers on, advisory boards, quango grants in order to be a success.  The art of Bootstrapping is being lost by the rationalization of business through the influence of MBA schools and management consultants (who have an interest in the fees that perspective generates – as such they are the modern sophists so derided by Socrates).  John Mullins's book – getting to plan B is a breath of fresh air on that front, reminding entrepreneurs that the best laid plans of mice and men are best treated as a work in progress and too much ‘institutional’ baggage can undermine the effectiveness of the business creation  process.  Business benefits from uncertainty, competition requires its, removing risk fundamentally undermines the ability of an economy to compete on the global stage – in other words we can’t have it both ways.  A Boom requires the potential of a bust to exist in any meaningful sense.

 

Subsidy occurs in other markets, such as retailers, who charge large amounts of money for brands to inhabit their ‘gondola’ – one referred to their subsidy by leading manufacturers as ‘crack cocaine’ which hampered the efficiency with which that brand could operate as a retailer (as opposed to being merely a department store).

 

The solution? Well subsidy is inherently culturally and economically conservative because it is money distributed from the top down.  What is required is new forms of “non-institutional” (individual?) money creation which can introduce real competition against these subsidized dinosaurs who are currently being insulated from the ice age of “austerity living” and more importantly in the future the effects of sustainable energy strategies on patterns of consumption, production and the wealth of nations.