Date: 2024-09-27 Page is: DBtxt003.php L0900-COofCA-2009-050000
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Burgess Manuscript
CONCEPTUAL OVERVIEW of COMMUNITY ANALYTICS Manuscript Draft from 2009 |
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Chapter 5
Value Dynamics of Society |
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Possibilities and opportunities are enormous!
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The idea that the negatives are bigger than the positives is just plain wrong:
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Existing Models and Metrics are Inadequate
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Over the past forty years the practice of econometrics has resulted in models that were meant to explain
how the economy had behaved and predict how it would behave in the future. In fact, however, these
macro models were quite limited in their capacity to understand what had happened and less able to do
much useful about the future.
CA is a different model ... much more basic ... and much more grounded in data that can be used for decision making as well as for operations research. CA is about the economic dynamic of the community ... and how community is impacted by internal and external influences. Economic models have become an important tool of modern economics ... but how good are they? The ones that are used to predict socio-economic progress for poor societies seem to be counter-productive ... and in reality most poor societies have progressed very slowly over a long period of time. Nor is it clear how good economic models have been It is not clear what economic models have used by the modern advanced private investment and banking community, but experience suggests that most users of models do not have a deep understanding of the assumptions used to create the models and their limitations. It seems that most economic models are developed around the data for highly monetized economies ... but most of the poor world is only lightly monetized. Life is not driven by how much money but by how much of the necessities the family has ... some of which are obtained by money transactions, but much comes from self-production and petty trade that has a barter-like quality. The CA conclusion from economic modeling for poor communities is that productivity is the key issue that needs to be addressed, and experience suggests that when constraints on improving productivity are identified and removed, there can be amazing progress. Macro-economic metrics ... key indicators Macro-economic metrics did not identify the economic crisis of 2008 until the damage was done ... the models could only anticipate previous experience ... even while other models were being used to game the system. At the macro level there are all sorts of metrics ... mostly derived from small surveys and aggregated statistically. They serve as useful proxies for more reliable metrics ... and serve quite well as long as changes are modest and there are no disruptive elements. When there is disruption and things change these measures are inadequate and probably wrong. But there are more fundamental problems with macro-economic metrics. They do not provide the level of detail or granularity that is needed to make decisions at any level much below the level of the Federal Reserve ... and the models are worse than useless outside the specific economy where they were developed. CA acknowledges that a range of macro-economic indicators exist and that these time series need not be changed, but a new set of indicators need to be developed and deployed. Crucial for effective policy formulation Understanding the economic dynamics that drive what happens in society is important. |
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Value Adding, Value Destruction and Sustainability
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Value adding and value destruction is the absolutely central idea of sustainable socio-economic
development. A sustainable society is one where there is net value adding ... anything else is
unsustainable.
Value adding An economic dynamic that creates value will sustain not only at a present level, but at an increasing level of value creation ... a virtuous outcome. In a simple world it would be easy to plan progress and achieve progress, but in the world of reality there is little that is simple. Besides value creation and a virtuous compounding, there is also value destruction. Value adding takes place whenever something that adds to quality of life occurs ... frequently in small increments Value destruction Value destruction compounds to form a vicious cycle of increasingly difficult outcomes. Value destruction may start slowly, but if not corrected the compounding eventually takes hold, and it is very difficult to control. In the complex reality of the economy, both value creation and value destruction are going on at the same time ... one offsets the other ... but there is always the potential for one of the other to get the upper hand. When it is value destruction that becomes dominant, the socio-economic outcome is catastrophic ... and this is what is happening in most poor settings. Sustainability Value chain analysis |
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Global, National and Community Dynamics
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Globalization has been a “buzz word” since the 1980s ... though it can be argued that global economic
activity has always been in play albeit constrained by the technologies of the past.
Global Dynamics The ideas of terms of trade and comparative advantage are fundamental to basic economic understanding. Where trade is free and fair, there will be trade when there is differential comparative advantage. Of course, when there is rule of law, there is never free and fair trade ... just regulated trade, with the regulation usually in favor of those that make the laws. National Dynamics The national and global economy What is understood at the macro level and the economic models used at this level do not translate well to the community level. There has been growing complacency among experts that the “business cycle” could now be controlled because the models were so good. Community Dynamics Linkages between activities ... everything is linked Linkages The world has discovered social networks which are all about links ... but links are fundamental to the operation of an economic system and much more prevalent than usually assumed in the attempts to measure socio-economic performance. Without taking into consideration the complex web of links, it becomes impossible to understand socio-economic performance. The CA value chain analysis identifies key linkages and helps to ensure that success is facilitated by a multi-sector and multi-function approach to development implementation. Multiplier Accelerator Employment Investment Savings Consumption Profits The CA paradigm shift makes the community the focal point for socio-economic analysis and planning. It becomes very clear that there are problems when they are visible in the community ... and opportunities are much more real when they can be seen at the community level. A sustainable community is one where the economic activities of the community improve the balance sheet of the community ... a balance sheet comprising social and human value as well as natural, material and financial assets. By simplifying the focus to the community ... rather than an aggregate at the national level of thousands of communities ... it starts to be possible to understand what is going on. It becomes possible to see what it is that is constraining better performance ... and what is enabling survival when survival seems impossible. Dynamics Economic dynamics are complex and very important ... but not well understood, especially at the community level. The CA paradigm is strongly in favor of investing ... and much less in favor of consuming, except where the consumption is needed for quality of life. The dynamic for economic crisis The dynamic for economic crisis is ever present. Society is complex ... and made more complex by the various institutional, legal, religious, cultural and other frameworks that people have created over the ages. But, for all its complexity, there is an underlying dynamic that results in progress or not. Exponential compounding One characteristic that is clear is that relationships are never linear ... rather relationships are exponential ... and because of this change sometimes appears to be slow, but hardly before it is recognized, it is already spiraling out of control. This may be good ... or bad. |
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The Value Dynamics of Markets
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Markets and markets
There are many that are totally committed to the idea that markets are the perfect invisible hand that makes economics work ... but experience suggests that while markets have a very important role in the functioning of the economy and society, they are only one part of the totality of the socio-economic infrastructure. My experience of pricing in Communist countries in the decades prior to 1990 would have convinced anyone that a system of administered prices ends up distorting the economy and making it totally unproductive. Markets do a far better job of allocating resources, and moving goods and services in response to demand. But administered prices have been little better in the non-Communist world. President Nixon imposed several rounds of price controls in the aftermath of the 1973 oil shock ... and accomplished nothing but market distortion and disruption. At the time I was running a factory and buying large quantities of bronze under a long term purchase contract. When price controls were introduced in the USA, but not in the rest or the world, our supplier suddenly had no supplies for us. Not surprisingly the supplier chose to sell on the world market at the world market price rather than in the USA at a much lower administered price. To keep our foundry operating we had to purchase bronze in Europe at the prevailing world price ... and then fly the metal to the USA in time to keep production going. Instead of bronze prices going from 50 cents a pound to 35 cents a pound ... the administered price ... my cost moved from 50 cents to $1.35 a pound. So much for controlling inflation through administered prices! But markets only work well when there is competition, and the competition is reasonably fair. The market does not work well as a resource allocation mechanism and as a vehicle for creating incentive for more supply when the supply chain is complex and there are market players on both sides of the same transaction. This has become very common, and the market mechanism often serves as a vehicle for extracting profit from the value chain Monopolies, oligopolies and the concentration of power Monopolies, oligopolies and the concentration of power have been a problem in all of history. There has been commentary on this since biblical times. Concentration of power is a reliable predictor of economic abuse. This was recognized in the 19th century and exploited to the maximum extent by those with powerful interests ... as it probably has been for all of history. The US lawmakers have tried to prevent the abuse of the concentration of economic power with Anti-Trust legislation ... and so also have other jurisdictions. It is difficult, because the rewards a great and there has been no lack of creativity. Democracy is an attempt to stop government and politics from becoming a system for the concentration of power ... but it has not been totally successful, and ever since it has been possible to pass law, there have been powerful interests trying to influence legislation in their favor. |
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Rule of Law ... or Rigging the System
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The idea of rule of law is very attractive ... but in practice it has worked less well than in theory. Law not
only has the power to level the playing field, but also to rig the system so that the powerful side will
always win. Rule of law should be something that works for the people ... but so much of the law that is
practiced serves the interests of a powerful elite.
Economics of employment Money, capital and credit Brand dynamics and distortion Media dynamics and distortion |
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Incentives ... Profit or Value?
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Needs, Wants and Market Demand ... Poverty
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Basic needs
Human beings in rich countries have little appreciation of the difference between basic needs and the many “wants” of a rich society. Those that live at the $1 a day level know how important it is to have water to drink, some food to eat, some clothes to keep warm and some shelter from the elements. This population knows something about family and children secure the future. Somehow, this population understands the importance of education and the need for healthcare. Above all this population is incredibly entrepreneurial and are survivors against all odds. The definition of basic needs changes as the wealth of the society increases ... but it is worth remembering that there are many layers of need. Below the lowest of the basic needs ... the outcome is death. What people want! Market demand Poverty It is confusing to hear the one liner that “people living under $1 a day” are the ultra poor, and ordinary poverty is merely “living with under $2 a day of income”. But worse, the very idea that so much of the world's population, maybe 2 billion people or about one third of the world's population, live at this level of poverty is disgusting. Until these levels of poverty are eliminated, the world should consider the national and international processes of relief and development an abject failure. Poverty is not caused by the laziness of poor people as much as it is caused by a systemic failure of the economic apparatus. People work hard ... but they get little reward, and there is little progress. A paradigm shift is needed that allows a productive economic system to work and makes it possible for poor people to be included. |
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Making the Best of Available Resources
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Productivity Instead of Growth
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Metrics ... for Services and for Production
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Value Dynamic in an Organization
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The profit maximizing enterprise
The profit maximizing enterprise ... the engine of the modern economy has a dynamic that seeks the maximum of profit and the maximum of stockholder value. Though a good organization would work to have great stockholder value that is sustained over time ... the way capital markets work, it behooves the management and decision makers to focus on short term value even if this consumes long term value. While the score-keeping was rigorous and relatively simple fifty years ago ... modern corporate scorekeeping is now the subject of all sort of rigging ... no relative of rigorous. The law and rules have allowed all sorts of practices that have helped make it possible to have reportable profits on top of enterprise activities that have been catastrophic. Bluntly put ... a lot of this has been fraud, even though it has been “legal”. The not for profit charity or NGO The not for profit or NGO has a very different dynamic. Job one is the survival of the organization, and for this a constant flow of funding to support the activities is crucial. There are a lot of activities that are done to support this priority ... including the production of monitoring and evaluation reports that satisfy the funding organizations, the donors. The organization must do some of what the donor expects them to do ... enough to be able to show the donors that the activities being funded are taking place. Nobody is, however, looking at cost efficiency and assessing whether or not the spending is resulting in a high or low level of activity. Nor is anybody looking at the results and assessing cost effectiveness in a rigorous manner. While the mission of the private charity or NGO may well be laudable ... this does not automatically translate into a well run organization that is both cost efficient and cost effective. These metrics are usually missing. The social business The social business has a different dynamic. The operations of the business may be highly profitable ... but the resulting fund flows are used to expand the operations to serve more of the market rather than to reward stockholders and maximize stockholder value. The business model helps to make best use of technology and resources to get the maximum of productivity. The social dimension aims to provide the most of value to the community by scaling up the operations as effectively as possible and as fast as possible. The sustainable business means that the enterprise is sustained not by donors, but by the market. |
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