The Economics of Abundance

Here are some things I used to believe:

1. The power of the free market comes from competition
2. If you are nice to someone, you will be rewarded commensurately
3. A penny saved is a penny earned
4. The more scarce something is the more valuable it is

I no longer believe these statements to be true.  To understand why, I’d like to share a little of my journey as an entrepreneur and investor.

In the mid to late ’90s I was working on a startup and getting my feet wet as an angel investor in Silicon Valley.  I, like everyone I knew, was an adherent of the Chicago School of Economics and the Efficient Market Hypothesis.  One of the mantras of this religion is that

The invisible hand of the marketplace will feed us all, but we have to compete vigorously with one another for it to work its magic.

Signing a Non-Disclosure Agreement on a first date — that’s not just good business, but a moral imperative as well.

Flash forward to my first TED Conference several years ago.  I learned phrases like “Social Entrepreneur”, “triple bottom line” and “doing well by doing good”.  And while I didn’t feel like these were exactly oxymorons, I didn’t really understand how powerful this new mindset could be.  Can you really make more money by putting your customer’s well-being ahead of your own?

So, in the spirit of TED, I started experimenting with a personal monetary policy that combined philanthropy with investment.  In practice this meant spending my time and money helping others with their ventures, not worrying so much about “return on investment”, and seeing what would happen if I left that part up to the universe.  In other words, testing out how real Karma actually is.

I would give people loans to go to conferences that would enrich their lives, and I’d ask them to “pay it forward” instead of pay me back.  I would invest in ideas and projects that had little “logical” chance of success because I believed in the individual, and that they’d somehow figure out how to make money.  I did deals on handshakes and email confirmation.  I let the other party suggest terms they thought was fair, and I didn’t negotiate looking to get the biggest piece of the pie that I could; instead I worked with the other party to increase the size of the pie that we would share.

Normally when we give our time or money to people in a business context, we are expecting an immediate quid pro quo, whether it be an airtight contract or a thank you with a solemn promise to return the favor.  But because I was feeling financially secure at the time, and I’d adopted this mindset of presuming the universe would sort out the Karma in the end, I was treated to a much different experience than I’d ever encountered in business.

First off, the Karma was often instant; I’d do something for someone and within days, sometimes hours, I’d get an unexpected favor in return.  Secondly, the return I received was usually greater than what I gave.  Third, it wasn’t always the person I gave to who gave back to me.  Sometimes I could tell that the original person talked to another and there was a sort of “Karma chain” that was coming full circle. But other times I couldn’t see a causal relationship between my giving and what I was receiving.  Maybe it was there, but it certainly was not obvious or predictable.

I started to get this odd impression that if I were trying to give my money away — which I certainly was not — that I actually couldn’t do it.  What I sensed was that the more I gave out, the more came back.  Now, I’m not suggesting that the Karmic return I received was in cash, but rather the social currency I was building up exceeded the value of the cash and time I was putting out.

A Theory of Abundance

Being trained as a cognitive scientist, and having earned most of my living by understanding probabilities, I know that this impression could easily be explained away with cognitive biases and logical fallacies.  But since it cost nothing to imagine an alternate explanation, I started to explore the idea that Karma was a universal force, just as real as gravity, entropy, and the invisible hand of the market.

In science, for a new theory take hold, it has to explain and predict all the same observations that the old theory did, but also explain and predict stuff that the old theory can’t.  In physics, we saw this when Einstein refined Newtonian mechanics with his Theory of Relativity, and then again when Quantum Mechanics showed us a more nuanced understanding still.

So let’s re-examine the tenets of “Newtonian Economics”:

1. The power of the free market comes from competition
2. If you are nice to someone, you will be rewarded commensurately
3. A penny saved is a penny earned
4. The more scarce something is the more valuable it is

I suspect if asked to answer True or False, most people would say they believe these statements to be True.  And it’s not that I think these aren’t perfectly valid under many conditions.  But like we found out with Relativity and Quantum Mechanics, there’s a more nuanced refinement which better explains and predicts.  Here’s my Theory of Abundance in a nutshell:

1. The real power of the free market comes from competition cooperation
2. If you are nice to someone, you will be rewarded commensurately with multiples
3. A penny saved is less valuable than a penny earned
4. The more scarce something is the more valuable it is; but some things are more valuable the more you give them away

Let me explain.

1. The Power of the Market Comes from Cooperation (not Competition)

“[Competitors] always beat cooperators when they encounter each other in a well-mixed population…. [But] cooperation can thrive when cooperators huddle together to form clusters.” (Martin Novak, Director of Harvard’s Program for Evolutionary Dynamics)

For a market transaction to take place, two preconditions must hold.  First, both parties have to be made better off after the transaction than before.  Second, both parties must trust that the other party will honor their end of the bargain; i.e. not lie about the nature or value of what they are giving, and not reneg or change the deal at the last minute.  In other words if you and I transact in the marketplace, I must trust you to do something that helps me, and vice versa.  This is cooperation.

Yes, there is competition that takes place to determine which two parties get to transact.  But once that’s been determined it’s all about cooperation.  The whole trick of the market, the reason it exists, is not to facilitate competition, but rather to form “clusters of cooperation”, even in the midst of a well-mixed population of competitors.

2. If You Are Nice to Someone, You Will Be Rewarded With Multiples

This is the Karma effect that I described earlier, and we’ve all experienced it at one time or another.  One thing I’ve noticed since I started believing in Karma, is that the more trust I put in others (or in the universe), the bigger the Karmic multiple.

3. A Penny Saved is Less Valuable Than a Penny Earned

Amongst my Silicon Valley friends, there was one who was legendary for “wasting” money.  He’d never haggle, always buy the most expensive brand, waited until his lights were turned off to pay the utility bills, and leave thousands of dollars in cash, checks and stock certificates laying around, stashed in old sock drawers, forgotten about.  His cost of living was easily twice the average of me and my friends.  Yet, somehow he always had way more money than any of us.  He was the first of my friends to become a “millionaire”, and opportunity seemed to fall out of the sky and land in his lap.

What I learned from observing my friend, is that the time and mental energy most people spent on preserving the resources they had accumulated, my friend spent figuring out how to make more of it.  So while his burn rate was 2x average, his earn rate was easily 5x.

One interesting aspect of this philosophy is that, if you believe you can always earn more money tomorrow, it helps you act on the natural generosity you are born with, today.

4. Some Things Are More Valuable the More You Give Them Away

Until a brave theorist named Brian Arthur challenged the Chicago School dogma, economists thought that return on investment could only diminish as you scaled up your investment.  But now we know that with certain types of resources like the FAX machine and the internet, we get not diminishing returns, but increasing returns.  With abundant resources, the more you give one away, the more valuable every other one of them becomes.  It’s known more commonly as the network effect.

I believe Karma exhibits the network effect too, because it’s infectious.  If I see someone do a good turn, I’m more likely to do something good too.  Behavioral psychologists have shown this is true in many different contexts.  We’re just hard-wired to imitate behaviors of other humans.

Giving creates more giving.  Add a dash of cooperation and creativity, multiply by Karma, and you get Abundance.

Societal Dilemma

Taken together, these four pillars of the Theory of Abundance suggest that when it comes to maximizing profits, we’re underperforming in our society.  We’re in a Prisoner’s Dilemma on a global scale.  We are playing a game of maximizing scarce resources, and ignoring the immense — and multiplicative — shared value that’s within our reach through radical collaboration and presumed abundance.

In future posts, I’ll describe experiments being done and case studies that support the Theory of Abundance and show us the way out of our collective dilemma.

Adjacent Possible, Alternative Institutions, Competition, Cooperation, Economics, Incentives, Investing, Invisible Etiology, Markets, Scarcity / Abundance, Social Capital, Social Entrepreneurship, TED, Trust