Economics as enterprise-architecture

Several people asked me to cross-post to other ‘economics’ sites the previous post on ‘Whuffie’ and currencies‘. I wasn’t comfortable doing so without editing-out the comments about the ‘Ready? Fire! Aim…’ syndrome, which were specific to the conversations to which that post referred: hence the re-work in this post here. I’ve also taken the opportunity to extend some parts, to link it more strongly to my ‘day-job’ of enterprise-architecture.

So: what can we learn if we tackle economics as enterprise-architecture? In other words, as if it was just another exercise in whole-of-enterprise architecture, the same as we would do for any large organisation (such as described in my book ‘Doing Enterprise-Architecture‘)? After all, ‘the economy’ is just another enterprise – it happens to be at a very large scale, but the exact same principles should apply.

(This’ll be another long one, hence I’ll place a ‘Read more…’ link here.)

An enterprise-architecture develops in five distinct maturity-levels, which in turn define five distinct groups of work:

1. What business are we in? – core vision, values, resources, decisions etc
2. Clean up the mess – horizontal optimisation of facilities, capabilities and resources
3. What’s our strategy? – top-down definition and implementation
4. Welcome to the real world – bottom-up constraints and localisation
5. Keeping it clean – ‘spiral-out’ to tackle ongoing ‘wicked-problems‘

We can do work from any of those maturity-levels at any time, and sometimes relative-priorities will force us to do so. The point is that each layer depends on those that precede it: we can do ‘later’ work, but the results are unlikely to be viable, especially in the longer term. For example, trying to tackle a clean-up before we have any clear idea of where we’re trying to go – which is what most standard IT-centric ‘enterprise-architectures’ try to do – will result at best in a system that’s well-optimised for, uh, something… And although the ‘wicked-problems’ are what the enterprise’s stakeholders will most want us to tackle, we won’t be able to do so successfully without a ‘palette’ of techniques and tactics that will allow us to iterate towards ‘re-solutions’ – and we create that ‘palette’ by working through each step of the maturity-levels in a disciplined way. (By definition, ‘wicked-problems’ are never ‘solved’: the best we can do is to create processes by which they are continually ‘re-solved’.)

Any sane observer would recognise that our present economic models not only don’t work well, but at present are still teetering on the edge of catastrophic collapse. Many people’s response has been to rush out and try to create some kind of ‘alternate currency’; but it should be clear from the above that that’s a level-4 or level-5 tactic that’s being applied without any of the ‘upper’ architectural-levels in place – not a good idea, because all it does is further embed the existing ‘wicked-problems’, and often create new ones as well. So let’s turn this round, to do it properly from an architectural perspective:

• Before we can tackle level-5 wicked-problems, we need a solid grasp of what the real-world looks like – in other words, level-4.
• Before we can tackle level-4 real-world problems, we need a framework of law and the like – level-3 – in which those solutions can take root.
• A level-3 framework operates through institutions – so to apply that framework well, we need to do a level-2 clean-up of those institutions to make them more efficient and effective.
• For that level-2 clean-up to work, we need to have a good idea of where we’re going, and, most importantly, why – in other words, level-1.

So to have any chance of success, we need to go right back to the start: in architectural terms, what is ‘the economy’?

If we do it ‘by the book’ (literally – see pp.44-87 in the sample-ebook [PDF] of ‘Doing EA‘), we split that level-1 work into four distinct parts:

• Step 1: Vision, values, principles and purpose
• Step 2: Enterprise context – including assets and resources
• Step 3: Functions and services
• Step 4: Architecture governance

Vision, values, principles and purpose

The word ‘economy’ literally translates as ‘the management of the household’. In the usual sense of ‘the economy’, the ‘household’ in scope is the entire world; ‘economics’ is thus the management of every aspect of that ‘household’.

An enterprise is a ‘community of commitment’: unlike an organisation, it is held together more by internalised shared-beliefs and values than by externalised rules and regulations. The term ‘enterprise’ therefore fits well with the concept of ‘an economy’: in essence, ‘the economy’ is the expression of the internal operations and external interfaces of ‘the enterprise’ that represents the overall ‘community of commitment’ at a global scale.

The vision is a single unifying theme that links all enterprise stakeholders; this includes stakeholders beyond the nominal enterprise itself (see ‘What is an enterprise?‘ on Slideshare), who in this case would include ourselves, other peoples at other places and times than the present here-and-now, the other animals, plants and other ‘actors’ in the broader ecosystem, and the planet itself as a whole. A suggested vision for this context might be appropriate and sustainable utilisation of the available ecosystem resources, functions and capabilities. (In a business enterprise-architecture we would then derive a sequence of ‘Vision, role, mission, goal‘, but I’ll skip over that for here.)

The values are what link the actors to the vision of the broader enterprise. (For this context it’s simplest to focus on the human actors at first, though Deep Ecologists would insist that we should extend that scope indefinitely.) Typical values here would include such notions as fairness, equitability, long-term sustainability, efficiency, reliability, appropriateness and so on.

The principles are practical expressions of the values: values are more about how we feel, principles more guidance for what we do. In effect, principles are the reference-prototypes for all implementation-rules, regulations and the like, and should always be concrete, actionable and verifiable. In this case, that means that we need explicit principles to enact and verify the economy’s alignment with those core values, such as fairness, equitability, sustainability, etcetera. (Again, I’ll skip over the detail there – yes, it needs to be explored in depth, but not in this quick overview.)

Finally, we do a cross-check to compare this nominal-purpose against the ‘effective-purpose‘ of what we currently have, using Stafford Beer’s acronym POSIWID, “the purpose of the system is [expressed in] what it does”:

“According to the cybernetician the purpose of a system is what it does. This is a basic dictum. It stands for bald fact, which makes a better starting point in seeking understanding than the familiar attributions of good intention, prejudices about expectations, moral judgment or sheer ignorance of circumstances.”

To be blunt, this is where it all gets seriously scary, because a mere few moments’ thought and observation would show that our present money-based ‘possession-economy’ fails virtually every possible test against the necessary values. It is demonstrably unfair; its natural ‘gravitation’ creates and reinforces all manner of inequities; it is clearly not sustainable; it is frighteningly inefficient (so much so that in order to prop up ‘the economy’ we are urged to be as wasteful as possible); and, increasingly, less and less reliable. The foundational principle of this concept of ‘the economy’ is a notion of ‘personal right of personal possession’ – with ‘corporations’ classed as virtual-persons that are assigned greater ‘rights’ and fewer responsibilities than any ‘natural person’ – and implemented by a standardised form of barter called ‘money’. A brief POSIWID assessment shows just how successful the ‘money-economy’ really is(n’t):

• It only deals with point-to-point transactions, not network-effects – especially at a societal level.
• It’s designed to work with ‘alienable’ physical objects, but now no longer has any actual anchor in the real world – instead, we have literally trillions of supposed ‘money’ in imaginary ‘derivatives’ sloshing around the globe.
• It’s very easy to ‘game’ via artificially-constructed price/value mismatches (such as in ‘scarcity economics’).
• The implied ‘gravitation’ structure of money-based capital tends to create ‘winner-takes-all’ accumulations – exacerbating social imbalances, often in the extreme, requiring separate sociopolitical action to try to redress the balance.
• Attempts to link ‘intellectual property’ into the money-system have resulted in a system which purports to match finite ‘alienable’ entities (physical ‘things’) with potentially-infinite ‘non-alienable’ entities (information) – which by definition cannot balance.
• Many organisations – particularly banks – are legally ‘entitled’ to invent money from nowhere, in effect assigning themselves an ever-increasing share of the society’s resources.
• A currency, by definition, relies on trust in the institutions that manage that currency, which in this case is the banks – yet much of that trust has been lost, and at present remains at an all-time low (hence the strong societal interest in options for ‘alternative currencies’).
• There are no built-in mechanisms to manage assignment of resources to those ‘outside’ of the monetary exchange-system (particularly children, parents, elderly, disabled and their carers, but also artists, scientists, thinkers, futurists, ‘creatives’ of any kind) – these stakeholders can only be served by ‘external’ mechanisms such as taxation, grants and benefits (which are clunky and kludge-ridden at best), or by forcing them to do work within the money-economy (which means that their actual needed work can no longer be done).
• There is a very strong tendency towards short-termism.
• There is a very strong tendency to try to force everything into a crude, ludicrously-simplistic ‘double-entry life-keeping’.
• There is a very strong tendency to assume that ‘value’ exists only in monetary terms, as ‘valuations’ of ‘resources’ – hence, for example, a forest supposedly has no value until it is cut down, a mountain has no value until mined for its minerals, and so on.
• There is a very strong tendency to assume that anything which cannot be counted and ‘valued’ in monetary terms either does not matter or does not exist.

In effect, POSIWID tells us that the ‘effective-purpose’ for the system we have at present is to create catastrophic failure of the economy in the medium- to longer-term – and that ‘longer-term’ seems to be taking place right now. The current economic system does not and cannot work in relation to the actual vision, values and principles needed to underpin a functional economy for the overall ‘human enterprise’.  Which is not good news…

In architectural terms, that’s the ‘as-is’; the real vision, values and principles provide the desired fundamentals for any ‘to-be’. To begin to define a ‘roadmap’ from ‘here’ to ‘there’, we next need to identify what we have available to us, what the constraints are, and what we can use – starting with the overall context for the enterprise.

Enterprise context

This section of the architectural analysis has two parts: compliance, constraints and standards, and assets, locations and events.

There are two categories of constraints on the system: physical, and social.

The social constraints and implied standards and compliance are invented, by people, in a myriad of forms. In practice, all of these are negotiable, although there is an evident need to construct frameworks that align well with what is ‘not negotiable’ within human nature. Of these, perhaps the core tension is between the individual versus the collective – in network theory, the node versus the network – in part paralleled by the tension between present versus future and/or past. The usual analogues for these are Darwinian (‘selfish’ individual) versus Kropotkin (collective ‘mutual aid’). The current ‘Western’ system of ‘private property’ – ‘personal right of personal possession’ – privileges the individual and the present-time, almost to absurd extremes, against the collective and/or elsewhen.

Most of the physical constraints on the economy are absolute and not negotiable. These include finite limits on resources, finite limits to system recovery, and a variety of system factors known to be capable of spiralling positive-feedback loops leading to catastrophic collapse. However, a POSIWID assessment shows very quickly that the present economic system depends on an assumption that growth and resources are infinite, and that there is no fundamental difference between farming (which can be sustainable) and mining (which by definition cannot). This means that by definition the existing economic architecture is non-viable in the longer-term: the question is not if it will fail, but when, and with what structural and other impacts.

The available assets or ‘resources’ include not just physical ‘things’, but also many other entities such as ideas, social-networks, beauty, art, hope and faith. These can be categorised in terms of (at least) four fundamentally-distinct dimensions:

• physical (‘things’; content): independent-existence; alienable; transferable; often destructively consumed
• conceptual (ideas, information; context): semi-independent existence; non-alienable; transferable; non-destructive consumption
• relational (relationships, connections): existence is between two entities; non-alienable; non-transferable
• aspirational (belief ‘in’ something, faith, drive; purpose): existence is from an entity to a conceptualised ‘Other’; non-alienable; non-transferable

Many (most?) real-world entities combine these dimensions: e.g. book = physical+conceptual; shared narrative-knowledge = conceptual+relational; product-brand = aspirational+physical (and/or conceptual), etc. Some people suggest that, architecturally speaking, money is itself another distinct dimension: but in practice it is best understood as a straightforward composite of conceptual+aspirational – a symbol of a belief.

Because of the fundamental differences between dimensions, a ‘currency’ will typically only work well with one dimension. Trying to use a currency in another dimension than that for which it was designed causes serious problems: famously, “money can’t buy me love” – although it can buy an illusion of ‘love’, which is not the same at all. Monetary currencies fit well with physical (alienable) objects, but do not fit well with non-alienable entities; ‘time’-type currencies do not work well with physical objects, especially manufactured objects that accumulate embedded-time; and so on. All currencies tend to create individual-focussed ‘double-entry life-keeping’, which blocks resource-flows at a societal scale, especially over longer timescales. In architectural terms, a currency is a ‘solution’ that tries to force all contexts to fit in with its own severe limitations: as a result, ‘currencies’ as an entire class contribute more to ‘the problem’ of economics than to its solution.

The locations of these assets are worldwide – yet, importantly, scattered very unevenly across the physical globe and in social-space, with considerable impacts on core values and principles such as equitability and efficiency. The ‘gravitation’ of the possession-economy tends to exacerbate these structural problems in many complex ways (which I won’t attempt to describe in detail here).

The key events in the economy include births, deaths and many types of interactions between (and within) the respective actors. Births and, especially, deaths indicate with bald finality of one of the many fundamental flaws in the concept of ‘personal property’: in an all too literal sense, we cannot take it with us when we die. (True, historically speaking, many people have tried to do so, but the only real result has been often-serious damage to the respective economy for the survivors and their descendants.)

Transaction-events in practice only make sense for exchangeable entities (physical and/or conceptual), yet even these operate under fundamentally different constraints:

• physical: zero-sum, often leading to a scarcity-based win/lose transactional model; potentially leads to a ‘tragedy of the commons‘
• conceptual: potentially-infinite, for which a scarcity-based model makes no economic sense, and in which the only transactional options are win/win or lose/lose; potentially leads to an inverse ‘comedy of the commons‘, but if misused may instead lead to a ‘tragedy of the anticommons‘

Relational and aspirational assets cannot be directly exchanged, but may undergo transaction-like events in which they are created, ‘read’, updated or destroyed. For example, a brand-relationship (aspirational-asset) may be created via various means, is ‘read’ during each transaction by that person in relation to the branded entity, may be transferred to another brand with great ease by the person but only with great care by the brand-holder (if any), and although the ‘relationship’ is one-sided (from the person to the conceptualised brand), it will be destroyed if either party abandons it.

One useful frame to demonstrate many transaction-variants is the market model. To extend the Cluetrain Manifesto:

• markets are transactions – often but not solely of physical ‘goods’
• markets are conversations
• markets are relationships
• markets are shared-purpose

Although these combine in many different ways, the most typical structure is the market sequence:

reputation -> trust -> respect -> attention -> transaction [ -> barter/money -> individualised ‘profit’ ]

The main part of the sequence occurs in all economic models, both ‘responsibility-based’ (collective-focus) and ‘possession-based’ (individual-focus).  The section within [..] occurs only in the ‘possession-economy’ add-on, which, in network terms, is essentially a parasitic overlay on a functional responsibility-based economy. (In principle the possession-economy provides governance for management of resources, but use of a non-finite ‘currency’ to manage finite resources makes no sense: the only possible result is ‘inflation’, and increasing assignment of finite resources to those who have the purported ‘right’ to extend – i.e. invent, from nowhere – additional ‘currency’.) The individual-oriented concept of personal ‘profit’ masks and ignores network-effects that frequently lead to huge whole-of-system losses. In practice, the possession-economy overlay contributes almost nothing to the economy, yet creates enormous inequities, instabilities and longer-term risks – and hence, in terms of the actual requirements, is neither useful nor desirable. It seems likely that the only viable option is to strip away the ‘possession-economy’ overlay, and (re-)construct a functional responsibility-based economic model.

Functions and services

The functions and services of ‘the economy’ consist of everything that anyone does, did or will do, in any form, at any time, anywhere in the world – so I won’t attempt to list them all here. 🙂 The very simplest summary is that we dig things out of the ground, do various things to those things, and put them back in the ground again. (Arguably that includes people too. 😐 )

A function is a place within the economy where something can change, acting on resources in accordance with specific rules. (Think of ‘function’ in the mathematical sense: a=func(x,y).)

A capability provides the ability to do something to something. It may be implemented by natural processes, or, in the human economy, by a real person, a machine, and/or (for conceptual-assets) some kind of ‘information technology’. Machines are good at dealing with certainty, but not good at dealing with uncertainty; it’s the other way round for real people. (These distinctions aren’t particularly relevant in a high-level enterprise-architecture, but become more and more important as we get closer to where real work happens.)

A service links together a function and a capability to enable real work. (On its own, a function can do nothing; and on its own, a capability literally has no function.) In a service-oriented architecture, each service presents an interface with its own protocols and service-level agreements, and these services are chained together in some form into processes; in a real-world economy these tend to be a lot more fluid and implicit than in an IT-services architecture, but the principles involved are essentially the same.

Best leave this part of the ‘economy architecture’ at that, but there’s more detail in the Doing EA book (pp.65-76 of the ebook [PDF]) if you want it.

Architecture governance

Viewing the overall economy as an enterprise-architecture, it’s clear that there is almost no integrated governance for the economy as a whole – which immediately implies a ‘natural’ tendency towards fragmentation and disintegration.

Management of the global ‘household’ is split between ‘economics’, which in essence deals solely with money-based transactions; ‘political economy’, which deals with some aspects of the ‘game-rules’ for the money-economy; ‘politics’, which deals with a fairly random subset of game-rules for the non-money parts of the economy; and general sociocultural background, which attempts to re-integrate the resultant mess.

The continued failure of ‘economics’ to deal with just about anything other than point-to-point transactions means that whole-of-system costs are very poorly understood. Frequently, money-transactions themselves introduce huge unacknowledged whole-of-system costs; and as Gil Friend explains, the decisions we make in the delusion that petrol costs only US$3 a gallon are very different from those we would make once we recognise that the real cost at present is more like US$15-20 a gallon and rising.

So there is an urgent need for something – some social institution – to begin to pull all of these threads together. As to what that could be, given the current socio-political shambles, is just about anyone’s guess: over to you for suggestions on that?