Currency, value and trust

More enterprise-architecture stuff, this time about the relationship between trust, value and money.

This starts from a Tweet by Swedish consultant Oscar Berg, which triggered off a back-and-forth flurry:

• oscarberg: The main currencies of business have always been information & trust. They let us exchange favors, goods/money etc <yes!!!
• erikproper: @tetradian @oscarberg 200grams of trust in exchange for one espresso?
• tetradian: @erikproper @oscarberg ‘pre-currency’ might be better term: monetary-type currency build _on top of_ trust etc
• oscarberg: @erikproper I’d need to know (info) that you sell espressos (incl price) & trust that you do good espressos to buy from you cc: @tetradian
• erikproper: @oscarberg Ah yes. But how are you going to pay for the espresso …
• oscarberg: @erikproper If I recommend your espresso to others, can’t you give me one for free? 😉
• erikproper: @oscarberg You would, as long as eventually I get “paid” in a “currency” that allows me to “hire” co-workers, “pay” the coffee supplier, etc
• oscarberg: @erikproper you will get paid, if people trust you and have the info needed (like my recommendation) to buy your espresso
• tetradian: @erikproper @oscarberg monetary payment represents _lack_ of trust in overall economy – to understand economics, focus on trust first?
• erikproper: @oscarberg But in what …
• tetradian: @erikproper “But in what …” – sometimes paid just in thanks! 🙂 – a currency is only a proxy for/in economics, not the economics itself!
• thoughttrans: @tetradian lack of trust in economy by the everyday person. hedge fund and corp execs are happy
• erikproper: @tetradian @oscarberg Monetary payment represents equalized trust? Enabling easier exchange of goods and favours by a unified value system?
• taotwit: @erikproper @tetradian @oscarberg interesting – what other Trust equalisers exist in business? Should we model them explicitly?
• erikproper: @taotwit @tetradian @oscarberg Really makes sense to more explicitly study value exchanges, and equalised notions of value and trust
• taotwit: @erikproper @tetradian @oscarberg ok that sounds like Value Network Analysis or do you think VNA is lacking?
• erikproper: @taotwit @tetradian @oscarberg Well. Is VNA in practice VN Modelling, or really critical VN Analysis, from a brdr prscptv, incldng non money
• jdevoo: @erikproper @taotwit @tetradian @oscarberg in an e3value model, exchanges can modeled that way I believe. That’s not VNA-related though.
• tetradian: @erikproper @taotwit @oscarberg @jdevoo re money and trust: getting too tangled for Twitter, will do blog-post instead! 🙂

Hence this blog-post…

To me there’s a fair amount of going-round-in-circles in the conversation above, though the point about Value Network modelling is certainly relevant. This is not unusual… And the reason why there’s so much circularity is that it’s starting from the wrong place – currency, or money – rather than where a transaction-economy actually starts, in trust and value.

Perhaps the simplest way to illustrate this is with what I call the ‘market-cycle’: trust and reputation enable relationship, which enable conversations about need and value, which enable transactions, which – when completed to the satisfaction of all parties involved – reinforces trust, in a virtuous-cycle.

In a currency-based economic model, currency changes hands at the end of the transaction: ‘completion for self’, from the perspective of the business. But if one or more of the parties are not satisfied by the transaction, trust is lost – often leading to a vicious-cycle in which transactions quietly fade away to nothing. So trust is actually the core here: not currency. The common over-focus on currency – or distant proxies such as ‘shareholder-value’ – will cripple an enterprise-architecture, especially when combined with the equally common ignorance about the centrality of trust.

All transactions start and end with trust. A currency is just a proxy for that trust at a societal level. It is not the trust itself: architecturally speaking, we must be careful always to keep the two apart, and to ensure that the focus ultimately remains on the trust itself, and not merely on its various proxies.

In a sense, a currency is actually a mechanism to transcend lack of trust. Many people have real difficulty in understanding systems or networks: they’re most comfortable with point-to-point transactions, direct reciprocal balance, ‘this for that’, ‘quid pro quo’, ‘double-entry life-keeping’ and suchlike. But that isn’t how real systems work: instead, Joe needs a loaf of bread, whilst Ben needs a hug, Kurt and Lina need timber for the barn, Mary needs someone to look after the kids while she leads the barn-raising, after which everyone needs a beer. 🙂 Everything balances out somehow over the entire system, the entire value-network, but will rarely do so as such across at each point-to-point transaction.

So a currency forms a useful bridge for people who can’t or don’t or won’t understand and trust those whole-of-system flows: I don’t get a straight barter-balance in this transaction, perhaps, but I get these tokens called ‘money’ which supposedly entitle me to other resources from someone else within the jurisdiction that these tokens apply. It’s a useful kludge, a workaround for lack of trust – and it’s really important that we understand that it’s nothing more than that.

More seriously, it’s a kludge that has some very severe limitations. One is that it really only works in practice with ‘exchangeable’ items – tangible goods and services, and a limited subset of non-tangible services (knowledge-work’ etc). With anything else, it tends to induce some serious delusions: for example, as the old song puts it, “money can’t buy me love”, or hope, or freedom from fear – though it can sometimes buy simulations of such things, which is not the same at all, and which itself creates further serious societal problems…

Another limitation of most (perhaps all?) currency-models is that there are always people who are left out, because they don’t have access to appropriate ‘exchangeable items’. Parents, children, the elderly, the sick – these are often the people who most need resources, and yet in a currency-based model they may well be the people least likely to receive them. (This is true for everyone, actually. If you take the stereotype lifecycle – childhood, teenager, first leaving home, partner, then kids, middle-age, kids leaving home, retirement, old age – and map it the likely resource-needs at each stage of that cycle against the likely resource-availability [‘income’] in a currency-based economy, you’ll note that it’s an almost perfect mismatch: whenever the needs are highest, the resource-availability is lowest, and vice-versa. In short, our ‘normal’ currency-based model, is not merely a poor system, but almost the worst that could possibly be devised.)

Even more problematic, most modern currencies are virtual-only (no longer connected to anything tangible, such as the old ‘Gold Standard’), and hence potentially infinite; yet the most of the resources that purport to be obtainable via currency-based transactions are finite. This leaves the system wide-open to a vast range of ‘price/value mismatch’ games – hence inflation, scarcity-pricing, most resource-‘bubbles’, most of the present ‘financial system’, and most of the current ‘financial crisis’. In terms of the resources and capabilities that it provides, the value of a house really hasn’t changed much in the past fifty years; but the price has changed enormously, including – now – the amount of life that one is expected to assign to someone else in order to obtain it. (The effective price of a house had been stable for a hundred years or more, at about three times the respective annual salary; but in the 1990s that ‘life-price’ suddenly leapt to five, seven or even ten years, for no actual increase in value at all. It therefore becomes interesting to ask where all that ‘excess value’ went…)

Much the same mess occurs with several related key business-concepts such as ‘shareholder-value’. There are huge problems with price/value-mismatch – hence ‘asset-stripping’ on one side, the ‘DotCom bubble’ on the other. There’s no actual linkage between share-price and real share-value (or even much understanding of what ‘value’ actually is, in the literal sense of ‘that which is valued’). And even the price itself is based on complex emotive responses to other complex, mostly non-linear, mostly non-reversible transforms from transactions acting on complex mixtures of ‘exchangeable’ items (physical goods and services, and some types of non-physical services) and ‘non-exchangeable’ items (goodwill, relationship, brand and, above all, trust): hence the ‘double-entry balanced accounting’ so beloved within the entire economic is little better than somewhere between wishful-thinking and outright fraud.

So as enterprise-architects and the like, what do we do about this? A lot: for example, we definitely need to map each enterprise at a whole-of-system level, tracking the value-transactions and value-transforms at each point in the network. Perhaps the single most important point, though, is to remember that every currency is a mere fiction, a kludge to get round people’s inability to trust: and it’s not the fictional currency, but the real trust that lies behind it, that is the true basis of any real-world economics.

Update: Take a look at Wim Rampen’s blog-post Destroying Customer-Value for a really good first-hand example and analysis of how currency [money], value and trust interact in the business-relations between a telco [cellphone service-provider] and a long-term customer.