This print conversation accompanies a This View of Life Podcast episode. Listen: Spotify – Google – Apple – Stitcher
In the Vision Statement for this series of conversations, I contrast laissez-faire and centralized planning—the two dominant approaches to entrepreneurship and other forms of social change—with another approach based on a combination of evolutionary and complex systems theory. Very simply, all three ingredients of cultural evolution—the target of selection, variation oriented toward the target, and the replication of best practices—must be managed to achieve positive social goals.
It is new to articulate the Third Way formally in terms of evolutionary and complex systems theory. However, if the Third Way is the only thing that can work, then it is the only thing that ever has worked. In other words, if we look at successful examples of positive change efforts (including but not restricted to entrepreneurship) in the past and present, we will find that the three ingredients of selection, variation, and replication were well managed, even if the people involved were not thinking explicitly in terms of evolution or complex systems.
David Colander is eminently qualified to comment on this bold conjecture. He is Distinguished College Professor at Middlebury College and author of numerous economics and social science textbooks. He also comments on the economic profession in books such as Why Aren’t Economists as Important as Garbagemen, The Making of an Economist Redux, Complexity and the Art of Public Policy (with Roland Kupers) and most recently, Where Economics Went Wrong (with Craig Freedman).
David Sloan Wilson: Welcome, David! I look forward to discussing the Third Way with you. Please introduce yourself to our audience. Not many economists take such a broad view of the profession and such a pragmatic approach to policy formulation, even to the point of calling it an “art” rather than a “science” or a matter of “engineering”.
David Colander: I am first and foremost a teacher of economics. An important research focus of mine is the economics profession itself—how does it work, what does it believe, and how can it be improved. I have sometimes been described as the economic profession’s court jester, the person who points out its foibles, and says what everyone knows, but also know better than to say in open company. Among other things, I am a historian of economic thought, a principles of economics textbook author, and an economist watcher. I’m also a strong advocate of the complexity approach to economics and have argued that the future of economics is complexity economics (Colander, 1999).
I think it is important to recognize that the complexity vision has been an important part of economics from its beginnings; it is not a new approach that is only now being discovered. What is now changing is that the complexity vision is being formalized because of analytic and technological advances that allow a formal analysis of non-linear dynamic high dimensional agent interaction systems using agent-based models, network analysis, and artificial intelligence models. These techniques allow the complexity vision, which before was part of economists’ informal theory, to be extended into a more formal complexity economic science. These recent formal technical developments should not cloud the fact that the complexity vision, and hence the evolutionary vision of the economy, has been an important part of the broader informal theory of economics since its inception. (In fact, until the 1930s that informal theory was a dominant strain of mainstream economics). I point this out because it is highly relevant to your Third Way entrepreneurship project. It is within this informal theory of economics where economists’ ideas about entrepreneurship resided. The mathematics of formal economic theory, without the new techniques, had no room for entrepreneurship.
What I am saying is that economists’ recent move into complexity economics is best understood as a return to a complexity approach to economics and economic policy as found in the methodological work of John Stuart Mill and to a lesser degree in the methodological approach of Alfred Marshall and his followers such as Ronald Coase. That approach sees policy in a far more nuanced way than it is normally presented in the textbooks.
DSW: I appreciate this point because it also describes the history of ecological and evolutionary thought. First, a qualitative phase that emphasizes the rich tapestry of life without being able to study it quantitatively. Then a quantitative phase requiring simplifying assumptions that leave out most of the complexity. And finally the “rediscovery” of complexity when quantitative tools are at hand. Please continue.
DC: My complexity approach to policy sees economists’ formal economic theory as providing at best half-truths, which need to be integrated with other formal and non-formal theoretical approaches, as well as with philosophical “truths,” before theory has any implications for policy.
DSW: Before continuing, please clarify what you mean by philosophical “truths”!
DC: Philosophical truths are truths determined by philosophical methodology, which relies on an internal sense of truth and reflective thought, not scientific methodology that relies on empirical verification. The Golden Rule—do unto others as you would have them do unto you—is a philosophical truth, not a scientific truth based on empirical proofs. Philosophical truths are the basis of society’s morality and can evolve over time.
Because philosophical truths can only be arrived at through open engaged discussion, not through scientific study, many aspects of applied economic policy are best understood as an analysis that goes beyond applied science. By that, I mean that applied policy is about entrepreneurial actions involving design and imagination; it is not necessarily dependent on existing scientific theory, which is often far too simplistic to capture the complexities of an evolutionary economy. Policy often precedes science. For example, we have no science telling us how a society with primarily social, not self-interested goals would operate. But we can explore policies that encourage less self-interest. The complexity approach places economics within the realm of biology and evolution rather than physics.
Drawing policy implications from a formal analysis of complex systems is wickedly hard, which is why I distinguish the scientific methodology of complexity analysis from the policy analysis methodology of complexity analysis. Scientific methodology is about finding truth without cost or time constraints. Policy analysis is about finding solutions to problems when facing binding cost and time constraints. That separation leads to an important difference in our expositions of policy. In your vision statement, you talk about managing the economy. In my view “manage” is far too strong a word. In a complex system, you don’t manage, at best you influence, and because you face time and resource constraints, you have to conduct policy with far from complete knowledge; often you best hope is to muddle through. This means that complexity policy is a process, in which unintended consequences and complications occur that continually undermine our ability to manage the economy. In complexity policy, you’re always looking for right time/right place policy that involves judgments and understanding that goes far beyond any scientific model. It is as much art as science. That means that policy views are not right or wrong in the scientific way; they are right or wrong in a more contextual artistic way.
DSW: I think that we’re in broad agreement but need to develop a common vocabulary, or at least understand what we mean by our choice of keywords such as “policy”, “manage”, “engineer”, “science” and “art”. The key variables appear to be the degree of understanding and control of a complex system. For you, it seems that “science” implies a high degree of understanding and “manage” and “engineer” imply a high degree of control. Your point is that we don’t have this degree of understanding or control for complex systems, which makes policy more of an “art” than a “science”. I agree with this point. We must always be humble about our degree of knowledge and prepared for unforeseen consequences in our policy actions. That’s why a variation-selection-replication process, which defines the Third Way, is needed. For me, however, science can be defined as a highly refined variation-selection-replication process, regardless of the degree of knowledge that has been achieved. And complex systems engineers employ evolutionary algorithms in their work while still thinking of themselves as engineers! My TVOL conversation with the systems engineer Guru Madhavan, titled “Systems Engineering as Cultural Group Selection”, speaks to this point. Finally, evolutionary algorithms can result in a high degree of control of a complex system, at least in some cases, worthy of the term “manage”. An entire genre of the management literature is devoted to Toyota’s continuous improvement methods! To conclude, despite different meanings that we attach to words, I think we agree upon the main points.
DC: I agree; many of our differences are semantic reflecting a different underlying framework. In my framework, the part of economics that is classified as science has the primary goal of finding the truth, whatever that may be. It consists of deductive models and inductive statistical work. It has rigorous levels of proof that have evolved into a scientific methodology. Scientists use those methodologies and levels of proof. The truth one finds in science might have some generally agreed-upon policy implications, but policy is best thought of as of secondary concern to a scientific researcher. The reason is that one’s policy views can (and do) influence one’s interpretation of theory and facts, undermining the objectivity of the scientific analysis, and making finding the truth more difficult.
Part of science involves developing formal deductive models that may be useful in thinking about the real world. This means that as a theorist you can be exploring a formal model that you know deviates from reality, but you use it anyway because it is tractable. In my view, for complexity economists such as myself, economist’s neoclassical rationality model is such a model. It assumes selfish rationality on the part of agents that any reasonable person knows does not capture the essence of humans. But that rationality model may nonetheless be useful in thinking about policy as long as, before it is applied, it is adjusted by one’s broader informal understanding of reality. Theory is a fable that serves as a stepping-stone to thinking about a policy problem, not a stepping-stone to determining a desired policy. A good policymaker can use many different theories, even though some of them might not meet the level of proof used in science. She is interested in whether the policy works in practice, and will assume that if it works in practice, it will work in some scientific theory.
What I am arguing is that to move from a scientific model to a policy conclusion requires much more than just applying a formal model to the problem. You need a filtering process that interprets the model and massages the insights from the formal model to fit the situation you are talking about. To do this analysis requires going beyond scientific methodology and using a looser methodology that J.N. Keynes in his summary of Classical liberal methodology, following Mill, called the art of economics. In a number of my latest works (Colander, 2018a, 2019b, Colander and Huei-chun Su 2019), I have been fleshing out what I mean by that complexity applied policy method. It is a methodology that uses scientific methodology when it is useful, but that uses other methodologies when it is not because time and resource constraints make that scientific methodology cost-ineffective to solve the problem at hand.
DSW: Again, I feel like we are in broad agreement but attaching different meanings to keywords. When you say “a filtering process…”, is that not a variation and selection process? When you say “going beyond scientific methodology and using a looser methodology”, isn’t that “looser methodology” a variation and selection process? But testing different options in a rigorous fashion is anything but loose! It requires such things as randomized control trials to test specific hypotheses. If that’s not scientific research, what would be?
DC: Yes, I agree. But the difference is when you throw in the “rigorous” qualifier. Think of the Ebola vaccine. To develop it using rigorous scientific methodology would have taken years. But the need was immediate and so developers cut corners in developing a vaccine, which scientifically, is not allowed, and developed a vaccine that seemed to work. So the looser methodology is, in my view, is a “variation and selection” process but in applied policy, where the goal is a cost-effective solution to a problem, the selection criteria are different from the selection criteria in science where the goal is a scientific truth. In my view applied policy economists use far too many randomized control trials—which are generally done because they allow the researcher to get publications–and far too little common sense trials—that lead to less expensive and more timely solutions to problems in which the many dimensions of ethical and pragmatic concerns have been integrated into the solution.
DSW: Agreed! Let’s continue by having you comment on the basic theme of my Vision Statement. What do you think of my basic contrast between laissez-faire, centralized planning, and the Third Way? Do you find it useful? Does it have weaknesses?
DC: My answer to the previous question reflected my reaction to your Vision Statement and emphasized what I see as some points of difference. I think we end up in the same place—the economy is a complex evolving multi-level system. Multi-level evolution uses a combination of bottom-up and top-down processes that blends laissez-faire with centralized planning in complex ways. But I think our paths to that result are different.
Let me first make clear that I find your multi-level evolution as an enormously satisfying vision of the economy within which to place economic policy. Multilevel evolution is a necessary part of the complexity vision that I advanced in my book on complexity policy with Roland Kupers. (Colander and Kupers 2014) In a review of that book, (Wilson https://thisviewoflife.com/two-cheers-for-complexity-and-the-art-of-public-policy/) you gave us two cheers—you withheld one because we did not adequately integrate our complexity vision with evolutionary work. I think you were right to withhold a cheer; we didn’t do justice to the multilevel evolutionary work in our exposition; I was insufficiently familiar with it. In the future, I will try to do better because I think the complexity and evolutionary views fit nicely together and are in many aspects not only complementary but almost interchangeable. I look forward to working with you to integrate the complexity and evolutionary worldviews.
DSW: Thanks very much! This is a good moment for me to comment on something that you said earlier, that economic theory and practice need to be based on biology and evolution, not physics. When I write about the relation between complex systems theory and evolutionary theory, I say that the first is more general because it covers both living and non-living complex systems. However, living systems are such a special subset of all complex systems that they require their own theory. Since economics is primarily about human social systems, it needs to be centered in biology and evolution, as you say. However, economic systems are nested in non-living systems (e.g., climate systems), so physics-based complex systems theory is needed as well.
DC: I think there are some differences between our approaches, which is why I’m happy to be having this conversation with you. Where I think we differ is partially spelled out above in the introductory material: in thinking about policy, you seem to rely more than I do on formal evolutionary theory driving policy understanding and leading to a clear-cut set of policies. As I stated above, I see the formal theory (economic and evolutionary) as a fable, which helps us organize thoughts. Theory is not a definitive guide to policy. (Colander, 2016) To be useful a theory—be it rational choice theory or multi-level evolutionary theory—has to be interpreted and massaged to fit the problem being considered. This means that any formal theory has a supplemental informal theory, which includes all the commentary about the theory, which is central to understanding the formal theory. That’s why I became a historian of economic thought as well as a theorist and is why I try to put the complexity theory of economics in historical perspective. (Colander, 2000) To understand the implications of formal theory I felt I had to understand its history and context—the way in which people used that theory to arrive at real-world policy suggestions.
The reason I have such a limited view of the usefulness of pure theory is that in a complex system, everything is interdependent and historically determined in ways that our meager analytic capabilities, even at their most advanced, are far too simplistic to provide definitive answers. What we know now is only a small fraction of what we would want to know, and of what we will know in the future. There are likely forces out there operating on us in ways that have no ideas of, and won’t for decades. For example, David Barrie in Supernavigators discusses all types of animal migration behavior that cannot be explained by existing theories and which likely reflects the operation of guiding forces that have not yet been explored by scientists. Complexity policy needs to deal with these forces using them whenever it makes sense. Being cognizant of our lack of knowledge reminds us to consider forces we don’t understand.
Within multi-level evolution, determining the goals of policy is especially complex; we ourselves are comprised of an evolving ecostructure, and are parts of larger ecostructures that are themselves constantly evolving. Given that complexity, it isn’t clear to me what the basic unit of analysis should be, or what the goals of policy are. The mathematics needed to formally capture even part of that complex multi-evolutionary process is still far beyond us. In such a world formal deductive theory can be at most suggestive, not definitive.
I think our differences on how we think about theory and policy can be seen in reference to the wonderful concluding passage of your 2007 article with Edward O. Wilson, titled “Rethinking the Theoretical Foundation of Sociobiology”:
Selfishness beats altruism within groups. Altruistic groups beat selfish groups. Everything else is commentary.
As I interpret this, the first statement is a summary of the implications of economists’ formal rational choice general equilibrium insight. The second statement is a summary of your multilevel evolutionary insights. We both agree about the importance of these insights. Where we differ is in the final comment that everything else is commentary. To me, your statement seems to be suggesting that commentary is somehow of lesser importance to theory. I don’t see that. Without the commentary, I don’t know how to interpret the first two statements.
DSW: I feel impelled to point out that Ed and I were stealing from Rabbi Hillel, who when asked to summarize Judaism while standing on one foot, recited the Golden Rule and said that everything else was commentary. We don’t regard the commentary as unimportant, any more than Rabbi Hillel thought that the great corpus of Jewish law as unimportant! There is more that I want to say, but I’ll wait until later…
DC: I had heard that story but the qualifier I remember was not commentary, but explanation. If you had said “Everything else is explanation,” I think I would have interpreted your comment differently. To me, commentary is more optional than is explanation. Commentary is not central to the meaning of what one the subject of the comment. Explanation is central. I fully agree that you regard commentary as important. What I’m arguing is stronger—I am arguing that the commentary is a necessary part of the core theory and that one can usefully undertake policy based on a formal theory only if it is accompanied by exhaustive and carefully designed granular commentary. In policy analysis often the commentary is more important than any formal specification of theory. To me, your summary was open to the interpretation that we can draw more implications for policy from formal theory than I think either of us thinks we can.
I’m sensitive about this because I think it reflects to how non-economist critics often mischaracterize economics. Critics often talk about it as if economics is defined by its associated formal theory. I don’t. I see economics as defined by its broader worldview. No reasonable economist sees homo-economicus as a description, either normative or positive, of human beings. But, nonetheless, a formal theory about how homo-economicus might act may be useful at times. To capture that broader worldview, one needs to consider all the commentary as well as the formal theory. Without the commentary, the formal theory tells you nothing about how the economist views the world.
Within economics, there are competing conceptions of selfishness, and competing altruistic groups, so there are millions of ways in which I could interpret and model your first two statements and their interactions. The process of doing so formally makes the analysis so messy that on theoretical grounds alone, one has no way of deciding which alternative specification of the statements I should be using. So, in my view, the informal general theories captured in your first two statements, provide essentially no practical insight into policy on its own. What gives theory real-world meaning is the commentary. So, for me, while everything else might be commentary, theory is so entwined with commentary, that commentary is a necessary part of theory. So my alternative to the Wilson and Wilson approach is:
Selfishness beats altruism within groups. Altruistic groups beat selfish groups. Commentary gives meaning to the above statements.
As I read your judgments about economics, I get that same sense that you focus on economists’ formal theory and view the commentary surrounding it as not important. Thus, you give much more weight to economists’ formal theories as the basis for their policy views than I do. For example, whereas you seem to see multi-level selection as inconsistent with standard economic model, I don’t. In my preferred informal economic model interpretation, homo-economicus agents can be altruistic, selfish, and rational all at the same time. It all depends on the assumptions of what their tastes are. I see altruism as a taste that people have; they feel good about themselves when they help others, and when they influence the type of social system they live in to make it fairer. Having a taste for altruism need not be considered different from having a taste for caviar. I recognize that there is debate about such issues; my point is simply that the implications of the model all depend on how one defines and interprets the concepts, and that is found in the commentary.
These differences of interpretation lead us to have somewhat different interpretations of the laissez-faire/central planning debate and how that debate relates to entrepreneurship. While I end up in the same place as you—the way forward in policy is a blend of the two–I see that top-down/bottom-up blended view of policy as totally consistent with the broader conception of economist’s informal theory and consistent with the broader classical liberal policy agenda as presented by John Stuart Mill. He supported both laissez-faire and socialism and had a vision of the future that was much more ecologically friendly than the current liberal neoclassical approach that is more connected to economists’ formal Walrasian general equilibrium theory. Mill’s policy agenda was a forward-looking normative policy agenda—not one based on scientific theory.
DSW: Wow, there is a lot to cover here! To begin, I want to emphasize the pernicious effects of employing the wrong theory, such as this one:
The only responsibility of a corporation is to maximize profits for its shareholders.
Everything else is commentary.
This is a theory followed by commentary, similar to the Wilson and Wilson theory, but commentary on it leads in a different direction and tends not to correct itself on the basis of its harmful consequences.
DC: I don’t see this “profit-maximizing” statement as a theory at all, and certainly nothing like the Wilson and Wilson theory. It was a debating comment that Milton Friedman used to attack the idea of corporate social responsibility. It can only be understood in context, and it certainly did not capture the views of most economics, even those who thought much of what was called corporate social responsibility was simply hot wind. While it helped Milton Friedman become better known, it did more to contradict support for a reasonable market economy than any socialist argument. I have called his article and characterization of the economic argument for markets the equivalent to trying to sell hamburger by calling it pink slime (Colander, 2017). Friedman knows that his argument is limited, and if you read his article carefully, you will find all types of qualifications and nuanced interpretations that contradict the idea that firms should only maximize profit. It is a statement designed to be misunderstood and misinterpreted. For example, your summary statement refers to profit maximization as “the only responsibility” whereas his article stated the “only social responsibility” which made it clearer that it was a response to the social responsibility debate. In the article, he points out that all firms should be ethical and should follow the norms of society, which leaves all types of interpretative wiggle room. Those qualifications are lost without commentary.
DSW: The point I am trying to make is that the two theories are like paradigms, the concept developed by Thomas Kuhn and others, and changing paradigms is a different dynamic than “normal” scientific progress within a paradigm. In evolution/complexity terms, different paradigms are like different basins of attraction or (to invert the metaphor) adaptive peaks separated by a valley. You use this metaphor yourself in your book with Kupers, if I recall correctly, describing general equilibrium theory as a lower peak, separated from the higher complexity peak by a valley.
Which brings me to my second point. We need to distinguish between schools of thought within economics. I’m not at all surprised that our zone of agreement is accommodated by a “broader conception” of economics, exemplified by early figures such as John Stuart Mill. The issue is whether it stands in contrast to the dominant school of economic thought during the last 50 years. I think we both agree that it does stand in contrast and that departing from the dominant school might need to be paradigmatic rather than incremental—your “two mountain” metaphor.
Third, let me attempt to demonstrate how commentary on the Wilson and Wilson theory straightforwardly leads to benign and science-based policy applications, in contrast to the shareholder value theory. Both of us admire the work of Elinor Ostrom (1990) and the eight-core design principles that she derived, which are required for groups to manage common-pool resources. In my collaboration with Ostrom (Wilson, Ostrom & Cox 2014), we showed that the core design principles map closely onto MLS theory. Very simply, in groups that strongly implement the core design principles, disruptive within-group selection (“selfishness beats altruism within groups”) is largely suppressed, so that between-group selection (“altruistic groups beat selfish groups”) becomes the dominant cultural evolutionary force. Three predictions follow from this mapping: 1) All types of groups need the core design principles, not just common-pool resource groups; 2) Helping groups assess and better implement the core design principles should improve their performance; and 3) The core design principles are scale-independent, needed to govern between-group interactions as much as within-group interactions. These three predictions establish an agenda that includes both basic scientific research and practical applications. At no point does it become “unscientific”.
Ostrom made an important distinction between the functional design principles and their implementation. For example, all groups need to monitor agreed-upon behaviors to function well, but how they monitor is highly contextual and must be determined by experiment. Sometimes the experimentation can be informal—trying stuff out and seeing what works. But informal experimentation is likely to fail in complex systems, requiring more systematic methods such as A/B testing and artificial intelligence algorithms.
When you describe policy as an “art” rather than a “science”, I think that you are referring to its highly contextual aspects, requiring “commentary” as you put it. But when we think of the contextual aspects as a form of experimentation guided by theory, which often requires the formal tools of experimentation, then it can be seen as fully scientific.
On that point, you began our conversation by stressing the significance of theoretical advances in the study of complexity, compared to mere qualitative appreciation of complexity by early economists and the first class of theoretical models that couldn’t cope with complexity. But since then you have been stressing the limitations of theory and the importance of commentary around the theory. What exactly is the importance of theory that does justice to complexity?
DC: Again, I think our interpretation of terms is leading to many of our perceived differences. I see your multi-level selection as an informal theory that is based on common sense and reasoned arguments. It only becomes a formal theory with a lot more granularity that requires lots of additional study. Basing policy on it is not applied science in the sense of applying a fully developed formal theory—as is done with computable general equilibrium theory for example, but is highly educated common sense applied to a problem. This is very similar to the scientific method since science is nothing but educated common sense, but it isn’t science. Since one isn’t trying to find the truth, only a workable solution to a problem, the high level of proof needed in science is not needed and is counterproductive. Policy proceeds with rules that work and does the trial and error adjustments on the fly. In answer to your question, formal theory involves thinking deeply about the patterns one finds. It leads to better understanding. But, there is no reason for an applied policy economist to limit herself to any one theory if other theories or frameworks provide better insight into a particular problem. Applied policy economists, who have time and resource constraints on coming up with a policy answer, should use different selection criteria than do economic scientists who have a much looser time and resource constraint.
DSW: Thanks! Now let’s proceed to the broader form of economics that you embrace, held by earlier economists such as John Stuart Mill and now due for a revival based on modern evolutionary and complexity theory—and how it relates to the Third Way.
DC: Mill’s picture of an idealized future was not one in which the focus of policy, or of an individual’s concerns, was on material welfare. He argued that in the future (which for us is now) society would have plenty to go around, and the needed policy change was in the nature of humans, not in producing more material goods. Mill writes “I am not charmed with the ideal of life held out by those who think that the normal state of human beings is that of struggling to get on—that the trampling, crushing, elbowing, and treading on each other’s heels, which form the existing type of social life, are the most desirable lot of humankind, or anything but the disagreeable symptoms of one of the phases of industrial progress….Nor is there much satisfaction in contemplating the world with nothing left to the spontaneous activity of nature… If the earth must lose that great portion of its pleasantness—which it owes to things that the unlimited increase of wealth and population would extirpate from it for the mere purpose of enabling it to support a larger, but not a better or a happier population—I sincerely hope, for the sake of posterity, that we humans will be content to be stationary, long before necessity compels us to it.”
DSW: These are indeed wise words for our time! To translate into MLS terms, Mill had an acute sense that the lower-level pursuit of self-interest does not robustly benefit the common good…
DC: Mill’s future Homo economicus was not a greedy, self-centered individualist, focused on material welfare, but rather a reflective individual with concern for herself, for others, and for the environment.
DSW: Which is paradigmatically different from H. economicus defined by the general equilibrium model…
DC: Not necessarily. One can interpret selfishness in many different ways depending on assumed preferences. Each interpretation leads to a different general equilibrium model. So there are an almost infinite number of general equilibrium models associated with different specifications of selfishness. I agree—for tractability reasons–economists have focused on a very narrow interpretation of selfishness, and I have criticized the profession for thinking that that model might be relevant for policy. (Colander, 2018d) Complexity economists are exploring other models, but there are so many different possible models, that precise guidance for policy is minimal.
Returning to my argument: Mill envisioned a future in which the economic problem of material scarcity was solved, and further advancement occurred by the self-development of moral character. Put another way, he did not see tastes as given, which formal economic theory assumes. For Mill, tastes evolve, and how they evolve is influenced by policy. People will still be entrepreneurs, but they will not necessarily concerned with monetary profits for themselves, but rather as a means to achieve their social ends. They are concerned with psychic profits associated with making a difference in achieving what they consider worthwhile goals. Mill envisioned an economy not focused on crass materialism.
DSW: Excellent! I will make only a few quick reinforcing points to keep up the momentum of our conversation. Mill’s vision was completely beyond the capacity of formal mathematical modeling at the time. Core assumptions of the general equilibrium model, such as self-regarding preferences, which might seem ideologically driven, were required to make the math tractable. This is where a new generation of theoretical tools can succeed where the old tools failed. Also, Mill’s vision strongly features a “higher good” that is inherent in the concept of moral character. Whatever we mean by self-interest and laissez-faire, it must contribute to rather than undermining the common good. This is what I mean by a systemic target of selection in Third Way terms.
DC: To achieve Mill’s vision of the future requires activist policy, but that policy would focus on providing a framework within which self-reflective people could develop and thrive. This was what in my complexity book I called meta policy—and the major focus of social policy was on developing the institutional structure that allowed and encouraged individuals to thrive within it.
DSW: Agreed! Mill was occupying some kind of middle ground between the unregulated pursuit of lower-level interests and rigid top-down planning.
DC: So Mill’s laissez-faire policy was visionary and progressive, but it was laissez-faire in that it let individuals determine their own goals. Mill’s policy was laissez-faire in the sense that government was not defining the goals. He was comfortable with individuals choosing their own goals. The government’s job was to provide an institutional structure within which they could make a reflective choice about goals. Laissez-faire would lead to “good” outcomes only if the institutional structure was appropriate to shape wants that were reflective of human’s true nature. Policy was very much about achieving what one values in life. Mill was willing to say what a good life was for him–being a contented pig was a less valuable life than being a dissatisfied human. His policy advice necessarily incorporated value judgments about ends and goals.
DSW: I agree and myself emphasize that science by itself only informs what is and not what to do. To think otherwise is to commit the naturalistic fallacy. Values must be added to scientific knowledge to know what to do. However, Mill’s conception of “human’s true nature” might require elaboration. He seems to have the best that humans can become in mind, but humans are also capable of the worst, especially when governed by the wrong institutional structure. Why is the worst side of human nature any less true than the best side? Let’s keep on going.
DC: The answer to that question comes from philosophy—it is an accepted philosophical truth that we want to encourage the better side—I wouldn’t call it Mill’s conception of human’s true nature. It is his conception of that is the most fulfilling nature—the one that makes people who have consider all possible sides as the most desirable—the one that makes them happiest (since Mill was a utilitarian)
Complexity Policy follows that same approach; it focuses on institutional structure, not on specific outcomes and goals. That means getting property rights right, and by “right” I mean consistent with what impartial spectators behind a veil of ignorance as to what position they would hold, would consider fair. Our current intellectual property rights would likely have appalled Mill. Complexity policy also requires getting our understanding of a good life right—what impartial spectators would consider right. Mill would likely have been appalled at the lack of progress in moving away from crass materialism, and how we allow and encourage advertising designed to support a system that provides it. But he would not impose his views; he would simply encourage institutions that would allow people to follow their own desires. Millian policy was highly normative and judgmental, which meant it could not be scientifically supported. It could, however, be philosophically supported, which made philosophical argumentation as to why the goals should be chosen by society, a central aspect of policy discussion.
In your writings, you don’t spend a lot of time discussing the difficulties of specifying social goals. As I read your work, you convey a sense that our societal goals as relatively clear-cut and consistent with a modern progressive policy agenda. For example, you say we want more equity in the system and more sustainability. Having more equity and sustainability sounds good but translating those general goals into specific policy actions is really difficult. I see an actual specification of the goals as far more problematic than you—there is enormous philosophical literature on morals and goals, and how to arrive at a consensus on them.
As soon as one translates a general concept such as equity into a specific goal, the philosophical debates begin. My view is that any bottom-up solution to our problems has to come from a consensus about goals, which is achieved through engaged debate. Policy goals evolve, and if they are imposed from the beginning of the analysis as self-evident, as many modern liberals implicitly do, that bottom-up evolution in goals cannot occur. People feel oppressed by the experts. It creates dissension, rather than bringing people toward a set of shared goals. That’s why Mill saw open debate and free speech as the core central values of a liberal society, and developing institutions that foster that open debate as to the key policy goal. Classical liberalism was an ideology, but it was not a neoliberal ideology. It was a liberty and freedom ideology.
Recent developments in academia and in progressive policy analysis are moving away from that liberty and freedom ideology and replacing it with an ideology based on equity and sustainability as core progressive goals. I tend to agree with these progressive goals, but I do not see them as the core; they should not be treated as self-evident. People need to arrive at these goals on their own. I do not believe it is appropriate for neutral policy analysts to impose any specific goal as being a requirement. I believe that goals that individuals arrive at on their own as being more supportable. I’ve developed this line of argumentation in Colander (2014).
DSW: Once again, I think that we agree on the fundamentals. Groups of all sizes must be oriented toward a common good, which is more a set of values than a set of concrete goals. Concrete goals are in the service of the values and must be monitored to make sure that they are heading toward “true north”. For Mill, “true north” was the fulfillment of our “true nature”. For the philosopher John Rawls (1971), it was the society that most people would design, subject to the constraint that they would be placed randomly within the society (the veil of ignorance).
You raise two points about the formulation of specific goals that take a group in direction of “true north”. First, the goals should emerge from engaged debate. I agree and don’t think I imply otherwise in my writing. Second, you say that the goals can be very difficult to derive. Sure, but I would add that they can also be simple and straightforward. An example from your book with Kupers is the French postal system. One of its goals is to optimize the routes of thousands of mail deliverers—a massive version of the traveling salesman problem. The goal is not difficult to derive. The difficulty comes with achieving the goal and the innovation that you describe is to supplement agent-based modeling with working with the actual postal workers to assess their preferences for alternative routes in an iterative fashion. This is a fine example of Third Way social change. A systemic target of selection, orienting variation around the target, and the replication of best practices in a way that is sensitive to context. There are dozens of examples like this where the societal goal is relatively straightforward and the challenge posed by complex systems is how to achieve it.
I think that Mill would be delighted by our process of working with groups to implement the core design principles. It begins with a reflection on values as part of the first principle (a strong sense of group identity and purpose). When fairness is discussed (an important part of most of the principles) we emphasize that there are different kinds, such as distributive vs. procedural, and the need for group members to decide which form is most relevant. The third principle, concerning inclusive decision-making, is all about democratic engagement. Group members decide upon their own short-term goals and optimally work with us over the long term to apply the same principles to between-group interactions in their cultural ecosystem (the eighth principle, concerning scale-independence). Essentially, this process provides an institutional structure for individuals to make their own informed decisions, which is what Mill recommended. Crucially, it begins at the scale of small, functionally-oriented groups and builds up from there to larger scales of governance. In this and other respects, I think that a modern understanding of evolution and complexity might help inform the particular institutional structure that is needed to fulfill Mill’s vision.
Now I’d like to turn our attention toward entrepreneurship in relation to other kinds of social change. While this series is centered on entrepreneurship, I think that the threefold distinction applies to all positive change efforts, including some that are not conventionally regarded as entrepreneurship. Is there a vocabulary for talking about different kinds of change efforts that I should be using?
DC: As I stated above, the concept of entrepreneurship exists in the informal, not the formal theory of economics. Standard economics essentially ignored entrepreneurship from the 1950s to the 1970s. It was kept alive by what was called the Austrian school of economics, which eschewed the formal mathematical theory. The reason why was that entrepreneurship involved process, not equilibrium, and process could not be well captured by economist’s math at that point. Since Austrian economists had strong ideological beliefs in markets, entrepreneurship became associated with monetary profit motivation and the free market. However, entrepreneurship need not involve monetary profit. It is about human motivation; it captures individuals’ desire to solve problems. Human beings have evolved into highly efficient problem-solving machines because solving problems improves their competitiveness in a complex environment. An entrepreneurial economy relies on bottom-up problem solving whereas a traditional socialist economy relies on top-down government problem-solving.
Since I never saw some abstract free market as a viable option—markets require a complex institutional structure–I have always seen real-world markets as blends of top-down and bottom-up problem-solving. Bottom-up problem-solving requires some top-down policy to create a framework where that works. It requires a strong government that can create an institutional structure within which markets work.
DSW: These are great points, which are affirmed by some of my other conversations in this series; notably with Geoffrey Hodgson.
DC: Entrepreneurship is often contrasted with rent-seeking, which involves people working to change the institutional environment to benefit themselves. I don’t see that entrepreneurship/rent-seeking distinction as a useful distinction either. Entrepreneurship involves both a market competitive process and an institutional competitive process. To distinguish between the two, you need to specify your ethical values and make judgments. Those ethical values determine what you see as rent-seeking and what you see as profit-seeking. Entrepreneurs do what they can to achieve their goals, within their own ethical framework. They will do this in groups and individually.
Successful entrepreneurship involves the creation of an institutional structure that is conducive to your product. It relates closely to what Peter Thiel in Zero to One points out is developing a monopoly. So I see any economy as a dynamic system of competing monopolies. Monopolies are being continually being formed and broken down by other’s attempts to create alternative monopolies. This occurs on many levels and is consistent with a multi-level evolutionary process. This building of and breaking down of monopolies is governed by a competitive system that is also evolving as each agent or grouping tries to find a protected niche.
DSW: Now I’m encountering more vocabulary problems. I think that your previous two paragraphs might err in the direction of assuming that lower-level competitive activities will robustly benefit the common good. They won’t, unless they are very carefully refereed to align with the common good. The analogy with sports competitions is apt. Every sport is carefully refereed and economic “games” are no different. We need terms that correspond to rule infractions in sports. Changing an institution for one’s own benefit, in a way that disrupts the common good, needs a name. If that name isn’t “rent-seeking”, then what should it be? Likewise, when a corporation becomes so large that it captures an entire market, it tends to resist positive change and is able to do so by virtue of its power, as Tim Wu describes in The Master Switch: The Rise and Fall of Information Empires. What name do you suggest for describing this situation, if not “monopoly”? More generally, a vocabulary is needed for economic activities that disrupt the common good and therefore need to be suppressed!
DC: The sport metaphor is one I’ve often used, but I use it in a slightly different context. The problem is that technology is always changing the economic game that is being played so that the old rules are no longer appropriate. That means that you need to change the rules of the game at the same time that you are playing the game, and you’ve got to figure out what changes in rules are appropriate and which not. In doing so it’s often not clear whether support for a change reflects rent-seeking or is an attempt to find a neutral modification. The various players obfuscate. For example, when meat producers say they want only meat, and not meat alternatives, to be labeled meat, are they doing it to protect their market position, or to provide honest information to the consumer. There are millions of such decisions that constantly have to be made in an economy.
Another term that is often used is social entrepreneurship, which I think rightly takes into account that entrepreneurs are interested in much more than pecuniary profits. I define social entrepreneurship as entrepreneurship designed to directly achieve the entrepreneur’s social, goals, rather than to earn a monetary profit and then use those profits to achieve either private or social goals. I think creating an environment that encourages bottom-up social entrepreneurship with what I call for-benefit firms is an important goal of complexity policy. A for-benefit firm is a firm that has been set up to achieve a social end, and whose institutional structure keeps its focus on that end.
DC: Social entrepreneurship has both Austrian entrepreneurship and rent-seeking characteristics. It involves an institution that forgoes profit or income that could enrich the entrepreneur to achieve some social goal. Social entrepreneurship can overlap with for-profit entrepreneurship since for-profit entrepreneurship also achieves social goals. The difference is that a for-profit firm achieves social ends indirectly, whereas a for-benefit firm achieves them directly. Social entrepreneurship involves both earning the money to achieve the social goal and achieving it.
That is a different definition than put forward by Bill Drayton who popularized the term. He saw social entrepreneurs as quite different from private entrepreneurs; they were system-changing entrepreneurs, committed to the good of all.
In his view, social entrepreneurs were quite different from for-profit entrepreneurs. I don’t see the two groups as that distinctive, and I don’t see political activists for social causes as social entrepreneurs, whereas he does. The reason is that I think people have a blend of social and self-directed goals and for-profit entrepreneurs can often have, and achieve important social goals. I see the social entrepreneurship term as capturing more of the bottom-up way of solving a social problem. Entrepreneurs, social and for-profit, solve problems from the bottom up. Complexity policymakers create environments within which they can do that.
DSW: John Gowdy and I make a similar point by stressing that we need to operate in two capacities: as designers of social systems and as participants in the social systems that we design. As designers, we must have the common good in mind and there is no invisible hand that will save the day. As participants, we can indeed follow our lower-level interests without having the common good in mind, as if led by an invisible hand. Put another way, the invisible hand is the environment created by complexity policymakers, as you put it.
DC: Drayton has since changed his nomenclature into something that I am more comfortable with. He now calls what he had called social entrepreneurs, changemakers. Changemakers include social activists—those who work through the political process to get the government to change the system to focus on goals that they prefer. That means that they advocate goals and push for goals, but rely on government to pay for achieving the goal. Social entrepreneurs do not rely on the government to pay. They develop voluntary funding methods and work within the market sector to achieve their social goals.
DSW: This is a useful distinction.
DC: Because the term social entrepreneur has a positive connotation, many individuals define themselves as social entrepreneurs. However, much of what is called social entrepreneurship cannot be distinguished from for-profit entrepreneurship. To be distinguishable, social entrepreneurship has to cost the entrepreneur something to achieve a social end. Companies like Tom’s Shoes, which gives a pair of shoes to a poor person whenever it sells a pair of shoes and is considered by many a social company, might be socially motivated, but they could also be seen as a standard for-profit company selling two combined goods—expensive shoes and warm fuzzies that make people feel good when they buy and wear those shoes. Most B-corps similarly can’t be distinguished from for-profit companies, because they argue that their social activism is increasing their profits. But if it is increasing profits, then a for-profit company would follow the same strategy. My bottom line: Such social entrepreneurship may be doing good, but so too are many standard for-profit firms. If an enterprise is not demonstrably lowering its profits by its social actions, it is essentially indistinguishable from a for-profit company.
DSW: Having made a study of B-corps, including site visits to five of them in the New York City area, I must disagree. Consider Greyston, a bakery whose mission is described as “to create thriving communities through the practice and promotion of open hiring.” One of their mottos is “We don’t hire people to bake brownies; we bake brownies to hire people”. Yet, if Greyston proves to be highly profitable as well—by developing a prosocial customer base, a loyal workforce and supply chain, etc., then so much the better. And this is indeed the case. In a comparison of B-corps with a matched sample of standard corporations, B-corps proved as profitable or more profitable (Chen & Kelly 2014). They did well by doing good.
More generally, it would be bizarre to use the success of a company with a prosocial mission to discount the mission and call it indistinguishable from a company whose only mission is to maximize profits for its shareholders—even if such companies also can do good in an appropriately structured economic environment. Don’t you need to back away from this statement?
DC: No, I don’t think so. In fact, I use Greystone as an example of what a social firm like I have in mind does. I can do that because it is fundamentally different from most B-corps. What makes it different is that it is owned by a foundation whose goal is not profit and income to stockholders, but advancing its social mission. Instead of donating to a non-profit to bring about social change, the foundation invests in social change. It reinvests its retained earnings in its mission; it doesn’t translate retained earnings into profits to be returned to private shareholders. That funding structure is fundamentally different from a B-corp funded by investors who are promised high monetary returns. So to determine whether a B-corp has a social goal as its primary mission, I look to its funding source, and what they funders are expecting in way of return on investment.
What I prefer to call social entrepreneurship and social companies is a much smaller group of entrepreneurs and companies that are not concerned with making profit for themselves but are instead interested in achieving a social goal. Many of these social entrepreneurs are former successful for-profit entrepreneurs, whose material welfare goals have been met. They’ve got all the money they want. They are looking for a new challenge—new problems to be solved, and they have decided to focus on achieving their social goals by providing products that improve the life of some group of deserving individuals. A policy that encouraged for-profit entrepreneurs to switch to become social entrepreneurs would be one type of policy I would encourage to bring about the Third Way.
DSW: I want to focus our conversation on outstanding examples of the Third Way, but first, can you provide some examples that illustrate the shortcomings of laissez-faire and centralized planning?
DC: There are so many shortcomings in both that doing so would require an entire book. As I’ve stated above neither extreme exists. We are somewhere in the middle. But my feeling is that we are in the wrong middle. Our current democracies aren’t working so we need ways to better resolve conflicts of views by academics and non-academics. Extreme laissez-faire has never worked. A market needs a framework; it needs property rights, rules, and laws that evolve over time. Markets are never fully free. Similarly, central planning has never worked. It is for that reason that I prefect to describe all economic systems as examples of pragmatism, not capitalism or socialism. My Third Way would involve a top-down policy focus on getting institutions right, and a bottom-up policy focuses on social entrepreneurial action to solve our problems.
DSW: It’s ironic that the failure of centralized planning at the national scale is so widely recognized yet remains so pervasive at the corporate scale. Is there a literature on the weaknesses (and perhaps strengths) of command-and-control style of management in the business world?
DC: I’m not a specialist in management theory, but as I understand it, the view of planning on the corporate level is more nuanced than you suggest. Fads go both ways; sometimes emphasizing the advantages of bottom-up approaches and other times emphasizing the benefits of top-down approaches. One recent fad is Zappo’s, which eliminated the traditional management role back in 2013 to empower employees and create a “holeocracy” in which employees act as entrepreneurs and authority is distributed widely. Earlier fads led to the development of the concept of entrepreneurship.
I think the top managers know that a mix is needed, and that management policy has an important right place/right time component. The appropriate mix changes with changes in technology, information flows, and learning by doing. Alfred Chandler’s The Visible Hand provides a rich historical discussion of that evolution in corporate structure that captures my sense of the tension between top-down forces and bottom-up forces.
DSW: That’s good to know. Now let’s dive into some case studies of positive social change done right. Do you have favorite examples?
DC: The framing of this question shows a difference in our sensibilities. I’m hesitant to say “positive social change done right”. That strong of a statement requires far more understanding of positive social change than I have. I do have some examples of social change that I think has characteristics that I find desirable, and that I argue in favor to others. But I always emphasize that my views are based on normative sensibilities not on my economics training.
I think what our society needs are institutions that allow social goals, taking all views into account, to organically develop from the bottom up, rather than to be assumed by a core group of elites, of which I would see you and I as part of—the liberal establishment. I think we share similar views about those goals, but I don’t think all society shares our views. Even when the general goals may be the same, the path to those goals can differ significantly. This is an example, for me, of where the “commentary” is central to the core of our understanding. Recent events in U.S. politics reflect a failure of institutions in my view, where the sense of the common good has not been allowed to evolve from the bottom up through engaged discussion by all, but is assumed to be understood by an elite, of which we professors are a part. Current institutions allow far too little engaged discussion among people with different views.
My view is that, upon reflection, the large majority of the U.S population will agree with the progressive goals you and I share, but they will only support those goals if they develop organically within them. People don’t like to be told what to do or what is right—they want to reason it out for themselves. The first goal of policy is to provide institutions that allow all to do that. An example of an institution that is working toward the engaged discussion goal is Better Angels, (https://www.better-angels.org/) which is a group committed to fostering engaged discussion. It is attempting to get both sides to listen, without taking one side or another.
Other institutions I find leading to positive social change are what I call for-benefit social corporations, which are businesses designed to achieve social goals as a central part of their mission. As I stated above, to be a distinguishable social corporation, the business plan of the company must actually cost the organizers something in terms of forgone profits. Social corporations will have lower profits than for-profit firms. Ideally, it is not only costing the organizers; it is also costing the firm’s committed employees something in terms of lower than market wages. Thus, what I am calling a social corporation doesn’t include most B-corps, which explicitly state that they are not foregoing profit to achieve social ends.
DSW: Again, I think that you are misconstruing many of the B-corps that I know. One CEO told me that B-corp does not stand for “Beautiful Corpse”. He meant that while his mission was to do good, this required surviving in a highly competitive business environment. When I started studying B-corps, I assumed that efforts on behalf of governance, workers, the community, and the environment (the four components of a company’s B-score) must subtract from the bottom line of profits. What I failed to realize is how much these direct outlays result in indirect benefits, especially in an appropriately structured business environment. Please don’t make self-sacrifice a requirement for a system that works well as a system! In a well-functioning system, people and groups get in proportion to what they give!
DC: I’m not making self-sacrifice as a requirement of a system that works well. What I’m arguing in that achieving one’s selfishly held social goals is a luxury activity that many in our society can afford themselves, and that doing so will provide them with more happiness than a second mansion, yacht, or painting. After the first $10 million, it’s not much of a challenge to make another, and unless you have social goals, it is hard to spend that much in a way that gives you good feeling about yourself. Instead of founding charities, a social entrepreneur creates businesses to achieve their social goals.
The type of social for-benefit corporation I am talking about are much closer to the Mohamed Yunis structure of social business. (Yunis, 2010) A Yunis social business does not have profit goals; instead it has social goals. Unlike B-corps they are often producing and selling goods to the individuals they want to help, not producing a luxury good for well-off people. The goal of a Yunis type for-benefit firm is to provide a beneficial good to the poor at a much lower price, and to expand the business so that they can help even more. So it might make a surplus, but that surplus goes into achieving the social goal. The firm’s central motivation is to help the poor, not to make a profit from them. In Yunis’ specification for a social business, investors may get their money back, but they can get no positive return—in my specification for a social business, investors only need to insure that there are predetermined limits on the financial returns they get from the investment. That allows a broader group of people and organizations to fund social business. So an investor in a social business might say that the investment will return only twice his original investment, with additional returns staying with the social corporation. Greystone Bakery fits that mold.
DSW: Despite my defense of the B-corp model, the Yunis model also appears excellent and likely superior in at least some contexts.
DC: Another area where my definition of social business differs from Yunis’ is that in my definition, it isn’t only investors who will explicitly receive below-market returns from a social business. Ideally, committed employees will be taking part of their pay in terms of psychic benefit, making the product even less expensive to the poor. All people working for a social corporation ideally have the same commitment to achieving the social goal. In my specification of a Yunis social business, both management and engaged employees will receive avocational wages—so that they too are taking part of their pay in psychic pay.
DSW: No doubt you are familiar with the classic paper by Robert Frank (1996) titled “What Price the Moral High Ground”, which compares the wage difference that people accept to work for a company with a prosocial mission compared to, say, a tobacco company. So many workers are already acting upon their moral principles in their job choices.
DC: The goal is to hold all costs down as low as possible to provide the product to the poor at the lowest possible price or to achieve the largest social gain. Thus, the social business corporation self-limits the pay structure of committed employees and, ideally, a social business will be populated by individuals, (including investors, management and employees) committed to the social goal, and they will be seen as stakeholders with a role in corporate governance. (When sufficient social investors and employees cannot be found, for-benefit firms can borrow, and hire standard employees at market rates, but these participants will not be considered stakeholders.) After costs have been covered by a social business, all retained earnings go toward achieving the social goal the organizers of the business have specified.
Likely funding source for these social businesses are foundations that share the same social goal as the organizers. An expansion of social business will change the nature of foundations. Instead of investing their endowment in for-profit corporations and using the proceeds to make a donation to a non-profit, the foundation invests in the social company in what is called a PRI, or program-related investment. This PRI will have a lower, or even zero monetary return since the investment itself is achieving the social end. Another likely funding source would be successful entrepreneurs who have fulfilled their material welfare wants for now and for the future and are now interested in achieving the social wants with their wealth. Instead of giving their money to a non-profit, they invest their money in a social business directly achieving their social goal.
An example of what I mean is Paul Polak, a successful psychiatrist and real estate developer who left his careers and devoted himself to developing products that would help poor people escape poverty. His was a bottom-up approach based on what he called “zero-based design” which meant that he relied on close guidance from the poor who will be using the product, and “radical affordability” so that his product would be useful to people earning only a couple of dollars a day. He argued that only for-profit companies could do this, and he helped poor people create for-profit companies owned by poor people that provided these products to the poor. Creating the companies and spreading the efficient cost-effective technologies to the poor were his social missions. He argued that non-for profits could not solve these problems, both because the not-for-profit organizational structure was too inefficient and because he believed that individuals cared much more for things that they had bought themselves than they cared for something they had gotten for free, or as a handout. Monetary profit for himself was not a concern to him. If he cared about that, he would have stayed in real estate development.
He determined a social goal of developing useful, inexpensive tools that would allow the hundreds of millions of people with income below $1.00 a day to be more productive. He founded International Development Enterprises that contracted with small companies to produced a low-cost donkey cart that could sell for $450 but which would allow buyers to earn $200 a month so that they could pay for it in less than a year. He followed that up by developing low-cost drip irrigation systems for farmers with small plots, helping set up firms that could market and sell them for a profit. Social corporations share a sensibility with Polak about what works but are structured in a way to build in the social goal of the founder into the company’s structure.
I think the possibilities of for-benefit social corporations to make a positive difference in our world are enormous. There are many sectors of the economy where I believe for-benefit corporations are a better structure than either for-profit corporations and not-for-profit corporations as currently structured. They include health care, education, the press, and platform social media companies.
DSW: Again, despite my defense of the B-Corp model, this also appears to be an awesome model for making social goals the primary mission of economic activity.
DC: The insight behind for-benefit corporations is that most successful entrepreneurs aren’t driven by a desire for monetary profit for themselves. They are driven by wanting to succeed and the desire to advance a vision they have about what the future could be. The policy approach I favor involves creating an environment that encourages people to follow their social goals. It involves a change in culture. Currently, success is measured monetarily in terms of how much profit an entrepreneur makes. Most entrepreneurs desire the success, not the money. To change the system we need to incorporate different, more social, measures of success. In terms of the Wilson and Wilson theory, we need to move entrepreneurs from the “selfishness beats altruism” measures of success to the “altruistic beats selfishness” measures of success, and we need to do it in a way that entrepreneurs are voluntarily choosing that altruistic measure, and the government is not imposing it on them.
I sometimes think of such an economy within a video game metaphor. Video games typically have different levels. The reason why is that once you have completed a level, the game is no longer a challenge. Video games with only one level quickly disappear. The problem with our current system of capitalism is that it is a single level game.
Multi-level games succeed and become addictive. Currently, for entrepreneurs, there is only one level, and success in the Level 1 game is measured in monetary profits. When entrepreneurs succeed in Level 1, they end up with too much money, and they end up giving much of it away rather than using it to directly improve society. Policy can change that. Say, for example, there was a Level 2 capitalism in which social goals are to predominate. Level 2 capitalist companies would have social goals and subject themselves to a much stricter set of ethical rules than do current for-profit firms. For example, in Level 2 capitalism property rights on intellectual property and patents could be much shorter, or even non-existent, so that the benefits of technology and invention can be passed on quicker and cheaper to all. The social goal of these social companies would be spelled out. For example, the social goal could be to provide medicine at 1/10th the cost of current medicine, or quality education at 1/10th the cost of current quality education. Success would be determined by the fall in price of the product, and the firm’s success at disrupting the existing monopolies.
These for-benefit companies will have lower employee costs and will not need to make a profit, and thus they can use their retained earnings to expand their social mission. They would not need to ask for foundation support; they can fund themselves out of retained earnings. Had Wikipedia and Kahn Academy been developed as for-benefit companies, charging a small amount for their services rather than providing them for free as a not-for-profit, they could have had a much larger positive social impact because they could have used their surplus to expand the social goals they were providing in education and on the internet. They would have likely created for benefit corporations providing low-cost quality education for all and disrupting the educational establishment. A for-benefit university makes sense; a for-profit university doesn’t. So, the increase in social corporations is one policy initiative that I would support in complexity policy.
Another change that I would advocate exploring involves policies designed to influence tastes and norms. We need to better understand how tastes are instilled within people, and how they might be usefully influenced. Regulations might be designed to make advertising much more information focused, and less manipulative. Institutions that channel individual’s energies into sustainable social activities could be encouraged, so that rather than having a norm of following a sports team, well-off individuals could be encouraged to “adopt” a team of at-risk students, with the goal of seeing them advance in life. I could even see leagues in which at-risk teams compete with others, with success judged by the at-risk students’ success.
I make no claim that these policies will be easy to implement, or that they don’t involve complex issues that go far beyond economics. They raise difficult normative questions that economists have worked hard to avoid. In my view what complexity and evolutionary theory tell us is that economic policy analysis was wrong in trying to avoid such questions; they cannot be avoided.
DSW: I look forward to working with you to realize your vision. This has been an exceptional opportunity to compare our views in detail, using the Third Way as an organizing framework. Thanks so much!
DC: And I look forward to working with you.
Read the full Third Way of Entrepreneurship series:
1. Evolution, Complexity, and the Third Way of Entrepreneurship
2. Pragmatism as the Third Way of Entrepreneurship: A Conversation with Trygve Throntveit
3. Socialism, Capitalism, and the Third Way of National Governance: A Conversation with Geoffrey Hodgson
4. The Third Way of Entrepreneurship and the Art of Public Policy: A Conversation with David Colander
5. The Role of the Market in the Third Way of Entrepreneurship: A Conversation with Peter Boettke
6. Urban Planning and the Third Way: A Conversation with Daniel T. O’Brien
7. The Third Way of Entrepreneurship in the Internet Age: A Conversation with Tim O’Reilly
8. Evolution, Complexity, and the Third Way of Development: A Conversation with Scott Peters
9. Ten Thousand Years of the Third Way: A Conversation with Peter Turchin
10. The Nordic Third Way: A Conversation with Nina Witoszek and Atle Midttun
11. Evolution, Complexity, and the Third Way of Entrepreneurship: A Capstone Conversation with Victor Hwang
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I have never witnessed such an in-depth intellectual conversation before. Mr Colander’s fictions makes sense from start to finish. As a starting point, I would like to make a suggestion for myself: We must redefine love which should no longer be instinctive [animal] nor is love only we are able to control.