Pragmatism Grows At Night

In "India Grows at Night" the writer and commentator Gurcharan Das shares his insights into how India's growing, pragmatic middle class can achieve the country's necessary political and economic reforms. While inspired by Das's presence in Tahrir Square two years ago, these insights also resonate with the plight of Western democracies whose growth is inhibited by extractive private and public sector institutions.

The title of the book comes from Das's belief that India's knowledge economy powered her economic growth because: 

"Bureaucrats did not know how to regulate it and could not choke it with red tape, in the way they stifled India's industrial revolution through licences, permits and inspectors... India's knowledge economy literally grew at night while the government slept."

But India's problems are not over. Das explains that the "puzzle is... how can a vibrant democracy with a rising economy and an energetic civil society have allowed the state and governance to decay"?  He then describes the evolution of the Indian state from before British rule until today, tracing the tensions between social and official structures, and the shortcomings of the political system and key market failures.

Despite different starting points, this 'decay' also awaits Western democracies who have not been alert to the need for ongoing political and economic reforms. There's an ominous familiarity, for instance, in the complaint that the Indian state is preoccupied with the quantity of schools and other public services rather than their quality - "which is what really drives shared prosperity." The problems in our financial system are well rehearsed.

Das's description of the reasons for India's institutional decay is also echoed in Phillip Blond's explanation of the 'political bankruptcy' in Western countries. I understand them both to be saying that right wing policies allow the concentration of wealth amongst relatively few extractive institutions and their management and investors, rather than creating an environment in which widespread entrepreneurship can flourish. Meanwhile, left wing policies that are designed to 'redistribute' income through taxation and public spending are grossly inefficient by comparison to markets. The self-interest of partisan politics has gone too far, and legislators have no real commitment to the common good. Electoral battles fought along social and cultural lines distract everyone from critical long term issues, as well as being dangerously divisive. As a result, we lack appropriate regulatory frameworks and incentives to address market problems that stifle innovation and competition. Not only does institutional decay reflect the bankruptcy of dogma-ridden political parties, but as that decay constrains growth the economy itself drifts into liquidation.

Das argues that successful reforms will only be achieved through more active political participation by the members of the rising middle class, since they are the most conscious of the problems and the most impatient for the necessary reforms. He argues that the intransigence of existing Indian political parties creates the need for an entirely new, 'bottom-up', liberal political party. Das explains that this is a 'classical' rather than a 'social' liberalism - tolerant on social and cultural matters, yet wary of state intervention where the private sector and the market can be more effective.

This also seems to reflect the "renewed political idealism" and "participative democracy" for which Phillip Blond argues. 

In UK terms, this would seems to place Das's vision for a 'liberal party' somewhere between the Tories and the Liberal Democrats. And it seems quite telling that UK voters have forced those two political parties into coalition.

However, I disagree that the formation of a new political party or even a new political idealism is a necessary pre-condition for achieving political and economic reform.

As discussed in Lipstick On a Pig, the bottom-up approach that Das refers to has already been unleashed, largely enabled by the Internet's 'architecture of participation'. The 'Arab Spring' and developments in sub-Saharan Africa emphasise both the global nature of this phenomenon and its effective political impact. This process of 'democratisation' requires no more structure than the social media and a city square, and its power lies in the fact that it isn't confined to politics or economics. Greater transparency, knowledge and reform in one area creates the desire for change elsewhere. The result is both seismic and chaotic, yet significant reform is bound to be 'messy', not orderly and neat. As a result, I've suggested we're seeing the evolution of a "personal state" in which we're acting pragmatically as individuals in a highly collaborative fashion through the services of facilitators, rather than passively relying on our institutions to set the pace of reform.

New political parties and ideals might well emerge in this environment, but they will be a symptom of reforms achieved by each of us acting personally, not the cause.   

The Personal State

This decade is not going well for Britain’s institutions. The 2010 election did not magically restore our faith in a scandal-ridden Parliament. Bail-outs failed to improve the conduct of UK banks. Our public sector finances are in an appalling state. And as more sunlight has revealed the self-serving conduct of our mountainous bureaucracies, the gradual melting of our trust in them has become an avalanche. We want to know how rotten our institutions really are. More importantly, however, we want new models that work. 

As explained in “Lipstick On a Pig”, this plunge in faith in our institutions coincides with trends that are democratising the means of producing goods and services. Using digital technology we are personalising the one-size-fits-all experience traditionally offered by the likes of record labels, publishers, retailers, banks and political parties, and manufacturing our own physical products using desktop industrial machines. Rather than merely accepting what is ordained from the top down, both individually and as members of the ‘crowd’ we are shaping products, markets and political policies to solve the problems we encounter in our day-to-day activities. 

This process of ‘democratisation’ is being facilitated by organisations that are intently focused on helping us solve those problems. I call these organisations ‘facilitators’ to distinguish them from ‘institutions’, which exist to solve their own problems at our expense. The characteristics that I believe mark an organisation as being either a facilitator or an institution fall within broader themes of alignment, openness, flexibility, transparency and responsibility. In other words, a 'facilitator' solves its customers’ problems openly, flexibly and transparently, and takes responsibility for the impact of its activities on the wider community and society. 

Why are these features so critical? You might argue, for example, that focusing on ‘creating shareholder value’ or maximising management and staff compensation have proved to be more successful for some organisations than focusing on customers. As Anthony Hilton, Financial Editor of the Evening Standard, once said, “The City has done very well over the past 50 years dreaming up any old product and shoving it down peoples' throats.” 

But if that’s such a successful strategy, why are those City firms suddenly the subject of scandal after scandal and fine after fine for mis-selling and other misconduct? Why aren’t they able to recover quickly from their mistakes and move on? Why is Parliament labouring over new banking and financial services legislation? Why are people taking to the streets in protest? 

Because these firms are not 'facilitators'. 

In “Lipstick on a Pig” I explored the distinction between facilitators and institutions in the context of financial services, which then marked the latest consumer frontier. That sector also provides a great illustration of how organisations that produce complex products with hidden fees that their own staff can neither explain nor justify to customers become hooked on revenue and profits that disappear when the regulators finally wake up. How clubbing together with competitors leaves the whole club vulnerable to the same event or the consequences of the same mistake. How ignoring complaints and covering up problems leaves an organisation unable to understand the causes of issues it needs to fix. And how, when it finally emerges that the institution is not managed in the interests of the wider community, that community will no longer support it.

Since then, however, the frontier has expanded to confront the public sector and how society works – or doesn’t - as a whole. So I've been focused on the extent to which the public sector shares the same institutional characteristics that afflict our banks, and how facilitators are emerging in that wider context to help people solve their day-to-day problems that are being ignored. 

Whether an organisation is a facilitator or an institution is ultimately a matter of personal judgement for each of its customers. You might consider that a supplier is on the cusp of either category. Some will shift categories over time - although the drift from facilitator to institution appears to be easier than reform the other way. Some may never be reformed. Instead, they will gradually wither away while alternative models grow around them. 

Ultimately, however, the success or failure of our institutions and the facilitators that replace them is down to each of us. We are obsessed with ‘our rights’, but we must also realise that each of us bears responsibility for the wellbeing of everyone else. With our rights come duties and obligations that each of us must perform personally. The state cannot perform these obligations for us. The state can only act as a facilitator for our own endeavour. This is “the Personal State”. 

The Personal State is a simple concept. But it is of course a hugely complex dynamic, fraught with deeply-rooted life and death problems. For it to operate effectively, each of us must act pragmatically - in an informed way, rather than by adopting “uninformed, stupid practice”. That means no longer describing problems in terms of political dogma and propaganda. It means thinking critically and practically to identify and solve real problems. It means praising what works and explaining what doesn’t. It means spending, saving and investing our money in productive ways, and declining state benefits we don’t need. It means finding ways to improve the efficiency and productivity of the public sector to reduce public spending. Of course we must punish the gross mismanagement of our institutions and other violations of public trust. Yet we must also encourage entrepreneurs to engage in survivable trial and error, in order to promote innovation, competition and growth. In short, we must help each other wherever we can. 

Now a state like that would be worthy of some lipstick.

Image from Makeup Artist.

More Risk, More Trials, More Error, More Success

I was at a Coadec event for encouraging tech start-ups in London on Wednesday. Much of the focus was on demonstrating why London and the UK are better locations for starting businesses than elsewhere. Certainly the Polish and Turkish entrepreneurs seemed to think so, although the Turkish guys did point out they'd tried the US and couldn't get a visa ;-).

That's nice to hear, but a bit underwhelming.

Research from the IEA has already shown it's easy enough to start a business in the UK, though the insistence on the 'employment' model still makes it a bit awkward for small businesses to take on staff. 

The real point is that we can't pick which businesses are going to be successful. The best that we - and government - can do is to ensure "a climate in which enterpreneurship can thrive". In other words, we have to encourage more trial and error. We have to welcome failure in order to see success.

Actually, I think we're okay with failure in the context of genuine innovation. It's a long time since anyone went to prison just being unable to pay their debts as a result of an honest small business failure. A lot has been done to make it easier to clean the slade and start afresh. And UK figures referred to at the Coadec event suggest that entrepreneurs fail an average of 3.5 times before succeeding (although the IEA also suggests that an entreprenuer is more likely to be successful if he or she has been successful before). 

Where we do have a problem, quite rightly, is with failure in the management of our major institutions. In this context, trial and error is acceptable. But running an established business process in a way that results in significant errors or outright disaster is not. Unfortunately, concerns here tend to drive higher levels of (fairly ineffective) regulation, which in turn stifles innovation and competition where it's needed most. Indeed, the European Commission Consumer Scoreboard suggests that the more highly regulated a consumer market is, the worse reputation its suppliers have with consumers - lowest of the low being financial services. In March, the FSA listed the key risks to consumers from FSA-regulated providers as being pressure selling; failing to provide ongoing service to existing customers; poor complaints handling; inefficient day-to-day business processes; cancellation blockages; lack of proper infrastructure; complexity and volume of communications; excessive and/or unfair charges; and changes in terms and conditions without notice or appropriate reasons. The FSA concluded:

"... on the whole, financial service providers were seen to generally fall short on their promises, to the extent that the majority of consumers in the study considered that there had been an erosion of trust between them and their financial providers. In particular, they cited an inability on the part of financial service providers to offer the most appropriate solutions for them."

How do we get these businesses "to offer the most appropriate solutions" to their customers' problems?

It seems to me that our heavily regulated institutions are too risk averse. As a result, genuine innovation among those institutions is virtually non-existent.

The sub-prime crisis, for example, was not caused by banks intending to take on more risk. A shortage of 'safe' assets - a deposit crisis - meant they were actually trying to transform high risk mortgages into low risk bonds, by bundling the mortgages together and cutting them up in different ways, repackaging them and so on. The bank that invented the process way back in the mid-1990's actually did sensibly trial it first, before deciding that it ultimately wasn't sustainable. So the huge errors and bank failures over a decade later resulted from imitators who had adopted the faulty process without adequate monitoring, controls and due diligence procedures that would have told them when to stop. Evidence of this has emerged in the resulting 'fraudclosure' scandal, where no one was sure who owned many of the underlying mortgages when they were called in.

There is no room for complacency on this front, but there's still plenty going around. Even the bank that realised the potential for the sub-prime crisis was recently caught out by its own process failures, allegedly while trying to hedge its existing financial exposures (i.e. reduce risk). These institutions are so smug that they pay half their 'profits' in bonuses even while failing to maintain adequate risk monitoring systems.  

Maybe if they committed themselves to taking more risk to solve their customers' problems instead of their own, these institutions would organise themselves to be better at monitoring and managing that risk than just selling the same old stuff. In doing that, however, they would need to engage in lots of little trials and ensure they had a good understanding of why each trial did or didn't work. We don't need big rolls of the dice. 

But where's the pressure to do this? Governments and regulators the world over are 'clamping down on risk-taking', after all. 

Perhaps the same effect will be achieved by the many start-ups focused on financial services. But again we run into the headwind of regulation and tax incentives, ironically designed to benefit consumers, which only serve to perpetuate the status quo. As recently discussed at the Finance Innovation Lab, regulators and policy-makers will need to improve their understanding of how the innovation process needs to work before customers will be better off.

Image from TVTropes.