Beneficial Nonlinearities – Their Impacts on Business and Society

Beneficial Nonlinearities, how digital platform companies have been achieving them and their impact on society

Overview of this Commentary

Apologies I have been a bit out of touch. The demands of a fast growing software company has prevented me writing a Commentary since “The Rise of National Capitalism” in Dec-Jan.

The thoughts in this Commentary were stimulated by research* on what has been driving large economic gains created by the “platform economy”? And consequently developing a theory of “Beneficial Nonlinearities”. This Commentary explores:

  • what are Beneficial Nonlinearities?
  • how have digital platform companies been achieving them?
  • what is their impact on society?

The third topic explores whether the success of today’s new corporate titans might represent “too much of a good thing”? I will explore whether the current explosion of (I will argue) nonlinearity-driven corporate success may worsen a special type of “singularity” that is undermining the democratic wishes of populations? And, by hollowing out jobs and not re-distributing gains, contribute to populism and in turn to National Capitalism.

I then review Map of Agriculture’s strategy harnessing information nonlinearities for the farming sector.

We end with a quick update on the various Craigmore farming, forestry and farm data ventures. An Appendix summarises some Princeton research on regulatory capture of the US political system. Addressing the balance between corporate / elite and people power.

* to refine the strategy for Map of Agriculture I have been reading:
1. Modern Monopolies, a “how to guide” for platform businesses by Alex Moazed and Nicholas Johnson
2. The Content Trap an excellent exposition of how businesses that create connections outperform by Bharat Anandt, HBS Professor of Strategy. In order to keep pace with my politically-questioning 18 year old I have begun reading:
3. Homo Deus by Yuval Noah Harari.

1. The (dispersed) Beneficial Nonlinearities of history

Nonlinearities have always been with us. Amoeba populations in a pond begin slowly, reproduce geometrically to great number, then run out of oxygen and start over. Mosquito populations have similar patterns.

“Beneficial Nonlinearities” help humans. When a tribe of hunter-gatherers built and traded a better tool or farming technology (that generated a “higher return” than others), so their resources and “power” grew – geometrically – at least for a time this was a Beneficial Nonlinearity.

The inventors of cereals agriculture; irrigation; the wheel; money; credit; banking and assembly lines of the industrial age all created cumulative gains for their sponsors and societies. However, normally only a small part of the benefits of these inventions accrued to one owner. Rather they became dispersed among the societies they serve. Wealth retained against innovations protected by right (e.g. property) or natural monopoly (e.g. ports & municipal utilities) represented and represents regional exceptions to the “law of dispersal” of gains.

Even today the mightiest of the firms that grew up in the 20th century must provide far more welfare to their customers than their shareholders. This is because they (mostly) remain subject to competition, in spite of their best efforts to establish monopolistic positions. Although brand integration and economies of scale give e.g. JP Morgan or Nestle an edge, they must still prevail in competitive markets. No one firm supplies all the banking services or ice-creams in every region of the world.

2. The emergence of Global Beneficial Nonlinearities

Companies like Alphabet, Facebook, Amazon, Tencent, Apple, Microsoft, Alibaba and Uber provide digital tools to help people exchange resources. This aspect of their creation of value is not in itself different from earlier Beneficial Nonlinearities. Like the assembly line, or the creation of professional business management.

However, what is remarkable about this crop of digital platform companies is how many are achieving “natural monopoly”. By which I mean achieving near ubiquity in their markets. And in many cases this dominance achieved on an enormous scale. Which I call “hemispheric” as often dominating one or both of the two major economic blocks on earth. These being 1. the Chinese sphere and 2. the rest. Thus e.g. Baidu & Google dominate search in each hemisphere. And Tencent and Facebook each dominate interpersonal communication.

The story of the “digital platform” period of economic history is only now being written, but it is likely the shareholders of these firms will retain a higher proportion of the rewards of their success, relative to traditional “non-ubiquitous” innovators and firms. The rich share valuations accorded to these firms by the stock market supports this assertion.

I will now argue that the reasons for the success of these platforms has been the harnessing of up to six powerful Nonlinearities, simultaneously**.

**each of these successful firms has also applied these strategies early – in order to create an early (but not necessarily first) mover advantage in their space.

3. Six key strategy steps of “platform” companies

Most of the following six Beneficial Nonlinearities are employed simultaneously by successful digital platforms:

As per the illustrations these Beneficial Nonlinearities have been powerfully deployed by masters of the digital offering like Tencent in Greater China, and Facebook and Amazon elsewhere. However, why list them together?

In the old economy, normally only one or two powerful “Nonlinearities” were at the disposal of e.g. a Henry Ford – in his case Scale Economics***. Now, digital flexibility and computing and connectivity breakthroughs are enabling these global platform companies to employ 4 or 5 or even 6 of these powerful Beneficial Nonlinearities simultaneously. I believe it is this “compounding effect” of extraordinary and simultaneous value creation that is behind the phenomenal growth of the hemispheric digital platforms.

*** An interesting exception was one of the earliest electronic innovators, Alexander Graham Bell whose telephone network was an early platform so had each of 1. Platform Economics, 2. Platform legal status, 3. Network Effects, 4. Scale Economics on its side. I suspect it also had 5. Multi-Product Economics assuming AT&T produced hardware (handsets), as well as connectivity (phone lines and exchanges). What AT&T has not had until very recently (and nor did Microsoft, also in most other respects an exemplar platform) is a reactive intelligence capability, with which to mine data on user behaviours, and so adjust offerings accordingly. These days known as algorithmic management.

4. Might we need to rein in these Natural Monopolies?

While digital platforms have added a lot of value to society, am I alone in finding the speed and dominance of their success disquieting?

The utility loss to society from allowing monopolies to exist is well documented elsewhere. I will not traverse the arguments here****. Instead, in the next section, I want to raise a geo-political concern about high and increasing influence of “the corporate interest” – which may be reinforced by these powerful corporates.

****The actions of first the DOJ then the EU in unbundling Microsoft’s products, and the EU’s attempts to restrict use of information by Facebook and Google are example regulatory responses.

5. Lunch with a news organisation CEO

I recently had lunch with the immediate past CEO of the holding company of a conservative British Newspaper, a charming and battle-hardened corporate warrior indeed. As a card carrying liberal I intensely dislike the editorial slant of his (recent) employer, so I was interested to meet somebody who had presumably got himself comfortable, morally, with working for such a reactionary organisation. I asked him why his Newspaper has persisted in publishing highly tenuous views about Climate Change? He replied that he himself appreciated Climate Change is a huge issue, but that he had not seen it as his job to preside over the efforts of his editor who, anyway, he repeated, he felt was producing fair views on the question. I nearly fell off my chair. If he thought his newspaper was publishing fair views on the question of Climate Change then … clearly … he had not been reading it!

Apparently, the CEOs of large publishers do not think the standards of material they publish much matters. Instead they publish what their audience wants to hear, irrespective of whether it is correct.

What is going on here? Obviously, my Commentary has wandered way off its promise, to provide analysis of Beneficial Nonlinearities! To rescue it I need to provide a cogent link between that topic and this story about corporate social responsibility. To provide this link I will now take you, dear reader, to yet a third conceptual place, the balance of power between men and machines. I argue that capitalism is an amoral machine, and that increasingly all of us, not just that CEO of that Newspaper, are caught up in its workings.

6. Are we “in” a special type of Singularity?

A Singularity is normally defined as an event when computing power enables machines to out-do human intelligence. Bear with me as I extend this concept with a couple of special definitions. Let us define a (special type of) Singularity trigger as the moment when machines over-power the democratic functioning of mankind. Further, let us define machines quite broadly as human constructs, whether social, mechanical or electronic.

Is it possible that capitalism (a social construct that allocates wealth in society according to relative endowments and prices of factors of production) may have already captured the decision mechanisms of much of mankind? The Newspaper CEO (and more generally the problem of fake news) being a case in point. He did not see a need to examine the moral consequences of his firm’s actions. That is not part of the compass of Capitalism.

7. Don’t get me wrong market capitalism has been generally a good thing!

Those of my dear readers who believe that capitalism does provide an adequate moral compass (an ideology perhaps shared by much of the population) may not be much troubled by the special type of Singularity that I have defined. They are of course correct that market capitalism has sponsored significant human happiness. Probably more than any other system could have achieved. I myself, like the Newspaper CEO, have spent most of my career working within that system and not questioning it. However all great systems should still be questioned and may be improved. E.g. addressing monopolies arising from concurrent beneficial nonlinearities. And addressing fake news.

8. Might Map of Ag also need to be controlled?

Both issues; of control of power and of promotion of truth; are of particular concern to me right now as my team and I are shaping a Map of Agriculture digital platform, itself bringing powerful beneficial nonlinearities to the global farming industry. “Map of Ag” is certainly not (yet!) a global hegemon. It has only £2 m annualised revenues. It operates in only 4 of the 200 Farm States we seek to serve. However, in designing Map of Ag’s relationship with farmers (where we will be the monopoly provider of farm data intermediation services in each region in which we succeed), we feel Map of Ag has a responsibility, in serving farming, to provide for the limitation of our potential power, in favour of the farms that we serve.

9. The argument thus far

I argue in this Commentary that the digital platforms now emerging, powered by Beneficial Nonlinearities we have seldom seen before, are more ubiquitous and more economically dominant than anything the world has seen.

This could be the reason Bill Gates’ wealth as a ratio of contemporary GDP, significantly exceeds that of John D Rockefeller as fraction of the GDP of his day.

I then asked whether the goods these digital platforms bring to our economies, undoubted boon though they have been, may represent “too much of a good thing” and go on to develop a theory of regulatory capture of society by corporate interests. By using the analogy of a “special type of Singularity” I argue that, if we think of Capitalism as a social machine, then the practises of Capitalism may be achieving this special singularity. As is further detailed in the Appendix, State decisions may be being made to further the interests of corporate owners, rather than the interests of the population at large. This risk of “regulatory capture” by business interests may loom large given we are now seeing emergence of corporations more powerful than any we have seen before. Disquieting evidence that the US Congress is systematically favouring the interests of the wealthy and compiled by Princeton University is presented in an Appendix.

10. Is there anything to be done about the next wave of corporate titans?

If the above arguments are correct then is there any reason to believe that e.g. Google will actually take steps to “do the right thing”?

Well, this is a really interesting question. Brin and Page are reportedly idealistic people and eager to make the world better. Zuckerberg, who has been musing publicly about the jobs that will be displaced by e.g. driverless cars, is an advocate of a universal social wage.

However, despite these stated views, is there any reason to believe they will do better than the newspaper CEO I met (and the rest of us!) caught up in the special Singularity of Capitalism?

One exemplar that gives hope is Gates himself. And Buffett. Managers and major owners of dominant businesses who have run them as “hard as they can” for profit, then turn around and donate much of their wealth to charity. To causes including climate change mitigation that might give this world a chance.

Clearly this is to be applauded, as was the famous $ 1 bn donation by Ted Turner, founder of CNN, to the United Nations.

However might there be a way, since they are natural monopolies, for digital platforms to be set up, either by their founders or by regulators, to provide their services not just in maximisation of value for their shareholders, but with adjustment of their models to in fact maximise value for society?

11. Building a respected digital platform for agriculture

The above is not just an ethical challenge for us as we expand Map of Agriculture as a digital platform for organisation of farm data. It is also a political question. Farming, which finds itself at the nexus of food production and the environmental caretaking of 40{f6c88d30aecbf4e615d1332a68b2b175670b58e505eb081fd0c1cb6014deac89} of the terrestrial surface of the Earth, is an intensely scrutinised industry. Farmers may now earn only 1.5{f6c88d30aecbf4e615d1332a68b2b175670b58e505eb081fd0c1cb6014deac89} of global GDP, however, our political role, as source of all food for the human population, is larger, and this is reflected in the political systems of every land. Of course, farmers themselves, large populations that they are (4 m in the US alone), are a political force. And fiercely aware of their prerogatives.

Therefore, for both ethical reasons (we did not set up Map of Ag to exploit farmers but to serve them) and political reasons (Map of Ag will not succeed if we are not trusted in each land) Map of Ag seeks to harness – and to be seen to harness – nonlinearities for farming in the right way. And to do this in a way that maximises outcomes for the farmer, even if this might be less profitable for Map of Ag. We think this is the right way to proceed. And, ironically, although in any one year we may give up some profits, we suspect Map of Ag may ultimately be a larger and more profitable firm as a result of “built by farmers, for farmers” constructs.

12. What Beneficial Nonlinearities is Map of Ag harnessing?

Which Beneficial Nonlinearities is Map of Ag employing?:

 
Appendix

14. Regulatory capture of the US and UK States

Jeremy Grantham, great investor and even greater writer of thoughtful newsletters, references in his Q4, 2016 Newsletter a piece of Princeton research, which Grantham summarises as showing “the complete lack of influence that voter opinion had on the probabilities of any bill passing through Congress. If favoured by the public the average 31{f6c88d30aecbf4e615d1332a68b2b175670b58e505eb081fd0c1cb6014deac89} chance of passing rose to a dizzying 32{f6c88d30aecbf4e615d1332a68b2b175670b58e505eb081fd0c1cb6014deac89}. If not favoured, it fell to 30{f6c88d30aecbf4e615d1332a68b2b175670b58e505eb081fd0c1cb6014deac89}, justifying the nickname given to the influence of the average citizen: “Gilens’ Flatline.” When favoured by the richest 10{f6c88d30aecbf4e615d1332a68b2b175670b58e505eb081fd0c1cb6014deac89}, bills passed at a 65{f6c88d30aecbf4e615d1332a68b2b175670b58e505eb081fd0c1cb6014deac89} rate… But, when opposed by the wealthier … “the passing rate was essentially nil”.

Grantham goes on to argue that, given democracy in America has developed this “tin ear” with respect to the wishes of the population, it is not surprising that populism (aka Trump) is rising. The situation in the UK may not be a lot better. In the same way that the “excluded” voted for Trump as a protest in the US, voters in the UK flocked to vote for Brexit. Some voted to leave because they want to separate from Europe. Others because all of the political parties in the UK, other than the unloved UKIP party, were opposed to Brexit, so voting to leave in the referendum was these voters’ chance to register a protest against an establishment they view as excessively in love with investment banking and internationalism, and other concepts foreign to the English and Welsh shires. Many Brits feel excluded in the same way as the Americans in the the Princeton research.

 

15. The internal tensions within “National Capitalism”

If this is true we may be truly, as I argued in my last Commentaries, in an age of “National Capitalism” – and in a special type of singularity to boot.

These are remarkable times with disenchanted voters and angry, populist politicians coming out strongly against the internationalism of the post-war period, yet the educated “elites” (yes, dear readers, this is you – and me!) still strongly committed to the capitalism that first flourished in the west after the war, and then spread to much of the rest of the world.

We may be stuck, unless a Teddy Roosevelt type figure or movement emerges to break the log-jam, in a volatile struggle between those of us eager to preserve the post war consensus around a pluralistic capitalism and the anti-liberals, eager to shatter if not capitalism (there does not seem to be a consensus for that) but the “rootless internationalism” that Teresa May railed against in some of her more populist (and to my ear regrettable) speeches in the second half of 2016.

****Martin Gilens and Benjamin I. Page, “Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens,” Perspectives on Politics, September 2014, Vol. 12/No. 3, Princeton University.

Forbes Elworthy.
Partner, Craigmore Sustainables and CEO of Map of Agriculture