Markets
Open markets are commonly presented as a method for governing an economy. While this is true, markets also present a strategy of governance design used to moderate interactions across many types of governance models. Consider a firm that opens up internal capital markets in the form of transfer pricing, which allows departments to interact using free market principles and even compete with outside firms in the case of internal/external markets. This is hardly the only method of incorporating markets into governance structures, as can be seen through ideas like the quantification of externalities generated by departments, which can then be traded within a company (e.g., diversity or carbon credits).
Here are two quick examples featuring the use of markets within governance structures:
- In 1998, BP made a commitment to reduce greenhouse emissions by 10% before 2010. They achieved this in only three years using internal marketplaces. Business units were given “permits” that represented the right to generate one ton of carbon dioxide in emissions. These permits could be traded within the company, allowing for a competitive and dynamic internal marketplace, with 4.5 million tons of emissions being traded in those first three years for an average cost of about $40 per ton. (This is an internal, market-based system not dissimilar from the public emissions-based trading system developed under the Kyoto Protocol.)
- Hewlett-Pachard developed a system in which anyone could propose a project to a board of senior managers at something the company called its VC Cafe, which acted as an internal VC. If a project was approved, it was given a budget and its description was posted on an internal network, allowing interested team members to inquire about joining.
Open markets are defined by their ability to self organize. When an organization uses an open market system, components of that organization that are better at achieving a specific pre-assigned goal get more resources and thus gain greater influence over how the organization plays out.
This metric can either be:
- Backed Money: A token backed by something the society believes has value (commodity money is the classic example here).
- Fiat Money: A generalized, freely traded token that can be exchanged with the governing body.
- Measured Tokens: Tokens that can be reliably acquired by achieving a specific, measurable goal and that often can be exchanged for currency equivalents (e.g., carbon credits).
- A Series of Tokens: A few token types used for different tasks that are allowed to develop an internal exchange rate (e.g., departments may get one set of tokens for efficiency at a task and another for safety during its undertaking—or tokens that are specific to their domains, like coding or HR tokens)
- A Non-Tradable Resource: Using this final definition allows individuals to think of things like political systems as an open market where firms or political parties compete for voters. It is a stretch to call such systems a marketplace.
The advantage of these systems is that the subjective human element of deciding which component is performing its task better is largely handled “automatically” instead of decided upon by a central authority. The downside of these systems is that they encourage competition between branches of a government, which can lead to the siloing of information, resentment, and reduced morale.
In the same way that communist systems are incredibly stable and effective in small population groups (i.e., on the family level) but almost inevitably toxic at the level of larger populations, the inverse is true for market-based governance systems. Market-based systems are often an effective component of large governance structures, having even been employed as such in communist states, but on the small scale almost always lead to extreme toxicity. It would feel dehumanizing and breed resentment to operate a family on a marketplace model. The same can be seen in smaller companies that attempt to use marketplaces as a major aspect of their operational structure (the breeding of resentment between departments).
If you are designing a governance structure with an open market component, note that:
- Market-based governance will not magically heal a toxic culture within a company or family office and may exacerbate the issue by encouraging even more cut-throat competition. (Removing the human component of determining who is the “best” department/person removes some of the fear of being punished for being an asshole.)
- When allowing for subgovernments to organically form and compete within a governance structure, remember that nearly all open markets have restrictions within them (e.g., on who can start these sub-governances, how much power they can accumulate, and how they can interact).
Open market structures are generally a component of a well-designed government when populations of above 50,000 people are at play. That said, open markets very rarely make up an entire governing system. (We won’t discuss prediction markets here as they are addressed elsewhere in the book.)