Development: Does it Cost Money or Produce Money?

Posted on 2012/04/23 by Ashton

People often say that it takes money to make money.

I have also often participated in, and overheard, discussions where it becomes clear to me that people believe that money is needed to solve a community’s problems. The truth is that money is not what will solve the problems of the community. The solving of the problems of a community will produce money. Money is not a cause, it is an effect. It can help to make things happen faster, and more smoothly, but it is not the primary starting point of the solution to the community’s problems.

I think this belief that we first need money, and then we can solve the problems, comes from our having forgotten what money is, and where it came from.

Now I am no historian, and my principle of economics are reasonably fundamental – so the exact facts here might be somewhat distorted, but the principles are sound.

Let me take you back to a little village, 6 000 years ago.

Johnny has cows. Jenny has vegetables. Johnny wants beef and French fries, so he pops over to Jenny’s and gives her some meat. In return, she gives him some potatoes and sunflower oil. But now Johnny doesn’t want to have to cut up a whole cow just to swap a few pieces for potatoes, neither does he want the equivalent of the entire cow in potatoes. Jenny doesn’t want a whole cow either. So Johnny cuts up his cow into pieces, and after having gotten his potatoes, he goes to town with his cow all cut up and displayed on his little cart, and he swaps it for some other things.

There is a problem, though: There are some things that Johnny doesn’t want now, but the people who have it, want meat now. In the same way, there are some people who want meat now, but they don’t have what Johnny wants right now. So meat is not a great thing to have, in order to “buy” things with.

One of the things Johnny really wants, is a new house. But Johnny is really bad at building. He’s willing to pay ten cows for a new house, but the builder has no-where to keep cows.

So Johnny goes over to the builder’s place, and they shake hands on the idea that Johnny will deliver five large steaks to the builder’s house every day, for the next three months, and in return, the builder will build Johnny’s house. This agreement to deliver one service in exchange for a product, over a period of time, is money that has just been created. You cannot see it, and you cannot touch it, but that is what money is. Money is simply a promise that I will deliver something to you, in return for something else.

Now let me show you how this became more like the money we know today.

The Builder could never eat five steaks a day. He could eat about one. (They were big steaks in those days.)

So the builder tells his wife that they have four steaks a day spare. His wife goes off to the market, and makes an arrangement with the vegetable supplier that she will swap one steak, for a certain amount of vegetables every day, for the next three months. This enables the vegetable supplier to make sure that he harvests and brings her order to the market every day. The builder’s wife asks Johnny the cowboy to deliver one steak to the vegetable farmer instead of to her house, every day. But now it begins to become tricky to remember and keep track of all these arrangements.

So the builder and Johnny the cowboy gets together, and they get Sally, who can write, to sit down and write them pieces of paper (or maybe they wrote on bark, or bamboo, or whatever). They count the days that would make three months, and for every day they write five pieces of paper that says, “I will give the Builder, or anyone who has this piece of paper, one piece of steak, in return for this piece of paper.” and then Johnny the cowboy draws a little cow at the bottom of the piece of paper – the way everyone knows only he can draw cows. So they know this piece of paper is of real value, and will be honoured.

Now Bob the Builder’s wife goes to town, and when she needs some clothes, she gives the clothe-maker a piece of paper. The clothes maker sees Johnny the Cowboy, and gives him the piece of paper, and he gives her a piece of meat. Over time, the Builder’s wife buys more clothes, and soon the clothes-maker has more slips than what she wants, so she takes some of it to the fisherman, who gives her some fish in exchange for the pieces of paper. Johnny the cowboy works hard at making sure than whenever someone presents him with a piece of paper, he gives them a piece of meat. He gets Sally the writer in again, counts his cows, calculates how quickly they can keep making new little cows and grow up, and calculates that he can safely slaughter one cow every second day, without risk of running out of cows. And he knows that he can get about a hundred steaks from one cow. So Sally helps him write different pieces of paper. Some promise one steak, some promise two, five, ten, and twenty steaks.

Now Johnny goes to town, gets everything he wants for a reasonable amount of steak, without exchanging any steak, just by handing over pieces of paper, and every second day he walks through town with one cow cut into pieces, exchanging it for pieces of paper.

And soon there are these pieces of paper everywhere, everyone is willing to accept a piece of paper in exchange for something, and soon they begin to bargain with each other. Not only that, but they begin to write their own notes. The baker writes notes that promise bread, the veggie farmer promises fruit and vegetables and so on. So when the veggie farmer wants clothes, she no longer has to worry about whether the clothes-maker needs vegetables right now, she just has to worry about whether the clothes-maker will need vegetables at some point – because that will make her willing to accept a piece of paper–a promise of vegetable–in return for some clothes.

From here things evolved. All the pieces of paper became messy. It was difficult to decide which pieces of paper were worth which products. How much bread should you get for three carrots, and how many carrots should you change for one steak and so on. The Blacksmith who was able to shape things, discovered that everyone liked gold, so he started making coins. These were scarce enough, and difficult enough to fake, that soon everyone started using coins. One coin began to have specific value. A coin could buy a certain amount of bread, or vegetables and so on. He started making different coins. Black cast iron coins were worth less than shiny polished iron coins, and silver coins less than gold coins and so on.

And then the blacksmith cottoned on to the idea that all people wanted was a promise of coins, so he started writing pieces of paper promising to give coins. He made them really nice and fancy, and very difficult to copy. But hardly anyone ever actually came for the coins. They just kept handing the pieces of paper around. Occasionally someone would come to him with a worn piece of paper and ask … not for a coin, but for a new piece of paper. He would take the old one, burn it, and issue a new one. He began to realize that he didn’t need to have quite as much gold as what he was issuing pieces of paper. So he started issuing more paper than what he had gold, because with every piece of paper he could buy stuff. Soon he was a wealthy man with a big house and some gold in his house, and he was no longer called a Blacksmith, but a Banker.

But it didn’t matter, because the real value was not in the gold, it was in the way that the community was now running smoothly, producing and exchanging products and services, using their pieces of paper.

So, going back to today. There are communities today who believe that they cannot do anything because they are too poor. It is not their fault that they believe this. Belief systems come about by circumstances. The point is that as long as you have some time, energy, and some kind of resources, you can do something. The very activity in itself generates value – and if you really don’t have any money yet, begin by exchanging promises and use them as the lubricant to get people in the community to do things for one another. Let every person search for ways to apply his or her resources, and the community can begin to build itself.

I know this sounds simplistic. But often we can become so blinded by the need for money that we forget that the true value is not in the money, but in the work that people do to improve the environment in which they live, for one another, by producing and providing goods and services. Money is merely the means of helping the exchange of those goods and services.

What it all really boils down to, is that economic development simply requires two things. Production and Exchange.

The production can be in the form of goods and services. The exchange can be in the form of bartering, verbal promises, written notes, or a sophisticated financial system.

If you can get these two things going in a community – Production and Exchange, and ensure that every healthy person between the age of about 20 and 70 is in some way involved in the process of production and exchange, you will have started up an economy. Over time, the methods of production and exchange can then be made more sophisticated.

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Does China’s Economic Models Hold Solutions for Africa?

Posted on 2012/04/23 by Ashton

Let me first say that I’m not an economist, I’m an Organisation Development guy. But I do try to understand the economic environment in which organizations operate.

The concept of market economy has over time created an increasing chasm between the true needs of society, and the products that are being produced. Ever increasing levels of competition have driven organizations to ever increasing speed with which new products and services are brought to market, and it has driven a whole industry of incredible research into how to convince consumers that they need the new products and services that are becoming available.

And don’t get me wrong. I am not an anti-free-market freak. I am absolutely in favour of the free market, and I am absolutely in favour of competition. However, looking at our world, and the economic challenges in America and Europe, from my comfortably isolated little apartment here in China, I am wondering whether the market-economic system is beginning to reach its end of sustainable usefulness for the human race, and this planet.

I have recently begun to become aware of the concept of a community driven economic system, and as soon as I’d discovered this concept, I suddenly began to get the idea that I’m beginning to understand the phenomenal growth in the local Chinese economy.

We tend to try to interpret things from the perspectives of the things we know, and so, being a capitalist, I’ve tended to try to understand China from that perspective, because it looks like a free market, when you look around you. People are free to start up businesses, they compete freely, there is very little government intervention – probably less government intervention than in most Western countries. So it must be a market economy, right?

But there is something that hasn’t been adding up. One of the fundamental requirements of a sustainable, successful market economy, is a strong legal system. And this is lacking in China. And yet the economy steams on. It steams on with very little legal intervention.

And this is where becoming aware of the concept of a community-based economy, suddenly made the penny drop for me.

Let me explain.

In market-based economies, “business” and “people” are essentially seen as two “entities” that interact through “contract.” For those who are not familiar with contract law. In very simple terms, when you walk into a shop, pick up something from the shelf, and put it on the counter, you are making an “offer” to buy the product for a certain price. The shopkeeper accepts your offer, and a contract comes into being. You then give the shopkeeper the money, he gives you your goods, and the contract has been concluded.

That is the summary of the system. Everything happens through “contract.”

In a community based economy, although the actions might seem exactly the same, when you watch it happen, the fundamental philosophy behind the whole system is different. People in a community based-economy do not think of business and community as different entities. There is just community. Business and consumers are both seen as part of the same community, and business arises not from the need to make money regardless of the community’s needs, but it arises from the process of identifying and meeting the community’s needs.

Instead of the control that exists in the legal system, the control is contained in community.

Understanding this difference helped me understand the philosophy on which Taobao, which is basically like E-Bay on steroids, has built its success. Aware of the fact that their only protection is in community, the Chinese are ardent commenters. For every product they purchase, they jump on-line, and they comment. The censorship for a person that cheats, misleads, misrepresents, advertises falsely, etc. lies not in the fact that someone will sue them, but that the community will comment, and close the business down faster than any lawsuit would have done. And with more than 300 million users, the economic cost of trying to control all those relationships contractually, would be huge. It’s much cheaper, and simpler, to just use every person’s small contribution, to build a massive reliable system.

Understanding this difference has also helped me understand the tremendous growth in local small businesses. In ways which I do not yet understand, which could vaguely be approximated to what we call “networking,” but which is far more advanced, because it’s steeped in 6 000 years of culture, the Chinese seem to be sub-consciously aware of the needs of their society – and based on those needs, they are continually working, meeting each other’s needs, and thus fueling an economy. Large businesses are relatively few, compared to the thousands upon thousands of small factories, tiny little shops, ten seater restaurants, single-bicycle delivery services, that really drive the economy. They do not try and build “big businesses,” they simply try to meet the need. The consequence is a much lower entry-level for business. To start up a delivery business, you need RMB 200 for a bicycle. From there, word-of mouth does your advertising for you.

So that’s the one half of the Chinese economy which is now beginning to make sense to me. It’s a community based economy, and I believe that community based economy is much more robust and sustainable in the long run, than a market-based economy.

The other half of the Chinese economy was easier to grasp, because I had learnt Economics 101 that governments do not act economically rational. The entire banking industry in China, as well as a lot of the largest companies, a lot of the universities, construction companies, exporting companies, large factories, all belong to the Chinese government. They are run as government owned companies, and the purpose of this article is not to go into what governments consider in their decision-making. The point is that their rationale is very different from private enterprises. The point is also, that the Chinese government doesn’t run a command-economy, as many would like to believe. Their control of the economy is more indirect, through their ownership in some of the largest companies (and all the banks) in the country. Understanding this, helps us understand the top half of the Chinese economy.

So if you are trying to understand the Chinese economy, it might help to remember that from the bottom up, it’s a community-based free-market, and from the top down, it’s a market that is “controlled” or “inordinately heavily influenced” primarily through government ownership of the major players in the economy, more than through legal control.

I believe that there are lessons in this model, that can help us design economic models that will be more suitable to Africa, than simply trying to impose the market-based economic models that had worked well in the West, until recently. A lot of African countries are grappling with getting their economies going. Why start them off on a model that is end-of-life, when there might be more suitable models that will serve them better in the information age that they have to enter if they are going to survive?

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Who do you Take Personal Financial Advice From?

Posted on 2012/04/18 by Ashton

One of my favourite personal finance writers, a guy who calls himself AJC, asks whether I would take advice from a financial advisor who had lost his house.

One of the readers, Rick Francis from Pondering Money comments on the fact that he was disappointed because “I had read a lot of his articles and thought they were pretty good.”

And I suddenly clicked something here.

In sports, we consider it quite normal that the players and the coaches are different people.  The best coaches seldom are the best players – and the best players seldom become the best coaches – with some exceptions.

From this concept came the idea of success coaching.  The “I will teach you to be rich / successful / happy / etc.” offer from a guy who is not rich / successful / happy etc. but who knows the theory, and can write / speak really well on the subject.

Sometimes models transfer from one sphere of life to another, and at other times they don’t.  Because they sometimes do, we tend to expect that they always will.

In this case, I think it’s a bad transfer.  The coaching model doesn’t transfer well from the sports world to “real life.”

The model that works in real life is something closer to a mentorship model, where the people that have succeeded, can help others succeed.

There aren’t many who have succeeded, who are willing to help – and as AJC has pointed out before, we cannot afford to pay them enough to give us the advice we need.

So be careful whose advice you read.  Be especially careful who you pay, to give you advice about how to build personal wealth.

Are they repeating the theory of others, who aren’t wealthy either?  Or are they teaching what they have proven in real life to work?

How does this apply to business consulting?  Not all business consultants are wealthy.  I am a case in point.  But then I do not try to teach people how to become wealthy.  I consult on specific areas in which I HAVE had success in organisations where I’d worked, e.g. how to motivate employees (I had an exceptionally motivated team) how to manage employee performance (my team performed exceptionally), how to manage change (I’ve overseen some very significant changes) and so on.

So if you want to start a small business, grow it, make it succeed, and sell it, don’t ask me (yet).  Ask AJC, or my friend Matthew Blewett, or someone else who has done this before.  But if you know there is a specific area in your business that needs specialist intervention – by all means ask someone like me.

And in about five years from now, when I’ve made my millions, you can ask me about growing your personal wealth.  But not now.  Because now I’m still learning.  I’ll give you some opinions, and talk about what I learn along the way – but I cannot mentor you on that yet

… and neither can anyone else who hasn’t done it.

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Innovation – The Power to change. If you can figure out how

Posted on 2011/10/24 by Ashton

I think one of our biggest challenges in bringing new ideas into our organisations and societies, is that we switch from “creative” to “implementation” mode, and so kill our own ideas.

Here’s my explanation:

Organisation Design not Creative or Innovative in Itself

It seems to me that because of the fact that our organisations are still mostly just derivatives of designs that came about during the industrial revolution, they are generally not well structured to foster creativity, innovation or invention. The ones that succeed in fostering these three and successfully applying these to create competitive advantage, seem to either have found ways to do this despite themselves, or because they are literally innovative from the ground up. With that, I mean that the structure, the management style, everything, is unusual – the very design and functioning of the organisation itself is creative and innovative.
For the rest of the “normal” us, who live in “normal” organisations, our organisations are defined by structure and driven by processes that in many ways draw on the thinking of the productivity and efficiency era. So when we try to bring innovation and creativity into these organisations, we try to identify where it fits in the existing structure, management and business processes. Sometimes it doesn’t so we create a new process, or a new structure for it. Like a creativity committee, or we have brainstorming sessions.

We function in Modes of Operation

It seems that the challenge then for organisations is to somehow get this creativity and innovation out of these compartments, and integrated into the organisation in such a way that it actually produces changes that are of real value (other than the psychological value of the good feelings we get from designing new things).
I think the challenge is that we tend to function in various “modes” as organisation members. I’m a senior manager in an organisation. So when I’m in an Executive Committee meeting, I am in “team member” mode. When I’m in a meeting with a division, I’m in “team leader” mode. When I’m doing team development with a division I’m in “facilitator” mode. And so on. In the same way, when I’m in a brainstorming session, I’m in “creative” mode, and then if we have a planning session after that, based on the selected ideas, I go into “planning” mode. At best, if our process defined the planning process as an innovative process, then I first go into “innovation” mode, and then into “planning” mode.

Creative Mode is NOT Implementation Mode

Here comes the rub then. “Planning” mode is a step or two away from “creative” mode. It is at least one step away from “innovation” mode.
And where do we go from planning? We take the high level plan, and we give it to middle management, and we tell them to go into “detailed planning and execution mode.” Now we are two or three steps away from creativity.
So we decide that we need creativity further down in the organisation, or we need more “buy-in” so we either add the middle and junior managers to our original creative forum, or we create more “creative committees” further down the organisation.
However, wherever the creative committees are, they still go from creative (brainstorming) to innovation (planning how to make the ideas valuable), to planning how to actually implement this, to then actually implementing. But it seems that most organisations’ biggest challenge is not on coming up with new ideas, but on IMPLEMENTING the new ideas – and the reason I think is that the ideas are created in an environment that fosters creativity – where everyone is in creative mode – but then implemented through a process that does not foster or even value creativity. And as anyone who has ever implemented anything knows, the moment you start implementing your plan, the plan changes, because there are a hundred things you just couldn’t have foreseen.
So where we then need creativity and innovation – to continually come up with new and novel ideas and methods of HOW to take this initial, great idea from idea to product or service, to market, it is lacking, because in those parts of the process, we are in “implementation” mode, and not in “creative” mode.
And it’s not just because it’s different people. It can be because the same people are in a different mode. I find this even in my own life. I come up with a great idea, and then I begin to try to implement the idea through the ways of working I am used to. As soon as I do that, I’ve moved from creative mode to implementation mode. And unless I very consciously remind myself to challenge the very process through which I am working, I find myself squeezing the idea into my way of work, rather than to revolutionise my way of work to best suit the idea.

We Need More Creativity And Innovation when we are in Planning and Implementation Mode

So a lot of creative thought, from the creative gurus has gone into trying to help us understand how to come up with good ideas, and how to take these ideas and convert them into innovations and inventions that can be of social or commercial value. But actually, our challenge is not so much that. Our challenge is how to remember to be creative in the way we (where we includes ALL members of the organisation) do our day to day work, in order to successfully give these great ideas an environment in which to become all they were meant to be, and how to create organisations that won’t disintegrate in the potential chaos that could be created if we actually got this right.

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Our Purpose is Eternal. But It Is Also NOW.

Posted on 2011/10/11 by Ashton

Eph 1:18 I pray that the eyes of your heart may be enlightened in order that you may know the hope to which he has called you, the riches of his glorious inheritance in his holy people,
19 and his incomparably great power for us who believe. That power is the same as the mighty strength
20 he exerted when he raised Christ from the dead and seated him at his right hand in the heavenly realms,
21 far above all rule and authority, power and dominion, and every name that is invoked, not only in the present age but also in the one to come.
22 And God placed all things under his feet and appointed him to be the head over everything for the church,
23 which is his body, the fullness of him who fills everything in every way.

Today, many people tend to read these kind of scriptures to only apply to the future. But verse 21 uses the word “also.” It seems that when this was written, people tended to read these only in the present, so the writer had to focus them a bit further into the future.

The church is called upon – to manifest this scripture. To be the instrument in God’s hand through which He will indeed begin to fill everything in every way, in which He will be set up as the head over everything. And this can only happen when the church grows up to the fullness that God had prepared for it.

And this cannot be done if the church is only doing the work of preaching a simple “believe in Jesus and you will be saved” gospel. This can only be done if the church practically manifests a “Your kingdom come and Your will be done on earth as it is in heaven” God is in everything we do, gospel. This can only be done if the church works through well run organisations and communities, speaks into every government, and indeed becomes the voice of God’s wisdom into every aspect of society.

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