Social Enterprise; The Vetting Mechanism; #1


I read many articles with rants like “all this social network stuff is cool – but show us the money”.  Innovation Economics offers a way to see new markets and new businesses that are currently hidden by “the old way” of doing things.   This article is part of a series called ‘Business Plans of the Innovation Economy” which will identify ways that Social Networks can command huge markets and drive vast revenues – if, and only if, they align themselves in a specific way….

Managers manage through experience. They observe a situation and compare it to prior situations they have encountered. Through a process of intuitive (statistical) analysis, they calculate the probability of success based on the success or failure of prior experience. This is the reason why managers are often older and also why youth correlates with inability to manage.  The depth and breadth of one’s experience is often called wisdom.

Today’s problems, business opportunities, technological change, and competitive strategies are so complex and so integrated across the globe that no single person can accumulate in a lifetime the experience needed to manage at what is called a Pareto Efficiency. A Pareto Efficiency, named after Italian economist Vilfredo Pareto, is an economic condition where a one’s actions benefits at least one person while leaving no other person less better off.

The problem with the “top-down” management structure is that the “top” no longer has a statistically relevant sample of prior experiences from which to fully understand the probable future outcome of their actions – the consequence is that someone always gets screwed (Pareto Inefficient).

The concept of Pareto Efficiency may be what people are today inadvertently calling “sustainability”.  I recently saw the movie Syriana with George Clooney about the petroleum industry in the Middle East.  It was a convoluted mix of 5 different stories.  Each story had its hero doing what they thought was in the best interest of those they represent – “the common people”.   Yet the combination of actions carried out by these heroes was absolutely disastrous for all of them.  So no matter how benevolent one’s intentions are – and I believe that most corporate managers are acting in the highest integrity that they know – this systemic failure of knowledge will always hurt someone, continually adding to those already at the fringes.

The world of imperfect information is therefore the enemy of sustainability.   Perfect information is when everyone associated with a business transaction has the exact same information as everyone else.  Perfect information is what makes markets efficient and decisions rational.  Agreement is perfectly mutual, supply and demand are perfectly aligned, all risks are perfectly predictable and cause and effect are perfectly transparent.

It follows that any business plan that simply improves information in a market can command revenues proportional to the degree at which market efficient is improved.  For example; Ebay owes its 50 Billion dollar market capitalization to the feedback system which supplies improved information in a market.  Carfax, The FAA, Craigslist, Democratic Government – all have vetting mechanisms that make their prospective markets more efficient.

Likewise, when the vetting mechanisms fail, the market fails.  I attended a lecture once with Charlie Munger, CFO of Berkshire Hathaway.  Regarding Enron, he said (paraphrase) “It’s tragic enough when the accounting profession goes bad, but God help us if we lose the engineers”.

This brings us back to management.  The business plan of the millennium will be the art and science of perfect information.  We know that no single human can accumulate enough experience, however, we also know that perfect information can reside in many people – it is simply a matter of finding the perfect group of people who collectively possess perfect information.

This relatively simple task is entirely and irrevocably the domain of Social Networks. Social Networks are sufficiently enabled by current technology to perform this essential and highly lucrative task – if and only if they align themselves accordingly.  Social Networks need to hold a complete and detailed inventory of resident knowledge.  Social Networks must cooperate to codify social capital, creative capital, and intellectual capital so that computational methods can be used to assemble unique collection of persons holding unique collections of experiences. That unique set of knowledge assets must then be deployed precisely in the market, ideally targeting specific transactions.

If Real Estate Agents can command 6% of a gazillion dollar housing market and bankers can take another huge chunk – and not even do a very good job at providing perfect information – only to get bailed those at the fringes.  Social Networking have a moral, ethical, and entrepreneurial obligation to compete in the sustainability game.

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