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Value networks, carbon allowances & measurement

October 25, 2006

I recently entered a lion’s den on the value-networks list serve by stating that: I think qualitative assessments where the questions are explicit and thus subject to gaming of outcome are fatally flawed and any method based on them can provide indicative perspective at best. There were various thoughtful responses including this from Verna which I post with my response. It also gave me an opportunity to raise Aubrey Meyer’s idea of tradable carbon allowances which to me is up there with the Grameen Bank in terms of ideas, and hopefully one of these days will be in execution as well.

Verna’s Response

This is in response to Dave Snowden question:” But VNA is based on an assumption that you can make value explicit is some way?”

VNA is based mostly on an objectivist theory of value. There are other theories of course.

VNA assumes that value is primarily subjective and negotiated, whether at the individual, group or societal level. So it is not value itself that is made explicit (probably impossible.) What we make explicit are our agreements ABOUT value. For example, the monetary system is a sociatal level agreement about how to handle the question of value. Generally speaking people think of the economic value of something is how much a product or service is worth to someone relative to other things, often calculated in financial or monetary terms. Money is simply an artifact that supports the execution of our societal level agreement to use a common unit of measure to calculate value. This agreement offers us certain conveniences and also has certain unintended consequeces such as a disconnect between consumption and the means of production, meaning we don’t have to see or consider the factory conditions that produced our designer sneakers. (money as a medium of exchange is a whole ‘nother topic in and of itself).

Where VNA uses the term intangibles for non-financial assets or deliverables others consider these as holding non-econonomic value. VNA is based on the assumption that intangible assets and exchanges are as important to the success and health of an economic system as are those that can be monitized. Intangible value is PART OF the economic system and not outside of it. We have made a somewhat arbitrary separation of economics and society (despite economics being a social science). VNA is basically challenging us to put the “social” back into economics and is one way to come at the question of value conversion.
(http://en.wikipedia.org/wiki/Value_conversion.)

What VNA offers is a way for people to more deliberately make explicit their agreements about what has value in both financial and non financial terms in their relationships. When we are working across so many different cultures and struggling with ways to collaborate more effectively I believe this is a useful exercise for sensemaking and coherence. Others might disagree with the value of doing this. In a way, it supports a special kind of “story-telling” about what we believe is important. Are any of the value exchanges indicated “absolute” value? Probably not – not even monetary transactions if one buys in to the objectivist theory of value.

My reply to Verna

My thanks to Verna for this detailed and honest clarification. My view is that methods that acknowledge their theoretical base and therefore qualify their applicability and great value, and researcher/practitioners such as Verna with this level of intellectual integrity are a pleasure to talk/work with.

Some comments:

The example of the monetary system is a good one both as an example of an artefact of cosiderable utility and in terms of the limitations (the disconnect between consumption and means of production for example). However we also need to acknowledge that although money is an artefact, it is one that have evolved its social use over centuries. Its use (not it) is a strange attractor in complexity terms in that it provides limits on behaviour. although the end point of any trajectory cannot be predicted. We cannot choose to abandon it other than as a part of some catastrophic failure. So although monetary transactions do not have absolute value in theory (there is a good article on this in the New Statesman publication date 23rd October by the way) I would agree with the objectivist theory) in practice they do. We no longer have a choice about their use as they have resulted from an evolutionary process. So within the boundaries of a phase transition they have absolute value (there I disagree with objectivist theory which I think needs to update its science)

The question them comes of who we achieve change. Now from a complexity perspective this is done by changing the nature of agent interaction, managing boundary and attractor mechanisms. It can not be achieved by rational design (a mistake made by the Intellectual Capital Measurement guys (ICM). However evolution is possible. I am very interested (to take one case) of the use of carbon allowances. Under this idea, from Aubrey Myer, each member of the human race would be given a carbon allowance reducing on an annual basis. This allowance is divided into tradable units and every time you buy buy something you loose units from your allowance. If you do not have enough units the price to you rises to cover the short fall. It thus creates a powerful incentive to become carbon efficient. The bulk of the world’s carbon allowance is not give to individuals, but instead is sold to government and industry on the basis of a weekly tender. This type of intervention represents an evolutionary or complex systems approach in that it seeks to change the evolutionary path not redesign it on idealist grounds. It also seems to be eminently doable and is more practical than the Kyoto Protocol. There is a good article about this in the 23rd october edition of the New Statesman. The Grameen bank is another example if this type of evolutionary intervention to change the boundaries of a system on a naturalistic, rather than an idealistic basis..

In the above two cases the “social” is put back into “economics” by changing the rules and monitoring for evolutionary development – not by design or assessment of value

Now when we come to intangibles we have a problem or two. The Intellectual Capital Movement effectively failed to get people on board with reporting as when push came to shove (to use an old British expression which I hope translates) cash, profit and growth dominated. The other major problem to my mind is that making explicit agreements about what constitutes value is possible in a contract negotiation where you have multiple “gives” and “takes” and a settlement. I am less convinced that it is sustainable on a daily basis.

Now this leads to a general statement about all systems dynamics and most systems thinking (in contrast with complexity) of which VNA is a part. The value is in the act and the time of creation. By going through the process of making things explicit and clear, value is created for the participants in the process within the time frame that their implicit assumptions apply. As such a specific tyupe of story can be created about relationships which is of value. So as a way of gaining perspective and enabling conversation within a time frame I would support VNA.

Now I think Verna is making no greater truth claim than that. She says (and I agree) that such approaches are a “useful exercise for sense-making and coherence”. However others claim more and the SNA guys (where they rely on gamable qualitative inputs) are to my mind largely beyond the pale in their claims for objectivity. However once declared the result is gameable and thereafter use fails either because (i) it is gamed, (ii) the models that made so much sense when created are too complicated to maintain or (iii) the context shifts and the cost of model recreation are two high.

Measurement is to my mind key here and it has taxed my mind for the best part of a decade since I saw the failure of IC measures. I and some others were convinced at the time that the only way IC was going to work was to break away from the attempts to design a formal method (there were several competing approaches) and what was needed was to create an ecology in which different methods could compete for acceptability. Rather as the current economic model of a company evolved over 400 years from the coffee houses of London and the practices of the Dutch East India Company (the first joint stock company) so IC measures would have to evolve. Our plan (which had the backing of one of the major international accounting firms, my employers at the time IBM, APQC and others) was to create a market environment in which the 400 years might be compressed to 40 or even 4. Now this fell apart for a myriad of reasons and I think the window for IC measurement as part of a balance sheet type structure has now gone; and it may have been the wrong route to follow anyway.

However, I do think we can make progress by looking at switching from outcome type measure to ones based on impact and also to creating non-gameable measures of value. We have, with Government funding being working on these. Provisional thinking can be found in a paper pre-hypothesis research on the web site and I will most more thinking there shortly (this is a part of the networked government initiative that we are establishing). For those interested I plan to present this (and invite participation) at a session to be arranged at KM World in San Jose CA on the 2nd November

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