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The Empowerment Economy

Everyone knows something is wrong with our economy: inequality, poverty, extreme wealth, corporations without accountability, and much more, and yet our world has never had more powerful tools and techniques to make for a better standard of living than ever before. The world collectively searches for a new system, maybe it's capitalism 2.0, or socialism, or maybe something else.

I've thoughts a lot about this over the years, and I came up with my take on this that I call the "Empowerment Economy". Essentially, I think we're past discussions of capitalism vs. socialism. We already have elements of both and informed technocrats largely debate around the edges. The problem is that neither of these systems really speaks to the problems and opportunities available today, but come from ideologies centuries old.

My core thesis is essentially that neither economic system has institutions with a direct incentive to seek out and help people achieve their best life. Capitalism as we know at the very least needs to be regulated to not end up deeply exploiting the most vulnerable, but even with regulation the market system alone is not enough. At the same time, socialism creates public institutions that become subject to political capture, ossification, and decay. These social service bureaucracies are only abstractly accountable to their users through long chains of elections, appointments, and public outcry. Unlike their for-profit counterparts who ideally have to earn customer's business in a competitive market, they rarely get upgraded when it literally requires an act of Congress to achieve real reforms, and those are always highly political games not truly focused on the outcomes for those needing the services.

In the Empowerment Economy, there are public and private elements, but the core driver a direct focus on the individual themselves and also not just on those having severe life problems, but thinking more holistically about how to orient all of society around empowering people to improve and live their best lives. In my first talk at the Santa Fe Institute in 2017, "Towards an Empowerment Economy", I introduced the above concept and focused on three core themes:

Funding the Unfundable: New forms of finance that allow markets to fund a broader range of projects, organizations, etc. that are currently not being adequately funded. Doing so would drive innovation, demand for labor, and demand for new goods and services they produced.

Human Capital Finance: Any type of finance that can help improve someone's skills, job, etc. that will allow their income to increase.

Digital Finance: That the recent increases in digitization and computability of everything is a core driver unlocking new kinds of finance. The thesis statement being "Where there is risk and computability, there is finance."

The talk goes on to look through emerging forms of each theme and how they might play out.

After more thinking on the topic, I gave an updated talk at the New Economy FooCamp that focused around thinking about these ideas as the next evolution our both our economy and in public services, looking at how business and the government coevolved to build our current institutions. An example of this being how the public school system was a response to broad educational needs of the industrial revolution with a need for more literate and numerate workers to staff the factories, drafting rooms, and bureaucracies of that emerging world. I see today's problems largely as the private sector being ahead of (and perhaps actively restricting) the public sector. Which is also inherently short sighted.

This talk also provide a table of some of the newest financial instruments I've come across for providing all kinds of novel financing.

After thinking in broad strokes with the previous two talks, I then thought about how to specifically implement the human capital aspect in this very brief talk below that I gave a FooCamp 2018 "Building a Human Capital Market". Let me elaborate a little as the talk was rapid fire and slides don't have a ton of info as it was spoken live.

Essentially, my thesis is that nearly everyone is underemployed - likely both from their current level of skills / experience, and even more so from where they could be given more education and other interventions. The reason for this unemployment is that our institutions, safety nets, etc. haven't evolved to keep pace and are in fact not even the full solution, to put it inhumanly, improve of stock of human capital - ie make everyone more educated and productive.

I compare that all financial markets have been looking for new assets classes to invest in - driving prices of stocks, real estate, etc. higher and higher, and how at the same time our people are uninvested in and could realistically improve their productivity. It looked like a solution to investigate further. The key is that you need a new kind of asset class to actually take Wall Street's money and funnel it to Main St. people. This class is what I call Human Capital - which can take many forms (with equity, debt, or derivative-like structures). One of the most common is a debt-like instrument known as the Income Share Agreement which essentially is a loan whose payments adjust based on a percent of your income and the payments only start after some significant increase in your income - so the financiers have an incentive to make you earn more to get their money back on time or even faster.

This strikes a lot of people as something like indentured servitude, and they're not wrong, if it was just unregulated I suspect that it would lead to exploitation - like pretty much everything. The question then is how best to do so. I think the best approach is to initially develop a kind of "Good Finance Seal of Approval", like Organic or LEED certified, it would have certain criteria the ISA contract, etc. would have to meet in order to be considered ethical. To do this, there has already been work into contract forms that should / shouldn't be used by human capital pioneer Miguel Palacios Lleras in "Investing in Human Capital". I also think that additionally there need to be tools available to borrowers that allow them to understand what they're getting into with respect to various outcomes, risks, etc.

Palacios' work centers around funding traditional education through a sort of ISA bank / credit issuer. In my conception, I look at a broader system that would (1) incorporate a very broad set of possible inventions that would improve outcomes, and (2) look into the financial viability and scalability of securitizing these outcomes. Think: mortgage backed securities, and yes I know the connotations :-) I look at another form of ISA issuer coding bootcamps like Lambda School who are bundles of: student vetting, ISA / finance, educational intervention, and job placement service. This is pretty normal in new industries where the initial businesses have to provide all aspects of their product. Later on when the market matures, they end up unbundling into an ecosystem of interrelated businesses - kinda of how factories used to generate their own electricity from on-site power plants. I see Lambda School evolving out of most of those businesses to let others focus on ISA issues, job placement, etc.

The talk then covers thinking through intervention ROIs based on their place on the risk-return curve such that you can see which ones would be market rate (ie fundable today) or not. The idea being that even for the non-market rate ones, they may be able to see and have motivation to seek higher returns (based on increasing efficacy or reducing costs) or lowing risk by perhaps getting better at choosing people for their intervention. The interventions are looked at as very broad and beyond standard educational offerings to things like giving someone a cellphone, money to move to a new location for a job, helping them with their interview skills, etc. in ways that might very quickly give them an income increase before even needing to add long-term options like education.

Further, the talk considers the currently scarce information on using multiple interventions at the same time which often has synergistic effects. For instance, many precarious workers may suffer inordinate pain due to a car breakdown that gets them fired. Even if you get them a better job, they may need a better car, maintenance, etc. in order to to keep it.

This information scarcity problem actually seems like the core issue in the space. I've since talked with investment banker, securities rating agencies, etc. and all of them show interest in an alternative asset class of human capital and have shown me due diligence docs that convince me that it's really possible to make such a financial market. The core problem for any new asset class is the lack of historical data makes it hard to price the assets because risk-return is unknown. This means that the best plan would likely involve some pilot with downside risk taken on by a non-profit/impact investor to allow the whole securitization process to be tested with real investors while being able to retain them due to the non-profit hedge. There are still many factors that have to be figured out for this to work, but from my investigations it seems like this may be a possibility. It's also intuitive: people already get loans for education, cars, etc. that give them more than enough economic advantage to repay the loans. This is just saying that there exist a whole class of ignored interventions that may be out there to help both poor and middle class alike.


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