In a previous blog on this site, “Diversity and Inclusion in Market Systems Programming,” contributed by Anoushka Boodhna and Devi Ramkissoon, the authors raised an important evidence-based discussion on why diversity and inclusiveness are central to more durable economic growth. During many conversations around resilience and economic growth at the 2019 Market Systems Symposium, I found it useful to reframe the purpose of a market system. If you can, think of a market system as evolved social mechanisms that, when most effective (i.e., provide the greatest good for the society), can proactively manage risks, solve problems and generate more resources. The challenge when market systems are not working at their best is they often become tools of the powerful and connected to extract resources and consolidate power. So the question remains: what to do when a market system is not working effectively for the wider society? Specifically, there are three interconnected and interdependent capacities that a market system requires to effectively perform its functions for a society. Without these capacities a market system cannot effectively allocate human, financial and other resources in response to emergent risks and opportunities. These three systemic capacities include:
Systemic Capacity 1 - Bridging Capital Capacity: Through a combination of many mechanisms, functions and norms, a society can lower the social, political, and economic costs/risks of agents to engage other agents outside their identity group. Central to this discussion is how a society tends to either amplify or lower the perceptions of barriers between identity groups. Societies that lower the cost/risks evolve the following aspects/components that form effective guarantee mechanisms that de-risk bridging capital:
fair and equitable judiciary/disputes resolution mechanisms,
cultural norms that reward individual accomplishment (i.e., over loyalty),
cultural norms/morality that value equity (i.e., across identity groups),
civil society that actively advocates for its constituents on the basis of equity/fairness,
effective, fair, evidence-based, and participatory political system that constantly develops/adapts regulations and laws that encourage testing, failure, and cross group interaction (i.e., contract law, bankruptcy, ease of registration, ease of compliance, etc.),
market forces that reward value add and sanction extractive strategies and tactics,
formalized social safety net services/insurances delivered through public and civil society systems, and
media that is independent and advocates for its audience on the basis of evidence/equity/fairness.
Through a combination of these components/mechanisms/etc, the cost/benefit of bridging capital can be substantially increased, which in turn, increases the level of interactions among agents across identity groups. Low costs and/or higher rewards for agents bridging across identity groups to work with other agents on goods and services like improved seeds, better IT apps, more effective health remedies, etc., are essential for a market system’s ability to innovate ways to mitigate, neutralize, or avoid risks, as well as take full advantage of emerging opportunities.
Systemic Capacity 2 - Churn: Churn is the process of agents and firms engaging in a cycle of connecting and testing ideas/relationships, and if the ideas/relationships add value, then they are supported with more resources (i.e., human and financial). If the ideas/relationships do not add value, then the agents/firms separate. When a system has an effective moral bridging capital capacity, the agents can cost-effectively engage with new agents/firms creating a new combination. High performing market systems can have failure rates as high as 80%, which is important in allowing significant testing and retesting with many combinations of agents/firms. The more a system includes as many people as possible in a cost-effective process of testing and retesting combinations, the higher the likelihood that the system will generate novel and increasingly more effective solutions to emerging risks/opportunities. This process creates an internal capacity for the system to constantly adjust resource allocation (i.e., human, financial, etc.) to solve/address complicated risks/opportunities in ways that demonstrates real value addition. The idea of churn also highlights the tension between agent and system level functions. From only an agent level perspective, high rates of failure could indicate a problem, but from a systemic level it is central to a system being inclusive, resilient and competitive.
Systemic Capacity 3 - Commercial/social feedback: Feedback in market systems is related to how agents/firms learn what the society thinks/defines as adding value, as well as sets the guidelines for how the system sanctions and rewards market behaviors. It is through effective feedback on collective demand that a society communicates how it prioritizes risks and needs that allow agents and firms to reframe that information into market opportunities for new products or services. When markets are effectively oriented to add value (i.e., solve problems, reduce risk, improve lives, etc.), feedback will evolve to sanction market actors that are unresponsive to demand and/or actively extractive in their strategies/tactics. In addition to less demand being a common sanction, other types of feedback, especially across other interconnected systems, would emerge. For example, poor customer service experiences can be amplified via word of mouth in community systems, media can amplify extractive behaviors via investigative journalism, civil society can advocate for their constituents publicly, and the legal/political system can act where cases flaunt laws. The combination of certain feedback evolving to be more influential is central to a market system favoring value addition.
It is through the interdependent interactions of these three capacities that a market system can effectively allocate resources to various combinations of people and ideas that most resonate with the society, as well as an ability to define relative value between different types of risks and associated products and services. A key point here is how market systems self-organize to be responsive to consumer/societal demands by innovating ways to meet demand and add value (i.e., by mitigating, neutralizing or otherwise managing risk proactively). These dynamic allocation processes ensure enough diversity and inclusiveness are integrated into the market system to best secure the wider society’s ability to proactively manage risk and add value.