064 – Defining Simplicity: When Money Isn’t Enough

[00:00:00] Santiago: Hi, and welcome to the IDEMS podcast. I am Santiago Borio, an Impact Activation Fellow, and I’m here with David Stern, one of the founding directors of IDEMS.

Hi, David.

[00:00:10] David: Hi, Santiago. Looking forward to another discussion.

[00:00:14] Santiago: Yeah, me too, and I’m very picky. I’m very pedantic.

[00:00:20] David: I know, I like it.

[00:00:22] Santiago: And I am the first person to edit every episode, so I really am one of the few people who have listened to every single episode in this podcast series. And you had an episode recently with Lucie, the title was simplicity versus complexity. And you mentioned something that I thought was an interesting classification of a simple problem whereby if you can throw enough money to solve it, it becomes a simple problem.

[00:01:01] David: No, so it is by definition not a wicked problem, doesn’t have complexity, if it is solvable just by throwing money at it. Yes, I believe that. So that is a form of simplicity.

[00:01:14] Santiago: So a form of simplicity for a problem.

[00:01:17] David: Is if it is solvable just by throwing money at it.

[00:01:22] Santiago: Okay.

[00:01:23] David: You’re going to pick me up on something, aren’t you?

[00:01:24] Santiago: I am, I am, and in fact, just anecdotally, a lawyer once told me that if a problem can be solved by throwing money at it, it’s not a problem but a cost.

[00:01:39] David: Yes, it’s the same thing. That’s the same principle.

[00:01:41] Santiago: Yeah. So, there was an episode way back, I can’t remember what episode number it was but it was a very interesting thought experiment. I remember the title, it was Who Wants to be a Trillionaire.

[00:01:57] David: Yes, yes. Yes, I remember the episode. And your claim is that, if in that episode we were doing a thought experiment, and if you were a trillionaire and you were trying to give it all away, you could actually eliminate absolute poverty, in theory.

[00:02:10] Santiago: That’s right. The thought experiment suggested that.

[00:02:15] David: But the important part there is in theory.

[00:02:17] Santiago: Yes.

[00:02:20] David: So that problem, in theory, absolute poverty is solvable, and actually this is not me the first person to say this was something which, there was a really nice book called The Bottom Billion, which actually broadly, the idea was, at that point in time, there were 7 billion people, broadly, 1 billion that are considered wealthy by some order of magnitude, 1 billion that’s the bottom billion, they’re the ones in absolute poverty, and then there’s everyone else in between.

And this is a very interesting way to look at the world. And it’s totally different from how most people see the world in their context. Very interesting book, I really like it. But, that’s not the point. The point is that the hypothesis, and this is a hypothesis which I first heard over 20 years ago now, was that actually absolute poverty was a solvable problem by just throwing money at it.

Now, nobody at that point was talking about universal basic income, that wasn’t really on the cards, but they were looking at solving it in other ways. There was this interesting work around millennium villages.

[00:03:24] Santiago: You mentioned that in the episode Simplicity versus Complexity.

[00:03:28] David: Okay, yeah and that was a very interesting set of work, and there’s good reasons why it didn’t work, but that’s a separate discussion. But the point which I think is so interesting on this is that the theoretical idea of the universal basic income of a dollar per person per day, and how much it would cost to actually implement that, that’s a really nice thought experiment at eliminating poverty, but if you wanted to actually implement it, ohhh….

How do you get that dollar a day to everyone? There’s people who have done similar things. They tend to do it in slightly bigger chunks, let’s say 30 a month instead of a dollar a day. And there’s reasons why that’s not the same. But, how do you actually make those sorts of micro transactions to literally 7, 8 billion people, however many we now are?

[00:04:19] Santiago: Yeah. But how do you reach them all?

[00:04:21] David: I mean, a lot of them have phone numbers and in low resource environments, if you have a phone number, you can be sent money. So in some countries, for those who have phones, you could just register their phones and send them a micro transaction every day. It wouldn’t cost much. Other people are not on those, and the penetration rate isn’t always as high as one would like, and so on. So there’s a whole set of interesting complexities that come out if ever you actually wanted to implement it. The complexity isn’t in the theory, it’s in the implementation.

[00:04:55] Santiago: And that’s why it was simply a thought experiment.

[00:04:59] David: Exactly.

[00:05:00] Santiago: Rather than a proposal for a project or something of the sort.

[00:05:05] David: Yes, exactly. I don’t make many proposals for projects worth a trillion dollars as a general rule of thumb. The only group I know who do that is OpenAI. A whole nother story.

[00:05:19] Santiago: Indeed. So as a thought experiment…

[00:05:23] David: Yes.

[00:05:25] Santiago: Under the premise of if you can throw money at a problem, it’s simple. Eradicating absolute poverty could be a simple problem.

[00:05:34] David: And I am not the first person to believe that. And this is, as I say, a few years ago, this was recognised as a thought experiment. It should be, we should have enough money in the world to eradicate absolute poverty. And this is as a thought experiment, it’s an easy problem. You just need the right type of redistribution of a tiny amount of wealth to resolve this. Absolute poverty should be solvable.

[00:06:02] Santiago: Yeah. This all makes me think about two very different countries, but similar in many ways, Kenya and Argentina, where both have the privilege of being able to produce huge amount of food, yet there are starving people in both countries.

[00:06:31] David: Those examples are really interesting, because both of those would be instances of country, where actually, removing absolute poverty wouldn’t actually make that big a difference. Because most people in those countries who are in poverty are in relative poverty rather than absolute poverty. And this is the thing, relative poverty in those countries is still really bad. But getting people a dollar a day, in either context, might make a difference, but it might not be transformative in those environments. They’re in some sense too developed already, which is interesting to consider.

I can absolutely see other contexts that I’ve worked in where a dollar a day per person would be transformative to the society. But I’ve lived long enough in Kenya and I know enough about Argentina to know that probably there are people for whom this would be important, but this would not resolve the poverty issues in those countries.

[00:07:34] Santiago: Yeah, and I imagine you’re mentioning countries like Niger where you grew up and so on.

[00:07:38] David: Yeah.

[00:07:39] Santiago: But my thought was, if there is enough money in the world to eradicate absolute poverty, the thought came to my mind there is enough food to eradicate…

[00:07:53] David: Hunger.

[00:07:53] Santiago: …hunger.

[00:07:55] David: Well, you’re just reinventing the sustainable development goals. Zero hunger, zero poverty. These were some of the sustainable development goals. And there’s thought experiments trying to work towards these. Absolutely. And one of the real dangers I feel at the moment is that there was a lot of very interesting work that happened around these sustainable development goals, which included zero hunger, as well as zero poverty, in terms of absolute poverty.

But progress has in my opinion not only stalled, but it seems almost governments are going back against this. This isn’t on the agenda. And I think this is possibly, COVID meant that people prioritised other things and the sustainable development goals became less important.

But yes, that is another very, in theory, simple problem, where the theoretical solution is easy.

[00:08:56] Santiago: Yeah, the resources are there, it’s just a distribution problem.

[00:09:03] David: If that were so simple, because of course it’s not just a distribution problem, because it’s a markets problem. And it’s not just a markets problem, because it’s actually a global market, and it’s a global trade. And it’s therefore about power, and it’s about all sorts of other things. One of the things where you talk about hunger crises in Africa, it’s so ironic to me that the Ukraine war, when the wheat stopped flowing, Europe didn’t go hungry, Africa did. This is the reality of that.

It’s a really serious reality that somehow our global systems are so interconnected, which is great in so many ways, but that doesn’t necessarily lead to stability. And this is, again, it’s a, it’s not just a distribution problem, there’s that complexity which comes in.

[00:10:00] Santiago: Yeah, interestingly, in Argentina the previous government was quite protectionist in many ways. They put a ban on a percentage of meat exports so that stock would remain within the local market because it’s so much more profitable for the producers to export all the meat. And there are people, there are countries willing to pay really good money for Argentine meat.

[00:10:32] David: Of course, known as being good meat. But I think one of the interesting things there is that if you actually look at that, you know, that reduction in costs of transport, this is actually one of the things which has led to that. That, in some sense, transport costs are so low, relatively speaking, that that means that the differentiation in price, the markup because of transportation, is not high. So this is where technological advances which reduce the price and which therefore reduce friction to global markets, they can have some really unintended consequences.

And your example of Argentine meat being exported. This played out even more severely with quinoa and that really had, again, an international market was created and it destroyed local communities in really interesting ways. And so this is something where this has been played out many times in different contexts, in different ways.

And I guess we’re coming back to this sort of point that if a problem is simply solved by money, it’s a simple problem. But most problems aren’t a simple problem, because if you solve them by just bringing money in, you’re actually creating other problems. And that’s the nature of a wicked problem. You have unintended consequences.

So of course, quinoa farmers, you’d think farmers being able to sell their crop at a good price, this is a good thing, that’s nothing but good, everyone will be better off. So to have communities decimated and much worse off because of the increased price of their crop is a really counterintuitive set of problems. But the quinoa farmers in the Andes, this is a well documented case.

[00:12:37] Santiago: That’s very interesting. And I’m familiar with some aspects of the Argentine agriculture industry and a lot of producers just store grain in silos until the markets go up and they keep that potential food, potential solution to hunger for economic reasons and there’s so many ethical considerations. Is what they’re doing unethical, if they want to maximise profit, if they’re a business that has maximising profit as their objective.

[00:13:25] David: One way to look at that historically is you have regulation and you have business which are then playing each other, one which is just focusing on maximizing their profit and the other which is trying to regulate for the good of society. We come to actually social entrepreneurship which actually tries to balance that within itself. Can that compete? I believe we’re entering into a space where actually elements of self regulation where you’re remaining profitable, but you’re not maximizing profit, could actually on average outperform.

And this is where it’s not that obvious, but part of the reason could be that if you can actually, through that process, create stabilised markets, the only reason it makes sense to store is not because that necessarily will give better returns, because storing is expensive. But it’s the fluctuations in the market, and therefore the instabilities, that make it profitable to store. So why do fluctuations happen? They happen because of hunger, because there’s times when there’s a shortage and there’s times when there’s not. If you had enough people who weren’t storing, where you actually reduced the fluctuations, then the incentives to store might be different.

[00:14:44] Santiago: There is another complexity at play in Argentina that there’s taxes on agricultural exports as well and exchange rates that are differentiated according to what type of transaction you’re doing. And that exchange rate fluctuates as well. It’s not just the market that fluctuates.

[00:15:08] David: This is exactly where you take a country like Argentina which in many ways has so much wealth, and the instability, that fluctuation of the economy as a whole, of the currency, that are within society, that’s what’s creating these opportunities for people to be exploitative and actually play the system for their personal benefit.

If you have societies which are more stable, then the incentives to do that are less because you’re going to reap less rewards. If the fluctuations are low, then your payoffs are low for playing the markets to look for those fluctuations. So this is where that complexity comes in really interesting ways. And it’s sort of societal impacts from this, and also the nature of societies just transform the opportunities in ways which are counterintuitive, they tend to lead to cycles. These could be virtuous cycles or vicious cycles.

And then vicious cycles, if you’re making more money by causing the grain market to vary more, to be more extreme, and then you do that more and you do that more and so on, and the incentives are such that’s the case.

[00:16:22] David: And so these are virtuous or vicious cycles. And it’s so easy to get into these if you don’t look at a system. And this comes back to, this sort of simplicity against complexity. If you just look at simplicity, you might solve what appears to be the problem and in do so create a virtuous or a vicious cycle without knowing.

But if you’re understanding the complexities of the system, you can be looking for the virtuous cycles and trying to avoid the vicious ones. And this is the thing, this is where the complexity becomes so important.

[00:16:58] Santiago: Yes. And another worry that you touched upon is on market fluctuations and how some markets are almost artificial. I heard a story, I don’t know how accurate this is, or how verifiable this is, but it said that if rather than buying an iPhone since the first iPhone, if rather than buying an iPhone, you bought stock on Apple for the value of that brand new iPhone, you would now be worth about 22 million dollars.

[00:17:43] David: Sounds about right.

[00:17:45] Santiago: That seems like a huge artificial inflation of market to me in the tech industry. It worries me how much money is going into stock for these tech companies? You mentioned the trillion dollar in AI.

[00:18:03] David: Seven trillion they’re looking for.

[00:18:05] Santiago: Yeah. If that fails, what is that going to do to the world economy? Are we going to have another need to bail out companies?

[00:18:15] David: Oh, this is a really interesting question. And to be honest I was worried about this before the latest AI boom. The latest AI boom has just exponentiated the scale at which this is happening. And I think you’re right to be worried about this. I certainly am concerned about it. It’s disproportionately putting value where there is a risk. It’s not just that there’s a risk, there will be failure. Now that doesn’t mean that they will all fail, but there will be elements of failure. And as you say, some of these banks being too big to fail is one thing. I don’t think the tech is going to be too big to fail.

Let me give an example of Uber, with the way it grew and the way it came. Right now, if Uber suddenly failed, no one would really notice. No one would feel the pain. Yeah, some people might be frustrated that they can’t use it, but if it were to fail, it wouldn’t suddenly disrupt everyone’s lives.

Apple is not in risk of failure. Alphabet is not in risk of failure at this point. They are groups where if they were to fail, it would affect your life. Amazon, if Amazon were to fail, and actually if you listen to some of the things Jeff Bezos said, his expectation is that it will fail at some point. That if it’s not growing then it will fail, and so at some point, the anticipation is it will. But so many people rely on it in so many interesting ways. It’s disrupted so many markets. If it were to fail now, people would feel it. It would have lasting impact. Now I don’t believe it’s anywhere near failure.

[00:20:06] Santiago: But it would create so many opportunities as well.

[00:20:11] David: Yeah, that’s possibly true. Absolutely. Would someone just sweep in and take over? Probably. And so what might failure look like? Might it be explosive? Might it just be as X, formerly known as Twitter, got bought out? Is that a failure or is that a success? Actually, for most startups being bought out is a success. So was Twitter getting bought out of becoming X success or failure? And is that just a matter of perspective?

When you start a tech company, many tech companies, their hope is to get bought out and become rich as founders. If you are or were Twitter and now have become X, is that success or is that failure? And if it’s not success then maybe you didn’t choose the right legal structure.

Because the legal structure was set up whereby getting bought out and the founders and the shareholders making money from it is success. The vision that was pursued through Twitter is maybe lost as it has transformed into X, but that’s questionable. But as a company, you cannot claim that being bought out like that is anything but success.

[00:21:31] Santiago: In the current mindsets?

[00:21:36] David: No, not in the current mindsets. In those legal structures. That’s why we’ve chosen different legal structures. For us being bought out is not possible in that way because that isn’t what we would deem a success.

[00:21:50] Santiago: Well, it’s not possible, so thinking of being bought out as success or failure for us is irrelevant.

[00:21:59] David: It’s just that we can’t get bought out in that way. Arguably OpenAI, when it was first founded, it didn’t have that as its goal, but it still got in some sense bought out. That’s a different story, I don’t want to get sucked into that. So there are other instances of people who hadn’t set out to set up a company which, where the main aim was to get bought out, but because of the success they found, they changed the legal structure so that this was a route.

Anyway, these are…

[00:22:32] Santiago: Far off our starting point.

[00:22:34] David: Not really, because it is about the question of if you can just buy it out, if you can solve it with money, it’s a simple problem.

[00:22:44] Santiago: Yeah.

[00:22:46] David: So this point that actually, if we take the idea that just money can resolve it, it can buy it out, it can do whatever, then it is in its very nature simple, however complex it may appear. It might appear to be complex, but if money is able to do that, then it is inherently simple. That is an interesting viewpoint, which I still quite like.

[00:23:16] Santiago: Yeah, and I think it applied in many moments of my life personally and I wonder if there is a limit at which things become too complex.

[00:23:31] David: What do you mean, to just be bought out? The point is it’s not about whether things are too complex to just be bought out. A complex problem, if you try to just buy it out, you will create another problem. You’re not resolving the fundamental issue, you’re just changing the nature of a problem. That’s the nature of a wicked problem.

[00:23:50] Santiago: Of course.

[00:23:51] David: Yeah, this is the point. It’s not that you can’t throw money at a wicked problem, but if you do just throw money at it, you’re changing the nature of the problem rather than actually resolving it.

[00:24:02] Santiago: I think I’m leaving this episode with more questions than answers. I’ll have to think a bit more deeply about it. And maybe we can continue this discussion at some other point.

[00:24:16] David: I think so. Let me leave with one final thought on this, because I’m really glad you’ve brought this up and drawn out this potential contradiction, which I don’t think is an inconsistency in the thinking on this.

The idea of being able to simply solve a problem based on money is very attractive, and it is something where there are many things that can be reduced or resolved with money. But I want to finish with my favourite example of this in, I think it was Mali, maybe it was Burkina Faso, where a village became a village of seed producers, where they learned and they gained the skills to actually, in that village, not only produce grain which people eat, but to produce seed, which then is sold on for people to plant. So they became certified seed producers. And as a village, they then prospered. Immensely. And it was fantastic to see the progress. And they had always had further plans of how they could prosper further.

But they were prospering and their neighbours were not. And this meant that they now had alienated themselves from their neighbours. They were no longer part of the community. Their wealth had almost created a rift between them and their neighbouring villages who were jealous because they all had motorbikes now. They had forms of wealth that their neighbours couldn’t dream of. And they couldn’t access because you can’t have everybody becoming seed producers because, mostly, people need to eat grain.

And to me, I love this instance of a wonderful case, and, nothing but credit to what they did to be able to create that solution for themselves. And this isn’t a handout. This was hard work and grit. But also a bit of luck and training and capacity building from others and support which couldn’t be scaled. And that’s created inequalities within their society that didn’t exist before. A new problem had been created by solving an old one.

[00:26:37] Santiago: I think it’s Malaysia, but at a larger scale did that with computer processors, they became specialists in that and started producing and exporting.

[00:26:48] David: Isn’t it Taiwan?

[00:26:49] Santiago: I thought it was Malaysia, but…

[00:26:51] David: Possibly. I know Taiwan is a stronghold for computer processing, but maybe we should fact check this and you can pick me up on it next time.

[00:27:00] Santiago: Okay, but the outcome was huge inequalities in society, a much wider gap between the rich and the poor but yeah, interesting.

Thank you very much for this reflection, David. And hopefully we can have another reflective episode like this at some point soon.

[00:27:22] David: I enjoyed it, thank you.