The central idea behind Causal Economics is that optimal decision making happens when costs and resulting benefits are tied together.
This is a simplification similar to that of boiling Behavioral Economics down to the idea of Nudging (a form of Libertarian Paternalism).
Going a step further, Causal Economics asserts that people are rewarded for their contributions and everyone can contribute in some way. Societal costs and risks are shared across citizens in line with associated benefits.
CE is a unifying theory of economics because the other major models of economics can be derived from it at both a micro and macro level.
At a micro level, major decision models, such as BE and EU, can be derived from CE through particular restrictions. Specifically, cost and benefit, both deliberate and uncertain are collapsed into a single time period and single outcome value and valued through a single variable function.
BE can be derived when sign-tiered comonotonic dependence is collapsed to sign comonotonicity and a reference point is enforced, and EU is derived when traditional independence is enforced.
At a macro level, all social coordination interactions, including free market and governmental as subsets, are analyzed through a single measure, the Causal Coefficient (Causal Coefficient). Mainstream economics does not leverage a single analytical measure such as this, but all other theories can be cast in the context of the CC.
Nudge theory is powerful and top of mind with many of today’s government, academic and business leaders. It’s earned its place there.
But, if one is to pick up on Phil Kotler’s comment that behavioral economics is a fancy new formalization of marketing, certainly it could be said that nudging is even more so directly aligned to marketing.
Heck, that’s what marketers do… they nudge people to buy. So is this all semantics that reflect who is doing the influencing by using core principles of psychology? In some ways yes. It is.
When companies influence people to buy, it is called marketing. That is very well established. What’s new is that now governments are effectively in the marketing business. They used to only use coercion (ie. taxes, laws, administration and information dissemination (propaganda)).
So you can indeed think of all the buzz around nudging as governments getting active in their marketing. As with all marketing, it can promo good and bad. Let’s ensure it is for good.
Many of the predictions of Causal Economics center on the impact of consolidated power, because that is one of the main conditions that allows for decoupling, driving up B/C ratios for those with power and driving down B/C ratios for those without power. Economic freedom and economic consolidation are at opposite ends of the spectrum. Think of a theoretical spectrum from ‘perfect competition’ to ‘perfect monopoly’.
With these things in mind, we’ve crafted a potential Economic Freedom Index, inspired by the core Causal Economics concept of coupling.
We’ve defined it as follows:
Economic Freedom Index = ( Market Cap S&P500 / Market Cap Dow ) x ( GDP / ( Government Spending + Government Debt ) x 100000
This index has been defined such that freedom increases as broad-based private sector activity (S&P500) rises relative to consolidated private sector activity (Dow) and as the size of government (government spending and debt) lowers relative to the overall level of economic activity.
Crunching the numbers for a short period of history we see the results in the table below. The data shows that economic freedom does jump around and has been trending down for the last decade.
This is a concept that may or may not add value. We’ll keep exploring it and are interested in any feedback to improve it.
Causal Economics provides a great deal of insight on compensation practices. It reinforces some well recognized practices, flags some areas of poor approaches and lays out potential new approaches. This post puts a few areas on the table for discussion.
Good compensation systems always try to connect pay (the cost to the employer and the benefit to the employee) to results (the benefit to the employer). An employee then manages his/her effort (their cost) to achieve target pay. Employees try to hit their benefit pay with the least amount of effort possible maximizing their B/C change ratio. Employers try to get the most results for the least amount of required pay, also maximizing their B/C change ratio. Through market negotiation they strike a balance.
Sales commission is the purest example of effectively coupling C and B for company and individual.
The next best example of coupling in practice in compensation is the bonus structure. Bonuses are tied to results, and so follow the idea with commission. Management bonuses are usually heavilly dependent on individual and broader team-based contributions.
Beyond these, most compensation is for effort exerted (time worked etc.), which often reflects base salary demands (to reduce employee risk). But, flat pay for time worked with no variable compensation often results from a stated difficulty in measuring an individual’s impact on results. This is where many experts are wrong. Every situation in business is one where individual and team impacts intermingle. Individuals must manage what they can and influence where they need to. No one’s individual impact is a lone endeavor, especially in today’s fast moving and free flowing economy.
Imagine if sales people didn’t have to worry about closing deals because customer decisions are out of the sales executive’s control. That’s reality and they get over it. Do employees take the brunt on pay sometimes when things out of their control go the wrong way? Yes. Do they sometimes get to ride the coattails of the hard work of others? Yes. This is business and reality and Causal Economics reminds us that anyone who spends time debating poor measurability of individual results as an insurmountable barrier is out of touch.
Causal economics suggests that all compensation should be a combination of some base plus a variable compensation component for individual performance plus a variable component for broader results (team, company etc.). This structure pragmatically couples B and C for employers and employees.
Meetings
Management meetings in general need an overal
Decisions
It’s commonplace to see increasing real GDP as a measure of improved utility in society. But it’s less common to imagine an even better scenario of increasing real GDP and deflation. In such a situation, real incomes are increasing in a strong and sustainable fashion, as we’ll show here.
The word ‘deflation’ itself conjures up zero or negative growth. It’s never associated with growth in mainstream economic thinking. Growth is always seen as associated with inflation and even a lack of growth is usually associate with some inflation, in a situation termed as ‘stagflation’.
Can growth and deflation occur together? Do we need to think about ‘GrowthDeflation’?
Casual Economics provides the theoretical foundation for this being a natural situation.
Economies grow in the long-term due to improved technology in the broadest sense–computing, automation and even processes. Technology improvements lower prices over time, as is observed today in the IT sector. Prices can also change in various sectors due to changes in relative demand. This trend will raise average prices in some sectors and lower them in others. These real economic drivers differ from the inflation we see in our economy today. The latter is entirely a monetary phenomenon, based on central banks exogenously issuing new money when there are no real strains on the velocity of circulation. Since funds are created electronically in modern economies, there is no underlying need to issue money to ‘lubricate’ activity.
The current model of central banks constantly issuing new funds is a dangerous long-term fallacy. It is truly nothing more than a long-term tax on the asset-poor middle and lower classes, shifting wealth to the asset-rich wealthy. It allows governments to make promises beyond their means and print money to achieve goals without paying any price in the short-term. In the long-term, their currencies and true wealth will be eroded, but in the short-term associated with government election terms low, positive inflation pays off.
Causal Economics shows us that inflation increases benefits for those involved in the central banking process and those with significant assets, while also increasing costs for those without significant assets in the economy.
Why is it worth attention to debate about low inflation? How bad can it be? We should give the issue our attention, because accepting inflation of any sort reinforces a distraction from the underlying means of real economic growth–technological advances.
Naysayers of this analysis will point to historical instances of ‘tight money’ choking off credit. The reality is that tight money is always a reaction to situations where inflation got out of control, situations where real growth wasn’t occurring and money was too loose. Tight money is either the policy correction or market correction to such an out of hand situation, to bring risk levels back in line. Sustainable credit conditions are based on risk/return underwriting, not the level of money supply, loose or tight.
Some might say this post is a brief treatment of a complex topic. We believe it is a case of getting to the bottom line in a straightforward manner, by keeping top of mind the principle of coupled cost and benefits, as shown through Causal Economics.
Should we be aiming for some ‘GrowthDeflation” soon?
100% Pure Socialism and Capitalism each convey unstable long-term extremes. Raw socialism will snuff out productive growth and innovation as individual entrepreneurship gives way to reliance on big government, run by bureaucratic elites. It simply removes incentives to innovation. Raw Capitalism will produce powerful capital holders that naturally steer societal rules to their own benefit at the expense of others. Both systems result at their extreme in consolidation of power and natural ‘projection’ of that power. There likely isn’t a person around that wouldn’t be ‘corrupted’ to some degree by such opportunity for power. Few people that project their power for their benefit and that of their family and friends would even see it as ‘exploitation’. There is a natural instinct to take care of oneself and one’s family first and foremost above all else. Power and wealth entrench that safety net.
In each case, concentration of power in elites results in conditions that increase their benefit/cost (B/C) ratio much more aggressively than other over time. In the long-term, those not in the elite class experience flat to declining B/C ratios. Each system incrementally increases decoupling in B and C over time, until the system is strained and breaks. We saw this in the collapse of socialist/communist economies in the 20th century and we are seeing the strains on capitalism today, with increasing cries for socialism.
Sustainable economies and societies couple B and C across all citizens. Each pursues their own freedom and through their economic contribution increases their B/C cost ratio. They are also accountable to the society they live in. Think of a Robinson Crusoe economy. Each citizen must pay a share of taxes to cover necessary government costs. Necessary government costs are those determined by an engaged and educated democratic electorate. Unfortunately, many government costs don’t meet this condition. It’s dangerous if we end up with back-and-forth swings from socialist to capitalist and back again as each is taken to it’s limits. History has shown that this is not a desirable situation.
Is there a more balances approach? It’s time to be open minded given the polarization we see today. Causal Economic Theory suggests that we try what we might call a “Causalist Economy”. This has never truly been done, and it’s pure form would require a lot of change from current conditions, so in a pragmatic sense, it must be tested and analyzed further. Here we want to start the discussion and analysis.
What does a Causalist Economy look like? In it’s pure theoretical form (just as in traditional economics we may look at ‘perfect competition’ in its pure theoretical form), a Causalist Economy would entail:
This is short list of some of the more impactful elements 0f a Causalist Economy based on the principle of Causal Coupling (making sure that B and C are coupled across agents in society).
As with all new theories, the practicality of some of these more radical components need further debate. Our goal here is to start and carry on those discussions, seeking better economic outcomes in today’s turbulent times that beg for new ideas.
We welcome your insights.
If you are one of the few business people, let alone marketers, who hasn’t feverishly digested the work of Anthony Robbins, then we recommend that you get on it.
Tony is still the master of applied behavior and decision making in business. It occured to us that in many ways, Causal Economics is an academic formalization of many of the concepts Tony Robbins shared with us. He demonstrates that people act on their perceptions of pain and pleasure (like cost and benefit). What matters most for marketers and business people is Tony’s work on what drives change and action from inertia. He educates us pain thresholds and conditioning assocations. The former idea is fundamental in the personal cost/benefit trade-off constraint and the person cost maximum curve in Causal Economics.
It’s refreshing that our theory aligns to the work of the absolute guru of applied psychology. Too bad previous theories of economics don’t line up. We’re excited about the future ahead for Causal Economics (and the work of Tony Robbins) in helping people and businesses make better decisions that advance the prospects of everyone.
The mainstream economics most of us learned in school is known as neoclassical economics, and it quite simply doesn’t explain human behavior. It’s all built on the 100% rational economic man – homo economicus. And well, people are regularly observed to be irrational/emotional. The recent surge in popularity of Behavioral Economics came about to fill the gap. It’s done a great job… but it hasn’t gone far enough.
Mainstream economics and traditional behavioral economics both model decisions based on single period time horizons and reactionary response to random outcomes. That’s not even close to reality, as you know.
Real world decisions require upfront effort – money, exertion or whatever. That is certain. They also require time for benefits to result, and those results are not always fully certain. Think of losing weight, making investments, building a business etc., pursuing a desired mate etc. etc. All of these real world decisions we make cover multiple periods, involve upfront costs and produce subsequent benefits… we hope. Causal Economics is a new branch of Causal Economics that is structured to model these real decisions.
Keep these simple principles in mind and you don’t have to go over all of the math :). But if you do want to see that, visit our foundational article published on ScienceDirect. Let us know what you think and how you’ve applied Causal Economics.
The standard in sales and marketing today is to relentlessly communicate benefits of our solutions. Barriers to implementation get very little attention during the buying process. It’s a natural situation, because bringing up costs and problems creates tough discussions. This can slow things down, right? Bringing up things that are negative.
It’s actually not true. The act of not bringing them up and dealing with them is what truly slows things down. Buyers know that solutions involve cost and benefit. When you highlight benefits and not costs, both financial, effort and timelines, you lose credibility and force more work on your buyer, who has to build this out on their own.
In addition, if you convey a more realistic B/C ratio, you set your standard of credibility way ahead of competitors. That gets you more trust and trust is critical in moving from stage to stage in the buying cycle.
Being realistic and transparent is what moves the buying process along as fast as possible. Traditional thinking about buying behavior forces into the one-sided mindset of conveying an unrealistically high B/C ratio. Causal Economics thinking shows us that it is critical to convey a realistic and likely smaller B/C ratio.
Give it a try and see if your sales cycle speeds up. We’re confident it will. Let us know!