Designing the Economy We Need

INTERNALITY · LEADERSHIP & CULTURE

The economy is moving now, and it needs our help.

In 1973, I started Cascade Engineering.That was also the year E. F. Schumacher published Small Is Beautiful: Economics as if People Mattered.

I didn't read Schumacher at the time. I was an engineer trying to start a manufacturing company. But reading that title again recently triggered a question for me:

Why did some ideas from that era get built into how we run companies while others stayed admired but unused? And if we follow that question, might it tell us something useful for today?

Two very different questions about purpose

Three years before Schumacher's book appeared, Milton Friedman published his famous essay arguing that the social responsibility of business is to increase its profits.

The two men seemed to be asking very different questions.

Friedman was concerned about who should decide how the resources of a corporation were used. If managers spent shareholders' money pursuing their own social objectives, whose interests were they actually serving? That is a legitimate question.

Schumacher was looking through the other end of the telescope. He was asking what an economy is ultimately for. If an economy becomes more productive but people aren't doing better, is that success? What if work loses its meaning? What if communities deteriorate? What if we consume natural resources faster than they can be replenished? Those seem like legitimate questions too.

Looking back, though, there was an important difference between the two ideas. One of them was much easier to act upon.

What made shareholder value so powerful?

Friedman's argument could be reduced to a remarkably simple management principle: run the business for the economic benefit of its owners.

Then, in 1976, Michael Jensen and William Meckling published their influential work on agency theory. Their concern was not excessive CEO pay. They were examining a real governance problem—managers controlling resources belonging to owners when both parties don't necessarily want the same things—-and asking how those interests might be better aligned.

One answer was incentives. If management benefited when owners benefited, perhaps the agency problem could be reduced.

Combine that with the growing emphasis on shareholder value and you have something actionable: an objective with a measurement system and incentive structure. Over time, equity and stock-based compensation became a larger and larger share of executive pay, and CEO and shareholder interests grew much more closely connected. There were benefits to that alignment. There were also consequences that perhaps weren't fully anticipated: the extraordinary growth in executive compensation and a steady pressure to optimize the outcomes we could measure most easily while paying less attention to the ones that were harder to see.

Which makes me wonder whether the triumph of shareholder primacy was really a triumph of the theory. Perhaps part of it was much simpler. Business leaders knew what to do with it.

Schumacher had a different problem

Schumacher asked us to pay attention to matters conventional economics tended to push toward the edges: human wellbeing, meaningful work, community, scale, and the natural environment. More than fifty years later, many of those concerns feel remarkably current.

But suppose I had read Schumacher in 1973 and agreed with him completely. What would I have done Monday morning?

That is much harder. How much should I pay people? How should I weigh wages against competitiveness? What responsibilities should the company assume for childcare, housing, healthcare, and education? How should environmental impact be weighed against financial performance? And what happens when doing the socially desirable thing raises my costs while my competitors’ stay flat?

Schumacher offered important principles, but principles don't automatically become management systems.

Maybe this is where we are today

I meet a lot of business leaders who sense that something isn't working as well as it should.

They see it most clearly in their own companies. A valued employee turns down a raise—not out of pride, but because the raise would cost the family more in lost benefits than it adds in pay, and they've done the arithmetic. Full-time workers who still can't get ahead. A community that generates real wealth while leaving many of its families economically insecure. Enormous promises in AI and automation, shadowed by honest questions about the people whose work disappears.

They also see the political noise around all of this, and they aren't especially drawn to the answers either side is selling.

And then comes the hard reflection:

What am I supposed to do about it?

I understand that reaction. The economy is an extraordinarily complicated system; change one thing and three others move. Raise wages and employees benefit—but costs rise. Provide childcare and costs rise, too—but perhaps absenteeism and turnover fall. Automate and productivity improves—but what happens to the displaced worker? Invest heavily in your people and perhaps performance and retention improve—or perhaps a competitor simply hires the ones you developed.

There are very few simple answers, which points to a different possibility.

Perhaps we shouldn't begin with answers at all.

What if we made the process actionable?

This is the thought behind InterNality, and I want to name it plainly, because it is easy to miss: we are not starting with a blueprint for the next economic system. I'm increasingly convinced that would be a mistake.

Instead, what if we could make the process of problem-solving as actionable as shareholder value once made the pursuit of profit?

A group of business leaders in a community begins with a problem they actually live with. Why are families working full time and still unable to get secure? Why can't we find enough skilled people? Why does childcare keep workers out of the labor force? What happens when AI removes a category of jobs?

Then they treat these as problems to investigate rather than positions to defend. What do we know? What don't we know? What are our hypotheses? Who is trying something interesting elsewhere? What could we test here, and what happened when we did? What surprised us? What should we change and test again?

Those questions feel very different from arguing about whose economic philosophy is correct.

There may be something of Schumacher in this after all

Schumacher himself may have pointed part of the way. One of his important ideas was "appropriate technology"—the notion that technology should fit the circumstances, resources and capabilities of the people using it rather than importing whatever someone elsewhere had decided was best.

That makes me wonder about an appropriate economics in much the same spirit. A solution that works in one community may not work in another. Housing might dominate the problem in Jackson, Wyoming;, but childcare or transportation might matter more somewhere else. Different countries carry entirely different institutions and expectations.

So perhaps we shouldn't try to scale solutions. Perhaps we should scale the ability to discover them. That distinction feels more important to me the longer I sit with it.

Something else has changed

We also have a capability Schumacher, Friedman, Jensen, and Meckling couldn't have imagined.

Artificial intelligence gives us a genuinely new way to see relationships inside a complex system. Imagine modeling what actually happens when an employer changes wages, childcare benefits, or training.You can see not just the cost to the company, but the effects on turnover, productivity, a family's real income after benefits and taxes, and eventually the surrounding community. Imagine capturing the experiments businesses are running in dozens of different places so that a leader facing a familiar problem doesn't start from theory.

Experiments can begin each time from a foundation of evidence.

Here are six things other companies have tried. Here is what happened. Here are the conditions under which each seemed to work. What might we try here?

At Internality, we named our process of modeling  Pivot Labs, where leaders define a real problem and design real experiments together. The Lab’s job is narrower than it sounds: not to add another cycle of guessing, but to shorten the guessing cycles by letting people see the likely consequences before they commit. That doesn't remove uncertainty, but it makes uncertainty something you can work with. And when local experiments start informing one another, the learning compounds without anyone needing permission from the center.

Perhaps actionability was the missing piece

Looking back over these fifty-plus years, I find myself wondering whether we framed the whole debate wrong.

Maybe the choice was never Friedman or Schumacher. Friedman gave business a remarkably actionable objective. Jensen and Meckling showed how incentives could organize a company around it. Schumacher asked us to hold a much wider set of outcomes an economy ought to produce. Perhaps all four still have something to teach us.

The open question is whether we can make that wider aspiration equally actionable. Can we help leaders see more of the consequences their decisions create? Can we experiment rather than advocate? Can a community learn what works under its own conditions? And can we share that learning fast enough that a thousand local experiments begin to inform one another?

I don't know exactly what the next economic system should look like. That's rather the point. It's the question Stuart Hart and I, and the leaders now sitting down together in places like Grand Rapids, keep returning to—not out of optimism about human nature, but out of something closer to relief.

Maybe we don't have to know the answer before we begin.

Maybe we just need a better way to learn our way toward it.