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Reputation Economics

Why Who You Know is Worth More Than What You Have

Palgrave Macmillan

WHAT IS YOUR MOTHER WORTH?

# OPENING SHOTS ON THE FINANCIAL OLIGARCHY

During the 9/11 attacks in New York City, federal investigators were certain that the terrorists had used the black market and a network of friend-of-a-friend connections to covertly move the funds they needed. In truth, they used an FDIC-insured bank based in Florida. At the same time, foreign workers the world over whose earnings could spell literal life or death for their families back home transferred their funds using the same underground network the FBI was worried about the terrorists using — because they felt it was safer.

As part of the exact same trend, someone is tweeting more than 45 times a day right now so they can get upgraded to an executive suite the next time they book a room at a hotel. Someone else is spending hours and hours after work painstakingly answering other people's technical questions, for free, without ever having a use for the solutions themselves. Neither of them is getting paid for this work, and yet they each consider this a significant career investment.

What's going on here? What's the connection, and what does this have to do with reputation, or the new world order of technology?

This book answers those questions. It is a guide to how the present moment in history is in the eye of a very peculiar storm, a deeply indrawn breath by the collective population of our tiny blue and gray planet before we jump into the next stage of global commerce. It's about destroying the unnatural assumption that financial currencies (and their related banking, loan, credit, and other services) are the pinnacle of human commercial development, and not an artifact of a time before the internet. It's about how we're beginning to stop pretending, as a species, that it's normal or even preferable to use money as our sole system of exchange.

This is happening thanks to an influx of powerful new methods of computer intelligence, sensor networks, and social platforms that are just beginning to shake the existing world of financial commerce in favor of a more human form of regulation and currency: reputation.

In the process, our expectations of otherwise ancient methods of exchange — and the technologies now encapsulating them — are leaving us woefully unprepared for the markets that are emerging. Businesses are flailing as they're subsumed by competitors created literally overnight in garages and basements. Traditional models of exchange are being undercut by the sudden appearance of cryptocurrencies like Bitcoin. Marketing and political campaigns backed by extensive customer research are falling flat as those "customers" suddenly vanish into crowdsourced purchasing mechanisms. Entire product categories are eroding into person-to-person exchanges backed by broad, cheap online platforms. At its extreme, consumer groups are starting to appear with the sole purpose of obviating entire markets, armed with the technology, relationships, and networks to actually do so.

Those are just the changes we're seeing in the First World. Meanwhile, the existing financial system that's been so preeminent as a commercial method here has set us up to be seriously blindsided as the rest of the world evolves. While we've been toiling away since the industrial revolution under the illusion that money is the only way to exchange value, the rest of the globe has been getting around their own exchange problems in other ways, often with no participation in financial mechanisms like loans, credit cards, or bank accounts at all. The result is an enormous global network of overlapping markets, trust relationships, unregulated commerce systems, and mixed currencies, every one of which is uniquely derived to represent the individual valuations of its participants.

Until now this rich diversity of methods has languished under the usual panoply of Second World and Third World market problems: communication restrictions, price discovery issues, missing transaction mechanisms, et cetera — all of which made them generally much less efficient than the existing global banking network. And until very recently that was all there was to it.

At the same time, the global technological elite have enjoyed the advent of platforms such as Facebook and Twitter and started finding ways to connect, person to person, at a whole new scale. Then, as the financial systems we relied on became unable to support these platforms, we started implementing workarounds for new kinds of exchanges of our own: cryptocurrencies like Bitcoin to enable more anonymous payments online; eBay seller ratings to allow strangers to buy from strangers with confidence; sites where peers rate each other's ability to answer questions germane to their field, resulting in better job prospects for those who rise within the meritocracy; self-aggregating car services to help people find a cab when their city's "official" taxi monopoly fails to meet demand.

Suddenly, there are a whole variety of emerging marketplaces available to us, all of which use this new, wide web of social networks and the reputation they engender as currency in part of the exchange. This isn't new as a mechanism — it's how most of the world does, and has always done, its business. What's really changed is that for the first time all the limiting factors that have kept these methods underground are being freed of their restrictions of scope and scale. The Internet is just now shaking off a primitive monopoly of financial exchange to allow people to exchange with all the multitudes of methods they have used for most of human existence. The result is massive opportunity in the form of new markets — and an incredible destructive force as consumers begin circumventing traditional business models entirely.

This confluence of global evolution, technically, socially, and economically, is setting us up to either take a terrible fall or make an incredible evolution (or both). The World Wide Web is becoming truly worldwide, and the openness of data and new platforms, and the resistance to regulation and control that are literally coded into them, will rework everything we know about commerce. Just as the twitterati and foreign workers of the world already know — and the 9/11 terrorists carefully avoided — a person's reputation can function as a far more powerful and effective means of ensuring a person's welfare than the machinations of massive, deeply bureaucratic, and highly impersonal institutions. That enlightened self interest is about to reshape commerce as we know it, particularly as the slumbering third world begins to onramp into the technology platforms and exchange systems we're creating in the first via the web.

Welcome ... to Reputation Economics.

# THE STATUS QUO IN A DISRUPTIVE ECOLOGY

So what are reputation economies? It's actually pretty straightforward — they're exchanges that use more (or other) measures than just financial currency. If you've ever participated in a white elephant gift exchange, you've done it. If you've given a birthday gift, or owed someone a favor, or hired a friend of a friend, you've done it. Reputation economics isn't a new form of exchange — it's how commerce traditionally happened before the industrial era got its collective panties in a bunch and decided that everything under the sun had to be fungible for cash.

Money is a great idea (we have the industrial revolution to thank for it, among other things), but human beings aren't reductionist enough to turn everything into cash value. After all, what's your mom worth? That's not a trick question, by the way. It's a serious inquiry that you might be asked by a life insurance adjustor, a retirement community manager, or even a Mother's Day gift card site. It assumes that all the elements of our lives that play a part in any human exchange — what your values are, who you know, what resources you have — can all be boiled down to money alone.

Like any apples-and-oranges equation, this doesn't hold up in real life. Sure, it works well enough — we just offload any externalities by pretending that things like reputation, relationships, or motivations aren't part of how commerce works. And because everyone plays along, the financial system staggers forward. (For most of us, anyway.)

But the truth is, you can't put a market price on love or happiness or loyalty; it's incredibly difficult to quantify relationships. Reputation is the closest thing we have for facilitating transactions, because reputation itself is tied to context, which means it's inherently and relatively qualitative instead of quantitative. It also means you need adequate context for it to hold water. As an alternative, finance's assumption that you can take a relationship and boil it down to a number is insanely reductionist ... but this is the assumption that for a long time was the best we had for facilitating commerce, particularly at scale.

This assumption about how commerce should happen isn't singularly necessary anymore. In fact, in many cases it isn't even desirable, because it results in most of us leaving value on the table. For example, if I own a bunch of sheep and harvest their wool, I can sell that wool on the open market for price X. But that doesn't take into account that my good friend, the one whom I spent three days in January helping bail out his flooded basement, might want to buy the wool for the much greater price of Y. Or that my sister, who I forgot to buy a birthday present for, might really enjoy the wool as a gift, which is worth something else entirely and is difficult to measure in dollars, yen, or euros. Again, what is your mother worth?

Reputation economies are systems of exchange that account for the fact that different people value different things in different ways at different times. Often, financial exchanges are embedded inside reputation ones; when I tip my server well because he or she went out of their way to help me, I'm acting on our relationship in addition to paying the pre-established market price. The difference is that reputation economies don't require financial systems to operate. That's eye opening to most, and threatening to many. It's also an opportunity — organizations that recognize this stand to quickly evolve leaps and bounds ahead of their competitors as reputation becomes more fluidly embedded in all our transactions.

After all, when I buy a cup of coffee at Walmart, both Walmart and I know what it's worth in dollars and cents, which is a function of what the market will bear — a set price established by the "invisible hand" of market demand and product supply. Ideally, this results in the optimal price for both buyer and seller. But when I drop by my aunt's place and she offers me a cup of coffee and then asks for help getting her car started, we don't pull out a pad of paper to deduct auto repair from coffee prices. Why not? Because that's not how human beings really work. We don't need to look up the market price of coffee or auto repair, because our brains are hardwired to take into account a plethora of dynamic, contextualized factors in order to valuate both services non-financially.

Again, all of this wouldn't matter much if it weren't for the Internet coming along and disrupting everything by allowing anyone on the planet to connect directly with anybody else. As a result of that massive change in scope, we're now able to have virtual cups of coffee with or to provide digitized auto repair for anyone, anywhere. More significantly, it also lets us get enough context, instantly, to make the same evaluation about otherwise complete strangers that we do about our aunt. If anything, the shift toward a prevalence of virtual (or virtualized) goods and services means we have even more context to make our valuations by. And increasingly, these platforms are available for real-world goods and services as well.

As an example, if I need someone to help me mod my IKEA furniture, I can use Freelancer.com to learn everything I need to about a potential designer in order to figure out exactly what the work is worth based on his or her reputation. And he or she can learn enough about me to figure out what they're comfortable charging me, as opposed to anybody else on the planet. Better yet, we can decide to trade work, favors, online account access, wool, rap songs, or anything else we want instead of or in addition to cash, and the pricing is identically negotiated. Again, it's an intuitive exchange based on reputation, except that whereas in the past I could have made this exchange only with the people in my village, I now have more than 7 billion people to work with. Even more importantly, I now have an exploding number of platforms whose sole purpose is to validate, authenticate, and support communities of individuals' reputations for any such exchange. Freelancer is one, but there are markets for borrowing cars, taking classes, or sharing tips on your cancer treatments that simply didn't exist before, with more appearing all the time. It's as though an eBay seller rating suddenly appeared for everyone online for anything anyone ever offered on any platform.

The fact that this is becoming available to anyone on the globe is critical, because reputation economies work well for person-to-person exchanges (i.e., those involving discrete human beings, like you or me) but not so much for big established bureaucracies whose advantages of scale rely on interacting with "customers." This isn't because companies can't have a reputation — indeed, what else is brand than a publicized reputation? Instead, it's because companies can't have personal relationships and therefore cannot enjoy the kind of trust two people can establish between each other. I.e., if my cable company screws up my billing, who is the individual I should hold responsible? The result is that all the nonfinancial elements of an exchange that could otherwise be enabled by trust simply don't exist for the purposes of a corporate transaction.

After all, the fact that Walmart needs to charge the same price for a cup of coffee in every store in Michigan in order to maintain adequate supply chains, management overhead, market competitiveness, et cetera, just doesn't matter to me. As individuals, we couldn't really give a damn; we already know what our aunt's cup of coffee is worth to us and whether it's worth helping her get her car started or if we'd rather come up with some excuse to get out of it. That doesn't help Walmart at all. If anything, it's a big problem when customers start expecting to have hyperpersonalized relationship-based price evaluations for every transaction in every Walmart store. After all, any sizable organization with the standard arrangement of phone trees and customer scripts and offshore support staff can't create meaningful human relationships with you — the cost in paying the salaries and retraining enough individuals to responsibly act on the company's behalf would be prohibitive. It would require radically changing the entire corporate structure. Instead, at best, it can create an unspoken, semilegal commercial relationship with you which will last exactly as long as the company does what you're willing to pay money for ... and no further.

Ostensibly this should work in our favor. And eventually it will, because the majority of us aren't going to keep playing a game that's rigged against us forever. After all, if I help a Walmart employee fix a flat in the parking lot, they still have to charge me the normal price for my coffee. If he or she "forgets" to charge me for it, that's a loss as far as Walmart is concerned — and so it's a punishable offense.

This has worked just fine for a while now. Most businesses are sitting within a system of exchange that works very well at their level of scope, scale, and control. So far, it's a position that's being enhanced by emerging technologies. Despite the suddenly superhuman ability to network with anyone on the planet that many of us are enjoying, at this stage most of the cards are being held by the entrenched financial and commercial systems — and they've got a really, really good hand.

That particular hand is so good because the platforms that we're all starting to lean on to get more value out of our non-financial resources are based on some pretty cool emerging technologies — stuff like cloud computing, data mining, sensor networks, and the like. The problem is that so far, only big companies are really making use of them. And they're investing a lot of time and money into these technologies in order to get more money out of all those aforementioned resources we're not currently realizing ourselves — stuff like our shopping habits, our friend networks, personal relationships, likes and dislikes, purchasing histories, plans for the future, skills and desires, and more. And they're getting pretty good at it, inasmuch as a brand can extract money from a customer.

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Excerpted from Reputation Economics by Joshua Klein. Copyright © 2013 Joshua Klein,. Excerpted by permission of Palgrave Macmillan.
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