A bottom-up approach to innovation

Driving change from below

A bottom-up approach to innovation

Go to the ant, you sluggard; consider its ways and be wise! It has no commander, no overseer or ruler, yet it stores its provisions in summer and gathers its food at harvest. (Proverbs 6)

Deborah Gordon has studied ants for 20 years trying to understand how an ant colony organises itself without a commander or ruler. http://www.ted.com/index.php/talks/view/id/145 Her observations are of great benefit in understanding how a complex system, such as an ant society, works. The lessons learned from her studies can also help to better understand the establishment and operation of our own human societal systems.

The organisation of ant colonies, like all complex systems, is an emergent property arising from the evolution of interaction between agents in the system and the rules governing behaviour as a result of that interaction. That is, each ant can be thought of as an agent and ants pass information between one another. Ant behaviour changes according to a fixed set of simple rules. The rules followed are genetic, such as “ants carrying food must leave a trail of scent that evaporates over time”. Another rule is ‘when an ant without food finds a scent trail, it will follow that trail to the food source”. If there is no food at the end of the trail the ant forages for more food, finds it then sets out for its nest following an existing trail or creating its own new scent trail.

It can be shown that this simple set of rules enables an ant colony to find food and harvest it efficiently and in a robust way. If a trail gets broken it is soon repaired. If a source of food runs out the ants quickly find another. If rain washes away trails they are soon reinstated . The important point is that there is no planning and no central control, yet the ant colony is very efficient at finding food. Other interactions and simple rules help create order in the colony, for example by ensuring that ants move from one task such as cleaning the nest to another task such as foraging.

While human society is undoubtedly more complex than ant colonies our systems operate on the same principles, even if we think they are planned and controlled. They operate by agents (companies and individuals) interacting in relatively simple ways to achieve a purpose. For example, the system for human “foraging” and the supply of food has evolved to our modern supermarkets but in such a way that we as consumers know nothing about growing the food, harvesting, packaging, processing, delivering or shelving. All that is required is that we select the goods we want from the shelves and pay some money. Our interactions with supermarkets have evolved to such an extent that no one knows how it all works. There is no managing body that organises the growing, harvesting, packaging, delivery, selling or advertising. The system for delivery of food to the population is not planned, nor is it centrally controlled. At each stage of the delivery chain there are sets of simple rules associated with interactions. If we change the rules we change the system. We saw this happen when grocery stores changed from serving people behind a counter to self service from shelves, a move that radically changed the way food was packaged and delivered.

Why is this important? It is important because unlike the examples above that continue to evolve to ensure optimal efficiency, many of the services in our community are delivered and supplied through “command and control” or centralised systems that are locked in to one particular way of operating. A good example is the way our education services are delivered. At the moment we have a central body that delivers education: the government which gives money directly to schools. Schools provide places and and then allocate those places to students. To create a more efficient system one possible change in interaction could be that rather than money going from government to schools then to students, it would instead progress from government to families who then purchase a place from the schools. This variation in bottom level interactions would lead to major changes in the school system. What those changes will be cannot be completely predicted. We can guess what will happen but given the complexity of the system, we can never be sure. What we can do is to measure outcomes and if necessary, change the rules of interaction to achieve more desirable outcomes.

There is no reason why we cannot apply the same concepts to change the way we conduct other transactions. In general if we change systems to allow consumers more choice we tend to get more effective, efficient and better services. Instead of the government paying a garbage company to collect our rubbish, we could give the money to residents who pay to get their garbage collected. Some might choose to take the garbage directly to tips themselves. Others may arrange to have their garbage collected when their bins become full. Others may opt for a regular weekly pick-up. Thus instead of the government providing a service the government gives us the money but lets us choose how the service is to be provided.

Another example is public transport. Instead of the government providing and subsidising buses the government could give the subsidy money to the people who use public transport and let them choose where to spend the money. This would enable other forms of public transport to arise such as mini buses, taxis, car pooling systems or trains.

Driving change and innovation from the bottom up also works for services other than government such as in areas where government regulations prevent the introduction of competitive pressures (retail banking, parts of the gambling industry, telecommunications, delivery of energy in its various forms, the airline industry, the insurance industry, the health care industry to name a few). Government regulations tend to restrict suppliers in different markets when the best way to achieve efficiencies is to open up a market by reducing barriers to competition and increasing choice of consumers.

The reason society has not used this approach is because, until recently, there has been no practical, efficient way to direct small expenditures and make sure money is spent where it is meant to be spent. If a person is given money to use on public transport, it has been too difficult and expensive to ensure that the money is spent on public transport and not on something else. If a bank gives a loan for a house it is too difficult to ensure that the interest rate charged depends on the whether it was a new house or an existing house. It has also been too costly to distribute such small amounts of money to people.

However, the technical barrier of inefficiency no longer applies in today’s world. Anyone with a mobile phone can participate in such systems. The computing power and communications infrastructure needed to deliver the systems are a fraction of the cost of the service delivered. The idea of a more direct consumer choice can, and ultimately will ultimately prevail because it is in the interests of the whole population to move in this direction. It’s an approach that leads to more services for lower taxes. It gives individuals greater control over their lives and removes many of the irritants that we now have such as water restrictions, high house prices, low frequency busses, and tip fees.

The principle goes beyond consumer expenditure. It applies to other areas of human activity.

If we want to reduce green house emissions we can charge people more if they produce emissions. However, we could also pay people not to indulge in activities that produce emissions and we could require that the money we pay them is invested in ways to reduce emissions.

A major problem with capital markets is the creation of money for non productive purposes. Banks are able to create loan money for a person to purchase an existing house or to build a new house. This inevitably leads to rising house prices beyond their economic worth because the bank takes less risk with a loan for an existing house than with a loan for something that does not yet exist. The same principle applies to other infrastructure and to the creation of new productive capacity. One possible solution is to make money for new assets “cheaper” than money for existing assets through differential interest rates depending not only on the risk of the loan but the purpose of the loan.

Imagine what would happen if banks were required to conduct instantaneous transfers of money from one bank account to another. It would open the gateway to innovation in banking which in turn would drive change in business practices.

Instead of trying to track terrorists through covert gathering of intelligence make the reporting of unusual terrorist type behaviour anonymous, public and risk free.

The message is that if you want to foster innovation, change the way bottom level transactions are carried out and the innovations will come without the need for more rules and regulations. Trying to impose innovation or change from the top inevitably leads to inefficiencies and monopolies both state or private.

How much will it cost Australia to be…

It is good economics to become as green as possible as quickly as possible

Australians can afford to reduce net greenhouse emissions to zero within ten years and in the decades following start to remove greenhouse gases from the atmosphere. For $3,250 investment per year per person for ten years we can generate all our energy needs with renewables and have a power system whose generating costs will be half the cost of the cheapest coal fired power stations.

The total energy consumption of Australians is 90,000 kwhs per person for all purposes. This includes transport, farming, mining, household and industrial energy uses.
The cost of building a new coal fired power station without any pollution controls is about $1,200 per kw of installed capacity. There are about 8,300 hours in a year and so the capital cost of coal power stations to generate the total power used by each Australian is about $13,000. The running costs of a coal fired power station are about 2 cents per kwh so the running costs are about $1,800 per person per year.
The cost of building thermal solar power plants is about $3,000 per kw for continuous power (including storage when the sun does not shine). The cost of geothermal is about $3,000 per kw for continuous power so the capital cost of renewables at present is about $32,500 for enough generating capacity for each Australian and the running costs are about $900 per year.
It will take 21 years to get back the investment in renewables at current prices. Power stations are built to last 50 years or more so ignoring the time value of money it makes economic sense to build renewable power stations today.
We can expect the cost of solar thermal and geothermal to come down with mass deployment and we can expect the running cost of coal fired stations to increase so it makes economic sense to build renewable power sources as quickly as possible. If you have power, water and CO2 you can create liquid and/or gas fuels for transport and we can use oil and coal for more valuable purposes like creating plastics, fertilizers, food, building materials and medicines so we can turn our coal mines into value added factories.
It is very difficult to understand why our society has not been building renewable energy sources to replace our existing power sources for the past ten years. If we each spent $3,250 a year for the next ten years we will have a zero greenhouse footprint. Surely we can afford this amount of money to not only stop global warming but give our children power at half the price and increase the value of natural resources like coal and oil by using them for high value products.
There are two urban myths that are sometimes used against solar thermal that are both incorrect.

  1. Solar thermal is high technology.
  2. Solar thermal stops when the sun goes down

The truth is that solar thermal is a simple technology and is made from mirrors heating water in pipes which then drives turbines. The turbines for generating electricity are much the same as in a regular coal fired plant.
The truth is that solar thermal power generators are designed to be 24 hours a day base load power stations. Heat is stored underground in well insulated storage during the day and used at night to power the turbines.

There is NO economic reason or technical reason not to start to move in a massive way to renewables. It appears that we don’t mainly because the owners of existing power and fuel resources think they will lose the value of their investments. However, we can arrange for them to be adequately compensated when they close their power plants providing they use their compensation to buy or build renewable power plants.

Letter to the Canberra Times – 22nd Jan

Greg Roberts article in CT Jan 21st on housing affordability, and your editorial on stopping inflation are related. In Australia too much money chasing housing is both helping cause inflation and causing house prices to become unaffordable. The amount of money created for house loans in November 97 was 22 billion dollars. Of this 20 billion was borrowed to buy existing houses while 10% or 2 billion was borrowed to buy new houses. The money supply in Australia is increasing by 20 billion each month to finance the purchase of existing houses and drive up the prices of all houses. The pressure could come off house prices with an increase in the interest rate on loans made to purchase existing houses. That is, instead of the reserve bank causing interest rates to go up for all loans by a general increase it could achieve a significant slowdown if new loans for existing houses had a surcharge. This money would increase bank margins to compensate them for the reduction in total loans. The scheme could be introduced with an agreement of the banks in a meeting chaired by the Reserve Bank. The reduction in money supply needed to ease inflationary pressures, and the interest surcharge to achieve this can be estimated and the surcharge can be removed when the inflationary pressures ease. The effect is likely to stabilise house prices and cause a reduction in the rate of inflation.

Kevin Cox
22 Yirawala St
ACT 2913


Letter to Editor on banks CT Jan 11th 2008

Wayne Swan is correct is chastising the ANZ for their proposed rate increase. The banks are taking advantage of their privileged position in the way that new money is created in Australia. Their competitors are the ones who have to pay more for money. The big banks are able to create money to loan without going to the international market and do NOT pay more for money for new loans let alone more money for existing loans. Swan can give the same privilege to competitors. The big banks are raising their prices because they can, not because competitive pressures force them. The banks are abusing their position and should lose them because they are putting their own profits before the community interests. It is the community who gives them their privileges and if they abuse their rights the community should act in its own defense and widen the privilege to create new loans without backing deposits to other institutions.

Black Band-Aid – Letter to Editor CT Xmas 2007

The WaterFord and Pryor article on the Federal government intervention in the NT (CT Dec22) is depressing reading because it describes an intervention that is repressive and restrictive. There is another way to tackle the problem that is positive and will cost a lot less. Rather than put restrictions on how people in the NT can spend their money give them more money to spend along with the responsibility of deciding how to spend it. For example, give people more money that they can spend on health. Reward towns that are tidy with more money. Support the building of infrastructure by supplying low interest loans to build houses, businesses and commercial enterprises. Reduce restrictions on the choice of the buyers but put restrictions and impositions on suppliers of services to ensure that they do not cheat vulnerable communities. Allow the communities to contract for services rather than services being imposed by a government. For example if a community wants police protection then give them the money to hire police not supply police. Impose control by monitoring the suppliers of services not monitoring and controlling the buyers of services. This is simpler and more cost effective as it creates a fairer market place in remote communities for the supply of services.