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Q5- Market Value and/or(?) Development Value?

January 15, 2009

Kytt Mier mentioned about decisions that can be described as “sub-optimization” (check our lively interchange in the Comments sections under Q1 (What is KM for?) and Q2 (KM is for creating value; whose value?) below). By “sub-optimization” he refers to decisions which seek highest gain but which in fact do not achieve highest gain if viewed from a broader perspective.

Let me give two examples: the private enterprise and the nation-state.

The private enterprise tries to optimize value creation, or more precisely, creation of market value. There is nothing wrong with value creation, which here means creating more wealth. Right? Wait. In Q3 (“The customer is king”: but the king is blind!?) we talked about social costs and what economists call “diseconomies” or “negative externalities.” This diagram illustrates what usually happens:


Social costs such as pollution to the environment do not enter the accounting system of enterprises. They do not factor into corporate decision-making — until a higher authority, the government enacts laws, rules and regulations to force them (such as the Environmental Impact Statement system) or until the negatively-affected public starts to react verbally, legally or violently.

Our corporate, or even individual actions do create side-effects on other people. The side effects are often unintended, unexpected, undesired and/or unknown to the organization or individual performing the action. We are often blind to side-effects, that is why we call them “side-effects”! Side-effects are included in the broader criterion of net welfare = private benefit — private cost + social benefit — social cost [thanks to Ann Lily Uvero for pointing this out].

Something similar happens to nation-states. Their optimization is actually “sub-optimal” if viewed from a planetary perspective. In attacking Gaza areas, Israel was protecting its citizens from Hamas’ rockets; but viewed from a larger perspective, this action may be increasing the distrust, hatred and resolve of Hamas, Hezbollah, Iran, Syria, the Arab and Islamic world, sympathizers in the Western world and — who knows — maybe the Russians and Chinese too? The consequences extend beyond Israel and Gaza.

This diagram illustrates what usually happens. The story and its tragedies are similar, but on an international or planetary scale:


Of course, nation-states want national development and growth. National decisions seek to optimize this form of value creation. There is nothing wrong with pursuing what is valuable, right? Wait. What happens when we take a planetary perspective?

Something seems to be missing in how we structure or configure our decision-making and governance systems, don’t you think so? Market value is good, but not enough. Development values are good, but not enough. What are missing?

We need answers quickly, or before another regional or global conflict erupts. If that happens then all the economic capital, social capital, cultural capital, natural capital, human capital, etc. that we all have built over the past decades and centuries would be at risk of being destroyed.

Quickly then, what are missing?

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Happy and Prosperous New Year!

December 31, 2008


Animation: thanks to