Towards a Hydra Economy

June 2, 2014 — Leave a comment

I. An Image Problem: Hercules & The Hydra

Hercules was a real jerk. That’s my conclusion after thumbing through the tales of his conquests last night in Edith Hamilton’s Mythology. He’s lionized as the favorite Greek hero, but this dude had a serious case of roid rage, perhaps the first in all of literature.

To illustrate: his most famous adventures come from the “Labors of Hercules” in which he choked-out the fierce lion of Lemea, diverted two great rivers to clear years of accumulated animal filth in the Augean stables, and killed the many-headed Hydra of Lerna, a creature considered immortal until it met Hercules. But why was he checking all these chores off a list? They were part of history’s first 12-step recovery program, penance for a roid-rage fit in which Hercules murdered his wife and three sons. That backstory was conveniently missing from Disney’s cartoon movie. Seriously, we need to reconsider our heroes.

Hercules v. Hydra, Photo Credit:  Eagle Painter Wolfgang Sauber, Creative Commons License

Hercules v. Hydra, Photo Credit:
Eagle Painter Wolfgang Sauber, Creative Commons License

Here’s Hamilton’s description of the Hydra conquest:

The second labor was to go to Lerna and kill a creature with nine heads called the Hydra which lived in a swamp there. This was exceedingly hard to do, because one of the heads was immortal and the others almost as bad, inasmuch as when Hercules chopped one off, two grew up instead. However, he was helped by his nephew Iolaus who brought him a burning brand with which he seared the neck as he cut each head off so it could not sprout again. When all had been chopped off he disposed of the one that was immortal by burying it securely under a great rock.

Let’s refocus this tale from Hercules to the Hydra. Despite its evil reputation, I want to reimagine the creature in a more pleasant light. That ability to grow two heads where one is lopped off has been the source of nightmares, but I want to strip it of fear and turn it into a constructive metaphor for something we should want more of in our local economies. I’ll call them Hydra economies. But first, a tangent.

II. Antifragile and Why the Restaurant Industry is More Robust Than Any Bank

Photo Credit: Author

Photo Credit: Author

Nassim Taleb has long been one of my favorite thinkers. He gained fame with his book The Black Swan in which he highlighted the ways we lull ourselves into believing that vast systems are stable and predictable. Nope, he says, they are prone to massive and impossible-to-forecast disruptions. Think how one tiny snowflake flicks a settled mass of snow into avalanche, how the subtlest of tremors triggers a chain reaction earthquake in the otherwise orderly bedrock, or how the stock market can smell all roses before descending without warning into a freefalling bear. These are black swans. Though we fool ourselves into believing we can predict these things, Taleb argues, we cannot. We are susceptible to all sorts of randomness that will always exist in big, complex systems.

In his most recent book, Antifragile, Taleb argues that the best systems (or, least fragile systems) are those that not only endure with some amount of disorder in them, but actually thrive as a result of that disorder. The instability comes when we try to stamp out the disorder that needs to be there. Our quest for control and consistency makes us more prone to black swan disruptions.

What seems strong is often fragile, Taleb teaches us. And what seems chaotic is often the least fragile of all. He has long been a critic of the too-big-to-fail banking system, so it comes as no surprise when he picks on them. Consider this contrast he draws between a seemingly weak industry and banks with all their power:

A natural organism is not a single, fixed unit; it is composed of subunits and itself may be the subunit of some larger collective. These subunits may be contending with each other…[For example,] Restaurants are fragile; they compete with each other, but the collection of local restaurants is antifragile for that very reason. Had restaurants been individually robust, hence immortal, the overall business would be either stagnant or weak…So some parts on the inside of a system may be required to be fragile in order to make the system antifragile as a result.

He continues,

…you never have a generalized restaurant crisis – unlike, say, the banking business. Why? Because it is composed of a lot of independent  and competing small units that do not individually threaten the system and make it jump from one state to another. Random is distributed rather than concentrated.

The most stable systems are those with distributed risk. The most stable industries are those where an individual company might collapse while having little impact on its peers. Let me try this Hydra metaphor: The banking industry gives the illusion of lots of choice. When I drive down the streets of Raleigh, I see plenty of banking options. So if it were a Hydra, it appears as if you could lop off one head without actually killing the beast. But as we saw beginning in 2008, all those heads seemed attached to one nervous system. When Bear Stearns failed, the whole monster started going down with it. It was all connected. We’ve slowly allowed that whole industry to be connected with big banks gobbling up small banks in the 10 years since Glass Steagall was repealed. And even those that remain independent by name are tangled together behind the scenes with the same derivatives rope.

That’s never true with restaurants. It’s not the nature of that industry. They tend to be distributed, each competing with all the others. And while we might mourn when our favorite neighborhood bistro goes out of business, we know others will pop-up soon enough. That industry is a true Hydra. Cut off one head, and more will grow back. You can’t kill it.

III. Going Back to New Bern

This is not really about banks and restaurants. That is, after all, an absurd comparison. But when we start looking at local economies, we fall into the same trap as the banking industry by concentrating our resources. Our economic developers spend a lot of energy convincing the big company, big employers to come to town. We rally resources to give them tax breaks and guaranteed loans. And it makes sense, we’re proud of Raleigh and want it to gain national attention and grow by leaps and bounds. That happens when you persuade MetLife and Fidelity Investments to relocate lots of high-paying jobs here. You don’t get the same attention when a tiny, entrepreneurial business gets going. It just seems ho-hum by comparison.

I wrote about this a few months ago when discussing the impact of moving my family’s emergency savings fund to Self-Help Credit Union in Durham. (See Michelle Gets a Loan: How a Credit Union Helps Where Banks Just Won’t.) In researching Self-Help, I learned what happened throughout North Carolina when we started losing the textile industry. Plants couldn’t compete with cheaper labor/cheaper products coming in from overseas, so they were either going out of business or moving overseas themselves. The effects of this were overwhelming. North Carolina was so dependent on this one industry – and individual towns were so dependent on single textile factories – that it has taken generations to recover…and many communities have yet to recover fully.

New Bern lost its Texfi plant in 1980. It halted production abruptly and laid-off 500 employees. This was painful. Texfi was one of the biggest employers in that small town, and there were not other businesses able to absorb the workers. Worst yet, the town had come to depend on Texfi for so long, it had lost its ability to train and fund people who wanted to strike on their own with tiny entrepreneurial ventures. It fell into a downward spiral. This is where Self-Help got started. Banks wouldn’t help unemployed workers start companies that might lead to self-sufficiency. “Too risky,” they said.  So Self-Help did it. It tried to provide capital in places the banks weren’t willing to go. It saw these tiny little bakeries (the example I used) as a way to jump-start a community that might otherwise remain ignored and just wilt on the vine.

We don’t want that in Raleigh. Perhaps we’re immune to it, but I suspect otherwise. We could always do better.

IV. Towards a Hydra Economy

I’m reappropriating the Hydra for this metaphor. While it’s one bad dude of a monster, the Hydra is pretty useful as a way to describe a healthy economy. So I’m trying this term on for size: the Hydra Economy.

A Hydra economy looks like the restaurant industry that Taleb describes above. It’s one in which lots of little activity chugs along, new businesses are coming and going, risk is distributed, and no one gets too-big-to-fail status. If one head gets lopped off – if one business fails – that’s okay. The ecosystem always has others at the ready to sprout up and keep moving.

New Bern was not a Hydra economy in 1980. All the risk was concentrated in a handful of too-big-to-fail employers. Raleigh is much more diversified, but I wouldn’t say we’re a Hydra economy either. A lot of our employment is tied to government, industry, or businesses employing thousands of people each. If those went away, the losses would ripple through our community.

We need an active, fertile ecosystem of entrepreneurs. And, to an extent, we have it. But early ventures still have a hard time getting access to capital, and even established (but small) businesses struggle for growth capital. To become a healthy Hydra economy, we must have mechanisms for providing capital to the smallest ventures to get them started and to help them grow.

My Enough Project is built around the thesis that we’re just doing too little on this front. My Enough Project is a tiny test of whether we can build even better mechanisms for funding that get us closer to an antifragile Raleigh; a Hydra economy.

(Not-so-tiny essay 5)

Paul Dryden

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