Posted by: rolfsky | December 19, 2006

Maslow’s Hierarchy of needs controls markets

This morning, I was reading an article and I thought that I’d been scooped, but it turns out they were arguing a my point without knowing why. I thought that I should write this down before someone else does.

I had created an elaborate story around this, but it turns out I am not the first person to recognize that innovation is often driven by miliary needs. In this article from 2004, N N SACHITANAND points out that:

Self-defence has been an age-old determinant in the innovative thrust. The need to detect in time the incoming waves of Luftwaffe bombers in the Second World War spurred on the invention of radar systems by the British. Living under the constant threat of attack by hostile neighbours has made the Israelis one of the most innovative nations in the fields of weaponry, electronics and information technology.

In the other aforementioned article, The Economist states:

In the past, innovation was driven by the military or corporate markets. But now the consumer market, with its vast economies of scale and appetite for novelty, leads the way.

The statement makes sense, our military pushes technology, in order to keep us safe, of course we would pursue those ends. The Economist’s view that innovation is also driven by corporate markets is also an easy leap to make; better technology helps a corporation get “the edge” against their competitors. A little more of a stretch is the assertion that the newest force driving the market is now directly consumers with an “appetite for novelty”.

It is interesting to note why it’s so easy for us to believe that military and corporate goals shape our markets. The concept that money would be spent on public safety “just makes sense” without even a second thought. Corporate innovation is a little less readily accepted, but it doesn’t seem illogical. So why do we immediately assume self-defense is “a given” and business profits, not too far off? The answer to this question lies in how we’ve been programmed during our evolution. In attempting to discern the ascending levels of human motivations, Maslow created a generally accepted hierarchy of needs. This hierarchy runs roughly in the following order: survival, prosperity, identity within a group, identity of self, identity of the group. I have a strong suspicion that these needs are an outgrowth of our evolutionary path, but that story is for another time.

What is interesting about Maslow’s hierarchy of needs is that it can be applied by proxy to entire markets. If we understand that markets act like individuals, we can analyze markets and trends in the same way we would analyze an individual.

Here’s the premise:

  • markets are made up of people
  • people have a recognized hierarchy of needs
  • therefore, market pressures are really the aggregated needs of the members of the market

It is most straight-forward to trace how these needs play themselves out in a few technologies with high barriers such as funamental advances in communications.

These needs express themselves in aggregate across all persons within the market. When there is some type of official body that expresses the will of the people (a government), these needs can be quantified and addressed on a most-needed basis. In a democratic government, individuals needs and desires can be expressed directly, or by proxy in a republic by electing someone who roughly reflects their views.

Governments which have control over collected taxes can function as a meta-organism, working to ensure its long-term survival and prosperity. As an organism, governments cannot exist without sovereignty, so the need for survival is commonly implemented as a well-funded military. The amount of funding a military receives is in direct proportion to which the populous fears for their national security. In this case, the individuals need for security is expressed as support for a strong military. Because the need for survival is the fundamental need in Maslow’s hierarchy and a military is commonly the only branch of society entrusted with the power to physically enforce this survival, the military often receives a significant portion of taxed revenue. Similarly in, communities where fire protection is a commonly shared need, those programs are more highly funded.

As all individuals have different pre-existing conditions, the quantity of their resources devoted to survival can appear subjective. The resident of an established, well-formed rural ranch with means to protect itself will place less emphasis on external physical security than an urban dweller who’s protection is largely controlled by a local police force. Environmental and social conditions influence the amount of resources required to “satisfy” each level of the hierarchy for each individual.

Because of these differences in resource requirements, a spectrum of motivations is expressed by individuals in markets at any given time. The aggregated needs are expressed in how the individuals decide to spend their resources. Where needs exist, an opportunity to fulfill those needs exist. Businesses who enable themselves as suppliers to those needs are able to collect stored resources in the form of cash.

Individuals’ Needs Drive Aggregate Markets

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Responses

  1. Rolf, check out Eric Beinhocker’s “The Origin of Wealth”. He discusses Maslow’s hierarchy and the source of market “value” from a complexity science and thermodynamics perspective.

    You are dead on, but as far as being scooped…as I recall, even Adam Smith and early economists have toyed with the idea of “utiles”, little measure of utility for consumers/ purchasers in economics. A utile is essentially a measure of the utility and how much someone is willing to sacrifice in exchange for some good or service. Maslow’s hierarchy fits neatly into the core set of utility for we humans.

    Creating a disequilibrium of resource exchange (This is worth more for you to get than for me to make and supply) is the name of the game and then drives the collection of surplus capital.

    Also check out Hernando de Soto’s “Mystery of Capital”. Which discusses similar ideas in relation to how property can be leveraged to generate capital. You can apply the same principles to intellectual capital and property.


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