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  • Writer's pictureJake

The Economics of Wokeness: A Risk Analysis

What does the science of economics say about the spread of “Wokeness”? How is it that the culture of offense has so quickly become the norm, particularly among corporations? There are good answers about the origin and strength of our latest cultural phenomenon stemming from sociology, theology, philosophy and other disciplines, but here we will examine it with an eye towards risk transfer. Let’s begin by reviewing some concepts in risk management and then apply them to the cultural changes we see.

Do-nut cross the street:

Imagine you are crossing a busy street to get the world’s best donut which here we will imagine are sold one at a time. You see a break in traffic and are 99.999% certain you will cross safely. That last 0.0001% change represents the chance you trip, fall, an oncoming car doesn't notice you in time, and kills you. Depending on the value of the reward on the other side of the street, you could rationally conclude this is an acceptable level of risk to undertake. It is, after all, the world’s best donut. You are not the only one making this “calculation”. Let’s say 10,000 of your friends will independently cross the busy street for the same reason as you did. Each performs the risk analysis and recognizes that in light of the donut on the other side, it is in their rational best interest to cross at such a low rate of risk.

In this first scenario, the risk and reward accrue to the same economic actor. In this second scenario, we will make the risk accrue to one person while the reward remain distributed: you have decided to make all of the donut runs for your 10,000 friends. Given the probabilities above, you have a 90.5% chance of death by the end of the 10,000 runs. If you know this, there is no possible way you will make the decision to get your friends those donuts.

With each trip by the individual 10,000 people, value was created in excess of risk. The total value in the first scenario could be represented by:

(Value of donut) - (Risk of death x value of life) = (Value of the donut trip)

(Value of the donut trip * (10,000 trips) = (Total value of donut trips)

Scenario three: you recognize that you are, in fact, an excellent judge of oncoming traffic. You care for your friends and decide to act as a crossing guard at this busy street, telling them when they can and cannot cross. One might think the risk and reward accrue to only those crossing the street, just like in scenario one. Everyone will get a donut safely, you may think. But no. We have introduced a new, concentrated risk that lands on you, the crossing guard. If you apply the same rational 0.0001% risk model to all of your friends, then your actions as a crossing guard have a 90.5% chance of getting one of your friends killed. Not only will this be personally devastating, all of your 9,999 other friends will be upset at your clear lack of regard for their safety.

One way to solve this is to make sure there is no more than a 0.0001% of anyone dying. However, that level of caution is 10,000 times higher than what is socially optimal, if the risk were distributed to individual friends. With this level of caution, it is doubtful any of your friends will ever cross the street and create donut based enjoyment value.

In the second and third scenario, all of the economic actors acted rationally and yet no donut based value was created. Clearly, the socially optimal risk distribution would be the first scenario.

Starbucks: Those the vicious racists

A few years ago, a controversy broke out about a Starbucks manager calling the police on two black men, who were using the tables without ordering a beverage. The incident in Philadelphia had damning footage that spread quickly throughout the world. In the aftermath of the debacle, Starbucks shut down its stores for racial sensitivity training, which cost in excess of $12 million in lost revenue alone.

For an individual coffee shop, it is rational to kick out people who seem to be loitering. No café wants valuable tables to be used by non-paying customers. And yet, there is always the small risk of a black swan event, where they make the wrong decision or are perceived to do so, and are branded “racist” (or any other rapidly-content-hemorrhaging slur the woke are so fond of).

If the added sales are the donut, and crossing the street represents kicking out loiters, then being attacked by a PR firestorm is analogous to being hit by the car. Here Starbucks is acting like the crossing guard, setting rules for its 31,000 stores. Because any incident of actual or perceived injustice is borne by Starbucks as a whole, and the benefits are distributed to individual stores, we would expect Starbucks to be about 31,000 times more cautious than would be socially optimal.

Woke culture has found a positive feedback loop. The more costly defaming a brand’s image appears to be, the more companies will be forced to act in accordance with the woke’s agenda. The more companies do this, the stronger the cultural movement becomes. Or at least this appears to be so. Around and around we go. Another coffee store brand like Dunkin surely sees what happened to Starbucks as a cautionary tale. Not only might they preemptively take steps to align themselves with the woke mobs, but by doing so they are indoctrinating their employees in the leftest way of thinking.

Trader – I’m not playing along

Traders Joe’s was was accused of “racism” because their ethnic food lines use names like “Trader Jose” for Mexican food and other similar names for other products. When attacked online, the company did something absolutely amazing in our current culture: they stood by their decision. The company denied the names were racist, told the public they don’t make decisions based on people’s petitions, and explained the names are a lighthearted way to showcase cultural products.

They stood up to the bully and found the mob backed down. At least in their case, the feedback loop was broken. Other companies ought to take note. The consequences of defying the left are nowhere near as bad as they would like you to believe.

All media is increasingly becoming national media, as local news sources continue to fizzle and die. Again, this makes sense, the cost of a reporter is similar for a local and a national story, yet the audience is orders of magnitude larger for the latter. It comes as no surprise that this further increases the publicity risk of a corporate misstep. What Trader Joe’s discovered is that in this new environment, the news is really just entertainment, because it has become further removed from people’s actual lives. When they stopped playing along and simply sent out a commonsense press release, they stopped being an entertaining story and the reporting vanished.

What to do

Companies that grow and multiply are the ones that best respond to the economic incentives facing them. As the cost of negative brand imaging has risen, their behavior has adapted as expected. Conservatives ought to use our power to reshape the incentive structure and create positive feedback loops in our favor.

First, there needs to be an equal or greater risk to offending the Right. We need to take the time to tweet, email, review, call or Facebook companies that offend us. The Left is doing this, but our voices are not being heard. A great example is the “Cuties” controversy, where Netflix added and promoted a movie that sexualized children. The Right, and even some on the Left, rightly protested this...but not hard enough.

Next, we must praise companies that take a stand. When Trader Joe’s or someone like them bravely defies the Left, they need to hear we will support them. This is not about supporting alternative platforms, although that has its place; this is about clawing back what we used to have as neutral ground before it is gone.

Finally, this seems like an entrepreneurial moment. Companies are making sub-optimal decisions because of their risk environment. This is a great opportunity for small firms to expand by making rational economic moves. Perhaps a small cafe can differentiate itself by offering tables which can be reserved and rented, giving those customers who highly prioritize an open table a guarantee they will get one. Grocery stores are being pressured to remove ethic food sections because in some peoples minds, these sections are somehow racist. Removing these sections increases search costs for consumers who value these products. A small, ethnic-only grocer who organizes many unique ethnic products under one roof, could exploit an prosperous niche in response.

The Cato Institute once asked the following question. “Do you agree or disagree with the following statement: ‘The political climate these days prevents me from saying things I believe because they might offend others.’”

Those who identified as “Strongly Liberal” were the only group of Americans who disagreed as a majority. Only 23% of “Strongly Conservative” people thought they could express their beliefs. There is no good reason to let the extreme Left shut us up. Use your voice, call out what is wrong, cheer on what is good, and for heaven’s sake, stand up for common sense.

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