The myth of "passive income"

A friend of mine, JD, who used to work as a developer in New England, tells me that there's a new board game which is "sweeping the country." The game: Cashflow 101. The object of the game: become wealthy by mastering the art of investing. The game's designer (or perhaps just endorser): Robert Kiyosaki of Rich Dad, Poor Dad fame.

After reading his Yahoo! Finance column a few times, I've come to conclusion that Kiyosaki is a financial charlatan (which means that I refuse to drive traffic his way by linking to his stuff directly). In a nutshell, Kiyosaki's financial advice boils down to "Choose to be wealthy." I'm not kidding. His is the worst kind of quasi-libertarian snowjob, since if you pay for any of his motivational products or services, but don't get rich, why, it must be that you just haven't "really committed yourself" to being wealthy. If you're poor, it's your fault. You just haven't really, in your heart of hearts, chosen to be rich.

"As you can see, my heart of hearts loves poverty more than I do."

While it's true that the acquisition of wealth can be a very subtle art, it's an open secret that (in the US, at least) the most simple, most direct, and by far most common strategy for getting rich is to have wealthy parents. But this is all really an aside. What I really want to discuss is the folly underlying Kiyosaki's game and the worldview it reflects.

In Cashflow 101, each player begins with a randomly selected income-expense profile--a job and a bunch of expenses. After that,

There are two stages to the game. In the first, "the rat race", the player aims to raise his or her character's passive income level to where it exceeds the character's expenses. The winner is determined in the second stage, "the fast track". To win, a player must get his or her character to buy their "dream" or accumulate an additional $50,000 in monthly cash flow.

The whole thing revolves around this mysterious concept of passive income.

He just followed me home. Seriously. So... can I keep him?

Aaron Maxwell has written a pretty good beginner's guide to Cashflow 101, which explains that

[p]assive income is income that comes in with little or no additional effort on your part. If you have royalties from a book, income from a rental property you own, or stock that pays dividends each quarter, you have passive income.

Maxwell immediately goes on the qualify that definition:

Sometimes you'll have to do SOME work - if that rental house develops a leaky roof, you'd better have it fixed if you want to continue collecting rent! The difference is that for a "normal" job, you have to invest your time continually to keep receiving income, and if you work half as much, your income immediately goes down by half or more. With passive income, after you do some initial work up front, you have an income stream that continues with little or no time on your part to maintain it.

And there's the rub. Passive income isn't genuinely passive in the sense that it requires no effort. It's simply that compensation isn't immediately correlated to effort. Passive income doesn't require endless, futile labor to sustain it. Rather passive income represents one flow within a relationship of ownership--and in the opposite direction flows responsibility. We receive passive income from assets for whose condition and behavior we are liable.

Calling the income passive is misleading, because it implies that such income arrives not simply without--or with minimal--effort, but with minimal worry as well. But ask any landlord--you're essentially paid to worry about stuff. Whatever the gods of pop music claim to the contrary, tenants do not call Ghostbusters first. Especially when the heat goes out. First, they call the landlord. Then, they call their lawyers.

I ain't afraid o' no tenant.

Responsibility implies liability. Although rental property income provides the most stark example, other kinds of passive income also admit of analogous forms of responsibility. In exchange for book royalties, the author remains responsible for what he's written. In exchange for stock dividends, the owner becomes responsible for the behavior of the company whose shares she owns. (Warren Buffett famously advocates treating the purchase of stock as equivalent to the purchase of the entire company.)

The point here is that wealth, because it depends upon ownership, entails responsibility and liability in direct proportion. There's no such thing as truly passive income, and anyone who thinks she wants to be rich should be warned that Easy Street is the main thoroughfare in Neverland. Wealth is a sacred social trust, not a ticket to heedless self-indulgence. It is most certainly possible to enjoys the fruits of responsibility, but only for so long as and to the degree that one proves willing and able to bear its weight.

We have a word for those who take the lazy way to easy street, and it ain't flattering.

Knowing what you know

When I found Langdon Morris's book on innovation which boasts an epigram from Aristotle's Nicomachean Ethics, I was understandably excited. "Which passage from Aristotle did he choose?" you ask. Well, he chose:

Excellence is an art won by training and habituation. We are what we repeatedly do. Excellence, then, is not an act but a habit.

Which is an awesome quote, except that it doesn't belong to Aristotle. As a one-time teacher of the Nicomachean Ethics, I can vouch that this quote accurately sums up Aristotle's position on excellence. But when I went looking for the precise provenance of the quote, I discovered that (according to Wikiquote, at least) while the meaning does indeed belong to Aristotle, the specific words flowed from another's pen. Apparently, the above quote is Will Durant's summation of Aristotle's position in Book I of the Nicomachean Ethics. Since the quote remains a clear, concise, accurate summation--in fact, it's probably better than anything Aristotle wrote himself--we'll keep it.

I expect that Mr. Langdon's ethically sensitive parsing of the innovation process will yield a number of worthwhile insights, but for now I just want to cover one. His definition of knowledge and its implied definition of learning. Definitions appeal to my inner philosopher, and smart definitions are what make the world make sense. Too, the subject is, I think, central to the whole constellation of fields covered by this blog; loyal readers will recall that this blog was launched with a post on knowledge and learning.

Langdon's subtle and sophisticated definition of knowledge (found on p. 61 of the .pdf), boils down to the following:

Knowledge is concerned with "how," with the capacity to do useful things. Such capacity, in turn, comes about as a result of the integration of three other elements, information, theory, and experience. Information is the "what," the basic description [the "facts" or "data"]; theory is the conceptual framework that explains how the world functions [the "context"], and experience is the immersive and multidimensional process of doing and having done [the "practice"].

The subtle shift in emphasis from knowledge-as-what to knowledge-as-how turns our entire educational system on its head. Knowledge isn't something that you have--it's something that you exercise. It isn't an amalgam of friable and discrete facts--it's a layered, nested, and embodied concatenation of practices. It isn't a two-dimensional map of bounded domains--it's a multi-dimensional narrative.

Academic education as internal phrenology.

On Langdon's definition of knowledge learning becomes the subjective fusion of information, theory, and experience. The student generates knowledge for himself by bringing information, theory, and experience into relation with one another. It isn't enough simply to have data; nor is it enough to see contextual possibilities; nor is it enough simply to have one or several experiences. All three must fuse within a single self-awareness, and the resulting knowledge possesses the breadth and depth only of the most limited of the three factors.

And perhaps most importantly for me, as an educator, on Langdon's definition of knowledge teaching becomes a creative attempt to stimulate and/or guide the student to meld the three ingredients of knowledge into practicable know-how. Successful teaching doesn't mean providing students with more or better information; it has to do with process only tangentially. Successful teaching means that students are, after being taught, measurably more effective in doing things. They get more done of what they want to do. It's hard to imagine students wanting anything else from their teachers--which may in itself be the strongest single argument for Langdon's definition.

Sector four

A riddle: If you're not for-profit, and you're not non-profit, what are you?

"Ah..." says the clever reader. "You're the government."

"But my lawyers tell me that I really am the government."

But let's just say that you're not the government either. (You listening, George?) You're still a private organization, you don't live off charitable donations, and you're not just in it for the money. Is there a fourth option?

There is. Although not fully formed, the emergent fourth sector comprises organizations not interested in playing by the old rules. Goodbye Marx, Spencer, Jacobs, and even Keynes. Hello KaosPilots. Increasingly referred to as "for-benefit," 4th Sector organizations have the following features:

• Privately owned and controlled (not government)
• Sustains its operations based on income generated by their activities (not a charity)
• Returns some of their surplus to their equity owners in the form of profits (not a non-profit)
• Leaves some of the value it generates in the community where it can continue to accrue (not merely a profit machine)

While for-benefit organizations often represent the fruit of social entrepreneurship, they're not one and the same. Social entrepreneurship (which has very official support here in Canada and elsewhere) means using the tools, techniques, and attitude of for-profit entrepreneurship to tackle social issues. For-benefits are one possible outcome of social entrepreneurship, but so are innovative charities, non-profits, political organizations, one-off events... even for-profits can be conscripted sometimes.

While no one knows exactly what the 4th Sector is going to look like, it's increasingly obvious that it's coming. (Even the last-to-every-party NYT has caught the shift in the wind.) And it won't be just companies--it's a whole new ecosystem. They're even growing their own venture capital firms. Watch out, old order.

"4th Sector rabble resists Ancien Régime forces?" No way.
"4th Sector overruns final barricade manned by scruffy Ancien Régime holdouts." Oh, yeah.

Development of the slums, for the slums, by the slums

Shack / Slum Dwellers International (an organization which seems to take a Puckish pride in the lumpishness of its name) has undertaken a challenging mission: "Securing land tenure and housing" for the urban poor "in 24 countries on 3 different continents." Bold, but hardly original. Their approach, however, is another matter.

The group, known by the initials SDI and formed in India in 1996, is a loose network of grass-roots organizations of the urban poor. It’s grown to millions of members in 24 nations, cities spread from Manila to Cape Town, Mumbai to Sao Paulo. Typically, members are women ready to share their meager savings in collective efforts to upgrade their homes, secure titles to the land their houses sit on, build a latrine block, perhaps start a school.

Slum dwellers sit right across the table from local government authorities, designing projects and negotiating how they’ll be financed and carried out.

Of course, the slum dwellers get professional advice [.pdf], but we're talking about slum dwellers acting as their own real-estate developers. For themselves and on their own terms. And they just got an unrestricted grant of US $10M from the Gates Foundation.

Unbelievable? On the contrary: perfectly necessary. When governments, NGOs, and big businesses can't or won't get people what they want, people quite naturally just do it themselves. Although it's obvious, it bears repeating: the poor (like every other demographic) are their own best--and in many cases only--allies.

Caging the innovation bird

So, 800-pound Microsoft has begun developing a network of Innovation Centers around the globe as part of strategy to "to foster innovation and growth in local software economies." Hmmm....

I think most people would be at least a little suspicious of Microsoft's intentions in spearheading such an effort. Innovation is inherently a collaborative and not a competitive process. Microsoft claims to be cooperating with governments, universities, and other software companies; while I see no reason to think that they're not doing so, I do believe there are grounds for thinking that Microsoft may understand "cooperation" differently than some of its Innovation Center partners. Microsoft Founder Mr. Gates may or may not have reconnected with his inner philanthropist; it remains the case that Microsoft's behavior and corporate culture during his tenure was profoundly combative and territorial.

Soon every innovation in this neighborhood... will be mine!
(Photo by oddthingies)

A key question private businesses are asking themselves these days is how to capture value generated by an innovation process--how keep the innovation bird happy in its cage, as it were. Innovation, however, doesn't just thrive in an open environment--it arguably cannot even survive unless it can roam freely, build doors in impenetrable walls, outgrow its origins. While people can own innovation processes and products in the looser sense of taking responsibility for them, it's hard to see how anyone can own them in the stricter legal sense. (And I seriously, seriously doubt that Microsoft will be the one to crack this nut; their outlook is too closed.)

And if you've been wondering whether or not the new fixation on innovation is just a passing fad, it isn't. My ex-boss David Smith of the Affordable Housing Institute recently blogged about an April 2007 PNAS paper by Luís M. A. Bettencourt, et al., entitled "Growth, innovation, scaling, and the pace of life in cities." According to Smith, Bettencourt et al. divide all the factors of urban life into three categories:

1. Factors that scale linearly with the city's size, such as number of jobs, water consumption, etc. (Smith calls these "personal matters");
2. Factors that scale sublinearly with the city's size--i.e., those factors that enjoy economies of scale--such as consumption of energy and transportation resources (Smith calls these "hardware");
3. those factors that scale superlinearly with the city's scale--i.e., those factors which enjoy network effects--such as disease rates, innovation rates, and wealth generation (Smith calls these "software," or "social interactions").
   

Wealth is, as Jane Jacobs has noted, an urban phenomenon. But wealth moves hand in hand with innovation--both are superlinear urban effects. Which means that big cities both demand and generate higher rates of innovation and wealth generation. Note that superlinear effects are not merely epiphenomena--that is, it's not just that bigger cities "happen to" generate exponentially more innovation, crime, wealth, and disease. The economies of bigger cities, when they grow (again, as Jacobs has noted), grow on the basis of wealth and innovation. An ever-growing economy producing ever more wealth--the holy grail of Protestant democratic capitalism--both requires and produces ever more innovation. As long as our cities keep getting bigger we will keep getting wealthier and smarter, and innovation will weave itself ever more inextricably into our economies and cultures.

As anyone who's tried to innovate knows, innovation relies upon creativity, and creativity thrives in open systems, open networks, and open minds. It's no wonder that the interests in innovation and social entrepreneurship have developed in parallel, since social entrepreneurs seem willing to perform all kinds of commercial functions without basing their organizations on the pathological greed and egomania which lie at the heart of corporate misbehavior. Greed and egomania are diametrically opposed to the values of generosity and humility which form the basis of every successful culture of innovation.

Corporations today--and Microsoft is no exception--want the wealth that follows on the heels of good innovation, but they can't bring themselves to believe that "proprietary innovation" makes about as much sense as "a happily caged falcon." At bottom, I think it's our whole notion of ownership which needs rethinking. In a sense, after all, wealth belongs to communities (or societies, if you prefer). We just entrust it to corporations and families and individuals in the belief that they will use it responsibly if their personal well-being depends upon its sound management. A pretty smart system, overall. But can we imagine (and design) a better one? Can we imagine (and design) a form of ownership which engenders and protects responsibility, but also resists the excesses of the miser and the tyrant?

Maybe building a better cage means not building a cage at all; maybe it means becoming falconers.
(Photo by wallyg)

Responsibility in education

One of my personal favorite pedagogic precepts was best expressed by the laconic Mr. Miyagi, one of the all-time best teachers portrayed in cinema: "No such thing as bad student; only bad teacher."

"Man who catch fly with chopstick accomplish anything."

Which is not to say that even the most gifted teacher will enjoy success with every student. It's just that the most important lessons we learn from our teachers--how to face the overwhelming reality of human ignorance, when and how to (dis)respect authority, when to resort to knowledge and when to resort to compassion--derive not from what the teacher knows but from who the teacher is. That's because good teachers know that learning is not the process by which the student absorbs the teacher's knowledge, but rather the process by the student creates knowledge. The teacher can only either stimulate or suppress the student's personal learning process; or, put differently, what a student really gets from a teacher is an attitude, and if a student internalizes a (teacher's) bad attitude, then that student will find all future learning difficult.

Thus Bob Talbert's corollary to Mr. Miyagi's precept: "Good teachers are costly, but bad teachers cost more." So when I see failure in an educational context, I always look to the teacher (and his bosses) first.

Mr. Whipswitch could never understand why the other teachers kept ending up with the best students.

But it's not always that simple. Take the example of 14-year old Australian Beau Abela, who can barely read, let alone spell. He's in high-school, and has trouble counting beyond 10, so let's just set aside any questions you might have about his performance in algebra class. Beau suffers from a mild learning disability, so in some ways it's not surprising that his performance is subpar for his age, but this seems egregious. Indeed, Beau's condition--unless you're one of those all-too-common philistines who actually embrace incompetence--seems utterly outrageous. As in, it outrages me.

And I'm not the only one who's upset. Beau's father is suing the Victorian educational department for AU $300k. On the surface, seems like they probably deserve it. As you might expect,

Mr Abela [has] said his court action was not motivated by money, but by frustration at the way the system appeared to be letting down children. ... Mr Abela said he would drop the lawsuit tomorrow if the department would guarantee him it would educate (Beau) to a proper level.

I think most people can understand that Mr Abela is frustrated given his son's lackluster academic performance, but what exactly does he mean when says that the system is "letting down children?" Certainly the system doesn't seem to be producing measurable results in Beau's case. But to whom to attribute this failure? Or rather, how should responsibility for this failure be untangled?

Mr Abela concedes that

the Education Department had made significant efforts to help his son, including paying for one-on-one tutoring and providing a laptop. Over the years dozens of assessments and reports have been done to get to the bottom of Beau's problems. ... Documents seen by the Sunday Herald Sun show Panton Hills Primary School and Eltham High have directed considerable time and effort towards the troubled student.

What kind of problems, exactly?

Beau has been on ADHD medication in the past and school reports consistently say he does not concentrate in class or make an effort with his work. ... Eltham High School principal Vincent Sicari said in a recent report Beau's behaviour was increasingly disruptive and violent.

Doesn't sound like Beau's is an easy case. In fact, it rather sounds like the school system has been sensitive, proactive, and generous.

As framed by the Sunday Herald Sun, it looks as though Mr Abela is suing simply because he's frustrated--not because the school is at fault. And even if the school had been less responsive, how much (and what kind of) responsibility for Beau's failure could we honestly lay at the feet of his teachers and their bosses? How much (and what kind) belongs to Beau? Without more particular information on Beau's case, it's impossible to judge the case wisely.

But the very intractability of the case forces one interesting issue to the surface: Why do we persist in regarding education as a responsibility? Issues in contemporary education--especially failures--are almost always framed as a polarized conflict between individual responsibility and systemic sensitivity. The important question, as this line of thinking has it, is how much responsibility belongs to the student and how much to the system (as though responsibility only came in one flavor).

The key assumption which underlies this thinking is that education is a necessity, with all that that entails. And of course, education is necessary for the kind of society we operate [.pdf], the kind of culture we participate, the kind of government we practice. Indeed, few institutions bear more of the weight of our current way of life than universal education. The incredible social importance of education, however, tends to overshadow the fact that education provides (if these guys are to be believed) the most sublime pleasure available to human experience. It's worth remembering that our word school derives from the Greek skhole, which means "leisure"--school is supposed to be what humans do for fun.

In a Protestant culture (and especially in a Puritan culture), even the pleasure of learning is suspect; only the pleasure of discipline passes without question--especially if the one disciplined is oneself.

Wait just a minute? Did I just say that learning is fun? Yes. That's it exactly. We often get so invested in the importance of "an education" (by which we too often mean "a decent résumé") that we forget that we can always recognize real learning when it happens because it is always pleasurable. (Incidentally, this is a non-trivial criticism of contemporary schooling, which is, as everyone knows, no fun at all. When learning happens in an academic environment, it's almost always either an accident or against the rules.)

So I have one question for Beau and his teachers: What does it mean that Beau is obviously having no fun at all "being educated" at Eltham High?