Related Books: The End of Jobs, Choose Yourself, The 4-Hour Workweek.
The Short Summary Of The Fourth Economy
The times they are’a changin’, and this book explains why we currently see economic and political turmoil in the Western world. Simply put, the limits to progress and growth for our society is in the midts of fundamental change. We’ve now overcome three of four economic limits to progress – land, capital and labour. What’s currently capping our progress, is a lack of entrepreneurship and innovation.
This phase shift, as with previous shifts throughout history, leads to intermittent chaos as we struggle to find new ways of organising our societies, our schools, our workplaces and, ultimately, our lives. Ron Davison’s book is long, deeply insightful and flat out fascinating. I’ve never taken more notes from a single book, so summarising this book in a few sentences is incredibly hard. If you’re planning to live to see the future, your ability to thrive in a post information age may in fact depend on understanding the contents of this book. I highly recommend you read it.
Backstory: How I Came Across This Book by Attempting to Learn Graphic Design (!)
I got this book for free, directly from the author, thanks to trying my luck as a novice graphic designer. Long story short, I read another book, The End of Jobs, which extensively referenced the core ideas of The Fourth Economy. I loved the ideas in there, and I decided to put it into an infographic that I could use to explain these ideas to others.
I made the infographic, sent it out into the wild world of the internet, and suddenly Taylor Pearson and Ron Davison, the authors of The End of Jobs and The Fourth Economy respectively. Long story short, Ron gave me his book, and I spent the next two weeks with my nose in it. Read the rest of this design story in my post How I Taught Myself Basic Graphic Design, And Conneced With Influencers In The Process.
Information was scarce in 1900 and more of it so easily informed us then. More than a century later, additional information is more likely to distract us than make us productive. The limit to progress has shifted.
It is true that traditional economic policies like education and access to capital will remain important in the future. It is not true that such policies will be enough.
Scarcities of land, capital, and knowledge workers have each – in turn – limited progress. Communities that focused on overcoming these limits by developing more land, capital, or knowledge workers prospered.
Back in 2005, there was a tsunami in the Indian Ocean. It began with an underwater earthquake that people did not notice and ended with a tsunami that people could not avoid. Economic change seems to work in the same way. The underwater earthquake that few notice is the shift in the limit to progress; the tsunami that people cannot avoid comes in the form of a new economy.
A technological invention is a novel design that allows parts to do jointly what they could not do on their own.
A social invention is a novel design that allows people to do jointly what they could not do on their own.
One quarter of Americans will never marry, and 40 to 50% of the ones who do will divorce. If a drug failed as often and had as many side effects as western marriage, the FDA probably would not approve it.
As someone who has only known a tricycle can’t just declare that they’re going to invent a luxury car without lots of intermediate inventions, so it is with simple communities that have only known tyranny and want to create a modern democracy. Inventions are complex and build on one another.
We recreate civilization in each child. We call it education. Look at the huge amount of time and attention that we devote to “civilizing” a baby to become a member of society. The gross effort it takes to recreate society in each child should be testament to the fact that a specific culture is not a “natural” or spontaneous state; Culture is a social invention that takes great effort. Specific language and manners, what we question and what we accept, social roles – all of these end products represent the teaching of parents, authorities, and even the media and are essentially conventions that work to construct meaning, to create the modern life.
Rather than see them as inventions, we often see social inventions as simply “the way things are.” Should you want a reminder that social inventions are just made up, however, raise a child. Parents know that the curious, rebellious, stubborn, and lazy child will challenge social inventions.
Learn about your culture and your place in it, but do not cling too tightly to it. What we’re teaching you probably needs to change, and soon.
Through history, the ways of being – the options for how we live our lives – have changed dramatically. What is perhaps most interesting about this change is that in each succeeding generation, one’s way of being has been defined less by the society one is, by chance, born into and defined more by personal choice. There is little reason to believe that the ratio of intentionality and choice to chance and destiny will not continue to rise. Increasingly, individuals will define their lives rather than leave that definition to the society into which they are born. This is already happening.
Charles Tart makes the point that a hypnotist, in a matter of minutes, can program you to do things you do not normally do and to believe what is not so. He then asks, how much more powerfully can society program you during the course of your life, given that it has so much more time and so many more persuasive tools at its disposal than does a hypnotist?
Imagine a world in which more people engage in acts of social invention. If social invention becomes to this century what technological invention was to the last, we will witness such a change. Or, rather, we’ll cause such a change.
As you can see, even though the output of your first machine has increased, the output of your factory has not. Your factory output is still 2. And the reason is that the limit has shifted from the first machine to your second machine. The second machine’s output is still just 2 and that’s your factory’s new limit. You may redouble your efforts to increase the output of the first machine, trying to recapture past success. You might even succeed in achieving a level of output you have never before hit, bringing its output to four. Still, though, the total output is limited by the second machine, the new limit. Improvements to the first machine no longer translate into improvements in the factory once the limit has shifted to this second machine. When the limit shifts, you have to shift your focus.
We can generalize from this factory to any system with a goal, whether the system is a factory, a freeway, an information system or even an economy. We can say two things about such systems. 1. You have to focus on the limit to improve the system, and 2. Successfully overcoming one limit creates a new limit.
Limits define communities in a variety of ways. The community whose economy is limited by land is likely to be very religious, for instance. They rightfully see that the natural resources they enjoy have their origins in something other than man’s efforts. The fish, the fertile land, rain, and the seasons are all blessings that they can do little to control or influence. Even today, agricultural or rural communities throughout the West are generally more religious than are urban communities.
An economy limited by land is ready for war. Members of this community know that any acre you rule is an acre that they do not. The competition for control of natural resources is zero-sum. (Control of resources is win-lose, or zero-sum. Trade of resources can be win-win, or variable sum. Communities whose progress is limited by land prepare for war and put a great deal of effort into military training and actual war.
By contrast, a community that faces the limit of knowledge work is less likely to be zero-sum. We cannot exchange acreage and each come away with more acres but we can exchange ideas and each come away smarter.
The more choice and freedom we give the individual, the more interesting the world is, and the better life is for nearly everyone. Inventions that give us progress are the ones that give us, along with generations to come, more autonomy and more choice about how to define and live our lives.
What policy would most effectively create more jobs more quickly? Imagine that policy makers had a magic wand that let them double any one of the following in 2013: college graduates, capital, or entrepreneurs. (We will leave aside the possibility of doubling the amount of land with a surprise attack of Canada.)
In the second economy, the simple answer would have been to get more capital. We could double capital held in banks and corporations to $8 trillion. Given the first $4 trillion is already idle, it is hard to imagine that pouring more money into banks and corporations will make a difference. (And yet, of course, this is what policy makers at the Fed had been doing until recently.) During the Great Recession, credit and capital did limit the economy. We seem to be getting past that now.
William Gibson said that “the future is already here – it’s just not very evenly distributed.” In the same way, the past is still here, just not in every mind or region.
We’re currently left with entrepreneurship as the limit. Adding more graduates or capital to the system would not necessarily create more jobs and wealth. By contrast, it is hard to imagine that doubling the number of entrepreneurs from 5.7 million to 11.4 million would not. To assume that a constant percentage succeed and become employers is to answer the question about which factor now limits.
Air still matters even when you are thirsty. Success at the old limit gives you a foundation for addressing the new limit. Factories that define the industrial economy could do little without natural resources to process, natural resources, which defined the limits of the agricultural economy. Knowledge workers sitting around manipulating symbols without machines to respond and to do the heavy lifting would be wildly ineffective,
Entrepreneurship is social invention that creates new systems.
Entrepreneurship in the fourth economy will be about creating new businesses and creating equity, as it always has been. It will also be about popularizing entrepreneurship, making more people more entrepreneurial, even if their role is still that of employee rather than company founder.
Entrepreneurship will be to the fourth economy what technological invention was to the third economy.
Communities within the West that do not encourage entrepreneurship will struggle to create jobs and wealth. In 2000, becoming an entrepreneur was like becoming a knowledge worker in 1900. That is, it was possible but also hard enough that few people did it. Systems were not really set up to make it common. One of the most urgent changes the West needs to make is to change this, working towards popularizing entrepreneurship in this century as we did knowledge work in the last.
Getting communities to shift is problematic for lots of reasons. One is that the very fact of a community facing a new limit is proof that their old strategies were effective. These strategies took them up to the new limit, and it is hard to abandon the tried and true.
If a community is serious about overcoming the limit of its economy, it needs to be serious enough to cede control from a previously dominant institution to a new, more effective one. This process alone makes for wrenching social change.
We have so tamed and subdued nature that it is hard for us to imagine how threatening the wilderness would have seemed to the average person at the beginning of the first economy. To venture into the forest or ocean was to court death.
Nature did not need protection from people; people needed protection from nature. There did not appear to be any real limits to how many fish could be hauled out in nets or how many birds could be snared or shot with arrows. For instance, in New England there was such a proliferation of number and variety of fish—fish that today we’ve never seen—that it was illegal to feed one’s servants lobster more than twice a week. Lobster was considered a garbage fish. The limit was not in nature. The limit was what people could take from nature.
The world’s population in 1300 was about 5% of today’s population, and life expectancy was roughly twenty years in the year 1000. Life was hard.
By 1305, King Edward I (Kind of England 1272 – 1307) had made a really important social invention: he’d standardized measures like the yard and the acre. This, in turn, helped with the invention of private property, turning land into acreage.
An acre once referred to an area that a team of oxen could plow in a day but Edward standardized it at 4,840 yards – a necessary step towards creating land as commodity that could be bought and sold.
In medieval times, pepper and other spices were status symbols, highly coveted, exotic, and expensive. So much so that pepper’s special place in our diet has carried over into today’s fine restaurants.
And as with any highly priced item, spices conveyed status; they meant it literally when they said that a man had good taste.
Since the first economy, we have made economic progress synonymous with the consumption of natural resources. It might be time to change that.
To shift from quantity of goods to quality of life will mean broadening our definition of economic goods to include economic goods to do. This gets to the definition of happiness and work. William James wrote that “Lives based on having are less free than lives based either on doing or on being.”
Consumers have money because they – or someone sponsoring them—also wear the hat of producer, creating goods and services. In the fourth economy, the corporation will become more adept at creating goods to do, at creating work that is meaningful and creates flow. It will do as much to design work as it now does to design products.
Christian crusaders intent on conquering the Holy Land returned from their journey seduced by new ideas and products. They brought back from the Arabs their numerical system, their nautical and astronomical knowledge, and new luxuries. The numerical system was used in bookkeeping and business. The nautical knowledge helped spur navigation that enabled exploration and trade. The luxuries, of course, became the initial impetus for trade. The crusaders found the Promised Land but it was a little different from what they expected, the lasting impression seeming to be one of sales rather than salvation. The trip to Jerusalem curiously enough ended up more like a trip to the mall, leaving Europeans wishing they had more money for their next trip and knowing just what they would buy next time.
With a monopoly on Marco Polo’s trade routes, Venice became the gateway between Europe and Asia and gained enormous wealth and power through trade. To this day, Venice is one of the most beautiful cities in the world, its architecture a curious blend of the Arabic, Asian, and European that defined the trade routes that made it wealthy.
One defining social invention of this particular phase of the economy is something that remains with us to this day: venture capital. Columbus needed Isabel and Ferdinand to finance his venture across the Atlantic.
The American continents had been unreported in earlier literature. Not even the Bible made mention of it. Yet this land was populated not just by savages but also by huge empires that had ruling classes, religion and priests, and economic activity. To disorient and shock people as much today might take the discovery of life and civilization on another planet.
Trade in the first economy gave Italy the tomato, Ireland the potato, and England its tea. Change was not just an abstraction. It was something you could sink your teeth into. It is true that new ideas from exposure to exotic cultures changed minds.
Yet while alcohol may have aided the growth in the European population, it seems likely that it had another, more inhibitive effect as well. Before trade with the New World brought Europe the potato, only bread provided Europeans more calories than did beer. (In northern Europe, most calories came from bread and beer. In the south, most came from bread and wine.) As late as the seventeenth century, every man, woman, nun, priest, and child in England drank about three liters of beer each day. Beer soup was a typical German breakfast. The traditional economy in Europe was not the only thing that discouraged progress or change; the European population was probably a little buzzed for a few centuries. You may love your stoner friend but likely would not expect him to start a new business. Alcohol may have improved public health, but it likely also took an edge off drive, reason, and energy levels.
To state that land, or natural resources, was the limit to progress in this first economy is accurate, but it misses an important point. The first limit to progress is the recognition that a limit to progress exists.
Man’s mind stretched to a new idea, never goes back to its original dimension.
–Oliver Wendell Holmes
Trade links communities in ways that invariably bring in more of the foreign culture than bargained for. You open a trade route for spices and your children are soon buying oriental rugs and using arithmetic to calculate their profits. A new computer delights a devout Muslim until he sees his daughter imitating Beyoncé’s dance moves.
Drawing from common resources tends to make people more shortsighted. Columbus’ men reported that it was difficult to fall asleep because of the vast number of sea turtles banging against the side of the ships. Sea turtles are now protected under the Endangered Species Act. The number and variety of fish has dropped since colonial times, a consequence of what systems thinkers call the Tragedy of the Commons.
Saul Alinsky (1909 – 1972) writes that someone pushing for social change will rarely have a majority on his side.
[Similar quote: “Whenever you find yourself on the side of the majority, it is time to pause and reflect” –Mark Twain]
“What took place in the early 1500s was truly exceptional, something that had never happened before and never will again. Two cultural experiments, running in isolation for 15,000 years or more, at last came face to face. Amazingly, after all that time, each could recognize the other’s institutions. When Cortes landed in Mexico he found roads, canals, cities, palaces, schools, law courts, markets, irrigation works, kings, priests, temples, peasants, artisans, armies, astronomers, merchants, sports, theater, art, music, and books. Higher civilization, differing in detail but alike in essentials, had evolved independently on both sides of the earth.
“The test case of the civilizations in America suggests that we are predictable creatures, driven everywhere by similar needs, lusts, hopes, and follies.”
The flow of gold and silver alone from the New World was enough to change Europe, where prices rose with this new influx of precious metal. Furthermore, in order to have items to trade with the Americans, Europeans were driven to manufacture items, helping to push Europe towards a nascent capitalism.
“Not until 1822 did the church permit books to be printed which accepted that the earth’s motion was real, a delay which fatally damaged Catholic science and likewise church prestige. And so, despite the evidence, it took two hundred years for Copernicus to be fully accepted.”
Renaissance art drew the individual’s attention to representations of the world as it is; Copernicus drew the individual’s attention to the universe as it is. Both were revolutionary.
Before the Renaissance, the general rule was to side with tradition. After the Renaissance, the general rule was to side with observable facts.
In the Middle Ages, books worms were worms that actually ate books.
1453 was a great year for books. Guttenberg (1398 – 1468) used his new press to print the bible at Mainz and the Fall of Constantinople triggered a flood of books and antiquities into Italy that exposed Europeans to the inquisitive minds of Greeks and other pagans. By roughly 1500, one thousand printing offices had produced ten million copies of thirty-five thousand books. The Dark Ages that so depended on ignorance and superstition had little chance against this onslaught.
In the centuries after the fall of Rome, the Western church had rejected much of the pagan literature of the Greeks and Romans. But early in the first economy, Christians in the east petitioned Rome for help in defending against the Turks. During the talks to discuss bringing together the East and West, the eastern Christians visited Florence to attend a conference hosted by the Medici. Even the pope was there. The Italians, living in a part of the Christian world that had banned pagan literature, were extremely impressed and very jealous of the libraries the eastern scholars brought with them. Later, Constantinople fell to the Turks in 1453. Many of these eastern scholars, with fond memories of Medici hospitality, fled to Florence. They brought their Greek and Roman libraries with them and this is one big reason that the Renaissance began in Florence.
By Richard Hofstadter’s (1916 – 1970) definition, intellectuals are not necessarily smarter than other people are. What characterizes an intellectual is his or her willingness to follow ideas regardless of whether the conclusion supports or overturns existing institutions.
It was not just that these books exposed people to new ideas. They changed their ideas about the very purpose of ideas. Through medieval times, philosophy, knowledge, and theology were all aimed at preparing man for a safe death. Montaigne (1533 – 1592), who used the new popularity and affordability of books to popularize the essay, rejected this notion, “arguing that the purpose of knowledge is to teach men how to live more adequately, more productively, more happily, right here on earth. … This was in effect the birth of the human sciences.”
The shift from awaiting Fortune to pursuing Fortune lies at the crux of the difference between a traditional and an economic society.
Machiavelli also wrote about the state, a political entity never really described before. That is, he wrote about a region ruled by a public official who exercised authority throughout a region irrespective of exactly what person held that public office. This is the difference between a gang leader whose gang might dissolve when he gets shot and a head of state whose death does not change the position.
The historian Will Durant argues that the rediscovery of Greece and Rome was as important as the discovery of America, claiming that “the literary and philosophical transformation had far profounder results for the human spirit … [because it] liberated man from dogma, taught him to love life rather than brood about death, and made the European mind free.”
The Renaissance was a rebirth of interest in the secular, the basis for the first economy.
The word “nation-state” refers to a community that shares both culture (the nation) and a political system (the state). It combines social and political bonds, and separates a community from its neighbors who are subject to different laws and rulers and often have a different sense of identity.
In most places, the modern era brought only one or the other of these elements: some places developed a nation but no corresponding state (e.g., the Arab world); others developed states but no corresponding nations (e.g., Latin America, Sub-Saharan Africa). But the most effective social organizations were created, and the most explosive energies were released, when these two elements were fused together into the nation-state.“
It is really remarkable that people take so to nationalism. Csikszentmihalyi opined that the flag might have been the most important invention of civilization. It is one thing for people to rally around their clan but quite another for them to rally around a flag that gives them a shared identity with people they’ve never even met. We kill one group of strangers and die for another. Perhaps it is just me, but again, this seems like something akin to magic.
Nationalism does not just happen. While it is true that the nation-state is a social invention, it is not one you can easily and hastily cobble together. The question no one asks about Afghanistan as I write this (early in the second decade of the twenty-first century) is what sort of state makes sense, given there is no Afghan nation. You cannot force a nation into being, and attempts to do so generally mean imposing a state—something that ends up looking a tad imperialistic. Social inventions need to be at least as carefully constructed as technological inventions.
If you were to draw a map of Europe over the years prior to the fourteenth century, it would probably look like a lava lamp, shapes shifting over time as pieces are absorbed and broken off, people and regions becoming part of one kingdom and then another, some disappearing altogether and others growing. It would, in a sense, be much like a map of today’s modern corporations.
Peace and order result from the state claiming a “monopoly of power” and not allowing its citizens to kill who they would (something prosecuted as murder in the new nation-state) and instead ordering them to kill who the state would (something prosecuted as war).
Chief among the services of the emerging nation-states was the administration of justice. If people were not allowed to settle their disputes through force on their own, they had to have someone to whom they could turn. We use the term “court” today to refer to the office that settles criminal and civil issues. This use evolved from the king’s “court,” the officials who could be petitioned to settle a grievance. Kings were happy to provide this service because it meant that their authority was acknowledged. Gradually, communities were happy to turn to the king for this service because it meant that there was an ultimate authority able to resolve disputes. Kings made peace within their kingdom because they offered a final authority to settle disputes.
A European merchant in 1550 might have to contend with custom tolls about every six miles. Within an area the size of a modern country there were hundreds of different measurement standards and a multitude of currencies. It was expensive for merchants to do business because there were so many nobles who charged trade tariffs as a fee for passing through their land. One reason that merchants favored the jurisdiction of kings was that under this new system they could pay just one tax, rather than many tolls. King Louis XIV, for instance, made France a free trade zone in order to encourage trade and business. Louis also instituted a host of taxes to fund his new government (and, of course, Versailles and a lifestyle of unprecedented opulence).
Social and technological inventions often work together. The struggle to monopolize power coincided with the spread of guns and cannons. The gun shifted power from knights to armies, from skill and strength to whoever had money enough for armaments. A bullet could pierce armor and made knights obsolete. It is harder to think of further proof of this shift from skill and strength to resources than in the simple fact that the term “infantry” comes from the French reference to youth, or infants. Military success was not even dependent on full-grown men.
Sadly, the process that generally began with some semblance of shared nationality and then morphed into state building in Europe was reversed in places like the Middle East and Africa, a reversal that creates political turmoil to this day. In many African countries, the political parties are essentially defined by tribes.
We sent troops into Iraq for nation building, but the truth is they were, at best, engaged in acts of state building. Saddam Hussein ruled over three peoples, three nations, with tyrannical force. The nation-state of Iraq did not arise organically. It was not the product of one people’s desire to share one state or one government. A British administrator created Iraq by drawing lines on a map.
At the start of the first economy, in 1302, Pope Boniface had issued a bull that asserted his lordship over all of Christendom. By about 1700, Christendom had ended. In 1648, the Treaty of Westphalia formalized the concept of sovereign states. More importantly, it ended the notion of any state representing the one true faith that could be imposed on other nations. The Treaty of Utrecht in 1713 reiterated this new agreement. Between 1648 and 1712, the state became the ultimate authority, eclipsing the church’s long role as the supreme authority in the West. Christendom – the notion of Christianity as the basis for political power – ended with these treaties.
It took centuries to transform religion into a personal rather than social choice. The invention of the nation-state, the changes brought by global trade and conquest, and the Renaissance were all forces that transformed the medieval church. Most importantly, the power of the pope was dispersed to the average person. After 1700, each person could define religious faith for himself or herself, a right only the pope had before 1300. This is enormously important. If you do not have the right to define your own beliefs, you do not have the right to define your own life.
Look toward heaven for a sign about who orders the life of everyday people. At various times, in various places, the dominant building has been the cathedral, castle, parliament, bank, or capitol. Today, corporate skyscrapers dominate big cities’ skylines.
It takes different skills to conquer than it does to develop. It is one thing for armies to know how to raid a village to violently take the food and women. It is another to know how to raise crops and children.
Bad popes and CEOs, while not a sign of end times, are a sign that an institution has gone rogue. When the church’s focus is the glorification of the pope, or the corporation’s focus is enriching the CEO, it is an institution in dire need of reform or reinvention.
To head the church meant more power and riches than any other position could offer, and it is unsurprising that the position attracted alpha males with little compunction about how to acquire or exercise this power. To this day there seems to be confusion between the skills needed to rise to the top of an organization and the skills needed to make that organization effective.
Most previous popes lived more circumspectly, but I’m sure Alexander would tell you that they missed an amazing opportunity. And while it might be true that what they did was harmful to the church, Alexander and Julius’s actions did not hurt them as individuals. When power and privilege rest with elites, this drives a wedge between the fate of the institution and that of its leader; a modern CEO can make hundreds of times what his employees make while pursuing policies that hurt the company.
Luther helped formulate a religion that depended on scriptures rather than on Rome for its authority. Many rulers saw in this the opportunity to gain independence from the church, and some seized on this. It would, among other things, save them money.
When possession of the bible began to shift from church to home, so did power.
Luther and Calvin did not approve of the church’s secular tilt and sought, instead, to create a new church based on biblical truths rather than tradition, something uncorrupted by so much power and money. As it turns out, these two approaches had more in common than an opposition to the status quo. A church that kept itself pure by letting others care about secular things like money and the rule of territory proved a perfect complement to the newly emerging nation-state, which was secular in its interests and focus.
Although it took centuries to truly play out, the eventual conclusion was that the ultimate authority was not any particular pope or prince, church or verse but was instead to be the individual who could decide which church or verse they thought sacred and which they thought were nonsense. This was to become how the West would define religion and it was truly revolutionary. Religion was a personal matter, not something authorities outside of the individual had any right to impose. And in this acceptance of a diversity of thought in religion would lay the foundation for an acceptance for a diversity of opinion in domains as different as politics, philosophy, and fashion.
“Don’t baptize babies” seems like reasonable advice. Yet even this criticism of the church was a sign of how growing affluence was rendering old ways irrelevant and even incomprehensible. During medieval times, infant mortality rates were so high that a mother had maybe a 50 percent chance of celebrating her baby’s first birthday. Concerned about what happened to the souls of these poor infants who did not live to the age of reason, mothers inquired of priests who, rather kindly, began the practice of infant baptism to assure these mothers than their little ones would be safe in heaven. (It was only in 2007 that Pope Benedict declared that Limbo, the place where unbaptized infants awaited entry to heaven, no longer exists. For popes, social invention is easier than it is for guys at the diner counter.)
As infant mortality rates dropped and literacy rates increased, what had formerly made perfect sense – baptizing babies who did not know what was happening – suddenly seemed like nonsense. Progress does that.
The emerging governments of the first economy challenged the medieval church throughout Europe – not just in Germany and England. Switzerland had two great religious entrepreneurs: John Calvin and Ulrich Zwingli. Zwingli seems to most clearly illustrate the shift in authority from the church to the state. Faced with the question of who had the authority to interpret the bible, the conclusion in Zurich was as follows: “The city council, seeing itself as a duly elected representative body of the Christians of Zurich, declared that it possessed the corporate right to settle the right of the interpretation of the Bible. … Religious authority was transferred from the pope or local bishop to elected representatives of the people.” Questions of religion were thus to be settled by democratically elected people. As if it were not enough that Copernicus and Galileo had set the world spinning through space; this decision turned it on its head. The Protestant Revolution made the church less important than the state.
In a less developed world, individuality has less opportunity for expression and individuals have fewer options for realizing their potential. Progress seems to breed diversity and diversity breeds progress.
During the first economy, diversity was transformed from deviant to desirable. This meant something profound: it meant that it was no longer a sin to be different. That is, individuals were now allowed to be individuals.
Clay Shirky (b. 1964) makes this fascinating comment about revolution. “As with the printing press, if it is really a revolution it does not take us from point A to point B; it takes us from Point A to chaos. The printing press precipitated 200 years of chaos. Moving from a world where the Catholic Church was sort of the organizing political force to the Treaty of Westphalia where we finally knew what the new unit was: the nation- state.”
King Henry furthered England’s policy of emphasizing property rights, which encouraged farmers to invest in their lands, thus increasing productivity, nutrition, size and health of soldiers, and even the incentive to defend their own land and crops. The free man fighting for his own land was a better fighter than a serf.
Yet in a way, Henry’s greatest invention was probably less an act of genius than of frustration: he just wanted a divorce. That might seem like a small thing in comparison to the Renaissance or the Protestant Revolts. It was, however, to prove momentous. To get a proper divorce, Henry was dependent on papal approval, but the pope said no. It is hard to think of a more personal affront to a king’s sovereignty than someone able to veto his request for a wife who could bear him a male heir.
While the pope resisted Henry’s requests, Anne did not: her pregnancy forced the king to act. If she was to bear him a son, she needed to be his wife in order to simplify the inheritance of the crown. So, Henry divorced Catherine and married Anne, without waiting any longer for the pope’s permission. Pope Clement was not amused. He excommunicated Henry. Henry did not call the pope his venerable stupidness or send his men to arrest Clement. He made no attempt to bring the Catholic Church under his control. He presided over a nation-state more defined and fully formed than Philip’s France of 1300 and was able to do something even bolder: in 1534, Henry passed the Act of Supremacy, making himself the head of the Church of England. He no longer needed the pope’s approval. He no longer even needed a pope.
With this act, the nation-state had officially eclipsed the church as the most powerful institution in England. This shift in relative power was to spread to other parts of Europe. By 1648, the Treaty of Westphalia defined the state as having sovereignty over matters of religion throughout Europe. No longer did the church dictate religion to kings and princes. After the Treaty of Westphalia, states had religion; religion no longer had states.
While the English were gradually accepting freedom of thought, the Spanish were insisting on purity of thought. While the Spanish were out conquering the people in the new world, the English were giving more freedoms to the people in their own.
When the Spanish established colonies in foreign lands, they were exploiting and extracting. When the British began colonizing later, they were actually bringing with them a blend of technological and social inventions that made land more productive. To this day, former British colonies generally outperform former colonies of France and Spain.
The Second Economy: Power & Politics, 1700 to 1900
During the second economy, incomes rose for the first time in thousands of years. The limit to the second economy was capital and by the close of the second economy, the West was awash with new machinery, factories, railroads, new products and millionaires.
Medieval guilds, like the medieval church, were more intent on protecting tradition than spurring innovation. It was not until the late 19th century that the term innovation had a positive connotation: early in the second economy, innovation had the negative connotation of referring to “a new development that threatened existing order in a detrimental way.” People just assumed that change was negative.
Guilds were about protecting the status quo. By contrast, capital is about betting on the future, on making money from what did not exist before.
Medieval tools were static. The capital of the second economy was dynamic.
Something curious happens when you connect more people. As cities get larger, incomes and rates of innovation rise. People are more likely to trade goods and ideas. Change stimulates more change and that dynamic became clear during the second economy. The stage was set for capital to transform life between 1700 and 1900.
Capital is a curious thing. You do not invest in financial capital because you want financial capital. You invest in financial capital because you want money that you can use to buy the things you do want. The other kind of capital—the technological capital—is the same way. You do not make a tool because you want a tool. You make a tool because you want to be able to more easily make shoes (or whatever it is you are making).
Division of labor (i.e. diving work into tasks for specialisation) was key to productivity gains. It was also key to automation because simple tasks could be done by machines.
Capital made a bigger difference than labor by about 1800. Put differently, a person with capital had an easier time of finding labor than a person offering labor had of finding someone with capital.
Capital made communities richer. It also made them poorer. Although life in 1700 was brutish and nasty and people lived without items like nylons or zippers, a person might eke out a living without access to capital. He could do manual work. By 1900, even a farmer had to have capital to purchase machinery and even land (something that often necessitated loans, making farmers both resentful of and dependent upon bankers). There was no way that a manual worker could make enough products to compete with a factory. If a worker could not either afford his own capital (not practical when it came to factories) or get work in a factory, he could not make a living. By 1900, making a living depended on access to capital. For the average person, that was typically gained through employment in growing organizations or through loans. In a very practical way, power had shifted to capital.
The compound returns of capital exacerbated differences in wealth. Over time, someone who invested became richer and someone who borrowed became poorer.
As it turns out, there are some predecessors to an industrial economy. Trade alone might be enough to encourage specialization, but handing off those simplified tasks to machines requires someone with the means and incentive to create such machines. Patent protection gave innovators incentive.
One could argue that no law did more [than patent law, first implemented in Britain] to make Britain home to the industrial revolution that would create an economy unlike any before it. If technological invention is important to progress, how much more important is the social invention that encouraged it? Patent law represented a huge advance and laid the foundation for the industrial economy.
Today, the supply of capital is great enough that interest rates hit zero. When something is scarce, its price goes up. When there is a glut of it, the price goes down. Interest rates are the price of capital and interest rates have been at or near zero for most of this new century.
A glut of capital would have seemed like a fantasy to people living in the second economy when capital was the limit in the same way that an all-you-can-eat buffet would have seemed like a dream come true to medieval peasants. But excess can bring its own problems and the financial crisis of 2008 that triggered the Great Recession was a reminder that a financial system can be weakened by either too little or too much capital. Like teenagers, when money is just hanging around with nothing to do, it tends to get into mischief.
To create more credit, to generate more capital, is like building up a glut of products between your second and fourth machine in the factory. It means increasing the capacity of the capital without a corresponding increase in knowledge workers or entrepreneurs. In the bubble leading up to the financial crisis of 2008, financial markets were wildly productive. That would have been a good thing had entrepreneurs been hiring workers at record levels, but they were not. The result was a huge bump in capital that simply bid up the price of existing assets (like homes and stocks) rather than creates them. This is akin to an increase in the rate at which we build up inventory (the product that passes through machine two) without increasing the rate of products that leave the factory (product that passes all the way through machine four). Inventory can only stack up for so long before the second machine has to halt production. This becomes the cycle of booms and busts when the second machine is capital. More capital at the dawn of the fourth economy created bubbles. Once we popularize entrepreneurship, this rise in capital output will be hugely beneficial.
For now, though, we have trillions in capital sloshing about the globe in search of returns that, like waves in a bathtub, can only go so far in one direction before it will reverse direction. In the late 1990s, it flowed into the stock market and drove up prices there, first creating a bubble and then a bust in 2000 when it left. In the mid-2000s, it flowed in the housing market, driving up prices there, first creating a bubble and then a bust in 2008 when it left. Capital has become dangerous, driving up the price of assets every time it sees one as key to returns and then driving down their price once it realizes the gains are the result of a surplus of capital bidding up the price of a scarcity of assets.
The good news is that the glut of capital makes possible a plethora of startups. In 2014, 1,205 issuers raised nearly $249 billion through Initial Public Offerings. That is still considerably less than the value of derivatives but it is growing. As we get better at developing entrepreneurs and making employees more entrepreneurial, we might have an abundance of investments, which will give these trillions in capital a place to create new equity rather than simply bid up the price of existing equity. Until then, an excess of capital will continue to create a series of bubbles and busts.
The idea of private property was one of the keys to the progress of the first economy. The idea that ideas could also become property (through patent laws) was one of the keys to the second economy.
Trade during the second economy introduced new products. One of these products was a social invention that seemed to defy God’s will – coffee. The link between coffee and capitalism is underappreciated. It’s worth remembering that water could not be trusted until fairly recently. Safe running water was a big reason that life expectancy rose 30 years last century. Initially, Europeans relied on beer and wine for safe drink. Remember the European reliance on beer and wine as a source of calories second only to bread well into the first economy. Now suddenly imagine British no longer drinking nearly a gallon a day of ale or beer a day, essentially sobering up in a coffee house where the new beverage stimulated conversation and ideas. Coffee may have been the original economic stimulus. By 1715, there were two thousand coffee houses in London alone, and these coffee shops, along with newspapers, were the medium for sharing news and culture in the same way that radio and TV were centuries later. Productivity gains did come from trade, improvements in agriculture, and nascent capitalism, but caffeine helped. You may want to compare your productivity by drinking three liters of beer a day in one week and three cups of coffee a day the next. Now imagine an entire continent making such a change and it’s easy to imagine how important coffee’s contribution to capitalism was.
Venture capitalists who had financed, well, ventures of ships traveling between Britain and the Americas were understandably anxious for news. Ships heading to foreign ports faced risks like foreign currency devaluation, a drop in demand for the goods they carried, embezzlement by ship captains, shipwreck, and even pirates. Investors could easily be ruined. Then, as now, venture capital was profitable but risky. Investors were eager for information about when, and whether, their ship would come in. In 1688, Edward Lloyd opened a shop that offered coffee with a side of information about the status of ships. It was here that one of the pillars of modern finance was founded. The caffeine-fueled conversation at Lloyd’s about how to deal with risk led to a new social invention: an insurance market called Lloyd’s of London. Essentially, by forgoing a portion of one’s cargo one was insured against losing the whole of it, and investors willing to insure the load could negotiate a fee with the venture capitalists. The coffee that sobered Europe thus also stimulated a conversation that led to Lloyd’s of London, the world’s most prestigious insurance market.
How does insurance help to overcome the limit of capital? Well, if you think that your life savings might literally be lost to shipwreck, you will hesitate to put your money into venture capital, not wanting to risk it on a ship and its cargo. The problem with this strategy is that as fewer people invest in shipping, there are fewer goods in the community. This means that everyone has fewer items to trade, there is less money to be made, and thus there is a lower quality of life. If there is no trade with the Orient, there is no pepper for the steak. Therefore, communities that make it easier for people to invest will enjoy more goods and higher incomes. Insurance is one way to make it easier to invest. The communities that more quickly find a way to insure investments will get more investments and therefore more returns and all the unpredictable consequences of new products and services in the community.
Now insurance might seem an obvious thing to buy, but that just shows how positively modern is your mindset. In the seventeenth century, there was still a persistent view of misfortune as God’s will, something to accept like spankings from the headmaster. It is odd to think of actuaries as cultural outlaws, but there you have it. Even the idea of insuring against God’s will seemed wrong to many. As is so often the case with social invention, the biggest obstacle is the prevailing notion of what is proper.
Lest you think that Lloyd’s coffee house was a fluke, it is worth considering Tontine Coffee House in New York. Between 1793 and 1817, it served coffee and housed the New York Stock Exchange. I guarantee you that right now, there are coffee shops around your city where entrepreneurs are working some stage of a startup.
At the beginning of the first economy, international trade was an activity reserved for the rich. At the beginning of the second economy, it was the same with manufactured goods. Such goods really were manu-factured. That is, they were made by hand. If it took a week for the average worker to make a shirt, than a shirt cost at least one week’s wages.
Then automation made cloth more affordable; “cotton cloth fell in price from thirty-eight shillings per pound in 1786 to less than ten shillings by 1800.” Again, as with coffee, this sort of progress affected the world in ways obvious and not so obvious. Affordable cotton made underwear affordable and more common. After 1850, there was a dramatic falloff in infectious diseases. The most deadly diseases of that time – cholera and typhoid – were spread by fecal-oral contamination. Given that it mitigated this sort of spread, underwear saved lives. Again, who could have predicted?
The first communities to be transformed by trade had ports along the sea. First, the Italians along the Mediterranean and then the Dutch and British along the Atlantic benefited from the trade of the first economy. Ports were transformative, but it is worth remembering what they are. “Port was originally an Anglo-Saxon word that meant ‘market.'” The railroad would do for regions like Bavaria, Russia, and Prussia what the compass and shipping had earlier done for Dutch and English seaports—exposing the average person to new products and competition through trade with regions from which they had previously been shielded. It was not ports, exactly, that were so transformative. It was markets and the railroad had the potential to make any town an open market.
Canals were 60X more efficient than carts and horses and for decades, investors financed their expansion. Then along came railroads, which were 60X more efficient than canals. Stock markets were dominated by railroads by the start of the 20th century. In the UK, they made up half the value of the stock market and in the US they were 63%. A century later, they were less than 1% of the American stock markets and nearly zero of the UK’s.  Still, the railroad helped to create modern financial markets.
The Enlightenment that fed and was fed by capitalism and democracy was more obviously an intellectual revolution than the Renaissance. For the first time in history, people expected progress, and worked to define natural laws rather than rely on divine intervention.
A worldview changes how people explain the world and what they expect of life. The Enlightenment undermined faith in authority and shifted reliance on revelation to reason. Perhaps most importantly, it defined a world of causation and predictability rather than of miracles and confusion.
One could do worse than explain the Enlightenment as emerging from the minds of Isaac Newton and John Locke, probably the two greatest minds to ever regularly dine together. Newton applied his powerful intellect to developing laws for the physical world and John Locke applied his to the social world. To this day, their ideas are used to explain our physical and social world. Newton’s was a philosophy that applied to the movement of planets and machinery, the language of “for every action there is an opposite and equal reaction.” Locke’s applied to people and governments, the language of “life, liberty, and property.” Newton’s laws represented the biggest transformation of God since the advent of monotheism. After Newton, God was no longer viewed as a being who interfered by miracles into the daily course of events but was, instead, viewed as one who had defined the world by immutable laws; not an agent of caprice but rather of order. Locke’s laws represented the biggest transformation of government authority since the days of early Greece. After Locke, monarchs were no longer the ultimate authority, who could impose their will, but were, instead, subject to constitutional laws just like everyone else, not agents of caprice but of rather of order.
Although the Enlightenment suggests the triumph of reason, Enlightenment thinkers were still real people quite prone to unreasonable beliefs. Isaac Newton (1642-1726) “clearly hated women, may well have died a virgin, and was terrified of sex (and believed that the menstrual blood of whores possessed magical properties).” His was also one of the great minds of history. In a single year, Newton “revolutionized the world of natural philosophy. He gave the first proper treatment of calculus; he split white light into its constituent colors; he began his exploration of universal gravity. And he was only twenty-four years of age.”
For Enlightenment thinkers, proof had more authority than, well, authorities.
The Enlightenment challenged medieval thinking in a way that built upon the optimism of Erasmus: Enlightenment thinkers believed in progress. For them it was simply not true that since man’s fall from grace in the Garden of Eden that people could hope only for spiritual salvation and expect little or nothing from this life. It was, perhaps, little wonder that economic growth, as best we can measure it, began during the Enlightenment.
The handoff was made from the invisible hand of God to the invisible hand of the market. While the hands were invisible, the social inventions that purported to do the will of God and market were not; what the church had been to medieval Europe, financial markets became to the second economy.
The English took money seriously. So seriously, in fact, that they appointed the most celebrated mind of the time to be their Master of the Mint. From 1699 until he died, Isaac Newton held this position. Imagine Stephen Hawking as Federal Reserve Chairman to get some sense of how much esteem and – in a way – how much naiveté the English had for the topic of money.
By the year 1700, the Dutch were by far the world’s wealthiest people, with a per capita GDP that was almost twice that of the nearest competitor, the English.” And this came about not so much in spite of debt as because of debt, debt that helped to promote the development of financial markets.
Holland’s wealth and financial sophistication enabled it to compete with much larger countries in terms of debt it could borrow from its people. In terms of per capita, debt, though, the larger states were no completion. Around 1650, Holland’s debt per capita was 1,663 grams per silver, more than double Castile’s 607 and 4X France’s 376. What emerged from the Dutch struggling for their independence and King Phillip struggling to control them was the revelation that population had become a less important determinant for winning wars than money. The Dutch, in part by broadening the portion of their population purchasing bonds, became formidable. During the 1600s, the Dutch government offered investors a Losrenten. Investors who gave the government an initial amount would collect payments in perpetuity. This bond did not mature in fifteen or thirty years. This bond paid indefinitely and the Dutch took this promise seriously. William Bernstein offers this story. “In 1624 a woman named Elsken Jorisdochter invested twelve hundred florins in a bond paying 6.25 percent that was issued to finance dike repair. Free of all taxes (similar to a modern municipal bond), she handed it down to her descendants. … In 1938, the bond came into the hands of the New York Stock Exchange, and as late as 1957, the exchange presented it for payment of interest at Utrecht.” More than three hundred years later, the Dutch were still honoring their obligation on the bond. Creating such confidence in investors means that a government is able to finance debt for far less than someone like the Spanish, who had a history of defaulting on their debt. If you trust a government’s promise to pay back, you will not demand as much interest. But if you suspect the government might default you want higher interest payments. For greater risk you need greater return. The more your government honored financial markets, the easier it was to get financing.
Venice is a distinctly beautiful city. Part of its charm lies in the fact that canals rather than roads cross through it. The city is built on water. The Venetians did not honor the typical requirements of having dry land as a foundation as a prerequisite for building a city. The Dutch showed even less respect for the convention of needing land, not merely bridging a cluster of islands, as did the Venetians did, but actually claiming land from the sea. The dikes used to drain the land (and periodically flood it when enemy troops occupied their fields) have roughly doubled the land on which the Dutch can live. Land was the limit to progress in the first economy but as it turns out, with enough capital, communities can create land. It is no coincidence that two of the primary pioneers of financing in the West did not just conquer land but literally created it. This little phenomenon is worth remembering today, as the developed nations struggle so to create jobs, even for knowledge workers. By becoming more entrepreneurial, these communities will be able to create jobs, just as these early financial innovators created land. Mastery of the new limit allows you to create more of the old limit.
British Finance: Loans Rather than Taxes. In the eighteenth century, the British Parliament was largely comprised of landowners and merchants. As Parliament gained power, it forced British monarchs to win approval for spending. Like the Venetians and the Dutch before them, British Parliament preferred to loan money to the government rather than pay a tax. Given Parliament members often owned bonds, they were fairly secure. One of the truisms of investment is that risk and return are linked. If the risk of loss is higher, the potential return must be higher. Given that investors saw little risk of default on British bonds, Britain, (as the kingdom was called after England’s union with Scotland in 1707) paid less to finance its debt than did France or Spain. Investors soon learned that parliamentary government meant a lower risk of default, and this was just one of the reasons that capital grew less certainly and more slowly under absolute monarchs.
There are two stages to social invention. In the first, elites engage in social invention that makes them rich and powerful. In the second stage, revolutionaries grab control of this social invention and make it a tool for the masses. In the first economy, revolutionaries wrestled control of the church away from popes; in the second economy, they battled kings and queens for control of the state.
As Saul Alinsky puts it, there are no successful traitors: one is either a founding father or a failure.
Although Protestants argued about the interpretations of different passages, they did agree on one thing: the Bible was the authority to which religious leaders should conform and not vice versa. Protestants had done away with the pope and embraced the Bible. Before the end of the century, they would adapt this model to government, forcing even their monarchs to conform to the constitutional documents and not vice versa.
In 1789, George Washington was elected the first president of a nation in the history of the world. As if that were not enough accomplishment for the West for one year, French revolutionaries sent King Louis XVI and his Austrian bride Marie Antoinette to trial and then to the guillotine. It is hard to think of a more stark illustration of how much democratic revolution had turned the world upside down than this: mere commoners could become heads of state and heads of state could be tried and sentenced as if they were mere commoners. Social invention changes what is true.
While the American Revolution of 1776 was a beautiful thing, it did not really change the rights of most Americans. It took 34 more years before people (well, property-owning white males) of any religion could vote. It took another 74 years before even white males who did not own property could vote. It was 144 years after 1776 before women could vote and 148 years before Native Americans were considered real Americans and able to vote as well. 189 years later the voting rights of minorities were ensured. It took nearly 200 years – in 1971 – before the eighteen-year-olds considered old enough to die for their country were legally old enough to vote for their leaders. (It is probably no coincidence that since then we have not had a military draft.)
Jews had no place in church or state, but given the peculiarities of Catholic law, Jews were often able to fill roles as bankers, roles that might make a good Christian either an outlaw or a social pariah. Because they could work as traders and bankers, they sometimes had wealth; rarely, though, did this translate into any kind of social power.
One in particular was to emerge as a genius: Nathan Rothschild (1777-1836), in London, was to become one of those historical figures whose potential was perfectly suited for his time. In concert with his brothers in the various corners of Europe, he was to plunge into the great act of social invention that so defined the second economy: he helped to create modern financial markets. Nathan was a banker.
Royalty throughout Europe were left shaken by Napoleon, who had toppled many thrones and threatened them all. Royalty who had previously felt happily secure in their wealth and privilege now felt the sudden urge to modernize, or at least to modernize their armies. But this was, of course, expensive, and hasty modernization meant that they would need debt financing. Through his experience in helping the British to finance unprecedented levels of debt, Nathan Rothschild had proven himself the global expert in bond financing. This expertise was to create a curious reversal of fortune for a Jew from the ghetto and German royalty from the castle. It was also to prove illustrative of the bank’s eclipse of the state.
After the war, the Prussian king, Friedrich Wilhelm III, turned to the Rothschilds for a loan. Prussia was the country that would eventually orchestrate the union of Germany, and Prussia was home to Berlin, which would become the German capital. The King of Prussia was no petty aristocrat when he came to Nathan Rothschild in the wake of the Napoleonic wars, asking for financing to modernize his country and army. Prussia was one of the great powers in Europe. Yet Nathan Rothschild’s response to Wilhelm’s request for a loan was symbolic of the great shift in power that had occurred.
Rothschild was simply defining terms for a loan in this initial negotiation, a perfectly reasonable thing for a banker to do. What was remarkable was that he was telling Friedrich Wilhelm III (1797-1840) to submit to a parliamentary form of government in order to qualify for the loan he had requested. “It is going to be tough to sell bonds,” he was essentially telling Wilhelm, “if you don’t agree to give up some power.” This, perhaps more than any other act, signaled a watershed moment: a banker was now dictating terms to a king.
The French armies wanted to topple kings and institute republics in their place. What the great Napoleon was unable to do in Prussia with artillery, Nathan Rothschild the banker was able to do with capital.
In the two hundred years between the end of King William (and Mary’s) reign in 1702 and the end of Queen Victoria’s reign in 1901, the world was transformed. Across the American and European continents, revolutionaries threw off the tyranny of monarchs and submitted instead to the tyranny of financial markets.
The third economy defined the world in which you learned what was normal. In 1900, only 10% of 14 to 17 year olds were enrolled in formal education. By 2000, fewer than 10% were not.
In a century, the US changed from an industrial economy dependent on child labor to an information economy dependent on adult education.
Knowledge work is different from manual—or manufacturing—work, in that knowledge workers manipulate symbols rather than objects. A knowledge worker might draw a blueprint but never actually move a wall.
As with each limit before it, knowledge work required a mix of social and technological inventions and a new philosophy. There were actually two institutions that would rise to prominence along with knowledge workers: the modern university that would educate and create them, and the bureaucracies within corporations and governments that would employ them.
During the last century, the US and other developed nations popularized knowledge work. In 1900, 10% of teenagers were enrolled in school; by 2000, fewer than 10% were not. In the school year just ended, American colleges and universities gave out 3.7 million degrees, a dramatic increase over the 29,375 degrees awarded in the 1899 – 1900 school year.
And the number of knowledge workers continues to rise: today, there are more scientists alive on the earth than have lived in all of history up until now.
Education was enormously important to this new economy, but we are unlikely to ever again get such dramatic gains from education. In 1900, only 10% of 14 to 17 year olds were enrolled in formal education. By 2000, less than 10% were not. We could try for similar gains for 24 to 27 year olds (or even 34 to 37 year olds) in this century, but that seems less promising. If we increased the level of education in this century as much as we did in the last, we would be keeping people in school until the age of fifty. That is not likely to happen.
As we did with the industrial economy in about 1900, we may be reaching a point of diminishing returns for the creation of knowledge workers. The information economy may already be history. While it worked, though, the information economy was the most extraordinary economy yet.
Railroads connect consumers and suppliers, connect town to town, and connect factories and stores. Railroads gave inland areas access to products and ideas they had previously lacked. This is part of what enabled Germany—a largely landlocked country—to become a rival to the British Isles in trade and industry. Suddenly, seaports did not automatically confer an insurmountable advantage in economic development. As it turns out, an economy is kind of like the brain: the value of the connections between the parts is at least as high as the value of the parts being connected.
What Crowell quickly realized was that the triumph of the second economy led to the challenge of the third. Unprecedented levels of production necessitated unprecedented levels of consumption. As an affable-looking Quaker led America into mass consumption, the problem of increased production increasingly took second place to the problem of increasing sales through product design, advertising, distribution, marketing, sales, and consumer credit.
It took concerted effort to keep up with these factories. In 1899, Thorstein Veblen wrote The Theory of the Leisure Class and introduced the term “conspicuous consumption” to explain the West’s seemingly insatiable desire for goods. His book was popular and became one more item people just had to buy. Shopping became serious recreation during the twentieth century.
Everyone knows that in this information economy, programming is important but for different reasons. The audience thinks that it is viewing programming. The advertiser thinks that it is programming viewers. Consumers were being programmed long before computers existed. As Eli Pariser puts it, “If you are not paying for the service, you are the product being sold.”
We calculate inflation to understand how much we should discount a dollar today to make it comparable to a dollar from a year or decade before. Curiously, we have nothing akin to inflation to adjust for what a dollar could buy today that it could not buy a year or decade earlier.
As late as 1900, the richest British peers lived lives vastly different from the average person. Some had hundreds of servants. One traveled abroad with a large personal orchestra. The ability to listen to music at any time in 1900 required enough money to have an orchestra on command. By 2001, when Apple introduced the iPod, a teenager with generous middle-class parents could afford to listen to orchestras, jazz, or Alicia Keys at 2 AM any day. These are products that let us live better than kings.
The purpose of fashion is to stimulate demand. It is a pretty brilliant ploy, really, to compel people who have a perfectly good product to replace it.
Decades ago, a writer at The Economist quipped that what America is to the rest of the world, California is to America, and what California is to the rest of the world, the Bay Area is to California. There did seem to be something to the culture in California – the Bay Area in particular – that lent itself to the inventions that allowed it to be the epicenter of recent technological and business change.
Steve Jobs embodied various technological and cultural trends and eddies that swirled through the Bay Area. He grew up there and liked to surprise people by saying that one of the two or three most important things he had ever done was drop acid. He dropped out of college and traveled to India to delve deeper into teachings on meditation and intuition. He thought that a computer was like a bicycle for the mind, something that enabled people to be more productive, creative, and free. IBM’s mantra was “Think.” Apple’s was “Think Different.” Knowledge work comes from the mind and any tools – from LSD to meditation to personal computers – that change and enable the mind have the promise of creating value. The Bay Area was perhaps the place in the West where one would be least mocked for mention of a change in consciousness. It seems unsurprising, in retrospect, that it would become host to a tool that informed consciousness.
[For more on this, read: “Stealing Fire” by Steven Kotler – it is mind boggling!].
Thousands of business and political leaders claim that they are not an ideologue but are, instead, pragmatists. (Barack Obama has referred to himself as a “ruthless pragmatist.”) The fact that pragmatism is not considered a worldview but is, instead, just what we think is realistic is great proof that pragmatism is indeed not just a worldview; it is our worldview.
Carl Jung once claimed that a myth is not a myth if people know it is a myth. People have to believe a myth is true in order for it to work as a myth. To the ancient Greeks, the stories about Zeus and his cohorts were not stories. To them, their gods were real. Only when anthropologists come along from another time or culture would the Greek gods become myths. Something similar seems to hold for a worldview. When the modern politician or business executive says that she or he is pragmatic, this is offered as evidence that she is not beholden to some outdated philosophy, is not ideological. To the ancient Greeks, the stories of Zeus and Aphrodite were not myths or literature: they were scriptures that explained why the world was the way it was. In a similar way, throughout the third economy, pragmatism is less often considered a philosophy than simply the way that things were.
For pragmatists, the point was not to know that but instead to know how.
One hardly knows whether to be empathetic or aghast that in the midst of this explosion of innovation, the commissioner of the Federal Office of Patents would declare, in 1899, “Everything that can be invented has been invented.”
If patent law was catalyst to technological invention, the corporation institutionalized it.
One could argue that the railroad, by linking states, made the United States a national market for the first time, and was at least indirectly a catalyst for the Civil War. The industrialists in the north clashed with the plantation owners in the south over whether it was the “United” or the “States” that had primacy in this new country. For the north, the united mattered most because their rich and powerful were selling, managing, and producing across state lines in regional and national markets. In the south, the states mattered most because their rich were landed gentry, using less-developed technology, and their production was focused locally.
The railroad was the first business to force managers to deal with the problem of managing work that they could not literally oversee. There was nothing like a few train wrecks to convince the railroad management that they needed a good way to coordinate work. (This was one reason for the drive towards standardized time zones: “What do you mean by 3 o’clock?”).
A railroad that connected two cities hundreds of miles apart by its very definition had employees spread further apart than line of sight. Among the many inventions of the railroad was the middle manager: a person who managed one group while reporting to yet another manager. Having to manage workers the manager could not see—even if it was through a middle manager—did much to drive the information age. Previously, managers could simply see what was being done in the shop or factory. Suddenly, they needed reports—that is, they needed information—to manage work and workers. For them, the representation of work became as important as the work itself.
As Alfred Chandler points out, the corporation grew in response to the complication of work that came along with the evolution from manufacturing work into knowledge work. Rather than the invisible hand of markets coordinating this work, it was the visible hand of management that now coordinated work.
Ronald Coase won a Nobel Prize in economics for explaining why organizations rather than markets emerged as a means to organize work. Simply put, his theory is that the information costs were too high to justify one-on-one transactions, and it was more efficient to establish companies as a means to organize work instead. Take the example of the person who wants to buy a burrito. Imagine that each time he wanted to get a burrito for lunch he had to find the vendor who made and sold tortillas, then the guy who made and sold beans, and so on for carnitas, guacamole, salsa, and whatever other ingredients he wanted. And then to top it all off, he had to hire someone to assemble all of this into a burrito. Not only would this be a terribly complex task to perform over the course of his lunch break, but the guy who would have to perform the few minutes of burrito assembly would likely charge him for a full hour’s work, since it would take him that long to coordinate all this for a single burrito assembly. And this does not even factor in the place and the tools (the capital) that would be needed to perform all this. A burrito in this scenario might cost hundreds of dollars and take hours to procure. It is much simpler for a customer to just go to the local taco shop, where all the knowledge, the labor, and the capital are pooled into one place, under one manager, and where our hungry hero can buy the burrito for, say, $6 instead. The cost to find each person and item involved in making the burrito is too high.
Complexity makes it challenging to coordinate production through one-off market exchanges, or single transactions. It is easier to set up a company and then manage such tasks and transactions (or as they are called within the corporation, process steps). Coase’s thesis is that information and transaction costs were higher than the cost of institutionalizing these activities. So, instead of market transactions for each task or project, organizations were formed to turn potentially sporadic transactions into relatively stable processes.
Prior to the information age, businesses were owned by the managers and managed by the owners. That is, the investors and managers were the same people. The railroad, by contrast, required too much financial capital to be funded by just one person or even a few partners. Outside investors had to be brought in to provide enough funding to lay down hundreds of miles of track. By necessity, the railroad’s owners did not manage the railroad. Nor did the managers own the railroad. The railroads meant the introduction of a new level of complexity and sophistication—and therefore the introduction of formal reports and layers of management. Running a railroad required a mix of special skills, focus, talents, and experience that most investors did not have. Professional managers quickly became a necessity. The railroad thus became the first industry to do what would become the norm within a century: it created a schism between investors and managers. It was not just that it was impractical for owners to also manage. The corporation itself had become divorced from the owners. In 1819, Daniel Webster successfully argued for the immortality of the corporation in Dartmouth College vs. Woodward. Before Webster moved at least one judge to tears with his eloquence, the identity of corporations had been tied up with individuals. If an owner died, so did the company. In the first economy, the nation-state was made immortal by the cry, “The king is dead! Long live the king!” Daniel Webster did something similar for the corporation. Daniel Webster thus helped to define what would become the next century’s most powerful institution when he persuaded the court that the corporation did not die with any one person.
Daniel Webster’s definition of the corporation held. His argument before the Supreme Court left Chief Justice John Marshall to offer the opinion that the corporation was, “an artificial being, invisible, intangible, and existing only in contemplation of the law.” Among the corporation’s properties were “immortality; and if the expression is allowed, individuality; properties by which a perpetual succession of many persons are considered as the same.” Invisible? Immortal? It is not just that the corporation seems to have taken the church’s earlier place as the West’s most defining institution. These qualities make it sounds like it adopted the powers of a god.
As America becomes more prosperous, the American Dream becomes more elaborate. This is part of what drives the assumption of debt. Our expectations rise along with rises in productivity and income. Debt is, in part, a vote on the future. We expect a certain level of income that will make it possible for us to sustain payments for today’s lifestyle.
So, since 1945, consumer debt has grown by 455X, whereas GDP has grown by 72X. That is, consumer debt has grown about 6X faster than GDP. Yet here is a little secret about debt: for every dollar of debt, there is an equal dollar of credit. For each dollar that needs to be paid back, there is a dollar that will be paid back. People talk about reckless spending that leads to credit trouble, but one of the biggest things that debt did was discipline the American worker. Debt worked neatly with the rise of the corporate employee, the person who needed a dependable monthly income to service monthly debt payments.
This easy access to credit has let the average consumer do more to shape the world. The American Dream is not particularly American. Since before the time peasants were day-dreaming about pepper in their pottage, we’ve been able to imagine what we’d do with just a little more money. The miracle of the age of consumer credit is that it gave that peasant money and we got to see what sorts of things he’d buy. It’s been fascinating.
The traditional bank had been about limiting losses of scarce capital; venture capital was about maximizing returns to abundant capital. Traditional banks treated capital as scarce and business opportunities as abundant (and suspect). Venture capital treated capital as abundant and business opportunities as scarce.
During the third economy, the banker lost his relative power over the economy for several reasons. One, the community in which he operated finally decided that it preferred that the head of the Federal Reserve or the elected president steer the economy instead of a private banker. Two, stimulating consumption required the extension of credit, putting the banker in the role more like retailer than staid judge of creditworthiness. Third, the corporation had emerged as an entity capable of generating cash directly from the public via stocks and bonds, allowing it to become less dependent on the banker for its financing. Fourth, the information economy had eroded the banker’s monopoly on information, allowing even individual investors armed with a public library card or internet access to investigate investments as thoroughly as could any earlier banker. Finally, the higher paid knowledge worker working in an organization had neither farm nor factory to sell to fund retirement; this new breed of employee became, through pension funds and 401(k) accounts, the new capitalist who fed an enormous surge in the volume and availability of capital. During the second economy, capital had been scarce and the banker who controlled it had power.
By the end of third economy, capital was seemingly as plentiful as information. The result was a bank that had more money than ever before but had less power.
The goal of policy – for schools, corporations, and governments – now needs to be the popularization of entrepreneurship.
The popularization of knowledge work transformed the 20th century and the popularization of entrepreneurship will transform this one.
The old economies still matter when the limit shifts but less as a room to live in than as a foundation to build on. In an agricultural economy, over 90% of people make their living working the land. Land and its products are still incredibly important to an information economy but only 3% of people make their living in agriculture. Land still matters but it just does not lead. California does not plan to revive its economy by invading Oregon or Baja California. The old agricultural, industrial and information economies matter in this entrepreneurial economy but they are less likely to be a source of new jobs. Jobs are less likely to be created than automated in the old economies.
The rewards for entrepreneurship have never been higher or come more rapidly. When prices rise, it is a sign that demand is increasing faster than supply. Higher prices are a signal from markets tugging at the sleeve of society to say, “Hey! We’d like more of this.” Entrepreneurship pays more than ever because there is more demand for it than ever. It is cliché to talk about the pace of change but it is a big reason that entrepreneurship has become more lucrative.
Given how rapidly markets, industries, companies, and jobs are destroyed, it is essential to have a vibrant, entrepreneurial economy. When innovation does not outpace automation, when the creation of the new does not stay ahead of the automation of the old, unemployment rises, wages fall, and the gap between rich and poor grows.
An economy needs to continually create new jobs to stay vibrant. Many new jobs. To do that, it needs to continually create new entrepreneurs.
In addition, the knowledge work we relied on for job creation and wage growth in the third economy is no longer enough because work is evolving. Knowledge work is where agricultural work was at the dawn of the industrial economy. Then, the machines of the industrial economy, like the steam shovel and cotton gin, automated manual work. Now, the software of the information economy, from ATMs to self-driving cars and the AI able to make medical diagnosis, is automating knowledge work. This drives the need for more entrepreneurs twice. One, we have to create more jobs more rapidly as knowledge workers’ jobs are automated. Two, as software automates knowledge work, jobs have to evolve into the next thing. That next thing is entrepreneurship. When machines automated manual work, the good jobs began to involve more knowledge work. As software automates knowledge, the good jobs will become more entrepreneurial.
Right now, entrepreneurs are like knowledge workers were in the late 1800s. They are largely self-made. What if entrepreneurs didn’t have to be self-made any more than engineers or doctors had to be self-taught? Imagine redesigning schools and businesses to create and enable entrepreneurship by a wider swath of employees.
As late as 20O0, it was not too much of an exaggeration to say that our economic system did not create entrepreneurs. It waited for them. The popularization of entrepreneurship, by contrast will mean becoming intentional about creating entrepreneurs in the same way that we now create professionals like dentists and lawyers.
But innovation is not the same thing as entrepreneurship. People can create new technology without starting a company or even translating that into a product, and vice versa.
An entrepreneur is a social inventor, creating a new business that the community will support. Whether or not she is also a technology inventor is incidental.
Almost by definition, the entrepreneurs we hear about reach huge success financially, but there seems to be a bit of a paradox in their approach. Most of us think of money as something that would let us do whatever we want. I don’t suppose that entrepreneurs are much different in that respect. Probably the real difference is that if they had money enough to do whatever they wanted, they would build great products and businesses. In other words, if they got money they would want to use it to make money.
Social invention is a game of seemingly infinite complexity, and one that entrepreneurs are playing rather than watching. Branson says that some of his friends thought that he should retire to have fun when his Virgin brand became so successful; the thing is that he was already having fun entering new markets with the brand. What hobby would be as engaging as commercializing space flight? How is golfing going to compete with that?
Entrepreneurs create systems. Michael Gerber’s book E-Myth distinguishes between the skills needed to make a pie and the skills needed to make a bakery. The notion that being a good baker has anything to do with running a successful bakery is what Gerber calls the entrepreneurial myth. One of his points is that entrepreneurship is still misunderstood, for all the press and adulation that it receives. His more important point is that successful entrepreneurship is about creating a sustainable system and not just being self-employed.
Entrepreneurship is the least tangible and certainly the most advanced of the four factors of production. Each of the factors gets a return. Labor gets wages. Land – or resources – gets a commodity price. Capital gets interest or dividend payments. After all the other factors are paid, entrepreneurship gets its profit or suffers a loss.
It is not enough for an entrepreneur to obsess about creating a new system. That system has to be more than the sum of its parts, at least in terms of market value. If the business that an entrepreneur starts and operates makes only enough revenue to pay labor its wages, pay for supplies, and pay back the banker, it will make no profit. Eventually, that means that the entrepreneur gets no return and has no business. Profits are proof that the entrepreneur has created a business that is more than the sum of its parts and proof that the community values it.
Americans are about ten times more likely than Scandinavians to attend church once a week, and about three times as likely as the French or British. Some have used this to argue that Americans are more old-fashioned in their social attitudes. That could be. It could also be that Americans are fiercely entrepreneurial even in their approach to religion. Many American pastors consider themselves entrepreneurs. When Rick Warren started his highly successful Saddleback Church, he interviewed people in the community to find out why they didn’t go to church. He then designed his church – like any smart product designer – to meet their needs. People can come dressed casually, grab Starbucks coffee in the lobby, and be back home in an hour. While it is true that Catholics and Protestants that trace their roots to Europe (e.g., Methodists and Lutherans) are the churches Americans are most likely to claim, this is the country where social inventors gave us the Disciples of Christ, Jehovah’s Witnesses, Assemblies of God, Seventh-Day Adventist, Christian Science, Latter-Day Saints, Oral Roberts Ministries, and Scientology. Whether you want your religion more comforting or challenging, literal or metaphoric, modern or ancient, miraculous or philosophical, you can find it – or create it – here in the US.
Everyone – from the least empowered employee to the most creative entrepreneur – is probably more defined by their times than they would ever care to admit or even be able to understand. Yet the entrepreneur attempts to define society and not simply let society define her.
The most passive among us hear the dictates of society as non-negotiable. Entrepreneurs, by contrast, are engaged in a dialogue with their times, negotiating to close the gap between possibility and current reality, to ask why and why not.
Joseph Campbell (1904-1987) once quipped that we meditate all the time. The only question is on what we are meditating. Is it our doomed relationship? Our money? Our lack of money? The prospect of an apocalypse or that “they” will take over our culture?” What we will have for lunch or watch after dinner? Consciousness will find a stream and will direct our thoughts. The question is whether we will structure our consciousness or if someone else will. For social inventors, the challenge is even greater: their task is to structure the consciousness of others. It is not just a cute saying that social change begins with a change in consciousness. What people are unaware of, they cannot choose. Some people are aware only of what lies before them; some are aware of possibilities that are not yet visible.
The rich and powerful are those who structure consciousness for others. They write the software that defines the processes used to work or even (nowadays) socialize. They write the books and screenplays that hold our attention and define conversations or even new norms. Whether you are rich or poor in the information economy is at least partly determined by whether you structure consciousness for yourself or have it structured for you.
No one plays, or appears to waste time, more than children, and yet no one learns or develops more rapidly.
Once it is clear that we need to develop entrepreneurship, there is every reason to believe that communities will flourish. The result of developing entrepreneurship will not be less capital or knowledge workers; the result will instead be more profit and more jobs.
The task of sustaining innovation within an organization is one that Drucker described as daunting: “It has become almost a cliché for historians of technology that one of the great achievements of the nineteenth century was the “invention of invention.” Before 1880 or so, invention was mysterious; early nineteenth-century books talk incessantly of the “flash of genius.” The inventor himself was a half-romantic, half-ridiculous figure, tinkering away in a lonely garret. By 1914, the time World War I broke out, “invention” had become “research,” a systematic, purposeful activity, which is planned and organized with high predictability both of the results aimed at and likely to be achieved. “Something similar now has to be done with respect to innovation. Entrepreneurs will have to learn to practice systematic innovation.”
The portion of the population now getting degrees is 30X higher than what it was in 1900. In the 1860s, a university education in England “was a luxury that only one in five hundred young men … could afford.” (Which, of course, meant that only one in a thousand young people could afford it, since young women simply did not have this option.) Imagine a similar increase in entrepreneurship during the next fifty years. What society has done for knowledge work in the last century it now gets to do for entrepreneurship in the next generation. Entrepreneurial responsibilities are too important to be limited to a select few within any organization or community.
Within the developed nations, there is a large gap between starting one’s own business and working as compliant employee, subject to (and at turns beneficiary of or suppressed by) other people’s judgment. There is an enormous gulf between traditional employee and entrepreneur – between enjoying relative security while being forced into compliance or facing probable failure (the majority of small businesses fail within a few years) while having the freedom to innovate. This huge gap offers great potential for companies. To the extent that companies can even incrementally move individuals from compliance to creativity, letting each person gradually find his or her own sweet spot in this range, the potential for progress is huge. Forced to choose between a bureaucratic role and role of a traditional entrepreneur, most workers would rather not. It is a stark choice. A community able to make the choice less stark can only benefit. Imagine letting people retain some of the income stability of the employee role and gain some of the risk and return of the entrepreneurial role.
Now, of course, crowdfunding sites like Kickstarter, indiegogo, and AngelList have made it easier for anyone to be play venture capitalist or entrepreneur. This matters for more than just aspiring investors and entrepreneurs. Pop culture changed for nearly everyone in the 1960s, even the people who did not start a band.
Every high school student knows about successful, high-paid athletes in the country and has a team of coaches at their school who can help them to become better at football or basketball. In 40 of the 50 states, the highest paid public employee is a football or basketball coach. Even though everyone knows that only a fraction of the kids playing football in school will go on to become pros, the ones who do are all the more adept at it for all the time they “played” in school. There are one million kids playing high school football. Seventeen hundred men play in the NFL. Imagine taking entrepreneurship even half as seriously as football, making sure that students weren’t just aware of high profile entrepreneurs like Elon Musk and Oprah but actually had coaches at school who could help to develop their ability to become entrepreneurs. Even if just fractions of the kids who “played” entrepreneur in school went onto become professional entrepreneurs, it could make a huge difference in rates of job and wealth creation.
There is no reason to think that the rate of technological invention will slow. Out of a slew of advances that I could foolishly try to predict, I do think it is worth predicting two things: we will live longer and that will drive people to reconsider what they do with their lives, how they work.
Aubrey de Grey, a researcher at Cambridge, has a concept he calls the “longevity escape velocity.” Last century, life expectancy rose about 30 years, from 47 to 77. This works out to nearly eight more hours every 24. de Grey points out that if we could triple that rate of increase to 24 hours a day we would extend life expectancy indefinitely. Every day that passed, we would get another day added. At this point, we would hit a longevity escape velocity that would put death on a horizon that would perpetually recede into the distance.
“Life as you were to die tomorrow” is a flawed cliché. A more fascinating bit of advice than would be to “Act as if you’ll live another century.” What project could you not do in this time? What communities could you not shape? What might you invent?
Startup success can be engineered by following the right process, which means it can be learned, which means it can be taught. Entrepreneurship is a kind of management. – Eric Ries, Author of “The Lean Startup”
Imagine that students needed to define and execute projects that took them out into the community. Poverty. Transportation issues. Drug use. Health problems. There is no shortage of issues that communities face. Projects – a central emphasis for any startup – could combine the expertise and goals of professors, community experts, and students. The objective of these projects would not be to pass on knowledge but instead to create it. These projects might change the reality of poverty, congestion, or addiction rather than simply report on them.
Not only could schools blur the boundary between work and learning, between social study and social invention, they could be adapted more to the realities of real human beings. Institutions like schools are just made up: people, by contrast, are real. Schools can better adapt to real human beings by designing education to accord with some of the more interesting theories about who people are rather than who we think they should be. One of the reasons that love is so intoxicating and desired is that being loved means being fully embraced for who we are. Institutions that insist we should become someone we are not seem to be the opposite of that. Love opens up a person; institutions, too often, shut us down.
If we assume that any one of the eight kinds of intelligence could mix with any one of the three kinds of learning styles, we have a complex menu of minds. In theory, we would have three times eight, or twenty-four, different kinds of learners. We would have auditory learners with interpersonal intelligence and visual learners whose greatest gift is logical-mathematical intelligence and so on. This suggests that in a time of entrepreneurship and social invention, we might create at least twenty-four kinds of learning experiences, if not even twenty-four different learning institutions. (And of course those are not the only theories about how people differ in learning and certainly not the only way people might articulate common goals for applying learning, another basis for social invention in the domain of education.) This customization of learning for different types of students would be just one example of how institutions is made into tools for the individual.
School should be a means for a student to discover and develop his own potential, not be ranked against other students on criteria that may have little to do with his – or even his community’s – future.
As it now stands, an 18 year old chooses a major, a direction in which to take her life, based on some vague notions of joy in work, income, and their own interests and strengths. For far too many students, though, it is a high price to pay for uncertain outcomes. They invest four to six years of their lives, pay tens of thousands in tuition and forego perhaps a hundred thousand in income in order to get a degree that ends up peripheral to their career. The first real feedback they get about whether this major is going to create opportunities to work with the sorts of people they enjoy, doing the sorts of tasks that engage them, creating value for markets able to reward them is after graduation. Some – many – go back to school for graduate or professional degrees after getting feedback on their bachelor’s degree but these, too, often result in unhappy careers. I recently had a lawyer tell me that based on her experience; about 80% of lawyers hate their career but cannot go into anything else because they are burdened with student loans that preclude a change.
What if, instead, universities practiced a variant of MVP? A Minimum Viable Graduate? Instead of rapidly releasing products for feedback – products that are continually revised based on real market response rather than speculation – universities could rapidly “graduate” students to enter the market? What if students graduated into the work place within weeks of when they started university? Perhaps at the end of a 10-week quarter. Or at most the end of a school year. And then returned to university 2 weeks to 6 months later with real data they could use to steer their education. Learning requires feedback. Learning in preparation for a career deserves market feedback.
Schools, like smart phones and cars, are just tools. Good product design adapts to the user.
Work matters. Profoundly. It has the potential to define us as much as anything else in life. Think of the people who stand out in history, people as different as Picasso, da Vinci, Marie Curie, Maria Montessori, Beethoven, Bjork, and Kurt Vonnegut. We know them through their work. So what does it mean to be defined by work that is defined by someone else? What does it mean to conform to processes defined by management teams who know little of our potential or unique skills?
Our economy still rests on the assumption that that we should harvest even non-renewable resources as if they were crops that will return again next spring.
Less obvious than issues with our natural systems is the extent to which our inventions – particularly our social systems – clash with human psychology, and are at odds with who we are. Corporations are good about conforming to psychology when it comes to products. The intuitive feel of a smart phone, the way a sports car excites or a cheeseburger comforts are just a few of the many pieces of evidence that corporations take human psychology seriously when it comes to the design of products. As consumers, we are seduced. As employees, we are bossed around. Imagine a world in which companies had to compete for employees who chose to work at a place based on its design of work and how well it facilitated engagement, creativity, and the production of value. Imagine a world, that is, where corporations took the average person as seriously in the role of employee as they take her as in the role of consumer, where they made creation and production as easy as they made consumption. Imagine that work (something we approach as producers) were designed to be as engaging as video games (something we approach as consumers).
Like dogs watching television, we sit on the sidelines of systems that we vaguely understand and poorly predict.
Systems are defined by interactions between their parts rather than the action of their parts. Another way to put this is to say that emergent properties define systems. For instance, hydrogen and oxygen are gases yet combining two atoms of hydrogen with one atom of oxygen gives you a liquid. Sometimes emergent properties are intuitive and sometimes – as with H2O – they are not.
What emerges out of relationships is not simple and cannot be reduced to its parts. The proverb, “In an avalanche, each snowflake pleads its innocence,” captures the fact of emergent phenomenon transcending any one agent.
Martin Wolf, the Financial Times commentator, has more than once pointed out that one can’t praise the Germans for running a current account surplus while criticizing the Greeks for running a current account deficit. It is true that German financial markets are a system with a great deal of complexity but it is also true that they are part of a larger, Eurozone system (that is, in turn, part of a larger global financial system). It is not possible for the Germans to run their current account surplus without Greeks (or someone) running a current account deficit. It is like delighting in your child becoming older even as you feel horror at your father getting older; they are two perspectives on the exact same process.
Many of our problems are not just difficult to solve using analytic thinking but are the result of organizing our world to conform with analytic thinking, our obsession with the performance of people and parts rather than what emerges out of the relationships between people.
There is, of course, at least one problem with this: in a world full of pragmatists all focused on specific solutions to specific problems in a specific context, it is too easy for everyone to neglect the system as a whole. Some intelligent experts are hard at work trying to understand how to sell cars. Others focus on how to sell political candidates. Still others grapple with the problem of climate change. Nobody has the responsibility to work on the interaction between these pieces, yet interactions define systems. So we move inexorably towards a calamitous collision of products, politics, and climate –our habits threatening our habitat. Working towards a solution to this problem is terribly un-pragmatic, suggesting a course of action that is both improbable and implausible. Climate change is not just, as Al Gore points out, an inconvenient truth but one for which our social inventions have left us ill equipped. Now, here in the fourth economy, pragmatism is no longer terribly pragmatic.
Systems thinking reveals flaws in the analytic perspective that has so pervaded science and policy. The analytic perspective would lead one to conclude that a fertilizer that greens one’s lawn is good, even if it harms the ocean downstream. The analytic perspective would conclude that a rise in GDP is a good indicator of progress, even if such a rise was the result of spending too much on food, which triggers obesity and excessive spending on health care (and, oddly enough, further increases GDP).
The systems perspective does not allow us to conclude that an economic system that consumes its habitat in the process of creating goods is good.
If a person wants to cross the room, she walks. If a person wants to cross town, she drives. If she wants to cross the continent, she flies. The scope of the goal determines the choice of technology, from house slippers to jet airplane. Yet, if a policy maker passing legislation or making decisions affecting a corporation wants to plan a meeting for that afternoon, he talks. If he wants to put in place a budget for the next year, he talks. If he wants to create rules or legislation to shape the next decade, he talks. Even as our world becomes more complex, the tools popularly used to make decisions and policy have not evolved much from what we have used since the dawn of the second economy.
“By and large, [managers and policy makers] don’t learn from their experience because the most important consequences of their actions occur elsewhere in the system, eventually coming back to create the very problems they blame on others”. One of the challenges to formulating policy is that changes to the system that seem to help one area or constituency may hurt another, and the cause and effect may be hidden from policy makers.
Senge’s point goes right to the heart of the institutional challenge posed by systems thinking: system dynamics almost invariably bring one across the borders of traditional institutions and departments. This alone suggests that a shift to systems thinking will trigger an unprecedented wave of social invention. To solve significant problems, you cannot neatly contain your efforts within departments or even within organizations.
One of the chief challenges to policy makers is balancing, or perhaps more accurately integrating, the needs of the individual and those of the system. Nobel-prize-winning economist Amartya Sen views the expansion of freedom “as both (1) the primary end and (2) the principal means of development.” Freedom – the autonomy of people to live as they want – is both the way we make progress and the outcome of progress.
We will have to teach systems thinking the same way that we now teach literacy. We will have to provide individuals with tools, models, and theories about the dynamics of the systems in which they find themselves.
Grammophones, CDs, movies and TV were all fine and dandy entertainment inventions, but none of these mediums give the audience what video games do: ability to interact and make a difference in the outcome. You can admire but you cannot shape those earlier forms of art. Millennials were the first generation to grow up with game controllers. They are not spectators. They are participants.
The Great Depression in the 1930s turned many young people away from corporations towards communism. By contrast, the Great Recession in the first decade of this century seems to have turned many away from corporations towards entrepreneurship. They are creating a lifestyle and then adapting a business to it. Seeing so many people lose supposedly secure jobs, they realize independence is risky but do not see risk as avoidable. In their minds, the risk of entrepreneurship is not that distinct from the risk of pursuing a traditional career within a business, school, or government agency. The risk is not that different but the rewards are.
Millennials are participating in another reinvention of marriage, so that does not really distinguish them. What will distinguish them is the pace and variety of social reinvention. People invented new products before the 20th century. What redefined the 20th century is the pace at which new products were introduced and the degree to which people came to expect technological innovation, innovation as commonplace. The fourth economy does not introduce social invention. It will just make it commonplace.
It is inescapably true and trivial that we are unique. A more interesting question is whether we can create institutions that allow for this inevitability without forcing us to fight.
We know that reading is important and no matter the struggle, it is a skill we expect of every normal, healthy child. The fourth economy will be a place where we work to create adults with a similar expectation of social invention. Literacy is too important to leave to chance; the same is true of the social invention that begins with a sense of one’s own potential and what next needs changing in order to realize that potential.
Within the West, the big social inventions have always been happy to define the individual. At various times and to various degrees, social programming has had a ready answer to the question of what the good life meant: being a good Christian, a good citizen, rich, an A student, or a good manager or employee. Imagine defining yourself instead as someone who defines institutions rather than being defined by them. Then imagine what sort of social invention you would have to engage in to create something akin to a school, a church, a government, or a business that would facilitate the person you aspire to be.
So the thing I would say is when you grow up you tend to get told that the world is the way it is and your life is just to live your life inside the world, try not to bash into the walls too much and try to have a nice family life, have fun, save a little money. But life … that’s a very limited life. Life can be much broader once you discover one simple fact: and that is everything around you that you call life was made up by people that were no smarter than you and you can change it, you can influence it, you can build your own things that other people can use and the minute that you understand that you can poke life and actually something – you know, if you push in something will pop out the other side, you can you can change it, you can mold it. And that’s maybe the most important thing is to shake off this, this erroneous notion that life is there and you’re just gonna live in it versus embrace it, change it, improve it, make your mark upon it. I think that’s very important and however you learn that once you learn it a you’ll want to change it, to make it better, cuz it’s kinda messed up in a lot of ways. And once you learn that you’ll never be the same again.
But what about you? Who are you? Outside of religion and politics? Outside of market valuations and measures of productivity? Who is the you who can dictate to church and state, banks and companies? Because finally, the only other alternative is that they dictate to you.
The question is not whether you will dance to the beat of cultural or genetic programming: that is inescapable. The question is whether you will find room within the larger symphony to sing your own song.
True economic progress results in more autonomy and greater choice about how to live.
From grading in schools to ranking in the workplace, the dominant social constructs attune individuals to extrinsic rather than intrinsic signals. That is, these institutions condition individuals to respond to outside stimulus without provoking the really hard work of understanding one’s own drives and aptitudes. Schools and workplaces can treat knowledge workers as robots who must be programmed, rather than as individuals who need to discover their potential. The result is the antithesis of entrepreneurial impulse.
The corporation is today’s dominant institution. What if, like the earlier church, state, and bank, it became a tool for the common person rather than simply using the individual as a tool?
A systems approach explains why CEOs make so much more than the average employee does. The CEO is the one employee who is able to look at and interact with the company as a system. Other employees are hired to fill particular roles within that system. If CEOs are worth 365X as much as the average employee then we need to redesign the corporation to allow more employees to add this sort of value. It would be silly to enable only one person to add so much value that he was the only one whose fair market value was in the millions. We should want that for dozens – hundreds – of corporate employees.
The former management gurus Peter Drucker and Russell Ackoff both have claimed that profit is to a corporation what oxygen is to a person: vital but by no means its purpose. Companies have to make a profit but they do not have to subordinate everything to it.
Profits ought to be the consequence of a more interesting goal of making life better. Not just for customers but for employees. This, in turn, suggests that the corporation could be a tool to enable the individual to create a life of her own choosing, a tool for autonomy.
The consumer gets to choose among a dozen dishes with ingredients as varied as pork belly and salmon, kale or sweet potatoes, cinnamon or kimchi. The employee essentially can say that she does or does not want fries with that. The lack of choices and freedom of the employee is in stark contrast to the plethora of choices and freedoms of the modern consumer.
Google is treating the resource of knowledge workers like venture capitalists do money. That is, Google is using a scarce resource – its programmers and engineers – and investing a portion of their time into new ventures that have a very high probability of failure. This seems like a silly short-term policy. Odds are good that they are just diverting precious attention into projects that will not pay back. Long term, however, this seems brilliant. They need only one spectacular success every five to ten years in order to maintain a growth trajectory that even corporate giants like GM and Microsoft have been unable to sustain.
Steve Blank is a Silicon Valley entrepreneur who went on to teach entrepreneurship to students at Berkeley, Stanford, and Columbia, and has defined and popularized a Lean Startup method that has been praised in Harvard Business Review, The New York Times, and the Economist. He recently said, “Corporate entrepreneurship and innovation will be the next big thing for the next 10 years, and the business school that sets up a program for that will be printing money from executive education and gradating a cadre of MBAs who will be snapped up by large companies that are desperate to reintroduce innovation inside their corporations.”
Curiously, SAIC founder Robert Beyster (1924-2014) received far less attention than CEOs like Howard Schultz of Starbucks or Jeffrey Immelt of GE. Perhaps the big reason he received less attention is because his company was employee-owned rather than traded publically. In any case, it is unfortunate because Beyster attained stunning results by blurring the boundaries between the role of employee and entrepreneur. Robert Beyster articulated a key challenge to his company as being the recruitment, retention, and reward of entrepreneurial employees who are also team players. For Beyster, this was not mere rhetoric. He built a company that had reached the level of hundreds of operating divisions, forty-four thousand employees, and $6.7 billion in sales by the time he retired. By sharing stock, he made millionaires out of hundreds of employees. He retained only 1.3 percent of the company – an amount still worth about $100 million when he retired. SAIC’s top management operated more like venture capitalists than a strategic management team anxious to impose strategic and process discipline onto lower-level managers. Market and project success were their own consequences, and shared equity helped to align the interests of shareholders, management, and employees towards the natural consequences of business success. What’s more, SAIC shareholders were the employees (and vice versa). Using an internal market for share trading, only SAIC employees, directors, and consultants could own shares.
Bill Gates once said, “My capital walks in and out of the office every day.”
For instance, leaders serious about making more employees more entrepreneurial could kickstart their corporation, adopting a model for product development that looks more like an episode of Shark Tank than the release of the Soviet’s 5-year plan. Imagine that rather than senior managers making funding decisions about which products to pursue, they relied on the wisdom of the crowd. More specifically, had organizations take their lead from employees whose willingness to invest – or not – would signal the new product’s potential.
Imagine that anyone in the organization – from a brilliant CEO like Elon Musk to an introverted IT expert like Maurice Moss – could make presentations to the organization proposing a development project. The very first limit to success with this would likely be education on topics like net present value, market analysis, assessment of technology risk, creating credible schedules, and building teams. To disperse the power over decisions about where to invest would drive widespread education of business principles to knowledge workers who might know more about C+ than Profit and Loss.
It would also further the trend towards the democratization of finance. Imagine that a portion (5%? 33%?) of every employee’s 401(k) fund had to be invested in either the company’s stock or in specific R&D projects. If you work for IBM now, investing in the company’s stock means investing in the efforts of 400,000 people and who knows how many projects. Letting employees invest in specific ventures within the company would offer the engagement of a fantasy league but with actual consequences. It would give employees the chance to get in on the start of lucrative projects.
This matters because the revolution of the third economy resulted in everyday employees – and not just elites – becoming the investors who drive markets. Collectively, American workers “control” $6 trillion in stocks through pension and 401(k) funds. Directing a portion of these funds into projects employees were involved in would help to shift ownership to the folks providing the intellectual capital. And it would change their relationship to the creation of equity from passive to active.
Maybe the most important change in this would be the shift from the project team focusing on whether the product will “work” to whether it will sell.
Specialists generally worry about how to make a product work. Entrepreneurs worry about how to sell it. The sooner market realities are incorporate into the design of a new product, the better its chances of success.
In practice, the result of this would be that employees would have greater risk and return than traditional employees but less than traditional entrepreneurs. The firm gets the benefit of the wisdom of crowds to help shape their investments and – one expects – more entrepreneurial ventures.
Entrepreneurs become entrepreneurs for one simple reason: to be free. If you give that up, then you stop being an entrepreneur, and to hell with that. –Wilson Harrell, founder of over 100 companies and former publisher of Inc. Magazine
Gallup is now tracking engagement at work just as they do optimism about the economy or presidential approval. In early 2015, 70% of workers feel disengaged. 70% unemployment would be disastrous. Perhaps in a few decades we will look at 70% disengagement with as much horror.
The revolutions of the first three economies have already changed religion, politics, and finance. Now, the fourth economy will change work in the same way, making it something personal. Imagine choosing a corporation the way you might choose a gaming console. Imagine that people use corporations as tools that enable to them to create value and find meaning. Once people have a few creature comforts, they are likely to seek engaging goals that make them happy.
Final chapter – The Rise of the Individual. It would seem to miss the point if I were to write this chapter, wouldn’t it? If you have come this far, this is your chapter to write.