#coecon

[doughenton-blog1]

Connecting Innovation and Inequality: Could Housing Be the Key?

One of the major topics in public debate today is how to address the problem of inequality. Does an innovative economy inevitably lead to winners and losers and growing disparity between the haves and have-nots? Or can innovation lead to shared prosperity and opportunity for all?

Since the Great Recession, inequality has been rising faster than ever before, according to the Organization for Economic Cooperation and Development (OECD), especially in America.[1]   OECD's report measures inequality using the Gini coefficient, "which runs from a minimum of 0 (perfect equality) to 100 (total inequality). ... America’s Gini coefficient, as calculated by the OECD, stands at 38. Most developed countries have Gini coefficients that run much lower."[2]

Clearly, the Great Recession "generated economic setbacks for many individuals and families. Several states still see high unemployment rates, stagnant median family income, and loss of wealth. In 2013, more than one in seven adults lived in poverty, and nearly one in five children lived in poverty. Children who grow up poor are more likely to earn less as adults, complete fewer years of education, and face more health issues than children living in higher-income families."[3]

Recently, Robert Putnam, a leading political scientist from Harvard, wrote “Our Kids: The American Dream in Crisis”, which focuses on the state of upward mobility and inequality.    "Widening income gaps, he argues, have brought profound but underappreciated changes to family life, neighborhoods and schools in ways that give big advantages to children at the top and make it ever harder for those below to work their way up."[4] He finds that "over the last several decades a distributing 'opportunity gap' has unexpectedly emerged between kids from 'have' and 'have-not' backgrounds. The central tenet of the American Dream—that all children, regardless of their family and social background, should have a decent chance to improve their lot in life—is no longer 'self evident.'"[5]

Jill Lepore analyzes inequality in her article "Richer and Poorer." 

What does Putnam’s say “we” do?  He proposes changes in four realms: family structure, parenting, school, and community. His policy recommendations include expanding the earned-income tax credit and protecting existing anti-poverty programs; implementing more generous parental leaves, better child-care programs, and state-funded preschool; equalizing the funding of public schools, providing more community-based neighborhood schools, and increasing support for vocational high-school programs and for community colleges; ending pay-to-play extracurricular activities in public schools and developing mentorship programs that tie schools to communities and community organizations.[6]

On the other hand, Lepore summarizes the views of Anthony Atkinson's, Harvard economist and author of “Inequality: What Can Be Done?”

Atkinson believes that solutions like Putnam’s, which focus on inequality of opportunity, mainly through reforms having to do with public education, are inadequate. Atkinson thinks that the division between inequality of outcome and inequality of opportunity is largely false. He believes that tackling inequality of outcome is a very good way to tackle inequality of opportunity. (If you help a grownup get a job, her kids will have a better chance of climbing out of poverty, too.) Above all, he disagrees with the widespread assumption that technological progress and globalization are responsible for growing inequality. That assumption, he argues, is wrong and also dangerous, because it encourages the belief that growing inequality is inevitable.

Atkinson points out that technological advance are governed by laws and laws are passed by legislators; in democracies, legislators are elected. So, too, new technologies don’t simply fall out of the sky, like meteors or little miracles. “The direction of technological change is the product of decisions by firms, researchers, and governments,” Atkinson writes. The iPhone exists, as Mariana Mazzucato demonstrated in her 2013 book “The Entrepreneurial State,” because various branches of the U.S. government provided research assistance that resulted in several key technological developments, including G.P.S., multi-touch screens, L.C.D. displays, lithium-ion batteries, and cellular networks.[7]

"'It is not enough to say that rising inequality is due to technological forces outside our control,' Atkinson writes. 'The government can influence the path taken.'[8]

Technology and the automation of middle-class jobs are often blamed for increasing concentrations of wealth in fewer hands. "But, a 26-year-old MIT graduate student, Matthew Rognlie, is now making waves for an alternative theory of inequality: the problem is housing (PDF)."[9]

...economist Thomas Piketty, argues that wealth is concentrating in the 1% because more money can be made by investing in machines and land (capital) than paying people to perform work (wages). Because capital is worth more than wages, those with an advantage to invest now in capital become the source of long-term dynasties of wealth and inequality. Rognlie’s blockbuster rebuttal to Piketty is that ““recent trends in both capital wealth and income are driven almost entirely by housing.” Software, robots, and other modern investments all depreciate in price as fast as the iPod. Technology doesn’t hold value like it used to, so it’s misleading to believe that investments in capital now will give rich folks a long-term advantage.

Land/housing is really one of the only investments that give wealthy people a long-term leg up. According to the Economist, this changes how we should rethink policy related to income inequality.

Rather than taxing businesses and wealthy investors, “policy-makers should deal with the planning regulations and NIMBYism that inhibit house building and which allow homeowners to capture super-normal   In other words, the government should focus more on housing policy and less on taxing the wealthy, if it wants to properly deal with the inequality problem. [10]

A recent report by the Legislative Analyst Office in California highlights the negative economic impact of high housing costs and the importance of housing policies for both equity and competitiveness. “One byproduct of spending a large share of one’s income on housing is that personal finances may be more fragile—meaning a smaller share of a household’s income is available for nonhousing goods and services, including savings. As a result, these households may find it more difficult to accommodate a drop in household income because they have a smaller amount of nonhousing disposable income and likely have smaller available savings.”[11]   Furthermore, "the state’s high housing costs make California a less attractive place to call home, making it more difficult for companies to hire and retain qualified employees, likely preventing the state’s economy from meeting its full potential."[12]

In sum, while education is important to opportunity, it may turn out that affordable housing may be the key to reducing inequality in an innovation economy.

_________________________________

[1] Babones, Salvatore.  OECD: Inequality Rising Raster than Ever.  Inequality.org.  May 19 2013.

[2] Ibid.

[3] NGA Center for Best Practices.  Improving Economic Opportunities for Children and Families.  

[4] DeParle, Jason.  'Our Kids,' by Robert D. Putnam. New York Times.  Mar. 4, 2015.

[5] Putnam, Robert D.  Our Kids: The American Dream in Crisis.  New York, NY. Simon & Schuster, 2015.

[6] Lepore, Jill. Richer and Poorer.  New York Times.  Mar. 16, 2015.

[7] Ibid.

[8] Ibid.

[9] Ferenstein, Greg.  "A 26-year-old MIT graduate is turning heads over his theory that income inequality is actually about housing (in 1 graph)." The Ferenstein Wire.  Mar. 25, 2015.

[10] Ibid.

[11] Taylor, Mac.  California's High Housing Costs: Causes and Consequences.  Legislative Analyst's Office. Mar. 17, 2015.

[12] Ibid.

[doughenton-blog1]

Silicon Valley Fever or a Smart Future?

March 2015 marked a milestone for Silicon Valley. We are finally back to 2000 employment levels, after a "lost decade” when our region shed over 200,000 jobs during the “dot com” bust and the Great Recession. Since 2008, our region has led the nation and California back from the recession with rapid job growth.(1)  

Silicon Valley’s remarkable progress compared to other economic regions is chronicled in the Silicon Valley Competitiveness and Innovation Report prepared by Collaborative Economics for the Silicon Valley Community Leadership Group and Silicon Valley Community Foundation. Our region has been a national leader in not only job growth but venture capital investment, IPOs and entrepreneurship.

However, many of the same regional challenges we saw in the last boom have re-emerged, especially in terms of rapidly rising housing prices and transportation gridlock, as well as talent shortages.(2)

In addition, we are now witnessing a land rush as major employers including Google, Facebook, Apple and others purchase property and build new headquarters in anticipation of significant new hires. Where will these employees live, and how will they get to work? Can we find innovative regional solutions to our housing, transportation and workforce challenges?

In short, we are experiencing another “Silicon Valley Fever”, the periodic episodes of exuberance that that we have witnessed before during in the 1970s with the rise of the explosive semiconductor industry (which gave us our name), the personal computer in the 1980s, the Internet in the 1990s and social media in the last decade. Will the fever break again as it did after each of these eras with fierce competition from Japanese chip makers, the rise of commodity “clone” PCs, and the dot com bust?

Two things could break our current fever. One set of factors is external. The Federal Reserve will raise interest rates and reduce the money supply after a period of historically low rates, which would end the six year stock market run, which has helped fuel this period of exuberance. Recent developments, as the market anticipates a rate increase later in 2015, suggest that this may happen. A second set of factors is internal. The lack of affordable housing and the traffic congestion could result in the migration of talent to other regions. We are already seeing evidence of this trend with flows of young talent going to other lower cost, high opportunity regions such as Austin, Seattle, and Boulder.

We have been here before. In 1998 during the rapid rise of jobs at the beginning of the Internet boom, over 1,000 businesses, government and civic leaders created Silicon Valley 2010 that outlined goals and strategies for achieving an innovative economy, livable community and inclusive society through regional stewardship.(3) While some of those goals were implemented, its progress was undermined by the recession following the dot com bust, which shifted our focus to recovery.

What will happen next following our current Silicon Valley Fever? Is another downturn inevitable as we follow our normal pattern of “creative destruction" in which new innovations replace the old with disruptions in employment, or can we prepare for a better future by making thoughtful choices now during our time of prosperity?(4)  

The Regional Economic Development Initiative (REDI) launched by the San Jose Silicon Valley Chamber in cooperation with the City of San Jose, Santa Clara County, private businesses and local chambers may provide an answer to these questions. This Initiative is identifying the most promising opportunities to drive the region into the future. REDI has found that we may be on the cusp of a new wave of innovation that combines each of our prior waves of defense, integrated circuits, personal computers, the Internet and social media into the Internet of Things that applies software, hardware and sensors to a wide variety of products and services in both consumer and industrial markets. Examples include Health IT, Smart Buildings, Advanced Transportation and Wearable Devices. Many of the leading firms in our region including Apple, Google and Cisco are already leaders in this emerging area.

Can Silicon Valley lead the nation into a “smart future”? Clearly this is what James Canton, a former executive at Apple and founding board member of the Singularity University based in Silicon Valley, believes. In his new book, Future Smart: Managing the Game-Changing Trends That Will Transform Your World, he outlines several trends resulting from a fusion of connected knowledge, individuals, technologies and markets that will shape our destiny. Below are a few excerpts from this list.

Connected Innovation Ecosystems—convergence of talent, technology, collaboration, and markets—will create competitive advantage.

Connected health care will enable more effective care.

Connected transportation will be safe.

Connected supply chains will speed production and raise quality. 

Connected education will enable smarter learning.

Connected products, Always Aware and online, will enable security.(5)

He argues that “How Future Smart we are about connectivity of the mobile online global economy will shape our civilization’s prosperity and progress for the next hundred years.”(6)

Is this optimistic vision possible? We may be already seeing the emergence of this vision in Silicon Valley with the rise of the Internet of Things. As Canton points out:

This Connected Planet will be dominated by mobile, wearable and embedded computing that will be linked together in the Internet of Things (IoT). The Internet of Things is the emerging technology wave of wirelessly connecting products, systems, computer chips, and devices to each other so they may sense, understand, analyze, predict, and exchange information, such as location awareness, and communicate with each other and us over the wave.(7)  

He then goes on to predict many of the things already happening in Silicon Valley today: connected health care, connected manufacturing, connected homes, connected enterprises and connected transportation systems.

What do we need to do to make this happen? First, we need to change our thinking to embrace collaboration. While competition fuels creativity in our market economy, collaboration is also critical in creating the infrastructure required to support this kind of future. This will require a kind of regional stewardship that was envisioned over a decade ago in Silicon Valley 2010. We will need that again if we are to meet our regional challenges with innovative solutions that apply the Internet of Things to our critical transportation, housing and education issues.

I remain optimistic for several reasons as suggested in my prior blogs : our economy may be entering a new act based on the next wave of innovation, the Internet of Things. This creates the opportunity for collaborative solutions, and intelligent machines can serve us by “augmenting” human intelligence not replacing it. In the end, we need to commit ourselves to finding intelligent solutions to the challenges we face and create a smart future that we all want.

1. Avalos, George.  "South Bay and East Bay post solid gains during January". San Jose Mercury News Business.  Mar. 11 2015.  2. Scheinin, Richard.  "Bay Area housing lags booming economy".  San Jose Mercury News Business.  Mar. 6 2015. 3. Henton, Douglas C., et al.  Silicon Valley 2010: a regional framework for growing together.  Joint Venture: Silicon Valley Network, 1998. 4. Henton, Doug and Kim Held.  "A Modern Proteus, The Dynamics of Silicon Valley: Creative Destruction and the Evolution of the Social Innovation Habitat". Social Science Information.  Dec. 2013. 5. Canton, James.  Future Smart: Managing the Game-Changing Trends That Will Transform Your World.  Boston, D Capo Press, 2015.  19.  6. Ibid. 19. 7. Ibid. 26.

[doughenton-blog1]

The Economy’s Next Act: Are we out of the woods yet?

Recent headlines suggest that the long awaited recovery has finally arrived. For example, The New York Times (11/25) reported that economic growth was stronger than expected in the 3rd quarter of 2014.

“The nation’s economic output grew at an even faster rate during July, August and September than the government initially estimated, giving the economy its strongest six-month performance in more than a decade.”

Furthermore, recent government data (12/23) revised the 3rd quarter estimate of GDP to indicate even more robust growth.

After the longest recession and weakest recovery since World War II, this is certainly welcome news (see my May 20, 2013 posting for more on the economic recovery). As Carmen Reinhart and Kenneth Rogoff found in their comprehensive review of the history of boom and bust cycles This Time Is Different: Eight Centuries of Financial Folly:

“The decline in economic output that follows the type of financial crises we had in 2008 is sharp, and the recovery tends to be slow and protracted, taking at least five to seven years to return to the pre-recession level.”

A 2012 analysis by Reinhart and Rogoff found that the recent financial crises is following a similar recovery trend as other recessions, taking at least five years to recover.

According to the President’s Council of Economic Advisors, 2014 was a breakthrough year for the U.S. economy:

Jobs: By November, 2014 was already the best year of job growth since 1999.

Wages: Much of the pickup in job creation in 2014 occurred in higher-paying industries, and overall wage growth continued to exceed inflation.

Deficit: The deficit as a share of the economy has fallen by about two-thirds, and the FY2014 deficit was below its average over the past forty years. This is part of a broader economic rebalancing that sets the stage for more sustainable growth in the years ahead.

Energy: The United States is leading the world in both oil and natural gas production, contributing to a roughly 40 percent drop in oil prices over the second half of the year. At the same time, solar energy is up tenfold since 2008, while wind energy has increased threefold.

Some challenges remain:

Jobs and Wages: The labor market is not yet fully recovered—further reductions in long-term unemployment and faster wage growth are needed.

Household Finances: Household finances vary widely across the population, and more must be done to ensure the benefits of a strengthening economy are widely felt.

Global Economy: Growth is slowing in many of our key trading partners, requiring a renewed global emphasis on pro-growth.

If we are finally recovering, leaving aside for the moment the uncertainties arising from the dramatic decline in oil prices, slower global growth and major political challenges which each impact growth, what is the next act for the economy?

Beyond the boom and bust of business cycles, our economy is also driven by longer waves of innovation. As Robert D. Atkinson pointed out in The Past and Future of America’s Economy: Long Waves of Innovation that Drive Cycles of Growth:

“Periodic waves of technological and economic change have fundamentally reordered the way we work, the organization of business and markets, and the role of government.”

Atkinson traces the evolution from the factory-based industrial economy in the early 1890s to the early 1940s; the corporate, mass production economy from the mid-1940s to the mid-1970s; to the turbulent transition to an innovation economy since 1974.

This wave theory builds on the work of Joseph Schumpeter, who coined the phrase “creative destruction” as “the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."

Carlota Perez draws upon Schumpeter’s theories in her book Technological Revolutions and Financial Capital, which explain why each technological revolution lead to the recurrence of financial bubbles and crises. These findings are illustrated with examples from the past two centuries: the industrial revolution, the age of steam and railways, the age of steel and electricity, the emergence of mass production and automobiles, and the current information revolution/knowledge society.

As the national economy begins to recover, state and regional economies across the nation are coming out of their own recessions at different rates and are beginning to ask questions about what is next, focusing on the longer term waves of innovation.

In the Kiplinger 2014 economic outlook (illustrated in this map), the growth forecast for the year was uneven across regions. States located along the West Coast were expected to fare better than states in New England and portions of the Midwest. Areas in states rich in natural and energy resources, such as North Dakota, were expected lead the way, while those states heavily impacted by ailing industries and cuts to federal and state government would see more muted growth. The sharp decline in oil prices may new affect economic growth in the energy states in 2015 while defense cuts are likely to impact defense intensive state and regional economies such as Virginia, Arizona and Southern California.

Silicon Valley is a clear example of region that is ready for its next act. For more than half a century, our world leading innovation region has been riding the waves of innovation. This has resulted in the “next big thing” through a process of creative destruction that created a series of boom/bust cycles. This evolution of the region is described in detail in Collaborative Economics’ The Dynamics of Silicon Valley: Creative Destruction and the Evolution of the Social Innovation Habitat.

Since the 1950s, Silicon Valley has evolved through a series of waves from defense, to integrated circuits, personal computers, the internet and social media. A single wave of this Schumpeterian process can be illustrated as a "hype cycle", in which early excitement about a promising technology fuels inflated expectations and eventually a crash.

Waves are initiated by a new technology, leading to profits for early investors and an increase in the visibility of the sector. A burst of economic activity follows; entrepreneurs and investors enter the market to take advantage of the new opportunity, proliferating new companies and jobs. The oversaturation of the market leads to declining profits and significant job losses. Surviving businesses refine their products or services and develop more productive processes.

Silicon Valley has pulled out of the recent recession, evident by strong job growth over the past three years. The recovery has been driven largely by robust growth in Software Internet & Information Services and Technical R&D.

This current wave might be described as Silicon Valley 2.0 with a shift from engineering innovative technology products and services toward creativity in applying technology for the consumer market. We can see this in the evolution from personal computers and the Internet to smart phones and social networking. Smart phones can now be used for mobile computing, allowing people to easily access social media applications (Facebook, Instagram, etc.) or text and e-mails anywhere. What is next for Silicon Valley?

First, it is important to understand there is a difference between Consumer Information Technology (IT) and Applied IT.

Consumer IT: IT software (e.g., social media such as Facebook, Google, publishing and entertainment) will continue to be important during this next wave.

Applied IT: Technology across broad array of industries; harnessing technology to improve productivity in traditional industries and the service sector may hold the key to the future. For example, IT was applied to the telephone, changing the PC and traditional telephone industry.

While Consumer IT has been the foundation of the recent Silicon Valley wave, Applied IT could be an important driver of innovation in the future. As in previous cycles, Silicon Valley will most likely see too many businesses enter the consumer IT space, initiating the next Schumpeterian cycle. While the social media wave and its proliferation of apps may be over-hyped, we also tend to over-estimate the short-term impacts of any new technology and under-estimate the long-term impacts. In the long term, we will see the application of information technology to a broader array of industries.

What will be the next innovation wave of the Valley? Potential waves on the horizon include:

Creative Industries: Social technologies are changing the nature of creative industries, allowing consumers greater access to arts, culture and entertainment. Application can be seen in social media and also in the vast global markets of tourism and travel, as well as experience industries. Companies such as GoPro and Pandora are examples in this wave.

Education and Life-Long Learning: Transforming education and publishing using information technology. The application of social media and information technology has opened new opportunities for online learning. This will create the potential for lifelong education as well as new business opportunities for educational institutions and the private sector. Companies such as Udemy and Coursera are examples in this wave.

Clean Energy and Environmental Technologies: The vast sums plowed into developing alternative energy resources and more efficient products and services will lead to incremental improvements and revolutionary breakthroughs. The deployment of renewable energy helps lower costs and speed up further adoption for both increased energy efficiency and renewable energy sources. Companies such as SolarCity, View, and Stem are examples in this wave.

Advanced Manufacturing: The application of information technology, simulation tools and sensors can lead to productivity improvements in advanced manufacturing. This precision manufacturing includes additive manufacturing or 3D printing, a process of making three-dimensional solid objects from a digital model. Companies such as Stratasys and Bespoke Innovations are examples in this wave.

Health Care: Using information technology in health care can create opportunities for Health IT and personalized medicine. This includes web-based medical platforms and genomics, which uses a biometric profile to target diagnosis and treatment to the genetic makeup of individuals. Companies such as Genomic Health and Fitbit are examples in this wave.

Most these applications will involve the creation of the Internet of Things. This refers to the rise of intelligent devices which combine software, hardware and sensors for a wide range of applications including cars, medical instruments, and home appliances. McKinsey Global Institute recently sized the market opportunity of the Internet of Things on the global economy as high as $6.2 trillion by 2025.

In January 2015, the Silicon Valley Leadership Group, representing 400 major Silicon Valley companies, and the Silicon Valley Community Foundation, the nation’s largest Community Foundation in the nation, will release a new report that examines current trends in the regional economy and compares progress with other leading innovation regions. This report will be discussed at a Public Policy Forum with policy makers, business and community leaders to develop a shared agenda to take Silicon Valley into the future. Collaborative Economics conducted the analysis and prepared this report.

As other regions emerge from their own recessions, they are now asking similar questions about their next act. We have been working with leaders in large metro areas including the Metro Atlanta region, a relatively small region in Western Massachusetts, regions in Arizona, Colorado and Oregon, and other regions of California including Los Angeles and the Central Valley. These regions are all searching for their most promising opportunities and identifying what is required to create prosperity and opportunity for their businesses and residents in the future.

2015 is shaping up to be a very interesting year for the regions of America and I am excited to be a part of this next act.

[doughenton-blog1]

The Future of Capitalism: Growing Inequality or Coming Abundance

Two books on the future of capitalism came out recently that reach very different conclusions. Capital in the Twenty First Century by Thomas Piketty and the Zero Marginal Cost Society: the Internet of Things, the Collaborative Commons and the Eclipse of Capitalism by Jeremy Rifkin describe alternative futures for capitalism primarily because of their different view of the role of innovation.

Piketty’s book is a lengthy history of inequality based on over a century of detailed data from Europe and the United States. Its major conclusion is that the decline in inequality that took place between 1914 and 1980, with a sharp drop after World War II, was an anomaly. His data shows inequality is now rising to the same levels as found in the Belle Époque and Gilded Age of the late 19th century. The reason for this, according to Piketty, is that the private rate of return on capital is growing more rapidly than the rate of the growth of output and income.

He says:

The problem is enormous, and there is no simple solution. Growth can of course be encouraged by investing in education, knowledge and nonpolluting technologies. But none of these will raise the growth rate to 4 or 5 percent a year. … For countries at the world technological frontier—and thus ultimately for the planet as a whole—there is ample reason to believe that the growth rate will not exceed 1-1.5 percent in the long run, no matter what economic policies are adopted.

With average return on capital of 4-5 percent, it is therefore likely that r>g [rate of return on capital greater than the rate of growth] will again become the norm in the twenty-first century, as it has been throughout history until the eve of World War I. In the twentieth century, it took two world wars to wipe away the past and significantly reduce the return on capital, thereby creating the illusion that fundamental structural contradiction of capitalism (r>g) has been overcome. (Page 573)

This pessimistic view of growth potential and the negative consequences of rising inequality lead Piketty to the conclusion that the only solution is a progressive annual tax on capital. His ideal solution would be a global tax on capital but in the absence of that he recommends raising the progressive tax in each developed nation.

While Piketty is a well respected economist and his new book is receiving a lot of attention, his assumption about slow growth may not be correct. What if instead, we were on the edge of a major new era of innovation that would lead to not only abundance but new forms of capital itself?

That is the conclusion reached by Rifkin, who in his book The Zero Marginal Cost Society "explains how the Communications Internet, Energy Internet and Logistics Internet are converging to create a global network connecting everything and everyone in an Internet of Things. This seamless, smart, twenty-first century infrastructure is accelerating productivity and reducing marginal costs of producing and distributing additional goods and services—if fixed costs are not counted—to nearly zero, making them essentially free. As a result, corporate profits are beginning to dry up, property rights are weakening and conventional notion of economic scarcity is giving way to the possibility of abundance as whole sectors of the economy are drawn into the zero marginal cost web." (Book jacket, The Zero Marginal Cost Society)

Pretty strong assertions but if true they would have major implications for not only the economy but society. Is information technology creating a whole new world?

Rifkin makes the case that "near zero marginal cost phenomenon has already wreaked havoc on the publishing, communications and entertainment industries as more and more information is being made available free to billions of people. Today, more than one third of the human race is producing its own information on relatively cheap cell phones and computers a sharing it via video, audio and text at near zero marginal cost in a collaborative networked world. And now the zero marginal cost revolution is beginning to affect other commercial sectors, including renewable energy, 3D printing in manufacturing and online higher education." (Page 4, The Zero Marginal Cost Society)

Rifkin explains how the Internet of Things is connecting people, production lines, logistics and consumption via sensors and software to platforms that continually feed Big Data to every node—business, homes, vehicles—moment to moment in real time. (Page 11) "Some of the leading information technology companies in the world are already at work on the build-out of the Internet of Things. General Electric’s “Industrial Internet,” Cisco’s “ Internet of Everything,”, IBM's “Smarter Planet,” and Siemens’s “Sustainable Cities” are among the many initiatives currently underway to bring online an intelligent Third Industrial Revolution infrastructure that can connect neighborhoods, cities, regions, and continents in what industry observers call a global neural network." (Page 14)

According to Rifkin, the Internet of Things "enables billions of people to engage in peer-to-peer social networks and cocreate the many economic opportunities and practices that will constitute life in an emerging Collaborative Commons." (Page 18) "Hundreds of millions of people are already transferring bits and pieces of their economic life from capitalist markets to the global Collaborative Commons. Prosumers are not only producing and sharing their own information, entertainment, green energy, 3D-printed goods and massive open online courses on the Collaborative Commons at near zero marginal costs. They are also sharing cars, homes... with on another via social media sites. ... The result is that 'exchange value' on the marketplace is increasingly being replaced by 'shareable value' on the Collaborative Commons." (Pages 18-9) What we are seeing is the rise of the sharing economy.

Here is where Rifkin suggests a different paradigm about the future of economic progress:

The current debate among economists, business leaders and public officials on what appears to be a new type of long-term economic stagnation emerging around the world is an indicator of the great transformation taking place as the economy shifts from exchange value in the marketplace to shareable value on the Collaborative Commons. 

Global GDP has been growing at a declining rate in the aftermath of the Great Recession. While economists point to the high cost of energy, demographics, slower growth in the labor force, consumer and government debt, an increase in the share of global income going to the very wealthy, and consumer risk aversion to spending, among other causes, there may be a more far-reaching underlying factor, although still nascent, that might explain at least some of the slowing of GDP. ... Even those items still being purchased in the exchange economy are becoming fewer in number as more people redistribute and recycle previously purchased goods in the sharable economy, extending their usable lifecycle, with concomitant loss of GDP. ... [A]s the number of prosumers proliferates, more economic activity is migrating from the exchange in the marketplace to the shareable economy on the Collaborative Commons, again shrinking the growth GDP.

The point is, while economic stagnation may be occurring for many other reasons, a more crucial change is just beginning to unfold which could account for a part of the sluggishness: the slow demise of the capitalist system and the rise of a Collaborative Commons in which economic welfare is measured less by the accumulation of market capital and more by the aggregation of social capital. The steady decline of GDP in the coming years and decades is going to be increasingly attributed to the change-over to a vibrant new economic paradigm that measures economic value in totally new ways. (Page 19-20)

Rifkin goes on to say that "[i]n the unfolding struggle between the exchange economy and the sharing economy, economist’s last fallback position, is that if everything were nearly free, there would be no incentive to innovate. ... Yet millions of prosumers are freely collaborating in social Commons, creating new IT and software, new forms of entertainment, new learning tools, new media outlets, new green energies , new 3D-printed manufactured products, new peer-to-peer health-related initiatives, new nonprofit social entrepreneurial business ventures, using open-source legal agreements freed up from intellectual property restraints. The upshot is a surge in creativity that is at least equal to the great innovative thrusts experienced by the capitalist market economy in the twentieth century." (Page 21)

Rifkin says:

The democratization of innovation and creativity on the emerging Collaborative Commons is spawning a new kind of incentive, based less on the expectation of financial reward and more on the desire to advance the social well-being of humanity. And it's succeeding. (Page 21)

So here is the essence of the difference between Piketty’s pessimistic view of the limited potential for economic growth and inevitability of rising inequality in an era of scarcity and Rifkin’s optimistic view of the continued opportunity in an era of abundance – innovation is creating a new economic paradigm based on collaboration. The Internet of Things changes everything:

Classical and neoclassical economic theory is mute once a society’s productive economic activity approaches near zero marginal cost. When marginal costs shrink to near zero, profits disappear because goods and services have been liberated from market pricing. They become essentially free. When most things become nearly free, the whole operating rationale of capitalism as an organizing mechanism to produce and distribute goods and services become meaningless. That’s because capitalism’s dynamism feeds off scarcity. … But when the marginal cost of producing those goods and services approaches zero and the price becomes nearly free, the capitalism system loses its hold over scarcity and the ability to profit from another’s dependency. Free implies free in two senses of the term: free in price and free from scarcity. When the marginal cost of producing additional units of a good or service is nearly zero, it means scarcity has been replaced by abundance. (Page 273)

So according to Rifkin a new kind of economic abundance may be on the horizon due to a fundamental shift in the way we communicate, produce and share so that rather than seeing a slowdown of growth and rising return of capital as predicted by Piketty, we may be seeing the exact opposite, with a increase in growth with declining returns to capital.

No less an economist as John Maynard Keynes may have seen this future in his 1930 essay, “Economic Possibilities for Our Grandchildren,” when he noted that new technologies were advancing productivity and reducing the cost of goods and services at an unprecedented rate.

"Keynes believed that 'a point may soon be reached, much sooner perhaps than we are all of us aware of, when these (economic) needs are satisfied in the sense that we prefer to devote our further energies to non-economic purposes.' He looked expectedly to a future in which machines would produce an abundance of nearly free goods and services, liberating the human race from toil and hardships and freeing the human mind from a preoccupation with strictly pecuniary interests to focus more on the 'arts of life' and the quest for transcendence." (Page 7)

[doughenton-blog1]

Democratizing Innovation: Will it lead to greater results?

I just returned from the fifth annual Economist Innovation Forum: Bigger Returns with Bigger Ideas where very smart people came together to talk about what it will take to grow the innovation economy. While some spoke about big ideas ranging from industrial design for Google Glass and brainwave controlled devices to nanotechnology-enabled approaches to bio-interfacing materials (e.g., creating the bionic man), the real focus of discussion was on how to translate these big ideas into results.

Curt Carlson of SRI International defined innovation as “creating new customer value with a sustainable business model”. Notice two key parts of this definition: the focus on the customer and the importance of a business model.

Today, there is an explosion of startups with big ideas attempting to bring them into the marketplace. The real challenge is how to commercialize these ideas by effectively managing the transition to rapidly changing markets in the face of intense competition. A startup with a great idea but without a clear understanding of its customer or a strong business model simply will not succeed.

According to the speakers, this requires working closely with the user to design new products, bridging the gap between design and engineering, and engaging in open innovation by seeking the best ideas from all over. In fact, the movement toward open innovation is probably the most important development in innovation in the last decade.

But something more fundamental seems to be happening: the democratization of innovation. "Carlson's Law", was coined by New York Times columnist Thomas Friedman to describe Curt Carlson’s balance between autocracy and democracy in innovation: "In a world where so many people now have access to education and cheap tools of innovation, innovation that happens from the bottom up tends to be chaotic but smart. Innovation that happens from the top down tends to be orderly but dumb.

The most animated discussion at the forum came at the end during a session on new funding models for big ideas that focused on the rise of crowdfunding. The founder and CEO of Indiegogo, one of the largest crowdfunding sites, made the case that it is the wave of the future. The founder of a recent startup Pebble Technology, a maker of the smart phone, spoke about raising $10 million, the largest amount from Kickstarter, after failing to gain support from angel or venture capitalists.

According to the speakers, with the JOBS Act becoming law, the tech industry is headed for some big changes. They claim that the legalization of crowdfunding in startups will “democratize” investing in innovation. While many of the consequences (positive or negative) of the legalization will play out over the next few years, the most well-known crowdfunding platforms are showing impressive results. According to Massolution, a research firm that specializes in crowdfunding, crowdfunding platforms raised $2.7 billion (an 81% increase) and successfully funded more than 1 million campaigns in 2012. Massolution estimated an increase in global crowdfunding volumes in 2013, to $5.1 billion.

Now the debate turns to regulating crowdfunding under the JOBS Act. "On October 23, 2013, the SEC voted unanimously to propose Regulation for Crowdfunding, the rules related to the offer and sale of securities through crowdfunded private offerings, as set forth in Title III of the Jumpstart Our Business Startups (“JOBS”) Act. FINRA then published its proposed rules governing the licensing and regulation of so-called 'funding portals,' a new type of limited-purpose regulated intermediary solely for these offerings."

Crowdfunding itself is not new. Websites like Kickstarter and Indiegogo have helped all sorts of businesses, organizations and people raise money through small individual contributions for an identifiable idea or business. Until the JOBS Act, however, crowdfunding could not be used to offer or sell securities to the general public. Issuers and intermediaries relying on Regulation Crowdfunding expect to further democratize investing in startups, because any investor, whether or not accredited, may invest in these securities.

"To permit crowdfunding, JOBS Act Title III added two provisions to the Securities Act of 1933: (1) Section 4(a)(6), which creates a new exemption to allow issuers to use crowdfunding to offer and sell securities in unregistered offerings and (2) Section 4A, which requires certain disclosures to be made by crowdfunding issuers and sets forth requirements for crowdfunding intermediaries."

In the months since the provisional SEC rules were released, scores of public comments have been submitted to the SEC. The comments have been heated and, at times, completely contradictory.

"At the heart of the debate is the concern that, by writing rules that regulate equity crowdfunding and protect unsophisticated investors from losing money, the spontaneity and fluidity that make crowdfunding attractive to upstart entrepreneurs will fade. In other words, by making equity crowdfunding safer, regulators run the risk of killing it." Advocates of crowdfunding argue that it is worth the risk to democratize financing and kick start innovation.

User-driven innovation, open innovation and crowdfunding all point to a bottom-ups trend toward greater democratization of innovation. Everyone can now get into the act. The question is whether it will lead to greater results.

[doughenton-blog1]

The Power Inversion: Regions take Center Stage

When David Brooks writes about The Power Inversion, you know that the importance of regions has finally entered the zeitgeist.

Since the New Deal, we have become accustomed to seeing American politics as an ever-concentrated national enterprise. But the sclerosis of the federal system will inevitably produce a reversal, as regions fill the void.

While the immediate impetus for his column was the new book The Metropolitan Revolution, by Bruce Katz and Jennifer Bradley of the Brookings Institution who argue that as federal government becomes less energetic, metropolitan city-states become more so, the idea that regions are now taking center stage as a result of a power shift has been gaining momentum for many years.   

Since the early 1990s, Neal Peirce and his Citistates Group has been chronicling these developments with the publication of the book Citistates: How Urban America Can Prosper in a Competitive World in and now through the weekly Citiwire. Over a decade ago, the Alliance for Regional Stewardship created a regional learning network to share best practices focused on the critical role of civic leadership. As stated by the late John W. Gardner in the initial monograph of the Alliance for Regional Stewardship in 2000: 

Regional stewards are rising to the challenge. But what do regional stewards look like? They have first of all a deep sense of responsibility about their region. They want it to thrive economically, to be sustainable environmentally, and to have the web of mutual obligations, caring, trust and shared values that make possible the accomplishment of group purpose.

They recognize that most of our communities are seriously fragmented, and they are committed to bringing the fragments together, committed to fostering the shared understanding and priorities that will permit community solidarity in pursuit of goals. Regional stewards will draw young potential leaders into the fray. They will make sure that leaders in their region come to know and understand different sectors so that true community deliberation can take place.  

Regionalism will continue to gain ground, but its progress will be greatly strengthened if we cultivate our potential regional stewards. 

Based on our experience in over 30 regions, Collaborative Economics has written two books on the central importance of regional steward leadership: Grassroots Leaders for a New Economy: How Civic Entrepreneurs are Building Prosperity Communities (1997) and Civic Revolutionaries: Creating the Passion for Change in America’s Communities (2003).

Now when David Brooks and Brookings recognize the national importance of these trends emerging from the bottom up, we know that its time has finally arrived. As Bruce Katz and Jennifer Bradley point out: 

The promise of the metropolitan revolution, of course, is not just to catalyze problem solving across metropolitan areas or even to unlock market innovations, as critical as those advances are. It is to repair what ails the United States, a political system mired in ruinous partisanship and ideological division. It is a short, logical step from collaborating locally on affirmative, pragmatic solutions to advocating at the state and federal level for systemic and structural policy reform. Collaborative action on ground level leads naturally to collective advocacy at the federal and state levels. (Page 205)

One current example of how regions are coming together to collaborate to address challenges at the state level is the California Economic Summit,  where 16 regions are engaging over 1,700 business, government, labor and environmental stewards in identifying and advancing common strategies focused on workforce, infrastructure, regulations, capital and innovation. This bottoms-up approach is modeling a new governance approach where regions work together to shape state level policies building on the work of the California Stewardship Network, an alliance of regional partnerships and California Forward,  a nonpartisan, statewide group promoting governance reforms.

Underneath this power inversion are much deeper trends. A recent forum led by Tom Friedman in San Francisco brought together some leading thinkers on how power is shifting downward.  Friedman likes to quote Curt Carlson of SRI International who says “everything that is top down is dumb and slow; everything from bottoms up is smart and chaotic.” Friedman asks, while we have more “amplified individuals”, who leads in this new bottoms-up world?

At his San Francisco forum, Friedman invited two leading thinkers who addressed the issue of the downsizing of power. Moisés Naím, former editor of Foreign Policy author of The End of Power asserts: 

Power is spreading, and long-established, big players are increasingly being challenged by newer and smaller ones. And those who have power are more constrained in how they can use it. …

Power is undergoing a fundamental mutation that has not been sufficiently recognized and understood. Even as rival states, companies, political parties, social movements and institutions or individual leaders fight for power as they have done throughout the ages,  power itself – what they are fighting so desperately to get and keep – is slipping away. 

Power is decaying. (Page 1)

He argues that restoring trust, finding new ways for citizens to meaningfully participate in the political process, creating new mechanisms for effective governance and enhancing the capacity to work together should be the central goal of our time. (Page 243)

We are on the verge of a revolutionary wave of positive political and institutional innovations. … It will not be top-down, orderly, or quick … Yet it is inevitable. Driven by transformation in acquisition, use and retention of power, humanity must, and will, find new ways of governing itself. (Pages 243-4) 

At the Friedman Forum, Marian Gorbis of the Institute of the Future in her book The Nature of the Future agreed that power is shifting downward but saw information technology as a driving force.  

Large corporations, big governments, and other centralized organizations have long determined and dominated the way we work, access healthcare, get an education, feed ourselves, and generally go about our lives. … Today, this organizational advantage is rapidly disappearing. The Internet is lowering transactions costs—costs of connection, coordination and trade—and pointing to a future that increasingly favors distributed sources and social solutions to some of our most immediate needs and our most intractable problems. (Book jacket, The Nature of the Future) 

She sees a new kind of social economy emerging where the need for institutional structures to create value and achieve scale are evaporating and being replaced by a new level of collective intelligence embedded in social connections with multitudes of others. Instead of taking the personal and social out of transactions, she believes that we can use our technology-enabled connectivity to achieve scale in new ways. (Page 39) She too believe this will lead to new forms of governance based on citizen participation and networked collaboration. (Page 115) 

It is worth remembering that the futurist Alvin Toffler saw these trends on the horizon over two decades ago in his 1990 book PowerShift – the second volume of his trilogy that opened with Future Shock and continued with the Third Wave: 

...We live at the moment when the entire structure of power that held the world together is now disintegrating. And this is happening at every level of human society.

In the office, the supermarket, at the bank, in the executive suite, in our churches, hospitals, schools, and homes, old patterns of power are fracturing along strange new lines. This crackup of old-style authority and power in business and daily life is accelerating at the very moment when global power structures are disintegrating as well. 

The forces now shaking power at every level of the human system will become more intense and pervasive in the years immediately ahead. Out of this massive restructuring... will come one of the rarest events in human history:  a revolution in the very nature of power. 

A “powershift” does not merely transfer power. It transforms it. (Page i)

Once again, Toffler was ahead of the curve in recognizing the importance of networks in providing a new way to organize in this changing environment. 

Informal networks of many kinds crop up in virtually all complex societies. … For a long time the role and structure of such networks were ignored by economists and business theorists. ... These networks, formal or not, share common characteristics. They tend to be horizontal rather than vertical – meaning they have either a flat hierarchy or none at all. They are adaptive—able to reconfigure themselves quickly to meet changing conditions. Leadership in them tends to be based on competence and personality rather than on social or organizational rank. And power turns over frequently and more easily than in a bureaucracy, changing hands as new situations arise that demand new skills. (Pages 196-7)

Which returns us to the core reason why regional networks and civic leadership within these networks have become so central in this era of power inversion.     

As the famous sociologist Daniel Bell once said, 

The nation-state has become too small for the big problems of life and too big for the small problems. 

As we face increasing gridlock at the national level and experience the long term, downward powershift, we must now turn to regions for innovative solutions to our most pressing challenges. At the core of the most effective regions we are likely to find “innovation brokers” who act as the critical intermediaries in the innovation economy who take regional assets like universities, local industry, and sources of capital and connect them in order to create new businesses, jobs, and wealth. We have been identifying this trend for some time.     

So there you have it; regions are finally being officially recognized for taking center stage. Let’s get on with creating the regional networks that civic leaders need to succeed in this more decentralized, innovation economy. 

[doughenton-blog1]

Give and Take: Secrets of Success in an Innovation Economy

We didn’t anticipate when we wrote Innovative Regions: The Role of Place and Networks in the Innovative Economy in 1999 how much of a consensus would emerge over the next decade about the importance of networks in a new model of innovation led economic development. 

We asked: What is the secret of innovative regions?

How has Silicon Valley made continual leaps across technology waves over four decades, moving from leadership in integrated circuits in the 1960s to leadership in personal computers in the 1970s, in software in the 1980s, and now the Internet in the 1990s? All these innovative leaps occurred in the face of rising costs, growing competition, and the rapid diffusion of technology. The answer lies in the dense and flexible networks of tight relationships among entrepreneurs,venture capitalists, university researchers, lawyers, consultants, highly skilled employees, and others who know how to translate ideas into new products and services fast enough to stay on the edge of the innovation curve. These complex networks continually connect people with good ideas and test the changing market, always searching for the next innovation.

Why did San Diego become a hotbed of bioscience and digital communications start-ups in the 1990s while Houston—with its much greater concentration of assets, including the world-renowned Houston Medical Center, NASA Space Center, Rice and Baylor Universities—produced fewer entrepreneurial firms in the same fields? An important reason may be that San Diego has learned how to stimulate an entrepreneurial environment by actively connecting its assets through formal and informal innovation networks; Houston has not. Assets may not be enough in the innovation economy.

Innovation and the successful entrepreneurs that drive innovation are embedded in regional networks that connect assets in ways that create wealth and opportunity for both firms and individuals. Innovation is a social process. It rarely occurs because a single individual or firm takes an idea to market. Instead, it involves many people playing many roles in a dynamic collaborative process built around creative teams and face-to-face interaction. Creative work, as opposed to routine production, requires close proximity. Innovation is not a linear process, but an active process of learning through trial and error. Networks speed up the innovation process by connecting people across boundaries and accelerating learning.

After writing many reports on the innovation economy over the past several years, we recently started focusing on the role of networks in regional innovation brokers that actively connect entrepreneurs with the talent, technology and capital they need to succeed in the marketplace. 

Now exciting, new research has provided guidance on how to succeed in this networked world. Adam Grant, professor at the Wharton School at University of Pennsylvania, has written an important, bestselling book entitled Give and Take that may offer the secret of success in the innovation economy. 

For generations, we have focused on the individual drivers of success: passion, hard work, talent and luck. But in today’s dramatically reconfigured world, success is increasingly dependent on how we interact with others. Give and Take illuminates what effective networking, collaboration, influence, negotiation and leadership skills have in common. ...

In professional interactions, it turns out most people operate as either takers, matchers, or givers. Whereas takers strive to get as much as possible from others and matchers aim to trade evenly, givers are the rare breed of people who contribute to others without expecting anything in return. 

Using his own groundbreaking [studies]... Grant reveals how these styles have dramatic impact on success. (Book Jacket, Give and Take) 

Grant argues that givers succeed in an economy built on relationships. The essence of a network economy is the web of relationships that connects people and institutions based on collaboration and trust. 

Grant creates a two sided matrix to help illustrate how givers succeed. 

He makes the point that selfless giving, in the absence of self preservation, easily becomes overwhelming and can lead to burnout. Successful givers engage in “enlightened self interest”—they give because they will receive as well as give as part of a relationship built on collaboration. 

According to Francis Fukuyama, in his 1996 book titled Trust: the Social Virtues and the Creation of Prosperity, a key to economic prosperity is “social trust,” based on reciprocity. Fukuyama defines trust this way:

The expectation that arises within a community of regular, honest, and cooperative behavior, based on commonly shared norms, on the part of other members of that community. 

He then takes this definition in an important direction for society and economies: 

Although it involves an exchange of information, trust is not reducible to information. (Page 25)

The greatest economic efficiency was not necessarily achieved by rational self-interested individuals but rather by groups of individuals who, because of a preexisting moral community, are able to work together effectively. (Page 21)

...one of the most important lessons we can learn from an examination of economic life is that a nation’s well-being, as well as its ability to compete, is conditioned by a single, pervasive cultural characteristic: the level of trust inherent in the society. (Page 7)

The entire imposing edifice of contemporary neoclassical economic theory rests on a relatively simple model of human nature: that human beings are “rational utility-maximizing individuals.”… But every one of the terms of the neoclassical premise... is subject to significant qualification or exception… between forty and sixty percent of those in [an] experiment contributed altruistically to the group’s well-being. The only exception was a group of entering graduate students in economics. (Pages 18-19)

The greatest economic efficiency was not necessarily achieved by rational self-interested individuals but rather by groups of individuals who, because of a preexisting moral community, are able to work together effectively. (Page 21)

So there you have it. The secret to success in the innovation economy is networks, and the secret to success in a network of trust relationships is acting as selfish giver—someone who understands that what “goes around, comes around.” 

[doughenton-blog1]

Dark Clouds and Silver Linings: Where are we going and how do we get there?

Recent headlines suggest both dark clouds and silver linings—at the same time. As we slowly recover from the deepest recession since the 1930s, we are clearly in an uncharted territory without a map or a flashlight.    

A story in the Wall Street Journal (6/3/13) says a “Risk-Adverse Culture Infects U.S. Workers, Entrepreneurs” as three recent trends suggest the U.S. economy has turned soft on risks: companies add jobs more slowly, investors put less money in new ventures and Americans start fewer businesses and are less inclined to change jobs or move for new opportunities. All three reverse prior trends. 

At the same time, Tyler Cowen, the author of The Great Stagnation now finds ”Five Positive Signs on the Horizon.”  

The state of the economy is far from ideal, but some very definite positives are brewing. It’s not just that we are continuing to recover from a deep recession; we are also seeing signs that America’s long-term future may be looking up, too. 

MORE DIPLOMAS: The nation’s high school graduation rate has risen — to 78 percent in 2010, the Education Department says in its most recent estimate. That’s obviously still not where it should be, but it’s the highest figure since 1974. 

On average, these additional high school graduates — not to mention college degree recipients — will find better jobs and enjoy better health, long-lasting benefits that will be reaped for many decades. 

NEW KNOWLEDGE, LESS COST: When it comes to education, an even greater productivity gain may be on the way. 

LOWER HEALTH CARE INFLATION: The growth rate in health care costs has been slowing for the last four years. In some years, in fact, it’s been no higher than the growth rate of the economy as a whole. And much of the change appears driven by efficiencies, rather than by the recent recession. 

POWERING AMERICA FOR LESS:  We appear to be at the start of a new era of cheap energy. Through advances in both oil and natural gas production, the United States is again becoming a leading exporter of fossil fuels. ...

The first decade of this century was largely a lost one, economically speaking, for the average American household. And in the beginning of this decade, median household income has actually dropped, during a time of ostensible economic recovery. Yet the longer-run picture, finally, can be given a partly optimistic gloss. These trends may not ultimately be the dominant ones, but if we’re looking for a positive narrative about the American economic future, some important pieces are starting to fall into place. 

This is certainly good news from someone who led the pessimist side of a lively optimist vs. pessimist debate at the recent Economist Innovation Economy: Ideas Forum.   

Why are we getting such mixed signals about where economy is going? In part, this may be due to short-term as opposed to long-term thinking. As we learned in This Time is Different by Carmen Reinhart and Kenneth Rogoff, who review eight centuries of financial history and help put our recent recession in proper context, it takes a longer time to recover from a major banking crisis than normal recessions. In the short term, we are likely to see the kind of risk adverse behavior described by the Wall Street Journal article. At the same time, over the long term, individuals adjust their behavior and institutions adapt to changing circumstances. The key is to look at the dynamics of the economy not just a static picture. 

Two recent books by real world economists with deep roots in the investment world frame our current situation from very different perspectives. One looks at present circumstances from a short-term viewpoint and sees only peril while the other looks at today from a dynamic perspective and sees opportunity. 

Stephen D. King, Group Chief Economist and Global Head of Economics and Asset Allocation at HSBC makes the case in his deeply pessimistic When the Money Runs Out: The End of Western Affluence  that “after six decades of continuously rising living standards, economic growth in the West has come to an abrupt halt.” Looking at our present predicament, he argues that “we have come to expect too much. During the age of affluence, we made promises to ourselves that are only achievable through ongoing economic expansion. Before long, the future benefits, we expect—pensions, healthcare, social security, for example, will cost more than Western economies can afford. (Book jacket, When the Money Runs Out) 

He finds that governments and central banks have reacted to the post-2007 debt crisis by letting budget deficits soar and allowing interest rates to drop to nearly zero. This may have prevented the recession from turning into a repeat of the Great Depression. But in the process, the role of central banks has become highly political. By allowing inflation to rise temporarily above its official target, or choosing to buy government bonds or other financial instruments, such as mortgage-backed bonds or corporate debt, they are making some people better off and others poorer.

Mr. King also worries that developed countries believe that, with the right short-term policies, the old rates of growth can resume. But he believes, like Hayek before him, that persistently low interest rates are really a sign of economic failure rather than a harbinger of future recovery. 

In summarizing the pessimist’s viewpoint he finds:

Our modern era of economic stagnation is fundamentally a different proposition [than earlier recessions]. Many of the factors that led to such scintillating rates of economic expansion in the Western world in earlier decades are no longer working their magic: the forces of globalization are in retreat, the boomers are aging, women are thankfully better represented in the workforce, wages are being squeezed as competitors from the emerging superpowers hots up and, as those superpowers demand a bigger share of the world’s scare resources. Westerners are forced to pay more for food and energy. (Page 2)

By focusing on a continuation of present trends, Mr. King may be missing some of the positive signs on the long-term horizon pointed out by Tyler Cowen. 

As usual, this kind of short-term, neo-Malthusian thinking focused on present constraints misses the long-term opportunity presented by a dynamic economy. As stated in the Economist: 

It was the misfortune of Malthus—but the good luck of generations born after him—that he wrote at an historical turning point. His ideas, especially his later ones, were arguably an accurate description of pre-industrial societies, which teetered on a precarious balance between empty and full stomachs. But the industrial revolution, which had already begun in Britain, was transforming the long-term outlook for economic growth. Economies were starting to expand faster than their populations, bringing about a sustained improvement in living standards. 

Another practical economist with investment experience, William H. Janeway, a venture capital investor who built and led Warburg Pincus Technology Investment team and teaches economics at Princeton, offers a very different perspective in Doing Capitalism in the Innovation Economy:

The Innovation Economy begins with discovery and culminates in speculation. Over some 250 years, economic growth has been driven by successive processes of trial and error and error and error: upstream exercises in research and invention, and downstream experiments in exploiting the new economic space opened by innovation.…

The transformational networks of infrastructure that implement the Innovation Economy can be planned, built and funded by the state:  the US interstate highway system is an outstanding exemplar.…

Occasionally… the object of [financial] speculation is the financial representation of one of those fundamental technological innovations – canals, railroads, electrification, automobiles, airplanes, computers, the internet – the deployment of which at scale transforms the market economy,  indeed creates a “new economy” from the wreckage of the financial bubble that attended it birth. 

... contrary to the central dogma of neoclassical economics, efficiency is not the virtue of a market economy whose growth is a function of the creative destruction identified by Joseph Schumpeter as the engine of economic development. The prime virtue is the ability to tolerate unavoidable waste in the evolution of the Innovation Economy. So the state has become central to the Innovation Economy’s dynamics, both to fund the upstream research that generates discovery and invention, and to preserve continuity in the market economy when the speculative bubbles that has funded its transformation bursts. (Page 1-3).

So here you have someone who says that financial bubbles can be expected to occur from time to time in modern economies and that on balance they contribute to positive economic transformations by financing new technologies, even though many of them inevitably prove to be false starts or dead ends. Irrational exuberance is perhaps a necessary component of a dynamic economy, driving what the economist Joseph Schumpeter famously termed “creative destruction.” He asserts that government plays necessary roles in the development of an innovative economy. Government promotes the basic research that fuels innovation and nurtures the talent and skills to develop it; think of the Pentagon’s role in the evolution of information technology or the National Institutes of Health’s contributions to contemporary medicine. It also helps stabilize the economy when private demand fails to fully employ a country’s resources. Finally, government limits the damage to the economy caused by unavoidable episodic financial bubbles.

In this way, by focusing on a dynamic economy and taking a longer view, William Janeway provides a kind of manifesto for “innovation economics” as a “third way” between short-term stimulus and austerity policies that will help to grow the economy and help to solve some of the real challenges outlined by Mr. King. 

As pointed out by Nobel Prize Yale economist James Tobin and William Nordhaus in their classic 1972 paper “Is Growth Obsolete?”, there are no real limits to growth if you allow for price changes and new technologies that allow for trail and error that leads to resource substitution in a dynamic market economy. 

This is why it is now time for new thinking in economics based on a better understanding of the role of innovation in modern capitalism.   

The World Economic Forum has recently created a global agenda council on new economic thinking that creates an opportunity to develop breakthrough ideas in this critical area of economic prosperity.