The Fourth Economy: Inventing Western Civilization

The book is now available on amazon for kindle or in paperback, and on Barnes & Noble for nook.

Read it if
- you want to learn how a pattern of social invention and revolution that began in medieval times will define the next few decades
- you want to know what comes after the agricultural, industrial, and information economies
- you are tired of the drum beat of doom about the economy and want something hopeful

Western Civilization has been through three great transformations. You get to live through a fourth. This is the story of social invention and progress, a pattern of revolutions that has just begun to repeat. Welcome to The Next Transformation.

Friday, October 17, 2008

The Transformation The Financial Crisis Can Trigger

“It will have to change in order to stay the same.”
- Daniel Greenstein


In the century between 1690 and 1790, political innovations triggered the financial innovations that gave birth to capitalism. More democratic governments gave birth to modern financial markets.

In this century, financial innovations can trigger business innovations that will give birth to a new entrepreneurial economy. Financial innovations can help to fund a period of entrepreneurship that will transform corporations.

I am going to state this as simply as I can:
The reason for the financial crisis has far less to do with financial markets than with the capacity of corporations and communities for entrepreneurship. Financial markets did their job – they created money, credit and a host of financial products. The problem is that this money went to bidding up the price of what already exists (e.g., stocks and real estate) rather than financing the creation of something new (e.g., new business ventures and the infrastructure for new transportation and energy technologies).

A series of bubbles have burst. First in stocks in 2000. Then in real estate in 2005. Again in stocks this year. Too much money was chasing too few possibilities. There are actually more mutual funds than stocks. Huge sums of money was seeking higher returns, bidding up the price of financial products and trying to enhance returns through leverage.

Too little of it – as a percentage – went into the creation of something new, went into infrastructure like public works or the creation of alternative fuels, or new businesses or new products.

The corporate world did not adapt to these innovations in financial markets – remaining a relatively staid place where little innovation is expected to occur (at least within corporations), particularly innovations that would demand the sums of money generated by the recent spate of innovations in financial markets.

This has a parallel from about 1690. First the Dutch and then the English made innovations in politics that triggered innovations in finance. The Dutch and British were the first to adopt constitutional monarchies and first to invent modern stock and bond markets. It is no coincidence that these two went together.

Constitutional monarchies – the political innovation of the Dutch and English - made kings and queens subordinate to laws and a constitution. Monarchs could no longer just tell their subjects to give them money – to simply tax them. Under this new form of government, Parliament had power to resist. When the king said, “Pay me a million in taxes,” Parliament could say, “Why don’t we loan you the money instead and you can pay us back. We’ll buy bonds that pay interest.”

Figuring out how to finance this prompted the emergence of modern bankers and bond markets. Innovations in politics – the constitutional monarchy and Parliament – triggered innovations in finance – the birth of bond markets and the gradual popularization of investing. This was huge because it laid the foundation for the birth of capitalism.

What is the parallel for today?

Innovations in financial markets have created our predicament today. We’ve leveraged our way onto a precipice and governments are now trying to talk credit markets down off the ledge before they jump.

As easy as it is to dismiss this “excess” in financial markets as proof of greed and madness, these financial innovations have created a huge capacity for credit and expansion. The problem is not that we’ve created more money, more capacity for financing. The problem is that we’ve used that money to bid up the price of existing things – stocks and homes – rather than to create something new. More specifically, we failed to apply this new credit and expansion to the creation of new ventures.

The innovations in finance can turn out to be as wonderful as the innovations in politics were hundreds of years ago. To properly work, though, we’ll need to see innovations in business, a transformation of the corporation.

Right now, corporations are set up to – for the most part – be founded by entrepreneurs and then run by employees. In order to properly use the money financial markets are capable of producing, the corporation will have to become much more entrepreneurial – a place where a growing percentage of employees behave more like entrepreneurs.

Transforming the corporation into an entrepreneurial place is going to turn corporations into net users of cash rather than net producers. Properly done, turning corporate employees within the corporation into entrepreneurs will require lots and lots of cash: perhaps as much as the recent spate of financial innovations has generated.

We are facing a great moment in history. Going back to the Great Depression, however, will suggest only some needed regulations. It will not suggest the innovations that are most likely to take us into an economy as different from this information age as capitalism was from the agricultural economy.

The ability to create money and credit ought not to be considered a bad thing. And if we can again use innovations in one major institution (finance this time instead of politics) to trigger innovations in another (business instead of finance), we can move towards a new economy.

The idea is not to perfect the old world with these innovations. Rather, the idea is to create a new one. This has always been the theme of progress. There is no reason to believe that the way of change has changed for our own time.

Monday, July 28, 2008

Collaboration in a Post-Institutional World

Clay Shirky claims that the problem of coordination and collaboration need not depend on institutions. New technology actually enables groups and individuals to collaborate without an institutional construct in which to operate. He claims that this is revolutionary and says that a revolution doesn’t take you from point A to point B but, rather, takes you from point A to chaos. The printing press took the West away from the organization that came from church rule into chaos that was not resolved until the treaty of Westphalia defining the nation-state as the newly dominant institution about 200 years later. He suspects that the emergence of social networks and peer to peer technology will do something similar to institutions today, particularly to corporations. But this time he thinks it is less likely to take 200 years and will likely play out in about 50.

I’ve talked for quite some time about the popularization of entrepreneurship and what that means for the corporation. I have basically said that the role of entrepreneur will become more widespread during the next 30 to 50 years, sweeping up an increasing percentage of employees into its net, just as knowledge work became so prevalent in the last century.

Shirky seems to challenge even the notion of what it would mean to be an entrepreneur, shedding light on how entrepreneurship might become so common. If collaboration and cooperation no longer requires an institutional overlay, or construct, entrepreneurship becomes an act of catalyzing behaviors and activities rather than focusing on creating the context or container for such activities.

This suggests that community itself may be the container for the actions and behaviors of individuals, with no need for creating institutions. It does suggest that the very notion of, or need for, institution is set to transform along with the definition of entrepreneur.

Here is Shirky's talk:

Tuesday, January 29, 2008

The Rise of the Individual

Bad governments come in at least two forms: they put up bureaucratic obstacles to those who are pushing beyond the current norms and / or they ignore the plight of those who are failing. Good governments don’t ignore one of these goals at the expense of another. And this is a trick of the hardest kind: creating a system that makes allowance for the individuals for whom the system does not work. This is the paradox of progress.

Systems don’t easily transform for the individual. Too much of what passes for self improvement is actually the act of conforming the individual to the system, to society, to the institution. We have not yet lived in a time when social systems were considered disposable and individuals essential to preserve; to date, our experience has been the reverse. Flipping this order would be transformative. Dopeless hope fiend that I am, I even think it can be done.

“He didn’t think in human dimensions. Humanity was never of any importance to him. It was always the concept of the superman … the nation, always this abstract image of a vast German Reich, powerful and strong. But the individual never mattered to him. Though he always said he wanted to make people happy – he started a variety of welfare and recreational organizations in the Third Reich – personal happiness was never of the slightest importance to him. “
- Traudle Junge, in Blind Spot: Hitler’s Secretary

Thursday, January 17, 2008

Corporate Revolution & the 4th Economy

So, here's the question: can a guy in a t-shirt, sitting in his home office, trigger a revolution? In my on-going life as an experiment, this is me trying a new medium for (what is for me) an old message.



I mis-spoke twice.
One, I said that 90% of the American population was employed. Not so. About 90% of the work force works as employees (as opposed to working as independents or business owners).
Two, I said that the CEO's role will look more like that of venture capitalist and the role of a growing minority of employees will be ... that of venture capitalist. Again, I mis-spoke. That should be, the role of employees will look more like that of an entrepreneur.

Next time, maybe I'll try using notes instead of just talking extemporaneously.

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Working in the basement on the Escher Expressway (every direction down hill for fuel savings) and Mobius Strip DNA (for immortality).