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Wednesday, October 22, 2008

When advances get in the way of innovation…

From the perspective of true innovation – not run of the mill, better, faster, smaller, cheaper innovation – but deep and fundamental – changes everything – innovation, the computer industry has stagnated for more than fifteen years. This matters. This matters to everyone and everything. This might matter more than any other thing that matters at this point in the history of human culture. Like it or not, computers are THE primary tool driving progress in ALL fields of human endeavor and ALL sectors of the market. The result? Hell we LIVE the results of this stagnation all day every day. The future might be forced to live it even more viscerally. Larger economic metrics like national productivity expose this standstill for what it is and what it effects.

This innovation standstill, and by extension, every wild financial boom-and-crash cycle the world has been through since, is the direct result of the fact that productivity (which of course is directly linked to innovation cycles) has not risen since 1992. As we all know, productivity rises in direct relation to the pace of innovation in tools and infrastructure. You can say what you will about the shear scale and rapid global adoption of the internet, of virtual shopping, banking, and stock trading, of email, and cell phones... neither new channels for communication, nor new venues for consumption, (despite the obvious revenue they have created), have significantly increased our global ability to do more work in less time... to increase productivity. Please remember that businesses are in the business of grabbing as much of the current GDP, the current economic pie. That is market competition... temporal and immediate. Productivity on the other hand, what I am talking about, totally different, is about growing the total economic pie. Productivity is an economics issue. Though it is often effected by or set into motion by the actions of businesses, productivity is a long term function... it increases as new tools, techniques, social behavior, or infrastructure allows the same production as before for less hours of labor, or less input of energy. It is the plow and irrigation channels that allow one family to feed nineteen families so that all twenty families together can build a more complex and still more productive infrastructure.

In the absence of the kinds of substantial technological innovations that are needed for paradigm increases in productivity, markets react in maladapted, but perfectly predictable and expectable ways. Left starving for real growth in wealth and wealth generation, markets adjust emphasis and focus towards the shifting around of assets, creative accounting, slice and sell, merge and downsize, layered asset repackaging, in short, they do what they have to do to keep equity partners and stock owners happy by any and every means possible. In the absence of innovation-driven rises in productivity, "any and every means possible", almost always leads to destructive long term results... to the opposite of growth.

At the same time, and somewhat ironically, second and third world economies have seen spectacular growth. Though daunting in other ways, "developing" regions owe there achievements in growth to the acquisition and application of innovation, pre-built. They simply adopt decades and even centuries old western knowledge and innovation... building out modern infrastructures at pennies on the dollar. All this while first world economies stagnate. How could this be? Surely, the first world benefits from global modernization, from the rest of the world catching up with western levels of wealth and productivity? Yes. Of course it does. The non-western world just happens to be composed of four fifths of the planet's population. From a purely business, abjectly greedy, point of view, you can make a lot more money selling four times as many washing machines as you can by treating these people as a source of cheep labor and the regions they represent as cheep sources of raw materials.

Because of the shear size of the undeveloped world, small rises in wealth have huge investment implications. As a result, western stock, commodities, and money markets, always the most attractive, have surged as much of this new money has entered the investment fray. But this surge of third and second world investment in western securities (sounds funny doesn't it) has not been matched by the kinds of true infrastructure advantages that would justify the resulting staggering growth in valuation. The west has found itself in the enviable position of having access to more money than it's own innovation mechanisms can support.

By the way, consumption does not equal productivity. Never did and never will. Consumption can act as a rough indicator of wealth, the inevitable outcome of wealth, but when driven by credit and debt, consumption can increase independent of, and often at odds with wealth. When people have more money, they can and do spend more of it on the things they need, and they spend in new markets (ipods and restaurant quality kitchen remodels, bigger houses, cars with all leather interiors, navigation systems, and flat panel media centers), and they spend what's left over on savings and market speculation. But consumption is sometimes the result of credit. With personal credit, people spend money that isn't yet theirs. People buy money in order to buy things and experiences. This activity is euphemistically labeled "consumer confidence" because it suggests that people think that though they don't have adequate money to make purchases today, they will somehow acquire more money in some reasonable tomorrow. But, in the presence of credit, people don't behave reasonably. In the presence of personal credit, consumption outpaces productivity generated real wealth. The more people owe, the less money they have to both pay back their credit debt and make more purchases. The credit industry responds by extending more debt. Real value of real money becomes, as a result, very hard to track. What does consumption driven revenue actually mean when that consumption is being financed by debt? Disturbingly, in wholesale markets, debt is conceived of, marketed, and packaged as "product".

Consumer credit is an extreme bastardization of the concept of "capital". Capital, as traditionally defined, as loans made to producers, can legitimately be show to increase an economy's ability be productive. Personal credit is rarely used to increase capital, rarely thought of as a tool to increase a person's ability to make wealth. It is somewhat ironic that we may cringe at the idea of max-ing out a credit card to finance a business or to initiate a creative project, but we have no such aversion to using the same credit to go on a weekend trip or to acquire new shoes. We recognize that business, in pursuit the creation of wealth, need access to loans, to lines of credit, to venture capital, to the sale of equity as stock. But we are generally cognizant of the fact that the same access to capital when offered to individuals as credit, does not often drive anything more profound than debt and the kinds of consumption that are non-productive, that don't add to an economy's ability to produce new wealth, to do more with less labor.

Consumption isn't restricted to the individual shopper at the local mall. Consumption happens at huge corporate and international scales as well. Consumption as defined as the act of purchasing things and services that do not lead to greater productivity is becoming an alarmingly common business practice involving tens of trillions of dollars exchanged daily in global markets. To the extent the money being spent is not owned by the consuming party, to the extent the things being purchased do lead to increases in productivity, and to the extent that the intention of the participating parties is not motivated by an understanding of productivity or a desire to act in its behalf, exchange throughput must be viewed for what it really is, an unreliable indicator of true growth. To the extent a market is propped up by the infusion of cash, to the extent that a market grows for reasons that are not tied to its ability to increase productivity, eventually the whole system has to crash. As it has many many times, and as it has crashed recently.

The same thing happened and caused the dot com boom. New money, money that had not previously had access to the markets, found its way to wall street through internet trading. Ma and Pa Simpleton could hook up a modem and siphon their savings and retirement accounts right into APL and IBM stocks. This new money made old stocks look more valuable. "Rising demand" and all. Only nobody got that there is a big difference between the new "more demand" and our old notions of "higher demand".

Likewise, the unprecedented surge of non-western investment in western stock markets coincided with an ongoing flattening of our own innovation-starved growth trajectories, good money was and continues to be funneled into very bad monitory mechanisms and "creative" securities products, when it should have gone towards innovation induced capital and productivity. We really don't have an economic theory to fit this crazy bottom up investment model. We really don't know how to track and predict the differences between and interactions in the intersection of investment markets and the real product markets they (sometimes) represent.

Meanwhile, second and third world markets have indeed grown as a direct result of the build out of more efficient infrastructures. The last 15 years has seen the second and third world adopting modern industrial farming, modern highway systems, modern water and energy production and distribution systems, modern banking and credit, pluralist governance and education, modern health care, and the industrial machinery that can only be produced and maintained by a well educated work force. Along the way, attitudes and cultures have adjusted to the individual freedoms that come hand in hand with wealth, capital, and stability. But all of this growth has been a result of the rest of the world adopting ideas, knowledge, tools and infrastructure that has long existed in the west. Productivity has risen as expected at the rate of adoption.

In traditional western economies, economies that originate(ed) the knowledge, tools and infrastructures now being adopted in the rest of the world, increases in productivity must come from innovation. We don't have the luxury of adoption... there are no societies more advanced from which to borrow innovation.

We must innovate! In a modern economy, innovation is mandatory. More to the point, the kinds of innovations we must produce, that the west must build and implement, must be the the particular kinds of innovation that result in true increases in global productivity. Forget about little innovations, or surface innovation, or innovations that extrapolate on older innovations. Don't bother with innovations that exploit markets created by earlier innovations... for apex economies, innovation is only innovation if it catalyzes whole new markets, if it fundamentally reshapes the future of innovation.

At every large organization, there are people who's primary responsibility is the happiness of investors. Investors expect the value of their equity share to increase steadily. Included in this group are CEO's, CFO's, Boards of Directors, and almost everyone working at top levels of management. Their careers are directly linked to the value performance of the organization they represent. When productivity doesn't rise apace, institutional professionals are compelled to find any and every artificial means of inflating the value of their product. A bubble is born. Unsupported by real value, these epochs of artificially inflated values must inevitably come crashing down.

Regulation does help. By restricting market managers from engaging in the most egregious and obvious inflationary tactics, some market shenanigans can be avoided. But ultimately, unhappy times, market mangers will find a way to do their job... to keep share holders (temporarily) happy. And then, of course, there is always, fiscal policy. Government and banking driven manipulation of fiscal and monitory policy (controlling the base price and availability of capital as loans) has important, but will only have limited and short term effects on markets. Fiscal policy is a surface fix. The fed board (and its equivalent in other nations/economies) is a fine-tuning instrument... has absolutely disastrous implications when used beyond this narrow band of effect (currency devaluation, runaway inflation, decreased foreign investment, etc.).

Again, we come back to the basics... to the the most fundamental metric in any economy... to productivity. If you can find a way to feed your entire society with just two percent of your population working the soil (rather than ninety), you can get more done with your total labor pool. Productivity rises. Industrialized farming, automated factories, the delivery of clean water to homes and work places, an accepted currency and banking system that makes capital available to the masses, and equitable and respected system of governance, and justice, the removal of garbage and human waste, an efficient transportation system for people, goods, and industrial materials, a reliable communications network, public education and career and health care, and an efficient source of energy that can be routed where it is needed... these are the foundational infrastructures that drive an economy. Each presaged an increase in productivity and is linked to true growth.

It has been a long time since an infrastructure-scale innovation has rocked the national and global productivity metrics. The cultivation of plants and domestication of animals. Metallurgy. Fire. Shelter and clothing. Devision of labor. Governance. Spoken and written language. The printing press. Transportation infrastructure. Production and distribution of energy. Communication systems. These epochs are at the scale I am addressing. Electricity. Oil and gas production. The telegraph/radio/TV. The internal combustion engine. Numbers, measurement, and mathematics. Public education. Currency. The periodic table. Germ theory. Genetics. Evolution theory. Information theory. Machines that compute. These are the innovations that produce epochs of productivity.

Marked in staccato evolutionary steps, computing has proceeded apace through its rather short history, aping the dumb media we used to conduct culture... before computers. Ledger sheets, paper and pencil, typewriters, notebooks, folders and filing cabinets, printing presses, desks, drawers, chalk boards, telephones, mail, even cameras, sound and video recorders, televisions and radios. Very little of this analog to digital conversion process has involved added to the science of computing. Very little of the computerization of media has advanced the infrastructure of logic, of systems, of knowledge automation. Mostly our efforts and the markets that have resulted (rich as they have been) have sidetracked true evolution in computing by aligning attention to artifacts instead of meaning. A the existence of computerized spreadsheets might make working with ledger data easier, but it doesn't help us understand economics any better, and it doesn't advance the science of computation or logic. Progress in computing over the last 30 years has done little more than adding efficiency to old methods and processes, very little of the effort expended has resulted in better computing.

This is a dead end process. Using all of this logical power to make a better piece of paper... what a joke. We should instead aim to evolve technology that can generalize the larger problems that end up expressing themselves as ledger sheets and notebooks... technology that gets to the base of the issues that manifest the need for spreadsheets and word processors... technology that understands goals, that tracks resources, that builds collaborative solutions, that seeks patterns that build patterns... technology that can process the hierarchies of influence that effect the transition from any now to any inevitable future.

Can we look to today's computers, as amazing as they are, and truly say of them that mimicking paper added as much value to computing as it did to writing and typewriters? Efficiencies have been gained, sure, but at what cost? A computer can and should be much much more than a writing device, it should be an evolution machine. Is it? They have the power. What's missing is vision… not their vision… ours. Humans need to expect more of this most plastic of all machines.

Randall Reetz

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