Wednesday, November 18, 2009
If a hundred trillion dollars* falls down in a forest, and nobody has anything to spend it on, does it make a sound?
In what might be the most embarrassing moment ever completely ignored, the post-industrial west is missing the greatest opportunity… ever.
It snuck up on us, yes. But that doesn't make it any less embarrassing. It still hasn't been acknowledged, sure. But that doesn't mean it hasn't (isn't) happening. What happened? Well, while we weren't looking, the so called second and third world made some money, a lot of money, and they came running to the west to spend it. Why wouldn't they? We're the experts. We know how to put big money to work… right?
Unfortunately, and at the same time, we, the west, the so-called 'first world', well, we slammed into what I call the productivity wall. Sure we were (are) way ahead of the rest of the world. But we aren't moving forward, and haven't for about 15 years. The lack of upward motion has caused the unthinkable to happen – we ran out of things to productively spend money on. We don't have reasonable investments in which to sink new capital. We ran out of ways to ingage new forms of production at the pace demanded by all of the new capital finding its way into our securities and investment markets. It's as if we never in our wildest dreams anticipated the second and third world adding significantly to the global capital pool. We outsourced. We ran up unheard of trade imbalances. We sold bonds by the trillions to China. The world changed. It was right in front of our noses, yet we never saw it, never bothered to model its implications to our increasingly outmoded economic models.
Pants well down. The whole world watching. Just standing here. Clueless.
Money flowing in. Unprecedented quantities of new capital. Accelerating. And here we sit – without any 'shovel ready' places to invest it.
What? you ask. How can this be? Surely there are people who would love to use someone else's money to build something and sell it. Right? And yes, the demand for capital is always there. There is always someone with some big plan and a need to go out an buy some parts, a factory, and the right people to run it. But what if nobody on the other end of the assembly line has any money to buy that new thing you just spent capital to produce? Or more to the point, what if there is nothing about the resultant goods or services that catalyzes the production of other goods and services? What if the only remaining places to spend capital don't make it easier and cheaper and faster to make other things. What if in effect, the existence of your factory and the widgets it produces, doesn't result in any real growth in consumption or wealth? What if you just spent good money to make things that the economy simply can not afford to purchase?
Unthinkable. Or is it? The value of currency, the purchasing power of the people who earn it, these are determined by productivity. Productivity is just the value of an average hour of labor. Productivity changes over time. Usually it increases. Sometimes, as when a new and powerful infrastructure is established – mechanized farming, electricity, telephonic communication, global integrated transportation – it increases in grand leaps. In between these technology driven epochs of growth, there are periods in which the full landscape of opportunity within that domain are exploited. Growth during these in-paradigm epochs slows as the possibilities made possible by that advancement approach its limits.
We in the west have not jumped productivity paradigms in a while. We are running out of productive ways of exploiting the current set of infra-structural advantages. As a result, an odd thing happens, an unintuitive thing happens, we find that throwing more fuel in the economic fire no longer buys greater productivity.
Sure, we can continue to spew out ever greater quantities of goods and services, but if things we spew do not increase the value of that all important average hour of labor, there will not be more money available to consume to our new levels of production.
Production does not equal productivity. Consumption does not equal productivity. Production plus consumption does not equal productivity. Productivity, the value of that average hour of labor, is determined by the effectiveness of the infrastructure.
The classic example of a productivity jump is the introduction of mechanized farming. Mechanized farming has allowed such yield (per hour of labor) that we can afford to feed all of the people with less than 4 percent of us spending our labor on food production. This single fact freed up the remaining 96 percent of us to do other things.
Unfortunately, just as the rest of the world got to the point where it could contribute capital fuel to our economic engine, we ran out of ways to put that capital to productive use.
Holly crap! China and Brazil and India and the Philippines and, and, and, they all have some extra money to pour into global capital markets, and just when they do, we run out of productive ways to spend it!
Has any greater opportunity ever presented itself to a people unprepared to take advantage of it?
So what did the west do instead? We faked it. We gladly accepted the money and spent it on crazy layered real estate loan stocks and layered stock schemes that were nothing but new plays on the same age-old shyster speculation scheme that has substituted for capital investment every time real productivity is elusive. And the real estate boondoggle isn't the first of our fakes. We started with energy deregulation and when the inevitable crash happened there, we moved quickly on to the dot-com boondoggle, and when that crashed, we faked it again with real estate and "mortgage backed securities". And now that this crash caused a global economic shock wave leaving double digit unemployment in the strongest economies and a fallout into the third world we are only now beginning to acknowledge.
And how did we respond to the mortgage securities crash? By faking it again of course. We said, "Sure we acted like shysters, but that was the past, we have changed, give us your money and we will spend it wisely this time!" And what wise thing did we do with that money? Did we go looking for the root of the problem? Did we attempt a wholesale rethinking and scientific understanding of the economy and what makes it work? Hell no! We sent quants back to their million dollar basements and told them to be better, bigger, and faster shysters! And what they came back with was a thing called "micro-second trading".
Micro-second trading is stock trading like any other stock trading, except that it is done and can only be done by high speed computers with exclusive access to the main trading computers operated by the various trading firms (NYSE, NASTEC, NIEKO, etc.) under the auspices of the Federal Trade Commission and other international policy bodies. Micro-second trading exploits a loophole in trading regulation that allows certain exclusive trading organizations access to trading data before the trades are made. Yes you read that correctly. Insider-trading on steroids. The loophole allows this peak into the future before it happens but only for a fraction of a second and only of course to those few companies who have somehow gained physical access to space in the computer server farms that operate the stock exchanges. Imagine what kinds of profits on futures trading you could make if you knew exactly what the future was?
When you read that the trading firms that lost the most money at the end of the real estate fiasco are currently giving out hundreds of millions of dollars in bonuses to their employees, and you wonder how they are doing it, where they are getting the money, well now you know.
And all of it, each of these fake investment schemes, one after the other, happened exactly and only because we, the most powerful, most educated, most economically potent people who have ever lived… well, we ran out of ideas. We came to a wall. We hit the end of the current paradigm and either couldn't figure out how to jump to the next one or weren't as a culture prepared to think in paradigm jumping terms.
I suspect that humans are just not very smart, that in mass, we are limited in the exact ways that the current circumstance and our reaction (or lack there of) so dramatically illuminates. That so many of us exist. That all of us are so well educated. That we live in and by so protected and fecund an infrastructure, and that not one of billion of us were not in a position to see this happening and plan around it tears at credulity.
Or maybe we are all of us so greedy and shortsighted that misfortunes like this happen despite the obvious cognitive capacity of our species? Either way, whether we are more in it or of it, we have to react to it. We have to do something to get productivity up and running again. And to do this we have got to build an understanding of economic systems big enough to include and predict the foibles of which we have recently been apart. Until we have such an understanding, we will not be able to avoid the future missteps as destructive and anti-productive as the bubble/bust cycles that have so plagued the last 15 years.
And what would it have looked like if we had been prepared to productively spend this windfall of new investment money rushing towards us? What, capitalization opportunities, had they been in place, would have allowed us to avoid the malevolently inventive 'creative financial products' that led directly to the string of bubble/bust cycles that have so devastated the global economy? What, one might reasonably ask (though few have) would or should the next (and long overdue) productivity paradigm look like?
I have invented a word, "productclivity" to describe a general framework of a scaffolding of a shadow of a description of an outline of the criteria that might be used to judge a new productivity paradigm. Productclivity is the propensity of a system to produce productivity. It is to economics what fitness is to evolution. In the longest run of time, it doesn't so much matter if you have a good set of legs as it matters that you have a good set of leg building algorithms… a good set of adaptation optimization algorithms, even better. Same goes for economic systems. Any successful scheme (mechanized farming, electric power grid, broadcast television, general purpose personal computing, cell phones, etc.) pales in productclivity comparison to things like public education and national or international research and development programs. Such systems tend to produce a continuity across productivity epochs.
Pop-economists and economy pun-dents are fond of terms like "the multifier effect", which is meant to describe investment and business activity that causes an out-fall of other investment and business activity. Investments in transportation and education and communication infrastructures are said to have this special something that produces productive systems that could not have been anticipated and would not have existed in their absence.
So lets look at the current paradigm. We already have mechanized farming. We have a decent communication system. We have a world class materials market and the transportation system to get those materials anywhere in the world in less than a week (a day if you are willing to pay for air freight). We have a decent data network (the internet) and the gateways, switchers, data storage and servers to make it all zing. We have programmable computers built into the fabric of every part of our daily lives and the things that make our lives long and rich. Through trickier and trickier programming we have automated our manufacturing, factories have become robots in them selves. The result has been a level of productivity unheard of in human history. It has given us time to screw around and the products and services to upgrade our "down time" to the level of "entertainment" and "leisure". What is left? What more could there be? The simple fact that the question seems so reasonable is evidence that we are in this particular problem for the full count.
But there are hints and there is hope that more might come, that there is still something of worth, something, "Not unbecoming men that strove with Gods" (Tennyson). We have the machines, the communication channels, the materials, the transportation, the manufacturing and materials, the educated labor, the social infrastructure (or, um, a bill of rights anyway), and the standard plumbing, mini-malls, and big box stores… everything one might need if one was packing for a trip to next-paradigm land. Which is another way of saying that we know and can list all of the things that make up the current infrastructure, all of the things that work, all of the things that brought us this far, all of the things the next productivity paradigm will need, and won't be.
And this is where I am obligated to insert a cautionary explanation. New paradigms do not, though they are frequently accused, replace that which came before them. But wait, you might say, everyone can come up with with a counter-example or two. Horse drawn carriages were replaced by automobiles… right? Paper mail has been replaced by email (or is doing a good job trying). The computer has replaced ledger sheets. Yes, yes, and yes. But none of these qualify, in my estimation, as paradigm shifts. The fact that they look like paradigm shifts, only results in confusion. In all three cases, the introduction of a new tool, process, or technology expediates or in some other significant way, improves a solution that already existed before. The car, like the buggy, accepted human passengers and transported them from one site to another. Same transform can be applied to most so-called "paradigm shifts". Better, ain't different. Paradigm shifts then, are caused by solutions to problems more fundamental than the problems that structure current solutions. If, for instance, an affordance was invented that gave people all of the benefits of being somewhere else, without actually being transported there, well that technology would qualify as a true paradigm shift.
Does double digit growth in second and third world economies mean they have jumped paradigms? Scooped the first world? Beat us at our own game? N0. Not even close. Lets not loose perspective. No need for hysteria or blame. Non-western economies don't have to jump paradigms, they have only to adopt the paradigms the west had already defined and refined. Their economies are growing fast, true, but this is the simple result of the efficiencies and advantages of moving their production and infrastructure up to modern industrial levels and then amortizing these advantages across the huge number of people (hours of labor) at their disposal Nothing magic, just productivity gains multiplied across huge populations.
In the west, we face a task far more complex. We can not play the same catch-up game being played in the 'rest of the world' (ROW). We already played that game… played it to the limits possible within this paradigm. No, now have to invent the next one, the next (productivity exploding) paradigm. Nothing else will work. This should be obvious by now. Even the notion that we could tap into old paradigm gains in that part of the world with rapidly growing populations of consumers is wrong headed and won't work. Yes, the global consumer base is expanding, yes this is happening in the second and third world. Yes the numbers are astonishing. But in order to sell to the rest of the world, we have to produce at efficiencies only allowable through the use of discounted ROW labor and materials rates. The only way we can get back to growing the rate of growth in the first world, our world, is by playing the paradigm-shift game.
And what does that mean? Given the current state of the first world, what are the parameters that would define a true paradigm shift? We start with the obvious statement; the next paradigm can't be anything we already have or do. More than that, it can't be an extension of or improvement on what we already have or do. It has to solve problems that are more fundamental to, that actually cause, the problems that provide the market and demand upon which the current economic paradigm feeds.
But before we go there, let's add another few items to the "how to tell a real paradigm shift in productivity from simple extension of the current paradigm" list.
First way to tell if what you are doing isn't a true solution is when you notice that the more you do the less you get out… this is the law of Diminishing Returns. When gains in productivity become more expensive, even while the energy or investment required by a new scheme increase. Shale oil, right-now manufacturing, team building exercises, on-line shopping, hybrid drive technology, cloud computing, web 3.0, ultra-sized wind turbines, commuter freeway lanes, customer relations management software, etc. These are all great examples of what I would call skimming; finding ingenious ways eek out the last few percentage point gains available within the current paradigm. Where a new paradigm should result in fold increases in productivity, skimming only yields percentage gains. These drop off to nothing as the full potential of that paradigm reaches its natural zenith.
And then there is the law of scales. This happens as a paradigm matures, when all the easy problems have been solved, and the only remaining solutions end up being solutions that work in ever smaller and ever more isolated domains. Come to think of it, scale is a good criteria upon which to compare true paradigm shifts with the range of lesser influencers. A true paradigm shift will expose entirely new markets, new sources, new methods, new materials, new activities and uses… solutions that scale both vertically and horizontally without apparent limit (at least at first). Stove-piping, the tendency of solutions to only work vertically and for these vertical markets to become narrower and more isolated over time… these are good indicators that the current paradigm is greying, robust, reaching maturity… that all of the easy to reach has been picked, that the investment in taller ladders can not be amortized across any other markets (fruit picking ladders have become so specialized that they are useless to firemen and painters).
In converse, true paradigms tend to be expansive, to open things up, and as I have suggested earlier, they tend to result in what many call a "multiplier" effect; from their seed, other opportunities bud and grow and multiply simply because the paradigm provides such a rich foundation for effective novelty.
OK, back to guessing. What will the next paradigm be? If it has to rooted at a deeper foundational level than current solutions, how much deeper? What does deeper mean?
In science, the trend has been towards theories (understandings) of the laws of nature, and for ways these laws are inherited from yet deeper and more general layers of meta-laws. Work in pure information theory is providing what might eventually work as the foundation of all, indeed any, natural system. Understanding the deepest layer(s) of nature allows one to predict, indeed derive, all of the laws above it (and show why they are the only possible laws). In business, this deeper understanding is phrased "knowing your market". Same thing. The deeper you tap into the causal strata that supports a system, the more control you have over and knowledge of the whole system. The deeper you tap into the causal strata, the more of that system's complexity becomes salient and controllable. In science this phenomenon is called "elegance". A theory is elegant to the extent that it can comfortably inform and predict the behavior of a large number of other theories or theories of theories. Elegance it is argued is a basic attribute of any evolving system. The universe has evolved, therefore it is fundamentally elegant. Any physics, any any descriptive abstraction of the universe will therefore be accurate to the extent that it is an accurate analog of the elegance of the system it describes, the universe itself, and by extension, the evolutionarily stacked layers that describe its history. But getting to elegance isn't easy. The deeper one digs into any historical or causal strata, the less like today do things appear. The promise though, is that an understanding gets more useful and profound the more deeply it is rooted. It might be easier to study legs, but you can get more information faster if you study the DNA snippets that propagate appendages across all of biology. Not only that, but an understanding of DNA in general will allow you to know things about legs that allows you to know things about ears and hearts and intestines and the production of enzymes and metabolism and growth and reproduction and evolution and information and energy and ultimately the topology of causality itself, the arch of possibility.
But digging deeper comes at a cost. Armed only with a good ruler and notebook, you can learn lots of stuff about legs, if you want to go the next bit and understand genetics, you had better build yourself a bunch of awesomely fast computers connected to some awesomely big data storage devices. And you had better find more and more robust ways of handling greater and greater amounts of complexity. The end result might be elegant descriptions but that elegance comes at great cost. The cultural and physical armature humans have had to build, in order to reach back into the causal structure of elegance is anything but elegant. Look for instance at the Large Hadron Collider. This machine is so complex that some theorists have questioned the likelyhood that it will ever actually work or work long enough for to acquire any reliable or demonstrable and supportable data. A whole branch of logic is likewise concerned with the limits of knowledge and thus the limits of abstraction. The data stream flowing from the fully operational LHC will exceed 300 gigabytes per second. Just mastering the technology and logic to store a stream that fast and wide is a challenge no previous generation could have met. Sifting through the resulting mountain of data requires logic armature of unprecedented complexity.
All of the low hanging fruit has been picked. We have measured all of the easy to measure stuff. We have stored and organized all of the easy to measure, store and organize measurements. We have built all of the equipment that that is easy to build. Even most of the stuff that is hard to build. We are increasingly, as a species, up against a complexity wall that keeps us from progress in almost every field of human endeavor.
The next productivity paradigm will have to have something to do with breaking through this wall, something to do with finding some understanding of the very shape of complexity and using that understanding to build a stable tunnel under, ladder over, or door through the complexity that vexes progress today.
Among the myriad of discoveries made over the past century, three of the most profound are the standard physical model, information theory, and evolution. Together these describe the relationship of matter to energy and to space and time, the limits of information, the equivalency of energy and information, the way both degrade over time, and how this guarantees the direction of time. All of which puts bounds around and relates reality and our abstractions of reality. Physics and cognition. The territory and the maps we can make of it. And, importantly, the physicality of maps themselves. But the complexities involved in the manipulation of this level of understanding pushes humans to the limits of their capacity (and beyond). Fewer and fewer of us have the cognitive wherewithal to make effective use of what is known.
What is needed, what is desperately needed is an automation of discovery and cognition. We need machines that do more than just help us acquire and organize the measurements we take. We need machines that work along side of us, extend cognition into realms beyond the easy reach of human minds. We've automated everything else. Cognition is all that is left to automate.
This is the next productivity paradigm. Like it or not, and from personal experience introducing these topics, most people decidedly don't, we have to push forward towards the automation of cognition.
Until then, and in the event we just can't stomach the idea of machine cognition, our only viable choice is to redirect the capital we can't viably spend – and spend it on infrastructure projects in the second and third world where in-paradigm solutions still result in productivity gains. Not to make money mind you, but to accelerate the flattening the world's markets and ready them for the eventual global jump to the next paradigm (when we can stomach it). This is especially true when that money is mostly from the emerging world in the first place. We can't fake it any more, the fake we've been doing is killing the world's economy, the fake is destroying our hard won reputation as innovators and capitalists, the fake is defacing the very idea that is capital.
* The International Monetary Fund estimates current Gross International Product (the annual sum of all human labor) at about 71 trillion dollars and rising rapidly. The greatest growth in relative wealth comes of course from the third world, where wealth building is more rapid. Because the vast majority of the world's population hails from the second and third world, small increases in individual wealth result in huge changes in gross wealth. As a result, the new money in the global investment system is coming from the third and second world. The question, the problem, the crisis is the first world's inability to make productive use of this new money.