17 August 2007

The 4th Economy

Evolution is simply development without precedence. We expect a baby will learn to walk, will rise up from all fours. When the first baby did it, it was an evolutionary step. When the 6 billionth baby does it, it is a normal stage of development. In evolution, the new script comes from a deviation from the normal genetic code. In development, the script comes from a conformance to the normal genetic code. Evolution is creative – a departure from the norm. Development, by contrast, conforms to established norms.

“It’s not that creativity and madness are necessarily linked, but rather that creativity and deviance (sometimes heroic, sometimes reckless) go hand in hand.”
- Denise Shekerjian

Social evolution is the story of firsts – firsts that became formalized into the cultural DNA through changes in institutions. Social evolution is the story of the emergence of banks and nation-states, handshakes and pants.

Development matters to any community that’s poor, that suffers from short life spans as a result of poor medical care or political turmoil. The question for such communities is how to develop, how to build institutions like those in the developed nations.

Social evolution matters because even the most developed communities haven’t yet solved some of the most important problems, like happiness and the compatibility of economic and environmental activity.


From about 1300 until today, social evolution in the West has proceeded in three separate waves of revolution – each wave culminating in a new economy, a new kind of society, a new type of individual. What we can now look back on as social evolution was experienced as social revolution.

First Economy – Agricultural
The first wave replaced the traditional economy with an agricultural economy. Land that was held in common was turned into private property, a move that stimulated investment like irrigation, fertilizer, and new tools like seed drills and iron plows. To enhance the value of the goods from land, trade opened up. Spices were traded from Asia and gold from the Americas. The emergence of the first economy drove unprecedented levels of conquest and exploration. Entire continents were discovered. The world was circumnavigated for the first time. Food previously unknown and grown in foreign lands became the stuff of daily diets: the Irish began to eat potatoes, the Italians tomatoes. The agricultural revolution didn’t just change diets – it changed how people thought and lived.

Second Economy – Industrial
After markets are opened up around the globe, the next stage of development involves processing natural resources – changing timber into lumber, wool into clothes, and ore into steel. This involves capital – money, factories, and machines. The emergence of the industrial economy involved another wave of transformation. Investing and working in factories changed the scale and nature of cities. Bond markets and banks emerged as new vehicles for financing new vehicles like railroads.

Third Economy – Information
If you are going to manufacture a thousand watches to ship to Topeka, you want to be sure that there is demand for a thousand watches in Topeka. To determine this, you need information. When your factories can make more than people might buy, the limit to progress shifts to information. Even in the 20th century, the emergence of a new economy was disruptive. The battle between capitalism and communism was won by the corporation, which emerged as the best way to manage knowledge workers. Computers and the Internet are just the latest version of information technology that began with the telegraph, telephone, and typewriter in the 19th century.

Evolution suggests a change in DNA – not just the individual animal. Social evolution suggests a change to social DNA. It is perhaps simplest to think of social DNA as institutional norms – the way most people think or make sense of the world, the dominance of a church or state, the institutions that are common and commonly used. Physical DNA has genes; social DNA has memes.

When the first economy emerged, the nation-state displaced the church as the community’s dominant institution. When the second economy emerged, capitalism – the bank and financial markets - displaced the nation-state as the dominant institution. When the third economy emerged, it was the corporation that took its turn as the most powerful institution. The most visible changes to social DNA can be seen through a community’s architecture. The cathedral that dominates the skyline in one period is replaced by the Parliament building is replaced by the bank is replaced by the corporate skyscraper. As revolutionary change becomes institutionalized, society evolves.

For simplicity, we can say that the agricultural economy emerged in the West between about 1300 and 1700. The Protestant Revolution transformed the church and the nation-state replaced it as the dominant institution in the West. The Renaissance became the dominant way of thinking.

The industrial economy emerged between about 1700 and 1900. Democratic revolutions transformed the nation-state and the bank, or capitalism, replaced it as the dominant institution. Enlightenment thinkers re-defined society and science.

The information economy emerged between about 1900 and 2000. Banking disintermediation and the welfare state transformed capitalism, as the masses became beneficiaries of investments, insurance, and credit. The corporation emerged as the dominant institution; by the end of the 20th century, roughly half of the largest economies in the world were corporations, not nation-states. Knowledge workers – pragmatists rather than Enlightenment thinkers – arose to become the new specialists who defined business, political, and financial policy.

The Fourth Economy – Entrepreneurial
Today, we’re living on the cusp of a new economy. This entrepreneurial economy will transform the corporation as fundamentally as the agricultural economy transformed the church, or the industrial economy transformed the nation-state.

For the developed nations, the goal is not development, not movement along defined paths. Rather, the point is evolution – movement into uncharted waters. There are no existing memes to script this progress. There is, however, a pattern from which we can draw.

The pattern of progress has been the same each time. An elite develop and control an institution. Popes and cardinals control the church. Then a revolution disperses the power of the institution. Martin Luther stands up and says, “We are all priests!” The individual has access to the church and control over it. Kings and queens gave way to representative assemblies. Dour bankers who said no to requests for credit became eager marketers who send out solicitations for credit cards each week. In each case, the individual gained control from the elites who first created the institution.

The Popularization of Entrepreneurship
Today’s dominant institution is the corporation. Quite simply, the pattern of revolution will be the same as what it was before: the everyday worker and investor will wrestle control of the corporation from the CEOs and senior executives.

The reason for this? It is to create institutions – not just corporations but schools, banks, governments, and churches – that more closely conform to the reality of the individual and of nature. To date, the point has been to conform nature and the individual to the linear thinking and predictable paths of institutions made for the masses. In the future, the point will be to more closely conform institutions to the unpredictable paths of ecosystems and personal psychology. And to create wealth – wealth as much greater than that of our own time as our wealth is to that of the first or second economy. Wealth as measured by autonomy, greater freedom for the individual. And indeed, this has been the path of progress since the dawn of the first economy – the increase in autonomy of the individual.

Entrepreneurship is the art of creating a sustainable institution. To date, that has been the work of elites. In the future, the work of entrepreneurship will be popularized. This will not happen rapidly by our normal reckoning. But it will happen. If only 1% of the population in 2000 acted like entrepreneurs, that number may be no higher than 3% by 2010, no higher than 8% by 2020. But entrepreneurship is the ultimate creative act, a social change that, when successful, creates enormous wealth. Rather than think of this as only 8% of the population, think of having 8 times as many entrepreneurs. Even today, this far past Democratic Revolutions, less than half of the population in the US actually votes.

The transformation of the corporation will change work as much as the Protestant Revolution changed worship, or as much as democratic revolutions changed what it meant to be a citizen. Corporations that have for so long measured their success by the creation of goods to have – products sold in stores – will begin to be more inclusive, adding to their metrics goods to do – satisfying work that is engaging and that stimulates creativity.

Past revolutions changed how we thought about the world – the pragmatism of William James and Oliver Wendell Holmes followed from the enlightenment thinking of Isaac Newton and John Locke, which followed from the Renaissance thought of Machiavelli and Copernicus. In the 4th economy, society will once again change its fundamental operating system. Systems thinking will emerge as the antidote to the specialization of pragmatists who measure progress in ways that exclude the erosion of their own habitat. Entrepreneurs create systems, bringing together supply and demand, labor, capital, and resources to create value.

Popularizing entrepreneurship, creating the expectation that society will accommodate the individual who has for centuries been expected to accommodate society, will be different. It will, in fact, be revolutionary.

1 comment:

Ravi Kumar said...

Very intriguing post on Business blogging!. I am from Sun Microsystems and my CEO too encourages this philosophy of corporate blogging. I wrote about Chris Anderson's Long Tail in