01 June 2012

Creating Jobs in the Fourth Economy

The job numbers for May were bad; the economy created a mere 69,000 jobs. Even before the Great Recession, the American economy struggled to create jobs. In the four decades from 1960 to 1999, it had created an average of 2.5 million jobs per year. In the first decade of this century, it averaged job losses of 100,000 per year.

Throughout the West, the policies of liberal and conservative administrations are ineffectual. In the United Kingdom, Conservative Party PM David Cameron made bold moves to reduce the deficit by simultaneously cutting spending and raising taxes. In response, the UK’s recession has begun its second dip. By contrast, Obama has managed to squeeze through a variety of stimulus measures, cutting taxes and raising spending since he has taken office. While the US economy has done better than the UK, it continues to falter between full recovery and recession. France has just replaced one of its most conservative presidents of recent times with a socialist and this month posted its worst job numbers of the new century. With few exceptions, the West is doing as poorly at job creation as it has during any time since the Great Depression.
While it seems absurd to claim that these economies would create more jobs if only government spending were slashed, it is still true that government spending and tax cuts have been more effective at creating debt than jobs.
Jim Clifton, Gallup Poll CEO, in his new book The Coming Jobs War, claims that their polls suggest “demand” for about 3 billion formal jobs around the globe but supply of only 1.2 billion. That is, worldwide, we’re short jobs by about 1.8 billion.
During the last century, we changed our economy so that it began to produce a quantity, quality, and variety of products that had scarcely been imagined in the past. It is possible to again change our economy so that it is able to do a similar thing with the creation of jobs, but this will require different strategies.
What if we’re in a new economy, one as different from the information economy in which we grew up as that was from the industrial economy before it? What if central banks really are doing all they can – and still it is not enough? What if governments are already teetering at the edge between the need to limit debt and stimulate the economy? What if it is not the policy failure of states or banks that has led to such anemic rates of job creation? What if the problem is that a new economy is demanding a change of corporations that is as significant as the change demanded of states during the transition into our industrial economy, or of banks during our transition into the information economy? What if communities have been holding governments accountable for failures of corporate policy?  
There are only four things that factor in the creation of economic value: land (or natural resources), capital, labor, and entrepreneurship. All economic value is created by some mix of those four and it seems that our first three economies have been led by the first three factors. Since the Dark Ages, the West has gone through three distinct economies: the first, agricultural economy was led by land, the second, industrial economy was led by capital, and the third, information economy was led by knowledge workers, or labor. Communities that did the most to create capital and get the most from it – whether from innovations in financial markets or factories – led during the second, industrial economy. Communities that did the most to create knowledge workers and make them productive – whether from innovations in education and management or information technology – led during the third, information economy.
First - Agricultural
Second – Industrial
Third - Information
Fourth - Entrepreneurial
Knowledge Workers
Period (roughly)
1300 – 1700
1700 – 1900
1900 – 2000
2000 - 2050
Institutional Revolution
Defined anew for the West

Now, it seems, we have access to resources – or land - anywhere on the globe, capital sums in the trillions, and a steady stream of university graduates. And yet economic growth is slow and job creation rates are anemic. It might just be that the good and bad news is that our economy has developed to the point that its limit has once again shifted. It seems that our economy has developed to the point that it is now limited by the most advanced of the four factors. The limit to this fourth, entrepreneurial economy is entrepreneurship.
There are many implications to a new economy. For one thing, these new economies have forced a transformation of the dominant institution.
The third, information economy, for instance, required a massive change to the bank. Capital that was scarce during the second, industrial economy was treated as plentiful rather than scarce during the third. Debt everywhere – on corporate balance sheets, in credit card balances, for mortgages, and for government spending – rose and brought the economy along with it. After about 1900, what limited progress was knowledge workers and the trick to prosperity was to create knowledge workers and keep them employed – even it if doing that required creating debt. The bank that, in the 19th century, reserved access to credit and investments for an elite few became a retailer to the masses, offering mutual funds and credit cards to households from every class.  
Universities, too, greatly expanded. In 1900, less than 5% of 14 to 17 year olds were enrolled in formal education; by 2000, less than 5% of 14 to 17 year olds were not enrolled in formal education, this being one obvious key to creating knowledge workers.
Corporations and governments both grew spectacularly during the third economy, for much the same reason. Knowledge workers are specialists and rarely create value working alone. Corporations and bureaucracies are home to the knowledge worker, letting the architect and computer programmer create value as part of teams. The rise of the knowledge worker was coincident with the rise of the corporation.
The model of the last century for economic progress and job creation has been – in retrospect – fairly simple. Pump capital into the expansion of organizations, creating larger government agencies and corporations, places where knowledge workers work. Educate an increasing portion of the work force to prepare them to become knowledge workers, with majors as varied as engineering and advertising. Give these new knowledge workers increasingly better information technology – from telegraph to typewriters to fax machines to computers to smart phones. Once you’ve done all this, stand back and watch innovation and growth follow.
But what happens when the next innovation in information technology does as much to distract as inform knowledge workers? What happens when corporate or government bureaucracy is no longer the best way to coordinate the efforts of knowledge workers? What happens when debt in every sector – households, corporations, and governments – becomes excessive? And what happens when universities create more knowledge workers than companies can employ? What if knowledge workers and the innovations they require no longer limit progress?
What if the new limit to progress is entrepreneurship?
Knowledge workers did not just suddenly appear in 1900. If we define knowledge workers as people who manipulate symbols, like blue prints, computer code, and accounting ledgers, rather than things, then we’d had knowledge workers for centuries. But starting in about 1900, their portion of the work force began to rapidly rise. Knowledge work was not created in the third economy but it was popularized. The same will be true of entrepreneurship in the fourth economy.
Entrepreneurs are not new to this emerging, fourth economy. What will be new is the notion that more employees should be more entrepreneurial, the notion that entrepreneurship should be popularized beyond an elite few. Knowledge workers within corporate or government bureaucracies were given roles which they have been expected to execute well. As communities make more employees more entrepreneurial, knowledge workers will act a bit more like CEOs – working with the primary aim of creating equity, secondarily involved in the creation of new processes, systems, products, and jobs.
Entrepreneurs create wealth and jobs. Two of the biggest problems we have in the West today are an excess of debt and a shortage of jobs. More employees becoming more entrepreneurial will reverse both of those problems.
The fourth economy will probably – but not necessarily – emerge in three phases. In the first phase, companies will change their policies and begin to use their hordes of cash to fund more entrepreneurial activities by their employees, expecting employees to not just make products but to make actual business units, to create equity. In the next phase, social entrepreneurs who have created and transformed non-governmental organizations and non-profits will begin to create and transform government agencies. In the third phase, expertise and fluency gained by the popularization of entrepreneurship will be extended into broader swaths of social invention, driving changes in education, work, government and communities in ways that would be as hard for us to imagine as it would have been for those in 1900, at the dawn of the popularization of technological invention, to imagine the myriad products that would be created in that century.
Communities that continue the extraordinary rise in incomes and prosperity that we’ve experienced during the last few centuries will popularize entrepreneurship in the same way that they popularized knowledge work in the last century.
CEOs would leave a community that defined and regulated their roles, possibilities, and income as much as they do for their employees. That is, the community they’ve created within their corporations is typically vastly different than the communities they choose to live in. It is less obviously government policies that are stifling entrepreneurship, growth, and innovation than corporate policies. And corporations are among the largest economies in the world, making up between one third to two thirds of the 100 largest economies. (Wal-mart sales are greater than the GDP of Sweden or the Philippine, for instance.) And while millions of Americans make more than what we pay our president, not a single employee within any Fortune 500 firm makes more their CEO. The corporation has to create more opportunities for entrepreneurship for its employees, institutionalizing entrepreneurship, or social invention, in this century in the same way that it institutionalized technological invention in the last century. And once more employees become more entrepreneurial, our problem will not be that we’re not creating enough jobs; that may become the least of our problems.
If it is true that we’ve entered a fourth, entrepreneurial economy, it is worth remembering one of the lessons of history: the communities that adapt to these new realities first will prosper the most. We have nothing to lose but our unemployed.
Ron Davison lives near San Diego and is a business consultant who has worked with some of the world’s largest corporations. He is the author of The Fourth Economy: Inventing Western Civilization.

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