04 December 2012

Entrepreneurship not Capital: What Limits San Diego's Economy?

San Diego's new mayor Bob Filner has a thousand competing claims on his attention. Where he focuses will make all the difference in how effective he is. If he wants to be really effective, he’ll adapt his policies to new realities.

The most important new reality is that we’ve entered a new, entrepreneurial economy as different from the information economy as that was from the industrial economy before it. The limit to progress has shifted to entrepreneurship and adapting to that will drive sweeping change.

An industrial economy is limited by capital. As a community gets more financial and industrial capital and learns how to make them more productive, it becomes more prosperous. Funding for factories, invention, and infrastructure yields a huge return.

An information economy is limited by knowledge workers. As a community focuses on creating more knowledge workers and making them more productive, it becomes more prosperous. Funding for great public schools, universities, and R&D yield a huge return.

It’s not obvious that our limit to progress is still capital or knowledge workers. This can be illustrated right here in San Diego. Qualcomm alone holds $12 billion in cash. Last year SDSU, UCSD, and USD sent about 20,000 graduates into the world. 

Republicans argue for tax cuts on capital gains, suggesting that we simply need more capital to create more jobs. Democrats argue for more education, suggesting that we simply need more knowledge workers to create more jobs. The policies to support such arguments are increasingly expensive and seemingly less effective than they used to be.

I simply don't buy these arguments. Instead, it seems to me that 200 more great entrepreneurs would do more for job creation in San Diego than would another $10 billion in cash or another 10,000 great college graduates. The new limit is entrepreneurship.  The big question of the information economy was, “How do we create more knowledge workers and make them more productive?” The big question of this fourth, entrepreneurial economy is, “How do we make more people more entrepreneurial?”

There is, of course, a great deal to a transition into a new economy, but most of it follows from communities shifting their focus from the old question to the new. In our case, making more people more entrepreneurial will create demand for more capital and knowledge workers, raising returns and creating better jobs. We will still need more knowledge workers and more capital in the new economy, but these now follow rather than lead economic progress. There are implications for government policy, for education, and most of all, for corporations. For now, it's enough to ask a new question.

Big Question
1st, Agricultural
1300 – 1700
How do we get more land and make it more productive?
2nd, Industrial
1700 – 1900
How do we create more capital and make it more productive?
3rd, Information
1900 – 2000
How do we create more knowledge workers and make   them more productive?
4th, Entrepreneurial
2000 – 2050
How do we create more entrepreneurs
and make them more productive?
 What' s true in San Diego is true across the US. 

In 2009, American corporations held about $5 trillion in liquid assets. Since 2008, about $2 trillion in cash has been added to bank deposits. Think about how much the need for capital has changed in the last century. An iconic startup in the 1900s and 1910s was a car company. For that you needed a lot of capital – financial and industrial. Today's iconic startup is an Internet company and for that you need a group of smart knowledge workers armed with laptops. It’s hard to argue that such ventures are limited by capital.

It's more plausible that we're limited by knowledge workers, but this, too, is a difficult claim. In 1900, fewer than 5% of 14 to 17 year olds were formally enrolled in education. By 2000, fewer than 5% were not. It's hard to imagine ever again matching the dramatic gains in knowledge workers of the last century or the economic output that came with them. The gain from 5% of teenagers to 95% enrolled in formal education is huge. There is no way to match that dramatic gain with the remaining 5%.

Capital matters. So do knowledge workers. But they aren’t enough. And yet our policies - trillions in tax incentives for investments and trillions more in education - are all predicated on the notions that the limits to progress are capital or knowledge workers. Maybe if we didn't spend so much trying to educate the last 5%, or offering tax breaks to encourage the next billion in investment, we'd have money to spend to make entrepreneurship easier, to make it a more obvious career choice for our young people. As it is, we're facing new realities with dated strategies - like adventurers who insist on staying in the boat even after they've hit shore.

We’re living in one of the great transition points in history. Whether that’s painful or wonderful depends a great deal on whether we cling to old policies or embrace new ones. That might start with something as simple as communities everywhere in the developed world starting to ask the right question.

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