Prosperity Depends on Trust

"As a personal attribute, trust is not inherently good or bad. If I am living in a neighborhood full of thieves and swindlers, being a trusting person will get me into trouble. Trust becomes a valuable commodity only when it exists as the by-product of a society whose members practice social virtues like honesty, reliability, and openness. Trust makes no sense unless it reflects a general condition of trustworthy behavior; under these conditions, it becomes the marker and facilitator of cooperation. Of course, an opportunist could try to take advantage of other people’s trust and try to cheat them. But if one wants to live in the community, this will quickly lead to ostracism and shunning."
- Fukuyama, Francis. Political Order and Political Decay (p. 123). Farrar, Straus and Giroux. Kindle Edition.

2008 was a financial catastrophe because of a credit market crisis. Per Wikipedia, credit came "from Middle French crédit (15c.) 'belief, trust,' from Italian credito, from Latin creditum 'a loan, thing entrusted to another,' from past participle of credere 'to trust, entrust, believe'." A lack of trust creates a crisis - whether within a company, a relationship, or in credit markets more broadly.

Fukyama writes of Greece and Southern Italy's economies in this context of trust. People in these places generally don't trust folks outside of their family. The result? You can't create a business of any size and government is dysfunctional. This creates poverty. Per capita income in the south of Italy is about half what it is in the north; in Greece it is 55% of what it is in Germany.

The key to success is making yourself part of such a big us that one can specialize. If you are in a group of five or ten, you have to be a generalist, you have to do everything. Your productivity will be so much lower than if you are in a large group where you can specialize. The key to becoming part of a bigger group, to making us larger, is to create institutions bigger than family or tribe, institutions like church, state, banks, and publicly traded corporations, and even the less obvious civic organizations.

Where you find communities where people have learned to be distrustful, you will find poverty. Success - whether within a family, friendship, company or country - depends on you creating a culture where trust is inherently good and isn't something easily or often betrayed.

The Future of Work Lies at the Intersection of Flow, Income, Meaning and the Popularization of Entrepreneurship

Some thoughts on labor on this its day.

One of my heroes, Deming, used to argue that the worker deserved to take pride in her work. To feel proud of what you do you have to feel like it matters, it is valued, and that it represents your best.

One chief difference between work and a hobby is pay. One reason I like markets is that it is a way for the community to signal what it values. You may want to write another folk song but what the folks in your neighborhood will actually pay for is someone who can solve the problem of getting them food at lunchtime or to devise a better solution for running rainwater off of - or collecting solar energy onto - their roof. Pay is the community conspiring to vote on what would be valuable to them and not just to you. That makes us all a little more relevant, forcing us outside of ourselves.

One of my other heroes, Csikszentmihalyi, studied the psychology of engagement, what he called flow. It turns out that we're happiest when we're doing something that requires our full attention. When we're in flow we face clear goals, there is a balance between our skills and the challenge we face, we are free from distractions, we are animated by clear - rather than conflicted - priorities, there is a perfect overlap between what we're thinking about, wishing for, and doing, we are not worried about failure (one's mind has no room to simulate that outcome, so fully engaged is it in the task at hand), we lose track of time, the activity becomes worth doing for its own sake, and the self becomes more developed as the result of this state of flow, this absorption in the task.

Flow is a fabulous thing but for many it is easier to find in a video game than in work. A video game provides little meaning, though.

A task is meaningful if it serves a purpose bigger than that task. One guy might be cutting stone and the guy beside him - engaged in the exact same task - may be building a cathedral, be glorifying God. Sometimes meaning is simply a matter of framing your work as something bigger than the task at hand. More often it is being animated by what a difference your work makes in the lives of others, even in the lives of future generations.

As we become more affluent, we may rather paradoxically define ourselves even more by our work. Identity is often bound up in our job and in answer to the question, "What do you do?" we rarely say, "Stay current on politics," or "Read all of Michael Connelly's new novels." We tell folks what we do for a living. But as work becomes less essential to covering the necessary costs of life, we may expect that we not just get paid in money but in flow and meaning as well.

Faulkner wrote, “You can’t drink eight hours a day. Or make love. Work’s about the only thing a fellow has to do to keep from being bored” We have a number of examples of folks in the modern world who have made more money than they can spend and yet a great number of them continue to work. I suspect that we peons will follow their example and increasingly demand of our work these elements of pay, flow and meaning even as incomes rise.

Video game designers, TV producers, and designers of social media know how to capture and hold attention. What I suspect will define much of the modern corporation is that it will distinguish itself not by the products it designs - its employees will do that - but by its design of work so that employee efforts create income, flow and meaning. The founder of companies in the early 1900s became wildly successful by designing products like safety razors and automobiles. I suspect that we'll look back at the founder of successful companies in the early 2000s as successfully designing work to attract the best and brightest.

Keep in mind that Facebook, Twitter and Instagram aren't producers of any content in the same way that Newsweek, CBS or the New York Times are. They are platforms. I think that corporations in general will take on a similar relationship with employees in the future, focusing on creating great work rather than great products or services, positioning themselves as a platform rather than maker of products. This is part of what I mean by the term, "the popularization of entrepreneurship." Employees will create the new products, services and businesses that generate new jobs and wealth. The corporation will create the systems and roles that facilitate those outcomes.

Work matters. Profoundly. It has the potential to define us as much as anything else in life. Think of the people who stand out in history, people as different as Picasso, da Vinci, Marie Curie, Maria Montessori, Beethoven, Bjork, and Kurt Vonnegut. We know them through their work. Work is key to how we become who we are. And just like us, our labor continues to evolve. I suspect it will matter even more in the future than it does now.

Happy Labor Day!

Political Conventions, Culture, Economics, Legacy and Progress

Economics fascinates me and seems a terribly important consideration for politics. Even early people taught their children how to make a living and the task of preparing the next generation for economic success seems like the most important priority for any government. Meanwhile, we're between the Democratic and Republican conventions and they seemingly prefer to talk about culture.

Economics gives us progress; culture gives us legacy. Politicians, who tend to be old men, prefer the latter. Progress is the concern of children - or would be, if they knew how dependent their future was on it.

For nearly five centuries, Rome was a Republic. At that time, no one person ruled. Julius Caesar began - and his heir completed - the task of turning Rome into an empire, something it remained until its fall about four centuries later.

Julius Caesar's heir eventually took the name Caesar Augustus. He'd had popular senators like Cicero assassinated, putting an end to dissent and the republic in which power was shared and debated. He defeated Mark Antony and Cleopatra, driving them to suicide after revealing that Antony - with whom he'd shared power - was no longer a "real" Roman, having fallen in love with an Egyptian and written a will stating his wish to be buried with Cleopatra.

Augustus ended a republic, but gained a legacy.

The ancient Greeks had Homer. The Romans had Virgil. As the historian John Lewis Gaddis points out, "The Aeneid, unlike the Iliad and the Odyssey, is a commissioned work. Augustus encouraged its completion and subsidized its author." Virgil - unsurprisingly - made Augustus look good.

Augustus was the first to take the title, “Pontifex maximus,” which meant greatest priest. Every Roman emperor after did until that title was taken by the pope.

As Roman emperor when Christ was born, Augustus is also in the Bible.

Augustus was immortalized in Virgil’s Aeneid, the Bible, and the Catholic Church. Those legacies are almost minor, though.

The months September, October, November, and December indicated that they were the seventh, eighth, ninth and tenth months in the Roman calendar. Before September came Sextilla, the sixth month of the Roman year. During his reign, Augustus had this sixth month renamed after him. 2000 years after his death, you say his name every time you mention August. Now that’s a legacy.

Progress depends on old men more worried about how their grandchildren will live than how they will be remembered, showing a greater concern for economics than culture. The thought of being an inescapable part of every summer, though, must be incredibly alluring.

For all the remnant glory of past generations, though, there is little evidence that per capita income rose at all between the time of Homer and Shakespeare. Glorifying any one person doesn't drive progress. For that you need to change the life of ordinary people.

As these conventions play out here in Augustus's month, worry less about how much they say about how great is their candidate (spoiler alert: they are really great) and listen more for how they will make life great for your children and grandchildren.

The Middle Class is Shrinking - And That's a Good Thing

The middle-class shrunk between 1967 and 2016. And that's a good thing.

The middle-class, lower middle-class and poor made up 94% of the population in 1967. (Yes. These numbers are adjusted for inflation.) By 2016, they were only 65% of the population.

The upper middle-class and rich rose from only 6% of the population to 35%.

Nearly a third of the population (well, 29%) moved from middle-class and below to upper middle-class and above.

Class matters to class. Go to class if you want to move up in the income ladder. Knowledge workers - folks with a BA - have gained the most from advances in information technology in the last generation.

Income gains have slowed in the last generation. Between 1967 and 1981, incomes rose 27%; between 2002 and 2016, incomes rose only 8%. My theory is that by the end of the last century we had effectively broke the code on how to raise the productivity and incomes with the popularization of knowledge work but now at the dawn of this new economy we've yet to figure out how to popularize entrepreneurship to continue that trajectory.

All this suggests some simple policy recommendations. Invest even more in creating knowledge workers and entrepreneurs (investment that includes massive increases in R&D spending as well as policies like proliferating the number of incubators in communities as we did the number of libraries, schools and universities in past generations) and watch the percentage of rich continue to rise. Tax the rich and upper middle-class to both fund all those investments and to subsidize the poor so that they enjoy some of the fruits of this prosperity. So, make more people rich and the poor less poor. That seems like progress to me.

Stephen Rose's study Squeezing the Middle Class: Income trajectories from 1967 to 2016 is here.

Villainomics (or, the question of who to blame for bad times and stagnation)

We had witch trials into the 18th century. To this day, tens of thousands of people are killed throughout the world each year, accused of the witchcraft that caused someone's misfortune.

We think we're more modern than that today but that question of who to blame stays with us. When it comes to prosperity issues, something I'd call villainomics is pretty common.

The big question of villainomics is who to blame; do we blame our woes on bankers or Jews, immigrants or bureaucrats? Find that group and reduce their number and then things will magically improve.

It is possible to win at the game of politics with villainomics. It is impossible to win at the game of economic progress with villainomics.

Global Antipathy Towards Globalization

Sadly, globalization has fewer defenders than nationalism. It's easier to excite the masses with cries of "Us vs. them" than "Us."

Since 1945, globalization has lessened global inequality, dramatically lowered deaths due to war, and increased prosperity. Put more simply, globalization fuels the twin goals of peace and prosperity that only ideologues dismiss as the most important goals of policy.

Here Martin Wolf explains how growing tensions between the US and China are reminiscent of the growing tensions between the US and Germany nearly a century ago.

https://www.ft.com/con…/5887ec6c-9d97-11ea-b65d-489c67b0d85d

Popularizing Systems Thinking

Models of complex behavior increasingly sit at the background of vital political discussions like global warming and pandemics. It is time to make them a more integral part of our political discussion. Until voters can understand and participate developing models to predict the behavior of systems, we will have unstable politics, particularly in a country like ours that puts so much stock in the opinion of everyone. This country was defined by a way of thinking. It’s time to expand that.

Our founding fathers did not pioneer Enlightenment thinking but they were the first to create a community organized around it. The Enlightenment shifted people from a reliance on authority and tradition (church and king) to reason and debate (science and democracy). Our founding fathers popularized education – most notably, Thomas Jefferson founded the University of Virginia – with an emphasis on rhetoric and analysis as essential to creating smart voters. They generally believed that education was necessary to freedom and democracy. But as it turns out, rhetoric is a poor way to understand or communicate complexity. We need to update what constitutes a good education.

Today we have expert systems thinkers but we haven’t popularized systems thinking, made it a part of the way we organize and act or even a part of what we include in education. Analysis focuses on parts at one point in time; systems thinking focuses on interactions over time, like how viruses spread at different rates depending on how we behave or how CO₂ builds in the atmosphere depending on our technology. Systems thinking is as important to an effective democracy in this 21^st century as Enlightenment philosophy was to an effective democracy in the 19^th and 20^th centuries. We can’t coherently debate systems as varied and crucial as our financial, environmental, education, and healthcare systems with fluency in systems thinking.

Hearing Bill Gates talk about a pandemic in 2015 and how serious it will be, he mentions what "our models told us." Listening to California governor Gavin Newsom in press conferences, he, too, references "our models." Models have the potential to explain futures we haven't yet experienced. Models will never be perfect; they can, however, be sufficient to inform good policy.  Once you understand compound interest, you may not be able to predict how much wealth you’ll have in 30 years but you know what to do: invest early and often to maximize that wealth. Once you understand how rapidly the coronavirus can spread, it informs policies like shelter-in-place. Even though models are sensitive to changes in assumptions and inputs, they can still point us in the right direction. The better people understand them, both their limits and the insights they provide, the more credible and helpful these models.

I work with really bright scientists and engineers to plan – or model – their projects to develop new products like drugs, medical devices and computer chips. Two benefits inevitably follow. One, each person gets insights into what others are doing and how that impacts them. Good models are key to coordination. Two, they learn more of what is possible as they play with the model, play a game of “what if” to see how they might accelerate launch. “What if we hired one more circuit engineer?” “What if we doubled the number of clinical trial sites so that we could enroll patients more quickly?” The models let them answer what-if questions and become tools for making really smart people even smarter, in the same way that a spreadsheet can help a financial planner to get and communicate insights. Models that a group jointly creates and maintains could be used to inform an entire populace about their policy options on issues like economic stimulus, global warming, or the spread of a pandemic. Even very simple models can help to illustrate important dynamics more clearly than rhetoric.

Democracy depends on education. Change is accelerating. We’re increasingly dependent on systems. Education needs to include system thinking. In a crisis like a pandemic, we have to react to what the models predict about consequences because if we wait to react to actual consequences or rely on our intuition (intuition informed by completely different circumstances) our actions will be tragically late. Models let us learn from the past and from possible futures. The AI that recently beat the world champion Go player Ke Jie was able to make a move no one had ever before seen, a move learned from millions of game simulations it had simulated play even before playing its “first” game with Ke Jie. When a community encounters something like the coronavirus, it would be nice to be at least as prepared as one might be for a game of Go.

There are a variety of ways to popularize systems thinking. One way might look like video games. Imagine kids learning about global warming or economic development by getting exposed to simple models that play out over time. They first learn to turn the knob on this variable and then that variable. They see which variables are akin to the butterfly's wings in Brazil that causes a snowstorm in Minneapolis and which are akin to a hundred moths beating their wings uselessly against a light bulb. Over time they begin to introduce their own data, their own variables, or even change the structure of the model. The class as a whole could build a model that represents their collective insights and predicts outcomes few – if any – minds are sophisticated enough to foresee.

Good education changes life outside the classroom. Eventually democracy might mean that we have collective, online models that represent our best knowledge and are as widely understood as an op-ed or debate. Policy could come out of millions of simulations that are largely transparent and contributed to and understood by millions of citizens. Perhaps working on models will become as much a part of citizenship as working on campaigns or reading and arguing about op-eds. In the same way that a car lets us travel further than we could on foot, good models can let us create better policy than we can with debates.

Ron Davison lives in San Diego County, wrote The Fourth Economy: Inventing Western Civilization and works with teams in Fortune 500 firms and startups to accelerate product launch. @iamrondavison

A Post-Pandemic Stimulus Plan to Quickly Create Jobs

Adding to the trauma of deaths, illness, layoffs, and social isolation, at the end of this pandemic we will find ourselves with tens of millions unemployed. Without quick, bold policy initiatives, the post-pandemic economy will create even more trauma. The millennials in particular – a generation that began its career in the aftermath of the Great Recession and now face this economic wreckage only a decade into careers – are going to be badly hurt by this.

Unemployment has longer lasting negative impacts than does divorce, being widowed, or being laid off.[1] It’s traumatic and ruinous to someone’s long-term economic prospects and any policy we need to adopt to address tens of millions who are unemployed has to account for this.

What would quickly employ people and stimulate wage and productivity growth? Doing for entrepreneurship what policymakers did last century for capital and labor. That is, invest boldly, at unprecedented levels.

Prices tell you what markets think is abundant and what is scarce. Capital and labor aren’t scarce. Entrepreneurship is.

Proof that capital is no longer scarce is simply this: the price of capital has gone negative. How unusual is that? The Dutch have records on bond sales that go back 500 years. In all that time they never had negative interest rates until just a couple of years ago. Growing affluence means that there are more investors than ever looking to build portfolios. (And hundreds of millions more reliant on markets through investments in pension funds.) Because of this, trillions in capital move around the globe in search of returns.

Education seems to also be providing a lower return than it did half a century ago. The price for college graduates is dropping. The Fed recently reported that a college degree no longer offers a wealth premium.[2] Which is another way of saying that market prices for education – like capital – suggest that it isn’t that scarce. And many millennials, struggling to pay for housing in cities on wages that aren’t terribly higher than those from a decade or two earlier are wondering when their return on a college investment is going to yield a return. It might not.

Once upon a time capital and education were scarce, though, and investing in them gave the country phenomenal returns. A look at what past investments in what was scarce did for wages and job creation suggests what could happen if we make similar investments in what is scarce today. That is to say, to get some sense of what a startup stimulus might do for the economy, we can look at what past investments in capital, education and research did for the economy last century.

In his book, The Rise and Fall of American Growth, Robert Gordon reports that output per hour between 1920 and 1970 grew 2.82% a year. Between 1970 and 2014, it grew only 1.62%. If wages had grown at 2.82% between 1970 and 2019, median income would have been $88,000 rather than the $48,000 it actually was. Compounded over a lifetime, a difference of 1 to 2% is huge. You don’t get returns without making investments, though.

During World War 2, the government invested billions in capital equipment for factories building wartime equipment. Between 1940 and 1945, consumption of capital rose from $19 billion to $116 billion[3], much of that coming from the government.  Additionally, it sent experts on production and management – consultants like W. Edwards Deming and Peter Drucker – to help companies make best use of this capital.

The result was dramatic. On D-Day, June 6, 1944, the Germans could deploy only 319 aircraft. The United States and its allies deployed 12,837. American manufacturing was more powerful than a Nazi blitzkrieg.

When the war was over, the government let companies keep the manufacturing and intellectual capital it had funded. Rather than make tanks and planes, they began making cars and TVs – at rates as impressive as the preparation for D-Day.

Next, the government invested an unprecedented amount in education. Between 1944 and 1949, BA degrees conferred rose from 126,000 to 432,000. The rapid rise in the creation of knowledge workers was essential to the emergence of the information economy.

Finally, the government spent more on R&D, funding agencies like DARPA and the NSF. The innovations resulting from this research – as varied as the internet, communication satellites, and genetic engineering –helped to create hundreds of new technologies, thousands of new products, millions of new jobs and trillions in new wealth. Most R&D investments fail to generate any return. The ones that do, though, continue to compound over time to create value that dwarfs the initial investment. (In this way, investment in R&D is very similar to investments in startups: most fail and the few that succeed generate great returns.)

A startup stimulus could do two things. It could quickly create hundreds of thousands – even millions – of jobs. And it could yield returns as dramatic as the long-term returns to education and research made after World War 2.

While the price markets pay for capital and education seems to be falling, the the price of entrepreneurship – wealth created by successful entrepreneurs – is high and still rising.

In 1987, when he was 31, Bill Gates became the youngest self-made billionaire in history. About a generation later, in 2008, Mark Zuckerberg became the youngest self-made billionaire at age 23. Investments in entrepreneurship could offer high returns.

Big investment in startups – entrepreneurship – will pose as many challenges as big investments in education, research or infrastructure did for past generations. Anyone who knows how difficult it is to identify good startup ideas or to launch a company from scratch will realize that a startup stimulus will be at least as difficult as figuring out how to ramp up production in 1944 to complete one plane every five minutes, launch fifty merchant ships a day, and finish eight aircraft carriers a month. Or land on the moon or launch communication satellites. It won’t be easy but it will yield a great return.

This is a big challenge that promises a big reward. A hundred billion dollars could fund 50,000 startups that employ 700,000 people for 18 months; a half a trillion would fund about 250,000 startups and create 3.5 million jobs. There would be no question about whether a startup stimulus would create jobs. It would be designed for exactly that. We could begin funding startups even as people still shelter-in-place and – depending on how bad unemployment is – adjust the scope of this startup stimulus up or down.

Americans hit by this pandemic could quickly return to work. Rather than a gap in their resume and a hole in their savings, they would get valuable work experience and savings. The trauma of long-term unemployment would be mitigated and their lifetime earnings, productivity and wealth would be greatly different.

What would we get for our return? Tens of percent of these startups will fail as soon as their guaranteed funding is gone, but they will have provided employment at a critical point in the recovery. Tens of percent are likely to continue beyond their window of guaranteed funding for another year or three. Many will become great, viable companies. A few will even become iconic companies, the GE, GM or Apple of their generation. Successful companies mean better products and services for all of us, higher wages and more wealth.

Additionally, all sorts of unexpected benefits came from aggressively investing in capital, education and research. The NSF didn’t start with the idea of genetic engineering or a computer smaller than a pocket protector. The same will happen with great investments in entrepreneurship. As more people become more adept at entrepreneurship, as more communities can at will create new companies able to create jobs and wealth, economies will become more prosperous and less subject to long-term sluggish growth that breeds cynicism and helplessness.

Bold investments in entrepreneurship will not only immediately create jobs but could trigger a steady rise in productivity and wages at least as strong as that of the American economy before 1970. The short and long-term potential of such policy is huge. So is the risk of doing anything less.

Ron Davison lives in San Diego County, wrote The Fourth Economy: Inventing Western Civilization, and helps team within Fortune 500 companies and startups to accelerate product development. @iamrondavison

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[1] https://ourworldindata.org/happiness-and-life-satisfaction

[2] https://www.theatlantic.com/ideas/archive/2020/01/college-wealth-premium-collapsed/604579/

[3] https://fred.stlouisfed.org/series/A264RX1A020NBEA (in 2012 dollars)

Real GDP Growth by Decades