American Economic Progress, Past and Future

 

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!

A Tough Trick: Giving People a Sense of Autonomy When Their Work is So Defined by Systems

Political turmoil always comes with economic progress because identity and the work we do is so intertwined.

I think that one of the tricks of the next economy that will be hardest to pull off is this: give people a sense of agency even though their productivity is defined by systems.

Right now almost no one I knows thinks that their salary has anything to do with dozens, hundreds of systems they have nothing to do with and yet what we make is 95% defined by systems rather than our own effort.

Machines automate more and more manual work every year. Algorithms are going to automate more and knowledge work every year.

Factory workers thought that their productivity was about them and not the factories they worked in. Knowledge workers think their productivity has something to do with them and not the educational and information systems they work in. It has been - and will be - tough to realize that's not the case.
We haven't evolved biologically in the last few thousands years but our productivity has gone up enormously. And continues to rise.

What are the systems that let the exact same animals be so much more productive?

Roads and highways and railroads and airports that let us send and get products and services from a broader region.

Educational institutions, unions, companies that have processes that make people more productive.

Information systems that let knowledge workers work more efficiently.

Laws and law enforcement that protect property and extend those principles to things like patents so that investors and innovators will invest in new products and technologies with the hope of returns.

The electrical grid and the appliances that work off it.

The fossil fuels and engines that require(d) thousands of innovators and inventors and that let a guy with a chain saw cut down more trees in one day than his great grandpa could in a month.

The social norms of employer and employee (Between 1800 and 2000, the percentage of workers employed by someone else rose from 20 to 90. By 2000, over half of employees worked for organizations with 500 or more employees; in 1800, none had.)

Language. Writing. Email. Software.

And so on, and so on, and so on.

The systems that most fascinate me appear at the level of economies. An agricultural economy has its own set of principles, practices, beliefs, and technologies. An industrial economy another. Those evolve and change and farmers and factory workers and knowledge workers in an information economy think that is who they are rather than just who people become in order to be productive. That identity, that definition of what it means to be productive, evolves and changes over time as the systems we live and work in evolve and change.

This is a big reason why social invention fascinates me. It means stepping outside of systems to shape them rather than let them shape us. (Okay. That's absurd. Our systems will always shape us.) 

Everything is made up and everything matters. Polygamy or monogamy? Made up. But it matters. The 10 most violent nations in the world practice polygamy which means lots of young men without partners wandering around angry. Dictatorship or democracy? Totally made up. But it matters. The 10 richest nations in the world are democracies.

One big obstacle to progress is that people defend the systems that define them even when those systems - like an agricultural economy for instance - are gradually made obsolete.

Progress comes from challenging and improving and inventing systems. That's tough work. Particularly when people define themselves by those systems. But here's the trick. Here is how you give people agency when their productivity is defined by the systems they live in and work with. You make them systems  thinkers and social inventors. You make their work the work of defining and shaping those systems.

Gales of Creative Destruction and the Need for Aggressive Investment post-Pandemic

In the 3Q of 2018, the economy created 67,000 jobs.
In the 3Q of 2019, it created 11,000 jobs.
In the three quarters between, it created 811,000, 525,000 and 182,000 jobs.
That sounds innocuous enough but those are net.

In the 3Q 2019, the economy destroyed 7.3 million jobs and created 7.3 million jobs and the difference between them was this tiny sum of 11,000 jobs. This is what gales of creative destruction look like.

In the last six weeks, 30 million people have filed for unemployment. This quarter the economy is likely to destroy closer to 50 million jobs than it's typical 7-ish million.

What does this mean? To counter this unprecedented level of destruction we will need unprecedented levels of creation. One tactic is to preserve businesses that will hire back once this is over. The other - complementary - tactic is to launch a tsunami of startups, turn cheap money (interest rates are absurdly low) into precious jobs. A third tactic is to literally create new infrastructure, knowledge and industries.

We should stop having infrastructure weeks and start an infrastructure decade - included in that the creation of green energy solutions that hasten the obsolescence of oil. Also, start spending as much research and development for federal departments like Housing, Transportation, Energy, Interior, and Education as we do on Defense.

We have a huge economic problem that will only get more complicated. Like any problem, we'll have to create our way out of it. When you have more destruction, the solution is more creation.

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)

Where Progress Comes From - and what we had best not blow up

In a time of crisis, everything is questioned. That makes sense but the West has made progress in certain ways that should never be undone. These things should not be questioned.

1. Freedom of religion and freedom from religion

Martin Luther's declaration that "We are all priests," is the claim that freed us from theocracy. There was a time when people looked to the church to explain causation and looked to supernatural causes rather than natural causes as reasons for why people got sick, crops failed or ships wrecked.

The Enlightenment thinkers who founded the US were among the first to free the community from the tyranny of one religious voice, allowing us all to freely choose how - and whether - worship. One of the biggest benefits of this is that it shifted the basis for social cohesion from dogma to science. Science builds on testable hypotheses and regularly generates new understanding. Scientific thinking is the stuff of progress.

The first amendment to the US Constitution captures beautifully the dimensions of this:

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

2. Democracy

The notion that a community should be for all its members and not just the aristocracy is another essential layer to the prosperity of our modern world. Theocracies and democracies are just made up but the consequences are real. Of the 10 most prosperous countries in the world, 10 are democracies. 

3. The American Dream 

Retirement income. The possibility of early retirement. Owning one's own home. Time and money for vacations. Most importantly, enough affluence to choose what career and what company - perhaps even one's own company - to work at.

The notion that people can freely and easily participate in job markets, credit and stock markets, and be consumers in a world with millions of products and services is another foundation stone to progress. 

These three are foundations to the world in which we now live. They do need continual improvement and refinement.  They need to be offered more broadly. (We need to continue efforts to make it easier for everyone to vote and lift more people out of poverty.) We will not make progress by having less of these three; we will have progress by having more them, more independence of thought and reliance on scientific rather than superstitious thought, more ability for communities to define the laws and policies that define their world, and more widely shared affluence.

These three also represent a transformation of the dominant institution from a tool for the elites into a tool for the masses. "We are all priests," and "We the people," made church and state tools for the individual, overturning theocracies and monarchies. The 20th century story of how the average person was given access to credit and investment markets and department stores and online shopping is a story of widespread poverty giving way to widespread affluence. The 20th century included the story of how financial markets - like church and state before them - became a tool for the masses and not just elites. Progress will never come from blowing these up, or reversing any of these three major institutional changes. It will come from furthering them.

More dramatic than incremental improvements on these three previous victories, though, is a transformation of the corporation. Like church, state, and bank before it, the corporation is now the dominant institution.

In the early 20th century, we made dramatic gains as corporations learned how to mass manufacture goods, giving the common person goods that had previously reserved for elites. Ford's Model T might be the most dramatic example of this. 

Year  -   Number Sold  - Price
1910        19,050             $900

1925    1,911,705            $260

This is a wonderful example of the American Dream in action, a good once out of reach becoming accessible. A broad swath of people were able to enjoy what only a few had earlier been able to enjoy.

Today's corporation is less about making products than creating value. In the company of 1920 succeeded by making products that benefited more people, the company of 2020 succeeds by making value that more benefits more people. Because of the transformation that has come from the American Dream, every year more Americans are benefiting from this latter promise of modern companies.

What does this mean for the corporation? For it to become a tool for the common person, it needs to build mechanisms that allow its employees to more easily create - and share in - wealth through forms of entrepreneurship. Like church, state and bank before it, the corporation needs to be made the tool of the common person and not just elites.

Progress won't blow up the three freedoms that have come from making church, state, and bank our tools to be used for us rather than we for them. Progress will come from extending that pattern of progress once more into yet another dominant institution. 

Has Wealth Creation Become More Exclusive?

As managing partner of Andreessen Horowitz, Venture Capitalist Scott Kupor argues that much of the gains from startups have shifted from later-stage, post-IPO to pre-IPO private markets. By the time we normal people get into the market, early investors have already captured a lot of the value.
From Scott Kupor's Secrets of Sand Hill Road (updated with data as of today).

"Consider the following example. Microsoft went public in 1986 at a $350 million market capitalization. Today, Microsoft has a market cap of approximately $1.2 trillion. That's a 3,430x increase in market cap as a public company. [An initial $1,000 investment in MSFT when it went public would now be worth $3.4 million.]
"In contrast, Facebook went public at a $100 billion market cap and now trades around $555 billion.[An initial $1,000 investment would now be worth $5,550.] ... For the public market investors to eventually earn the same multiple on their Facebook holdings as has been the case for their Microsoft holdings, Facebook would have to reach a market of more than $340 trillion. To put that in perspective, US GDP is about $20 trillion and global GDP is about $100 trillion. "

[Ron again, not Scott.]
In other words, folks who bought Facebook stock will never get the returns of folks who bought Microsoft stock.

Two possible explanations - not mutually exclusive.

My notion of the third economy is that finance was democratized (banks and stock markets made tools of us common folks in the same way that the first and second economies made tools of church and state). It seems sad that we've gone backwards on this and so much of the gain on capital has been pushed back into less accessible private markets that fund early stage startups where elite investors can get higher returns.

There may, of course, be another explanation for this. Capital no longer limits but knowledge workers do. Median pay at Facebook is $240k. That's median pay. It might be that the knowledge workers who are the limits to the information economy are now getting the returns that capital used to get.

We are All Uprooted Now

Anomie, noun Sociology. a state or condition of individuals or society characterized by a breakdown or absence of social norms and values, as in the case of uprooted people.
from dictionary.com

The new, entrepreneurial economy is disruptive. It is not just entrepreneurship that will be popularized, the emergence and disappearance and transformation of companies and entire industries destroying, creating and relocating jobs, careers and people. Social invention - the emergence of new kinds of marriages, schools, businesses and government - compounds the feeling of dislocation.

"The past is a foreign country: they do things differently there," wrote L.P. Hartley.

Anomie is the sense that what you knew of social order has been reset. It's like what happened to American natives after the European arrived with his devastating diseases, weaponry and culture.

Anomie is what an uprooted people feel. We are all uprooted now.

Income Inequality and Income Growth - Fairness and Progress

There are two dimensions to improving lives. The first has to do with income transfer from rich to poor, the second with raising real median wages. Those initiatives are not at odds with each other but they are separate.

There is so much talk about income inequality and stagnating median income in ways that suggest the speaker thinks they are the same thing. They are not.

Alleviating Poverty
Most people agree that the rich should help the poor. There can be arguments about who is rich, who is poor and how much help they should provide. Those are important arguments.

For instance, I believe it's absurd for someone in the top 49th percentile to help someone who is in the bottom 49th percentile. Someone making $60k shouldn't have to give $500 to someone making $55k. There has to be a middle ground of 30%, 50% or even 80% of people who are neither expected to help others or expect to be helped. (At least formally through income transfer in the form of taxation and welfare. Obviously everyone helps and needs help just to get through the day.)

Should only people making $200k help only those making less than $10k? Or should even households making $100k help households making less than $35k? The first choice would leave about 87% in the middle class who neither got nor gave help. Do you make more than $10k a year? Don't expect any help. Do you make less than $200k? Don't worry about being taxed to help the poor. The second (tax above $100k and subsidize below $35k) would leave about 43% in the middle class who neither got nor gave help.

In the last 100 years, the top marginal tax rate has ranged from a low of 28% to a high of 94%. Even within the same country, the consensus about what constitutes a fair rate of taxation varies over time. To illustrate how unsettling this change is, Starbucks founder Howard Schultz came out this week to say that he was running for president. One reason? He hate this absurd talk of a 90% marginal tax rate. Asked who is favorite Democratic president was, he said FDR. Under FDR, marginal tax rate was 94%.)

[You can find data on median income and what percentage of Americans make more or less than certain amounts here.]

You can argue about the cutoff point for who pays additional tax for the poor and who is poor enough to benefit from that tax. Ultimately, though, voters will decide what is fair. There is no magic formula for that.

By definition, though, you can never raise the average wage through income transfer. In theory you can raise the median wage through income redistribution but that strikes me as funky; it essentially means that you would tax enough people in the top 49th percentile at high enough rates to lift the income of everyone in the 50th percentile on down.

To define someone making the median income as poor is odd. It's like defining a 5'10" man as short. Income transfer is compassionate, practical and yet does nothing to raise median income. For that you need a completely different set of policies.


Raising Median Income
The usual suspects to raise median income? Investments in infrastructure and education, research and development, childcare and healthcare. These all help to raise incomes. These are essential. We're not doing enough of them or even doing them enough. That said, the biggest boost to an economy is moving into a new one.

In the century after the US was founded, median wages rose as we created an industrial economy that gradually supplanted the agricultural economy. Last century, median wages rose as we created an information economy and workers moved from factories into cubicles. This century, median wages will rise as we create an entrepreneurial economy. The median wage in Santa Clara County - home to companies like Google, Intel, HP, and Apple - is $107k, nearly double the $58k for the US. This will become a norm as more regions adopt and adapt the entrepreneurial culture that defines Silicon Valley. And there is so much more we can do to popularize entrepreneurship. Redefining work to become more entrepreneurial will do as much to raise productivity and wages as any previous change.

The question of how to alleviate poverty through income transfer is an important one and needs to be defined in a way that voters think is fair. The question of how we move into a new economy to create more for everyone is even more important. How a community answers the first one defines how they pursue fairness. How a community answers the second one defines how they will pursue progress.