A Big, Bold Proposal for Capital Market Reform - a startup tax on capital markets

SAC Capital is under investigation for insider trading. A securities analyst has been accused of leaking secret information about a potential partnership between Yahoo and Microsoft. People are upset because insider trading gives an unfair advantage to traders who cheat and this seems an indictment of the larger system. But that is not an indictment of the larger system.

The big question is not whether there is cheating and insider trading. That's the little question. The big question is whether capital markets are set up to best create long-term wealth, whether capital still drives economic growth. For all the talk of capitalism, that's no longer so clear.

Oddly, the movement of equity markets seems to have little to do with the movement of GDP. One might imagine that as equity prices are bid up, there is more incentive to create equity, to start businesses, and that GDP growth would follow a rise in the stock market. As it is, though, rallies that seemingly rest on the assumption that the economy is about to take off merely bust. The stock market goes up faster than average but the economy does not follow, as you can see in this graph from Market Watch.

If capital markets did a better job of creating equity rather than just pricing it, you might GDP go up in response to a rise in market capitalization. But this doesn't happen. As you can see in this graph on the right, GDP grows at a fairly steady pace while the market leaps about it like a hyper kid. As we were reminded by the Financial Crash of the late aughts, equity markets rising can actually trigger the reverse, as burst bubbles actually create a recession.

To me, this points to a failure of entrepreneurship. Capital markets are plenty powerful to provide trillions in debt or equity financing. This chart suggests that capital is more often used to price (often incorrectly) equities than create them. All that money chases value; little of it creates values. I would argue that this is because entrepreneurship is the limit in today's economy, not capital. There is more money available to invest than there are plausible ventures in which to invest.

It would be interesting to have some sort of equity tax, requiring investors to set aside a percentage of their investments to finance public and private sector startups, forcing more money directly into entrepreneurial ventures. This might raise the probability that as investments go up, a percentage is actually creating the next GM, IBM, or Microsoft rather than just changing the price of the old GM, IBM, or Microsoft. The problem of failing to create wealth or jobs does not point to a shortage of capital. Rather, it points to a shortage of entrepreneurship. Any policy that would do more to stimulate entrepreneurship would make capital markets more effective. After all, if capital markets aren't creating wealth, it hardly makes a difference to the economy whether or not some people are unfairly getting information in advance of the market; to move early on a market that's only keeping pace with GDP growth rather than driving it confers little advantage.

If markets were forced to funnel more capital into startups, this could easily create a bubble there. If entrepreneurship really is the limit, it suggests that much of the capital invested in creating a new generation of entrepreneurs would - short turn - be wasted. But a wave of investment financing that had to go into startups would do at least two things. One, it would entice existing corporations to structure to make themselves more entrepreneurial, spinning off ventures that could become stand alone entities. Two, it would create a generation of entrepreneurs who might have otherwise stayed in middle management, an initiative akin to the GI Bill that turned thousands - perhaps millions - of returning WWII veterans who would have otherwise worked in shops or on farms into college students who became doctors, lawyers, professors, engineers, and scientists. People who would not have otherwise become white-collar professionals did, and incomes rose.

It is time to take seriously the fact that in the West, capital markets are no longer creating wealth and jobs at the rate they once did. The limit to progress has shifted and until policy changes to reflect that, capital markets are as likely to create bubbles as jobs or a general rise in income. Studies suggest that about 100% of the rise in income coming out of the recession went to the top 1%. The problem is not that the rich are getting richer. The problem is that no one else is.

Bernanke has done a fairly heroic job of stimulating the economy without any assistance from Congress, but his monetary policy seems to inadequately funnel money into the markets for startups where it can actually create jobs. In the last year, banks reserve balance requirements - the amount they are required to hold idle to offset loans and investments - rose by nearly $13 billion, from $51B to $63B. The amount they actually held in reserve, however, was wildly in excess of that: in the last year it has risen by about $500 billion, from $1.5 trillion to $2 trillion.  As it now stands, money pushed into the system can - and does - sit idle. A startup fund could change that.

Capital markets could create widespread wealth and jobs far more effectively. Going after cheaters won't change that. Establishing up a startup tax could.

"Hello! I'm running for mayor because my wife likes me."

We can only hope that when voters replace San Diego mayor Bob Filner they don't do what they did after Clinton and elect someone whose only apparent qualification is that he's faithful to his wife.

Will the Internet (specifically AirBnB) Drive Up Property Prices?

Airbnb.com let's people sublet a room for one night a month or 30 nights a month. This could change the calculus people make about how much they can afford to pay for mortgage, a factor that could drive up home prices.

Airbnb is an online bed and breakfast. What makes it unique is that it lets people just "rent" a room for the night to folks who don't want to pay normal hotel rates. My daughter recently stayed in Palm Springs for only $35 a night, in a guest room of a house. The family there keeps their price lower than average in order to rent out the room every night. As a result, they pay their mortgage from airbnb revenue. Another couple she knows rents a room in San Francisco. They used to have a boarder who paid $800 a month; they now get closer to $3,000 a month for that same room, renting it out in increments of less than a week.

Airbnb has exploded. About a year ago I saw a presentation claiming that more people had spent the night in Airbnb beds than hotel beds the previous week in Manhattan.

This could drive home prices up. Typically lenders calculate your ability to buy a house based on your income, usually calculating a mortgage loan payment at between 25% to 40% of your gross income. If that monthly income should suddenly include another $3,000 in Airbnb income, that drives the calculation of sustainable mortgage payments upwards.

It is easy to say that Airbnb and its competitors could stay marginal and thus have little or no impact on property prices. That's possible but unlikely for this simple reason: markets reach equilibrium at the margin. Any given day, most people choose not to buy or sell any particular stock or home. It is only a small percentage of homes, say, that sell any given year. And the folks who buy those few homes outbid anyone else. So, it's perfectly conceivable that the new equilibrium price of homes will be driven up by buyers who have already factored in revenue they might get from Airbnb. Or maybe they already are.

The Politics of Undocumented Sex

Curiously, Anthony Weiner is about to lose an election because of virtual rather than actual sex.

I remember reading the Starr Report on Bill Clinton's affair with Monica Lewinsky. In one segment, the report graphically described Clinton approaching climax in the Oval Office. I remember thinking that if you could graphically describe a president's bowel movement you would probably cause a spike in disapproval of any former White House occupant. Some acts, while inherently human, certainly don't seem presidential. Starr realized that it wasn't enough to accuse Clinton; he had to graphically describe what he did. Weiner did Starr's work for him, "documenting" what didn't even happen.

What's curious about Weiner's sexual problems is that he apparently didn't have sex with any woman. His was an act more akin to interactive erotica than actual sex. Still, it leaves behind a trail of evidence far more graphic than actual sex and for that reason I think that these acts of virtual sex will do more to de-rail politic careers than actual sex that is left rather abstractly described. "They had an affair" sounds less offensive than "He, turgid and eager, raised above ..." even if the first is real and the second is virtual.

In most of corporate America, work isn't real unless it is documented. In a social world increasingly defined by Facebook and Twitter, a good time undocumented by pictures is suspect. Finally, a sexual indiscretion that is documented - even if it didn't happen in the physical world - is more real than one that isn't documented - even if it did happen in the physical world.

Oh, and one last thing. All the pundits are saying that Weiner should drop out. Weird. He's running in an election. Last I heard, the voters decide if this sort of thing disqualifies you. If it is as bad as the pundits think (and it probably is), that will be reflected in the polls. But again, elections let voters weigh the difference between the veteran who might be too cozy with lobbyists or the rookie who seems clean but is probably clueless, the actor who can deliver great speeches but seems sketchy on policy implications and the policy wonk who makes  voters' eyes glaze over. As much as pundits would like it to be different, voters still decide.

The Moral Consequences of Money, Power & Poverty - Or Why the Pope's Got It Wrong

APARECIDA, Brazil (AP) — Pope Francis made an emotional plea Wednesday for Roman Catholics
to shun materialism in the first public Mass of his initial international trip as pontiff ... [His] encounters
 had a common theme that the humble pope has stressed during his young papacy: a denunciation
of the "ephemeral idols" of money and power and a need for the Catholic Church to focus on
the poor and outcasts of society.

As lovely as these sentiments may sound, they are the reason that when the West was most attentive to the pope it was most backwards and conditions were most evil. Small children rarely die from malice; more often they die from living in undeveloped communities where there is a lackf of money and power to change reality - what the pope calls ephemeral idols. Whether it is telling women in developed nations to not use contraceptives or telling poor countries to ignore economic progress, what the pope advocates makes the world worse, not better.

Earlier this month dozens of school children died from eating food that contained pesticide. The police have issued an arrest warrant for the headmistress. She's married to the man who supplied the bad food. And this may indeed be a particularly vile example of corruption, the pursuit of profits at the risk of innocent lives. I think that the real culprit is thwarted progress.

In poor communities -whether we're talking about 17th century France or 21st century Democratic Republic of the Congo - life is cheap simply because there is no money. You can't spend $1,000 for safeguards for a single life when that life represents an income of less than $1,000 a year. The money simply is not there.

To me, this suggests that progress is a moral issue. Policies that thwart progress are not just bad policies in the sense that they get the wrong results; they are bad in the same sense that you'd scold your dog for being bad after chewing your expensive shoes. Progress has a moral component for the simple reason that stalled progress makes tragedies like this one that killed so many Indian school children are more probable in less developed communities.

Someone like Mother Teresa shows a particular nobility by ministering to the poor. That's wonderful. It's much better, though, to take steps that aid in progress, making the people themselves live more like nobility.

It's easier to vilify a headmistress than poverty but no gaggle of headmistresses has ever killed more people, robbed more years, than poverty. And there is no reason to benignly accept poverty any more than we would benignly accept a mass murderer. Even if it means pursuing "ephemeral idols" like power and money.

Why Growth Makes Cities Thrive and Corporations Stagnate (and what that suggests about turning corporations into tools)

As cities become larger, they create more wealth and innovation. As corporations become larger, they are less creative, less able to create wealth. That difference could suggest a very different model of the corporation, helping to highlight a potential transformation in business that would make employees more entrepreneurial.

 First, a theory about why cities thrive and companies stagnate as they become larger.

Connections in a network grow exponentially. Put in terms of a city or corporation, the number of potential relationships between people rapidly goes up as the number of people increase.

The 22^nd person to join a group, for instance, just adds one more person to the group. However, he also adds another 21 possible relationships. This 22^nd person could form a friendship, start a conversation, start a business, or even start a family with one of the others in the group.

In a city, the relationship of the 22^nd person to the other 21 is not regulated, not defined, not  prescribed. And this is a reason – perhaps THE reason – why cities become more dynamic as they get larger.

In a typical corporation, the relationship of the 22^nd person to the other 21 is regulated, is usually defined in a process. While a new employee might start a conversation or even a family with one of the other 21, they will assuredly not start a business within the corporation. That level of innovation is not expected of employees. And while a new citizen of a city could start a business or make an investment that could make her richer than the mayor, no new employee is likely to ever make more than the CEO. And this matter of prescribed roles rather than dynamic relationships is a reason – perhaps THE reason – why corporations become more stagnant as they get larger.

The corporation defines our world in the same way that the church defined the medieval world. And while the corporation is more advanced than the church in so many ways, it still lags it in another.

While the church was once able to dictate actions, beliefs, and require attendance, it is now just a tool that the individual may or may not choose to use. People in the West are free to meet in homes with a couple of people or meet in cathedrals with hundreds. They are free to believe what they want – whether it is exactly prescribed by their minister or in defiance of it. In the modern world, people use the church as a tool that enables them to experience fellowship, peace, joy, insight, a renewal of purpose … or just make their mother happy. Whether you go to church every Sunday or only twice a year is up to you.  The church is a tool.

Contrast that with the corporation. The corporation can dictate how much time you spend each week. It requires an adherence to a central vision, prescribes processes around that vision, and gives you a role within that larger context and purpose. The corporation is not a tool for individuals to use. For most everyone but the CEO, the individual is, instead, a tool for the corporation. In this way, the corporation lags the church in evolution.

Of course it’s not true that all corporations are like this.

Amway and Shaklee are tools that people can use or not. The person who “recruits” you has no power over you to define your hours or the process you use. And if you go on to do great things, that person can benefit, giving someone the incentive to hire someone better than one’s self (not a normal incentive inside of corporations). Amway grew through the recession, its sales now in excess of $11 billion.

Ricardo Semler did something fascinating with his company, Semco. In his first 20 years as CEO, revenues at Semco rose from $4 million a year to $212 million. One of the more notable things that Semler did was to sponsor new business initiatives that employees undertook and the company sponsored. Even more striking, at one point Semler had people working side by side under very different arrangements: some were renting the facility and equipment, paying a flat fee, some were working as hourly employees, some were profit-sharing, and some were involved in joint ventures with Semco. Semco was a tool that employees could use as they saw fit. And because any arrangement that employees proposed or accepted were also acceptable to Semco, the arrangements that lasted were mutually beneficial.

One way to think about what it means to make a corporation more entrepreneurial is to ask what happens when the 22^nd person joins the other 21. Is that person free to create something new or is she expected to fill a prescribed role? Is there room for innovation in the relationship? Because if the new relationship just has to be managed, it means that as you become larger the cost of managing the exponentially growing number of relationships within your corporation will just rise. But if you are more like a city, a place where relationships have potential you can’t prescribe ahead of time, you’ll actually see an increase in innovation and wealth as you become larger. To do that, however, probably means accepting that you are just a tool for people. That is still a shift that most companies haven’t made.

Bernanke and America's Lost Potential

Ben Bernanke spoke to Congress today. It's fun to hear Congresspeople ask him questions (or just riff on themes he listens to patiently, only on occasion feeling compelled to correct their odd folk theories about the economy). I wasn't able to listen for a terribly long time but there were some interesting things I did catch.

Unemployment is 7.6% and it's Bernanke's perception that maybe 5.6% is frictional or structural unemployment and about 2% is cyclical, something that could be cured with fiscal or monetary stimulus.

Because Congress refuses to help him, the economy is growing about half as much as it should be. He provides monetary stimulus while Congress puts on the fiscal brakes. GDP growth is about 2% but should be about 3.5%. The sequester - the automatic mix of spending cuts and tax hikes that are the product of Congress's inability to reach an agreement - makes up that difference. What does this 1.5% mean?

• About 750,000 full-time equivalent jobs. (Roughly 600,000 of those were lost directly to layoffs in the government sector. Bernanke rightfully pointed out that past recoveries did not have to contend with job losses in the public sector as the economy recovered.)
• Unemployment would be down about 7 or 8 tenths from where it is now. (To about 6.8% to 6.9%.)
• 1.5% of GDP equates to about $225 billion of lost economic activity.

Bernanke made the point that while Congress is cutting near term spending and thus slowing the recovery, it is still failing to address the structural problems (baby boomers beginning to collect social security checks en masse, for instance) that will drive big deficits in the future. So, Congress is getting the worse of both worlds: it's extending the recession but still not addressing long-term debt. It's no wonder that Congress has the lowest approval rating of any institution measured by Gallup.

He also corrected the impression that he'd ease monetary policy BEFORE the economy recovered. About a month ago, the market had a big sell-off when he said that if the economy continued to recover, he would ease up on stimulating it. First, there is a piece of this correction that is rational: if interest rates go up, the value of future earnings goes down and it makes sense that the market would fall in anticipation of such a move. But to think that this would make the market fall beyond this one-time correction is to think that he was going to take measures that would contract the economy early. He's not.  

A number of congresspeople - Republicans and Democrats - said that they were more interested in Main Street than Wall Street. At least one wondered aloud about why the market is doing so well when the economy is doing so poorly. Those points are related and deserve to be addressed because they suggest a confusion about cause and effect.

One, financial markets move more quickly than labor markets. You can move a billion in capital from money market accounts into stocks in nano-seconds. By contrast, it takes months to hire people. And hiring is not something you reverse as easily or as quickly as you do investments. Main Street lags Wall Street for at least two reasons: it takes more confidence and more time to hire than it does to invest. Main Street lagged Wall Street on the way down in this recession and it is - rather fittingly - lagging it on the way back up.

Two, everybody now depends on Wall Street. We're all capitalists now. You say that you are a government employee who has a pension? Your pension is at least partly invested in Wall Street. If Wall Street falls - as it did years ago - your pension fund will be smaller than you had expected and your government will have to cut spending in places like salaries or projects to cover the gap - as it did years ago. Anyone who has to borrow money to buy a car or house or even lunch with a credit card - or anyone who hopes to someday retire - is dependent on Wall Street. And as Bernanke said today, "We are using financial tools to stimulate the economy because that is what we have at our disposal. It is through these that we are changing things on Main Street." Wall Street and Main Street are really like those roads in your town that are Maple except for that two mile stretch where it has been named Martin Luther King Drive. They are just different segments of the same stretch of economy, connected in spite of the lags between them. 

Finally, a quick little rule of thumb from the Federal Reserve Chairman. Long-term, interest rates = inflation plus economic growth he said. I must have slept through that lecture. I thought that the price of capital was determined by some more complex formula. But that is the power of being Fed Chairman: if he believes this about interest rates, than it is true. And I guess it means that low interest rates are not so much a present as an assessment of our slow growth. Interesting.

Conclusions Begin Our Reasoning Rather than End It (Oliver Wendell Holmes Explains George Zimmerman's Acquittal A Century Before it Happens)

Oliver Wendell Holmes, co-founder of Pragmatism and appointed by Teddy Roosevelt to the Supreme Court, would have probably been unsurprised that a jury acquitted George Zimmerman. Here are a few paragraphs taken whole from The Fourth Economy.

In a perfect world, voters and pundits alike would consider the facts before judging policy and politicians. In that same world, judges and juries would consider the facts before reaching a verdict.

As befits a pragmatist, it was the real world rather than the perfect one that Oliver Wendell Holmes examined. He argued that judges did not reason their way to conclusions by careful consideration of the facts. Instead, judges and juries had conclusions for which they then developed and offered a rationale. It is terribly difficult to objectively sift through facts and evidence and then piece that together into a conclusion. Easier to reach a conclusion and then look for evidence to support it. Holmes aligned with what psychology then and cognitive science now seems to suggest: the unconscious or subconscious mind does much to dictate the direction of consciousness. We are not so much rational as rationalizing. While argument for a belief might be clear, reasons for such a belief are less clear.

Holmes was disdainful of the idea of the law as something that followed from constitutional proofs in the same unerring manner as equations followed from mathematical proofs and his relative, pragmatic approach did more to define law through the third economy than did Enlightenment thinking. Conservatives may prefer to avoid the legal complexity that comes from acknowledging the nuance and context of specific cases, but universal laws like “Thou shalt not kill” quickly break down in a world where people argue about whether the definition of killing should include self-defense, warfare, abortion, capital punishment, or turning animals into meat.

Job Creation Index at 5 Year High

Everyday, Gallup asks people whether their employer is contracting the size of its workforce or expanding, letting folks go or hiring. They subtract the percentage who report contraction from those who report expansion. For instance, in early June 37% of respondents reported expansion and 15% reported contraction for a net score of 22%.

During the last month, the average has been nearly 23%, which brings us to a 5 year high. (Even January of this year the 3-day moving average dipped as low as 11%.)

This is a ridiculously slow recovery.
If there is any consolation, though, it is that it's better to be moving slowly in the right direction than rapidly in the wrong direction. Or, in contrast to Europe, to be moving at all.

It's Always Disheartening When Old Protest Songs Sound Fresh

I'm not the first to suggest this but consider the aftermath of an incident in which a black man got out of his car in a white neighborhood, confronted a white teenager without a record and then shot and killed him. There was confusion about what happened between the time the black man got out of his car to approach the teenager and shot him, but it was known that whatever happened, the black man voluntarily confronted the kid and then the kid died.

Now imagine a black man ever getting off with all charges dismissed.

America. It's quite a country. In England you have to be a cop to kill a kid; we've subcontracted it to self-appointed neighborhood watch. Tennis shoes instead of mopeds, neighborhood watch instead of the police. America - where even injustice costs less.

Imitation as Creativity: Rock and Roll and the Renaissance

Imitation seems to be an overlooked route to creativity. Young, white British boys trying to imitate old, black American men helped to create rock and roll and give it its distinct sound. 15th century Italian artists trying to imitate Roman artists from the time of Christ helped to create the Renaissance.

We all have our own potential and limitations, live in our own time, have our own technology, our own audience, our own trajectory. Because context can change everything, even an attempt to perfectly imitate something from another place or time will inevitably result in something unintended, something novel. And of course it is not just context that will inevitably be different - so are we.

Imitation also seems like a distinct phase of development. Every song writer first learns to play someone else's music. Every writer first reads a lot (and probably all first try to imitate the voice of a writer they admire).

It would be interesting to emphasize imitation more as route to creativity, to something unique. If we better understood development, context, and how incompressible each life is, we might trust imitation more. Go tell a kid to be just like _______ (fill in the blank with anyone you'd like) and there is only one guarantee: they won't. But still, it could be fascinating to see who they become in that period when they make the attempt.

Could a Healthy Populace Make the Economy Sick? or - Schumpeter's Gales of Creative Destruction Played Out at the Level of Economies

Imagine that next week, a company announces that they've cured illness. They have developed a new nanotechnology that circulates throughout your blood and automatically detects and repairs illness and injury (from broken bones to ruptured arteries). It cost only $3,000 for the injection and from then on the nanotechnology is - itself - self repairing.

Assuming that it had the capacity, in its first year this new company would do two things. One, it would make  $900 billion for its American market alone, equipping each of the 300 million Americans with its technology. Two, it would wipe out a healthcare industry of roughly $2.5 trillion. (Yes. With a T. American healthcare costs represent nearly 18% of America's $15 Trillion GDP.)

So, in year one GDP would drop by $1.5 trillion and by year two it would be down by a full $2.5 trillion. Lots of great jobs (from biomedical researchers and doctors to X-ray techs and nurses) would be gone.

Here's the question: is the economy better? Is quality of life better?

Schumpeter introduced the notion of gales of creative destruction. Progress does not just create something new - it destroys something old. The automobile puts buggy whip makers out of business as carriages become cars. In the above example, its clear that - economically - an industry has been destroyed. It's less clear what - economically - has been created. Which brings me to software.

Software is an amazing (perhaps inevitable) development in the advance of civilization. Like the nanotechnology that continuously cures us, it has inarguably made life better. What it has done for the economy is less clear. I don't think that people talk enough about how disruptive it is to the labor market. Many of the jobs that were created since about 1900 were jobs in what we could call the Information Economy. Whether using typewriters or computers, telegraph or telephone, file cabinets or big servers, the tasks of creating, analyzing, editing, storing, retrieving, and communicating words and numbers, tasks that go under the umbrella of secretary, stock broker, inventory manager, purchasing agents .... the Information Economy created millions of jobs to replace the Industrial Economy jobs (which replaced the Agricultural Economy jobs).

Charles Babbage's Analytic Engine from 1833, predecessor to the computer (a replica)

Schumpeter's gales of creative destruction don't just work at the level of products, companies, or even industries. They work at the level of economies.

Software - or what IBM calls cognitive systems - is becoming more sophisticated. As it does, it replaces more Information workers.

One (non-trivial) reason that we need to become intentional about hastening the transition into an Entrepreneurial Economy is that software is forcing us to be more creative. It's what we need to do in order to retain market value. And among the many things that an Entrepreneurial Economy could create of value is jobs. There is still no "product" that simultaneously creates value, distributes income, and provides meaning to people the way that a job does. Automation - whether through the machinery that frees us from brute labor or the software that frees us from tedious labor - does not do that.

Late 90s Monthly Job Creation Nearly as High as Annual Job Creation Since - Looking at the Latest Jobs Numbers

In June, the American economy created 195,000 jobs.

Based on the average through the first half of the year, 2013's job creation will total 2.4 million.

The good news is that this will make 2013 tie (with 2005) for the best year for job creation since 1999. This seems like further proof of a recovery.

The bad news is that a relatively unimpressive 2.4 million jobs ranks so high for the last decade and a half of economic performance.

In 1999, the American economy created 3.1 million jobs. (And that was the third year in a row that job creation had been over 3 million.)

Since 1999, annual job creation has averaged one-tenth of that, only 311,000 jobs.

Let me put that a little differently. In the late 1990s, we created nearly as many jobs per month as we have created since then per year.

So while 195,000 is not bad, it still isn't enough to make up for a lost decade.

Happy 4th! (In Which Your Blog Author Takes Yet Another Stab at Making the Case for Creating a New Economy)

Happy 4^th (Economy)!

It’s the 4^th of July and a good day to think about revolution.

The good news from last month’s job report is that job growth continues, and compared with every Western nation save Canada, the US seems like a beacon of job creation. The bad news is that job growth continues to be anemic: in contrast to the 2^nd terms of any recent president, Obama’s second term average monthly job creation number of 202,000 is ranked last, behind Clinton, Nixon, Reagan, and GW Bush. Admittedly, no president has had to swim upstream against such steady layoffs from the government sector during a recovery. But then again no president has had such a large labor pool; simply adjusted for the size of the work force, Obama’s job creation numbers should run about double Nixon’s.

It might be worth considering the possibility that something is different about this economy. Taken as a whole, there has been no time since the Great Depression that the West has done so poorly at job creation.

I think that an argument can be made that we need a new set of policies to acknowledge the possibility that we’re in a new Entrepreneurial Economy that is as different from the Information Economy into which we were born as that was from the Industrial Economy before it. If my theory is right, this new economy suggests that we will have to develop a new set of policies to popularize entrepreneurship as much as we popularized knowledge work in the last century.  Before we can make sense of this new economy and begin to formulate effective policies, we need to understand a pattern of progress.

Since the Dark Ages, the West has had at least three distinct market economies. The same pattern of change that created them is now creating a fourth.

Economy	~ Period
1st Agricultural	1300 to 1700
2nd Industrial	1700 to 1900
3rd Information	1900 to 2000
4th Entrepreneurial	2000 to ~

These economies are defined by their limits to progress.

Progress in an Industrial Economy, for example, is limited by capital – industrial and financial. As a community in an Industrial Economy creates and attracts more capital, it becomes more rich and powerful. 

But just as what limits a baby’s development is different from what limits a teenager’s, so it is with economies at different stages of development. At a certain point, an industrial community has enough factories to make more than enough products and now needs knowledge workers who can design better products, more efficient processes, and stimulate demand. Manipulation of things gives way to the manipulation of symbols, and an Industrial Economy limited by capital gives way to an Information Economy limited by knowledge workers. Limits shift and as communities adapt and attempt to overcome the new limit, they begin to create a new economy. Eventually information does as much to distract as inform, and university graduates struggle to find jobs that pay enough for them to pay back student loans and the rent.

Economy	Period	Limit to Progress
1st Agricultural	1300 to 1700	Land
2nd Industrial	1700 to 1900	Capital
3rd Information	1900 to 2000	Knowledge Workers
4th Entrepreneurial	2000 ~	Entrepreneurship

Economies depend on invention for progress. Nobody denies that. Curiously, though, technological inventions like steam engines and computers get more attention in discussions about progress than do social inventions like banks and the modern corporation. Yet social inventions are just as important.

Business entrepreneurship – starting a business – is just one form of social invention.

It might be easy to understand that a nation-state with a standing army to defend (or even extend) borders is important to an economy limited by land.

It might be harder to understand that as communities struggle to overcome the limit of entrepreneurship they’ll have to popularize social invention. This suggests a different idea of self. A self defined by the big institutions is different from a self who defines them. It’s very different to be a good Catholic or good British citizen than to be a Protestant or American revolutionary. To be a good employee is very different than to be a good entrepreneur. The popularization of entrepreneurship – or social invention – will rely on a very different notion of the individual, a new kind of self.

Economy	Period	Limit to Progress	New Social Invention
1st Agricultural	1300 to 1700	Land	Nation-State
2nd Industrial	1700 to 1900	Capital	Bank
3rd Information	1900 to 2000	Knowledge Workers	Modern Corporation
4th Entrepreneurial	2000 ~	Entrepreneurship	Self

The pattern of progress doesn’t just result in new social inventions: it transforms the old ones. The Medieval Church did not meekly yield to the new nation-state. Monarchs in the 2^nd economy didn’t easily yield power to the new capitalists. But in spite of resistance, the institutions created by and run for elites become a tool for the masses. Martin Luther proclaims that “We are all priests,” or Thomas Jefferson writes, “All men are created equal,” and the power of popes to define beliefs or of monarchs to define policy becomes a power of the common person.  This pattern will repeat again in the fourth economy; rather than use the individual as a tool, the corporation, just as the church, state, and bank before it, will become a tool for the average person.

Economy	Period	Limit to Progress	New Social Invention	Social Transformation
1st Agricultural	1300 to 1700	Land	Nation-State	Religion (Protestant Revolution)
2nd Industrial	1700 to 1900	Capital	Bank	Politics (Democratic Revolution)
3rd Information	1900 to 2000	Knowledge Workers	Modern Corporation	Finance
4th Entrepreneurial	2000 ~	Entrepreneurship	Self	Business

We don’t just invent and transform institutions. We invent and transform ways of thinking.

Successful business entrepreneurs create a system that generates more value than it costs. Like systems thinkers, they focus on the interaction of parts as much as the action of the parts, working towards value that emerges out of these interactions. A knowledge worker focuses on a specialty; the entrepreneur looks at the whole. Knowledge work is enhanced by pragmatism and entrepreneurship is enhanced by systems thinking.

Of course our modern world is defined by systems – manmade information and transportation systems that rest atop – and interact with - climate and ecosystems. One way to frame the central challenge of our time is to create sustainable and stable systems – from financial systems to industrial systems. And incidentally, becoming more adept at understanding, creating, modifying, and harmonizing with systems will make us more adept at entrepreneurship, at social invention. As we begin to organize our world around the principles of systems thinking we’re likely to change our world as much as the Enlightenment thinkers of the American colonies changed theirs.

Economy	Period	Limit to Progress	New Social Invention	Social Transformation	New Way of Thinking
1st Agricultural	1300 to 1700	Land	Nation-State	Religion (Protestant Revolution)	Renaissance
2nd Industrial	1700 to 1900	Capital	Bank	Politics (Democratic Revolution)	Enlightenment
3rd Information	1900 to 2000	Knowledge Workers	Modern Corporation	Finance	Pragmatism
4th Entrepreneurial	2000 ~	Entrepreneurship	Self	Business	Systems Thinking

The West is struggling to create jobs. Continuing to assume that what limits job creation and economic progress is a lack of capital when trillions sit idle in banks and corporate accounts, or even knowledge workers when the most educated generation in history struggles to find work suggests that we’re clinging to old models of the world in the face of new realities. Assuming instead that what limits us is entrepreneurship – and beginning to make the changes that focus on overcoming that limit – could be the key not just to getting back to the healthy job growth of past decades but to the most healthy and innovative economy the West has yet created.

Where Are Reagan's Big Government Policies When We Need Them?

Here's a remarkable chart that contrasts reality with myth. Ronald Reagan supposedly unleashed the American economy by championing a smaller government. By contrast, Barack Obama slowed down the economy by making us more dependent on government. This chart suggests that those claims would fall into the category of urban myths. Here, from the Atlantic, is a chart that compares the rise in spending during the recession that played out during the early 1980s and our more recent recession. Under Reagan, government spending rose more than 21%. Under Obama, by contrast, it has actually dropped by more than 6%. 

Not only has the origin of our current recession been different than the one in the 1980s (that one Paul Volcker engineered to bring down inflation) but we've had to continually struggle uphill against a steady erosion in government spending, government employees laid off into a weak job market. Austerity measures have been one significant reason that, as Matthew O'Brien writes, "Even now, there are three unemployed people for every job opening -- worse than it ever was after the tech bubble burst."

Reagan would have never put up with such poor jobs numbers in pursuit of ideology. House Republicans are a little bit like Medieval Christians - using the name of their role model to do things he never would have done.