Equal Investment for Equal Returns - Creating a More Fair Economy

In the early 1800s, about half of all children went to school. Now, more than half of young adults enroll in college.

The higher your standard of living, the bigger the investment it takes to get you there. If your portfolio is worth a million dollars, it will generate more return in the next decade than if it is worth $1,000. What is true of financial capital is also true of intellectual capital. One of the reasons doctors make more than high school dropouts is because more has been invested in them.

It took us a about a century to normalize the notion that the community should invest unprecedented amounts into launching their children’s careers if we wanted them to enjoy unprecedented levels of affluence. Big returns require big investments.

Our notion of acceptable investment in launching a career, though, is really just focused on preparing knowledge workers for success. This is a great investment but it simply isn’t enough for at least two reasons. One, there are other routes to good paying jobs that we don’t generally support in the same way that we support a kid getting an engineering degree to go on to a great career. Two, if we want our returns – our standard of living – to continue to rise like it did last century, we need to increase and expand our notion of a reasonable investment in the start of a career.

The University of California spends nearly $20,000 per year on students. Assuming five years to complete their bachelor’s, that is an investment of $100,000 per graduate. We accept that, and rightfully so.

I think we should expand that. More investment for more return.

Investment could be expanded in a variety of ways but three occur to me.

One, for kids who would rather do the work of manipulating things than manipulating the symbols of things, we could invest that same $100,000 into launching their careers. That money could be spent on trade school but as importantly, part of it could be spent on capital equipment that would make them more productive. The engineer gets a higher salary in part as a return on a public investment in their intellectual capital; the machinist could get a higher salary in part as a return on a public investment in their industrial capital.

Two, kids who don’t have any immediate academic or hands on career plans, who may - at least for now - pursue service jobs could have that $100,000 put into financial capital, something that might build over their lifetime to become a supplement to their retirement. ($100,000 invested at 20 at 4% will be worth $500,000 when that kid is 60.)

Three, this $100,000 could be pooled with a few other people to fund a startup. Convince others to help to create a successful business and you all could simultaneously create jobs and wealth.

Even better, as we realize that a big rise in investment in entrepreneurship this century is as important to a rise in salaries and standard of living now as the big rise in the investment in education was to its rise in the last century, we may simply create a new category of public investment in entrepreneurship akin to the investment we now make in education. The paltry investments in education that we made in 1830 aren’t enough to sustain our quality of life today; the paltry investments we make in entrepreneurship in 2020 aren’t enough to sustain the quality of life our grandchildren will enjoy in 2050.

In any case, I suspect that this notion of fairness in terms of the investments we make in each young adults’ career will become an important issue. It simply isn’t fair to make vastly different investments in different children and then act as if the big differences in their lifetime earnings have nothing to do with how different was the initial investment in them.

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)

Some Policies my Ideal 2020 Candidate Would Pursue

My ideal candidate would take the following positions on these issues.

Economics

• Make it easy for entrepreneurs to succeed.
• incubators in communities the way earlier generations planted libraries and universities as just one of the many support structures to put in place to make more citizens more entrepreneurial. Do all we can to make citizens wildly successful and then tax the ones who achieve success at high rates (say, marginal tax rates double that of middle class) to pay for investing in the next round of new entrepreneurs.
• Make a huge investment in research

• We will spend about $3.5 billion on DARPA - Defense Advanced Research Projects Agency - this year. DARPA has helped to fund amazing technologies that helped birth modern computers, smart phones and satellites. We are still counting the trillions in returns on early investments of millions and billions in DARPA. I would match the DoD's R-and-D spending with similar levels of spending on Department of Education, Department of Energy, etc. to something like the table above. This would not only employ a growing number of doctoral graduates (we could conservatively assume about 140,000 new jobs for staff and leading researchers with the numbers above) but would lead to returns of trillions in the future as we solve problems of energy, commute times, poverty, environment, etc. Entrepreneurs can translate this research into development, creating new wealth and jobs in the process of deploying new processes, services and products that build on this research.
• Make it easy for employees to use corporations as tools for creating wealth
• Laws requiring mechanisms inside of corporations that allow employees to create wealth through innovation and entrepreneurship and dictating that between 0.5% to 2% of that corporation's employees are paid more than the CEO as a result.
• Tax inheritance more than capital gains more than income
• Massive spending on research on alternative energy, upgrading infrastructure to reduce carbon emissions and the introduction of carbon tax. Innovate our way out of a fossil fuel economy.

Social policy

• Make it easy for single moms to succeed
• Make high-quality childcare free
• Sex is one of the most wonderful acts and rape is one of the worst. The main difference is consent. Pregnancy and childbirth is one of the most wonderful acts ... unless it is forced on you by others, in which case it is one of the worst. It should be the choice of individual women about whether and when to have sex or babies, not the choice of the men in their community. 
• Annually - and aggressively - reduce childhood poverty
• Provide universal healthcare
• This would include death panels and other criteria about what level of care we have a right to and what level of care the community should not be billed for.
• Transform K-16 into an education system that creates a common sense of community but a wildly diverse workforce that includes the knowledge workers that are the primary focus of schools today AND trades, entrepreneurs, makers, government and service workers and other emerging career paths

Communications

• Treat investigative reporting like research. That is, it should be funded by the government with oversight of the agenda by citizen boards. (We should more aggressively follow the example of the BBC.)
• People whose data is key to the success of a social platform (e.g., Facebook, Twitter, etc.) should receive a portion of that platform's revenue (idea taken from Andrew Yang).

Bigger is Better

It seems a requirement of modern politics that Democrats criticize big business and Republicans criticize big government.

There is one problem with these shibboleths, these tests of the faithful: they ignore how the interplay between big government and big business has made us prosperous. History suggests that any politician successful at impeding either government or business will effectively slow economic progress.

Some people know the amazing story of Elisha Gray arriving at the patent office just hours after Alexander Graham Bell with his patent application for the phone. Bell went on to fame and fortune and Gray to a life of anonymity. There’s more to it, though. Our founding fathers were intent on creating an accessible, affordable patent system. One might even say it was democratic. Fewer people know that the Italian Antonio Meucci had invented the telephone years – not just hours – before Bell but could not afford to patent it through Italy’s expensive patent system. Had Italy been more visionary about subsidizing the work of its inventors by making it cheaper to file for a patent, it may have hosted the myriad, great inventions that defined the decades around 1900 or had the equivalent of Bell Labs from which communication satellites and transistors emerged as catalyst for huge industries. Our government enabled invention.

In his book The Rise and Fall of American Growth, Robert Gordon shares this story of Bell, Gray and Meucci and gives a host of other examples of government and business interacting to create prosperity.

During the second world war, the federal government led initiatives to increase industrial capacity. The government invested capital equal to half the capital that existed at the start of the war, capital in the form of factories and machine tools (which doubled during the war). Even better was the problem-solving that resulted in better production methods. During the war, Kaiser initially took 8 months to complete a ship; they accelerated that to just a few weeks by the next year. A plane factory of Ford's increased its rate of 75 planes per month in February of 1943 to 432 per month by August of 1944. By D-Day, the Germans could launch only 319 aircraft; the US and its allies launched 12,837. American factories won the war.

After the war, the government turned all this over to private companies. Armed with these investments in capital and knowledge, these companies began making consumer products like cars and TVs. Before the second world war, the economy had lurched in and out of recession. After, it took off. Government regulations helped raise wages and government investment helped raise productivity. Workers both made and bought these new products.

Eisenhower had been a solider during the first world war and was part of a group transporting vehicles across the US. It took them 62 days to go from coast to coast. Head of the Allies’ conquering army, he experienced first-hand the German autobahn and was amazed at the contrast. The interstate highway legislation Eisenhower signed increased American productivity by tens of percent.  Like the railroads the government subsidized a century earlier, the highway system gave customers and producers easier, more affordable access to products and markets. Decades earlier, life expectancy had gone up as a result of similar, local efforts to build out the infrastructure that brought safe water into homes and piped sewage out, another initiative dependent on the cooperation of government and business.

Another outcome of the second world war was increased investment in research and education. In WWII we didn't just pump unprecedented amounts of money into research but FDR asked Vannevar Bush to institutionalize that, which he did with what become the NSF (National Science Foundation) and DARPA (the Defense Advanced Research Projects Agency). From DARPA we got the Internet which has enabled the creation of trillions in new wealth and millions of new jobs. The GI Bill was another product of the second world war and it led to a huge increase in college enrollment, creating a new generation of better educated, more productive workers.

Possibly the most important interplay between big government and big corporations comes in R&D. Research is hugely uncertain and most of it results in nothing. If it does result in something cool it may happen a decade or three later than expected. Also, not every cool thing becomes profitable. Because of this, corporations rarely finance basic research and it needs to be heavily funded by institutions like DARPA or the University of California. This research is crucial to corporations' later developments. "The parts of the smart phone that make it smart—GPS, touch screens, the Internet—were advanced by the Defense Department," as Mariana Mazzucato points out in her book The Entrepreneurial State. Corporations try to find a way to translate research that has taken one to two decades into development that takes two to four years. It's a great system and at its best we tax successful corporations to fund the next round of research which could be transformed into new products by corporations. Symantec and Qualcomm were among the new companies funded by The Small Business Innovation Research program - a program started by Ronald Reagan. Google's basic algorithm was funded with a NSF grant.

Of late, our policies seem less reflective of this interdependence. As corporations pay less in taxes the government has less money for initiatives that could help the next generation of companies and workers to prosper. Our productivity, wages and GDP were growing faster during a time when corporate tax rates were maxed out at about 50% and personal income tax rates maxed out at about 70%. The trick is to tax what is successful now to fund what will become successful next.

Government has an important job as a referee, a role Elizabeth Warren articulates well. Government has an important job of moderating wealth and income inequality. (Trump looked at the world with the biggest gap between rich and poor in history and concluded that the rich were not rich enough and the poor were not poor enough, giving the first a tax break and cutting assistance to the second. Few people would reach such a conclusion.) Those jobs of referee and moderator are important but over the long term, they are not as important as the job of collaborating with business and labor to create the next generation of technologies, products, industries and companies. It is in that direction that lies the kind of progress we had from 1900 to 2000 that increased real incomes by 8X and let us buy myriad objects like airplane tickets, personal computers and antibiotics that did not even exist at the start of the century.

The world is full of communities who would love our problem of big government and big business. Big projects are not done by small organizations. It should be a cliché to say what is too rarely said: progress is not a product of markets or democracies but rather their interaction. Strong companies and strong government go together in vibrant economies. Even within the US, the states that keep taxes and investment lower and have few big companies have lower household income and create fewer jobs. Big businesses and government agencies are not a sign that we’re off the rails. They are, instead, the way we got both the rails and the trains.

Growing Income Inequality and the Real Policy Solution of Popularizing Entrepreneurship

The effects of automation are accelerating as algorithms grow more sophisticated and a global market means more people who might come up with that one killer app or manufacturing process or delivery trick that quickly obsoletes 2 or 3 people or even 2 or 3 industries steadily grows by millions every month.

How does one counter that? Income vulnerability seems inevitable in a world of growing disruption. The good news is that the team who creates the new solution to obsolete the old one(s) will get rich; the bad news is that there is a whole swath of people will lose income and wealth as they become obsolete. If we want to ride this wild horse of automation to higher productivity, we need to acknowledge that our safety nets need to be good. How this happens will ultimately involve a mix of unemployment insurance, universal healthcare, affordable or free education and retraining for any age, and perhaps a variant of guaranteed income. But those are mere bandages on the body politic, merely a way to mitigate the pain of disruption. The solution that is essential to couple with more rapid automation is more rapid entrepreneurship and innovation.

When we no longer need 90% of our people to grow our food on the farm, we can use them for other things. Some can get into food preparation and serving, letting us enjoy a wider variety of foods that people in 1790 America (when 90% of the population was in agriculture) would have never imagined: foods like sushi, adoboda tacos, spaghetti, and liquid nitrogen ice cream. Others can design and make cars, legos, barbie dolls, and new drugs. If there is nothing else to do but grow food, reducing the percentage of our workforce needed to grow food from 90% to 1% (which is roughly where it is today) is a catastrophe. 1% of the population would be incredibly rich and the other 99% would literally need credit just to buy food. But we innovate and those 99% come back with cool stuff that entices the farmer to give up his food. (Or, more precisely, he sells his crop for money he can use for the cool stuff.)

The problem with wealth and income inequality today is not that people are getting rich automating jobs. The problem is that we have not learned how to balance that rate of automation with an equal or even better rate of innovation and entrepreneurship.  What this means will involve everything from even more money poured into R and D to more funding even within Fortune 500 companies for entrepreneurial efforts that simultaneously allow employees and the company to create new wealth.

As mentioned, programs to mitigate income and wealth inequality seem both necessary and inevitable. But to stop there is not enough. The real question of economic progress should be: how do we create the new so rapidly that it feels like the old industries are not automating jobs fast enough to free up workers to enter the new industries and companies? 

Economics makes a big deal of supply and demand and equilibrium between them. It's a beautiful and powerful concept. But just as important to prosperity is understanding the balance between automation and innovation, destroying the old while creating the new. What is the solution for automation obsoleting jobs? Popularizing entrepreneurship: making it easier for more people to be more entrepreneurial and even changing the definition of work as much as the information economy has or the industrial economy before that.

Gales of Creative Destruction and the Stress of Progress

Since Oct-2010, the US economy has destroyed 475.6 million jobs (layoffs, retirements, firings, quits) and created 494.2 million jobs for net of 18.5 million jobs.

As of June, the labor force was 162.1 million.

So during the 8-year recovery the American economy has created 3X more jobs than there are people in the workforce and destroyed 3X more jobs than there are people in the workforce. 

244,000 jobs were created in May. More precisely, 5.8 million jobs were created and 5.5 million jobs were destroyed for a net of 244,000. It is not true that everyone kept his or her job except for 244,000 people who were newly hired. Every month people are laid off, fired, quit or retire; in May, 5.5 million people had such experiences. That's a lot of elation (those who retire), relief (those who quit), frustration and panic (those laid off and fired). We talk a lot about taxes but an economy this dynamic is emotionally taxing.

One of the challenges of the modern economy seems to be that given progress comes in the form of gales of creative destruction we have a high level of stress. Personally I think that just reinforces the necessity of things like universal healthcare, investments in job retraining and generous unemployment, etc. But regardless of the solution you'd advocate, you have to realize that anyone whose idea of the good life is a stable, predictable career is going to feel a continual level of stress and unease by progress.

Two things can be simultaneously true: we are creating better jobs and a lot of people end up with worse jobs. There are probably as many people laid off from manufacturing jobs paying $45,000 a year now working at Wal-Mart for $25,000 as there are people with new programming jobs making $75,000. (And of course that very dynamic is part of why median wages move upwards so slowly and why income inequality is increasing.)

This economy is wonderfully creative but it is increasingly disruptive. Entrepreneurship and social invention creates the new and obsoletes the old just as innovation does with products. We used to have marriage between one man and one woman and now we have same-sex marriage and polyamory. We used to have jobs with pensions and 40 hour workweeks and now we have 401(k)s and a gig-economy that offers us Uber-like jobs with both more freedom and uncertainty. We used to have an American economy and now we have NAFTA. If you find comfort in continuity you will actually find progress threatening because so often it forces us to act or be different. 

Innovation changes products while entrepreneurship and social invention changes people. That's unsettling.

It seems to me like the divide that doesn't get talked to enough is the divide between those who embrace progress and all its novelty and those who embrace tradition and all its familiarity. To the latter group, progress can actually feel like a threat.

How Apps, Entrepreneurship and a Steady Boom Have Brought Unemployment Claims to an All-Time Low

The Facts

The 4-week moving average of initial unemployment claims is at an all-time low.

In raw numbers, it was actually lower in 1969 but at that point the labor force was exactly half (well, okay, 50.7%) what it is now. So as a percentage, it has never been lower in recorded history.

This statistic is a measure of how many people walk into an unemployment office to say, "I've lost my job and don't have another one to go to."

In April of 2009, 658,000 people filed for unemployment each week. That was the worst of the Great Recession. October of 1982 was even worse, with 671,750 walking into unemployment offices around the country during a single week.

But the American economy is always shedding and creating jobs, at a rate of about 2 million per month. It's remarkable that such a small number of folks laid off or quitting one job don't end up in an unemployment office before they get their next job.

The week of 24 February, only 220,500 people filed initial unemployment claims. The last time it was lower was 27 December 1969 - nearly 50 years ago - when it hit 219,750. As a percentage of the labor force, though, that 1969 number equated to about 1.1% of the labor force showing up in an unemployment office during the month whereas this latest number suggests only 0.5% of the labor force filed for unemployment in the month. It's a stunning number.

The Theories

The most obvious explanation is an uninterrupted rise in jobs created that has now gone on for 88 months (and counting). Every month that results in more jobs created than destroyed means that many fewer people unemployed or unable to find a job. I think there is more to even than that, though.

Simply put, the economy has never been more efficient at creating new jobs and then matching unemployed people to those new jobs. I don't know why but I have a theory that it is because of apps and entrepreneurship.

Uber, Lyft, Mechanical Turk, PostMates, and other apps quickly match people to tasks they can do. Even the websites like Monster, and Indeed have accelerated the time it takes for employers to find qualified employees to hire. Some apps quickly find someone to perform a task; other sites accelerate the time it takes to find a new employee.

Once upon a time, in small communities, you knew that Todd could help carry heavy loads and Melissa could repair fragile things. You could easily find help and they could find work. As the world got bigger and more advanced, it became harder to know who could program in Java vs. C, or who could design period-furniture and who could repair modern furniture. It took a long time for the unemployed to find jobs and for employers to find help. It would take months to find the right person for a job and for tasks that might take only minutes or days, you might never find a match. There was a lot of friction in job markets even a decade ago.

Now software lets a person who wants to drive you to the airport find the person who wants a ride to the airport within about 15 minutes. It's easier than ever to find a match and this makes for nearly friction-less labor markets. This means that more people are downloading an app to make money (I know, to qualify as an Uber driver is not as easy as downloading an app) rather than waiting for a person to hire them. One result is a lower number of folks who file for unemployment.

Another element is increased levels of entrepreneurship. It is easier than ever to start or expand a business. Once upon a time you had to get loans to buy a store or build a factory to start a business; now you can fund a software startup with six laptops. More than half of American employees now work at least part of the week at home. This suggests that the overhead for office space per person is dropping, one less barrier to starting or expanding a business. (I know. It's not THAT cheap or simple. Still, even renting a cubicle is cheaper than setting up a factory.) A great number of employees are hired as contractors; some because that is now how corporations are engaging employees and some because that is an increasingly common way to put someone through the equivalent of a probationary period. There is less commitment and expense in "hiring" an employee and thus less hesitancy to do so. Employees still face a great deal of uncertainty about particular contracts or income levels but less likely to go long stretches without some kind of income.

In this way it's a bit like the move from a bank account that offers 3% annual rate vs. a stock that could rise or fall 30% in a year. Income will fluctuate more but employment will not. People are less likely to turn to unemployment insurance than to another job or task that could mean a temporary rise or fall in pay. If not already, I suspect that fewer people will look back at the last ten years of employment as a steady rise of 4% in annual pay and will instead see rise and falls more akin to the performance of a 401(k).

What It Means

One thing that no one would suggest, though, is that the Uber drivers are fine with just their cars and Uber app. Among other things, they need roads to drive on. Why mention this obvious thing? As the economy and information systems become more adept at matching supply and demand, it's important to support the infrastructure that makes it work. In this case, it's not just roads. People who are more likely to be getting their income from contract jobs and apps need things like universal healthcare to replace the standard benefits once provided by corporate employers and job training programs to make them steadily more productive. The good news is that these more efficient markets will mean less reliance on government unemployment insurance; the bad news is that more tenuous income streams suggests a greater need for things like government health insurance and education.

Another implication of more efficient labor markets is the very real possibility that the natural rate of unemployment has dropped. The ideal rate of unemployment would not be zero for the simple fact that finding a great fit between employee and job is not an instantaneous process. Given it takes a little while to find a great match, it makes sense that somewhere between 2 to 5% of the labor force would be unemployed at any given time. If it is true that it's easier for people to find work, it makes sense that this rate has gone down. What that means is that if string of uninterrupted job creation continues another 6 to 24 months, the unemployment rate could approach 3%. [I've already forecast about a 33% chance of a recession but if that doesn't hit this year, unemployment could steadily trend downwards.]

In all, more efficient labor markets is yet another great sign of progress. It doesn't mean that business cycles are over but it does mean that in any given month fewer people face the prospect of unemployment. That's pretty cool.

Two Simple Policy Goals

Maybe I'm simple minded but I don't think that policy has to be terribly complex.  

A great test of your economic policy is how easily someone can start a new business that has a legitimate chance of creating wealth and jobs.

A great test of your social policy is how easily a single mom can raise a child who has a legitimate chance to be happy and productive.

Doing well on those tests is not trivial. If you are successful at popularizing entrepreneurship you have a great education system, easy access to capital markets that are well regulated and reward people who invest well and punish people who abuse investors or borrowers, and stable, predictable laws around property and wealth. Your culture embraces disruption and protects losers enough that your community has little resistance to new companies, technologies and industries and welcomes change. You have things like universal healthcare so that would-be entrepreneurs face less risk when they take on the risk of a new business. Your culture sees social invention and product invention the same way: you keep improving what you have and looking for new ways to reach old goals more effectively, whether that goal is to store fresh food for longer like a fridge now does (and like some other technology may do in the future) or create meaning and community like a church now does (and like some new social invention may do in the future). 

If you are successful at making it easy for every parent to raise a child, this again has many policy implications. People have easy access to birth control and abortion so that they can easily control when they become a parent. Maternity and paternity leave is generous without penalizing companies that employ young people who are more likely to be starting careers and families. Childcare is affordable. Jobs can be customized. (The Netherlands has brought birthrates back up by offering more flexible job options: many parents (mostly mothers) work part-time.) You have a vigorous defense of the environment, minimizing the probability that children will be exposed to threats that might not show up for decades.

Rather than penalize entrepreneurs who would create jobs and wealth by making them jump through hoops,or ignoring the fact that their educational needs are just as real as those who would pursue a vocation or white-collar job, the community should make it easier for them in a host of ways, from mentoring programs to bureaucratic aides to help them through necessary legal, financial and regulatory hoops. Rather than penalize young mothers who would raise up the next generation of workers and citizens, the community should make it easier for them in a host of ways, from mentoring programs to childcare along with logistical and emotional support to help them through the various challenges of parenting.

If your mothers are raising the children they aspire to raise, you'll have an emotionally whole and productive citizenry. If your entrepreneurs are creating the businesses they aspire to, you'll have steadily rising wealth and income and strong job markets that enable the community to finance personal things like fine meals and communal things like beautiful parks and good roads. If you focus on making life easier for single mothers and entrepreneurs you will automatically make it easier for two-parent families and no children families. If you focus on making it easier for entrepreneurs, you will automatically make it easier for employees and investors.


The policy implications of these two goals - the various programs and initiatives that would help further us towards these goals - could be continually enhanced by - among other things - running focus groups with real and aspiring entrepreneurs and real or aspiring single moms. Asking them what would make them more successful, what obstacles and frustrations the have, what their needs are and sorts of resources they need would help to inform policies that could make a difference. Tracking the efficacy of these policy initiatives to determine what makes the most difference for the least time and money could be used as further feedback about which policies to continue and which to let die. With these two goals, a community could continuously experiment to see how best to achieve them. It's hard to imagine how such policy experiments wouldn't make the community better for everyone.

Why Tax Policy Is Largely Incidental to Economic Development

Two quick things about taxes.

Studies suggest that if you try to increase government revenue by raising tax rates, the rich leave. The result? Your higher tax rates result in about the same tax revenue. So, if your route to making your government more vibrant and healthy is raising tax rates, you'll fail.

Studies also suggest that tax breaks for job formation are really expensive. It looks like you have to pay about $100,000 per job by taking the tax incentive route. So, if your route to making your business sector more vibrant and healthy is lowering tax rates, you'll fail. The rest of the community is unlikely to get $100,000 back in taxes and additional business for each new job created in the area.

Tax policy - whether to raise tax rates for your government or cut tax rates for your businesses - is an admission that you don't have any good ideas for development. 

Economic development is a slow game and has a few elements. 

1. Create an alliance between city leaders, education, and industry to facilitate the creation of wealth and jobs through the creation of new businesses and technologies. Fred Terman at Stanford worked to bring in venture capitalists onto campus to collaborate with his professors and students; his early students included Hewlett and Packard.

2. Welcome and attract the best and brightest from any and everywhere. Do this by hosting conferences on important topics, by developing university programs for emerging technologies, nurturing startups with mentors and financing, and promoting a culture of entrepreneurship starting as early as high school. Alphabet (nee Google) has 70-some thousand employees and - like half of the tech companies in Silicon Valley - was co-founded by an immigrant.

3. Make your city a great place to live. This gets overlooked but ultimately you want to attract employees and entrepreneurs and world-class researchers who can afford to live anywhere and will choose to spend a good portion of their wealth and income to live in an area that they love and is stimulating. This means public works projects like art and museums and it means taking advantage of and incorporating into your city, natural beauty and / or good weather. California has relatively great weather and Seattle - a place that has created an abundance of wealth in the last 30 to 40 years - is surrounded by natural beauty. Edinburgh has developed a vibrant startup scene in part because it is such a great city that Scotland's best and brightest are happy to live there, making it easier for companies to attract talent. Creating a great community also means including a lot of voices in the definition and pursuit of quality of life. 

Bookstore door in Seattle, close to Pike Market

4. Welcome diversity. West Virginia's population has dropped in the last 50 years. California's population has gone up 4X. West Virginia is 92.3% white. California is 37.7%. From the early Silk Road that facilitated trade between folks who live in what is now Europe, Iran, India, and China to Silicon Valley, regions that have brought together people from a variety of cultures and perspectives are the regions that are more creative and prosperous. And diversity doesn't just mean skin color or cultural background. Places like California's Bay Area and Seattle have not just created billions in wealth; anyone who has spent time there will tell you that these areas are also hotbeds of radical ideas. It almost seems like it is the same magnet for diversity that will attract people from other countries, communists, and venture capitalists and if you're unwilling for one or two (or, given it is is diversity, twenty or thirty) of these categories of people and thinkers, you're unlikely to get any of them.

Each of the above points deserve their own blog post - their own set of books, really - but taxes are tools towards these goals, not something that will magically create a better community. You shouldn't invest in Business A instead of Business B simply because Business A said they need less capital. Nor should you be impressed that Business B needs more capital so is obviously building a more impressive business. Capital is necessary to a business just as tax revenue is necessary for a community but the fact of it being higher or lower is largely incidental to whether that business or community will prosper. 

The Real Failing of Modern Politics

Yesterday's UK election brought home what is for me the major failing of modern politics. There was little question that the biggest winner would be either Jeremy Corbyn's Labour Party or Theresa May's Conservative Party. Simply put, Corbyn wants more government spending and May wants more government austerity. These positions are distasteful to most voters because on the one hand it means more taxes and on the other it means fewer government services.

What is the biggest failing of modern politics within the West? Politicians have largely given up on promising prosperity. They've run out of tricks. W. Bush pushed capital gains tax reduction to stimulate more investment and investors pumped money into weird things like mortgage backed securities, thus setting us up for the Great Recession. Democrats push for investing more money into education but already we have more graduates than new jobs. (In 2013, the American educational system created 3.7 million college graduates (from AA and BA degrees to PhD and professional degrees) but only 2.4 million net new jobs.) What worked brilliantly in the 18th and 19th centuries (encouraging the creation and deployment of capital) and what worked fabulously in the 20th century (creating an extensive public school system to make K-12, even K-BA education the new normal) simply is not enough in this new century.

We will need capital in today's economy. More than ever. We will need well educated workers in this new economy. Again, more than ever. The difference? Capital and knowledge workers no longer lead the parade of progress. Entrepreneurship does. Any policy makers intent on creating prosperity need to focus on creating an entrepreneurial system.

One of the most spectacular inventions of the two centuries from 1700 to 1900 was the development of a financial system. Through a combination of private and public sector efforts, the West created an incredible ability to finance projects as vast as interstate highways or as small as the purchase of a coffee with a credit card. And policy makers can influence that system with changes in interest rates and other policies to stimulate or cool an economy, helping to promote the creation of jobs or to lower the rate of inflation. Our financial system is vast, complex, and rightfully the focus of policy makers throughout the economy.

One of the most incredible inventions of last century was the development of an education system that changed the experience of children from that of entering the work force at the age of 8 or 10 to that of entering university at 18 or 20. Again, this is a vast system with many moving parts but it is possible - through policy initiatives and cultural norms - to change and influence education and thus the economy through this system.

By contrast, we still have not developed a comparable entrepreneurial system. That is the work of our generation. We can lower interest rates and increase borrowing, change educational standards and increase the number of students who get a high school diploma or a graduate degree in business or education. Meanwhile, our relationship to entrepreneurs is about what it was to education in the 1800s. In 1800 most communities supported freedom of speech and thought but they largely left education to autodidacts and elites, self-taught gentlemen who could afford libraries, trips abroad or time at a university. The masses were not expected to get much of an education. In 2000, most communities support the ideas of entrepreneurship and grant a measure of freedom to private citizens to try their hand at starting a business. Entrepreneurship is left to those who are strong enough to push against the system or financially supported enough to fund a venture that might take years to become profitable. (The children of the affluent are far more likely to become entrepreneurs.) We don't expect the masses to consider - or even know how to approach - entrepreneurship. Unlike education, we have yet to popularize entrepreneurship.

Rather than force communities to choose between cutting services or cutting taxes, really effective politicians will engage in a conversation about how to create prosperity. During the 20th century, not only did families end up with vastly more income but they were able to fund a vastly larger government. There wasn't a trade off. The private AND public sector got enormously better. Prosperity gives you that option.

My own sense is that until communities throughout the West get as serious about the work of popularizing entrepreneurship, they'll continue to pursue a politics of divisiveness that forces communities to choose between the lesser of two lessers rather than the greater of two mores.

The Fourth Economy & the Popularization of Entrepreneurship (or how work evolves from farming to entrepreneurship)

Graphic created by Jacob Morch jacobmorch.com

The definition of work changes as economies evolve. The grandchildren of farmers became factory workers and the grandchildren of factory workers became knowledge workers.  There’s good reason to believe that the definition of employee will change again, this time into something like entrepreneurship.

Thomas Jefferson imagined the United States as a country of educated, gentleman farmers. Even when he became president in 1801, though, the percentage of Americans farming had begun its steady decline. Now, each month economists await the announcement of nonfarm payroll employment. Today farm jobs are not even included in the country’s defining measure of jobs lost and gained.

Alexander Hamilton’s vision of an industrialized nation turned out to be more prescient but in recent decades, manufacturing’s share of the work force has also been in steady decline. Next century, economists may await the nonmanufacturing payroll employment report.

  

Millions voted for Trump and his promise to bring back manufacturing jobs. As promises go, it seems more akin to a 1916 campaign promise to bring back farming jobs than an adaptation to new realities. Yet acknowledging that farming and manufacturing are unlikely to reverse their decline leaves us with the question about the source of next generation jobs.

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The economy has shifted but policy has not. Until economic policy begins to address the new limit, it will continue to be ineffective.

Over the last 40 or 50 years the per capita GDP growth rate has fallen. The fallout is not just economic. It has made voters less trusting of major institutions and expressed itself in surprising victories for BREXIT and Trump. Most people now feel that “the system is broken, unfair, and failing them.”[1]

Meanwhile, one place that has done remarkably well in the last half century is Silicon Valley, a place that more than any other has become synonymous with entrepreneurship.

About a century ago, Henry Ford made business history by doubling the wages of his factory workers. Doubling. Not only was he making cars more affordable, he was paying working class people enough to buy them.

In 2016, median wages in the US were about $51,000 a year. Like Ford, Silicon Valley has doubled that. In Santa Clara County – one reasonable approximation of Silicon Valley – average wages were $117k, or 118% higher than the national average.

It’s possible that Silicon Valley is an anomaly, a place that other communities can only envy but never emulate. A more interesting possibility is that Silicon Valley is to a new entrepreneurial economy what Manchester, England of the 1700s was to a new industrial economy: just the first place to enter a new economy whose practices will eventually spread around the world.

Four Economies and Four Limits

Agricultural economies give way to industrial economies, which give way to information economies. Most people share that intuition but their understanding of what these labels mean and how to distinguish between them is fuzzy. Even industrial economies have farms and information economies have factories. It takes a little explanation, but limits can clarify the distinction between different economies and predict a fourth, entrepreneurial economy.

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

Before talking about economies, imagine a factory with four stages. It gets raw materials in on one end and sends product out the other. The materials that become a finished product must pass through all four stages before they’re sold.

The numbers and height of the bar indicate how many products a stage can process in an hour. The first stage can process only 1, the second can process 2 and the fourth and final stage has the capacity to process 4 products an hour.

The customers don’t buy the unfinished product from any intermediate phase, though. They only buy product that comes out of the whole factory, product that has passed through all four phases. The question is, what is the capacity of this whole factory? How many products can it produce per hour?

The answer is 1 per hour. Your factory’s capacity is equal to the capacity of your first stage. You could call that a bottleneck, a constraint or limit. Whatever you call it, this limit defines the capacity for your whole factory. If it can only feed the next stage 1 item per hour, it doesn’t matter that the second stage has the capacity to process 2 items per hour because it won’t get product fast enough to process that many.

Until you increase the capacity of the first stage, you will not increase the capacity of your factory. So, you experiment. Maybe you speed up the process, simplify the process or just buy a second machine for that first stage. However you do it, you eventually double the capacity of this first stage to get a picture like this:

The good news is that by doubling the capacity of the first stage you have just doubled output for the whole factory. Armed with the knowledge that focusing on the first stage makes all the difference, you continue to experiment and invest in improving that first stage until you find a way to double its capacity again.

This time, though, doubling the capacity of your first stage does not change your factory output. Why? You were so successful at improving the first stage that it is no longer the limit to your factory. Your limit has shifted elsewhere.

Two lessons from your factory could apply to any system.[2]

•        To improve the system, you have to focus on the limit, and
•        Success eventually shifts the limit.

So, what limits an economy? In every introductory economics course, students learn that there are just four factors of production: land, capital, labor, and entrepreneurship. Anything of value created by an economy depends on some mix of these four factors and one of those would have to be the limit at any given stage of economic development. Land includes all natural resources, from herring to oil, acreage and cotton. Capital includes the financial and industrial tools that transform those natural resources into finished products, the factories that can turn cotton into clothing and the stocks or bonds that finance the machines and factories. After the industrial revolution, the labor of knowledge workers – people like accountants, engineers and advertisers – who manipulate the symbols of things rather than actual things was the most defining labor. Finally, entrepreneurship brings together land, capital and labor into a profitable enterprise.

The four phases of a factory can become four factors of production in an economy and we can examine limits to an economy in the same way that we examined limits to the factory. The output of an economy can be measured by things like jobs or wealth, income or GDP.

Different limits create different economies

Agricultural economies are limited by land. Wealth between 1300 and 1700 didn’t result from advances in information technology (not that the Gutenberg Press wasn’t disruptive) but instead came from trade, conquest, and colonization with faraway lands and creating nation-states and private property in your own land.

An industrial economy is limited by capital. Between 1700 and 1900, the creation of wealth was less about exploration, conquest and colonization than it was about building the factories that could turn raw materials into finished goods and then build out canals and railroads to distribute those goods. Wool and cotton became fashion. Iron ore became railroads. Skyscrapers rose in cities and cars emerged to drive between them.

An information economy is limited by knowledge workers. Between 1900 and 2000, it wasn’t enough to have factories that could make more products than anyone had ever seen before. They had to be the right products (which required marketing and design expertise) made for and sent to the right places (which took manufacturing and distribution knowledge) by the right methods (which took advertising and retail display experts.)

An information economy emerges after an industrial economy. Before the automation of the industrial economy, you need workers to manipulate actual things, afterwards, machines can do that and  labor can shift its focus to manipulating symbols. The sequence from agricultural to industrial to information economies is not just an historical sequence, it’s a logical one.

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

Economies are complicated and progress is slow so it makes sense that as communities gradually overcome limits they’ll cling to the processes that once made them great. Like the factory manager who keeps doubling the capacity of his first process step to no avail, communities can continue to create foreign colonies, spending huge sums on a global empire even after they’ve entered an industrial economy. Or more recently, they might pump money into their economy or create graduates past the point that capital or knowledge workers actually limit the rise in per capita GDP. It is almost inevitable that communities will continue to do what they’re now good at even after reaching a point of diminishing benefit. Cultures last longer than cost-benefit analysis and new practices become old habits.

An additional complication is that there are always pockets within a larger community that face earlier limits, and those limits define local culture and politics. When natural resources are the basis for wealth in a region, for instance, it will be more religious and more inclined towards policies like a strong military that support the notion of a zero-sum economy. It’s not the ingenuity of people that creates an oil field but is instead just a gift of God or nature. And that oil field doesn’t get larger because we decided to share it. Either I own it or you do, and rather than win-win we’re going to have a winner and a loser in this exchange. There will always be regions that lead or lag in development and thus will lead or lag in the reality they experience and that informs their convictions. It’s not just that a person living in rural Kentucky has a different political philosophy than her peer in Cambridge, MA; the daily reality that informs her perspective is different.

One other way to understand a limit is to look at its price. Scarce factors are expensive and abundant factors are cheap.

The success of the second economy made capital abundant. Traditional bankers who emerged from the second economy (many of our current banking practices were defined in England by 1900) carefully loaned out money, trying to minimize the risk of losing capital. Venture capitalists, by contrast, treat capital as abundant and fully expect to lose quite a few investments. Given they’re taking equity in a new firm rather than hoping to get back capital with interest, they know that only a fraction of their investments need to succeed in order for them to get great returns. Traditional banking evolved when capital was scarce: venture capitalists evolved when capital was abundant.

What is scarce now? Entrepreneurship and we can see that in its price. At 31, Bill Gates became the richest self-made billionaire in history. A generation later, Mark Zuckerberg became a billionaire at 24. The price of capital is the interest rate and towards the end of last year, investors owned about $12 trillion in negative interest rate bonds. Trillion. We have a glut of capital and a shortage of entrepreneurs, which suggests that effective policy would focus on increasing the supply of entrepreneurs rather than the supply of capital. Between 1700 and 1900, we learned how to increase the supply of capital through a variety of means, from popularizing savings and investment (from founding father proverbs like “A penny saved …” to expanding the number of people who bought wartime bonds and then later became savers) to changing the money supply or interest rates. If policy makers think that we’re short of capital, they can quickly pump billions into the economy. There are no comparable policy levers for increasing levels of entrepreneurship. Not yet.

When The Old Limits No Longer Limit

If capital were still a limit, we’d be in great shape. The S&P 500 have $1.5 trillion in cash and in the third quarter of last year they paid out $200 billion in dividends and stock buybacks. Banks excess reserves have dropped from their August 2014 high of $2.7 trillion but are still at a staggering $1.9 trillion.[3] (Before the Great Recession, excess reserves in the US were closer to $1.5 billion.)

Our education system helped us to overcome the limit of knowledge workers. In 1900, less than 10% of 14 to 17 year olds were formally enrolled in education. By 2000, less than 10% were not. In a century, the US went from an industrial economy dependent on child labor to an information economy dependent on adult education. That helped to transform life in the 20^th century, real incomes increasing 6X to 8X and life expectancy rising from 47 to 77.

If knowledge workers and their information technology were still a limit, creating more graduates would help to create more jobs. In 2013, the American education system created 3.7 million graduates, everything from folks with AA degrees to PhDs and all the degrees in between. That same year, the economy ended the year with 2.4 million more jobs than it had at the start. We’re creating graduates faster than we’re creating jobs, 15 new graduates for every 10 net new jobs. It’s no wonder that student debt is becoming a growing issue.

It’s not just ineffectual to pursue old policies in a new economy. It can be dangerous.

A glut of money creates problems. Investors in search of returns, unwilling to accept negative interest rate bonds, too readily bought expensive things like tech stocks in 1999 or subprime mortgage instruments in 2007. Trillions in investments can create a series of bubbles and busts as it wanders the earth like a murmuration of starlings in search of returns.

A glut of graduates creates problems. Young people not only start careers with mounting debt but find it more difficult to find jobs they could not have worked with just a high school diploma. Millennials who are the best-educated generation in history nevertheless fear that they’ll be the first generation in American history to do worse than their parents. (This student debt will also make it tougher for them to finance startups. As medical school has become more expensive, for example, the percentage of doctors working for large groups or hospital has gone up relative to those who start a private practice.)

One consequence of continuing to pursue dated policies is that it makes it tougher to pursue any policy. When incomes are steadily rising, politics is civil. Families can pay a little more in taxes to support schools and help the poor while still taking home more pay after taxes. When incomes are stagnant, politics becomes more divisive. Few people like the idea of not supporting education or the sick but if the choice is between that or less take home pay? Well, the conversation becomes more heated and compromise is harder to reach on top of the fact that everyone starts this policy conversation disenchanted and bewildered.

We don’t need to jettison incredible financial and educational systems that are essentially over-producing, creating more capital or graduates than we can fully employ. We just have to stop looking to those systems as the means to create jobs and wealth. As we become successful at overcoming this new limit of entrepreneurship, we’ll be able to fully employ capital and college grads. Eventually, we will even create enough demand for them to bid their prices up further.

The Central Question of Every Economy

The central question for any generation concerned about economic progress is how to overcome its limit, not the limit of its grandparents or founding fathers. Creative answers to that question result in a new economy and a very different community.

In retrospect, the central question of economic development from about 1700 to 1900 was simple: how do we get more capital and make it more productive? The creative answers to this included everything from the Dutch stock market, Rothschild’s international bond market and the British banking system to the spinning jenny, steam engine, and continuous production technology. (The question is simple. The answers can be complicated.)

The central question of last century was, how do we create more knowledge workers and make them more productive? The creative answers to this included the popularization of K-12 education, the modern university, R&D labs, the modern corporation and information technology.

The question that policy makers everywhere – city hall and senate floor, corporate boardrooms and universities – should now ask has two parts:

•       How do we create more entrepreneurs and make them more effective?
•        How do we make employees more entrepreneurial?

Creative answers to these simple questions will transform the economy. We now have a financial system and an education system. We don’t have an entrepreneurial system but instead expect our entrepreneurs just to show up, like autodidacts in 1800. Changing will be an odd, fascinating and profitable project. Think about educating students to be prepared to become entrepreneurs in the same way that we now educate students to become university students and knowledge workers, for instance, or changing the definition of employee.

Changing the Definition of Work. Again.

Perhaps more interesting than the question of how to create more entrepreneurs is the question of how to make employees more entrepreneurial. We – rightfully – make a big deal about national economic policy. It’s worth keeping in mind that measured by GDP or revenue, of the 100 biggest economic entities only 31 are countries; the other 69 are corporations. (Walmart’s $480 billion in revenue would put it just between Sweden and Belgium’s GDP.) Corporate policy deserves as much discussion as national policy if we’re interested in progress. The most important topic in this discussion might be to ask what it means to be an employee in a time when AI like IBM’s Watson is liable to automate knowledge work in the same way that capital automated manual work.

Think about changing employment so that employees within a corporation had as much freedom to pursue new ventures as citizens within a country. Roughly 800,000 Americans make more than the $400,000 a year that we pay the president.[4] That sort of thing was unthinkable in Egypt under Hosni Mubarak or France under King Louis XIV, but as nation-states evolve, people within them have the potential to prosper more than even the head of state. Contrast that with how evolved the corporation is. While it’s common for professional athletes or portfolio managers to make more than their managers, it is rare that anyone inside a traditional Fortune 500 firm makes more than the CEO. What if employees could become more entrepreneurial, were able to create equity by taking existing products into new markets or by leading product and business development efforts that are akin to startup activities? And what if the success of those ventures could actually result in their making more than the head of the company in the same way that an American entrepreneur has the potential to make more than the American president? This dispersion of power and pay is just one way that the popularization of entrepreneurship will change the corporation.

Overcoming the limit of entrepreneurship will require and result in new legislation, new education, and new definitions of what it means to be an employee. As importantly, it will continue in a grand tradition of the west, doing for business what earlier economies did for religion, politics, and finance. That is, it will expand freedom for the individual. There is no way to make employees more entrepreneurial without giving them more freedom.

There are interesting examples of popularizing entrepreneurship within companies. Ricardo Semler did something interesting with his Brazilian company Semco. He gave his employees freedom to negotiate work arrangements. People working side by side on the factory floor doing similar work might have very different arrangements. One was paid hourly, another a monthly salary, another paid by piecework and another might actually be paying Semco to use equipment to make product that she – the employee – could later sell herself. Uber lets “employees” accept or reject specific fares and take just one fare a week or work all day. Amazon’s marketplace and Apple’s iTunes are platforms that let companies and entrepreneurs sell their own products. P&G is among the companies who richly reward successful product development leads whose responsibilities overlap quite a bit with entrepreneurs. All of these are examples of enabling entrepreneurship, blurring the boundary between traditional definitions of employee and entrepreneur, and giving the employee more freedom to define their own work and its results.

This matter of employees gaining more autonomy is not incidental to progress. Autonomy is a way to define progress and each new economy has given the individual in the West more freedom. If you have shoes you have more options about where to go than if you are barefoot; if you have a car you have even more options. If you live in a democracy, you have more options about what to believe and how to live than if you live in a theocracy. If you have a credit card you have more options than if you need to approach a banker to request a loan for a specific item, or can’t get a loan at all. If you have the freedom to create equity as an employee you have more freedom than if you’re expected to adhere to a process someone else defined.

The popularization of entrepreneurship will increase our product options and levels of wealth. Progress, though, is only partly about more and better products. That is only one way that our lives expand to include more options. The first economy didn’t just bring potatoes and tomatoes to Europe; it brought religious freedom. The second economy didn’t just bring fashion and automobiles to households; it brought democratic freedoms. And the third economy didn’t just give us radio and the polio vaccine; it made capitalists out of knowledge workers, giving them financial options that people in 1900 would have found as baffling as the internet. The fourth economy will transform business and work in the same way that the first three economies transformed religion, politics, and finance. That is, it will give us more autonomy, as economic progress always does.

As you might imagine, there is a great deal more to this new economy than would can be captured here. My book, The Fourth Economy: Inventing Western Civilization, can be found here. It's a longer read but it does explain progress from the Dark Ages to about 2050.

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[1] https://twitter.com/Bill_Gross/status/821245915579240448

[2] Eli Goldratt, author of The Goal and Critical Chain popularized the ideas of Theory of Constraints (TOC) in the 1980s and 1990s within many Fortune 500 companies and government agencies.

[3] https://fred.stlouisfed.org/series/EXCSRESNS

[4] https://www.ssa.gov/cgi-bin/netcomp.cgi?year=2015