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.

Bell Labs as a Pioneer of Culture and Practices that Made Knowledge Workers Productive

A number of elements were needed to create the information economy. Perhaps unsurprisingly, much of what was needed emerged at the company responsible for America's communication: AT&T. Bell Labs did not just develop amazing technology like transistors, fiber optics, lasers and cellular telephones. They developed the practices that made knowledge workers productive.

Three of those practices were a reliance on
1. research rather than just tinkering,
2. creating a community of minds, and
3. crossing boundaries between the private and public sector.

research rather than just tinkering
Thomas Edison tinkered. It took him about 3,000 experiments before he figured out the light bulb. He gained knowledge through trial and error.

No one has the time and money it would take to develop fiber optics, transistors, or satellites with trial and error. To develop products that much more sophisticated than a lightbulb required basic research, gaining an understanding of theory. Bell Labs had folks focused on basic research, on gaining understanding of deeper principles that would enable technologies like fiber optics that could carry thousands of conversations along the same strand or satellites that could seemingly defy gravity while collecting and transmitting information across continents at the speed of light.

Because it was a place where people could perform basic research, nine Nobel Prizes were awarded for work at Bell Labs. The ripple effect of this basic research has still not been fully felt. Three of those Nobel Prizes were awarded for the development of the transistor and one of those prize winners went on to found the first in a series of companies that would lay the foundation for Silicon Valley. It is true that a lot of basic research will never payoff; it is also true that it is impossible to fully calculate the value of successful basic research. Early in the 1900s, William James was explaining pragmatism as assessing the cash value of holding an idea. An idea like transistors and all that it enabled has a value in the trillions and counting.

creating a community of minds
Bell Labs was a community.

It was a creative environment that fostered a rich exchange of ideas, something the science writer Steven Johnson has observed is more important in eliciting important new insights than market forces. The projects at Bell Labs required teams. Those teams required a community. The problems they were solving and possibilities they were pursuing were far beyond the capabilities of any one person.

crossing boundaries between the private and public sector
One of the many reasons that the information economy is a global economy is because ideas show as little respect for borders as clouds or pandemics. Translating ideas into value doesn’t come from rigid barriers between nations or institutions. It comes from a flow of ideas and practices across such lines.

A 2008 study titled "Where do Innovations Come From?" concluded that partnerships between corporations, government laboratories, and university researchers has become essential to innovation. In 2006, for example, 77 of 88 US entities that produced significant innovations had received federal funding.

Bell Labs received government funding in a couple of ways. The first was that the government granted it monopoly status to run the nation’s phone system. This guaranteed steady revenues to fund long-term research. The second was that Bell Labs received billions from the federal government. In World War 2 alone, Bell Labs received thousands of contracts. It was the beneficiary of the funding for these projects and of course the beneficiary of the intellectual capital generated by these projects.

The central question of the information economy was how to make more knowledge workers and make them more productive. Bell Labs gave us some great answers to the question of how to make them more productive. Their technology made the flow of information – and thus ideas – easier, which made knowledge workers more productive. As befits a company responsible for creating and maintaining the phone system that connected an entire nation, it also pioneered a culture and practices for corporate America that encouraged cooperation and a free flow of ideas.

Given the complexity of the problems in the 20th century, any successful effort would find a way to encourage collaboration among lots of really smart and informed people. Because one of the many truths to emerge out of the 20th century is that all of us are smarter when all of us are smarter. As we connect and share ideas, your insights become mine and mine become yours. Often, this inspires yet another insight or idea. If I give you a dollar and you give me a dollar, we walk away no better off. If you give me an idea and I give you an idea, we both walk away better. Technology and culture that encourages communication and collaboration – even across traditional boundaries of private and public sector - is key to making knowledge workers more productive.

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Much of the above information about Bell Labs came from Jon Gertner's The Idea Factory: Bell Labs and the Great Age of American Innovation.

How Pragmatists Created Knowledge Workers and the Information Economy

In 1776, Adam Smith published The Wealth of Nations and Thomas Jefferson and associates published the Declaration of Independence. The industrial economy, or capitalism, and modern democracy were products of Enlightenment philosophers who actually shaped their world according to their new philosophy reliant on facts and theories that fit them.

What the Enlightenment was to the Industrial Economy, Pragmatism was to the Information Economy.

Pragmatism – dismissed by Europeans as a curiously American invention – has come to guide how our experts and leaders think about everything even though we don’t much talk about it. To be dismissed in the modern world, tell someone you’re an idealist. To be respected, tell them you’re pragmatic.

One of Molière’s characters was surprised and delighted to learn that he had been speaking prose all his life without knowing it. We’re like that with pragmatism. Most of us have learned to think like this without even being aware that we are thinking like this.

The first published mention of pragmatism was in 1898. Arguing, as I do, that the 20th century was shaped by the rise of the knowledge worker, this timing is fortuitous. The 20th century was a century in which thousands of new jobs and areas of studies emerged. This sort of rise in specialization isn’t the product of people looking for universal truths; it is the product of people looking to solve specific problems.

Pragmatists didn't see ideas as some abstract truth out "there" to discover but instead as tools no different than a fork or knife. Ideas either enabled us to create the world we wanted or did not. William James wrote about the cash value of an idea: did it pay you to have this idea? And of course, for the knowledge worker who began a career with a university education, this was a very relevant question: what did it pay to be able to solve problems in this particular domain?

Enlightenment philosophers like an Isaac Newton were looking for universal truths. The apple falling from the tree as Newton pondered gravity was the aha moment in which he realized that gravity was universal - something that applied to the apple falling from a tree, the moon orbiting earth, or earth orbiting the sun.

Pragmatists had smaller goals. They were less interested in whether an idea was universal than whether it was effective here and now. Will this line of code stop the program from crashing? Will this change to the wing design stop this plane from crashing? This sort of problem-solving and design did, indeed, rely on some general principles but the value of the knowledge worker lay less in her ability to spout these universal truths than to solve this specific problem.

Universities were greatly shaped by pragmatist’s focus on the particular. The 20th century did not just see the rise of the knowledge worker – a person who worked with their knowledge, translating it into cash value as William James had suggested – but of university as prelude to careers. Out of pragmatism’s focus on specifics came a proliferation of new majors and careers. It was not enough to be an engineer. One had to choose whether to major in civil, electrical, mechanical, computer, chemical, industrial, or circuit engineering. None of these specialists were trying to discover the universal truths that a Newton sought; they were focused on solving a particular set of problems, translating their work into the cash value of the market place. For the knowledge worker, ideas were not abstractions; they were a source of income. The knowledge worker is very pragmatic about his knowledge.

The pragmatists were operating in a post-Darwinian world. For the pragmatist, we have minds because they help us to adapt to our environment. Our minds don’t simply mirror our world but help us to generate hypotheticals that let us adapt ourselves or our reality so as to live better.

It may seem innocuous enough for pragmatists to each focus on their own set of problems and possibilities. No pragmatists stood up to challenge the church or British Empire the way that the Enlightenment philosophers who led revolutions had a century or two earlier. But as it turns out, continuously creating new products and solutions is incredibly disruptive. If revolution overturns reality, evolution creates a new reality. The latter may work more slowly but it might actually change us just as much, if not more.

The Enlightenment philosophers who created democracy and capitalism in the US around 1800 gave us a new world. So did the pragmatist philosophers who created public education and the information economy around 1900. That one simply came with less fanfare and violence.

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The brilliant Louis Menand discusses his books The Metaphysical Club here. It is his book which properly introduced me to pragmatism. He does not make the tie between pragmatism and the information economy but he's incredibly insightful and, of course, the pragmatists like William James, Charles Peirce, Oliver Wendell Holmes and John Dewey are fascinating characters.

The 20th Century as the Century of Labor: the invention of retirement, knowledge work and the worker as capitalist

In the early 1900s, labor followed capital. Specifically, workers came off of the farm to work in factories. By the late 1900s, capital followed labor.

Workers used to need the industrial capital that increased their productivity; investors now need intellectual capital that increases their returns. Four companies are now worth more than a trillion dollars, making thousands - possibly hundreds of thousands - of investors rich. Those four - Apple, Microsoft, Amazon and Alphabet (Google) - have leveraged the efforts of knowledge workers via the design of software, processes, and processes.

In the same way that workers once brought their labor to factories that made things in places like Manchester or Detroit to enhance the return to their efforts, investors now bring their capital to these companies that manipulate the symbols of things to enhance the returns to their capital.

The Labour Party was founded in 1900 in the UK. At about that same time, the Democratic Party was struggling to reinvent itself from the farmers' party to a labor party. These changes in political realities followed from changes in economic realities.

The 20th century was the century of labor, which got its workweek reduced from 60 to 40 hours, gained safer working conditions, got children out of factories and into schools, and invented retirement, something made possible by extending life expectancy from 47 to 77 and making labor the new bourgeois, investors in their own and other companies' stocks as they built up retirement portfolios.
And this reality of making more and needing to prepare for a retirement also made financial capital more eager to invest in the companies that hired knowledge workers.

Employees at companies like IBM and Eastman Kodak in the 1960s began to buy stocks in their own companies as their salaries grew. They saw surprising returns from this and informed family and friends. Investing became more popular. In 4Q of 1969, mutual funds were worth $48 billion. By 4Q 2019, mutual funds were worth $17.7 trillion.

One of the reasons that financial capital is no longer scarce is because there are so many capitalists now. An increasing percentage of employees are also investors. This new abundance of capital has driven down its price; the returns to capital measured by the interest rates on bonds has moved close to zero. It's no wonder that everyone - even labor itself - is now placing bets on the returns to labor and entrepreneurship in the form of stock in the companies that employ the most iconic of today's knowledge workers.

Kent State and a Half-Century Conflict Between Two Economies and Two Kinds of Labor: Factory Workers and Knowledge Workers

On May 4, 1970, the National Guard opened fire on student protesters at Kent State, killing 4 and wounding 9.

On one side of campus were guardsmen - most of whom had not considered going to college until ordered to go that day - and on the other side were students who were preparing for careers that neither they nor their professors could imagine. A divide that would define the next half century.

Economic change creates new identities which changes politics. Before 1970, white collar and blue collar workers shared the identity of labor and tended to vote similarly. After 1970, a divide began to emerge between the college educated who saw themselves as part of a global, information economy and non-college educated who felt more a part of an American, industrial economy. Labor split into factory workers and knowledge workers and they voted differently.

Between 1933 and 1969, as the party of labor the Democratic Party had the White House and a majority in the House and Senate 72% of the time. They dominated. After 1969, labor identities split between factory workers and knowledge workers and the vote - too - was split. Since 1969, power has been shared between Republicans and Democrats 70% of the time, and each has had control of government only 15% of the time. That could change.

In 1972, the Democratic National Committee set quotas for women, minorities and youth but not union members or factory workers. After that point, feeling ignored by the Democratic Party, factory workers tended to vote Republican and knowledge workers to vote Democratic.
When there were more factory workers than knowledge workers, the Republicans won the popular vote for president. When the number of knowledge workers began to eclipse the number of factory workers, the Democratic Party began winning the popular vote for president.

In the 1970s and 1980s, factory workers outnumbered knowledge workers. In five presidential elections from 1972 to 1988:
- Republicans won 4 by average of 11.2 million votes
- Democrats won once by 1.7 million (and that was after Watergate)

Since 1990, knowledge workers have outnumbered factory workers. In the seven presidential elections since 1992:
- Democrats have won 4 by an average of 7.1 million votes
- Republicans have “won” 3 by an average of -133,444 votes (the one time a Republican presidential candidate actually won the popular vote was after 9-11)

Factory workers as a percentage of the population continues to fall and the percentage of folks with a Bachelors degree continues to rise. While Trump has a shot at winning the electoral college, his odds of winning the popular vote are close to zero. Trump has finalized the Republican Party's identity as the anti-knowledge worker party. Since he has become head of the Party, Republican's trust in universities has dropped and a willingness to defy experts has become key to the identity of Trump's Republicans.

That day at Kent State dramatized a dividing line between two groups with very different identities that considered themselves part of two very different economies. It is a conflict that has continued to define our politics for half a century and is finally waning in importance as the percentage of factory workers falls to the level that knowledge workers were at the beginning of this divide.

The Real Economic Debate (is not about socialism or capitalism)

The big debate isn’t about whether we should have a socialist or capitalist economy. 

Depending on how you define those terms, socialism and capitalism are either essential or absurd. 

Do you define capitalism as no different than a market economy? By socialism do you simply mean some mix of social security, public funding for healthcare, public education, and unemployment insurance? By those definitions, capitalism and socialism are essential. 

Or by capitalism do you mean that we should be rid of social security, healthcare, public education and unemployment insurance? And when you say socialism do you mean that we should do away with markets? By those definitions, socialism and capitalism are absurd and harmful. 

It’s a valid thing to argue where on the spectrum between cruel market or controlling government we should be, but that can easily distract us from a more vital, more concrete debate about how normal people are going to create new jobs and wealth. 

The debate about whether we're in an industrial or information economy is the more relevant and productive one. Put more simply, do we think that jobs and wealth are going to be created in factory work or knowledge work?

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College education has become one of the better predictors of how people vote. In the 50 counties with the highest levels of education, Hillary Clinton won by 26 percentage points. In the 50 least educated counties, she lost by 31 percentage points.[1] Those knowledge workers are also more affluent than factory workers. Clinton won only one-third of the counties in the US but those counties represent about two-thirds of the country’s GDP.

By contrast, Trump won by nearly 16 percentage points in the ten states with the highest percentage of manufacturing workers and lost by 9 points in the ten states with the lowest percentage.

In 1972, the Democratic Party shifted its focus from factory workers to knowledge workers. In 1972, the Democratic National Committee had set quotas for women, minorities and youth but none for blue-collar workers. In terms of policy, that was visionary. Since that time an information economy has clearly driven economic growth. In terms of politics, it was disastrous. Knowledge workers still made up only 11% of the population in 1970. Democratic nominee George McGovern lost by 520 to 17 electoral votes in 1972 and in 1984, Mondale won only 13 electoral votes. 

Since 1992, college grads have outnumbered factory workers and since 1992, Democratic presidential candidates have won the popular vote by an average of 4.1 million votes (and only lost the popular vote once in the last seven elections). In the Democrats’ last three presidential victories (Obama 2012 and 2008, Clinton 1996), they won the popular vote by a total of 22.7 million. In the Republicans’ last three presidential victories (Trump 2016, Bush 2004 and 2000), they lost the popular vote by a total of 400,331. Because of the quirk of the electoral college and knowledge workers’ tendency to cluster in cities, Republicans and Democrats have split the last six elections in spite of Democrats dominating the popular vote.

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Trying to bring back manufacturing jobs makes about as much sense as trying to bring back farming jobs. And for a host of reasons it simply isn't smart policy. Ours would not be a better economy if we still had 90% of the workforce engaged in raising crops for us nor would it be a better world if we still had 36% of the workforce making stuff. We can now be fat and our houses be cluttered with less than 2% of the workforce raising our food and 8% making our stuff.

The question is not "How do we get more people back into factories?" The question is, What work will add value, what work will actually improve our quality of life, what work would voters value enough to fund with government spending or consumers value enough to fund with cash or credit? That is the question entrepreneurs ask.

The answer to the question of whether we think that jobs and wealth are going to be created in factory work or knowledge work has two parts. Short-term, none will be created in factories but many will be created in knowledge work. (And by none I mean net. New jobs will emerge in factories but not as quickly as they are destroyed.) Long-term, all will be created by entrepreneurs.

We don't exactly have all our problems solved as yet. In every direction we turn there are problems to solve and possibilities to explore. How do we create affordable housing in big cities without creating more congestion? How do we increase the quality of life of people over 80? (The fastest growing group in the world.) How do we create institutions that encourage the intrinsic motivation that makes us happy, creative, and productive? How do we automate more of the tasks that have become boring and simply reduce our quality of life and create the tasks in their place that both create value for customers and flow for workers?

Wasting effort on returning to the past is like a 60 year old dressing like a 16 year old. What was once exciting has become disconcerting, what was great becomes caricature. 

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[1] http://fivethirtyeight.com/features/education-not-income-predicted-who-would-vote-for-trump/

From Gates to Bezos - What the Change in World's Richest Man Tells us About a Shift From an Information to Entrepreneurial Economy

On America’s west coast there are examples of what the popularization of entrepreneurship could look like at the regional and company-level.

Silicon Valley continues to attract more venture capital and to create more wealth than any country in the world. The folks in the Bay Area have created an entrepreneurial economy.

Further north in Seattle, Jeff Bezos has created an entrepreneurial company.

Jeff Bezos recently emerged as the world’s richest man and is the world’s only triple-digit billionaire. Bezos is an entrepreneur. He has also created a platform that has popularized entrepreneurship. Not only does Amazon have more than 500,000 employees, it has "2 million sellers, hundreds of thousands of authors, [and] millions of Amazon Web Services developers.”  And, Bezos reports, "In 2017, for the first time in history, more than half of units sold on Amazon worldwide were from third-party sellers."[1] 

Bezos isn’t doing all the entrepreneurial lifting at Amazon; he’s got millions of co-entrepreneurs and the result is that as they struggle to become rich they inevitably increase his net worth. People who create, make or ship products hope to get rich by selling through Amazon. Jeff Bezos is just one of the millions of entrepreneurs who use the platform that his team has built.

Knowledge workers turn raw data into knowledge in the same way that factories turn raw materials into products. A computer makes knowledge work far easier and during the 1980s and 1990s, the personal computer became ubiquitous as knowledge work evolved and became more common. Microsoft provided the PC’s operating system and software like Word, Outlook, and Excel and for Microsoft it was like having a patent on forks and spoons when people stopped eating with their hands.

In 1995, Bill Gates became the world’s richest man by creating tools that enabled knowledge workers to do their work. In 2018, Jeff Bezos became the world’s richest man by creating tools that enabled entrepreneurs to do their work. From the last couple of decades in the 20^th century to the first couple of the 21^st century, the source of new wealth was shifting from making knowledge work easier to making entrepreneurship easier.

Sometimes what is most obvious deserves the closest scrutiny. A region that has created record amounts of wealth. The world’s richest men? Those might just hold clues as to how the economy is changing. Successful economic policies in this century will popularize entrepreneurship.

Three categories of successful 21^st century economic policies will be “follow the lead of Silicon Valley,” create an entrepreneurial track in education, and make it easier for employees to act - and be rewarded - like entrepreneurs

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[1] https://www.sec.gov/Archives/edgar/data/1018724/000119312518121161/d456916dex991.htm

The British as Social Inventors (or, the policies that could make the UK wildly prosperous again)

The UK will elect its next prime minister in just a few weeks, on 7 May.

As an American, I envy the fact that British politics is so much more humane. But judging from the political debate earlier this month between the UK's seven major party leaders, the British seem to have lost their sense of history. Why were they the world’s leading force for centuries? Why are former British colonies so much more affluent than former colonies of Spain or France? Why is English still the world’s dominant language when it comes to business, science, and innovation? Knowing the answer to that question provides the answer to how the UK could again make its economy vibrant, perhaps even a global leader.

The simple answer is that, from before 1534 when Henry VIII severed ties with Rome to help to create the nation-state to the time that the British invented the single-payer healthcare system in 1948, the British led in social invention. And not just any sort of invention. They led in the social inventions that helped overcome that period's limit to economic progress.

Instead of discussing social inventions that redefine a century, though, political leaders are now arguing about changing tax rates or spending small percentages, each trying to find the right balance between fiscal responsibility and addressing needs. There is no sense of history now. Just a sense of responsibility. Rather than ask how to create jobs they’re asking how much unemployment and welfare they can afford. Rather than asking how to create wealth, they’re asking how much debt is reasonable. And rather than ask how to make the British once again world leaders in economic growth, they’re asking questions about how fairly government services are being shared among the poor and new immigrants. As an American I can only envy this delightful sense of fairness. In the end, though, it’s less about whether you share the mastodon kill fairly than whether you learn how to domesticate crops. If you want a great community, you don't choose between fairness and progress.

For centuries, the British were the world’s leaders at changing people’s minds about what was possible. Their social inventions were not just about what was fair or right. Their social inventions actually created wealth in ways that were unprecedented in world history.

The British National Health Service (NHS) is the oldest single-payer healthcare system in the world and is a wonderful example of social invention. The British set up a system that made healthcare a right rather than something only people above a certain income could access. Like so many of their social inventions, most of the West has since adopted some form of what the British created. (Even we Americans have taken steps towards following this example.)

But long before that, they also invented new institutions that made people more prosperous. 

In 1623, Edward Coke championed legislation - patent law - that rewarded inventors. By 1699, Thomas Savory had invented a steam engine. At that point, for the first time in thousands of years, per capita income began to rise. Because of social inventions like patent law that let people profit from the investment of time and money into new products, the British led in the industrial revolution.

The British were not just social inventors. They rapidly adopted what worked in other countries. The Dutch were the first to set up a corporation that could trade in a remote part of the globe on behalf of the state (the Dutch East India Trading Company), the first to set up a stock market (to trade shares in that one corporation) and the first to set up a central bank that could help to regulate currency and make loans on behalf of the state. The British were smart enough to adopt those inventions when they brought William and Mary over from the Netherlands in 1689 to become their monarchs, and that soon helped them to pass even the Dutch in per capita income. This was not just the kingdom that gave us the invention of the steam engine: it gave us Charles Darwin and the concept of evolution.  The British continued to innovate and tinker with these big inventions. It was the Bank of England that became the model for the world's central banks. And the eventual change they made to the corporation was even more momentous.

In 1862, the British Parliament passed the Company Act and invented the limited-liability, joint-stock company. That is, they invented the modern corporation, the best institution yet made for the creation of jobs, products, and wealth. John Micklethwait and Adrian Wooldridge called it “yet another quirky Victorian invention that changed the world.” Putting aside the fact that the Americans more fully subordinated themselves to this new institution, this transformative social invention was British.

Whether it is through patent law or the modern corporation, central banking or NHS, no people have done more than the British to make history by changing history. No people have been more ready to re-invent themselves or their institutions. 

So what could the British do now? What social inventions would shift their conversations from unemployment to job creation, from debating about how much debt they could afford to best strategies for creating wealth? It would be any social invention that would help them to overcome today’s limit to progress, which is different from the limit of a century ago – or two centuries earlier.

From about 1300 to 1700, the limit to progress was land and because the British people led in social invention and adoption that helped them to overcome the limit of land – from a nation-state and private property to standardized measurements and colonization – they became the world’s leading economy. 

From about 1700 to 1900, the limit to progress was capital and because the British people led in social invention and adoption that helped them to overcome the limit of capital – from patent laws that inspired invention to central banking policies that stabilized financial markets – they were the world’s leading economy.

From about 1900 to 2000, the limit to progress was knowledge workers. Even though the British people invented the modern corporation – the place where knowledge workers created products, wealth, and jobs through product manufacturing and invention – they lost their lead to the US, Germany, and Scandinavian countries because they were slower to realize the importance of public education. (In 1875, England’s illiteracy rates were about 10X higher than those in Germany and the Scandinavian countries.) In a world where English is the dominant language, it’s worth noting that kindergarten is a German word. The social and technological inventions that did the most to create knowledge workers and make them more productive were the ones that made communities richer and more powerful. One might argue that as the world's original capitalists, the British saw their invention of the modern corporation more as an investment tool than as a tool for making knowledge workers more productive, and lagged because - for a time - they made capital more important than labor.

The conversation the British people need to have now isn’t about how to get more land and make it more productive. Land is no longer the limit. The days of colonization and the British Empire are past. It’s not about how to get more capital and make it more productive. Trillions of pounds of capital wander the globe in search of returns. A massive infusion of capital now is as likely to sit idle in banks (or, in the form of industrial capital like robots, make labor sit idle at home) as to create jobs and wealth. It’s not even a question of how to create more knowledge workers or make them more productive. The good news is that - largely because of British social inventions - the West has overcome the limits of land, capital, and knowledge workers. The bad news is that more of those factors that no longer limit won't just fuel economic progress.

Period (roughly)	Market Economy	Develop & Acquire
1300 – 1700	First, Agricultural	Land
1700 – 1900	Second, Industrial	Capital
1900 – 2000	Third, Information	Knowledge Workers
2000 ~	Fourth, Entrepreneurial	Entrepreneurship

So what is the limit to today's economy that social inventions must help communities to overcome? Entrepreneurship. Last century, the West popularized knowledge work. Between 1900 and 2000, the economies of the West transformed from industrial economies dependent on child labor to information economies dependent on adult education. Now, it is time to popularize entrepreneurship. The first wave of this popularization will likely be like the British adoption of Dutch institutions. That is, communities able to adopt the policies of Silicon Valley, creating an entrepreneurial region, will make great progress. The next wave will likely come in the form of changing the corporation again. This will involve making more employees more entrepreneurial, allowing them to create equity and not just products. No one has yet taken the lead in this but the British (or for that matter, the Scandinavians, Germans, Canadians, Americans or the people of Singapore) could become leading innovators in this. And just as the British became prosperous in ways that past generations could not have imagined when they boldly overcame the limits of capital, so could this next generation.

The question for today’s economy is how to create more entrepreneurs and how to make more employees more entrepreneurial. As people find creative answers to these questions, they'll create jobs for knowledge workers and will fully employ the trillions in capital that people like Marin Wolf and Ben Bernanke warn is symptom of a savings glut (or investment dearth). Knowledge workers and capital are no longer limits. Entrepreneurship is.

The British people have proven themselves incredibly creative. For centuries. There is no question about that. The only question is whether British policy makers will decide to find creative answers to the question of how to create more entrepreneurs or how to make more employees more entrepreneurial. Last time they got serious about finding ways to overcome the limit to progress through thousands of small and large social and technological inventions, they gave us the industrial revolution. Who knows what extraordinary world lies on the other side of the myriad inventions that will help the West to overcome the limit of entrepreneurship?

Economic Panacea: Start with US Private Sector and UK Public Sector Policies to Promote Entrepreneurship

The International Monetary Fund and Federal Reserve have both made downward revisions to economic forecasts this week. The IMF doesn’t think the US will reach full employment until 2017.[1] If that’s right, it will mean that full recovery took nearly a decade.

It doesn’t have to be that slow.

A couple of years ago, the IMF warned the UK against austerity measures, predicting that the UK’s economy would grow by only 0.7% in 2013. Instead, actual growth came in at 1.7% and is, this year, predicted to hit 2.7%.[2]

So why, even as it was raising taxes and cutting spending, did the UK pull out of a double dip recession? Contemporary economic thought would predict what the IMF did: that sort of policy will drag GDP growth down.

Well contemporary, proven economics suggests that the best way to stimulate an economy in – or recovering from – recession is through a combination of fiscal and monetary policy. Cut taxes. Increase government spending. Lower interest rates. Have the central bank buy back bonds, putting more cash into the economy. And for the most part, the short-term evidence is pretty clear that this helps to stimulate an economy. To a degree.

Banks with more money might simply add to their reserves. Households with more cash from tax cuts might just pay down debt. Corporations with more money might just sit on it. And in fact, in the US these very things happened. Corporate cash and equivalents rose to nearly $5 trillion by the end of 2011[3]. $5 trillion. As of June 11, 2014, excess reserves at American banks was $2.6 trillion,[4] going up roughly $2 trillion since early 2009. And households were paying down debt, reducing their debt service to the lowest it’s been since the Fed began keeping track in 1980. [5] Economists use the image of pushing a string to illustrate the challenge of translating credit into spending. And of course if spending doesn’t go up, it’s hard to create new jobs.

The UK did something else. Or more precisely, something more.

It’s not that the British don’t understand the importance of credit and monetary policy. This is the country that gave the world the model for central banking. John Kenneth Galbraith said of the Bank of England that it is in all respects to money what St. Peter’s is to the Faith. The Bank of England was founded about a century before the Bank of France and about two centuries before the US Federal Reserve. The first to rely on monetary policy, the British may have become the first to realize that there are more direct ways to go after job creation, that while monetary policy matters it is not enough. Pioneers in patent law, central banking and the modern corporation, the British may once again be ahead of us in economic policy.

You can make credit easier, hoping that households and businesses will spend more, thus creating jobs. Or you can fund startups directly, cutting out the uncertainty and the middlemen. Rather than push the string you can pull it. This is what the UK appears to have done as they confounded the able economists at the IMF. It is what the US could do as well to beat forecasts.

Measured by startup activity, the US at the end of 2012 was still below its 2007 level. By contrast, the UK was up 29%.[6] Even during its second dip, its second descent into recession, the UK’s startup activity rose from 117% to 126% of its 2007 level. During that same time the US – even as it avoided a second dip – nonetheless had a drop from 98% to 95% of its 2007 level.

Even during the recession, the US media and pundits seemed critical of funding for startups or expansion. By contrast, by the end of 2013 the UK had help to fund 10,000 startups.[7] This in just its first 18 months of their startup program. The plan is to help fund 30,000 startups. The same ratio of startups in proportion to the US population would be a plan for 150,000 startups. If we had the same program, we’d have helped fund 50,000 startups through the end of 2013. This sort of stimulus would inescapably create jobs and increase spending. It could confound expert forecasts for economic growth.

Opponents of government funding for startups say that the government shouldn’t pick winners or losers. Well, it’s too late to avoid that. The government chooses which kids go to university and which kids go to jail. The government chooses which defense contractors become huge and which go out of business, which businesses get subsidies and which pay taxes. Governments inescapably choose winners and losers. But in the process of choosing which firms to help fund, they can directly create jobs and even industries.

Funding startups is just one tool that could be used for creating more entrepreneurs. There is good reason to believe that the limit to progress has shifted from a shortage of capital – the limit during the Industrial Economy – or shortage of knowledge workers – the limit during the Information Economy – to a shortage of entrepreneurs. If so, the economic lead will go to the communities that do the most to popularize entrepreneurship, making it more common. Last century in the West, economies popularized knowledge work, moving from an Industrial Economy based on child labor in 1900 to an Information Economy based on adult education by 2000. Something similar could happen in this century with entrepreneurship, but it will take a combination of private and public sector initiatives.

The private sector in the US is doing a remarkable job of popularizing entrepreneurship. An average of 325 crowdfunding campaigns start daily.[8] And that rate is doubling every couple of months. Few people realize that to create a net of 200,000 new jobs in a month, the American economy has to create about 4.7 million jobs given the gales of creative destruction are destroying 4.5 million jobs a month. Just as the capital of the Industrial Revolution freed up people from manual work, enabling – and requiring – them to take on knowledge work, the algorithms and software of the Information Economy have enabled (and yes, is increasingly requiring) modern workers to take on more entrepreneurial roles. Work has to change to keep pace. As the pace and scope of automation increases, so must the innovation that creates new products, new companies, and new industries that provide jobs even as automation destroys them. The American private sector – from venture capitalists to kickstarter – are helping to popularize entrepreneurship. Progress in the public sector seems less obvious.

This week the Obama administration has a week-long focus on innovation. Uber has recently made news for sparking riots in Europe. Uber uses information technology to match people with cars to people who need rides. Uber doesn’t need to buy cars, just offer a fee to drivers with cars. Taxi drivers are losing market share to Uber and are protesting. Airbnb does something similar, matching folks with a spare bedroom and folks who need a place to sleep. These businesses don’t require more investment. They use the spare capacity of existing investments. Obama is doing something similar to Uber and Airbnb, opening up federal facilities to entrepreneurs.[9] NASA wind tunnels and supercomputers are among the assets that could be used by folks who could never afford to make such huge investments but could benefit from their use. This could help to stimulate new businesses and products and – given it requires no new funding - is a fairly ingenious way to work around an obstructionist congress

This is nice but it isn’t much.

It is tempting to believe that de-regulation is one way to stimulate entrepreneurial activity. And it’s likely true that – all else being equal – a community that puts up fewer obstacles to starting a business will have more startup activity. But one study of 150 successful entrepreneurs within the US revealed that regulatory environment was mentioned as a factor by only 2%.[10] More important was access to a talented workforce and customers and a community they thought offered a high quality of life, typically measured by natural and cultural attractions. (And quality of life didn’t just make a place desirable for the entrepreneurs: it helped to attract and keep the talented workforce they seek.) San Francisco and New York are two metropolitan areas that are not only expensive but challenge entrepreneurs with expensive permits and require payments to dozens of tax authorities. By one measure, San Francisco’s regulatory environment is twice as onerous as Dallas. And yet, of course, San Francisco’s entrepreneurial activity is booming. And New York is second only to San Francisco in startup activity.

California’s Bay Area is not only number one in the US in terms of startups but it is increasing pay at a time when pay across most of the US is stagnant. In San Mateo County (located at the heart of startup activity between San Francisco and Palo Alto) employees not only saw their salaries go up by more than 10% between September of 2012 and September 2013 but within the IT sector, salaries went up over 100%. When Henry Ford doubled wages to $5 a day in 1913, it rightfully got a huge amount of press; by contrast, this doubling of wages a century later went oddly un-reported.

During the Industrial Economy, employees made products. During the Information Economy they designed them. Now, in Silicon Valley at the dawn of the Entrepreneurial Economy, employees are making equity. For a long time, New York had the highest wages in the country because of Wall St. Now, employees in high-tech – and venture capitalists on Sand Hill Road – have shifted coasts for highest salaries. 3 of the top 4 top-paying counties in the US are in California’s Bay Area.[11] While New York County’s average weekly pay is double the national average, in San Mateo County it is nearly triple (2.7X) the average.

There is another element as well. Invention depends on a disdain for tradition and respect for what works for the individual. Places like Santa Cruz, San Francisco, Austin, Texas and Boulder, Colorado lead the nation in patents per capita and in startups. These are places with a liberal bent and a high degree of tolerance for what we might call non-conformists. It's not just entrepreneurs and programmers who are happy here but hippies, communists and transgenders. This suggests that a community embraces innovation as package – whether it come in the form of same-sex marriage or an app. Entrepreneurship is a form of social invention and social conservatives who prefer the status quo aren’t comfortable with innovations that disrupt the norms they’ve known all their life, whether those norms define the role of women or how someone sends a letter.

In any case, de-regulation doesn’t seem like policy enough. It certainly isn’t what is driving up wages and startup activity in California’s Bay Area.

From The Fourth Economy: Inventing Western Civilization
Market Economy	Limit to Progress	Period
First, Agricultural	Land, natural resources	1300 ~ 1700
Second, Industrial	Capital, Financial and Industrial	1700 ~ 1900
Third, Information	Labor, knowledge workers	1900 ~ 2000
Fourth, Entrepreneurial	Entrepreneurship	2000 ~

It’s possible that a new, entrepreneurial economy is emerging, a new economy limited by entrepreneurship in the same way that the Industrial Economy was limited by capital. This new economy will be led by communities most intent on popularizing entrepreneurship, just as the Information Economy of the last century was led by communities most successful at popularizing knowledge work. Popularizing knowledge work took a mix of public and private sector policies and initiatives. The iniatives included social inventions (e.g., modern universities and corporations) and technological inventions (e.g., Information Technology from telegraphs to the Internet) that helped to create knowledge workers and make them more productive. The popularization of entrepreneurship will require a similar mix.

Judging from regions like Silicon Valley, the US seems to lead the world in terms of private initiatives to popularize entrepreneurship. But judging from stimulus policies like funding startups, the UK may well lead in terms of public policy. It would be nice to get a blend of the two.

In any case, the attention paid to entrepreneurship is miniscule in comparison to that paid to the more traditional tools of fiscal and monetary policy. Google’s Ngram’s demonstrate how little mention it gets.

In this first graph, two of the most frequently mentioned policies related to entrepreneurship are graphed since 1900. The great news is that there has been a sharp upturn in mention of “promoting entrepreneurship,” and “entrepreneurial education” in books in just the last few decades.

But to put things in perspective, here is a graph showing those same terms compared with mention of monetary and fiscal policy. As you can see, entrepreneurship barely registers.

Unsurprisingly, in Obama's most recent annual report, entrepreneur (or entrepreneurs or entrepreneurship) is mentioned only 6 times in 410 pages. One party largely ignores entrepreneurship. The other thinks the simple solution to more entrepreneurship is less regulation. In a country defined by polarized politics there seems to be one thing the two parties have in common: both seem to believe that benign neglect is the route to entrepreneurial success.

If entrepreneurship now limits progress just as capital did during the Industrial Economy, it only makes sense that communities at every level – from cities and small businesses to nations and corporations – and in every sector – from private to public and non-profit – embrace every experiment that promises to create more entrepreneurs and make employees more entrepreneurial. It might be time for us to watch entrepreneurial activity as closely as we watch the monthly jobs reports and quarterly GDP growth. Because now, more than ever, jobs and GDP are going to be the products of entrepreneurial activity. It’s not enough to hope that entrepreneurs will show up. We need to become as intentional about creating them as we did knowledge workers last century. And once we define the problem of economic growth that way, we’ll find a thousand ways to solve it and to make progress – just as we did during the earlier industrial and information economies.

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[1] http://www.chicagotribune.com/business/sns-rt-us-imf-usa-20140616,0,6883507.story

[2] http://www.telegraph.co.uk/news/politics/10884632/Do-I-have-to-go-on-my-knees-grovelling-apology-from-IMF-head-for-incorrect-warnings-on-UK-economy.html

[3] https://www.stlouisfed.org/publications/re/articles/?id=2314

[4] http://www.federalreserve.gov/releases/h3/current/

[5] http://rwrld.blogspot.com/2014/05/spending-is-up-but-debt-is-down-this.html

[6] http://stats.oecd.org/Index.aspx?DataSetCode=TIMELY_BDS_ISIC4#

[7] http://startups.co.uk/start-up-loans-backs-10000th-small-business/

[8] http://www.entrepreneur.com/article/234426

[9] http://www.post-gazette.com/local/city/2014/06/17/Obama-to-tout-entrepreneurship-during-Pittsburgh-visit-today-1/stories/201406170142

[10] http://blogs.hbr.org/2014/06/deregulation-wont-improve-entrepreneurship/

[11] http://www.bls.gov/news.release/cewqtr.nr0.htm