What the Acceleration of Product Adoption Means for Politicians Who Resist Social Change

"Dude," did you see how the gays just like, organized and got same-sex marriage legal, like, everywhere?"
Dude exhales. Giggles. "Yeah."
"We should, like, totally do that for weed."
Inhales. Long seconds pass. Exhales. Stares into space. "Yeah. That would be so cool."

Marijuana legalization has lagged same-sex marriage legalization for some reason, but both are trending upwards. Social norms are changing. And the rate at which they are changing is accelerating.

Friday, the Supreme Court made same-sex marriage legal throughout the United States. While Massachusetts was the first state to make it legal, it is worth remembering that San Francisco was the first government within the US to legalize same-sex marriage. San Francisco has also led the nation in entrepreneurship. Social innovation shows up as both entrepreneurship and as new norms and laws.

One of the most central drivers behind progress is social invention. We all know that the steam engine was central to the emergence of an industrial economy. People are less likely to realize that the emergence of the stock market and modern bank were just as important. The steam engine is an example of a technological invention. The stock market is an example of a social invention. The first lets parts do what they could not do before, resulting in new or different products. The second lets people do what they could not do before, resulting in new or different institutions.

During the last century, people have become more open to change. We expect technological invention and the parade of new products it brings. This chart from Pew shows how the time it takes for us to adopt new products has accelerated. It took 35 years for the telephone to be adopted by one-quarter of us, but only 13 years for the mobile phone. And the rate at which adoption is accelerating is accelerating. The PC took 16 years to be adopted by one-quarter of us, and once we had it took just 7 years for one-quarter of us to get online. We adopted the internet twice as fast as we adopted computers and four times as fast as we adopted radio.

This matter of accelerating adoption rates matters to anyone predicting social change. We don't just adopt new technologies. We adopt new norms. And, just like with technology, the rate at which we're adopting new norms is accelerating.

In no small part because what starts out as technological innovation becomes social innovation. The automobile drove the creation of the suburbs. Radio and TV drove mass consumption. The computer drove online trading. New products lead to new behaviors. As we become more accepting of new products, we become more open to new norms.

The rapidity of change in product adoption is echoed in a change in social norms. The rise in acceptance of same-sex marriage in the last 20 years has been remarkable. It has more than doubled since 1996, in less than 20 years.

A shift in product adoption can make or break companies. A shift in the adoption of norms can make or break political parties.

The Whig Party died in the US when Republican Abraham Lincoln passed the Emancipation Proclamation. The shift in norms from slavery being legal to being illegal was a greater shift than this week's legalization of same-sex marriage, and it took out a party when it hit. The Republicans continued to lead into the next century. Along with progressives like former-Republican Teddy Roosevelt, Republicans helped to legalize women's vote. 

But of course now, Republicans aren't thought of as disruptive social innovators. Instead, they are associated with resisting new social norms. They are the political equivalent of the ones who don't have a phone in the 1960s or don't have a computer in 2000. They don't lead the adoption of new social norms. They resist it.

Anyone who points to the fact that Republicans still have good numbers in most states needs to remember how quickly markets for products and political ideas can reach a tipping point and shift. Until the Republicans re-brand themselves as social innovators, they risk becoming the Whig Party of the 21st century.

The Stock Market as a Place Where Learning is Punished

One popular theory about the stock market is that its movement is random. This theory states that today’s prices reflect everything we now know. Only new information changes today’s prices. We don’t know if the new information will be good news or bad so we don’t know if prices are about to go up or down.

Maybe, though, there is a different explanation for stock movement.

Consider the possibility that the stock market is a place where - paradoxically – lessons are only beneficial up until the time they are learned. Once lessons are learned, they no longer apply.

That’s probably confusing but bear with me.

What happens during a bull market? First, a few investors who have purchased stocks after the bust experience great gains. Other people soon learn that you can miss out on big returns by not buying stocks, so they start to buy. Eventually, many people have bought stock.

Lesson that drives people’s behavior during a bull market?

If you buy stocks, you will make a lot of money.

What happens during a bear market? First, many investors who bought stocks at the peak lose a lot of money. Other people learn that stocks are a dangerous investment and best avoided.

Lesson that drives people’s behavior during a bear market?

If you buy stocks, you can lose a lot of money.

It is only once the lesson is learned that it no longer applies. Once people learn to be cautious, there is no reason to be cautious.  Once people see the benefit of risk, it is best to avoid risk. (Think about the 2008 financial crisis.)

It’s not that today’s information is reflected in today’s stock prices. If that were true, new information would change prices only incrementally and stock markets would not be so volatile. Instead, today’s prices reflect yesterday’s lessons learned. For a while. Once this lesson has spread to a critical mass of investors, though, it becomes obsolete. We reach a tipping point and at that point the lesson no longer applies.

This paradox of learning is not just a collective issue. It applies to individuals.

About 15 years ago, I bought a stock that I knew was high-risk and high-return. I thought that it had enormous potential but also knew it was really vulnerable. I told the kids that we would take a vacation on its value in a year. If it fell in value, we'd go camping for a weekend, If it took off like I thought it could, we would spend weeks in Europe. Well, it doubled. Then tripled. And then collapsed. The company went bankrupt and the value of my stock was not halved or reduced by 90%. It was zero.

Later, when I bought another stock that I thought had tremendous - but uncertain - potential, I used the lesson I'd learned.  The stock doubled. Then tripled. At that point, I cashed out my initial investment AND the amount by which it had doubled, leaving me with just a third of the shares I had initially purchased. Pretty smart, right? As of today, though, that stock is  up 15,585% from when I bought it and its management has announced that it will soon do a 7 for 1 split for this stock. (Yes. This is Netflix.) The lesson I learned from the earlier stock didn't apply to the next stock. Or more accurately, once the lesson was learned and changed my behavior, it was no longer a good lesson.

I’ve learned other lessons. I waited for Google’s seemingly inflated stock price to fall after the hype around its IPO in 2004. It rose steadily after its IPO and has never returned to that initial price since. I missed out on that ride by refusing to pay what I thought was a temporary blip in price.

So I learned the lesson that when a stock goes public with great potential it will open high and the keep rising just in time to apply it to a stock that opened high and then fell. Because of the lesson learned from Google, I plugged my nose and bought Lending Club at what seemed like a high price. Lending Club fell about a third from that initial, inflated price. Presumably other people had learned the lesson from IPOs like Google, a lesson that didn’t apply once people used it as a basis for paying what seemed like too much.

The next time I then decided to wait for the hype to fade, the high initial price of the IPO just kept climbing, rising 25% before I finally bought it. 

You might argue that stock movements are random and you might be right. But it might also be that the stock market is one place that punishes learning by changing in response to what we've learned the instant we've learned it.

You might even say that the real lesson learned is to do exactly the opposite of what worked last time but beyond the obvious problems (how do you actually define the last time? What is the opposite?), to the extent that this is actually learned, it will already be reflected in today's price and no longer be an applicable lesson. 

It is only the lessons not yet learned that work, which may be one reason that hedge fund managers like Jim Simons at Renaissance Technologies Hedge Fund have done so well by creating algorithms that detect patterns too subtle for us to learn. Even Simons couldn't explain why his algorithms found the relationships it did: he only knew these relationships (e.g., the link between yesterday's hog bellies price and tomorrow's value of the yuan) existed. Simons personally made $6 billion in income in just a few years using algorithms that broke the code on these obscure relationships that - apparently - he could never articulate in simple English. Why? Because in the stock market, it is only what hasn't yet been learned that is worth knowing.

Herbal Economics: Economic Policy in Modern Democracies

About half of Americans believe at least one medical conspiracy theory. The most popular belief is that the FDA is "deliberately preventing the public from getting natural cures for cancer and other diseases because of pressure from drug companies."

What we know about medicine now is incomplete but it is based on studies. I have worked with drug companies and while they are interested in profits, the people in these companies really do want to create products that improve lives. And they can't just make up data. After a variety of animal and human studies, they have to prove the efficacy of their drug over a three year window. It is not enough to have a story or two to illustrate this. They need data. From a lot of people.

The standard of proof for FDA studies is high. The guy selling bee pollen for your cold is telling you a story. It may well be that bee pollen shortens colds by 3 days for 80% of the people who take it. There are no studies to prove that. Instead, the guy selling this product tells you a story. It's not scientific but it is appealing. No dangerous side effects. All natural. And it'll cure you.

It's a beautiful thing that people can buy bee pollen even though it hasn't met with FDA approval as a remedy for colds. But of course bee pollen isn't covered by medicare. Unless you are talking about boycotting vaccines and thus putting the population around you at risk, your medical choices are individual choices. Popular opinion is not binding on medical experts.

Which brings me to economic policy.

In a modern democracy, economic policy is ultimately the product of popular opinion. Sort of. Voters respond to candidates' stories and either vote for them or not. The candidates who get in are the ones who help to shape economic policy. And while doctors don't shape their advice to align with popular misconceptions; politicians who hope to get elected must.

And this is the problem. "Bee pollen," is easier to understand than, "based on the protocol defined by our doctors in conjunction with our institutional advisory boards, we saw an improvement of 53% of the people in our clinical study, as opposed to an improvement in 28% who took the placebo ..."

When it comes to economic policy, "we should run the government like a household," is easier to understand than, "the multiplier for government spending during a recession is somewhere between 0.9 and 1.7."

It's a wonderful thing that we have a democracy. It does mean, though, that we're subject to herbal economics, home remedies that make for appealing stories even in the absence of actual studies.

Jeb or Jed? A Voters Guide

Jeb Bush officially announced today that he's running for president. It's a crowded field in the Republican primary so to save you from embarrassment, here is a simple guide to telling Jeb Bush and Jed Clampett apart.

The Entire History of the Nation in Just a Word or Two From 24 Different Presidents

R. Luke Dubois has created a fascinating way to see which words the presidents used most frequently in their state of the union addresses here. It's like candy for a political nerd like me.

Ronald Reagan's Most Frequently Used Words in SOTU

Here is a list of (some of) the presidents most commonly used word (or in some cases, top two or three). It is like a single word tweet for the defining issue of their time, a fascinatingly succinct way to review the history of centuries and the focus of their administration.

George Washington: Gentlemen (a lovely bit of civility to a group of rebels who'd just defeated the world's greatest empire)

Madison: Enemy (the battle of 1812 took place during his presidency, the only time the White House was occupied by enemy soldiers)

James Monroe: Parties (the emergence of political parties had become a new reality for the young country)

Andrew Jackson: Bank (Jackson dissolved the Central Bank and it would be decades before the Federal Reserve would replace it)

Tyler: Texas (added to the nation during his term)

Polk: Oregon, California (soon after his term these became new states)

Taylor: Empire (apparently this process of adding territories like Oregon and California got a little intoxicating) 

Buchanan: Slavery (an issue that would drive the country to civil war soon after he left office)

Lincoln: Emancipation (an issue resolved - sort of)

US Grant: Products, education (emergence of mass manufacturing and need for better education for new economy)

Rutherford Hayes: Coinage, dollar (debates about how to increase supply of money to match the increased supply of products)

Arthur: Merchandise (trying to sell the products to people with coins and dollars)

Harrison: Wages (emergence of jobs and the popularization of working for other people rather than working as independent farmers and artisans)

Teddy Roosevelt: Corporations (the newly dominant and powerful institution at the dawn of the 20th century), Railroads, Wage

Hoover: Unemployment (the Great Recession hits)

FDR: Democratic, Unity, Allies (We are all in this together, from WWII to economic recovery)

Truman: Soviet (now that the Nazis are gone,this is our new threat)

Eisenhower: Nuclear (and in case you were unclear about it, this is specifically how they threaten us in this new Cold War)

LBJ: Vietnam (where the US lost its first war and where Johnson lost his presidency)

Nixon: Truly (truly ironic given his own tapes revealed the depth of his deceit), Environment (this is the man who signed the EPA into law)

Ford: Barrels, crude, gas (from the year before he took to the year he left office, oil prices more than doubled - which raised inflation and unemployment)

Reagan: Deficits (which the man created when he simultaneously cut taxes and raised defense spending), Let's, Bless (optimistically rallying the country)

Clinton: 21st, Got, Lot (looking forward to a time of prosperity)

W. Bush: Terror, Iraq, Iraqi, Terrorist (looking back in fear)

Confusing Innovation and Entrepreneurship

Innovation and entrepreneurship are closely related but you can make a big mistake by thinking that they are the same thing. They are not.

Innovation results in a new technology or product. It is technological invention, which lets parts do what they could not previously do. You have an engine and wheels and axles and you put them together to invent a car. Progress depends on innovation and great innovators can get rich.

Entrepreneurship, by contrast, results in a new company or organization. It is social invention, which lets people do what they could not previously do. You have people with more money than they need now and people who need money and put them together to make and get loans and you have a bank. 

Progress depends on entrepreneurship and great entrepreneurs get even richer than great innovators.

Henry Ford

Ray Kroc didn’t invent the hamburger but when he died he was worth half a billion dollars. He was an entrepreneur. Sam Walton didn’t invent the retail store but his heirs are worth more than $100 billion. He was an entrepreneur. Henry Ford didn’t invent the car but he when he died in 1947, he was worth nearly $200 billion (inflation adjusted). He, too, was an entrepreneur.

Sam Walton

Given the way we use the term, all of these entrepreneurs were innovative. And indeed, it is hard to imagine an entrepreneur who wasn’t innovative having much success. You have to distinguish your product or service from competitors and that usually calls for innovation.

But thinking that your job as an entrepreneur is the same as the job of an innovator can create unnecessary confusion and failure.

Imagine two people with equal skills for creating companies and software. One – Seo-joon - thinks of himself as an innovator and focuses on creating a great app. The other – Emma - thinks of herself as an entrepreneur and focuses on creating a great company.

Seo-joon uses his scarce attention to analyze the market, software tools, and to code. He does a great job and creates a valuable app.

Emma uses her scarce attention to analyze markets, business plans and processes, and to create a company where people who want to focus on creating and selling great products will want to work. She does a great job and creates a valuable company.

When Seo-joon completes his great app, his work has just begun. He will need a way to distribute the app, to market and sell it. He will need to find a way to support it as customers begin to use it and either encounter bugs or simply have questions. He will need to do research on how the product is being used to decide how to improve the product and to find new markets for it. He will need to set up payroll, finance, HR, and a host of other business processes to support his app.

What is likely to happen? Probably, after realizing how much more work he has to do – work he has not even focused on understanding or learning – he will sell his product to Emma who will either buy it outright or offer him royalty payments. Emma has engaged in entrepreneurship and has built a company. Seo-joon’s app is just one of her products. She has a portfolio of products. Emma is actually in a position to create more value with this portfolio of products – even though she may not have designed or created a single one – than Seo-joon is with his great app.

The world needs both innovators and entrepreneurs. R&D labs, though, are full of innovators who work for entrepreneurs or someone who manages a company founded by an entrepreneur.

Decide if you are building a company or a product. Decide, that is, whether you are an innovator or entrepreneur. If you try innovation without a way to sell and support your product, you’ll likely flounder. If you try entrepreneurship without some innovative approach or with partnerships with innovators, you’ll likely flounder. Be clear about what you are doing and then try to excel at that. Great innovators and entrepreneurs tend prosper; people who divide their attention between both of these important tasks tend to be either unlucky or superhuman.

Will Hillary's Campaign Strategy Make the Country More Polarized?

Today's NY Times has an article about Hillary Clinton's probable strategy, written by Jonathon Martin and Maggie Haberman. Bill Clinton went after (and won) states like Kentucky whereas Barack Obama focused on fewer states with an agenda that had less broad-based appeal. It seems that Hillary will be more like Obama in this regards, focusing on rallying more liberal voters rather than appealing to more moderate swing voters. The fear is that Democrats in the neglected states will be less likely to win local elections and even the ones who do win a place in Congress are going to be less able to relate to the folks across the aisle. Which is to say, it could cause more gridlock, not less.

The quote that summarizes the thinking behind Hillary Clinton's strategy is here:

“The highest-premium voter in ’92 was a voter who would vote for one party some and for another party some,” said James Carville, Mr. Clinton’s chief strategist in 1992. “Now the highest-premium voter is somebody with a high probability to vote for you and low probability to turn out. That’s the golden list. And that’s a humongous change in basic strategic doctrine.”

The real question is whether this is a capitulation to the reality of a more polarized electorate or if it is just going to exacerbate this polarization. In either case, it seems like a reminder that Hillary is more pragmatic than idealistic, less about changing voters's minds than winning office.

Why Fear Sells in the Republican Primary

With the exception of Rand Paul, the 10 to 17 Republican candidates running for the White House all say they would not have invaded Iraq but do say they're eager to attack Iran. Lindsey Graham is probably the most extreme example of what is fairly normal within the GOP: warning about a world set to explode into chaos, militants who hate our way of life.

This is perplexing. Deaths from warfare have been steadily and significantly dropping throughout the last 70 years.

The violent crime rate has fallen in 8 of the last 10 years. And yet, in 10 of the last 10 years, the majority of Americans thought that violent crime rates were going up. A great many people do perceive the world as getting worse, not better.

I think there are a variety of reasons why negativity is such a positive for politicians - particularly for Republican politicians.

For one thing, the belief in progress is still a fairly novel thing. Until about 1500 to 1700, most people believed that the Garden of Eden was a paradise from which we'd fallen. Life had not gotten better since Adam and Eve but had, instead, only gotten worse. If there was any hope for freedom from grief it was not to be found in this life. The Renaissance wounded this concept and the Enlightenment dealt it a death blow. Well, for some people. There are still many people who have a visceral conviction that things will get worse in the future or even believe that things are getting worse now. Some, not all, of these people are religious and still believe in the fall from grace. And, of course, religious conservatives are more likely to vote Republican.

And of course pessimists are right at some level. I have found that my own view of myself lags reality by at least a decade. I'm surprised by recent pictures of me that show me as much older than I remember. My father died about a year and a half ago and I have no illusions about what the end of life will be like. I'll become less able and, in the words of Bruce Springsteen, "unrecognizable to myself," and I'll eventually die. It's hard to take comfort in the fact that life could be better for the average 30 year old in 30 years if I'm dying or dead then. When you reach a certain age, it becomes harder to be optimistic about the future. And of course, the elderly are more likely to vote Republican. A message of optimism directed at them seems to ring false.

There is one other factor that might explain why the message of military might and threats of violence so resonate with certain voters. It has to do with the source of wealth.

When land is the basis of wealth, it is worth fighting. If you win, you keep your land or even get more. If you lose, you wander without home or income.

When knowledge work is the basis of wealth, you do better to collaborate than fight. In Harari's Sapiens: A Brief History of Mankind, he makes the point that in 1849, during the California gold rush, it would actually pay off to attack California. If you conquer it, the mines are yours. You get the wealth. By contrast, if you were to conquer Silicon Valley today, killing people as you invaded, you would end up with nothing. Silicon Valley's assets are in people's minds and it is tough to seize those with tanks and planes.

Rural areas tend to be more Republican. For these people, their wealth is often rooted in farmland or oil wells or businesses that support them. In urban areas, we have knowledge work as the basis of wealth. People who base their wealth on land are more threatened by the thought of war. It actually makes sense to seize a farm or oil well. People in cubicles are more likely to be baffled by the threat. It doesn't really even register as plausible.

So when candidates talk about the threat of radical Islam, it resonates with religious farmers and oil men who see war as a credible way to gain wealth and persecute true believers. By contrast, neither of those buttons work for most urban knowledge workers. And if you talk about how things are getting worse to people in their 80s, people for whom life really is getting worse, it resonates in ways it simply can't with young people still in the prime of their life. Unsurprisingly, Republicans preach fear to their base of rural, religious, older citizens. Fortunately for the world - unfortunately for Republicans - this base is shrinking.

Rick Perry's Country Rap (C-Rap) Campaign Song

Today Rick Perry announced he is running for president. As the field of dubious candidates grows, it is a reminder that not every child should be told he can grow up to be president.

Rick strolled out into the crowd of supporters to this song, which apparently will be his campaign song. It's sort of country, sort of rap so it's obviously been carefully crafted to appeal to a broad segment of voters. 

Here are the lyrics:

Rick Perry supporter, 

let's protect our border. 

To hell with anyone who don’t believe in the USA, 

Rick Perry all the way.

I won't back up, I don’t back down. 

I been raised up to stand my ground. 

Take my job, but not my gun. 

Tax my check till I ain't got none. '

Cept for the good lord up above, I answer to no one.

Give me my right to vote, my right to tote

The weapon of my choice, don't censor my voice.

Hate me if you want

Love me if you can

If the truth is what you want

Then you found your man

He does have great hair, though, doesn't he?

Education Myth vs. Education Reality - When Knowledge Work Boosts Your Economy

I remember a conversation with a man who grew up in the Soviet Union. This was a time when the Soviets had the best chess players and a military-science program that rivaled our own, in spite of their having a smaller economy. The real problem in the USSR was not the quality of education, he said. That was as rigorous as education anywhere. The problem was, there was no capital. If you are a wizard at chemistry but don't have a lab to work in, it is tough to translate your knowledge into value.

Russian programmers are among the most valued on Wall Street. Apparently their code is more elegant and runs more quickly. The reason for this is that they didn't learn programmer with unlimited time on the computer. They had to write out their programs on paper before sitting down to the computer in order to complete programs in the limited time they had.

The problem in the Soviet Union and now Russia was and is access to capital. Without sufficient capital, it is hard to make real gains from education. Chemistry without labs or computer science without computers is more of an intellectual exercise than a boost to the economy.

Which brings us to Ricardo Hausmann's The Education Myth. Here is an excerpt:

In the 50 years from 1960 to 2010, the global labor force’s average time in school essentially tripled, from 2.8 years to 8.3 years. This means that the average worker in a median country went from less than half a primary education to more than half a high school education.How much richer should these countries have expected to become? In 1965, France had a labor force that averaged less than five years of schooling and a per capita income of $14,000 (at 2005 prices). In 2010, countries with a similar level of education had a per capita income of less than $1,000.In 1960, countries with an education level of 8.3 years of schooling were 5.5 times richer than those with 2.8 year of schooling. By contrast, countries that had increased their education from 2.8 years of schooling in 1960 to 8.3 years of schooling in 2010 were only 167% richer.

In the Fourth Economy, I argue that capital is a limit to economic progress before knowledge work is. Why? In the simplest example, if you still have to shovel coal by hand, it doesn't matter that you know engineering principles for designing a steam shovel. Your productivity will be a product of your back muscles, not your design insights. At one point of development, capital is clearly the limit to progress. You need machines that can do the work of people doing manual work. After this point is reached, knowledge work becomes the new limit. Once workers can drop their shovels, they can begin to create value through knowledge work that results in a redesign of the steam shovel or even re-think the source of energy.

Oddly, education can offer diminished value at two stages of economic development. When a country still hasn't got the computers or labs for its computer science and chemistry majors to work in. That is, when a country still faces the limit of capital. Or when a country has moved beyond the limit of knowledge work and now faces the limit of entrepreneurship. Countries like Tunisia find themselves in the first category. Countries like the US find themselves in the second. And yet, as Hausmann points out, education is held up as a panacea for economic progress.

Education and capital have been offered as solutions to economic stagnation for a good reason. They've been at the heart of massive gains in productivity and GDP. Kneading and baking dough has also been at the heart of great bread but it has to be done in the right order.

Why Capitalism Might Yet Topple Democracy (It's Not How You Think)

In just the last decade, you can walk into frozen yogurt shop and make a dessert that has exactly the mix of nuts and berries and candies and yogurt that you want. You make it. It doesn't matter if you want 44% granola and 18% syrup and the rest yogurt or 77% berries with a topping of yogurt and nuts. It's yours to customize exactly as you want. During that same time, pizza places have emerged that let you instruct folks about exactly what sort of toppings you want and in what quantity. And then they cook it with surprising speed: fast food customized.

You might have terribly obscure tastes and yet you can find what you want in the modern market. You like Afro-pop? You can find hundreds of songs online, even if no one else in your dorm or suburbs has even heard of the genre. You think it's a shame that Hank Williams and George Jones don't get enough play on country stations? You can train Pandora to play them often on your custom radio station.

The market caters to individuals and as the costs of manufacturing - anything from songs to cars  - drops, it is easier to make custom or niche products for people of fairly modest means.

Every year the market comes closer to giving you exactly what you want, no matter how antiquated, futuristic, marginal or mainstream are your tastes. It really is a triumph.

But of course that makes politics look bad by contrast. Politics is the art of compromise, the practice of translating individual desires into group consensus. In that sense it moves in the opposite direction of capitalism. While capitalism caters more and more to the individual, politics pulls us into a wider world full of people who have very different sensibilities than us.

Your odds of walking away from the cash register happy are very high. Your odds of walking away from the polls happy are fairly low. In the US, after a presidential election, roughly 49% of voters wake up the next morning horrified and gut sick. In the UK, where voters recently got to choose between about a half dozen parties, it was 63.1 percent of voters who woke up shocked and dismayed that the conservatives won an outright majority with just 36.9% of the vote. We often think of democracy as a "majority rules" government but in the UK, it is a majority who are guaranteed to lose. (David Cameron's Conservative Party had only to win the most votes in a majority of voting districts in order to make him Prime Minister. Given the average voter could choose between about a half dozen parties, "the most votes" could work out to about 30 to 40%. Do that in 51% of districts and you are the ruling party.)

You think that climate change is a hoax? Well, the good news is that you can find a rich stream of talk shows, articles, books, and videos that confirm your belief. But when it comes to voting, you'll have to reconcile your worldview with that of people who are convinced that it is the biggest threat to human life since the Black Plague.

You think that commuting is horrendous and we need better public transportation and less reliance on fossil fuels? Or that commuting is horrendous and we need to drill more freely and remove regulations on expansion of freeways? Or that commuting is a problem faced only by people stupid enough not to work from home? Well, in order to get what you want you'll have to convince people with a host of opinions about commuting. Or you'll have to change what you want.

The best bet for political activists - from Occupy Wall Street protesters who camp out for months in public places to Koch brothers who fund chosen candidates with millions of dollars - is that they won't get what they want. Even if your candidate gets in, chances are that at some point he'll make a decision you find reprehensible.

All of this means that the likely outcome of voting is the opposite of the likely outcome of shopping: you will not get what you want. Or, more precisely, you will at best get some vague approximation of what you want. Your vote will get smudged together with hundreds of million other citizens (and when it comes to international policy, it's more like billions). Your policy pizza might not have the toppings you wanted. If might not even be pizza.

So as markets become more sophisticated and evolved, politics looks more crude and alienating by contrast. Which turns off more and more people from politics.

For now, markets are making governments look bad. And this means that voters whose naive expectations of getting what they want has been shaped by markets are going to become more disenchanted by politics. The consequence? The average person will have less and less influence over outcomes in politics and will put more and more energy into markets.

If markets topple governments, making your vote ineffectual, it will likely be because they have made your dollar so very effectual. Every decade we become less able to think about ourselves as part of a group and think more of ourselves as individuals. The market is made for that. The polls are not. This simple fact could make democracy an experiment that lasted only centuries in the long history of civilization.

Betting Against the Euro Zone

About a dozen friends sign a pact. They are going to become better people. They debate a few variables and finally agree to the same workout regime (jog three times a week, weights twice), same diet (2,500 calories max each day, dessert just twice a week), same education goals (one TED talk and one book a month), and same social calendar (one big outing with friends every month, one smaller one each week). And they are going to all contribute 20% of their take home pay to an investment account, on track to early retirement.

This sounds pretty good. By the end of the year they will all be fit, socially healthy, richer, and smarter. This is going to be amazing.

But of course it won't work. Some friends will be too stressed by their job to spend even more time with people than they've spent during the week. Others won't be able to resist that new pizza place down the street and will gain 5 pounds in a month trying their exotic new flavors. Someone else will need to run out to Vegas, liquidating their 401(k) betting on football. People are different and none of us are as impressive as our intentions.

Jean-Claude Juncker, President of EU

Which brings me to the eurozone. I'm no expert on European nations but I know they have very different cultures. More importantly, they are at different levels of development and they're probably even on different development paths. While they may have common goals for spending and deficits, it's not obvious that they'll be able to converge on these goals. Plus, given they face different realities, they likely need different policies.

I've never really understood how they might get their very different countries aligned enough to benefit from very similar policies. It seems to me that they need different monetary policies from one another but of course that's a very difficult thing to do when they share a currency.

38% of investors expect the euro zone will break up within the next 12 months. That, it seems to me, is a fairly reasonable bet.

A Few Economic Metrics (as the Nation Seriously Considers Hiring a Third Bush for President)

Personalized DNA Analysis Will Eventually Be Something You Can't Live Without

Personalized DNA analysis reminds me of computers in the early 1980s.

In 1983, fresh out of university, I managed a ComputerLand store. People would come into the store to see what they could do and we would show them how cool they were but quite a few people wandered away a little baffled about the hype. If I wanted people to be particularly confused by my excitement, I would expound on how all information - from books and newspapers to radio and TV - could be digitized. Eventually, newspapers and TVs and radios and phone calls will be streaming across digital lines, I would tell people. They would say, "Oh."

And now, of course, computers are unavoidable. 

Recently we got 23andMe analysis of our DNA and it very much reminded me of Apple IIe and the first IBM PC. What we got was ancestry analysis, something that showed probable countries of origin for the folks who've contributed to my genetic make up. I found out I have European ancestors, which is almost comical in terms of obvious information. There is not a lot that I learned. My maternal and paternal haplogroup (a specific mutation) are shared by Anderson Cooper, Meryl Streep, Catie Couric, and Stephen Colbert. I am 2.9% Neanderthal - slightly above the average for 23andMe members. And while most of my DNA traces back to British and Irish (33.9%) and Scandinavian (28.1%), tiny amounts trace back to Ashkenazi Jews (0.1%) and Yakut Indians (0.1%). All of that was interesting but not really enlightening. Like the personal computers of the late 1970s and early 1980s, this DNA analysis seems to me more full of potential than actually cool. Yet. 

My prediction? We will learn an enormous amount about DNA in the next decade or three. The consequence will be that we will be able to tell new parents that probably their child will need intense physical challenges to develop their potential or need lots of social activity or very little social activity or will do best connecting lots of fast moving ideas or focusing on one big idea. We will be able to tell their community - from parents to teachers to managers - what sorts of conditions are most likely to cause them to thrive and which are most likely to make them freeze up or glaze over.

It is very cool to be able to calculate a spreadsheet or write a document on a word processor. It is so much more cool to be able to connect socially with hundreds of friends on Facebook or publish a blog post. It is very cool to be able to see your genetic ancestry by country. It will be much more cool to better understand who we are and what conditions allow us to realize our potential rather than wander through life confused and unrealized. Like modern computers, personalized DNA analysis is going to become something we won't be able to live without.

Forecasting 2nd Stage of Recovery - After 1/2 Decade of Job Creation We Will Have a 1/2 Decade of Wage Growth

Through April, the American economy has been creating jobs (11 million) for 55 straight months.This is a record for uninterrupted job growth. 

If the first half of the 2010s was defined by job growth, this next half - from 2015 to 2020 - will be defined by wage growth.

5 years ago - April of 2010 - unemployment was at its Great Recession high. 9.9%. Since then it has dropped 4.5 percentage points to 5.4%. 

The recovery continues and demand for labor has yet to stall. Unemployment will likely fall more before year end but it certainly won't fall another 4.5 percentage points in the next half decade. So how will continued growth in demand for workers show up? Higher wages.

Companies and city councils will continue to announce a hike in minimum wages. Wal-Mart has already announced this. Just this week, Portland announced a raise for minimum-wage jobs, an uptick to $15 an hour. This change in government regulations and corporation policies will continue to raise wages. 

As important as regulatory changes will be, the simple fact of growing demand for workers coupled with lower unemployment will mean that companies will be bidding their wages up. Given that unemployment cannot drop another 4.5 percentage points, wages are likely to start increasing by something closer to 3% than 2%.

This is going to be a very good decade, the first half characterized by job growth and the second half characterized by wage growth. 

$2 Billion for Campaigning May Sound Like a Lot But It's a Trivial Sum

I recently heard that Jeb Bush and Hillary Clinton will probably spend a billion each for their presidential campaigns. This seemed to the commentator further proof that our campaigning is spiraling out of control. I think it shows good judgement.

A billion sounds like a lot. It's not. It's pocket change. Literally. It works out to $3 per person. Less than a penny per day over the course of a year, roughly a penny a week over the course of a 4 year presidential term.

Annual GDP in the US will be $18 trillion by the time the next president takes office. The difference between 1% and 5% growth in GDP during their term means a cumulative difference of $8 trillion in total GDP. That works out to a per capita difference of about $23,000 during first term.

If we spent nothing on campaigns and gave it all to you, you could buy a small starbucks coffee. If we manage to choose a candidate whose policies make a significant difference in GDP growth, you could buy a small car.

No. This post doesn't delve into campaign finance reform. I don't disagree that it is absurd that people can spend money on campaigns anonymously. I don't doubt that we could do a much better job of demanding actual information from candidates rather than just letting their platitudes float around the media-sphere without hard analysis or firm commitments. I don't doubt that campaigning has huge flaws. I'm simply arguing that anyone who says that spending billions on choosing candidates is a waste of money fails to realize what is at stake.

How Those Wacky Social Conservatives Sound to Me

Rudolf Diesel, inventor of the Diesel engine

"That was never the intention of the founding fathers," some social conservative somewhere is saying right now.

That is such an odd thing to say. You can think that Henry Ford or Rudolf Diesel were geniuses without worrying once about what they intended for the automobile.


"GPS?!?!? That was never something Henry Ford intended for cars!"

History makes a better foundation for the future than ceiling. Unless you're afraid of so much open space.

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?