This mindmap attempts to show a view of the 3 levels of the economy, and how the planet and financial institutions at various level interact with it. It will be periodically updated.
Saturday, October 17, 2009
Labor Shock and Its Role in the Economic Crisis
Commuters on their way to work in Bangalore's Electronic City
Bangalore, India, April 2009: Everyday Hosur Road feeds thousands of workers into Bangalore’s Hi-Tech Electronic City. Beside the roadway the ‘music of the streets’ is almost deafening; the drone of a 2-stroke 3 wheeled taxis is punctuated by incessant horn-beeping as workers pour into the city. It has an almost pleasant quality, it’s evocative of an India that combines the aggressive desire for modern growth and international stature with a people who have learned to live with whatever life deals them. It is a study in contrasts, magical and a little bizarre, where high-technology and poverty drive alongside one another on the way to work.
Phoenix, Arizona, U.S.A. April, 2009: Back in Phoenix, Arizona, we see a different picture; among the palm trees on the west side of town, the local strip malls surrounding one of the once-busy avionics engineering plants display 'For Lease' signs as does the once-busy avionics plant itself. The plant’s parking lot, once full of SUV’s and shiny new Honda Accords owned by legions of engineers, now sits empty. This plant location closed a couple of years ago, after many of its functions were moved to facilities in Bangalore, the Czech Republic and elsewhere. These high-tech jobs helped fuel Phoenix’s meteoric real estate appreciation in the bubble years, but recent events have been more unkind. Phoenix and Bangalore are poster children for this economic force we’re calling ‘Labor Shock’. This shock is happening because millions of new workers are arriving onto the world labor market, changing the relationship between supply and demand of labor, and drastically changing the societies on each side of that equation. Population, education, free flow of information, goods, and capital have all combined to intensify and accelerate the effects of the leveling of wages rates around the world.
The Economic Crisis Was Caused by Reduced Labor Income
This article argues that the bursting credit bubble is not the core reason for the advanced economies’ sudden reduction in spending. The credit bubble delayed that reduction, but can no longer prevent it. Rather, we assert that 1) the advanced economies are experiencing labor shock as they fail to adequately adjust to the changes in labor supply and demand, 2) that this shock is causing a severe wage income reduction in the developed economies, and 3) that the result of reduced income has been reduced demand from the West that is not being taken up in emerging markets, and therefore 4) that the reduction in developed economy labor income precipitated the credit collapse and is the fundamental cause of the current severe recession.
Global I.T. industry wages and supply 2006 - 2010 according to IBM Global Services Division
Global labor supply from export-oriented economies skyrocketed from 1980 - 2005
Shipping volume doubled in twenty years. Imagine what the information flow and financial transaction flow numbers look like!
In just twenty years, automation halved the number of workers required to manufacture a product in the U.S.
The Growth of Cheap Labor
Over the past few decades, the emerging economies have been furiously developing their labor forces in order to participate competitively in the world economy. Their efforts have paid off. The chart to the right (produced by IBM’s Global I.T. Services division in 2006) shows the enormous increase in I.T. workers in India and China and the huge disparity in wages between their wages and those of workers in the developed economies. To get a better picture of how effectively the emerging nations have targeted their labor development efforts, see the graph (supplied by the International Monetary Fund) that shows the growth of the labor supply that’s weighted (directed) toward exports. These emerging economies have done a magnificent job of aiming their strategic advantage (low labor cost) directly at the industries and labor categories in the advanced world which offer the greatest export earnings potential.
All that was needed was to increase the logistical capacity between the emerging and advanced economies, and the global income would come pouring in. The graph to the right, showing the doubling of sea-borne trade over the past twenty years, gives an index of how much the trade flows have increased.
The New Workforce is Highly Skilled
The skill level of the LDC worker has been growing very rapidly. In Bangalore, the engineers we visited are experts in their field. They run their software development organization at CMM Level 5, which is “world-class” by the standards of the Software Engineering Institute. These engineers are critical thinkers, challenging every assertion and filtering it through their knowledge and expertise. India has long had sophisticated defense and infrastructure capabilities, easily seen in such impressive facilities as the Indian Ministry of Information Technology building in Electronic City, which seems to sport more communications antennas than the Pentagon. India’s skill sets have not just come from free flow of information from the west. Considering their high skill level, the cost of labor here in India and from the other LDCs is a bargain. No wonder Western companies are flocking here to set up their software development operations.
Labor Shock: Not Only a Result of Increased Supply
Technology trends are also contributing significantly to the labor shock. Take a look at the Manufacturing Output per Labor Hour chart to the right. This chart shows that it takes only half as much labor to manufacture something in the United States as it did just twenty years ago. Half as many people! And that very same advanced manufacturing technology is being exported to China and the rest of the LDCs as fast as possible. What does that mean for future labor-demand growth? Technology is moving us toward the negation of the need for human labor across all industries and locations. More and more products and services can be generated without any increase in labor.
Enter the Platform Enterprise
In leveraging globalization, technology has also changed the structure and function of organizations. We now have an entirely new breed of world-wide economic actor: the “platform enterprise”. The Platform Enterprise is designed to leverage comparative advantage, to perform design, development, and manufacturing in the locale that’s best suited to deliver maximum value for each function across the entire supply chain from raw materials to finished product. A typical product development cycle might have the design and management team in one country, with engineering resources in another, lower cost location. Data can be shared worldwide, 24-7. When it comes time to manufacture, corporations today have raw resources such as steel, copper, or silicon wafers shipped from Africa or S. America to another part of the world to be molded, cut, or stamped. Foundries in Taiwan turn out chips that go into electronics built in Korea, Europe, the US, or anywhere else. The finished products are made available worldwide. The new platform enterprise exists to maximize their profits by arbitraging between global sources of material and labor. These platform companies accelerate the rate of labor shock by maximizing the speed and efficiency of flow between the global input suppliers.
Capitalism Responds To Globalization
Electronic City covers a vast 10-mile-square swath of Bangalore. Visitors are directed through the bewildering maze of streets by placards that list countless Indian firms and multinational giants. WIPRO, for example, is one of India's I.T. leaders. Passing its huge complex one can see the firm’s private fleet of busses which daily brings in workers. Electronic City has a 75,000 strong workforce that’s transformed itself into a world-class technology powerhouse. In the past decade, the IT and engineering skills concentrated here have become a part of a trend, whereby labor cost is a driving force in structuring businesses for maximum profitability. Simply put, if a region offers a competitive advantage, there’s a platform enterprise that will market that advantage to the rest of the world.
The realities of business in the 21st century have made this inevitable. When a business can reduce cost and increase margin, shareholders approve as profits increase. Investors allocate their capital where it can generate the highest returns. Today’s market trading technology and a hyperactive investment climate demands that capital allocations follow short-term results, and are not influenced by the effects of these investments upon the welfare of the workers in any particular region.
Labor Incomes Fall, Advanced Economies Contract
So the bottom line rules today’s global markets, and as the biggest expense for most companies is labor, the labor pool bears the brunt of cost cutting. Just because cheaper labor or the automated platform enterprise is available does not mean businesses have to use it. Businesses must make the choice to use this potential. However, in the business environment we have experienced the past few years, many have been forced to use this potential to stay afloat, and naturally, have responded with a vengeance. The increase in global trade patterns shows the extent to which non-raw materials have comprised an increasing percentage of trade. We have shifted to the platform enterprise, but the shift has had huge unintended consequences.
The term platform enterprise may excite Wall Street with dreams of ever-greater profits, but back in Phoenix, it has meant something completely different. Engineering jobs began to move offshore in the city’s avionics plants around the late 1990s. At first, the trend helped companies meet a constant demand for engineers. A few Indian engineers even began showing up in Phoenix from Bangalore, courtesy of H1B visas. Technical information flowed both ways. But gradually, as the aviation industry peaked, and times changed. Hiring freezes were put in place. New cost targets we established for software development which practically dictated that manpower could only be applied from offshore to stay within budget. Rates dropped in the local contract engineering community. Several rounds of layoffs in the past few years predated the current economic crisis. Now, as the economic storm has arrived in full force, the winds in Phoenix have been among the most severe. Hundreds if not thousands of qualified aviation engineers in the area now look for work alongside everyone else. A 10% across-the-board pay cut was recently announced at one company, and all contract engineers were let go on the same day. The collapse of the real estate bubble in Phoenix has been extreme, so that Phoenix leads the nation in home price depreciation and foreclosures. The effect of the Labor shock is stark and undeniable.
The Adjustment Process
The labor shift has been evident for over a decade now. It’s clear that the shift is good for Bangalore, but it’s hurting the people of Phoenix. Let’s take a look at what happens when a job is moved from an advanced to an emerging economy. The advanced economy must create not just a new job, but a new industry. If it makes sense to move one I.T. job to Bangalore, why not a million jobs? And that’s just what happens: a whole industry gets moved.
Jobs were moved from manufacturing to credit-bubble industries like retail, home construction and hospitality. Look at the anemic job growth in I.T. - the sector that was supposed to drive job formation for decades. Not!
Let’s take a look at how the U.S. coped with the loss of manufacturing and then I.T. jobs over the past decade. The table to the right shows the job losses in manufacturing, the anemic job growth in I.T., and the moderate job growth in health care, state and local government, home construction, finance and real estate, the hospitality industry, and retail. The only bright spot was the modest increase in technical service jobs. Health care is arguably consumption, state and local governments are consumption, and the finance, real estate, home construction, hospitality, and retail industries are substantially dependent upon credit, which has crashed. Because labor income is falling, consumption across the board is, and will continue to fall. The advanced economies have not generated new, defensible, wealth-producing industries at the same pace that their mainstays are moving to lower-input-cost regions of the world.
Won’t the Emerging Economies Make Up the Demand?
So as the advanced societies struggle to adapt, what of the LDCs who are gaining the jobs? Won’t their consumption increase to offset the demand drop in advanced economies? Economists, almost to a man, pin their hopes on increasing demand from LDCs. Look to the east, we are told, for they will lead us out of the downturn. This may happen, but it will not happen fast. To answer why, we can again return to the streets of Bangalore.
We discussed the challenges facing India today with an engineering manager for an avionics outsource company. He manages several dozen employees, the equivalent of a senior manager in a US company. He is proud of his Maruti hatchback, a small subcompact equivalent to a Chevrolet Aveo. Most of his engineers ride scooters and motorcycles, as they are much more affordable and bettter suited to commuting than cars. Average Indians (as opposed to Mumbai’s jet set as depicted in ‘Slumdog Millionaire’) are not prone to western style debt levels, so will consume only what they can afford. And this is much less than their advanced-economy counterparts.
Another factor limiting India’s consumption is the infrastructure. In many instances, the streets are relics of the distant past, with few signals, dirt patches, potholes and a wide array of obstacles such as pedestrians, bicycles, vegetable carts, and of course cows. India has the desire to put more automobiles on its roads, but the reality is they will struggle to do this. Another limiting factor is energy. Rolling blackouts plague Bangalore, including Electronic City, its economic flagship. India has nowhere near the power generation capacity required for its vast population. India simply can’t consume anywhere near the pace of an advanced economy; the infrastructure can’t deliver the necessary inputs. It’s going to be several decades before the developing economies can supply enough demand to compensate for the falling demand from the West.
Meeting the Challenge
The falling incomes in the advanced economies that result from Labor Shock pose serious challenges. While supply and demand imbalances have existed before, the scale and rapidity of the phenomena is daunting, and may well be unprecedented. Never before has it been possible for man’s labor to be so mobile and so sensitive to global wage and cost structures. The inevitable result of this would appear to be extreme deflationary pressure on wages, with severe ripple effects across the advanced economies, and coupling effects into the developing economies.
At some point in the future, global labor prices will reach near-parity. But the process of equalization is going to be painful. The question in many people’s minds is no longer “what’s happening”. Many of us have rejected the idea that turning on the credit spigot is the answer. We’re looking at incomes, specifically incomes from labor, and alternatives to labor income for those that made their living selling labor into this increasingly globalized market.
Alternative strategies for workers and affected businesses are not only possible, they are probable and are needed now. Look at what the emerging economies have accomplished in just the past twenty years. Why can’t the advanced economies develop and promulgate new industries, just as the emerging economies did?
There is certainly a big difference between moving some jobs between locales and creating a brand new industry. But that is the task that confronts the advanced economies: to create new industries faster than they’re being lost to wage arbitrage and automation. So far, we’re losing the race, and that is the fundamental reason that we’re in a recession.
Change From the Bottom
It is highly unlikely that the innovation and entrepreneurship that creates industries can come top-down. This is why Washington and Wall Street, and the investor-class in general can’t solve what ails the advanced economies. At RealEconomy.Org, we think the solution will come from the bottom up, and will take the form of massive peer-to-peer collaboration directed toward business formation and entrepreneurship.
This article was a collaboration from RealEconomy and authored/edited by contributors there including ex VRWC
Baby Boomer Generation
A Generational Tide Has Crested
A Generational Tide Has Crested
The baby Boomer economic tide is going out. Boomers have been a major economic force for the past half a century. This population surge, composed of the 78.2 million Americans born between 1946 and 1964 has virtual control over the U.S. economy, which currently accounts for almost 25 percent of worldwide gross product. Beginning after the Second World War, the generations that followed have transformed the economic landscape of the world. Spawned with a keen desire for education, growth, and opportunity, the Boomer generation rebuilt the world, and brought it into the twenty first century. It was always understood that this generation would mark a high tide someday. What has become clear in the past few years is that this high tide was artificially made higher by a credit boom and bubble cycles. And this tide is now going out with a vengeance. This fact – the baby boomers bust cycle - will be a dominant economic factor for the next several years.
After Unimaginable Tragedy – Boundless Growth
Most people agree that the Boomer generation has been an economic force since they were conceived at the end of the most devastating half-century of war in history. This was the generation of American opportunity, an expansive time buoyed by the Marshall Plan and the ascendancy of a U.S. flush with victory and eager for expansion. With much of Europe and Asia devastated by war and only one industrial power left standing, this was a uniquely favorable moment for the U.S. in world history.
The Boomers were the first generation in American history to have significant numbers college-educated, with many advanced degrees fueled by programs like the G.I. Bill. As the first generation to have such access to education, the Boomers invented and expanded the boundaries of everything. They also bought what they wanted with their increased earning power and when that wasn’t adequate, they borrowed, especially in recent years. Boomers felt they had no boundaries and they changed the world in ways unimagined by previous generations.
A Generation of Expansionist Monetary Policy
The economic and financial landscape of the Boomer generation was a Keynesian one, wherein interest rates were quite effectively manipulated to produce high employment rates and consistent growth. Savings became passe; everyone knew that the inflation rate exceeded the interest rate on a savings account! The tax subsidies to investment, begun under the Reagan administration, quickly changed how people “saved” for the future. Responding to government policy, Boomers shifted from savers to investors. 'Savings' became at-risk investments in the stock market. This was a strategic and fundamental shift, and it propelled world economies forward for a few decades after the flush of post-world-war growth abated.
As Boomers headed into their peak earnings years, they poured money into 401(k)’s and mutual funds and bigger and better housing . Housing was was an “investment” too – all done in hopes of “selling high, and retiring someday”. Investment became less about long term growth and more about “leverage”. Leveraging someone else’s savings to overcome shortfalls of one's own.. In the past decade, Boomers ran pell-mell into the leverage game, until the bottom dropped out. Real incomes stopped growing, and Boomers couldn't borrow to cover the difference between what they earned and what they spent. The fundamental assumption that growth could continue indefinitely was now under serious challenge.
Buying Power Implodes
The end of an uptrend is never as clear or easy as its beginning, and this is true of the Boomer generation as well. In the case of the Boomers, the attempts to continue the upward trend have clearly led to our current bubble economy. But bubbles are always unsustainable, and the massive contraction in spending that happened when the debt bubble finally began deflating has been devastating. We have seen a crash in home prices, asset price volatility, a secular bear market, and deleveraging on a massive scale. For many it has shaken their entire economic foundation, and many people are realizing that their dreams of retirement have vanished - they may not be able to retire, ever! Boomers have lost a large percentage their on-paper wealth. Many have lost over 50% of home values and 40% of portfolio values.
Why Buying Power Collapsed
Before we examine the effect of the Boomer’s plight, let’s make sure we’re not exaggerating it. In June of 2008, the McKinsey Global Institute published a report before anyone realized the extent of the housing slump and before the stock market crashed. Boomers were already in serious trouble. By June 2008 less than a third of Boomers had enough savings or equity to even contemplate retirement. Since then things have gotten much worse.
Another, more recent report which corroborates and updates the McKinsey report was released in February 2009 by the Center for Economic Policy Research. This report presents the Boomers' financial situation in early 2009 and projects that situation into the coming decades. This research shows most Boomers don't have enough savings to even contemplate retirement, and that only about ten percent have adequate resources to maintain their current lifestyles into retirement. Many retirees will live well below the standard of living they enjoyed while working. Over half will only have social security to live on.
The result of this huge loss was an immediate demand retrenchment. Take a look at the recent contraction in spending. This is a graph sourced from CalculatedRisk Blog, depicting the annual change in retail sales over the past 15 years.
Surely someone will say “but that contraction is due to global sentiment. The Boomers are a U.S. phenomenon”. Surely you’ve heard of the concept of “coupling”? By that expression, we mean the close-coupling of global economies, and the unfortunate reality is that the U.S. consumer provided most of the demand for export products from around the world, so long as the Ponzi-Economy Myth remained un-contested.
Now the Boomers’ wealth-effect consumption has stopped, cold. The world economy may well take decades to recover from the sudden removal of this demand. Whatever the effect of the Ponzi-collapse on the world economy, the effect on the Boomers themselves has been shattering. For many it has shaken their entire economic foundation, and many people are realizing that their dreams of retirement have vanished - they may not be able to retire, ever!
The Future of the Boomers – the Bust Generation
No matter what happens in the economy, Boomers will need to live and will have the political influence to impel other generations into supporting them, in some way or another. Boomers are aging, and that means they'll need ever increasing health care. This is an interesting paradox for Boomers and the entire country. The common assumption is that aging Boomers will cause the health care system to expand and there will be lots of money to be made. The reality is that Boomers may drive up the demand but have few resources to pay for all this demand. Where is the money going to come from, especially when governments are already running huge deficits that will have to be repaid by the younger generations? How can the advanced economies governments take on ever more entitlements in a time of decreasing tax revenues and spiraling deficits. Something will have to give, and it will.
Many Boomers are relying on pensions and government Social Security programs. They face longer life spans, but this also comes with increased costs in later life. They will be collecting, not contributing. And why shouldn’t they – they built the economy and they feel they deserve to bask in their twilight. Unfortunately, the economic realities are very different from the way it should be.
The Boomer’s demand has been severely curtailed, much earlier than many of them expected. With 401K’s and home equity gone, with pensions suspect and Social Security a ticking time bomb, Boomers are cutting back. A natural part of aging – the desire to simplify, has been brought front and center into the Boomer’s consciousness. They realize their jeopardy and they are reacting. The transformation is not an unnatural one. Aging people naturally want less and less to take care of. Less yard work, less responsibility, fewer consumer goods, less gadgets, more simplified lives. This is a normal part of aging for most people. We have seen it happen in all generations as they age. Retirement villages will grow or families will go back to multi generational configurations like in past generations and in many other countries.
What Does It Mean for the Economy of Tomorrow?
The trend for the Boomer’s economic tide is clear – it’s going out. The trend of the underlying economic math is also clear – it doesn’t work. When economists build their projections for future growth assuming trendlines will move as they have in the past, they risk missing this important generational wave. The Boomer bubble will not be reflated; our nation's current economic policies are pushing on a string. The assumptions of economists and policy makers will almost certainly prove to be too optimistic. As in other things that need ‘fixing’ in the global ecomony, the fixes will have to come, bottom up, from the next generation and from Boomers working from a new foundation with an entirely new set of assumptions. The future is not going to look or act like the recent past because the Boomers are now bust. Now we must deal with the consequences.
This article was a collaboration from RealEconomy and authored/edited by contributors there including ex VRWC
Information Flow is Changing the Economic Landscape
The Internet has radically changed the availability and cost of information. The Internet isn't just moving advanced technology across town, or across the nation. It's moving it from one nation to another, from areas of high concentration of technology to areas of low concentration. It is leveling the playing field.
This revolution of information access is at least as important as the other major revolutions, such as the Industrial Revolution of the late 19th century. The graph below shows the exponential growth in access to information via the Internet:
It's an Economic Earthquake
Free flow information isn't simply a technological change. It represents a fundamental and massive economic force. The economy cannot remain static in the presence of such a powerful shift. The strategies that will work in tomorrow’s economy must take this revolution into account. They must recognize the effects and harness the power of this force in order to be successful.
What is the economic impact of free flow of information? How does it affect today’s business climate? How does it affect your job? What should be our national policy on information flow in the years ahead? Let's explore these questions in detail.
The Economic Impact of Free Flowing Information
Let's examine how the flows of information have changed in the past 15 years. Think of outsourced software development, and global supply-chain management, and online patent databases, open-source software projects, and Wikipedia. Think about AliBaba, the web-based global marketplace for manufactured items. Everyone has nearly equal access to the latest technological information, regardless of which society created that knowledge. This has produced a sudden and accelerating shift in the relative capabilities of whole nations, and has moved entire economies away from certain kinds of economic activity and toward others. Manufacturing has moved to emerging economies. Technical skill has followed via the outsourcing boom. If manufacturing know-how and technical know-how has flowed around the world, can other forms of know-how be far behind?
In addition to changing the worldwide competitive-advantage landscape, the Internet has clearly transformed many areas of our society, such as media, entertainment, commerce, and the retail shopping experience. The presence of a mechanism to quickly comparison shop prices and get the lowest one, or even to conduct online auctions has meant a huge shift toward online shopping, at the expense of local retailers and, of course, jobs. But the elimination of retail and other service sector jobs has not been the only result of the internet explosion. The internet has also had a fundamental impact on other forms of employment as well.
Leveling World Wage-Rates
Most studies place the percentage of workers that are classified as knowledge workers anywhere from 30-50% of the workforce in the most service-oriented economies, such as the UK and US economy. A knowledge worker is one whose contributions depend on the development and synthesis of ideas. While knowledge work has expanded and is expected continue expanding, knowledge workers in the developed world are facing fierce price competition from the places where the information is now more freely flowing. This isn't your ordinary price competition, though. A software engineer’s salary in an emerging market can be 10% of the salary in a developed country. In other words, an engineer in India may make $7,000, while his U.S. counterpart expects to make $70,000. In a globalized economy, who will win this price war?
Opening the Floodgates – Open versus Closed Intellectual Property (IP)
On a recent trip to an aerospace museum in Tucson, Arizona, I was standing in front of a Kaman HOK-1 Twin Rotor helicopter when I met a man with an interesting story to tell. As I studied the design of the helicopter and commented on it, the retired engineer standing next to me told me what really impressed him about Kaman. It wasn’t their helicopters, it was their bearings. He told me the story of his days designing landing gear for companies such as Boeing, and how no company could match the Kaman self-lubricating bearing products. Nobody knew what was inside, and for the longest time, Kaman would not even file a patent on their technology, because that would mean they would have to disclose how they did it. Kaman shut others out of their market for years and successfully deployed their bearings on many aircraft platforms. (http://www.kaman.com/history/history_p.html) Kaman’s approach to information flow was simple – trust no one because then no one can duplicate what you do.
In today’s economic landscape, Kaman’s approach to IP protection and business building is a relic from the past. Today’s corporate strategy is usually built around a different set of criteria. Instead of building basic technology and creating a product line around it, today’s corporations add value to technology they buy. They may develop a market by integrating hardware, and software and meeting an end user need. Instead of technology differentiation, what is more important is time-to-market, head-to-head price competition, and being in the right place at the right time. What becomes deemphasized is the traditional model of building a product line from company owned technology and owning the market because your engineering and know-how is fundamentally just better. One clear culprit in this changing landscape is the free flow of information.
Open development. Open Source. Open Access. Open Architecture. Open Standards. The Open movement has elicited fundamental changes in the way information is shared, especially in the technology industry. The growth of open source software projects, for instance, has been exponential in the past decade. What is interesting is to compare the graph below to the growth of the internet. Clearly, the more information flows, the more collaboration between people occurs. This is very evident in the open source world.
Source: The Total Growth of Open Source Amit Deshpande and Dirk Riehle Proceedings of the Fourth Conference on Open Source Systems (OSS 2008). Springer Verlag, 2008. Page 197-209.
While it can be difficult to assess the impact of open source on, say, overall software employment levels in the US, it suffices to point out that, overall, open source tends to move the software talent pool away from fundamental technology development and toward a value-add support model instead.
While the software industry has been significantly impacted by the free-flow of information, the domain of computer circuit design has proven much more resistant to this free information flow. So called IP cores (blocks of hardware logic) have been a fixture of the hardware design industry for some time, they are much harder to use in an open development process. In the hardware arena, the notion of selling IP (in the form of IP cores, Application Specific Integrated Circuits (ASICs) and silicon chips) is much more developed. A well known example of IP reuse illustrates this point. Consider the the graphics engine first introduced to the world via the Sega Dreamcast.
Sega’s Dreamcast game console has been called many things, but a roaring commercial success is not among the terms commonly used. However, the PowerVR 3D graphics engine found in the Dreamcast has had an illustrious history. Eventually taken over by silicon IP vendor Imagination Technologies, the PowerVR IP now powers most mobile 3D applications on cellular phones, including Apple’s phenomenally successful iPhone. In this case, the same IP resulted in two very divergent commercial products, but the technology's creators were able to retain control, and benefited from the investment in basic technology that they created.
Whether for hardware or software, openness is here to stay. Are business models that stress value add, support, agile development, time to market, and customization the wave of the future? Will we lose our capacity for innovative development in basic technology because no one wants to risk capital developing a technology that everyone can use for free? The mechanisms by which innovation is grown, nurtured, and eventually turned into commercial success are key to tomorrow’s economy. How should we prepare ourselves to compete in a world where everyone's got equal access to information?
Innovation – Relic of a By-Gone Era?
Not long ago, I had lunch with the CEO of the company where I work. He's in regular contact with the venture capital (VC) community, and during our conversation the subject turned to the current climate for VCs in Silicon Valley. The picture he painted was pretty dark. “Nobody is investing in tech right now. They are all in safe investments with known returns, such as real-estate”. His message was clear – we better be prepared to live – and innovate- off of operating revenues if we were to survive. Funds to grow and innovate were going to be scarce for quite some time.
Venture capital is not the only means by which innovation occurs in advanced economy. Innovation has always been what drives advanced economies such as the US forward. On a recent visit to China, I had this pointed out to me. The Chinese, it seems, have a view of America that many Americans themselves no longer seem to believe in. They see America as a shining city on the hill - of technology and innovation. A conversation with my Chinese host was eye-opening. "We need to work with Americans to get the high tech. We are not so strong in this", she said. "In China, we have many engineers, but not so many who now how to build the whole system, to design it".
So, if innovation is the basis of advanced economies strength, but innovation funding is being cut in a risk averse capital environment, where will futire innovation come from especially in the era of free-flow of information? There is no easy answers, but there are some helpful ideas. There are other avenues for innovation funding to take place, such as the U.S. Governments Small Business Innovative Research (or SBIR) program, whereby the U.S. Government conducts targeted research via small businesses to help it solve problems in many areas, especially military technology, and supports commercialization of the developed technology. But relying on government will not be enough. Instead, the new global economy needs a bottom-up approach to nurturing innovation and creating viable businesses incorporating it.
Bottom-Up Transformation and the Information-Enabled Globe
Clearly, we need to adjust to new economic reality. Forces such as the free flow of information are fundamentally changing the economic landscape in ways we are only beginning to understand. The current top-down mechanisms being tried by governments and central banks to restore the economy of yesterday cannot address the long term changes being wrought by these underlying economic forces. Advanced economies are being hollowed out. Their capacity for leadership and growth is being whittled away, while too much treasure, too many resources, and valuable brainpower is being allocated to areas of the economy that may be prifitable but do not further the collective good. The global challenges are great. We can no longer afford to let the situation deteriorate. We need to somehow turn the tables – to harness free flow of information to remake the economy of tomorrow. It will take a bottom-up approach and free-flow of information can be an ally in this endeavor.
How do we do that? We get everyone involved in innovation. We use that free flow of information to equip ourselves to innovate and especially to collaborate. We take innovation to the next level, and we apply it to world-wide problems.
Raising the Level of the Level
Free flow of information is the great income leveller. But it does not have to mean we all are dragged down. Freely flowing information could and should function as an upward leveller. As more knowledge is distributed to more places, the information will begin to elevate areas of the world where future demand must come from. Information can expand knowledge to allow more minds to meet the challenges we all globally face. What must we do? We must learn to better collaborate and exchange information with real problems in mind. Rather than building hundreds of businesses whose goal is to make a cheaper cell phone or different ways to loan money, how about hundreds of businesses whose goal is to make smarter use of agricultural resources? How about smart technology for tomorrow’s farms, or tomorrow’s energy grid? How about low-cost delivery of medical information, in the language it is needed, at the right level, where is it needed? All of these things can be beneficiaries of free flow of information, if we only put it to good use. This is how this massive economic force, the free-flow of information, can be used to create a better world.
This article was a collaboration from RealEconomy and authored/edited by contributors there including ex VRWC