Wednesday, March 19, 2014

Capitalism without Capital: A Cambrian Moment

It has become clear that there is an economic revolution underway. Technology and innovation are creating new types of companies and services. It has been referred to as the second economy, the frontier economy, the digital economy, the knowledge economy, the zero-marginal-cost economy, and the second machine age, among others. Others have viewed developments more gloomily and used terms like the jobless economy, and the taskrabbit economy.

The defining characteristic of this new economy is that technology has provided the means whereby an idea for a product can lead to the formation of a company to implement that idea in a very short time and with almost no requirement for capital. Nathan Heller produced a fascinating look at this new entrepreneurial environment and the people who live in it in an article for The New Yorker: Bay Watched: How San Francisco’s new entrepreneurial culture is changing the country. Heller provides this insight provided by an entrepreneur named Naval Ravikant.

"Once, an entrepreneur would go to a venture capitalist for an initial five-million-dollar funding round—money that was necessary for hardware costs, software costs, marketing, distribution, customer service, sales, and so on. Now there are online alternatives. ‘In 2005, the whole thing exploded,’ Ravikant told me. ‘Hardware? No, now you just put it on Amazon or Rackspace. Software? It’s all open-source. Distribution? It’s the App Store, it’s Facebook. Customer service? It’s Twitter—just respond to your best customers on Twitter and Get Satisfaction. Sales and marketing? It’s Google AdWords, AdSense. So the cost to build and launch a product went from five million….and it’s now to fifty thousand.’ As a result, the number of companies skyrocketed, and so did the number of angels: suddenly, you didn’t need to be a venture-capital firm to afford early equity."

With startup costs so low it is quicker and easier to try out an idea to see if it works than it is to try and predict whether it will work or not.

This type of environment led The Economist to publish an extended article on startups titled A Cambrian Moment.

The reference is to a period in evolutionary history that began about 540 million years ago and is referred to as the Cambrian Explosion. Before that time only very simple life forms existed. It seems that nature had somehow managed to assemble the tools needed to create more complex life forms and spent millions of years experimenting. Most of these prototypes disappeared quickly. Only a relatively few anatomical forms survived to form the template for the animal kingdom that has persisted to this day. Nature continues to experiment with new species, but they mostly conform to the same anatomical types.

"One explanation for the Cambrian explosion of 540m years ago is that at that time the basic building blocks of life had just been perfected, allowing more complex organisms to be assembled more rapidly. Similarly, the basic building blocks for digital services and products—the ‘technologies of startup production’, in the words of Josh Lerner of Harvard Business School—have become so evolved, cheap and ubiquitous that they can be easily combined and recombined."

"Startups are best thought of as experiments….testing what can be automated in business and other walks of life. Some will work out, many will not. Hal Varian, Google’s chief economist, calls this "combinatorial innovation". In a way, these startups are doing what humans have always done: apply known techniques to new problems. The late Claude Lévi-Strauss, a French anthropologist, described the process as bricolage (tinkering)."

Jeremy Rifkin recognizes this new economy and suggests we spend less time documenting its existence and more time worrying about where it may be taking us. He produced an article for the New York Times: The Rise of Anti-Capitalism.

"We are beginning to witness a paradox at the heart of capitalism, one that has propelled it to greatness but is now threatening its future: The inherent dynamism of competitive markets is bringing costs so far down that many goods and services are becoming nearly free, abundant, and no longer subject to market forces. While economists have always welcomed a reduction in marginal cost, they never anticipated the possibility of a technological revolution that might bring those costs to near zero."

Rifkin points out that technology is creating what he refers to as "the internet of things."

"This new technology platform is beginning to connect everything and everyone. Today more than 11 billion sensors are attached to natural resources, production lines, the electricity grid, logistics networks and recycling flows, and implanted in homes, offices, stores and vehicles, feeding big data into the Internet of Things. By 2020, it is projected that at least 50 billion sensors will connect to it."

"People can connect to the network and use big data, analytics and algorithms to accelerate efficiency and lower the marginal cost of producing and sharing a wide range of products and services to near zero, just as they now do with information goods."

Rifkin seems to believe there is a positive nature to this development in that it will encourage social interaction and social inclusiveness—presumably by favoring shared usage of goods and services rather than private ownership.

"What makes the social commons more relevant today is that we are constructing an Internet of Things infrastructure that optimizes collaboration, universal access and inclusion, all of which are critical to the creation of social capital and the ushering in of a sharing economy. The Internet of Things is a game-changing platform that enables an emerging collaborative commons to flourish alongside the capitalist market."

"This collaborative rather than capitalistic approach is about shared access rather than private ownership. For example, 1.7 million people globally are members of car-sharing services. A recent survey found that the number of vehicles owned by car-sharing participants decreased by half after joining the service, with members preferring access over ownership. Millions of people are using social media sites, redistribution networks, rentals and cooperatives to share not only cars but also homes, clothes, tools, toys and other items at low or near zero marginal cost. The sharing economy had projected revenues of $3.5 billion in 2013."

Rifkin provides this rather remarkable conclusion:

"As for the capitalist system, it is likely to remain with us far into the future, albeit in a more streamlined role, primarily as an aggregator of network services and solutions, allowing it to thrive as a powerful niche player in the coming era. We are, however, entering a world partly beyond markets, where we are learning how to live together in an increasingly interdependent, collaborative, global commons."

There are a number of ramifications associated with this picture of the economic future that Rifkin does not consider in this article.

Users of car sharing or ride-sharing services may gain value for themselves, but there is a cost to society. If people buy fewer cars there will be fewer manufacturing jobs and the price of cars will go up. If fewer people use public transit then service will be diminished and price will likely increase. Public transit is designed to ensure that the least of the citizens are able to get around at an affordable cost.

Much of this new economy seems designed to make life easier for people who have money to spend, while at the same time limiting opportunities for those who need stable employment in order to deliver a reliable income. The idea of an economy where individuals earn money by bidding on tasks and hoping to be low bidder brings to mind Victor Hugo’s Les Misérables. Everyone becomes a day laborer. That is no way to live.

We may not be supporting the social commons; we may be destroying it.

The Cambrian analogy seems appropriate. We are performing experiments and moving in unknown directions—perhaps even random directions. We are in the process of making enormous changes in our economy and in our society with little thought as to whether or not it is a good idea.

Stephen J. Gould wrote a Scientific American article entitled The Evolution of Life on Earth in which he describes some of the lessons learned from studying the record from the Cambrian Explosion.

"Humans arose, rather, as a fortuitous and contingent outcome of thousands of linked events, any one of which could have occurred differently and sent history on an alternative pathway that would not have led to consciousness...only one member of our chordate phylum, the genus Pikaia, has been found among these earliest fossils. This small and simple swimming creature , showing its allegiance to us by possessing a notochord, or dorsal stiffening rod, is among the rarest fossils of the Burgess Shale, our best preserved Cambrian fauna....Moreover, we do not know why most of the early experiments died, while a few survived to become our modern recognized traits unite the victors and the radical alternative must be entertained that each early experiment received little more than the equivalent of a ticket in the largest lottery ever played out on our planet—and that each surviving lineage, including our own phylum of vertebrates, inhabits the earth today more by the luck of the draw than by any predictable struggle for existence."

If we are to model nature with a trial and error approach to our society, then we should remember that most of nature’s experiments end badly. Also, since we are astonishingly lucky to be here, we shouldn’t push our luck any further.

A little thought about where we should be heading seems appropriate.

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