Economics is…
Link: Despair, Inc.
Our Exponential Future
About 1260 AD, Ibn Khallikan, a Kurdish historian living in the Abbasid Empire (modern Iraq), wrote an encyclopedia with biographies of many famous men (though no women). One of the biographies includes a story about chess and the meaning of “exponential growth.” The story takes place in India, because Ibn Khallikan knew that chess was a game that came from India.
According to this story, King Shihram was a tyrant who oppressed his subjects. One of his subjects, a wise man named Sissa ibn Dahir, invented the game of chess for the king to play, to show him that a king needed all his subjects and should take good care of them. King Shihram was so pleased that he ordered that the game of chess should be preserved in the temples, and said that it was the best thing he knew of to train generals in the art of war, a glory to religion and the world, and the foundation of all justice.
Then King Shihram asked Sissa ben Dahir what reward he wanted. Sissa answered that he didn’t want any reward, but the king insisted. Finally Sissa said that he would take this reward: the king should put one grain of wheat on the first square of a chessboard, two grains of wheat on the second square, four grains on the third square, eight grains on the fourth square, and so on, doubling the number of grains of wheat with each square (an exponential rate of growth).
to bring out the chessboard and they started putting on the wheat. Everything went well for a while, but the king was surprised to see that by the time they got halfway through the chessboard the 32nd square required more than four billion grains of wheat, or about 100,000 kilos of wheat. Now Sissa didn’t seem so stupid anymore. Even so, King Shihram was willing to pay up.
But as the slaves began on the second half of the chessboard, King Shihram gradually realized that he couldn’t pay that much wheat – in fact, to finish the chessboard you would need as much wheat as six times the weight of all the living things on Earth.
(London, 1843-1871, Biographical dictionary of Ibn Khallikan, vol. III, p. 71). – Kidipedea
One big risk for humans is that we may not always precieve the world correctly. We live in a world that can change exponentially with brains that like to plot things out linearly.
In other words, we do a bad job at perceiving reality in some cases. (It is no secret to those of us interested in cognitive science know that humans minds are flawed. Here is a list of cognitive biases if you want to peruse a few. We have a habit of perceiving things that are not true.)
The theory I propose that can cause us problems in the future: Humans seem to think (and plan) in a linear growth fashion while reality can be exponential.
So, we seem to have problems getting our minds around exponential behaviors. They can sneak up on us, like in the old story above. For example, energy usage, population growth, and consumption of resources are all growing at an exponential rate. Exponential depletion of resources combined with exponential consumption layered on top of exponential population growth appears to be the reality we are moving into at this point.
Let’s take a look at a population graph of the world since 10,000 BC. This is an exponential graph. Once you get on the right side of one of these things, it can start going almost straight up at this scale.
Combine a population that is growing exponentially, combined successful populations of people moving out of poverty to become ever more consumption oriented – and you could perhaps have a problem at some point.
Our history plotted on this population chart has been one where growth and consumption has been the goal throughout history – and man has not had an issue because the finite amount of total resources was so much larger than the population’s demands. But, I think there has to be a point where exponentially depleted resources meet exponentially growing demand, and we have an issue. We would at that point meet a new paradigm that we have never encountered before. So, the future over the next 20 years could be much different than the last 20.
On the positive side, we can make progress at an exponential rate. Ray Kurzweil, futurist, technologist, and all around genius predicts exponential growth in certain information technologies, which can allow us to survive and thrive. For example, he believes that solar energy is improving at an exponential rate and will be capable of providing all of our energy needs in 20 years.
The reason why solar energy technologies will advance exponentially, Kurzweil said, is because it is an “information technology” (one for which we can measure the information content), and thereby subject to the Law of Accelerating Returns.
“We also see an exponential progression in the use of solar energy,” he said. “It is doubling now every two years. Doubling every two years means multiplying by 1,000 in 20 years. At that rate we’ll meet 100 percent of our energy needs in 20 years.”
Solar Power to Rule in 20 Years, Futurists Say
So, what what topics should be paid attention to in order to understand the future? I recommend 4 words that start with “E”: Energy, Environment, Economics, and last but not least… Exponential growth.
He who lives by free, dies by free?
Mark Cuban had some comments on the Free/ Freemium business model…
Lets look at the rule that eventually KILLS all freemium based content plays:
There will always be a company that replaces you. At some point your BlackSwan competitor will appear and they will kick your ass. Their product will be better or more interesting or just better marketed than yours, and it also will be free. They will be Facebook to your Myspace, or Myspace to your Friendster or Google to your Yahoo. You get the point. Someone out there with a better idea will raise a bunch of money, give it away for free, build scale and charge less to reach the audience. Or will be differentiated enough, and important enough to the audience to maybe even charge more. Who knows. But they will kick your ass and you will be in trouble.
Link: blog maverick
Why you need to fail
People with a growth mindset feel smart when they’re learning, not when they’re flawless.
Michael Jordan, arguably the world’s best basketball player, has a growth mindset. Most successful people do. In high school he was cut from the basketball team but that obviously didn’t discourage him: “I’ve missed more than 9,000 shots in my career, I’ve lost almost 300 games. Twenty-six times I’ve been trusted to take the game wining shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”
Link: Why You Need to Fail – Peter Bregman – HarvardBusiness.org
10 Things Most MBA Schools Won’t Teach You About Startups
As I move close to a full decade since I picked up my master’s in business and technology, it is good to reflect back on what you may not hear in class.
From OnstartUps.com, here is a summary of the 10 things you won’t learn about startups.
(Hat Tip Rob May)
1. No amount of strategic planning will ever substitute for managing your cash flow.
2. There are always more things to do than there is time to do them.
3. Sleep is that time you’re working on startup problems with your eyes closed.
4. It helps not to call people “human resources”.
5. No amount of academic theories on efficient pricing will prepare you completely for what people will actually do.
6. Price discrimination (in an economic sense) is a wonderful thing. Except that it often ignores the real costs in terms of organizational complexity. Every time you add a new product or product option a small part of your company dies.
7. There are an infinite number of ways to spend money on marketing. You have no idea what’s actually going to work. The idea is to experiment broadly and learn lessons cheaply.
8. To recruit the best people…
9. There’s a lot of value to being likable. Good things happen when people like you.
10. Advanced game theory is exceptionally useful. Basic game theory is dangerous — because it assumes that you’re dealing with a bunch of rational “players”.
Read the full article at this link: Startups: 10 Things MBA Schools Won’t Teach You
Consumption being replaced by creation?
Conspicuous consumption has been with us quite a while. Humans like to “compete with the Joneses” by acquiring ever more goods than others they observe in society. But, with the recession and other societal pressures, people are slowing their spending (buying smaller houses, fewer cars). They also may be replacing their “conspicuous consumption” to some degree with “conspicuous creation”.
In other words, as opposed to competing with your neighbor based on a bunch of physical stuff, you can partially compete with virtual stuff (blogs, picture, videos, etc) shared online.
Good magazine has some good comments on the topic:
Throughout the last century conspicuous consumption meant buying cars, boats, larger houses, jewelry, art, and meals in restaurants. Keeping up with the Joneses required a lot of energy—and produced a lot of carbon and waste. More and bigger became our mantras. The average size of the American home leapt from 983 square feet in 1950 to 2,080 in 1990, increasing roughly 20 percent per decade. The number of cars per U.S. family saw a similar 14 percent growth rate per decade over the same period.
Just over 100 years since Veblen introduced the idea of conspicuous consumption, however, the practice appears to be losing steam. The rates of growth in average home size and family car ownership in the United States have both roughly halved since 1990. The square footage of an average U.S. home peaked in the second quarter of 2008, and is now back down to pre-2004 levels. The average number of cars per household is following a similar trajectory.
Are people becoming less conspicuous? Hardly. Is this a response to the recession? Partially. A conscious effort to curb the environmental crisis? Unlikely. It may be, in fact, that houses, cars, clothes, and other traditional means of distinguishing oneself are no longer the best tools for the job.
…
Professional thirtysomethings spend more time polishing their LinkedIn pages than pruning their front lawns. Prospective singles—men and women—focus more on tweaking their Match.com or eHarmony profiles than they do searching for that perfect convertible.
Old Media Survival Tips
Chris Anderson kicked off Wired’s Disruptive By Design conference and gave some ideas for old media wanting to find out how to make money in the new Internet driven world.
“This is the law of gravity online,” says Anderson. “Everything that becomes digital will become free. There will be a free version, either you will be competing with free or giving it away for free and selling something else. If it is not zero today, it will be zero tomorrow.”
When he addressed how this is affecting media and whether or not traditional media organizations should charge for their content online, he draws a number of conclusions from what the Wall Street Journal is doing. The tension is not so much free versus paid, but free versus freemium. In one slide, Anderson comes up with the following rules for media companies trying to figure out how to make money online:
1. The best model is a mix of free and paid
2. You can’t charge for an exclusive that will be repeated elsewhere,
3. Don’t charge for the most popular content on your site,
4. Content behind a pay wall should appeal to niches, the narrower the niche the better
Adam Smith Warned Against Subprime Lending
Adam Smith warned against subprime lending. In The Wealth of Nations, he advocated usury laws within the context of a free market.
From The Wealth of Nations:
The legal rate…ought not be much above the lowest market rate. If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent, the greater part of the money which was to be lent would be lent to prodigals and projectors [promoters of fraudulent schemes], who alone would be willing to give this high interest….A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it.
When the legal rate of interest, on the contrary is fixed but a very little above the lowest market rate, sober people are universally preferred, as borrowers, to prodigals and projectors. The person who lends money gets nearly as much interest from the former as he dares to take from the latter, and his money is much safer in the hands of the one set of people than in those of the other. A great part of the capital of the country is thus thrown in the hands in which it is most likely to be employed with advantage.
naked capitalism: Adam Smith Warned Against Subprime Lending.
Warren Buffett on the Recession and Bailout
SUSIE GHARIB, ANCHOR, NIGHTLY BUSINESS REPORT: Are we overly optimistic about what President Obama can do?
WARREN BUFFETT, CHAIRMAN, BERKSHIRE HATHAWAY: Well I think if you think that he can turn things around in a month or three months or six months and there’s going to be some magical transformation since he took office on the 20th that can’t happen and wouldn’t happen. So you don’t want to get into Superman-type expectations. On the other hand, I don’t think there’s anybody better than you could have had; have in the presidency than Barack Obama at this time. He understands economics. He’s a very smart guy. He’s a cool rational-type thinker. He will work with the right kind of people. So you’ve got the right person in the operating room, but it doesn’t mean the patient is going to leave the hospital tomorrow.
…
SG: But I know that during the election that you were one of his economic advisors, what were you telling him?WB: I was telling him business was going to be awful during the election period and that we were coming up in November to a terrible economic scene which would be even worse probably when he got inaugurated. So far I’ve been either lucky or right on that. But he’s got the right ideas. He believes in the same things I believe in. America ’s best days are ahead and that we’ve got a great economic machine, its sputtering now. And he believes there could be a more equitable job done in distributing the rewards of this great machine. But he doesn’t need my advice on anything.
…
SG: What’s the most important thing you think he needs to fix?WB: Well the most important thing to fix right now is the economy. We have a business slowdown particularly after October 1st it was sort of on a glide path downward up til roughly October 1st and then it went into a real nosedive. In fact in September I said we were in an economic Pearl Harbor and I’ve never used that phrase before. So he really has a tough economic situation and that’s his number one job. Now his number one job always is to keep America safe that goes without saying.
SG: But when you look at the economy, what do you think is the most important thing he needs to fix in the economy?
WB: Well we’ve had to get the credit system partially fixed in order for the economy to have a chance of starting to turn around. But there’s no magic bullet on this. They’re going to throw everything from the government they can in. As I said, the Treasury is going all in, the Fed and they have to and that isn’t necessarily going to produce anything dramatic in the short term at all. Over time the American economy is going to work fine.
SG: There is considerable debate as you know about whether President Obama is taking the right steps so we don’t get in this kind of economic mess again, where do you stand on that debate?
WB: Well I don’t think the worry right now should be about the next one, the worry should be about the present one. Let’s get this fire out and then we’ll figure out fire prevention for the future. But really the important thing to do now is to figure out how we get the American economy restarted and that’s not going to be easy and its not going to be soon, but its going to get done.
SG: But there is debate about whether there should be fiscal stimulus, whether tax cuts work or not. There is all of this academic debate among economists. What do you think? Is that the right way to go with stimulus and tax cuts?
WB: The answer is nobody knows. The economists don’t know. All you know is you throw everything at it and whether it’s more effective if you’re fighting a fire to be concentrating the water flow on this part or that part. You’re going to use every weapon you have in fighting it. And people, they do not know exactly what the effects are. Economists like to talk about it, but in the end they’ve been very, very wrong and most of them in recent years on this. We don’t know the perfect answers on it. What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake and we don’t know how effective in the short run we don’t know how effective this will be and how quickly things will right themselves. We do know over time the American machine works wonderfully and it will work wonderfully again.
SG: But are we creating new problems?
WB: Always
[Original Excerpt from PBS Nightly Business Report]
I'm Will, a Principal within the Innovation group of a Fortune 100 company. I am a corporate entrepreneur and Innovation expert.
