December 2011 Archives

The 1930s are best known as the time of the Great Depression, brought on by the Wall Street crash of 1929.  Most point to speculation, excessive debt, and an ensuing stock market bubble as the "cause" of the depression.  The Great Depression was accompanied by the Dust Bowl--a time when much of America's agricultural "Heartland" dried up and blew away, leading to massive unemployment, homelessness, and social upheaval (remember the John Steinbeck classic, The Grapes of Wrath?).

Few remember, however, that the so-called "Roaring 20's" were the time when the agricultural economy in the US actually began its steep descent.  In fact, the period immediately following World War I, represented the first large-scale application of mechanized farming practices in the World.  This was uncharted territory:  Never before had farmers used tractors and fossil fuels to cultivate increasingly large tracts of land to grow commodity crops for a burgeoning urban population.  Not surprisingly, there were unintended consequences.   In the free-for-all that ensued, farmers plowed and over-cultivated their way to oblivion, causing widespread soil erosion, loss of fertility, and ultimately, the Dust Bowl.

Some would say that the collapse of the farm economy was what made the Great Depression the decade long debacle that it became.  Only with the advent of the Soil Conservation Service and a whole set of other institutions aimed at regulating and improving industrial agricultural practice, did the situation turn around after the Second World War.

Fast  forward to the 2000s.  In 2008, the financial crisis, and the Great Recession struck.  Most point to speculation, excessive debt, and an ensuing housing bubble as the "cause" of the recession.  Few remember, however, that the 1990s were the time when academic finance and the financial services industry really took off.  Driven by deregulation and the rapid develop of distributed computational power, exotic financial products such as CDOs and derivatives became possible for the first time.

Just like mechanized farming in the 1920s, these new tools got out of hand.  In the free-for-all that ensued, financiers securitized and arbitraged their way to oblivion, causing widespread misery and wealth destruction. 

The question is:  where is the financial equivalent of the Soil Conservation Service? 

When will we create the global institutions required to regulate and improve the functioning of this new force of nature?  Until this happens, expect the New Dust Bowl to continue.

Since the dawn of the Industrial Revolution, economies of scale have ruled the day, with massive investments in power plants, pipelines, factories, transmission lines, dams, and highways to more efficiently serve the burgeoning consumption needs of the rising consumer classes. Industrial-era technologies (such as electricity, petrochemicals, and automobiles) were also closely associated with mass production, the assembly line, and centralized, bureaucratic organization, resulting in the rise of organized labor, worker alienation, and growing social stratification.

As we enter the second decade of the new century, however, the "dark satanic mills" of the Industrial Revolution are giving way to a new generation of technologies that promise to change dramatically the societal, economic, and environmental landscape. The information economy powered by the microchip has already begun to revolutionize society by democratizing access to information and empowering the repressed. Indeed, You-Tube, Twitter, and the rapid emergence of the "blogosphere" have spawned a bottom-up revolution in user-generated content.



Increasingly, the technologies of tomorrow will be decentralized, distributed in character and disruptive to incumbent firms and institutions. It is much cheaper and more energy efficient, for example, to treat drinking water at the point of use, rather than transporting massive quantities of clean water through pipes from treatment plants only to have much of it leak out or be re-contaminated before it reaches its final destination.

Indeed, we are witnessing a dramatic reversal of the logic of scale--the new diseconomies of scale.

Think about it: Over the past decade or so, we have witnessed the rise of: distributed generation of energy, point of use water treatment, community supported agriculture, microbreweries, point of care healthcare, microfinance, and sustainable construction, to name just a few. Indeed, the term "nano" has become de rigeur.

Because existing players in the utility, energy, transport, food, water, and material sectors have so much to lose, however, it is enormously difficult for the entrepreneurs developing such distributed solutions to gain traction in established markets. Yet given their small scale and distributed nature, such clean technologies hold the potential to creatively destroy existing hierarchies, bypass corrupt governments and regimes, and usher in an entirely new age of capitalism that brings widely distributed benefits to the entire human community.

And rather than depending on national governments or paternalistic social engineers to design the future for the aspiring masses, these disruptive new technologies may be best brought forward through the power of capitalism--not the capitalism of the Industrial Revolution, which enriched a few at the expense of many, but rather a new, more dynamic form of global capitalism that will uproot established elites and unseat incumbents by creating opportunity at the base of the economic pyramid on a previously unimagined scale.

When Thomas Newcomen pumped water out of an English Coal Mine with a makeshift steam engine for the first time in 1722, little did he know that he was giving birth to the defining characteristic of industrial capitalism for the next two centuries--the relentless quest for greater labor productivity.  By substituting coal for manpower, the English textile industry drove the industrial revolution and established the template--and "rules of the game"-- for all industrial enterprises to come.  From cars to chemicals to computer chips, the very concept of "productivity" came to mean producing more product with fewer person-hours of work.

This metric made sense in the 19th century, when coal (and other raw materials) were plentiful and people were relatively scarce.  Now, however, exactly the reverse logic applies--fossil fuels and other raw materials are increasingly scarce and people are relatively plentiful.  We now live with the paradox that increasing business productivity means fewer jobs (especially when economic growth slows), precisely at the time that we need productive employment the most.

Occupy Wall Street, the Arab Spring, the corruption crisis in India, the rural revolt in China--all of these growing social protest movements originate from the same source--a growing "opportunity crisis" driven by unemployment, underemployment, alienation, and humiliation.  The time has come, therefore, to overthrow the tyranny of labor productivity and graduate to a new definition for what it means to be "productive" in business.

In the emerging economies of the world, this revolution has already begun.  ITC in India, for example, prides itself on creating livelihoods for the poor in the rural areas as part of its strategy for wasteland reforestation and agricultural productivity improvement.  Indeed, as commodity costs rise, it may make sense to redefine productivity--from capital intensity and labor efficiency to labor intensity and capital efficiency.  In the 21st century, "sustainable" enterprise must define success by the extent to which they create productive and fulfilling employment for the people of the world. 

Is business up the challenge?