Marginal Revolution has an interesting post today, "The Demand for R&D is Increasing". In it they discuss the potential market for cancer drugs in China, which they estimate is 8X larger than the U.S. Based on this potential market size, the Chinese government is funding pharmaceutical research for the first time.
The takeaways:
Clayton Christensen was correct when he stated that the market size is determined by the number of unserved customers.
China, India, Russia or any other large country should offer incentives to move pharmaceutical research to their country, assuming development costs would be a fraction of the cost in the U.S. (The post estimates that development cost in China is 10 percent of the cost in the U.S.). Such an approach would likely lower healthcare costs for the government, encourage a pharma industrial cluster in the country and raise research standards in local universities, to name a few benefits.
Pharmaceutical prices in the U.S. are outrageously high given the number of worldwide patients for any given drug at an "affordable" price. Given the tiny marginal cost to produce an additional pharmaceutical unit, liability cost cannot explain the high prices given that R&D costs are spread over large unit volumes.
"Wednesday marked a historic milestone in the future of early stage investment and funding for innovation. Roughly 60 days from now, over 200 million Americans will have the option to be angel investors." LawGives.net March 27, 2015
Several Presidents have promoted home ownership despite no constitutional requirement. Most notable was Bill Clinton and we know how well that turned out. Now the SEC has changed the law to permit greater participation in equity crowd funding. Some estimate that 200 million Americans are now eligible to invest. The law was changed ostensibly to permit a larger number of investors to buy shares early in sexy pre-IPO companies like Google, Amazon and Facebook. Probably a popular populous idea. Again, there is no constitutional requirement for such investment rights.
The question I would ask is how many of my fellow Americans are financially literate enough to evaluate early stage companies. Based on returns, only about 10 percent of venture capitalists generate returns consistent with the risk and these are full-time professional investors. On a good day maybe 5 percent of Americans or 10 million of the 200 million are sufficiently literate financially to pick startups. Looks like we are following in the footsteps of Bill Clinton and about to start building toward a huge snafu again, promoting investments that were not prudent for the investors.
I don't object to permitting individual investment in early stage companies or crowd funding. I just do not believe it is the government's role to promote it. That's why I keep referencing the constitution. Looks to me that every time the government starts a populous investment program not required by the constitution, we have huge financial problems.
What could be the the crisis? My biggest concern is the huge amounts of money that normally go into the stock market or bank deposits could now be tied up in illiquid equity investments of uncertain value. Every investor has the right to make their own decisions. I just do not like the government promoting investments that are imprudent for many.
I have been reading an interesting book, "How the West Grew Rich", by Nathan Rosenberg and LE Birdzell. One of the interesting points they make is that as organization evolves, commercial activity changes. For example, at various times man has self-organized around clans, tribes, kingdoms, feudalism, city-states, countries and self-governing countries. Commercial changes began probably with barter, progressed through guilds, private companies, public companies and now there are multi-nationals. Whenever there is a significant change in how people are governed, such change permits new commercial activities.
A reader wrote after my post "Would Y Combinator Invest in a Militia" to tell me that democracy was never the intention of the Founding Fathers (they designed a republic). The writer may be correct, but if we follow Rosenberg and Birdzell maybe we are at one of those inflection points where the form of government is going to change again-- from a republic to a true democracy. Technology is definitely available for populous voting in a direct, secure, authentic way where citizens could propose laws and certain levels of popular votes would make them effective. Challenge will be getting the existing government to agree to such changes, which is why we may need to start without their consent. Maybe a small city like where I live could be an example and pass a law based on popular vote. All the citizens could agree to abide by the law. Failure to follow the law would result in social ostracization.
Many factors tell me that we are on the verge of change in the current form of government in the U.S. For example, new technologies in social media always precede profound social changes, such as a move to democracy. The complete stupidity of the current two party system may suggest that such a system is breaking down. For all the years that I have watched the federal government I cannot remember a period where government was less effective than a period that began with Clinton and continues through Bush to today.
Note: An alternative to democracy as the fundamental organizational change may be a partial return to city-states, as described in this post "City-States and Romer's Idea of Urbanization". Maybe Shanghai or Sao Paulo would be candidates. Another alternative may be private cities.
Sometimes defining words drives me crazy for years. As yesterday's post might indicate "risk" is one of those words. I really like the concept of equating risk with "variance in cash flow" in business usage.
"Social" is another such word that perplexes and annoys me. I cannot understand why this word should have implied normative value, as in social benefits. Social is derived from "society". Social is a characteristic of a group of people. A group of people is a "society". So, society is the sum of the individuals.
Ostensibly capitalism allocates the resources to satisfy individuals and their needs. What capitalism cannot allocate resources to, probably because such a thing cannot attract investment capital, might just be a social benefit. For example, no performing arts center can attract investment capital so maybe such a project is a social benefit.
Social benefit looks a lot like a public good. My rather detailed thinking on the subject is in this post, "Public Good". Until further notice, this capitalist is defining "social benefit" as public good.
One of the benefits of Uber and Waze, to cite just two, is that these companies have disrupted highly regulated parts of our lives. Bitcoin shows the promise to do the same in monetary matters and other financial services. Further efforts to innovate in financial markets will improve our lives (e.g. Apple Pay), expand sources of capital (e.g. hedge fund commercial lending) and foster new financial services (e.g. C2FO).
This article, "What Failure of Macroeconomics", provides an interesting analysis of the last banking crisis in 2008. Three key points:
"Banks emulate each others' strategies...., they herd. The failure of one is therefore likely to be correlated with the failure of others.
One bank's failure will have a chilling effect on others; they'll try to hoard cash by withdrawing credit.
Non-financial firms [commercial enterprises] can't easily switch away from bank finance."
As more and more companies continue to disrupt the regulated financial service(s) industry, the reliance on commercial banks for finance will be reduced. As this reliance on commercial banks declines, the impact of changes (wild swings) in bank commercial lending levels will be reduced. That is undoubtedly a good thing as the possibility of a future banking crisis is diminished.
One issue to ponder. If commercial banks play a smaller role in commercial finance, will the Fed still be able to effectively control the money supply. How will the government manage economic policy without an effective Fed. Don't lose sleep over this question and the upcoming inability of the government to effect economic policy. We will just sort it all out in the new, disrupted, innovative financial services market.
This post may just sound like another commercial for FA Hayek, but I think regulated industries disrupted by a Bitcoin or an Uber strongly suggests that the role of government will be reduced in the future. What the new, reduced scope of government should be is the really interesting question.
(Note: Earlier posts on the financial crisis are here.)
This January, teaching at MIT, I think I had an important realization about social entrepreneurship. In simple terms I think of social entrepreneurship as entrepreneurship directed at solving a social problem. (The sophisticated, academic definition I like is here.) "Social" is just a comment on the type of problem one selects to solve. Nothing more.
So, if social entrepreneurship is just entrepreneurship then why cannot we just use Osterwalder or Bill Aulet or BCG or my own concept of business model to think through scaling a social entrepreneurship venture. (That was the realization.) So, why do we need a special business model for social entrepreneurship. There are three reasons:
The market conditions in much of the developing world are so tough that almost everybody needs partners to handle distribution, sales and marketing.
To get the proper resources, one frequently has to find private sector partners where there is a match between market forces and social objectives
If you can satisfy 1. by 2. then you can avoid the shortfall likely in qualified staff to pursue the social objective; if not revisit 1 and 2.
When one starts a new company in the U.S. one chooses the distribution channel(s), but one hardly worries about how to get product to Des Moines. In Honduras, for example, the complexity of distribution to remote cities can not be described. The best hope is to find an existing distributor knowledgeable in your product category who has the capital to finance more inventory of your product. Should one fail to secure this distributor (lack of matching between market forces and social objective), the alternative may be a donkey train at best. Repeat story for sales channels, marketing, customer education, after sales service.....
In conclusion, the difference between business models for entrepreneurship and social entrepreneurship is that one needs to find the partners and construct the matching between market forces and social objective in social entrepreneurship. In entrepreneurship, particularly in advanced countries, it is more a matching of market forces at all times and markets are efficient about allocating the necessary resources
Note (1): In determining 1 and 2, please pay attention that the business model can be replicated from country to country to continent.
Note (2): Some would argue that "becoming a movement" is a requirement of a scaleable business model in social entrepreneurship. I would agree it makes it much easier, but one needs a very special set of circumstances to pull it off.
This is an excerpt from an article on AVC about enterprise-oriented networks:
“C2FO is a network of businesses and their suppliers that solves a working capital problem for the suppliers and provides a better return on capital to large enterprises. Here is how it works: C2FO has a sales force that calls on large enterprises and shows them how they can use their capital to earn a better return while solving a working capital problem for their suppliers. They bring these large enterprises onto their platform and, using C2FO, they recruit their supplier base onto the platform. They also bring all the accounts payable for the large enterprise onto the platform. Once the network and the payables are on the platform, the suppliers can bid for accelerated payment of their receivables. When these bids are accepted by the large enterprise, the suppliers get their cash more quickly and the large enterprise earns a return on the form of a discount on their accounts payable. C2FO takes a small transaction fee for facilitating this market.”
What caught my eye is that the C2F0 model is an excellent way for F500 companies to share value with smaller suppliers in less developed countries where capital is scarce. If a F500 company were to adopt the C2FO model worldwide for small suppliers, I think that would be a major social program consistent with social entrepreneurship. In fact, maybe it should be a requirement for all companies applying for B Corp status (above a certain size).
A shortage of capital is a major issue in the developing world and the C2FO model helps to organize capital to solve the problem. Perhaps World Bank or Inter-American Development Bank could provide a similar service discounting F500 accounts receivables for small suppliers or partner with C2FO to expand internationally.
I think if I was the CEO of C2FO I would build my brand and value proposition around helping small businesses around the world solve their capital problems and not around "delivering efficient cash flow and bold returns". Package the pitch to F500companies around social responsibility with a return. I might also consider changing the strategy and provide technical infrastructure for a fee to organizations like World Bank or Qatar Foundation (and no longer need a direct sales force).
I just completed my fifth year teaching an IAP course at MIT Sloan on social entrepreneurship. The first two years the course focused on telling the One Laptop per Child story, the third year focused on better defining social entrepreneurship and year four and this year (5) focused on "scaling" social entrepreneurship. To some degree these courses have documented the evolution of my thinking on social entrepreneurship.
The approach to social entrepreneurship that I prefer is to ignore all of the normative hype and merely focus on solving the "social" problems. My cocktail party definition of social entrepreneurship is now:
"A commercially sustainable, scalable solution to a social problem"
In this definition, the selection of the problem the entrepreneur addresses will define them as a social entrepreneur or a traditional entrepreneur. I define sustainability simply in terms of cashflow and not in the alternative usage that includes social, economic and environmental benefits. I am not against a wider range of benefits, but I believe many social ventures fail because they define their mission too broadly to achieve all three types of benefits. Such a broader mission is more difficult to manage, more expensive to execute and more expensive to the disadvantaged person one is trying to help.
In one economist's definition, social entrepreneurship can be defined using the value creation-value capture model of resource-based theory. In this model social entrepreneurship "maximizes value creation and satisfices for value capture" (sufficient to stay in business). Value is defined as "utility". Originally I thought of this transfer of value as exclusively between the provider of product/service and the customer or user of a product or service. This limited definition of "value creation" has bothered me for awhile now because I think it ruled out organizations that are social entrepreneurs. The issue came up in class at MIT and a vigorous debate ensued.
I now believe that the social entrepreneur could transfer value to other stakeholders in addition to the customer. For example, selecting to work with new indigenous people to become suppliers would be a value transfer to the indigenous farmers. Paying above market wages would be value creation for local workers. Providing stock ownership to employees might be creating value for employees. Effectively, value creation can benefit any stakeholder of an organization provided enough value is transferred to the customer or end user to have an exchange (purchase). The exchange is required to meet the requirement for entrepreneurship.
Two additional themes were stressed for the last two years:
Social entrepreneurship offers the opportunity to redefine the role of government
Value proposition is just as important, or more important, in social entrepreneurship because the disadvantaged person may need more assistance to recognize and use a solution to a problem.
My lecture slides from MIT 2015 are available through this link. Download SCALING SE MIT 2015. I very much like the Scaler Model for scaling social entrepreneurship, which is explained in the slides.
Note: The original definition of social entrepreneurship using value creation and value capture was developed by Felipe Santos in an INSEAD Working Paper. He did not consider value transfer to all possible stakeholders in the article, "A Positive Theory of Social Entrepreneurship".
HBS Working Knowledge has an interesting new working paper by Gerald Carlino and William R. Kerr, "Agglomeration and Innovation". The paper discusses the academic literature and the authors' views on the factors that explain the geographic concentration of innovation. Not surprisingly, innovation concentrates in metropolitan areas. Innovation is defined in a classic way as "invention that is commercialized", which in the vernacular would be described as entrepreneurship. Other findings from the article are quoted below:
The benefits from local public subsidies for basic research may not stimulate growth in targeted communities, except for creating a few jobs for scientists and engineers.
They relate co-agglomeration levels [of innovation] to the extent to which industry pairs share goods, workers, and knowledge. They find evidence for all three mechanisms, with knowledge spillovers again the most localized.
For all industries, the localization effects of being near similar businesses decay rapidly with distance within cities—the positive localization effect from being within one mile of another company in one’s own industry is at least ten times greater than the positive effect realized when locating two to five miles away from said company.
While most thoughts of innovation clusters today naturally begin with Silicon Valley, it is important to recall that innovation clusters do move over time.
On the relationship between agglomeration and innovation… What is better established is the development and sharing of specialized business services. This has been especially true with the case of entrepreneurial finance (e.g., angels, VC). Traditional sources of financing, such as bank loans, may be unavailable to innovative start-ups due to their high risk, large financing requirements, and asymmetric information, especially in high-tech industries (Gompers and Lerner, 2001).
The strong concentration of the commercialization of innovation... to the need for specialized business services (e.g., firms specializing in market research and product testing, specialized patent lawyers, and the availability of financing) and similar infrastructure.
Knowledge spillovers are geographically concentrated
There is general empirical evidence that R&D at local universities is important for firms’ innovative activity. Audretsch and Feldman (1996) and Anselin et al. (1997) find localized knowledge spillovers from university R&D to commercial innovation by private firms
Setting aside the academic speak, innovation and entrepreneurship benefit from:
Like minded people very nearby
Support by research universities, and
Support services nearby, most notably capital.
The article should be required reading for politicians. Most government support for entrepreneurship appears to be mis-directed or wasted.
Note: While Miami has made progress in developing the entrepreneurial community, certain theoretical requirements still need to be further addressed.
Friday morning I attended an event on how large companies can use innovation in business model to generate revenue growth. A previous post on this theme is "Innovation in Large Corporations". Much of the discussion focused on alternatives for partnering between startups and the Fortune 500 as a means to foster innovation. Some alternatives include
Venture capital investment
Joint ventures
Spinning off skunk works projects
Sharing problems
I particularly like problem sharing where the Fortune 500 brings a problem to a startup, design firm or university and the resultant solution is commercialized through a new business.
However, sharing problems brings up a new problem in innovation for the Fortune 500--they need to be much more transparent. Christensen has written extensively about why large companies lack innovation, but I have not seen mention of transparency. An example illustrates the point. Electronic medical records (EMR) are not shared between competing medical service providers because they feel such records aid competitors to steal patients (according to a pioneer in defining the format for EMR). To safe guard information at the expense of patient care I would classify as extreme lack of transparency.
Why do companies opt for a lack of transparency, hide behind government licenses and, in general, use contrived barriers. The answer is that it is much easier and lower cost to use contrived restrictions rather than create value for customers. However, the day is not far off when customers are going to break down artificial barriers to transparency in areas such as patient medical information. The balance of power is changing in favor of the customer for transparency and corporations need to recognize this change. One way for corporations to start being more transparent is with their partners, where it might foster more innovation.
After we move large corporations to transparency, we can work on the government.
I think it is debatable whether the best management thinkers today are at Santa Fe Institute (SFI) or the U.S. Army. Both groups share at least one common interest—complexity--as contrasted with the complicated. SFI's approach to complexity tends to focus on advanced mathematics. The U.S. Army's approach involves design thinking and is comparatively more understandable. Today's post comes from The U.S. Army Marine Corps Counterinsurgency Field Manual via the Farnam Street blog.
When should one plan? Much less often than you think. I am not advocating one go mindlessly through life, although it may be less stressful, but rather that one use alternatives to planning. A quote from the Field Manual:
"Planning applies established procedures to solve a largely understood problem within an accepted framework. Design inquires into the nature of a problem to conceive a framework for solving that problem. In general, planning is problem solving, while design is problem setting.Where planning focuses on generating a plan—a series of executable actions—design focuses on learning about the nature of an unfamiliar problem." (My emphasis)
Planning, a series of executable actions, applies in situations that are deterministic and likely to be expressible in numbers. Sales forecasting, architecture, engineering are some disciplines that are largely deterministic. Much larger are the domains that do not lend themselves to mathematical approaches, such as most things that involve politics, emotion and the arts. In these areas, design thinking is one peferred approach.
If we consider managing a business, perhaps the startup effort to find product/market fit lends itself more to design thinking. Maybe growing a business from $30-100 million in annual revenue is more of a planning exercise, until you need to revamp a product, react to a monster competitor entering the market or adjust for a law change (think Uber). Actually most of the events affecting customers or products are not handled by planning. This type of event is not deterministic in nature. Design thinking and framing the problem correctly are a better approach, which is why you can plan less.
Last December I wrote a post, "Good Question: What Good is Wall Street". The post generated quite a lot of discussion but not in the comments. The theme of the post was:
"Banks went astray when they diverted so much capital to support trading schemes in the new derivatives....., which was not part of their original mandate as utilities."
Much discussion circulated around the use of the word "utility" and their "mandate to distribute capital".
Now it is one year later, December 2014. What has Washington learned? Maybe the better question is how should Washington be thinking about banking regulation or perhaps how do we better regulate derivatives. This quote from political economist William Tabb is insightful.
“Technological revolutions and political upheavals condition economic possibilities, which then become the givens for sustained periods of seeming stability in which regulatory regimes designed for the conditions of the social structure of accumulation of the era lend a semblance of orderly progress. These institutional forms, appropriate to one stage of development, become a drag on the development of new forces and emergent relations of production. The vitality of market forces create in their wake social problems which, when they become severe enough need to be addressed through spirited struggle out of which new rules, regulations, and institutions form. [My bold emphasis]
A bit of a leap, but I think the crisis of 2008 shows us that in finance we can no longer regulate institutions and must instead regulate financial instruments such as derivatives. Regulation of banks proved inadequate in part because so many of the key market participants were not banks or regulated by the federal government. Now if we no longer regulate banks as the means to control the financial system, why cannot anybody offer deposits, loans, insurance etc. Put $100 million on deposit with a depository, pass a background check and you can be a "bank", an "insurance" company or a mortgage lender. We could use the Bitcoin infrastructure to record transactions, document margin deposits, etc. Loan to equity ratios, derivatives outstanding to equity ratios, return on equity calculations and similar financial reports would serve as the control mechanism. Such an approach to regulation, based on assets, equity capital and profitability would provide the regulatory control, except Bitcoin would be calculating daily ratios and temporarily shutting down businesses that exceeded their permitted ratios. All transactions would be required to be done on Bitcoin or a similar system exclusively. Regulations would have to be simple enough that computers could calculate ratios, a big improvement over the current system. Asset quality would not be regulated but rather would be "managed" by the market.
The big debate would become how much capital does one have to reserve for a particular financial instrument. Maybe we just say, if it is not a debt or equity instrument, then it is a derivative/insurance product and use three reserve requirements. For example when you strip a mortgage, the principal would be classed as a debt but the interest stream would not be a loan and therefore subject to derivative/insurance reserve requirements.
This scenario might appear fanciful. As soon as the market players start trading outside the system of government regulation my scenario looks more attractive. IT technology is transforming how financial markets work and it is time to take a completely new look at regulation.
Note: The Tabb quotation is from Complexity and the Economy by Brian Arthur. Excellent book.
"The Emerging Architecture Of Internet Applications" lays the ground work for the future elimination of governments and corporations. May take awhile but an attractive idea. Make sure to read all the referenced articles if you think about a new world order.
"It's Not the End of Apps". Excellent article about the future direction of apps, notification and UI.
From Google+: What did the turkey say to the computer? Google, Google. I hope this was written by someone in marketing at Google :)
Marginal Revolution has a post about a new article by Harvard economist Akos Lada entitled "The Dark Side of Attraction" (abstract). Lada makes the argument that Putin invaded Ukraine because his dictatorship was threatened by the economic and political success of the more democratic Ukraine. Ukraine's comparative success highlighted to the Russian populous the lackluster economic results of Putin's government and therefore put its continuation at risk. Lada also examines three historical cases to provide additional analysis on the hypothesis about Ukraine.
F.A. Hayek, Nobel economist, made a similar point in 1960 in The Constitution of Liberty:
"The benefits of freedom are therefore not confined to the free – or, at least, a man does not benefit mainly from those aspects of freedom which he himself takes advantage of. There can be no doubt that in history unfree majorities have benefitted from the existence of free minorities and that today unfree societies benefit from what they obtain and learn from free societies. Of course the benefits we derive from the freedom of others become greater as the number of those who can exercise freedom increases. The argument for the freedom of some therefore applies to the freedom of all."
Would be interesting to know if Putin has read Hayek.
(The reference to the Hayek quote above also came from Marginal Revolution.)
Note: The success of the One Laptop per Child project in Uruguay prompted both the Brazil and Argentine governments to undertake large scale 1:1 computer learning projects. This is another example of the same kind of logic on the part of country leaders that Lada discusses.
In May I wrote a post, "Another reason to explain social entrepreneurship". I basically argued that social entrepreneurship developed as one of the required business models to solve the remaining complex problems, many, many of which are social. These problems will not be solved by AI and robots and therein lie the jobs of the future.
HBR Blog Network has an interesting article today, "Capitalism’s Future Is Already Here". The thesis of the article is that we should reject Milton Friedman's dictum,"the purpose of the corporation is to maximize shareholder returns", which first appeared in the New York Times in 1970. This type of thinking lead to a now outdated set of management practices according to the author because Friedman does not recognize the growing needs of society.
The focus of management should now be the customer and by serving the customer well, you serve the shareholder's best interest. This concept was first presented by Roger Martin, an academic who I have a great deal of respect for. Martin's special talent, in my opinion, is that he always finds the perfect balance between sound theory and workable practice. However, this time I think he got it wrong. Yes, a corporation should always make the customer the priority and the focus of management. (As I tell my students, if it does not affect the customer or put you out of business, it is not an important decision.) Focusing on the customer gives the corporation the flexibility (opening) to consider societal issues, but what is the framework for selecting the issues. Simon Synek of Golden Circle fame would probably say to pick the societal issues and let the customers pick your corporation/product to identify with. The problem with this logic is that homeless dogs and homeless children would be equally valid social objectives for a corporation. Perhaps we should have corporations commit to the UN Millenium Development Goals (UN MDG) or at least one goal. Probably no large corporation would have the courage to pick "human rights" but maybe startups could make that commitment and eventually we would have large corporations committed to human rights. Corporate support in the U.S. for the UN is almost non-existent so the UN MDG is probably not a workable model, but it points us in the direction to address Martin's shortcoming.
This closing comment from the article sums up the important point very well:
"It’s a shift in what society demands of the managers of its most powerful institutions: from narrow definitions of their owners and decisions that serve their short-term interests, to broad acceptance of the responsibility that comes with power and leadership concerned with what is best for society. In the shift, we are learning that an argument about the proper activities of managers can be logical, can be strongly argued, can influence decades of practice in the world’s largest corporations – and can still be plain, flat, dead wrong."
Changing the way that corporate managers think about society in the context of their decisionmaking is one of the objectives of the modern business education. Eventually everyone will realize that Friedman actually did leave us the room to be good corporate citizens.
HBS Working Knowledge has an interesting article today, "Food Stamp Entrepreneurs: How Public Assistance Enables Business Bootstrapping". A controlled study shows that people on public assistance opt for self-employment, start new businesses and increase family income from such activities in greater numbers than another group of equally poor people that do not qualify for government assistance.
One's first reaction might be that government assistance has a real economic and social value, as shown by this study. However, a study in Sweden shows that undergraduate students who exit an entrepreneurship program where venture funding is guaranteed for selected businesses are more likely to opt to start new businesses. Do you recognize the similarity between U.S. public assistance and the program in Sweden?
In each case the program reduces the economic risk of cash flow uncertainty sufficiently for the individual to start a new business. Government assistance is not really relevant. Any program that reduces cash flow risk is likely to spawn new business entrepreneurs.
Recently I met some "do gooders" who advocate for "social entrepreneurship" to solve social problems. In their minds the term looks like this.
Social
entrepreneurship
They believe that social entrepreneurship is the solution to the lack of morality in capitalism. I prefer to think about the shortcomings of capitalism, whatever they might be, as an education problem. If we train the next generation of capitalists and business owners to be more socially concerned in their business decisionmaking, the supposed shortcomings of capitalism may not be so onerous. If we merely taught a framework wherein the bottom of the pyramid was just considered a high growth market where returns needed to match risks, many social problems would be quickly addressed by those capitalist "dogs". Such a framework would probably mobilize a much larger group of problem solvers than the small current group of social entrepreneurs and the new entrants would bring their own capital and access to capital markets.
Just one more observation. In the 1960s the best business school graduates went into manufacturing and the economic growth in the U.S. was spectacular. In the 1980s the best business school graduates went into banking, investment banking and hedge funds and they nearly wrecked the world financial system in 2008. The good news is that the best B school grads today are starting new technology companies, which hopefully means that the dummies will become the bankers as it was in the prosperous period starting in 1960. Many B school grads are interested in social entrepreneurship, which is a great temporary soloution until we educate enough people to realize that capitalism and social responsibility are not mutually exclusive.
For a long time I have thought that lawyers and accountants were going to be disrupted by technology. The value of such a professional service has been reduced in many cases to a license issued by a state government . The recent controversy surrounding Airbnb and the car sharing services is similarly a regulatory issue. Technology is allowing for not only services to be provided in new ways but for trust to be established between user and provider without the need for government licensing.
Banking is a highly regulated industry where I think alternative service providers are emerging. Several examples support this trend.
Hedge funds are making commercial loans to small businesses because banks are restrained by regulatory concern
Bitcoin is well known but Stellar has just emerged. Stellar describes itself as:
"Stellar is a decentralized protocol for sending and receiving money in any pair of currencies. This means users can, for example, send a transaction from their Yen balance and have it arrive in Euros, Yen, or even bitcoin. We’re expecting to support the usual categories of transactions: payments to a merchant, remittances back home, or rent splits with a roommate. You can hold a balance with a gateway, which is any network participant you trust to accept a deposit in exchange for credit on the network."
Stellar makes it possible for anybody to take deposits using their open source code. Such an organization could then lend the money to a hedge fund to lend to small businesses. We just duplicated most of the value of a bank with out any regulation. Imagine if Google or Facebook took the deposits in Gibraltar or Cayman islands and promised significant new jobs there in return for no local regulation. Perhaps we have more confidence in those organizations than in Citibank or Wells Fargo.
Vivek Wadhwa's Washington Post op-ed piece, "We’re heading into a jobless future, no matter what the government does", has gotten a lot of pick up on the Internet. Wadhwa is a professor at Stanford with a distinguished academic career. The article basically discusses the dramatic decline in employment opportunities due to technologies such as AI, automation and robots. I particularly like the joke about a factory:
“The factory of the future will have only two employees, a man and a dog. The man will be there to feed the dog. The dog will be there to keep the man from touching the equipment.” Carl Bass, CEO Autodesk
Wadhwa makes a more serious point when he discusses the role of government in addressing the lack of future jobs. In the industrial age government could manage policy to create enough work for people to provide for their families and maintain self-respect. Wadhwa believes that government can no longer manage policy to create sufficient jobs. The current efficiency of production and the expected increase in productivity will result in government policy being ineffective to create new jobs faster than existing jobs are eliminated.
If Wadhwa is correct, which I think he is, then what is the role of government. If government cannot manage the economy to satisfy individual economic needs then what role is left for government. This is perhaps the bigger question raised by Wadhwa. Why do we need a government with 2.7 million government employees, excluding the military, if the government cannot satisfy the most fundamental economic well being of people. Maybe government should be re-thought.
Of course, many, including Hayek and Wadhwa, have said that government cannot manage complex problems. Doubtful government will redefine its role and equally unlikely government will develop economic policies that counterbalance the natural job loss from new technologies.