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Ubiquitous Innovation challenges Every Assumption

We live in an economic system that allows innovative people to go from zero to hero in nothing flat.   Of course, on some level, that’s always been possible.

However, what makes this era truly exceptional, is the frequency, speed, and scale of how the innovation process works.  In other words, success from innovation happens much more often to many more people in a lot less time to a greater degree than ever before.

The interesting thing about this rise in innovation is that it isn’t because our economy was well planned, or that our markets are extremely efficient.  It’s due to something new.

It’s due the global network we’ve built.  The network that now connects all of us.  This network has or is connecting everything in a way that makes innovation much easier.

The upshot is that the ability of this network to enable innovation is distorting (!) the economic and financial system that runs the world.  It’s dynamically rewiring it in ways that nobody understands fully, in large part by making innovation common.

That’s a tough assumption for economics to swallow.  For the most part, economic theory is based on the idea of equilibrium.  A stable flow of goods, services, and finances.  In economic theory, innovation does not exist.  It’s not part of the theory.  There’s no mechanism for creating it.

Innovation comes from the black box of the void.  It’s exogenous.  It arrives unexpectedly from outside the tidy envelope of economic theory (where entrepreneurs are merely merchant adventurers buying and selling trinkets).

The increasing role of innovation in how our world works hasn’t gone unnoticed by economists.  As a result, there have been numerous efforts to revise economics (from Joseph Schumpeter to the frantic efforts in the last decade) in a way that embraces innovation.  However, the degree of overhaul required to accomplish the feat may exceed the capacity of economic philosophy to absorb it, absent catastrophic failure.

The rise of ubiquitous innovation has made the assumptions upon which we predicate our social and economic system obsolete.

You can see this at the mathematically level. All of the governing logic we’ve built to manage this system is based on degree of stability.  A Gaussian curve with a trend towards centrality.  As my compatriot in critique, Nassim Taleb (the author of the Black Swan and Anti-Fragile), has pointed out on numerous occasions, down to their academic roots, these systems of social philosophy and managerial practice assume a level of stability that doesn’t exist.

All of the models used by our economic and financial elites assume some central tendency to the randomness they see — a relatively stable, thermodynamic random walk based on Gaussian curves.  The problem is, we don’t live in a world that works like that.  In fact, we’ve never lived in a world like that, although it really didn’t matter until recently.  Until recently, the match between reality and a Gaussian curve was close enough to provide benefit — the successes outweighed the failures.

With the arrival of ubiquitous innovation made possible by the global Internet, this is FAR from true anymore.

The global network we’ve built is completely rewiring these system and it is in the process of fattening up the tails on our distributions, increasing the extreme outcomes (crash, boom, etc.) that are possible.  And as these tails get fatter, the gap between the performance of our institutions/firms/etc. and the way the rewired economic system really works will widen.  Mistakes will increase in severity and frequency until modern economic theory and the institutions founded upon it are  inevitably replaced.

On a more practical level, a world awash in innovation calls into question every social and economic assumption we have.  From how we allocate decision making authority in our economy (wealth) to how we provide stability (social safety net) to how we protect ourselves (public safety to national security) to how we tax to how we regulation/protect to the basic viability of our political system.

I am positive we’re not going to arrive at new assumptions regarding governance, wealth, social stability, etc. overnight.  We’re certainly not going to see well thought out solutions arrive from our political and economic leadership, particularly since these solutions challenge the superstitions (false beliefs) that make them wealthy and powerful at the expense of everyone else.

The new assumptions, when they arrive, will be found through trial and error.   We can help that process along by formulating a new American Dream and testing it against the new world we find ourselves in.

Sincerely,

JR

PS:  This network is inverting everything.  My friend, Bruce Sterling points out:  ~a person is a networked computer with a human attached, a car is a networked computer with a car attached and a plane a computer with plane attached.

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Discussion — 6 Responses

  • Burgundy February 10, 2014 on 6:24 pm

    Now your talking. Economics has been superseded, as has capitalism and the notion of the “common good”. Technical evolution is in control and to understand what is happening we need to view things through the same lens it uses. Otherwise everything begins to look chaotic as what’s supposed to happen doesn’t and what’s not supposed to happen does.

    The people going from zero to hero are generally innovating things which are contrary to the common good (albeit unintentionally). Companies that employ a handful of people and displace companies that employ thousands is not in the common good. Same applies to robots. But often the innovations are also unprofitable in the classic sense, the innovator gathers the rewards via financial bubbles, taking on debt or attracting financial backing.

    Technical evolution advances regardless, even as the negatives out way the positives from a human perspective. The economists, et al, twist and contort their theories to try and explain the reality until they break. As you say.

    Reply
  • larrydunbar February 10, 2014 on 8:10 pm

    ” success from innovation happens much more often to many more people in a lot less time to a greater degree than ever before.”

    If defining success as your children being better off than you are, isn’t it really just the opposite? In the next 100 years fewer people will be successful from innovation less often than ever in history? At least since the time of the spear?

    Reply
    • John Robb larrydunbar February 11, 2014 on 1:03 pm

      Larry,
      If you are talking in terms of projecting forward success in industrial terms, yes. That’s inevitable. That system can’t go forward as is because it’s obsolete. Fortunately, a new system is emerging that provides new pathways forward to happiness and prosperity. Within that new system, yes, our kids will live much better lives than most of us did.
      JR

      Reply
      • larrydunbar John Robb February 11, 2014 on 10:47 pm

        But decentralization is not a “new system”. I mean your kids will probably be better off than you (if you have said kids), but only if they don’t decide to opt-out of said system.

        I believe that decision is out of your hands, unless you have figured out that “generational” thing.

        You’re not planning to freeze your head so you can wake up in another generation are you?

        Reply
        • John Robb larrydunbar February 12, 2014 on 8:36 am

          Larry, Getting out of the “job” mindset is a pretty big step. Goes against most of this system’s programming. JR

          Reply
  • Luke February 19, 2014 on 1:48 pm

    John,

    You’re right that entrepreneurship has traditionally received scant attention in *neoclassical* economics, but the same cannot be said of the Austrian school. I’m not sure how much you will focus on this in your book, but you may want to look into some of the work by economists of that tradition as they have long recognized the critical role played by the entrepreneur in the market process.

    Reply