Posts about economy

The importance of JOBS

The JOBS bill being signed by President Obama today is critical to the emergence and growth of the next generation of industries as ecosystems.

Those ecosystems are made up of three layers: Platforms (Google, Amazon, Salesforce, Facebook, Kickstarter, Federal Express, Foxconn), which make it possible for entrepreneurial ventures to be built at lower cost with less capital and reduced risk at greater speed. To provide the critical mass that large corporations used to provide — to, for example, sell advertising at scale or acquire distribution or acquire goods or services at volume — sometimes these ventures need to band together in networks (Glam, YouTube, Etsy, eBay). This is how I simplistically draw it in a whiteboard:

Our economy — equity markets, regulation, taxation — has been built to support The Firm: large companies that controlled the entire chain from design to manufacturing to marketing to distribution, gaining efficiency and control as they gained size. The new ecosystem still benefits large companies if they are platforms, as today much — perhaps most — of the value created via the net falls to new corporate behemoths: Google, Amazon, Facebook….

But it’s at the entrepreneurial layer that the real work is being done, the real efficiency is being found, and the real value is being built. But they need capital — not much, but they need it. And they need to be able to recognize the value they create. That’s what I hope Steve Case and others worked toward with the JOBS bill. Andrew Ross Sorkin is worries that the new law’s loosened regulation for some companies will mean that more will lose money. But Henry Blodget counters that it’s not the SEC’s job to save you if you’re stupid enough to invest in Groupon (told ya!). The lighter regulation certainly bears watching.

But the part of the bill that encourages me is the ability of small companies to raise small amounts from small investors. I see this as economically democratizing on both sides of the transaction: more small companies disrupting large firms and more real investors able to get in on the opportunities (and risks) of a platform-enabled entrepreneurial economy.

Such small-scale investment has already been possible in the U.K. — not just possible but encouraged through 30% tax break on investments. Recently I got email from a company set to benefit, Escape the City (soon to be renamed escape.co), which helps would-be refugees from London’s financial district build new and one hopes better lives outside it. Cofounder Mikey Howe kindly wrote to me because he’d read What Would Google Do? and said it helped him think in new ways. (Thank you, Mikey.)

Howe wrote on the occasion of the company sending a letter to its 57,000 members inviting them to pledge to invest in the venture. Within one hour, $6.6 million was pledged. I checked back with him three weeks later and 2,200 members had pledged $15 million (more than they will end up raising). What’s exciting is not just that a small company can more easily raise investment funds but that this small company knows its potential investors. They are members of the service already: a community of customers and investors. Imagine what that relationship could do to help a startup, when your users, your customers have a stake in your success. (I also enjoy the notion that their venture attempts to disrupt the financial district they left.)

Start Something You Love: Escape the City…1 year on from Escape the City on Vimeo.

Until the JOBS bill, about the closest thing we had in America was Kickstarter. My entrepreneurial journalism students are eager to try to use it to raise funds — perhaps a bit too eager, I caution them, for funding a single product or project does not a sustainable strategy make (any more than begging for grants from foundations). But properly used, Kickstarter reduces risk by performing the best possible market research (pre-orders) and allowing an entrepreneur to use her customers’ capital to start her venture while also turning customers into marketers. Kickstarter could not sell equity. Should it? I think that’s an entirely different proposition. In any case, now we can see Kickstarters of a new sort help more new companies. See also the U.K.’s Funding Circle, which loans capital to startups (and which just got an investment from New York’s Union Square Ventures).

The irony of the JOBS bill’s title (it stands for Jumpstart Our Business Startups) is that it may end up killing more jobs than it creates as it funds highly disruptive and highly efficient new ventures that will try to replace large and now inefficient companies in old vertical industries. (See my post, the jobless future.)

But if the disruption is inevitable — and I believe it is, across many industries from media to retail, banking to travel and even manufacturing — then the only sane response is to find the opportunity in the change. The JOBS act helps more people, entrepreneurs and investors, find more opportunity. That, more than bailouts, is the wise role for government to play in the shift from an industrial to a digital economy.

Efficiency over growth (and jobs)

The hook to every song sung at Davos is “jobs, jobs, jobs.” The chorus of machers on stages here operate under an article of faith that growth can come back, that they can stimulate it, that that will create jobs, and then that all will be eventually well.

What if that’s not the case? I am coming to believe, more and more, that technology is leading to efficiency over growth. I’ve written about that here.This notion is obviously true in some sectors of society: see news and media, retail, travel sales, and other arenas. But how many more sectors will this rule strike: universities? government? banking? delivery? even manufacturing?

As I write this, I’m watching a WEF panel moderated by Reuters’ editor, Steve Adler, with Larry Summers and government and business leaders. They’re discussing growth strategies and so far we’re hearing the same notions we hear elsewhere in Davos, the complete trick bag: spend money on infrastructure, be nice to business, regulate less, reform taxes, reform immigration. OK and OK.

“The problems of job creation are more complicated than that. They are more complicated than wealth creation,” says one of the panelists (operating under Chatham House Rule, so I won’t attribute*). “This is a group that understands wealth creation better than job creation.” He says “there are inherent limits” to the number of people employed in various sectors.

I haven’t heard any strategy yet that reverses the trends underway in the transition from the industrial economy to the digital economy. What will offset the shrinking of vast industries? New industries? Well, we have new, digital industries, but they are even more efficient than restructured old industries. Compare Google’s staff size to GM’s, even now. Facebook serves almost a billion people with the staff the size of a large newspaper. Amazon employes far fewer people than the bookstores it put out of business did. So those new industries will bring growth, profit, and wealth, but not many jobs.

“There are fewer jobs for regular people because those innovations happened than there would have been if those innovations hadn’t happened,” the panelist says. It would be “a delusion” to think that encouraging this innovation will increase jobs.

So what if the key business strategy of the near-term future becomes efficiency over growth? Productivity will improve. Companies will be more profitable. Wealth will be created. But employment will suffer.

I’m hearing no strategies focused on this larger transition in a gathering about the transition. I think that’s because the institutions’ trick bags are empty. They ran an industrial society. That’s over. And the entrepreneurs who will create new companies but also new efficiency aren’t yet in power to solve the problem they create.

I ask the panel whether all this talk of jobs, jobs, jobs is so much empty rhetoric. I ask whether there are other tricks in the bag.

The panelist I’ve been quoting says that there are two sets of economic issues: In the short term, for the next five years, we are dealing with demand and macroeconomic policy. “Employment today has nothing to do with the Kindle,” he says. “It has everything to do with the financial system, deleveraging, and macroeconomic policy.”

It’s in the long term that the issues I’m addressing here come to bear. “For the longer term, we don’t have nearly as good answers as we would like to,” he says. “We are going to have to embrace the idea that we are going to have growing numbers of people involved in the provision of fundamental services to other people, services like health care and education. We’re going to need to make that work for society.”

That is to say, health and education don’t directly create wealth; they are services funded in great measure by taxes of one sort or another. Employing people in those sectors amounts to a redistribution of wealth with the fringe benefit of providing helpful services. Is a service-sector economy the secret to growth? Who pays for that when fewer people have jobs in the productive economy? I still don’t see an answer. This is not an economic policy so much as it is a social policy.

Another panelist says that we will have fewer people and we will need to retrain people throughout their lives for new jobs. I agree. But that doesn’t create jobs (except in schools); it just helps fill the ones we have.

One more panelist, from Europe, suggests that nations here will end up making stuff for the growing economies and consuming middle classes of China, India, Brazil, etc. In a globalized world with maximum price competition, I’m not so sure that’s a strategy for growth, only survival. I’d hate to place my strategic bets on continuing — or returning to — the industrial economy. And at some point, that strategy bumps up against the question of sustainability: is there enough stuff to go around?

Indeed, in a globalized society, we need to look at total jobs, the sum of work and productivity and demand, not country-by-country. The question is: Will jobs on the whole increase in this digital economy?

If instead efficiency increases — and with it, again, productivity and profit — then great wealth can be created: see Google, and the technology economy. But that means the disparity of income and capital will only widen yet more. And it’s just wide enough today to cause unrest around the world. That’s much of what #Occupy_WEF et al is about. That’s what is causing such tsuris and uncertainty on the stages of the world (Economic Forum). That’s what is causing the institutions represented here to fear, resist, and regulate technology in the hopes of forestalling the change it is bringing. There is the root of the disruption we’re witnessing now even in Davos.

* I saw Summers later and he gave me permission to quote him by name. He is the quotable panelist.

The jobless future

UPDATE: This is now the topic of my South by Southwest proposal. Please go vote for and comment on it here.

We’re not going to have a jobless recovery. We’re going to have a jobless future.

Holding out blind hope for the magical appearance of new jobs and the reappearance of growth in the economy is a fool’s faith. Politicians who think that merely chanting the incantation “jobs, jobs, jobs” will bring them and the economy back are fooling us if not themselves. When at least a tenth of Americans are out of work, for Wall Street to get momentarily giddy at the creation of 117k jobs is cognitive dissonance at its best. No one can make jobs out of thin air. Jobs will not come back. A few new jobs reappearing won’t fix anything.

Our new economy is shrinking because technology leads to efficiency over growth. That is the notion I want to explore now.

Pick an industry: newspapers, say. Untold thousands of jobs have been destroyed and they will not come back. Yes, new jobs will be created by entrepreneurs — that is precisely why I teach entrepreneurial journalism. But in the net, the news industry — make that the news ecosystem — will employ fewer people in companies. There will still be news but it will be far more efficient, thanks to the internet.

Take retail. Borders. Circuit City. Sharper Image. KB Toys. CompUSA. Dead. Every main street and every mall has empty stores that are not going to be filled. Buying things locally for immediate gratification will be a premium service because it is far more efficient — in terms of inventory cost, real estate, staffing — to consolidate and fulfill merchandise at a distance. Wal-Mart isn’t killing retailing. Amazon is. Transparent pricing online will reduce prices and profitability yet more. Retail will be more efficient.

The housing market has imploded and is not likely to reinflate for a long time to come. So the market for new homes will not recover and construction jobs will not come back.

I can and will keep going, but later. Technology and related trends, including globalization, lead to efficiency in companies and sectors. Transparent markets lead to lower prices. Digital abundance leads to both.

All this has profound implications on both business strategy and policy, but we’re not facing these issues as, instead, our leaders keep trying to resuscitate old markets and old ways. Bailing out banks only transferred debt from them to governments (read: citizens), leading to Europe’s mess. Bailing out GM gave life support to an industry that deserves disruption. Fighting over debt in Congress — and reducing the markets’ faith in the markets, leading to this week’s mess — isn’t the issue. The question is, what should government be doing — where it should be investing — to improve our lot in the future as the size of government with the taxes available will inevitably shrink with the economy.

Don’t fill potholes — or rather. don’t think that will fix the economy. Instead, we should be investing in the entrepreneurs who will create jobs — if fewer — and wealth — greater, thanks to platforms and efficiencies. Invest in education of our youth and our unemployed. Invest in efficiency — energy efficiency, for example.

As I say, these are ideas I want to explore now and I hope you’ll help me by sharing yours.

: MORE DISCUSSION: There is an amazing discussion going on not only in the comments here but also at Google+ here.

Paul Graham of Y Combinator led off another amazing debate at HackerNews here.

I crossposted to HuffingtonPost here.

Henry Blodget just crossposted it at Business Insider here.

Thanks to all this amazing discussion, I just substituted my South by Southwest talk from publicness to this topic. Thank you all for the inspiration and for pushing the ideas here.

This is the next topic I want to work on, as I said. So this discussion is invaluable to me as I explore these notions. Again, thank you.

: Here is the text I resubmitted to SXSW under the title, “Honey, we shrunk the economy.”

: See also Rob Paterson’s post on the end of the job and corporation as we knew them. And another thoughtful post from Ben Casnocha.

: Jason Calacanis riffs on the idea of creating a retraining program that would give people the opportunity to move to new jobs.

: Eric Reasons, who really kept me going on this topic when I first raised it on my blog a few years ago, answers the questions in my SXSW talk proposal.

When innovation yields efficiency

Much of the innovation we’ve seen lately hasn’t led to growth but instead to efficiency – that is, shrinkage.

I’ve been mulling over Mike Mandel’s cover story in last week’s BusinessWeek, in which he tried to puncture another bubble: the belief that we’ve had a rich decade of American innovation. He argues that there’s actually an “innovation shortfall” and he uses economic stagnation to plead his case. Now I’m not economist (that’s a straight line) and so I won’t argue about the impact of other events on growth – starting with the so-called financial crisis.

But as I thought through the major innovations of the last decade, many of them have not led to economic growth; they haven’t added money to the economy but left it in the economy. Thus measuring innovation’s impact in the revenue, growth, productivity, and market cap of large companies may not be valid. Instead, we are seeing innovation take money out of their pockets, leaving it with their customers. What they, in turn, do with that extra money and what impact it has on the economy is an entirely different question – and that impact is likely seen in any case not in large companies but in individual consumers and in small businesses. But I think the proper measure of the changes in the last decade is the innovation dividend. See:

* craigslist is blamed for destroying (that’s from the publishers’ perspective) $10 billion in classified ad value annually**, replacing it with its reported $100 million revenue. Newspapers act as if that was their money – as if they had a God-given right to it – but, of course, it wasn’t. When Craig Newmark spoke with my students at CUNY, and they asked him why he didn’t maximize revenue at craigslist and sell it for billions and then use that money for philanthropy, he told them that he thought he was doing more good for the country and the economy by leaving more money in the pockets of the people who were doing the transactions he now enabled. He cut out a gross inefficiency born of the monopoly that newspapers held over the means of production and distribution. If you try to measure his innovation’s impact on the economy with old methods and metrics – built on the assumptions of the old economy – you can’t see it. He didn’t make companies grow or become more productive. He added efficiency.

* Amazon, eBay, and the internet as a whole are blamed for destroying large swaths of the retail marketplace. But again, they brought efficiency in a number of ways: price transparency, which leads to lower prices for customers; critical-mass efficiency; the reduction of brick-and-mortar and staff costs; and I’d imagine a reduction in distribution and warehousing costs. The net result is fewer jobs, less rent, less waste (that is, books on shelves that get pulped; now they’re made just in time), and lower prices. Again, more money is left in the pockets of the transcators. The impact of innovation on retail is seen in shrinkage and efficiency, not growth.

* Google is blamed for destroying media but, of course, all it did was give advertisers a better deal. It dared to compete. Google did this not just by creating abundance rather than selling scarcity born of control of those means of production and distribution. This created a more efficient – read: less expensive – marketplace for advertising. More important, Google revolutionized advertising by selling performance, proving a return on investment. So the money that didn’t stay in the pockets of people buying and selling cars and homes, thanks to Craig, now stayed in the pockets of retailers and manufacturers thanks to Google. More efficiency. In What Would Google Do”, I argue:

We have shifted from an economy based on scarcity to one based on abundance. The control of products or distribution will no longer guarantee a premium and a profit. . . . We are entering a post-scarcity economy in which Google is teaching us to manage abundance, challenging the bedrock rule of economics, first written in 1767: the law of supply and demand.

Old rules and measures and analyses can’t track that.

* Web 2.0 is credited with making it much faster, easier, and far less expensive to start new companies. That is the other innovation dividend – the innovation that happens on the back of innovation. But this is happening, again, not at a large-company level but at a small-company level. Measuring spending on innovation, then, becomes another unreliable metric. The economics of innovation itself have changed.

The reliability of the standard metrics and analysis matters greatly because profound – and expensive – policy and economic decisions are being made on the basis of them and I’m not at all sure they’re valid anymore, or at least as valid. They miss too much of the change and impact and value and dynamics in this new economy. They lead us to bail out GM and Chrysler. One could argue, as George Will did in yesterday’s Washington Post, that that the bailout violates even old rules:

The administration’s deepening involvement in designing and marketing automobiles through two crippled companies ignores this truth: Capitalism is a profit-and-loss system, and the creative destruction it produces is supposed to clear away failures such as Chrysler, freeing capital for more productive uses.

But that capital, once freed, may not go to building huge new ventures. It may go to building small new ventures. It may stay in the pockets of people doing transactions and now instead of spending it on Toyotas, it may go to banks. You won’t see all the impact – except negatively – on the Dow Jones Average and the Fortune 500; those were the measures of the old economy. We need new measures.

** I had said craigslist and the internet replaced $100 billion in revenue in newspaper classified, which was an attempt to calculate over the life of the web, but that was difficult to calculate, so I changed the figure to $10 billion, the difference between classified revenue at its height in 2000 and in 2008.

Defining the new economy

I’m collecting links to thinking that tries to identify the essence of the new economy. In a stream-of-consciousness flow about just this, Brian Frank argues that we’re moving from an industrial to a venture-capital economy where supposed scientific precision gives way to the imperfection that is inherent in innovation:

[Paul] Graham compares this to the Industrial Revolution, which is a fair comparison in terms of scale, but I think we should recognize that these current changes are a kind of reversal, or inversion, or undoing of the Industrial Revolution.

Through the Industrial Revolution the economy itself gradually became like one big machine — or at least that’s how most economists tended to see it. Everything could supposedly be quantified, reduced, and rigorously predicted.

Silicon Valley represents something else entirely. . . .

Rather than expanding control and diminishing variations, the emerging attitude will be about expanding variety and accommodating the unknown. It inverts all of our intuitions and assumptions about doing business and managing the economy… Know your ecology and complexity science.

(My favourite books on this are The New Pioneers by Tom Petzinger, Surfing on the Edge of Chaos by Richard Pascale et al, and Bob Sutton’s Weird Ideas That Work… I haven’t read Jeff Jarvis’s What Would Google Do? yet — I have it on-reserve — but I think it might make my list too. Orbiting the Giant Hairball has been on my reading list for a long time as well.)

So far Silicon Valley is the best model we have for going forward. It addresses the two big defects of industrialism: the one pointed out by Roger Martin, that employees and customers are turned off by rigorous efficiency, and the one pointed out by Nassim Taleb, that the unexpected is inevitable.

The Great Restructuring

It’s not a great depression, neither is it a great recession we’re going through now. At the Brite conference this week, Umair Haque called it a great “compression,” as an economy built on perceived value reconciles with actual value. This morning, The New York Times finally realized that what we’re experiencing is more than a financial crisis: “Job Losses Hint at Vast Remaking of Economy.” Well, yes, if hints were sledgehammers.

I try to argue in my book that what we’re living through is instead a great restructuring of the economy and society, starting with a fundamental change in our relationships – how we are linked and intertwined and how we act, nothing less than that.

The Times sees this play out in the loss of jobs that won’t return in their industries. That’s merely the symptom.

In key industries — manufacturing, financial services and retail — layoffs have accelerated so quickly in recent months as to suggest that many companies are abandoning whole areas of business.

“These jobs aren’t coming back,” said John E. Silvia, chief economist at Wachovia in Charlotte, N.C. “A lot of production either isn’t going to happen at all, or it’s going to happen somewhere other than the United States. There are going to be fewer stores, fewer factories, fewer financial services operations. Firms are making strategic decisions that they don’t want to be in their businesses.”

Yes, entire swaths and even sectors of the economy will disappear or will change so much they might as well disappear:

* America may well not be in the auto industry soon. “American car sales have dropped to an annual pace of nine million, from some 17 million in 2007. Even if sales increase considerably, that is likely to leave a lot of unneeded auto factories,” said The Times.

* Financial services will have to be completely remade (by government). “Much the same can be said for financial services, which gave up 44,000 jobs in February.” The Times said. “During the housing boom, banks hired tens of thousands of well-compensated traders, analysts and marketers to sell mortgage-backed securities and other investments. That industry is unlikely to return to its former shape.” Who knew that The Times was such a master of understatement?

* Newspapers will vanish. Magazines are in worse shape than I would have guessed and many will go. Books‘ channels of manufacturing, distribution, and sales will go through upheaval.

* Broadcast media will become meaningless, replaced by digital delivery.

* Advertising will be next to feel the earthquake avalanche, after media.

* Large-scale retail will shrink and consolidate and then be transformed by a search-and-buy economy. The Times: “The economy lost 39,500 retail jobs in February, and has eliminated more than 500,000 in the last year.”

* The blockbuster economy in entertainment will become harder to support as more attention and money shifts to the tail.

* Business travel – including the convention and conference business – will take a huge hit in the financial crisis and much of it won’t come back, replaced by more efficient communications.

* We can only hope that dirty and political energy industries will shrivel.

* Residential and commercial real estate will have to restructure around a new capital structure. Homes will get cheaper but so much of homeowners’ equity has been wiped out in real estate and stock investments that I’ll bet apartments will be what’s built when building returns. Commercial real estate had its own bubble and it will be hit with a double whammy as tenants shrink and disappear. Construction will, of course, decline.

* Health care was the one sector in this month’s employment report that showed growth. But we know that medicine, pharma, and insurance will undergo a forced restructuring.

* Computers are getting so small and cheap and open that that industry is under growing pressure. As every other device we have becomes smart and connected, I wonder whether the computer itself will begin to disappear.

* Universities are facing competition from each other and commercial newcomers online and have suffered huge blows to their endowments; they will have to change. We should be so lucky that elementary and secondary education will also face such pressure.

* Finally, consumer products of all sorts will have to change in the face of empowered customers and, in some cases, with competition from small competitors given the benefits of scale on platforms (see: eBay, Etsy, Amazon, et al). They will also face price pressure thanks to online comparison shopping and new retail structures.

* Government will grow but thanks to the empowered populace, it, too, will face fundamnetal change.

* * *

There are opportunities here, of course. There always is in change if you’re willing to see and seek it.

* This is the time when startups start. I agree with Reid Hoffman that founding new companies is our way out of this mess. Given the profound nature of the restructuring, starting new businesses – not fixing old, doomed ones – is the only sensible path. “Consider a few start-ups from the past century.” he wrote: “Microsoft, MTV, CNN, FedEx, Intel, Hewlett-Packard, Burger King. Each opened during a period of economic downturn. Today, these brands employ hundreds of thousands of people worldwide. We need to prepare for the next Burger King. By empowering individuals and small businesses, an innovation stimulus can help germinate stable industry players for the long term.” Fred Wilson would disagree with Reid, I think, about government helping to fund startups, but I think we can all agree that creating the right environment for investment could not be more critical.

* Creating platforms to serve small and independent businesses and networks to bring them the advantages of scale are key opportunities in the restructured economy. That is the real lesson of Google in WWGD?. There are three ways to succeed here: Create a platform; create a network; build on top of somebody else’s platform or network. This, I believe, is how large companies will be replaced.

* There are many opportunities to provide services to new, independent players – startups and newly self-employed individuals. At yesterday’s Hacking Education, Scott Heiferman and I tweeted back and forth about the opportunities to build a network of spaces for independent work (the inverse of Starbucks: good with space and services, OK with coffee). Add payroll, insurance, hosting, and all sorts of services.

* Education is a growth opportunity but not in its current institutions. As industries are killed and turned upside-down, present and former employees will need to be retrained in technology, in the skills of starting and running a business, in entirely new skills. In Hacking Education, some participants were building such platforms. I see huge disruption here.

* Of course, there are opportunities to remake the fallen industries. At Davos, in a session I ran, business guys reinvented the bank under radical transparency. In my book, I started to rethink the auto industry in the image of the computer industry: disaggregating the car so we can reaggregate it from many new suppliers. Many are working on new scenarios for news. I see huge opportunities in rethinking and remaking advertising from the ground up. Every one of the collapsing industries listed above will be replaced – in a different image, at a different scale – and that presents opportunities.

* * *

But all that still doesn’t reveal the extent to which our society is changing. At Brite, Haque addressed some of this as he talked about a “metacrisis” in our “zombieconomy” in which we have understated cost and overstated value. He talked about reconceiving thin vs. thick value creation; about Google as an example because it creates principles more than strategy; and about the new principles of a new economy, built around stewardship, trusteeship, guardianship, leadership, partnership.

I said from the audience that his prescription sounded like a moral imperative. Another member of the audience said it sounded like dialectical materialism (I had earlier joked in my talk at Brite that I vaguely sounded Marxist talking about how all the change I outlined in media came from no longer being bound by the means of production and distribution). Haque responded that though both our contentions might be true, he was declaring an economic imperative. He previewed that view sometime ago when he wrote what I came to call Haque’s Law: “As interaction explodes, the costs of evil are starting to outweigh the benefits.”

Now back to the start: We are linked in new ways. Because of that, it’s hard to build a business model anymore out of screwing people – since when you do, we the screwed can rise up and be heard and fight back and make evil too expensive. Our interconnectedness is also what made the complex derivatives – the toxic assets – that triggered the financial crisis possible – but that is all the more reason why we will demand transparency, our best antidote to evil. That will change how business is run in fundamental ways.

And so there is our Great Restructuring, Great Rethink, Great Reboot, call it what you will: The change in our society and how it is structured are both causing and necessitating change in the economy and its industries. The crisis is bigger than it appears in the rear-view mirror. It’s more than jobs lost and companies folding. It’s a new economy built on a new society that we are only just beginning to recognize if not understand. That is WWGD? – and its sequel.

: LATER: In typical eloquence, Yochai Benkler expresses the restructuring in his response to Paul Starr’s lament about newspapers and the future of democracy:

Like other information goods, the production model of news is shifting from an industrial model–be it the monopoly city paper, IBM in its monopoly heyday, or Microsoft, or Britannica–to a networked model that integrates a wider range of practices into the production system: market and nonmarket, large scale and small, for profit and nonprofit, organized and individual.

This will be the case, I argue in WWGD? and now here, not just for digital and information enterprises but for others. Education was built, it was pointed out often at Hacking Education, for an industrial age, to turn out factory workers. It was also built in an industrial model: every student off the assembly line the same. The future of education will be a magnificent mish-mash of – to quote Benkler – market and nonmarket, large scale and small, profit and nonprofit, organized and individual. Computers and their software are made this way. Cars may be. Banking, I think, will be a similar mix (nonprofit? yes, credit unions). The bottom line is the shift from an institutional economy to a network economy.

: LATER: This post seems to have caused Bruce Sterling a bad trip. Sorry about that.

: “The new normal will be a lot different from the old normal.”

Now more than ever

Friend Stephen Baker, author of the wonderful The Numerati, wrote a kind review of What Would Google Do?, eloquently summarizing its key message and also making a point I hope others see: that now more than ever, in the midst of crisis and permanent change, we should look to companies that see the world in new ways. Steve wrote:

It’s full of ideas, and it’s perfectly timed for the economic storm we’re experiencing right now. The way Jarvis sees it, most of our industries and institutions developed in a time of information constraints. People made money or achieved power, whether in publishing, banking, insurance or education, by leveraging the information they had access to. They profited from scarcity.

Information, in the age of Google and the Internet, is no longer scarce. It no longer takes time to travel from one place to another. Knowledge no longer requires the movement of atoms. Our brains are linked. That is the revolution Jarvis describes. Of course, we’ve all been aware of these changes brewing since the dawn of the Internet. But Jarvis does a very good job pulling it all together. Readers of his BuzzMachine.com blog will be familiar with many of his arguments, from his push for transparency, links and “publicness” to “small is the new big.” But the book forces him to synthesize more than on the blog, and to tie these phenomena together.

Jarvis was at work on this book before our economy dive-bombed. But as I mentioned, our economic situation makes the book more relevant, not less. This economy is on its way to tearing down the inefficient structures built in the age of scarce information. Understanding and adapting to the forces he describes are no longer simply competitive issues. For many–journalism and publishing are front and center–it’s a matter of survival.

(I might add here that the Numerati are leading actors in this drama. The information revolution he describes creates the rivers of data they feed on. And there are no bigger Numerati on earth than the triumvirate running Google, a company entirely built on the analysis of data and the statistical correlations between what we’re looking for and the advertisements most likely to interest us.)

Thank you, Steve.

The Google economy

I think there’s something more fundamental happening in Google’s rousing quarterly report yesterday than we’re seeing in the news reports about it (which are mostly eating crow over predictions to the contrary).

I think we’re seeing a new definition of “the economy.”

The old definition meant and measured the performance of big companies and their impact on each other. This was especially the case in media and advertising, which served only companies of a certain size because only large companies could afford to advertise in large outlets. But Google’s marketplace for advertisers of all sizes represents the small-is-the-new-big economy: no limit of small enterprises that can now add up to a critical mass. The fact that it is an auction marketplace also means that this economy is more fluid; it fills in voids.

So for example, when there’s an economic downturn that affects, say, travel, that will affect a magazine like Condé Nast Traveler; airlines and hotels of a certain size will advertise less and there aren’t new advertisers to fill in that void at Traveler’s price. But on Google, if American Airlines and the Ritz aren’t buying the keyword “Paris” this month, there are no end of advertisers who will step in to buy the word. The price of that keyword may decline. But in Google’s very broad economy, the prices of other keywords (e.g., “credit”) may rise.

And because this is a pay-per-performance marketplace and Google is motivated to continually improve relevance and performance, it is not a market driven by scarcity of space or audience. That makes it hard for old measures of the economy and media to figure it out. It doesn’t march to static metrics like fuel costs affecting prices and dollar conversions affecting passenger miles, all of which affect paid ad pages.

This is apparently what threw Comscore’s measurements into a tizzy as it tracked what it thought was a drop in clicks on Google ads while Google said it was tuning its ad placement to improve relevance and performance. There was another variable in there that old economic measures could not predict. Were we clicking less because we were poor and depressed or because Google tuned an algorithm? No way to know. After causing a storm with this measurements, Comscore tried to back up and say that it wasn’t necessarily saying that Google would earn less; the market didn’t listen and punished GOOG by 100 points but last night it punished Comscore’s stock in retaliation.

This is also one of the many factors making old-style media — and, in some cases, economic — measurement inaccurate and irrelevant. I’ve been saying that measurement by sample is useless because you can’t possibly get a big enough sample to measure all the niches; Nielsen, Comscore, and the entire industry will fail in a small-is-the-new-big economy because they can never measure and add up all the smalls. They will also fail because measuring how big a media outlet is has become almost irrelevant: An advertiser buying in Condé Nast Traveler cares how many people read the magazine because the assumption is that everyone who sees the magazine sees that ad. But online, a sponsor buying ads at the magazine’s site, Concierge.com, cares only about the specific people who saw the ad when it was served on specific pages, and so the size of the overall site is largely irrelevant except as a filter to decide where to consider buying ads or as a bragging right for the site. (This is why, when I served on committees for the Audit Bureau of Circulations in the mid ’90s, we discovered that audits of total site audience were meaningless — nobody wanted to pay for them — and all sponsors wanted audited was the serving of their own ads.)

But the pity is that ad agencies and stock analysts, reporters, and stock buyers still pay attention to these outmoded measurements and the companies that push them. That’s why GOOG went down 100 points while the company’s revenue soared 30 percent. They were selling on the wrong measurements that led to the wrong assumptions. But mere methodology won’t help. Why?

The Google economy is just different.

(Disclosure and caveat: I bought GOOG at 512 and now don’t feel quite so stupid for it, but I did feel stupid in econ class.)

: LATER: The NY Times headline this morning said that “Google defies economy.” Perhaps that’s a typo. Should it be “Google defines economy”?