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Roll over, Gutenberg

Germany, I fear, is not the land of innovation. It is a land of institutions.

This week the German Bundestag passed a law created by publishers — primarily Axel Springer and Burda — to force internet companies — read: Google — to pay for quoting — and thus promoting and linking to — their content. The legislation, the Leistungsschutzrecht, was known as the Google tax.

lsr_banner13In the end, compromise legislation exempts precisely what the publishers had been going after: snippets of text of the sort that search engines quote. The bill now generously says that single words or very few words — it is not precise in its definition — remain free. But of course that exception only proves the absurdity of the effort: Who could ever own a word or a phrase? Or a thought?

So now, if the bill passes the next house of the legislature, lawyers will make a fortune debating how short is too long. No matter the length, speech suffers. Don’t the publishers see that they live by the quote? Their content is made up of what other people say. Their content gains influence when other people quote it.

But that is beside their point. They want to tax Google. They say it is not fair — imagine a kindergartener stomping his little feet — that Google makes money as they lose money. They think they deserve a share, though the truth is that their content makes up very little of what people search for. And, besides, every time Google links to them it is up to the publishers to establish a relationship with that user and find value in it. That publishers have failed to do this almost two decades into the web era is not Google’s fault; it is their fault. Rather than innovating and finding the necessary opportunity in their disruption, these publishers — conservatives who otherwise would diminish government — go running to the Chancellor and her party to pass their Leistungsschutzrecht.

To be fair, this is not purely a German disease. It is a European ailment as well. In France publishers hide behind government’s skirt to blackmail Google into paying into a fund to support innovation by publishers who’ve not innovated. The French government is also looking at taxing the gathering of big data — a tax, then, on knowledge. Belgian publishers rejected Google’s links and then thought better of it and finally extorted Google into advertising in their publications to avoid that nation’s version of a Leistungsschutzrecht. The internet causes a certain insanity the world around. In the U.S., we had SOPA and PIPA, laws like the Leistungsschutzrecht meant to protect ailing industries — though they were defeated. Then there is ACTA, an international attempt to protect the copyright industry.

But there are more issues in Germany. It is leading the privacy technopanic in Europe. Government leaders have urged citizens to have pictures taken from public places of public views of the facades of buildings blurred in Google Street View; they label this their Verpixelungsrecht. A privacy extremist in one state in Germany has tried to outlaw Facebook’s “like” button. That same state tried to overrule Facebook’s requirement to use real names.

And another: In entrepreneurial circles, Germany is known as the land of internet copycats. Again and again, German entrepreneurs have copied American services and business models, though their real business model is to get bought by the American originals.

Mind you, I love Germany (though to many Americans, that seems like an odd statement). There’s nowhere I’d rather visit. I have many friends there. I have met many talented technologists there. I marvel at its book culture and at its lively — if also suffering — market for serious journalism.

But today I worry about Germany. It is an industrial wonder in a postindustrial age. Government and media are embracing each other to defend their old institutions against disruption and the opportunity that can come with it. As I wrote in my book Public Parts, I’m concerned that Germans’ will to be private, not to fail, and especially not to fail publicly put them at a disadvantage in an entrepreneurial age when failure is a necessary product of experimentation. I fear that entrepreneurs, investors, and internet companies will shy away from Germany’s borders given the hostility that is shown especially to American internet companies.

I am disappointed that the land of Gutenberg, the land that invented the ability to share knowledge and ideas at a mass scale and to empower speech is now haggling over the control and ownership of a few words. As they say in German, schade. What a shame.

[This post has been translated into German and adapted as an op-ed at Zeit Online here.]

Related: I respond to Albert Wenger, a wise and German VC, regarding the #LSR here: http://disq.us/8cfp8h

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The (continuing) institutional revolution

I just read a fascinating book by Douglas W. Allen, The Institutional Revolution, which attempts to explain England’s transition from its apparently illogical early-modern institutions — aristocracy, purchased army commissions, lighthouses, private roads, even dueling — to modern institutions. And today, we see many of those institutions challenged.

Allen, an economist, argues that in a period when nature — weather, mostly — had a controlling influence on the work of state, and before authorities had reliable measurements — synchronized clocks, the ability to navigate to longitude, standard units of length — there was no way for the crown to measure the performance of its agents, to “distinguish between shirking and sloth, on the one hand, and chance, on the other.” So they proved their trust through investing what he calls hostage capital: building large estates, sending daughters to the court, buying army commissions in hopes of earning spoils of war. New means of measurement, he argues, opened the door to more sensible and effective management structures. “[P]rogress,” he says, “has been often little more than the removal of randomness in outcomes.”

I’m fascinated with Allen’s examination of society’s institutions — as organizations and as sets of rules — as they adapt to or are made extinct by new technologies. He points out that the transition to modern democratic institutions and bureaucracies was slow and syncopated. “As a result,” he writes, “throughout the Institutional Revolution numerous circumstances would have existed where the old institutional apparatus was inappropriate for the new order of things. This mismatch would have acted as a brake on economic growth…. [T]echnical innovations by themselves created institutional problems at the same time they solved engineering ones. Because the institutions took time to adjust, the full benefits of the technical changes took a long time to be felt.”

Sound familiar? Allen does not attempt to extrapolate to today — and perhaps I should not. But he does suggest that “an institutional reexamination of the Industrial Revolution” could “help modern economists in their policy recommendations on matter of current economic growth and development.” (Or a lack thereof.)

I wonder how inadequate — or doomed — our institutions are today in the face of new and disruptive technologies, including — to echo Allen — profound new means of measuring behavior (which upends, for example, advertising, not to mention tracking government performance through its data). It’s that kind of question that gets me in the most trouble with people I’ll call institutionalists, who defend legacy institutions — journalism, media gatekeepers, the academy, government, et al — against the disruption I sometimes welcome. See, for example, Andrew Keen. But I’m not killing these institutions, merely asking uncomfortable questions about the continued viability — without, of course, any answer to the question: What will follow them?

* Is the institution of journalism adequate to our new needs and knowledge?
* Was copyright as an institution made obsolete when copying cost nothing?
* Are modern politics incurably corrupted by money? (To answer that question, listen to this episode of This American Life.)
* Are our schools designed to turn out managers in the industrial age — human widgets made to make widgets, all the same — instead of the innovators we need, who are more likely to succeed?
* Is the firm — or at least part of its raison d’être — outmoded by the ecosystem?
* What is to become of the untrusted bank? Surely it cannot survive as an oxymoron.
* Can our capital markets still reward only growth when technology produces efficiency instead?
* Haven’t our health-care institutions foundered completely attempting to deal with the cost of their success: greater longevity and thus more ailments to treat?
* What becomes of our notion of nations when we can find, form, and act as publics around their borders?
* Whither capitalism?

Allen sheds no light on what could come next, nor could he or anyone. Instead, he offers a means of analysis. “[I]n the Darwinian struggle between nations, firms, and individuals,” he writes, “societies are driven to find institutions that get the job done under the circumstances faced at the time.” The issue for society is not affection or disdain for an institution and its traditions but the task at hand. Wishful thinking will not preserve the power of unnecessary old institutions nor make new ones. “Institutions are arrived at in many ways, often by accident or by trial and error.”

And so we have begun the process of negotiating new norms and building new institutions, while seeing whether incumbents can adapt. In the face of social services and the means to speak and share and connect anyone to anyone anywhere anytime, we are trying out new norms of privacy and publicness, etiquette and rudeness. Governments sense the threat of the internet and try to control it — under the guises of piracy, privacy, decency, security, civility — and contrary forces use the net to challenge their power. Journalism, publishing, and education face new, more efficient competitors. #OccupyWallStreet demarcated battle lines between the 1% — the modern aristocracy — and the 99%. As the aristocrat’s of Allen’s early modern period traded in social capital, so do we today, though we constantly recalculate its source and worth. Just as early modern roads were first maintained and run privately, so today are our early digital roads privately owned, and we are negotiating whether that is best for society. (At the start of the 19th century, Allen says, commerce and civic services “demanded that the roads ‘accomodate the traffic, rather than the traffic accomodate the roads.'” That is our battle today, eh?) Prior to the Institutional Revolution, labor was a matter of master and servant; will the current relationship of company and employee continue? And on and on.

In his conclusion, Allen writes:

Life is filled with examples of institutions that get the job done. Look around. Grand and broad systems such as ‘the rule of law’ and written constitutions exist, as do firms, churches, tribes, universities, societies and clubs, aid agencies, professional associations, unions, consumer’s groups, political parties, condominiums, cooperatives, and so on. But many more informal examples abound of social systems that can be just as binding and often more interesting: families, friendships, social networks, peer pressures, customs, social norms, mores and religious values, and the like. All of these social factors — these collections of economic property rights that affect an individual’s scope and ability of decision making — work together to make people behave a certain way: it is hoped in order to create a community that is prosperous, regenerating, and competitive. Not all societies are successful at achieving this end and often institutions are chosen that fail to meet the regularity of behavior that is desired. Stagnation is common for a period of time, but in the competitive environment of institutions, successful one often win out.

That is why I celebrate the competition.

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.

Whither capitalism?

I’ve been arguing for sometime that technology leads to efficiency over growth and that that will have profound impact on society we can only begin to grasp. Michel Bauwens now furthers the argument, asking whether capitalism can continue. I don’t think I’ll go that far yet. But his arguments are fascinating.

Where there is no tension between supply and demand, there can be no market and no capital accumulation. What peer producers are doing, for now mostly producing intangible entities such as knowledge, software and design, is to create an abundance of easily reproduced information and actionable knowledge.

This cannot be directly translated into market value, because it is not at all scarce – it’s over-abundant. And this activity, moreover, is done by knowledge workers, whose ranks are steadily expanding. This over-supply threatens to make knowledge workers’ jobs precarious. Hence, an increased exodus of productive capacities, in the form of direct use value production, outside the existing system of monetisation, which only operates at its margins. In the past, whenever such an exodus occurred – of slaves in the decaying Roman Empire, or of serfs in the waning Middle Ages – that is precisely the time when conditions were set for major societal and economic changes.

Indeed, without a core reliance on capital, commodities and labour, it is hard to imagine a continuation of the capitalist system.

The problem is this: internet collaboration has enabled the creation of use value in a way that totally bypasses the normal functioning of our economic system. Normally, increases in productivity are somehow rewarded, and these rewards enable consumers to derive an income and buy products.

But this is no longer happening. Facebook and Google users create commercial value for their platforms, but only very indirectly. And they are not at all rewarded for their own value creation. Since what they are creating is not what is commodified on the market for scarce goods, these value creators do not receive income. Social media platforms are exposing an important fault line in our economic system.

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.

Our notion of nations

Consider: I a matter of a year, the leaders of Italy, Greece, Libya, Egypt, and Tunisia have all been ousted not in the normal course of governance and not at the polls. Who’s in charge there? In the Middle EAst, it’s the people, at last (but can they retain power?). In Europe, its bondholders and neighboring nations. Meanwhile, in Spain and the #occupywallstreet movements, disgruntled, disorganized citizens are making their voices heard. In Iceland they’re rewriting their constitution using Facebook.

What is becoming of our notion of nations?

In the Frankfurter Allgemeine Zeitung, Georges Papandreou’s short-lived threat to hold a plebiscite over the EU’s insistence of austerity as a condition of bail from fiscal jail set off a debate among the paper’s editor, Frank Schirrmacher; the esteemed political philosopher Jürgen Habermas, and economic writer Rainer Hank.

Far be it from me to translate the language or its subtleties and ironies, but it’s clear that they are debating who’s in charge in Europe: government? bond-holders and bankers? the people? Hank notes that “the governments of Europe are under dual supervision.” He questions whether Europe is facing “dictatorship of the people versus dictatorship of financial markets” or a question of “democracy versus rule of law.”

At the same time I (tried to) read all that, Martin Gurri wrote a most eloquent review of and rumination on Public Parts (his son, Adam, happened to do likewise). Gurri père raises many thoughtful points about the value of publicness and its support of trust. I recommend reading both posts. But for purposes of this discussion, I want to focus on Martin Gurri’s trepidation about government. To quote:

In the existential struggle between the public and the old structures of authority, Jarvis is a participant, not an observer.  At times, he makes it sound as if the public can bypass authority and strike out on its own.  The larger argument of Public Parts, however, is that the conflict can only be resolved when authority regains the public’s trust by aligning its practices with those of the new information environment.  Though optimistic in tone, Jarvis doesn’t directly venture an opinion about the cost of this transformation, possibly because he views it as inevitable.  In the manner of a conqueror he proclaims, “Resistance is futile.”

It’s an easy guess that the collision with the public will transform the old institutions.  The question is the social and political pain involved:  whether the process will resemble gradual evolution or, as I suspect, an extinction event.  (There are those who theorize that such a cataclysm has already struck the global economy.)

Because of their immense inherited weight, business and government have a vested interest in inertia.  In this context, resistance may be futile in the long term, but rational for the moment.  As an old government hand, I can attest to the accuracy of Jarvis’ portrayal of the bureaucracy – but he fails to note the profound emotional investment in existing institutions by the people who inhabit them.  Even the most up-to-date bureaucrats, in my experience, will resist the advance of the public until retirement day.
Bending the massive structures of authority to the ideals promoted in Public Parts may well be impossible without a traumatic fracturing of the status quo.

And a traumatic fracturing of the state itself?

That is the question I want to raise here: Are we seeing such cracks begin to open before our eyes?

Is Europe’s crisis of economics and government structure — even of the legitimacy and power of government — a signal?

Is the Arab Spring and its ability to tear down government without a clear notion of what will be built in its place an opportunity to rethink government?

Is Iceland as a startup nation a legitimate effort to show that course?

Did Spain attempt to organize a revolution without organization?

Is #occupywallstreet an effort to reassert the authority of the people outside the structure of politics and government? (Some say they make a mistake not becoming overtly political with candidates and platforms. I am coming to believe they are right to stand outside government and demand attention and reform from that distance. Its platform perspective might be: ‘We don’t want to get any on us.’)

Will we question the idea of what a nation is? Are Greece and Italy still sovereign nations when bankers can overthrow their governments and neighbors can dictate the terms of governance? Are the hashtag rebels of Spain then the U.S. then other nations establishing a new society (albeit one even more unsure in its structure than Egypt’s and Tunisia’s next forms)?

Says Gurri Senior:

Particularly unsettling are the prospects for government.  The extraordinary outcomes today demanded from politics, Paul Ormerod has shown, lie beyond the reach of human power.  We simply don’t know how to “solve” unemployment or inequality.  The more we expect to impose such outcomes on a complex world, the deeper our disenchantment will be.  Transparency and citizen participation, in such circumstances, will only aggravate the friction between a triumphant public and its failed institutions.  Modern government, outwardly so imposing, will be revealed in its nakedness to be a feeble and incapable organ, unable to rise to the hopes of the citizenry.  The consequence is likely to be turbulence for every ruling principle, including liberal democracy.

Gurri might have begun wondering whether I went to far. Then he went even farther.