We Will Be Poorer -- Why Should We Care?

Most educated observers of the global economy recognise that we in the West are likely to be relatively poorer over the coming decades than we have come to expect.  Our children are one of the few generations in recent centuries who cannot reasonably expect to be wealthier than their parents (on a society-wide basis of course, not individually).  This is a rather troubling development on its face, but the answer to the question "Why should we care?" is not as straightforward as it seems.

The reasons for the less the rosy economic prognosis are a fairly clear litany of challenges -- including:

• excessive debt of governments and (to a lesser extent) the private sector,
• competition from developing markets from which there is little protection in a globalised world,
• population growth and the related challenges for food and water security,
• climate change and associated costs, and
• global security challenges, driven largely by some of the foregoing.

Some of these challenges (e.g. population growth and climate change) have a greater effect on the developing than developed world, but nevertheless have materials effects in restricting growth opportunities for developed countries.

So, why should we care?  Two reasons that quickly spring to mind for many are, in my view, not the main concerns.  First is nationalistic competition -- e.g. let's not let those Chinese beat us!  There is no easy answer to this argument, except perhaps "Get over it."  We should not bemoan the success of others, but rather concentrate on our own circumstances.  It is a commonplace of international economics that the global economy is not a zero-sum game.

Second, many simply like having more wealth (i.e. more material goods and comfort).  But putting to one side the effects on growth and prosperity of reduced consumption (which admittedly is a big thing to ignore given the multiplier effect), the people of most developed countries in fact have far more than they need (on average, that is -- poverty does of course remain a problem).  Studies show that beyond a level of basic comfort, greater wealth does not bring greater happiness, and that it is relatively poverty that causes the greatest psychic pain.

This brings us to the heart of the problem.  In countries that face challenged economic times, the gap between rich and poor tends to widen.  This has been happening in the US and many other western countries in recent decades, and the process seems to be accelerating.  This problem of inequality of income and opportunity seems to me the real reason we should care about economic hard times, and there is no easy way to avoid it.

One partial solution, related to the theme of this blog, is to increase entrepreneurial opportunity.  There is historical precedent for this.  Many great innovations have occured in economically hard times, and it is flexible economies that have best weathered economic storms.  In my own business, I have observed that today's hard times have driven an increased appetite for creative, flexible solutions -- as opposed to the tried and true.  Furthermore, digital technologies have made it increasingly easier for new economic actors and smaller players to challenge incumbents, as I have written in The Big Shift -- Opportunities for Innovation and Risks of Growth.  In sum, I hold out some hope that by maintaining flexible, entrepreneurial economies, the societies of the West can preserve well-adjusted, well-functioning economies -- even if most of us end up with a few less toys.

Entrepreneurial Opportunities for the UK

In preparation for lunch today with one of the UK's leading technology journalists, with whom I have previously discussed opportunities for entrepreneurial UK technology businesses, I spent the early hours of this morning putting together a presentation that expands on my earlier entry Why The UK Has a Poor Record of Technology Innovation.  I suggest that the entrepreneurial success of countries depends upon three main factors:

• infrastructure (funding, technology clusters, regulatory environment)
• entrepreneurial culture (accepting failure, avoiding "me too" ideas, avoiding early exit)
• market size.

The UK is positioned reasonably well on infrastructure (but not as well as the US) and in a moderate position on market size (with larger opportunities in the EU and global markets), but lags on entrepreneurial culture compared to countries such as Israel, the US and even China.  There is reason to believe that we can do better on this last important dimension, including due to current grassroots efforts, supported by pressure from our severe recession (which is an expected driver of innovation under Kondratiev's wave theory) and encouragement from the success of global icons like Facebook and local champions like Last.fm and TweetDeck.

2010 -- A Low Water Mark for Internet Privacy

There were several important controversies around Internet privacy in 2010, including these involving Internet giants Google and Facebook:

• in February, Google's forced retreat from the default setting of Google Buzz that made Gmail address books into public contact lists;
• in May, Facebook's introduction of simplified privacy settings, as part of a forced retreat from an effort to broaden its usage of user data (including making friend lists effectively public); and
• also in May, the discovery that Google had gathered a variety of data from home WiFi networks as part of its Street View project, leading to ongoing controversy for the rest of the year.

It has become clear that these events and this year represent a low water mark for Internet privacy.  It is increasingly difficult for major companies to take such actions with such blatant disregard for privacy.  The above actions failed this year, and similar actions will fail in the future.

Sure, there will be major controversies in the future over use of personal data, and technologies that threaten privacy will become increasingly sophisticated.  But serious players in the online economy are facing clear and increasing pressure to think carefully about handling data in ways that taking privacy into account.  Probably the most substantial reason is pressures from government.  Enforcement of the EU data protection law is becoming increasingly aggressive; and even in the United States, which has shied away from broad privacy regulation, the Department of Commerce has just proposed a Privacy Bill of Rights.

This does not mean that our personal data will become safe from abuse.  Indeed, considering privacy in the traditional paradigm of secrecy and confidentiality, the reality is likely to remain, in the prescient words of Scott McNealy of Sun in 1999: "You have zero privacy anyway.  Get over it."  And wide availability of personal data, combined with Internet technologies and evolving business models, can also have significant benefits for individuals.  

In this environment, rather than rules preventing the spread of personal data, we will instead see a rising tide of increasingly strict rules about how widely dispersed personal data may be used.  It is highly unlikely that this rising tide will in our lifetimes subside to the low water mark of 2010.

EMI and Sour Grapes

Originally posted 05/11/10
I was extremely pleased today that Terra Firma yesterday failed in its lawsuit against Citigroup over Terra Firma’s investment in EMI.  I have been extremely interested in this litigation, both because it is an interesting result of the amazingly rapid damage to the global recording industry from new music distribution models, and more importantly because something would be very wrong if an equity investor could prevail in a “sour grapes” lawsuit simply because it made a bad investment.  Suppose we accept Terra Firma’s core contention that Citigroup lied about the existence of another bidder?  Even if true, lying about bidders in auctions is common behaviour by investment bankers, and was questionable here only because Citigroup was itself playing both sides of the deal by acting for Terra Firma too.  Much more important, any Citigroup lies about the auction process have almost nothing to do with whether EMI was a good investment at the price paid, which is primarily a matter for due diligence, financial analysis and Terra Firma’s investment judgment.  The credibility and viability of the private equity and venture capital investment process would have suffered a huge blow if Terra Firma had won — thank goodness they did not.

Why the UK Has a Poor Record of Successful Technology Innovation

Originally posted 02/07/10

It is widely recognised that the UK has a great record of developing new technologies — particularly at its world-leading universities like Cambridge and Oxford — but a poor record of turning that technology into great companies, by comparison to the United States, China, Germany and Israel to name a few.  Of course, there are exceptions like Vodafone, ARM, Autonomy and others.  There is no single cause for this problem.  Here are a few that contribute:

• lack of a concentration of talent and resources for entrepreneurs (like in Silicon Valley) — the Cambridge region is the closest thing, but is too small and operates too independently of other nearby centres of excellence such as the Oxford and Thames Valley regions;
• lack of an entrepreneurial culture that excuses failure, and serial failure;
• insufficient sources of seed funding and venture capital, at least by comparison to the United States;
• tendency of entrepreneurs to sell out when their companies are big enough to make them rich, rather than waiting until they are world leaders;
• too small a domestic economy (related to the previous point); and
• tendency towards “me too” thinking — the reasonably vibrant London entrepreneurial community has too many people trying to build a new social network (or something like that), compared to those who are truly thinking “out of the box”.

The Big Shift -- Opportunities for Innovation and Risks of Growth

Originally posted 22/05/10

John Hagel III and John Seely Brown have identified a “Big Shift” in the way our economy functions, including the startling finding in a report with Deloitte that return on assets (ROA) of US publicly-traded companies has declined 75% since 1965. Hagel and Brown observe that this change is associated with an increase in competitive intensity related to the spread of digital technology and economic liberalisation.  They also identify an opportunity to reverse the deterioration in ROA for firms that learn how to participate in the knowledge economy.  These conclusions point to huge opportunities for innovation — both to topple existing business models and to create new ones (which are of course flip sides of the same coin).

There is also a more sinister conclusion that could be drawn from the decline in ROA, on which Hagel and Brown do not seem to focus. A decline in ROA can be caused both by a decrease in the numerator (i.e. returns) or an increase in the denominator (i.e. assets).  Given the huge economic expansion in the last 50 years, returns have increased significantly. But total invested assets have increased much faster, driven in large part by innovation in the now enormous financial sector. There are serious questions whether continued economic growth of this nature is sustainable, with probably the two leading concerns being the environmental effects of growth (primarily global warming) and the increasing financial instability caused by the risk structures necessary to sustain growth. For most of human history (until about the last 100-150 years) growth was considered far from the unalloyed good that it is today. We may need to move back towards the philosophy of those slower times to save our planet and our societies for our children.

These cautionary conclusions do not, however, disturb my initial conclusion in this post that this is a wonderful time for innovation, and indeed innovation is not inconsistent with slower growth. Indeed, new technologies and ideas present real opportunities for us to live better with less.

Staying Real

Originally posted 05/03/10
This post is not about innovative technology, but about something more fundamental — the nature of reality and how we react to it (heavy, huh?).  I have been thinking about the fact that most people pay very little attention to reality.  Getting caught up in the pressures of daily activities, and particularly our emotions about them, can easily distract us from an objective view of what is really going on around us.  Unfortunately, reactions that are disconnected from reality tend to be ineffective and often damaging.  Staying real is a good idea.  This occurred to me powerfully on New Year’s Eve 2010, when I considered the changes is my life over the decade since the turn of the millennium, and realized how little daily worries affect the overall direction of my life.  Made me think about staying focused on the things that are really important to my long-term reality.