Saturday, January 05, 2008
BGSL 2008-2010: Rethinking The Economic Institutions of Hypercapitalism
I usually make predictions at the beginning of the year. Not this time. I think 2008 is going to be an important year - and it's important for us all to kick it off with more depth.
What's gonna happen in 2008? The macropocalypse.
It's not a credit crunch, or a liquidity crisis. Unfortunately, it's a lot deeper than most of us think.
Let me try and explain what's really going on here.
The real problem is that the firm - the corporation, as the fundamental institution of production - is deeply and irrevocably broken. It's DNA is in shock. The corporation we've created is a monster; a form of organization growing more pathological by the day.
BGSL studies industries, markets, firms, and their economics. So those (really) are strong words.
But the evidence is, at this point, almost impossible to refute.
Is there much difference between banks ripping off small towns, and Wal-Mart's active exploitation of sweatshop labour?
No. They're symptoms of a deeper cause: the decay of the firm itself.
These are brushstrokes in a larger, darker picture: moral hazard is rife across the productionscape.
To be blunt: today, every industry across the larger economy is marked by deep, systemic moral hazard.
That's not just depressing: it's shocking.
I started bubblegen by studying the most flagrant example: record labels, the RIAA, and the MPAA.
But think about how food players have created an obesity epidemic. Or how pharma players have spent billions upon billions - to subvert and replace value creation in healthcare with push marketing. Or how Detroit spent continues to focus on coercing people, cities, states, and nations into consuming car afer car - instead of on durable, sustainable long-run productivity and efficiency gains.
The virus is rotting the system from inside. The hypercapitalist economy we've built isn't about deep, sustainable value creation. It's become about simply shifting value from one party to another.
Whether it's from small towns to Wall Street bonuses, or from Chinese migrant workers to Wal-Mart's income statement - what most firms are doing - what they are actively built to do - is exactly the same: actively and deliberately failing to create value.
But the game is fast coming to an end. The emperor has no clothes. The masquerade of value creation is can't go on forever. No economy can survive where value doesn't get created.
The need for fundamental, systemic reinvention has never been greater and more pressing. Tomorrow's revolutionaries are going to face the task of reinventing the institutions of production - and they will unleash tidal waves of new value by doing so.
So forget predictions for 2008.
Take a long, hard look at the economy, at your industry, at your market - and what's wrong with it. And if you're a venture guy, an entrepreneur, a beancounter, a geek - whatever: start thinking about doing something about it now.
Because players who don't simply won't survive the next five years.
Great post. I very much believe that things like VRM are to come and... stay ;-).
I believe that you have touched the most sensitive nerve i.e. the rotting economy. It is rightly said that value/quality creation hasnt seen the sunshine since years now.
I think PRC should be blamed for it, for flooding the market and pulling down prices, degrading the quality and the value of a product too.
I support your staments Umair. Nice thoughts. :)
I get the sense that this is one of the radical innovators you talk about.
From ZDNet Irregular Enterprise:
they’re looking to take the first steps in solving the knotty problem of integrating transaction based systems with the unstructured forms of collaboration that render value. If they pull that trick then Jive Software will have done something extraordinarily useful. Derived visible value from informal interactions but without the strictures of process control that inhibit creativity.
all good stuff. what's your definition of a valuable / value creating pursuit?
Damn Umair, I think this post along with the two-part analysis of the music industry are some of the most succinct and insightful things I've read in probably two years. Nobody has applied the economic analysis of incentives and moral hazards in the music industry as well as you did here and with clarity that most bloggers could only dream of. Thanks for starting off the year with such powerful thinking.
Just like the 50's labor movement and the impact to the Big 3 auto makers as well as industrials, your statement on investors seeking to be different falls on deaf ears. Many positions of strength do so until the position is no longer viable due to systematic change, not internal initiative.
Senior exec pay v. base labor rates, banking abuses, i-banking extreme premiums for a sliver of value... These things all will see shifts in the long run, but to think 2008 will be a breaking period is probably a bit aggressive.
These are definitely moral choices, and with luck, we all get to impact them by action and a bit of the bully pulpit. Good for you in pushing the topic as it is definitely an unpopular one.
I have always looked at this issue as being rooted in the concept of market extensions. Why companies are companies so prepared to iterate and not invent?
the problem is a perfect storm of gross misinterpretation or ingonrance of moores law combined with resitance to the long tail.
The reason that patent value is in freefall is that the time it takes between filing and being approved, someone else has invented launched, dominated and exited your category.
I would love to hear your perspective on pharma: deeply evil IMHO
Talk about pathologically lame. Pharma is more evil that I thought. (Marketing is 2x the R&D spend) The original article for the last comment is actually here: http://medicine.plosjournals.org/perlserv/?request=get-document&doi=10.1371/journal.pmed.0050001
anyone who can solve the moral hazard inherent in the pharma industry will make a fortune.
All so true, Umair, and remarkably unremarked on.
But don't forget about Big Food, which is poisoning the populace and has a big role in high health care costs. See in today's NYTimes (registration required):