It is difficult to do refined work and creative work at the same time. Over the past few weeks I have been pursuing a number of different threads and it takes some time to see the connections between them and produce fully formed insights. Until those connections emerge, it is just a soup of disparate ideas with hints of relevance to each other.
I sit down to try to write something but everything that comes out is half formed garbage, lacking any rhetorical force. I could attempt to refine that garbage, manufacture some rhetorical import, but it would all be fake. Moreover, those manufactured conclusions would only obscure the real insights that are still floating out there somewhere…waiting to be grasped.
Creative work and refined work come and go in cycles. A long creative cycle creates a mountain of material that demands to have some order imposed on it. Extended dedication towards refinement becomes boring and creates a yearning for new direction. Jumping prematurely from one to the other simply creates confusion and frustration.
While wallowing in my frustration I realized that this individual struggle provides an apt metaphor for the challenges currently facing the developed economies around the world. The strains on the industrial system have been mounting for some time and the cracks in the foundation are beginning to show. Unfortunately, a fully baked alternative has yet to emerge.
In other words, a creative cycle has been building for some time. The hints of solutions are floating around, but they have yet to cohere into anything ready to be refined and implemented at scale.
The temptation, when faced with market volatility like that experienced over the past several days, is to grasp for solutions and rush into action. That would be putting the cart before the horse. Any solutions enacted now, before the creative cycle runs its course, will emerge half formed and crippled…and will only serve to obscure any genuine solutions still incubating.
The only option now is to ride out the storm, try not to make it worse, and allow emerging solutions the time necessary to develop…
What Do We Know?
Let’s start with some context. The industrial economy could be described as looking something like this:
The relative sizes of the quadrants indicating the role of each in mediating actual economic activity…
- The transactional economy dominated the vast majority of economic activity
- The attention economy facilitated a significant share of activity as a medium for marketing and advertising.
- The gift economy, in the form of political economy, also directed a significant share of activity.
- The relationship economy was relatively insignificant in terms of economic production
The Growth of Unrefined Economies
The obvious trend is the growth of the non-transactional quadrants, particularly the attention economy and the relationship economy. We can witness the growth of the attention economy in the groundswell of cognitive surplus now being devoted to productive activities. New tools allow anyone to be a creator and to freely distribute their creations. Technology is also enabling relationships to emerge and organize outside the traditional boundaries of work, home, and local community. Social sharing and collaboration are becoming viable methods of producing and allocating economic value.
Growth in the attention and relationship economies represent a dramatic increase in the supply of unrefined goods and services. Has there been a commensurate increase in demand for unrefined value?
I believe there is, though this conclusion is more speculative. Our basic requirements for survival in this world are food, shelter, and safety…needs that are primarily satisfied by material goods. Beyond those basic needs, further increases in material wealth continue to confer meaningful benefits up to a certain point. Eventually the marginal benefits of accruing more stuff begin to dwindle.
The same holds true for most refined forms of value – the benefits scale up to a certain point and then diminish. This is the basic logic that underlies the common wisdom “you can’t buy happiness”. You can buy insurance against pain. You can even buy pleasure. Both are readily delivered by refined goods and services…
But, happiness is more elusive. Happiness is personal and requires active participation from the subject. Individuals must find their own happiness, and unique individual wisdom rarely comes in a refined package. Unrefined economic activity is growing in direct response to demand for participatory opportunities. People in developed countries are recognizing that they have reached consumption saturation…they are looking for alternative ways to find fulfillment.
You might not be convinced by this argument. At this point I am only offering it for your consideration…
Is The Transactional Economy Shrinking?
I don’t know.
It is difficult to predict whether the trends described above are drawing economic activity away from the transactional markets or whether they are merely supplementing it. We can point to anecdotal evidence of market disruptions. For example, it would seem obvious that traditional media firms are losing their audiences to amateur content from blogs and social media platforms. Yet, many of these ‘amateur’ media outlets have grown into financially viable businesses in their own right.
Historical evidence suggests that transactional markets will emerge from technological disruption stronger and more robust. I don’t think we can yet predict whether the growth of the unrefined economies represents a paradigm shift. I do think we should be cautious of any argument promising that “this time will be different”.
The Structure of The Transactional Economy
What we do know is that the structure of the transactional economy is changing. Activities that previously required huge organizations now require only a small team. Ventures that once demanded for huge sums of investment capital are now launched with only a fraction of that.
The decrease in technology related start-up costs is well documented. The argument I now hear from venture capital circles is that, though start-up costs are trivial, scaling a product still requires manpower, and hiring that team still requires significant funding.
But even that argument is losing ground, at least the margins. With so many start-ups now relying on network effects of one sort or another, the user base in effect becomes part of the workforce. The firm builds the stage, but that stage is a blank slate without the users who populate it. As such, the firm only needs to fund a small portion of traditional value chain. The user community (developer community) fills in the gaps.
Setting aside the trendy consumer internet sector, start-up funding requirements have long been decreasing in more conventional ways as well. Outsourcing, and the resulting segmentation of the value chain, allows individual firms to focus on granular market niches, thereby eliminating the need to reinvent (and fund) an entire vertical. The net result is that new ventures can scale incrementally, allowing them to bootstrap much more effectively.
The Demand For Capital
All of the trends outlined above combine to reduce the demand for investment capital.
Capital markets exist first and foremost to facilitate the efficient allocation of capital in an economy. Yet, today most capital is sloshing around in the (zero-sum) secondary markets, with little connection to primary funding activities. And even within those secondary markets, returns have become steadily more ephemeral. Dividends have become increasingly unpopular – the yield of the S&P 500 is currently about half the historical average and shows a clear downward trend over the past 55 years.
The point being, financial markets are increasingly disconnected from anything occurring in the real world. Even if the transactional economy stabilizes and returns to growth, expect the volatility in financial markets to persist as demand for passive capital continues to decline. If the hedge fund managers and prop traders of the world cannot find real returns, their only option will be to indulge in more ambitious speculations.
photo courtesy of artemuestra