OnTheSpiral

The following is partly inspired by Venkat's recent post - How the World Works: Part II (my comment here).

Innovation cycles oscillate between periods of bottom up innovation and periods of top down innovation.  Favoring one over the other for an extended period of time calls forth the black swan gods...

Take the recent housing crisis...certain "innovations" in mortgage writing, such as variable rates, were initially developed bottom up (setting aside for the moment gov't policies that encouraged lending to low income home buyers).  At the same time, securitized financial instruments like mortgage backed securities emerged to create liquidity for variable rate mortgages.  At small scale there was little danger in this sort of activity.  But as the market developed an appetite for MBS and similar securities, mortgage originators on the ground began to favor them more heavily.  Home buyers who had no business messing around with new fangled mortgage products were pushed into those types of loans because that is what the market wanted sell.  Over the course of several years diversity and resilience in the mortgage market was destroyed...the market became brittle and unstable.  

Admittedly the real estate market involved significant top down intervention from the very beginning so let's consider a less obvious but more pure example.  When smartphones first hit the market, software development for these products was all over the place.  Device makers produce much of the software themselves.  Carriers added their own bloatware.  Some big brands vied for prominent placement.  Some independent developers tried to work with carriers while others delivered applications through the browser.  

No particular distribution modality dominated until Apple introduced the app store.  Since then the majority of mobile development resources have been pulled into the app markets (apple first, now android).  In the short run that evolution of the market was a major innovation.  Buyers of applications and developers of applications knew where to find each other in one centralized place, leading to dramatic growth in the market.  However, in the long run the app stores will become impediments to innovation if they capture so much of the market that other paradigms are ignored or stifled.  

The takeaway from this preamble is that innovation, and economic development in general, must cycle between periods of bottom-up exploration and top-down exploitation.  A focus on only bottom-up innovation will create a chaotic and disorganized market that never fully delivers on its potential and eventually peters out due to lack of coherence.  An emphasis on only top-down innovation will lead to a brittle monoculture that produces a short-term windfall at the expense of future resiliency.  

Debates in economics tend to take on a dialectic character - markets vs central planning, populism vs corporatism, open source vs corporate walled gardens.  These debates present a woefully oversimplified picture of the world.  As human society advances the institutional marketplace broadens and deepens, increasing the range of dialectic conflicts.

Over time, bottom-up institutions tend to grow in capability and influence, taking on ever larger roles.  The most successful of these become top-down institutions themselves by nurturing a new round of bottom up innovation.  Unfortunately, the temptation for the mature top-down institution is to stick its grubby hands in the honey pot to try to exploit the new round of bottom up innovators.  This is where the dialectics emerge.  

Governments spawn markets and corporations but then attempt to milk the market and increase governmental influence.

Corporations create platforms, nurturing communities of customers and commercial partners, but then attempt to lock-in those partners in order to maximize profits.  

In both cases the top-down institution is killing the golden goose.  Their influence should be getting wider but shallower as they move up the stack.  Instead, by trying to deepen their influence they are stifling their progeny.  

Top-down institutions are much like human parents.  They give birth to new entities.  During the early years their children require nurture and guidance.  As the children mature they need to be set free to achieve their potential.  If parents raise their children well they will retain some of their former influence and be taken care of in old age.  If they are overbearing their children will rebel and eventually disown them.

A dynamic yet structured economic ecosystem should behave like an enlightened multi-generation family.  Perpetually renewed by younger generations (emergent institutions), yet receptive to the wisdom of the elder generations.

(Unfortunately the intended video won't embed correctly.  Follow this link to see the video referenced below.)

Above is a somewhat slow-moving but deceptively important presentation. W. Brian Arthur argues that the accumulation of digital processes (processors, sensors, actuators) that can talk to each other are creating a semi-autonomous second economy...an economy that produces value for the human economy with minimal human intervention.

The implication I want to focus on at the moment is the analogy to the industrial revolution and the associated challenge to employment. The argument that automation is a primary cause of unemployment is clearly gathering momentum at the moment. The same argument could have been (and surely was) made 100 years. Industrial/Mechanical technology greatly diminished the need for human labor and threatened to leave vast swaths of workers unemployed.

Yet, in the long run that is not what happened. Short term unemployment gave way to a long term structural shift in the nature of work. Industrial labor was replaced by office work. For the 19th century factory worker predictions of this impending shift would have sounded absurd. People will be paid to sit in comfortable offices and push paper around all day? But of course that was exactly what happened...and as it turned out, it was neither utopian nor dystopian. Office work had its benefits but also obvious shortcomings.

We are in a similar situation today. Clearly digital automation is taking on many of the tasks that are currently major centers of employment. We also seem to be passing through an inflection point wherein change is occurring faster than our ability to structurally adapt. However, in the long run there will surely be some value that human intelligence can add. Given our current perspective, speculation regarding that human value-add might seem absurd.

"People will get paid to do what?!?"

But that is exactly what history predicts. The human economy will do whatever the automated economy cannot. That role might seem trivial today but it will seem critical and obvious in retrospect.