Tuesday, May 13, 2014

The Complexity Economy

Steve Denning has a piece in Forbes in which he asks Is the Creative Economy Also in Trouble?

There is much more going on in the piece than first meets the eye. It must be read to the bottom. Part of the problem of understanding economic growth is that most people do not really understand the dynamics of complex network processes, like economies. If you are working with an equilibrium model only, growth itself really doesn't really make that much sense.

In dynamic, complex network processes, you get s-curve growth. That means you go from essentially flat growth, through an exponential growth phase, to another period of flat growth. The three industrial revolutions mentioned in the article are periods of s-curve growth. Another term for it is "punctuated equilibrium," which emphasizes the two equilibrium points. What happens with punctuated equilibrium is there is a lot of change happening without much growth taking place. Then a tipping point is reached, and there is massive growth. We see this happening in biological evolution, in climate changes, in social changes, and in human learning. One result is the appearance of an apparent "lag" between innovation and economic growth. Denning observes one lag happening 1906-1928 -- the dynamics of punctuated equilibrium solve this problem. Another result is the lag Denning argues we are seeing now in relation to IT innovation vs. economic growth (indeed, one hopes it is indeed such a lag and not the result of another tipping point being reached: enough regulatory weight on the economy to cause a new economic equilibrium to emerge).

Euel Elliott and I suggest that technology and the economy are both dynamic network processes which, when they interact, can feed into each other and drive exponential growth. Still, there are bound to be upper limits. For example, how much is there left to be done with simple physics? Perhaps more than can be imagined, but at the same time, physics is the simplest level of reality, and that means we will sooner or later exhaust what can be done with physics-based systems. We have perhaps only touched on the possibilities in chemistry -- especially given the literally infinite ways of rearranging carbon. But what we have really only just barely touched on, if we can be said to have touched on it at all, is complexity-based technology.

The internet is certainly a complexity-based technology. True, the basic components of it are rooted in pure physics, but the overall structure is an extension of human social networks, making it a cyborg technology of high complexity. Yet even so, we have not tapped into the incredible potential of biotechnology. We have done a few small things in biotechnology, when we can treat living things like physics objects (where one gene has one effect, and no complex interactions at all), but we have not been able to scratch the surface of possibilities. We would have to understand a huge number of complex interactions to fully harness the possibility of biotechnology.

Indeed, the next biggest leap in technology -- leading to another huge industrial revolution -- will be when we are able to create complex technologies. The technologies we create now are simple. Incredibly simple. The great innovators of the future will be those who are able to harness complexity and to create complex technologies that behave in complex manners (which does not mean "unpredictable," though it can appear to be to the untrained eye).

But what we see now is a steady decline of startups. Why is that? Startups need new ideas, and if there are not many new ideas, you will see fewer startups. Also, startups need a good environment; the increasing regulatory burden in the U.S. may be slowly decreasing the number of startups, meaning we are seeing the top of an S-curve. If that is the case, we are just waiting for the regulation that will act as the tipping point to collapse the entire economy.

It may be ironic that the more hopeful interpretation is that we are running out of ideas, and that's why we're seeing fewer startups. But what that really means is that there are entrepreneurial opportunities out there. I mean, are we really running out of ideas? Or are we running out of things we can do at the level of mere physics? This means that the creative economy will become ever-more important. And ever-more difficult. More, it will mean relying more and more on those capable of seeing and understanding complex patterns.

These aren't the only things discussed in the article. Denning also lists four major changes the internet has had on the economy. All are worth taking the time to truly understand. Especially the fourth one about customer sovereignty, which is now truly here in all its glory. Meaning marketing is now itself more complex than ever.

We are moving into the complexity economy. Are you ready?

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