New Rules For The New Economy
The ‘Net will create a major social/economic transformation. Do you know what’s coming? Prepare your business now by knowing what’s ahead!
Editor’s Note: This provocative excerpt from Kevin Kelly’s new book, New Rules For The New Economy, originally appeared in the Internet Sales Discussion List. I thank Kevin for allowing me to reprint it here.
This New Economy
No one can escape the transforming fire of machines. Technology, which once progressed at the periphery of culture, now engulfs our minds as well as our lives. Is it any wonder that technology triggers such intense fascination, fear, and rage?
One by one, each of the things that we care about in life is touched by science and then altered. Human expression, thought, communication, and even human life have been infiltrated by high technology. As each realm is overtaken by complex techniques, the usual order is inverted, and new rules established. The mighty tumble, the once confident are left desperate for guidance, and the nimble are given a chance to prevail.
But while the fast-forward technological revolution gets all the headlines these days, something much larger is slowly turning beneath it. Steadily driving the gyrating cycles of cool technogadgets and gotta-haves is an emerging new economic order. The geography of wealth is being reshaped by our tools. We now live in a new economy created by shrinking computers and expanding communications.
This new economy represents a tectonic upheaval in our commonwealth, a far more turbulent reordering than mere digital hardware has produced. The new economic order has its own distinct opportunities and pitfalls. If past economic transformations are any guide, those who play by the new rules will prosper, while those who ignore them will not. We have seen only the beginnings of the anxiety, loss, excitement, and gains that many people will experience as our world shifts to a new highly technical planetary economy.
This new economy has three distinguishing characteristics: It is global. It favors intangible things — ideas, information and relationships. And it is intensely interlinked. These three attributes produce a new type of marketplace and society, one that is rooted in ubiquitous electronic networks.
Networks have existed in every economy. What’s different now is that networks, enhanced and multiplied by technology, penetrate our lives so deeply that “network” has become the central metaphor around which our thinking and our economy are organized. Unless we can understand the distinctive logic of networks, we can’t profit from the economic transformation now underway.
New Rules for the New Economy lays out ten essential dynamics of this emerging financial order. These rules are fundamental principles that are hardwired into this new territory, and that apply to all businesses and industries, not just high-tech ones. Think of the principles outlined in this book as rules of thumb.
Like any rules of thumb they aren’t infallible. Instead, they act as beacons charting out general directions. They are designed to illuminate deep-rooted forces that will persist into the first half of the next century. These ten laws attempt to capture the underlying principles that shape our new economic environment, rather than chase current short-term business trends.
The key premise of this book is that the principles governing the world of the soft — the world of intangibles, of media, of software, and of services — will soon command the world of the hard — the world of reality, of atoms, of objects, of steel and oil, and the hard work done by the sweat of brows. Iron and lumber will obey the laws of software, automobiles will follow the rules of networks, smokestacks will comply with the decrees of knowledge. If you want to envision where the future of your industry will be, imagine it as a business built entirely around the soft, even if at this point you see it based in the hard.
Of course, all the mouse clicks in the world can’t move atoms in real space without tapping real energy, so there are limits to how far the soft will infiltrate the hard. But the evidence everywhere indicates that the hard world is irreversibly softening. Therefore one can gain a huge advantage simply by riding this conversion. To stay ahead, you chiefly need to understand how the soft world works — how networks prosper and grow, how interfaces control attention, how plentitude drives value — and then apply those principles to the hard world of now.
The tricks of the intangible trade will become the tricks of your trade.
The new economy deals in wispy entities such as information, relationships, copyright, entertainment, securities, and derivatives.
The U.S. economy is already demassifying, drifting toward these intangibles. The creations most in demand from the United States (those exported) lost 50% of their physical weight per dollar of value in only six years. The disembodied world of computers, entertainment and telecommunications is now a industry larger than any of the old giants of yore, such as construction, food products, or automobile manufacturing. This new information-based sector already occupies 15% of the total U.S. economy.
Yet digital bits, stock options, copyright, and brands have no measurable economic shape. What is the unit of software — Floppy disks? Lines of code? Number of programs? Number of features? Economists are baffled. Walter Wriston, former chairman of Citicorp, likes to grumble that federal economists can tell us exactly how many left-handed cowboys are employed each year, yet have no idea how many software programs are in use. The dials on our economic dashboard have started spinning wildly, blinking and twittering as we head into new territory. It’s possible the gauges are all broken, but it is much more likely the world is turning upside down.
Remember GM? In the 1950s business reporters were infatuated with General Motors. GM was the paragon of industrial progress. It not only made cars, it made America. GM was the richest company on earth. To many intelligent observers, GM was the future of business in general. It was huge, and bigger was better. It was stable and paternal, providing lifetime employment. It controlled all parts of its vast empire, ensuring quality and high profits. GM was the best, and when the pundits looked ahead 40 years they imagined all successful companies would be like GM.
How ironic that ever since the future has arrived, GM is now the counter example. Today, if your company is like GM, it’s in deep trouble.
Instead, pundits point to Microsoft. Microsoft is the role model. It is the highest valued company on Earth. It produces intangibles. It rides the logic of standards. Its sky-high stock valuation reflects the new productivity. So we look ahead and say: In 40 years all companies will be like Microsoft.
History would suggest this is a bad bet. The obvious lesson is that we tend to project the future from what’s fashionable at present. Right now software and entertainment companies are very profitable, so we assume they are role models. Brad DeLong, an economist at UC Berkeley, has a handy theory of economic history. He says that various sectors of economy wax and wane in prominence like movie stars. The history of American economy can be written as a series of industries that first appear on the scene as unknowns, then heroically “save” the economy by doing economic miracles, and for a time are treated as economic stars. In the 1900s, the automobile industry was heroic: there was incredible innovation, many, many car company upstarts, incredible productivity. It was a wild and exciting time. But then the heroism died away and the auto industry became big, monolithic, boring and hugely profitable. In DeLong’s view, the latest heroic savior is the information, communication, and entertainment complex. Businesses in the realm of software and communications are now valorous: they pull successes out of a hat, stack up unending innovation, and perform economic miracles. Long live computers!
There is a lot of common sense to DeLong’s view of heroic industry. Just because Microsoft is heroic now, doesn’t mean all companies will follow their lead and replicate intellectual property on floppy disks with a profit margin of 90%. No doubt many, many companies in the future will not resemble Microsoft at all. Somebody has to fix the plugged toilets of the world, somebody has to build houses, somebody has to drive the trucks hauling our milk. Even Wired magazine, mouthpiece of the digital revolution — where I serve as one of the editors — does not approach the ideal of an intangible company. Wired is located smack in the middle of an old-fashioned downtown city, and in one year turns 8 million pounds (or 48 railway cars) of dried tree pulp, and 330,000 pounds of bright colored ink into hard copies of the magazine. A lot of atoms are involved.
So how can we make the claim that all businesses in the world will be reshaped by advances in chips and glass fibers and spectrum? What makes this particular technological advance so special? Why is the business hero of this moment so much more important than its recent predecessors?
Because communication — which in the end is what the digital technology and media are all about — is not just a sector of the economy. Communication is the economy.
This vanguard is not about computers. Computers are over. Most of the consequences that we can expect from computers as stand-alone machines have already happened. They have sped up our lives, and made managing words, numbers and pixels quite extraordinary, but they have not had much more effect beyond that.
The new economy is about communication, deep and wide. All the transformations suggested in this book stem from the fundamental way we are revolutionizing communications. Communication is the foundation of society, of our culture, of our humanity, of our own individual identity, and of all economic systems. This is why networks are such a big deal. Communication is so close to culture and society itself, that the effects of technologizing it are beyond the scale of a mere industrial sector cycle. Communication, and its ally computers, is a special case in economic history. Not because it happens to be the fashionable leading business sector of our day, but because its cultural, technological, and conceptual impacts reverberate at the root of our lives.
Certain technologies (such as the integrated circuit chip) spur innovation and novelty in other technologies; these catalysts are called “enabling technologies.” Occasionally an economic sector will leverage power and accelerate the advance of other sectors in an economy. These can be thought of as “enabling sectors.” Computer chips and communication networks have produced a sector of an economy that is transforming all the other sectors.
Only a relatively small number of people have ever been directly employed in the world of finance. Yet ever since the days of the Venetian bankers, financial innovations such as mortgages, insurance, venture funding, stocks, checks, credit cards, mutual funds, to name only a few, have completely reshaped our economy. They have enabled the rise of corporations, of market capitalism, of the industrial age, and much more. Unlike many previous heroic industries such as the electrical power industry or the chemical industry, this small sector has influenced how all business is done, and how we structure our lives.
As tremendous as the influence of financial inventions have been, the influence of network inventions will be as great, or greater.
It took several billions years for life on earth to evolve unicellular life. And it took another billion years or so for that single-celled life to evolve multicellular arrangements — each cell touching a few cells near it to make a living spherical organism. At first, the sphere was the only form multicellular life could take because its cells had to be near one another to coordinate their functions. After another billion years, life eventually evolved the first cellular neuron — a thin strand of tissue — which enabled two cells to communicate over a distance. With that single enabling innovation, the variety of life boomed. With neurons, life no longer had to remain bounded in a blob. It was possible to arrange cells into almost any shape, size, and function.
Butterflies, orchids, and kangaroos all became possible. Life quickly exploded in a million different unexpected ways, into fantastic awesome varieties, until wonderful life was everywhere.
Silicon chips linked into high-bandwidth channels are the neurons of our culture.
Until this moment, our economy has been in the multicellular stage. Our industrial age has required each customer or company to almost physically touch one another. Our firms and organizations resemble blobs. Now, by the enabling invention of silicon and glass neurons, a million new forms are possible. Boom! An infinite variety of new shapes and sizes of social organizations are suddenly possible. Unimaginable forms of commerce can now coalesce in this new economy. We are about to witness an explosion of entities built on relationships and technology that will rival the early days of life on earth in their variety.
In the future very few companies will look like Microsoft, or even Wired. Even ancient forms will be bent. Farmers, and truckers, plumbers and other traditional occupations will continue, just as lowly unicellular bacterial life continues. But the economics of farmers and friends, in their own way, will obey the logic of networks, just as Microsoft does now.
We see evidence for that already. A farmer in America — the hero of the agricultural economy — rides in a portable office on his tractor. It’s air conditioned, has a phone, a satellite-driven GPS location device, and sophisticated sensors near the ground. At home his computer is connected to the never-ending stream of weather data, the worldwide grain markets, his bank, moisture detectors in the soil, digitized maps, and his own spreadsheets of cash flow. Yes, he gets dirt under his fingernails, but his manual labor takes place in the context of a network economy.
Much the same can be said about truck drivers. While the experience of sitting behind a wheel remains unchanged, the new tools of trucking — bar codes, radios, dispatch algorithms, route hubs and even roads themselves — all follow the logic of networks. Thus, the very sweat of truckers as they manually load and unload heavy boxes becomes incorporated into the network economy.
Our economy is an amalgamation of diverse styles of trade, commerce, and social exchanges. New economic functions develop around the operating old.
Barter, one of the earliest forms of commerce, has not gone away. The barter economy ran through the agricultural age, the industrial age, and continues today. Indeed most of what happens on the World Wide Web is barter. Even many years from now a significant portion of what the economy does will be done by the industrial layers — machines churning out goods and moving materials. The old economies will continue to operate profitably within the deep cortex of the new economy.
Yet the inertia of the industrial age continues to mesmerize us. Between 1990 and 1996 the number of people making tangible things — stuff you can drop on your toe – decreased by 1%, while the number of people employed in providing “services” (intangibles) grew 15%. Presently a mere 18% of U.S. employment is in manufacturing. But three quarters of those 18% actually perform network economy jobs while working for a manufacturing company. Instead of pushing atoms they push bits around: accountants, researchers, designers, marketing, sales, lawyers, and all the rest who sit at a desk. Only a minuscule percentage of the workforce performs industrial age tasks, yet our politics, our media, our funding, and our education continue the grand fantasy that industrial jobs need to be created. Within a generation, two at the most, the number of people working in honest-to-goodness manufacturing jobs will be no more than the number of farmers in the land — less than a few percent. Far more than we realize it, the network economy is pulling in everyone.
As the world of chips and glass fibers and wireless waves goes, so goes the rest of the world.
In the face of history this bold assertion may seem naive. But every once in a while something big and new does happen. It must have felt that way to the home-craft Luddites who sensed that the industrial age was not just about new-fangled looms, but foreshadowed deep, systemic changes with life-changing ramifications. Were they naive to think that machines would ultimately transform the ancient and holy act of planting seeds and harvesting the grain? Of breeding cows? Of the structure of communities?
“Listen to the technology,” advises Carver Mead, one of the inventors of the modern computer chip. “Find out what it is telling you.” Following that lead, I have assembled these rules of thumb by asking these questions: How do our tools shape our destiny? What kind of an economy is our new technology suggesting?
Steel ingots and rivers of oil, smokestacks and factory lines, and even tiny seeds and cud-chewing cows are all becoming enmeshed in the world of smart chips and fast bandwidth, and sooner or later they will begin to fully obey the new rules of the new economy, as everything will. I’ve listened to the technology, and as best as I can determine, the technology repeats ten distinct refrains, as premiered in the following ten chapters.
New Rules of the New Economy
1) Embrace the Swarm. As power flows away from the center, the competitive advantage belongs to those who learn how to embrace decentralized points of control.
2) Increasing Returns. As the number of connections between people and things add up, the consequences of those connections multiply out even faster, so that initial successes aren’t self-limiting, but self-feeding.
3) Plentitude, Not Scarcity. As manufacturing techniques perfect the art of making copies plentiful, value is carried by abundance, rather than scarcity, inverting traditional business propositions.
4) Follow the Free. As resource scarcity gives way to abundance, generosity begets wealth. Following the free rehearses the inevitable fall of prices, and takes advantage of the only true scarcity: human attention.
5) Feed the Web First. As networks entangle all commerce, a firm’s primary focus shifts from maximizing the firm’s value to maximizing the network’s value. Unless the net survives, the firm perishes.
6) Let Go at the Top. As innovation accelerates, abandoning the highly successful in order to escape from its eventual obsolescence becomes the most difficult and yet most essential task.
7) From Places to Spaces. As physical proximity (place) is replaced by multiple interactions with anything, anytime, anywhere (space), the opportunities for intermediaries, middlemen, and mid-size niches expand greatly.
8) No Harmony, All Flux. As turbulence and instability become the norm in business, the most effective survival stance is a constant, but highly selective disruption that we call innovation.
9) Relationship Tech. As the soft trumps the hard, the most powerful technologies are those that enhance, amplify, extend, augment, distill, recall, expand, and develop soft relationships of all types.
10) Opportunities Before Efficiencies. As fortunes are made by training machines to be ever more efficient, there is yet far greater wealth to be had by unleashing the inefficient discovery
A Thousand Points of Wealth
The network economy will unleash opportunities on a scale never seen before on Earth. But the network economy is not utopia. It is a unique phase of economic development much like adolescence — a thrilling, disorienting, and never-to-be repeated time. A planet can progress only once through the stage when it is first completely wrapped by networks of thought and interaction. We are now at that moment when a cloak of glass fibers and a halo of satellites are closing themselves around the globe to bring forth a seamless economic culture.
This new global economic culture is characterized by decentralized ownership and equity, by pools of knowledge instead of pools of capital, by an emphasis on an open society, and most importantly by a widespread reliance on economic values as the basis for making decisions in all walks of life.
The sources of capital, which in the industrial age were once consolidated in a few banks and individual “capitalists,” are now fragmenting into millions of networked bank accounts, mutual funds, and private investments throughout society. Elite, centralized banks used to have a monopoly on capital — the engine of capitalism. Bankers loaned their assets as debt, and from this debt, industry rose. But with increased knowledge and communication, investors realized that partnerships — or investments where the investor shares risk — yield significantly more wealth in the long run. Technology has accelerated the migration from making loans to making investments. The ease of computerized accounting allows almost anyone with as little as $100 to plug into the network of equity. Despite the rise of a few gigantic global banks, increasing amounts of the wealth are now held in equity, and not in debt. Today, for instance, 28% of US household assets are kept in equities, and 44% of US households own stock.
Networks promote this equity culture. The ownership of organizations is distributed and decentralized into a thousand points. The transactional costs of owning a tiny share of someone’s else’s dreams and ambitions continue to drop so that it becomes feasible to possess, directly and indirectly, small parts of many companies. When you invest in a mutual fund, you invest in hundreds of thousands of other people’s work. You use the wealth that your own ambition has generated to seed the generation of prosperity by others. You may only own some minuscule portion of an enterprise, but you can easily own parts of many firms, and each firm is owned by millions of individuals. This is network equity.
Out of this distributed ownership a portrait of a network emerges. Millions of lines of investment crisscross the landscape. A few individuals own a lot, but the majority of nodes are dispersed into small bank accounts in small towns. The bulk of stocks in the US are controlled by the pension funds of ordinary citizens — by millions of individuals in the aggregate. The workers of America really do collectively own the means of production.
This network equity is made possible by the same network technology — shrinking chips and expanding communications — that creates wealth in the first place. The tracking, accounting, and transmission of each person’s wealth and slivers of ownership can only happen because computation and telecommunication have reduced the cost of a transaction to insignificance. Today there are 7,000 mutual funds — 7,000 ways to divvy up the equity of wealth creation. And there are a similar number of publicly traded companies that have, in effect, divvied up their wealth to many owners.
There are several trends in this emerging equity culture, each one amplified by pervasive network technology.
First, the spread of ownership is becoming global, just as the economy itself is. In the last few years, Europe has suddenly sent a mind-boggling infusion of money into the stock markets. Europeans discovered equity culture and overnight invested hundreds of billions of dollars of their old wealth into the network of ownership. At the same time, hungry investors are pouring billions into the coffers of Asian and Latin American “emerging markets.” Today, almost any investor in mutual funds, whether they know it or not, has a stake in a company operating in a nation outside his own.
Second, as the ease of transactions increases and the price drops, the spread of ownership becomes fine-grained and ever more wider. Smaller and smaller investments into more and more varieties of endeavors are possible.
Third, the same type of fine-grained decentralization is about to happen in publicly traded companies. During the 1990s approximately 4,000 companies “went public” in the US. These corporations were newly funded by the investment of many small holders, who collectively contributed about $250 billion to these companies’ equity. Right now, very old-fashioned hurdles prevent many smaller companies from accepting equity investments by the public. Some of these hurdles are legacies from the industrial era when communication and information were scarce. Some obstacles are simply the selfish protections of investment bankers and others who reap billions by their monopoly on controlling the process of taking a company public. Network technology is radically altering the stock market, causing a widespread reevaluation of the role and worth of stock brokers, traders, and a centralized market itself (such as the New York Stock Exchange) in a world where economic information is ubiquitous and instant. Secure, reliable, and trustworthy offerings of publicly traded companies can happen on the net without most of the traditional Wall Street rigamarole. Network technology will make it possible for qualified companies to take their company public from a desktop, directly soliciting the investments from billions of individuals and organizations worldwide. This will happen sooner than Wall Street thinks.
Fourth, the Silicon Valley model of compensation is infecting more parts of the world. A major element of equity culture is the ideology that every person working in a company should have the opportunity to own part of it. In most American high-tech companies, stock options for employees are mandatory. Shares in the company are often used to recruit hot talent, or to be dispensed as bonuses, or, in the case of start-ups, to be paid out as a substitute for a salary.
In the network economy ownership is fragmented into myriad parts, sped along electronic pathways, and dispersed among workers, venture capitalists, investors, alliance members, outsiders and, in minute doses, even to competitors. Networks breed swarm capitalism.
Yet as networks rise, the center recedes. It is no coincidence that global networks appear at the same time as the postmodern literary movement. In postmodernism, there is no central authority, no universal dogma, no foundational ethic. The theme of postmodernism in the arts, science and politics is summed up by Steven Best and Douglas Kellner in their book The Postmodern Turn: “The postmodern turn results in fragmentation, instability, indeterminacy, and uncertainty.” This also sums up the net.
Network principles renounce rigidity, closed structure, universal schemes, central authority, and fixed values. Instead networks offer up plurality, differences, ambiguity, incompleteness, contingency, and multiplicity. These qualities are ideal for disruption, for the spread of networked-organized crime, and for fostering the lack of shared values.
Because the nature of the network economy seeds disequilibrium, fragmentation, uncertainty, churn, and relativism, the anchors of meaning and value are in short supply. We are simply unable to deal with questions that cannot be answered by means of technology. The stereotypical modern consumer is already a rather thin character. He or she is like a balloon: possessing an inflated ego and a thin identity stretched to its limit. They don’t know who they are, but they are very certain that they are very important. The smallest prick can pop their container.
In the great vacuum of meaning, in the silence of unspoken values, in the vacancy of something large to stand for, something bigger than oneself, technology — for better or worse — will shape our society.
Because values and meaning are scarce today, technology will make our decisions for us. We’ll listen to technology because our modern ears listen to little else. In the absence of other firm beliefs, we’ll let technology steer. No other force is as powerful in shaping our destiny. By imagining what technology wants, we can imagine the course of our culture.
The future of technology is networks. Networks large, wide, deep and fast. Electrified networks of all types will cover our planet and their complex nodes will shape our economy and color our lives. The shift to this new perspective will be neither immediate nor painless. Nor will it be as strange as it first appears.
There is no reason to accept the imperative of technology without challenge, but there is also no doubt that technology’s march is clearly aimed toward all things networked. Those who obey the logic of the net, and who understand that we are entering into a realm with new rules, will have a keen advantage in the new economy, now in progress.
New Rules For The New Economy, Copyright 1998 by Kevin Kelly. Published by Viking Books in the US, and Forth Estate in the UK. Available from Amazon.com. The full text of his first book, Out Of Control can be found at http://www.well.com/user/kk/OutOfControl/