The Next Economic Paradigm

Tag: outsourcing

Social Clipping and the Amazing Disappearing Economy

In the early 1990’s, the NAFTA Mutual Recognition Document (MRD) for engineering professionals was the first modern attempt to treat knowledge like a financial instrument. Unfortunately it failed because of a tiny little flaw that I call ‘social clipping’.

Most trade agreements that followed were modeled after NAFTA and, as such, inherited the clipping flaw.  The flaw is that ‘products’, but not the knowledge assets that created them, are mobile in a global economy.

The MRD handed the knowledge economy to Mexico on a silver platter; but they turned it down.  The government did not want to give their engineers “wings” because they were afraid that they would fly away.  Instead, Mexico chose to sell their extraordinary young engineering talent off cheap to meet quotas promised to Asian, European, and American companies to relocate huge manufacturing plants to the country. Today, Mexico competes with China in a race to the bottom of a manufacturing economy and almost no indigenous design industries.

Two-way street:

Back then, the protesters raged about an influx of cheap foreign engineers to the US.  But many US engineers saw that Mexico needed everything that engineers make – roads, bridges, infrastructure, etc. The needs were endless and the objective was clear; to increase human productivity in Mexico was to create real and sustainable wealth.  Maybe then, the citizens would not need to fly away.

These infrastructure projects could have been funded because the Professional Engineering License behaves like a financial instrument mitigating project risks (so that nothing “disappears”). Only then banks would lend and insurers would insure.  The transfer of knowledge and accountability to Mexico would have been extraordinary; the relationships, profound; their development progress, astonishing.

The Disappearing Economy

But the MRD died by clipping.  Mexican Engineers would have been required to take the same engineering examinations as US engineer.  The government refused citing concern that they could not pass. So, in 1994-1997, this author directed a large comparative education project sending over 250 engineers to the US professional engineering examination (EIT).  The Mexican Pass rate was extraordinary – they were easily comparable to the US pass rate in most subjects and flat-out superior in mathematics.  There was nothing wrong with Mexican engineers, or the culture; there was something wrong with the financial system that keeps them invisible.

Knowledge is Power

As the story goes, Mexico has a family oriented culture where hierarchy is often based on seniority; a common examination may favor recent graduates.  It would be inappropriate for a young engineer to have authority over a more senior engineer.  Dig a little deeper and the real problem was power. In Mexico, power is concentrated among very few people.  It would have been unacceptable for transparency to exist.

We are facing a similar situation in America today.  Power has been steadily consolidating over the years.  A huge and fast stimulus package will enter a financial system with a shortage of vetting institutions. There is a strong pull toward ‘business as usual’ – creating J-O-B-S; not necessarily more entrepreneurs, engineers, or mentors, and certainly not empowering whistle blowers.  In the knowledge economy, Americans salaries are pegged to off-shore outsourcing. This is a game that we can no longer win playing by the rules.

Social clipping

As we have seen with less developed nations; when people are held below a certain economic level, they fail to organize for innovation, social change, entrepreneurship, and value creation because they are too busy trying to pay off debt and feed their families.  Social capital, creative capital, and intellectual capital are muted; that’s when the magic of innovation disappears. That’s social clipping.

America must move on to the next level of economic growth.  The Innovation economy is a game we can win playing by new rules. Government must trust the people, empower social media, and not clip our wings with an outdated economic model.

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Intellectual Property in the Innovation Economy

Today there is a big scare that bad people will run off with your intellectual property and make a ton of money with it. Another problem is that the Patent system is so slow and so expensive that the vast majority of innovators simply do not have access to patent protection – many people just keep their ideas secret. This happens in corporations where your ideas are used to advance the careers other people. Often the dominant strategy is to not innovate or keep your ideas secret.

The trend toward open sourcing and crowd sourcing is a real option in the Innovation Economy where Social Network are self regulating. In fact, these articles reference Wikipedia – a community source of definitions.

In practice, If I do dirty deals of Craig’s List, for example; people know where I live….or I get flagged. EBay, for example, produces relatively little to earn their 30B market cap except protect their social accountability system – the EBay feedback mechanism rewards high integrity and punished low integrity. The hallmark of the Web 2.0 is the user generated content as well as the user generated vetting of the content.

This is significant. The efficiency of any market is directly related to the efficiency of the vetting mechanism by rewarding high integrity and punishing low integrity; the FAA vets the airline industry, checks and balances vets democratic government, and the FICO score vets the consumer credit markets. Likewise, things go horribly wrong when the vetting mechanism fails; the accounting profession after Enron, and the sub prime mortgage crisis after loose lending practices, etc. The battlefields of business are littered with similar examples.

In an Innovation Economy, the secret sauce for the production of innovation is far more valuable than any single innovation itself.  The secret sauce provides a monopoly on dynamic repeatability rather than some static device. As such, patents can be open-sourced and innovation crowd sourced across a much wider domain of user applications.  Such conditions will change the type of innovations that are favored to reflect the broad and sweeping social priorities rather than innovations that are easy to patent, protect, and monopolize – and fear for one’s IP being stolen.    Bad people cannot steal your intellectual capital, your social capital, or your creative capital – it is yours, you own it and you have the social network to prove it.

Ownership is the key ingredient of entrepreneurship – everyone owns the innovation economy.

In fact, the objective of innovation economics is for people to take your ideas and make money with them – then give you some of it. Your income arises from collecting royalty payments on your ideas and participation of many ventures. If someone does not play fair, their access to intellectual property and the Percentile Search Engine can be curtailed just like access to credit can be curtailed in modern finance. Therefore, it is in everyone’s best interest to play fair; you may cheat, but only once.

Social Networks are largely self-regulating; no government, Industry, or management is needed. This is efficiency, scaleability, and multiplicity all in one!

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