Welcome to part 2 of the New Economic Paradigm series.
In part 1 we determined that money represents human productivity and the only way to sustainably create wealth was to innovate.
Then we identified the flaw that money lives in a complex and integrated system while Innovation does not, rather, innovation is isolated, random, non-integrated and subservient to the financial system.
This module discusses the currency of the innovation economy.
A Currency is anything that serves as a medium of exchange, a stored value, and a standard of value.
We all know that Dollar denominated money is a medium of exchange – but it does not represent gold or silver or even oil, it represents human productivity. Money, and therefore all financial instruments store value related to human productivity.
When we look into society throughout history, everywhere people are trading information and ideas with each other at some velocity. The Internet and social media (machine enabled society) has sped this process up to incredible rates. All of this information adds up to something because obviously things get built and stuff rolls off assembly lines. Furthermore, people act on information obtained from each other to produce things.
The currency of trade for the next economic paradigm must represent this “stock exchange”
Intuitively we know that information, knowledge and innovation are profoundly related to each other. In fact, if you don’t have one, you can’t have the other two. Our currency of trade must represent all three; information, knowledge, and innovation. Therefore, we need to redefine these terms in a manner that relates them.
First we must define ‘information’. That’s easy, information is facts and data.
Next we need to define ‘knowledge’ in terms of information: Any good teacher can tell you that information must be introduced in a certain sequence and at a certain speed in order for the student to learn. Knowledge is therefore proportional to the rate of change of information.
For the purposes of this analysis, we will use the following definition: Innovation is defined by the rate of change of knowledge where knowledge is defined by the rate of change of information. For example; everyone has had an ‘Ah-Ha!’ moment during a brain storming session, or after making a mistake, or after witnessing a profound event. The AH-HA moment represents a very high rate of change in our knowledge that occurs in a very short period of time.
According to this definition, every idea, conversation, dream, design, sketch, or discovery experienced and shared between two or more people is an innovation.
Math students can see that this definition sets up a differential equation that we can use to model the innovation system computationally – something that cannot be done with the current definitions.
Now let’s look at the “economic outcome” part
The factors of production for the industrial economy are land labor and capital. Entrepreneurs allocate these three factors in different combination in the formation and growth of corporations. If any of these factors of production are missing, dysfunctional, or corrupted – the corporation stops producing.
We have learned that in the knowledge economy, the location of knowledge work is highly mobile – so “Land” does not have the same significance for making things as it did 100 years ago.
What about labor? Knowledge workers analyze situations, manage many variables, and create unique solutions. They do not really produce identical knowledge pieces like a machine operator or a production worker. Everything they see and do becomes part of their relevant knowledge set: 24/7/365. The idea of an 8 hour day and pay-by-the-hour are no longer relevant.
Capital is money needed to build future structures, buy machines and to pay wages. Today, money provides access to information. The current economic meltdown demonstrates that where the information is corrupted, the money is corrupted – and so becomes everything connected to the money.
We now see that many old economic principles do not work quite as well in the new economies. Yet, the Land, Labor, and Capital theory is still the foundation of much of today’s corporate, academic, government, financial, and social thinking.
Using our definition for innovation, we can see that the innovation economy will emerge from the rate of change of the knowledge economy. Today we are witnessing an astonishing growth in social media and a breakdown of traditional media for the dissemination of information.
The factors of production for the new currency are Intellectual Capital, Social Capital, and Creative Capital.
Intellectual Capital is also called Human Capital – and suggests that concentrations of educated and motivated people attract investors to employ them and invest in the communities where they reside. This investment attracts other intelligent people who in turn attract more investment thereby creating a cycle of economic growth
The Social Capital Model suggests that people acting in communities can create better solutions, greater accountability, and more economic growth than management, governments, or bureaucracy can induce on their own. Examples of Social Capital include Civil Rights Movement, community watch organizations, Democratic Government, Social Networking, and notably, recent political changes events.
The Creative Capital model, suggests that engineers and scientists think more like artists and musicians than like production workers – their ideas come 24/7/365 – and that an environment of tolerance, diversity, and openness promotes creative output.
A Currency is anything that serves as a medium of exchange, a stored value, and a standard of value.
In the current financial economy, the currency is a dollar. The rate of change of the currency is called appreciation, depreciation, or “interest”. The rate of change of interest is the growth rate or compounding. These are very familiar conditions in finance and the basis for a company’s stock price.
In the innovation economy, information is the currency. Knowledge is the rate of change of information, and innovation is the rate of change of knowledge.
This will become a very familiar and useful relationship in the innovation economy.
For example, innovation is difficult to measure directly. However, we can measure the rate of change of knowledge as a proxy for innovation. It is difficult to measure knowledge. However, we can measure the rate of change of information as a proxy for knowledge.
In finance and calculus, these are called derivatives.
In the next module we will discuss the inventory and accounting system for an innovation economy.
