Large scale job growth requires new ecosystems

In July of this year Andy Grove wrote a thought provoking article: How America Can Create Jobs.

I reread the article this week, which led to spending my Saturday writing this article.

These are complex issues that often require a lifetime of immersion to understand, if ever, with both experiential and intellectual exposure. Generally speaking an economist is not qualified to discuss job creation—rather they are an excellent source for analyzing the impact and results. A career in one company or even one industry will not necessarily provide a good understanding of the topic, and a career in academia has proven to be more of a negative for understanding job creation than a positive, despite the confusion in media and academia.

Most jobs are created a few at a time by small business, born from need by entrepreneurs to make a living and/or fierce desire for liberty and then only grow under the right conditions, or environmental factors. I call the process, art, and science of crafting viable entrepreneur environments market farming, not to be confused with economic development, which often manifests in the form of government welfare programs. When ‘toxic chemicals’ are introduced to markets, which we’ve often seen from a variety of sources in the U.S. in recent decades, the result for job creation is very similar to toxicity in agriculture; barren fields. A good example of a very toxic application for markets is the current realization of moral hazard in housing where those who chose not to abuse the system are being punished  and are also being required to subsidize those who chose to abuse the system.

Another example still infecting markets today are thousands of smaller companies throughout our economy who made a daily choice for decades to play by the rules  and are now required to subsidize in a multitude of ways larger competitors who threatened our entire system. Moral hazard is at its core an extremely dangerous threat to the very motivation that binds our entire global economy together. Despite the wishes of many, voluntary markets are much superior to compulsory, even if highly dependent upon regulatory enforcement. Some lines are best never crossed, most of which have been crossed recently, which is negatively affecting job creation currently more than all other factors combined.

Markets can also be damaged by excessive harvesting, over grazing, subsidies, mandates, too many citizens dependent on government, market dominance, over consolidation, strategic interests, capital droughts, capital floods, excessive taxation, dysfunctional politics, fiscal imbalances, excessive debt, excessive greed, and last but not least; customers who don’t understand how to farm markets.  Markets have always been more fragile than most understand; otherwise society wouldn’t be so intent on destroying them.

Bubbles do not a durable economy make

I was highly critical during the formation of the excesses in the dot-com era, excessive outsourcing to Asia, the strategic venture capital model that emerged in Silicon Valley, and the expansion phase of the housing bubble. Most of my conversations were private; some were protected by confidentiality, and none were terribly popular. The red flags I raised almost certainly damaged my businesses and career, but in hindsight proved accurate. Note the ironic moral hazard (still) at play here…

The dot-com bubble was the result of a combination of excessive capital entering venturing from institutions chasing higher returns on far too large of a scale, and a new global medium that threatened to completely change the game throughout large sections of our economy. The combination of the Internet and Web didn’t alter fundamental economics nearly as much as disrupt and rearrange specific segments, but the growth and then enormous values attracted everyone from authentic entrepreneurs to fraudulent opportunists to entrenched institutions threatened with extinction; a process that continues.

I argued then that the historic over-investment in the medium completely disrupted a natural organic process well underway before the stampede of capital flooded (fragile) fertile fields of emerging commerce. If not for the dot-com bubble America would be much stronger today with a much greater number of strong companies poised for the future. Unlike housing, which was far more national, the dot-com bubble was primarily caused by Silicon Valley, Wall Street, the relationship between the two and their investors. It was enabled by the SEC and the White House which viewed the capital gains from the bubble as a positive (capital gains can be positive, but not in pump and dump schemes that just leads to higher government spending based on unsustainable bubbles).

India and China may have been negatively impacted from too much investment later, but in the earliest stage of web commercialization, public forums like the Asian Internet marketing discussion list were full of authentic, hungry entrepreneurs who were far more eager to learn than the majority of their western counterparts. Essentially what I witnessed in those early days of Asian e-commerce were not investors, observers or academics—but doers. During the dot-com era, while the U.S. was overflowing with prospectors infected with gold fever, Asian entrepreneurs were becoming the tool makers of the future with national support from policy, strategic investment, and trade negotiations that leveraged their strongest asset; the fastest growing and potentially largest markets in the world.

In the U.S. our policy favored entrenched interests, including capital and job flows to Asia, which remains true today. Most government agencies for example at the local, state, and federal level are still financially rewarding multinationals that are sending assets and jobs to Asia while cutting in the U.S.  BRIC countries must indeed think we are self-destructive fools—one need not start a global trade war to make wise decisions at home, and avoid suicide.

Lethal prescription for U.S.; easy money instead of fiscal discipline

One of the byproducts of the dot-com era was excessive centralization of wealth, particularly in and around Silicon Valley, Manhattan, and a few other cities, creating a negative spiral of protecting assets (again attempting to keep unsustainable bubbles inflated-improper use of capital) instead of creative destruction that favors job engines and long-term wealth creation. It also created resentment in flyover states that did not participate in either destructive strategic capital wars, or fraud, which was caused by moral hazard from the S&L crisis that I think contributed to the housing bubble.

The rise of Asia combined with the wealth effect of technology and the real estate bubble provided a potentially lethal combination to the U.S.  At the precise time the U.S. (and EU) should have been saving more, and retooling for a changing global economy to become more competitive—just the opposite occurred; cost of living in the U.S. went ballistic, as did the cost of infrastructure, healthcare, education and government; making it increasingly difficult for authentic entrepreneurs to build real, long-lasting companies in the U.S. (monetary easing?).  So venture capitalists, institutional investors, and multi-nationals focused primarily on two strategies for profit making, depending on their internal strengths; scaling in emerging markets and financial engineering. Most I’ve talked to privately don’t feel they had any choice, but they are wrong—I didn’t participate in the self-destructive mayhem nor did most others.

Until very recently, when the first real economic correction began in generations, Americans could party their way through a public university, obtain a degree, and if nothing else popped up get a job with a government agency and be set for life—our institutions are filled with mediocre and apathetic cultures because of it. The more gifted and/or driven students could join the stampede of financial engineers on Wall Street (or increasingly Silicon Valley) to harvest some of the excessive currency that had been printed over the years, get rich quick, and retire. Brilliant scientists could remain in academia forever, consult on the side, and sell some IP to obtain wealth without assuming much if any risk. While I am exaggerating to make a point, this is hardly the type of incentive structure, culture or environment needed to build new industries or strong companies like the early Intel, which after all moved the bulk of its manufacturing operations out of the Bay area long ago due to a suicidal cost trajectory from this very culture.

Market manipulation eventually fails; market farming eventually works

The problem that few in Silicon Valley would admit publicly until very recently is that California is just too expensive and prices need to fall dramatically in order to be competitive; an extreme case of the same disease facing much of the U.S. and EU.  A large portion of the capital invested in California is strategic and protectionist, and not free to flow to opportunity. For several years while I was a VC based in AZ, CalPERs mandated $8 billion per year in just one program to be invested in venture capital firms located within California borders, representing a classic predatory bubble maker, resulting in good companies starving throughout the U.S. while many undeserving ventures partied hard in California. Most states were either unwilling or unable to play capital warfare (this is still the national U.S. policy).

I was born in California and we liked living there otherwise but over decades we’ve seen a great deal of market manipulation under the guise of market capitalism. Populism mixed with political and market manipulation has now devastated the world’s strongest economy. The place that taught the world about the importance of creative destruction failed to practice the discipline; otherwise capital would have flowed to opportunities in flyover states. Instead, other states were viewed as competitors and Asia was viewed as the answer, but California was over estimating its own community and underestimating others.

The good news is that many other areas in the U.S. have become far more competitive on costs with relatively competitive human capital, particularly for tech manufacturing of the type Andy Grove discusses. The bad news of course is that healthcare, education, public policy and bureaucracy are acting like chains of economic repression to emerging companies, either directly or through our dysfunctional banking system. Perhaps worse is that entrepreneurs have been lectured rather sternly for the past several years through policy that bigger and incompetent is far more highly valued by the U.S. now than smaller and competent, even though entrepreneurs create jobs, so we should not be surprised at the result.

Enough of the past; what about the future?

As Andy Grove suggests I think accurately, one of the key problems facing the U.S. today is our lost ability in scaling companies. Where I disagree with Andy is that he argues against new business as the primary answer to that problem, which probably reflects the fact that I am a founder of a start-up in a new emerging ecosystem and he is founder and advisor to an entrenched giant that emerged 40 years ago. I am certain, however, that the U.S. needs more creative destruction, not less, and that cannot be achieved through entrenched institutions—they simply have too much to protect and usually fail to cannibalize voluntarily, which results in economic stagnation.   Job creation on the scale the U.S. and EU need today requires new ecosystems—they will not emerge from entities threatened by same, or quite possibly even regions or markets they dominate (update– see this article for a post doc EDU).

What we need today is what Intel had in the beginning, as I recall portrayed to me a couple of years ago by a mutual friend Les Vadasz over lunch in Palo Alto. In the early days of Intel, several essential ingredients existed, without which they may not have survived, the most important being a customer willing to take a chance with a young company.  This simple dynamic of mature supporting emergent is prevalent in Asia, improving in the EU, Canada and others today, but has become almost completely absent in the U.S. culture. The fact that the first major customer for Intel was based in Japan may tell us something about how clubby U.S. industry was even in 1969; otherwise Intel would probably have found its initial customer in the U.S.

I have immense respect for the founding team at Intel, not only because of the great technology and wealth created that supports industries, governments, and foundations, but the manner in which they created it. They not only created a new ecosystem but taught many others how to farm markets, learning the hard way over time the high cost of toxicity to market farming.

Today however, we should not look to market leaders for job creation, but rather young companies attempting to create new ecosystems, like our effort in leading the semantic enterprise. Whether we call it opportunity, liberty, creative destruction, or simply progress—emerging companies are the job engines of our economy, particularly when built upon new technology ecosystems that only occur every generation or two. There is no alternative to the new company and ecosystem. Any culture or nation that fails to embrace this truism does so at their own peril.