Thursday, February 10, 2011
Rebuilding Jobs in the United States
Types of Value
There are three types of value: knowledge, capacity, and Political. In previous posts, I’ve defined and described the concepts of Value, Knowledge Value, Capacity Value, and Political Value. Briefly, Knowledge creates value. An inventor can use new knowledge to create what is currently called “disruptive technology, that is, technology that makes a significant number of products and services obsolete. Or, it can create value by adding new and unique functions to existing products and services. Capacity creates “more of the same” value. As knowledge defuses through the industry or industries, customers come to expect it as part of all products or service of that type. Then suppliers compete on the bases of price rather than unique functionality. They lose their “pricing power.” So the products and services turn from producing knowledge value to producing capacity value.
There are two types of Political Value, Mediated and Exploitative. Only the Control function of the IDEF0 model of organizations can create political value. The control function is either the leadership or management of the organization, or the governing body of some political unit (e.g., country, state, or local). Mediated political value is good in the sense that it provides security, and policies and standards. These reduce intra-/inter-organizational process friction by standardizing interactions to make a “level playing field” with minimum negotiation, which reduces process costs to all organizations or units within the organization or political unit—the key reason for governance.
However, those responsible for ensuring “the level playing field” can tilt the field to the advantage of those that, in one way or another, recompense them for the change. I call this exploitative political value. It’s political value that creates influence or real value for the “gatekeeper.” At its worst, it’s the way tyrants, dictators and other of that ilk gain value. The owner of the plantation is the archetype of the gatekeeper. As the Lord of the manor he owns everything with the vassals and serfs all working to create value for him.
The Current State
Currently, in the United States, there is a system of value exploitation of entrepreneurs and knowledge workers by financiers and large corporations. I suspect that it was not created with malice aforethought, but through political exploitation nonetheless. This is how the system works. Frequently, the inventor or innovator/ entrepreneur must use venture capital (from investment bankers among others) to develop their concept and to get the necessary processes and tooling into place to make the product or service, that is create the production capability. Then and only then does the product or service have a chance to make knowledge value. Once the product or service starts creating the knowledge value, the venture capitalists sells off the organization to a major corporation. How? Because the venture capitalist (loan shark) insisted on owning more than 51 percent, just for the loan of the money—generally more like 90 percent or more. What does the knowledge creator end up with, generally little more than the shirt on his or her back. The venture capitalist makes a bundle and the major corporation milks the rest of the knowledge value and as much capacity value as possible. So, in the what is the point in creating new products and services? While this is a simplification (as witnessed by Steve Jobs) and there are many nuances, still this system produces the most value for finance engineers on Wall Street and other investors, but not for the true economic engine then knowledge creators. These are the people that create the products and services that create the jobs.
Additionally, the Wall Street and Corporation Finance Engineers follow the “use it up” philosophy. They do not invest or take any risk they can possibly avoid; and they go a long way to avoid risk. That includes not spending any additional research and development and not spending on any new tooling or support. In fact these finance engineers are a bit like the previous owner of my boat.
In 1995, I bought a sailboat. I could afford it, barely, and, basically, the boat was sound, at least according to the boat’s surveyor. I soon found that what the surveyor thought was sound, I didn’t. For one thing, the handles on the through-hull shut-offs were corroded so badly that some of them fell off (the through-hulls drain water in the sinks, the cockpit, and so on, through the hull into the water. The shut-offs prevent water from coming in if one of the hoses that’s attached to the through-hulls fails. The failure would sink the boat—not my idea of a good situation. Further, there were many more problems of this nature.
The reason that there were so many problems is that the previous owner used the boat for racing; and, he had done well. But, he put no money into the boat’s maintenance other than the minimum needed to keep the boat racing. Like all good finance engineers, he had used the infrastructure resources up. During the first year I had it, the boat was always at risk of sinking. Since, I’ve spent four or more times as much getting the boat seaworthy and into good condition as I originally spent of the boat.
British Petroleum learned this lesson of short-term financial engineering thinking, twice, once with the Alaska pipeline blow-outs and once with the gulf oil spill. In both cases, maintenance was not performed, because it cost too much and would take too much time, and both ended in catastrophe. Now the United States faces the same problem. Federal regulations to insure and maintain the financial systems were removed from the financial industry, due to greed by Wall Streeters, the result they got big bonuses and the federal government, us, got stuck paying their bills. The roads, bridges, electrical grid, and other components of the physical infrastructure are near or beyond their designed life. Yet, Federal, State, and local governments spend the minimum to “fix” them and hope. The government should have spent to create jobs was spent, instead, on social welfare. Likewise, the system of regulations—many conflicting overload all job creating organizations—while tilting the playing field for the few.
Prescription for Jobs
Using the architecture found in “Organizational Economics: The Formation of Wealth”, which is about to be published, there are five things any organization, including the US Federal Government to keep their value growing and increasing the number of jobs as the knowledge-based continues to accelerate.
1. Research and Development – Fundamental to staying competitive is knowledge. Only knowledge value creates real high-paying jobs; only knowledge creates knowledge value; and only research and development can create knowledge. All public and private organization must invest at least 10 percent of their “profit” on R&D.
2. Training – Learning must be a continuing part of everyone’s life. With additional knowledge, people need to understand how to create new knowledge and how to convert it into products and services. All public and private organizations should invest in education and training for their members. For the Federal Government, the WWII GI Bill is a primary example.
3. Rebuilding or Maintaining the Organization’s Infrastructure – All organizations, both private, but especially public, should look to invest heavily in rebuilding or maintaining and upgrading their infrastructure. This should be done instead of social welfare, bonuses, or dividends; and that is hard.
4. Rationalize Policies, Regulations, and Standards – All public and private organizations should use Enterprise Architecture to help the leadership ensure that policies and standards are reducing intra- and inter-organizational conflict, not conflicting with one another, and keeping the “playing field” as level as possible.
5. Rationalize and Optimize Investments by Organizations – All public and private organizations should use Enterprise Architecture, in the form of Mission Driven Architecture to help them determine the optimality of their investments in R&D, and Infrastructure. Policies and standards must support the organization’s mission, strategies, and processes.
Though I disagree with his social welfare agenda, President Obama got it exactly right when he made all of these points in his 2011 State of the Union message to Congress; but how they are implemented will decide how well the US does in the future.
The Time Horizon for Growth
Unfortunately for most politicians and their constituents, and most managers and their investors, instituting these strategies are not short-run methods for “starting the economy”. These are not 3 month or six month fixes; instead they are the methods the United States used to grow its economy during its first 300 years.
Generally, there is about a 30 year gestation period from the first implementation of a new technology until it is makes a significant contribution to the organization’s ability to produce value. I think it could be persuasively argued that the boom in technology that President Clinton to credit for, is a direct result of NASA program that Kennedy Administration pushed, both with a Mission and with funding. The bust cycle of the George W. Bush Administration was caused as much by the Johnson Administration’s “Great Society” entitlement programs and the destruction of the real research programs at the same time, as by many of the later missteps, including deregulating banks, by President Clinton.
For example, in the 1940s, science fiction included Dick Tracey’s communications watch. In the 1950s, Isaac Asimov described a tablet that acted much like a PC, but with no keyboard, but linked to a global data network. In the 1960s, the first cell phones appeared—but were prohibitively expensive. It was not until the late 1980s and early 1990s, that cell phones started to “takeoff” as a product and service. Now, in 2011, the iPhone and its competitors make the Tracey watch look out of date, and the iPad and its competitors have all of the functions (and more) that Asimov described. So it takes 30 years for the evolution to complete.
But it is a process of Circular Cumulative Causation. The more R&D that’s done, the more possibilities for new products, services, AND jobs that are generated; the more infrastructure that’s created, the more current and future jobs that are created. However, unless we can stop always taking (killing the goose that lays the golden eggs) and start investing using the strategies above, the United States will continue to grow poorer relative to those countries that get it right. Because all wealth is ephemeral and trying to invest only in risk free assets is one simple way to lose the value and the wealth.
For more details on how, see my posts entitled Using Enterprise Architecture to Reduce the Federal Debt, An Example of Enterprise Architecture Changing the Structure of Government, and A New Structure for the US Federal Government Executive Branch--A Really, Really Wild Hare