According to a number of serious and well-intentioned articles written in the last century (not to mention the Jetsons), by 2010 we were all supposed to live in giant cities with mile-high sky-scrapers, flying cars, pneumatic tube transit, and robot servants. Admittedly, this view gave way to a somewhat more dystopian version around 1980 or so - think Blade Runner, for instance - in which overpopulation, over-urbanization and technology gone wild created a dark and threatening world.
Perhaps one of the biggest exponent of the power of technology to change the world for the better is Ray Kurzweil. Inventor, author, visionary, Kurzweil's central thesis has been that as Moore's law continues in its seemingly unrelenting progression, humanity and the machine will become ever more indistinguishable, and that ultimately there will be no problem that can't be solved with the suitable application of intellect.
At the other end of the spectrum for Kurzweil is James Howard Kunstler. Kunstler has been writing about the relentless spread of urbanization and the problems that will occur as systemic shocks - peak oil, peak water, climate change, aging populations and so forth - cause profound changes to the way that we build our cities, ultimately resulting in the destruction of the suburbs and the end of technological society as we know it. His vision of late 21st century life looks a lot more like the mid-19th century, and it is, curiously, surprisingly appealing even in its starkness.
I've dubbed these scenarios Kurzweil Cities and Kunstlervilles - views of optimism and pessimism that, when looked at through somewhat different lenses, could just as readily be interchangeable in terms of their values as utopias vs. dystopias.
As many people have noted, cities are organic over a large enough period of time. They exhibit emergent behaviors that seem eerily similar to the way that lower order life-forms act. They grow in response to available energy sources, expanding outward as energy enters the system, contracting back in on itself as energy leaves. Highways and streets are the arteries, carrying car and truck corpuscles from one part of the city to another. The nerves are the power and information conduits within the city. When cities collide, they either form systemic cells or absorb one another, the older former towns slowly losing their distinct identity over time.
This metaphor, or abstraction, is an important thing to keep in mind when looking at the future of cities. Cities grow in response to increases in population. This may seem obvious, but I'd contend that its actually a very subtle point - the larger the population, the more likely that the necessary number of interactions can take place to push the city to a new level of abstraction, while at the same time the greater the drain on the energy resources available to that city. In a city where the energy drain is higher than the energy sources (where energy can be physical energy such as electricity or the abstraction of energy in the form of money) the quality of life in the city drops - there are fewer job opportunities, the standard of living goes down, the government becomes more authoritarian, the ability to support urban services decline.
Technology cannot create new energy - it can only make it possible to use existing energy more efficiently, and always at the cost of powering the technology itself. This has always been the fundamental flaw of Kurzweil's vision - Moore's law does not come for free. Every generational doubling in processing power occurs because more energy goes into the technologies to make it happen. Costs for fabrication plants for creating new microprocessors increase geometrically as well - the cost to create a typical fab is now well into the billion dollars category.
The problem that's led to the current crisis is that the energy costs here are borrowed. Intel or AMD generally doesn't have anywhere near the amount of cash on hand to build new fabs. Instead, it borrows the money against future earnings - it is in essence borrowing energy that hasn't been created yet.
This future borrowing has been endemic in US culture for a long time. Cities (and larger geopolitical structures) generate their revenues in one of a few ways - they either take possession of a power or resource source and sell from that, they receive revenues from the state (which simply pushes the problem up a level of abstraction), they place a tax on the current revenues of its citizenry and associated companies, or they create bonds to borrow from the future earnings that the project in question will produce, adding in a premium in order to compensate the bond holders for the potential risk of the bond defaulting.
When the weight of such credit exceeds the potential of the system (as it exists) to pay back those loans, the system collapses. That's what is happening now. The system is becoming less energetic, and as such, the ability of the system to support its abstractions is diminishing. The US government is working diligently to prop up the system, but it's constrained by the same problems - any money that it creates is a promissory note on new energy production, despite the fact that energy production in the US has been declining since the early 1970s. It may be able to sustain the status quo for a while longer - but the next crash will likely be harder.
So is Kunstler in our future then? Not necessarily. Kunstler's central thesis is that an oil-dependent economy will eventually lead to collapse as the supply of oil continues to diminish relative to demand. Oil is important, both as a fuel source and as a resource for production of goods, but its important to differentiate these two use cases. The principle use of oil today is for transportation, moving things from point A to point B. If you can switch cars over to electric or electric-hybrid use this will significantly reduce demand on oil - perhaps even to the point where US production can easily accommodate all other uses of oil. Flywheel systems, and shock kinetics also add potential power, especially for larger vehicles that have more intrinsic momentum).
To do so, however, other changes become important. Electricity production needs to become more distributed. Efficiencies in solar power production are raising the possibility that cities can actually become net power producers - both with regional power "farms" and solar enabled houses and businesses. Beamed power - in which solar power collectors in space are used to create coherent microwave beams that can provide power to collectors even in cloudy areas, could dramatically increase capabilities. Geothermal taps, wind power, wave power and more efficient super capacitors make energy production in coastal areas more feasible. More efficient monitoring and routing of power (smart grid) can also insure that energy is made available to those places that have the largest demand, rather than getting wasted.
There are even places for such technologies as nuclear fission plants, which, despite the publicity of both Four Mile Island and Chernobyl, are generally much safer today. The principle problem here comes in taking care of the high upfront costs and the still troublesome waste disposal issues.
What this implies however is that the future will likely be neither Kurzweil cities nor Kunstlervilles. Instead, for a while it will be a mix of both - cities that can most effectively harness net energy production will thrive and grow, and the standard of living there will improve. Cities that can't will sink into slums and abandoned neighborhoods, crime will rise and people who can afford to leave will for those places that offer better standards of living. The dominant cities of the twenty-first century will be the ones that make the transition first, and it is likely that these cities will also end up creating stronger regional trading blocs that circumvent political boundaries (a case in point would be the Vancouver/Seattle/Portland corridor, which has the potential to become a cohesive political entity as energy and resource systems merge, despite crossing both state and national boundaries).
Indeed, this last point is worth reiterating - political boundaries may be conservative, but they also eventually snap in the face of energy flow structures. Regional trade and energy blocs are comparatively new abstractions, eddies along the older nationalistic boundaries. They will gain in cohesiveness over time, eventually overshadowing older nationalistic boundaries altogether. This means that, again taking the case of "Cascadia", while inhabitants of Portland, Seattle and Vancouver will continue being citizens of their respective states, provinces and countries, they will increasingly think of themselves as being Cascadians as trade and energy alliances build.
Ultimately, the cities of 2020 or even 2050 will likely end up being not that different from today, at least on the surface, though individually they may look quite different. Some places, like Detroit, may not even exist - it was conveniently placed in the 1920s through the 1960s to bring together the raw materials, energy sources (from Pennsylvania oil) and cheap labor to mass produce cars, as well as conveniently placed to distribute them. None of these factors are in play anymore, so the city is dying.
On the other hand, when a city enters into this mode, it is also, ironically, at its most fluid - investment terms are favorable, it's easier to raze dead neighborhoods, townships that are tethered to the city are able to break free and make more effective decisions at lower levels of abstraction, Detroit in 2050 may very well be a network of independent towns, each powering their own subgrids, each producing its own own products and services. Education and the arts may may very well be growth industries by that point, with energy production subsidizing the initial costs, and this is perhaps the real lesson to be gained from Kurzweil and Kunstler both - by moving off the oil grid, by moving away from a caustic and self-defeating consumerist culture, it may be possible that both scenarios come true; the future is a region full of universities towns and centers of learning and the arts - urban enough to bring together the necessary confluence of people but rural enough to sustain the agriculture basis of the region. I could live with that.
2009-05-07
Future Proof: Freelancer
I have been a freelancer for most of my working career. The specific jobs vary, of course - I've been a freelance writer, a freelance journalist, a freelance programmer, a freelance information architect, a freelance trainer, a freelance teacher - the list goes on and on. While there is a standing joke that freelance is another word for unemployed, I'd definitely have to disagree there ... I have had years where I've cleared six figures as a freelancer, though there have also been a few years where I've made just barely above the poverty line.
There are certain professions that lend themselves well to freelancing, most of them in the information sphere. Programming is a natural - projects have a beginning, a middle and an end. After the project is done, you may or may not need the skill-sets of the person involved. Ergo, freelancing. Writing is another intellectual pursuit that has a definite terminus. You teach classes for a quarter or two, but unless you're tenured there's no real advantage to keeping a teacher when all you're looking for is someone to impart this particular wisdom at this time.
There are similarly professions that don't lend themselves well to freelancing, though they are becoming rarer. Indeed, as I'm writing this, I'm scratching my head about what professions can't be done in freelance mode. And that, in a nutshell, may be the problem.
Full time work makes a great deal of sense in an industrial society - the need for producing X number of widgets per hour every day means that you need to have labor there every hour of that day, you need managers for that labor, then need managers for the managers. The cost of disruption in that labor is high - if someone quits then you have to get someone else trained up in that new role, and you have holes moving through the organization until you can find someone from the outside. This translates into significantly reduced productivity.
Most of the "benefits" provided by business have their origins in this mindset as well - health care originally made sense by having an onsite doctor or working closely with a nearby hospital, in great part because it made sense financially to insure that workers had as few disruptions due to illness or injury as possible. Pensions (and later investment vehicles) similarly emerged as a way of keeping employees long term - people were far less likely to quit for a competitor (and take potentially valuable information with them) if the company held on to their retirement savings. In general, retention was the rule.
However, today, this process is going in reverse. Businesses are disaggregating. Conglomerates are selling off or IPO-ing divisions because the costs involved in a large labor force are increasingly outweighing the benefits. Health care costs are skyrocketing as the workforce grows older, as the multiple layers of "managed care" extract ever larger portions of the pie, and as fewer doctors and nurses enter the field. Pensions had long been something of a running joke - a borrowable pool of funds for the company that was often used to invest in fairly risky investments, and as those investments failed to play out, companies are now faced with new retirees asking for their pension funds just as those funds have been wiped out by malinvestment and mismanagement.
What makes this worse is that the technologies are increasingly in place such that people no longer need to be in one place to work, and that if a person does in fact leave they seldom have the same negative impact on productivity (in the short term) that they once did - even if that person is a stellar performer. Longer term, of course, losing those start performers can be the death knell for a company, but the difference is that the impact is seldom felt for a while.
Thus, for many companies, the ongoing recession is a chance to reduce their existing obligations - purge their full-time ranks and then, as people become more desperate, rehire them on a contingency, freelance or part time basis. From an accounting standpoint, this is the best of all possible worlds - you don't need to pay for ever-increasing health care, don't need to make contributions into a pension plan that you know will never actually be fully capitalized, don't have to dilute existing stock, can hire more people when demand rises and can then lay them off when demand falls, either on a project basis or over the course of a general economy's rise and fall.
However, from the labor standpoint, this is also the worst of all possible worlds. As a freelancer, you are essentially running your own business, but almost invariably without the level business support that corporations routinely have. You become responsible for your own health care, for doing your own taxes (and usually get taxed at a fairly high premium for being "self-employed"), for your own retirement. Work becomes episodic and sporadic - you either are searching for new work or you are facing a glut that you can't fill, but you don't dare outsource it because you need the money to tide you over in the lean times.
Most independent freelancers compensate for the sporadic nature of the work by charging a premium for services - a contractor should, in theory, cost a company more than a full time employee short-term because the freelancer is paying for his or her overhead that would otherwise be paid for by the company. However, in practice, unless you are highly specialized, you are competing with a (currently growing) pool of similar contractors which mean that companies can effectively bid on competing contracts to keep these wages low.
This practice is exacerbated by agencies, which usually end up acting as a buffer between the freelance labor force and companies. Most of them may offer very short term benefits for the duration of the contract - minimal health care policies, for instance, that the employee usually has to purchase - but usually nothing beyond that. In exchange for that, they absorb that 20-30% pad that freelancers would otherwise save up for down-time, meaning that from the hiring company's standpoint, the labor is still expensive, but can be let go at a moment's notice without significant contractual problems - and because the agency itself can cap the wages, the wages are still less than they would be for an independent contractor.
Currently 29% of the workforce in the United States is contingency contract, up from 24% in 2005. That includes both part time workers (those that are deliberately held below the minimal 35 hour line that costitutes full employment) and freelances who may work 40 hours or more a week but are hired on a temporary basis. It's likely, as companies continue to shed jobs that this will grow to between 33 and 37% by 2015, meaning one in three people will be working outside of the established "safety net" of full or salaried employment, including a rising percentage of professionals - management executives, medical practitioners, financial services professionals, lawyers, engineers, marketing and communication specialists, designers, system architects and software developers, along with the whole plethora of "creatives" - artists, writers, musicians and so forth.
Of those, roughly 70% are female, which reflects less upon a bias against women (though that's there too) and more on the fact that women have entered the workforce more recently than men, are more likely to be in information-centric careers and are thus perhaps more indicative of future trends than men are. It's worthwhile noting that the percentage of contingency workers under the age of 40 is also much higher than it is for those older than forty, though how much of this is due to structural changes in the workforce vs. the fact that younger workers are more likely to have fewer commitments that make contingency work more attractive is hard to tell, save that the under-forty contingency percentage has been creeping up steadily for decades.
The question for policy-makers is what to do about it. First, its worthwhile to note that there is a world of difference between a freelance lawyer or programmer who has specialized knowledge and can usually afford to handle insurance, taxes and retirement savings and the part time Walmart worker who likely can't - and for clarification, I'll refer to the first as freelance workers and the second as contingency workers.
The freelancer in general should bite the bullet and incorporate as a small business, and press for better legislation to provide more legal rights to these microcorporations. I see this ultimately happening, especially as the number of web businesses rise - businesses that have significant "virtual" presence, but that may represent a group of one or a handful of active partners. Overall the IRS has taken a dim view of such small organizations, but they represent the bulk of all new incorporations, and as the force multipliers of technology have increased the ability of such small companies to have an oversized presence, it's likely that most of these businesses will stay small, people wise.
Unfortunately, contingency workers may not be as well positioned. In the 1930s, Franklin Delano Roosevelt worked with the Federal Reserve to create a plan to put Americans to work long term - an decision was made to allow for a certain amount of inflation in the monetary base in exchange for full employment. In essence, every year the monetary base was allowed to grow by between 2% and 3%, which devalued the dollar by a corresponding amount. Prices rose, and with them real wages dropped, but as more people were entering into the system at that point than leaving it, it meant that people entering the system were actually making marginally less that, in the aggregate, freed up a lot of capital, which in turn was used for starting new projects and hiring more people while keeping people happy that their wages (at least on paper) were stable or growing slightly.
This worked for a while because it was a Ponzi scheme - so long as the work population itself was growing, such a model was sustainable. However, in the last eighty years, the demographic pyramid has inverted, and there are now more people near the end of their career than there are starting out. Add into this the effects of technology in making work more efficient, and you get the rather ugly situation that we're in now - a situation where you have more people who are staying in the workforce at the higher wages that their skills and experience should support (and who are desperate now to refill their coffers after the last couple of years) and fewer people at lower wages that support the Ponzi scheme.
What this means is simple - many of the jobs that are being shed now by business are not coming back. Middle management has been hemorrhaging for the last two decades because the value provided by these managers is no longer as critical. Retail sales jobs are disappearing at a rapid rate as retail centers collapse in the face of low demand and Internet distribution. Manufacturing looks to be in its death throes in the US (if the bankruptcy of Chrysler and GM are any indication), and it is likely that moving forward the jobs being replaced will not be at the upper end but at the lower with new designers and engineers who are more familiar with cutting edge tools, fabrication methods, and technologies. Construction will likely be at an ebb for the next decade. There are more marketing people out there than there are markets, and again as new jobs do arise, they will be in areas where you have the young and savvy rather than the experienced.
What makes this worse is that even in those areas where growth may occur - health care, energy production, high speed rail, education and the like - you are generally going to be talking about specialist jobs requiring long term training - and an education/training system that is still bound up in a large corporate model. What's more, even if the education did exist, the absorption rate for these professions is comparatively small - you need more doctors, for instance, but if even one half of one percent of the unemployed work force were to go back and get medical degrees, it would easily swamp the field.
This will set in place the great forces of the next decade. Each recession is likely to result in higher unemployment than the previous one, while each recovery will see a smaller percentage re-employed. Against this will, paradoxically, be the growth of spot shortages in the labor markets in specialized areas - those that are capable of going freelance and are successful at it will end up creating loci of specialized job growth, but the growth will remain limited.
This is always a dangerous mix for political stability. Shadow economies usually emerge once you get a certain level of unemployment - people still have an imperative to survive, and will do so any way they can. Drug trafficking typically rises during recessions, even as prices for those drugs fall, because drug dealing provides not only income but organizational structure (albeit very dangerous organizations). Prostitution rises as well for much the same reason. Both left wing and right wing paramilitary organizations usually tend to do quite well during these periods, providing both places to live and organizations to be a part of, and such organizations, while possibly carrying out political agendas, usually provide "security" services to that same underground economy. The Internet in this case will likely only hasten this process; it is very easy to set up online communities and exchanges that can't be easily regulated, taxed or even monitored. As people become more desperate, expect that barter and trafficking on these sites will increase dramatically.
On the other hand, its also likely that a virtual side of the shadow economy will show up in online games and other environments. Already, there are people that are making a living either producing goods and services in games like World of Warcraft or Second Life, are playing automated gambling sites, or are fully engaged in eBay or other online markets. The irony here is that while this market is likely growing dramatically, its metrics are so different from those of the "real" world that it's hard to tell how many people who are technically unemployed are actually making a living there.
Note that these are also freelancers, though they don't show up in official measures as such - and there's a lesson to be learned from this. Over the next decade you're going to see a generation grow up on the Internet, learn to make a living there, and develop an entirely new conceptualization of business there. They're growing up in a grey area that's neither "corporate" nor governmental, becoming very entrepreneurial while at the same time working outside of the bounds of contemporary business.
Many (and certainly the best and brightest) of these younger men and women are going to grow up with nothing but disdain for the modern corporation. The more that they establish themselves on the Internet, the less likely that they are going to put up with office politics, small cubicles, long commutes, and the increasing uncertainty of job stability in an organization that could cut 10,000 jobs in one fell swoop. The talented ones will be on the cutting edge, creating new virtual company after virtual company, each staffed with perhaps a couple dozen people tops that communicate with one another from remote locations, each company with a killer product or idea that will chip away at market share of conglomerates piece by piece.
When the economy does improve, this generation will not come to work for the old corporations. The smart companies will change in response. Most won't. Many of these companies will sink into irrelevancy, no longer able to tap into a mindset that is radically different from anything that the senior managers can even begin to imagine. These people will have become used to starting with next to nothing and being exceptionally frugal - they will be anti-consumerist, highly innovative, and with very little use for traditional social structures.
Hiring managers, beware. The freelancer is about to take over your business.
There are certain professions that lend themselves well to freelancing, most of them in the information sphere. Programming is a natural - projects have a beginning, a middle and an end. After the project is done, you may or may not need the skill-sets of the person involved. Ergo, freelancing. Writing is another intellectual pursuit that has a definite terminus. You teach classes for a quarter or two, but unless you're tenured there's no real advantage to keeping a teacher when all you're looking for is someone to impart this particular wisdom at this time.
There are similarly professions that don't lend themselves well to freelancing, though they are becoming rarer. Indeed, as I'm writing this, I'm scratching my head about what professions can't be done in freelance mode. And that, in a nutshell, may be the problem.
Full time work makes a great deal of sense in an industrial society - the need for producing X number of widgets per hour every day means that you need to have labor there every hour of that day, you need managers for that labor, then need managers for the managers. The cost of disruption in that labor is high - if someone quits then you have to get someone else trained up in that new role, and you have holes moving through the organization until you can find someone from the outside. This translates into significantly reduced productivity.
Most of the "benefits" provided by business have their origins in this mindset as well - health care originally made sense by having an onsite doctor or working closely with a nearby hospital, in great part because it made sense financially to insure that workers had as few disruptions due to illness or injury as possible. Pensions (and later investment vehicles) similarly emerged as a way of keeping employees long term - people were far less likely to quit for a competitor (and take potentially valuable information with them) if the company held on to their retirement savings. In general, retention was the rule.
However, today, this process is going in reverse. Businesses are disaggregating. Conglomerates are selling off or IPO-ing divisions because the costs involved in a large labor force are increasingly outweighing the benefits. Health care costs are skyrocketing as the workforce grows older, as the multiple layers of "managed care" extract ever larger portions of the pie, and as fewer doctors and nurses enter the field. Pensions had long been something of a running joke - a borrowable pool of funds for the company that was often used to invest in fairly risky investments, and as those investments failed to play out, companies are now faced with new retirees asking for their pension funds just as those funds have been wiped out by malinvestment and mismanagement.
What makes this worse is that the technologies are increasingly in place such that people no longer need to be in one place to work, and that if a person does in fact leave they seldom have the same negative impact on productivity (in the short term) that they once did - even if that person is a stellar performer. Longer term, of course, losing those start performers can be the death knell for a company, but the difference is that the impact is seldom felt for a while.
Thus, for many companies, the ongoing recession is a chance to reduce their existing obligations - purge their full-time ranks and then, as people become more desperate, rehire them on a contingency, freelance or part time basis. From an accounting standpoint, this is the best of all possible worlds - you don't need to pay for ever-increasing health care, don't need to make contributions into a pension plan that you know will never actually be fully capitalized, don't have to dilute existing stock, can hire more people when demand rises and can then lay them off when demand falls, either on a project basis or over the course of a general economy's rise and fall.
However, from the labor standpoint, this is also the worst of all possible worlds. As a freelancer, you are essentially running your own business, but almost invariably without the level business support that corporations routinely have. You become responsible for your own health care, for doing your own taxes (and usually get taxed at a fairly high premium for being "self-employed"), for your own retirement. Work becomes episodic and sporadic - you either are searching for new work or you are facing a glut that you can't fill, but you don't dare outsource it because you need the money to tide you over in the lean times.
Most independent freelancers compensate for the sporadic nature of the work by charging a premium for services - a contractor should, in theory, cost a company more than a full time employee short-term because the freelancer is paying for his or her overhead that would otherwise be paid for by the company. However, in practice, unless you are highly specialized, you are competing with a (currently growing) pool of similar contractors which mean that companies can effectively bid on competing contracts to keep these wages low.
This practice is exacerbated by agencies, which usually end up acting as a buffer between the freelance labor force and companies. Most of them may offer very short term benefits for the duration of the contract - minimal health care policies, for instance, that the employee usually has to purchase - but usually nothing beyond that. In exchange for that, they absorb that 20-30% pad that freelancers would otherwise save up for down-time, meaning that from the hiring company's standpoint, the labor is still expensive, but can be let go at a moment's notice without significant contractual problems - and because the agency itself can cap the wages, the wages are still less than they would be for an independent contractor.
Currently 29% of the workforce in the United States is contingency contract, up from 24% in 2005. That includes both part time workers (those that are deliberately held below the minimal 35 hour line that costitutes full employment) and freelances who may work 40 hours or more a week but are hired on a temporary basis. It's likely, as companies continue to shed jobs that this will grow to between 33 and 37% by 2015, meaning one in three people will be working outside of the established "safety net" of full or salaried employment, including a rising percentage of professionals - management executives, medical practitioners, financial services professionals, lawyers, engineers, marketing and communication specialists, designers, system architects and software developers, along with the whole plethora of "creatives" - artists, writers, musicians and so forth.
Of those, roughly 70% are female, which reflects less upon a bias against women (though that's there too) and more on the fact that women have entered the workforce more recently than men, are more likely to be in information-centric careers and are thus perhaps more indicative of future trends than men are. It's worthwhile noting that the percentage of contingency workers under the age of 40 is also much higher than it is for those older than forty, though how much of this is due to structural changes in the workforce vs. the fact that younger workers are more likely to have fewer commitments that make contingency work more attractive is hard to tell, save that the under-forty contingency percentage has been creeping up steadily for decades.
The question for policy-makers is what to do about it. First, its worthwhile to note that there is a world of difference between a freelance lawyer or programmer who has specialized knowledge and can usually afford to handle insurance, taxes and retirement savings and the part time Walmart worker who likely can't - and for clarification, I'll refer to the first as freelance workers and the second as contingency workers.
The freelancer in general should bite the bullet and incorporate as a small business, and press for better legislation to provide more legal rights to these microcorporations. I see this ultimately happening, especially as the number of web businesses rise - businesses that have significant "virtual" presence, but that may represent a group of one or a handful of active partners. Overall the IRS has taken a dim view of such small organizations, but they represent the bulk of all new incorporations, and as the force multipliers of technology have increased the ability of such small companies to have an oversized presence, it's likely that most of these businesses will stay small, people wise.
Unfortunately, contingency workers may not be as well positioned. In the 1930s, Franklin Delano Roosevelt worked with the Federal Reserve to create a plan to put Americans to work long term - an decision was made to allow for a certain amount of inflation in the monetary base in exchange for full employment. In essence, every year the monetary base was allowed to grow by between 2% and 3%, which devalued the dollar by a corresponding amount. Prices rose, and with them real wages dropped, but as more people were entering into the system at that point than leaving it, it meant that people entering the system were actually making marginally less that, in the aggregate, freed up a lot of capital, which in turn was used for starting new projects and hiring more people while keeping people happy that their wages (at least on paper) were stable or growing slightly.
This worked for a while because it was a Ponzi scheme - so long as the work population itself was growing, such a model was sustainable. However, in the last eighty years, the demographic pyramid has inverted, and there are now more people near the end of their career than there are starting out. Add into this the effects of technology in making work more efficient, and you get the rather ugly situation that we're in now - a situation where you have more people who are staying in the workforce at the higher wages that their skills and experience should support (and who are desperate now to refill their coffers after the last couple of years) and fewer people at lower wages that support the Ponzi scheme.
What this means is simple - many of the jobs that are being shed now by business are not coming back. Middle management has been hemorrhaging for the last two decades because the value provided by these managers is no longer as critical. Retail sales jobs are disappearing at a rapid rate as retail centers collapse in the face of low demand and Internet distribution. Manufacturing looks to be in its death throes in the US (if the bankruptcy of Chrysler and GM are any indication), and it is likely that moving forward the jobs being replaced will not be at the upper end but at the lower with new designers and engineers who are more familiar with cutting edge tools, fabrication methods, and technologies. Construction will likely be at an ebb for the next decade. There are more marketing people out there than there are markets, and again as new jobs do arise, they will be in areas where you have the young and savvy rather than the experienced.
What makes this worse is that even in those areas where growth may occur - health care, energy production, high speed rail, education and the like - you are generally going to be talking about specialist jobs requiring long term training - and an education/training system that is still bound up in a large corporate model. What's more, even if the education did exist, the absorption rate for these professions is comparatively small - you need more doctors, for instance, but if even one half of one percent of the unemployed work force were to go back and get medical degrees, it would easily swamp the field.
This will set in place the great forces of the next decade. Each recession is likely to result in higher unemployment than the previous one, while each recovery will see a smaller percentage re-employed. Against this will, paradoxically, be the growth of spot shortages in the labor markets in specialized areas - those that are capable of going freelance and are successful at it will end up creating loci of specialized job growth, but the growth will remain limited.
This is always a dangerous mix for political stability. Shadow economies usually emerge once you get a certain level of unemployment - people still have an imperative to survive, and will do so any way they can. Drug trafficking typically rises during recessions, even as prices for those drugs fall, because drug dealing provides not only income but organizational structure (albeit very dangerous organizations). Prostitution rises as well for much the same reason. Both left wing and right wing paramilitary organizations usually tend to do quite well during these periods, providing both places to live and organizations to be a part of, and such organizations, while possibly carrying out political agendas, usually provide "security" services to that same underground economy. The Internet in this case will likely only hasten this process; it is very easy to set up online communities and exchanges that can't be easily regulated, taxed or even monitored. As people become more desperate, expect that barter and trafficking on these sites will increase dramatically.
On the other hand, its also likely that a virtual side of the shadow economy will show up in online games and other environments. Already, there are people that are making a living either producing goods and services in games like World of Warcraft or Second Life, are playing automated gambling sites, or are fully engaged in eBay or other online markets. The irony here is that while this market is likely growing dramatically, its metrics are so different from those of the "real" world that it's hard to tell how many people who are technically unemployed are actually making a living there.
Note that these are also freelancers, though they don't show up in official measures as such - and there's a lesson to be learned from this. Over the next decade you're going to see a generation grow up on the Internet, learn to make a living there, and develop an entirely new conceptualization of business there. They're growing up in a grey area that's neither "corporate" nor governmental, becoming very entrepreneurial while at the same time working outside of the bounds of contemporary business.
Many (and certainly the best and brightest) of these younger men and women are going to grow up with nothing but disdain for the modern corporation. The more that they establish themselves on the Internet, the less likely that they are going to put up with office politics, small cubicles, long commutes, and the increasing uncertainty of job stability in an organization that could cut 10,000 jobs in one fell swoop. The talented ones will be on the cutting edge, creating new virtual company after virtual company, each staffed with perhaps a couple dozen people tops that communicate with one another from remote locations, each company with a killer product or idea that will chip away at market share of conglomerates piece by piece.
When the economy does improve, this generation will not come to work for the old corporations. The smart companies will change in response. Most won't. Many of these companies will sink into irrelevancy, no longer able to tap into a mindset that is radically different from anything that the senior managers can even begin to imagine. These people will have become used to starting with next to nothing and being exceptionally frugal - they will be anti-consumerist, highly innovative, and with very little use for traditional social structures.
Hiring managers, beware. The freelancer is about to take over your business.
Swine Flu: End of the MBA Farmer?
While there are legitimate questions about the potential severity of swine flu, it is still a dangerous flu for a simple reason - most flu viruses in circulation are very minor variations on existing strains, which means that most people who get the "flu" end up with symptoms that have more to do with histimine reactions - runny eyes and nose, aching joints, maybe a day in bed feeling lousy - then they're past it.
Swine flu, otherwise known for its genetic markers as H1N1, isn't an existing, commonly circulating flu. It's relatively new although with very old antecedents, which means that most people have no immunity to it. This means that it will likely spread remarkably quickly, will leave a significant portion of the population sick with it, and could prove to be deadly even for adults.
What epidemiologists are discovering about this particular flu bug is very disturbing - first, that it is a variant of the Spanish Flu virus that accounted for more deaths worldwide than World War I, which was waging at the time. Spanish flu was extraordinarily virulent, and when it finally died out, it became very quiescent - effectively disappearing altogether from the cloud of seasonal viruses that normally lay people low in late winter.
However, in addition to this, it now appears that the term Swine Flu is more apt than was even apparent on the surface - Swine flu itself first appeared in hog factory farms in the 1990s, mutating rapidly in the high density "population" of pigs kept in tiny pens little larger than the pigs themselves. The flu wasn't lethal for pigs, and the particular strain of swine flu that did jump to humans was of a variant that didn't "catch", failing to reach critical mass or virulence to be a true pandemic.
The early 1990s also saw the graduation of a crop of new business school MBAs, instilled with a twin philosophy - automation was the wave of the future, and one could apply the new thinking of the 1980s to every business endeavor in order to transform these into hyper-efficient super businesses, including agriculture. "Archaic" farms that had established an understanding of animal husbandry over centuries were quickly put out of business and bought out by new "factory farms" that used a combination of technology, mass-injections of antibiotics, close-confinement of the "stock" and waste disposal being passed to the community.
The last issue eventually caused enough of a reaction that many of the now very wealthy agribusiness concerns realized that setting up factory farms in Mexico, which had far laxer environmental laws, lower labor costs and generally a less empowered populace, might actually prove more profitable (just as such farms had tended to relocate in states that had lower taxes, environmental restrictions and wages originally).
In the end, this strategy, while increasing the overall production of beef, pigs and chickens dramatically, also caused the price of these meats to drop fairly dramatically, further eroding the ability of other farms to compete and driving them out of business. Meanwhile, south of the Rio Grande, these elongated factory farms proved the ideal breeding ground for increasingly antibiotic strains of viruses. It was only a matter of time before such a strain would jump to humans (indeed, it's likely that Mexican workers at these plants were also virus laboratories, providing many more opportunities for animal to human transmission), and from there, additional vectors took it into the general population - other kids playing with the infected kids bringing home the virus usually without knowing they had it.
The epidemiology of viruses is well known, yet advanced knowledge of medicine isn't going to help when you have viral factories that speed up the evolution of viruses a thousand fold. Even if this particular virus proves not to be especially virulent, the next one or the one after that may well be. Perhaps it is time for us to start questioning whether the factory farms are in fact yet another artifact of the "greed is good" mentality that's proving to be so destructive to the rest of society. Beyond the ethical dilemmas of keeping animals in such conditions, these factory farms are increasingly proving to be businesses that do harm than good, and as such at a minimum need to be rethought in light of that, and perhaps even need to be abolished (not just moved to places where people can't protest them).
Swine flu, otherwise known for its genetic markers as H1N1, isn't an existing, commonly circulating flu. It's relatively new although with very old antecedents, which means that most people have no immunity to it. This means that it will likely spread remarkably quickly, will leave a significant portion of the population sick with it, and could prove to be deadly even for adults.
What epidemiologists are discovering about this particular flu bug is very disturbing - first, that it is a variant of the Spanish Flu virus that accounted for more deaths worldwide than World War I, which was waging at the time. Spanish flu was extraordinarily virulent, and when it finally died out, it became very quiescent - effectively disappearing altogether from the cloud of seasonal viruses that normally lay people low in late winter.
However, in addition to this, it now appears that the term Swine Flu is more apt than was even apparent on the surface - Swine flu itself first appeared in hog factory farms in the 1990s, mutating rapidly in the high density "population" of pigs kept in tiny pens little larger than the pigs themselves. The flu wasn't lethal for pigs, and the particular strain of swine flu that did jump to humans was of a variant that didn't "catch", failing to reach critical mass or virulence to be a true pandemic.
The early 1990s also saw the graduation of a crop of new business school MBAs, instilled with a twin philosophy - automation was the wave of the future, and one could apply the new thinking of the 1980s to every business endeavor in order to transform these into hyper-efficient super businesses, including agriculture. "Archaic" farms that had established an understanding of animal husbandry over centuries were quickly put out of business and bought out by new "factory farms" that used a combination of technology, mass-injections of antibiotics, close-confinement of the "stock" and waste disposal being passed to the community.
The last issue eventually caused enough of a reaction that many of the now very wealthy agribusiness concerns realized that setting up factory farms in Mexico, which had far laxer environmental laws, lower labor costs and generally a less empowered populace, might actually prove more profitable (just as such farms had tended to relocate in states that had lower taxes, environmental restrictions and wages originally).
In the end, this strategy, while increasing the overall production of beef, pigs and chickens dramatically, also caused the price of these meats to drop fairly dramatically, further eroding the ability of other farms to compete and driving them out of business. Meanwhile, south of the Rio Grande, these elongated factory farms proved the ideal breeding ground for increasingly antibiotic strains of viruses. It was only a matter of time before such a strain would jump to humans (indeed, it's likely that Mexican workers at these plants were also virus laboratories, providing many more opportunities for animal to human transmission), and from there, additional vectors took it into the general population - other kids playing with the infected kids bringing home the virus usually without knowing they had it.
The epidemiology of viruses is well known, yet advanced knowledge of medicine isn't going to help when you have viral factories that speed up the evolution of viruses a thousand fold. Even if this particular virus proves not to be especially virulent, the next one or the one after that may well be. Perhaps it is time for us to start questioning whether the factory farms are in fact yet another artifact of the "greed is good" mentality that's proving to be so destructive to the rest of society. Beyond the ethical dilemmas of keeping animals in such conditions, these factory farms are increasingly proving to be businesses that do harm than good, and as such at a minimum need to be rethought in light of that, and perhaps even need to be abolished (not just moved to places where people can't protest them).
Chrysler, Hedge Funds and Contracts
President Obama is beginning to look less like Franklin Delano Roosevelt, and a lot like his distance cousin Teddy. After several months of trying to come up with a viable solution for preserving Chrysler, yesterday the ailing car company went into formal bankruptcy, which means that the auto unions and the government at this stage essentially now own the company.
For the last week, Obama has been working with all of the major parties - automaker Fiat, unions, banks, hedge funds and similar investors and lien holders on the company, to try to stave off bankruptcy, while trying to keep from adding even more federal loans to the beleaguered company. In the end, while most parties agreed, the major hedge funds balked, demanding preferential treatment in terms of payback and seeking to get 2-3 times as much return on their investments as every other players. Obama finally lost his patience, ordered the company into bankruptcy, and effectively hit the reset button, wiping out several billions of dollars of equity outstanding as part of the process.
No doubt the financial industry and its captive press will scream bloody murder here, but the events of the last week represent the emergence of a new, big-money hostile political environment that will likely only strengthen from here.
In financial circles, one of the most sacrosanct documents is the contract. Filled with obscure legalize, most contracts are dense, deliberately obscure, and are often designed to seek the maximum possible advantage of one side over the other. Contractual obligations have played a major part in the most recent financial crisis, especially when such contractual obligations have overwhelmingly benefited the financial industry. A prime example of this was the defense given by investment banks that, even while being funded to the tune of hundreds of billions of dollars by the US government, paid out lavish bonuses to superstar investment bankers, analysts and C-level officers - they were contractually obligated to pay these bonuses, and as such couldn't go back on them.
Contracts are important. However, the problem with contracts is that while they may in fact describe the contractual obligations between two parties, there is *always* a third party involved. Call it the public good, call it government, call it society, but in all cases it should be seen as the interest that the rest of society has in insuring the peace and stability of that society. One of the underlying concepts that has taken place over the last forty years has been the rise of the doctrine of private business - that so long as companies do not in fact engage in specifically illegal activity by the letter of the law, government has no role in the contractual process - even if the companies engage in activity that violates the spirit of the law. Grover Norquist's famous quip about wanting to see government so small that it can be drowned in a bathtub is perhaps the most pithy encapsulations of this philosophy.
Tim Geithner, a former Federal Reserve regional governor, and Ben Bernanke, the current Federal Reserve chairman, have been steeped in this zeitgeist for so long that it is central to their world view. Barack Obama, on the other hand, has seen what happens when the rule of contract exceeds the rule of law, and as he becomes more comfortable with his own authority, is also beginning to exercise what may very well become known as the Obama Doctrine - that contracts that harm the public good even while being within the letter of the law can be abrogated by the third party in those discussions - the government, keeper of the public good.
There are many in the investment community (and in political circles) who are fearful that this approach will cause investors to not want to reinvest in the banks, for fear of their investments essentially being annulled. This has always been powerful weapon to wield against those who would seek to change the status quo; however, it is an argument increasingly without teeth. Those who invest should understand implicitly that no investment is guaranteed to be without risk, regardless of whether that investment is a few shares of penny stock or a sizable investment in a car company ... or a bank. The owners of a business who fail to press the people who manage that business to be more responsible, more innovative, more willing to respond to changes in demand, and more ethically responsible should hardly be upset when those companies fail.
Indeed, this is perhaps one of the fundamental problems that this society faces: there is an implicit assumption that one can make a business grow and thrive simply by pouring money into it, especially at the senior management levels. In essence, money is being used as a way to get reward - dividends - without otherwise having to do any work. It also has become a way of dodging the responsibility of managing that company well; rather than planning for changing environments, trying to produce better products and services, most senior managers have become adept at manipulating the markets instead to increase dividend yields for their owners.
It's increasingly obvious that sweat equity, which has long been a very secondary aspect of business, is once again coming into its own. To me Obama has just turned Chrysler into an object lesson, one that banks and financial institutions in general should pay a great deal to. It looks like the silent partner is beginning to speak up, and what he's saying is going to completely reshape the way that America does business.
For the last week, Obama has been working with all of the major parties - automaker Fiat, unions, banks, hedge funds and similar investors and lien holders on the company, to try to stave off bankruptcy, while trying to keep from adding even more federal loans to the beleaguered company. In the end, while most parties agreed, the major hedge funds balked, demanding preferential treatment in terms of payback and seeking to get 2-3 times as much return on their investments as every other players. Obama finally lost his patience, ordered the company into bankruptcy, and effectively hit the reset button, wiping out several billions of dollars of equity outstanding as part of the process.
No doubt the financial industry and its captive press will scream bloody murder here, but the events of the last week represent the emergence of a new, big-money hostile political environment that will likely only strengthen from here.
In financial circles, one of the most sacrosanct documents is the contract. Filled with obscure legalize, most contracts are dense, deliberately obscure, and are often designed to seek the maximum possible advantage of one side over the other. Contractual obligations have played a major part in the most recent financial crisis, especially when such contractual obligations have overwhelmingly benefited the financial industry. A prime example of this was the defense given by investment banks that, even while being funded to the tune of hundreds of billions of dollars by the US government, paid out lavish bonuses to superstar investment bankers, analysts and C-level officers - they were contractually obligated to pay these bonuses, and as such couldn't go back on them.
Contracts are important. However, the problem with contracts is that while they may in fact describe the contractual obligations between two parties, there is *always* a third party involved. Call it the public good, call it government, call it society, but in all cases it should be seen as the interest that the rest of society has in insuring the peace and stability of that society. One of the underlying concepts that has taken place over the last forty years has been the rise of the doctrine of private business - that so long as companies do not in fact engage in specifically illegal activity by the letter of the law, government has no role in the contractual process - even if the companies engage in activity that violates the spirit of the law. Grover Norquist's famous quip about wanting to see government so small that it can be drowned in a bathtub is perhaps the most pithy encapsulations of this philosophy.
Tim Geithner, a former Federal Reserve regional governor, and Ben Bernanke, the current Federal Reserve chairman, have been steeped in this zeitgeist for so long that it is central to their world view. Barack Obama, on the other hand, has seen what happens when the rule of contract exceeds the rule of law, and as he becomes more comfortable with his own authority, is also beginning to exercise what may very well become known as the Obama Doctrine - that contracts that harm the public good even while being within the letter of the law can be abrogated by the third party in those discussions - the government, keeper of the public good.
There are many in the investment community (and in political circles) who are fearful that this approach will cause investors to not want to reinvest in the banks, for fear of their investments essentially being annulled. This has always been powerful weapon to wield against those who would seek to change the status quo; however, it is an argument increasingly without teeth. Those who invest should understand implicitly that no investment is guaranteed to be without risk, regardless of whether that investment is a few shares of penny stock or a sizable investment in a car company ... or a bank. The owners of a business who fail to press the people who manage that business to be more responsible, more innovative, more willing to respond to changes in demand, and more ethically responsible should hardly be upset when those companies fail.
Indeed, this is perhaps one of the fundamental problems that this society faces: there is an implicit assumption that one can make a business grow and thrive simply by pouring money into it, especially at the senior management levels. In essence, money is being used as a way to get reward - dividends - without otherwise having to do any work. It also has become a way of dodging the responsibility of managing that company well; rather than planning for changing environments, trying to produce better products and services, most senior managers have become adept at manipulating the markets instead to increase dividend yields for their owners.
It's increasingly obvious that sweat equity, which has long been a very secondary aspect of business, is once again coming into its own. To me Obama has just turned Chrysler into an object lesson, one that banks and financial institutions in general should pay a great deal to. It looks like the silent partner is beginning to speak up, and what he's saying is going to completely reshape the way that America does business.
Future Proof: The Disaggregation of Business
91. Our allegiance is to ourselves—our friends, our new allies and acquaintances, even our sparring partners. Companies that have no part in this world, also have no future.
Cluetrain Manifesto
The following blog is written in support of Cluetrain Plus Ten, a celebration of the 10th Anniversary of the Cluetrain Manifesto.
The news today in the papers was rather stunning - the United Auto Workers union was buying part of GM and Chrysler. General Motors, once the largest and most powerful car companies in the world, is being sold to its workers because the company became too fixated upon the business of making money and not fixated enough upon the business of making cars. Presumably, those workers, who still are in the business of making cars, may actually understand where their priorities really are.
This process is going on everywhere. The newspaper publishing industry is disintegrating, not because there's not enough news, but because there's too much of it - millions upon millions of "citizen journalists" who are reshaping the fabric of news, armed with inexpensive camcorders and laptops and iPods. Big box stores are being replaced by hundreds of thousands of specialized retailers, operating over the Internet or with minimal brick and mortar presences. Office parks are emptying out, as the workers of the companies that used to be in them work from homes and coffeeshops and conferences a thousand miles away. The giant businesses loom over all of this like hulking dinosaurs, scary until you realize that most are dying, and that what you are seeing are the skeletal ribs of decaying corporate carcasses.
Recessions come and go (though most in the last eighty years have not been quite so bad as the current one) and in most of them, older, less efficient businesses often disappear along the wayside, beat out by newer, flashier, more nimble opponents. Yet it is likely that this time around, we're going to see a mass extinction event, because the very nature of business itself is changing.
The large-is-better business model evolved through much of the late 19th and 20th centuries because it was the most efficient mode for communication channels - a hierarchical business model is a network with a bias towards centralized information dissemination and execution. Direction was passed from a leader to his subleaders, who would then break down the tasks pertinent to their domain and pass it down to their respective subleaders, until eventually you had specific tasks assigned to individuals at the leaf ends of the network. It also had the advantage of working well in a geographically centralized manner - each subtree usually represented a geographic aggregation of some sort.
Additionally, such command and control structures had the additional benefit of pushing information back up through a series of management filters - if it was not perceived as being important enough to engage the time of a given lieutenant, it wouldn't pass beyond that lieutenant to his superiors. This meant that, in theory, only the most important information would make it up to the top, and the role of the centralized decision maker became at least somewhat rationale.
In practice, however, such filters also served to isolate these same decision makers from interacting with the outside world. Hierarchies by their very nature tend to promote privilege - the higher up the chain you are, the more you are rewarded, and in practice the less you are likely to interact with the people that actually use your business products or services - instead, you interact with your counterparts at other businesses or organizations. And as a consequence, hierarchies can become forts, with the leaders of the hierarchy only vaguely aware of (and usually far less mindful of) the actual work done collectively by the others in the organization that in turn pay his paycheck and bonuses - or of the people who pay for that work.
The hierarchical model is well suited for broadcast - information from a centralized source gets disseminated through the hierarchy, while the hierarchy in turn acts as a filter to analyze and consequently respond to this data in aggregate. This has the side-effect, however, of dehumanizing the response channel - you are less interested in whether Jane Doe was motivated by your messaging (advertising or otherwise), but far more interested in the fact that a 32 year old Caucasian single woman who makes $64,000 a year, lives in a $550,000 house and is a vegetarian purchased your product. Jane Doe is a person, the latter is a demographic profile that can be used to see whether Product X is successful in getting Jane Doe to fork over her hard-earned money.
The Internet establishes an alternative set of communication channels that are very different from the hierarchical model. In effect, it makes for ad hoc, collaborative, overlapping interest groups. It makes aggregate collectivist behavior far easier to accomplish, and it means that information can spread very quickly, as it passes from interest group to interest group through common members.
Most companies originally thought that such interest groups were a good thing - after all, most of marketing involves targeting your message toward a given interest group while trying to reduce the exposure of the message outside of that interest group (as the non-interested groups produces far fewer responses - it's not as cost effective to advertise to people who either lack the means or the desire to purchase your goods or services). Company X could market its new organic power bar to such interest groups, and expect a much higher conversion ... which in fact did happen.
What these companies were not expecting was that the members of this interest group would also pass negative information about the products (and the company) to one another ... and that they would talk back. This wasn't supposed to happen. If the power bar didn't taste very good, this was information that would spread just as quickly, and it was beyond the control of the company to fix. If the organic components really weren't, if the green message on the wrapper was at odds with the fact that bar was produced in a factory in China under less than ideal conditions, if the CFO was involved in an affair with the CEO's wife, all of this information would get passed on ... and the company had no way of controlling this back-channel communication.
Corporate communication is very impersonal - its intent is not necessarily to inform, but rather to protect the hierarchy - to promote the successes, to spin damaging news, to obfuscate the communication access to the primary decision makers and in general to reduce potentially embarrassing contacts between the decision makers and the outside world. The problem of course is that as the dialog channels between people improved, the cold, mechanistic nature of corporate speak also became far more obvious - and more sinister. People react negatively when they realize that communications are one-sided - that while there may be a semblance of human communication going on, there's actually no one on the other side that is in a position to actually do anything about it ... it's a waste of time.
Beyond this, corporations are made up of people, and when those people feel that they have been abused by the company, they now have at their tools powerful ways of disrupting those corporations. When people are laid off in a poor and demeaning way, when they are customers who have been "shafted", they will lose whatever loyalty they may have had to the company in question - and will become increasingly shy about giving loyalty to any corporation. They will develop ideas and tools outside of the context of companies - something especially significant because it is often those very ideas and tools that the company would otherwise turn into products and sell themselves. They will encourage others to boycott companies and suggest alternatives that will reduce sales for the company in question.
In one scenario I saw recently, a disgruntled former customer of a cable company established a website and devoted himself to convincing others to take their business elsewhere. In the end that one customer probably cost the company $1.5 million dollars in revenue, all over a cap on services that might have cost the company perhaps $30. Such anti-customers really didn't make much of a difference pre-Internet - the company could have acted with impunity because the real ability of that customer to affect the company was limited. Today, a single Twitter from the right person (who might either be the anti-customer or sympathetic to the anti-customer) could have hugely negative consequences for a company.
The real difference between a company and an interest group (a social community) is surprisingly small - usually an agreement for revenue sharing. This means that whereas fifty years ago it may have taken several thousand people to establish and run a business of any complexity, today you can get by with perhaps fifteen or twenty - which in turn mean that such companies need a much lower threshold of net revenue to be viable concerns. This is increasingly as true in capital intensive sectors as it is in information services. Componentization and modularization of parts in various sectors mean that you can construct and customize even durable goods at only a slightly higher margin than a much larger factory, and because you don't have the significant overhead associated with the larger factory, the marginal costs even out.
This means that, even as dinosaurs like GM thrash about in their death throes, there are dozens of smaller companies making specialty cars that are far more responsive to new technology and market demands, at a small fraction of the overall costs that GM needs to develop a given car line.
The upshot of this is that we are in for a long period of business disaggregation - where huge conglomerates spin off companies to sink and swim, where small, ephemeral companies navigate more effectively than large ones, where the distinction between consumer and producer becomes blurred to irrelevance. People won't be any less loyal, but they'll be loyal to those "projects" that they themselves have a controlling interest in. Brand names are only significant as ways of identifying those prosumers who are most adept at navigating this world, and are increasingly tied into the "personal brand" - "I trust Jane Doe because I can communicate with her, her ventures generally succeed, and she knows how to involve others in her ideas."
It should be an interesting decade.
Where has all the money gone
I entered into an interesting twitter exchange recently, to whit:
The numbers vary - from $2 trillion dollars to more than $40 trillion dollars depending upon how measure it, but in any case, a lot of "wealth" has seemingly gone up in smoke in the last year. Retirement, pension and college funds have been cut by 50% or more, municipal bonds have turned to dust, treasuries at the local, state and national level are bare. The world has, seemingly overnight, gone from being hyperfrenetic with activity to being, well broke ... and broken.
The question that Brendan brought up is a sensible one - where did all that money go? Is there someone out there who's now sitting on a pile of everyone else's money? No ... and yes.
People, including bankers who should know better, tend to look upon money as being, well, solid. You work every day, you get a paycheck for your efforts that represents a contract with your employer. That contract is usually slanted toward the employer - you provide the labor, and at the end of two weeks or one month or some other milestone, the employer gives you a piece of paper transferring a certain amount of value from the companies earnings to you. You take this to the bank, the bank deposits it, and from there you can "spend" this value.
Suppose, however, that the company has not made this money in earnings yet. Instead, they went to a bank and said "give us a line of credit, here is our plan to make value in the future". The bank evaluates the plan and the individuals involved, and if it feels like the plan will return a reasonable amount of earnings within a reasonable time, it will give the company that line of credit - a form of a loan, along with a fee to be added in order to compensate the bank for the risk that the company won't in fact make these earnings over the stated time.
This means that the money that you are making is not based upon existing value, but upon future value production. In essence, the company is in turn taking a risk that you will produce, though it is usually a pretty safe one. If you don't, then you will no longer receive that compensation, and someone else will be hired.
Yet, say after a couple of years, the company is not making enough money - the guess that was made concerning the profitability of the venture was off. The company's already sunk money into infrastructure, into salaries for the people, into energy costs, and into intangibles - marketing efforts. The company can go back to the bank and ask for an additional loan, but the bank at some point needs to determine whether the ongoing effort will ever prove profitable - otherwise, it is simply throwing bad money after good. The bank decides that "no, we're not going to give you the loan" and assuming the company doesn't find other investors (typically with more stringent requirements because of increased risk) it will close its doors, and everyone will be out of a job.
Now in this particular venture, you may have made money - though much of that money went into paying off necessities - housing, transportation, energy, food, information access and so forth - so you may have actually just broken even or even fallen behind. However, when the company fails, it can't turn around and ask for that money back. It's been spent. The money that the bank has also loaned has been lost - the loan becomes non-performing, because it no longer generates revenue, and the bank also took a loss.
If the bank charges fees on the establishment of the loan, these fees are things that can be assessed early - at the time the loan is made. At some point, the bank manager might realize that taking the fees are less risky than waiting for the loan to mature. They sell the loan as a "security". Now, this security is still potentially valuable, because it represents a steady stream of income in interest, and an investor can buy the security as a long term performing vehicle - so long as the person or company who took out the loan can continue to make payments.
Now the bank, at this point, has been lobbying the government to let them sell these securities, and a particularly business friendly administration gives the go-ahead. All of a sudden, a bank can make a loan, pocket the fees for that origination, then sell the loan as a security taking additional fees. What this means is that the bank no longer has any real incentive to insure that the person or company taking the loan can actually pay it back, because by the time it becomes an issue, it will be someone else's problem. The bank has essentially siphoned off a fairly significant amount of money in the transaction without actually creating significant value.
What this means is that they will be encouraged to make many more loans, because there is no moral hazard if a loan goes bad. If the loan is a mortgage or a lease, the bank may also encourage the ones acting as brokers in the sales of these properties to try to get top dollar, because it increases the fees that they can take off the transaction. The mortgage broker sees no problems in that - he too gets a percentage off the top, so the more valuable the property, the more he makes. The county assessors that determine the baseline price will try to increase the property price as well, because that increases revenues in the tax coffer, and if tax revenues go up, well, its good for the city or county.
Now, normally, this breaks down if interest rates are high - because the person who actually commits to the purchase has to pay the interest on top of the agreed upon price and fees. However, if interest rates are kept generationally low, then even though the house may cost more, the individual payments may be smaller, especially if they can be spread out over a longer period of time. Then of course, you also have speculators who buy up properties with no intention of paying the long term price - they simply become brokers themselves, selling to someone else at a higher price in three or six month, because real estate prices always go up. The buyer may also simply not have the financial resources to purchase the property in the first place under normal circumstances, but with a bit of "creative accounting" they are encouraged to buy.
Now this chain goes all the way up and down - ratings agencies are encouraged to rate securities higher than they should be, corporate raiders use risky securities (junk bonds) to effectively purchase companies, replacing actual earnings with debits against future earnings. Stock brokers use this debt to leverage purchase of stock with very little actual money committed, and so forth.
All of this activity involves replacing existing earnings - real work - with promised earnings - credit, and because there is comparatively little oversite, the actual obligation on the part of the wage earners and company earnings climbs and climbs and climbs, until you get a situation where a person would have to work continuously, 24 hours a day, for century or more to produce the real work that's been obligated on her, usually without her direct consent. That's clearly unfeasible, and the system ultimately collapses as each company or person fails.
Debts that the banks and shadow banks hold have to be written off, rather than being treated like assets. This reduces the amount of money that the banks can commit to writing loans, and also instills a sense of hyperconservatism in extending new loans, because they can no longer service the old ones. This causes credit availability to collapse, which means that companies can no longer pay their workers (as the paychecks were paid from the loan which was to be repaid by earnings).
As workers lose their jobs, they cut back on their spending, which causes other companies to go out of business, which only exacerbates the situation. Companies are forced to lower their prices in order to move any product, and a deflationary spiral sets in. Everything loses value as the availability of money dries up and markets plummet.
Eventually, demand for goods reasserts itself, as things wear out, as population grows, or as people become less fearful about the future. However, the damage has been done - the negotatiated value of things have dropped dramatically, whether that's the cost of a new car or the cost of a stock, and people who purchased the stocks thinking that it was a safe investment now discover that they're holding worthless paper - the company has either gone out of business or, if it survived, now has a much smaller cash position and it will take time for it to get back to its earning potential, significantly reducing the long term return on investment.
So, given that, chances are pretty good that there's not one person out there who is now sitting on everyone else's money. The money never really existed, save in potentia. What disappeared was the expected potential of that future labor.
However, that doesn't mean there aren't scoundrels. Companies who buy and sell these securities have profited immensely by the transaction fees and bonuses, which also came from future earnings. It would be much like you being paid for the next thirty years of your wage earning time up front. If the business fails, it makes no difference to you - you've already been paid handsomely, and can turn around and spend that money any way you choose.
Yet that money has to come from earnings at some point, and it does. It comes from pension funds that fail, leaving people who have invested with nothing. It comes from reduced pay elsewhere in the industry, as credit has been compromised. It comes from tax revenues, which decline dramatically in a recession because people don't have the wherewithall to pay. In other words, the thirty million dollar "bonus" that the hedge fund manager or bank CEO takes home comes directly or indirectly from the earnings of others, who now have to work longer just to get back to where they are.
So, yes, it was a ponzi scheme, a bubble with a skim, caused by the greed of "financial professionals" and political officials, aided by tax cuts that were highly favorable to these same people, and a war that made it possible to hide similar fraud elsewhere. It is still going on, and it has bankrupted this country for years to come.Where has all the money gone
BrendanWenzel: A lot of people have "lost" money, but who is gaining it all? Wealth is never destroyed, but transfered. Who is it being transfered to?
kurt_cagle:Actually, in this case, "wealth" is just being destroyed, because assets are being repriced downward.
kurt_cagle:Most real wealth was made 2004-2006 by people in top 1%; we're just now discovering the fact that we've been robbed.
BrendanWenzel: So you are saying that these worthless assets never had value and were just a tool to steal wealth?
kurt_cagle: ... a tool to steal wealth? Um ... yup, pretty much. Did any investment banker really produce $30 million worth of value? No.
The numbers vary - from $2 trillion dollars to more than $40 trillion dollars depending upon how measure it, but in any case, a lot of "wealth" has seemingly gone up in smoke in the last year. Retirement, pension and college funds have been cut by 50% or more, municipal bonds have turned to dust, treasuries at the local, state and national level are bare. The world has, seemingly overnight, gone from being hyperfrenetic with activity to being, well broke ... and broken.
The question that Brendan brought up is a sensible one - where did all that money go? Is there someone out there who's now sitting on a pile of everyone else's money? No ... and yes.
People, including bankers who should know better, tend to look upon money as being, well, solid. You work every day, you get a paycheck for your efforts that represents a contract with your employer. That contract is usually slanted toward the employer - you provide the labor, and at the end of two weeks or one month or some other milestone, the employer gives you a piece of paper transferring a certain amount of value from the companies earnings to you. You take this to the bank, the bank deposits it, and from there you can "spend" this value.
Suppose, however, that the company has not made this money in earnings yet. Instead, they went to a bank and said "give us a line of credit, here is our plan to make value in the future". The bank evaluates the plan and the individuals involved, and if it feels like the plan will return a reasonable amount of earnings within a reasonable time, it will give the company that line of credit - a form of a loan, along with a fee to be added in order to compensate the bank for the risk that the company won't in fact make these earnings over the stated time.
This means that the money that you are making is not based upon existing value, but upon future value production. In essence, the company is in turn taking a risk that you will produce, though it is usually a pretty safe one. If you don't, then you will no longer receive that compensation, and someone else will be hired.
Yet, say after a couple of years, the company is not making enough money - the guess that was made concerning the profitability of the venture was off. The company's already sunk money into infrastructure, into salaries for the people, into energy costs, and into intangibles - marketing efforts. The company can go back to the bank and ask for an additional loan, but the bank at some point needs to determine whether the ongoing effort will ever prove profitable - otherwise, it is simply throwing bad money after good. The bank decides that "no, we're not going to give you the loan" and assuming the company doesn't find other investors (typically with more stringent requirements because of increased risk) it will close its doors, and everyone will be out of a job.
Now in this particular venture, you may have made money - though much of that money went into paying off necessities - housing, transportation, energy, food, information access and so forth - so you may have actually just broken even or even fallen behind. However, when the company fails, it can't turn around and ask for that money back. It's been spent. The money that the bank has also loaned has been lost - the loan becomes non-performing, because it no longer generates revenue, and the bank also took a loss.
If the bank charges fees on the establishment of the loan, these fees are things that can be assessed early - at the time the loan is made. At some point, the bank manager might realize that taking the fees are less risky than waiting for the loan to mature. They sell the loan as a "security". Now, this security is still potentially valuable, because it represents a steady stream of income in interest, and an investor can buy the security as a long term performing vehicle - so long as the person or company who took out the loan can continue to make payments.
Now the bank, at this point, has been lobbying the government to let them sell these securities, and a particularly business friendly administration gives the go-ahead. All of a sudden, a bank can make a loan, pocket the fees for that origination, then sell the loan as a security taking additional fees. What this means is that the bank no longer has any real incentive to insure that the person or company taking the loan can actually pay it back, because by the time it becomes an issue, it will be someone else's problem. The bank has essentially siphoned off a fairly significant amount of money in the transaction without actually creating significant value.
What this means is that they will be encouraged to make many more loans, because there is no moral hazard if a loan goes bad. If the loan is a mortgage or a lease, the bank may also encourage the ones acting as brokers in the sales of these properties to try to get top dollar, because it increases the fees that they can take off the transaction. The mortgage broker sees no problems in that - he too gets a percentage off the top, so the more valuable the property, the more he makes. The county assessors that determine the baseline price will try to increase the property price as well, because that increases revenues in the tax coffer, and if tax revenues go up, well, its good for the city or county.
Now, normally, this breaks down if interest rates are high - because the person who actually commits to the purchase has to pay the interest on top of the agreed upon price and fees. However, if interest rates are kept generationally low, then even though the house may cost more, the individual payments may be smaller, especially if they can be spread out over a longer period of time. Then of course, you also have speculators who buy up properties with no intention of paying the long term price - they simply become brokers themselves, selling to someone else at a higher price in three or six month, because real estate prices always go up. The buyer may also simply not have the financial resources to purchase the property in the first place under normal circumstances, but with a bit of "creative accounting" they are encouraged to buy.
Now this chain goes all the way up and down - ratings agencies are encouraged to rate securities higher than they should be, corporate raiders use risky securities (junk bonds) to effectively purchase companies, replacing actual earnings with debits against future earnings. Stock brokers use this debt to leverage purchase of stock with very little actual money committed, and so forth.
All of this activity involves replacing existing earnings - real work - with promised earnings - credit, and because there is comparatively little oversite, the actual obligation on the part of the wage earners and company earnings climbs and climbs and climbs, until you get a situation where a person would have to work continuously, 24 hours a day, for century or more to produce the real work that's been obligated on her, usually without her direct consent. That's clearly unfeasible, and the system ultimately collapses as each company or person fails.
Debts that the banks and shadow banks hold have to be written off, rather than being treated like assets. This reduces the amount of money that the banks can commit to writing loans, and also instills a sense of hyperconservatism in extending new loans, because they can no longer service the old ones. This causes credit availability to collapse, which means that companies can no longer pay their workers (as the paychecks were paid from the loan which was to be repaid by earnings).
As workers lose their jobs, they cut back on their spending, which causes other companies to go out of business, which only exacerbates the situation. Companies are forced to lower their prices in order to move any product, and a deflationary spiral sets in. Everything loses value as the availability of money dries up and markets plummet.
Eventually, demand for goods reasserts itself, as things wear out, as population grows, or as people become less fearful about the future. However, the damage has been done - the negotatiated value of things have dropped dramatically, whether that's the cost of a new car or the cost of a stock, and people who purchased the stocks thinking that it was a safe investment now discover that they're holding worthless paper - the company has either gone out of business or, if it survived, now has a much smaller cash position and it will take time for it to get back to its earning potential, significantly reducing the long term return on investment.
So, given that, chances are pretty good that there's not one person out there who is now sitting on everyone else's money. The money never really existed, save in potentia. What disappeared was the expected potential of that future labor.
However, that doesn't mean there aren't scoundrels. Companies who buy and sell these securities have profited immensely by the transaction fees and bonuses, which also came from future earnings. It would be much like you being paid for the next thirty years of your wage earning time up front. If the business fails, it makes no difference to you - you've already been paid handsomely, and can turn around and spend that money any way you choose.
Yet that money has to come from earnings at some point, and it does. It comes from pension funds that fail, leaving people who have invested with nothing. It comes from reduced pay elsewhere in the industry, as credit has been compromised. It comes from tax revenues, which decline dramatically in a recession because people don't have the wherewithall to pay. In other words, the thirty million dollar "bonus" that the hedge fund manager or bank CEO takes home comes directly or indirectly from the earnings of others, who now have to work longer just to get back to where they are.
So, yes, it was a ponzi scheme, a bubble with a skim, caused by the greed of "financial professionals" and political officials, aided by tax cuts that were highly favorable to these same people, and a war that made it possible to hide similar fraud elsewhere. It is still going on, and it has bankrupted this country for years to come.Where has all the money gone
End of US Dollar as Reserve Currency
I'm going to get off the meta-trends that I've been following throughout the week and get down to a list of things that I've been tracking myself. I'll probably make this a regular feature - there's so much going on right now that I doubt serious whether any one article would cover more than a small part of it, and trends can be disrupted (or just peter out) without actually amounting to any thing. I welcome feedback here on what you've been watching as well, as I think the best way you can become informed about the world is to get a different perspective from the one you currently have.
So, without further ado:
The US Dollar is losing its status as the world's reserve currency.
First, a quick definition here: in the 1940s, a decision was made on the part of the various world powers to establish the US Dollar as the reserve currency for the purchase of oil. What that meant was that if you wanted to buy a barrel of crude on the spot market, you could only purchase it in dollars, and if you wanted to sell that barrel, you similarly had to accept that money in dollars. This was essentially one of the key requirements for receiving aid via the Marshall Plan, something that was sorely needed in Europe at the time.
In essence, what this meant in practice was that a country that needed oil (and all countries need oil) had to maintain a certain amount of financial reserves in dollars. To get them, it either had to buy US goods, or it had to give the US a certain amount of gold at a fixed rate to buy these dollars, usually in the form of treasury bonds. However, on the flip side, a country could also, upon demand, sell their dollars back to the US for gold.
This had the immediate impact of swelling the US treasury, which was in fact one of the things that helped the country pull out of the depression of the 1930s. It also introduced a pernicious inflation through much of the 1950s in the US, as the US printed more and more such dollars in order to meet global demand. However, it also had a darker side effect for the banking industry - it kept their ability to leverage down to a very definite minimum, meaning they could originate very few loans - and it increased the demand for gold globally as other countries began to recover.
Presidents Eisenhower, Kennedy and Johnson were all forced to revalue the currency by increasing the price of gold, but diminishing actual reserves finally forced Nixon, in 1973, to "close the gold window" and declare that the US would no longer honor the gold cap but would let the dollar float. This (along with the effects that it had upon the oil producing states) ended up forcing the energy crisis of 1974-77 and the subsequent period of hyperinflation. It was also one factor leading to the creation of the Euro.
Inflation was ultimately tamed by Paul Volcker, the Federal Reserve Chair, who raised the prime lending rate dramatically in order to attract foreign investment, a strategy, which, while leading to a fairly severe recession in the short term, managed to accomplish the task, restoring confidence in the American markets and laying the groundwork for much of the long bull market that followed thereafter.
However, without some form of backing, the degree of confidence in the dollar had largely become a function of the degree of trust in the US economy. This trust began to be eroded in the wake of the savings and loan scandals of the late 1980s and of the implosion of specific hedge funds after the economies of a number of Southeast Asian countries collapsed in the late 1990s.
However, the last decade has seen the uncertainty turn into outright distrust as the Federal Reserve seemed to be deliberately manufacturing bubble after bubble in an effort to sustain an increasingly shaky financial system. The housing bubble in particular in particular had the effect of significantly raising questions about the strength of the dollar, and by mid 2007, the value of the dollar dropped fairly precipitously relative to other currencies. The Canadian Loonie, for instance, at one point briefly topped US1.10 = CAN$1.00, after started at about US$0.74 in 2002.
This was also reflected in the price of oil at the time. While oil prices were up fairly dramatically in Europe, they were up far more (percentage wise) in the United States (the US has a very low gas tax rate while Canada and most European countries have a much higher rate, meaning that absolute measures were actually much closer). The top of the oil speculation market came in the summer of 2007, though by the fall, the first inklings of problems within the mortgage sector were making themselves felt.
This isn't the place to go over the whole financial collapse between 2007 and 2009, that story is now familiar to most people. However, in its wake, a couple of very interesting things have happened. The first has been a massive flight to treasuries (the US Dollar) which has caused the unwinding of most of the currency advances as investors have moved out of equities and properties into a temporary store. For foreign investors, the assumption has likely been that it was wise to move out of falling markets into treasuries rather than repatriating those funds. However, this has also had the effect of creating a bubble in Treasuries.
However, a second factor that's come into play has been that China has been purchasing Treasuries in order to keep their currency, the Renminbi pegged to the US dollar in order to remain competitive in providing goods and services. This has meant that they have ended up purchasing roughly $1.5 trillion dollars in treasure currencies as of 2009 - money that in fact has largely been used (dubiously) for the Iraq war and for financing the mortgage bubble in the first place.
One way to think of a treasury note is to envision it as a stock warrant in USA, Inc. The warrant pays a dividend (interest) to the holder of that note. When a company goes public, it sells shares in the company, yet the company itself is worth only so much money (essentially some percentage of its potential lifetime earnings). This means that as the number of warrants issued rises, the individual return on those warrants drop - the warrants become worth less. At $1.5 trillion dollars, China holds roughly 10% of the total GDP of the US. If China was dump these holdings on the world market, the value of the dollar would collapse overnight, resulting within six months of extraordinarily high inflation - high double or even triple digit inflation.
China won't do that, because it would not only make its investment worthless, it would also completely destroy the economy of its largest market. However, it has all but stopped its own purchases of treasuries, and in the last month (March/April 2009) has devised a strategy which will let it significantly reduce its own exposure to American financial activities. It has contacted the International Monetary Fund, and asked for the creation of an IMF bond invoking what are called Special Drawing Privileges that essentially would make it possible to set up direct currency exchanges with other countries - most notably Brazil, Russia and India, which, with China, make up what have become known as the BRIC economies. It has also created additional currency swap agreements with countries such as Argentina, a number of countries in Central Africa, and Indonesia. Significantly, all of these are oil or other resource producers or act as brokers for same.
Put simply, the goal of the Chinese is very much in accord with a number of oil producing companies in the Middle East - reducing the historical role of the US Dollar as the global reserve currency. Given the antagonism that the US has engendered over the last decade, there is far more support for such an action than there ever has been in the past, and even though it is likely that Obama's overtures will likely mend a few fences, the real damage has been done to the trust of the dollar. Sometime within the next 3-5 years, it is likely that a global "reserve currency" will arise, one that consists of a basket of floating currencies and exchange agreements rather than any single country's currency. The US will likely be a part of that, of course, but it will no longer be the world's bank (or the world's first consumer) - and that has a number of potential implications for the US.
One of the largest is that the US credit card will officially be maxed out. The US borrowing debt ceiling has been a convenient fiction for a long time - as the US gets close to it, an act of Congress raises the ceiling. This was done largely on the strength of expected sale of US Treasuries. The world now has more US Treasuries than it could use, but once a basket currency becomes the norm, there will be far more interest in purchasing other countries' debt instruments, which means that demand for US Treasuries will likely remain depressed for some time.
This means that the account deficits explode, and there becomes no way of even paying off the interest on the debt. This will result in the reduction of the rating of US bonds. One effect of this is that relatively soon, taxes will have to be raised, and fairly dramatically, in order to finance any new expenditures. The US will have to raise its own interest rates in order to attract more investors, at a time when the economy will just begin its recovery. Defense expenditures will have to be significantly reduced, social entitlements will have to be renegotiated, and the ability of the government to act will be increasingly hamstrung.
This will also mean that the Americans will have to save more. At the moment, much of the effort in the recovery is going towards getting Americans to spend more, to increase the velocity of money in the system, but its becoming increasingly obvious that this isn't working. Now the problem with saving is that while it is prudent at the individual level, it reduces the amount of money available to create businesses (in the short term) and reduces tax revenues that derive from the acceleration of money in the system at the macro-level. In other words, a savings-oriented mindset is anathema to a consumer economy ... at least for a while.
However, my own take is that we're not going to end up going back to a 30's style "great depression", nor do I necessarily see the stark future outlined by people like James Howard Kunstler. We're in the midst of a major structural change in society, one fed in great part by the profound changes in information infrastructure and additionally shaped by a growing awareness about the fragility of the underlying ecosystem. The consumer culture of the 20th century is failing, but that doesn't mean that all of a sudden we should all become socialists or communists or cogs in some oligarchical brave new world order.
What it does mean is that we're making it up as we go along. One of the reasons for the original Bretton Woods accords was to attempt to guarantee, as much as possible, the notion of full employment, at the expense of inflating the currency. The reality now is that full time employment, at least in the traditional sense, is breaking down. We need to make some hard decisions about what constitutes a valid standard of living - and what constitutes an excessive one. We need to come to terms with information and reputation as forms of currency, with virtual currencies, and with the degree to which currency reflects value.
All of these things (and many, many more) will ultimately need to be determined as the world adjusts to a new abstraction of currency, and the more that efforts are made to return to an unsustainable status quo, the longer it will take before a true recovery can take place - and the more turbulent society will become.
So, without further ado:
The US Dollar is losing its status as the world's reserve currency.
First, a quick definition here: in the 1940s, a decision was made on the part of the various world powers to establish the US Dollar as the reserve currency for the purchase of oil. What that meant was that if you wanted to buy a barrel of crude on the spot market, you could only purchase it in dollars, and if you wanted to sell that barrel, you similarly had to accept that money in dollars. This was essentially one of the key requirements for receiving aid via the Marshall Plan, something that was sorely needed in Europe at the time.
In essence, what this meant in practice was that a country that needed oil (and all countries need oil) had to maintain a certain amount of financial reserves in dollars. To get them, it either had to buy US goods, or it had to give the US a certain amount of gold at a fixed rate to buy these dollars, usually in the form of treasury bonds. However, on the flip side, a country could also, upon demand, sell their dollars back to the US for gold.
This had the immediate impact of swelling the US treasury, which was in fact one of the things that helped the country pull out of the depression of the 1930s. It also introduced a pernicious inflation through much of the 1950s in the US, as the US printed more and more such dollars in order to meet global demand. However, it also had a darker side effect for the banking industry - it kept their ability to leverage down to a very definite minimum, meaning they could originate very few loans - and it increased the demand for gold globally as other countries began to recover.
Presidents Eisenhower, Kennedy and Johnson were all forced to revalue the currency by increasing the price of gold, but diminishing actual reserves finally forced Nixon, in 1973, to "close the gold window" and declare that the US would no longer honor the gold cap but would let the dollar float. This (along with the effects that it had upon the oil producing states) ended up forcing the energy crisis of 1974-77 and the subsequent period of hyperinflation. It was also one factor leading to the creation of the Euro.
Inflation was ultimately tamed by Paul Volcker, the Federal Reserve Chair, who raised the prime lending rate dramatically in order to attract foreign investment, a strategy, which, while leading to a fairly severe recession in the short term, managed to accomplish the task, restoring confidence in the American markets and laying the groundwork for much of the long bull market that followed thereafter.
However, without some form of backing, the degree of confidence in the dollar had largely become a function of the degree of trust in the US economy. This trust began to be eroded in the wake of the savings and loan scandals of the late 1980s and of the implosion of specific hedge funds after the economies of a number of Southeast Asian countries collapsed in the late 1990s.
However, the last decade has seen the uncertainty turn into outright distrust as the Federal Reserve seemed to be deliberately manufacturing bubble after bubble in an effort to sustain an increasingly shaky financial system. The housing bubble in particular in particular had the effect of significantly raising questions about the strength of the dollar, and by mid 2007, the value of the dollar dropped fairly precipitously relative to other currencies. The Canadian Loonie, for instance, at one point briefly topped US1.10 = CAN$1.00, after started at about US$0.74 in 2002.
This was also reflected in the price of oil at the time. While oil prices were up fairly dramatically in Europe, they were up far more (percentage wise) in the United States (the US has a very low gas tax rate while Canada and most European countries have a much higher rate, meaning that absolute measures were actually much closer). The top of the oil speculation market came in the summer of 2007, though by the fall, the first inklings of problems within the mortgage sector were making themselves felt.
This isn't the place to go over the whole financial collapse between 2007 and 2009, that story is now familiar to most people. However, in its wake, a couple of very interesting things have happened. The first has been a massive flight to treasuries (the US Dollar) which has caused the unwinding of most of the currency advances as investors have moved out of equities and properties into a temporary store. For foreign investors, the assumption has likely been that it was wise to move out of falling markets into treasuries rather than repatriating those funds. However, this has also had the effect of creating a bubble in Treasuries.
However, a second factor that's come into play has been that China has been purchasing Treasuries in order to keep their currency, the Renminbi pegged to the US dollar in order to remain competitive in providing goods and services. This has meant that they have ended up purchasing roughly $1.5 trillion dollars in treasure currencies as of 2009 - money that in fact has largely been used (dubiously) for the Iraq war and for financing the mortgage bubble in the first place.
One way to think of a treasury note is to envision it as a stock warrant in USA, Inc. The warrant pays a dividend (interest) to the holder of that note. When a company goes public, it sells shares in the company, yet the company itself is worth only so much money (essentially some percentage of its potential lifetime earnings). This means that as the number of warrants issued rises, the individual return on those warrants drop - the warrants become worth less. At $1.5 trillion dollars, China holds roughly 10% of the total GDP of the US. If China was dump these holdings on the world market, the value of the dollar would collapse overnight, resulting within six months of extraordinarily high inflation - high double or even triple digit inflation.
China won't do that, because it would not only make its investment worthless, it would also completely destroy the economy of its largest market. However, it has all but stopped its own purchases of treasuries, and in the last month (March/April 2009) has devised a strategy which will let it significantly reduce its own exposure to American financial activities. It has contacted the International Monetary Fund, and asked for the creation of an IMF bond invoking what are called Special Drawing Privileges that essentially would make it possible to set up direct currency exchanges with other countries - most notably Brazil, Russia and India, which, with China, make up what have become known as the BRIC economies. It has also created additional currency swap agreements with countries such as Argentina, a number of countries in Central Africa, and Indonesia. Significantly, all of these are oil or other resource producers or act as brokers for same.
Put simply, the goal of the Chinese is very much in accord with a number of oil producing companies in the Middle East - reducing the historical role of the US Dollar as the global reserve currency. Given the antagonism that the US has engendered over the last decade, there is far more support for such an action than there ever has been in the past, and even though it is likely that Obama's overtures will likely mend a few fences, the real damage has been done to the trust of the dollar. Sometime within the next 3-5 years, it is likely that a global "reserve currency" will arise, one that consists of a basket of floating currencies and exchange agreements rather than any single country's currency. The US will likely be a part of that, of course, but it will no longer be the world's bank (or the world's first consumer) - and that has a number of potential implications for the US.
One of the largest is that the US credit card will officially be maxed out. The US borrowing debt ceiling has been a convenient fiction for a long time - as the US gets close to it, an act of Congress raises the ceiling. This was done largely on the strength of expected sale of US Treasuries. The world now has more US Treasuries than it could use, but once a basket currency becomes the norm, there will be far more interest in purchasing other countries' debt instruments, which means that demand for US Treasuries will likely remain depressed for some time.
This means that the account deficits explode, and there becomes no way of even paying off the interest on the debt. This will result in the reduction of the rating of US bonds. One effect of this is that relatively soon, taxes will have to be raised, and fairly dramatically, in order to finance any new expenditures. The US will have to raise its own interest rates in order to attract more investors, at a time when the economy will just begin its recovery. Defense expenditures will have to be significantly reduced, social entitlements will have to be renegotiated, and the ability of the government to act will be increasingly hamstrung.
This will also mean that the Americans will have to save more. At the moment, much of the effort in the recovery is going towards getting Americans to spend more, to increase the velocity of money in the system, but its becoming increasingly obvious that this isn't working. Now the problem with saving is that while it is prudent at the individual level, it reduces the amount of money available to create businesses (in the short term) and reduces tax revenues that derive from the acceleration of money in the system at the macro-level. In other words, a savings-oriented mindset is anathema to a consumer economy ... at least for a while.
However, my own take is that we're not going to end up going back to a 30's style "great depression", nor do I necessarily see the stark future outlined by people like James Howard Kunstler. We're in the midst of a major structural change in society, one fed in great part by the profound changes in information infrastructure and additionally shaped by a growing awareness about the fragility of the underlying ecosystem. The consumer culture of the 20th century is failing, but that doesn't mean that all of a sudden we should all become socialists or communists or cogs in some oligarchical brave new world order.
What it does mean is that we're making it up as we go along. One of the reasons for the original Bretton Woods accords was to attempt to guarantee, as much as possible, the notion of full employment, at the expense of inflating the currency. The reality now is that full time employment, at least in the traditional sense, is breaking down. We need to make some hard decisions about what constitutes a valid standard of living - and what constitutes an excessive one. We need to come to terms with information and reputation as forms of currency, with virtual currencies, and with the degree to which currency reflects value.
All of these things (and many, many more) will ultimately need to be determined as the world adjusts to a new abstraction of currency, and the more that efforts are made to return to an unsustainable status quo, the longer it will take before a true recovery can take place - and the more turbulent society will become.
Future Proof: Tornadoes and Turbulence
When I was sixteen, I saw my first tornadoes. My family had decided to visit some friends in Cheyenne, Wyoming, so we loaded up the van and made the trip from Peoria Illinois, encountering unsettled weather conditions all during the two day trek. As we were unloading our bags, I noticed my father periodically staring up at the sky, which had taken on a peculiar green cast to it. A few minutes passed, the sky became darker and more ominous, then out of the maelstrom one, then two, until finally six twisters came snaking down from the clouds. For nearly half an hour we watched as the tornadoes ran along a couple of ridges, occasionally flattening one house then hoping over the next, until finally the storm lost enough strength and the twisters became wispier and more tentative until they finally faded altogether.
By the end, the twisters had collectively destroyed 200 homes, flipped numerous cars, caused significant damage to the governor's mansion, and threw a commuter plane through the door of an aircraft hangar. It was one of the most destructive tornadic storms to ever hit the state, and gave me a healthy appreciation for the power, majesty and mindless destructiveness of nature.
One of the most interesting facts about tornadoes is also one of the least appreciated. Tornadoes come from thunderstorms - as anyone who has seen the ominous green thunderheads can attest to, but they are not, in fact, part of the the powerful circulating cyclonic cell of hot moist air and cold dry air that make up most thunderstorms. Instead, they arise due to turbulence along the edges of this large rotating system. Thunderstorms can move quickly, and can rotate quickly. As they do so, they drag the air around them, but this drag is uneven ... and is influenced by such factors as the topography of the ground, the overall viscosity of the air and the formation of wind sheers and streams ahead of the storm - in other words, the environment external to the storm itself.
Tornadoes are directly related to the vortices you get when you run your hand through water in a trough or other constrained place - they are islands of temporary stability within an otherwise unstable environment. They also act to siphon off a lot of the potential energy within the storm itself, converting that energy into kinetic energy, which eventually dissipates as drag with the rest of the environment. Once the tornadoes release their energy, this also typically pushes the storm down a level of organization and energy to the point where it can no longer hold the water vapor that it is carrying, which then causes the heavy rains that usually follow such storms as the structure dissipates.
Every system, including systems of abstraction, requires energy of some sort to maintain it. Similarly, every system interacting with those things outside of that system create drag on the system, resulting in turbulence. Turbulence should be seen as the transfer of energy out of a system into the environment, and as such is very closely linked with thermodynamics. This holds as true of software and social structures as it does of physical systems, as long as you understand that in both cases what you are dealing with are systems of nested abstractions.
This doesn't mean that outside of every social structure there's a giant whirlpool or tornado waiting to happen. Rather, it's worth understanding that any system is made up of interacting parts that for the most part have achieved a fairly high degree of internal efficiency. One way of thinking about this is that the system has a certain momentum associated with it - energy and information moves through the system in such a way as to keep the system cohesive.
However, especially at the edges, this energy drags against the outside world, and in so doing, it creates pools of resistance, and counterveiling forces. Normally, such forces are comparatively small, and in many ways can actually contribute to the underlying cohesiveness of the primary system because they create a barrier of insulation against external stimulae or impulses - the turbulent counterflows absorb the attack, dissipating or at least blunting the impact upon the system. One way of thinking about this is that people may have a particular ambivalence about leader or political group, but they fear change from outside more than they do the status quo ("better the devil you know than the one you don't").
However, in the presence of other dynamic systems, sometimes the turbulence that emerges becomes large enough and cohesive enough to became stable in its own right, especially as one particularly stable "whirlpool" merges with another.
A good example of this can be seen in the rise of Open Source software. Microsoft in particular had managed to dominate the software sector by the mid-1980s, and with it the proprietary software model become the accepted mode of operation by the mid-1990s. However, Microsoft also ended up stirring both resentment among other development groups and concern among customers that were afraid of vendor lock-in.
This set up turbulence for Microsoft's "system". Any one piece of that turbulence - Linus Torvald's invention of Linux, the rise of Apache as an increasingly popular browser, the GNU GPL, Sun's releasing of the Star Office code as Open Office, and so forth, individually bled small amounts of energy from Microsoft, but nothing that seriously impeded its own growth. However, each piece of turbulence would interact with others, and after a while a new countervailing system emerged out of that turbulence. A tornado or whirlpool is a cohesive system that draws on the energy of the overall hypercell, and the larger or more powerful the tornado becomes, the more it bleeds off energy from the main cell. Open source soon began to bleed away the proprietary model that Microsoft most clearly embodied at the time, pulling in more developers, more investment, more potential users.
Up to a certain point, the energy entering into a system ends up as more turbulence and more quasi-stable neo-systems, as well as providing the necessary glue for smaller systems to merge into larger ones. However, there's a certain balance here - too much energy into an environment can prove disruptive overall as the turbulence makes it too difficult for new systems to maintain cohesiveness - the turbulence spawned subsystems are disrupted by their own turbulence (in essence, the market is boiling at that point). Too little energy, and you get systemic decay, where the least stable systems fall apart. Typically, transitions from one stage to another of abstraction involve energy exceeding or failing to reach a critical threshold for that system.
From the future analyst's standpoint, then one of the lessons to be learned is that when you look at what appears to be a stable system, look at where it is causing the most turbulence. At the moment, for instance, the whole of desktop computing is being challenged by the cloud, a universe of services that individually may not be a match for the corresponding desktop app, but that collectively are reshaping the programming paradigm dramatically. The traditional world of publishing is under assault from a myriad of social media applications that individually are not that threatening, but which together is forming a cohesive interactive system of its own that has traditional publishing on the ropes. In the near future, centralized power distribution is being challenged not by a single new power source but by a whole spectrum of technologies that each emerged in response to the problems that the existing grid failed to answer, and that collectively are creating a new system that is challenging most of the core assumptions about power distribution that have been considered "holy writ" since the 1920s.
In other words, when looking toward investing (whether time, money, career involvement and so often) look toward areas where countervailing technologies are emerging, and pay special attention to those that seem to develop easy synergies with other complementary technologies. In the energy sector, for instance, solar energy (photoVoltaics) including beamed microwave energy, geothermal pumps, intelligent energy routers, hypercapacitors, hybrid automobiles, maglev trains, recycled heat systems and wind farms together make up a cohesive system of technologies that are complementary to one another, and that collectively make up a self-reinforcing system. Individually, they won't replace the existing carbon-driven fuel system, but collectively, they may very well.
By the end, the twisters had collectively destroyed 200 homes, flipped numerous cars, caused significant damage to the governor's mansion, and threw a commuter plane through the door of an aircraft hangar. It was one of the most destructive tornadic storms to ever hit the state, and gave me a healthy appreciation for the power, majesty and mindless destructiveness of nature.
One of the most interesting facts about tornadoes is also one of the least appreciated. Tornadoes come from thunderstorms - as anyone who has seen the ominous green thunderheads can attest to, but they are not, in fact, part of the the powerful circulating cyclonic cell of hot moist air and cold dry air that make up most thunderstorms. Instead, they arise due to turbulence along the edges of this large rotating system. Thunderstorms can move quickly, and can rotate quickly. As they do so, they drag the air around them, but this drag is uneven ... and is influenced by such factors as the topography of the ground, the overall viscosity of the air and the formation of wind sheers and streams ahead of the storm - in other words, the environment external to the storm itself.
Tornadoes are directly related to the vortices you get when you run your hand through water in a trough or other constrained place - they are islands of temporary stability within an otherwise unstable environment. They also act to siphon off a lot of the potential energy within the storm itself, converting that energy into kinetic energy, which eventually dissipates as drag with the rest of the environment. Once the tornadoes release their energy, this also typically pushes the storm down a level of organization and energy to the point where it can no longer hold the water vapor that it is carrying, which then causes the heavy rains that usually follow such storms as the structure dissipates.
Every system, including systems of abstraction, requires energy of some sort to maintain it. Similarly, every system interacting with those things outside of that system create drag on the system, resulting in turbulence. Turbulence should be seen as the transfer of energy out of a system into the environment, and as such is very closely linked with thermodynamics. This holds as true of software and social structures as it does of physical systems, as long as you understand that in both cases what you are dealing with are systems of nested abstractions.
This doesn't mean that outside of every social structure there's a giant whirlpool or tornado waiting to happen. Rather, it's worth understanding that any system is made up of interacting parts that for the most part have achieved a fairly high degree of internal efficiency. One way of thinking about this is that the system has a certain momentum associated with it - energy and information moves through the system in such a way as to keep the system cohesive.
However, especially at the edges, this energy drags against the outside world, and in so doing, it creates pools of resistance, and counterveiling forces. Normally, such forces are comparatively small, and in many ways can actually contribute to the underlying cohesiveness of the primary system because they create a barrier of insulation against external stimulae or impulses - the turbulent counterflows absorb the attack, dissipating or at least blunting the impact upon the system. One way of thinking about this is that people may have a particular ambivalence about leader or political group, but they fear change from outside more than they do the status quo ("better the devil you know than the one you don't").
However, in the presence of other dynamic systems, sometimes the turbulence that emerges becomes large enough and cohesive enough to became stable in its own right, especially as one particularly stable "whirlpool" merges with another.
A good example of this can be seen in the rise of Open Source software. Microsoft in particular had managed to dominate the software sector by the mid-1980s, and with it the proprietary software model become the accepted mode of operation by the mid-1990s. However, Microsoft also ended up stirring both resentment among other development groups and concern among customers that were afraid of vendor lock-in.
This set up turbulence for Microsoft's "system". Any one piece of that turbulence - Linus Torvald's invention of Linux, the rise of Apache as an increasingly popular browser, the GNU GPL, Sun's releasing of the Star Office code as Open Office, and so forth, individually bled small amounts of energy from Microsoft, but nothing that seriously impeded its own growth. However, each piece of turbulence would interact with others, and after a while a new countervailing system emerged out of that turbulence. A tornado or whirlpool is a cohesive system that draws on the energy of the overall hypercell, and the larger or more powerful the tornado becomes, the more it bleeds off energy from the main cell. Open source soon began to bleed away the proprietary model that Microsoft most clearly embodied at the time, pulling in more developers, more investment, more potential users.
Up to a certain point, the energy entering into a system ends up as more turbulence and more quasi-stable neo-systems, as well as providing the necessary glue for smaller systems to merge into larger ones. However, there's a certain balance here - too much energy into an environment can prove disruptive overall as the turbulence makes it too difficult for new systems to maintain cohesiveness - the turbulence spawned subsystems are disrupted by their own turbulence (in essence, the market is boiling at that point). Too little energy, and you get systemic decay, where the least stable systems fall apart. Typically, transitions from one stage to another of abstraction involve energy exceeding or failing to reach a critical threshold for that system.
From the future analyst's standpoint, then one of the lessons to be learned is that when you look at what appears to be a stable system, look at where it is causing the most turbulence. At the moment, for instance, the whole of desktop computing is being challenged by the cloud, a universe of services that individually may not be a match for the corresponding desktop app, but that collectively are reshaping the programming paradigm dramatically. The traditional world of publishing is under assault from a myriad of social media applications that individually are not that threatening, but which together is forming a cohesive interactive system of its own that has traditional publishing on the ropes. In the near future, centralized power distribution is being challenged not by a single new power source but by a whole spectrum of technologies that each emerged in response to the problems that the existing grid failed to answer, and that collectively are creating a new system that is challenging most of the core assumptions about power distribution that have been considered "holy writ" since the 1920s.
In other words, when looking toward investing (whether time, money, career involvement and so often) look toward areas where countervailing technologies are emerging, and pay special attention to those that seem to develop easy synergies with other complementary technologies. In the energy sector, for instance, solar energy (photoVoltaics) including beamed microwave energy, geothermal pumps, intelligent energy routers, hypercapacitors, hybrid automobiles, maglev trains, recycled heat systems and wind farms together make up a cohesive system of technologies that are complementary to one another, and that collectively make up a self-reinforcing system. Individually, they won't replace the existing carbon-driven fuel system, but collectively, they may very well.
Future Proof: From Word of Mouth to the Open Book
We are a talkative species.
If you take a look at the bulk of inventions produced in the last 10,000 years, they fall into four broad swaths - better ways to move things (and ourselves), better ways to protect ourselves, better ways to feed ourselves, and better ways to communicate with one another. Communication with one another is such a strong imperative that one of the harshest punishments that we can inflict on people is to deprive them of that communication - to put them in solitary confinement, to exile them to the wilderness, to "ex-communicate" them. In many primitive cultures, should a person commit manslaughter or some similar crime and get caught, they became "dead" - not killed in retaliation, but made a non-person that others were not permitted to acknowledge or speak to.
Because of that importance, how we communicate is a very significant thread for the future analyst to watch. The predominant communication channels that a culture uses will dictate its organizational structure, more so than any other factor. In hunter-gatherer societies, communication (beyond one-to-one local communication) is typically done communally, within groups. For formal communications - when decisions need to be made, for instance, or in the recitation of (and addition to) a community's memory structure - the role of speaker was typically formalized - the speaker was the one who held a given totem, or given the floor. Communication range was also limited to the speed at which a man or woman could walk or run.
Additionally, these early cultures typically made use of a living long term memory, usually via an oral "song" that kept intact the important stories, historical figures, legends, and constraints of the group. One of the fascinating things that neurologists have recently discovered is that musical memories are stored in a very different way than spoken memories are in the brain, and that such memories are typically retained much longer and with better fidelity (in great part because these memories are actually retained in the hippocampus and cerebrum rather than the cerebellum). Kinesthetic memories similarly tend to be retained far better as well. This may be why most people within these cultures were taught oral history as a combination of chant and dance - the body actually "remembers" this information at a deeper level than it retains speech.
Nomadic cultures made an important discovery - horses not only made for good food, but if you could manage to sneak up on a horse, it was possible to actually ride it. At first such rides were probably just short enough to put a spear in it, but after a while some genius realized that if they could actually control horses, they could go far faster than they could on foot. Beyond the obvious advantages from a food hunting perspective, one additional advantage was that horse-borne messengers could communicate far more effectively with people at greater distances. This made it possible to coordinate actions, and was in fact one of the first instances of hierarchical military structures - a warlord with one force could communicate effectively with additional forces under his captains, who could in turn coordinate their forces with lieutenants.
Agrarian communities developed a somewhat more defensive structure, designed primarily to keep these same nomadic cultures out. but also because the communication requirements of agriculture are broader. Farming is a chancy business - you're forced into defending a turf of land - running away isn't really an option unless you were willing to starve - so you needed to have ways of coordinating the troops (again, a hierarchical structure). However, you also needed to manage inventories, to determine how much of a given crop you needed to replant as seed, to set prices on the grains and other goods, and, ultimately how much to tax people for the services in order to make all of this possible.
As discussed in an earlier column, what this amounted to was the process of shifting abstraction levels. This can be seen in mythology. Tribal mythologies are very animistic - every grove, brook, wind and cave had its attendant spirit, but for the most part, those spirits simply existed - you acknowledged their existence and occasionally bribed them in order to insure success in your ventures, but there was little in the way of hierarchy.
Most agrarian societies, on the other hand, very quickly established hierarchical models - supreme gods, and then secondary and tertiary gods - that reflected the growing power of centralization in human hierarchies. The warlord became the god incarnate, and power became concentrated in bureaucracies - priestly castes, military castes, merchant castes.
It's perhaps not thus surprising that writing only came about with this shift in complexity; tribal societies have no need for writing, but agrarian ones have a large number of such needs. The emergence of writing was a radical change in human society - first because it meant that humans didn't need to expend as much of their thought processes on rote memorization, and likely for the first time could start thinking about information in a way that wasn't tied specifically with a generational oral record.
Indeed, one interesting speculation about this is that "spoken" language may actually only have emerged about the time that writing began, and that most languages prior to that were likely sung rather than spoken. One possible indication of this is to look at those cultures in the last hundred years where there was no formal written language and compare what happens before and after they are exposed to writing. Typically, children from these cultures who are then exposed growing up with writing tend to have far worse rote verbal memorization capability, though they have far better analytic ability.
It's worth noting that reading and writing also cause a significant change in the communication structures of a society. Writing is an asynchronous operation - information placed in writing does not need the speaker of the information - you could write "letters" that allowed (slow) communication between people who were not geographically close.
Additionally, and more subtly, it becomes possible to scan written information in a way that's simply not possible with speech. This in turn let to breaking blocks of narrative into smaller, more digestable portions, a process that almost invariably occurs as new media emerge. The earliest written narratives were literally epic in scale - they represented a story that might be told over several hours in an evening, because they were almost certainly based upon earlier oral stories. However, as writing became more sophisticated, it began to develop a recursive hierarchical structure of its own as people began to master the nuances of committing symbolic representations of meaning to a physical medium.
Most early literate cultures developed a "bible" of some sort, a written work usually attributed to divine provenance, that encoded the mythos (the legends, accepted history, genealogies and so forth) and ethos (the ethical rules or laws of that people that described what was acceptable and unacceptable within the society) of that culture. The Hebrew Torah, the Islamic Talmud, the Christian Old and New Testaments, the Hindu Mahabharita and Ramayana, all of these "books" emerged in cultures that had established active literary traditions, and more had them long enough to accumulate a body of related "subordinate books". Indeed, by some estimates the "Bible" alone represents the political and cultural selection of between 80 and 110 different books, depending upon the particular sub-branch of Christianity or Judaism, with another few dozen books that were in one version or another over the years but have been dropped.
Cultures of the Book illustrate how powerful the advent of writing was. With a single cultural canon, mores and ethics can be established independent of geography. For instance, the Old Testament represents the ethos and history of a desert-based culture. Desert cultures are typified by a nomadic existence, a male-dominated society where women were usually treated as chattel, a strong sense of hierarchy, a low premium placed on the value of human life, and a very competitive warrior ethos. Even the New Testament, which may have been influenced by the Dionysian Mysteries so prevalent in Asia Minor as the time, is still filtered through this desert culture filter.
Yet because of the "authority" that the book has compared to more transient oral traditions, Christianity was carried all the way to the wilds of Northern Europe, England, Scotland, Ireland and Wales, which previously had a forest culture structure - far more gender equality and egalitarianism, strong oral traditions but only very crude literary ones, a far higher sanctity of life, a much stronger clan or family basis, and so on. It's perhaps not surprising that so many of the heresies that the Catholic Church eventually had to stamp out come mostly from the north as a consequence, as there was a certain cultural schizophrenia that occurred as a fairly alien cultural outlook became overlaid upon a very different foundation.
The migration of book production to the north also brought about the next major evolution in communication - the shift from papyrus based scrolls to vellum-based books. Papyrus came from desert reeds, and thus, over time, became increasingly brittle - and usually could support only a minimal amount of pressure before it crumbled - thus papyrus scrolled around two rods, casette-tape style, was the most effective way to store it.
Vellum, on the other hand, was made from lambskin, which was far more plentiful in the north. Because of the curing process, vellum was remarkably resistent to fading or crumbling (indeed, many vellum books survive to the present day in very good condition. However, lambskin was, by its very nature, much more limited in dimension, which eventually led to using vellum leaves that were originally stacked together, then later sewn together, into a new arranged where the content was displayed in pages.
The introduction of new communication channels are quite frequently accompanied by significant upheavals in cultures, especially if the new channels are markedly superior to the old. The first Western printed work was the Gutenberg bible, produced in 1439. Printing was quickly picked up and improved by Italian Aldus Manutius in the mid 1450s, and in England by William Caxton and others in the 1470s.
One of Caxton's most significant innovation was actually a cost-saving measure - rather than a printer using a single folio page for a book (which resulted in very large books), he subdivided the folio page into quartos (quarters), and figured out how to orient the page so that such quartos could be more efficiently printed and bound. This essentially meant that you could produce four times as many "books" with the same effort, and it also represented the shift to the first truly portable book since the innovation of the scroll, which had the effect of lighting a fire under the nascent publishing industry.
This technology change was likely one of the major factors of the Reformation and the rise of Protestantism. Prior to this period, most bibles were owned only by churches or the very wealthy/powerful. With Caxton books (and a subsequent shift away from expensive vellum to cheaper cloth and wood pulp pages), bibles (and many other books) now moved into the realm of being affordable (albeit still expensive) for the average middle-class burgher or shop-keeper.
Martin Luther's innovation (and its worthwhile understanding that it was an innovation) was to translate the contents of these bibles from Ecclesiastical Latin into contemporary German. This has the immediate effect of letting ordinary people understand and interpret what had been, up until then, what had only been disseminated by priests and clergy. In modern parlance, Luther disintermediated the priests. This had the fairly immediate effect of subverting the legitimacy of the Catholic Church (especially in the North), and the rise of a new class of priesthood who adapted to the new technologies by shifting from the role of arbiters to the role of guides and interpreters.
Of course, the established order did not go quietly into that good night - it seldom does. Once a given communication channel stabilizes, a social order will tend to evolve around that communication channel, to become invested in it. This is especially true in those situations where the communication system is hierarchical and it meshes with a hierarchical mindset. Once you introduce a technology that had previously been available only to the gate keepers to everyone else - whether affordable books in the language that people spoke or low-cost publishing systems that bypass the established news providers, then the value of the existing services plummet, while those that master the production within the new media are able to establish new value measures.
What's more, invariably the first uses of a new medium are to recreate the dominant pattern of the old. The vast majority of all of the new works produced during the mid-15th century were bibles. Of course, this undermined the scriptora throughout Europe - a single bible might take a team of monks the better part of a decade to create, whereas while it may take only a few months to set and print a bible using a press, and once one bible was printed, dozens more could be printed until the first wooden type blocks wore out. Once people began experimenting with molten lead dies, this meant that hundreds of such books could be created.
Yet the real changes - the truly political ones, came as printers began to realize that while the demand for Latin bibles was high, it wasn't infinite, and eventually they began to turn to examine other uses. The translation of bibles into contemporary languages (the vulgate, or common, versions) became an act of defiance of the existing religious establishment - as well as a means of controlling the message by local kings and rulers trying to break the stranglehold that churches had held on their lands for years.
It also meant that other books were soon also published. Histories, books of poetry, philosophical tracts, and similar works emerged around this time, as the medium made such works economical to produce, and in so doing laid the groundwork for the birth of most forms of contemporary literature. In many ways, publishing in the period from 1470 to about the 1530 or so was as dynamic a period of time for innovation as the Internet would be five hundred years later. By the end of this period, the Reformation would be sweeping Northern Europe just as the Renaissance was sweeping southern Europe. The church, seemingly dominant and invincible in 1450, would be torn by strife and dissension as a thousand year old empire disintegrated.
There are a number of lessons to be learned here. Changing communication channels can have huge impacts upon society, something that we're only just really beginning to face today. It is a mistake to see the world of 2020 as being much like today, because the very structures that formed the foundation of the last couple of centuries is now being torn asunder in very much the same way. More on this in the second part of this blog post.
If you take a look at the bulk of inventions produced in the last 10,000 years, they fall into four broad swaths - better ways to move things (and ourselves), better ways to protect ourselves, better ways to feed ourselves, and better ways to communicate with one another. Communication with one another is such a strong imperative that one of the harshest punishments that we can inflict on people is to deprive them of that communication - to put them in solitary confinement, to exile them to the wilderness, to "ex-communicate" them. In many primitive cultures, should a person commit manslaughter or some similar crime and get caught, they became "dead" - not killed in retaliation, but made a non-person that others were not permitted to acknowledge or speak to.
Because of that importance, how we communicate is a very significant thread for the future analyst to watch. The predominant communication channels that a culture uses will dictate its organizational structure, more so than any other factor. In hunter-gatherer societies, communication (beyond one-to-one local communication) is typically done communally, within groups. For formal communications - when decisions need to be made, for instance, or in the recitation of (and addition to) a community's memory structure - the role of speaker was typically formalized - the speaker was the one who held a given totem, or given the floor. Communication range was also limited to the speed at which a man or woman could walk or run.
Additionally, these early cultures typically made use of a living long term memory, usually via an oral "song" that kept intact the important stories, historical figures, legends, and constraints of the group. One of the fascinating things that neurologists have recently discovered is that musical memories are stored in a very different way than spoken memories are in the brain, and that such memories are typically retained much longer and with better fidelity (in great part because these memories are actually retained in the hippocampus and cerebrum rather than the cerebellum). Kinesthetic memories similarly tend to be retained far better as well. This may be why most people within these cultures were taught oral history as a combination of chant and dance - the body actually "remembers" this information at a deeper level than it retains speech.
Nomadic cultures made an important discovery - horses not only made for good food, but if you could manage to sneak up on a horse, it was possible to actually ride it. At first such rides were probably just short enough to put a spear in it, but after a while some genius realized that if they could actually control horses, they could go far faster than they could on foot. Beyond the obvious advantages from a food hunting perspective, one additional advantage was that horse-borne messengers could communicate far more effectively with people at greater distances. This made it possible to coordinate actions, and was in fact one of the first instances of hierarchical military structures - a warlord with one force could communicate effectively with additional forces under his captains, who could in turn coordinate their forces with lieutenants.
Agrarian communities developed a somewhat more defensive structure, designed primarily to keep these same nomadic cultures out. but also because the communication requirements of agriculture are broader. Farming is a chancy business - you're forced into defending a turf of land - running away isn't really an option unless you were willing to starve - so you needed to have ways of coordinating the troops (again, a hierarchical structure). However, you also needed to manage inventories, to determine how much of a given crop you needed to replant as seed, to set prices on the grains and other goods, and, ultimately how much to tax people for the services in order to make all of this possible.
As discussed in an earlier column, what this amounted to was the process of shifting abstraction levels. This can be seen in mythology. Tribal mythologies are very animistic - every grove, brook, wind and cave had its attendant spirit, but for the most part, those spirits simply existed - you acknowledged their existence and occasionally bribed them in order to insure success in your ventures, but there was little in the way of hierarchy.
Most agrarian societies, on the other hand, very quickly established hierarchical models - supreme gods, and then secondary and tertiary gods - that reflected the growing power of centralization in human hierarchies. The warlord became the god incarnate, and power became concentrated in bureaucracies - priestly castes, military castes, merchant castes.
It's perhaps not thus surprising that writing only came about with this shift in complexity; tribal societies have no need for writing, but agrarian ones have a large number of such needs. The emergence of writing was a radical change in human society - first because it meant that humans didn't need to expend as much of their thought processes on rote memorization, and likely for the first time could start thinking about information in a way that wasn't tied specifically with a generational oral record.
Indeed, one interesting speculation about this is that "spoken" language may actually only have emerged about the time that writing began, and that most languages prior to that were likely sung rather than spoken. One possible indication of this is to look at those cultures in the last hundred years where there was no formal written language and compare what happens before and after they are exposed to writing. Typically, children from these cultures who are then exposed growing up with writing tend to have far worse rote verbal memorization capability, though they have far better analytic ability.
It's worth noting that reading and writing also cause a significant change in the communication structures of a society. Writing is an asynchronous operation - information placed in writing does not need the speaker of the information - you could write "letters" that allowed (slow) communication between people who were not geographically close.
Additionally, and more subtly, it becomes possible to scan written information in a way that's simply not possible with speech. This in turn let to breaking blocks of narrative into smaller, more digestable portions, a process that almost invariably occurs as new media emerge. The earliest written narratives were literally epic in scale - they represented a story that might be told over several hours in an evening, because they were almost certainly based upon earlier oral stories. However, as writing became more sophisticated, it began to develop a recursive hierarchical structure of its own as people began to master the nuances of committing symbolic representations of meaning to a physical medium.
Most early literate cultures developed a "bible" of some sort, a written work usually attributed to divine provenance, that encoded the mythos (the legends, accepted history, genealogies and so forth) and ethos (the ethical rules or laws of that people that described what was acceptable and unacceptable within the society) of that culture. The Hebrew Torah, the Islamic Talmud, the Christian Old and New Testaments, the Hindu Mahabharita and Ramayana, all of these "books" emerged in cultures that had established active literary traditions, and more had them long enough to accumulate a body of related "subordinate books". Indeed, by some estimates the "Bible" alone represents the political and cultural selection of between 80 and 110 different books, depending upon the particular sub-branch of Christianity or Judaism, with another few dozen books that were in one version or another over the years but have been dropped.
Cultures of the Book illustrate how powerful the advent of writing was. With a single cultural canon, mores and ethics can be established independent of geography. For instance, the Old Testament represents the ethos and history of a desert-based culture. Desert cultures are typified by a nomadic existence, a male-dominated society where women were usually treated as chattel, a strong sense of hierarchy, a low premium placed on the value of human life, and a very competitive warrior ethos. Even the New Testament, which may have been influenced by the Dionysian Mysteries so prevalent in Asia Minor as the time, is still filtered through this desert culture filter.
Yet because of the "authority" that the book has compared to more transient oral traditions, Christianity was carried all the way to the wilds of Northern Europe, England, Scotland, Ireland and Wales, which previously had a forest culture structure - far more gender equality and egalitarianism, strong oral traditions but only very crude literary ones, a far higher sanctity of life, a much stronger clan or family basis, and so on. It's perhaps not surprising that so many of the heresies that the Catholic Church eventually had to stamp out come mostly from the north as a consequence, as there was a certain cultural schizophrenia that occurred as a fairly alien cultural outlook became overlaid upon a very different foundation.
The migration of book production to the north also brought about the next major evolution in communication - the shift from papyrus based scrolls to vellum-based books. Papyrus came from desert reeds, and thus, over time, became increasingly brittle - and usually could support only a minimal amount of pressure before it crumbled - thus papyrus scrolled around two rods, casette-tape style, was the most effective way to store it.
Vellum, on the other hand, was made from lambskin, which was far more plentiful in the north. Because of the curing process, vellum was remarkably resistent to fading or crumbling (indeed, many vellum books survive to the present day in very good condition. However, lambskin was, by its very nature, much more limited in dimension, which eventually led to using vellum leaves that were originally stacked together, then later sewn together, into a new arranged where the content was displayed in pages.
The introduction of new communication channels are quite frequently accompanied by significant upheavals in cultures, especially if the new channels are markedly superior to the old. The first Western printed work was the Gutenberg bible, produced in 1439. Printing was quickly picked up and improved by Italian Aldus Manutius in the mid 1450s, and in England by William Caxton and others in the 1470s.
One of Caxton's most significant innovation was actually a cost-saving measure - rather than a printer using a single folio page for a book (which resulted in very large books), he subdivided the folio page into quartos (quarters), and figured out how to orient the page so that such quartos could be more efficiently printed and bound. This essentially meant that you could produce four times as many "books" with the same effort, and it also represented the shift to the first truly portable book since the innovation of the scroll, which had the effect of lighting a fire under the nascent publishing industry.
This technology change was likely one of the major factors of the Reformation and the rise of Protestantism. Prior to this period, most bibles were owned only by churches or the very wealthy/powerful. With Caxton books (and a subsequent shift away from expensive vellum to cheaper cloth and wood pulp pages), bibles (and many other books) now moved into the realm of being affordable (albeit still expensive) for the average middle-class burgher or shop-keeper.
Martin Luther's innovation (and its worthwhile understanding that it was an innovation) was to translate the contents of these bibles from Ecclesiastical Latin into contemporary German. This has the immediate effect of letting ordinary people understand and interpret what had been, up until then, what had only been disseminated by priests and clergy. In modern parlance, Luther disintermediated the priests. This had the fairly immediate effect of subverting the legitimacy of the Catholic Church (especially in the North), and the rise of a new class of priesthood who adapted to the new technologies by shifting from the role of arbiters to the role of guides and interpreters.
Of course, the established order did not go quietly into that good night - it seldom does. Once a given communication channel stabilizes, a social order will tend to evolve around that communication channel, to become invested in it. This is especially true in those situations where the communication system is hierarchical and it meshes with a hierarchical mindset. Once you introduce a technology that had previously been available only to the gate keepers to everyone else - whether affordable books in the language that people spoke or low-cost publishing systems that bypass the established news providers, then the value of the existing services plummet, while those that master the production within the new media are able to establish new value measures.
What's more, invariably the first uses of a new medium are to recreate the dominant pattern of the old. The vast majority of all of the new works produced during the mid-15th century were bibles. Of course, this undermined the scriptora throughout Europe - a single bible might take a team of monks the better part of a decade to create, whereas while it may take only a few months to set and print a bible using a press, and once one bible was printed, dozens more could be printed until the first wooden type blocks wore out. Once people began experimenting with molten lead dies, this meant that hundreds of such books could be created.
Yet the real changes - the truly political ones, came as printers began to realize that while the demand for Latin bibles was high, it wasn't infinite, and eventually they began to turn to examine other uses. The translation of bibles into contemporary languages (the vulgate, or common, versions) became an act of defiance of the existing religious establishment - as well as a means of controlling the message by local kings and rulers trying to break the stranglehold that churches had held on their lands for years.
It also meant that other books were soon also published. Histories, books of poetry, philosophical tracts, and similar works emerged around this time, as the medium made such works economical to produce, and in so doing laid the groundwork for the birth of most forms of contemporary literature. In many ways, publishing in the period from 1470 to about the 1530 or so was as dynamic a period of time for innovation as the Internet would be five hundred years later. By the end of this period, the Reformation would be sweeping Northern Europe just as the Renaissance was sweeping southern Europe. The church, seemingly dominant and invincible in 1450, would be torn by strife and dissension as a thousand year old empire disintegrated.
There are a number of lessons to be learned here. Changing communication channels can have huge impacts upon society, something that we're only just really beginning to face today. It is a mistake to see the world of 2020 as being much like today, because the very structures that formed the foundation of the last couple of centuries is now being torn asunder in very much the same way. More on this in the second part of this blog post.
Future Proof:Catching Black Swans
Recently an earthquake hit the town of L'Aquila in Italy, collapsing a number of buildings, killing more than a hundred people and leaving several thousands stranded. Last year Hurricane Ike slammed into Galveston, Texas, leaving many parts of the coastal community submerged. In the news of late have been the "one-time write-offs" that banks are taking because of the extraordinary credit crisis.
The one thing that all three of these things have in common is that they appear to be "Black Swans", a term that economist and mathematician Nassim Taleb used to describe events that seem wildly improbable, yet nonetheless do occasionally happen. The term derives from the saying that, as all swans are white, the term "as rare as a black swan" means something that is so improbable that there is no way that it could happen.. Of course, eventually a species of black swan was eventually discovered in Australia, which was Taleb's point - beware of assuming that simply because events are rare, they will never happen - and when they do happen, they tend to cluster.
To understand why black swans are not as rare as one may think (and to anticipate their appearance), it's worth going back to the abstraction model proposed a couple of posts ago. Almost all complex systems exist at multiple levels of abstraction. One way of thinking about this is to envision the human body as being made up of subsystems - organs - each of which in turn are made up of tissues. which are in turn made up cells. A person in peak health has all of her subsystems (organs) operating more or less optimally.
However, one day a carcinogenic agent enters the body - tobacco smoke, asbestos, environmental steroids, the list is rather depressingly long. A cell in her breast mutates in the presence of the carcinogen, losing the ability to "shut off and die", which most cells do after they've reached a point where their internal mechanisms are no longer sufficient to do the job efficiently. The cancer spreads, every time the cell would undergo normal meiosis. If the woman is lucky, a routine examination would find this cancer when it is fairly small, at which point the best solution is to remove the cancerous tissue.
If the woman is unlucky, the cancer would grow until it found a conduit (typically a lymph node or a blood vessel). Cancer cells that broke free from the mass would be transported by the conduit until it ends up somewhere else in the body, at this point it would attach itself to other tissue and continue spreading. The cancer cells crowd out other cells, choking off access to blood vessels or waste channels, and other cells either become cancerous in turn or they become necrotic - dying but not being removed by the body's defenses. The woman becomes tired more easily as energy that would normally be going to maintenance of the body is increasingly co-opted by the cancer cells. Tissue becomes tender and inflamed, and pain caused by cancer cells crowding in on nerve endings becomes more endemic.
If the cancer spreads to the lungs, then breathing becomes more difficult and becomes an emphysema. If it spreads into the lymph system then the woman has more trouble fighting off infections, and becomes sicker more often. If it spreads into the bone then normal stresses may cause the bone to snap.
The broken bone is a black swan event - it seems unlikely that a bone would normally break under typical stress actions, but in point of fact, this isn't a typical stress action. The system has been compromised, and the cancer has spread out in a spider-web like fashion through much of the body. An aggressive fight against the cancer by irradiating it or using poisons (chemotheraphy) may be able to remove the tissue, but typically it does so by further weakening the ability of the body to function.
The body does not die because of the cancer. Instead, the cancer causes each system in turn to become less efficient, and ultimately to fail because it can't get the energy necessary to continue. Once one organ fails, it increases the likelihood that other systems that are dependent upon that organ will also fail. The unfortunate woman dies of system failure.
This rather detailed and morbid description still serves as a metaphor for other systems. Complex systems are made up of simpler ones, which are made up of simpler ones still. Corruption usually occurs fairly far down in a given system, but most complex systems are generally fairly effective at catching and eliminating the obvious points of corruption (or worst case scenario, sequestering them off in isolation) . Corruption here simply means a subversion of the normal functions of that particular abstraction - an bridge inspector signing off an inspection report with only a peremptory check of the bridge, an employee stealing supplies from the supply cabinets, a student cheating on an exam or a businessman cheating on his taxes, a radical publishing seditious tracts, to name a few of the many, many examples.
Physical system analogs would be areas of snowfall on a mountain that gets more sun than normal but is also supporting other areas of snowfall, a particularly warm, dry, dust-laden wind coming off the Sahara into the Atlantic Ocean, the gradual creep of increasing temperatures in an area that hasn't faced them pushing flowering and bee pollenation behaviors slowly out of synch.
The point about most such corruption (i.e., regions of potential instability) is that, for systems in quasi-equilibrium, the corruption usually has comparatively little impact over the short term. Most systems have regulating mechanisms that tend to correct for such instabilities - the office manager notices that one department is using more supplies than the other, and a bit of surveillance reveals that one employee is using dramatically more than he should be. At that point, the employee is summarily fired, and a new employee hired to replace him, and the message is made clear - you steal, you're gone. This tends to move the system back into equilibrium.
The regulation and action is not a normal event - it is only undertaken when corruption is noticed. It's a small "collapse", one that may result in some disruption of activities and hence impact the efficiency of the abstraction - and for the employee it results in a significant disruption from the way things were. However, such feedback cycles normally keep the system relatively stable.
However, over time, the corruption can become more endemic, and at a higher level of abstraction. The managing bridge inspector is lax in checking on reports, and the inspectors under him avoid looking at those places on the bridge that are awkward to get to or would require getting especially dirty, the comptroller in a company works with one or two accounts to falsify the books, the teacher at a university starts accepting bribes and sexual favors for grades, a company provides campaign donations to a politician in order to give them a tax break or special legislative consideration.
Note in this case that there are two levels of abstraction involved in all of these scenarios. Generally the role of a manager is to act as a governor or regulator on the actions of others, to provide negative (damping) feedback to minimize corruption in a system. When that feedback is subverted, it amplifies the corruption rather than reducing it, and it makes it increasingly likely that the feedback will start to compromise the stability of the abstraction layer.
One of the more interesting phenomena that takes place in systems of abstraction is the paradox that the longer a system remains in equilibrium, the more likely that it will become unstable. In order to understand why, consider that most corrective feedback occurs only after a problem has reached a crisis point - the office manager finds that supplies she just ordered are gone, and she can't think of any legitimate reason why they would be. As she is responsible for her budget, she knows that she has less lattitude if excess pilferage is reducing her budget (and that she could face "corrective action" if such thefts continue to be unexplained.
However, as the organization gets larger, the office manager has more responsibilities, and tracking down pilferage drops down the list. The attitude begins to form that office supplies are fair game, and people begin more inclined to take supplies whether they need them or not - and those office supplies begin to move towards bigger ticket ideas like computers and projectors. Expense accounts start to become padded, and pretty soon begin to become a significant part of a person's income. Eventually the amounts begin to become high enough that it impacts the bottom of the line of the company, particularly if the comptroller and his friends in accounting are in on it (getting kickbacks for equipment that's disappearing).
What makes this worse is that it has gone from being an isolated instance to becoming pervasive and endemic. You can't fire everyone without bringing the company to its knees. Eventually you are forced to fire the comptroller, establish a new-tight accounting system for all internal goods and services, alienate a number of your employees who had come to see the office supplies as a right, and then spend several months searching for a new accounting team.
Stability breeds complacency, which breeds instability. Hyman Minsky, an economist in the 1960s, laid out this hypothesis for financial systems, but it holds in most complex multi-layered abstraction systems. Deregulation of the banking industry, low interest rates on the part of the Federal Reserve and a push towards home-ownership in the early 2000s meant that bankers could make higher risk mortgage loans to increasingly unqualified buyers then sell these loans to other financial institutions. These financial companies would combine these mortgages in novel (and dangerous) ways and sell them as financial vehicles to investors. The investors would then use these securities as collateral to build increasingly unsustainable leverages, while insurance companies sold "black swan" insurance that they never expected to pay off in order to make these securities palatable to accountants. Meanwhile, the real estate agents worked with the appraisal firms and builders in order to get the largest payback in fees, and homeowners in turn found themselves forced to take out ever larger loans for the same properties.
Low initial rates on loans were reset after a specific period to a much higher rate, and people began to fall behind on their payments, in time, the cascade of defaults and jungle mail cascaded through the system. The rapidly receding value of these assets caused a Minsky Moment in September 2009, as a key investment bank, Lehman Brothers, was allowed to go bankrupt. Because of the unwinding of the positions that Lehman had held, this created the financial equivalent of a heart attack as credit disappeared from the market overnight.
Starved for credit, companies could no longer sustain regular payroll, watched their energy supply (cash inflow) dry up as consumers pulled back abruptly in spending and soon were forced into rapid liquidation. Abstractions were unwound as energy (in the form of credit) disappeared from the system. Unemployment shot up as millions of people were forced out of work, accelerating the crisis, while attempts to recapitalize the banks have so far fallen short of solving the systemic problems.
Instabilities - turbulence - disrupted each layer of abstraction. This process is still ongoing, and will likely take one to two more years in order for the turbulence to dissipate to a level that new structures can start to form again, at a lower energy level.
The lesson for futurists - first, disruptions do not happen without reason. Most disruptions occur when a stable (complacent) abstraction becomes corrupt and brittle. In a recently stable scenario, external stimulae impinge upon the system all the time, but the system is resilient enough to ward them off. As systems become more mature they become more fragile, and their ability to adapt becomes increasingly compromised. Eventually, a stimulus occurs that causes a breakdown of a particular part of the system, and the system has become so interdependent that this shock then gets passed on, destructively, to other subsystems. The subsequent loss of system integrity can prove fatal, and the system will unwind to a less energy intensive state as energy bleeds into turbulence.
In general, you cannot predict what the shock will be that will ultimately send a system over the edge, and its futile to try. What's important is to examine whether, given a shock, a system is resilient enough to absorb it, or whether the shock will prove devastating. The role of both analysts (who are futurists) and regulators is to do the research to determine what organizations are too fragile, and then to examine the consequences that a shock to the system will have.
One final note here: a good place to look are organizations that are deemed "to big to fail". Most likely once a company (or a government) reaches that point, it is definitely overdue for an earthquake.
The one thing that all three of these things have in common is that they appear to be "Black Swans", a term that economist and mathematician Nassim Taleb used to describe events that seem wildly improbable, yet nonetheless do occasionally happen. The term derives from the saying that, as all swans are white, the term "as rare as a black swan" means something that is so improbable that there is no way that it could happen.. Of course, eventually a species of black swan was eventually discovered in Australia, which was Taleb's point - beware of assuming that simply because events are rare, they will never happen - and when they do happen, they tend to cluster.
To understand why black swans are not as rare as one may think (and to anticipate their appearance), it's worth going back to the abstraction model proposed a couple of posts ago. Almost all complex systems exist at multiple levels of abstraction. One way of thinking about this is to envision the human body as being made up of subsystems - organs - each of which in turn are made up of tissues. which are in turn made up cells. A person in peak health has all of her subsystems (organs) operating more or less optimally.However, one day a carcinogenic agent enters the body - tobacco smoke, asbestos, environmental steroids, the list is rather depressingly long. A cell in her breast mutates in the presence of the carcinogen, losing the ability to "shut off and die", which most cells do after they've reached a point where their internal mechanisms are no longer sufficient to do the job efficiently. The cancer spreads, every time the cell would undergo normal meiosis. If the woman is lucky, a routine examination would find this cancer when it is fairly small, at which point the best solution is to remove the cancerous tissue.
If the woman is unlucky, the cancer would grow until it found a conduit (typically a lymph node or a blood vessel). Cancer cells that broke free from the mass would be transported by the conduit until it ends up somewhere else in the body, at this point it would attach itself to other tissue and continue spreading. The cancer cells crowd out other cells, choking off access to blood vessels or waste channels, and other cells either become cancerous in turn or they become necrotic - dying but not being removed by the body's defenses. The woman becomes tired more easily as energy that would normally be going to maintenance of the body is increasingly co-opted by the cancer cells. Tissue becomes tender and inflamed, and pain caused by cancer cells crowding in on nerve endings becomes more endemic.
If the cancer spreads to the lungs, then breathing becomes more difficult and becomes an emphysema. If it spreads into the lymph system then the woman has more trouble fighting off infections, and becomes sicker more often. If it spreads into the bone then normal stresses may cause the bone to snap.
The broken bone is a black swan event - it seems unlikely that a bone would normally break under typical stress actions, but in point of fact, this isn't a typical stress action. The system has been compromised, and the cancer has spread out in a spider-web like fashion through much of the body. An aggressive fight against the cancer by irradiating it or using poisons (chemotheraphy) may be able to remove the tissue, but typically it does so by further weakening the ability of the body to function.
The body does not die because of the cancer. Instead, the cancer causes each system in turn to become less efficient, and ultimately to fail because it can't get the energy necessary to continue. Once one organ fails, it increases the likelihood that other systems that are dependent upon that organ will also fail. The unfortunate woman dies of system failure.
This rather detailed and morbid description still serves as a metaphor for other systems. Complex systems are made up of simpler ones, which are made up of simpler ones still. Corruption usually occurs fairly far down in a given system, but most complex systems are generally fairly effective at catching and eliminating the obvious points of corruption (or worst case scenario, sequestering them off in isolation) . Corruption here simply means a subversion of the normal functions of that particular abstraction - an bridge inspector signing off an inspection report with only a peremptory check of the bridge, an employee stealing supplies from the supply cabinets, a student cheating on an exam or a businessman cheating on his taxes, a radical publishing seditious tracts, to name a few of the many, many examples.
Physical system analogs would be areas of snowfall on a mountain that gets more sun than normal but is also supporting other areas of snowfall, a particularly warm, dry, dust-laden wind coming off the Sahara into the Atlantic Ocean, the gradual creep of increasing temperatures in an area that hasn't faced them pushing flowering and bee pollenation behaviors slowly out of synch.
The point about most such corruption (i.e., regions of potential instability) is that, for systems in quasi-equilibrium, the corruption usually has comparatively little impact over the short term. Most systems have regulating mechanisms that tend to correct for such instabilities - the office manager notices that one department is using more supplies than the other, and a bit of surveillance reveals that one employee is using dramatically more than he should be. At that point, the employee is summarily fired, and a new employee hired to replace him, and the message is made clear - you steal, you're gone. This tends to move the system back into equilibrium.
The regulation and action is not a normal event - it is only undertaken when corruption is noticed. It's a small "collapse", one that may result in some disruption of activities and hence impact the efficiency of the abstraction - and for the employee it results in a significant disruption from the way things were. However, such feedback cycles normally keep the system relatively stable.
However, over time, the corruption can become more endemic, and at a higher level of abstraction. The managing bridge inspector is lax in checking on reports, and the inspectors under him avoid looking at those places on the bridge that are awkward to get to or would require getting especially dirty, the comptroller in a company works with one or two accounts to falsify the books, the teacher at a university starts accepting bribes and sexual favors for grades, a company provides campaign donations to a politician in order to give them a tax break or special legislative consideration.
Note in this case that there are two levels of abstraction involved in all of these scenarios. Generally the role of a manager is to act as a governor or regulator on the actions of others, to provide negative (damping) feedback to minimize corruption in a system. When that feedback is subverted, it amplifies the corruption rather than reducing it, and it makes it increasingly likely that the feedback will start to compromise the stability of the abstraction layer.
One of the more interesting phenomena that takes place in systems of abstraction is the paradox that the longer a system remains in equilibrium, the more likely that it will become unstable. In order to understand why, consider that most corrective feedback occurs only after a problem has reached a crisis point - the office manager finds that supplies she just ordered are gone, and she can't think of any legitimate reason why they would be. As she is responsible for her budget, she knows that she has less lattitude if excess pilferage is reducing her budget (and that she could face "corrective action" if such thefts continue to be unexplained.
However, as the organization gets larger, the office manager has more responsibilities, and tracking down pilferage drops down the list. The attitude begins to form that office supplies are fair game, and people begin more inclined to take supplies whether they need them or not - and those office supplies begin to move towards bigger ticket ideas like computers and projectors. Expense accounts start to become padded, and pretty soon begin to become a significant part of a person's income. Eventually the amounts begin to become high enough that it impacts the bottom of the line of the company, particularly if the comptroller and his friends in accounting are in on it (getting kickbacks for equipment that's disappearing).
What makes this worse is that it has gone from being an isolated instance to becoming pervasive and endemic. You can't fire everyone without bringing the company to its knees. Eventually you are forced to fire the comptroller, establish a new-tight accounting system for all internal goods and services, alienate a number of your employees who had come to see the office supplies as a right, and then spend several months searching for a new accounting team.
Stability breeds complacency, which breeds instability. Hyman Minsky, an economist in the 1960s, laid out this hypothesis for financial systems, but it holds in most complex multi-layered abstraction systems. Deregulation of the banking industry, low interest rates on the part of the Federal Reserve and a push towards home-ownership in the early 2000s meant that bankers could make higher risk mortgage loans to increasingly unqualified buyers then sell these loans to other financial institutions. These financial companies would combine these mortgages in novel (and dangerous) ways and sell them as financial vehicles to investors. The investors would then use these securities as collateral to build increasingly unsustainable leverages, while insurance companies sold "black swan" insurance that they never expected to pay off in order to make these securities palatable to accountants. Meanwhile, the real estate agents worked with the appraisal firms and builders in order to get the largest payback in fees, and homeowners in turn found themselves forced to take out ever larger loans for the same properties.
Low initial rates on loans were reset after a specific period to a much higher rate, and people began to fall behind on their payments, in time, the cascade of defaults and jungle mail cascaded through the system. The rapidly receding value of these assets caused a Minsky Moment in September 2009, as a key investment bank, Lehman Brothers, was allowed to go bankrupt. Because of the unwinding of the positions that Lehman had held, this created the financial equivalent of a heart attack as credit disappeared from the market overnight.
Starved for credit, companies could no longer sustain regular payroll, watched their energy supply (cash inflow) dry up as consumers pulled back abruptly in spending and soon were forced into rapid liquidation. Abstractions were unwound as energy (in the form of credit) disappeared from the system. Unemployment shot up as millions of people were forced out of work, accelerating the crisis, while attempts to recapitalize the banks have so far fallen short of solving the systemic problems.
Instabilities - turbulence - disrupted each layer of abstraction. This process is still ongoing, and will likely take one to two more years in order for the turbulence to dissipate to a level that new structures can start to form again, at a lower energy level.
The lesson for futurists - first, disruptions do not happen without reason. Most disruptions occur when a stable (complacent) abstraction becomes corrupt and brittle. In a recently stable scenario, external stimulae impinge upon the system all the time, but the system is resilient enough to ward them off. As systems become more mature they become more fragile, and their ability to adapt becomes increasingly compromised. Eventually, a stimulus occurs that causes a breakdown of a particular part of the system, and the system has become so interdependent that this shock then gets passed on, destructively, to other subsystems. The subsequent loss of system integrity can prove fatal, and the system will unwind to a less energy intensive state as energy bleeds into turbulence.
In general, you cannot predict what the shock will be that will ultimately send a system over the edge, and its futile to try. What's important is to examine whether, given a shock, a system is resilient enough to absorb it, or whether the shock will prove devastating. The role of both analysts (who are futurists) and regulators is to do the research to determine what organizations are too fragile, and then to examine the consequences that a shock to the system will have.
One final note here: a good place to look are organizations that are deemed "to big to fail". Most likely once a company (or a government) reaches that point, it is definitely overdue for an earthquake.
Future Proof: Abstraction Uses Energy
Societies, just as software systems and other dynamic systems, have the potential to operate at multiple levels of abstraction. Government is an abstraction, for instance - you can't point to a particular building and say that is the government - it may house the officials and the record stores, but the government is in fact the interaction of a set of laws and rights with the participants of that government, and the officials in question essentially serve to make government happen. Government isn't a thing, its a process - and as such it uses energy.
Abstraction is the process of hiding complexity under a metaphor (or interface). Once the abstraction exists, it becomes a thing, and can interact with other things at the same level. This can be seen in the settlement metaphor. A person leaves a city and journeys into the wilderness. There he sets up a farm. Others, driven by the same pressures, set up farms nearby - the resource base is extensive (though not infinite). The farmers initially farm to produce enough goods to feed themselves, but eventually may reach a point where they produce more than they consume and they can start trading.
A trading post is set up within comfortable transportation range, and they are soon able to specialize in producing different products. Other amenities spring up - smiths to handle shoeing of horses and production of localized implements, chandlers to produce candles for light, coopers to build barrels and storage bins, taverns to provide food and drink (and occasionally companionship) and so on. A certain degree of energy is required to reach this stage, and the degree of dissonance rises with the number of interactions, until eventually, a group of people get together and set up a set of rules to create a "town", providing basic services (such as law enforcement) at the expense of certain activities (such as robbery or murder being "allowable"). It takes a certain level of energy to get to this new level of abstraction, but once it's achieved, it's stable - it's a quantum electron state within a metaphorical atom.
So long as the energy is supplied (taxes or services on the part of the members), the town continues to exist - and can even exist for a certain period of time after the energy is removed (thus, it's actually quasi-stable). This is why gold mining towns often died out - once the energy (in the form of gold sales) was removed, the town eventually couldn't maintain a sufficient level of complexity to continue. The building might persists, but no one was in them to do the business of governance.
Eventually, if the energy is maintained, other towns spring up in the same general vicinity. Advances in technology become possible as people specialize, and as edge effects motivate innovation. The towns begin to trade with one another, and as they grow, their boundaries eventually overlap. These towns (or townships, as they are now increasingly called) are able to produce more, are able to devote more energy to communal activities - the development of schools, of watersheds, of roads, of sanitation facilities. The towns become a city, forcing a higher level of abstraction (and more energy).
The interactions of cities with other cities is similar to, that of towns with other towns, but it is usually at a much higher level; ad hoc rules become the foundation of formal legal systems, universities spring up, as does the rise of a formal peace-keeping militia (a police force). At some point, if there are indigenous peoples in the same area, the expanding towns will eventually end up reaching one of three states - if they are at a sufficient level of abstraction to expend the energy, they will wipe out the indigenous population. If they aren't, then the will either assimilate the other culture and be changed by it in turn, or they will marginalize the other population - literally push them to the margins of the existing system. This is part of the reason why cultures with lower levels of societal abstraction (energy draws) tend to end up living in typically harsh and forbidding lands when such expansion occurs.
In time, the various cities in a region also form abstractions - provinces. Provinces (in the general sense, not specifically Canadian provinces) differ from cities in a qualitative way, and again they require a certain energy level to function properly. This nesting process can be carried up the line. Moreover, you can have other abstractions that have their own plateus - the structure of business, from sole proprieterships to transnational corporations, follow a very similar progression, and are in many ways fueled by the same energy derivatives - the movement of money in the economy.
It's worth addressing that issue here. Energy is required to convert resources into usable form, energy is required to transport those goods to either other processors or to consumers, who in turn use that energy to handle the processing of those goods either physically - a foundryman pouring steel into ingots, a truck drive driving those ingots to a construction site, a construction worker using the beams as piles the foundational support of an office building - or virtually - the bank manager who arranges finance for the office building, the graphic artist who puts together a brochure about the office building for prospective buyers, the programmer who writes the program that handles the finances. Money, then, can be seen as a proxy for either energy or resources (and usually a combination of both), while technology should be seen as a way to convert this money back into energy in some fashion.
Note, however, that this process of nested abstraction does not place all at once. A higher level of abstraction can only exist once the need for that abstraction arises - while you can call a new town in a virgin region a province, can draw maps, and put together flags, the abstraction level will remain that of a town until such time as you have enough of the actors (towns in this case) to even make a city, let alone a province. Similarly, a conqueror can take control over a number of cities in a region, but if he doesn't do anything to make those cities work together in a cohesive fashion (and doesn't supply the energy to make this possible on a continuous basis) then his empire will crumble within a few years.
So what happens when the amount of energy available drops? At first, not much. You get discontent among the participants, but there's also a certain amount of momentum that exists at each plateau that keeps the abstractions going. Call it cultural memory - its the reluctance that people have to give up what they have in terms of their own binding to the abstraction. Moreover, the energy levels of the highest abstractions tend to have higher priority than lower level abstractions. This means those at the lowest levels of abstractions usually feel problems first.
Individual towns first reduce staff and services, then reach the fateful day when they can't meet payroll, and disincorporate. Services disappear, and people leave. Opportunities diminish. In time, the town becomes a ghost town. The same things begin to happen at former townships that are now suburbs. The cost of commuting becomes too high compared to the benefit of living away from the action. Individual stores begin to fail, then malls begin to fall vacant. Housing prices drop, foreclosures rise, and crime levels (a break down of the authority of the state to maintain order) rise along with it. The wealthiest neighborhoods become increasingly isolated, gated communities that effectively maintain their own separate identity (energy levels are higher here) but the allocation of energy (via wealth distribution and services) to those outside these gated communities begins its own steady decline.
Eventually, whole sections of a city go dark, lives become increasingly desperate, and those with the means to do so flee the city to get closer to centers of power (and hence of energy). This urban flight only exacerbates the situation, diminishing the tax base. Deserted areas increasingly go to seed, their resources stripped, their infrastructure devastated. Communication and transportation routes begin to fail due to vandalism and lack of maintenance. Educational levels drop, and the few areas that remain at a higher potential eventually become separate towns Urban centers, may see a brief uptick in their fortunes as suburbanites move closer, but unless they can find a new equilibrium from alternative energy sources (either directly or indirectly) then they become more and more townlike themselves.
At the higher level of organization, the provincial control begins to falter as energy is shunted to the political center. Unrest begins to rise, and at the edges of the province, where control is weakest, if a particular group of cities are able to gain a new source of energy, then they may in fact attempt to break away. This will usually result in armed conflict and civil war, as provincial authorities end up investing ever more energy into building up the military and police, yet the more that regions break away, the smaller the tax base and the less energy that the capital can allocate. Eventually, the province fragments into smaller abstractions, and with that loses political power.
Again, note that the same thing is true for any form of abstraction. Small companies merge or are acquired to provide more services, branch offices are added, which eventually requires regional management, which in time extends out to extra-provincial activities. This brings more money in but also increases its need to sustain that monetary flow. This means that most companies ultimately can get only so big before they become unwieldy, unable to respond rapidly to change in the markets, and consequently energy outflow exceeds energy inflow.
During tough times, companies close branch offices, spin off divisions, become increasingly specialized - in other words, they shift down to the previous level of abstraction, even while potentially seeding their future competitors. This also affects business partner and supply chain channels. The best and the brightest - the innovators in the company, who are in effect energy multipliers, realize their opportunities are limited, and leave to form their own ventures. In other words, as energy recedes, things become more primitive.
Note that this isn't necessarily an up and down process - technology can make new sources of energy viable, reversing a decline, structural changes in the economy (which can create temporary drawdowns) can be resolved, particularly draining activities (such as wars) can end, reducing demands upon energy and so forth. Moreover, once a given abstraction level is achieved, even if it is temporarily lost, the energy necessary to rebuild is usually less than it was initially (less need for expensive innovation).
On the flip side, environmental degradation can serve as friction towards the utilization of new energy. Environmental degradation in this case usually means that the cost of extracting energy into usable forms goes up, and tends to be a major drag upon any system. One way of thinking about this is that such degradation is systemic turbulence. The role of both technology and environmental degradation will be covered in the next column.
Abstraction is the process of hiding complexity under a metaphor (or interface). Once the abstraction exists, it becomes a thing, and can interact with other things at the same level. This can be seen in the settlement metaphor. A person leaves a city and journeys into the wilderness. There he sets up a farm. Others, driven by the same pressures, set up farms nearby - the resource base is extensive (though not infinite). The farmers initially farm to produce enough goods to feed themselves, but eventually may reach a point where they produce more than they consume and they can start trading.
A trading post is set up within comfortable transportation range, and they are soon able to specialize in producing different products. Other amenities spring up - smiths to handle shoeing of horses and production of localized implements, chandlers to produce candles for light, coopers to build barrels and storage bins, taverns to provide food and drink (and occasionally companionship) and so on. A certain degree of energy is required to reach this stage, and the degree of dissonance rises with the number of interactions, until eventually, a group of people get together and set up a set of rules to create a "town", providing basic services (such as law enforcement) at the expense of certain activities (such as robbery or murder being "allowable"). It takes a certain level of energy to get to this new level of abstraction, but once it's achieved, it's stable - it's a quantum electron state within a metaphorical atom.
So long as the energy is supplied (taxes or services on the part of the members), the town continues to exist - and can even exist for a certain period of time after the energy is removed (thus, it's actually quasi-stable). This is why gold mining towns often died out - once the energy (in the form of gold sales) was removed, the town eventually couldn't maintain a sufficient level of complexity to continue. The building might persists, but no one was in them to do the business of governance.
Eventually, if the energy is maintained, other towns spring up in the same general vicinity. Advances in technology become possible as people specialize, and as edge effects motivate innovation. The towns begin to trade with one another, and as they grow, their boundaries eventually overlap. These towns (or townships, as they are now increasingly called) are able to produce more, are able to devote more energy to communal activities - the development of schools, of watersheds, of roads, of sanitation facilities. The towns become a city, forcing a higher level of abstraction (and more energy).
The interactions of cities with other cities is similar to, that of towns with other towns, but it is usually at a much higher level; ad hoc rules become the foundation of formal legal systems, universities spring up, as does the rise of a formal peace-keeping militia (a police force). At some point, if there are indigenous peoples in the same area, the expanding towns will eventually end up reaching one of three states - if they are at a sufficient level of abstraction to expend the energy, they will wipe out the indigenous population. If they aren't, then the will either assimilate the other culture and be changed by it in turn, or they will marginalize the other population - literally push them to the margins of the existing system. This is part of the reason why cultures with lower levels of societal abstraction (energy draws) tend to end up living in typically harsh and forbidding lands when such expansion occurs.
In time, the various cities in a region also form abstractions - provinces. Provinces (in the general sense, not specifically Canadian provinces) differ from cities in a qualitative way, and again they require a certain energy level to function properly. This nesting process can be carried up the line. Moreover, you can have other abstractions that have their own plateus - the structure of business, from sole proprieterships to transnational corporations, follow a very similar progression, and are in many ways fueled by the same energy derivatives - the movement of money in the economy.
It's worth addressing that issue here. Energy is required to convert resources into usable form, energy is required to transport those goods to either other processors or to consumers, who in turn use that energy to handle the processing of those goods either physically - a foundryman pouring steel into ingots, a truck drive driving those ingots to a construction site, a construction worker using the beams as piles the foundational support of an office building - or virtually - the bank manager who arranges finance for the office building, the graphic artist who puts together a brochure about the office building for prospective buyers, the programmer who writes the program that handles the finances. Money, then, can be seen as a proxy for either energy or resources (and usually a combination of both), while technology should be seen as a way to convert this money back into energy in some fashion.
Note, however, that this process of nested abstraction does not place all at once. A higher level of abstraction can only exist once the need for that abstraction arises - while you can call a new town in a virgin region a province, can draw maps, and put together flags, the abstraction level will remain that of a town until such time as you have enough of the actors (towns in this case) to even make a city, let alone a province. Similarly, a conqueror can take control over a number of cities in a region, but if he doesn't do anything to make those cities work together in a cohesive fashion (and doesn't supply the energy to make this possible on a continuous basis) then his empire will crumble within a few years.
So what happens when the amount of energy available drops? At first, not much. You get discontent among the participants, but there's also a certain amount of momentum that exists at each plateau that keeps the abstractions going. Call it cultural memory - its the reluctance that people have to give up what they have in terms of their own binding to the abstraction. Moreover, the energy levels of the highest abstractions tend to have higher priority than lower level abstractions. This means those at the lowest levels of abstractions usually feel problems first.
Individual towns first reduce staff and services, then reach the fateful day when they can't meet payroll, and disincorporate. Services disappear, and people leave. Opportunities diminish. In time, the town becomes a ghost town. The same things begin to happen at former townships that are now suburbs. The cost of commuting becomes too high compared to the benefit of living away from the action. Individual stores begin to fail, then malls begin to fall vacant. Housing prices drop, foreclosures rise, and crime levels (a break down of the authority of the state to maintain order) rise along with it. The wealthiest neighborhoods become increasingly isolated, gated communities that effectively maintain their own separate identity (energy levels are higher here) but the allocation of energy (via wealth distribution and services) to those outside these gated communities begins its own steady decline.
Eventually, whole sections of a city go dark, lives become increasingly desperate, and those with the means to do so flee the city to get closer to centers of power (and hence of energy). This urban flight only exacerbates the situation, diminishing the tax base. Deserted areas increasingly go to seed, their resources stripped, their infrastructure devastated. Communication and transportation routes begin to fail due to vandalism and lack of maintenance. Educational levels drop, and the few areas that remain at a higher potential eventually become separate towns Urban centers, may see a brief uptick in their fortunes as suburbanites move closer, but unless they can find a new equilibrium from alternative energy sources (either directly or indirectly) then they become more and more townlike themselves.
At the higher level of organization, the provincial control begins to falter as energy is shunted to the political center. Unrest begins to rise, and at the edges of the province, where control is weakest, if a particular group of cities are able to gain a new source of energy, then they may in fact attempt to break away. This will usually result in armed conflict and civil war, as provincial authorities end up investing ever more energy into building up the military and police, yet the more that regions break away, the smaller the tax base and the less energy that the capital can allocate. Eventually, the province fragments into smaller abstractions, and with that loses political power.
Again, note that the same thing is true for any form of abstraction. Small companies merge or are acquired to provide more services, branch offices are added, which eventually requires regional management, which in time extends out to extra-provincial activities. This brings more money in but also increases its need to sustain that monetary flow. This means that most companies ultimately can get only so big before they become unwieldy, unable to respond rapidly to change in the markets, and consequently energy outflow exceeds energy inflow.
During tough times, companies close branch offices, spin off divisions, become increasingly specialized - in other words, they shift down to the previous level of abstraction, even while potentially seeding their future competitors. This also affects business partner and supply chain channels. The best and the brightest - the innovators in the company, who are in effect energy multipliers, realize their opportunities are limited, and leave to form their own ventures. In other words, as energy recedes, things become more primitive.
Note that this isn't necessarily an up and down process - technology can make new sources of energy viable, reversing a decline, structural changes in the economy (which can create temporary drawdowns) can be resolved, particularly draining activities (such as wars) can end, reducing demands upon energy and so forth. Moreover, once a given abstraction level is achieved, even if it is temporarily lost, the energy necessary to rebuild is usually less than it was initially (less need for expensive innovation).
On the flip side, environmental degradation can serve as friction towards the utilization of new energy. Environmental degradation in this case usually means that the cost of extracting energy into usable forms goes up, and tends to be a major drag upon any system. One way of thinking about this is that such degradation is systemic turbulence. The role of both technology and environmental degradation will be covered in the next column.
Future Proof: Technology is an Accelerant
One of the most common mistakes that people make when looking to "predict" the future is to concentrate on the technology as being the future. In the 1950s, cars and television were the hot new technologies, and the future was filled with cars that could go three hundred miles an hour, would drive by themselves, would fly and go underwater..
Of course, the reality has turned out a little different - Certain cars have certainly achieved speeds in excess of three hundred miles (largely by turning them into rockets), recently a "flying car" - more like a small plane with foldable wings - debuted, and there have been several stabs at cars that could at least go on water, if not necessarily under it.
Yet even after sixty years, the typical car doesn't go that much faster than they did in 1955, still doesn't drive by itself, and is still best optimized for driving on paved roads rather than the airway. So what went wrong? To better understand this, its worth stepping back and looking at what technology is ... and isn't.
People have a historical view about technology. The first automobile was built by Karl Benz in 1885. The first radio was built by Guglielmo Marconi in 1901, the Wright Brothers built the first airplane in 1903, Edison created the light bulb in 1879. History is filled with these kinds of milestones, yet in every one of these cases, there had been innovations, ideas, patents, and unsuccessful (and in some cases successful) trials by many others. In most cases, the information that sparked the "successful" invention was culled from previous theoretical work or the innovation of key subcomponents. Benz's work, which involved the creation primarily of the engine, could only have been accomplished thanks to the efforts of Siegfried Marcus of Vienna, who created an engine to propel a handcart that made use of gasoline. It was in his critical work of building what would eventually become the alternator, however, that proved the key for many people moving forward.
Innovation builds on innovation, and while from the historical perspective it can appear that technology seems to have appeared in a moment of inspiration, this inspiration almost invariably involved improving what was "almost" right by someone else, or by combining two other inventions in novel ways.
One of the key points about such innovations however, is that there is a definite level of diminishing returns on energy investment. For instance, while there were huge numbers of refinements between Karl Benz first car in the 1880s and the cars of the 1980s, most of the critical changes occurred toward the beginning of that period. Why? Primarily because the number of cars on the road expanded dramatically between 1880 and 1950, and each new car offered a new opportunity for innovation. Yet once the basic principles were worked out, the changes became more subtle - eeking out better speed, more fuel efficiency, improving the user experience - and ultimately became little more than cosmetic touches (fins vs. no fins, grills vs. hoods, that sort of thing). The technology had matured.
Yet at the same time, the specific role of the car was also becoming more clearly defined. There were cars that were capable of driving very fast - in excess of 200 miles or more an hour - but with the exception of racetracks, such cars would have been seen as dangerous to anyone who didn't have twitch reflexes to handle it, and even then the practical limitations of city transportation grids made it unwise to try to go even 100 miles an hour in most places.
Similarly the concept of a car that could fly was mitigated by the very real issue of coordinating existing flying traffic, safety issues, noise issues and a host of other problems. If you could only take off and land such a car at an airport, why not simply purchase a small plane for approximately the same price, something that's far more well designed for use within the existing infrastructure.
Technological change thus always emerges only in context, and it is shaped by that context.
Surprisingly enough, the last decade has probably seen far more innovation in automobiles than the last fifty years prior. The reason for that is two-fold - first, computer miniaturization reached a stage where it was feasible to create localized processing at key points within the system, to better regulate fuel consumption, engine heat, electrical systems, and so forth, as well as to provide a better interface with the rest of the world (think about the innovation of the GPS system for cars). By becoming increasingly intertwined with the operation of the car, the computer systems give the car a type of internal intelligence, making it more systemic, less mechanical.
You're beginning to see this manifest in things like early warning systems that can notify a driver of potential hazards in the environment and can even slow or stop the car if it appears that the driver is not responding to these hazards. Cruise control systems are becoming considerably more sophisticated as well, better handling the sometimes seasickness induced surges that older systems ran into. Navigational systems and real time telemetry can notify drivers where congestion is and suggest alternate routes. In short, cars are becoming considerably more intelligent - as one pundit put it, the car is the ultimate mobile computer.
On the other hand, system shocks due to oil disruptions are forcing the development of electric and electric/hybrid vehicles. Ostensibly one of the major reasons for this is to reduce carbon emissions, but while this is a "feel good" reason, the reality of high oil prices, while no longer as dominant a theme, has made electric car investment feasible - especially in conjunction with the increased computerization of such vehicles.
Most technologies are developed in order to make processes more efficient. "Labor saving devices" has been a major selling point for technology since the late 18th century. When you pay a person to work, what you are doing is asking them to commit their energy (and time) to process a particular resource into a different form. You're paying for them to expend their energy and their expertise (their technology) to accomplish a given task. In a factory setting in the 1900s, by creating the assembly line, you could also optimize this process by having people that were more proficient in a given technology do that technology, thus reducing the overall time to accomplish the task, letting you do more of those tasks.
As advances in metallurgy, in electrical systems, and in machine tooling swept the factories, machines augmented this specialization; making it possible for one man to do in a day what two men could do earlier, then what three men and so forth. In doing so, this had two effects - it meant that with the same number of men, he could accomplish far more in the same period of time, or it meant that he could use fewer men but reduce labor costs. In most cases, he could do both, especially as technological improvements came fast and furious. Ultimately, this reached a point where the amount of manufacturing capacity exceeded the available market, and the economy slowed until either the population grew to accommodate the higher demand, the price dropped to make the product affordable (tightening margins), or wages increased (wage inflation) to create new markets.
Technological innovation slowed over the first half of the twentieth century as more investment resulted in more marginal returns. Manufacturing reached a metastable point - until the innovations of the 1970s and 1980s. Robotics is the process of applying machine intelligence to mechanical systems. A contemporary car or truck is a robot. A commercial jet is a robot. Each of these are robots because there are autonomous decision making components that determine certain aspects of a given subsystem's operations.
Whereas before, mechanical systems replaced either the speed or the power with which a given individual could apply to a task, robotic systems effectively replaced the judgement and expertise of that individual, could do the work repeatedly, with little downtime, and could alert managers whenever something beyond its ability occurred. This led, not surprisingly, to the complete downfall of manufacturing as a form of employment.
Not surprisingly, as computer systems become more sophisticated, and processing levels of abstraction continue to climb, this is also destroying the service and management sectors of employment - in short destroying the existing corporate infrastructure. Corporations are using computers as mechanisms to enable the shift to ever higher levels of abstraction, but in the process are also reducing their own energy inputs as the number of people who are unemployed continue to climb, thus reducing the available capital flow to those companies.
Yet there are interesting developments along the margins - as technology becomes more pervasive, it also becomes more accessible. As technology multipliers climb, a handful of people can replace a thousand - so companies shrink, become more specialized, more distributed, more amorphous, more virtual. The energy costs of producing a good or service decline, meaning that while more can use the technology to convert resources into a usable form, , the margins to be gained by doing so eventually reach zero.
What's this mean to the budding futurist? When looking at a technology, examine its potential impact upon society, both in isolation, and in combination with other technologies - technologies that reinforce one another will ultimately beat out ones that don't. Understand that technology follows the curve in which science this year becomes engineering next year and technical maintenance the year after that. Most technology will ultimately end up eliminating more jobs than it creates, but in the process is also reducing the barrier to entry for nearly all fields, meaning that corporations also are forced to become smaller, more distributed and more virtual.This particular meme will play out for the next fifteen to twenty years before we reach a point of stability, and even technology which dramatically increases energy input will now only reinforce these trends.
Of course, the reality has turned out a little different - Certain cars have certainly achieved speeds in excess of three hundred miles (largely by turning them into rockets), recently a "flying car" - more like a small plane with foldable wings - debuted, and there have been several stabs at cars that could at least go on water, if not necessarily under it.
Yet even after sixty years, the typical car doesn't go that much faster than they did in 1955, still doesn't drive by itself, and is still best optimized for driving on paved roads rather than the airway. So what went wrong? To better understand this, its worth stepping back and looking at what technology is ... and isn't.
People have a historical view about technology. The first automobile was built by Karl Benz in 1885. The first radio was built by Guglielmo Marconi in 1901, the Wright Brothers built the first airplane in 1903, Edison created the light bulb in 1879. History is filled with these kinds of milestones, yet in every one of these cases, there had been innovations, ideas, patents, and unsuccessful (and in some cases successful) trials by many others. In most cases, the information that sparked the "successful" invention was culled from previous theoretical work or the innovation of key subcomponents. Benz's work, which involved the creation primarily of the engine, could only have been accomplished thanks to the efforts of Siegfried Marcus of Vienna, who created an engine to propel a handcart that made use of gasoline. It was in his critical work of building what would eventually become the alternator, however, that proved the key for many people moving forward.
Innovation builds on innovation, and while from the historical perspective it can appear that technology seems to have appeared in a moment of inspiration, this inspiration almost invariably involved improving what was "almost" right by someone else, or by combining two other inventions in novel ways.
One of the key points about such innovations however, is that there is a definite level of diminishing returns on energy investment. For instance, while there were huge numbers of refinements between Karl Benz first car in the 1880s and the cars of the 1980s, most of the critical changes occurred toward the beginning of that period. Why? Primarily because the number of cars on the road expanded dramatically between 1880 and 1950, and each new car offered a new opportunity for innovation. Yet once the basic principles were worked out, the changes became more subtle - eeking out better speed, more fuel efficiency, improving the user experience - and ultimately became little more than cosmetic touches (fins vs. no fins, grills vs. hoods, that sort of thing). The technology had matured.
Yet at the same time, the specific role of the car was also becoming more clearly defined. There were cars that were capable of driving very fast - in excess of 200 miles or more an hour - but with the exception of racetracks, such cars would have been seen as dangerous to anyone who didn't have twitch reflexes to handle it, and even then the practical limitations of city transportation grids made it unwise to try to go even 100 miles an hour in most places.
Similarly the concept of a car that could fly was mitigated by the very real issue of coordinating existing flying traffic, safety issues, noise issues and a host of other problems. If you could only take off and land such a car at an airport, why not simply purchase a small plane for approximately the same price, something that's far more well designed for use within the existing infrastructure.
Technological change thus always emerges only in context, and it is shaped by that context.
Surprisingly enough, the last decade has probably seen far more innovation in automobiles than the last fifty years prior. The reason for that is two-fold - first, computer miniaturization reached a stage where it was feasible to create localized processing at key points within the system, to better regulate fuel consumption, engine heat, electrical systems, and so forth, as well as to provide a better interface with the rest of the world (think about the innovation of the GPS system for cars). By becoming increasingly intertwined with the operation of the car, the computer systems give the car a type of internal intelligence, making it more systemic, less mechanical.
You're beginning to see this manifest in things like early warning systems that can notify a driver of potential hazards in the environment and can even slow or stop the car if it appears that the driver is not responding to these hazards. Cruise control systems are becoming considerably more sophisticated as well, better handling the sometimes seasickness induced surges that older systems ran into. Navigational systems and real time telemetry can notify drivers where congestion is and suggest alternate routes. In short, cars are becoming considerably more intelligent - as one pundit put it, the car is the ultimate mobile computer.
On the other hand, system shocks due to oil disruptions are forcing the development of electric and electric/hybrid vehicles. Ostensibly one of the major reasons for this is to reduce carbon emissions, but while this is a "feel good" reason, the reality of high oil prices, while no longer as dominant a theme, has made electric car investment feasible - especially in conjunction with the increased computerization of such vehicles.
Most technologies are developed in order to make processes more efficient. "Labor saving devices" has been a major selling point for technology since the late 18th century. When you pay a person to work, what you are doing is asking them to commit their energy (and time) to process a particular resource into a different form. You're paying for them to expend their energy and their expertise (their technology) to accomplish a given task. In a factory setting in the 1900s, by creating the assembly line, you could also optimize this process by having people that were more proficient in a given technology do that technology, thus reducing the overall time to accomplish the task, letting you do more of those tasks.
As advances in metallurgy, in electrical systems, and in machine tooling swept the factories, machines augmented this specialization; making it possible for one man to do in a day what two men could do earlier, then what three men and so forth. In doing so, this had two effects - it meant that with the same number of men, he could accomplish far more in the same period of time, or it meant that he could use fewer men but reduce labor costs. In most cases, he could do both, especially as technological improvements came fast and furious. Ultimately, this reached a point where the amount of manufacturing capacity exceeded the available market, and the economy slowed until either the population grew to accommodate the higher demand, the price dropped to make the product affordable (tightening margins), or wages increased (wage inflation) to create new markets.
Technological innovation slowed over the first half of the twentieth century as more investment resulted in more marginal returns. Manufacturing reached a metastable point - until the innovations of the 1970s and 1980s. Robotics is the process of applying machine intelligence to mechanical systems. A contemporary car or truck is a robot. A commercial jet is a robot. Each of these are robots because there are autonomous decision making components that determine certain aspects of a given subsystem's operations.
Whereas before, mechanical systems replaced either the speed or the power with which a given individual could apply to a task, robotic systems effectively replaced the judgement and expertise of that individual, could do the work repeatedly, with little downtime, and could alert managers whenever something beyond its ability occurred. This led, not surprisingly, to the complete downfall of manufacturing as a form of employment.
Not surprisingly, as computer systems become more sophisticated, and processing levels of abstraction continue to climb, this is also destroying the service and management sectors of employment - in short destroying the existing corporate infrastructure. Corporations are using computers as mechanisms to enable the shift to ever higher levels of abstraction, but in the process are also reducing their own energy inputs as the number of people who are unemployed continue to climb, thus reducing the available capital flow to those companies.
Yet there are interesting developments along the margins - as technology becomes more pervasive, it also becomes more accessible. As technology multipliers climb, a handful of people can replace a thousand - so companies shrink, become more specialized, more distributed, more amorphous, more virtual. The energy costs of producing a good or service decline, meaning that while more can use the technology to convert resources into a usable form, , the margins to be gained by doing so eventually reach zero.
What's this mean to the budding futurist? When looking at a technology, examine its potential impact upon society, both in isolation, and in combination with other technologies - technologies that reinforce one another will ultimately beat out ones that don't. Understand that technology follows the curve in which science this year becomes engineering next year and technical maintenance the year after that. Most technology will ultimately end up eliminating more jobs than it creates, but in the process is also reducing the barrier to entry for nearly all fields, meaning that corporations also are forced to become smaller, more distributed and more virtual.This particular meme will play out for the next fifteen to twenty years before we reach a point of stability, and even technology which dramatically increases energy input will now only reinforce these trends.
Future Proof: The Future Comes From the Edges
In software architecture circles, there's a rather curious term in vogue called "future proofing". Typically, when you are putting together an architecture, especially an enterprise level architecture, one of the major goals is to insure that, once laid down, it won't be necessary to come back in ten years time, tear the whole thing out and start from scratch. In essence, you want to set up the architecture so that, no matter what the future brings, the application or system can adapt.
It's a laudable goal in theory, but in practice, it's seldom an achievable goal. Part of the reason for this is that while architecture tends to be a top down imposition of ideas and structure, the future is notoriously bottom up. It creeps in through the cracks, like weeds pushing up through concrete pavement ... before you know it, the concrete has been reduced to rubble, and the seemingly soft and fragile weeds and saplings have become a wilderness.
This is a part of the reason that many very good architects - whether of buildings or of software - tend to have a touch of Zen master in them. They do not see the future as the enemy, but rather as a wild and unknowable force that, nonetheless, can be redirected to work the least amount of damage (and perhaps even to improve upon the existing infrastructure) over time. What this means is not anticipating the future per se - that really is an exercise in futility - but in understanding the characteristics of change and to build with these in mind.
Such thinking applies just as readily to urban planners, managers, and decision makers as it does to architects - too many choose to "make their mark" upon the future without realizing that doing so is an exercise in hubris, and usually doesn't end well.
I am beginning a series of essays on "predicting" the future that looks not at trends or even critical technologies to watch but rather that look at "techniques" - where to look for innovation, how to understand the growth and decline of systems, understanding how to pull the relevant from the irrelevant and so forth. Fans of systems theory will recognize most of these, as in general anticipating the future usually involves understands how trends and energy flows interact with one another and how layers of abstraction can be modelled and consequently separated from one another without losing out too much of the behavioral glue that nested abstractions bring about.
Each article in this series will be labeled as Future Proofing. Click on the Future Proofing keyword to see a list of all articles in the series and check back frequently, more will be added on a daily basis.
Any given structure that you build by its very existence establishes boundaries. So long as those boundaries remain inviolate, the structure will stand. However, those boundaries are also under near continuous bombardment as the outside world interacts with these boundaries. For instance, every day, a house's walls (and more especially its roof) are attacked by insects, by mold, by water, pollen spores, and other agents that are quite fully capable of interaction with these boundaries. Water pools under roof tiles, slowly dissolving nails and glue, until eventually a heavy wind rips one or two of these away.
Once the integrity of the house has been breached, the invasion mounts. Ants and termites get in, mold develops within wood beams and along exposed paper, increasing the breach and reducing the integrity even more. Stressed beams pop as rusting nails and staples crumble, sheet-rock and drywall become powdery and fragile, even mortar for bricks will eventually disintegrate. This process doesn't happen quickly, but it does happen - most houses constructed today, when left unmaintained, will become unlivable within a couple of decades, and will disintegrate completely within a hundred years.
The same process occurs in society, though it usually happens much more quickly because the boundaries involved are far more ephemeral in nature. Governments arise in order to insure that collective actions of a specific group can take place with as little organizational impedance as possible. While it is possible that the group is involved consists of all people within a given geopolitical boundary, in practice, governments usually serve to mediate conflicts within the most powerful members of the society - landowners, for instance, or investors, with the decisions to support other that are not in that group being made because of the potential that these non-group members have to disrupt the society.
However, these non-members also represent agents of change, for good or for ill. If they don't have representation in the group but the group has some effect upon their lives, then they will agitate for ways to gain representation. They operate at the margins - protests, work stoppages, subverting the dominant media, "terrorist" actions, warfare, interbreeding. The societal structures will remain change so long as the integrity of those structures remain solid, but eventually, at some point, a chink will develop. The organization/government/consensus must either adapt, integrating these new members and/or ideas, or it will disintegrate if the invaders have a more efficient mode of operation (more force or a better ability to exploit the existing environment).
From a system architect standpoint, this means designing architectures so that natural channels exist. If formalized mechanisms exist for recognizing and incorporating change exist, this makes the process less disruptive in the long term. This is called flexibility. Design so that the system can adapt to stress, perhaps even utilize it. People are beginning to experiment with building hi-rise towers that not only bend in the presence of high winds or earthquakes, but that can actually extract energy from the building as it does so to use for other purposes. Many social networks actually get their value from the change within their channels.
From a future watch perspective such edge considerations should therefore be subject to especially close scrutiny. Most intermixing of ideas occur at the boundaries (think of such boundaries as the edge of turbulence, where the inside environment mixes with the outside. When two cultures meet, they have to resolve differences, define new interfaces between one another, try to work out which works best on either side. This is the basis for innovation. However, it is also the place where the greatest strife is occurring, and the biggest threats to the company, as illustrated above. Look at mashups, where two unrelated technologies are combined in novel ways. Look at mergers, where the two organizations are roughly of the same size (same abstraction level, as discussed in the next section). Look at organizations that are on the verge of going from one abstraction level to the next (up or down). Look in cross discipline studies, where people from different disciplines begin comparing notes. This is always a good place to start when trying to assess the future.
It's a laudable goal in theory, but in practice, it's seldom an achievable goal. Part of the reason for this is that while architecture tends to be a top down imposition of ideas and structure, the future is notoriously bottom up. It creeps in through the cracks, like weeds pushing up through concrete pavement ... before you know it, the concrete has been reduced to rubble, and the seemingly soft and fragile weeds and saplings have become a wilderness.
This is a part of the reason that many very good architects - whether of buildings or of software - tend to have a touch of Zen master in them. They do not see the future as the enemy, but rather as a wild and unknowable force that, nonetheless, can be redirected to work the least amount of damage (and perhaps even to improve upon the existing infrastructure) over time. What this means is not anticipating the future per se - that really is an exercise in futility - but in understanding the characteristics of change and to build with these in mind.
Such thinking applies just as readily to urban planners, managers, and decision makers as it does to architects - too many choose to "make their mark" upon the future without realizing that doing so is an exercise in hubris, and usually doesn't end well.
I am beginning a series of essays on "predicting" the future that looks not at trends or even critical technologies to watch but rather that look at "techniques" - where to look for innovation, how to understand the growth and decline of systems, understanding how to pull the relevant from the irrelevant and so forth. Fans of systems theory will recognize most of these, as in general anticipating the future usually involves understands how trends and energy flows interact with one another and how layers of abstraction can be modelled and consequently separated from one another without losing out too much of the behavioral glue that nested abstractions bring about.
Each article in this series will be labeled as Future Proofing. Click on the Future Proofing keyword to see a list of all articles in the series and check back frequently, more will be added on a daily basis.
The Future Comes From the Edges
Any given structure that you build by its very existence establishes boundaries. So long as those boundaries remain inviolate, the structure will stand. However, those boundaries are also under near continuous bombardment as the outside world interacts with these boundaries. For instance, every day, a house's walls (and more especially its roof) are attacked by insects, by mold, by water, pollen spores, and other agents that are quite fully capable of interaction with these boundaries. Water pools under roof tiles, slowly dissolving nails and glue, until eventually a heavy wind rips one or two of these away.
Once the integrity of the house has been breached, the invasion mounts. Ants and termites get in, mold develops within wood beams and along exposed paper, increasing the breach and reducing the integrity even more. Stressed beams pop as rusting nails and staples crumble, sheet-rock and drywall become powdery and fragile, even mortar for bricks will eventually disintegrate. This process doesn't happen quickly, but it does happen - most houses constructed today, when left unmaintained, will become unlivable within a couple of decades, and will disintegrate completely within a hundred years.
The same process occurs in society, though it usually happens much more quickly because the boundaries involved are far more ephemeral in nature. Governments arise in order to insure that collective actions of a specific group can take place with as little organizational impedance as possible. While it is possible that the group is involved consists of all people within a given geopolitical boundary, in practice, governments usually serve to mediate conflicts within the most powerful members of the society - landowners, for instance, or investors, with the decisions to support other that are not in that group being made because of the potential that these non-group members have to disrupt the society.
However, these non-members also represent agents of change, for good or for ill. If they don't have representation in the group but the group has some effect upon their lives, then they will agitate for ways to gain representation. They operate at the margins - protests, work stoppages, subverting the dominant media, "terrorist" actions, warfare, interbreeding. The societal structures will remain change so long as the integrity of those structures remain solid, but eventually, at some point, a chink will develop. The organization/government/consensus must either adapt, integrating these new members and/or ideas, or it will disintegrate if the invaders have a more efficient mode of operation (more force or a better ability to exploit the existing environment).
From a system architect standpoint, this means designing architectures so that natural channels exist. If formalized mechanisms exist for recognizing and incorporating change exist, this makes the process less disruptive in the long term. This is called flexibility. Design so that the system can adapt to stress, perhaps even utilize it. People are beginning to experiment with building hi-rise towers that not only bend in the presence of high winds or earthquakes, but that can actually extract energy from the building as it does so to use for other purposes. Many social networks actually get their value from the change within their channels.
From a future watch perspective such edge considerations should therefore be subject to especially close scrutiny. Most intermixing of ideas occur at the boundaries (think of such boundaries as the edge of turbulence, where the inside environment mixes with the outside. When two cultures meet, they have to resolve differences, define new interfaces between one another, try to work out which works best on either side. This is the basis for innovation. However, it is also the place where the greatest strife is occurring, and the biggest threats to the company, as illustrated above. Look at mashups, where two unrelated technologies are combined in novel ways. Look at mergers, where the two organizations are roughly of the same size (same abstraction level, as discussed in the next section). Look at organizations that are on the verge of going from one abstraction level to the next (up or down). Look in cross discipline studies, where people from different disciplines begin comparing notes. This is always a good place to start when trying to assess the future.
An Experiment Towards the Future
Social networks are finicky things - to develop a community of interest, you need to have both a compelling topic and a reasonable platform on which to host that community. I've been working with Drupal for several years now, and while I thoroughly love Drupal for its extensibility, in order to build a community of any complexity, you end up having to make so many modifications and add so many modules that the system can become glacially slow.
I stumbled upon Ning recently, though I've been on Ning networks before without realizing it, and found that I could put together a serviceable site that offered almost every capability that I'd been looking for in about twenty minutes. It's also separately hosted, which solves a lot of the concerns that I've had with my own self-hosted site at http://www.xmltoday.org, especially given the high cost of hosting and my own rather precarious financial state at the moment. Given those concerns, and of course the option of playing with a new social media environment, I decided to set up a Metaphorical Web ning site.
I want to open this up to participation by anyone interested in the primary topics of the site. What are those, you ask? (You did, really, I heard you about to say exactly that! Really!!). Well, what I'm going to cover here moves beyond what I cover on xmltoday.org, which focuses purely on XML issues, though I'll be covering that too. However, with Metaphorical Web, I have a somewhat broader agenda.
Specifically, the following topics come to mind:
It's a fairly daunting list, and is no doubt incomplete. My desire here is to pull together people that are interested in the trends of tomorrow, from the technologies to the social issues to how we actually survive on this planet. Feel free to join the group, to blog, to create new discussions, to post your events or your photos, to make yourself at home. Think of this as a debate salon, a place to discuss the world with others, and to put in your two cents worth.
I will be maintaining the XMLToday.org site as well, but will continue the trend that I've started with it and keep it strictly focused on XML-related news exclusively. This site I'm hoping instead to focus on building community. Enjoy, kick back, and stay for a while.
Kurt Cagle
Managing Editor
The Metaphorical Web
http://metaphoricalweb.ning.com
I stumbled upon Ning recently, though I've been on Ning networks before without realizing it, and found that I could put together a serviceable site that offered almost every capability that I'd been looking for in about twenty minutes. It's also separately hosted, which solves a lot of the concerns that I've had with my own self-hosted site at http://www.xmltoday.org, especially given the high cost of hosting and my own rather precarious financial state at the moment. Given those concerns, and of course the option of playing with a new social media environment, I decided to set up a Metaphorical Web ning site.
I want to open this up to participation by anyone interested in the primary topics of the site. What are those, you ask? (You did, really, I heard you about to say exactly that! Really!!). Well, what I'm going to cover here moves beyond what I cover on xmltoday.org, which focuses purely on XML issues, though I'll be covering that too. However, with Metaphorical Web, I have a somewhat broader agenda.
Specifically, the following topics come to mind:
- The Metaphorical Web Side This is devoted more to future topics and issues
- The New Publishing - neo-journalism, social networks, CMS's, DITA, DocBook, Drupal, Twitter, SVG, etc.
- The Architect - discussions about the profession of information architects, software design, programming, methodologies, and so forth.
- Macro-Economics and Systems Theory - Everything from relevant economic discussions to software agents to the Sims
- Climate Change and Green Tech - A look at everything from climate change related stories (pro and con) to solar energy to infrastructure issues.
- TomorrowVille - A change to play futurist, looking at trends and patterns that will shape our future.
- The XML Side This is devoted to XML related topics in particular
- Open Standards - W3C, OASIS, IETF, ECMA, and just about anyone else.
- XRX Technology - XQuery, XSLT, XForms, RESTful Services, XProc and other Xy things
- XBRL and Open Data - includes NIEM (and NIEM IEDPs), GML, ePub and other governmental XML standards, as well as looking at the intersection of IT and government.
- The Semantic Web - RDF and RDFa, classification, taxonomy, OWL, SPARQL, and the way that we organize information.
It's a fairly daunting list, and is no doubt incomplete. My desire here is to pull together people that are interested in the trends of tomorrow, from the technologies to the social issues to how we actually survive on this planet. Feel free to join the group, to blog, to create new discussions, to post your events or your photos, to make yourself at home. Think of this as a debate salon, a place to discuss the world with others, and to put in your two cents worth.
I will be maintaining the XMLToday.org site as well, but will continue the trend that I've started with it and keep it strictly focused on XML-related news exclusively. This site I'm hoping instead to focus on building community. Enjoy, kick back, and stay for a while.
Kurt Cagle
Managing Editor
The Metaphorical Web
http://metaphoricalweb.ning.com
2009-03-13
A Need to Blog
I was counting the other day, and came to the realization that, over the last couple of years, I have ended up blogging in about ten different places. Yet despite that, I also made the rather disturbing observation that while I am regularly writing articles for O'Reilly (about fifteen to twenty a month, which, when you get right down to it, is an incredible amount of writing), for XMLToday.org (which is focused on XML issues), for DevX, for EMC/Documentum and elsewhere, what I didn't have was a place where I could just blog for myself.
That's when I remembered this blog. It's not a Drupal instance, just a simple Blogger app, but I'm coming to understand that perhaps this is not a bad thing - I need something that I can periodically just write to without having to get sucked up in the mechanics of blogging. I've learned to really like Drupal, but sometimes you need to just walk away from the code and concentrate on the message.
In the case of Metaphorical Web, that's precisely what I intend to do. This can be considered my kick back my feet and just write whatever I want to write blog. I might talk about code, or economics, or just how I'm feeling that day, and I make no promises that you're going to learn anything here, other than maybe the occasional odd rumination.
Ironically enough, as a professional writer, I'm beginning to realize the real value of such a blog. One of the real challenges that you face as a pro writer or journalist is that overall you are always writing for others. You have to consider every thing you say in terms of the editorial message of the site, the audience involved, the needs to promote this or that conference or book or product. Especially in the age of tightening belts, you also have to make sure that what you're writing has value with every article.
Yet here's a secret for you - no writer can be "on" all the time. That's not to say that a writer can't consistently write articles or stories or what not. That part of writing is a lot like what a long distance runner goes through, just building up your endurance so that you can crank out an article every day or two, two to three stories a week. Yet even the best writer (just like that endurance runner) will have off days, will produce a piece or two of forgettable crap for every good story, and the really incredible pieces will be balanced by the occasional article that frankly should have been left exposed on a rock to do a humane death.
What's more, that writer periodically needs to write to no one in particular just to get the frustrations off his chest, to say the things he daren't say when writing for pay, to have, well, a journal. In its own way, writing is an addiction. The more you write, the more that the pathways in your brain see writing as the mechanism for expressing itself, and as a consequence you find that its often difficult to use the medium of speech because your brain is wanting to shape things into words on a page or pixels on a screen.
I've been at a number of author readings and been on panels at everything from science fiction conventions to international conferences with other writers, and one of the things that I've noted is that most writers tend to be naturally taciturn and withdrawn, though certainly capable of speaking eloquently when called upon to do so. At first, my thought was that the profession tended to draw introverts to it, in great part because introverts tend to live more in their head than via interactions with others.
Yet over the years, I've also begun to see that the process of writing reinforces this introversion, makes it stronger. Writers are aloof not because they believe themselves above other people, but rather because writing crowds out speaking and other human interaction, and as a consequence, the skills for dealing with other people become rusty and frequently mechanical, as writers find themselves having to remember how to do these things.
This isn't unique to writers, of course. Creators in most endeavors tend towards this way of thinking. Artists use different pathways, and as a consequence, the way that they view life differs somewhat, but at the same time, most artists become artists because art is the mechanism that they use for communication. Musicians, good musicians, similarly become wrapped around their music - and find that the channels over which they communicate dominate their interactions.
Once consequence of this is that there is a world of difference between communicating with someone in your modality of expression, and someone who simply "appreciates" that modality. I can communicate with my eldest daughter along a channel that others can't, because my daughter has the artist "genes" - the combination of talent and the overriding compulsion to draw and paint - that I have (I was very much the same as she was at her age -I was always drawing). I can communicate with my wife along the writing channel because she is a writer herself, which provides a shared set of referents or symbols (and experiences) that would be lost among non-writers.
Yet the irony is that I'm a lousy critic, which is I suspect also true for most creatives. An artistic critic is someone who looks for meanings and interpretations in a "work of art", as if there was actual intent there to provide such symbolism. I remember in high school one time, an elderly English teacher gave us a test which included the question "Why did Shakespeare write Romeo and Juliet?". My response, for which I received a rather stern lecture, was "because he had to pay the rent."
Writers write for public consumption not to load their works with deep symbols and meanings, but because they've discovered that the voice in their head that demands expression can be occasionally harnessed to pay the bills. The voice, the compulsion, to write, is still there, of course. They would write regardless, just as the artist will draw or the musician play, even if there was no audience. It's their language.
Yet this harnessing the writing impulse to pay the bills has a darker side as well. When everything has a deadline, what this means is that the temptation will be strong to do nothing but write for public consumption, even if what you're writing holds no great interest to you. The stories that you used to write get left undone because the clock is ticking and you have to get three articles on the latest news du jour written by the end of the day, you have to get the next chapter to the manual completed by mid-next week, the interview you did has to be transcribed and re-edited before the next conference. All are important, all pay the bills, but the music, the creativity that you once enjoyed as part of the writing process gets lost - your ability to express yourself gets lost in the requirement of expressing the needs of others.
There's another corrosive aspect of commercialization: you began seeing other writers not as people with whom you have a deeper understanding based upon your art, but as competitors for the same audience, the same revenues, the samelucrative barely minimal writing contracts. You don't dare do any but your best work because if you fail, you're toast. Unfortunately, this typically means that you also don't experiment or take risks, both critical for improving your craft, because the perceived cost of failure becomes too high.
I'm not sure there's necessarily a morale here, though I do have a suggestion to writers, (though it applies just as readily to artists, musicians and other creatives) from a writer who is rediscovering this for himself:
Always leave a certain space for yourself; block out a chunk of time in the week that is devoted to your play time, your experimentation time. If you write news for a living, use this time to work on a novel without the expectation that it will ever see print. If you're a technical writer, spend some time composing poetry, playing with the way that words sound and feel. If you're working on a book, take some time to write an essay about the coolness of the spring morning, or a random character portrait of someone you see in a coffeeshop.
Minimize the interruptions around you during this time, and do not, regardless of what else you do, use this time for paid work. This time is the equivalent of working out at the gym (something else you should do, for what its worth) in that it is not time that is owned by someone else but is necessary for your own sanity. This time takes precedence over everything - even if you have a critical deadline, take this time for yourself, because there will always be critical deadlines, and just as working out physically can often help relieve a lot of the physical stress that you face and make it easier to get things done, so too is this creative exercise time necessary to cut down on the mental stress that you face.
My suspicion, when it's all said and done, is that when I finally die, it will be the work I do during this time, rather than the marketing document for client X due next week, that will define me as a writer. Creativity is rare not because people aren't creative ... most people have a streak of creativity in them ... it's rare because people become so obsessed with the need to do their "work" that they fail to take the time necessary to actually be creative for its own sake, rather than in the service of some larger goal.
Take the time, it'll make you a better writer.
That's when I remembered this blog. It's not a Drupal instance, just a simple Blogger app, but I'm coming to understand that perhaps this is not a bad thing - I need something that I can periodically just write to without having to get sucked up in the mechanics of blogging. I've learned to really like Drupal, but sometimes you need to just walk away from the code and concentrate on the message.
In the case of Metaphorical Web, that's precisely what I intend to do. This can be considered my kick back my feet and just write whatever I want to write blog. I might talk about code, or economics, or just how I'm feeling that day, and I make no promises that you're going to learn anything here, other than maybe the occasional odd rumination.
Ironically enough, as a professional writer, I'm beginning to realize the real value of such a blog. One of the real challenges that you face as a pro writer or journalist is that overall you are always writing for others. You have to consider every thing you say in terms of the editorial message of the site, the audience involved, the needs to promote this or that conference or book or product. Especially in the age of tightening belts, you also have to make sure that what you're writing has value with every article.
Yet here's a secret for you - no writer can be "on" all the time. That's not to say that a writer can't consistently write articles or stories or what not. That part of writing is a lot like what a long distance runner goes through, just building up your endurance so that you can crank out an article every day or two, two to three stories a week. Yet even the best writer (just like that endurance runner) will have off days, will produce a piece or two of forgettable crap for every good story, and the really incredible pieces will be balanced by the occasional article that frankly should have been left exposed on a rock to do a humane death.
What's more, that writer periodically needs to write to no one in particular just to get the frustrations off his chest, to say the things he daren't say when writing for pay, to have, well, a journal. In its own way, writing is an addiction. The more you write, the more that the pathways in your brain see writing as the mechanism for expressing itself, and as a consequence you find that its often difficult to use the medium of speech because your brain is wanting to shape things into words on a page or pixels on a screen.
I've been at a number of author readings and been on panels at everything from science fiction conventions to international conferences with other writers, and one of the things that I've noted is that most writers tend to be naturally taciturn and withdrawn, though certainly capable of speaking eloquently when called upon to do so. At first, my thought was that the profession tended to draw introverts to it, in great part because introverts tend to live more in their head than via interactions with others.
Yet over the years, I've also begun to see that the process of writing reinforces this introversion, makes it stronger. Writers are aloof not because they believe themselves above other people, but rather because writing crowds out speaking and other human interaction, and as a consequence, the skills for dealing with other people become rusty and frequently mechanical, as writers find themselves having to remember how to do these things.
This isn't unique to writers, of course. Creators in most endeavors tend towards this way of thinking. Artists use different pathways, and as a consequence, the way that they view life differs somewhat, but at the same time, most artists become artists because art is the mechanism that they use for communication. Musicians, good musicians, similarly become wrapped around their music - and find that the channels over which they communicate dominate their interactions.
Once consequence of this is that there is a world of difference between communicating with someone in your modality of expression, and someone who simply "appreciates" that modality. I can communicate with my eldest daughter along a channel that others can't, because my daughter has the artist "genes" - the combination of talent and the overriding compulsion to draw and paint - that I have (I was very much the same as she was at her age -I was always drawing). I can communicate with my wife along the writing channel because she is a writer herself, which provides a shared set of referents or symbols (and experiences) that would be lost among non-writers.
Yet the irony is that I'm a lousy critic, which is I suspect also true for most creatives. An artistic critic is someone who looks for meanings and interpretations in a "work of art", as if there was actual intent there to provide such symbolism. I remember in high school one time, an elderly English teacher gave us a test which included the question "Why did Shakespeare write Romeo and Juliet?". My response, for which I received a rather stern lecture, was "because he had to pay the rent."
Writers write for public consumption not to load their works with deep symbols and meanings, but because they've discovered that the voice in their head that demands expression can be occasionally harnessed to pay the bills. The voice, the compulsion, to write, is still there, of course. They would write regardless, just as the artist will draw or the musician play, even if there was no audience. It's their language.
Yet this harnessing the writing impulse to pay the bills has a darker side as well. When everything has a deadline, what this means is that the temptation will be strong to do nothing but write for public consumption, even if what you're writing holds no great interest to you. The stories that you used to write get left undone because the clock is ticking and you have to get three articles on the latest news du jour written by the end of the day, you have to get the next chapter to the manual completed by mid-next week, the interview you did has to be transcribed and re-edited before the next conference. All are important, all pay the bills, but the music, the creativity that you once enjoyed as part of the writing process gets lost - your ability to express yourself gets lost in the requirement of expressing the needs of others.
There's another corrosive aspect of commercialization: you began seeing other writers not as people with whom you have a deeper understanding based upon your art, but as competitors for the same audience, the same revenues, the same
I'm not sure there's necessarily a morale here, though I do have a suggestion to writers, (though it applies just as readily to artists, musicians and other creatives) from a writer who is rediscovering this for himself:
Always leave a certain space for yourself; block out a chunk of time in the week that is devoted to your play time, your experimentation time. If you write news for a living, use this time to work on a novel without the expectation that it will ever see print. If you're a technical writer, spend some time composing poetry, playing with the way that words sound and feel. If you're working on a book, take some time to write an essay about the coolness of the spring morning, or a random character portrait of someone you see in a coffeeshop.
Minimize the interruptions around you during this time, and do not, regardless of what else you do, use this time for paid work. This time is the equivalent of working out at the gym (something else you should do, for what its worth) in that it is not time that is owned by someone else but is necessary for your own sanity. This time takes precedence over everything - even if you have a critical deadline, take this time for yourself, because there will always be critical deadlines, and just as working out physically can often help relieve a lot of the physical stress that you face and make it easier to get things done, so too is this creative exercise time necessary to cut down on the mental stress that you face.
My suspicion, when it's all said and done, is that when I finally die, it will be the work I do during this time, rather than the marketing document for client X due next week, that will define me as a writer. Creativity is rare not because people aren't creative ... most people have a streak of creativity in them ... it's rare because people become so obsessed with the need to do their "work" that they fail to take the time necessary to actually be creative for its own sake, rather than in the service of some larger goal.
Take the time, it'll make you a better writer.
2007-11-29
CDF: The common format you've never heard of
Quick! Do you use the Compound Document Format?! You, know, CDF … surely you use CDF, right?
Chances are pretty good that you have no idea about what I’m talking about. Everyone knows Microsoft’s word document format and Adobe’s PDF, chances are pretty good that if you’re reading this on XML.com you’ve heard of ODF and OOXML, especially after the fairly rancorous discussions about ISO status for these two formats. Yet CDF, hmmmm … that’s a rough one. Didn’t it belong to Corel, once upon a time?
Okay, now, how about this one … do you work with (or even just read) XHTML? Probably, if you’re involved in XML work, your HTML conforms to a great degree to the formal XHTML standard. Good enough. How about CSS 2.1? Sure, who doesn’t. Okay, here’s a biggy -how about XMLHttpRequest? You do AJAX work? Good for you. XForms - well, that one’s a little less prominent, but yeah, it’s beginning to appear. SVG? Hmmm … again, kind of touch and go, but even after a few hard years SVG’s by no means dead yet. The occasional XSLT - Google’s doing some nice work in getting their Javascript based AJAXSLT up and running, which means that those few browsers that don’t support XSLT (and XPath) natively should be able to support it via an AJAX layer. Oh, and perhaps through in XSL-FO for good measure, as it continues its quiet but relentless march into becoming a mainstream format.
So, do you work with CDF? You betcha. The Compound Document Format was set up as a way of tying together at a minimum all of those technologies described above into a single cohesive whole. Put another way, it’s a fancy way of describing the core suite of W3C document standards into a cohesive whole, although it does place some fairly minor requirements on usage in order to provide a consistent standard.
CDF was in the news recently with the implosion of the Open Document Foundation, originally established to endorse ODF, though in its death throes it briefly highlighted the CDF format as perhaps a better format for documents than either OOXML or ODF. This is admittedly one of those areas where it may be justified in looking at XHTML especially and going “huh”? How can that be a full document format - it’s used for web pages, after all - you wouldn’t want to use it to mark up a full book, would you?
Document formats are a lot like religions - people are ready to defend them to the death if need be, yet at the same time it becomes easy to dismiss certain religions that don’t even seem to be religions at all (such as my personal favorite, the rather philosophical Tao). Could you mock up a brochure in XHTML and CSS? Actually, it turns out that its surprisingly easy to do just that - especially if you throw a little SVG into the mix and allow the possibility of embedding XHTML within SVG (for all those odd little bits of rotation and other special effects).
How about linking between blocks of physically disconnected content? That’s what hyperlinks are for, after all. CSS gives you at least a dozen different unit references, lets you control borders, margins, padding, kerning, image placement, color management, and so forth. There are pieces I wish could work better - I’d love to have the capability of defining a color in SVG then referencing it within my XHTML document via CSS; full support of CDF will likely allow that. If you jump just a little beyond the current CSS 2.1 spec you even have some fairly decent support for columns of text, not to mention tabular structures and even VoiceML support. Moreover, consider XInclude support, something that really, really needs to be a part of every browser implementation (though its fairly trivial to write AJAX classes that let you create similar bindings).
These are all disparate documents, not a single “document” akin to Word or the ODF Writer format. However, even that’s not quite true. The effort of the CDF working group has been to essentially standardize on the way that web documents can be “bound together” into what appears to be a cohesive “whole”.
Part of this is accomplished through the use of a standard called the Web Integration Compound Document (or WICD). This standard provides a number of both new features and clarifications:
- an extended definition for the HTML
object, - the integration of Scalable Vector Graphics (SVG) with XHTML and other documents,
- establishes the
andelements, - establishes the characteristics of hyperlinks and focus across the boundaries of namespaces,
- defines the nature of focus across multiple embedded documents,
- introduces support for animation and synchronization, building on the older SMIL and SVG standards, and
- includes support for SVG fonts.
Two additional WICD standards - WICD Mobile and WICD Full - extend these with a few other features, most notably ECMAScript 3rd Edition (4th edition is currently still under development), the XMLHttpRequest to support most AJAX applications, XHTML 1.1 and the CSS 2.1 specification. Additionally, CDF working group also define two “modes” of operation - Compound Documents by Reference (CDR), in which internal content to the document is provided via reference links, and Compound Documents by Inclusion (CDI) in which internal content is rendered into the containing document directly in a different namespace.
Admittedly, I think it can be argued that the W3C effort could do with a few less acronyms (and perhaps a bit more of a PR effort) but overall, what is happening with CDF is a very critical - and welcome - evolution of HTML. The web needs to be more than just static web pages - this has been demonstrated by the continuing strength of the Web 2.0 meme, that documents should be able to talk back to the server and interact with them at higher levels than simple links for refreshing content. Commercial vendors would love to fill that space, and by doing so regain for themselves control over the underlying technologies that make up the web. Yet the message coming about with CDF is both simple and profound: the web grew up on the strength of seemingly simple technologies - HTML, CSS, JavaScript. These technologies are still around, they’re just maturing as people come up with new ideas about what the web can do, the pieces slowly unfolding as we progress further into the realm of the Internet as operating system.
Already, much of CDR has been implemented in the more sophisticatedly forward browsers. Opera 9.5 has a rather extensive support for most of CDF core and Firefox 3.0 is moving in that direction (though the biggest area of weakness is in SVG animation support). JustSystems, a company that has a huge presence in Japan but is only now just (sorry) beginning to make an impact outside of that country, has been working towards a CDF platform for a number of years, and has one of the more expressive (and impressive) displays of how compound documents COULD work (I will no doubt by writing more about JustSystems over time). Both Sony and Nokia have WICD implementations working (as prototypes) on certain of their mobile phone chipsets, with similar announcements from Abbra Vidualize and BitFlash, both makers of mobile graphical chipsets, while Sun is partnering with OpenWave to create a formal WICD implementation in line with JSR 290: JavaTM Language & XML User Interface Markup Integration.
This is no guarantee, of course, that WICD will catch on, or even become a household name (even in geek households), but unlike other technology most of what’s involved already exists, and has already been proven every day millions of times a day. Already, the number of HTML documents that exist dwarf (by a few orders of magnitude) the total number of Microsoft Word documents. As editing increasingly moves onto the web, its safe to say that the document of choice will be neither ODF nor OOXML, both of which gain their power on the basis of supporting legacy word processing systems. Instead, what seems to be emerging from the W3C is something that is not an office suite because it didn’t evolve from one, but that nonetheless is capable of most if not all of the same functions that office suite documents pose.
Moreover, if you come to realize that XHTML by itself is NOT the only targeted compound document (indeed, the specification is rather clear that it is intended to be extended to other formats, from XSL-FO to DocBook to the aforemention ODF or OOXML) then what becomes clear is that the ability to integrate content itself can be standardized, and like many other W3C formats, this move to the metadata level may very well provide the necessary differential to make the technology succeed in even the most competitive of milieus.
So, don’t worry - if you’re not using CDF yet … you will be.
Kurt Cagle is an author and chief architect of Metaphorical Web (http://www.metaphoricalweb.org). He lives in Victoria, BC, where he is making it his mission to visit every Starbucks on Vancouver Island.
2007-11-26
Will Wall Street Tremors Bring Another IT Recession?
Greetings, one and all. I'm bowing to a reality here that Google, in its oh so infinite search engine wisdom, is still finding this particular website more often than it is my Drupal (www.metaphoricalweb.org) site. For the moment, I shall maintain both sites, and see if perhaps something comes of it one way or t'other.
Lately, I find that far more of my reading has centered on economic news rather than upon technical, though to be honest the intricacies of many of the "investment credit vehicles" that have been foisted off on the public frankly put the Obfuscation C Coding Contest winners to shame. In most cases, when a financial fraud is perpetrated, one of the hallmarks that jurors use as evidence is the degree to which illicit cash flows are threaded above, below, and through more mundane transactions. The intent of fraud is simple - make people believe that they are financially safe when in fact their life savings are being purloined.
What your seeing each day in the big financial papers is disclosures of "write-offs" of hundreds of billions of dollars of money by banks, mortgage institutions, hedge funds and similar financial players, largely because these organizations had become engaged in the practice of ... well, fraud.
Mortgage brokers initiated liar loans with people who clearly had no means of paying back even the teaser rates, then got those loans off their books and into "structured investment vehicles" that sliced and diced these shaky loans and, with the assistance of ratings organizations turned these loser portfolios into alchemical gold by building highly leveraged hedges against them.
The banks that purchases these would then get them off their books by selling them to investors, who generally had no idea that the "risk" that they were buying was not safe, conservative debt but rather investments into millions of loans that had about 50/50 chance each of going into default.
Not surprisingly, while many of the mortgage companies and investment banks that perpetrated this nonsense are either in bankruptcy or in financial distress, most of the CEOs who should have put on the brakes early have reaped hundreds of millions of dollars and golden parachutes that will likely see them well into their retirement years.
Of course, the same practices that made this possible also have laid the same insidious seeds within most other credit companies, including credit card issuers and corporate paper investors. As the domino of subprime mortgages fall, its already begun to press auto loan issuers, and there are indications that the commercial credit market is also seizing up as dubious corporate investing also is beginning to look ominously diseased.
Now, I am not an economist - I'm a programmer. While I find this a fascinating exercise to watch in system theory, ultimately the questions that I'm having to ask have more to do with the simple question of how it will affect me, my clients, and the IT industry in general.
Five years ago, the Tech Recession hit. If you were in financial services, you might be forgiven in saying "recession? We're in a recession?!" The effects on most other sectors was comparatively light, though it was devastating if you happened to be in IT. Fully 40% of IT jobs were shed at the height of the recession, programmers who had been buying Starbucks coffee and making six figure incomes suddenly found that the paper options they'd been paid in were worthless, they'd given the best, most productive years of their lives and their most innovative works for comparative peanuts, and they were living in their parent's spare bedroom.
Not surprisingly even now, five years later, a lot of programmers have become skittish about accepting stock options and they have become considerably more parsimonious about how they spend their money (and what jobs they accept in the first place) - and there are comparatively far fewer people entering into the IT field. They've also become very good at watching economic trends, and most programmers that I know who went through that period are getting rather twitchy about now.
Right now, the ill winds of recession are blowing most heavily through the housing sector, especially in the US. One of the things to consider about most recessions is that it is actually quite rare for a recession to affect the entire economy. Instead, in most cyclic recessions, what you have is a situation where supply has temporarily exceeded demand, and the excesses of that supply need to be worked off.
The IT recession of 2002-2004 was a fairly classical one - there was too much investment in IT, both in terms of jobs and in terms of technology, and it took about eighteen months and some fairly severe slashing before demand could catch up with supply. By 2004, even though tech was still technically (sorry) in a recession, there were already signs that things were beginning to recover, and the market very quickly went from too few jobs for the number of workers to too many - to the extent that finding good, qualified people is becoming quite challenging.
The housing sector is going through its own recession, but unfortunately it will take more than eighteen months for demand to catch up with supply; there are a number of reasons for this, from speculators flipping houses who are now left with too many properties and no buyers, to houses going into foreclosure due to onerous adjustable mortgage rate resets, to a longer term demographic switch away from large, costly-to-heat houses in the face of higher energy costs and shrinking families.
Yet by itself, the recession that results from this will also would be at least somewhat self-contained, if an oversupply of houses was in fact the only real problem. Unfortunately, what is now emerging is that this is the domino falling that seems to be catching other dominoes with it. Risk is being repriced much higher, because the same lending practices that made it possible to get a loan for a half-million dollar house with an income of less than $20,000 was also at work in the hedge-fund space, the commercial paper space (which affects corporate buy-outs, business expansion), credit card paper, student loans, re-insurers ... indeed, just about everyone out there is suddenly discovering that the foundations that they were building on was made not of concrete, but quicksand, which has many of the same properties but a rather disturbing tendency to be lethal.
This is the real recession, and the last time that something even vaguely similar happened, Herbert Hoover was president. Credit, which has replaced cash in just about every transaction that occurs today, is rapidly disappearing. Indeed, it is worth it to understand that credit is itself simply a measure of risk. "I will let you take out a loan because I believe you to be a trustworthy individual," the banker should say, "you pay back your loans on time and reliabily, you have open accounting, you have shown good judgment in how you spend your money. "
The problem comes with the next part - "Even the most reliable person occasionally runs into problems. As a banker, I should be compensated for the small chance that you will be unable to pay your loan under the terms you and I set out. That compensation is the interest on the loan."
So what's a reliable rate of interest? This is where things get tricky. The more risky the investment, the higher the rate of return should be, so the higher the rate of interest, and the harder it becomes to qualify for a loan. The problem of course is that the banks make money on that interest, and in good economic times it becomes easy to fudge the credit-worthiness of an individual or two, if higher returns is the desired goal. Of course, once risk becomes high enough, it becomes far more profitable to initiate the transaction (be it mortgage, credit card application, or small business loan) then sell off that risk to someone else. That proved SO profitable that the process got repeated many times, with the same questionable risks getting packaged and repackaged to the point where there was no real way of determining where the risks were - or, more to the point, what they were.
Now, that whole edifice is going through a slow motion crash, and despite everything you hear in the Wall Street Journal or CNN/Money, it is going to continue to crash into other sectors. Right now, it really hasn't fully impacted the consumer (though there's another factor working there) but it will. If no one has any idea what the real value of risk is anymore, no one will initiate loans. Companies are already finding it increasingly difficult to get funding that used to be routine. Companies can't expand beyond the reserves that they already have on hand, and already accountants at many companies are beginning to question just how stable those reserves are. More than one company has been forced to delay even paying their employees or their accounts because their banks have frozen all accounts.
In the late 1930s, the FDIC was established in order to avoid a credit crunch like the one that wiped out the economy in 1929. It stipulated that banks always maintain a fixed percentage of assets (originally 10% of total capital lended) in order to insure that in the event of a bank run, there was enough operating capital to keep the bank afloat until help could be arranged. Additionally, many banks were required to honor the first $100,000 of deposited funds. The problem is that lax regulatory oversight has effectively eviscerated most of the FDIC's mandate, to the extent that it is unlikely that most banks could in fact meet 1% of total capital extended if they had to.
Of course, in order to look like they were in fact complying with these strictures, many financial institutions put much of their assets off the books into secondary corporations that were not then subject to the limitations, meaning that the actual debt that a financial institution had was generally far greater than what they showed on the books. So long as no one looked too closely (and when the money was great enough people would not look too closely) this meant that banks could make incredible returns by lending money that, for all intents and purposes, didn't really exist.
The problem is a Schroedinger Cat crisis. In quantum mechanics, there is a classical thought experiment in which a single atom of uranium is placed in a special trap that would, when the atom decayed, release a toxic gas that would kill a cat locked in a box. Quantum theory states that what is at work here is a wave function, and as such, the cat could simultaneously be both alive and dead, and the only way that you could actually tell (well, besides the obvious yowling of a pissed boxed cat) was to open up the lid. Once you had opened the lid, then you had collapsed the wave function, and there could be only one solution.
The banking industry has been build on the same wave functions, and so long as no one looked in the box, then there could be an infinite amount of money there. Once you open the box, unfortunately, reality steps in, and the reality is considerably more disappointing than anyone could have hoped.
So what happens this time around to IT. The credit crunch will hit in a number of ways:
-- Kurt Cagle
Lately, I find that far more of my reading has centered on economic news rather than upon technical, though to be honest the intricacies of many of the "investment credit vehicles" that have been foisted off on the public frankly put the Obfuscation C Coding Contest winners to shame. In most cases, when a financial fraud is perpetrated, one of the hallmarks that jurors use as evidence is the degree to which illicit cash flows are threaded above, below, and through more mundane transactions. The intent of fraud is simple - make people believe that they are financially safe when in fact their life savings are being purloined.
What your seeing each day in the big financial papers is disclosures of "write-offs" of hundreds of billions of dollars of money by banks, mortgage institutions, hedge funds and similar financial players, largely because these organizations had become engaged in the practice of ... well, fraud.
Mortgage brokers initiated liar loans with people who clearly had no means of paying back even the teaser rates, then got those loans off their books and into "structured investment vehicles" that sliced and diced these shaky loans and, with the assistance of ratings organizations turned these loser portfolios into alchemical gold by building highly leveraged hedges against them.
The banks that purchases these would then get them off their books by selling them to investors, who generally had no idea that the "risk" that they were buying was not safe, conservative debt but rather investments into millions of loans that had about 50/50 chance each of going into default.
Not surprisingly, while many of the mortgage companies and investment banks that perpetrated this nonsense are either in bankruptcy or in financial distress, most of the CEOs who should have put on the brakes early have reaped hundreds of millions of dollars and golden parachutes that will likely see them well into their retirement years.
Of course, the same practices that made this possible also have laid the same insidious seeds within most other credit companies, including credit card issuers and corporate paper investors. As the domino of subprime mortgages fall, its already begun to press auto loan issuers, and there are indications that the commercial credit market is also seizing up as dubious corporate investing also is beginning to look ominously diseased.
Now, I am not an economist - I'm a programmer. While I find this a fascinating exercise to watch in system theory, ultimately the questions that I'm having to ask have more to do with the simple question of how it will affect me, my clients, and the IT industry in general.
Five years ago, the Tech Recession hit. If you were in financial services, you might be forgiven in saying "recession? We're in a recession?!" The effects on most other sectors was comparatively light, though it was devastating if you happened to be in IT. Fully 40% of IT jobs were shed at the height of the recession, programmers who had been buying Starbucks coffee and making six figure incomes suddenly found that the paper options they'd been paid in were worthless, they'd given the best, most productive years of their lives and their most innovative works for comparative peanuts, and they were living in their parent's spare bedroom.
Not surprisingly even now, five years later, a lot of programmers have become skittish about accepting stock options and they have become considerably more parsimonious about how they spend their money (and what jobs they accept in the first place) - and there are comparatively far fewer people entering into the IT field. They've also become very good at watching economic trends, and most programmers that I know who went through that period are getting rather twitchy about now.
Right now, the ill winds of recession are blowing most heavily through the housing sector, especially in the US. One of the things to consider about most recessions is that it is actually quite rare for a recession to affect the entire economy. Instead, in most cyclic recessions, what you have is a situation where supply has temporarily exceeded demand, and the excesses of that supply need to be worked off.
The IT recession of 2002-2004 was a fairly classical one - there was too much investment in IT, both in terms of jobs and in terms of technology, and it took about eighteen months and some fairly severe slashing before demand could catch up with supply. By 2004, even though tech was still technically (sorry) in a recession, there were already signs that things were beginning to recover, and the market very quickly went from too few jobs for the number of workers to too many - to the extent that finding good, qualified people is becoming quite challenging.
The housing sector is going through its own recession, but unfortunately it will take more than eighteen months for demand to catch up with supply; there are a number of reasons for this, from speculators flipping houses who are now left with too many properties and no buyers, to houses going into foreclosure due to onerous adjustable mortgage rate resets, to a longer term demographic switch away from large, costly-to-heat houses in the face of higher energy costs and shrinking families.
Yet by itself, the recession that results from this will also would be at least somewhat self-contained, if an oversupply of houses was in fact the only real problem. Unfortunately, what is now emerging is that this is the domino falling that seems to be catching other dominoes with it. Risk is being repriced much higher, because the same lending practices that made it possible to get a loan for a half-million dollar house with an income of less than $20,000 was also at work in the hedge-fund space, the commercial paper space (which affects corporate buy-outs, business expansion), credit card paper, student loans, re-insurers ... indeed, just about everyone out there is suddenly discovering that the foundations that they were building on was made not of concrete, but quicksand, which has many of the same properties but a rather disturbing tendency to be lethal.
This is the real recession, and the last time that something even vaguely similar happened, Herbert Hoover was president. Credit, which has replaced cash in just about every transaction that occurs today, is rapidly disappearing. Indeed, it is worth it to understand that credit is itself simply a measure of risk. "I will let you take out a loan because I believe you to be a trustworthy individual," the banker should say, "you pay back your loans on time and reliabily, you have open accounting, you have shown good judgment in how you spend your money. "
The problem comes with the next part - "Even the most reliable person occasionally runs into problems. As a banker, I should be compensated for the small chance that you will be unable to pay your loan under the terms you and I set out. That compensation is the interest on the loan."
So what's a reliable rate of interest? This is where things get tricky. The more risky the investment, the higher the rate of return should be, so the higher the rate of interest, and the harder it becomes to qualify for a loan. The problem of course is that the banks make money on that interest, and in good economic times it becomes easy to fudge the credit-worthiness of an individual or two, if higher returns is the desired goal. Of course, once risk becomes high enough, it becomes far more profitable to initiate the transaction (be it mortgage, credit card application, or small business loan) then sell off that risk to someone else. That proved SO profitable that the process got repeated many times, with the same questionable risks getting packaged and repackaged to the point where there was no real way of determining where the risks were - or, more to the point, what they were.
Now, that whole edifice is going through a slow motion crash, and despite everything you hear in the Wall Street Journal or CNN/Money, it is going to continue to crash into other sectors. Right now, it really hasn't fully impacted the consumer (though there's another factor working there) but it will. If no one has any idea what the real value of risk is anymore, no one will initiate loans. Companies are already finding it increasingly difficult to get funding that used to be routine. Companies can't expand beyond the reserves that they already have on hand, and already accountants at many companies are beginning to question just how stable those reserves are. More than one company has been forced to delay even paying their employees or their accounts because their banks have frozen all accounts.
In the late 1930s, the FDIC was established in order to avoid a credit crunch like the one that wiped out the economy in 1929. It stipulated that banks always maintain a fixed percentage of assets (originally 10% of total capital lended) in order to insure that in the event of a bank run, there was enough operating capital to keep the bank afloat until help could be arranged. Additionally, many banks were required to honor the first $100,000 of deposited funds. The problem is that lax regulatory oversight has effectively eviscerated most of the FDIC's mandate, to the extent that it is unlikely that most banks could in fact meet 1% of total capital extended if they had to.
Of course, in order to look like they were in fact complying with these strictures, many financial institutions put much of their assets off the books into secondary corporations that were not then subject to the limitations, meaning that the actual debt that a financial institution had was generally far greater than what they showed on the books. So long as no one looked too closely (and when the money was great enough people would not look too closely) this meant that banks could make incredible returns by lending money that, for all intents and purposes, didn't really exist.
The problem is a Schroedinger Cat crisis. In quantum mechanics, there is a classical thought experiment in which a single atom of uranium is placed in a special trap that would, when the atom decayed, release a toxic gas that would kill a cat locked in a box. Quantum theory states that what is at work here is a wave function, and as such, the cat could simultaneously be both alive and dead, and the only way that you could actually tell (well, besides the obvious yowling of a pissed boxed cat) was to open up the lid. Once you had opened the lid, then you had collapsed the wave function, and there could be only one solution.
The banking industry has been build on the same wave functions, and so long as no one looked in the box, then there could be an infinite amount of money there. Once you open the box, unfortunately, reality steps in, and the reality is considerably more disappointing than anyone could have hoped.
So what happens this time around to IT. The credit crunch will hit in a number of ways:
- No money available for expansion of companies, beyond existing funds. Too many companies have been "living beyond their means", using their existing reserves as collateral against loans. As those loans begin to dry up, they are forced into using those reserves, which often may be tied up in existing investments and thus are less than completely liquid. When you are forced to sell to meet costs, you often get a far less than ideal value for your assets, especially when everyone else is doing the same thing.
- Illiquid third party investment. VCs and other investment companies will have more demand on their moneys from more traditional sources, which may be good for the VCs (in the short term) but it also dries up much of the money that IT startups in particular count upon. Moreover, many of those VCs represent funds that may also be fairly heavily hedged, and so the same repricing of risk that is going on in the commercial sector will make it harder for them to pull together the funds necessary to complete deals.
- Strapped consumer spending. Don't pay too much attention to all of the sighs of relief after Black Friday sales. People are strapped for cash, and they are as attracted to a bargain as anyone. The problem will come soon enough, as people can no longer take out much money via a second mortgage, will be facing stagnant wages and unemployment in December (one of the highest months for force restructuring) and will find it difficult to get credit extensions on their credit cards. I expect that consumer spending will plummet in the next couple of months. Sales from Walmart are done from last year, but so are the sales from high end luxury brands. This will mean that spending on consumer software and hardware will also in general be declining pretty dramatically in the next few months, which directly impacts people in IT.
- Declining dollar. As the economy becomes more distressed, calls will be made increasingly to cut interest rates. The problem with that is that the dollar's value is declining relative to other currencies as rates go down, making American goods and services cheaper ... but also making American companies cheaper. This will reduce the attractiveness of outsourcing (a definite plus for developers, who've often had to compete with foreign developers) but will make it more likely that companies in other countries may start outsourcing to American IT workers. On the other hand, this will likely only happen once American wages become competitive with those in countries like China or India, which means that programmer's standards of living will likely be dropping for some time before you see a massive influx of capital, and that capital will likely mean that the "parent company" of your company is not even in your hemisphere.
Note that the carry trade in currencies will likely intensify as people move money out of both hard assets (short term, commodities will likely stall somewhat, though the long term outlook is still somewhat bullish) and financial assets (nearly all classes, long term) but seek even some returns. The downside is that this will likely lead to greater instability in the currency markets, with the possibility that one or more countries could "crash" - the US being at a very real risk of this. - Energy costs. IT has generally been a net consumer of power, though that's changing. In many ways, IT has been working towards applying technology to reduce their energy footprint for financial reasons rather than ecological ones, but of all departments in a given company, IT is often the "greenest". On the other hand, a significant amount of energy costs are due to a declining dollar (along with considerations for peak oil and other geopolitical issues) which means that the relative cost of oil (and hence gas) will affect the prices of goods that need to be transported (nearly everything at this stage) and hence will mean that computer infrastructure (which has generally been declining at a rate consistent with Moore's Law) will likely start getting more expensive again relatively speaking (though it may end up spurring additional investment into local hardware production infrastructure such as chip fabrication plants).
The cost will also accelerate the decade long trend of distributing the corporations into islands of loosely connected individuals who may actually work half a world away from where they live. If your workers are spending four hours a day on the road and are forced to pay an increasing premium for the privilege, they will go elsewhere where they can telecommute instead. - No (immediate) bloodbath in IT. Corporations are going to be considerably more loathe to trim their IT staff, in part because that staff has only begun to recover from the last bloodletting, and in part because in many cases existing infrastructure has been pushed for about as long as it can be, so the imperative for improving core infrastructure will likely remain strong even in the face of slowing sales. On the other hand, its unlikely that you will see a lot of companies do anything beyond low cost pilot projects for R&D, especially after the first quarter of next year. As the recession spreads to other industries, I think that IT could be vulnerable on an industry by industry basis, but some of that may be mitigated by investment from foreign investors seeking firesale prices on companies.
- Shakeout of vulnerable companies. There are a fair number of mid-sized IT companies in certain sectors that managed to survive the Tech Winter, but that are increasingly becoming vulnerable. Even a year ago, these companies would likely have been bought up by larger or more successful companies, but as the available moneys for buyouts dry up, what will more likely happen is that the less successful of these will be forced into bankruptcy instead, without the "Get Out of Jail" card that seems to be the privilege of companies in other sectors.
The irony is that a lot of new startups may actually end up surprising relatively intact. While there is some fluff in the startup space, it never reached the level of 1999, and a lot of the companies that started in the last five to six years are generally very lean (and fairly heavily open source-based, from all indications) and for the most part are considerably more pragmatic about the market. On the other hand, there will be relatively few IPOs for the next several years out of this sector (though this has been a trend since around 2000).
- Save money when you can, and reduce spending on extravagances. If you currently have any debts (especially credit card debt) pay it off and get out of those cards, highest interest first. Debt ties you down and reduces your cash-flow, which will be threatened at the best of times.
- Stay as liquid as possible, and if possible diversify your funds out of US dollars, at least for the next year or so. If you can land one or more clients that are out of the US, even better, though try to negotiate in funds out of US dollars if at all possible. It's likely that 2008 won't be quite the rout for the dollar that 2007 has turned out to be, but it is also likely that you still will likely turn out better in foreign funds, even with conversion rate charges.
- On a similar note, for the short term, if you are invested in equities, resource and energy stocks will likely be the most solid for the foreseeable future, though you are looking there less for significant gains but to minimize losses.
- Diversify your client list as much as possible - and be fairly ruthless in negotiating. They will be. Assume the likelihood of a default by one or more clients is at least a possibility, and plan accordingly ... its possible that all of your clients may go belly-up at once, but in most instance, if you have three or four clients, you should be able to maintain steady work. On the other hand, work hard to deliver as promised ... the ones that do survive generally are ones you want to keep.
- If you do find yourself between clients, spend that time getting caught up on skills that you didn't have the chance to work on while you were too busy with clients. Unless you are fairly new to the programming field, you're best served by increasing the depth of your skill rather than the breadth, unless the shift to the new field is part of a larger move into that technology as a base. Be thinking a year ahead in terms of where tech will be.
- In boom-times, programmers generally find recruiters to be pests. In bust-times, recruiters find programmers to be pests. Find a few good recruiters at various companies and get to know them, even refer people to them when you're offered a job you can't or do not want to take. They'll be more inclined to use you when times get tough.
- Recessions generally happen for reasons that you have little or no control over, but it is easy to become stressed, bitter, depressed or angry during those times, often making it harder for you to get motivated to work or look for work if there isn't any. It's worth remembering that programmers in general usually tend to have very desirable skill sets. If you have the time, join and contribute to open source projects - not only will you keep your skills up to date and work on interesting (and occasionally even useful) projects, but you stand a better chance of making contacts, developing your interpersonal network and gaining early proficiency in new technology by doing so. It will also let you combat the tendency to want to crawl up in a ball and whimper all day. Indeed, staying connected in general is a good idea.
- Keep alert and informed. In general, diversify your news sources (especially economic and political) and verify what's going on with one from another. Assume that no one knows the exact timing of when the "recession" or "recovery" first hits until after it has happened.
-- Kurt Cagle
2007-09-23
Move to Metaphorical Web.org
Trying to stay current on the web can prove a challenge for anyone, but if you publish a blog, you're likely to find making sure all the links that you have out there are in fact pointing to the right place one of the biggest challenges. I've recently moved Metaphorical Web to a new Drupal-based site:
www.metaphoricalweb.org
both because I needed the ability to customize the site to display code samples and the ability to set up and maintain web feeds, external links and a forum that I couldn't get from the Blogger environment. I hope that you join me there.
-- Kurt Cagle
www.metaphoricalweb.org
both because I needed the ability to customize the site to display code samples and the ability to set up and maintain web feeds, external links and a forum that I couldn't get from the Blogger environment. I hope that you join me there.
-- Kurt Cagle
2004-12-22
Migrating Metaphorical Web
I have started using a new blog software provide for The Metaphoric Web, incorporating it under M. David Peterson's UnderstandingX*L sites at http://www.understandingXML.com. Please join me there. I will be redirecting the Metaphorial Web URL (http://www.metaphoricalweb.com) to that address by the first of the year.
-- Kurt Cagle
-- Kurt Cagle
2004-12-21
Take 2: Chaos and XML
When I wrote the last post, I didn't realize at the time that I was running about a 102 F temperature, and would end up spending the next three days in bed with alternating bouts of chills and sweating, talking in my sleep - it was not one of the more pleasant weekends I've ever spent. While the underlying concept of measuring complexity is sound, I erred on the definition of entropy. Entropy is not a measure of the number of states in a given system configuration, but rather a measure of the change in the number of states in a configuration over time - in a non-self organizing system, the potential number of states increases, consequently becoming more disorganized (or more properly, converting into heat).
The concept describing the log of the number of states itself is the multiplicity of a system. Multiplicity isn't of course the only measure of complexity, but its a pretty useful one. Think of the traditional model of chaos - the conversion of laminar flow to turbulance. Typically there the first state is simple laminar flow - each water molecule flows in a straight line. As the flow moves faster, interactions with the surrounding media become more prominant, causing first a split into two streams, then four, then eight, until eventually there are thousands of such substreams, and the water becomes turbulant (this is the typical model described by Lorentz equations, by the way).
I have to wonder, though, if in fact there is some underlying connectivity between language (whether human based or artificial, as in the case of XML) and chaos theory, by this same modelling. Specifically, as the multiplicity of a document schema increases, so does the turbulence induced by that schema. I'm not sure what that the interpretation of that turbulence might be, though informational noise would be an obvious candidate. A simple schema is unambiguous - the specific meaning of a given aspect (element content or attribute value) is clearly defined, within its own constraints. However, as the number of aspects increase, their potential for coupling increases, for two properties to both be dependent upon a third (potentially undeclared) property, or two elements may in fact describe the same property in different and potentially conflicting, ways. Ambiguity is a form of informational noise.
Keeping this short (for me) tonight. I will be migrating in the near future to a new website, though it should still be accessible via http://www.metaphoricalweb.com. Until next time ...
The concept describing the log of the number of states itself is the multiplicity of a system. Multiplicity isn't of course the only measure of complexity, but its a pretty useful one. Think of the traditional model of chaos - the conversion of laminar flow to turbulance. Typically there the first state is simple laminar flow - each water molecule flows in a straight line. As the flow moves faster, interactions with the surrounding media become more prominant, causing first a split into two streams, then four, then eight, until eventually there are thousands of such substreams, and the water becomes turbulant (this is the typical model described by Lorentz equations, by the way).
I have to wonder, though, if in fact there is some underlying connectivity between language (whether human based or artificial, as in the case of XML) and chaos theory, by this same modelling. Specifically, as the multiplicity of a document schema increases, so does the turbulence induced by that schema. I'm not sure what that the interpretation of that turbulence might be, though informational noise would be an obvious candidate. A simple schema is unambiguous - the specific meaning of a given aspect (element content or attribute value) is clearly defined, within its own constraints. However, as the number of aspects increase, their potential for coupling increases, for two properties to both be dependent upon a third (potentially undeclared) property, or two elements may in fact describe the same property in different and potentially conflicting, ways. Ambiguity is a form of informational noise.
Keeping this short (for me) tonight. I will be migrating in the near future to a new website, though it should still be accessible via http://www.metaphoricalweb.com. Until next time ...
Subscribe to:
Posts (Atom)
Posts
