Enjoying Creative Destruction: a Review of Alan Greenspan's The Age of Turbulence

After seeing Alan Greenspan's clip on the Daily Show I figured it was worth picking up his book titled The Age of Turbulence, and I just finished it on my flight back to the United States. His book is sold as about economics, but it really is about understanding the emotions and psychology that drive markets.

Personal Property Rights

Protecting personal property rights is crucial to creating a market worth investing in or participating in. Who wants to work only to see their work arbitrarily stolen?

Frank Schilling wrote about domain names:

People flock to America to invest, build their lives and homes because it is a land of opportunity (current credit market warts and all).. People go to namespaces for the same reason.

Some of the largest and most powerful Internet companies profit handsomely by having no respect for copyright. Double talk like Youtube's recent "we support this copyright agreement" while standing on the sidelines of the associated agreements won't work as a strategy in 5 years.

Centrally Planned Economies Falter

The book talked about the fall of communism and how unbelievable devastated East Germany was by the time the Berlin Wall was ripped down. As markets get more complex the central networks and central regulators are less able to control markets, and instead move to a role of providing guidance and direction. Reactionary caps and regulations often end up heavy handed, setting off cascading imbalances.

Even central military planning has its limits. Greenspan highlighted how capitalism has spread to parts of the world which were unwilling to change after US military campaigns, later stating that for economic growth: "The evidence of human history strongly suggests that positive incentives are far more effective than fear and force."

Greenspan quoted a Martin Feldstein's article:

Cellphone service is widely available [in India] at low cost because it was regarded as a luxury and therefore left to the market, while electricity is hard to obtain because it has been regarded as a necessity and therefore managed by the government.

Google, which put search and ads at the center of their network, and bolts on lower margin stuff is using a model that is more effective and more forward looking than Yahoo's model, which is to attempt to be a leading publisher in virtually every high value and/or high traffic field.

From a business scalability standpoint it is also better to sell access to a community that works together rather than relying too heavily on a single individual. This is a huge weakness in my current business model. My model would be far more effective if this site were more of a gathering spot than me just spouting off about whatever I felt like writing about, and selling one hit product.

Most increases in economic activity typically come from specialization and division of labor. If you try to do too many things the custom systems that once set you apart become legacy infrastructure that hold you back.

Increasingly we will rely on outsourcing, smaller start ups, and the outlook of being employed will drastically changed. Paul Graham recently wrote:

We now think of it as normal to have a job at a company, but this is the thinnest of historical veneers. Just two or three lifetimes ago, most people in what are now called industrialized countries lived by farming. So while it may seem surprising to propose that large numbers of people will change the way they make a living, it would be more surprising if they didn't.

Marketing Can Make Life Meaningless

Alan wrote:

And one can seek material well-being and yet view competitive markets as subject to excessive manipulation by advertisers and marketers who trivialize life by promoting superficial and ephemeral values.

That quote reminds me of the shock I had when I learned that in the Philippines they sell skin whitening cream, while in the US the standard sales pitch is for making your skin darker.

He also referenced The Theory of the Leisure Class by Thorstein Veblen, about how people consume based on the consumption habits of others, which hints at the increasing forward value of being a top editorial channel and/or a social recommendation engine which is quick to hightlight the latest trends.

As virtually everything gets commoditized, selling in the future will require increasingly strong social proof of value. Those who have a history of recommending things of value will continue to gain relevance and distribution at the expense of those who are afraid to be biased in favor of being objective.

The Beauty of Creative Destruction

One of the things Mr. Greenspan emphasized more than just about anything else was the value of creative destruction, which is the killing of old business models and the shifting of capital toward better business ideas / models / formats. Having just got back from a month long stay in Manila, I could put the book into context by thinking of some of the business models that were relevant and prevalent in one location, but not relevant in another.

The trade-off for an efficient marketplace that keeps moving capital is that jobs are quite temporal in nature and stress levels are higher than in more socialistic societies. Online you can think of information and services as consistently moving toward free, but people will always be willing to pay for good formatting, clarity, reputation, empathy, and how well they trust you.

If you test evolving formats and technology you

• learn how to apply them to older fields
• learn what markets will change before most people do
• are more likely to be considered remarkable
• enjoy effective marketing techniques before mass pollution rendered them worthless

To put this in perspective, one of the marketing techniques that I was successful with last year has been cloned by virtually all of the big competitors in that same category. If I was not first with the idea they would have destroyed the associated profit margins by saturating the market with similar ideas and a larger stack of capital than I can afford to risk.

If you think about the success of this site, much of it is due to being one of the first bloggers covering SEO stuff. Start a blog about SEO today and it would be much harder to gain traction. I also was one of the first SEOs to make publicly available extensions for modifying search results and aggregating data via widgets. All of that stuff is free though, I likely need to change the format of what I am selling away from a singular large ebook into a format that is more friendly to consume, such that I can go even deeper with providing more high value information without overwhelming people.

Even if you are using creative destruction to push your business model, profit margins, and your field it still helps to do whatever you can to offset that destruction part to appeal to "the deep human need for stability and permanence." If people think you change too much then they might be less likely to want to invest in your business or even link at your website. When possible, small incremental changes tend to be more effective than large changes. Don't make frequent and drastic changes to your homepage.

Economic growth is becoming more ideas oriented - less tangible and more conceptual. This means that you will not need as much capital to compete going forward. You will only be required creativity and a willingness to be wrong from time to time.

The Media

Greenspan spoke about how his support for measured tax cuts IF the budget surplus remained were reported in the media as "Greenspan to Back Tax Cuts." He also highlighted how his quotes urging spending restraint fell on deaf ears and became about taxation.

The dumbing down and misquoting that is common in the media is yet another reason people will increasingly flock to independently published websites.

Wealth Disparity and Redistribution

When new technologies change markets rapidly there is an increase in income stratification. You and I do (or soon will) benefit from the inequality of wealth distribution based on new technologies associated with the WWW.

The low skilled US labor prices are dropping because of

• deflationary pressures from unlocking high quality laborers that were unavailable in years past due to central economic planning
• better and more sophisticated software (I have wasted many days doing junk that a software program should have been able to do far faster)
• cheaper communication

Other Economic Tidbits

• Dutch Disease - Developing countries that discover an abundance of natural resources tend to stagnate. Currency appreciation kills the competitiveness of other export based business models and revenues from the resource make people lazy.
• moral hazards - government insurance causes people to take risks they otherwise wouldn't (like the current mortgage mess)
• Oil - prices are far more elastic than many appreciate, and Greenspan thinks there is plenty of oil, but we should be aggressive in promoting the use of alternatives like nuclear power and biofuels.
• Alan also does not think the trade deficit or foreign governments holding US dollars pose big risks

I Was Wrong

I used to think that some of the central bankers were pretty dirty based on watching a documentary about it. In years past many of them likely were, but after reading Alan Greenspan's book I trust him, largely for the following 5 reasons:

• In his book he said his mother was "not the least bit intellectual". Even if that statement were true about one of my parents and that parent was dead I can't imagine being blunt enough to write that line in what amounts to a widely read autobiography.
• He was already making loads of money before working at the Fed. If it was money he was after he could have got much more of it for far less stress.
• He admitted that the Fed did once attempt to raise interest rates to pop the tech stock bubble, but doing it small enough to not hurt economy does not kill the euphoria and only further validated the run up.
• On page 463 Alan wrote "And whatever their publicized angst over Saddam Hussein's 'weapons of mass destruction,' American and British authorities were also concerned about violence in an area that harbors a resource indispensable for the functioning of the word economy. ... I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil."
• In a recent interview he went on record and admitted that the Federal Reserve was not fully independant.