I read a fair amount and it’s usually only a book a year that noticeably shapes my thinking years into the future. In 2012, that book was The Fourth Economy.

When I met with the author, Ron Davison, I told him it influenced my thinking more than anything I’d read since the Communist Manifesto at 18 which lead to 3 years of my life chasing rabbits down socialist, ideological tunnels.

Gracious enough to chuckle, Ron’s more humble than Marx and in much better touch with reality. To the extent his book predicts the future, it continues existing trends into the future rather than predicting unprecedented revolution.

I’ve probably recommended the book to fifty people in that time with as far as I can tell one person actually taking me up on it which is more of a commentary on my persuasiveness than the book. The Fourth Economy is dense and long. Despite what you can tell is painstaking work to provide example and analogies, the concepts are complex and profound, all making it poorly summed up in bar talk.

It’s integrates the last 714 years of Western history into a single coherent framework.

In an effort to improve success rate in recommending the book, this is a very relatively brief, very rough annotated summary of the overall concept, and an exploration of the concepts most applicable to the day-to-day work of entrepreneurs and organizations.

Looking back over the preceding 50 years, the U.S. economy has gone from producing 2.5 million jobs per year from 1960 up until 2000 to shedding jobs at a rate of 100,000 per year in this century.

While the popular view point has been to label it a painful global recession, the other possibility is that we’re transitioning between two distinct economic periods.

If we’ve reached an economic and social limit where investing more into the previous limit, knowledge work, won’t get us out of our present condition, only shifting focus towards an entrepreneurial economy will return growth on both a macro and micro level.

To substantiate the claim, the book traces the last 700 years of human history showing the distinct economic period the West has moved through and the different characteristics of each. (I’m not doing the whole 700 years in this post, promise, just the major concepts.)

At each economic transition, we’ve seen diminishing returns from investing in the previous limit. That is the limit of what is holding back the economy has shifted. In the chart above, that’s the things in the “develop and acquire” column.

An easy way to understand limits is to use Eli Goldratt’s Theory of Constraints from manufacturing. Basically, the Theory of Constraints says that any system with a goal has one limit and worrying about anything other than that limit is a waste of resources.

Imagine you have an assembly line with three sections and two of those sections can produce 100 units per hour while the third can only produce 50 units per hour.

Any investment outside of improving the third section won’t improve the outcome. Doubling the first two to be able to produce 200 units per hour while the third can still only produce 50 still nets you 50 units per hour at the end of the day.

This is dramatically over-simplified in a macro context. Because economies and societies are far more complex systems than an assembly line, different limits can exist in the same society.

There are still farmers and manufacturing companies, but the broadest segment of Western societies is employed in the knowledge economy.

However, it’s a useful tool for understanding how investment in one area works.

When the limit of an economy shifts through the four different stages, from land to capital, capital to knowledge, and knowledge to entrepreneurship, investing more heavily in what has always worked won’t improve the output.

Looking at it historically:

To overcome the limit of capital, a community might invent a bank or a steam engine (or to be more historically accurate, one of the myriad innovations that become a part of what we now think of as a bank or steam engine – these defining inventions are actually complex systems). Once a limit is overcome, though, a community has a choice: stagnate by continuing to focus on what used to limit or reinvent itself by shifting its focus to the new limit.

At the dawn of an industrial economy, a community is limited by capital; without machines or money people have to make things by hand and, as a result, have very few things. By the end of an industrial economy, by contrast, they have enough machinery and money to make lots of products. When that happens, the limit has shifted from capital to knowledge workers who can do things like create advertising that creates demand for all the products that capital can make. At different stages of development, economies have different limits and those limits define them.

The question then is are we stagnating because we’re just in a recession or because we’re focused on the wrong limit?

At one stage of development, you can make progress just by raising graduation rates, increasing your output of knowledge workers. At the next stage, increasing graduation rates might do little to further progress; the limit has shifted.

In an entrepreneurial economy, systems move from complicated to complex within the Cynefin Framework . The limits to growth are less and less solved by best or even good practices, but by people who are trained in trial and error.

Application 1: Microsoft Excel and Harvard MBA. Application 2: High School Diploma. Ability to repurpose existing resources into higher more profitable in most cases uses.

Instead, entrepreneurship limits most businesses and individual. The ability to repurpose existing resources (land, capital and knowledge) into higher and better (read:more profitable in most cases) uses.

Knowledge work, across all domains, is becoming increasingly commoditized and competitive.

I read an article recently saying that 1 in 10 applications to top tier universities in the U.S. is now a Chinese student and some absurd percentage of them score 800 or better on the SAT.

The glut of lawyers in the U.S. may be the most obvious example, but even professions like engineering and the other somewhat hallowed STEM fields are growing more competitive as globalization improves access to education.

I chuckle when people put “Microsoft Excel” on their resumes. Partially because I’m an ass, and partially because it’s an indication of how out of touch traditional institutions have put most people

I see this all the time with businesses I work with entrepreneurs that I talk to. Very few entrepreneurs and business owners (especially high-growth businesses) are lacking for competent knowledge workers.

A Shift in Limits

Once you accept that we’ve reached at a transition point, the question becomes in order to return to growth, what has to happen?

In every previous economic transition, two revolutions have taken place:

An Economic (or Technological) Revolution – a transformation of the dominant institution (in the current case, the corporation) A Social Revolution – A change in the dominant player (in the current case, the entrepreneur/self)

When we moved from the Industrial to the Knowledge Economy, the limit shifted from capital to knowledge workers. Banks had become extremely effective at producing capital, but the economy didn’t have enough knowledge workers to grow.

Because the corporation produced knowledge workers more effectivley than banks, the power shifted from banks to corporations (which is not say previously dominant institutions like banks or nation-states didn’t still have power, just that they had relatively less than they did before. The president still has a lot of power, but to what degree do politicians wield their power outside of the influence of corporations? Most Americans would argue “not much.”)

In the 1970’s, banking went from a relationship-based business to a transactional one. It became commoditized.

IBM’s 1975 bond issue makes this pretty clear.

IBM told Morgan Stanley that it would ignore its rule of dealing exclusively with them and would bring in Salomon Brothers to help with a billion-dollar bond issue. Upset, the directors from Morgan Stanley refused to cooperate with IBM and Salomon. They thought that IBM, intimidated, would back down. Instead, IBM went ahead without Morgan Stanley. As Morgan Stanley feared, this did indeed set a precedent. Most people know that IBM helped to popularize the personal computer, giving households and small businesses confidence in a technology in a way that lesser known brands—like Apple, Commodore, Osborne, and Tandy—could not. Fewer realize that IBM helped to usher in a world of transactional banking to replace relationship banking. There might have been no more obvious sign that the corporation had eclipsed the bank. -Ron Davison, The Fourth Economy

The demand for knowledge work eclipsed the demand for capital. Banks were subjugated to corporations.

Implications of an Entrepreneurial Revolution

Dramatically Outsized Gains for Entrepreneurs

Right now, becoming an entrepreneur is like becoming a knowledge worker in 1900. That is, it is possible but hard enough that few people do it. -Ron Davison, The Fourth Economy

It looks to me like the same thing is happening now with entrepreneurs and corporations.

The multiples that are commanded by entrepreneurial companies when they’re acquired by corporations are seemingly absurd and yet steadily rising.

Entrepreneurial companies like Mint, What’sApp, and Oculus Rift all got multiples way higher than what any traditional business valuation would have yielded. As the multiples on traditional brick-and-mortar businesses fall, the multiples on technology and internet based businesses are rising.

Small businesses are proliferating faster and failing less than ever.

While people continue to complain that governments, banks and corporations aren’t growing the economy and spend their own time and energy trying to outpace inflation, small and entrepreneurial companies are growing more quickly than ever.

I routinely see 100% annual growth with small businesses I work with and entrepreneurs I meet.

Most entrepreneurs and organizations I talk with are disappointed by 20% annual growth.

Perhaps nation-states, banks, and corporations aren’t doing the wrong thing. Perhaps they’re simply losing leverage.

They’re trying to move the world with a shorter and shorter lever. Pushing harder isn’t really the answer.

The Entrepreneurial Long Tail

Instead, the dominant institution is shifting from corporate CEOs to entrepreneurs.

The self is becoming the dominant player and it’s proverbial lever is getting longer.

Accompanying the evolution of the dominant institution from the Corporation to the Entrepreneur, is the transformation of the self.

Terms like freelancer nation have entered the dialogue as over 1/3 of American workers now consider themselves freelancers.

Since the turn of the century, the average size of establishments has been steadily dropping, even in years the economy has expanded.

The Rise of Social Invention

Technological invention is a novel design that allows parts to do jointly what they could not do on their own. A social invention is a novel design that allows people to do jointly what they could not do on their own. -Ron Davison, The Fourth Economy

One of the most common moves in basketball is the pick-and-roll. The forward sets a screen for the guard and then “rolls” towards the basket forcing the remaining defender to either stay on the guard and leave the forward open or guard the forward, leaving the guard a free lane to the basket.

While this is usually seen as a technological invention, it’s just as much a social invention.

The “pick” makes sense only within the context of the team and the game. If the guard doesn’t use the screen, it serves no purpose. If the teams aren’t competing to see who can score the most points, there’s no reason to try and get to the basket and score.

Economic behavior conforms to social invention in much the same way.

Money is only money because we agree it is money. As soon as we all agree that Confederate currency no longer has any value, it no longer has any value. When we agree that information on magnetic strips affixed to plastic has value, it has value. Whether someone is a slave, employee or part-owner of an enterprise is not inherent in any physical reality or dependent on any brute facts, but is – instead – true only as an institutional fact. -Ron Davison, The Fourth Economy

Much of what we accept as societal norms are social inventions. Monogamy, nation-states, and corporate structure are not “norms” in any absolute, brute sense. They’re all social inventions that at one point in history didn’t exist and in some parts of the world still don’t.

What’s changing is that our lives are more and more defined by social inventions than any natural law.

We use a razor to shave (a technological invention), shampoo to wash our hair (more technology), and a brush to comb it (technology) so that we’ll look fashionable (a social invention), and we do it quickly in order to be on time (social invention) and seem like a good employee (social invention). -Ron Davison, The Fourth Economy

A serf in 16th century Europe didn’t have those concerns. When he woke up, he mainly had to worry about not upsetting his feudal lord and not dying from starvation, malnutrition or infectious disease (the latter 2, he didn’t yet realize existed).

It’s hard for him to imagine worrying about what to wear or if he would be on time.

Despite the fact that it plays an increasingly dominant role in our day-to-day lives, not a whole of attention is paid in our culture to social invention. We all know invented the telephone or electricity.

Who invented the nation-state or the corporation? I have no idea.

Transformational social technologies haven’t always existed and yet we act as if they had.

One consequence of overlooking social inventions as inventions is that we are less inclined to think about the need to change them. Ron Davison, The Fourth Eocnomy

This is starting to change.

Many startups and small businesses run by entrepreneurs understand social invention and the role it plays in transitioning from a knowledge to an entrepreneurial economy.

They just call it culture. AirBnB founders asked Peter Thiel, who had just given them $150 million, his biggest piece of advice. His response? Don’t Fuck Up the Culture.

Inside an organization, technological invention, the product or service you produce is important, but social invention, your culture, is becoming more crucial to the success of the company and the success of the people within the company.

On a company level, a company with the “right” company culture may end up being successful even if their technological domain changes.

Twitter began as a podcasting platform. They’re now, well, Twitter. Despite a seemingly radical change in their technological invention, they’ve been successful because of a focus on culture – social invention.

Venture Capitalists seem to have realized this and are far more and more likely to invest in the right founders as opposed to the right idea than they were 10 years ago.

Businesses, organizations and entrepreneurs may stand to benefit a lot more if they begin to see themselves more as social entrepreneurs than technological ones.

While technological invention is certainly a limit, could we be shifting into a period where social invention is the bigger one?

Perhaps more startups should spend less resources on product and more time on culture?

As the dominant player shifts from corporation to self, personal development suddenly becomes institutionalized.

Work/Life balance becomes work/life integration. I’ve never liked the term work/life balance because it implies opposing forces. Integration instead is synergistic.

Ask a group of entrepreneurs how much they work and the two most common answers are “all the time” and “never.”

Work as a concept is being transformed.

Just as the experience of a knowledge worker differs dramatically from that of an industrial one, entrepreneurs experience work in a different way than knowledge workers.

Freedom and Purpose of the Individual Become Synergistic with Economic Growth

One repeating pattern throughout the history of the West is the dispersal of power. “We are all priests,” cried Martin Luther as he wrested authority away from the pope and gave it to every Bible-reading Christian . “All men are created equal,” wrote Jefferson, who was issuing a challenge to aristocrats, not an invitation to slaves. Such sentiments speak to real changes in what it meant to be a Christian or a citizen. Such sentiments also describe the democratization of power. Up until now, it is the few who have defined society and the many that have been defined by it. A few receive divine revelation and many receive Mass. Think about a world in which the direction is increasingly reversed, a society in which the individual is less social invention than social inventor. Or, rather, imagine a world in which more people engage in acts of social invention. -Ron Davison, The Fourth Economy

Over the past 100 years, the gains that have been made from a consumer point of view are astounding.

Everyone reading this has a higher quality of life as a consumer than John D. Rockefeller, the richest man on Earth, had at the turn of the last century.

From a consumer perspective, Louis CK is right. Everything is amazing and nobody is happy.

Blaming this attitude on an entitled, spoiled millennial generation misses the point.

Power has been and continues to disperse over time. Millenials should have a higher quality of life and more power than generations that came before them. If I have children, I certainly hope they have a higher quality of life than I do.

The point is that despite our options and access as consumers, most people are incredibly dissatisfied as producers. They need work/life balance because the work side of the scale is dragging them down.

I was hanging out with someone I’d recently met a couple of months ago and I glanced at my phone and saw it getting late (that means 9:30pm or so for me). I looked up and said that I was heading to bed.

She asked why, and I replied so that I could get up early tomorrow and work because I really like my work.

“Really?” she responded, “I fucking hate my job. I mean it pays well, but it sucks. I think I’m going to get a transfer into a better division though. But this week I don’t really have to work, I’m just going to plan the Halloween party.”

And that to me symbolizes the zeitgeist around work right now. We’re more satisfied as consumers and less satisfied as producers than ever.

I’m starting to see this change in the companies and entrepreneurs I work with.

They’re growing in dollars and cents by actively cultivating a sense of freedom and purpose in the work they do and how they do it.

The manage not by top-down, command and control, but by an open door policy.

Not just open door in the sense of “come see me if you have a question,” but open door in the sense that there are lots of opportunities for personal growth within the company and they’re inviting team members to walk through those doors.

One-on-one meetings are more likely to include phrases like, “there’s an interesting opportunity in the company to…” instead of, “go do what I say.”

It’s staggering what someone working towards a freely chosen, meaningful goal can accomplish compared to someone work towards an arbitrary, assigned one.

Telecommuting and distributed teams let employees work in an environment where they’re most effective, happiest and ,as a result, most productive.

Partnerships and joint venture opportunities let entrepreneurs collaborate on goals they share.

Work is becoming more meaningful AND more productive.

The corporation is increasingly serving as the educational body of the entrepreneurial economy.

Universities arose as a way to solve the knowledge worker problem. Even as many try to re-engineer themselves to solve the entrepreneurship shortage, it’s largely startups and small businesses that are solving this problem.

The education I use day-to-day in my business came from working in a small business, not from any of my formal schooling.

I met an entrepreneur in Austin, Texas a couple of months ago that was one of three MBAs that had co-founded a eCommerce software startup. They had been turned down twice by the incubator they applied to for having “too many MBAs in one room.”

She whispered this to me in a secretive way. In a lot of entrepreneurial circles, you don’t want to let word get out that you have an MBA.

In a world where entrepreneurship limits growth and social invention limits entrepreneurial, the scarcest resource (and most valuable) in today’s economy may be the social inventions that better facilitate the transition from a knowledge to entrepreneurial economy.

Social invention – this story of the rise and transformation of institutions – offers the potential for huge and powerful payoff. The walls of Oxford’s Christ Church College Dining Hall are covered with portraits of luminaries who have attended Oxford. John Locke is among them. Even if every other graduate of Christ Church had been a slacker who smoked opium and played video games, Locke’s ideas would have ensured England’s positive return on their investments in Oxford. It would be difficult, if not impossible, to calculate the extent of the benefit we have received as a result of John Locke’s ideas, which did so much to create modern democracies. Social invention has huge potential, and because of its track record we’ve come to nearly deify social inventors like America’s founding fathers. And here’s the point: if social invention can make so much difference, why not make it an intentional part of life rather than something that happens only on rare occasion? When we create institutions to overcome limits, we make progress. When we transform institutions to make them tools available to many, we are better off. Social invention, just as assuredly as technological invention, facilitates progress. It makes little sense to confine it to history books when we can make it a part of our lives. Ron Davison, The Fourth Economy

Sounds fun 🙂

h/t @TropicalMBA for the book recommendation.

P.S., I always welcome additions to my Anti-Library. If you have a book that you think I should read – drop it in the comments.