Depression? Recession? No, It's the Great Restructuring

It’s not a great depression, neither is it a great recession we’re going through now. At the Brite conference this week, Umair Haque called it a great “compression,” as an economy built on perceived value reconciles with actual value. This morning, The New York Times finally realized that what we’re experiencing is more than a financial crisis: “Job Losses Hint at Vast Remaking of Economy.” Well, yes, if hints were sledgehammers.

I try to argue in my book that what we’re living through is instead a great restructuring of the economy and society, starting with a fundamental change in our relationships - how we are linked and intertwined and how we act, nothing less than that.

The Times sees this play out in the loss of jobs that won’t return in their industries. That’s merely the symptom.

In key industries — manufacturing, financial services and retail — layoffs have accelerated so quickly in recent months as to suggest that many companies are abandoning whole areas of business.

“These jobs aren’t coming back,” said John E. Silvia, chief economist at Wachovia in Charlotte, N.C. “A lot of production either isn’t going to happen at all, or it’s going to happen somewhere other than the United States. There are going to be fewer stores, fewer factories, fewer financial services operations. Firms are making strategic decisions that they don’t want to be in their businesses.”

Yes, entire swaths and even sectors of the economy will disappear or will change so much they might as well disappear:

America may well not be in the auto industry soon. “American car sales have dropped to an annual pace of nine million, from some 17 million in 2007. Even if sales increase considerably, that is likely to leave a lot of unneeded auto factories,” said the Times.

Financial services will have to be completely remade (by government). “Much the same can be said for financial services, which gave up 44,000 jobs in February,” the Times said. “During the housing boom, banks hired tens of thousands of well-compensated traders, analysts and marketers to sell mortgage-backed securities and other investments. That industry is unlikely to return to its former shape.” Who knew that the Times was such a master of understatement?

• Newspapers will vanish. Magazines are in worse shape than I would have guessed and many will go. Books‘ channels of manufacturing, distribution, and sales will go through upheaval.
• Broadcast media will become meaningless, replaced by digital delivery.
• Advertising will be next to feel the earthquake avalanche, after media.
• Large-scale retail will shrink and consolidate and then be transformed by a search-and-buy economy. The Times: “The economy lost 39,500 retail jobs in February, and has eliminated more than 500,000 in the last year.”
• The blockbuster economy in entertainment will become harder to support as more attention and money shifts to the tail.
• Business travel - including the convention and conference business - will take a huge hit in the financial crisis and much of it won’t come back, replaced by more efficient communications.
• We can only hope that dirty and political energy industries will shrivel.
• Residential and commercial real estate will have to restructure around a new capital structure. Homes will get cheaper but so much of homeowners’ equity has been wiped out in real estate and stock investments that I’ll bet apartments will be what’s built when building returns. Commercial real estate had its own bubble and it will be hit with a double whammy as tenants shrink and disappear. Construction will, of course, decline.
• Health care was the one sector in this month’s employment report that showed growth. But we know that medicine, pharma, and insurance will undergo a forced restructuring.
• Computers are getting so small and cheap and open that that industry is under growing pressure. As every other device we have becomes smart and connected, I wonder whether the computer itself will begin to disappear.
• Universities are facing competition from each other and commercial newcomers online and have suffered huge blows to their endowments; they will have to change. We should be so lucky that elementary and secondary education will also face such pressure.
• Finally, consumer products of all sorts will have to change in the face of empowered customers and, in some cases, with competition from small competitors given the benefits of scale on platforms (see: eBay, Etsy, Amazon, et al). They will also face price pressure thanks to online comparison shopping and new retail structures.
• Government will grow but thanks to the empowered populace, it, too, will face fundamental change.

There are opportunities here, of course. There always is in change if you’re willing to see and seek it.

• This is the time when startups start. I agree with Reid Hoffman that founding new companies is our way out of this mess. Given the profound nature of the restructuring, starting new businesses - not fixing old, doomed ones - is the only sensible path. “Consider a few start-ups from the past century.” he wrote: “Microsoft, MTV, CNN, FedEx, Intel, Hewlett-Packard, Burger King. Each opened during a period of economic downturn. Today, these brands employ hundreds of thousands of people worldwide. We need to prepare for the next Burger King. By empowering individuals and small businesses, an innovation stimulus can help germinate stable industry players for the long term.” Fred Wilson would disagree with Reid, I think, about government helping to fund startups, but I think we can all agree that creating the right environment for investment could not be more critical.
• Creating platforms to serve small and independent businesses and networks to bring them the advantages of scale are key opportunities in the restructured economy. That is the real lesson of Google in WWGD?. There are three ways to succeed here: Create a platform; create a network; build on top of somebody else’s platform or network. This, I believe, is how large companies will be replaced.
• There are many opportunities to provide services to new, independent players - startups and newly self-employed individuals. At yesterday’s Hacking Education, Scott Heiferman and I tweeted back and forth about the opportunities to build a network of spaces for independent work (the inverse of Starbucks: good with space and services, OK with coffee). Add payroll, insurance, hosting, and all sorts of services.
• Education is a growth opportunity but not in its current institutions. As industries are killed and turned upside-down, present and former employees will need to be retrained in technology, in the skills of starting and running a business, in entirely new skills. In Hacking Education, some participants were building such platforms. I see huge disruption here.

Of course, there are opportunities to remake the fallen industries. At Davos, in a session I ran, business guys reinvented the bank under radical transparency. In my book, I started to rethink the auto industry in the image of the computer industry: disaggregating the car so we can reaggregate it from many new suppliers. Many are working on new scenarios for news. I see huge opportunities in rethinking and remaking advertising from the ground up. Every one of the collapsing industries listed above will be replaced - in a different image, at a different scale - and that presents opportunities.

* * *

But all that still doesn’t reveal the extent to which our society is changing. At Brite, Haque addressed some of this as he talked about a “metacrisis” in our “zombieconomy” in which we have understated cost and overstated value. He talked about reconceiving thin vs. thick value creation; about Google as an example because it creates principles more than strategy; and about the new principles of a new economy, built around stewardship, trusteeship, guardianship, leadership, partnership.

I said from the audience that his prescription sounded like a moral imperative. Another member of the audience said it sounded like dialectical materialism (I had earlier joked in my talk at Brite that I vaguely sounded Marxist talking about how all the change I outlined in media came from no longer being bound by the means of production and distribution). Haque responded that though both our contentions might be true, he was declaring an economic imperative. He previewed that view sometime ago when he wrote what I came to call Haque’s Law: “As interaction explodes, the costs of evil are starting to outweigh the benefits.”

Now back to the start: We are linked in new ways. Because of that, it’s hard to build a business model anymore out of screwing people - since when you do, we the screwed can rise up and be heard and fight back and make evil too expensive. Our interconnectedness is also what made the complex derivatives - the toxic assets - that triggered the financial crisis possible - but that is all the more reason why we will demand transparency, our best antidote to evil. That will change how business is run in fundamental ways.

And so there is our Great Restructuring, Great Rethink, Great Reboot, call it what you will: The change in our society and how it is structured are both causing and necessitating change in the economy and its industries. The crisis is bigger than it appears in the rear-view mirror. It’s more than jobs lost and companies folding. It’s a new economy built on a new society that we are only just beginning to recognize if not understand. That is WWGD? - and its sequel.

: LATER: In typical eloquence, Yochai Benkler expresses the restructuring in his response to Paul Starr’s lament about newspapers and the future of democracy:

Like other information goods, the production model of news is shifting from an industrial model–be it the monopoly city paper, IBM in its monopoly heyday, or Microsoft, or Britannica–to a networked model that integrates a wider range of practices into the production system: market and nonmarket, large scale and small, for profit and nonprofit, organized and individual.

This will be the case, I argue in WWGD? and now here, not just for digital and information enterprises but for others. Education was built, it was pointed out often at Hacking Education, for an industrial age, to turn out factory workers. It was also built in an industrial model: every student off the assembly line the same. The future of education will be a magnificent mish-mash of - to quote Benkler - market and nonmarket, large scale and small, profit and nonprofit, organized and individual. Computers and their software are made this way. Cars may be. Banking, I think, will be a similar mix (nonprofit? yes, credit unions). The bottom line is the shift from an institutional economy to a network economy.

: LATER: This post seems to have caused Bruce Sterling a bad trip. Sorry about that.

: “The new normal will be a lot different from the old normal.”

Comments

[pacman1947:]

Jeff,
Your articles display a talent for seeing beyond the bailouts to the ultimate sustainable result: Organized global balance. Deleveraging the money supply (the end of free money) may stave off hyperinflation that might otherwise force the dollar to lose as a medium of exchange without the confidence of the nations. This global expansion of debt, the speculative bubble of borrowed money, has popped.

As Buffett said, "We are the world's strongest economy and we're not done yet!" I agree with him. You have foretold some of the likely outcomes. The best future for us revolves around implementation of disruptive technologies that bypass expensive, wasteful, inefficient, and capital intensive solutions generally accepted in the past.

"Waste makes great!" no longer rules. Survival in the times of mass layoffs means trimming fat, using muscle, and clearing your head before charging into the fray.

We must learn to be smarter, learn from our mistakes, and forge new alliances with those who are willing to lead.

Yours is a great article with a wealth of ideas and insight. I congratulate you.

Mar 10 09:32 AM

[change is t...:]

The people on the titanic didn't know they would sink. They just ran around the ship. Some, however, found life boats. Nothing written says how to find a lifeboat. This entire analysis is moving deck chairs around on the sinking ship.

The problem we face is like being alive with a bullet in your brain. Remove it and you will die, leave it and you have a bullet in your head that is going to kill you.

The financial crisis has undermined our nation and indeed all of western civilizations foundation. Sovereignty's local value if global interconnected financial destruction has taken place is what is really being "restructured". We are all watching our world's government's try to figure out the bullet problem.

The real question is are we going to fight over stuff (either through trade or hot wars), or are we going find a way to balance the global physical economies to reflect new financial and fiscal realities. That is the unknown unknown.

Mar 10 10:07 AM

[OhSure:]

You, Mr. Jarvis, are a bullshit artist.

You've done nothing but throw up a cloud of smoke celebrating chaos, with not a single idea that could be put in place in the real world today or tomorrow.

Mar 10 10:47 AM

[GoldMarketPaul:]

When this is all over, I think that a lot more people in the developed world are going to be putting on a pair of overalls or actually getting their hands dirty at work. Gone will be the days of pointless paper-pushers, or doing simple customer service jobs and expecting to get a living wage for it.

Mar 10 10:55 AM

[alphadominance:]

I see this crisis as a call to decentralize where ever possible. We are simply to dependent on monolithic institutions who have become too big to fail. Not only do we subsidize them by paying them outsized profits which are concentrated in the hands of a few, but now we are paying their bills from our depleted national coffers. Small business is the model that provides for the majority of Americans and is robust and nimble enough to remake themselves continuously in the crucible of the marketplace. I agree with the author that we need to remake education and industry in the same fashion. We now have the communication and logistical infrastructure to support distributed production of many more goods, and with rapid prototyping coming online, many more needs can be filled on demand. A return to decentralized means of production of goods and necessities like food and energy will decrease losses and increase network efficiency. It will also foster biodiversity of foodcrops, and foster responsible food production and benefit our health. It will also decrease our vulnerability to terrorist attack. Such a sea-change would also permit populations to de-concentrate alleviating the density in urban areas and the consequent pressure on real estate prices. Some value would be lost in urban areas, but gained in rural ones. We may also be able to reduce our reliance on the automobile for commuting purposes. Such changes would allow us to reap many rewards in quality of life and reduced commodity consumption. All for it.

Mar 10 11:47 AM

[TimR:]

Fascinating article. I think it might go a little too far regardng the end of the "old economy". Some newspapers and magazines will survive and so will advertising.

But the main points of the articles are clear well expressed and defended. It is good to see someone actually making sense of what is happening.

Mar 10 11:52 AM

[rrbatch:]

Great post, Mr. Jarvis. Real food for thought.

In the spirit of Schumpeter's "Creative Destruction", I believe we are at a climactic point in the continuing process of innovation and change in societal structure. At least we're learning new limits on faulty applications of economics to capital allocation - i.e. the fallacies of hiding risk in "derivatives" and similar indirect and opaque investment vehicles.

To those who say manufacturing must be the basis for future economic expansion, I say nonsense! In 1850, 64% of the US population worked on the farm; in 1900 it was 38%; in 1950 12%, and now about 2% - and farm production far exceeds what we need to feed the rest of the US population. Automation and process innovation (more than outsourcing) will continue to reduce the population working in mills and factories, both here and overseas, while sustaining production of the material goods we need.

Where will our progeny work? Are the engineers and programmers who develop new products and processes working in manufacturing or the service industry? Is the efficient distribution of goods not productive, if markups can be driven down? Likely more will work in health care as the population ages, but I would expect benefits from automation and process improvement there, as well as in providing government services. You're certainly right that education is a field crying out for restructuring!

Who can predict what new inventions and corporate structures will be the engines of future growth? Who at the time could predict the following outcomes, but think of the wealth they spawned:

Edison > GE
Wright Brothers > Boeing and airlines
Noyce > Intel
Hewlett and Packard > HP?

I spend a few hours a week with SCORE, counseling folks who want to start, sustain, or grow small businesses. I can attest that there's no end to ambition and courage among young folks who want to undertake the risks of business ownership. I am also witness to the lumbering disinterest and uselessness of government institutions that claim to foster small business, like the SBA. The lack of substantial small business incentives in the "stimulus" bill, and the money squandered to perpetuate the lives of zombies like Citicorp and GM are evidence of the government's inability to allocate its capital productively.

With an exception: government expenditures on national defense have resulted in truly significant technological spinoffs to civil society. The internet started in a small project at MIT called DARPANET. The earliest computers were developed to simulate nuclear reactions, and the technology for the nuclear power industry came from government laboratories. I've also participated in government-sponsored technology programs that were total wastes.

When you speak of banks and related financial institutions, there is obviously room for improvement in efficiency and safety. I once invested part of my modest savings through an account with a major brokerage (that is no longer independent) - until I discovered that i could execute my infrequent trades instantly on-line for one tenth the cost with an account at Fidelity, Vanguard, Schwab, or a similar brokerage service. For the life of me, I can't understand how the large retail brokerages survive, except from the inertia of their legacy customers.

Mar 10 12:09 PM

[John Lounsbury:]

Jeff - - -

I am disappointed at the dismissive (and insulting, in some cases) nature of some comments. You have presented a broad pallet of ideas. It is too bad that some can't appreciate what you have done.

I'm sure we all can find things to debate in what you have covered. Debate is valuable. It involves the promotion of competing ideas. Some commenters seem to prefer vitriol.

Back to the article: I especially noticed:

<...Haque’s Law: “As interaction explodes, the costs of evil are starting to outweigh the benefits.”>

<The bottom line is the shift from an institutional economy to a network economy.>

<We are linked in new ways. Because of that, it’s hard to build a business model anymore out of screwing people - since when you do, we the screwed can rise up and be heard and fight back and make evil too expensive.>

In the late 1990's, there was much talk about the demise of brick and mortar with the rise of the internet. That talk diminished during and after the dot.com bubble burst, but it has continued happening anyway. More and more, traditional based business models (offices and shops) are being replaced with virtual workplaces. I worked for 35 years in a corporate brick and mortar environment. That was followed by 8 years in my own business, using commercial office space. Finally, the last 8 years have been operated virtually, working from a home office and networking with clients.

My wife and I have 7 children between us. One is a small business operator, with a brick and mortar presence. Three have corporate jobs with traditional offices. The other three have corporate jobs with virtual offices only.

The redefining of work relationships, based on my family experience, is well underway: 50% traditional and 50% virtual workplaces. We need new ways of doing business and we have started on that path.

Yes, we need new business activities. These may come from currently unrecognized quarters, just (as you pointed out) they have in the past. However, I think some of the new business areas are well underway and growing, such as the many internet business models. These were dismissed by many early in this decade, but this area has continued to grow dramatically. Other new business areas are just starting. Most notable is the domestic energy area, with new energy sources and new distribution systems.

We are seeing a contuing wave of "creative destruction". We have been focussed on the destruction. It is time to focus on the creation.

Mar 10 12:22 PM

[John Lounsbury:]

rrbatch - - -

Excellent comment. I share many of your viewpoints.

Mar 10 12:26 PM

[NetworkKing76:]

Great article Jeff...For some of the commenters. The horse and mule were excellent tools for transportation and moving goods when compared to human muscle alone. I'm sure there was resistance to the machines that later replaced these methods. I'm seeing the same mindset in some of these comments.

Businesses have been ignoring the customers for several years. Yes mass manufacturing has worked as well as the franchise model and vanilla suburbs but people have slowly started to backlash against this mass generalization. People have individual personalities that are not recognized in the market. There has been no move towards Mass Customization and making it more profitable. The profits were too fat before...so now that those profits have disappeared, it is the perfect opportunity to look at serving the needs of the people (and make money in the process).

Mar 10 01:31 PM

[Jeff Noel A...:]

one of the most insightful pieces i have read so far. Takes the viewpoints in from both side of the fence, and great perspective on how everyone sees this as another dark age, and the other opportunity.

dialectical materialism this article isn't. I am sure you have made the right fact collection and info digging, factoring in current news and tools you possess before drafting the piece and kudos for the output. we all our economists and have opinions. the middle (working)class are the majority, and this is a democratic country. people up there in public policy knows this and to go back to the basics and do what they entitled to do provided the assurance that this is the most powerful country is the essential action, we will get through this.

it is true those privileged will not give up their power easily (use loosely). those below them wants change, but the opposing side are reluctant.

disruptive innovations (c. christenson) should not be for health care anymore. application to other fields is beneficial.

Mar 10 07:01 PM

[Doug Poretz:]

what you are missing is some concern about a pattern that i believe is evident around the globe: in virtually every area of the world, protests are flaring up and often turning into riots or general strikes -- these protests are not single issue but are economy-related and are more about venting frustration and anger at the ruling governments and the upper class than about anything else. The news media is missing the broad story -- there is a trend that -- IF it continues going in the same direction, looks like a class battle -- I have chronicled it here: tinyurl.com/ccsga4 -- for anyone who wants to look, this isn;t so much theory or prediction but an iteration of stunning facts.

Mar 11 08:51 AM

[Jonathan Ch...:]

In 1981, I was a student at Harvard Business School, and made a short presentation on the Kondratieff Cycle. I described the Cycle as based on the birth of new technologies, the growth of those technologies, their maturity and then decline. Based on the information I had at that time I explained that the cycle is about 70 to 75 years long, and that the last bottom was in the early 1930's and marked The Great Depression. Based on that cycle time, I expected the next bottom to occur in the first decade of the 21st century. At that time, I mentioned the new technologies as information technology, genetic engineering, materials engineering and energy.

While I obviously had no idea of what would be happening, it was clear, even than, that the technologies we had were maturing, and that new ideas were beginning to take their place.

The renaming of our situation as the Great Restructuring is entirely on track. In the intervening years, I have seen the beginnings of these future great industries, as all of us have. But let's refresh what I think we all see:

INFORMATION: Processing rates so high that people stop thinking in terms of bytes and start thinking in terms of products per unit of time. Information storage costs so low that Tera becomes the standard unit of storage. Networking speeds so high that the rate of establishment of links becomes more important that the transfer of information from a link.

GENETIC ENGINEERING: Individual genetic information so precise that specific drugs can be pre-engineered at birth for an individual's future problems. Drugs so precisely engineered that they make specific genetic tweaks to an individual's to both prevent problems s well as improve on abilities. Potential changes to a person's genome so large that we may need to legally re-define what a human being is. Creation of multifunctional crops, such as plants that produce tomatoes from the above ground portion and potatoes from the roots, or grains that produce a head of seed and a stalk full of sugar. Genetically engineered bugs that create structural components of metal or plastic in the same way that trees produce lumber.

MATERIALS: Microscopically controlled properties, enabling a single material to be multifunctional. Some of the concepts are actually nearing prototype: Cloth with built in lights, sensors and computing capability. Metals that change shape according to environmental conditions. Multi-functional structural elements that exhibit properties that are not currently available, perhaps transparent metals, ductile ceramics, self-repairing membranes and components.

This is getting too long -but you get the idea.

Mar 11 10:49 AM

[mariomc:]

Just when China is practicing relentless capitalism to modify itself to the successful American model, all the while camouflage itself as communism. America is practicing relentless welfare state to model failed Chinese socialism, under the camouflage of liberalism.
Chinese have "liberated" Tibet, didn't they?


On Mar 10 12:44 AM Michael_Cohen wrote:

> It will be harder for America to be the leader in this Great Restructuring
> when our companies, both large and small, will be taxed much higher
> than our worldwide counterparts to support a growing welfare state.
>
>
> Great Depression, yes. Great Restructuring, yes. America maintaining
> itself as the worldwide economic and military powerhouse after this
> mess is over, no.

Mar 11 01:33 PM

[Teutonic Kn...:]

Jeff, your article raises some good points.

Whatever you would want to call it,however, be it depression, recession, or restructuring, we need first to "restructure" our mindsets in order to be able to move forward.

First, there is no precedent to the current crisis, although some historians compared it to that of the 1837 Panic that was caused by excessive land speculation in the wild west frontier of this then very young nation. Like the old saying, "Hope for the Best; Prepare for the Worst". Remember, Mr.Obama is just a rookie.

Second, most of our young folks at their twenties have never experienced a truly vicious downturn of the economy in their lives before. They were either toddlers or kids at or around the time of the 1982 downturn. And of course for the 1969-70 and 1974-75 downturns they were not even born then. These young folks will experience undue hardship in their adjustment to the ensuing "restructuring" described by you the author.

Mar 11 11:05 PM

[367851:]

Wouldn't it be better to divert some of this money to more useful enterprises like healthcare or agriculture? Couldn't we stop bombing people and start feeding, housing, educating them, and looking after their basic health needs?


On Mar 09 11:53 PM 367851 wrote:

> Billions of dollars in armaments were blown off in December/January
> to destroy Gaza and innocent lives. Now billions of dollars are needed
> to rebuild Gaza. All this destruction and rebuilding is funded by
> the American taxpayer, without their consent, at a time when we are
> struggling at home.

Mar 12 03:46 PM

[367851:]

The same thing happened in Lebanon only a couple of summers ago. You can't tell me that this tiny nation of a few million people can afford all this high tech destructive gear. I think it is clear that US taxpayers are footing the bill for all this destruction and reconstruction. A few companies benefit and the American taxpayer foots the bill. Obama continues with this program.


On Mar 09 11:53 PM 367851 wrote:

> Billions of dollars in armaments were blown off in December/January
> to destroy Gaza and innocent lives. Now billions of dollars are needed
> to rebuild Gaza. All this destruction and rebuilding is funded by
> the American taxpayer, without their consent, at a time when we are
> struggling at home.

Mar 12 03:56 PM

[367851:]

Israel - a tiny nation of a few million people, with a few world class companies like Teva Pharmaceutical, but hardly enough revenue to pay for all this military activity, all those bombs, planes and tanks, not to mention they have nuclear capabilities. Where did that come from?

All that destruction, loss of life. Who pays for that?


On Mar 12 03:56 PM 367851 wrote:

> The same thing happened in Lebanon only a couple of summers ago.
> You can't tell me that this tiny nation of a few million people can
> afford all this high tech destructive gear. I think it is clear that
> US taxpayers are footing the bill for all this destruction and reconstruction.
> A few companies benefit and the American taxpayer foots the bill.
> Obama continues with this program.

Mar 12 04:01 PM

[yellowhoard:]

How about The Great Hycolonic.

The time when the impacted financial bowels of the world were clensed by a vast torrent of cheap cash.

Ahh. Refreshing.


On Mar 09 05:20 PM MGA_1 wrote:

> Hmm... in 20 years I doubt they will call this the time of "great
> restructuring" - I believe it will be given a different name.

Mar 13 10:34 AM

[chleoku:]

Good points. To add on, it's more like restructuring on the leverage dominating market and slash on credit-based spending. I think the period of advanced spending is going away, and US's role in the global economy changed. As Warren Buffett put it, consumer behavior change will be results from this recession/depression:

www.wealthalchemist.co.../

Mar 17 06:30 PM