Saturday, July 18, 2015

What's Scarce Geopolitically: Stability, Ways to Get Ahead and Innovation

Conserving what is failing is not a path to stability.
What's in demand but scarce is valuable. This is one of those scale-invariant principles: businesses large and small want what's scarce and in demand, because that's what generates profits.
What's abundant but not in demand is cheap. What's scarce but not in demand is ignored. Capital, talent and profits flow to whatever is scarce and valued as an engine of wealth creation.
Geopolitically speaking, tangible assets have self-evident value: seas between your borders and potential enemies, a wealth of natural resources, and so on. But equally important are intangible assets: the human, social and symbolic capital of the people, culture and institutions of the nation.
What seems scarce in the world is not just a specific tangible asset or intangible form of capital, but a mix that provides stability, ways for average citizens to get ahead and fosters innovations that can quickly spread through the society and economy.
We could say engines of wealth creation are scarce, but if the wealth isn't distributed somewhat broadly, or the source of the wealth is not innovation but extraction of resources, any stability is temporary or illusory: resources run out, and wealth inequality fuels social and political instability.
What's exceptional is a mix of assets and attributes that yield the stability needed for for people to get ahead, a playing field that's level enough for people to get ahead, and a culture of innovation, because ultimately only innovation increases productivity, and increasing productivity is the only sustainable source of wealth.
For example, cheap energy is a gift to its owners and consumers; but eventually cheap energy is consumed and what's left becomes expensive. Innovation is needed to extract more work from the remaining energy.
There is no one combination that yields Stability, Ways for Everyone to Get Ahead and Innovation; a variety of potentially successful models exist. Resource-poor Japan, for example, has been stable and wealthy for decades, despite a sclerotic economy.
But as history speeds up and volatility increases, some elements of that mix become increasingly important. Resources that are suddenly unavailable due to weather or crises elsewhere can derail stability, so autarky (self-sufficiency) in key assets starts becoming consequential.
By default, most institutions are conservative; they avoid rapid changes out of caution. It's a safe bet that what worked in the past will work in the future. But as history speeds up, clinging to "this is the way we've always done it" can become a losing strategy.
How big is the slice of the culture and economy that spurs and spreads innovation--not just technological innovation, but social innovation? If that slice is tiny, then the society simply doesn't have the capacity to absorb innovations fast enough to change direction. If only 1% of a society and economy are encouraged to innovate, experiment and fail, that tiny slice simply doesn't have the mass to move the 99% in time to avoid instability.
The Pareto Principle suggests that a minimum 4% of the society/economy must be actively innovating to eventually influence 20% of the society/economy, which then influences 80%. If 20% of a society/economy mutates/adapts rapidly due to the fast cycling of innovation, experimentation and failure, that nation has an exceptional advantage over other societies/economies that lack the ability to respond/adapt to changing circumstances.
When what's worked for decades no longer works, the ability to find solutions and quickly distribute those solutions will make a profound difference in stability, ways to get ahead and innovation. Innovation disrupts the old ways, and that means some people will lose their jobs. The distribution of opportunity and wealth (ways to get ahead) are as critical as stability and innovation: the society/economy must have mechanisms for enabling those disrupted by change to adjust and find their footing.
Another way of saying all this is: it's not wealth that counts, it's the engines of wealth creation that count, and the distribution mechanisms for that wealth. Wealth dissipates or is consumed if it isn't renewed; wealth that flows into the hands of the few at the expense of the many triggers instability.
Those nations with the greatest stability, meritocracy and engines of innovation/dispersal of innovation will naturally attract capital and talent from nations that cannot muster up a mix of capital and attributes that generate Stability, Ways to Get Ahead and Innovation.
We tend to assume that the key to stability is keeping everything the same, but as history speeds up, stability will require maintaining an active sector of instability that cycles efficiently through innovation, experimentation and failure and rapidly distributes what's faster, better cheaper.
Conserving what is failing is not a path to stability. As Charles Darwin observed, "It is not the strongest of the species that survives, nor the most intelligent, but the ones most adaptable to change."
This essay was drawn from Musings Report 8. The Musings Reports are emailed weekly to subscribers and major contributors ($50+ annually).

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