Irving Wladawsky-Berger

Systems Thinking, Safety and Risk Management

A few weeks ago I participated in a roundtable breakfast on Protecting Financial Markets in the Age of the Cloud.  The roundtable gathered together a group, - consisting primarily of financial experts, with a sprinkle of technologists like me, - to explore how to best regulate financial markets in our fast changing, highly interconnected, complex, digital world. 

Several participants cited the sharp rise in volume and speed of high-frequency trading over the past decade as an example of a current practice that is potentially increasing volatility and systemic risk in financial markets.  They mentioned the flash crash of May 6, 2010 as the kind of incident that is not well understood, and whose recurrence could compromise the stability and general trust needed for financial markets to function smoothly.  At least one of the roundtable participants was convinced that another major event, similar to the global financial crisis of 2008 would inevitably take place in the next few years. 

Toward the end of the roundtable, the moderator asked us to reflect on the kinds of controls needed to make financial systems more stable and less prone to another major crisis.  Can you do so with incremental, evolutionary safeguards, or do you need major new regulations?  Can the industry institute the needed safeguards on its own or do governments have to play a bigger role?

These are very complex and important questions for which there are no simple answers.  Our answers often reflect where we stand in the conservative-liberal spectrum.  My own point of view is shaped by my interests in complex engineering systems, in particular, in systems whose components are interconnected via digital networks; where software plays a major role in their overall design and operations; and, which involve people and information as well as technology. 

Financial systems are an example of such complex engineering systems.  Thus, I am hopeful that much of the research on the design and operation of such systems will shed light on how to better manage financial systems as well.

Adjusting to Life in a Hyperconnected World

In the spring of 1997, during a presentation in Paris on IBM’s new e-business strategy, the CIO of a major European retail chain mentioned that his company had just spent a lot of money remodeling their stores.  He was wondering if they had done the right thing, given all this new economy talk.  We were in the middle of the dot-com frenzy, and the buzz in the air was that in the Internet-based new economy, brick-and-mortar businesses, like other businesses grounded in the physical world, could not possibly compete in this fast-moving digital space and were therefore headed for extinction. 

Similar questions were being raised all around us.  In my local library, in whose advisory council I have been serving since those days, we were making plans to leverage the new Internet capabilities, such as introducing an online catalog and providing wireless Internet access in the library building.  But we were also wondering if a library building would be needed at all in the future, given the growing digitization of books, music, videos and just about all content. 

As it has turned out, the Internet, along with the overall digital revolution has proven to be a transformation of true historical proportions, propelling us from the industrial society of the past two centuries to a new kind of information society and knowledge-based economy.  But, it has not quite worked out the way some predicted back in those dot-com bubble days.

Measuring the Forces of Long Term Change

Intel co-founder Gordon Moore described what became known as Moore’s Law in a 1965 paper where he observed that the number of components in integrated circuits had doubled every year since their invention in 1958, and predicted that the trend would continue for at least ten years, a prediction he subsequently changed to a doubling every two years.  The semi-log graphs associated with Moore’s Law have since become a visual metaphor for the technology revolution unleashed by the exponential improvements of just about all digital components, from processing speeds and storage capacity to networking bandwidth and pixels.

But, while the dramatic advances in digital technologies have been well measured and quantified, their impact on firms, economies and individuals has been more anecdotal.  We talk about how this digital revolution has been transforming just about every aspect of business, society and our personal lives, bringing us both near-magical products and services as well as their accompanying creative destruction and pain.  But, how can we quantify this revolution beyond its technological foundations?

This is the task undertaken by Deloitte’s Center for the Edge in its ambitious Shift Index project.  The Shift Index is an attempt to quantify the long term impact of the digital revolution through 25 metrics grouped into three overlapping waves of deep change which is referred to as the Big Shift.  First published in 2009, the study has been updated twice since, most recently in November of 2011.  The study is led by the Center’s co-chairmen John Hagel and John Seely Brown.

Design Principles for Complex, Unpredictable, People Oriented Systems

An IBM Global CEO Study conducted in 2010 concluded that complexity was the primary challenge emerging out of its conversations with 1,500 CEOs and senior government officials.  “CEOs told us they operate in a world that is substantially more volatile, uncertain and complex.  Many shared the view that incremental changes are no longer sufficient in a world that is operating in fundamentally different ways.”  

These same CEOs cited creativity as the most important leadership quality they look for over the next five years.  “CEOs now realize that creativity trumps other leadership characteristics.  Creative leaders are comfortable with ambiguity and experimentation.  To connect with and inspire a new generation, they lead and interact in entirely new ways.”

A similar view was expressed by Roger Martin, the dean of the University of Toronto’s Rotman School of Management in an excellent January, 2010 article in the NY Times - Multicultural Business Theory.  At B-School?.  For over a decade, Professor Martin has been advocating “what was then a radical idea in business education: that students needed to learn how to think critically and creatively every bit as much as they needed to learn finance or accounting.  More specifically, they needed to learn how to approach problems from many perspectives and to combine various approaches to find innovative solutions.”

Over the past several years, we have seen a rising emphasis on design, creativity and holistic thinking in business to help us deal with an increasingly volatile, unpredictable complex world.  This is reflected not just in studies and articles, but in the growing number of design consulting firms like IDEO, as well as of design centers in universities, such as MIT's Media Lab and the d.school in Stanford.

Business and business schools are supposed to be all about applying hard, that is, quantitative, analytical approaches to management.  What then do we mean by bringing seemingly soft topics like design and creativity to business and why is it so important in today’s world?

The Complex Transition to the Age of the Cloud

In June of 2008 I participated in a conference on cloud computing.  After a full day of talks and discussions, the sense of the meeting was that cloud computing has the promise to bring a real paradigm shift to the IT world, although, as the conference organizer succinctly put it in his closing remarks: “There is a clear consensus that there is no real consensus on what cloud computing is.”  In other words, something big and profound seems to be going on, although we are not totally sure what it is yet. 

Where are we now, almost four years later?  Just about everyone agrees that cloud computing is one of the major trends in IT, with important implications not only to IT but to business and society in general.  Many books and articles have been written on the subject.  A number of companies have cloud-based offerings in the marketplace, with more to come.  But, while many of us feel that cloud is even bigger and more profound than we thought back in 2008, lots of questions remain on its intrinsic nature and its value to the business. 

In November of 2011, Andrew McAfee published an article in the Harvard Business Review: What Every CEO Needs to Know about the Cloud.  McAfee is Principal Research Scientist and Associate Director of the MIT Center for Digital Business, where I am a Fellow.  

He writes that cloud computing is “ . . . a sea change - a deep and permanent shift in how computing power is generated and consumed.  It’s as inevitable and irreversible as the shift from steam to electric power in manufacturing, which was gaining momentum in America about a century ago.”

Reflections on the Evolving Role of the CIO

Much has been written about the future role of the Chief Information Officer in the last few years.  Many opinions have been put forward.  All pretty much agree that fundamental changes, already underway, will take place over the next few years in how the IT function is organized and managed.  Some feel that the CIO role is likely to significantly diminish, with its various responsibilities distributed across the business or subsumed within the CFO organization.  Others are of the opinion that CIOs will play an even more influential role.  Given the growing importance of information technologies to all aspects of the business, the CIO role will likely be viewed as being as critical to the business as the CFO.  

I am very much in the latter camp.  I strongly believe that CIOs are in the eye of the IT storms that continue to rage all around us.  While their impact on business is hard to predict and unlikely to be the same for all institutions, few will dispute that over the past couple of decades IT has been significantly transforming just every company, industry, economy and society around the world, as well as our own personal lives.

Hot Spots: Benchmarking Global City Competitiveness

A new report, Hot Spots: Benchmarking global city competitiveness, was just released by the Economist Intelligence Unit.  Hot Spots is the result of a comprehensive study that analyzed the competitiveness of 120 of the world’s major cities.  The study evaluated their performance along eight distinct categories, from which it developed an overall Competitiveness Index for each city.  The study was commissioned by Citigroup as part of its Citi for Cities initiative.

 Hot Spots observes that over half of the world’s population now lives in cities, generating over 80% of global GDP.  As a result, companies are planning their global business strategies from a city, rather than from a country perspective.  The 120 urban centers ranked in Hot Spots have a combined population of about 750 million and collectively account for almost 30 percent of the global economy.  They are fiercely competing with each other to attract business investment and top talent that will enable them to grow their economies, create jobs and improve their overall standard of living and quality of life.

What determines a city’s competitiveness and growth potential?  Hot Spots defines competitiveness as a city’s ability to attract capital, business, talents and visitors.  Competitiveness, according to the report, “. . . is a holistic concept.  While economic size and growth are important and necessary, several other factors determine a city’s overall competitiveness, including its business and regulatory environment, the quality of human capital and indeed the quality of life.  These factors not only help a city sustain a high economic growth rate, but also create a stable and harmonious business and social environment.”

The research team assessed each of the 120 cities benchmarked using 31 different indicators.  Working with a number of experts, it then grouped these indicators into eight major categories, assigning a weight to each toward the final overall ranking: economic strength (30%), human capital (15%), institutional effectiveness (15%), financial maturity (10%), global appeal (10%), physical capital (10%), environment and natural hazards (5%), and social and cultural character (5%).

Would a Distributed Model of Government be More Suitable for a Complex, Diverse 21st Century Democracy?

Last week I wrote about the forces that, in my opinion, are contributing to an increasingly polarized America.  I mentioned three such key forces:  the structural changes and employment challenges our economy is going through; the changing demographics and emergence of a kind of new establishment in US society; and the technology-amplified, free-for-all conversations taking place through our multitude of information and communication channels.

How should government evolve to better adapt to these forces?  Are there innovative government models that might work better than our present ones?  Can we look at the evolution of organizational models in business over the past twenty years for inspiration and guidance?

Companies, especially large, global companies have been going through dramatic changes in the last couple of decades, driven by a combination of advances in information technologies, the Internet, the fast-changing market environment, and the heightened competitive pressures brought about by globalization.  In particular, companies have had to move away from the hierarchic, centralized management models that prevailed in much of the last century and embrace a more distributed organizational style.

Capitalists and Capitalism

A recent NY Times OpEd by Nicholas Kristof observes that:  “Just as Communists managed to destroy Communism, capitalists are discrediting capitalism.” 

“A Pew Research Center poll in December found that only 50 percent of Americans reacted positively to the term capitalism, while 40 percent reacted negatively.  Among Americans ages 18 to 29, more had a negative view of capitalism than a positive view, the survey found.  Those young Americans actually viewed socialism more positively than capitalism.  In other words, America’s grasping capitalists are turning young Americans into socialists.”

Kristof’s OpEd references a very interesting survey by Edelman, a global public relations firm which has been publishing an annual Trust Barometer for over ten years.  Their 2011 Trust Barometer notes that “Trust Plunges in the United States While Resilient across the Globe.” 

“Trust in business saw a two-point global increase, surging in Brazil, rising in Germany, and holding steady in China and India.  The United States was the outlier, as trust dropped across all institutions - business, government, NGOs, and media.  U.S. trust in business fell by eight points to 46 percent - placing the world’s largest economic power within five points of last-place Russia - and decreased in government by six points to 40 percent, putting the U.S. among the bottom four countries with the least trust in government.  In the Trust composite score, an average of a country’s trust in all four institutions, the U.S. also fell to fourth from the bottom, while three years ago, it was in the top four.”

Over the last few weeks we have heard the term vulture capitalism used in national public debates, not by members of the Occupy Wall Street movement, but by arch-conservative politicians.  Are we seeing the emergence of a New Populism where the people, - whether the Tea Party on the right or Occupy Wall Street on the left, - are rising up against the elites, - the rich and powerful who have gotten the US into such a mess?

Information, Money and Related Subjects

“Money, it is conventional to argue, is a medium of exchange, which has the advantage of eliminating inefficiencies of barter; a unit of account which facilitates valuation and calculation; and a store of value which allows economic transactions to be conducted over long periods as well as geographical distances,” writes Harvard historian Niall Ferguson in The Ascent of Money: a Financial History of the World. 

For a long time, money was embodied in precious metals like gold and silver.  The earliest known gold coins were produced in Lydia, in what is now Western Turkey about 2500 years ago.  But, with the introduction of banknotes in seventh-century China, money started to decouple from physical objects with intrinsic value.

“Today . . . we remain more or less content with paper money - not to mention coins that are literally made from junk,” writes Professor Ferguson.  “ . . . we are happy with money we cannot even see.  Today’s electronic money can be moved from our employer, to our bank account, to our favorite retail outlets without ever physically materializing.  It is this virtual money that now dominates what economists call the money supply . . .The intangible character of most money is perhaps the best evidence of its true nature.”

Given this intangible character of money, it is not surprising that major advances in information technologies have in turn led to major advances in the way we deal with money and payments.  In the 1960s, 1970s, and 1980s, mainframes, minicomputers, data networks, transaction processing and data bases enabled financial innovations like ATMs and credit cards.  Then in the 1990s, the wide adoption of the Internet and World Wide Web led not only to online banking, but paved the way for online shopping and e-commerce in general.

Smart mobile devices, broadband wireless networks, cloud-based services and big data are now ushering the next major phase in the evolution of money and payments.  Money is continuing its centuries old transformation from being embodied in objects with intrinsic value, like gold and silver, to being nothing more than information in the digital wallets of our mobile devices as well as in our digital accounts someplace out there in the cloud. 

Since just about everyone in the world, rich and poor alike, now has access to mobile devices, this major chapter in the history of money brings with it a universal inclusiveness that has been missing in the previous links between information technologies and money.  Mobile digital money is coming, - over time, - to every individual in every corner of the world.

Principles for Managing Strategy and Innovation

Through the years, I have been intrigued by the number of once powerful companies that are no longer around.  Darwinian principles seem to apply in business as much as in biology.  When technology and market environments go through major changes, as is certainly the case today, previously successful business strategies will no longer work, no matter how much you try to fix them.  Companies that are unable or unwilling to adapt to the changes in such a Darwinian climate will become marginalized or extinct.

It is not hard to understand how I come to this somewhat fatalistic view of business.  In the IT industry, I have seen many once leading companies disappear altogether or become shadows of their former selves.  IBM's near-death experience in the 1990s was very painful for me personally and for all us in the company.  Even though IBM managed to survive, as well as to regain a position of leadership in the IT industry, the experience has definitely left its imprint and colors my views of the world.

More recently, Citi, which I joined as strategic advisor in March of 2008, has gone through its own near-death experience as a result of the financial crisis of the past few years.  As we know, quite a number of once mighty financial institutions did not survive the crisis.  

Why is it that some firms are able to go through ups and downs, yet survive and thrive?  What accounts for their long term, enduring success?  Are there any principles or patterns that can help guide companies through these highly uncertain times and allow them to not only survive but emerge stronger than before?

The US Economy in 2012 - Two Big Problems, Two Ready Solutions

What should the US do in 2012 to address its tough economic problems?  We will hear many answers to this question through this presidential election year.  Many will be based on ideological conviction and/or political opportunism.  They will likely not lead to any kind of workable solutions.  But some will be more pragmatic and might perhaps stand a chance.

The January 1 Sunday Business section of the NY Times asked six economists to give their best advice for 2012 on a variety of issues.  Among them was Christina Romer, Professor of Economics at UC Berkeley and former chair of President Obama’s Council of Economic Advisors.  Professor Romer wrote an excellent article, - Two Big Problems, Two Ready Solutions - offering practical advice for the US economy in 2012.

“The United States faces two daunting economic problems: an unsustainable long-run budget deficit and persistent high unemployment,” she writes in the opening paragraph.  “Both demand aggressive action in the form of fiscal policy.  Waiting until after the November elections, as seems likely, would be irresponsible.  It is also unnecessary, since there are plans to address both problems that should command bipartisan support.”

Scale and Complex Systemic Innovation

The year end issue of The Economist includes a provocative column - Big and clever: Why large firms are often more inventive than small ones.  The column addresses a fundamental question that those studying innovation have been wrestling with for years:  “Are big companies the best catalysts of innovation, or are small ones better?”

The column is based on a recent study - Scale and Innovation in Today’s Economy - by Michael Mandel, chief economic strategist of the Progressive Policy Institute. 

“Conventional wisdom these days says that small is better when it comes to innovation and putting new ideas into practice,” writes Mandel at the beginning of the report.  “Large enterprises are typically thought of as hidebound defenders of the status quo, dominating by market power and brute force rather than technological and innovative prowess. . .Yet reality is far more complicated than this simple small versus big distinction. . . After 20 years where startups have rightly dominated the innovation headlines, we will show that the pendulum may be swinging back.  As a result, there are reasons to believe that scale may be a plus for innovation in today’s economy, not a minus.”

There is little question that small, entrepreneurial start-ups are almost always the ones that bring to market highly disruptive innovations.  They excel at creative destruction, the term that economist Joseph Schumpeter  popularized almost seventy years ago to describe the process of transformation that accompanies disruptive innovation. 

Entrepreneurs have sharp incentives to break into a market with a disruptive new idea that attacks the dominance of established companies.  They are highly motivated to bring to market new products which offer significantly improved designs and/or lower costs, and thus gain competitive advantage and market share from the established leaders in their segment of the market. 

But, in what has become known as the Schumpeterian Hypothesis,  Schumpeter also believed that large companies in concentrated markets have more incentives to innovate.  By investing in new products or processes, the company can sell them to their already large customer base and reap greater rewards faster.  Moreover, in a highly competitive market, startups will have trouble holding on to the gains from their innovations because they will be quickly imitated by rivals, while large companies with greater market power will be able to better protect and hold on to the gains from their innovations.  

So, which is it?  Are large companies at a disadvantage because start-ups can move much faster in bringing new ideas to market, or is their scale an incentive for investing in innovation?  Mandel summarizes the economic research evidence in two words: It depends.

The Emergence of a Digital Money Ecosystem

At the beginning of this year I wrote that the transition to universal mobile digital money is likely to be among the most exciting, important and challenging projects the world will undertake in the coming decades.  Everything I have learned through the year indicates that, while still in the very early stages, the transition is well underway and gathering momentum. 

This transition involves a lot more than the transformation of money - cash, checks, credit and debit cards, and so on, - from physical to digital objects that we will carry in our smart mobile devices.  It encompasses the whole money ecosystem, including the global payment infrastructures, the management of personal identities and personal financial data, the global financial flows among institutions and between institutions and individuals, the government regulatory regimes, and so on.  

In other words, just about every aspect of the world’s economy is involved.  Over time, mobile devices will truly become our personal windows into an increasingly global, digital economy.  This will take decades to fully play out, - historical transitions take their time.  But, it is most definitely underway, with an increasing number of market pilots and research studies already taking place around the world.  

As part of my work with Citi, I have been spending a lot of time thinking about the implications of this historical transition to a digital money ecosystem.  The more I learn about it, the more I am convinced that this is truly a major paradigm shift that will change the very way we think about money.

Open, Collaborative Trust Frameworks

A couple of weeks ago I attended a workshop on Inventing the Future of Finance cosponsored by ID³ and the MIT Media Lab.  ID³, - the Institute for Institutional Innovation by Data Driven Design, - is a new multidisciplinary non-profit institution formed to develop architectural frameworks, open source software and educational content for the protection, sharing and monetization of sensitive data. 

It was founded by MIT Media Lab Professor Alex “Sandy” Pentland, and by John Clippinger, who is currently a Research Scientists at the Media Lab, and until recently was a Senior Fellow at Harvard’s Berkman Center for Internet and Society.  Clippinger is Executive Director and CEO of ID³, while Pentland serves as its Chief Scientist.  I just joined its Board of Directors.

One of the key missions of ID³ is the creation of trust frameworks, which it defines as:  “A combination of software mechanisms, contracts, and rules for defining, governing and enforcing the sharing and protection of information according to a common and independently verifiable standard of performance.  Whenever possible, such governance mechanisms and contracts should be self-executing and self-correcting.”

A Neural, Digital System for the Economy

Most everyone will agree that the world’s economy is undergoing historical structural changes, mostly caused by the digital technology revolution taking place all around us.  In particular, ever since the explosive growth of the Internet in the mid 1990s, we are seeing the emergence of a global, digital economy.  What does this mean?  How can we best describe the nature of this emerging digital economy?  What are some of its key implications for the overall economy?

There is clearly no simple answer to these questions.  But, I recently read one of the clearest and most elegant explanations of the changes our economy is going through in an article in McKinsey Quarterly by economist W. Brian Arthur, - The Second Economy.  Dr. Arthur is external professor at the Santa Fe Institute and visiting researcher at PARC’s Intelligent Systems Lab.

“Digitization is creating a second economy that’s vast, automatic, and invisible - thereby bringing the biggest change since the Industrial Revolution,” he writes at the very beginning of the article.  He illustrates his point with an analogy to the transformation of the US economy by the railroads in the second half of the 19th century.”

Open Services Innovation

Earlier this year, UC Berkeley professor Henry Chesbrough published a new book, Open Services Innovation: Rethinking Your Business to Grow and Compete in a New Era.  This is his third book on open innovation in the last eight years, having published Open Innovation: The New Imperative for Creating and Profiting from Technology in 2003, and Open Business Models: How to Thrive in the New Innovation Landscape in 2006.

Professor Chesbrough is in the faculty of Berkeley’s Hass Business School and executive director of the Garwood Center for Corporate Innovation and of the Program in Open Innovation.  I met him over a decade ago when I first got involved with Linux and open, collaborative innovation.  He is a top expert on the value of open innovation to business.

When I recently found out that he had published a book on services, I was eager to learn how he framed the subject.  For over ten years now, I have been thinking about the application of technology and innovation to services.  Over the years, I have given quite a few seminars on the subject, including a graduate course in MIT in the Fall of 2010.  I have also written a number of entries on services in this blog.

Jobs in the Age of Watson

On October 31, I participated in a symposium sponsored by MIT’s Center for Digital Business on The Race Against the Machine: The Future of Technology and Employment.  The symposium was associated with an event that took place later that same day on the Harvard campus, the IBM Watson Challenge.  The Watson Challenge was an exhibition Jeopardy! match between Watson, IBM’s question-answering system, three students from the Harvard Business School and three students from MIT’s Sloan School of Management.  Watson won the exhibition match, with the Harvard team finishing a close second.

At the MIT symposium, I was part of a panel on How will technology affect productivity and employment? The panel was moderated by MIT management professor Erik Brynjolfsson, who is also the director of the Center for Digital Business.  The other panel members were MIT economists David Autor and Frank Levy.  We discussed the impact of technology on jobs, in particular, the impact of advanced systems like Watson which are pushing the boundaries between human and machine capabilities

Digital Technologies for 21st Century Democracy

The Club de Madrid is an independent, non-profit organization of 80 democratic former Presidents and Prime Ministers from 56 different countries founded in 2001.  Its members include Bill Clinton, Mikhail Gorbachev, Felipe Gonzalez and Vicente Fox.

The mission of the Club de Madrid is succinctly captured in its tag line: democracy that delivers.  As described in its website, it constitutes “the world´s largest forum of former Heads of State and Government, who have come together to respond to a growing demand for support among leaders in two key areas: democratic leadership and governance; and response to crisis and post-crisis situations.  Both lines of work share the common goal of addressing the challenge of democratic governance and political conflict as well as that of building functional and inclusive societies, where the leadership experience of our Members is most valuable.”

It holds an annual conference, which this year took place on November 8 and 9 in New York City.  The focus for this year’s conference was Digital Technologies for 21st Century Democracy.  The program was comprised of a number of plenary panels and breakout sessions, each of which included experts from business, government and academia as well as Club de Madrid members.

I was invited to attend the conference, and participate in the opening plenary panel on Digital Technologies and the Future of Governance.  The panel was moderated by Beth Noveck, Professor of Law at the New York Law School, who until recently served in the White House as Deputy Chief Technology Officer and leader of the White House Open Government Initiative.  In addition, Professor Noveck was the conference's overall content advisor and wrote this introductory paper on Evolving Democracy for the 21st Century.

Race Against the Machine

Erik Brynjolfsson and Andrew McAfee just published an excellent short (sixty pages, less than twenty thousand words) e-book - Race Against the Machine: How The Digital Revolution Is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy.  Erik Brynjolfsson is a professor at MIT’s Sloan School of Management and director of the MIT Center for Digital Business.  Andy McAfee is Principal Research Scientist at the Center for Digital Business, as well as serving as its associate director.   

“This is a book about how information technologies are affecting jobs, skills, wages, and the economy,” they write in the opening sentence.  There are few more timely and vital subjects.  During the 2007 - 2009 Great Recession, unemployment increased by as much as 5.7%, the largest increase in the post war period. 

But, recessions are always accompanied by job losses.  A more perplexing problem is our jobless recovery since the recession was declared officially over.  The seemingly recovering economy is not putting enough people back to work.  More than two years after the recession officially ended, US unemployment is still over 9 percent.

The Emergence of Cognitive Computing

On October 21 I participate in a Colloquium on the Frontiers of IT at IBM’s Thomas J Watson Research Center.  The colloquium, - which was part of IBM’s Centennial celebration, - brought together experts across industry and academia to discuss and debate the direction of four key Grand Challenges at the very leading edge of IT:  nano systems, exascale, big data, and cognitive computing.

John Kelly, senior VP and director of IBM Research, gave an overview of these four areas.  Here is a similar version of his talk given a week earlier at the University of Melbourne.  John explained that these four areas have the potential to transform the IT industry because of their exponential growth, a result of both continual improvements and disruptive innovations.  “Exponential curves,” he said, “will either put you ahead of the competition of kill you.  It’s one of the other.”

Over the next decade, nano-devices are expected to advance by three orders of magnitude, from a billion to a trillion transistors in a chip.  We will be able to design sophisticated, powerful nano systems-on-a-chip that will be totally contained within such a trillion transistor nano device.  To do so, we will have to shift from silicon to other carbon-based materials.  This requires disruptive technologies and innovations at all levels, including new materials, fabrication processes and design tools.  The work is underway.

Unleashing the Next Age of Prosperity

A few weeks ago I met with Carlota Perez in New York.  I first met Carlota, - a friend so I will refer to her by first name, - around the time of the publication of her 2002 book: Technological Revolutions and Financial Capital:  The Dynamics of Bubbles and Golden Ages.  In her book, as well as her many articles and lectures, she frames the turbulent times we are going through into a clear, historical perspective.  Let me briefly summarize her views. 

Over the past couple of centuries, we have had a technology revolution every 40 - 60 years, starting with the Industrial Revolution in 1771, which was characterized by the emergence of machines, factories and canals.  This was followed by the age of steam and coal, iron and railways which started in 1829; steel and heavy engineering (electrical, chemical, civil and naval) starting in 1875; and the age of the automobile in 1908.  Our present information technology and telecommunications age, whose starting point Perez pegs at 1971, is the fifth such major revolution in that span.

Each such technology revolution is composed of two very different periods, each lasting 20 - 30 years.  The installation period is the time of creative destruction, when new technologies emerge from the lab into the marketplace, entrepreneurs start many businesses based on these new technologies, and venture capitalists encourage experimentation with new business models and speculation in new money-making schemes.

Services, Production and Clouds

Last week I wrote about the workshop I recently attended in IBM’s Almaden Research Lab on The Co-Evolution of Future Technologies, Skills, Jobs, and Quality-of-Life.  In particular, I discussed the talk on the IT-based transformation of services given by John Zysman, professor of political science at UC Berkeley and co-director of the Berkeley Roundtable on the International Economy.

Professor Zysman key premise is that the service transformation we are going through is truly an Algorithmic Revolution, that is, the ability to formalize and codify the activities underlying services, express them as computable algorithms and capture them in software.  Given the major advances in the power and costs of information technologies, many more such service activities are now amenable to be transformed into algorithms and embodied in software.  This is profoundly changing the nature of business and just about all other institutions in society, as  they increasingly turn to IT-based services to add value to their offerings.

Over the past several years I have given a number of seminars on technology and innovation in services.  It has been a tough subject to teach.  Services, along with their creation and consumption, have been difficult to define.  So, like many others, I have discussed services and their attributes in contrast to what they are not - physical products that are generally manufactured in factories.  But, while such a definition of services and the service sector of the economy may have worked well in the past, it does not work so well now.      

One of the major consequences of the IT-based transformation of services is the blurring of the lines between manufactured products and products delivered as services, as well as between the industrial and service sectors of the economy.  The distinction between products and services blurs, as physical products are increasingly embedded into service-based solutions, where the clients pay for the services they receive, not the products embodied in the solutions.  The traditional boundaries between the industrial and service sectors of the economy have been breaking down.

The IT-based Transformation of Services

On September 27 I participated in a workshop at IBM’s Almaden Research Lab on The Co-Evolution of Future Technologies, Skills, Jobs, and Quality-of-Life.  The key objective of the workshop was to explore how new technologies are changing the economics of work activities, and to understand the frameworks, theories and models that might help us better deal with these economics changes.

In a series of talks and panel discussions, the workshop first reviewed the historical patterns of technology innovations and economic cycles, and then looked at the future of work economics in three key areas: technologies and societal infrastructure; skills and jobs; and careers and quality-of-life measures.  I gave a presentation on Job Creation, Education and Entrepreneurship in the Emerging Knowledge Economy.

John Zysman, professor of political science at UC Berkeley and co-director of the Berkeley Roundtable on the International Economy, gave an excellent talk on Production, Clouds, and the Transformation of the Global Economy.  He presented a particularly interesting point of view on the ongoing IT-based transformation of services, which he calls an algorithmic revolution.  His discussion of services is largely based on his 2006 paper, The 4th Service Transformation: The Algorithmic Revolution, which was later followed by a more comprehensive 2010 paper, Services with Everything: The ICT-Enabled Digital Transformation of Services co-written with Stuart Feldman, Jonathan Murray, Niels Christian Nielsen and Kenji E. Kushida.

We Are All New Immigrants to the Hyperconnected World

Last week I wrote about Think: A Forum on the Future of Leadership, a conference that IBM held in New York on September 20 and 21 as part of its Centennial celebrations.  The THINK Forum included a number of talks and panels which looked at leadership from a number of different angles.

One of the speakers was Tom Friedman, Foreign Affairs columnist for the New York Times and renowned author of a number of books, including The World is Flat.  Tom (whom I know personally and will therefore refer to by his first name) moderated a session on The Importance of Systems Thinking.  He then gave an excellent talk focused on the themes in his new book - That Used to Be Us: How America Fell Behind in the World It Invented and How We Can Come Back.  The book was co-authored with John Hopkins Professor Michael Mandelbaum.

Tom said that the biggest challenge we all face is that in the last few years we have gone from a world that was connected to a world that is now hyperconnected.  He observed that when he started writing That Used to be Us, he went back and looked at The World is Flat, which he had written in 2004.  In the earlier book he never mentioned Facebook, Twitter, Cloud, LinkedIn, 4G or Skype.  These companies and technologies had not been born or were in their infancy in 2004, yet they are now a major part of our conversations.  In these short number of years, we have moved from a flat to a hyperconnected world.

Leadership and Rational Thinking

As part of its Centennial celebrations, IBM held a conference in New York in September - THINK: A Forum on the Future of Leadership.  The two day THINK Forum brought together leaders from government, business and academia  to discuss the future of leadership from a number of angles, including the changing nature of the corporation, the importance of systems thinking, leading in times of deep structural changes and bringing science to leadership.

After the Forum, I spent some time reflecting on what I had heard in the various talks and panels.  Lots of different opinions and points of views were expressed.  But, I believe that an overriding message kept coming through loud and clear: to make progress in addressing the very complex problems that we all face, we must leverage the power of rational thinking.

Several speakers pointed out that the world is no longer just connected via the Internet, as we have been saying for the past fifteen years.  It is now becoming hyperconnected, given the proliferation of smart mobile devices and sensors all around us.  In such a hyperconnected world, changes now propagate and build on each other faster than ever, rendering just about all private and public institutions increasingly unpredictable and harder to manage.

But, a number of speakers also pointed out that our ability to understand the world around us is directly related to the tools at our disposal.  And, we now have an array of highly sophisticated tools that, when properly used, can help us make sense of all that complexity.  In particular, just like centuries ago telescopes enabled us to peer into the sky and better understand the universe and our role in it, information has now become a similar such tool, enabling us to now peer into our highly complex world and help us understand what is going on.

Innovation in Higher Education

A glance at the latest US employment figures from the Bureau of Labor Statistics reveals sharp differences in unemployment rates by educational attainment: college degree or higher: 4.3%; associate degree or some college: 8.2%; high school graduates, no college: 9.6%; and no high school diploma: 14.3%.  Moreover, while the overall unemployment rate remains over 9 percent, a recent McKinsey report found that employers are having trouble filling specific positions because they could not find applicants with the right skills.  The report projects that if economic conditions improve, there will be a shortage of 1.5 million workers with college degrees by 2020, but a surplus of almost 6 million of workers with no high school degree.  It also projects a continuing shortage of workers with technical and health care skills not necessarily requiring a college degree.

Just about every such study points to a similar trend: for the foreseeable future, the US economy will need better educated workers with specific skill requirements.  Workers without a post-secondary education face a contracting set of job opportunities.  Those with higher educational attainments will be in the best position to obtain good jobs with good pay. 

Thus, we need to significantly increase the number of students receiving post-secondary education.  However, our colleges and universities, the very institutions to which the country should turn to help us address these increased educational demands, are facing problems of their own. Tuition costs have risen much faster than the rate of inflation and keep going up, thus making it harder for them to serve the students most in need of their services.  Many educational institutions are facing financial difficulties.  The financial crisis has been aggravating the situation, at both public and private institutions.  Government education budgets are under huge pressure at all levels, - local, state and national.

Incremental steps will not make much of a dent on the problem. We need to look at higher education through the lens of disruptive innovation, argues a report published last February, - Disrupting College: How Disruptive Innovation Can Deliver Quality and Affordability to Postsecondary Education.  The report is written by Clayton Christensen, Michael Horn, Louis Caldera and Louis Soares.

Social Business: e-business 2.0 . . . and Beyond

IBM executive Sandy Carter has just published a new book - Get Bold: Using Social Media to Create a New Type of Social Business.  I know Sandy well, having worked with her at IBM for over a decade in various initiatives.  She is now Vice President of Sales for Social Business and Collaboration Solutions, as well as one of IBM's key Social Business evangelists and strategists.

IBM announced its Social Business initiative in the Fall of 2010.  Its basic definition is simple and practical: A Social Business embraces networks of people to create business value.  When I first learned about Social Business, I thought of it as the natural evolution of IBM’s Internet and e-business strategies.  Let me explain. 

When first announced in 1997, the basic definition of e-business was equally succinct: Leverage the Internet for Business Value.  So, as Web 2.0 technologies and Social Media applications emerged several years later, it is natural that e-business would have now evolved into something like e-business 2.0, continuing to leverage (the more recent advances of) the Internet for business value.  But, as Sandy observes in Get Bold, Social Business goes way beyond its Web 2.0 implications.

The Limits of Meritocracy

In March of 2010, The Atlantic published an excellent article by Don Peck which painfully described the dire consequences of a long period of high unemployment on US society -  How a New Jobless Era will Transform America.  According to Peck, the consequences of prolonged unemployment are not only bleak but truly systemic in nature -  “a slow-motion social catastrophe.”  Joblessness is more devastating to families and communities than poverty, he wrote:

“The Great Recession may be over, but this era of high joblessness is probably just beginning.  Before it ends, it will likely change the life course and character of a generation of young adults.  It will leave an indelible imprint on many blue-collar men.  It could cripple marriage as an institution in many communities.  It may already be plunging many inner cities into a despair not seen for decades.  Ultimately, it is likely to warp our politics, our culture, and the character of our society for years to come.”

Peck just published another very good article in the September 2011 issue of The Atlantic - Can the Middle Class be Saved?  In this article, his focus is on what he refers to as The Culling of the Middle Class:

“Arguably, the most important economic trend in the United States over the past couple of generations has been the ever more distinct sorting of Americans into winners and losers, and the slow hollowing-out of the middle class.  Median incomes declined outright from 1999 to 2009.  For most of the aughts, that trend was masked by the housing bubble, which allowed working-class and middle-class families to raise their standard of living despite income stagnation or downward job mobility.  But that fig leaf has since blown away.  And the recession has pressed hard on the broad center of American society.”

Job Creation and America's Future

This past June, the McKinsey Global Institute published one of the most comprehensive reports I have seen on the high unemployment and jobless recovery the US has been going through for the past few years - An Economy that Works: Job Creation and America’s Future.  The report is based on a McKinsey research study that surveyed 2,000 business leaders, conducted detail interviews with a number of human resource executives, examined in depth those sectors of the economy with the highest potential for growth, developed a number of detail scenarios for how the US employment picture might evolve into the future, and made several concrete recommendations on what the country should do to address our very serious unemployment issues.

Right at the beginning the report hits us in the face with a few statistics highlighted in big text that succinctly capture the job picture in 2011: US jobs have declined by 7 million since December 2007; 20% of men are not working today, up from 7% in 1970; there has been a 23% drop in new business creation since 2007; the jobless recovery is projected to last 60 months; 10% of Americans move annually, down from 20% in 1985.

The very next page uses the same big text format to summarize the very tough challenges the country faces: we need 21 million jobs by 2020 to return to full employment, - that is, to return to the 5% pre-recession unemployment level instead of the current level of over 9%; the job-growth scenarios modeled by McKinsey ranged from 9.3 to 22.5 million, so only their most optimistic high growth scenario gets us back to full employment; in 2020, there will likely be a 1.5 million shortage of college graduates in the workforce; even today, 40% of companies have had job openings for six months that they have not been able to fill due to lack of the proper skills; and 58% of employers said that they will hire more temporary and part-time workers.

“The United States faces an immediate challenge:,” the executive summary starts out saying, “finding employment for 7 million people still out of work from the 2008–09 recession and reviving robust job creation in the decade to come.  But simply employing a nation’s people is not enough. In a globalized, information-age economy, there is no more important economic priority than building a strong workforce.”

Social Reputation in the Age of Globalization

Given my current university affiliations and teaching responsibilities, I spend quite a bit of time thinking how we should best train future leaders to help prepare them for the complex, volatile and unpredictable environments that they must learn to navigate.  Before the Internet brought the world much closer together, change propagated relatively slowly and often became attenuated and lost intensity before reaching other parts of a business and the economies and societies in which it operates.  Not so today.  In our increasingly integrated world, change now propagates much faster, and its impact will often lead to unexpected serious problems that a company’s leaders have to learn to deal with.

My own personal experience has been primarily with the impact of disruptive technologies and innovations on business.  Thus, my seminars and courses have generally focused on the management of technology-based business transformation, the transition to an information-intensive, knowledge-based economy and related areas.  But, beyond my core interests at the intersection of technology, management and complex systems, I have been thinking quite a bit about the central role of trust and reputation now plays, especially for highly visible global companies that are leaders in their industry.

Regardless of how it eventually comes out, the ongoing News Corporation scandal is a real time case study of the importance of trust and reputation to a powerful global company.  As we now know, for the last few years, employees of the British tabloid News of the World have been accused of hacking into the phones of celebrities, politicians and members of the British Royal Family in the pursuit of juicy, exclusive stories.  They have also been accused of bribing members of London’s Metropolitan Police Service. 

Few paid much attention to these allegations.  But then, the scandal went viral seemingly overnight and reached its current critical stage when early in July of 2011 it was revealed that the hacking extended to the phones of ordinary citizens, including a murdered school girl, relatives of deceased British soldiers and victims of the London bombings of July 7, 2005.  These latest revelations resulted in a public outcry in the UK against the News Corporation, its chairman and CEO Rupert Murdoch and other senior executives of the company.

Business Problems, Trust and Values

Like many who are not fans of the kind of journalism practiced by the News Corporation in its tabloids and cable news channels, I must admit to feelings of schadenfreude at their current problems in the UK as a result of the phone hacking and related scandals.  The scandal has already derailed their planned takeover of British Sky Broadcasting, led to the shutdown of News of the World, caused the resignation of a number of senior executives and the arrest of a few present and former News Corp employees. 

Given that the formal investigations are just starting, we don’t know how the UK scandal will evolve.  It is also possible that the scandal will reach across the Atlantic, given that the FBI is now launching its own  investigation as to whether similar phone hacking incidents took place in the US.  We have to wait to see how this incident will play over time, and what its impact will be on the News Corporation and its various media holdings around the world.

But, even at this early stage, it is instructive to look at the problems News Corp is going through, - one of the world’s most successful media conglomerates run by executives who are undoubtedly among the best and brightest in their industry, - and reflect how such powerful companies get into such serious trouble.  For me this is particularly interesting, given that organizational culture is one of the topics I often discuss in my university seminars.  In addition, just last month we celebrated IBM’s Centennial, and along with the many who have written articles on the subject, I kept asking myself: “why is IBM still alive and thriving after so long?”

The Science of Complex Systems

When I look back over my long, relatively eclectic career, complex systems have been a common theme in all the activities I’ve been involved in.  It started in the 1960s, when I was an undergraduate and graduate student at the University of Chicago majoring in physics, - the study of complex natural systems.  The research for my thesis was focused on the highly complex world of atoms and molecules.  

After finishing my studies, I joined IBM Research in 1970 and switched to computer sciences.  My main research interests were centered on large computer systems, including mainframes, supercomputers and distributed systems.  In the 1990s, my work was focused on the kinds of complex systems and applications made possible by the advent of the Internet, World Wide Web and e-business. 

Then, around ten years ago, I became very interested in the applications of technology to market-facing, people oriented complex systems, especially systems involving services.  Over the past few years, I have also become increasingly interested in economic systems. 

In addition, I started to notice that a number of the concepts and principles I learned many years ago as a physics student seem to apply to these new kind of complex organizational systems I was now interested in.  Let me explain.

Fixing the US Jobs Problem

Last week, I wrote about the recent work of Michael Spence, professor of economics at NYU’s Stern School of Business, professor and dean emeritus at the Stanford Graduate School of Business, and the recipient of the 2001 Nobel Prize in economics. 

In The Evolving Structure of the American Economy and the Employment Challenge, which was published in March of this year by the Council on Foreign Relations, Professor Spence and co-author Sandile Hlatshwayo, examined the impact of globalization over the last twenty years.  They divided the economy into two segments: tradable and nontradable.  They then looked at the trends in each segment by analyzing data from 1990 to 2008 from the US Bureau of Labor Statistics and the Bureau of Economic Analysis.  Their analysis uncovered a tale of two very different economies. 

The tradable sector includes those parts of the economy most subject to global competition from foreign companies and suppliers, - e.g., manufacturing, energy, back-office services.  It significantly improved its value added per job or productivity, but had negligible incremental employment, primarily because a growing number of jobs have been moving offshore.  The nontradable sector, which includes those parts of the economy which must be produced and consumed locally, - e.g., government, health care, construction, - had virtually all the job growth during this period but significantly lower value-added.

As they wrote in the Executive Summary, the employment picture does not look good over the next several years, perhaps longer:

“Given the prospect of slowing employment growth in nontradables and rising competitive pressure on tradables, major employment problems in the near future are a certainty.  Even if the nontradable sector is able to continue to absorb the growth in the labor force, pressure on wages and salaries will be downward, and consequences for income distribution unavoidable.”

“To create jobs, contain inequality, and reduce the U.S. current-account deficit, the scope of the export sector will need to expand.  That will mean restoring and creating U.S. competitiveness in an expanded set of activities via heightened investment in human capital, technology, and hard and soft infrastructure. The challenge is how to do it most effectively.”

The Employment Challenge in the US Economy

A couple of years ago, McKinsey, the global management consulting firm, launched a new website called What Matters.  It asks a big question and invites a wide array of people to write essays giving their points of view on the topic.  In 2009, for example, What Matters addressed Innovation, and asked, Where will the world’s primary centers of innovation be?  I was invited to participate and contributed an essay, “What’s Next in the Knowledge Economy?”

Earlier this year I was once more invited to contribute an essay on the topic of Growth and Productivity, focused on the question: Has the US passed peak productivity growth?  I wrote “The next golden age of innovation”, which was posted last month.

A number of eminent economists also contributed essays on Growth and Productivity.  I was truly humbled to have my essay posted alongside theirs.

Two of the essays in the section revolve around recent work by Michael Spence to try to understand the reasons for the current jobless recovery in the US economy, a fairly unique situation where business conditions have significantly improved while unemployment remains high.  Professor Spence is the recipient of the 2001 Nobel Prize in economics.  He is currently in the faculty at  NYU’s Stern School of Business, as well as professor and dean emeritus of the Stanford Graduate School of Business.

The Modernization of the State

I spent the first week of June in Chile, my fourth visit in the last five years.  I was there at the invitation of Fernando Flores, President of the National Innovation Council for Competitiveness, to assist in the Modernization of the State initiative, one of the major projects in the administration of Chile’s President Sebastian Piñera. 
 
The Modernization of the State initiative is being led by Rafael Ariztia under the General Ministry of the Presidency.  It has four major objectives:

• Improve in the overall services that the government provides to all its users
• More effective and efficient government institutions
• Improve the effectiveness of government employees
• Facilitate the decentralization of the country

I first met Fernando Flores during a trip to Chile in August of 2006 to attend an international conference.  He was a Senator then, a position he held from March of 2002 until he was appointed by President Piñera to his present position in March of 2010.  We discovered that we had a lot of common interests and have since become friends.  I continued to meet with him during subsequent visits to Chile.  He knew about my strong interests in cloud computing, and last year I invited him to a briefing on the subject in IBM’s headquarters in Armonk, New York.

Flores has been very involved in the Modernization of the State initiative, both because of his position as president of the Innovation Council as well as his personal expertise in technology and management.  He holds a Ph D from UC Berkeley, has worked extensively in the fields of organizational leadership and human cognition, and written a number of books, including Understanding Computers and Cognition: a New Foundation for Design and Building Trust: in Business, Politics, Relationships and Life.

Flores feels that cloud computing has a major role to play in helping to achieve the objectives of the Modernization initiative.  We talked about his ideas earlier this year, which I thought were right on the mark.  He later invited me to assist in these efforts by coming to Chile for meetings with Rafael Ariztia and the key groups woking on the initiative, as well as to give a seminar explaining cloud computing and its potential to Chilean government officials.

The Evolution of My Complex Relationship with Blogging

From time to time, I like to reflect on my feelings about blogging, and then write about them in an entry in my blog.  I have not done so in a while, and it has now been just about six years since I started this blog, so I thought that it would be a good time to return to the subject.

I started blogging at the urging of colleagues at IBM.  In the Spring of 2005 the company was getting ready to launch a major blogging initiative to encourage its employees to participate in the rapidly growing blogosphere.  My colleagues felt that as someone closely associated with IBM’s Internet strategy, it was important that I personally become an active blogger.
 
For several years my friend and colleague John Patrick had been urging me to start a blog.  John has always been a pioneer in embracing new technologies.  He was one of the first people I knew who had a blog, - which is still going strong after all these years.  I resisted John’s exhortations, partly due to the commitment of time and energy it entailed, and partly due to fears that I would not have enough interesting things to write about every week.  But, the excitement building up in IBM around the new blogging initiative finally pushed me over the edge.  I posted my first blog on May 16, 2005.

Reflections of the Evolution of Capitalism

The Cold War was an era of military, political and economic conflicts between the communist world led by the Soviet Union, and the Western world, led by the US.  The two sides were also engaged in fierce debates about the merits of their key political and economic philosophies:  the communism and one-party states of the countries in the Soviet camp, versus the democracies, capitalism and market economies of the West.  These debates were settled by 1991 with the collapse and dissolution of the Soviet Union.

China, Vietnam and other countries have one-party political systems ruled by their communist parties, but in the last couple of decades they have also embraced market economies.  Their economic systems look more like a kind of state capitalism, with the government behaving like one giant corporation, than anything resembling Soviet style communism.  For all practical purposes, only Cuba and North Korea have remained faithful to the highly centralized style of communism once practiced in the Soviet Union.  The sorry state of their economies speaks for itself.

Given that most countries around the world now have economies based on some form or another of capitalism and open markets, you would expect that the passionate ideological debates of the past are over.  Not so.  The economic debates in the US and many other countries are actually fiercer than ever, but they are taking place within the broad framework of capitalism.  Capitalism continues to evolve, and different people have their own ideas about how that should happen. 

There are many lenses through which to view the evolution of capitalism.  Let me offer my reflections on the topic through a few such lenses.

The Management of Disruptive Innovations

The management of disruptive innovations is very different when looking at relatively simple or self-contained technologies, products or services versus highly complex platforms and infrastructures.  A lot of the hype you often hear when new innovations come about is the result of people not properly understanding the different dynamics that apply to simple versus highly complex innovations.  Unrealistic predictions are then made about the near term impact and rate of adoption of the new innovation, because the innovation in question is quite complex in nature, but the predictions assumes that it is on the simpler end of the spectrum. 

Let me illustrate what I mean by giving a few examples of different kinds of disruptive innovation across the spectrum from relatively simple to highly complex.

Reflections on the Transition to an Information Society

In the 1920s, Russian economist Nikolai Kondratiev observed that capitalist economies go through long term cycles of booms and depressions every 50 years or so.  These economic cycles became known as Kondratiev Waves.  More recently, Carlota Perez expanded on Kondratiev’s work, describing the central role of technological revolutions, disruptive innovations, and financial and production capital in these economic cycles.

Perez identified five such technology-based revolutions and economic cycles since the onset of the Industrial Revolution in 1771, the first one being the age of machines, factories and canals.  This was followed by the age of steam and coal, iron and railways starting in 1829; steel, electricity and heavy engineering in 1875; the age of oil, the automobile, and mass production in 1908; and our present age of digital technologies, information and telecommunications which Perez pegs as starting in 1971.

In each of these cycles, unrealistic expectations in the new disruptive technologies led to over-investments in new companies.  This eventually turned into unsustainable speculation, causing a financial bubble, which eventually crashed and resulted in a period of economic stagnation. 

In the past four cycles, once the impact of the financial bubble and economic stagnation worked themselves out, a golden age of innovation and production followed, where new paradigms based on the new technologies significantly transformed the economy and just about every single industry, as well as re-shaping the institutions of society, and the nature of work, government and even people’s personal lives.

But now,  given our jobless recovery and continuing slow growing economy in the US, we are pondering whether we are once more at the onset of a new golden age of innovation, or at the beginning of something different which will become known as The Great Stagnation.  While I am hopeful that technology, innovation and globalization will eventually lead to all kinds of new jobs, a much improved economy and a higher standard of living, none of us really knows which of these two scenarios will prevail in the future.

A Great Stagnation or a New Golden Age of Innovation?

Here is the way things are supposed to work.  Every 50 years or so, the world goes through a major technology-based economic revolution, - also known as Kondratiev Waves.  A new disruptive technology emerges out of the lab into the marketplace, becomes increasingly successful, gets embraced by entrepreneurs who start new businesses based on these new technologies, and begins to gain market share at the expense of the previous, slow moving market leaders.  These new ventures continue to attract more and more financial capital from investors, which in turn helps improve the quality and lowers the cost of the new disruptive technology and leads to many new innovative applications.     

But inevitably, the investments in new companies and applications turns into unsustainable speculation, leading to a financial bubble which eventually crashes. 

Then, after the crash, comes a time of institutional recomposition.  The now well accepted technologies become the norm.  New paradigms emerge for guiding innovation and for determining winners and losers in the marketplace.  Over time, these new paradigms significantly transform the economy and everything around it, as well as re-shaping social behavior and the institutions of society.  The previous decades of creative destruction now become a golden age of creative construction.

The MIT Forum on Future Cities

Last week I participated in a Forum on Future Cities hosted by MIT’s Senseable City Lab with support from the Rockefeller Foundation.  The Senseable City Lab was founded in 2004 by architect and engineer Carlo Ratti, who is a faculty member in MIT’s Department of Urban Studies and Planning.  Its key objective is to bring together the worlds of design and architecture with the worlds of technology and engineering, in order to understand and anticipate how digital technologies are changing the urban environment as well as their impact on people’s lives. 

The Forum on Future Cities attracted leading world thinkers from academia, industry and government to discuss the most pressing issues surrounding the large scale urbanization taking place all around us, and to explore how new mobile, smart technologies can contribute to help us better manage our rapidly growing cities.  The Forum included talks and panel discussions on a wide variety of subjects.  I moderated a session on Changing Research, which included six talks on new research ideas followed by a panel discussion.

My overriding impression of the Forum is the variety of skills and disciplines that are now coming together to study cities and urban systems in general.  Urban studies and planning has been a major area of human endeavor from time immemorial, ever since people started congregating in towns.  But, it does seem that in the last decade, the discipline has significantly expanded, for at least two main reasons.

The Future of the State

The March 19 issue of The Economist included a special report on The Future of the State.  In an excellent series of articles, the special report explains why the continuing growth of government is no longer sustainable, especially in the more advanced economies with aging populations like the US and Western Europe.  It highlights what some governments are doing to address the problem, especially Singapore and Britain.  Finally, the report offers a set of recommendations that governments might follow if they want to get a handle on the extremely complex and challenging problem of reforming the state.

“How to slim the state will become the great political issue of our times,” is the byline of its introductory article, Taming Leviathan.  “The state has kept on grabbing an ever larger share of the economy in the rich world for a century, and the state’s regulatory sweep has increased as well.”  The report includes a chart showing that the average government spending as a percentage of GDP in thirteen rich world countries went from 10.4% in 1870, to 28.8% in 1960, and 47.7% in 2009.     

“ . . . the forces driving this growth are powerful,” it writes, “but so are the reasons why it needs to be halted . . . there are pragmatic grounds now for politicians of all sorts to make the state more productive.  With ageing populations to care for, many rich-world governments are on course for bankruptcy - unless they raise taxes to levels that would wreck their economies.”

Why has government grown so much in these rich nations over the past century?  “Because, despite all that rhetoric from the tea-partiers, big government is not just the fault of self-interested bureaucrats and leftist politicians.  Conservative voters, even if they don’t like taxes, have kept on demanding that the state does more.  Just as the left has built hospitals, announced endless programmes to help the poor and indulged the teachers’ unions, the right has built prisons, announced wars on drugs and terror, and indulged generals, farmers and policemen.”

Complexity and Design in Warfare

On March 11 I participated in a workshop in Washington, - Design Unbound, - organized by The Highlands Forum.  The workshop explored how design-oriented approaches can help us better understand and deal with the very complex problems we are increasingly encountering in all aspects of business, economies, government, public policy, military operations and society in general.

The Highlands Forum is an informal, cross-disciplinary group sponsored by the Office of the US Secretary of Defense.  Its mission is to explore new ideas and emerging trends that will help support high-level Department of Defense (DoD) policy and strategy.  It was organized in 1994 by retired US Navy captain Richard O’Neill, who continues to serve as its leader. 

The Forum holds several meetings a year, each centered on a specific topic, mostly related to information technologies and their impact on society.  Experts from government, industry, academia, and a variety of professions are invited to discuss their ideas on the subject - to be part of a kind of strategic conversation.  Some of the areas explored by the Forum are emerging technologies, organizational development, economic competition, and the changing concept of security. 

Over the past few meetings the Forum has focused on various topics related to complex systems, - how to best understand and manage them in the present, as well as predict and shape their future directions.  In this recent meeting we discussed how to apply the concept of design to address such complex systems and problems.

A Time of Institutional Recomposition

There is little question that our economy, our society and just about all our institutions are going through major structural changes mostly caused by the digital technology revolution that has been all around us for the past several decades.  Such technology-based structural changes are not new.  In her 2002 book Technological Revolutions and Financial Capital:  The Dynamics of Bubbles and Golden Ages, scholar and writer Carlota Perez puts our own turbulent times into a clear, historical perspective.

According to Perez, over the past couple of centuries, we have had a technology revolution every 40 - 60 years, starting with the Industrial Revolution in 1771, which was characterized by the emergence of machines, factories and canals.  This was followed by the age of steam and coal, iron and railways which started in 1829; steel and heavy engineering (electrical, chemical, civil and naval) starting in 1875; and the age of the automobile in 1908.  Our present information technology and telecommunications age, whose starting point Perez pegs at 1971, is the fifth such major revolution in that span.

To better understand the dynamics of a technology revolution, we should split it into two different periods, each lasting 20 - 30 years.  The installation period is the time of creative destruction, when new technologies emerge from the lab into the marketplace, entrepreneurs start many new businesses based on these new technologies, and venture capitalists encourage experimentation with new business models and speculation in new money-making schemes.  Inevitably, this all leads to the kind of financial bubble and crash we are all quite familiar with from our recent experiences.

After the crash, comes the deployment period, the time of institutional recomposition.  The now well accepted technologies become the norm.  New paradigms emerge for guiding innovation and for determining winners and losers in the marketplace.  Over time, these new paradigms significantly transform the economy and everything around it, as well as re-shaping social behavior and the institutions of society.

The Co-Evolution of Humans and our Tools

Tools have played a critical role in human evolution for a very, very long time.  As the Tools entry in Wikipedia observes: 

“Tools are the most important items that the ancient humans used to climb to the top of the food chain; by inventing tools, they were able to accomplish tasks that human bodies could not, such as using a spear or bow and arrow to kill prey, since their teeth were not sharp enough to pierce many animals' skins . . . The transition from stone to metal tools roughly coincided with the development of agriculture around the 4th millennium BC.  Mechanical devices experienced a major expansion in their use in the Middle Ages with the systematic employment of new energy sources: water (waterwheels) and wind (windmills). . . Machine tools occasioned a surge in producing new tools in the industrial revolution.  Advocates of nanotechnology expect a similar surge as tools become microscopic in size.”

Beyond extending our physical capabilities, tools have played a major role in the evolution of our brain and mental powers:  “Using tools has been interpreted as a sign of intelligence, and it has been theorized that tool use may have stimulated certain aspects of human evolution - most notably the continued expansion of the human brain.”

Business Winners: Combining Scale with Agility

A few weeks ago I posted an entry inspired by an excellent article in The World in 2011, The Economist’s annual issue offering predictions for the following year and beyond.  Another article in the same issue caught my attention, Multinationimbles, by Matthew Bishop, who is the US Business editor of The Economist.

The article is built around a somewhat provocative premise: “The business winners will be those that combine scale with agility.”  It is provocative because people generally associate agility with entrepreneurial startups, and scale with more mature, established companies, although a few relatively young companies like Amazon, Google and Facebook have already achieved scale to complement their entrepreneurial agility. 

But the potential oxymoron in the article’s premise is the notion that a large mature company can achieve this combination of scale and agility.  Doesn’t this violate Schumpeter’s 70-year-old theory of creative destruction?  Once large and successful, aren’t companies that once revolutionized their industries supposed to be too slow and locked into the sources of their past success to respond to the new waves of entrepreneurs now attacking them with innovative products and services? 

Bishop’s article focuses primarily on the few mature companies that have achieved this important scale-agility combination: GE, Procter & Gamble, Wal-Mart, and especially IBM. 

“In June 2011, with much fanfare, IBM will celebrate its 100th birthday.  Big Blue is a rare example of corporate survival: few companies last that long, and at times it didn’t look as if IBM would either.  Its secret is not resilience alone, but an ability to reinvent itself.  As Lou Gerstner recounted in his bestseller, “Who Says Elephants Can’t Dance?”, he brought the firm back from the brink after he became its chief executive in 1993 by shifting its focus from selling hardware to selling services.  Since Mr Gerstner left, IBM has reinvented itself again - this time in how it is run as much as in what it sells - with the result that it will mark its centenary as a role model for what a company needs to be to prosper in the second decade of the 21st century.”

Bishop predicts that in 2011, “the biggest winners will be companies that can combine the advantages of scale with the agility to respond to fast-changing market conditions.”

Design Takes Over: Making Beauty Out of Necessity

Toward the end of 2010, The Economist published The World in 2011, its annual issue with predictions for the following year on the variety of topics it normally covers.  As summarized in the introductory article From the Editor, the 2011 predictions presented a balanced view of the next year, articulating both the magnitude of the challenges we face as well as the major opportunities for progress:

“It will be a tale of two economies: a rich world struggling with a weak and jobless recovery, and an emerging world growing four times as fast.  Europe will be divided between a solid centre of its euro zone and a wobbly periphery.  . . Look at politics, and you will often see two clashing forces, too . . .  America faces gridlock between the White House and Congress . . . A sense of division, and frustration, will also prevail in international affairs. . . For all the talk of co-operation on global issues  . . .  it will often seem like a zero-sum world. . . But the gloom will be overdone.  The year ahead will produce striking examples of the power of technology and imagination to address fundamental problems of the age. . .”

This was the 25th edition of “The World in . . . .”  To mark the occasion,  The Economist also included a section on The World in 2036, peering 25 years ahead on a variety of topics, including the economy, technology, religion and collaboration.

I particularly enjoyed reading Design Takes Over, the 2036 prediction by Paola Antonelli, senior curator for architecture and design at New York’s Museum of Modern Art.  She starts her short and elegant article, by first explaining the importance of design in our increasingly fast changing and complex world:

From e-business to Social Business

At the beginning of February I participated in a Social Business Industries Symposium sponsored by IBM in Orlando.  Social business is an initiative that IBM launched last November, along with new products and services that combine social networking with advanced analytics capabilities to help organizations build trusted relationships and make better and faster decisions.

What is a social business?  In the past few years, the term has been used to mean “a non-loss, non-dividend company designed to address a social objective,” - a new kind of capitalism to serve humanities most pressing needs, pioneered by Nobel Peace Prize winner Muhammed Yunus and others.
  
But with the rise of social media, another major use of social business has emerged.  IBM’s basic definition is short and simple:  A Social Business embraces networks of people to create business value.

Why Do Firms Exist?

Ronald Coase, the eminent British economist and University of Chicago professor emeritus, turned 100 on December 29.  In 1937, Professor Coase published a seminal paper: The Nature of the Firm, which along with many other achievements earned him the 1991 Nobel Prize in economics.

The Economist marked Professor Coase’s 100th birthday with an article, Why Do Firms Exist?,  that reviews his major accomplishments.  I like its edgy first paragraph:

“For philosophers the great existential question is: ‘Why is there something rather than nothing?’  For management theorists the more mundane equivalent is:  ‘Why do firms exist?  Why isn’t everything done by the market?’”

Professor Coase’s work provides simple answers to to these questions.  He explained that, in principle, a firm should be able to find the cheapest, most productive goods and services by contracting them out in an efficient, open marketplace.  However, markets are not perfectly fluid.  Transaction costs are incurred in obtaining goods and services outside the firm, such as searching for the right people, negotiating a contract, coordinating the work, managing intellectual property and so on.  Thus, firms came into being to make it easier and less costly to get work done.