October 22, 2014

One Divided By Zero Equals Infinity — Economic Perspectives On Our Increasingly Connected World

Posted By Guido Mengelkamp, Partner, INEX Advisors

Connecting Humans

Every week, 1.5 million people join the urban population: a “new” London every 1.5-months, a new Tokyo every 2.

The West took over two centuries to move from the countryside to the city; the East is transitioning much faster.

In 1800, only 2% of the world was urbanized, in 1950, 30%, in 2007, 50%.  Cities filled with German craftsman, American cowboys, Japanese samurais, converging their material world, maintaining their cultural, rural traditions.

Economic implications of these migrations include a growing number of consumers and producers from increasingly diverse cultural backgrounds, increasingly connected, consuming and polluting many of the same resources.

The Internet has connected humans much faster.  Democratization of network and information access, first through PC, later through mobile, has created highways of 1s and 0s of massive scale and velocity: digital social networks with the power to put governments on their knees in days, companies in hours.

Economically, networks (self-) organize, driving efficiencies.  Networks drive markets towards an Efficient-Markets Hypothesis where only information matters, often with limited product, and mainly service differentiation.

But change does not happen in a straight line:  networks go through phase changes.  A ‘new system’ reaches critical mass, its connections start interconnecting, ‘disrupting’ the previous system, organization or market structure.  This can happen overnight, turning markets upside down, first celebrating diversity and small, then control with few utility-like vendors.  Open and efficient can become closed and fragile, even risking collapse.

Many case studies exist, including new terminology such as ‘freemium’ and ‘open’.  Amazon turned the printed media industry from centuries of publisher-driven push, to consumer-driven pull. Apple turned the music industry upside down in a similar fashion.

But in retail, many start-ups and investors alike, are weary of working with Amazon, given the control the company has in the value chain.  An industry where contagion and the fragility of concentrated digital networks risk collapse is finance.


Connecting Tasks and Processes

Many tasks and processes have been turned into 1s and 0s by the software and logic of IT.  Since its inception, IT has seen several technology cycles influencing the organization and connectivity of information and tasks. The introduction of the mainframe centralized, while client-server distributed tasks and information inside companies; the Internet distributed IT to our homes and pockets of our trousers.

Each cycle made large economic contributions through productivity gains, many driven by task related efficiencies such as outsourcing and automation.  Each wave had its own champions, of enormous value and scale: IBM in mainframe, Oracle in client-server, Microsoft and Intel in PC.

Now, computers and the software running them are being networked and connected.  The size of the ‘open’ human Internet is enabling us to connect and centralize the software running many of the tasks of enterprises on a global scale, in ‘clouds’, like a large global mainframe.

The current ‘cloud’ cycle re-centralizes IT and creates efficiencies on a global scale.  The ‘product IT’ is being disrupted by the ‘service IT’, IT-as-a-Service.   IT is becoming a utility.  IT is dying.  Long live IT.

Few technologies created utilities, the last being electrification.  While the Industrial Revolution automated manual labor through the creation of hardware, does the current Information Revolution automate knowledge through the creation of software?

Something is missing.  Unlike digital human networks, many processes take place in the real world, where context, real time and local exist.  The missing pieces in the puzzle are our resources.


Connecting Resources

The next wave of the Internet, called the Internet of Things (IoT), is about instrumenting and connecting resources, our physical world that does not have a digital signature, but is often sub-optimally utilized.

Our partners at Flora & Fauna International, who measure bio-diversity, believe we do not have a choice but to instrument and monitor everything.  The aforementioned demographic trends pose similar questions about human sustainability and health around food, water and energy – just to name a few.

Google is connecting taxis and eating taxi drivers.  Organizational dependencies and knowledge reuse exist between humans, tasks and resources.  Dependencies between humans and tasks are about assignment.  Concentrated assignment is not good for confidence, and confidence is driving consumption, driving economic growth.  It is no surprise that some regulators are getting nervous.

The economic implications of IoT will be enormous.

In finance terms, the information gathered, is a measure of risk.  The information about resources and assets will provide the ‘last mile’ of contextual data completing the digital picture of all our organizational dependencies.  Connecting assets will drive huge efficiencies and productivity gains in many B2B markets towards service-only differentiation, unlikely disrupting them completely, but providing industrial conglomerates with a range of challenges, including lower product value and increased scrutiny of overhead and inefficiencies.

One of the biggest opportunities might lie in the distributed and local nature of resources – and of IoT, especially as the Internet was intended to have a distributed vs. central architecture.  The next wave might architecturally, logically, favor scope over scale, favor local over central.  This could be great economic news: a completely ‘tailor-made’ world, where local is profitable, driving value and creating employment, sustainably.


Humanist objectivism

What could be the social implication of concentrated human, social networks?  Concentrated and centralized social networks can confuse people, especially as they lack context.  The network seems bigger then life, it humbles people the way the illimitable opportunity of money, the vastness of oceans or mountains can humble and confuse.

And humans have culture, made up of beliefs, traditions, celebrations, punishment, shaping and segregating their social networks.  Concentrated and centralized beliefs can radicalize much more easily.  That while our world is becoming more culturally diverse, not less.

Combine concentrated assignment, eating employment, with confused, radical, diverse social networks…

But what if we can connect and create a perfect digital imagine of our ‘here and now’?  Let us assume for one minute that humans have relatively similar values whatever our beliefs.  That our actions are driven by the order of our values, and this order by the interpretation, understanding, or lack of understanding of our ‘here and now’.

Perfect, rationale, digital information, about the ‘here and now’ to all of us, to all stakeholders, not controlled or concentrated by a single, or few entities, might help us act rationally and do what matters for all, globally, locally, sustainably, whatever our belief.

IoT has huge potential, economically for sure, maybe socially.  I am very grateful to all the Ayn Rand fans, heroes, disrupting century old networks and democratizing the world through ubiquitous access to information and knowledge.  The Internet has made the world a much more merit-based, equal, flat place, now reorganizing labor, without colonial suppression, making Adam Smith proud.

But heroes can become dictators, unless they realize they are only human, with all our cultural biases and irrationalities.  1 divided by 0 equals infinity, but do the heroes still take that into account? We always need new heroes: maybe we should introduce Ayn to Erasmus…

We want to share our experience, our models, our networks and learn from the new heroes.

October 22, 2014