Friday, June 11, 2010

The Three Economies of Plenty

First, some apologies on two counts. Firstly I'm going to swing to the edge of scope for a post or two, as I'm thinking a little bit about economic context in which Universities will operate as the century wears on. I want to capture some thoughts I have on that, which sit at the edge of scope, both in terms of topic, as they don't address Universities specifically and in terms of time, looking ahead towards the centuries end. Apologies are also due that this topic is at the edge of my expertise, I'm no economist, a point which will no doubt become painfully evident presently.

The 21st century will be a century of 3 economies, material, informational and experiental, or, for short, stuff, ideas and fun. Right now the three economies are entangled, confused and confounded. That will change over time.

The material economy is the most familiar. You buy stuff, you make stuff, you sell stuff. For a long time, it didn't go anywhere much, as the supply and variety of stuff was limited - mainly potatoes in Ireland, it seems.Basic economic constructs like supply and demand curves come from this economy. It started to get interesting a few hundred years ago when industrialization greatly increased the volume and range of goods available. Supply up, cost down, demand up, world economy go go go!

This kind of economy will approach, but not hit, the bumpers over the next century. Environmentalists tell us finite resources and raw material supply puts physical limits on the worlds capacity to make stuff and we must all make do with less. Perhaps. More likely, in my view, is that we will hit the limits of what we can consume. There are only a finite number of cars, phones and shoes we can actually own. Even in my lifetime, attitudes to  material goods have shifted. A house heavy with possessions is an anchor, not an asset. When everything is available, 24/7, there is no need to accumulate your own personal warehouse - you can buy what you need, when you need it. We may continue to buy more expensive objects as status symbols (the Mercedes instead of the Skoda) but the amount of physical goods involved, and the relative functionality of those goods won't change much. To put it another way, there is only so much cake we can eat. It might be very good cake, hand baked in Switzerland by the latest celebrity chef and flown in by SST, but it's still cake. In some cases, the real status is to have less, drowning in possessions in unfashionable. Who wants a GPS, an MP3 player,a portable  a HD handycam and a phone nowadays when you can have them all in one slim device?

This economy does have a fair bit left to run - the sons and daughters of Chad have a long walk in the dust, generations, until they reach the point where that third hovercar is just an encumbrance, but their grandchildren will get there.

The second economy is the information economy - books, music, movies and media. For a long time, people thought this was just an annex of the physical economy. From the first Bible at 30 florins to the last DVD Series Box Set at €9.99 in the bargain bin, people thought they were selling physical objects, when they were really selling the information encoded on them. By creating a finite number of copies, you could create an artificially limited supply and slip into the working patterns of the material economy without trouble.

This economy, as you may have noticed, is in trouble. Napster smashed the illusion of scarcity. Now we all understand that the marginal cost of a piece of information is zero. In the age of the eBook, no bestseller can sell out. Because humans have a herd instinct, and like to have something to talk to each other about, there are still hit singles, blockbusters and bestsellers which are valued enough that they can conceivably charge for access - some TV stations make a tidy sum charging people to view soaps online - a day early. Others services charge for convenience - it's easier to pay 99c for a song on iTunes than to hunt for a dubious download. Undercutting the whole process is open content, open to all, distributed at no cost. You may want to be paid for your column in the newspaper, but ten others behind you will blog the topic for purely for glory. Your book may be insightful and comprehensive, but I'll get the gist of the topic on Wikipedia first.

This economy will sort itself out into a working model over the next decade or two, and then hit the buffers of demand. Just like physical goods, there is a limit to what humans can consume. We can only read, watch, and listen to so much in a day. Time is finite. It doesn't matter how compelling your new album is, I'm all compelled out. I don't have time to watch TV, but I keep a list, I call it the Dribble List, of stuff I'd like to watch sometime. When I get to a stage in life when all I can do is dribble, and hit the pause button so I can make a rude suggestion to the RoboNurses, I'll catch up. Maybe.

The third economy is the experience economy. It's the holiday, the restaurant meal, the night at the theatre. It's not like the information economy, for every person having an experience there is a real, often very high, marginal cost. Supply is somewhat elastic  - new restaurants sprout remarkably quickly when the economy improves). Except sometimes it isn't - only a handful of people can climb Everest each year, there are only so many tickets for the Met, and so many unspoilt beaches. Unmet demand is enormous, as we have more and more free time, we increasingly want to do something more compelling with it than watch Big Brother, if we have the money. People in the second economy are smartly moving into the third, if they weren't there already. I'm going to a Suzanne Vega concert tomorrow. I spent more on two tickets than I would to buy her entire back catalogue, and she'll get a bigger cut out of it. Musicians will make more from concert tours, authors from public speaking engagements, TV stars will make more from stage shows and tours.

The interesting thing about these economies is they run on a system designed to manage scarcity in the first, physical economy. If there is only so much stuff to go around, then it makes sense to invent money as a measure of need, and give the stuff to the person who will give you the most. The ideas of supply and demand, fundamental to economic thought and theory, come from this economy of stuff. The rules make no sense in an information economy, where the marginal cost drops to zero. Similarly, in a world without scarcity, these rules make less sense. We have to create artificial scarcity, in a overpriced, designer limited edition batches, to keep prices up. Despite the best efforts of marketing gurus, everything can be had, in quality far better than our parents had, in the bargain warehouse, at the China price.

Healthcare is an interesting example of an experience economy which breaks our economic models. We have trouble, globally, in finding models for funding healthcare that work because our economic models simply don't work when supply is finite and at high marginal cost, but customers have no choice but to get it. You can buy rice instead of wheat, but dialysis is dialysis.

Education, particularly tertiary education, would see itself firmly in the experience economy. Tertiary education changes your brain, your heart, and often your liver. It's an real experience. Let's not forget though, that many Universities still have one large boot in the information economy. Libraries, lectures, course programmes and journals were part of the package of information you bought access to with your fees. Universities who spend a lot of effort on that need to think again. You can't make a buck on something that become free or bulk commodity, unless you have superstar lecturers, the Simon Schamas and Niall Fergusons who will by virtue of their status attract keen students and make you more marketable.

The smart move is to give the information away for free and focus on the experience. Anything else is swimming against the tide. 'Destroy your business' wrote Jack Welch, former celebrity Ego CEO of General Electric. He was wrong about a lot of things (who isn't), but right about that. What he meant was - think what a disruptive competitor could do that would put you out of business. Do it. Do it to them before they do it to you. MIT understood this when they launched their open courseware initiative. Universities who put their very best high value content up on youtube and iTunesU for free understand this. It doesn't matter if it isn't sustainable in the long term. In the long term, as Keynes put it, we're all dead. Another 15 years and the sector will be so unrecognisably scrambled that everything will be different anyway. The 21st century is like being trapped in a burning building. You might not know where to go, but you better drop and crawl as fast as you can, 'cos staying put isn't going to keep you alive for much longer.

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