eLetters

Getting Stuck in Anger -- And How We Can Do Better

I didn't expect to become exceedingly angry when I woke up this morning. but that's how it turned out. The trigger: Thomas Friedman's latest column in the New York Times, "All Fall Down."

In the column, Mr. Friedman himself is very angry. As so many others have done, he directs his inchoate anger and vituperative bile at the straw man now commonly called "the credit crisis." For instance, according to Mr. Friedman, "This financial meltdown involved a broad national breakdown in personal responsibility, government regulation and financial ethics."

After reading the column, I got angry too. But I didn't get angry at Mr. Friedman's supposed "broad national breakdown in personal responsibility." Instead, I got angry at what I see as a colossal meltdown in forward-thinking. Therefore, Mr. Friedman, I'm pointing the finger at YOU. There is a deep flaw in your reasoning, and I'd like to try and explain it to you. Hopefully, if I can show you this flaw, then your future columns will not stoop to the level of undisciplined invective -- which, quite frankly, is the single biggest threat to our world's security. Loose lips don't just "sink ships." They can also start world wars. I for one think that two world wars in the past 100 years is plenty of enough.

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There is a well-known finding of behavioral psychology called the Kübler-Ross model for grief -- commonly referred to as "the 5 stages of grief." They are, in order, denial, anger, bargaining, depression, and acceptance. Today's credit crisis is, without a doubt, a large helping of grief that has been doled out to the entire world. For some time -- most of 2006 and 2007, in fact -- we were in denial about the problem. Now, the threat is undeniable; we have been forced to move into anger. Recently, bailouts and stimulus plans from governments around the world seemed to be moving us further along the path to recovery - bargaining. But then today, I woke up to find Mr. Friedman still stuck on anger, seemingly unwilling to move on.

Sometimes anger has its benefits -- When someone is clearly at fault, they must be punished. It is unavoidable and necessary that we mete out justice when appropriate. Therefore, I understand the knee-jerk need to blame Lehman Brothers, Fannie and Freddie, AIG, and now Citigroup (among others) for their failings. In some sense, they deserve it. So too do many in the US government who looked the other way, or who willingly fueled the bubble before it burst.

But if we're prepared to deliver harsh judgments on these people, the dictates of logic and fairness will take us still farther on our crusade for justice. We should also blame financial institutions in Europe (Northern Rock, for one example), and governments like Iceland. In fact, since the entire EU is headed for recession, maybe we should blame all of Europe. But why stop there? Doing so would break the original logic of our need for justice. Japan and Korea are also headed toward recession, probably due to "short-sighted" policies. Asian stocks have been tumbling just like the NYSE. Let's blame those guys too. And then there's China -- it seems that China's leaders in both business and government relied too heavily on the US as a manufacturing and consumer products customer. Now, the lack of overseas demand is short-circuiting their economy as well. Let's blame China's leaders too! And so the blame-game continues, in an unending circle that is as unproductive as it is tedious. We can do better. 

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The blame-game is unproductive...because we have all been "wrong" in a sense -- complicit from birth in a system that has been rusting and decaying for many years. The useful question, therefore, is not "who," but rather "why." The answer is simple: the Information Revolution.

At its root, globalization has been fueled by technology -- a point made very effectively in Mr. Friedman's bestselling book "The Lexus and the Olive Tree." Political, social and other proximate causes notwithstanding, technology was the silent crowbar that ended the Cold War. Then, Internet-fueled eCommerce boom was there to precipitate the Asian financial crisis in the late 1990s, and the subsequent dot.com bubble burst in the early 2000s. Technology has spawned Napster and the ensuing disgrace of the movie and music industries. Technology-driven blogs and tagging sites have upended the media industry globally. Technology has even given itself fits -- with the likes of Apple and Google sending shivers of fear toward companies such as Sprint and Verizon. And technology is now challenging world-beaters such as Microsoft and Oracle, as they struggle to adapt to the distributed, networked, Web-based model of next-gen global computing.

Over the past 1-2 decades, we have seen a series of rolling blackouts that are still sweeping across our institutions. They began in the most "sensitive" industries -- style-driven, consumer-facing industries such as media and entertainment. Now it is moving to the heavier, more conservative, more lumbering institutions such as finance. Eventually it will move to governments as well -- necessarily the most conversative institutions of all. This realization alone should be of no surprise to any thoughtful observer. Similar "rolling blackouts" -- and the subsequent emergence of better, stronger institutions in the aftermath -- happened according to a similar pattern during the Industrial Revolution (and especially the "Second Industrial Revolution"). For those interested in learning more, I'd recommend Carlota Perez's book on the dynamics of bubbles and golden ages.

Beyond what our common sense tells us, there is clear evidence that the same patterns of technology invention, economic and social upheaval, and resulting consolidation and stability are happening again today. In their book on "Global Migration and the World Economy," Professors Hatton and Williamson suggest that we are in the midst of the largest wave of worldwide mass migration since the mid-1800s. The cause back then was railroads and urbanization from industrial factories. Instead of taking weeks to get to a port of call, the lower-middle-class could get on a train and travel across the continent in a few days. Suddenly, rural citizens seeking opportunity were emigrating in massive volumes not seen in hundreds of years.

Today, the story is analogous, but the proximate cause is new: the Internet has fueled our globalization, in a way that railroads never could have. Foreigners come from all over the world to study at US universities. Before the rise of the mass Internet, they tended to stay in America and settle their families in the US -- an industrial-age mindset. Now, increasingly, the return home to seek opportunity where it is needed most -- in their home country. This has helped produce the Asian Miracles of India and China; a rising Latin America; and an Africa that may finally find peace and prosperity. And it was not possible before the Internet. Many other similar pieces of evidence also point to the enormity of the Internet's impact on "changing the game" for the functional patterns of our economy, our institutions, and our social habits.

* * * *

Instead of sticking with the blame-game, I suggest that we all work toward two goals that we also all share: 1) understanding the causes and the dynamics of the these rolling blackouts; 2) using our understanding to create solutions that address the root causes.

Starting with #1, I propose that these rolling blackouts are truly a "force of nature" -- natural forces of massive gravity that easily transcend individual questions of guilt, responsibility and greed. They affect the entire world, in the same way -- and to the same degree -- that a hurricane affected New Orleans, or that an earthquake affected Sichuan. And they have been caused by a new and powerful technology infrastructure that is ushering in a new economic paradigm. It is the onset of this paradigm that has promulgated the financial crisis. Greed, stupidity, and irresponsibility are the symptoms, not the causes.

We are now able to predict hurricanes very well, and earthquakes somewhat well. But economic shocks of massive proportions -- this is the cutting-edge of today's scholarship in economics and social science. This is an uncharted frontier -- NO ONE is certain of the precise rules and patterns behind these phenomena. As a result, the specter of a truly Digital Economy looms ominously today on the horizon, and more clearly apparent than during the early blackout tremors in the 1980s and 1990s.

In fact, I am willing to wager that much of the risk-taking and financial "innovations" in recent years have been attempts to avoid further blackouts. As investors and institutions suffered from the first series of blackouts in the 1990s and early 2000s, more and more pressure rested on the rock-solid institutions -- banks, insurance companies, and governments -- to keep the economy stable and healthy. The fact that they accomplished this for more than a decade is testament to their skill. Unfortunately, for reasons that NO ONE fully understands, even today, it turned out that these efforts were merely delaying the problem rather than solving it. Now, Mr. Friedman and many others are lampooning these people and institutions as the culprits. This is horribly disingenous; we are shooting the messenger, and blaming those institutions that desperately tried to prop up a system that was already implicitly in shock. 

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The real question is this: Why did we all ask the bankers to prop up a dying system? And now, why do we persist in our shrill -- yet increasingly quaint -- demands for justice and retribution on the people that answered the call? And most importantly, where do we go from here? Far more than another go-round on the blame-game, these are the types of questions that everyone around the world -- and I mean EVERYONE -- needs to address.

As parting words, I'd offer one suggestion for where to get started: technology. The age of ubiquitous, networked computing has unleashed these elemental forces of nature upon us. Nature, in essence, is trying to tell us that we should make better use of what we created. I say...let's get to it! Instead of speaking in industrial-age, pre-information-age terms, let's give our society a system upgrade. Let's take the gears of government, business, and non-profits and graft them onto this amazing technology backbone that we now have. This is how to get past the annoying economic blackouts that plague us all.

The Hidden Risks of US "Energy Independence"

A colleague of mine from Jupiter Research (now merged with Forrester) recently authored a blog post about whether the US could actually declare "energy independence" in the foreseeable future. The post comtained some interesting comments about geopolitics, which I'd like to expand upon here.

Specifically, I'd like to add another geopolitical dimension for consideration -- the global economics of energy independence. *If* a major energy importer like the US were to eliminate its need for outside energy, the oil and natural gas industry could be a major economic bubble waiting to happen. Think about it -- the basic reason for the credit crisis is that for several years, everybody was buying homes, and so real estate and construction firms were going crazy trying to keep up with demand. Then, suddenly, everyone stopped buying homes. The spike and crash in demand might still crash the whole system. 

Now think about the global market for energy. The economices of many of today's developing nations -- Russia, Iran, Iraq, UAE (including both Dubai and Abu Dhabi), Venezuela, etc. rely very heavily on oil and/or natural gas. If you take this away, their economies would be obliterated almost overnight. Just think of the problems that this will unleash on the world's economy. Enough commerce already goes through places like Dubai and Moscow that it would be a BIG problem. And when those economies crash, just imagine what kind of terrorism we'd see in their wake. Lots of people with no jobs and no hope -- in economies that crumbled when the US pulled out its money. It could get really ugly. Especially in continental Europe, where many middle-Easterners live already -- much more than in the US. Because Europe is often lumped together with America to comprise "the West," London, Paris, Berlin, and other major cities would likely have heightened ethnic unease, perhaps even rioting. Expats might have trouble returning home to see their families. Foreign policy stances would stiffen. Turkey might literally be ripped in half as a country. And lots of other bad things might happen. And that's just in Europe, leaving aside the implications for the US. 

Even further, non-energy-rich developing nations like China and India are severely dependent on oil and gas imports. In one sense, this might be good – acting as a buffer against a global market crisis from a sudden US "energy independence" policy. Hopefully their demand could fill the gaps left behind by an energy-independent US. But if not -- if a sudden drop in US demand is enough to immediately shock the system into freezing up -- then the economic virus would extend far beyond the "petro-autocracies." China and India would suddenly lack the fuel (literally) for their economic growth, and I can guarantee you that their economies would derail as a result. And because China's and India's economies have been growing at blistering speed, the carnage would be as if a Tokyo-bound bullet-train had derailed -- at high velocity and with massive numbers of casualties. 

This is much closer to a doomsday scenario than a US credit crisis could ever create. The credit crisis – especially given that it didn't unfold overnight -- is actually good for the global economy in the long term. This is because the finance system will now re-jigger itself for an Information Economy. Essentially, it will force a global software upgrade for the rhythm of business -- one that suits a post-Cold-War kind of global economy that has been waiting to emerge anyway. But if the energy markets freeze, then the train wreck will stall the very economic progress that would propel the world into a stable post-Cold-War world order. It would be VERY BAD. 

In my mind, the best strategy for energy independence is to slowly and deliberately ween the entire world off of archaic means of fueling our livelihoods -- our buildings; our modes of transportation; and our industrial production. And here's the silver lining: This weening process is already happening --  in places like Germany, Israel, and some of the Nordic countries, promising markets are surfacing for renewable energy. And if Congress ever lifts some of the regulations that are preventing this from happening in the US, then a similar thing is likely to emerge in Silicon Valley and the 128 corridor in Boston. Over time, these markets will grow and prove their merit on their own terms -- without the kind of dangerous geopolitical machismo that can bring the whole system crashing down before the system upgrade is fully "baked."

At the same time, of course, regulation is necessary and useful. But it is NOT the instrument of economic change or growth -- which almost by definition must come from the bottom-up. The function of good (and yes, *necessary*) govt regulation is to shape and steward the grassroots innovations percolating up from entrepreneurial interests in the private sector. This is the government oversight that was lacking when the real-estate bubble was forming; and THIS is the kind of policy tool that the next US president should be interested in wielding. Trying to use geopolitics instead as a direct instrument of economic creation is an abjectly BAD idea. This is what used to be referred to as fascism -- and as history has shown us, it's how World Wars get started. To avoid fascism in the US, we need policy makers to guide and supervise our economy, not create the economic engine themselves.

The Trouble With Armchairs

Have you noticed? Armchairs have proliferated across America. These armchairs seem to be entrenched in every city, town, and village -- perhaps every living room. Since the collapse of Lehman Bros., our country has been a haven for armchair economists, armchair senators, armchair policy-makers, and armchair philosophers (not to mention armchair doomsdayers, armchair conspiracy theorists, etc.). 

Every armchair, it seems, comes pre-installed with a strong sense of moral outrage. It has become de rigeur to speak of the (unspeakable) greed that has circulated around Wall Street. "They're getting what they deserve," the armchairs cry. "How could a corrupt minority imperial our great country?" they ask. If only the guilty could be punished, the system would recover and the armchairs appeased.

But there's a problem with all of this moralizing: The further we dig for blame, the more that the finger of blame will point back at each of us. And thus, "the guilty" will likely be punished whether or not there is a shrill public outcry. Why do I say this? Because today's economic mess is not an isolated problem fueled solely by Wall Street's "greed." Rather, the entirety of American society has spawned the greed that has collapsed our economy. We have all been complicit in a system in which mass-consumerism binges and a get-rich-quick investment culture has perpetually stoked the fires of Wall Street's malaise. Think about why the housing bubble burst -- because for awhile, everyone was buying houses, but then the next year, that demand plummeted. Pointing the finger at the realtors, homebuilders, and financiers who were trying to meet this growing demand is patently absurd. The so-called "criminals" in finance and real estate are creatures of a system that regular folks all across America helped to created (and support). To now bite the hands that were serving our greed so capably is fatuous at best, downright evil at worst.

The fact that our country has maintained such prodigious wealth for the past 15 years -- at a time when our educational, political, and civic insitutions have been quitely self-destructing with such incredible vigor -- is a powerful testament to the skill and aplomb of our "duplicitous" bankers, "unscrupulous" investors, and "crooked" politicians. For almost two decades, the diligent work of these men and women has propped up a rotting system with remarkable effectiveness. Small wonder that many of them worked 80+ hours a week, with nary an hour's break to spend their money, nor a day to spare for some quality time with their families.

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The danger in this realization is that the armchairs now have fuel for a new kind of moral outrage -- culture backlash against materialistic consumerism, the ills of free-market capitalism, and so on. This also is to be avoided, for it is just as counter-productive. What we need is for the armchairs to disappear -- for the "culture wars" to cede to plain-folks civic engagement. For example, we need more parents at PTA meetings -- but we need them there to discuss community standards, not to shout at each other. The armchairs *must go.* If there is a war to be fought, it's with a piece of furniture, not with other people. 

In truth, our problems are ultimately structural in origin. the American system has been rotting from the insid-out since the late 1980s, back when we "won" the Cold War. As a result of our "victory," we lost the Soviet system as our societal rival and Doppelganger. Without a country to play the "villain" role in the great American narrative, we lost the common enemy that tied us together as a nation. And with nothing to push against, we lost our way, and our economy began to eat its own own tail. We have become the victims of our own success, our own wealth, and our own complacence. And so, in 2008, we have reached an inflection point that history books will likely refer to as "the credit crisis" -- which, in fact, is a proximate cause rather than the disease itself. Mostly, today we need a swift exit from the strange dream-world of the past 20 years -- from the absurdly low prices, accumulation of debt, and the rusting of our social institutions. 

Unfortunately, instead of coordinating a comprehsensive system re-boot, we are sitting in armchairs, commanding that politicians on TV screens fix our problems for us. From the comfort of our armchairs, it's easy to sit idly by while we turn our country's leaders into scapegoats. Only when we eschew the armchairs for civic engagement will we give our leaders a chance to become heroes. Until then, every "armchair American" will be spreading the same old rot as before -- thus continuing to unleash the termites that have already been gnawing at the pillars of our society. 

Here's hoping we can each turn a new leaf, set aside our self-righteous opinions, and instead take up the hard work necessary to reclaim America's lost prosperity.

What Chrome reveals about Google's long-term strategy

This post outlines my sense of Google's long-term market strategy, in light of its Chrome release. As a pithy slogan, I would call Google's strategy "1 + 1 + 1 = 1." Or maybe "Three Pillars Make An Institution."

Please allow me to explain.

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GOOGLE'S STRATEGY is to become a utility-grade platform for transacting the world's information. In this case, the meaning of "utility" has two distinct and important meanings. In one sense, "utility" is analogous to the power company or the water company in terms of being a "natural monopoly" -- i.e., everyone in my neighborhood has exactly one choice for their electricity provider (NSTAR). In the operational sense, however, "utility" is not meant as a provider but as a transaction platform -- analogous instead to how although NYSE provides the scaffolding for the world's financial transactions, the NYSE does not really own or trade stock on its own exchange (it merely allows others to do so).

For a decade now, Google has been working steadily to aggregate and organize ALL of the world's information, one careful step at a time. They want to be the world's information software platform. If done successfully and responsibly, this has enormous upside for macroeconomic efficiency -- akin to the advent of paper currency to replace the barter economy. If Google achieves its aim, we will truly have an "information economy" -- brokered as much by Google, Microsoft, and IBM as by banks, investors, and financial accountants (note: the "financial" adjective here is critical as a qualifier).

In doing so, however, there are a number of pitfalls that Google must avoid in satisfying its grand quest. I think of these as the three core pillars supporting Google's long-term strategy:

1. PROFITABILITY. As a public company, Google has an obligation to return growing profits. In the long run, this requires growing business interests -- operational efficiency gains may allow for proximate profitability boosts, but this is merely a tactic that reaches an asymptote if taken too far or too singly. Instead, capturing, deepening, and/or creating new markets and new customers and new revenue streams is vital for a public company like Google -- especially when your growth strategy is as broad as "organizing the world's information." So far, Google has done this very successfully through AdSense, but most people admit that AdSense (in its current manifestation -- this caveat is critical) will not shore up profitability indefinitely. Rather, I think of AdSense as "Google monetization lever, v1."

2. "PLATFORM" STATUS. First and foremost, Google must enjoy a monolithic, platform-level center of gravity in the information industry. Without this, Google will never have access to enough information to grow to the pervasive ubiquity required as "information organizer of the world." Google Search did much to make Google a platform, but trends like the "social Web" and cloud computing are likely to eventually wipe this out as a sustainable platform enabler. Google Apps has helped extend the platformability of Google, but this too may have a shelf life. Chrome is a further continuation and extension of Google as a true platform giant. And importantly, it beats back companies like Microsoft that want to sweep true "Internet platform" status out from under Google's feet. In that sense, Chrome is an extremely powerful way for Google to protect its flank -- in which the "flank" is maintaining the platform status that supplies a robust and comprehensive set of metadata that can continue to monetize AdSense and its successors (once again, the qualifying phrase is critically important).

3. TRUST. Despite the scoffing of many observers, Google takes user privacy and consumer trust incredibly seriously -- almost to the point of zealotry (to see their philosophy laid bare, check out, for instance, Google's testimony before Congress about China data-privacy concerns: http://googleblog.blogspot.com/2006/02/testimony-internet-in-china.html). Without qualification, it's vital that Google be obsessive about user trust and privacy concerns. As soon as Google loses the public's trust to safeguard our data and our identities, they're finished.

And Google's demise in this way would come *incredibly* fast, I guarantee you. In effect, we will all simply decide to move our lives to platforms like Hotmail rather than Gmail, or AIM rather than G-Chat. Google has nothing to keep us other than the strength of its solutions and the trust it has earned from us. For most people and most uses of Google, there are very few sunk costs, other than the development of personal behavior habits (and perhaps some core "data" that you were foolish enough not to back up on an external drive somewhere).

* * * *

These three pillars add up to one clear purpose -- "organizing the world's information." In this way, Google is quietly building an institution of enormous value and import. The Industrial Age came to be organized around mass production, transported by railroads (and then trucks and planes as well), and supported by institutional banking. In contrast, the Information Age is shaping up to be organized around collaborative knowledge production, transported by the Internet, and supported by Google. Our next great "financial system" will not come as a direct replacement to the banks and stock exchanges that have suffered in the recent credit crisis. Instead, tomorrow's "financial institutions" will be information providers ("banks") and information exchanges ("stock markets"). Money will probably not go away, but it will take a backseat in influence to the infrastructure of information flow. Information, not financial capital, will be the primary lever for moving and organizing the world's economy.

In this race, Google is vying tooth-and-nail with the likes of Microsoft, Facebook, and others. Microsoft had been trying to build an "Internet OS" to replace a dying Windows business model; and recent evidence had given indications of potential Microsoft success in doing so. Now, however, I think Google Chrome has changed that -- and effectively put an important first nail in that coffin. Microsoft may have to look elsewhere to claim the "majorly big platform" status which is becoming akin to "information banking institution" status. Importantly, however, this is not a singular race -- just as there are many different banking institutions, Google and Microsoft are unlikely to completely obliterate each other. But one could certainly become the dominant force and de facto path-decider of the "information platform" industry more than the other.

* * * *

Chrome's release today is further evidence that "organizing the world's information" is WAY, WAY, WAY more than just a catchy, feel-good corporate slogan. Rather, it is a fully-fleshed (and incredibly well-conceived) corporate strategy. Google Chrome, for all its power and coolness (which I've already tried and thoroughly enjoyed), is fundamentally nothing more than a "product complement" within the Googleplex pantheon. Google doesn't care at all if Chrome turns a profit. From a corporate strategy perspective, Chrome was built to defend Google's flank -- i.e., to preserve its core competitive moat of "Three Pillars Makes An Institution."

And here's the amazing thing -- I don't it makes much difference whether people know what the core of Google's strategy really is. In fact, Google's been trying to tell us all along -- they are "organizing the world's information." We just haven't been particularly good listeners yet. My hope, of course, is that once we listen better to what Google is really doing, we can also get down to business: competitors can keep forcing Google to work hard for its vision; governments can start to regulate appropriately the major information firms (Google, Microsoft, Facebook, etc.) as if they were investment banks or electricity companies; and entrepreneurs can keep dreaming up ways to extend and connect the Information Economy as it grows into a more definite shape.

Seminar on China's foreign policy -- hosted by a Tsinghua scholar

Today I went to a seminar given by Prof. Yan Xuetong of Tsinghua University (which, to a very rough approximation, is China’s equivalent of MIT). Prof. Yan is a foreign policy scholar who came to give a lecture on “Chinese Foreign Policy in Hu Jintao’s Second Term.” The lecture was hosted by Harvard’s Fairbank Center: http://www.fas.harvard.edu/~fairbank/events/events.html. Although open to the public, generally only a handful of students and scholars show up to these talks -- which are scheduled regularly through Harvard's Asia Center. This in my view is a shame, because the knowledge that is shared is often breathtaking. 

As to the talk, Prof. Yan outlined the four fundamental principles that will guide Chinese policy at a strategic level over the next five years: 

1. Democracy is not the only path to prosperity. Apparently the Chinese government will become increasingly open in its position on this topic in the coming years. At the NPC this past March, it seems that the top leaders came to consensus that democracy is not requisite to the economic success of a society. 

2. Increased openness is China’s way forward. This is essentially an economic statement – China has come to the conclusion that openness is essential for competition, and competition is essential for a sustainably healthy, prosperous economy. 

3. Politics and economics can be managed separately. Logically, this derives from the same realization as #1. The Chinese leadership has found that socialism is the best form of political system for their country, and that capitalism is the best economic system. Unlike most Western observers, they don’t view these two systems as being in conflict. Instead, Prof. Yan said that in China the politics of socialism and the economics of capitalism “complement each other perfectly.” Going forward this will be China’s stated policy. 

4. Multilateralism “with Chinese characteristics” will define China’s foreign policy. The final maxim asserts that China will take a fundamentally multilateral approach to its relations with other countries. However, Prof. Yan stressed that this will not be Western-style multilateralism such as is standard in the EU. He says that the European form seek to build consensus around shared interests. By contrast, the Chinese form of multilateralism does not seek to build consensus, but rather to negotiate with other parties so that each can achieve their own unique objectives. Thus, multilateral action is possible even if those countries have different incentives for participating. 

After stating these fundamental precepts for the next 5 years of Chinese foreign policy, Prof. Yan went on to describe how they would manifest in terms of specific international issues. In the next few posts, I will regurgitate some of Prof. Yan’s thoughts on these topics.