Wednesday, December 13, 2006

 

The New Horizontal Thinking

A few months ago I suggested that saving, and even creating, new jobs in Michigan might not be in our best interest if they did not promote our transformation into a third-stage, upgrading economy. I’d like to push this assertion even farther by arguing that to survive, yes survive, we need to become a community of innovators.

How do we do this? It may be helpful to apply insights from the theory of evolution to the question. In a very simple form, organisms that adapt to new circumstances survive. Those that don’t, don’t. But some biologists suggest that in fact evolution is not a linear process. Instead, critical events lead to “punctuated equilibria” in which massive changes create entire new paradigms. Organisms that survive must change rapidly to survive. Then a period of stasis follows in which change happens primarily at the margins until the next critical event.

Economics might also work this way. Relatively long periods of stasis as one kind of economy gives way to another relatively rapidly. Interestingly, the period of stasis between critical events and the time it takes to move to a new paradigm have both shortened dramatically over time, putting increased pressure on firms, individuals, states, and countries to change ever more quickly.

We in Michigan are now facing just such a transformation. For almost an entire century we’ve benefited from a vertical agglomeration in a few industries, especially autos and agriculture. But then over a few short decades, the international economy changed. Oh, we knew changes were happening, but we didn’t really appreciate what they meant to us. Changes in consumer tastes, market access, technological capabilities, and foreign competitive capacity, among other things, have critically altered our system of wealth creation. So, what do we do next?

The answer is to strategically abandon our old economy and create a new one. Note the word strategic. We need to take our old, vertically integrated model of manufacturing and turn it into a new, horizontal model of innovation and capacity that can be applied to numerous industries and at numerous points in the production process.

In this new economy, value and wealth are created in the design and research phase. Agglomerations and linkages are based on talents, skills, knowledge, and capacity, most of it scientific. Centers of innovation emerge that produce knowledge applicable to numerous industries simultaneously. Industries are then linked horizontally: new generation automobile engines lead to alternative energy, which leads to advanced agriculture, which leads to pharmaceuticals, which leads to medical technologies, etc.

The same change can also be applied to humans. Global changes demand that unions remake themselves to be pertinent in this new economy. For example, in Singapore organized labor leads in training and skills development, recognizing that increased pay MUST be tied to productivity gains, not collective bargaining.

These changes undertaken in response to a shifting global economy will attract similar capacities, skills, knowledge, and capital. We must again become a capital, but one that produces ideas rather than cars.


 

Evolution and Magnetism

A few months ago I suggested that saving, and even creating, new jobs in Michigan might not be in our best interest, depending on the type of jobs we were talking about. In that same article I suggested that we needed to upgrade our economy, and doing so would require us to change the way we think.

I’d like to now suggest how we do that. I’ll start by explaining two natural laws: the law of evolution and the law of attraction. Now I admit up front that I’m no biologist or physicist. However, I know enough of the properties behind these laws to suggest they have significant ramifications for our economics. First, the law of evolution predicts that organisms that don’t adapt to meet changing circumstances will eventually disappear. This has proven as true for dinosaurs and great civilizations (think Rome) as for the dodo bird and small communities (think of small farming communities in this and every other developed country). Second, the law of attraction says that similar things attract and that the more of a similar thing you have, the more it will attract.

Turns out we’ve been the beneficiary of both laws. In the early 20th century, Henry Ford transformed the world economy with new production techniques that gave our state a special advantage in manufacturing, especially automobiles. As our expertise and success in auto manufacturing grew, we attracted companies, money, and talented individuals from across the world to come to Michigan to build cars. Because the economy at this time was constrained by limited technology, especially transportation and communication, new firms that supplied the auto industry, including steel, manufactured parts, plastics, and so forth, also set up shop in Michigan.

This arrangement worked well for almost an entire century. But almost imperceptibly, the rules of the international economy changed out from under us. Oh, we knew changes were happening, but we didn’t really appreciate what they meant to us. Changes in consumer tastes, technological capabilities, and foreign competitive capacity, among other things, all chipped away at our previously stable system of wealth creation until we now find ourselves in fairly critical circumstances. The 100K question facing us is what to do next?

The answer is to strategically abandon our old economy and create a new one. Note the word strategic. We need to transition current strengths into new activities. For example, we need to understand that it may not be in our best interest to continue to be the auto manufacturing capital of the world. But I would argue we should be the transportation technology capital of the world. Why not adopt the computer industry model? The production of hard disk drives, monitors, mother boards and chips are all highly commoditized processes. The significant value and wealth, however, is created in the design and research phase. I believe the same is true with automobiles. Moreover, focusing on value added leads us from autos to other complementary technologies, such as alternative energy, which leads to advanced agriculture, which leads to pharmaceuticals, which leads to medical technologies, etc. You’ll notice that these linkages are not the old vertical linkages we enjoyed for so long with automobiles. Instead, they are now horizontal agglomerations based on talents, skills, knowledge, and capacity, most of it scientific, rather than industrial structure.

The same change can also be applied to humans. We talk a lot in our state about organized labor. It would be hard to deny that our labor structure has been a tremendous asset to our automotive industry. But again, external changes demand internal ones. My challenge to unions is to remake themselves to be pertinent in this new economy. For example, in Singapore organized labor has taken the lead in training and skills development, recognizing that increased pay MUST be tied to productivity gains, not collective bargaining.

The payoff is that these new activities undertaken in response to changes in the global economy will attract similar capacities, skills, knowledge, and capital. Educated labor will attract more educated labor. Advances in automotive technology can encourage advances in other industries. Indeed, the most competitive economies in the world boast horizontal capacities, like precision engineering in Singapore, that can be applied to a host of industries, products, and processes. Success for these countries is not to create an entire vertical production chain in one geographic location, but instead to position themselves as an essential cog in a global production chain that is not bound by location.

As I hope you can see at this point, evolution and attraction will play an important role in any economic success we enjoy. However, there is one big difference in the economic sphere: Time. Whereas natural science counts time in billions of years, current economic change counts time in decades at the longest. The clock is ticking, it’s time to adapt and attract.


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