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How We Economists Missed the Boat
By   Shlomo Maital   

As an economics student, many years ago, I was taught that production (both industrial and agricultural) was ruled by a Law. The Law of Diminishing Returns.  (See diagram). The more effort you invest in something, the less and less additional output you get. This law originated in agriculture. For a given plot of land, the output of food it produces rises by less than the labor and resources invested in it. Here is the proof: If there WERE increasing returns, you could grow all the world’s wheat in a flowerpot. The same “law” translated as well into industrial production.

   Some 23 years ago, in 1996, a brilliant and convention-breaking economists named W. Brian Arthur published an article in Harvard Business Review. The title: Increasing Returns and the New World of Business. I wish I had paid closer attention to it. Here in his words is why the ‘law’ of diminishing returns has been repealed forever.

     The powers of mind are everywhere ascendant over the brute force of things. As the economy shifts steadily away from the brute force of things into the powers of mind, from resource-based bulk processing into knowledge-based design and reproduction, so it is hsifting from a base of diminishing returns to one of increasing returns. A new economics – one very different from that in the textbooks – now applies, and nowhere is this more true than in high technology. Success will strongly favor those who understand this new way of thinking.

   What does this mean for us ordinary people, in simple language? Mainly, this. If you live in a world of increasing returns, then follow what a brilliant Israeli manager once decreed: first to imagine, first to move, first to scale. Think of a great idea. Get it rolling. And then scale it up fast! Because – winner takes all. The farther ahead you are of competitors, the more efficient and more profitable you become. And in the end, you, the winner, rule the market and can eliminate or buy up all your competitors.  And basically, do whatever you want to make piles of profit.  Including —   hire armies of lobbyists.

     Does this sound familiar?   Apple? Google? Facebook?  Amazon?

     Problem is, our political and regulatory systems still do not fully understand this. Only now are government bodies beginning to investigate the monopolistic practices of Facebook and Google.   These huge winner-take-all operations operate globally, so checking their power locally, in individual countries, is very difficult.

       The dominant economic idea of free markets and open competition does not hold when the law of diminishing returns has been repealed and replaced by increasing returns. In this new world, little fish grow bigger, swallow the smaller fish and become predatory whales.   Despite Arthur’s seminar article written in 1996, I believe it has not fully dawned on us that the old economics is gone forever. 

     We need to rethink how we regulate economies dominated by predatory whales rather than vigorous little minnows.

 

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Can Facebook Innovate?

By Shlomo Maital

Facebook

This cartoon ran in a German newspaper; it was accused of anti-Semitism, because its portrayal of Mark Zuckerberg, Facebook founder, who is Jewish, with a long hooked nose, recalls anti-Semitic literature.

Actually Facebook and Zuckerberg do have a problem. But it is NOT anti-Semitism. It is innovation – how to remain innovative, even though Facebook is not that old. When startups grow to global size, almost invariably they lose the creative spark. And Facebook is no exception. Facebook has been forced to acquire its innovation, rather than initiate it internally. Its innovations like Home and Graphsearch failed; and it paid huge sums for Instagram and WhatsApp.

   In an interview with New York Times writer Farhad Manjoo (April 17, “Can Facebook Innovate?”), Zuckerberg describes Creative Labs, an effort to unbundle the “one big blue app” that migrated Facebook to mobile phones.   Creative Labs will try to create a wide variety of Facebook spinoffs, with specific features users seek, some of them not even branded as Facebook. It should not be that hard. People spend 20 per cent of their mobile time, on average, on Facebook. This is amazing, considering Facebook migrated to phones not that long ago. But – how to sustain this 20 percent? It already seems to be eroding.

   Why is it so hard for companies to innovate, as they grow large? Zuckerberg’s answer:

“Understanding who you serve is always a very important problem, and it only gets harder the more people that you serve,” says Mark Zuckerberg.

Big companies become isolated from their customers. Senior management sits in their 30th floor corner offices, and never speak to a real customer from one year to the next. And when customer preferences change rapidly, daily, hourly, this isolation from customers and clients is almost fatal. Zuckerberg is struggling to keep in touch with Facebook users.

   Will he succeed?   Stay tuned. Meanwhile, let’s learn from Facebook. As your startup grows,  do everything possible to keep decision-makers in touch. Have them make sales calls. Get them out of their offices at least two days a week.   Have them answer the customer service phones for a few hours a week. and have them bring regional executives and sales personnel back home frequently, for informal chats. It is the sales people who really know what is going on with customers.

     Another key issue: Wealthy senior management live lives totally different from those of their customers, and soon grow out of touch with reality. Zuckerberg says: “ .. my life is so different from the person who’s going to be getting Internet in two years. One of the things that we do is ask product managers to go travel to an emerging-market country to see how people who are getting on the Internet use it. They learn the most interesting things. People ask questions like, ‘It says here I’m supposed to put in my password — what’s a password?’ For us, that’s a mind-boggling thing.”

     Startup entrepreneurs must make a point of trying to live more or less ordinary lives, if they are to remain in contact with real people. Pretty hard, when your net worth is several billion dollars.

 

Internet for the World: Facebook & Drones!

By Shlomo Maital

Drone facebook

Hard to believe, but the World Wide Web is only about 23 years old. In 1993, only 20 million people were on the Internet. In 1999 only four per cent of the world’s population of 6 billion people, or 240 m., were Internet-linked. Today 40 percent of the world’s population of over 7 billion people, or some 2.8 billion people, is Internet-connected! The Internet has changed our lives massively and permanently. That is – those of us who are connected.

   But what about the remaining 4.2 billion, or 60 per cent of the world? Google and Facebook are both racing to find ways to connect them. It is not easy. Most of those 4.2 billion people live in countries with minimal infrastructure. How can it be done?

   According to Vindu Goel, writing in today’s New York Times, Facebook is pulling an “Amazon” (remember Jeff Bezos’ recent pitch, that Amazon will deliver packages with drones) and is hiring as many as 50 aeronautical engineers and space scientists, to “figure out how to beam Internet access down from solar-powered drones and other ‘connectivity aircraft’.”   This will be done in a new Facebook Connectivity lab and a project called Internet.org. Part of Mark Zuckerberg’s goal, apparently, is to make (and keep) Facebook the most cool, interesting place to work.  He is fighting against the curse of scale – big companies lose their creative drive, and their creative people, as they scale up and bureaucratize.

   Earlier, Google too announced a drive to connect those unconnected 4.2 billion. Google’s approach currently focuses on high-flying balloons.  Facebook is also working on compressing Internet data, cutting the cost of Internet mobile phones and finding ways to hook up remote areas.

   Neither Facebook nor Google seem to have a clear business model in mind for their balloons or drones. The advertising model probably won’t work, because most of those unconnected 4.2 billion people are quite poor – although the late C.K. Prahalad pointed out, in his book, Fortunes at the Bottom of the Pyramid, that collectively, they form a huge market.

   Many analysts are very critical of both Google and Facebook for their ‘connect everyone’ efforts.

   Maybe we are missing the point. Maybe Google, and Facebook, are trying to connect everybody, because – it’s just the right thing to do. Maybe this is a new face of capitalism? Could it possibly be?   Maybe an exlusive  capitalism that leaves out over half the world will eventually crumble, taking Google and Facebook with it..and maybe Sergei Brin, Larry Page and Mark Zuckerberg realize it?  Maybe inclusive capitalism is cool?!

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
June 2019
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