A lifetime ago, before the market meltdown, when it was just an ordinary recession, there was a theory that the big emerging markets (BRIC: Brazil, Russia, India, China) were “decoupled” from the US economy. According to this theory, when America had problems due to subprime mortgages, these countries would only be affected marginally. Well, that theory has been totally discredited. It turns out that the other web, the web of financial transactions, makes the global economy tightly coupled. But it is possible, faintly possible, that there is another form of decoupling happening between the traditional economy and the innovation economy.
Loosely Coupled Is Better than Tightly Coupled
Software engineers know how nasty tightly coupled systems can be. When a bug hits a tightly coupled system, the web of interconnections (“tangle,” “spaghetti code,” “hairball” if we are being rude) creates cascading failures that lead to chaos and crashes.
Well, that just happened to the whole world, thanks to the web of financial transactions connecting bankers, hedge funds, and, well, just about everybody.
We just saw chaos theory in action. The classic chaos theory analogy, illustrating the complexity of the global weather system, is that of a butterfly flapping its wings in China and creating a hurricane in Florida. In this case, a bunch of people defaulted on their mortgages in Florida and created food riots in China.
So, it would be great if the global financial system was loosely coupled, if Lehman Brothers was a component neatly insulated from AIG. The government would let banks fail if they screw up, just as they let you and me fail if we screw up.
It would also be great if Iceland did not have to go bankrupt because a bunch of people in America could not pay their mortgages; or that British government officials did not have to wake up in a cold sweat at 3:00 am thinking about Reyjkjavik-on-the-Thames (i.e. that the UK, as another relatively small country with an over-active banking system, could go smash).
But we are all connected. The dream of the web came true and turned into a nightmare. Yes, we love the web, but bad stuff can travel down the same wires. Not all connections are good.
So let’s hope that those geeky guys, Ben Bernanke and Tim Geithner, can do some major refactoring and create some clean interfaces. What do you reckon? Are they up to the job? Can those guys at Google lend a hand maybe? Some of that 20% time could come in handy here perhaps?
Actually, all they need to do is copy the architecture of the Internet, which was invented by DARPA all those years ago precisely to avoid a cascading failure from a Soviet nuclear attack hitting one location and thereby disabling the whole country. Despite phenomenal growth and what seems like a crazy, anarchic structure, the Internet has never seen a major systemic failure. Its problems have been temporary and isolated.
Simple refactoring, huh? Well, other than politics, power and money are also involved. A lot, in fact. So, it is not a simple case of refactoring, unfortunately.
Our best hope, then, is that there is another economy that is decoupled, one that works just fine and does not care a hoot if the General Motors, AIG, Citi behemoth all go smash. In fact, this other economy is just chomping at the bit to get its day in the sun as the behemoth crumbles.
I have been seeing some strange signs that this may be happening. I see these as straws in the wind. I see the straws, so the wind must be there, but I can’t see the wind. I’d be very interested in hearing from people who see similar straws. I would also love to hear from those who assume I must be smoking something and are totally certain there is no wind.
September 2008: Weird Scenes Inside the Gold Mine
I went to the Web 2.0 Expo in New York City the week that the markets imploded and giant household-name firms evaporated in front of our eyes. These were “weird scenes inside the gold mine,” as Jim Morrison sang and as I reported at the time for ReadWriteWeb. The disconnect was stunning. Maybe the Web 2.0 guys just did not know what was happening and what was about to hit them, too busy singing Kumbaya and bloviating about Facebook and Twitter? Perhaps. That was at least partly true.
But a few weeks later, in San Francisco for DreamForce, I saw real growth and optimism among the SaaS vendor crowd. I can usually tell when somebody is spinning the “We are fine” story as they go whistling past the graveyard. I did not get that sense. I saw companies that were growing in revenue and profits. Then I realized I was seeing the Barbarians bashing down the gates of Rome (the established enterprise vendors). Sure, it was doom and gloom in Rome, but the Barbarians were on a roll!
Message from the Singapore Shopkeepers
Straws in the wind matter, because the hard data, those official GDP and employment numbers, are out of date by the time we hear them. Using them to run your business is like driving with only a rear-view mirror: dangerous!
I learned this when my wife and I moved to Singapore in 1994. As we arrived, the newspapers were reporting strong GDP growth. When we saw rather empty shops and asked shopkeepers, “How’s business,” we heard in response, “It’s bad”. Guess which information source proved more accurate?
The same is true at the other end of a cycle, when all the official news is negative. If you wait till it turns positive, you’ll have missed your opportunity.
Straws in the Wind Today
Joel on Software asks, “Is the tech recession over,” based on strong sales in his own business. The comments are well worth reading.
At ReadWriteWeb, we like sounding the contrarian trumpet, sending warnings when it all looks great and reporting some good news when everybody is gloomy. Recently, we have been reporting on gritty entrepreneurs who are doing well, new jobs being created, and growth in Series A financing. We even reported — shock, horror — on profitable VC-backed ventures.
Fred Wilson relates a growth story at some of Union Square Ventures’ portfolio companies. There is a FriendFeed Good News Community. The EmploymentCrossing site tracks daily and weekly job creation. On the day I looked:
- New jobs this week: 212,755
- Jobs added today: 6,943
The Bits of Destruction Theory
Fred Wilson describes eloquently why we might be seeing this decoupling. He calls it “bits of destruction.” His conclusion is worth printing and pinning on your wall:
“This downturn will be marked in history as the time where many of the business models built in the industrial era finally collapsed as a result of being undermined by the information age. It’s creative destruction at work. It’s painful and many jobs will be lost permanently. But let’s also remember that its inevitable and we can’t fight it. Technology and information forces are unstoppable and they will reshape the world as we know it regardless of whether or not we want them to.”
Coase’s Theorem
The original decoupling story came with a theory. The theory was that the growth in BRIC economies was strong, and that a slowdown in exports created by a recession in the West would shave off a GDP point or two for a few quarters, and that would be it. That would have been true if the financial system had been built on a loosely coupled architecture similar to the Internet’s.
What theory could explain a lot of tiny little start-ups being in good shape, while big companies in all markets and all countries are struggling?
This fundamental secular shift in power from large business to small business can be explained by Coase’s Theorem (which won its author the Nobel prize in Economics in 1991). Here is the key bit:
“The theorem states that when trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights.”
Yes, the Internet reduces those transaction costs. So, you don’t need to be big to compete. You don’t need vertical integration. This dramatically changes the Nature of the Firm.
Barbarian or Roman, Your Choice
If this all sounds like optimism run rampant, like rose-colored spectacles worn by entrepreneurs who have to be positive just to get out of bed, ask yourself which of these you would prefer to be running now:
- GM/Ford/Chrysler or a tiny all-electric startup like ZennCars?
- Citi/BankAm/Wells Fargo or a startup like Virgin Money, which is doing an end run around the whole banking system?
- Oracle/SAP or 37 Signals, Zoho, Relenta? (Yes, this is a very short list of my current favorite SaaS providers; the full list is a lot longer).
One can make a similar case in virtually every market. In short, it is a better time to be a Barbarian than a Roman, better to be attacking than defending.
This is not the normal story in a downturn, when start-ups go smash and Big Co entrenches its position. Something seems to be fundamentally different this time.
Nah, Just Stock up on Canned Food and Guns?
In late 1999, I was doing some heavy-duty gardening, pulling up some roots, digging away energetically. A neighbor asked me what I was doing. I said, “Planting potatoes. Have you not heard? Y2K is coming, and there will be no food in the shops?” I was new in the area, so she did not know I was kidding. “OMG,” she said, “You are in the computer business, so you really know this is true, right?”. I cooled her down. It was ridiculous then, and it’s ridiculous now. Rome survived; there were just different people in charge, and those Barbarians eventually became civilized and boring. This is just a transfer of wealth and power.
Report the Straws You Are Seeing
Take a break from the gloomy headlines and tell us what is happening in your market. Are you seeing any growth?
Photo by Joe Geranio.
