America 3.0?

Where is America going?  Maybe the better question is where do we want it to go? The election and Mr. Trump have soaked up a lot of the media attention in the last year.  But more and more, as I listen, I think; the real action isn’t happening there. While Mr., soon to be President, Trump will have an impact on the economy and hopefully do some thing to put things back on the right course, the only thing a President can do is create a fertile field for growth. It’s up to the people, especially the entrepreneurs to make it work.

The good news is that the fact that given an alternative to the same old, same old, it doesn’t make a difference who we elect, candidates, the American people chose the disruptive candidate in spite of everything the establishment did.  The American people know that things are not working and that given the chance, We The People can create America 3.0.

The United States of America is in crisis. The economy is supposedly in recovery, but it is the slowest and most painful economic rebound since the Great Depression. Unemployment is high and millions have dropped out of the workforce entirely. Many American families have suffered a collapse in their net worth since 2009. During the current administration, America’s debt has increased from ten trillion to sixteen trillion dollars. American businesses face a regulatory burden of well over a trillion dollars per year. Investment in start-up businesses is thwarted and innovation is far short of what it should be. The government is abusing its powers and attacking basic liberties.

All this bad news makes it easy to despair and to worry that the decline might just be permanent. But as bad as things are today — and they will likely get worse for some years to come — the future will be bright for the United States because we are, in fact, in a period of transformation, not decline.

Transformation not Disintegration

America has already once made a change on the scale of that which is happening now. That was when it transformed itself from the rural and agrarian society of the founding era — which we call America 1.0 — to the urban and industrial society that peaked in the mid-20th century — which we call America 2.0. That earlier transition, from roughly 1860 to 1920, was more painful than most people think. Yet the transformed, industrial America became the wonder of the world.

The American political and economic regime now in crisis was built for the world of America 2.0. Today, we are in the midst of a dramatic transition.

The American political and economic regime now in crisis was built for the world of America 2.0. Today, we are in the midst of a dramatic transition to a new technological and political configuration — which we call America 3.0. Institutions that once looked permanent are cracking at the foundations. Technology will drive the transition, and the shape of future technology can only be known in broad outline.

Most importantly, the cultural foundation of America, based on its unique type of family life, will remain intact. This is the continuous thread linking each of the three “versions” of America. Our deeply rooted orientation toward personal and economic freedom will allow us to dismantle America 2.0 and build a better, freer, and more prosperous America 3.0 in its place.

American Exceptionalism: Based on the American Family

American exceptionalism is based on our family structure, which has the following characteristics.

  • Individuals freely select their own spouses. There are no arranged marriages and very few limitations on whom a person can marry; essentially, only marriage to close relatives is forbidden.
  • Women enjoy a high degree of freedom, autonomy, and equality.
  • Parents are free to give more or less financial assistance to different children, and they are not required to treat their children equally.
  • Grown children leave their parents’ homes, marry, form new households, and create new families of their own.
  • Extended families are weak. People have no right to help from relatives.

These things seem normal to Americans, but many cultures have dramatically different customs. For example, in some cultures extended families act as protective networks and their members have a duty of loyalty and assistance to one another.

As a result of our family structure, American culture has the following characteristics.

    • Americans Are Individualistic. The American family pushes Americans to be autonomous, self-reliant, and freedom-loving.
    • Americans Value Liberty. Americans expect to be on their own, choosing their own spouses, making their own way in the world, and managing their own affairs.
    • Americans Are Non-Egalitarian. Americans have a comparatively low interest in economic equality.
    • Americans Are Competitive. Americans generally consider an economy with winners and losers to be fair. They believe in a minimal safety net compared to other communities.
    • Americans Are Enterprising. The family has been the engine of economic progress in America, creating America’s well-known “go-getting” and “hustling” spirit.
    • Americans Are Mobile. Americans form their own families, acquire their own homes, and have always been willing to move to where the work is.
    • Americans Volunteer. Because Americans do not have extended family networks, they have formed voluntary associations as the foundation of the economy and of civil society.
    • Americans Have Middle-Class Values. Most Americans, whatever their actual wealth, consider themselves to be middle class, and they are interested in public order and safety for their families and property.
    • Americans Have an Instrumental View of Government. They see the government as a tool to accomplish things that benefit them and protect the interests of the middle class.

America 3.0: The Coming Reinvention of America

The resilience of the American people is incredible.  Time and again, when the constraints of whatever progressive movement had absorbed the Democrat party in the last Century the American people put the economy right back into doom by coming up with new innovations and products that nobody even thought of.  When the ground is fertile yo can’t stop Americans from starting new businesses and companies in that almost unique American institution, the garage. It’s only when the taxes are high and regulations tie things up that the American startup drive slows down.

Startups are a good thing, whether they are small businesses that help people move up the opportunity ladder or the sort intended to become the next Airbnb or Uber or Google.  The latter, high-impact startups, are especially important for making the US economy as productive and innovative as possible. But the US would seem to have a startup problem. As researchers Ian Hathaway and Robert Litan  write in their 2014 paper,  “Declining Business Dynamism in the United States“: “… the firm entry rate—or firms less than one year old as a share of all firms—fell by nearly half in the thirty-plus years between 1978 and 2011.”

On its face, that number is alarming. High-impact entrepreneurship is the deep magic of the free enterprise system. Less entrepreneurship means a less dynamic American economy — less growth, fewer good jobs, not as much cool stuff.

But is the number as scary as it seems? There is an argument to be made that the startup decline is neither that severe nor scary. First, perhaps the numbers are misleading. Those long-term startups numbers are surely deflated by industry consolidation, whether from big-box retailers, chain restaurants, or megabanks. And while we may get nostalgic about those mom-and-pop shops, as economist Noah Smith has put it, “the birth and death of small family businesses is one kind of ‘economic dynamism,’ but not really the kind that leads to increasing living standards or technological progress.”

Second, just look at the business news. Silicon Valley seems to be buzzing with startups. An informal Bezinga poll late last year of 20 investors and executives in the startup “space” found that three-fourths thought there was a “startup bubble.” Around the same time, venture capitalist Bill Gurley told the Wall Street Journal that he thought “Silicon Valley as a whole, or that the venture-capital community or startup community, is taking on an excessive amount of risk right now—unprecedented since ’99.” Indeed, US firms attracted the most VC dough last year, more than $48 billion, since 2000 — the end of the internet bubble.  It was also the best year since 1990s for initial public offerings.

My response: First, although the growth of bigbox retailers may be hampering start-ups in the retail sector, explains JPMorgan economist Mike Feroli, “the decline in entrepreneurship is affecting most industries, not just retail.” A 2014 paper, “The Secular Decline in Business Dynamism in the U.S.” by  Ryan Decker, John Haltiwanger, Ron Jarmin, and Javier Miranda notes that “after 2000, the information and high tech sectors exhibited sharp declines in measures of dynamism and entrepreneurial activity. In addition, it is after 2000 that we observe a decline in high growth businesses.” Likewise, a 2014 Kauffman Foundation study notes that  the share of young firms in the high-tech sector has exhibited a more pronounced secular decline in the post-2002 period than in the rest of the economy.” These trends that have continued long-after the tech bubble collapased, which is now 15 years ago.

Second, things very well may have improved the last couple of years. Americans started 410,000 businesses in 2012, notes Ben Casselman of FiveThirtyEight, but an increase of just 2% from a year earlier and still more than 20% below prerecession levels. I asked Ian Hathaway about this very issue in a podcast last year:

Now, of course there’s been a surge in activity in recent years.  And, unfortunately what we’re getting with accuracy with our data, which is administrative data that’s calculated by the Census Bureau, and it comes from – it comes from actual tax records from the IRS, so encompassing the entire private sector universe – what we’re getting with accuracy – unfortunately, we have a time lag there.  So, as I mentioned, just yesterday, the data for 2012 were released.  And we all know that there’s been a surge in tech entrepreneurship, in particular in the last couple of years. So while I would expect that rate to have gone up in the two years that have passed, the bigger picture here is that there was a persistent decline for three decades.  So if we’ve experienced a rebound these last few years, and my guess would be that we have, particularly in certain segments of the economy, but we still have a huge hole to climb out of.

Third, let’s keep things in perspective. Although there were nearly 300 IPOs last year, that still below the nearly 500 seen in 2000. And as John Dearie notes, the small-cap IPO market has recovered anywhere that overall sector. From an analysis last summer: “Of the 165 IPOs so far this year, less than 7 percent were valued below $50 million, and only 22 percent were valued below $1 billion. By stark contrast, 80 percent of the 3,000 companies that went public between 1991 and 1997 were valued at less than $50 million.” Then again, maybe startups are choosing to stay private. From the WSJ:

Wall Street is dealing with new challenges in one of its bedrock businesses, taking young companies public, as more startups choose to stay private longer. A number of Internet, software and consumer companies are raising huge sums in private deals that enable them to postpone initial public offerings for years, if not indefinitely. Moreover, they often negotiate these private placements directly with investors, bypassing banks.

It is a debate that will continue. (I haven’t even mentioned how “network effects” may be playing a role in all this.) But I here’s where I am: I want more potentially high-impact startups, in all sectors. And I doubt public policy — whether education, taxes, basic research, regulation, infrastructure — is optimal in generating such an ecosystem. Creating an innovation state — rather than just a wafare state or welfare state — is a great lens though which to view a smarter role for government, doing more in some areas, less in others.

Is America’s entrepreneurial engine roaring or sputtering?

In the period from

Certainly, it is difficult to know exactly in which direction technological change will move and how significant it will be. Much as in evolutionary biology, all we know is history. Yet something can be learned from the past, and it tells us that such pessimism is mistaken. The future of technology is likely to be bright.

The first thing to note is that the twentieth century experienced probably as many headwinds, albeit of a different kind, as Gordon foresees for the twenty-first. Industrialized nations fought two massive world wars and experienced the Great Depression, the Cold War, and the rise of totalitarian regimes in much of Europe and Asia. In the past, such catastrophes might have been enough to set economies back for hundreds of years or even to condemn entire societies to stagnation or barbarism. Yet none of them could stop the power of ever-faster innovation in the twentieth century to stimulate rapid growth in much of the industrialized and industrializing world.

Keep in mind, too, that economic growth, measured as the growth of income per capita (corrected for inflation), is not the best measure of what technological change does. True, technology increases productivity by making it possible to produce goods and services more efficiently (at lower cost). But much of what it does is to put on the market new products (or vastly improved ones) that may be quite inexpensive relative to their benefits. Many of the most important inventions of the late nineteenth and twentieth centuries are things that we would not want to do without today; yet they had little effect on the national accounts because they were so inexpensive: aspirin, lightbulbs, water chlorination, bicycles, lithium batteries, wheeled suitcases, contact lenses, digital music, and more.

Further, our outdated conventions of national income accounting fail to capture fully the many ways in which technology can transform human life for the better. For instance, national income calculations do not count “leisure” as a valuable good. People who are not working are not producing, and this is simply “bad,” in Gordon’s view, because they are not adding to economic output. But it may well be that a leisurely life is the best “monopoly profit,” as Nobel Prize winner John Hicks already noted in 1935. And thanks to new technology, leisure—even involuntary leisure such as unemployment—can be more enjoyable than ever before. At little cost, anyone can now watch a bewildering array of sports events, movies, and operas from the comfort and safety of a living room on a high-definition flat-screen TV. If the technology of the twentieth century did anything, it vastly augmented our ability to have a good time when we are not working. Yet, while the average individual in an industrialized country nowadays has far more leisure hours and many more enjoyable things in his or her life than the typical person did a century ago, such things hardly show up in the national income statistics.

Many pessimists make their predictions by extrapolating on current technological trends. Jan Vijg, a distinguished geneticist with an interest in history, is disappointed that airplanes do not fly any faster than they did 50 years ago and that the basic design of our automobiles has not changed. He notes that improvements still take place but tend to be marginal and subject to diminishing returns. Some of the most convenient devices that appeared in the twentieth century, such as air-conditioning and antibiotics, are already in use everywhere. Maybe the low-hanging technological fruit has all been picked, as George Mason University economist Tyler Cowen has said, and there is little left to invent.

But consider those things that ignited rapid progress in the past. The technological historian Derek Price has emphasized that the tools that technology makes available to science help determine the rate of progress. Typically, we tend to see scientific discoveries as a causal factor in technology: as physics and chemistry improve, inventors can design new products and materials. But the reverse is equally true: as scientists get better tools (made, say, by instrument makers and lens grinders), they can advance knowledge, which in turn leads to technological progress. This creates a virtuous circle that has been responsible in the past for the miraculous, technology-driven events that created modern economies. It is not easy to pinpoint when that virtuous circle started, but one salient event occurred in the seventeenth century, when microscopes and telescopes first emerged and enabled scientists to see what no human had ever seen. The development of the barometer led to the discovery of the atmosphere, soon to be followed by steam (that is, atmospheric) engines. The process accelerated after 1750. Another example: the greatest breakthrough in nineteenth-century medicine—the discovery of the germ theory of disease—was made possible by improved microscopes, which reduced optical aberration. Modern economic growth would surely have fizzled out had it not been for the way science and technology reinforced each other.

If this historical model holds some truth, the best may still be to come for modern societies. Only in recent decades has science learned to use high-powered computing and the storage of massive amounts of searchable (and thus accessible) data at negligible costs. The vast array of instruments and machines that can see, analyze, and manipulate entities at the sub-cellular and sub-molecular level promise advances in areas that can be predicted only vaguely. But these tools, to beat Cowen’s metaphor into the ground, allow us to build taller ladders to pick higher-hanging fruit. We can also plant new trees that will grow fruits that no one today can imagine.

A second reason technological progress will continue unabated has to do with the emergence of a competitive global marketplace, which will encourage the spread of new technology from its originating locations to other users who do not wish to be left behind. The idea that such competition leads to more rapid development is nothing new. The great eighteenth-century historian Edward Gibbon noted: “Europe is now divided into twelve powerful, though unequal, kingdoms, three respectable commonwealths, and a variety of smaller, though independent, states. . . . In peace, the progress of knowledge and industry is accelerated by the emulation of so many active rivals.”

America is ready to spring back. We are the country of “I did build that.”  The United States not only the largest economy in the world, but probably the most diverse and inventive.  The strength of the US is not big government and corporations. The strength of the US is in people doing things for other people.  Businesses are built and that’s what we, given a chance, do.

Given even the slightest chance, America 3.0 is going to be better than ever.  For all the talk during the election that Mr. Trump was some sort of Fascist, the choices he’s made for the people in his Administration seem to say that he’s looking to be the opposite of what Fascism was.  I think he really wants to give us the chance to get the things done that need to be done.  The US is not one person, it’s each of us, doing well by being better and making things better. We don’t need “experts” to tell us what we MUST do, or else.  We need a government that leaves us alone to deal with our own problems without the fear that everything that we do will be undone by predatory bureaucrats and greedy taxmen.  Given that and the freedom of opportunity that our ancestor enjoyed, there will be no holding back America 3.0.

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