What If Your Model Is Wrong?

There’s been something unsettling to me about Paul Krugman’s Great Depression II op-ed piece and I’ve struggled for a week to figure out what it is. And then today, I came across Umair Haque’s piece from last month called Do Economists Matter?

I don’t want to disparage Paul Krugman. He’s way smarter than I am, he has degrees from Yale and MIT, he’s taught at MIT, Stanford, Yale, and now Princeton. He received the Nobel Prize last year in Economics. He’s one of the most influential economists, thinkers, and writers in the world.

And yet, Krugman’s Depression II piece is essentially a debate and discussion of Keynes vs Freidman, tax cuts versus infrastructure investment. It’s a 20th century economics model being applied to a 21st century crisis. And I think there’s a really good chance that these models the economists are using are outdated and focused on the wrong issues.

Haque, on the other hand, sees this economic crisis differently. He says:

We can’t fix today’s problems unless we change yesterday’s rules. But
economists — and the models they rely on — are bounded by yesterday’s
rules.

I wrote a long piece over the holidays called Bits Of Disruption where I argued that technology has fundamentally changed the economic model of most, if not all, industries and we are witnessing the destruction that goes along with that disrpution.

That’s one big vector of change, but it’s not the only one. Globalization is another huge impact. The most influential book (on me) I read last year was Fareed Zakaria’s The Post American World. Surely the economic models our leaders are using incorporate global money flows and other important global factors. But we’ve never been in a world where you can hire someone anywhere in the world in a matter of days, where you can transact instantly with companies all over the world, and where global factors weigh so heavily on economic issues. I just don’t think our models fully incorporate the global world we live in today.

But neither of these vectors are what Umair is obsessively focused on. He sounds more like Marx than any current economist to be honest. Umair’s interested in DNA, not what makes each of us unique, but what makes companies, institutions, and even governments unique. And he points out that the old models don’t work anymore.

Starbucks, for example, pursued a
textbook approach to strategy; growing from a strong core defended by a
powerful brand, value chain control, and scale, into adjacent markets,
like food, music, and events. All of which led it directly and deeply into strategy decay – by robbing it of purpose, vision, and empathy.

Microsoft, perhaps the ultimate hardball player, focused on ownership
of a standard at all costs – and is now struggling to compete in an
industry whose fabric has been riven by open standards and open code:
its own domination games have returned, like the ghost of strategy
past, to haunt it.

The old rules certainly don’t work for many (most?) businesses anymore and they probably don’t work for the economists either. So Obama will spend upwards of a trillion dollars of stimulus in a combination of tax cuts, building roads, bridges, and hopefully public transportation. And it can’t hurt and maybe it will help.

But what matters more is how we change our culture, our society, our government, our economy and the companies that help make it up. A good place to start are Tim O’Reilly’s three rules:

1) work on something that matters more than money

2) Create more value than you capture (that’s the kind of DNA that’s winning the day now)

3) Take the long view

I had dinner last night with some friends, all of whom were big supporters of Obama and his vision of change. All of us were at least a little (and in some cases a lot) concerned that in the transition from candidate to President, Obama was getting sucked into conventional thinking. Spending a trillion dollars may work, but helping change the DNA of america and the world would help a lot more. And he doesn’t need economists to tell him how to do that.

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