Think Bigger. Aim Higher. Go Further.

Tag: exchange

The Mother of All Hedge Funds

Money is supposed to represent human productivity; otherwise nobody would work for it (think about that for a second).

Today, money is created from future productivity in the form of debt;  when you take a loan, money is created out of thin air and posted as an asset on the banks ledger.  Unfortunately, the money required to pay interest is never created at all, which drives eternal scarcity.

What Happens Next:

Through the miracles of the fractional reserve system and high finance; money gets thrown into a blender where it is then divorced from the productivity of those who create it, and is converted to exotic financial instruments that bet for or against the future productivity of the future productivity of the future productivity, etc – in both Calculus and Finance, these are called derivatives.

Why does it still work?

So the question becomes; if money does not represent productivity, then why do people still work for it? Well, there is no other alternative to money as we know it.

Then came … and went … Bitcoin;

Bitcoin is all the rage because it behaved sort of like a currency – it had many of the desirable characteristics for the storage, exchange, and unit of account for value. But something about it didn’t sit right with society in general – most people aren’t willing to work in exchange for it.

Bitcoin has 3 fatal flaws:

  1. Bitcoin does not represent human productivity.
  2. The total available Bitcoins were highly concentrated among a very few people.
  3. Bitcoin are speculative in value.

Many words have been committed to these topics so I’ll leave a deeper understanding to the reader to research on their own.  However, we can now ask the question;

What if a virtual currency could be designed that does represent human productivity, is widely distributed among the users, and empowered by those who interact with it?

 

Consider an Engineering Backed Currency:

Let’s consider an engineering backed currency and the existing institution of the National Society of Professional Engineers (NSPE)

 Condition 1: Engineering works increase human productivity in the form of roads, bridges, machinery, energy, clean water, sanitation, and generalized problem solving.  A currency backed by engineering would invariably be backed by human productivity thereby satisfying condition #1.

Condition 2:  Suppose that upon paying their 300 dollar dues to the National Society of Professional Engineers, the NSPE Knowledge Bank issues 3000 NSPE Bucks, a virtual currency, to the member so that any member can trade with any other member for the purposes of learning, teaching, and collaboration (don’t worry yet about the technical challenges of doing this).

If any member gets stuck on a project, or they need to understand new technologies, or are looking for complementary knowledge, they can compensate another engineer in the NSPE Technical Network using NSPE Bucks.  Young engineers can teach seniors about new tech, social media, hot mobile apps, and seniors can teach young engineers about nuances of engineering practice, etc., all in exchange for NSPE-Bucks.  NSPE bucks will become evenly distributed thereby satisfying condition #2.

 Condition 3: The NSPE Bucks act as a form of insurance.  If an engineer gets stuck on a project or needs a review of their work or intersects another discipline, they can get rapid and effective support across a vast network of knowledge assets in the profession.  An engineer may be empowered to interact with their peers and innovate in their careers knowing that the wisdom and experience of their peers is mutually accessible.  As such, condition number 3 is met.

Hold on to your seat – this last point will blow you away:

Innovation is the domain of engineering – the two words are synonymous.  People innovate today for the purpose of increasing productivity in the future.  Remember, debt is also a currency backed by future productivity.  Therefore, when you have two currencies that are backed by the EXACT same underlying asset, they are fully convertible on an open exchange.  So NSPE bucks can be easily converted back to dollars or simply traded broadly in a market.

The Mother of All Hedge Funds

As the dollar weakens in scarcity, the NSPE Buck will strengthen in abundance, value will be preserved in the works of engineering that are created. In fact, an engineering backed currency would hedge the dollar as it weaken in it’s ability to maintain infrastructure, build schools, solve climate problems, and provide for the safety health and welfare of people and property.

There is no shortage of work to do and there is no shortage of innovation – there is only a shortage of money.  If Banks can print money out of thin air, why can’t engineers?

 

 

 

 

Trading Money in for Value

Money is a convenient way to store and exchange value. Unless the world enters into a free trade agreement with Martians, Earth is the physical boundary of all existing value.

No matter what a monetary currency is called or how it behaves in the financial system, by definition, it can never represent any more than the value that exists on Earth.

Value is reflected by  “Market Capitalization” of corporation, Roads, Bridges, infrastructure, armies, education, food, real estate, and all so-called tangible things. Intangibles such as human resources, public assets, and shared natural resources are only valuable to the extent that people depend on those resources for survival. Not surprisingly, “tangible” means all things that can be controlled and “intangible” means everything else.

However, if you look at how all value is created, it all eventually boils down to human knowledge.  All control and influence over human knowledge boils down to the individual. All Value on Earth is stored between our collective ears.  In order to fully assess the global financial system, there must be a corresponding global inventory of human knowledge.  There is no body of any influence in the world proposing this as a means of defining solvency.

Meanwhile, the social media revolution is slowly introducing a global knowledge inventory to financial markets with effects that are becoming increasingly profound. In case you have not noticed, money no longer represents value, it represents the control of value.  Social media is disrupting who, what, when, where, and how all the value can or cannot be controlled.

With every new exotic financial maneuver, the monetary currency becomes increasingly divorced from the value of human productivity.  With every new advancement in social media applications, human productivity is becoming less controlled by money.  Watch the news – the battle fields are all about who what when where and how someone can control what is between your ears.

Not surprisingly, governments, marketers, advertisers and even academia are the first and most public victims of losing control of their message.  Their message is being re-written by forces outside their control.

This is serious – Don’t let anyone try to convince you that the value of social currency is not hedging the value of financial currency.

Today, we are on the cusp of the greatest revolution that the world has ever known. The control of money may go to the banks but the control of value will not.  It will happen when people decide it will happen.  Perhaps they already have…2012 anyone?

To Accelerate Serendipity, The Whuffie Factor

Tara Hunt; Future of Money and Technology Summit 2010

Tara Hunt; Future of Money and Technology Summit 2010

In 1999, Cluetrain Manifesto flipped everything we knew about online behavior on it’s head. The integration of information being published on the Internet reached a tipping point indelibly articulated for all time by Doc Searles: Markets are Conversations”

The Whuffie

In 2003, Cory Doctorow published Down and Out In The Magic Kingdom where he introduced the concept of Whuffie as a form of reputation currency that accounts for social value in a fictional future society. In Cory’s thesis, people who produce things that represent social value were awarded Whuffie. People who produce anti-social value were punished Whuffie. The twist was that everyone has equal say as to who is awarded Whuffie and who is punished Whuffie. In retrospect, the concept of Whuffie, stands today an important metaphor marking the beginning of the social media revolution.

The Whuffie Factor

In her book The Whuffie Factor (2009), Tara Hunt identifies the facts of a reputation backed exchange among real people, communities, companies, and social interactions – with all their associated human complexities. By the gift of wisdom or intuition, Tara’s choice of the modifier “Factor” is an important distinction. In mathematics, a “Factor” is a multiplier against some other quantity.

Social Capital

In Tara’s book, Whuffie is roughly synonymous with ‘new’ social capital – a hugely complex financial instrument that is currently emerging before the eyes of all practitioners of social media. In 2010, everyone still struggles to articulate social capital with a 1999 vocabulary of new conversations living in old financial markets. There simply is no word for the phenomenon of social media daily manifesting in so many new and valuable ways – it’s just too new.

Yes, Tara has critics, but most I believe are short sighted. The term “Whuffie” is as good a word as any, so deal with it. The term “Factor” is what Tara is really talking about, so lets move on.

Love ’em or Hate ’em, Whuffie is a Derivative.

From Wikipedia: a derivative is any agreement or contract that is not based on a real, or true, exchange ie: There is nothing tangible like money, or a product, that is being exchanged. For example, a person goes to the grocery store, exchanges a currency (money) for a commodity (say, an apple). The exchange is complete when both parties have something tangible.

If the purchaser had called the store and asked for the apple to be held for one hour while the purchaser drives to the store, and the seller agrees, then a derivative has been created. The agreement (derivative) is derived from a proposed exchange (trade money for apple in one hour, not now).

Infinite Possibilities

In short, the current value of the relationship is backed by the past and future value of the many other relationship(s) formed. The twist is that social media has vastly equalized people’s impact on the true value of relationships – this remains consistent with Doctorow’s thesis. Tara takes us a step further where the underlying asset can be generalized as simply “value” where the Whuffie Factor is a derivative against this value. This is consistent with Searles’ thesis.

Social Currency

In my opinion, The Whuffie Factor will become one of the seminal books of its time period. Indeed there are many excellent books in the genre of collecting, building, engaging, storing and exchanging trust, reputation, or influence in Social Media. What sets Tara’s book apart is that, like Doc and Cory, she had the guts to call it something real.

Elevate the conversation or get out of the way

Tara Hunt effectively nails this profound abstraction to the floor so that the rest of us can now walk through to define and articulate the Holy Grail of our generation; a true Social Currency. Bravo Tara, Bravo

To Accelerate Serendipity, that’s the Whuffie Factor.

Photo Source/Credit; Jesse Lara

Social Currency and Anonymity

The subject of privacy and anonymity are again rising up with the latest move by Facebook to integrate updates across the Internet onto the Facebook platform.

Conspiracy theories about Facebook and the CIA continue to flourish.  Meanwhile, the marketing and advertising industry seems poised to reboot their dwindling influence under a new cloak and dagger of social media data hustling and predictive demographics rather than playing by new rules of engagement.

Money is one thing and value is another.

I am astonished that people willingly and freely give up huge volumes of information about themselves when they really don’t have to.  In earlier times, marketers and advertisers would pay a great deal of money for far less information that people give them for free.  People do not understand the value that is stored between their ears or how easy it would be to set up an alternate economy that trades in social currencies.

If advertisers can pay someone to cold call me, to graph my data across the web, or sneak around my social networks, then they can certainly pay me to answer the phone.

The Ingenesist Project specifies an Innovation Economy built on the platform of social media.  While that thesis is extensive, let me summarize that the primordial soup of the Innovation Economy is called the Knowledge Asset Inventory.

Anonymous assets

One essential element of the new economic paradigm is the ability to combine knowledge assets so that innovation becomes predictable and therefore capitalized. However, a side effect is that such code makes the individual containers anonymous.  Marketers will have to pay you to find you.  here is why:

Now think about it this way – if you remove 20-dollar bill from your wallet to buy a Latte, you do not know (nor do you care) whether the last transaction performed by that 20-dollar bill was a donation to a charitable cause or a drug deal.  The dollar bill is anonymous – but you, as an asset, are not.

Social Currency is a Social Imperative

Dollar denominated money is a system to control social currency at a leverage factor of 1000:1.  Take away the dollar currency, and the leverage disappears.  Add a social currency and the national debt disappears.

Almost as a bonus, it is an absolute impossibility for marketers and advertisers to store and exchange value denominated in a social currency without extraordinary changes to the way they engage their clients….like, uhm, …don’t waste our time.

If we are smart, we can shut down the privacy issue in a hurry – anonymity of knowledge assets is the key.

Is a social contract legally binding…and who cares?

Trillions of dollars in play:

Trillions upon trillions of dollars worth of value that once coursed through the veins of Market Capitalism is being transferred to social media from the legacy economy now stifled by insurmountable debt.  These numbers are indeed spectacular because they account for the invisible value “lost”, and most importantly, the calculations provides clues on how to “find” it again.

What is a Social Contract worth?

According to Legacy Economics, the term “social contract” describes a broad class of theories that try to explain the ways in which people maintain social order. The notion of the social contract implies that people give up some rights to a government or other authority in order to receive or maintain social order. Otherwise, we would each have unlimited natural freedoms, including the “right to all things” and thus the freedom to harm all who threaten our own self-preservation; there would be an endless “war of all against all”.

Take me to your leader

By contrast, Social Media begs the questions: who or what exactly is that authority?  Isn’t the greatness of the Internet the lack of an all powerful authority? So why aren’t we at a war of all against all?  What keeps social media at peace instead of an endless flame war?  Whatever this alien is, it is capturing and storing trillions upon trillions of dollars of value away from the legacy economy, but where?

Separating facts from fiction

According to the old economy, it is a “fact” that human knowledge is an “intangible asset” of which there are only two types defined:

1. Legal intangibles such as trade secrets, copyrights, patents, and goodwill (brands).

2. Competitive intangibles such as knowledge activities, collaboration activities, leverage activities, and structural activities.

However, when we consider social media;

1.    There is no law governing the phenomenon – so there are no legal intangibles.

2.    Collaboration, leveraging and structural activities are not being conducted in a competitive environment (the context of one “Company” against another).

So, the definition fails to account for knowledge assets in social media. The Ingenesist Project discovers the lost trillions simply by treating the social contract like a legal contract.

Tangible assets are managed by contracts

Technically, any oral agreement between two parties can constitute a binding legal contract. The legacy economy limitation, however, is that only parties to a written agreement have material evidence (the written contract itself) to prove the actual terms uttered at the time the agreement was struck.

But social media, email, and blog posts, etc., all constitute vast “written” agreements and material evidence as far as most people are concerned.   So what is missing?  Are we waiting for permission from government, Wall Street, corporations, attorneys, or the Federal Reserve to say it is OK for people to stop competing with each other or to renegotiate the terms of the social contract (and currency of exchange)?

The mystery is no mystery

Guess what, there is nothing there. Absolutely nothing except philosophical barriers carried over from legacy economics built upon political division. The mystery is that there is no mystery except using social media to unite people.  After all, the biggest Brand in the world is a Community Organizer.  Such calculation provides clues on how to “find” value again.

The New Economic Paradigm; Part 5: The Entrepreneurs

There is no shortage of entrepreneurs in this world.

6 Billion of them wander the Earth looking for assets that exists at a low state of productivity waiting to be elevated to a higher state of productivity.

The entrepreneur must first be able to identify an asset as an asset.  Next they need to identify the lower level of productivity and they need to be able to imagine the higher potential level of productivity.  The entrepreneur must identify and manage some risk, perform leadership tasks; and as a result, elevate the asset to the higher state of productivity.  Profit is the difference between the lower and the higher state – minus expenses.

Unfortunately, today this process starts at the forest and ends at the junkyard.

This is how our economic system is organized.  The next economic paradigm flips that idea over.  Instead of accounting for natural resources as the tangible element and human knowledge as the intangibles element; the next economic paradigm must account for the natural resource as the intangible element and the human knowledge as the tangible element.

The current problem is not that knowledge is intangible; rather, knowledge is simply invisible.

The Ingenesist Project will make knowledge assets visible by provisioning all of the information that an entrepreneur now needs to identify the knowledge asset and the associated states of productivity.  Entrepreneurs can then increase human productivity using knowledge assets applied to natural resources, instead of natural resources applied to consumption.  The implications are vast.

Returning to the financial analogy:

With a financial bank, the entrepreneur assumes that they have the knowledge required to execute a business plan and the go to the Financial Institution to borrow the money.

With an “Innovation Bank” the entrepreneur assumes that they have the money to execute the business plan, and they go to the innovation institution to borrow the knowledge.

While this may sound trivial, the implications are vast:

1. A virtuous circle now exists between society and the financial system
2. Profit is derived from increasing human productivity not natural resource exploitation.

Economics is the science of incentives:

A financial Bank seeks to match a surplus of money with a deficit of money.  It is in the best interest of the bank to find rich people who will not need their money for a while, and poor people have the best likelihood of paying the money back in time.  The process assumes that the borrower has the knowledge required to execute a business plan when they seek to borrow money.  However, that FICO score does not measure knowledge explicitly, so little incentive exists to make it tangible.  All of the top ten reasons why businesses fail are due to failures of knowledge.  The financial system is collapsing under the weight of failed knowledge.

By contrast, the Innovation Bank seeks to find people who have a surplus of knowledge and people who have a deficit of knowledge about what they intend to produce. The innovation bank then uses a series of statistical calculus (the same calculus as the credit/insurance/risk management professions) to match most worthy surplus of knowledge assets to most worthy deficit of knowledge assets.  Here, the opposite assumption is made; everyone assumes that the borrower has the money required to execute the business plan and they go to the innovation bank to borrow the knowledge.  People have an incentive to accumulate knowledge.

Simplicity that defies comprehension:

The business plan for the new entrepreneur is deceptively simple to do and nearly impossible to monopolize; anyone can do it not just the wealthy and their chosen few.  The next 3 modules will outline how new enterprises will be constructed from the virtuous circle created between the financial bank and the innovation bank.  This changes everything …. and did I mention that the implications are vast?

The Next Economic Paradigm; Part 4: Institutions

In part 1, we introduced a new paradigm of economic growth; the innovation economy. In part 2, we identified information as the currency of trade for an innovation economy and we defined that currency’s relationship to knowledge and innovation.  In part 3 we demonstrated a structure for a knowledge Inventory that would enable an Innovation Economy.  In this module, we will discuss the institutions in social media that could keep an Innovation Economy, free, fair, and equitable.

In civil society, there are laws and regulations that protect our constitutional rights; these are essential institutions.

The legal system of the United States is extremely expensive, however, the expenditure is necessary to keep the society upright, productive and prevent it from falling into chaos.  Where a country’s legal system fails, so does its economy.  Entrepreneurs do not invest in places without a good legal system and where property rights are not protected. It is that important.  Investment abhors risk.

Arguably, the most important element of the Innovation Economy will be the vetting mechanism.

Fortunately, social media has the potential to serve this function; in fact in many cases it already does.  A feedback system supports Ebay ($35B Cap), community flagging supports Craigslist (40M ads/mo), peer review supports Linkedin (150M users).  These are not small numbers.  All markets must have a vetting mechanism in order to operate efficiently and if done correctly, social vetting has vast economic implications for an Innovation Economy.

First, let’s return to our financial analogy.

In the old days, the banker was the person to know if you wanted to be successful in town.  But with the emergence of the credit score, the “banker” became digitized; now a Saudi Billionaire can lend money to a young couple in Boise to buy their first home – and neither is aware of the other.  The credit score is responsible for the creation of great wealth because many more entrepreneurs could borrow money to invest in enterprise.

The credit score is statistical in nature; it isolates about 30 or so indicators of your financial activity and puts them on a bell curve relative to everyone else.  These include how much debt you have, how much your assets are worth, your income, etc.  These ratings are run through the FICO Equation and out pops your credit score.  Anyone can now predict the likelihood that you will default on your obligation.

All of the data that feed FICO are collected from public records, your employer, and the people who you borrow money from because these same organizations have a vested interest in a system of correct credit scores.

We are competing with ourselves.

It is interesting that you and I do not compete for our credit score because it is not a ranking system. On the other hand, with no credit, we are invisible and the system shuts us out.  With bad credit, the system shuts us out. We lose some freedom and privacy, but we accept these terms well because they provides us with tremendous benefit to finance a business, automobile, or a home without needing to save cash.

Now we will draw the comparable analogy from the social media.

In the old days, the hiring manager was the person to know if you wanted to get a job.  They would read your resume and compare it with “bell curve” in their experience about what has worked or not worked in their past.  This worked great in the industrial economy, but it falls far short in the innovation economy.  Innovation favors strategic combination of diverse knowledge where the Industrial economy favored identical packets of similar knowledge.

Not unlike the FICO score, the knowledge inventory is a collection of statistical variables and the social network is the reporting agencies who have a vested interest in a system of correct values.  Unlike FICO however, the variables are infinite and it responds to positive event input.
Social networks are by far among the most exciting and important new technology for an Innovation Economy.

Social networks must now evolve to become the vetting institutions for knowledge assets.

All the pieces are almost in place; now we need to develop a new type of search engine.

The Percentile Search Engine is generic term for the ability to make statistical predictions about all types and combinations of knowledge Assets in a network. Conceptually, the percentile search engine is where all of the equations that we use to analyze financial assets are now applied to knowledge assets.  The main characteristic is that the search engine returns probabilities for the entrepreneur to test scenarios.

For example; an entrepreneur may want to know if her team has enough knowledge to execute a business plan.  Perhaps the team has too much knowledge and they should try something more valuable.  Maybe the team does not have enough knowledge and they should attempt another opportunity or accumulate training.

The search engine can look into a network and identify the supply and demand of a knowledge asset. If it is unavailable or too expensive, the search engine can adjust for price, risk, or options that may emerge at a later date.

Talent will bid up to their productivity value, and brokers will bid down to their productivity value.

Competitors can scan each other’s knowledge inventory to compete, cooperate, acquire, or evade. If a key person retires, the entrepreneur would simulate the knowledge that is lost and reassign people strategically. All of these scenarios can be examines prior to spending money. They can be made during the project cycle, or after the project is completed.  Lessons learned can be used to adjust the algorithm perfecting it over time.

For example: companies such as Disney and Boeing both use Engineers, each would have proprietary algorithm of knowledge that represents their “secret sauce” of success. These recipes can be adjusted and improved to reflect and preserve the wisdom of an organization.

When the innovation economy will catches fire….

Over time, these algorithms will far more valuable then the Patents and Trade Secrets created by them – this will allow technologies to be open sourced much more profitably and shared across more industries.

In the next module, we will talk about the entrepreneurs.

The Next Economic Paradigm; Part 3: Knowledge Inventory

Welcome back to the New Economic Paradigm Series.  The objective is to develop an innovation system that emulates the financial system.  In order to do this, we look for the social component that could best duplicate the function of the closest corresponding financial system component.

Part 2 discussed the currency of trade.  Part 3 will discuss the inventory of knowledge assets.

Most companies have an inventory of every nut, bolt, rivet, or panel that they need to build something tangible.  In innovation economy, we will need to have an inventory to assemble knowledge assets so that we can build something tangible and support the currency.

Your resume is like a book about you.  Conversely, every book that you have read has become part of your knowledge inventory.

Every experience you have had, every conversation you have participated in, every new idea that tried, successful of failed, is part of your knowledge inventory.  The things that you like to do, things that you do not like to do, and things that you do not know are part of this inventory and the way it is organized in your consciousness.

The Dewey Decimal System is a way to catalog information in books. Keep in mind that The Dewey System is archaic; however, it does provide us with some key insights:

From our earlier definition; to organize information is to organize a proxy for knowledge and innovation.

The decimal classification structure has a great advantage for the computer and mathematical analysis.  Additionally, tens of thousands of librarians are fluent and most people in the US have at least a minimal familiarity with it.

For a quick review, the body of written information is divided into 10 main categories.  Each main category is divided into 10 more categories and each of those are divided into 10 categories – and this can go on forever.

It is useful to note that the Dewey Decimal classification has a bias toward the three factors of production for the innovation economy; Social capital, creative capital, and intellectual capital:

Most resume reading programs just pick up key words, so why have any other words?

Your resume can be a series of Dewey numbers instead of words and computers can tag the numbers as they do key words today. For example:

302, 307, 330, 607, 17, 500, 519

If your mind were a library and you attempted to map it all out, one would see that everything is related in some way – intuitively, this is what defines you. If we looked into your world, we would discover a huge network of experiences, books read, lessons learned, and people encountered.

We would find a system of knowledge rather than random facts that you have organized.  Your likes and dislikes would be reflected in what you do and do not want to do. Everyone is different – nobody is the same.  Everyone innovates, everyone has knowledge, and everyone shares information.

If we add some mathematical symbols and Boolean logic, perhaps we could capture the system of knowledge a little better. Your resume may now look like this:

{20,12};[302 AND 307], (330):[607 AND 17] OR [500/519]

Now need to make this look like money.  Before our knowledge can behave like a financial instrument we need to add one additional factor – the quality of the knowledge.

In American society there is a persistent ideology of winners and losers; there can only be one winner and the rest are losers.  We rank things in a very linear way; 1st, 2nd, 3rd, etc.  Our culture is to protect one’s position at all cost, shield away all attackers and decimate our competition.  This way of thinking was effective in the industrial economy, but today it keeps us from understanding how knowledge actually exists in a community.

We need to switch to a bell curve distribution for knowledge assets because it better reflects reality and eliminates unproductive competition; there are no winners or losers, just different markets.

There is a perfectly legitimate market for a Porsche as there is for a Toyota.

Statistical distributions are used extensively in finance to value financial instruments; we need to do the same now for our knowledge assets. To make financial sense out of our random world, we must classify knowledge assets on a bell curve.  Consider the following resume:

{20:95%,12:80%};[302 AND 330]70%:(607 AND 17)80% OR [500/519]90%

This person is a specialist in Social Interaction and economics at the 70th percentile related to educational research at the 80th percentile. She (or he) has a Background in applied mathematics and physics at the 90th percentile. She (or he) is a trained ethicist at the 75th percentile, philosopher, and artist specializing in musical theory and orchestration at the 50th percentile. Fluent English and Spanish

Now, we have a system of numbers and symbols represent the knowledge of the person in a tangible manner.

Keep in mind that this is only a demonstration, however, we see some key advantages:

1.    The Inventory is Infinite and expandable to any field of knowledge
2.    Paints a picture of knowledge and not simply a list of information about a person.
3.    Machine enabled, programmable, and readable.

Now, all of the tools, methods, and equations in the world of banking, finance, and insurance can be used to combine, amalgamate, and diversify knowledge assets in an innovation market.

Your resume can now be combined with other resumes to represent the collective knowledge of a community.  This expression carries all of the information that an entrepreneur needs in order to estimate the probability that the community can execute a business plan.  We will discuss predictive characteristics extensively in future modules.

In the next section, we will talk about the institutions that exist in our communities through computer enabled society which will keep this game free, fair – and most importantly, equitable.

The Next Economic Paradigm; Part 2, Currency

Welcome to part 2 of the New Economic Paradigm series.

In part 1 we determined that money represents human productivity and the only way to sustainably create wealth was to innovate.

Then we identified the flaw that money lives in a complex and integrated system while Innovation does not, rather, innovation is isolated, random, non-integrated and subservient to the financial system.

This module discusses the currency of the innovation economy.

A Currency is anything that serves as a medium of exchange, a stored value, and a standard of value.

We  all know that Dollar denominated money is a medium of exchange – but it does not represent gold or silver or even oil, it represents human productivity.  Money, and therefore all financial instruments store value related to human productivity.

When we look into society throughout history, everywhere people are trading information and ideas with each other at some velocity.  The Internet and social media (machine enabled society) has sped this process up to incredible rates.  All of this information adds up to something because obviously things get built and stuff rolls off assembly lines.  Furthermore, people act on information obtained from each other to produce things.

The currency of trade for the next economic paradigm must represent this “stock exchange”

Intuitively we know that information, knowledge and innovation are profoundly related to each other.  In fact, if you don’t have one, you can’t have the other two.  Our currency of trade must represent all three; information, knowledge, and innovation.  Therefore, we need to redefine these terms in a manner that relates them.

First we must define ‘information’. That’s easy, information is facts and data.

Next we need to define ‘knowledge’ in terms of information: Any good teacher can tell you that information must be introduced in a certain sequence and at a certain speed in order for the student to learn. Knowledge is therefore proportional to the rate of change of information.

For the purposes of this analysis, we will use the following definition:  Innovation is defined by the rate of change of knowledge where knowledge is defined by the rate of change of information.  For example; everyone has had an ‘Ah-Ha!’ moment during a brain storming session, or after making a mistake, or after witnessing a profound event. The AH-HA moment represents a very high rate of change in our knowledge that occurs in a very short period of time.

According to this definition, every idea,  conversation, dream, design, sketch, or discovery experienced and shared between two or more people is an innovation.

Math students can see that this definition sets up a differential equation that we can use to model the innovation system computationally – something that cannot be done with the current definitions.

Now let’s look at the “economic outcome” part

The factors of production for the industrial economy are land labor and capital.  Entrepreneurs allocate these three factors in different combination in the formation and growth of corporations.  If any of these factors of production are missing, dysfunctional, or corrupted – the corporation stops producing.

We have learned that in the knowledge economy, the location of knowledge work is highly mobile – so “Land” does not have the same significance for making things as it did 100 years ago.

What about labor? Knowledge workers analyze situations, manage many variables, and create unique solutions.  They do not really produce identical knowledge pieces like a machine operator or a production worker.  Everything they see and do becomes part of their relevant knowledge set: 24/7/365. The idea of an 8 hour day and pay-by-the-hour are no longer relevant.

Capital is money needed to build future structures, buy machines and to pay wages. Today, money provides access to information. The current economic meltdown demonstrates that where the information is corrupted, the money is corrupted – and so becomes everything connected to the money.

We now see that many old economic principles do not work quite as well in the new economies. Yet, the Land, Labor, and Capital theory is still the foundation of much of today’s corporate, academic, government, financial, and social thinking.

Using our definition for innovation, we can see that the innovation economy will emerge from the rate of change of the knowledge economy.  Today we are witnessing an astonishing growth in social media and a breakdown of traditional media for the dissemination of information.

The factors of production for the new currency are Intellectual Capital, Social Capital, and Creative Capital.

Intellectual Capital is also called Human Capital – and suggests that concentrations of educated and motivated people attract investors to employ them and invest in the communities where they reside.  This investment attracts other intelligent people who in turn attract more investment thereby creating a cycle of economic growth

The Social Capital Model suggests that people acting in communities can create better solutions, greater accountability, and more economic growth than management, governments, or bureaucracy can induce on their own.  Examples of Social Capital include Civil Rights Movement, community watch organizations, Democratic Government, Social Networking, and notably, recent political changes events.

The Creative Capital model, suggests that engineers and scientists think more like artists and musicians than like production workers – their ideas come 24/7/365 – and that an environment of tolerance, diversity, and openness promotes creative output.

A Currency is anything that serves as a medium of exchange, a stored value, and a standard of value.

In the current financial economy, the currency is a dollar.  The rate of change of the currency is called appreciation, depreciation, or “interest”.  The rate of change of interest is the growth rate or compounding. These are very familiar conditions in finance and the basis for a company’s stock price.

In the innovation economy, information is the currency.  Knowledge is the rate of change of information, and innovation is the rate of change of knowledge.

This will become a very familiar and useful relationship in the innovation economy.

For example, innovation is difficult to measure directly.  However, we can measure the rate of change of knowledge as a proxy for innovation.  It is difficult to measure knowledge.  However, we can measure the rate of change of information as a proxy for knowledge.

In finance and calculus, these are called derivatives.

In the next module we will discuss the inventory and accounting system for an innovation economy.

Next Economic Paradigm; Part 1

Technological change must always precede economic growth. We are going about the process of Globalization as if economic growth can precede technological change. This is the singular flaw of market capitalism that needs to be reversed.

The Next Economic Paradigm will be an Innovation Economy. Unfortunately, this will not be delivered by corporations, Government or Academia. There no single person, country, ideology, or philosophy that can meet the challenges of the future alone – everyone will be required to participate because everyone has a stake in the outcome.

The Ingenesist Project outlines a very optimistic future. The problems ahead have a relatively simple solution that can be implemented today using existing tools and infrastructure. These tools acting in the right system can have profound impact on future economic growth and the sustainability of our resources.

The Ingenesist Project identifies a core problem:

This is the human productivity chart. Every time humans invent better ways of doing things, they become more productive. Where more people are more productive, the economy gets bigger. This is a fact.

About 50,000 years ago, humans began to make tools using tools and innovation increasing exponentially. Tools made hunting and gathering easier. As farming developed so did the emergence of cities. When people could produce more than they needed, they had time to think about things like philosophy, art, astronomy, written language. This led to a scientific revolution that continued to make new observations about the world. These observations were applied to systems that made people still more productive. The industrial revolution followed. Industry produced a lot of information. The ability to process that information using computers led to the information revolution. Soon people began seeing new trends among the information, facts, and data. This ability largely defines the knowledge economy that we see today.

Obviously, There were economic “eras” in the past and there will be more in the future; of this is not the end of human economic development. Something else will happen after the knowledge economy. This next economic paradigm is not easy to see.  Many people have a sense that civilization is changing – it must change.

Looking at the productivity chart, we notice a few interesting trends.

  • Every level of economic development was derived from the prior level of economic development.
  • That transformation was achieved by integrating the tools that were developed during the prior economy.

The two greatest tools in the knowledge economy are the Internet and Social Media. The Innovation Economy must integrate these tools.

Now, this is the Human Gross Domestic Product Chart. This is obviously very similar to the productivity chart except that the bottom axis is labeled with Global Gross Domestic Product over the same time period. The global GDP of 50,000 years ago was about 200 Million in current dollars.

Today, the Global GDP is about 65 Trillion Dollars.

If this curve was to continue, and it can, the next level of economic development could easily value in the Quadrillions. However, this cannot happen without some adjustments to the current system:

The only way to create more money is to increase human productivity and the only way to increase human productivity is to Innovate. This is the guiding principle of an Innovation Economist.

The problem is that the financial system is highly organized while the “Innovation system” is nearly random.

Economic growth with “money” as the scorecard lives in a complex, global and highly integrated system where billions of dollars circle the globe daily at the click of a mouse.

By contrast, human innovation lives in the patent system which is extremely slow, static, and prohibitively expensive. Of course, innovation certainly happens in places like Silicon Valley, Government Laboratories, Universities, and let’s not forget the proverbial “Steve’s Garage”; but these sources are not integrated and they do not behave like a system – except at the mercy of the financial system.

Innovation is market driven, markets should be innovation driven.

It is clear; there is no Innovation system to match the financial system in speed, efficiency, and integration. The objective of the Ingenesist Project is to specify an innovation system that integrates the tools of the knowledge economy into a structure that mimics the financial system. If it looks like money, it will behave like money and people will trade it.

The Next Economic Paradigm must duplicate the same 5 essential components as today’s economy.  These 5 components interact with each other as a system.

The 5 Essential Components of an Economy

1. A Currency to store value

2. An Inventory to account for the storage and exchange of value

3. Institutions that are supposed to keep the game fair

4. Entrepreneurs to do the “fuzzy math”

5. Business Plan or philosophy such as “Capitalism”

If any of these pieces are missing or corrupted, the market will fail. All 5 of these elements must be operational and integrated in order for a market to be efficient.

In the next several articles, we will go through each of the 5 elements and develop the corresponding knowledge system that will be integrated as we create the structure of the Innovation Economy.

If you give people a game they can win, they will play it all day long. In this regard, human behavior is highly predictable.

Finally, A Definition for Innovation

Innovation: The rate of change in knowledge with respect to time 

[In earlier post we identified the 5 essential elements of a market economy. What would be the currency of an innovation economy? Currency is anything that serves as a medium of exchange, a stored value, and a standard of value. Basically we are asking; What are those things that people are out in the World trading among each other today?]

Today, innovation is repeatedly cited as the only thing that can get us out of the financial/environmental/sustainability conditions that find our ourselves in, yet the most common definitions for this term are deeply and tragically flawed.

Most definitions for innovation boil down to: “a new idea introduced that has an economic outcome” or “something new that is useful”. While these definitions match some observations, they are reflective and “You know it when you see it”. As such, there is little to define innovation before it happens or to make more of it from this definition.  It is like defining “Art” as the thing that people stare at.  Unfortunately, this is just the beginning of our troubles.

“Innovation is a new idea introduced that has an economic outcome” is impossible.

This definition defines one unknown quantity (innovation) with four other unknown quantities: what is new; what is an idea; what constitutes “introduced”; and what is an economic outcome?  From High School Algebra we know that you cannot solve one equation with two unknowns – let alone four.  There is little that you, I or anyone else can do to satisfy this definition.  Therefore, it is not useful.

Granted, this definition sells plenty of ad copy as the guru of the week wax-poetic over those four pesky unknown thingies.  I found one consultant who claims that innovation has 51 variables and only he can solve that matrix – for a price.

What is the truth about the phenomenon of Innovation?

A useful definition must clarify the subject in a manner that is repeatable and measurable.

If we look at history we know that economic “benefit” and innovation are mutually dependent – you can’t have one without the other.  Wealth has been created by increasing human productivity through innovation in agriculture, manufacturing, computers, etc.

Next, we observe that information, knowledge and innovation are also mutually dependent – you cannot have one without the other two.  Wealth is created by integrating information, knowledge and innovation.

Next; look at our society; everywhere we turn, people are collecting information from each other, building their knowledge, and innovating together, i.e., coming up with better ways to do things. All of these little exchanges obviously add up to something because things like IPods and Airplanes get built and lots of stuff rolls off assembly lines.

Innovation is anything that increases human productivity

Next we can say that information, knowledge and innovation can be related as follows:

  • Information is defined as facts and data

This should not surprise anyone.

  • Knowledge is proportional to the rate of change of information (facts and data) over time.

This is a little trickier to grasp. But any good teacher knows that information must be introduced in a certain order and at a certain speed before the information can become knowledge – this is called learning. Learning is a mental process for turning information from a book, a lecture, or personal experience into knowledge that can be used later.  Therefore, knowledge is proportional to the rate of change of information and can only exist inside a person’s head.

  • Innovation is proportional to the rate of change of knowledge over time

trickier still, but for example; everyone has had an ‘Ah-Ha!’ moment during a brainstorming session, some incredible event that we witness, or even after some real bad mistake that we made. The Ah-Ha moment is a spike in our knowledge that happens in a very short period of time. Innovation is related to this high rate of change of knowledge.  Then we blurt it out, or write it down, or make a sketch, give a lecture, in the form of information, etc.

Definition of Innovation:

a. Innovation is anything that increasing human productivity.
b. Innovation is proportional to the rate of change of knowledge and information.

Admittedly, not as sexy in the sound bite but this definition does include all conversations, sketches, dreams, and ideas of all people on Earth and allows them to combine with the sketches, dreams, ideas, of all people on Earth to become designs, methods, and processes which further combine to become products, systems, and institutions, etc.

Let entrepreneurs worry about the economic outcome

Since innovation can be difficult to observe directly. Our new definition allows us to use a proxy that is easier for entrepreneurs to see. For example; if you want to identify innovation as it is happening, simply look for high rates of change of knowledge in a community. If you want to create innovation, do things that create high rates of change of knowledge. Likewise, if you want to identify knowledge, look for high rates of change of information.  If you want to create knowledge, do things that create high rates of change of information.

We need to give the entrepreneur a game they can win. The key is that everyone must be included in the game. This is a definition that can be used by anyone and everyone, in fact, it already is.

notes:

[Anyone familiar with differential Calculus can see an equation forming where Innovation is the derivative of knowledge and knowledge is the derivative of information. Calculus is the study of change like geometry is the study of space. Since the mathematics is beyond the scope of this article, I’ll finish with the following analogy for defining information, knowledge, and innovation more intuitively: “Information is to knowledge is to innovation what distance is to velocity is to acceleration”]

A Few Predictions for the Innovation Economy

Here are a A Few Predictions for the Innovation Economy

Social Network will become the corporate structure of the future. They will spit out start-ups at an astonishing rate.

The “resume system” will be banished forever possibly earning the title of the cruelest human invention since the lobotomy.

The University System will be challenged – the relevance of the college degree will be questioned in an economy that favors unique combination of knowledge assets rather than everyone having the same “degree”.

Everyone will have visibility of supply and demand for knowledge assets meaning that employers and employees will have equal information about cost, availability, and demand.

Creative knowledge workers will earn micro-royalties for their participation in thousands of brainstorming sessions and product development discussions. Earnings will be shared openly and the percentile Search Engine.

The new Patent will be the “Secret Sauces” – the algorithm that entrepreneurs will develop to select their knowledge assets when producing specific innovation.

Teachers will forego salary in favor of an equity position in their students. The best teachers will make the most money. Universities will forego tuition in favor of an equity position in students; the best students attract the best mentors and universities. Apprenticeship will become commonplace.

The knowledge inventory and Percentile Search Engine system rewards people for doing what they are most passionate about. The dominant strategy for all players in an Innovation Economy (that which produces the most revenue) is for participants to pursue what they are naturally good at and passionate for – as long as there is a market for it.

Innovation bonds will return 80% interest or more with near-zero risk. Institutional investors, insurance reserves, and foreign investors will flood the market with venture capital.

Knowledge workers will outsource management.

The Fed will peg the dollar to productivity, not gold or silver – interest on deposits will track productivity increases due to innovation.

Social priorities will impact what gets invented or what stays on the shelf; Global Warming, Alternative Energy, Sustainable environments will have net positive business cases.

The flaw in market economics will be reversed. Technological change will precede economic growth eliminating the economics of debt (ref video). The financial system will be restored to a sustainable condition.

We know that innovation is the engine of all wealth creation and it will live in an integrated system. Knowledge will be reformatted to emulate a financial instrument.

A good article from business week

A great Blog: Jay Deragon and the relationship economy

The Capitalization of Knowledge – Innovation Bonds

With a computer readable knowledge inventory, local communities of practice, a percentile search engine algorithm, and the virtuous circle of finance, then future innovation cash flows can be predicted much more accurately and with far lower risk than with, say, the venture capitalists acting alone.

Were risk is predictable, cash flows are predictable and the portfolio of innovations can be diversified so if one business fails there is an equal chance that another will succeed and the risks cancel each other out. The cash flow of all the innovation enterprises can be combined into a single large steady cash flow. Just like companies do to raise money for expansion, the innovation bank can issue innovation bonds on the open market. The revenue from selling Innovation Bonds can return to the community to finance innovation and fund wealth creation at very low interest rates compared with venture capital today.

With a lower cost of venture capital and a system that supports open source innovation an astonishing amount of innovation will be unleashed in society.

The Capitalization of Knowledge – The Virtuous Circle

We have set up a new game for entrepreneurs to play called Innovation Economics. We have defined a currency and an inventory where knowledge is visible outside the construct of the corporation – and resident in social networks. We have also described a way for entrepreneurs to visualize the knowledge asset and the supply and the demand for knowledge assets. We have given them a tool for matching assets for profit. We have described how social networks will keep the game fair. We have outlined the structure of new business plans; the brain storming session, product development cycle, the neural network, and the multiplier effect. Future businesses will be built upon combination of these four structures and whatever else entrepreneurs can dream up.

We have described all of the pieces needed to form a new economy. Now we need to connect with the financial markets so that knowledge is readily convertible to other currencies.

For review;

With the financial bank, the entrepreneur assumes that they have the knowledge to execute a business plan and then they look for the money. The risk is that the entrepreneur does not in fact have enough knowledge.

With the Innovation Bank, we assume that we have the money, and we go to the bank to search for the knowledge. The risk is not having enough money to purchase sufficient expertise.

With both banks acting together – the risks cancel each other out and the innovation economy tends toward a ‘risk free’ cycle; the more knowledge you can assemble, the more money you can borrow. The more money you can assemble, the more knowledge you can assemble.

Now we have a virtuous circle. The more knowledge you have, the more money you can borrow; and the more money you have, the more knowledge you can borrow.

There is no shortage of money circling the globe – only a shortage of risk free places to put the money. The innovation economy is an environment of very high return for a very low risk and will attract a great deal of money to fund innovation enterprise.

Earlier we demonstrated that money represents human productivity. It follows that the places that have the greatest potential for increasing human productivity can create the greatest amount of wealth. Therefore, poor areas and marginalized economies with under utilized knowledge inventories or the injection of specific knowledge inventories, become the highest ROI centers in a risk-free system; a condition the explicitly favors the wealth equalization rather than wealth disparity.

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