Until quite recently, most high school seniors contemplating higher education had their sights on the local college or, if more ambitious, the state university. Even those who might otherwise have qualified for scholarships to the world’s fanciest ivy-infested citadels didn’t venture too far away. They and their parents simply didn’t know enough to weigh the advantages. The same principle governed your choice of hospital: It was the one close by, or in the region—even if you needed a heart bypass. That would apply in your choice of lawyer, mortgage lender, and car dealer as well.
But all this is changing as new communication, transportation, and information technologies allow readier comparisons. Through the Internet, buyers are beginning to get reliable data on prices and quality on a wide range of products and services from all over. Universities, hospitals, law firms, banks, and car dealers are competing for customers at far greater range, sometimes nationally, occasionally internationally. It’s as if all sellers of all products and services have suddenly been placed next to one another in a global bazaar in which all prices, and all information about quality, are immediately apparent to all buyers. The more sellers who appear in the bazaar—who post their own Web sites, offer goods and services online, participate in online auctions, contribute information to various portals—the more isolated and marginalized are those who don’t. Join the bazaar or die. But if you join, be ready for fierce head-to-head competition.
You can shop for a car loan or negotiate the terms of a mortgage loan on the Web. Several students have told me they (or their parents) made their final college selection on the basis of which institution gave them the best tuition deal—negotiations made easy over the Internet. Business customers are requiring their suppliers to bid against one another in Web-based auctions. And e-clearinghouses are becoming as ubiquitous as summer garage sales. Sellers are starting to offer deep discounts on remaining items that otherwise would be thrown away—aircraft about to depart with empty seats, trucks returning from a delivery with near-empty containers, hotels reaching the end of the day with empty rooms, radio stations about to broadcast with advertising time still unfilled, colleges about to begin the term with empty slots.
There’s a race to provide useful ratings and reviews, as in comparisons of insurance agencies (premiums and payouts); of universities (tuition and fees, and placement of graduates in good jobs); of hospitals (the number and kind of successful operations performed in each, their mortality rates and costs); of law firms (the ratio of cases they’ve won relative to those they’ve lost, the average amount of money they have gained or lost in settlements, their hourly fees); of wages for people with certain skills; and of the price and quality of countless new digital, molecular, and genetic creations.
Someday we’ll have our own personalized “bots”—the electronic equivalent of golden retrievers—that can be programmed to run into cyberspace and fetch the best deals for us. And as more and more of us sell our own services in the open market, the global bazaar will offer buyers comparative data on our backgrounds, skills, and past performance.
We
will be that which is retrieved.
E
YE-POPPING DEALS
and bargains, opportunities never dreamed of—exactly what you want, from anywhere, at the best price and value. We are not there yet, and may never be entirely, but the trend is unmistakable—and it is accelerating quickly. It is happening because new technologies are expanding choices and making it easier to find and switch to something better. The wider choices and increasing ease of switching are intensifying competition among sellers. This, in turn, is putting ever-greater pressure on them to offer terrific deals. As a result, the choices continue to widen and improve. The deals are getting even better, the opportunities bigger, the possibilities seemingly limitless. It’s a virtuous circle, and we buyers are the beneficiaries.
Were this the entire story, we would live happily ever after, and this book would be very short. But there’s more to life than getting terrific deals. We’re not only buyers and investors. Most of us also have to work for a living. In addition, we have relationships that are important to us, that help define who we are and what we want from life—our families, friends, and communities. The emerging economy is altering these aspects of our lives as well. And our working lives and our lives outside paid work are not being altered for the better in every instance. The Age of the Terrific Deal comes with a catch. Herein lies the dilemma of our time.
CHAPTER TWO
A
S NEW TECHNOLOGIES GIVE
all buyers wider choice and easier access to something better, they render all sellers less secure. Most people would rather feel secure than insecure, but insecurity is not bad for an economy. It spurs innovation, the other major principle of the new economy. Understanding it is the next step to understanding what’s happening to the rest of our lives.
THE NEO-LUDDITE FALLACY
First, though, we need to dispense with a myth. Some future-gazers confuse insecurity with joblessness, and fret that advancing technologies eventually will eliminate jobs.
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They are as wrong as their forebears, the Luddite machine-breakers of early-nineteenth-century England who destroyed power looms that were forcing weavers out of work. New technologies surely will force people to change or alter their jobs, but they won’t reduce the amount of paid work. There’s no natural limit to what people want and are willing to pay others to do for them. Nor is there a finite amount of human intelligence and imagination capable of discovering what can be done, or done better.
As societies become richer and as technology makes all sorts of things more affordable and accessible, an ever-larger portion of personal income will be spent on insatiable wants that extend infinitely beyond bare needs for adequate food, clothing, and shelter. No matter how much people possess of these insatiables, they will always want more. It’s in these domains that you can expect the economy to grow and future jobs to multiply.
Health.
Regardless of how good human beings feel and how long they live, they will always want to feel better and live longer. So there will be no end to the demand for advice, medications, gadgets, treatments, and exercise regimes that prolong bodily existence and well-being.
Entertainment.
Regardless of how much people already enjoy life, they will want more fun, thrills, surprise, suspense, titillation, excitement, and aesthetic pleasure. Hence, there will be no limit to the demand for entertaining films, videos, theatrical presentations, music, sporting events, travel, and stories, or for death-defying experiences like hang-gliding, bungee-jumping, or visiting a theme park with a three-year-old.
Attractiveness to others.
No matter how lovely people are, most of us want to be more appealing. As a result, there will be a limitless market for such things as fashionable apparel, cosmetics, breath fresheners, straight teeth, tummy tucks, tanning creams, hair dyes, diets, and inexhaustible advice for how to become more sexy, charming, persuasive, or otherwise enticing.
Intellectual stimulation.
Despite the psychic damage done by dreary years of formal education, most human brains still yearn to be provoked. So there will be no natural limit to the desire for news, information, explanation, historical description, and insight into why things happen the way they do.
Contact.
Hermits and misanthropes aside, humans are social animals with an insatiable need to connect with other humans. Hence, there will be a limitless market for faster, easier, cheaper, and more convenient means of connecting, and also of being pampered, cared for, massaged, and sexually delighted.
Family well-being.
Humans are hard-wired for altruism, especially toward those whose genes most closely resemble their own. Family feuds notwithstanding, there’s no natural limit to the happiness or health most people desire for their children and closest kin. Hence, an abundance of products and services to care for, educate, inspire, and otherwise ensure the welfare of loved ones.
Financial security.
Money doesn’t bring happiness, but it is a means of acquiring any of the above, which can. As a result, there will be an almost limitless market for financial advice and planning, schemes to maximize returns on savings, and insurance against bad luck.
These wants can’t be “satisfied” in the sense that hunger or sleep or even ambition can be. But with the possible exception of attractiveness, gratification doesn’t depend on acquiring more than others have acquired; it can be achieved regardless of relative position. And since the supply of these wants depends more on good ideas than on scarce resources, one person’s enjoyment doesn’t necessarily come at the expense of another’s.
These seven areas represent fast-growing markets within which a large proportion of the workforce will be creating and distributing products, services, and advice in the decades ahead. Such work will find its way into computer software, engineering designs, Web pages, financial services, statistical analyses, musical scores, film scripts, and advertising. Advancing technologies will help idea generators accomplish all such work better and quicker, giving them greater leeway for their imaginations.
Another portion of the workforce will respond to these wants in person. Such work will include the pampering of bodies and minds through what are now called recreation specialists, aerobics instructors, personal trainers, massage therapists, tour guides, spiritual guides, personal coaches, teachers, drivers, waiters, and the like. It will also include caring for infants and children, the sick and the mentally disabled, and, increasingly, the elderly. By the second decade of the twenty-first century, millions of corroding baby boomers will need a lot of personal attention. The boomers will not go quietly. Expect an outcropping of “Med-Meds”—the equivalent of Club Meds with medical facilities built in. Scuba in the morning, emergency oxygen in the afternoon.
The biggest difference between the old work and the new is the sharply accelerating pressure to do it all better, faster, and cheaper. How much better, faster, and cheaper? There’s no necessary limit. Even scientific barriers once thought impervious are yielding.
THE NECESSITY OF BETTER, FASTER, AND CHEAPER
The economic system that dominated most of the twentieth century allowed producers and sellers a fairly relaxed existence. Economies of production scale and stable markets (with their corresponding oligopolies and regulations) protected large enterprises against unruly competition. Small, neighborhood sellers competed only with other local shops and services.
With enterprises, as with people, a comfortable existence tends to weaken motivation to work hard. The old industrial economy did not, for the most part, ignite great entrepreneurial zeal. Big companies maintained research and development departments that produced a steadily respectable output of patented invention, but major breakthroughs were rare, and intended to be so. Too much change would threaten the capacity to plan, and might destabilize the system. Most innovation occurred at the margin, in cosmetic design rather than in the basics. Automobile tail fins grew longer, but the quality of suspensions and engines improved only gradually. “New and improved” dishwashing detergents and kitchen appliances appeared with predictable regularity but were never especially new, nor very improved.
By the middle decades of the twentieth century, sellers could be relaxed about controlling their costs. With unions negotiating wage rates for entire industries, wage increases could be passed along to consumers in the form of higher prices without imperiling any particular company. Nor were sellers interested in squeezing their suppliers unduly. Any change of supplier threatened the efficiency of large-scale production, whose smooth flows required long-term contracts and stable relationships.
As a result of these accommodations of employees and suppliers, wages and prices tended to spiral upward. Price increases raised the cost of living, which caused workers to seek additional wage increases. Occasionally, government sought to control wages and prices directly by establishing official wage and price ceilings or by “jawboning” industrial and union leaders to keep prices within bounds, but to no great effect. Inflationary cycles gathered momentum until the Federal Reserve Board raised interest rates and plunged the economy into recession.
The emerging economy provides a telling contrast. As noted, buyers are less constrained by production scale, distance, or information. With access to a widening choice of products and services coming from almost anywhere on the globe, and armed with better comparative data about price and quality, buyers can more easily switch to something better. The easier it is for buyers to switch to a better deal, the harder sellers have to work to attract them and to keep them.
Some researchers credit the recent upsurges in innovation and productivity exclusively, and simply, to new technologies. But they’re leaving out the crucial steps that explain
why
sellers feel far more compelled to innovate. New technologies of communication, transportation, and information are empowering buyers to find and switch to something better. This, in turn, is putting pressure on sellers to produce better. In order to survive and prosper, sellers must continuously cut costs and add value, faster than their rivals. Not only do they have to offer better products and services, but they also have to continuously improve their organizations, to make them capable of generating whole streams of better products and services faster than the competition.
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This trend helps explain why inflation has become less of a threat, even during periods of low unemployment. Sellers continuously have to find new ways to slash costs and lower their prices in order to stay competitive. It also sheds light on why, after slumping in the 1970s, productivity (output per unit of labor input) has been rising. Companies have been under increasing pressure to do more with less.
*
Fiercer competition has spread to nonprofit institutions as well. Even the stuffiest, most hidebound universities, hospitals, museums, and charities must now innovate, because they’re subject to the same underlying dynamic that’s affecting the rest of the economy. Attendees, patrons, and donors have an increasingly wider choice from which to pick, better information about how each institution is performing, and greater capacity to switch to one that satisfies them more. So nonprofits have to be better, faster, and cheaper, too.
THE LOGIC OF INNOVATION
To understand this dynamic, it helps to go back to the musings of Joseph Alois Schumpeter. Schumpeter was a professor of economics at, successively, Graz (Austria), Bonn, and finally, Harvard, and also served as finance minister of Austria after World War I. Wherever he went Schumpeter cut a dramatic figure—aristocratic, romantic, and not unduly burdened by modesty. (Later in his life he said he had always had three wishes—to be a great lover, a great horseman, and a great economist—and that two had been granted.
3
) In
The Theory of Economic Development,
originally published in 1912, Schumpeter conceived of a world in which the entrepreneur played a central role.
Most economists still focus on how supply and demand come into balance, and how scarce resources are allocated most efficiently. Imbalances in supply and demand are considered to be inconvenient exceptions to the economists’ model of perfect competition, caused by some external force like a flood, plague, or politics. But Schumpeter assumed that a healthy economy is never in tidy equilibrium; it’s continuously wracked by invention and change. Innovation will occur most readily, he reasoned, when entrepreneurs are rewarded for their brave efforts by gaining a temporary monopoly on something for which consumers are willing to pay extra—but only temporary. Unless entrepreneurs feel threatened by new competition, they will have no incentive to continue to innovate. Economies, therefore, cannot progress without the “gales of creative destruction” wrought by such entrepreneurial
Sturm und Drang.
As the twentieth century wore on and large-scale production came to dominate modern economies, Schumpeter became gloomy about the prospects for entrepreneurship. Everywhere he looked he saw businesses more interested in stability than in change. He failed to see, or to value, the benefits of mass production and mass marketing. Instead, Schumpeter dwelled on the lackluster managers and risk-avoiding paper-shufflers who were running large-scale enterprises. He gloomily predicted that capitalism would disappear into a static morass of bureaucratic socialism.
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But at the start of the twenty-first century, Schumpeter’s dire prediction is being proven wrong. We’re moving quickly into a neo-Schumpeterian world.
Try this mental experiment. Suppose you offer to sell X for the price of $Y. Assume you’ve already figured out how to make X better, faster, or cheaper than anyone else. Maybe no one else even imagined there was a market for X, and you’re the first to sell it. Buyers begin flocking to you because you are offering them a terrific deal, and you start to make a lot of money. Schumpeter would be proud.
But now not only do additional buyers find out about the deal you’re offering, but other sellers learn of it as well. Your prospective rivals may not know exactly how much you’re pocketing, but they can probably deduce it because they can discover how much you’re paying for all the ingredients that go into X, including labor. Information is cheap and readily available—and more so all the time. Soon a rival comes along who offers buyers the same deal, and draws off some of your profits. And then another rival, and another, until your profits shrink to almost nothing.
You might try to protect your newly invented X with patents or copyrights. These legal protections for “intellectual property” are similar to those that prevent people from stealing your three-dimensional property. But intellectual-property protections are of only limited help in the emerging economy. Simply by producing X and gaining a positive reaction from buyers, you’ve already revealed to your rivals that there’s a market for X—and
that
particular information is often more valuable than any other. So, sooner than you’d like, one of them will figure out how to make or do X just as cheaply without infringing on your intellectual property. (Maybe he “reverse engineers” your X—takes it apart, and rejiggers it just enough to come up with another way to make it that circumvents your patent—or, if your X is a piece of software or a recipe or an artistic composition, he devises another way to express it that bypasses your copyright.) Perhaps he simply disregards your legal claim altogether and dares you to take him to court; he’s much richer than you, and can afford a lengthy court battle. And even if you can afford it too, there’s no guarantee you’ll win: The heist of an idea can never be proven with the same certitude as the heist of a car. Courts increasingly are clogged with contentious brawls over who invented what and when.
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(Calvin Klein alleges that Ralph Lauren’s “Romance” fragrance infringes on Klein’s best-selling “Eternity” cologne—but what, exactly, is an aroma, and is it possible to own one? A scent is also a mood, an image, a style. How to distill it from all that surrounds it, and turn it into property?)