Safe is the New Risky — How to Prepare For the Impending Fourth Economy
Safe is the New Risky. Risky is the New Safe
Our collective understanding of a “safe career choice” is fundamentally flawed plain wrong.
Exponential technologies, global competition, and the rise of entrepreneurship are all contributing to a radically new world of work that we are just starting to see the contours of.
- “Safe” careers such as accounting are about to be eradicated by artificial intelligence. AI and robotics will do to white collar workers what industrial machines did to blue collar workers.
- You cannot out-work the competition anymore. You are competing for jobs with tens of millions of third world graduates per year, who speak better English than you, have better schooling than you, eagerly work 15 hours per day, and charge $4 per hour.
- “Risky” entrepreneurial ventures teaches you skills that the new economy desperately needs. This is valuable even if your ventures fail miserably, and even if you’re employed at a big corporation.
We are entering a distinctly new economic era as we speak. Realising that the game has changed sooner rather than later, is the key to getting a head start in a new world of work which is distinctly different from the working world our parents grew up in.
We, the millennials and those even younger, are joining a completely new board game. With a new game comes new rules, and different strategies to win. This is frightening to most people, but exciting to those who are aware, curious and well prepared.
This post explains what the Fourth Economy is, why it is coming, and what to do if you want to surf this new economic wave instead of being drowned by it.
Fasten your seatbelts and join the ride into the Fourth Economy.
The Fourth Economy: A Book and a New Reality
A gentleman named Ron Davison has written a book that I’ve been pondering over for months — “The Fourth Economy: Inventing Western Civilization”. It’s a 700+ page behemoth of a history book, but I finished the whole book in three sittings. That says a lot about Ron’s fascinating perspectives, ideas and excellent delivery.
Over the past months, I have told practically everyone about this book and its core ideas. But it is not easy to pack 700 pages and 1000 years of history into a brief encounter with someone. Therefore, I’m writing this post as a brief summary of the book’s core concepts, and their implications for all of us going forwards.
This Post’s Content
- Making toys for fun and profit: Comparing the global economic system to a toy factory, to explain leverage and systemic limits to progress.
- One, two, three, NOW: A brief overview of the last 1000 years of Western history, divided into four distinct economic periods — the first, second, third, and upcoming fourth economy.
- Excess flour in urgent need of bakers: Explaining why we need more entrepreneurs with our without baking skills ASAP. Summarising the implications of the economic transition period we are experiencing now. Showing why we are facing an incredible opportunity to change the nature of work, and become financially free in the process. In other words, what you can do to benefit from the fourth economy, rather than get destroyed by it.
The Last 1000 Years in Four Distinct Economic Phases
Roughly speaking, the Western world has been through three economic phases over the last millennium, with a new, fourth economy about to enter the picture;
- The Pre-Agricultural Economy (wasn’t really a functioning economy at all),
- The Agricultural (first) Economy,
- The Industrial (second) Economy,
- The Knowledge (third) Economy — we’re just about to leave this one,
- The Entrepreneurial (fourth) Economy — we’re currently entering this one.
This graphic illustrates these economic phases, one after the other.
The graphic shows that each economic period is defined by certain characteristics:
- Each period has a distinct scarce resource which acts as a limit to progress and growth.
- Each period has a distinct power entity, which cultivates and controls the scarce resource.
- Each period has a dominant player who controls the power entity. This type of person makes the ultimate decisions, and thus has the power to exert massive influence on the economic system.
These are worth briefly expanding on, starting with the scarce resources which act as limits to progress and economic growth.
Limits and Leverage
In each economic phase, the scarce resource has been an effective limit to progress. This limit must be overcome in order to progress to the next level, the next economic phase.
Simply put, the economic system had to produce more of the scarce resource in order to create more wealth and economic growth.
In economic terms these resources are known as the four factors of production.
The Four Factors of Production
Tweaking the Right Lever
In a complex system such as global economics, many levers can be tweaked in order to bring about desired outcomes. But not all these levers will produce results. In fact, tweaking on a critical few levers will produce massive results, while tampering with others will yield no impact at all.
This brings us to leverage, and to Eliyahu Goldratt’s framework The Theory of Constraints for understanding growth in complex systems.
Toy Production, The Global Economy, and Other Complex Systems
“Give me a lever long enough, and I shall move the world.” –Archimedes
The global economic system is very complicated. So let’s instead consider something much simpler — a toy factory.
This is the essence of the toy factory: some resources go in to the factory, some activities happen within the factory, and some toys come out the other side.
Inside the factory, the raw materials must go through four different machines in order to become toys. These machines have one job each:
- Cutting the wood,
- Drilling holes,
- Assembling the pieces, and
- Painting the final toy.
The conveyor belt pulls the materials through the machines, and the final painting machine pours out toys when they’re finished.
Each machine has a maximum toy producing capacity per hour, and it looks like this:
As we see, the cutting machine is the slowest step in the process, with a maximum hourly output of only one toy. Because of this, the entire factory can only produce one toy each hour, regardless of the extra capacity in the other machines. Adding more raw materials to the conveyor belt will not produce more toys — the cutting machine is the limit to progress.
“The collective speed is controlled by the slowest mover of the group.” –Proverb From Somewhere
Imagine being the toy factory owner for a moment. You realise you must improve the cutting machine in order to improve output. So you get a better machine with double capacity. The cutting machine can now cut materials for two toys per hour. Your total hourly output of finished toys suddenly doubles, from one to two toys per hour.
The new situation is illustrated below.
Hooked on this success, you come to believe that getting better cutting machines is the way to increase output in your factory. So you spend all your savings on a state of the art cutting machine which can cut enough material for SIX (!) toys per hour. You are excited to install it and see your toy business take off.
But nothing happens to your output after installing the super-duper cutting machine. You can still only get two finished toys per hour out of the factory. You are disappointed and confused — “it worked so well last time I did this..!”.
New situation with super duper cutter machine installed.
What happened? The cutting machine is no longer the limit to progress. The limit has shifted to the next step on the conveyor belt, the drilling machine (see below).
Investing in the previous limit no longer improves the overall outcome of the system.
“Identify a system’s limiting factor (constraint) that stands in the way of progress. Improve that constraint until it is no longer the limiting factor, then focus on improving the new constraint, and so on.” –Eli Goldratt’s Theory of Constraints
Toys, Prosperity and a Need For More Entrepreneurs
The toy factory is analogous to the global economic system, and the economic situation of the Western world in particular. The economic system, too, has limits to progress, prosperity, and economic growth.
Those limits are land, capital, knowledge workers (labour), and entrepreneurship.
And here’s the kicker: we’re in the middle of another epic economic shift. The limit to progress is shifting from the quantity and quality of knowledge workers available, to the quantity and quality of entrepreneurship available.
Illustrating the Theory of Constraints at a global economic level looks like this:
How did we get here, you ask? Let’s do a brief history lesson of past economic periods and the shifts between them.
One, Two, Three Economies — The Warm-Up to the Fourth Economy
The First/Agricultural Economy (1300–1700): Making Land Productive
During the first economy, the scarcity of land and natural resources was the limit to progress and economic growth. Land was not used effectively, so production of agricultural and artisanal goods was very low.
How did the West overcome the limit to progress?
- People discovered more land and natural resources in the world (“The New World”), and started trading resources across geographical areas which were previously unavailable.
- The Renaissance happened. This changed people’s attitudes and beliefs about work and reward. People went from believing God’s almighty power predetermined their lives’ outcomes, to seeking a better future for themselves through hard work instead.
- Private property laws were invented in England, which gave people incentives to invest in their land. Before these laws, nobody could claim their property as their own, so nobody had any incentive to work hard at improving their living conditions nor agricultural lands.
When people had figured out how to make land productive, their agricultural needs and wants were fulfilled. Getting even more carrots out of your land lot was no longer making your life significantly better, because you already had enough carrots to feed your family. The limit to progress was shifting towards capital.
The Second Economy (1700–1900): Commoditising Capital
In the second economy, the scarcity of capital was the limit to economic progress. Capital, meaning money and other assets used for economic activity (machines, technology), was underdeveloped and largely unavailable.
This gradually changed during the ~200 years the second economy lasted, as the speed of technological innovations accelerated, and global financial markets were established.
How did the West overcome the limit to progress?
- Patent law was invented, to give people an economic incentive to invent new technology. Where private property law had given people an incentive to invest in land in the first economy, patent law gave an incentive to invest in capital during the second economy.
“The idea of private property was one of the keys to the progress of the first economy. The idea that ideas could also become property (through patent laws) was one of the keys to the second economy.”
–Ron Davison, author of The Fourth Economy
- Loads of new machines (a form of capital) were invented and used to massively improve production effectiveness.
- Railroads were invented and laid out wide and far. This connected previously unconnected areas, and facilitated a massive increase in trade across geographical distance.
- Insurance was invented, which lowered the risk of investing in risky, yet often capital producing ventures (specifically sailing ships venturing out to new lands to trade).
- International financial markets were created by bankers such as Nathan Rotshchild and his five sons spread across Europe. These bankers profited by lending out capital to kings and nation states who needed capital, not more land, to keep wars going.
By the end of the second economy, capital is no longer the scarce resource in the economic system, as we had figured out how to make and multiply capital. This is most visible in the forms of new technology, fancy machines, and effective international capital markets.
Sidenote: It is worth noting that the commoditisation of capital continued on throughout the third economy as well, up until today. Today (I’m writing this in May, 2017), capital has become so wildly abundant that the interest rates, the price of money, is effectively zero. We always have, and always will, desire more and more money, but in fact, supply of capital has now outpaced demand for it. Borrowing money is free, for the first time in history.
200-year long trend: The interest rates (the price of money) falls as capital becomes more and more abundant. Source: CNBC.
The Third Economy (1900–2000): Knowledge Workers Everywhere
If you’re a millennial like me, our parents (Baby Boomers and Gen X) grew up in the third economy, and we grew up with their third economy based worldview.
This is the economy in which we learned what is “normal”.
This is also where it gets really interesting to see why we think what we think, and the inherent fallacies we’re grappling with as we are about to move into the fourth economy. But more on that later..
Entering the third economy, we had overcome both land and capital as limits to progress. At this point, we were producing goods and services faster than they were being consumed.
Plot Twist: Too Much Stuff, Too Little Shopping
This makes for an interesting plot twist in traditional economic theory. Consider “The Fundamental Economic Problem” from the first lesson of every single ECON101 class ever held:
The Fundamental Economic Problem:
Given insufficient resources to satiate all our needs and wants; what, how and for whom should we produce goods and services?
Up until the third economy, the fundamental economic problem was a resource allocation problem focused on covering the needs mentioned above. It was truly a problem of scarcity — how do we produce enough to satiate our collective needs?
Entering the third economy, the fundamental economic problem did a 180 degree turn, changing focus from satiating needs to satiating infinite wants. It became more of an abundance problem than a scarcity problem.
Now, the Western world’s economic powerhouses were asking unprecedented questions such as..
- “How do we get people to consume all this stuff we’re producing?”,
- “How do we get people to want this?” Or, even better, the holy grail of marketing:
- “How do we make people feel an imaginary NEED for this product/service?”
To solve this new “problem” of insufficient consumption, we didn’t need more land, nor more capital. We needed to stimulate demand for products and services.
We had to invent needs and desires which weren’t inherently present in us. And to do so, we needed clever knowledge workers. Lots and lots of them.
Overcoming the Limit: Knowledge Workers to the Rescue, and the Creation of Consumerism
Knowledge workers can fuel the collective desire to consume more and more and more. But in order to do so, they need training and knowledge about psychology, sales, economics, law, you name it.
The white collar knowledge worker was the Superman we needed, in order to get people to essentially buy more crap. So we set out to produce millions of him. Then, luckily, we could produce millions of her as well, when women entered the workforce en masse after World War II. Additional bonus effect? Two employed parents doubled a family’s available cash pile. Great news for anyone selling anything.
The College+Corporation Concoction
Two institutions took upon themselves to create and cultivate a wave of much needed knowledge workers — universities and corporations. Universities educated white-collar knowledge workers. That was a good start, but not knowledge workers just sitting there weren’t very profitable.
The corporations came along and organised these workers into profit-producing entities, decorated with business cards, LinkedInflated titles, dark suits and corner office aspirations.
Many inventions came from this boom in knowledge workers on a quest to boost aggregate consumption:
- Marketing, advertising and advanced sales tactics were invented and improved during the third economy,
- Consumer psychology became a field of expertise. Its essence in one sentence? “How do we make people buy more than they need?”,
- Faster and faster fashion, from two style seasons a year (winter/summer), to 52 micro-seasons a year, were invented to make you feel untrendy a mere week after your last shopping spree.
Training millions of knowledge workers worked well, in terms of overcoming limits to progress. Profits and wealth soared in Western world as consumption rose to unprecedented levels. It didn’t turn out so well for the natural environment of our planet, but that’s a different story and an inconvenient truth for another time.
Unprecedented Growth, The American Dream, and the Highway to Happiness
Remember that our parents grew up in the third economy, and we grew up with their third economy based worldview. This is the economy in which we learned what is “normal”.
This “normal” was the highway to happiness we’ve all been taught since birth.
It’s rather simple. Just follow three steps, and you’ll be successful, happy and all the rest of it.
We all know this model, and the reason it is so well established is simple: IT WORKED! The reason it worked, was because it used a good lever, targeting the limit to progress of that economic phase. When the limit to progress was the amount of knowledge workers available, becoming a much needed knowledge worker was great!
For a LONG TIME (~100 years), this model delivered on its promises. If you followed the path, it did indeed lead you to a stable, secure job and income.
With that steady paycheck, you could afford the stuff they told you would make you happy. You know, the cars, vacations, and the house with a white picket fence for you, your perfect spouse and your 2.1 pristine children.
White picket fence, aka The meaning of life.
This was all fine and fun and jolly while it lasted. But get this: while this success recipe worked for our parents and grandparents, it won’t necessarily work for us. The old system is broken, because the limit to progress has changed.
The Number of Advanced Degrees Is Too Damn High
“Can one desire too much of a good thing?” –Shakespeare
White collar knowledge work has been the path to wealth and security in the West for about one hundred years. During that time, more and more people wanted a piece of the pie. So increasing numbers of people followed the recipe — they pilgrimaged to college, got served degrees and bodies of knowledge at the altar of Ivy, and offered to sacrifice their time for money in the holy land of big corporations.
Nothing wrong with that. Until now.
Today, a lack of knowledge workers are no longer the limit to progress. The limit to progress has shifted. Yet we keep going to college at unprecedented levels, racking up debt in the hopes of attaining the American Dream we’ve been promised.
“In 1900, only 10% of 14 to 17 year olds were enrolled in formal education.
By 2000, fewer than 10% were not.
The number of knowledge workers continues to rise: today, there are more scientists alive on the earth than have lived in all of history up until now.”
–Ron Davison, author of The Fourth Economy
New Yorker Cover, May 2016
I’m sure you know plenty of people in their mid 20s and 30s who have secured the holy trinity of underemployment: exceptional degrees, immaculate CVs, and lousy jobs. My favourite example? The barrister barista, who can argue court cases eloquently, can solve complex judicial twists, and, may I add, makes a killer double latte.
The coffee making lawyer, the MBA waitress and the engineering grad at your local supermarket may sound like extreme examples, but they are in fact quite normal.
If you don’t know anybody who’s overeducated and underemployed, you may not see this reality right away. That doesn’t mean it’s not real. It just means you’re not getting the memo. Here is some bedside reading to get you up to speed:
- The Atlantic: America May Have Too Many College Graduates,
- Newsweek: Millennial College Graduates — Young, Educated, Jobless,
- The New York Times: Too Many Law Students, Too Few Legal Jobs.
In brief, we’re facing a systemic problem: the system we’ve grown up with is broken. Instead of seeing the writing on the wall and starting to seek out new solutions, we cling to and over-invest in the limit of the old, familiar system.
China, Silicon Valley and Other Fine Places to Blame
We can’t take credit (nor blame) for getting ourselves into this situation purely by our own accord, as several factors got us to this point.
I could go on for hours about this, but just consider the following two contributors to the diminishing value of formal credentials and the traditional knowledge worker:
- Globalisation: our grandparents competed with their regional classmates for jobs. Our parents competed with people on a bigger map, perhaps state- or nation-wide.
We compete GLOBALLY thanks to better communication technologies and improved English skills all over the world.
Do you think you can out-work, out-degree or out-specialise the millions of Chinese students who diligently study 12 hours a day, and work for $3/hour? Really?
- Massive technological advances: what industrial machinery did to the blue collar worker ~50 years ago, artificial intelligence and machine learning will do to the white collar worker very soon.
If you’re an accounting major who believe you’ve chosen a safe, future-proof career path, I believe you’re naïve and uninformed. Sorry about that, but it’s the truth.
Paradoxical Investment Advice: Over-Invest in Depreciating Assets
The less valuable formal degrees and credentials become, the more time and money we pour into getting MORE degrees and letters behind our names, so not to be left behind everybody else.
The notion that degrees = success = happiness is so prevalent that I’m sure you’ve heard some variation of these popular maxims repeated ad infinitum:
“The master’s is the new bachelor’s degree, ya know..!” –Well-Meaning Dad
“Better get a PhD to survive in this economy..” –Auntie Anxious
I can certainly understand people’s desire to “keep up with the Joneses” in educational terms. Call it an educational FOMO if you like. That being said, if you’re a student, beware of spending hundreds of thousands of dollars you don’t have in order to get a degree you don’t need, hoping for a job you don’t want, to ultimately please people you don’t like. Once you’re in that hole, it is hard to stop digging.
If expensive, advanced degrees don’t necessarily lead to the end result we’ve been promised, why do we keep stacking credentials behind our names? Because it is the only acceptable cultural narrative at the moment. It’s the only “right” choice.
But the collective results of this unquestioned pursuit of degrees aren’t just sunshine and rainbows. The fetishisation of credentials results in overeducated and underemployed lawyer barista types, crippling college debt all across the board, and systemic financial stress for the upcoming generations.
It is time to do something different.
“The definition of insanity is doing the same thing over and over, expecting a different outcome.”
Entering The Fourth Economy: A New Limit to Progress, and the Rise of the Entrepreneur
At this very point in time, we are no longer limited by the amount of land, capital or knowledge workers available. The limit to progress has shifted to the final economic factor of production, entrepreneurship.
“Entrepreneurship will be to the fourth economy what technological invention was to the third economy.”
–Ron Davison, author of The Fourth Economy
Imagine a small bakery for a minute. In this bakery, there are three ingredients available; water, flour, and sugar. The baker mixes these ingredients together in interesting ways to make good pastries come out the other end.
Try stuff. Make things. Be like this guy.
Now, let’s look at the economy of a country with the same lens. Land, capital and labour are merely the raw ingredients available to make things with.
The entrepreneurs in this economy are the proverbial bakers, who mix the ingredients together in interesting ways to make good economic outcomes pop out the other end.
Without a baker in the bakery to experiment, fail, and try again until a great cake is made, nothing happens in the bakery. It may as well shut down.
Similarly, without entrepreneurs who take initiative and mix up land, capital and labour in interesting concoctions, nothing happens in the economy.
The more bakers who dare to experiment and look for new ways to create tasty value, the more good pastries will inevitably be invented.
The more entrepreneurs who dare to experiment and look for new ways to create economic value, the more good ideas, products and services will inevitably be invented.
By now, we have enough water, flour and sugar in our Western world bakery — that means enough land, capital and labour in the economy, if you’ve fallen off the analogy wagon. But we need more entrepreneurs in order to make more dough (pun most certainly intended).
We Must All Become More Entrepreneurial (Yes, You Too)
In pursuit of prosperity and economic growth, the Western world has worked towards overcoming the limit to progress present in each economic phase. Looking back, this has worked well, but during the phase shifts from one economy to the next, there was always chaos.
The transition towards the fourth economy is happening as we speak, and the clever folks among us are not only aware of this shift, but planning for it.
Every one of us must become more entrepreneurial if we are to thrive in the world of the fourth economy.
That does not mean we all need to become entrepreneurs per se, but we do need to acquire certain skills associated with entrepreneurs and innovators. Such skills include experimentation, taking smart risks, learning from market feedback, and experimenting more based on the learnings of previous testing cycles. I can also include the ability and courage to think and act in creative, non-conventional (aka innovative) ways to this list.
So you’re an employee at a big corporation, you don’t need any of this, right? Wrong!
You too must learn to think and act in an entrepreneurial manner to thrive within the organisation. Intrapreneurship is a term I like to use for entrepreneurial activity within companies and corporations.
Cultivating intrapreneurs within organisations is essential, because any company that isn’t innovating and disrupting itself, will inevitably be disrupted by someone else, or simply lose relevancy and slowly fade away. Don’t even get me started on Kodak.
Big companies die younger than ever.
Future-Proofing Yourself: How to Think and Act Entrepreneurially
If you’ve followed along this far, let’s get to the juicy, tactical bits. We’re entering a new economic phase, with a new rulebook, but how exactly should we play the game to win?
I strongly believe that entrepreneurship is a learnable skill. As with all skills, the way to become good at it, is to practise. Since practise is a constant cycle of failure, iteration and trying again, the best way to learn entrepreneurship is to go out and try it.
Luckily, we live in the best time IN HISTORY for entrepreneurs. The costs and barriers to entrepreneurship have never been lower, yet the rewards and upside has never ever been higher. Consider this:
- 10 years ago, calling someone internationally cost a fortune. Now? Skype for free with just about anyone, anywhere.
- 20 years ago, getting paid online was impossible. 15 years ago, it was expensive and complicated. Now, it’s practically free, and you set it up in 5 minutes via Stripe or Paypal.
- 20 years ago, your potential customer reach was geographically limited. Now, you can sell anything to anyone (at least to the billions of people connected to the internet).
- 30 years ago, reaching customers with your marketing messages required massive ad budgets. Now, you can reach specific niche groups of people via Facebook advertising for a few bucks.
- Pre-internet, getting information about startups and entrepreneurial best practises was a pain. Enter Google and the web. Now, the information problem is about finding the good stuff among the abundance of information, not about finding information in the first place.
It has never been easier, safer nor cheaper to dip your toes into entrepreneurship. You can literally start selling things on Shopify within half an hour of getting an idea, for a few bucks a month.
Let me repeat that more bluntly: Trying out entrepreneurship HAS NEVER EVER BEEN EASIER THAN NOW.
Let me wrap it all up with a few bulletpoint suggestions for what you might do right now to start thinking and acting more entrepreneurially:
- Start an e-commerce store (which is fancy speak for sell random stuff online).
- Learn something cool by yourself, for example digital marketing, graphic design, or copywriting. Then get paid for your new skill as a freelancer.
- Read a few books on startups and entrepreneurial best practises.
- Join an entrepreneurship course, if such exist in your area (if you’re a student in Norway, join Early Stage!).
- Listen to this podcast to learn what a Side Hustle is, why you need one, and how to go about creating a small venture on the side.
The goal of policy — for schools, corporations, and governments — now needs to be the popularization of entrepreneurship.
The popularization of knowledge work transformed the 20th century and the popularization of entrepreneurship will transform this one.
–Ron Davison, author of The Fourth Economy
Right now, entrepreneurs are like knowledge workers were in the late 1800s. They are largely self-made. What if entrepreneurs didn’t have to be self-made any more than engineers or doctors had to be self-taught? Imagine redesigning schools and businesses to create and enable entrepreneurship by a wider swath of employees.
–Ron Davison, author of The Fourth Economy
A note on college (to hedge against overt hypocrisy, since I’m about to re-enroll as a student as we speak): I’m not anti-college, I’m pro choice. I plan to finish up a master’s degree in a few months myself. I’ll lay out my reasoning and ROI calculations on this matter in a future post.
- Requiem for the American Dream,
- Inside Job,
- Choose Yourself,
- The fourth Economy,
- the end of jobs,
- Inequality for all.
Originally published at Jacob Mørch.