The New Rules of The Economy

The rules of our economy have shifted.

Economics says value or output arise from four factors of production - Land, Labour, Capital and Enterprise.

As technology progresses, the mix of these four factors shifts wildly.

During the Agricultural Age, wealth was largely dependant on how much land you had. Very little skilled labour was required in the economy. Small amounts of capital could be put to use and a small number of? enterprising people could participate in small cottage industries. The dominant economic system was feudalism (the ability to defend your land) and wealth mostly stayed within a family linage. There was almost no economic mobility and wealth was massively unequal.

Technology breakthroughs such as steam, steal and the production line ushered in a new era - the Industrial Age.

Wealth was no longer about land, it was largely dependant on how much capital (money to buy machinery and materials for a factory) you could access followed by how much skilled labour you could access. Only a small number of enterprising people who could set up and run factories and they became very wealthy - the "Industrialists".

Capital gave access to the means of production, the means of production attracted labour. Skilled labour was in short supply so the schooling system was created to create more skilled labour. Capital created more and more innovations and more and more labour was required, this resulted in the emergent middle-class.

There was a great debate socially and economically around which factor of production was most important. Socialists tried to make the case that Labour was the most important factor of production and should attract the majority of the economic rewards. Capitalists argued that it was the money, machinery and materials that were most important and the profit motive was essential for progress.

Ultimately the dominant system was capitalism but several wars were fought over this and the debate has raged on for over 100 years.

During the height of the Industrial Age both capital and labour were pumping at full force - investors were backing businesses and those businesses were hiring skilled workers. Suddenly wealth was moving around much faster, people's economic lives could change and wealth became more equal for a time. From 1950 to 2000 the middle class had never been stronger - normal workwrs could afford homes, travel, education, cars, technology and luxuries at a level that had never been seen before in history.

Then along came a new technology - the Digital Revolution. The ability to connect people and information at light speed no matter where they are.

Digital technology is highly efficient and requires a small number of skilled people working with relatively small amounts of capital to produce something of value for a large number of people. A team of a dozen digital creators can build something that a hundred million people find valuable.

The digital world needs almost no land, very little labour and relatively little capital. The key to production in the digital environment is entrepreneurship. Due to the fast and disruptive nature of this technology, those who can spot opportunities, attract customers, organise teams and develop new innovations are the engine of the economy.

What we are seeing now is the breakdown of the old economic system in two BIG ways - the diminishing value of skilled labour and capital.

Lately, many people have been saying "capitalism is broken" and to a degree they are right. Capital was the most important factor in the Industrial Age because it was very (VERY) expensive to create and distribute something of value.

That isn't true anymore and so Capital has frozen - we have created a lot of it and it doesn't have anywhere to go. Capital once moved around rapidly from the hands of the wealthy and the banks into the hands of anyone who had a productive use for it. Now it has less of a use, the wealth have just stashed it in houses, shares and bonds and this has created a massive capital bubble. Even Warren Buffet doesn't know what to do with $180B of cash he's sitting on!

Many people have also noticed that "Education is broken". Education's function is the production of labour and most education systems are not able to reliably train people who can easily get a well-paying job.

The value of skilled labour is falling dramatically. It used to be that any university degree would get you a good job. You could study history or geography and end up on $80K a year in a marketing agency. Now many people are discovering that they can't even get jobs relating to the things they have studied. The digital economy needs low skilled labour to do stuff only humans physically can do but it doesn't need that many people to be decision makers, networkers, engineers, designers, skilled workers, mangers or executives.

We see the incomes of CEOs and entrepreneurs going higher and higher. If you are exceptionally good at decision making, relationship building, capital allocation or innovation, you can earn 20-2000x the incomes of normal workers but anything less than being exceptional in these fields isn't that much better than a computer system.

The pendulum has swung towards enterprise. Entrepreneurship is the big game in town. Spot opportunities, launch products, enrol talent, make sales, find a way to scale and exit. This is the skill set that is most rewarded.

Those who identify as workers are having a hard time, those who are embracing entrepreneurship are succeeding. The difference is "demand" versus "supply" - entrepreneurs figure out the demand for something whereas workers figure out how to supply it. An entrepreneur is looking for a market opportunity and a worker is fulfilling it.

In the coming years, the gap will widen and most people won't know why. We will see capital pile up in traditional assets and create endless bubbles. Anywhere that you can "park money" will continue to be massively over-valued. The value of labour will continue to fall and many millions of people will become jaded, restless and demand redistribution of wealth without an exchange of value. On the sidelines you will see the farmers and the entrepreneurs. Land is still essential to feel everyone and farmers are essentially entrepreneurs who leverage massive amounts of automation (including soil!). Digital entrepreneurs will be in a position to live outside of the collapsing system, they don't require much capital or labour, they can live and create from anywhere - this is the time to be part of The Entrepreneur Revolution.