Keynes Was Right
Looks like the right wing has gotten a little hot under the collar http://bit.ly/tatcG4 . Might be because their rhetoric does not match facts very well.
Happy New Year!
Thanks to all of you for reading, writing comments or even emailing and calling me over the last year to discuss the ideas advanced in this forum. I wish you safe, healthy and happy times in 2012!
Peace!
Denis
Substitution and Resilience
I culled two stories from today’s (Thursday) New York Times that illustrate some important points about energy, substitution and resilience. I think the word resilience will be prominent next year as the economy tries to recover further. Tired of waiting for full recovery we may very well see more people taking matters into their own hands—legally and non-violently—to make the difference. This will amount to substituting one form of activity for another in an effort to reduce costs and keep the wheels turning. That is essentially what resilience is all about.
Example one, “Signs Point to Economy’s Rise, but Experts See a False Dawn” . Ok, this may not be the most upbeat headline but it makes some good points. Economic activity in the fourth quarter may be trending up to four times what savvy analysts had predicted at an annual pace of 3.7 percent. That’s good. What’s not so good is that the boost may be temporary and a result of rebuilding inventories that have run down over several quarters. But that’s what recoveries are all about so I’m playing the optimist on this one.
The article falls short of making the connection between energy prices and economic growth but it is plain to see. The first half of 2011 had reasonably good economic numbers, which caused increase demand for energy. In May while on a trip to Chicago I saw gas prices pushing five bucks and the same was true in San Francisco.
High energy prices cooled the economy. As a result demand for energy fell back. Prices in a photo accompanying this article show regular gas at $3.16 per gallon. A few years ago that would have been nose bleed territory but today three bucks seems like a tropical vacation. We’ll take it!
Example two, “Video Chat Reshapes Domestic Rituals” describes how families are using video chat to stay close, even when they are across the country and can’t travel. Video chat is not just like being there, yet, but it fills a void. The article briefly mentions one person’s inability to hop on a plane for face time; clearly video chat is substituting.
Not only is video chat substituting for being there but also it is helping to create new ways of connecting and reasons for connecting which is all wonderful. It is also a great example of resilience. It shows that conservation through substitution need not be onerous; it need not feel like a sacrifice to use Skype rather than travel, especially when you can’t afford to travel anyhow.
I’d say that adoption of video chat is right where social media was about five years ago. It’s in the grass roots stage; it is personal for the most part though advanced corporations are discovering its value. And it is dependent on hardware technology rollout meaning PC’s with microphones and cameras. Generation Two of all this will mean a PC directly connected to your giant plasma TV with a built in mic and camera. I have a Mac Mini connected to my TV and it is fantastic. In addition to Skyping, I can watch silly cat videos any time I want on the big screen.
So here is my point. Energy supplies are tight and will remain so indefinitely. If you like the ups and downs of the economy that match the rise and fall of energy prices, stay tuned, as supply continues to tighten there will be more and the ups and downs will be more violent.
On the other hand, if you like the idea of less turbulence in the economy, you know what you can do. You can find substitutes for energy in your lives both personal and working. This kind of substitution on a macro scale makes a difference. It makes each of us a little more resilient to energy price fluxes and it makes the society as a whole a lot more so.
Peak Software?
It is an iron law of physics. A component of a closed system is limited in size to the size of the closed system. For instance everything on this planet is bounded by the size of the planet and nothing on this planet can grow forever. This gets us right into economics because the economy is a subset of the ecosystem.
Trace any economic good to its source and you will find an ecosystem natural resource whether it’s sand for making silicon wafers, energy for baking them or the brains of people who build and program them. More than this, there are also economic rules, like the Jevons Paradox, that correlate energy use to increasing economic activity.
In the last five or so years there has been increasing talk about limiting factors in economic growth, peak oil being the most obvious. There is only so much oil in the ground or, another way to state it, the earth is finite and so is the supply of crude. Without a limitless supply of cheap energy to fuel economic growth the economy would cease to grow, as it almost has.
This is the context for reviewing Oracle’s quarterly report, which was delivered yesterday. Although the company managed to make some money it badly underperformed compared with analyst projections. You can get the details here my point is not to review them but to analyze their meaning directionally.
I believe this miss combined with the lackluster performance of many traditional software companies in recent years represents a plateau forming for conventional software. The economy is barely growing and absent growth many corporations have much reduced need for software or inclination to buy products that have notoriously long lives that demand expensive maintenance and labor to support them. The software industry is a subset of the economy and if the economy is not growing software can’t grow for long.
To be blunt: the conventional software industry has peaked. It will not go away but it will go sideways for a while. The sideways motion will last as long as it takes customers to move the bulk of their processing to the cloud. Since most conventional software companies have already introduced software for the cloud, you can expect a big fight for cloud dominance among them that will last for several years. It will be a zero sum game as each company tries to retain its customer base and poach from the competition. But during that time it will appear that the industry is thriving.
At the end there will be a robust industry that has nevertheless shrunk in real dollar terms because a subscription model will generate less cash on a recurring basis than the old license model. Companies that will fare well in this situation are those that have already made a substantial investment in delivering cloud services and those that have aggressively sought out new niches, especially in front office business processes increasingly mediated by one form of socialized engagement or another.
None of this should be surprising. A quick look at the growth of GDP over the last sixty years reveals an upward trajectory
US GDP Growth
that resembles a classic bubble. This was made possible by cheap and readily available fossil fuel. Although growth appears to have resumed it is likely that a plateau is forming and that an asymptote is in sight.
To my mind the clear implication of all this is that the economic paradigm we have all lived in for virtually our entire lives is changing. The question of the moment is how do we adapt?
MIT Traced Twitter’s Rise Through Conventional Social Nets
Researchers at MIT have concluded from a research study that the spread of Twitter occurred through traditional social channels. That might not seem earth shaking because, well, how else would a new social technology spread? As the report notes, “MIT researchers who studied the growth of the newly hatched Twitter from 2006 to 2009 say the site’s growth in the United States actually relied primarily on media attention and traditional social networks based on geographic proximity and socioeconomic similarity. In other words, at least during those early years, birds of a feather flocked — and tweeted — together.
But the significance of the study and its results is better summarized by lead researcher Marta González, assistant professor of civil and environmental engineering and engineering systems at MIT, who is co-author of a paper on this subject appearing this month in the journal PLoS ONE. “The big question for people in industry is ‘How do we find the right person or hub to adopt our new app so that it will go viral?’ But we found that the lone tech-savvy person can’t do it; this also requires word of mouth. The social network needs geographical proximity. … In the U.S. anyway, space and similarity matter.”
While the diffusion of innovation has been studied exhaustively for durable goods, little research into how free things like a website go viral. “Nobody has ever really looked at the diffusion among innovators of a no-risk, free or low-cost product that’s only useful if other people join you. It’s a new paradigm in economics: what to do with all these new things that are free and easy to share,” says MIT graduate student Jameson Toole, a co-author of the paper.
So maybe we can finally get a definitive answer to whether the freemium model is a good idea?
