The industrial age made work in the physical sense obsolete. That is, before the advent of mechanical engines, the major source of human employment was in physical labor: the exertion of force on matter. In those days there was always work for a man, because people needed holes dug, and rocks moved around, and rows planted. Today we have backhoes, dump trucks, and planting machines. Over time, the replacement of physical labor moved from bulk transfer tasks to more refined ones, like sewing, metal crafting, and watch making. The net effect of this ongoing process is that the ratio of dumb work to smart work is falling. In the past, a few innovators could create enough work for hundreds of thousands of laborers. Today, the vision of an entrepreneur is likely to be realized by a small team of experts directing a work force of computers and robots. If this trend continues, and it will, then our economy is going to need a lot more entrepreneurs.
In the economic sense, an entrepreneur is someone who discovers resources that are underutilized and puts them to a use that society values more highly. Economic theory says that the cost of inputs—workers, equipment, facilities, and raw materials—will be governed by the revenue that can be generated by selling the outputs that they are capable of producing. Revenue is the product of the quantity of the output and the price that it fetches in the market. If I can figure out how to use the same inputs someone else is using, but produce more output or produce a product with a higher sale price, then I can, in a sense, commandeer their inputs and put them to work on my alternative, higher value, project. That is, with my higher revenue per unit of input, I can afford to offer the workers a higher wage, enticing them to come to work for me. I can offer suppliers a higher price for their products; and I can make higher bids when purchasing equipment and facilities.
In this sense entrepreneurship is the master resource of the market economy. It perceives people's wants and recombines society's limited resources in a way that better satisfies those wants. The entrepreneur is rewarded by the opportunity to capture a portion of the margin of improvement as excess profit. Initially the innovator only needs to bid marginally higher than existing firms and can pocket the rest of the value added. Eventually competitors will see what the entrepreneur has done and take advantage of whatever innovations are bearing the excess profits and they too will be able to place higher bids for inputs. Competition will drive input prices up and profit margins down until there's no more advantage in moving into this particular business than into any other. But, in the process, the allocation of resources is being shaped to best produce the things people most desire. And, once the excess profits evaporate, all the benefits of the innovation go to the workers who now command better wages and to the consumers who get better products at lower prices.
This role is so important that most economics textbooks put entrepreneurship into a category of it's own when enumerating the resources of production. The most basic list would also include land (which includes raw materials), labor, and capital (equipment and facilities). Even though the entrepreneurial role absorbs vastly fewer man hours than labor, it gets equal billing in the list. A successful enterprise requires judiciously chosen quantities of each of these four resources. For any given output there is probably an optimal recipe: so and so much labor, so and so much capital, etc. What I want to argue here is that the recipe is changing. Modern cookbooks are calling for a much higher ratio of entrepreneurship to labor.
A recent info-graphic in the Economist really crystallized this idea for me. The gist that I took from it was that three traditional companies, Boeing, Toyota, and McDonalds, employ a combined 2.2 million people, while four new economy companies, Apple, Google, Amazon, and Facebook, only employ about 140 thousand. The market capitalization (perceived present value of future earnings) for the two groups are respectively $290 billion and $790 billion.
One way of thinking about what these numbers mean is that the new style companies are, on average, creating $5.6 million of wealth per employee, while the old style companies are producing $132 thousand. Lest you come away with the impression that employees are vastly underpaid, note again that those numbers represent the net present value of all of the future profits that these companies are expected to earn, not, say, earnings this year. The point is that the difference is huge. A billion dollar idea for an old school company would represent about 7600 new jobs. A billion dollar idea for a new school company would only create 178 new jobs. If profit generating ideas represent entrepreneurship and employees represent labor, then the ratio of labor to entrepreneurship is 43 times higher in old school companies than in new school ones. If new school companies are the future, then we're going to need a lot more ideas.
I should pause to consider an alternative conclusion. One might look at the same data and say, “wow, we could sure use a lot more old school companies”. Let me explain why I think this is the wrong angle to take.
One might note that what I'm calling the old economy appears to consist of manufacturing and services, while the new economy peddles mostly information. One might follow that observation up by noting that manufacturing and services aren't likely to go anywhere. We'll always need homes and electronics and hamburgers and haircuts. True. But the old school companies are already doing their darnedest to become new school companies. The number of employees per unit of output has been steadily declining for decades. Indeed, that is precisely what the industrial revolution was all about. The rising standard of living that the developed world has experienced over the past century or two is really just the result of society producing more and more output per worker. According to the Bureau of Labor Statistics, the average manufacturing worker today produces about four times as much as their counterpart in 1950.
What I'm saying is that, though the old economy still employs more workers per unit of output than the new economy, it is making do with fewer and fewer every year. By all accounts this trend appears to be accelerating. The manufacturing sector's share of GDP is falling every year. And this trend can't just be explained away as the result of outsourcing and the hollowing out of the American manufacturing sector. It's a worldwide phenomenon. According to the U.N., manufacturing accounts for a 10% smaller share of world output today than it did 40 years ago. We are consuming significantly more manufactured goods per person, but automation is making those goods cheaper and cheaper, such that they require a smaller and smaller share of our budgets to purchase.
The same thing happened in agriculture a hundred years ago. In the nineteenth century the majority of Americans were agricultural workers. The industrial revolution put farmers on tractors, making the average agricultural worker vastly more efficient. At the same time that demand for farm workers was falling, the demand for industrial workers was rising, and the resulting wage pressure (falling wages for farm labor and rising wages for industrial labor) led people into factory jobs and cities. Today our population is mostly urbanized and fewer than two percent of the population make the majority of their income from agriculture. We still need to eat, but very few people are employed growing food.
While a few people might lament those good old days before the industrial revolution, faced with the realities, few of us would really want to go back. Certainly a world that requires ditch diggers and row hoers offers an ample supply of work. But when people talk about the desirability of work they're mostly speaking about the income that that work represents. And, while ditch digging and row hoeing are great ways to put in a lot of labor, they're terrible ways to earn income. A backhoe operator or a farmer riding a tractor can do the work of a hundred of their manually working counterparts. Since workers are compensated based on the value of their output, these modern capital enhanced laborers earn much more than their predecessors did.
We of course know that the replacement of one hundred ditch diggers with one backhoe operator does not mean ninety-nine permanently unemployed people. The people who might have been ditch diggers have long since moved into other professions and are now much better paid. Resistance to the industrial revolution for fear of the implications for unskilled labor has long since been proven ill considered. The vast majority of the population has migrated away from unskilled labor and is the better for it. Indeed, present nostalgia for the days of the economic dominance of manufacturing is actually a yearning for the state of affairs that the original Luddites were so afraid of. And I'm saying that that nostalgia is itself a new form of Luddism.
Yes, the agricultural sector has shrunk to near insignificance. But eighty years ago the average American spent about a quarter of their budget on food, while today we spend around a tenth. Concerns about obesity aside, who can argue that consumers eating more and better food while spending a much smaller portion of their budget on it is a bad thing? Countries where the proportion of the workforce employed in agriculture is still in the double digits are universally undesirable places to live. I would suggest that in fifty years the same will probably be said about manufacturing. Adjusted for inflation, the average American today earns about eight times as much as the average American a century ago while working fewer hours. Such income growth is the product of massive productivity increases which can only come about when the way that people work is free to change over the years. I believe that the coming entrepreneurial revolution will dwarf the industrial revolution in it's ultimate impact on society. We should embrace it.
We've already seen that new economy workers produce much more wealth than old economy workers. This happens to explain another recent trend: growing income inequality. The fact that workers in the new economy are vastly more productive than those in the old economy means that they are also much better paid. The difference between compensation in the new economy and that in the old creates precisely the sort of wage pressure that moved people from farms to cities at the beginning of the industrial revolution. The present pressure is incentivizing a shift from routine forms of skilled labor to creative, intellectual, entrepreneurial endeavors. Rising income inequality is a sign of a disequilibrium that will gradually be arbitraged away as people move into the new economy. We can see the exact same thing happening in China as they undergo their overdue industrial revolution. The industrial workers in the cities are so much more productive than the farmers in the countryside that income inequality has spiked dramatically.
Another sign of the times is the recent spate of “jobless recoveries”. The last few economic downturns have eliminated many jobs and the following recoveries have largely failed to replace them. New growth is consistently coming from increasing the productivity of existing workers rather than from bringing in new workers. Ideas are being substituted for labor at a faster and faster rate, but our economy has not responded with the necessary acceleration in the production and implementation of new ideas necessary to exploit the supply of underutilized workers. The structure of our businesses, capital markets, and educational institutions has locked in an ongoing shortage of entrepreneurship.
Again, we must avoid the conclusion that these changes are bad. New economy workers are digging with backhoes, while old economy workers are still using shovels. We should not seek somehow to increase the wage share of old economy jobs in order to reduce the disparity. These changes are precisely what will drive the next century of economic growth. What we do need to do is facilitate the migration of workers from the old economy to the new. Attempts have been made at doing this, but the steady decline in workforce participation seems to indicate that these attempts are coming up short. The industrial revolution ultimately transformed the structure of society and it's institutions. The entrepreneurial revolution will require a similarly radical transformation.
Perhaps the biggest change that the entrepreneurial revolution will require is rethinking the nature of work. One of the key characteristics of entrepreneurship is that it is always creative. Any work that devolves into a task that you can show someone how to do is labor, not entrepreneurship. Entrepreneurship is inherently unique and original. Entrepreneurship is coming up with novel ideas and implementing them. Our traditional view of work is non-entrepreneurial: someone else has come up with an idea, figured out how to implement it, and is now hiring someone to do the grunt work. The very essence of the entrepreneurial revolution is that, in the near future, grunt work will be entirely the domain of machines. The only way to do grunt work in the future will be to be cheaper than a machine. Given that machines are becoming cheaper and cheaper, being a grunt will mean accepting lower and lower wages.
In this sense we could view outsourcing as an indication that, in many lines of work, the only people who are willing to work for less than machines are the very poor. The only place where you can still find people that poor is in the developing world. Another way of looking at this is that, in the future, the only way to make a good wage will be to be a manager. Though most managers will be managing teams of machines rather than humans. The role of humans in the coming century will be to use their minds to direct action rather than to perform actions themselves.
Those who do manage humans will have to think very differently than they did in the past. In the past a company was like an army, with far more grunts than decision makers. If the new economy is an economy where expert decision making is the ultimate commodity and all workers are creative information generators, then managers need to be coordinators rather than commanders. The traditional low level manager gives a team of grunts clear instructions. Since the new low level manager will be managing entrepreneurs rather than grunts, her primary purpose will be to facilitate the intellectual development and maximize the creative freedom of her team. Engineers and programmers, professionals who have long operated in the province of creativity rather than routine, have frequently argued that this is precisely the approach that defines successful enterprises in their fields. The Dilbertesque MBA middle manager who attempts to exercise low level control over tasks that they don't really understand is a universally despised figure among such creative workers.
All of this will require a revolution in education. Our current educational system was designed to accommodate the needs of the industrial revolution. It teaches people how perform tasks rather than design them. It teaches people how to be job seekers rather than value creators. The entrepreneurial age will require all workers to discover needs and create opportunities rather than depend on others to create opportunities for them. The present educational model asks students what existing niche they want to fill. The educational system we need will help students figure out how to find new niches and take advantage of unexploited opportunities. Educational institutions have ineffectually attempted to adapt to the changing economy by teaching people to fill a different set of niches. Students need to learn how to think for themselves rather than be prepared to follow a new, slightly altered, set of marching orders. I think that profound structural changes will have to occur before these institutions will be able to effectually serve their new purpose.
To be clear, I'm not saying that in the future everybody will have to start their own business to survive. I'm speaking of entrepreneurship in a much broader sense. Actually, starting a business per se doesn't necessarily require entrepreneurship in the economic sense. Establishing a routine business like a real estate agency or fast food franchise may be entirely cookie cutter, and require no innovation or recognition of novel opportunities. These enterprises require management, which is usually a form of labor, but they do not require entrepreneurship. Similarly, it is entirely possible for an employee to do entrepreneurial work. Economically speaking, entrepreneurship is adding value by solving novel problems. What I'm saying is that, in the future, regardless of whether you start a business or go to work for someone else, the nature of work will be much more about creatively solving new problems than about implementing the same solution over and over.
The new economy will require a lot more from the typical individual. Some would argue that it asks too much. I disagree. I think that everyone is capable of solving novel problems and adding unique value to society. People rise to the expectations placed upon them. The agricultural age and the industrial age required lots of human cogs to perform routine tasks. People only developed their capacities as far as was necessary. Einstein said of the job training model of education that the graduate “with his specialized knowledge more closely resembles a well-trained dog than a harmoniously developed person”. From a humanistic perspective, it's a good thing that the entrepreneurial age will ask more of us.
I have no doubt that the entrepreneurial revolution will be as disruptive and turbulent as the industrial revolution. I also have no doubt that once we have passed through the fire, we will be as uninterested in returning to the pre-entrepreneurial age as we are presently uninterested in going back to living as pre-industrial peasants. The entrepreneurial age will ask the typical person to become a thinking, self-actualized, self-directed, independent agent. I believe that information technology and a restructured educational system will give people the means to achieve that end. The result will be a happier, more productive, and better governed society.
Thinking entrepreneurially is empowering. It requires asking ourselves, what do people want that they don't have? What is now difficult but could be made easy? What is now done poorly that I could do better? The industrial age made us feel small and disempowered. The grunt lacks the tools to control the world around them. They fill a prefabricated niche and pray that nothing happens to change that niche. The grunt is weak and fearful. The entrepreneur thrives precisely because they see the world around them as malleable and actively change it to suit their needs. The entrepreneur is resourceful and courageous. Imagine a world full of makers, a world full of thinkers, a world full of harmoniously developed people. That's where we're going.