The world is moving towards hyper-specialization. No longer will we be cogs in a corporate wheel of full-time work and collecting paychecks. We need to be aware of the changes and become nodes in a global network.
This piece is supposed to raise awareness to the new order, an outline of how I see the future of the world economy, and how you fit in. It starts with a basic outline of two major principles in economics: Comparative advantage and transaction costs. If you have a firm understanding of these concepts please skip ahead. I hope you’re ready, the future is beautiful, but will require a lot of self-awareness and self-direction.
A Quick Lesson in Comparative Advantage
“Do what you do best and trade for the rest” – Dr. Thomas Rustici
Crusoe and Friday
Comparative advantage is doing the things you’re best at, creating value from doing those things, and trading with others who are doing what they’re best at.
Crusoe and Friday are stuck on an island with few resources. In order to survive they must forage and hunt for the only two food sources: coconuts and fish. In order to survive they need to find the optimal trade-off to get both coconuts and fish each day. The Crusoe/Friday example has two variations:
First Variation:
Crusoe is really good at finding coconuts and Friday is an expert fisherman. Each day on the island they go out, Crusoe collects 10 coconuts and Friday catches 10 fish. They each trade their excess haul, 5 coconuts and 5 fish respectively, and come away with enough of each. This is great in an ideal world, but what happens if Friday is better at both gathering coconuts and catching fish?
Second Variation:
Friday is really good at finding coconuts and catching fish. On any given day Friday can catch either 10 fish or forage 10 coconuts. Crusoe, on the other hand, isn’t very good at either. He can only catch 5 fish or collect 5 coconuts. In this example it’d be easy to say, “Well Friday can catch all the fish and forage coconuts better than Crusoe so there’s no value in trade.” However, they both need both fish and coconuts to survive.
Friday doesn’t want to spend all day fishing and gathering. Instead Friday catches 10 fish, eats to subsistence, and holds on to the excess while Crusoe is collecting coconuts. This allows both of them to get what they need while both do less work than if they were to do it themselves. They both are better off, even if one is a better producer than the other.
Transaction Costs – The Nature of the Firm
R.H. Coase is probably most famous for his essay on transaction costs titled “The Nature of the Firm.” If you have any interest in why companies come to be, this is one of the best pieces to read, I highly recommend it.
In short, Coase came to the conclusion that firms exist because there are costs that can only be alleviated if an organization is formed. Although an entrepreneur may be able to do a lot of work in an efficient way, eventually they will get to a point where in order to grow they’ll need to expand operations.
There are costs that go into running a business from marketing, to utilities, to paying for software/subscriptions, etc. These costs may be handled by one person, but as the business grows, the expenses also grow. Opportunity costs also grow, not allowing the sole business-owner time to focus on other things. At this point the costs of hiring someone outweigh the transaction costs of keeping it a one-person business. Once transaction costs reach a certain level, the only solution is to incorporate and become a larger business.
Comparative Advantage and Specialization
Although our example above focused on two items, coconuts and fish, the world has millions, if not billions or trillions, of items for trade. As each becomes cheaper, and easier, to hunt/gather/collect/produce, we can become more and more specialized.
Technology is transforming at a exponential pace. It used to be very inefficient to run an entire company by yourself. From the legal know-how, to accounting, to running your service or goods-based business, they all required lots of chefs in the kitchen. With comparative advantage, all of that goes away. You can outsource a lot of your small business needs and focus on your true calling. Instead of spending your time doing lots of different tasks, technology has enabled us to truly “do what we do best, and trade for the rest.”
Taylor Pearson, in a phenomenal post on “Going All In” has the following story about a digital marketing entrepreneur:
An entrepreneur that runs a businesses offering digital marketing services for dentists previously did digital marketing in Cincinnati, but decided to work exclusively with dentists.
By working with a single type of client, dentists, instead of in a geographical area, he gained a lot of efficiencies that he could pass on in value to the clients both in terms of reduced costs and improved results.
Because he understands the industry, sales is easier, they have a smaller group to work with, and word of mouth is more effective. Marketing is easier because other dentists easily identify with existing client case studies.
Fulfilling a job is also done more effectively. Instead of having to go through a period of learning a new client’s business every time, they can hit the ground running and start generating results for their clients faster. Their processes are more streamlined and efficient.
In the past, geography kept these kinds of businesses from existing, but that’s no longer the case. He can be based in Seattle and work with clients all over the country.
He can focus his time in the marketing of dentists, make more money from being more efficient, and trade his excess, in this case money, for everything else he wants in life. In essence, this entrepreneur has become a node in the network (economy).
Lower Transaction Costs, Smaller Businesses
In the past this kind of thing was impossible. We couldn’t start a business in Seattle and help people all over the country. We would also need a lot of in-house staff to focus on legality, keeping books, being secretaries to schedule in-person meetings. As of today, these are no longer needed, and cost very little to outsource. An office isn’t even necessary anymore.
In “The Nature of the Firm”, Coase theorizes that companies will only grow to the size that adding one more person is cheaper than the transaction costs that the next employee would offset. With lower transaction costs, there is a lower need for more employees, and businesses can be smaller, keeping only essential personnel.
Current State of the Economy
Full-time, collecting-paycheck, employees are having a really hard time. Even for the behemoth that is tech companies. IEEE Spectrum, a leader in engineering, technology and science news, recently posted a fear-inducing article titled “Ugly Year for Tech Layoffs, and It’s Going to Get Worse” A top analyst in tech jobs predicts there’ll be close to 400,000 unemployed tech workers by March/April of 2017, “And worse, he says, these laid-off workers are never again going to find tech jobs: ‘They will always remain unemployed,’ at least in tech, he said. ‘Their skills will be obsolete.’”
Another article, posted today on Harvard Business Review, is an MBA professor who advises her MBA students to start looking at the gig economy. (Quick aside, YOU DON’T NEED AN MBA TO JOIN THE GIG ECONOMY!) The article is written by Diane Mulcahy and is titled “Why I Tell My MBA Students to Stop Looking for a Job and Join the Gig Economy.” If that’s not reason enough to be skeptical of the current state of the economy and think about self-employment, I don’t know what is.
Imagine You’re a Glass Sphere (or a Node)
There is a great post on FEE.org by Jeffrey Tucker titled “Imagine a Floating Glass Sphere Filled with Immutable Information Bits.” It’s a post about bitcoin and the future of blockchain in our everyday life. But I love the imagery and the idea that we are all nodes with immutable capabilities.
You cannot replicate the comparative advantage I bring to the table and I cannot replicate your comparative advantage. We are both nodes, floating on the network, trying to produce something in order to pay for everything else. And we are both unique. We have our specialties and use those to improve ourselves and improve the network as a whole.
Comparative Advantage is Already Making Our Lives Great
We get so caught up in our day-to-day struggles that we fail to see the magic all around us. We are living in a marketplace where everything is at our hands. It’s all because of comparative advantage and people being nodes within the network. Donald J. Boudreaux outlines this in his FEE.org post “Spontaneous Cooperation Is Why Your Life Rocks“:
The worldwide market of which you are a part – indeed, which is responsible for your very existence – is not nirvana. It doesn’t work as perfectly as our vivid imaginations are capable of conceiving. But here’s the thing: it works so damn well that what we notice are its relatively few failures to work smoothly; we don’t notice – because it is so common – its routine, smooth, everyday marvelous successes.
Next time you’re getting gas at a gas station, coffee at a local coffeeshop or a meal at your favorite restaurant, I challenge you to think the amount of people that it took to get that product to you. The nodes it traveled through, and the network that’s been created to connect the nodes.
Self-Employment Revolution
The revolution is already underway. We millennials have realized the desk-job future isn’t for us. We crave the independence of working remote, making our own hours, and outsourcing things we aren’t spectacular at. Baylen Smith, in his post “Freelancing: The New Way of Business” said it best:
So, Gen X, Baby Boomers, if you can’t beat us, join us. You all are the ones that have the management positions. You sit in the conference rooms where these decisions are made. Instead of expanding your graphic arts department, hire all of your graphic arts designers through Fiverr (not a typo) or another freelancing site. Freelance out your labor, save time on training, save money on insurance, save office space and let the work from home. That’s the way we want to work, sure, but it helps you as well.
In my terms this was a call to action for everyone to become nodes, latch on to the network that’ll connect the nodes, and do what you do best. The world today is full of opportunities to specialize and trade your services for the things you want most. Millennials are starting to realize, but it’s going to take everyone buying into the revolution.
It Truly is a Great Time to be Alive
I have written over 60 blog posts in the past two-months. Every time I write one, whether doom and gloom, happy, or a fluff piece, I almost always want to end them with “It’s a great time to be alive.” This piece is no exception. Although it’s scary thinking that our full-time jobs may disappear, it also opens a door to endless possibilities. Instead of being fenced in by a cubicle, and an overwhelming boss, we can become our own bosses. We can become nodes in the nodular economy.
Once we understand where the future is going we can start aligning our steps with our destination. It’s cheaper than ever to start a business and become self-employed. As costs of production go down, our leisure will go up. Living in today’s world can be scary for those used to collecting a paycheck, but once we embrace the trajectory of the future, we can become a productive node creating the future we’re already living in.
It truly is a great time to be alive.