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Creating wealth for fun and profit

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Over the past decade, employment growth netted zero. Personal assets actually declined. For middle-income families, so did wages. (Source: “A Decade of Zeroes,” Dirk van Dijk of Zacks Investment Research, 1/4/2010.)

It appears our national economic experiment of attempting to build an economy on finance, services, and information, leaving such trivialities as manufacturing to other less enlightened nations, hasn’t panned out.

Our collective economic experience of narrowly averted economic depression got me wondering about what we do in the United States to create wealth.

The subject isn’t money. It’s what you can buy with money – the total amount of desirable stuff in the world, however it’s distributed. This definition disqualifies the products of financial innovation … derivatives, securitized debt and so on …while including (for example) services like dry cleaning and vacuuming my carpets, and things like cars, toys, food, clothing, homes, jewelry, and beer.

The Anchor Steam brewery creates wealth. Chase does not.

Here’s what’s disturbing: The private sector, for quite a long time, has been a minor contributor to the underlying drivers of wealth. Our preference for free markets notwithstanding, over the past couple of decades the federal government has done more to create the foundations of wealth than private industry, and it’s hard to find any modern foundation of wealth that hasn’t depended heavily on government-funded innovation.

The entertainment industry might be the only U.S. industry that creates wealth without government help. Except, of course, professional sports teams, which consider free facilities their due.

In our own industry, an admiral invented COBOL; microprocessor technology owes a lot to the Apollo program; and the private sector completely ignored the entire Internet until after the Web got started. The private sector contributed relational database management, transaction processing, local area networking, and not a few other core innovations.

Healthcare? New diagnostic technologies and most cures begin with the National Institutes of Health. Agribusiness depends heavily on public-sector research and development.

In consumer electronics, every device depends on the microelectronics revolution that, as already noted, owes so much to NASA; some gadgets, like GPS navigators, owe a lot more. Private sector innovation has mattered here … a lot … but other than cellular telephones relatively little has been foundational.

Then there’s energy. Nuclear power began with the Manhattan project. Those who promote fossil fuels are harvesting private sector innovations, not from the last century but from the century that preceded it. And just about everyone who is interested in “green” energy expects the innovation to come from government investments – private-sector-funded energy research and development has declined steadily since the mid-1990s.

The broad trend toward leaving wealth creation to others mirrors a long-standing business preference for investments in cost-reduction to investments in revenue-generation. And when businesses do invest in revenue, a lot of the investment goes to buying it through acquisitions instead of winning it in the marketplace.

What does this have to do with you in your role as an information-technology leader? Viewed narrowly, not much, other than giving you one more reason to look at the world and say “tsk tsk.” After all, if your internal customers don’t want to invest in revenue-generating business projects, that isn’t your concern, is it?

The answer depends on whether you accept the misbegotten notion that you have internal customers. If you do, you can leave such niceties as the business strategy to others, accepting the subservient roles of execution and blame-acceptance as your proper lot in life.

Sound like fun?

The microeconomic equivalent of wealth-creation is creating value for Real Paying Customers, one product and service at a time. This is where revenue lives. It’s also where IT’s leaders should spend most of their time and attention, because directly or indirectly, a lot of customer value comes from information technology.

Or could, if we looked at the world from a value perspective.

Ask yourself: What are the current big trends in technology? What are the trends waiting around the corner that you, in your role as the company’s IT leader, are best-positioned to recognize before anyone else? Think about how your company can:

  • Build them into the next generation of its current products and services to increase value, and therefore sales and margins, or …
  • Wrap them around its current products and services to increase value, sales and margins, or …
  • Use them to create entirely new and unexpected products or services current customers will find intriguing.

Revenue might not cure all ills, but one thing is certain.

It’s way ahead of whatever is in second place.

Comments (6)

  • The idea that :
    Build them into the next generation of its current products and services to increase value, and therefore sales and margins, or …

    Will never work in the US. The reason is that currently people do not want to work towards tomorrow they only want to know the bottom line in this years budget.

    Sad as it may be from first level supervisors to CEO that is the bottom line and that is all that they are interested in. The CEO wants as much pay as he can squeeze out of the company as he might not have the job 6 months (or less) from now. *IF* CEO’s were graded on long term profits then maybe. Until then forget it. Greed is KING in the US.

  • Long ago it was taught the wealth of the United States was created by growing it, mining it, or making it.

    For years I blissfully toiled as a leader in factories making things. Then came the post-industrialists who tried teaching that services, and intellectual property were new legitimate ways of creating wealth. Somehow this just didn’t seem right.

    Think logically about the situation reached the conclusion that wealth is like energy and services are conversion or transfer devices, but do not create wealth.

    Services are just a path for wealth to flow. The value of the service comes from its’ scarcity or difficulty. Heck, that’s just the economic theory of wages. Again no wealth is created, even though some service providers seem to collect a lot of money. Governments and the military are just services. Even though they can print money, they cannot create wealth.

    Which nations are rich today? Why are they rich? Growing, mining, making.

    Intellectual Property or ideas are also a service and only have value when they are applied. Some ideas are potentially very valuable, but they really only have value when applied to Growing, Mining or Making. Take Edison versus Tesla both geniuses, but only one was successful in converting those ideas to wealth. That wealth came through making products. Ideas on their own are just thought, a minor electrical disturbance. Thoughts need application to create wealth.

    Perhaps one day we will re-learn these old lessons and value growing, mining and making again. Think creatively and mine the sunlight, harvest the wind, and grow new sources of food and resources.

  • I’ve always been a little confused about what the difference between a service and manufacturing is. Looking at the Anchor Steam example, is the mixing, fermenting, and filtering a service? It doesn’t make anything (conservation of matter!), but it does transform it. Then what about distribution, or even scarier, what does marketing create? Or accounts payable?

    Then there’s Chase. I happen to have one of their credit cards. I’m willing to use it and merchants are willing to take it because I can safely carry it without a large risk. It’s convenient too, I buy groceries on credit (I don’t carry a balance!), but flowing the money out the tap is just a service after all, but isn’t it worth something? Then what about accounts payable factoring for smoothing revenue to make planning more efficient? Bonds for spreading risk to investors willing to take it (things wouldn’t get done if it required a few big investors, and there’d be a lot of monopolies and state run business — that hasn’t worked too well throughout history so far…) So I’m pretty sure that’s worth something too.

    And then there’s value. There is no intrinsic value in anything, other than others can be convinced that they want it (oops, there’s that marketing again). In fact, the dollar bill is just a piece of paper backed by the illusion that a greater fool will give you something for it. It’s such a pervasive belief that we require essentially zero risk premium for transacting with it. But it is just a piece of paper… so does this illusion have value?

    I’m not going to start using $20 bills as note paper (too little blank space anyway), so how do we decide when the marketing of a currency is getting shaky? I think the scary part is that we don’t… everyone else does.


  • >The private sector contributed relational database management
    The story I heard many years ago is that Oracle was the code name of an intelligence agency project that the company’s founders had worked on as contractors. When the original project ended, they formed their own company to expand the concept. If that story is true, then even relational database technology owes much of its success to Government.

    As an employee of a major Government contractor, I happen to be a big fan of our Government, and the way it drives the development and deployment of new technologies. The Government may not be particularly efficient, but there are always some elements of the Government that are focused on the future. With private industry focused on short term profitability, I am glad that at least some elements of the Government are looking out for our longer term interests.

  • I’m inclined to agree with the basic premise of Bob’s column.

    That said, insurance may not create wealth, but if it works as marketed, it can prevent catastrophic destruction of enterprises that create wealth. Banks also may not create wealth, but can provide a means of concentrating it to allow larger ventures and a means to store wealth safely.

    I’m hedging my words because, of course, derivatives were destructive. I’d argue that many of them were not true insurance, in part because they were/are underregulated. And a bank that is merged with an investment business is no longer as safe a place to store wealth.

  • Private sector innovation has mattered here … a lot … but other than cellular telephones relatively little has been foundational.

    I wouldn’t give cell phones to private industry either.

    CDMA was developed by Hedy Lamarr in 1941, intended for guidance of radio-controlled torpedoes. Then current technology was inadequate to implement the theory, so it wasn’t actually used until 1962 … by U.S. Navy ships blockading Cuba.

    So it may not have been a government program that created the idea, but it was clearly intended for government use, and first put into production by the government.

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