Today’s fascinating Western history comes from my brilliant and prolific friend Taylor Pearson.
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“Hurry up, I want to get on Cody’s webinar with Ron.”
I was standing on the 8th floor of the Aloft Hotel looking out over the trendy bars and restaurants lining the Sukhumvit Road in Bangkok.
Forty-eight hours earlier, I’d been packing up my life in the suburbs of Memphis, Tennessee. The night before I’d had drinks in Thailand with a group of entrepreneurs and was now scouting out conference space for an event that weekend.
Turning back from the window I looked over my shoulder to ask, “Who are Cody and Ron?”
“I’ll explain later, the webinar’s starting” Dan said.
I sat down to listen to Cody’s voice come over the laptop speakers to introduce Ron Davison.
Ron is the author of The Fourth Economy: Inventing Western Civilization.
I didn’t know it at the time, but few books would have such a profound impact on my life and business.
In the book, Ron articulates the story of the West over the past seven hundred years is one of the increasing distribution of power. As we have moved from an agricultural to industrial to knowledge economy, the individual has gotten more and more powerful.
But it’s only in the last few decades that trend has reached a tipping point.
The means of production, as Marx would have called them, are no longer factories and no longer controlled by industrial titans, they are a laptop and an internet connection.
The nexus of power today is hustle, cleverness and a wifi connection.
The rapid development of technology and globalization has changed the leverage points in accumulating wealth: money, meaning and freedom.
Those that don’t adapt are becoming trapped in the downward spiral of a dying middle class — working harder and earning less.
Entrepreneurs that understand the new paradigm, have created unprecedented wealth in their lives and the lives of those they love.
At the time, listening to Ron on Cody’s webinar, I didn’t get it.
After spending the past four years with other entrepreneurs running their businesses while traveling the world, I read Ron’s book, chuckling to myself to find Cody’s name in the afterword.
No longer just a theoretical possibility, Ron’s vision was a living reality. It’s something I’ve struggled to attempt to explain ever since:
Why Are We at the End of Jobs?
In the 1980s, Creative Output, an Israeli company, developed the first software package that sped up scheduling for production environments like a typical factory floor.
In the process of setting up and installing the software, one of Creative Output’s founders, Eli Goldratt, found that frequently the software failed to live up to its potential because of the existing habits of employees and managers.
Despite the software offering them obvious solutions to speeding up the factory and increasing output, the pre-existing paradigms and mental models of the managers kept them from implementing the software successfully.
Goldratt, frustrated by the inefficiency, holed up for 13 months to write The Goal, which laid out his “Theory of Constraints.” Goldratt’s theory explains that any system with a goal has one limit, and worrying about anything other than that limit is a waste of resources.
If an assembly has three sections, and two of those sections can produce one hundred units per hour while the third can only produce fifty units per hour, any investment outside of improving the third section won’t improve the outcome. Doubling the first two to make two hundred units per hour while the third still only produces fifty units per hour will only yield fifty units per hour.
If you’ve ever helped send out a physical mail campaign, there’s always a clear bottleneck. If you have five people stuffing envelopes at a rate of one hundred envelopes per hour (twenty envelopes per hour for each person) and one person addressing them at a rate of fifty units per hour, the envelopes will pile up and you’ll be waiting around on the one person to address all the envelopes.
Adding five more people to stuff envelopes won’t get the job done any faster, the envelopes will just pile up faster.
Adding a single person to address the envelopes will get the job done in half the time since it addresses the bottleneck. 100 envelopes will get stuffed every hour and 100 envelopes will get addressed.
This is obvious in simple systems like stuffing envelopes, but equally true and far more powerful in complicated and complex systems.
If you’re trying to grow a business, there’s always a primary limit preventing that. If you have an amazing product and no one knows about it, improving the product won’t help it sell more.
Limits play an enormous role in any system, from our day-to-day lives to how economies work.
There are three basic questions to ask when applying Goldratt’s framework:
What’s the system?
What’s the current limit?
What’s the obvious way to improve the limit?
Once you can identify the components of a system and discover what the limit is, figuring out how to improve it becomes much easier.
While our first instinct is usually attempting to push harder, it’s more valuable to figure out where to push.
The famous dictum: “If I had an hour to solve a problem, I would spend 59 minutes asking the right questions” recognizes that defining the system and its limit often makes the solution obvious:
The Secret to Health: More Sleep, Fewer Scones
Let’s apply the framework to something almost everyone’s experienced. You’ve made it your New Year’s resolution to get in shape. This is the year that you’re finally going to get healthy. We’ve got our outcome: Get healthy.
So you join the gym, put together a workout plan, and order all the right supplements. You’ve got protein powder, creatine, and everything else you read about on the internet that you need to get in shape.
You stick to the workout plan. You hit the gym six days a week. After a couple of days, you haven’t noticed any improvements. You keep going. After a month, still nothing.
Before we go and do a lot more hard work to improve our health (the system we defined), let’s take Goldratt’s and Edison’s advice and answer the next two questions.
What’s the limit?
What’s the obvious way to improve it?
While you’re going to the gym six days a week, you’re going at 5am, which means most days you only sleep five or six hours if you were up late the night before. You also treat yourself to a scone from Starbucks after every workout.
An hour running on the treadmill will burn 400 calories. A scone from Starbucks has 400 calories, which means you’re not going to lose any weight. Any hormonal benefits of exercise are being counteracted by the hormonal problems caused by a lack of sleep. You’re spending more and more time exercising when the limit isn’t exercise.
If you fix your sleep and diet, then you’ll get better results even with less exercise. By giving up the scone and getting an extra couple hours of sleep every night, even with a very modest amount of exercise, you start to see the pounds drop off. Instead of spending two hours in the gym everyday, an hour in the gym every other day suddenly yields better results because you’ve addressed the appropriate limits.
Despite playing year-round sports in high school and college football for two years, I was grossly overweight, weighing 345 pounds at my heaviest. Some days I would have to get in bed for an hour in the afternoon just to relieve the back pain from carrying around so much excess fat.
I was working out five or six days a week and taking around 30-50 pills of supplements a day. In order to manage playing sports, studying, and working a part-time job as a tutor, I was throwing out everything else in my life. I never cooked for myself, preferring a steady diet of foot-longs from Subway and family packs from KFC and sleeping around five or six hours a night.
Watching my mother go through a double hip replacement convinced me something was going to give sooner or later. I was on a one-way train to dysfunctional living at twenty-two years old. I cut my workout schedule in half, often exercising only a day or two per week, started sleeping seven to eight hours a night, and eating a diet of lean meat and vegetables that I cooked at home. I still remember stepping on the scale and seeing 220 pounds, 125 pounds down from my heaviest, and thinking the scale must have been broken.
Limits can be applied to any system in order to dramatically improve the outcome without having to dramatically improve the inputs. I didn’t add more time in my life to be healthy, I just changed the limits that I was addressing with the time I already had available.
The Greek mathematician Archimedes illustrated the concept beautifully: “Give me a lever long enough […] and I shall move the world.” Addressing the limit is like having a longer lever. Instead of just pushing harder, we’re figuring out where to push to create the greatest impact.
How Limits Work in Economies and Careers
Over the past seven hundred years, the West has seen an unprecedented level of growth. Sitting on the dirt floor of their hut in 1300, a European peasant couldn’t imagine the quality of life most middle class Americans enjoy today.
Our rapid improvements have only been possible because at three distinct points in our recent history, we have, as a society, figured out the limit to economic progress and shifted to re-address it.
The most recent was when the limit shifted to require more complicated work. The Baby Boomer generation went to school and got the expertise and credentials to address that limit. It’s for that reason we enjoy the level of affluence we have today.
The limit has moved again from complicated work (jobs) to complex and chaotic work (entrepreneurship). Despite being more credentialed than ever, the U.S. economy has gone from adding 2.5 million jobs per year between 1960 and 2000, to shedding jobs at a rate of 100,000 in the first decade of the 21st century. Growth hasn’t just slowed—it’s reversed.
In his book The Fourth Economy, author and systems thinker Ron Davison organizes the last seven hundred years of Western History into three distinct economic periods: Agricultural (1300-1700), Industrial (1700-1900), and Knowledge (1900-2000).
At each economic transition, we’ve seen diminishing returns from investing in the previous limit. The popular response has been to label our current economic woes a painful global recession. The popular point of view is wrong. We aren’t going through a global recession—we’re transitioning between two distinct economic periods.
Certainly, the model of four distinct periods is oversimplified. Economies and societies are far more complex systems than an assembly line. Different limits can exist in the same society. There are still agricultural workers (farmers) and industrial workers throughout the West, but the broadest segment of Western population is employed in the knowledge economy, and it’s that part of the economy that, over the past hundred years, has been responsible for creating most of the abundance and wealth now available.
When the limit of an economy shifts through the four different stages, investing more heavily in what has always worked won’t improve the output—just as spending more time in the gym is counter-productive if you aren’t sleeping enough or eating healthy. If you push harder and harder on a shorter and shorter lever, you still won’t get better results.
In order to understand how limits work in economics and how it affects your career choice, let’s take a (brief) look at what has happened over the past seven hundred years of Western History and how we arrived where we are today.
The Agricultural Economy (1300-1700): Henry’s Heresy
Starting in around the year 1300, natural resources were the primary source of wealth in the West. The wealthiest people were those that had the most natural resources because they owned the land. Land was the limit.
The nations that thrived in Medieval Europe did precisely that. Beginning with the Portuguese in the early 1400s and then eventually all major Western European powers, the Age of Discovery was characterized by the rapid and dramatic accumulation of land. As these countries and the individuals within them acquired more and more land, they became more powerful and wealthy.
The Catholic Church, which had been the dominant institution in Europe, and the Pope, who had been the dominant player, were eclipsed by a slightly larger group: the rulers of nation-states. Kings. Power transferred from the Church to the nation-state, and from Popes to kings.
Perhaps no individual did more to create the Agricultural Economy than Henry VIII of England. He removed tariffs, made England a free trade zone, and standardized weights and measures to facilitate trade. On continental Europe, merchants moving across Germany would have been faced with hundreds of tariffs, various measurement standards, and different currencies. The same merchant moving across England would have a set of standard weights and measures, and be comparatively tariff free.
He furthered England’s policy of emphasizing property rights, which encouraged farmers to invest in their land. This increased the productivity, nutrition, size, and health of individuals. It also created an incentive for them to defend their own land—free men fight harder than serfs.
In the Dark Ages, kings were subject to the Pope, and in order for Henry to get a divorce he needed papal approval. When Henry’s first wife, Catherine, was unable to produce a male heir, Henry wanted a new wife who could.
He petitioned the Pope for a divorce, but when Henry’s then-mistress, Anne Boleyn, became pregnant, his hand was forced and he divorced Catherine. Pope Clement excommunicated him. Instead of crawling back to Clement, Henry instead declared himself the head of the Church of England.
Now the head of the Church, Henry proceeded to dissolve Catholic monasteries and distribute their land through sales and titles to the gentry class. This made the land more productive and generated more money for England, a nation-state, instead of the Catholic Church.
The Treaty of Westphalia, signed over one hundred years later in 1648, delivered the coup de grace, giving nation-states sovereignty over the Church by letting monarchs dictate religion to their subjects. Land had been overcome as a limit, nation-states had eclipsed the Church, and kings had eclipsed the Pope.
From 1300 until around 1700, we went through the first primary economic transition in the West. It consisted of three important characteristics that all future transitions would have:
The limit shifted — The Pope’s religious authority was not as powerful as the newly-established limit, land. With the revenue from the land and the power he was able to distribute to the gentry class, Henry didn’t need papal approval to rule.
The dominant institution shifted — Because nation-states controlled land, the power shifted from the Church to nation-states.
The dominant player shifted — Because kings ruled nation-states, power shifted from a single individual, the Pope, to a small group, kings.
Through King Henry’s experiences, we start to see the long-lasting impact of being among the first to address a change in limits. England’s ascension to the top of the hierarchy among nation-states would last until World War I wrought enough destruction in Western Europe that the United States and then the USSR surpassed it.
The Industrial Economy (1700-1900): The Rise of the Rothschilds
In the three-and-a-half centuries following Henry’s rule, the world was transformed. The West went from an agricultural to an industrial economy.
The limit shifted from land to capital, the dominant institution shifted from nation-states to banks, and the dominant player shifted from kings to bankers.
This transformation is best told through the story of Nathan Rothschild, a banker, and Friedrich Wilhelm III, the King of Prussia.
In Medieval Europe, Catholic law prohibited usury — the lending of money at interest. This meant a lot of Jews ended up becoming bankers, as Catholics were effectively forbidden from the job.
The most successful banker was a Jew by the name of Mayer Rothschild. Rothschild saw that there was an opportunity to distribute his five sons across Europe to create an international banking organization at a time when only Jews were bankers and there was relatively little competition.
Nathan Rothschild, the son he sent to London, achieved the most success. Nathan capitalized on the Napoleonic Wars at the turn of the 19th century by buying bonds from the British government—who needed money to fight the war—and then selling those bonds into the international market through his brothers in Vienna, Paris, Frankfurt, and Naples. Brokering the sale of these bonds made the Rothschilds fantastically rich. Richer, in fact, than kings.
As the the Napoleonic Wars drew to a close, the Prussian King Friedrich Wilhelm III turned to the Rothschilds for a loan. Napoleon had set off an arms race after his escape from prison and return to France. Prussia needed to modernize and re-arm to defend against Napoleon. The rearmament, which would bring about the formation of modern-day Germany, required a king (Friedrich) to ask a banker (Nathan Rothschild) for a loan.
Despite owning an enormous amount of land, Friedrich lacked the capital to re-arm Prussia.
When Nathan Rothschild received Friedrich’s request for a loan, he sent Wilhelm a letter with a conditional “Yes.” The Rothschilds would loan Germany the money, but only if Friedrich, the king, submitted to a parliamentary form of government in which power was more evenly distributed and corruption more difficult. Nathan wanted to make sure he got his money back, and parliaments have a lot harder time building palaces for themselves than kings.
A banker dictated terms to a king. What Napoleon failed to do with an army of hundreds of thousands, a banker did with a letter.
The bank was eclipsing the nation-state. Bankers were becoming more powerful than monarchs.
Just like in previous transitions, three fundamental changes had occurred:
The limit shifted — Friedrich had land in abundance, but didn’t have capital. The limit was capital.
The dominant institution shifted — Because banks control capital, the power shifted from nation-states to banks. Banks controlled the scarce resource and so they gained power.
The dominant player shifted — Banks are run by bankers and so bankers became the fundamentally powerful group.
The Rothschilds again show the value of investing early and heavily in a change in limits. No one has heard much about the Rothschilds banking innovations in the last hundred years or so, yet there are plenty of wealthy Rothschild descendants walking around today.
The Knowledge Economy (1900-2000): The Conquest of the Corporation
Over the course of the one hundred and fifty years following the Napoleonic Wars and Nathan Rothschild’s loan to Friedrich, (roughly 1800-1950), the modern corporation arose.
As we transitioned from an industrial to a knowledge economy, banks became extremely effective at producing capital, but the economy didn’t have enough knowledge to grow. The limit has moved from capital to knowledge. The dominant player changed from banker to CEO, and the dominant institution shifted from banks to corporations.
The story of the shift from an Industrial Economy is best told through the history of J.P. Morgan’s bank, Morgan Stanley, and Thomas Watson’s corporation, IBM.
Morgan’s bank, Morgan Stanley, was the primary bank of Watson’s corporation, IBM, in the 1970’s.
Just as Morgan Stanley was one of the great symbols and controllers of capital, IBM was one of the great symbols and controllers of knowledge. From the suit and tie dress code (showing that their workers were unfit for manual work), to the company’s slogan of “THINK,” IBM was symbolically the home of knowledge.
For most of the 20th century, corporations like IBM did not antagonize their banks. They were faithful and monogamous. Because financial markets were opaque and difficult to understand for corporations, it was difficult to get all the information needed to operate effectively in them.
Banks still held the power. Corporations needed bankers who controlled the information about how financial markets worked to advise them.
When IBM issued a billion dollars in bonds in 1975, it told Morgan Stanley that it wanted to bring in Salomon Brothers to help with the issue—a move that was, at the time, unprecedented. Bond issues were typically always handled by a single bank. Not wanting to lose their hegemonic position as IBM’s sole bank, Morgan Stanley refused to cooperate with Salomon. IBM, intimidated but not deterred, went ahead without Morgan Stanley.
The bond issue was a success and a new precedent was set. The scales tipped. Banking went from a relationship-based business to a transactional one. It became commoditized and, in time, the corporation transcended the bank as the dominant institution. Corporations now began to dictate terms to banks. CEOs began to dictate terms to bankers. The demand for knowledge eclipsed the demand for capital. Banks were subjugated to corporations in a way that they never had been before.
Again, we see the value of investing early. Despite what many would say have been substantial blunders over the past thirty years (including handing Microsoft over to Bill Gates), IBM is still a tremendously valuable company, with a market capitalization of around $170 billion as of 2015.
We see again the three changes in all preceding transitions:
The limit shifted — Morgan Stanley had capital in abundance, but didn’t have knowledge. The limit was knowledge.
The dominant institution shifted — Because corporations controlled knowledge, the power shifted from banks to corporations.
The dominant player shifted — Corporations are run by CEOs, and so CEOs became the fundamentally powerful class.
The Ascendence of the Entrepreneur
In every previous transition, three shifts have taken place. In the current transition (the Fourth Economy), that looks like this:
The limit is shifting from knowledge to entrepreneurship. The entrepreneurial Complex and Chaotic domains are the ones increasingly in-demand.
The dominant institution is shifting from Corporation to the Individual (or self). What used to require large companies, technology, and globalization has now been made available to the individual or micro-multinational.
The dominant player is shifting from CEO to Entrepreneur.
Most institutions and individuals don’t have a good track record of adapting effectively to these shifts. They continue working to address the wrong limit decades or even centuries later. We’re seeing that now.
Individuals are investing in more knowledge, they’re going back to school to get more credentials. Even as the returns on credentials are declining, still students continue to pay more and more for them. Considering credentials and knowledge have been the scarce resource for the last century, this isn’t surprising. For the past one hundred years, going back to school for more credentials was a good strategy.
Yet, even as the cost of college and graduate school increases each year, the value is decreasing.
Simple supply and demand shows us that investing more in abundant resources isn’t a very good strategy. It won’t improve the outcome of a system. Spending more time in the gym won’t make you any healthier if you aren’t sleeping or eating well.
However, it takes society a long time to adapt to the shift and make wise investments. What seems obvious in retrospect appears, at the time, a risky investment.
While it takes society as a whole a long time to shift and address the limit, there is always a golden moment when it’s easier, safer, and more profitable than widely perceived to invest in a scarce resource.
Henry invested in land and England, a small island in the North Sea became the dominant world power for a few hundred years. The Rothschilds invested in capital when most people undervalued it, and to this day are among the richest families in Europe. Thomas Watson invested in knowledge by founding IBM when it was undervalued and built one of the defining corporations of the twentieth century.
Could we be at the same point for entrepreneurship?
All the tools necessary are now available. That’s why I wrote The End of Jobs, to show people that entrepreneurship isn’t just more fun, it’s safer, more accessible and more profitable than widely imagined.
Because books like The Fourth Economy have made such a deep impact on me, I’m giving away my 67 favorite books on Entrepreneurship — valued at $1,310 (including The Fourth Economy).
If you enter here, you’ll also get a free chapter of The End of Jobs and be notified when the book is released free (for five days only) on Amazon.
Read the original article on Thrilling Heroics here: Is This the End of Jobs?