March 17th, 2021

Modern Economic Models

We are experiencing an explosive rate of change from atoms to bits. 

Industrial revolutions (via the progress process) are a rising tide. They typically are hallmarked by lifting all sectors across all industry. If you reference past industrial revolutions you will see this pretty clearly. As well, the advancements from the previous progress generation will allow for the next to occur. Let’s review the last 3 and look to number 4.
 

Previous industrial revolutions:

Steam Engine (1st IR) – the advancements ushered in across all sectors and industry by the steam engine (steam ships, steam cars, steam locomotives, steam powered factories)…lead us to the automobile…and not long after…
 

Electricity (2nd IR) – the advancements in understanding of physics, mathematics, and science allowed for the development of the computer, leading to the advancement of semi-conductors, leading to the development of the personal computer (PC) brought about the …   
 

Digital Revolution (3rd IR) – which ushered in the network and the internet which has led to the IoT (internet of things), the software as a service, the smart phone, and the smart watch, all of which were ushered in because of the Moore’s law (see more below) which in effect, makes computing power so cheap it becomes more powerful by a factor of 2x. As it becomes cheaper and more powerful, it is easier to program it to do more which ushers in the demand for things like AWS which ushers in cheaper and cheaper processing power and bandwidth which ushers in the ability for … 
 

Current industrial revolution:

AI & ML (4th IR) – artificial intelligence and machine learning which are allowing for incomprehensible advancements and innovations to things like DNA sequencing, advanced robotics, energy storage, electric vehicles, space flight, Fintech, Insuretech, Real Estatetech, autonomous vehicles, drones, blockchain technology and 3D printing. 
 

As you can see, industrial revolutions are brought about by an inflection point in technological advancements. Over the past 250 years we have been on a non-stop innovation cycle where technology continues to advance and then technology eats everything. 
 

Look around you. How much has technology changed your life, your work, and your environment over the last 5 years. Staggering right when you look back 5 years. Now think 10 years back…now 15. It is even more substantive. Important point: you as a consumer end user adapt much quicker than businesses and industries to these major changes that are brought about by industrial revolutions…they adapt to the technology curve much more slowly…and then all at once. 
 

We are experiencing an all-at-once period of change right now. COVID19 has been the trigger of that avalanche change from atoms to bits. We were progressing naturally on that curve from atoms (physical brick and mortar business models) to bits (internet, computing, technology business models) over the last decade. But there was no major catalyst that was pushing things into high gear…that is until COVID19 hit. The pandemic (which is now endemic meaning it is not going away soon) created the all-at-once rush for any and all businesses and industries to quickly and swiftly embrace AI, ML, and tech in general and begin to invest quickly in anything related to them. We have already seen this in Silicon Valley, where it is reported that this is most active technological early stage and seed investing time ON RECORD (Q2-2020)…which on the surface seems counterintuitive (there is a pandemic) but when you look at the way life will be permanently altered by COVID19, it makes perfect sense…the boulder of momentum from 3 IRs (industrial revolutions) was already in motion and COVID19 shoved it down the mountain…so now what? 
 

Well, there are two important laws of the future economic models you need to understand going forward if you are to project what the business landscape looks like in the future. You need to know what Moore’s Law is (and what it did) and what Wright’s Law is (and how it is impacted by AI/ML): 
 

Moore’s Law
Gordon Moore was the founder of Intel. Moore one day made an observation, “that number of transistors that can be packed into a given unit of space will double about every two years.” It was just a postulation but turned out to be so accurate that it is widely referenced now as “Moore’s Law”. Moore's Laws is a cause/effect situation. The cause: the number of transistors on a microchip doubling every two years yields → effect: the costs of the computers is halved. 

 

This implies the speed and capability of our computers increases every two years and we will pay half what we paid two years prior. This naturally leads to exponential growth in the sectors of industry that utilize computing power which creates even more knock-on effects. Practically every facet of our high-tech society benefits from Moore’s Law in action. Mobile devices, like smart phones, tablets, and laptops would not work without very small and powerful processors. Likewise, neither would video games, GPS, robotics, or even blockchain for that matter. Blockchain wouldn’t even be feasible without them, neither would vig.io. 

It is notable that Intel has stated that the reality that the doubling of installed transistors on silicon chips is actually occurring every 18 months instead of every two years…so things are speeding up even faster. Smaller and faster computing power improves transportation, health care, education, energy, retail consumption, finance, and more. It is a significant component of the modern economic model (bits). 
Since Moore’s law has had such amazing computing power impacts…we are seeing a second order impact start to unfold – computing power is beginning to eat industry…let’s look at Wright’s Law to understand that dynamic in more detail: 

 

Wright’s Law
Theodore Paul Wright (T.P. Wright to his friends) was a U.S. aeronautical engineer and educator. While studying airplane manufacturing, he determined that for every doubling of airplane production the labor requirement was reduced by 10-15%. He wrote a paper on the findings of experience curve effects – effectively “we learn by doing” and that the cost of each unit produced decreases as a function of the cumulative number of units produced

 

Y = aXb   

Y = cumulative average time (or cost) per unit 
X = cumulative number of units produced 
a = time (or cost) required to produce 1st unit 
b = slope of the function
 
 

Effectively…the smarter we get at itthe cheaper the cost to produce itNext, mix in massive, cheap, and fast computing power + the mix of intelligent quantitative algorithms and advanced software coding structures…and you end up with machine learning and then artificial intelligence. 
 

IF we assume that Wright’s Law is true (we do) and that we “learn by doing” (we do) and that massive, cheap, and fast advanced computing power leads to machine learning and then AI – you have a situation where Wright’s Law is going to be exponentially more pronounced during the next 5-10 years. This will really cause explosive advancements in industry that will drop costs of producing goods even further in the future. This is why analysts are saying that technology is the greatest deflationary force of all time. It is a mathematically true statement at this point. 

 

Atoms vs Bits
Consider these three factors: 
1.    We were already in motion towards a major inflection of the velocity of technological advancement 
2.    COVID19 acted like napalm on an already burning gas fire 
3.    Advanced computing power, machine learning, and AI (which create a ‘Wright’s Law Nirvana’ per se) will begin to eat all the excess wasted motion in our economic ecosystem…

...then we really should question prior economic models being useful moving forward. Not in the sense of Keynesian or Friedman monetary theory or MMT…but actual economic ecosystem moving parts. There will be no sacred cows this time around as everything will be tested – mark our words. 
 

What do trucking look like in an autonomous vehicle world? How will robotics change surgery? Can we eradicate disease in the genome sequence before it activates? Do you really need a real estate agent, insurance agent or title company for sequential transactions that a blockchain would be more efficient to handle? Do you need cash in a digital world where we Venmo each other payment instantly? 
 

The atoms will always be there in some form or fashion, but they are no longer in control…I posit this in the path forward in the 4th industrial revolution that we are living in right now and will be in for another 10 years: 
 

Atoms used to control our actions. For example, we would migrate to large city to find opportunity – the density created diversity and with it a more opportunistic economic ecosystem for one to find ways to profit and find success in. Now the ‘large city’, the economic ecosystem(s) is 100% digital and 100% global. Reach in a digital world is so global its theoretically even interstellar. Atoms in this world have a declining marginal value. In the modern economic model, the bits decide the usefulness, or not, of the atoms…
 

We may be in for more change in a decade than we have ever seen in history. Embrace it and look for the ways to profit from atoms and look for the bits business models that will still exist because they will always be necessary…and then see how the atoms will make them more efficient and more productive. Don’t look back in an atom-driven economic world. Look forward. 

vig.io Economic Models
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