Every year, Warren Buffett, the Sage from Omaha, delivers his Annual Letter to Berkshire Hathaway shareholders. What is so special about it? After all, tens of thousands of companies do the same. Each one produces an annual report with a letter to shareholders giving investors an account of how their corporation performed in the previous year and what lies in the pipe for the forthcoming year.
Of all those letters, the one that excites the most interest is the annual missive from the Sage of Omaha, Warren Buffett, whose iconoclastic approach to running a company has made Berkshire Hathaway Inc.'s class A shares the most expensive stock in America. For instance, the 2015 Letter is pure Buffett:
"I've mentioned in the past that my experience in business helps me as an investor and that my investment experience has made me a better businessman. Each pursuit teaches lessons that are applicable to the other. And some truths can only be fully learned through experience. In Fred Schwed's wonderful book, Where Are the Customers' Yachts?, a Peter Arno cartoon depicts a puzzled Adam looking at an eager Eve, while a caption says, "There are certain things that cannot be adequately explained to a virgin either by words or pictures." If you haven't read Schwed's book, buy a copy at our annual meeting. Its wisdom and humor are truly priceless."
Note that Buffett does not offer Schwed's book, shareholders have to buy their own copy, no small profit!
In another letter Buffett told Berkshire shareholders that Ajit Jain, who runs Berkshire reinsurance operations, wrote a rather unusual insurance policy. Indeed, in 2003 PepsiCo promoted a drawing that offered participants a (slim) chance to win a $1 billion prize. After multiple numbers-based games of chances and progressive eliminations, a single individual stood in the race facing the ultimate challenge. The six-digit number he was carrying had to be perfectly matched by the random drawings made by a 4 year old chimp named Kendall.
Despite the incredibly low odds, Pepsi management was worried that somebody might hit the jackpot. Hence, it decided to find somebody to lay off the risk. And, guess what, Berkshire issued a policy for the whole risk (as a matter of fact, the risk was less than $1 billion as the prize was to be paid over yearly installments, namely a present value of $250 million). The drawing was held on September 14th, 2003 and you can imagine that Jain and Buffett were holding their breadth while Kendall the chimp was carrying its duty. Fortunately for Berkshire, nobody won!
This story is not only interesting per se but also because it raises the question of whether you can trade away any type of risks. In the sixties, Kenneth Arrow and Gérard Debreu, two Economics Nobel laureates, came up with the so-called complete markets model where any event can be spanned by a security yielding a $1 payoff upon the occurrence of that event and none in case of no-occurrence. In Kendall the chimp case, Berkshire issued one billion of them paying $1 each if Kendall drawings were to match the finalist numbers. Real life is obviously far from this abstraction. But, as Buffet's example shows, market creativity tends to reduce the gap between the theoretical Arrow-Debreu world and reality.
This reminds me of the late Karl Borch story about the Loch Ness monster. Karl was a first-class economist and a true gentleman. He dedicated his entire life to the study of insurance and the economics of uncertainty. One of his pet example of an Arrow-Debreu market was that of Scottish whisky distillery Cutty Sark that had promised one million pounds for the capture of the Loch Ness monster. The distillery was fearing that, despite the low odds, somebody might succeed. Lloyd's of London did not shy away. Its underwriters issued a policy to cover the risk! The policy required the payment of a £ 2,500 premium. It covered the period 1st May 1971 to 30th April 1972. The monster was to be captured alive. It spelled the following extra conditions:
"As far this insurance is concerned, the Loch Ness Monster shall be: 1/ in excess of 20 feet in length, 2/ acceptable as the Loch Ness Museum to the curators of the National History Museum, London. In the event of loss hereunder, the Monster shall become the property of the underwriters hereon."
What is the lesson, if any, to be drawn from this? Apart, of course, from the fact that Lloyd's underwriters are shrewd: They become owners of the Monster! The lesson is that, contrarily to a widespread belief, we do not suffer from an excess of markets. As a matter of fact, a simple look at daily life strongly suggests that we suffer from not having enough markets to fine-tune our exposures to daily contingencies. Think of your home: Real estate prices are volatile and your home is usually a major fraction of your wealth. Still, you have to live with the hard fact that your home may one day become a lot less valuable than it used to be. And, for that exposure, unlike the Loch Ness Monster case, you do not have any insurance available. Markets are missing. Worse, the available markets fail us when we badly need them. The recent crisis is a sad illustration of this costly failure.
Missing markets are another example of the "all or nothing society." Either you have access to them or you don't. In today digital economy the situation is even worse. Millions of people who made so far a decent living out of their services are now dis-intermediated without any compensation. Jaron Lanier, in his remarkable Who Owns The Future? Book, notes for instance that when we use automatic translation services, such as Google Translate, we naively believe that we are using some sort of state of the art polyglot AI algorithm. Nothing can be further from truth. As a matter of fact, we access a cloud made of millions of translation snippets written by real human translators that are constantly harvested over the Web. What we submit for translation is compared to material that was previously translated. That's how we get the translation results. The thorny issue is that in the course of doing so the original human translators do not get a penny for their work as Google does not pay them anything. We get value from the translation service, Google gets good advertising money but the source of the original value is expropriated. All or nothing at play again. Lanier rightly argues it does not have to be so. Worse it is unsustainable. Quoting Ted Nelson's pioneering work on hypertext, Lanier advocates a micro-payment market whose aim would be to remunerate the authors of "borrowed" information. Since everything is stored in the cloud and can be traced back to the original authors, it should not be that difficult to organize a market that will reward these authors for the use of their work. Redneck pirates will certainly object to this proposal as it collides with their information wants to be free leitmotiv.
But this leitmotiv is awfully myopic. Free in a digital economy invariably leads to Leviathans through increasing returns to scale. Free means long term impoverishment. We end up being unfairly swapped: Free means that we have to accept an Faustian swap à la Google, Facebook, Instagram and so on. The swap is odious as it expropriates millions of people who keep joining the ocean of wannabes while the Google, Facebook... superstars capture all the gains. This is simply an unsustainable social contract. The future is broken if we are not able to engineer the missing markets necessary to recapture and fairly redistribute the value that has been expropriated on an unprecedented scale.
Let's put this way. We suffer from two deadly diseases: Too many (poorly designed) buoyant markets and too many missing (to be designed) markets!
Let us work on curing them both.
According to best-seller author, Seth Godin, you're either a Purple Cow or you're not. You're either remarkable or invisible. Make your choice.
Cows are boring. Purple Cows are not. Purple Cow is a metaphor for something very special, not another marketing trick. It is embedded into the service or the product. If you've never read a book by Seth Godin, the Purple Cow is a good start. Godin has an innate way of making you think out of the box: Don't expect something academic, expect good sense and a great sense of humor too. If you run your own business, I bet after reading the Purple Cow you will keep wondering whether your business is a purple cow, and if not, how to make it purple.
This reminds me of the interview of a German manager whose family had been manufacturing garden dwarfs for centuries. Some twenty years ago, it was his turn to run the show. At the time, he said he hated the idea: How can you be successful with girls, he said, when they realize that you're in the business of garden dwarfs! As you may imagine, even if there are more and more garden dwarfs aficionados (including French designer Philippe Stark who made a stool out of a dwarf), most people tend to laugh at people who put dwarfs in their garden. They find it ridiculous, ugly what have you...
Now, it turns out that our German manager loves dwarfs and has developed a deep understanding of the garden dwarf market. What did he do to fall in love with his heirloom? He made a bet. He introduced a brand new (rather unexpected) kind of dwarf. His firm designed a new breed of dwarfs: For instance, a dwarf that has been killed by the neighbor. Imagine a dwarf, lying down, face (and beard) on the ground, with a knife deep in his back. This dwarf made a killing. The firm has sold tons of them.
The assassinated dwarf is a kind of purple cow. The dead dwarf is a fun and astute way of generating cash-flows out of the love-hate feelings that garden dwarfs trigger. You hate them, show it, buy a killed one. You love them and want to make fun out of your neighbor who hates them, buy one too!
As the Japanese koan wisely puts it, "always look for what you seem to miss in what you have." Many Internet businesses these days are born from this form of paradoxical wisdom. For instance, you think you do not have a hotel room, but as a matter of fact you do have one or even several, at home! So do many people all over the world who make Airbnb success. You do not have a cab, but as a matter of fact, you do have one, your own car. So do many people all over the planet who use Lyft, Uber... You do not have a distribution channel, but as a matter of fact you do have one, our PC and your Internet connection. Again, attitude beats latitude!
Daniel Kahneman is a faculty member at Princeton University and a fellow at Hebrew University. He is the winner of the 2002 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (erroneously known as the Nobel Prize in Economics), despite being a research psychologist and not an economist. Along with Amos Tverski, he has developed the so called "prospect theory" . On important feature of prospect theory is loss aversion.
According to Wikipedia, loss aversion refers to the tendency for people to strongly prefer avoiding losses than acquiring gains. Some studies suggest that losses are as much as twice as psychologically powerful than gains.
In a YouTube video, Daniel Kahneman gives his thinking on loss aversion. What is quite interesting is the point he makes on the difference between knowing the odds and not knowing them. When you toss a coin, you know the odds. When you innovate, fairly good chances, you don't know the odds.
When people don't know the odds, loss aversion disappears. People, according to Kahneman, behave optimistically. They are no longer shying away. They even tend to be overoptimistic.
That is what makes entrepreneurs a different kind of people: If they really knew the odds, they would never start in the first place! It seems, though, that venture capitalists are precisely those who want to know the odds and, above all, price them (business plans, Powerpoint presentation, valuation...). This may explain why they are so loss averse.
What is even more troubling though is how, despite my friend Nassim Taleb's writings, people, especially managers, can be fooled by randomness. They often take for genuine skills what is purely the output of luck. Think of portfolio managers claiming to outperform the market (do you really believe them given how many of them started the same rat race in the first place?), of CEOs loaded with stock options who were fortunate enough (few years ago) to see them end up in the money (see what happens when the stock market plummet, stock options are under water, does this mean that this time CEOs lack relevant skills or lost them?) etc...
Not knowing the odds is another way of saying that anything can happen. So, the first quality of an entrepreneur, apart from being an optimist à la Kahneman, is recognizing that systematically disentangling skill from luck is not worth the effort. What matters is the ability to define a business that does take advantage of luck, that is serendipitous, that improves through tinkering.
If you happen to be successful in the course of doing so, I will not blame you if you let others praise your skills.
But please don't let them fool you and others for too long!
Did you know that monkeys peel bananas from the bottom up (well to make things even more confusing this is the other way round since bananas grow upside down)? Anyway! If you assume that monkeys are banana experts (not a bold assumption to make), how can it be that we, clever humans, have it all wrong for so many years?
This is not a joke or some kind of "I love to turn conventional wisdom upside down" trick. The reason why I am interested in the art of peeling a banana is not to add my own explanation but rather to illustrate a principle, namely that of inversion. This principle is much useful as it can spark very creative processes. It is simple and boils down to the question "what if I were doing it the other way round." Yale University Professors Ayres and Nalebuff use this principle in their book entitled Why Not? and in their eponymous website.
Why do we have ATM machines where we can get money even if we are not customers of the bank where the ATM is located while we cannot do the same when we want to deposit money in the same ATM?
Why is that telemarketers who call us on the phone to ask us questions don't use a number which would credit our bank account, thus paying us for our time that so far they consume for free.
Think of Dutch auctions: Instead of proposing higher and higher prices, the auctioneer does the reverse and the bidder who wins is the one who steps in first (as opposed to last in "traditional" auctions).
Applying this inverted way of looking at business and people is indeed a unique way of creating new ideas, new business opportunities.
When I was an investment banker, I did realize that it was easier (to a certain extent of course) to buy from my clients than to sell to them. Not that obvious when you think of that army of fellows on trading floors called salespeople. They are not called "buypeople"! Buying derivatives from my clients made it easier to sell them derivatives. This is one the reason why the business of structured finance has been so lucrative: Putting in one single financial product derivatives bought and sold made the transaction more appealing. I will always remember this sentence from the floor: We have to make the product «optically good looking»! And, optics does involve inversion indeed: which side of the lens are you looking through?
A blogger abides to the inversion principle being both at the same time his or her own publishing company and the author. Airbnb homeowners become hotel managers. Cab clients turn into Uber cab drivers. Apple recreate the stores that Amazon and Dell wanted us to leave. Even hotel chains are applying the inversion principle. In 2014 Scandic Hotels has launched its Scandic to Go concept whereby you no longer go to your hotel. Your hotel room fully equipped comes to you wherever you are (as a matter of fact the spot has to be checked and cleared by Scandic first).
Monkeys are smart. Unlike Michael Porter, they know that value is nowhere to be found in a chain where everything always flows in the same direction. It does indeed pay to invert the flow!
So, next time you eat a banana, try it the other way around. While eating it try to find a new idea that would make the monkeys proud of you !
I once heard on the radio that Swiss students went on strike because they wanted more scholarships and less student loans. Who indeed would pay interest charges when you can find legal ways to avoid them ? A scholarship is nothing but a fully subsidized loan. In the finance jargon, what Swiss students have been asking for is a zero cost funding topped by the right not to repay the principal of the loan (right which in this particular case is always exercised.) Most of us would certainly love to receive free of charge money to fund the assets we want to invest in.
Even though I have a lot of sympathy for student activism, what strikes me in this episode is that (far too) many people, including students, seem to think that we live in an "All or Nothing" society. Either you get what you want in full (zero cost funding for that matter) or you get nothing (namely a loan with an interest rate).
But, wait a minute, where has creativity gone? Human brain is admirable precisely because it has always been able to fill the void between all and nothing. Let's take the example of the student loan again. The interest rate does not have to be either zero or strictly positive. What if students could get a loan where the forthcoming installments would be indexed on some future earnings measurement ? When students' future earnings would go down, the loan installments would go down too : Right when they badly need it. Take the worst case scenario where students do not find any job. In that painful case, the loan reimbursements would be suspended as long as the students do not find a job. When students' future earnings would go north, installments would go north too : Right when they can afford it.
I know there are many contractual details to be fixed to make this type of structured loan fly. Sadly enough and because of the 2008 credit crisis the creative folks at My Rich Uncle do no offer such a scheme and variations around it anymore (http://en.wikipedia.org/wiki/MyRichUncle.) Their schemes were quite innovative and available online ! But the spirit is still there: Use your brain to fill the void between all or nothing !
Recently, I visited vintage bookstores in Brussels. I bought an old business textbook dated 1900. It is titled "Textbook of Commercial Sciences" and has been written by Professor Merten of the University of Ghent. Two things caught my eyes. The first one is related to the way the reader can authenticate whether he is reading a true copy or a fake one. Simple, each true copy had to carry the author's signature. The absence of the signature signaled that the copy was a fake. Of course, it begs the question of how one knows the authors' true signature in the first place and how one can be sure it has not been counterfeited. In any case, it is fun to see that the compulsory signature indicates that book piracy was already an issue in this pre-Internet age !
The second thing has to do with copyright and copyright enforcement. We all know the traditional formula. It usually says "All Rights Reserved". Well, here the text is rather different. It is a lot more personal and a lot more detailed. Indeed, the publisher writes unequivocally:
"All rights are reserved in accordance with the law. I am willing to sue anyone who would, in violation of my copyright, reproduce any theory or proof from this book, either from past editions or from the current one." , The Publisher.
One cannot be more specific! I truly find it more « credible » than the usual "All Rights Reserved". Here again though, what strikes me is that we are still stuck in an "all or nothing" situation. Either the book is copyrighted (all) or the book is public domain (nothing: No Rights Reserved).
This is sad! What about having something softer that would say "Some Rights Reserved"? These rights would be spelled accordingly. Some uses would then be allowed without violating the publisher's rights. For instance, photocopies of books should be allowed in jailhouses or hospitals.I know that Harvard Law Professor Lawrence Lessig and the folks at Creative Commons have been fighting big time for this. Creative Common licenses do allow to change the copyright terms from the default of "all rights reserved" to "some rights reserved." But, the simple fact that they still have to fight for it is again strong evidence of the pervasiveness of the "All or Nothing" society.
The "All or Nothing" society is a real plague. The last thing we should do is surrender to it, an insult to our individual and collective intelligence, truly. After all, copyright is a social creation that we can and must adapt along the way. Some argue that copyright should be totally abolished. I do not think this is a good solution. A full copyright world is indeed not right. However, a no copyright world is wrong too. And, what is true of copyright is also true of property rights. It is an obvious fact that ideas can flow worldwide at click-speed. This does not necessarily mean that all copyright and property right dams should be destroyed. These dams do carry opportunities that can make them legitimate. What if, for instance, some of the royalties they trigger were allocated to public funds supporting innovative projects? What if we reconsidered what I call the Faustian swap (free service in exchange of all your data)? The swap is truly odious: the more free data are crunched, the more we are crushed. The more data are given away, the wealthier, more powerful and more uncontrollable robber robot lords are. Free is not fun at all!
So, next time you feel in an "All" or "Nothing" situation, please observe it carefully, there might be room for a new business.
Your next business! (Or, your next piracy?)
"Our fine arts were developed, their types and usages were established, in times very different from the present, by men whose power of action upon things was insignificant in comparison with ours... In all the arts there is a physical component which can no longer be considered or treated as it used to be, which cannot remain unaffected by our modern knowledge and power... We must expect great innovations to transform the entire technique of the arts, thereby affecting artistic invention itself and perhaps even brining about an amazing change in our very notion of art."
The Conquest of Ubiquity Pièces sur l'art, Paris, 1934, p. 103-104 (Bibliothèque de la Pléiade, Tome II, 1960, P 1284)
This quotation from a short essay by French writer Paul Valéry appears as the epigraph of Walter Benjamin's groundbreaking text: The Work of Art in the Age of Mechanical Reproduction. Authored in the 1930s by two men of letters, their writings constitute a visionary interrogation on the status of the work of art at a time when technology rendered it reproducible ad infinitum. Walter Benjamin's interest in the question did not arise haphazardly. His was passionate about photography. For him, photography is a form of art but unlike the other arts it allows for a multiplicity of prints remaining "identical" to the original. As technology permits large-scale reproduction of a work of art, Benjamin asked a key question: In what respect do we have to reconsider the relation between originals and copies since unlike for paintings we can no longer "authentically" distinguish the original form the copy? What becomes of art in a world of untethered reproduction?
As art amateurs we do have an intuitive answer. Indeed, we do experience a great difference between observing the Chartres cathedral stained-glass windows in the church itself and a print reproduction of the same stained-glasses. When we are inside the cathedral, we can feel the presence of thousands of pilgrims who prayed in front of the stained-glasses. The luminous contemplation of the famous Chartres blue is a direct link to them. The stained-glasses do not stand alone: they are wrapped into what Benjamin calls an aura. In that sense, Chartres stained-glass windows are truly authentic. And, this is precisely this aura that vanishes in the mechanical reproduction. This loss is not a full loss though. As Walter Benjamin put it:
"...by permitting the reproduction to meet the beholder or listener in his own particular situation, it reactivates the object reproduced."
Some eighty years later, the questions raised by Walter Benjamin and Paul Valéry are strikingly echoed in the domain of pedagogy, which is being thrown into upheaval by the emergence of Massive Open Online Courses (MOOCs), of which the best-known avatars are Coursera (www.coursera.org), Udacity (www.udacity.com), FutureLearn (www.futurelearn.com), EdX (www.edx.org) and OCEAN (http://www.ocean-flots.org/) Having previously escaped the digital tsunami that has wrought havoc on industry, academic institutions are now in the eye of the storm.
In a nutshell, MOOCs are courses to which millions of students throughout the world have free access via the web. Outfitted with a pronounced community dimension, the classes are neither walled off nor subject to geographical boundaries. Generally speaking, as is the case with Coursera, they are drawn up from colleges and universities such as Stanford, Yale or Princeton. The recent popularity of extra-mural pedagogy is nothing short of phenomenal; over the same lapse of time, student enrollment in Coursera has increased far more rapidly than member registration in Facebook or Twitter! As of now, Coursera counts more than four million students scattered around the world. Needless to say, e-learning and distance learning came into being prior to MOOCs, but neither of them has been able to attain comparable quantity (number of enrollees, countries and universities involved) or quality (worldwide learning communities, dissolution of the focal point of pedagogical authority). Michel Serres, the French veteran philosopher, Stanford professor and eternal optimist, is hardly worried by the shape of things to come:
"Far from disappearing, the class is plugging itself into the network and restructuring itself following an open and participatory model. It was previously formatted following the model of the page of a book: The teacher was in front of his class and held the position of the author, of the person who knows and transmits to those who are not in the know. Nowadays this model is falling to pieces. »
The shattering of the model is tantamount to the loss of the aura of the original, namely professor's lectures in an amphitheater. The master lecture is inherently theatrical. It brings together the actors in a classic unity of time, place and action. It is built around a focal point, the podium, the Power Point in the original sense of the word.
This short-lived unity, which is anchored in long-standing academic tradition, endows the lecture with an aura that is dissipated by MOOCs and the new technologies. A MOOC is initially a large-scale copy of the original, a copy rendered possible by the technological resources of the Web. And yet, it is far more than that; it is a reworked copy that Benjamin might have termed "reactivated". It is a copy which trumpets its infidelity with respect to the original.
This shattering could not help but vitally interest me for at least two reasons. The first is my passion for teaching. I taught economics and finance for more than fifteen years. This is an activity that I more than happily go back to when I am offered the opportunity. The second reason relates to Cyberlibris (www.cyberlibris.com), the firm which I co-founded fifteen years ago. Cyberlibris, whose digital libraries are used by millions of students worldwide, is a response to what we call the tyranny of the single, authoritative manual. Like it or not, the book has entered the age of digital reproduction. Similarly to MOOCs, which emancipate pedagogy from the enclosed space of the classroom, the digital book separates its content from its former "Gutenberg" container. The art of discovering and reading books is overhauled as a result. When a student reads a copy he is no longer depriving the other learners. Queuing up and rationing are becoming a thing of the past. As a digital community library dedicated to business schools, ScholarVox (www.scholarvox.com) epitomizes for instance this pedagogical emancipation. Day in and day out, several hundreds of thousands of students, professors and librarians converge towards a digital location where they can share their readings and manage, by design and community-based serendipity, to discover works they would surely never have otherwise known.
Needless to add, the library is anything but a new idea. On the other hand, the emancipated and emancipating library without walls is new indeed. Goodbye to the linear model of the appraised and validated, purportedly authoritative text; hello to a model of reading that is profoundly organic, literally natural. Mother Nature proceeds tentatively and uncertainly, by trial and error. That's how new species emerge, prosper or disappear. Mother Nature constantly make mistakes, and it is that what allows it to move forward in its untold wealth and multifarious diversity? In the digital library, students practice the same serendipitous "tatônnement" hopping from one book to next. They are a library away from their next book, a book away from their next library.
Given my digital library background and my passion for teaching , I could not help but ask myself questions on MOOCs and their repercussions on the arts of learning and teaching and, more plainly, on education and the institutions with which it has been associated.
Beyond Benjamin's interrogations, there are at least two reasons why this type of examination is indispensable at a time when MOOCs are becoming mainstream. The first of them is put forward in the highly pragmatic words of Sir Kevin Robinson:
« I mean, I always think this: Kids who start school this year in Australia in primary school will be retiring round about 2070. You know, nobody has a clue what the world will look like this time next year, let alone 2070. So, yes, parents are concerned and they're right to be concerned. I'm concerned. I've got two kids. But I'm concerned that they get an education which is tailored to these circumstances rather than the ones that obtained 150 years ago. »
Our educational model is derived from a long-standing tradition dating back to ancient Greece and the Gutenberg printing press. It was late in 19th century that presently existing compulsory education systems came into being. Since that time, their overall design has undergone hardly any genuine change. It remains permeated with a model derived from the master ironworkers of yesteryear. That's why it is high time to voice some concern. From this standpoint, MOOCs serve as active catalysts. The second reason for challenging the current model is that the diploma = employment equation that functioned so effectively for a number of decades has broken down. As underlined by Sir Kevin Robinson, the very notion of a degree is being trivialized:
« More and more people are now going to college and getting degrees. There are two reasons for this expansion. The first is population growth. In the last 30 years the world population doubled from 3 billion to 6 billion. The second reason is the growth of the knowledge economy and the growing demand for intellectual labor. The combined result is that in the next 30 years, more people will qualify, through formal education and training around the world, than since the beginning of history. This is an historic change in the demand for education, and it has huge implications for the nature of it. »
How Creativity, Education and the Arts Shape a Modern Economy, April 2005
My personal conviction is that MOOCs are providing a once-in-a-lifetime opportunity to comprehensively review and revise our thinking on education, pedagogy and the institutions through which they are administered.
With MOOCs, one moves from an economy of pedagogical perspiration (the campus, the walls, the classrooms, the faculty...) in which pedagogical returns are decreasing (once the classroom is filled with students, you have to have a new one to accommodate more students) to an economy of pedagogical inspiration where economies of scale are legion, where returns are increasing to scale and where serendipity is maximized. Who knows if among all these online African or Haitian students we won't find entrepreneurs, scientists whose discoveries will one day shake the world? MOOCs give long range wings to ideas. Ideas are freed from their traditional containers. They can travel faster and further away. Moreover, ideas are not like standard goods. The fact that you use Pythagora's theorem does not preclude me from using it at the same time as you. Academic institutions, which have been for so long the tabernacle of ideas, have now an opportunity to take advantage of these increasing returns to scale. But, this will require a great sense of adaptation from them. Mark Twain was so skeptical about this capacity for self-reform of academic establishments as to state:
"College is a place where a professor's lecture notes go straight to the students' lecture notes, without passing through the brains of either. "
Knowledge has become boundless, and MOOCs are avatars of today's overabundance. Knowledge is no longer a rare commodity; more precisely, it is no longer confined to campuses, which in Michel Serres's terms have become similar to the camps of the Roman army. Students can now play hooky and off the walls cherry-pick the courses they are most interested in.
Amidst the expansive portfolio of Coursera courses, the student may wish to take but a single course, for example the one given by Franklin Allen of the Columbia Business School. He is no longer required to tackle the whole Columbia curriculum after having been allowed to indulge his passion for finance. The freedom offered by the MOOCs is total: No curriculum is imposed. Each students can build his hooky playlist. For free! This worldwide hooky playlist game is not synonymous of lost revenues for schools and universities though. Scrutiny of the Coursera's geographical data shows that many registered students reside in emerging or underdeveloped countries. They undoubtedly are students who could not immediately have afforded the onerous tuition fees for Yale or Stanford. This means that these universities are not on the face of it losing any money at all.
This being said, two scenarios may be imagined. The first is based on the notion of filtering. By taking and passing the course units they have chosen, the students directly signal their value and interest to the universities involved and can easily be identified; when appropriate, they could be offered scholarships enabling them to accede to degree courses. The second scenario is inscribed in the same perspective. A student who one day was allowed to discover the source of his passion is unlikely to forget a decisive turning point in his life. It may even be presumed that when the time comes, he will decide to register in the university of which one of the on-line courses functioned as a revelatory foretaste. He will receive credit for the course.
The free-of-charge model is of course hardly new. This is the model on which radio is predicated. Radio is free; it can broadcast because third-party payers agree to substitute for the end user. It is easy to imagine that many third parties, particularly potential employers, will show interest in the data whose collection will be effectively facilitated by MOOCs. One can also suppose that companies will agree to finance and sponsor courses so as to derive benefit from information likely to serve the purposes of their selection and recruitment units.
This is indeed the strategy that is financially backed by numerous venture capital firms, particularly in Silicon Valley. Digital reproduction does not come cheap and this explain the Silicon Valley activism. The difficulty lies in the fact that once an initial investment is made (A quality MOOC is costly to put together), the marginal cost per supplementary unit is low. Advancing from two hundred to twenty thousand students poses no major problem. Everyone has access to the same MOOC. As a result, and in accordance with the teachings of microeconomics, it becomes difficult to charge a price for the supplementary units higher than the close to zero marginal cost and thereby generate sustainable income.
The monetary opportunity lies on the other side of the coin. It consists in the increasing returns offered by MOOCs. Co-founder of Coursera, Daphné Koller once mentioned that at Stanford, the "Machine Learning" course given by Andrew Ng, the other co-founder of Coursera, draws 400 students. On the Coursera website, however, more than 100,000 students take Ng's course. In order to achieve an identical result, on the Stanford facilities Andrew Ng would need to offer that course for one quarter of a millennium! Moreover, success breeds success. The more a course boasts a favorably inclined audience, the more candidates and the more students it attracts, and the more its franchise is reinforced. The fundamental question then consists in how to reconcile increasing returns to scale and the capacity to sustain a price higher than the marginal cost, that is to create a rent. In the minds of venture capitalists, the equation is simple enough. The option on that future rent has got to be captured through the injection of tons of money. One day, in one way or another, the option will be "monetized" as I carries lots of potential.
When one looks at this buoyant digital activity, it is hard not to be a trifle appalled when comparing a photographed classroom in 1900 and a photographed classroom in our time. Little or nothing has changed. Blackboards, tables, stools, podium are still in the same place. Only the uniforms have disappeared. However, as Benjamin was aware, the student no longer goes to class, to the original. The class, the copy of it, comes to the student. This inversion of the pedagogical path is fascinating and prompts me to take the risk of drawing an inventory of potential consequences.
The fact that MOOCs open the door to course granularity is crucial. The notion of curriculum established by the empowered academic authorities is still in almost all cases the dominant model. A student must fit in and meet its demands. If not, he runs the risk of failing to be awarded the coveted diploma. The curriculum contains a beginning, an end, and programmed progression. It is in some sense linear. MOOCs, on the other hand, are highly non linear: The student builds his own learning portfolio, grain by grain, according to his wishes and to his tastes. He does so outside the usual institutional boundaries. A finance-based comparison illustrates the repercussions of this very valuable non-linearity. It is inspired by the derivative markets. Any option trader knows that an option portfolio is of more value than an option on a portfolio. As regards the latter, any possible gain is binary: either the option is or is not in the money. As concerns the option portfolio, on the other hand, possible gains are decidedly more varied: each option may or may not contribute to the final gain. A greater number of lucrative possibilities consequently exist. It is preferable to dispose of a large number of "small" options on different assets rather than a "large" option on a single asset portfolio. This is somehow what trial and error is all about, a string of options which allows mistakes and rebound. You try something out, you are mistaken you try again. Since the trial is limited in scope and deleterious eventualities, the damage is minimal. MOOCs encourage this type of "tinkering" in which Mother Nature is indeed an expert. Otherwise we would not be here! They offer flexibility allowing the learner to "goof up" and enabling him to make one attempt after another, and to achieve self-discovery through experimentation. Far from stigmatizing error, they encourage him to learn from his mistakes and to wind up finding the right match for his needs. The learner thereby engages in "convex tinkering" recommended by Nassim Taleb and becomes "antifragile".
Bumbling, fumbling and stumbling are at once desirable and beneficial. And they are by no means detrimental to academic institutions, which derive benefit from this 1/N strategy by enlarging the pool of talents knocking on their doors. This is a crucial point: whether from the learner's or the establishment's standpoint, pedagogy has got to be convex. It has got to be not the locus of a single possibility, but rather the meeting point of everything and anything possible. This is the best way to address and respect the wide variety of the cognitive abilities presented in human beings.
Are diplomas yesterday's papers?
This spatial / temporal granularity and this non-linearity of education has radical repercussions on the very notion of a diploma. It is highly likely, if not a safe bet, that the notion of a diploma, taken as the ultimate validation of a finished industrial product, is bound to disappear. We will have to get used to attending fewer formal graduation ceremonies replete with their commencement addresses and caps and gowns. Is this really a loss? Paul Valéry was unsparing in his condemnation of the diploma:
"I do not hesitate to declare ; the diploma is the mortal enemy of culture. The greater the importance diplomas have been given in life (and their importance has steadily grown due to the economic circumstances), the lower the yield of teaching. The more prevalent the exams being given, the poorer the results. Poor in terms of their effects on public spirit and the spirit in general. Poor because they create hopes and illusions of acquired rights. Poor on account of the multiple stratagems and subterfuges they imply, the strategic preparations and, all in all, the use of all the expedients needed to cross the redoubtable threshold".
If one nonetheless wishes to conserve the term, the diploma will be the business of a lifetime. Each one of us will build the curriculum that suits him or her the best. The "diplomas" and itineraries will be as numerous as the learners. The diploma will no longer be a piece of parchment paper issued by a particular institution. There will rather be personalized sampling of the courses given by a large number of institutions. The constraints of time and geography will have gone with the wind. A diploma will no longer be the threshold detested by Paul Valéry. It will be a permanent individual and group building effort.
The virtues of syndication
How will this granularity affect existing institutions? There is a high likelihood of creation of granular models of "coopetition", which means models in which educational institutions agree to cooperate while competing with one another. This is already happening in Europe in the framework of the Erasmus exchanges and the ECTS scheme. MOOC technology will render it systematic and, crucially, planetary. One may imagine Harvard "labeling" a MOOC originating in Yale and integrating it to one of its degree-granting programs. Just like EdX and Udacity, Coursera will surely be called upon to become a MOOC syndication platform. Syndication will enable it to institutionally monetize the MOOCs available on its platform and by doing so, to generate income while remunerating the universities rightholders.
A wealthier ecosystem
Coursera and the other educational technology companies herald the arrival of pure players whose talent will consist in selecting among the dedicated portals the relevant MOOC "bricks". One may imagine a group of reputed professors building a platform containing their own MOOCs combined with those having been syndicated around, say, Coursera. The platform's validity will be premised on the professors' reputations and the originality of their proposals. This is where free-of-charge access takes on its full meaning. Indeed, it paves the way to setting the prices of syndication. The most popular free courses will, once syndicated, become the most expensive. It is also clear that academic institutions with a poor reputation will be called into question, as is made crystal clear by Professor Timothy Devinney:
"Having been at the top and bottom of the academic food chain (being both at U. Chicago and now in Australia at what is dominantly a teaching factory) I have seen the differences. The students at Chicago get knowledge at the coal face by people who understand what is both leading edge and sophisticated. Students here get commoditized information delivered by individuals who only know what they read because they are not leading edge scholars. Indeed, where the MOOC Tsunami will hit is on this commoditized end of the business."
Timothy Devinney, http://www.ft.com/cms/s/2/cde6163c-7f4a-11e2-97f6-00144feabdc0.html#axzz2QABQsuIB
Research: 1 point; Pedagogy: 1 point
The above remark by Timothy Devinney calls for a commentary. It may be considered as elitist insofar as the perfection of an academic institution would mainly reside in the quality of its professors' publications. We will not take sides in a debate as to what determines the scientific value of an article. This is neither the time, nor the place. On the other hand, Devinney's emphasis on the importance of scientific research spurs us to ask questions on the reasons for its omnipotence. One of them has to do with digital visibility, which reaches its peak in businesses or institutions such as Elsevier, SSRN and ArXiv. The articles and their authors are visible. They are digitally accessible. Up until recently, however, pedagogy and the pedagogues were not exactly in plain view. More precisely, they were visible within but not outside the walls of academia. Research carried the day for want of a visible opponent.
Emergence of the MOOCs represents a new deal. The pedagogues become highly visible. We can henceforth take it as a given that the promotion of professors will no longer exclusively depend on their research. It will also hinge on their pedagogical savvy and savoir-faire. In this respect, the filtering mentioned above will not involve the learners alone. It will also involve pedagogues, whose pedagogy will at long last be seen in the light of day. Learners will filter with the rigor and vigor that the Net encourages. Academic institutions will strive to hire the best pedagogues in order to endow their portfolios with the richest, most widely varied and relevant, not to mention the most audacious MOOCs.
Going off the (re)beaten tracks
At this time, MOOCs are still anchored to the curricula of academic institutions. In their seminal phase, it is par for the course that they rely on existing infrastructure. However, the audaciousness of the offer consists in their emancipation from existing forms. Teachers will have the opportunity to experiment with courses outside the tried-and-true taxonomies. More broadly speaking, a recovery of pedagogical liberty will be given impetus by an open invitation to take risks and engage in pedagogical tinkering. MOOCs will to an ever lesser extent be homothetic to a preexisting frame. They will rather devolve into a privileged field for large-scale experimentation and collection of data efficaciously contributing to the understanding of learner behavior. New subjects will emerge, and they will flout the usual disciplinarily specialized pigeon holes and compartments.
The art of conversation or the art of exposing oneself to risk
MOOCs restore prominence to the art of conversation that Michel de Montaigne held so dear as to prefer a brain well-formed to a brain well-filled. Today's classrooms remain hierarchical organizations in which pedagogy is aimed at filling heads up. However, it is obvious to any visitor in these precincts that heads are no longer content to be docilely "crammed". Quite on the contrary, they converse, they chat either physically or virtually. Only distractedly do they hearken to what's being professed on the podium. They are free because they know that the connected place providing access to the stock of knowledge is right before their eyes: the laptop, the tablet, the smart phone are screens that screen out the academic monologue. And new heads require new rules of engagement compatible with the tools they are helping to fashion. The "knower" (the professor) finds himself amidst the "knowing" (the students) as primus inter pares, first among equals. He has no choice but to run the risk of casual, informal conversation. He has no choice but to lay down his arms as an authority figure and to recognize that far from being the sole driver, he is himself a passenger. The knower and the knowing form an enigmatic couple that brings to mind the hedgehog and the fox, of whom the first recorded mention dates back to the 7th century before Christ. In a stand-alone verse of the poet Archilochis, as cited by Isaiah Berlin, we may read:
« The fox knows many little things. The hedgehog knows one big thing."
In more recent words, "The hedgehog always remains at the same place, stalking the prey within its reach. As for the fox, he is ever on the move, hunting for a wide variety of game." (Irène Tamba (2012)).
The professor, or the hedgehog, the porcupine, symbolizes centripetal force. The student, or the fox, symbolizes centrifugal force. If a classroom wishes to have a ghost of a chance of renewing its "aura", it must mutate into a space of sharing, of invention, of assumed orality. But that alone cannot suffice. The site where the rejuvenated class will provide new food for thought shall have to be re-conceived. Its architecture should not survive in a form inspired by "power point" pedagogy. Its libraries must not remain storage zones. Its territory has got to be transformed into an agora where silence is the exception, and not the rule. All told, campus architecture will need to be reviewed to as to emancipate itself from the "Roman camp" model castigated by Michel Serres.
The digital "trivializes" pedagogy, rendering it reproducible. By contrast, the physical pedagogical site cannot and must not be trivial. It has got to be difficultly reproducible, it has got to make the seeker of knowledge desire to enter. After all, it is a site made for meetings of minds, and that is the way it has got to be thought out. It has got to be unique, and equal to the challenges posed by the encounters, the "hic et nunc" exchanges between human beings who will never be wholly reproducible.
To whom does knowledge belong?
A MOOC is structured around one or several professors, who hold positions in academic institutions. How are we to define intellectual property when knowledge is disseminated via a MOOC? Let us imagine for illustrative purposes that a Yale professor, author of a successful MOOC, leaves his university for Harvard. Is he the proprietor of his MOOC, or has he ceded the copyright to the university of which he is now an employee? Once employed in his new university, can he bring into being a similar MOOC without being considered as an intellectual hacker? The intellectual property issue is far from negligible, and it shall need to be treated with vigilance and diligence by the universities intending to utilize MOOCs. One may imagine that a system similar to the one governing the economy of books will be put into place. While the professor will take on the role of the author, the university will assume the role of the publisher. The publisher will agree with the professor on contractual terms, operate the MOOC of which the professor is the author, and remunerate him according to the sales recorded by the MOOC.
How to evaluate, to certify, to accredit?
Traditionally, an educational system hinges in the notion of grade or mark, of an evaluation given by instances the legitimacy of whose authority cannot be called into question. With regard to MOOCs, on the other hand, observers have noted some trending towards peer evaluation, which is no longer wholly vertical, but also and significantly horizontal. On this subject, a method has been set up in Coursera (http://help.coursera.org/customer/portal/articles/1163294-how-do-peer-assessments-work-, https://www.coursera.org/about/pedagogy ).
This assessment is premised on the community-based dynamics constituting one of the guiding principles of the MOOCs. A student can draw support from a widespread network of other students registered for the same MOOC. Horizontal pedagogy both complements and supplements vertical pedagogy. Mutual pedagogical assistance brings together students who up until the moment before were total strangers. Digital solidarity is a common phenomenon on the Web; question & and answer forums are but one example. As concerns MOOCs, it is of paramount importance. In fact, digital solidarity is their alpha and omega, and it is no surprise to find it present in the assessment process.
What happens to confidentiality?
This is a recurrent preoccupation on the Web. Whether voluntarily or involuntarily, Internet users leave behind a number of tracks and traces that pique the interest of businesses. MOOCs can hardly be immune from ongoing debates on protection of private data. It is all too easy to imagine the hunger of companies for the academic records of MOOC users, which are essentially open for inspection! This is by no means an unreasonable concern. Data are a strong currency, and we shall not leave them in the hands of digital speculators. That much said, it must not lead to obliteration of the collective intelligence that aggregation of individual information allows to emerge. This is a fine line, but as always the devil lies in the details.
In praise of Babel : What is to happen to public education authorities?
MOOCs are a homage to the Tower of Babel. Persons from hundreds of countries converge towards the MOOCs, which are derived from similarly multifarious professors and universities. Their diversity is an undeniable source of wealth. However, it just as undeniably raises questions concerning the supervisory authorities in public education and their mission consisting in the recognition of diplomas. Once degrees have become granular or gone so far as to disappear, what role shall national ministries of education and higher learning have to assume? What will be their missions in a geographical perspective dispensing with boundaries between nations?
At the end of 19th century, Ferdinand Buisson, a French General Controller of the Ministry of Education , tried to make "play hooky" part of the official instruction process through a method he called "the intuitive method":
"Sirs, the intuitive method is the one that tells the teacher: your task is heavier by the day. It is getting more complex. To get it done, you need to be helped. By whom? By good books, good tools, good programs? Yes, of course but even more by the student himself. He is your most reliable auxiliary, your most efficient co-worker. Make sure that instruction is not imposed on him. Make sure he takes full part in it and your problems will be solved. Instead of pulling him to make him advance, he will happily walk with you."
The core of the game has not changed that much! MOOCS are play hooky at its best. Play hooky has always been viewed as a bad habit. It is considered futile musing. But kids playing hooky are close to real life, playing with insects, looking at flowers and trees, gazing at the clouds, listening to bird songs. Their get a lot through their musings. They just need someone to give them some perspective to fully learn from their escapades. That's what MOOCs do at the end of the day. In his best seller "A Whole New Mind"; American author Daniel Pink writes:
"When facts become so widely available and instantly accessible, each one becomes less valuable. What begins to matter more is the ability to place facts in context and to deliver them with emotional impact."
So it goes with pedagogical contents. When they become so available, so abundant and accessible in so little time, they take on less importance. On the other hand, the ability to put them in context and provide them with emotional impact is perhaps what matters most.
Today's upheavals are particularly captivating insofar as they are likely to call upon our cognitive processes in many more ways than one. Subsequent to the works of Professor Roger W. Sperry, winner of the Nobel Prize for Medicine, we now know that the two hemispheres of our brain fulfill different yet complementary functions. The left hemisphere is the site of sequential thinking; the right hemisphere is the site of simultaneous, holistic thinking. Daniel Pink sums up the duality as he writes:
"The left hemisphere specializes in text; the right hemisphere specializes in context."
To summarize by once again citing the celebrated fox/hedgehog aphorism dating back to the 7th century before Jesus Christ, the left part of the brain assumes the role of the hedgehog, while the right part is reminiscent of the fox.
MOOCs favor learning through tinkering. They enable us to learn many things. What matters now is to endow this sequential tinkering with meaning and to arrive at a synthesis, what Daniel Pink calls right-brain thinking. Classroom pedagogy, which has so often been premised on left-brain thinking (an almost cult-like status), is challenged to capitalize on right-brain thinking. A pedagogue has to place himself at risk: he has to ignite his faculties of emotion, of esthetics, of context, of synthesis, of overview. Excepting the initial conception of MOOC, he is no longer the pope of left-brain thinking. In his pedagogical art, he has got to transform himself into an apostle of right-brain thinking. The architecture of the campuses in which right-brain thinking is called upon as likewise got to be comprehensively transformed.
Today's campus architecture, which is built around "Power Points", corresponds to a situation where hedgehogs try to train foxes. The future architecture of campuses shall have to develop in such a way that foxes and hedgehogs can switch roles in the same space.
In his Essays, Montaigne wrote that he preferred a well-made to a well-filled head. A full head is inclined towards left-brained rather than right-brained thinking. As of now, one shall not have one without the other. When push comes to shove, a well-made head is an hybrid one that details and connects; neither function systematically wins out over the other.
In an age of technical and digital reproducibility, pedagogy has to rise to the challenge of facilitating the flourishing of well-made heads that do play hooky!
Management, these days, is full of corporate metrics that managers are urged to follow, to maximize or to minimize, in any case to outperform: EVA, CFROI, shareholder value, etc... to name a few.
The theory underlying these catch-all metrics boils down to the idea that following them is good for the corporation as a whole. As a result corporate decisions should always be benchmarked against them. In a nutshell, what is good for shareholders is also good for the firm as a whole. Managers who do well with respect to the metrics shall then be handsomely rewarded.
Surprisingly enough, the discussion around the true relevance of these benchmarks is rather tenuous. Yes, market imperfections are discussed and principal-agent models, game-theoretic-models have been crafted to discuss situations when incentives of different stakeholders are not properly aligned.
However, it is rather puzzling that a principle known under the name of "Goodhart's law" is hardly mentioned in business books. The law is named after Professor Charles A. E. Goodhart, Norman Sosnow Professor of Banking and Finance at the London School of Economics, who crafted it with central banking in mind. According to the 99th edition of Pears Cyclopaedia (1990--1, pp. G 27, G31), the law states that:
"As soon as the government attempts to regulate any particular set of financial assets, these become unreliable as indicators of economic trends."
"financial institutions can... easily devise new types of financial assets."
Professor Charles Goodhart was Chief Adviser to the Bank of England. He gave his own statement of the law in his Monetary Theory and Practice textbook, page 96:
"Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes."
In other words, when a measure becomes an objective, it is no longer a good measure. Too much emphasis on a measure as a target kills the measure that may have been relevant in the first place. Why? Because it is all to obvious that people who are subject to a given metric (say, outperform some profitability index) will do whatever it takes to beat it. They will game it as much as they can. For instance, in the case of an asset profitability ratio, they will minimize the denominator (assets) instead of maximizing the numerator (profit). This will last as long as the asset accounting trick is not discovered. And, this can last long: It was recently discovered that Toshiba manipulated its profitability seven years in a row! The more distant history is also quite rich in such stories, chief among them that of former USSR and its obsession for production targets (yielding the results that we all know about).
Now, even if metrics parameters are not manipulated, metric based management and compensation is not a good idea at all as it tends to reward (convex exposure to) luck rather than skill. Take the example of stock-options. A lot of managers became wealthy upon their exercise. Was it because they were remarkably skilled or just because it turned out that interest rates were going south lifting the stock price? How do you distinguish between what is due to chance and what is due to skill? Is not it unfortunate that metrics end up paying well people that were simply in the right place at the right moment?
Worse, in economies like our today digital economies which are highly non-linear (knowledge-based economies, complex systems, winner-take-all etc...), it is not even clear that any such measure does exist. More often than not, obliquity is at work. Metrics are very poor at capturing the richness and complexity in which we live and operate. They simply don't work.
So, why is that most business books authors and professors forget about Goodhart's law as if they were petrified telling students that, indeed, the oblique world outside is not made for metrics?
The objectives we reach are rarely those we had set at the start. British economist and columnist John Kay,(www.johnkay.com), calls this salutary deviation "obliquity".
The zeitgeist seems anything but oblique. Businesses and managers are asked to focus all their efforts on one goal only: to reward their shareholders, namely maximize their wealth. To fulfill this task managerial metrics are legion "Economic Value Added", "Cash Flow Return on Investment", "Risk Adjusted Return on Capital" etc ... Similarly, we measure the wealth of nations in terms of the gross domestic product (GDP) despite its numerous defects. GDP is the goal. To correct the GDP deficiencies, it has been suggested to use an Gross Happiness Product (GHP). GHP should be the next goal. Shall we really abide by these metrics? Or shall we be skeptical about their merits?: It is indeed easy to game them especially if one is handsomely rewarded for outperforming them. Are metrics good guides for action in the hyper-connected world in which we live assuming they are not gamed?
John Kay has a nice oblique story to show that we should beware. This is the story of the American Department of National Parks. One of the priority tasks of the Department is to protect forests and prevent them from being devastated by fires. There was a time when that mission took a very simple form: zero tolerance. Any fire should be extinguished. No fire outbreak was tolerated. In practice, this firm policy turned into rather embarrassing statistics. Instead of a reduction in fires, US officials observed an increase in fires. Their mission had failed. The objective was not reached. How come rigor was so poorly rewarded?
We must let the ground speak. The forests are dense environments in which bushes and trees coexist. These bushes are a potential threat. They can fuel major fires. It is therefore advisable, in addition to manual undergrowth clearing, to let small fires complete the job. Thus, instead of implementing a drastic zero fire tolerance policy, the Department would have been wiser to let rangers on the ground gauge the situation and decide whether or not to intervene. This holistic approach prevails today.
Such an adaptive approach is particularly relevant in systems where small variations may entail subsequent changes of great magnitude. The flagship example is the butterfly whose flapping wings in Africa trigger a violent tropical storm in the Caribbean a few weeks later. What this example essentially says is that complex systems are very sensitive to initial conditions. A slight change in a parameter (the wing flapping) is followed by a radically different system response. The system nonlinearities route the new response along brand new and, more often than not, unexpected paths. Complex systems like forests, fires, weather behave in a nonlinear fashion which implies they are unpredictable.
The digital economy exhibits a similar nonlinear behavior. Its complexity increases at the hectic Internet connectivity pace. This never ending branching process creates a vast archipelago whose many islands are no longer independent of each other. Its growth is such that what gets big is deemed to get bigger or to vanish. Moreover, our societies have moved from a mainly physical economy of perspiration (which Jack London documents in the Abyss Society) to an inspiration driven (digital) economy. Does it make a difference? Yes it does!
Secondly, it does because the economy of ideas is characterized by a very particular production cost structure. A standard perspiration good must be manufactured unit after unit to be sold. Each unit requires the mobilization of fixed and variable costs. It comes at a strictly positive marginal cost. An inspiration good is different. The original unit requires a significant initial investment outlay. The next units are copy/paste of this original unit. Hence their marginal cost is close to nil. Take the celebrated example of Microsoft's Windows software. Microsoft charges a hefty price for each copy of the software despite the fact that the cost of each extra copy is almost zero. Microsoft is able to extract a rent, a float from its clients. It enjoys monopoly power. Economists teach that the best way for an economy to be prosperous is to foster competition. Competition will eliminate rents as long as prices are not equal to the marginal cost. At this level profits are said to be normal, to be fair. But if we were to apply this competitive pricing rule to, say, Microsoft it would go bust. It would have to charge zero for its software as indeed its marginal cost is nil. It would be unable to recoup the initial outlay. In order to survive and be profitable, Microsoft needs market power. If things go well, it becomes the winner, the winner who takes all.
The question is then obvious. How does Microsoft reach this "managerial nirvana" without prematurely passing away? To answer this question, American economist Brian Arthur of the Santa Fe Institute compares the world of the British economist Alfred Marshall (1842-1924) to that of increasing returns to scale. The world of Marshall is an industrial world with capacity constraints (a plant cannot produce more than its capacity) and diminishing returns (once the capacity is reached returns tank). In this world, one day or the other, the profits converge to their "normal" level. In his Principles of Economics, Marshall demonstrates that this result obtains through optimization techniques, derivatives of cost functions etc...
The world of increasing returns to scale is totally different. This is a world where things move potentially very quickly: those that increase increase even faster, those that fall down shrink even faster. The typical example is network effects à la eBay. Sellers join eBay because they know that buyers are there. Buyers join too because they know they will find sellers there. The winner, eBay in this case, takes all. The more it does, the more it does! We can say the same about Twitter, Instagram or Facebook. The consequences of such a world are well known: imperfect competition (must be able to charge more than the marginal cost), uncertainty (a small change, a mistake can upset all), unpredictability (can't predict in fast changing nonlinear world), "winner take all" and record profits for the winner (2 + 2 = 8). This is how Microsoft got its Windows market power. This is how the most sought after Unicorns are born!
How should individuals, institutions, businesses and governments behave in a world so different from that of Marshall? Should they optimize, fine-tune metrics and try to outperform them? Or should they adopt a holistic behavior like US forest rangers?Well, it seems sensible in our world (which is a mixture of the Marshallian world and the Arthurian world) to develop a strong sense of adaptation. The world of increasing returns is really an oblique world that can play tricks on us. To garner "hits", metrics, whatever their "sex appeal", won't work. They are the sure recipes for failures. A slight mistake in the metrics and everything falls apart for good or bad. One cannot, for example, understand why Facebook paid so dearly to acquire Instagram or What's App using standard Marshall thinking. Facebook, despite its sheer size, is not immune to the digital flapping. Facebook was created at a time when the mobile smartphone revolution had not yet been "fomented". Instagram however is a genuine product of the smartphone phenomenon. This is its DNA. Instagram or What's App wing flapping may cause a storm at Facebook: A team of thirteen person and a small app were able to attract millions of users. At the time of its difficult IPO, Facebook could not take the risk of either Twitter or Google rounding up Instagram or What's APP. This is certainly a costly but ultimately very oblique bet. For, no one can say today what future "business model" will eventually justify or invalidate the amount paid. What is sure is that Facebook did not want to miss the smartphone crowd, the related advertising money and of course the the formidable data aspirator that both apps constitute.
Digital obliquity should also be pondered by governments and regulators. Governments in charge of drafting the institutional framework conducive to the prosperity of their nations must accept that the digital economy they contributed unleash requires a flexibility incompatible with their partisan ideologies. The cherished (linear) cause to effect link no longer works. Governments must adopt a Louis Pasteur stance: "chance favors the prepared mind." Serendipity must become the keyword of their programs even if serendipity seems to deprive them of any control on events.
Regulators should resist the urge to regulate everything, to codify everything, and above all to do it too soon. Regulation that wants to eradicate piracy (zero tolerance to fires) is an example. Moreover, it is the exact opposite of the "habeas corpus" dear to the Anglo-Saxon. The presumption of guilt becomes the rule. It is up to the innocent to demonstrate that he really is. It is not by enacting such drastic legislation (inspired mostly by incumbent corporate interests), by not listening to what pirates are saying that one prepares the nest of future business models.
The eagerness with which the French law on e-book prices has been passed is a vivid testimony of what not to do. In short this law says that only the publishing house can set the price of an e-book. This price has to apply to all distributors at the same time. The truth is that the sole purpose of the law is to protect the print book chain (from authors to readers through publishing houses, distributors and booksellers), to duplicate it in the digital world. A chain that becomes truly one, unable to unchain, unleash and redistribute productivity gains. This law is everything except oblique. It tries to freeze things instead of providing market players with the proper incentives to digitally adapt and innovate.
Famous British detective Sherlock Holmes would have clearly objected to it. In the Valley of Fear he reminds one of the protagonists the extraordinary value of being oblique:
"Breadth of view, my dear Mr. Mac, is one of the essentials of our profession. The interplay of ideas and the oblique uses of knowledge are often of extraordinary interest."
And he was not living in the digital gilded age where obliquity is the name of the game!