The Next Big Thing Redux
Robert E. Wright, Nef Family Chair of Political Economy, Augustana
University
For Sioux Falls Downtown Rotary, Sioux Falls, SD, 1 August 2016
You’re
all conversant with the concept of tipping points, or critical turning points when
X rapidly changes into Not X. And you probably realize that tipping points can
cascade, or cause changes that spur yet more changes, eventually leaving the
world transformed. Tipping points are important in business, too, and who among
us isn’t involved in business as an employee, investor, proprietor, or
consumer? People who see a tipping point coming can make billions. Just ask
George Soros or Warren Buffett. People who don’t see tipping points coming can
lose billions. Ask the executives of Kodak, Xerox, or Enron, if you can find
them, or even recall their names. Those folks were trend line followers, or
naïve optimists.
Predicting
tipping points or other types of reversals is of course much more difficult
than following trends, which helps to explain why the remuneration is so much
greater. Spotting a truly new trend can be lucrative – just ask the people who
bought tickets to the Hamilton musical in 2014 -- but following an existing trend
will earn tenuous rewards at best. That is because everything changes sooner or
later. The key question is not “if” but “when”
or “how.”
Change
over time is at the core of only one of the traditional liberal arts
disciplines, History, and yet most business people, and even most business
professors, do not make a serious study of it. That is probably because most
equate History with dry political facts or, perhaps worse, arcane cultural
minutia. The most successful value investors, however, know a good deal of history,
especially business history.
That’s
right, there is an entire subfield of history devoted solely to the study of
individual innovators, key corporations and other business organizations,
important industries ranging from coal mining to banking, and the economic
growth and development of local communities, states, regions, nations, and
continents. Unfortunately, business history is usually only taught at the
graduate level and only in the best business schools, places like Harvard,
Stern, Penn, and Darden. I’ve tried to integrate it into the curriculum at
Augie, only to be met with silent, blank stares from professors and
administrators alike, at least until Pam Homan joined the Augie team last fall.
The only
other Augie leader to show an understanding of the importance of business
history is Harry Thompson, head of the Center for Western Studies. It was Harry
who encouraged me to write a book about the history of entrepreneurship in
South Dakota. Nobody expected the book, which we titled Little Business on the Prairie, to make any bestseller lists but we
have been disappointed in sales nevertheless. Once again, business leaders are
leaving cash on the table, or exposing their businesses to losses, by failing
to see the importance of business history.
I
guarantee that in a decade your line of business, regardless of what it is,
will be vastly different from what it is today. That is because the city,
state, regional, national, and global economies are in flux, as are the
technologies with which you purchase inputs, coordinate your work flows, and
sell your output. Blockchain technology and so-called smart contracts, for
example, are poised to revolutionize how businesses work even more fundamentally
than the Internet did.
Instead
of going with the flow and hoping a waterfall does not loom around the next bend,
you need to be able to peer into the future, if only enough to avoid disaster.
And the best way to understand the future is to understand the past, which,
after all, is nothing more than a chronological series of presents, of moments
of uncertainty about what the next present would bring. Study how previous
presents changed over time and patterns much more sophisticated than following
the current trend begin to emerge. Place those changes into ever larger
contexts and those patterns become more nuanced and hence robust. Soon you will
see that history does not literally repeat itself but it does rhyme and slant
rhyme. You will never be able to predict the future with certainty, of course,
but you’ll be able to assign relatively accurate probabilities to the more
likely major outcomes. That is exactly what successful economic prognosticators
like Bob Shiller and Nouriel Roubini do, and forms a large part of the strategy
of successful value investors like Charlie Munger.
Little Business on the Prairie does not provide readers with
off-the-shelf predictions applicable to their specific business niches but it
does give those heavily involved in the state’s economy with the context needed
to stimulate their own thinking and research. Foremost, it establishes that South
Dakota has long enjoyed one of the highest levels of economic freedom of any of
the states or provinces of North America and that stimulated considerable
amounts of entrepreneurship, especially replicative entrepreneurship, throughout
its history. That is important because entrepreneurship begets more entrepreneurship.
People are much more likely to be self-employed, to form their own businesses,
or to innovate in the workplace if they know someone else who is self-employed,
owns his or her own business, or makes improvements in his or her job.
Once the
state generated a reputation for economic freedom it attracted free spirits,
like shepherd turned author Archer Gilfillan, who called South Dakota quote A
great land! A free land! unquote because it gave him quote the opportunity to
live his own life in his own way unquote. Conversely, statists and socialists generally
eschewed the state until recently.
Cultural
selection certainly occurred as well. In other words, the least risk-loving
settlers were the ones most likely to leave the state. The quote unquote stickers,
as the ones who stayed behind called themselves, were the ones who most readily
adapted to rapidly changing economic, political, and climatic circumstances.
Freedom
loving stickers like Gilfillan naturally voted for politicians who were freedom
loving stickers too, policymakers who saw value in innovation,
entrepreneurship, self-reliance, and self-employment. Unsurprisingly, early South
Dakota lawmakers tended to be friendly towards business, especially small and
local companies. That is the deeper context and background of South Dakota’s
business friendliness or relatively high level of economic freedom today.
As a
result of its business-friendly legal and political atmosphere, the history of
South Dakota can be told as the history of one quote unquote BIG THING after
another. Today, I’ll survey the state’s big things in the hopes of ascertaining
what might be coming next. Note at the outset that these Big Things did not disappear
completely but rather continued to the present, albeit in smaller ways. For
example, the first Big Thing, dating to about 10,000 years ago, was BIG GAME
HUNTING AND PROCESSING. Those activities still occur in the state today, they
just are not as important to the overall economy as they once were, declining
from an estimated quarter of GDP then to less than one percent of total
economic activity today. Augie archeologists, for example, tell us that on
Firestone Creek in present day Mitchell there existed a site where Indians
processed bison into pemmican, a mixture of fat and meat resistant to spoilage,
that was sent down the Missouri River to Cahokia, near present day St. Louis,
for purposes of trade or tribute. By 800 AD and possibly earlier, RIVER VALLEY
HORTICULTURE AND LONG DISTANCE TRADING were probably even more important than big
game hunting. South Dakota’s river valleys were by then already part of a corn
belt and the ecotone, or transition zone, between the woodlands of the east and
the plains of the west. Eastern South Dakota was by then an important zone of
long-distance trade, as demonstrated by the artifacts recovered from the Blood
Run site along the Big Sioux River just outside of Sioux Falls. By about 1325
AD, if not earlier, SLAVE RAIDING and TRADING was also a Big Thing, as
evidenced by the skeletons at the Crow Creek massacre site near present-day
Chamberlain, which included the expected distribution of both genders and all
ages, except young women, who presumably were enslaved. And you thought sex
trafficking was new.
During
the sixteenth, seventeenth, and eighteenth centuries AD, after indirect trading
and then direct contact with Europeans, the FUR TRADE became the next Big
Thing. That included bison and bear hides and elk and deer skins for sure but
also the pelts of beavers and other small furbearers.
The BLACK
HILLS GOLD MINING BOOM took place in 1870s but the placer prospectors actually
did not find much gold compared to what would eventually come out of the Homestake
Mine. Instead, what boomed were the various businesses that found it lucrative
to supply the miners with what they needed, which included clothing, food,
shelter, and something euphemistically called entertainment. This shows that
sometimes it is better to supply the producers of the next Big Thing than to be
directly involved oneself. Internet backbone manufacturer Cisco Systems, for
example, continues in operation while Boo.com, Boxman.com, Clickmango.com,
Etoys.com, and thousands of other tech startups live on only as examples of
irrational exuberance in various blog posts.
The
1880s witnessed the Great Dakota Boom, the rapid expansion of EAST RIVER
FARMING. Efficient farmers and railroads were the big winners here, along with
successful town boosters in places like Aberdeen and Huron. The boom ended with
the rains so some South Dakotans in the 1890s turned to FINANCE, especially
COMMERCIAL and MORTGAGE BANKING, and also CORPORATE LEGAL SERVICES. That might
sound odd but the state tried to unseat New Jersey as the corporate charter
capital of the country, only to lose the contest to Delaware after South
Dakota’s lightly regulated chartered corporations gained an unsavory reputation
among investors for fraud and chicanery. South Dakota officials have made noises
about making another run at Delaware and I’ve publicly argued that it is
possible it could win so CORPORATE LEGAL SERVICES could become a Big Thing in
So. Dak. once again.
RANCHING
was the Big Thing of the first decade of the twentieth century, especially WEST
RIVER, where the open prairie was enclosed by barbed wire fences for the first
time, forcing small scale operators like Bruce Siberts out of the free range cattle
and horse business.
In the
1910s and 1920s, WHOLESALING was the Big Thing as companies like Brown Drug
Company of Sioux Falls cropped up and grew by supplying various RETAILING
establishments throughout the Northern Plains. Competition was intense,
especially as automobiles proliferated, which they did amazingly quickly in a
state terrorized by its own vast spaces. The aggregate number of trade centers
in South Dakota, where most retailers naturally located themselves, declined by
just one during the 1920s. Turnover, however, was 50 percent. In other words,
half of the little towns in existence in 1920 were gone by 1930; the retailers that
inhabited them went bankrupt or moved on to the next trading center.
That
brings us to the 1930s, the decade of the Great Depression, when the Big Things
were the PUBLIC DOLE and PHEASANTS. When people think of the Great Depression
on the Great Plains, they think of the Okies of John Steinbeck’s Grapes of Wrath. A higher percentage of
South Dakotans, however, were on the public dole than the residents of any
other state in the union. Meanwhile, pheasants, which had been introduced in
the 1910s and 1920s with mixed results, thrived in the state’s many
uncultivated fields, supplementing the diets of many a rural family with cheap
protein and cementing the state’s reputation as one of the world’s premiere
pheasant hunting destinations.
The
1940s brought World War II and renewed prosperity that manifested itself in
many ways, the most important of which was EAST RIVER FARM MECHANIZATION AND
CONSOLIDATION. Steam tractors had appeared on the prairies in the 1880s and modern
gasoline ones in the 1920s but it was not until the 1940s that it was clear
that pack animals would soon completely disappear from the state’s farms,
replaced by efficient but expensive mechanized critters that devoured farmers
who were not shrewd businessmen as well as keen agriculturalists. Innovations
included the proliferation of so-called sidewalk farmers who lived and worked
in town during the week and tended their farms on evenings and weekends and
also suitcase farmers who, like giant mechanical geese, worked multiple farms
in multiple states by following differential seeding, weeding, and harvesting
schedules.
In the
1950s, the federal government stepped in to provide the next Big Thing, the RENEWABLE
HYDROELECTRIC ENERGY produced by the dams of the massive Pick Sloan Missouri
River improvement project. To this day, South Dakota gets well over half of its
electricity from its hydroelectric dams, something this old boy from Western
New York, which gets most of its electricity from Niagara Falls, surely
appreciates.
Aided by
another federal project, the interstate highway system, TOURISM was the Big
Thing of the 1960s. The state of course had always attracted visitors,
especially to the Black Hills. At first many came by rail but in the postwar
period the automobile reigned supreme. And the motorcycle. The 1960s was when
the Sturgis rally really began to take off as a national event. Pheasant
hunting remained important and the so-called great lakes formed by the Pick
Sloan project began to attract notice as one of the Midwest’s premier fisheries
too.
In the
1970s, MANUFACTURING grew by leaps and bounds in the state, though admittedly
from a low base. Between 1969 and 1984, about 100 manufacturing businesses left
Minnesota for South Dakota to reduce their tax and wage bills. Litton, Sencore,
Grant, Raven, and others built everything from air balloons to microwaves to
motorcycle helmets in the state. Some folded, moved, or were bought out, but
others, like Trail King Industries, took their places.
The
1980s saw the revival of the state’s FINANCIAL SECTOR with the entry of
Citibank and other banks into the CREDIT CARD PROCESSING INDUSTRY. Well
educated, hardworking, inexpensive workers without strong accents located in
the center of the country was a dream come true for Citibank executives, who,
contrary to myth, decided to move operations to Sioux Falls before the state
dropped its usury cap. Ironically, liberal do gooders with little understanding
of history, business, economics, or even rudimentary arithmetic are currently
trying to cap interest rates on small consumer loans in South Dakota once
again. If they succeed, the next Big Thing might be businesses that work around
their silly little law.
In the
1990s, HEALTH CARE was a big growth industry in South Dakota. That was the
decade when Sioux Valley Hospital, now Sanford, Avera McKennan Hospital, and
Regional Health in Rapid City began to rapidly expand and consolidate. By the
first decade of the twenty-first century, agriculture was once again on a solid
footing, after terrible troubles in the 1970s and 80s, because of improved
techniques and technologies but also due to SPECIALIZED “NEOAG” PROPERTY RIGHTS
that separated land ownership from agricultural rights, water and mineral rights,
and hunting rights. Because of this intricate system of contracts, an
octogenarian living near Madison can lease land he owns in western Miner County
to a resident rancher, a nearby farm operator, and a hunter from Sioux Falls,
thereby maximizing both the use of the land and his income. And in dry years,
he can sell excess water on his land to his neighbors. ETHANOL is another recent
Big Thing thanks to bumper crops of corn, POET, and government subsidies.
So,
finally, we have reached the present and can start to think about what might be
the state’s next Big Thing. Certainly OTHER FORMS OF RENEWABLE ENERGY,
ESPECIALLY SOLAR and WIND have to be on the short list because of the state’s
history with hydro and ethanol and its seemingly never ending supply of moving
air and sunny days. Many of the first jokes about the state referenced its
wind, which allegedly required that South Dakotans scream at each other to be
heard and that they double stitch the buttons of their shirts lest they be
ripped off. Photographs of early settlers taken in summer often reveal the
effects of the sun. Some members of the audience may recall the time when South
Dakota called itself the Sunshine State. If not, take a good, long gander at
the state’s flag.
Another
possibility is that entrepreneurship itself will be the state’s next Big Thing.
In other words, DIVERSIFIED ENTREPRENEURSHIP, a little of this and a little of
that, might be what drives the state economy in the 2020s. If anyone outside of
South Dakota would read Little Businesson the Prairie and discover the worlds of opportunity available here,
entrepreneurs and innovators might start to flock to the state at least to get
started, much like Gateway computers did before it slunk off to California and
sold itself to Acer. Institutions like The Bakery, a new 8,000 square foot
small business incubator in downtown Sioux Falls, combined with the state’s
business-friendly atmosphere and culture, might make South Dakota the next big
place to start a new business in the Midwest or even the nation.
MEDICAL
RESEARCH could also be the state’s next Big Thing. The healthcare systems that
emerged in the 1990s have matured and are now looking not just to practice
medicine but to advance the frontiers of medical knowledge in areas like genomics
and genomics counseling and some other specialties.
A closely
related and certainly not mutually exclusive possibility is that South Dakota’s
next Big Thing will be AUGUSTANA UNIVERSITY, if it can transition from a
liberal arts college into the state’s first great private research university.
That will require more institutions like Sanford and more individuals like Rudy
Nef, who endowed the chair that I hold at Augie, to step up and donate
resources. Good, private research universities like Stanford, MIT, and others
of course drive innovation in high tech industries but also across a broad
spectrum of economic activity. Harvard, for example, originated many famous
business consultancies, including McKinsey, while New York University, for
better or worse, helped to create the nation’s modern financial system.
South
Dakota’s Indian Reservations may prove to be a superior asset. Some tribes near
major cities got rich from their casinos but the Indians of South Dakota did
not because of the tyranny of distance and the state’s relatively liberal
non-Indian gaming laws, like Deadwood and all those electronic casino
competitors. But there are plenty of other stupid laws, like those against
marijuana, that the state’s Indians could help to subvert. Because of fuzzy
jurisdictional lines, the state’s Indian tribes have more policy leeway than
non-Indian governments do and hence could help Americans to dodge Dodd Frank
and Obamacare, among other policy monstrosities, and make a bundle in the
process.
By
design, the possible next Big Things just mentioned are tied closely to South
Dakota’s unique history. But of course the state is part of larger regional,
national, continental, hemispheric, and global economies, any of which could
spark an exogenous Big Thing in the Mount Rushmore State, much as the
Eisenhower administration did with the Pick Sloan project and the interstate
highway system. Of course I can’t pretend to know every new trend and fad throughout
the world, but I do know of some movements that tie in nicely with the state’s
history. For example, due to the rise in sex trafficking over the last few
decades, prostitution and pornography have become major political issues again.
Some policymakers and pundits want to abolish them completely while others
think that they should be decriminalized, taxed, and regulated. I don’t want to
take a position on the matter here today, I just want to remind you that
prostitution in Deadwood was de facto tolerated until the early 1980s. To my
knowledge, the state has never been a serious producer of pornography but of
course that could change. After all, movies have been produced in the state and
it has not always been a bastion of family values. In addition to rampant
prostitution, in the late nineteenth century South Dakota was a haven for rich
folks who wanted to get a quick and easy divorce by the standards of the day.
I would
be remiss if I did not also note that South Dakota’s future is not necessarily
rosy. It could be shocked by forces outside of its control, ranging from
natural catastrophe to global recession to piss poor policies emanating from
Washington. The biggest threat that South Dakotans can control, I believe, is
the recent abuse of ballot initiatives, several of which have reduced economic
freedom and vitality. Plebiscites are a horrible way to establish economic
policy because it is too easy to use language to obscure the true costs of the
measures, or to hide the identities of their ultimate beneficiaries and victims.
Ballot initiatives should be used to check the state government should it
behave tyrannically, not to establish a tyranny of the majority.
Adam
Smith once claimed that all that was necessary to turn a barren desert into an
opulent state was quote peace, easy taxes, and a tolerable administration of
justice, all the rest being brought about by the natural course of things
unquote. For the present, South Dakota has those three things and it is better
than a barren desert, most years anyway. All that is left is for the natural
course of things to occur and that means for you to discern the next Big Thing in your own area of expertise and
make the most of it.
Thank you!
