Monday, August 01, 2016

The Next Big Thing Redux



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 na├»ve 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!

No comments: