Organizational DNA, Disruptive Innovation, Economics at the Speed of Light and the Impact on Investment in Future

4 12 2010

Marye Anne Fox, National Medal of Science Winner (2010) and Walter Kohn, Nobel Prize in Chemistry Winner (1998) at a recent UCSD 50th Anniversary Celebration


The economics of communication, collaboration and commerce at the speed of light is changing the global competitive landscape by leveling the playing field in product leadership, operational excellence and customer intimacy through commoditization of technologies. The only choice open for nations to be number one is to bring disruptive innovation to differentiate.  Time and again, evolution has proven that architectural simplification through disruptive innovation brings orders of magnitude productivity. Life forms survive and thrive by changing their DNA and adapting to external changes.  Will the differentiation in the future for an organization come from investing in disruptive innovation? 


A nation’s vibrancy is often, visible in the halls of its learning institutions.  It was most visible recently at the 50th anniversary of University of California, San Diego whose chancellor, Marye Anne Fox, was awarded the national medal of science by President Obama just a day before.  Many of the old alumni and faculty were invited to celebrate the 50th anniversary.  Walter Kohn, a card-carrying physicist who won a Nobel Prize in Chemistry in 1998 was there.  There were talks about the origins of the university and now legendary Roger Revelle [1] “whose dream it was to establish a great institution of learning and recruit world-class scientists to come and join its faculty — for their names lured other outstanding people to come. And their prestige attracted money for research grants and superior students to enroll.  At one time UCSD’s faculty had eight Nobel laureates and 50 members of the National Academy of Sciences.  Revelle hoped to desegregate the sciences and the humanities and social sciences, because of the profound effect of technology and scientific discovery upon all aspects of modern society.”  Starting from its humble beginnings as UC La Jolla, UCSD today has grown to encompass six undergraduate colleges, five academic divisions and five graduate and professional schools. 

Equally visible were the protests from the students on recent 8-percent student-fee increase from $10,302 to $11,124 for the 2011-12 academic year, which comes a year after a 32-percent increase passed last November.  The increase is proposed because of the decline of California state budget allocated for supporting education.  “What does it say about any state that focuses more on prison uniforms than on caps and gowns?” Schwarzenegger [2], the governor of the state of California said recently, adding that “30 years ago, 10 percent of the general fund went to higher education and 3 percent went to prisons. Today, almost 11 percent goes to prisons and only 7.5 percent goes to higher education. Spending 45 percent more on prisons than universities is no way to proceed into the future.” The state’s priorities, he added, “have become out of whack.”

State and national priorities on where they invest become a critical issue in a globally competitive market place where nations fiercely compete for their market share.  In an Internet connected global economy where communication, collaboration and commerce are conducted at the speed of light, the national boundaries have blurred with respect to competition in the market place.  Technology innovations propagate rapidly and products and services get commoditized globally seeking cheap resources and customer demand.  Global corporations in their quest for profits, in a competitive environment with profit margins under constant pressure, are no longer sensitive to a nation’s local economics.  The invisible hand of economics that establishes equilibrium in a free competitive market place cannot cope with rapid fluctuations introduced by the communication, collaboration and commerce conducted at the speed of light [3].  For example, cheap labor in a particular sector of economy may transfer jobs very rapidly from one nation to another but the laid off workers cannot move with the same speed from one sector to another or one nation to another.  The time scale disparities of economic cause and response have diverged so much, with the advances in technology,  that the non-equilibrium economics becomes the norm and all the economic theories that address equilibrium and small deviations from equilibrium become the exception.  How can nations cope with this side effect of technology advances that also have improved productivity and quality of life for everyone?

The answer may lie in understanding the organizational DNA that assists in developing patterns of evolutionary advantage and competitive differentiation.

Organizational DNA, Disruptive Innovation and the Culture of Game Changers

According to a new management theory [4, 5, 6, and 7] organizations evolve developing their own DNA which contributes to their business success.  Four following base elements constitute the organizational DNA:

  1. Leadership
  2. Strategy
  3. Culture and
  4. Organizational structure

Very similar to the DNA of biological systems, the organizational DNA consists of different patterns combining the base elements and some patterns have evolutionary advantage over others that promote competitive differentiation and survival.  These successful patterns define how leadership implements  the four strategies exploiting the cultural diversity and different management structures.  The four strategies identified as primary drivers for success are:

  1. Customer intimacy,
  2. Operational Excellence,
  3. Product Leadership and
  4. Disruptive innovation.

Each strategy, the theory claims, has evolved different combinations of cultural traits and organizational style for its successful implementation.  One combination that works well for implementing one strategy may be not optimal if not fatal for implementing another strategy.  By successfully exploiting the right combinations of strategy, culture and structure, leadership manages to develop competitive differentiation in the open competitive market place to assure long-term survival and sustenance. 

In particular, the disruptive innovation as a strategy to provide competitive differentiation requires a culture of cultivation and an organizational structure that promotes collaboration between technical functional organizations that bring technical competence in multiple disciplines and business and marketing organizations that have a pulse of the market drivers.

If the theory has any validity, it has profound implications on how we approach innovation and exploit our halls of learning to be number one as a nation. 

Disruptive innovators or game changers are different breed of people who cause technological change —distinct from simple increased inputs of land, labor, and capital— which contributes to great leaps in economic growth.  As another Nobel Prize winner Solow pointed out, about four-fifths of the growth in US output per worker was attributable to technical progress [8].  On the other hand “a generation of scholars had arduously and systematically documented empirical evidence that supported the conclusion of Joseph a Schumpeter’s [9] “What we have got to accept is that the large-scale establishment or unit of control has come to be the most powerful engine of progress and in particular long-run expansion of the output.”  John Kenneth Galbraith [10] provided a postwar interpretation:  ‘There is no more pleasant fiction than that technological change is the product of matchless ingenuity of the small man forced by competition to employ his wits to better his neighbor.’”

The organizational DNA theory reconciles the observations of Solow, Schumpeter and Galbraith by pointing out that all four strategies with associated patterns are equally important for evolutionary success.  The disruptive innovation cultivated by individuals needs both technical competence and market savvy to translate into product leadership which then has to scale to sustain through operational excellence and customer intimacy.  This means that the entrepreneur and unit production cost reduction through large-scale are both essential for evolutionary success.

The cycle of product and technology maturity is described by the S-curve shown in figure 1 which describes the three phases of evolution and associated return on investment.

S-Curve depicts the evolution of technology/process innovation and associated productivity enhancements

Three important points need emphasis:

  1. Technology or process innovation that improves productivity evolves through three distinct phases (incubating, emerging and mature) which have different returns on investment.  Disruptive technologies that raise the productivity from one level to a next higher level occur through evolutionary need for competitiveness. Traditionally, as technologies start to mature, governments and corporations have devoted a part of their revenues (taxes or profits) in incubating technologies as an investment to their future competitiveness and survival.  History has shown that this investment is about 3 to 6 percent of their revenue.  History also has shown that such investment attracts the creative scientists and engineers to nurture the culture of cultivation and structures that collaborate (without the near-term profit oriented cut-throat competition) and go on to achieve Nobel  prizes  and National Science Awards.  DARPA and NSF funded projects, UCSD and AT&T Bell Labs are just a few examples.  Incubating technologies require expertise in multiple disciplines and collaboration which Roger Revelle emphasized when he was advocating the need for a university.  His main concern was that for Scripps Oceanography Institute to be successful, it needed multi-disciplinary expertise of highest quality available nearby.
  2. When the incubating technologies start to show promise as emerging technologies, the Animal Spirits and Venture Capitalists start smelling high profits and exploit entrepreneur’s product development expertise and establish product leadership.  The culture and structure required for this phase according to the organizational DNA theory is different from the culture of Nobel Laureates and structure of collaboration required from many disciplines.  
  3. As the products, processes, services  and technologies prove themselves in customer environments, conventional capitalism kicks in and large corporations exploit scale through establishing operational excellence and customer intimacy.  Again the organizational DNA theory emphasizes that the culture and structure that is exploited by conventional capitalism are different from the cultures that support disruptive innovation and establishing product leadership.  The culture of control that helps in establishing operational excellence fails miserably in creating disruptive innovation.

The long and short of the theory is that the patterns of evolutionary advantage are different in supporting different phases of implementing productivity improvements and establishing competitive differentiation.

Organizational DNA and Impact on Investment in Future of a Nation

Communication, collaboration and commerce at the speed of light have changed the global market place and both corporations and nations are struggling to establish a new economic equilibrium where they need to respond to establish competitive differentiation in a level playing field.  Global connectivity and instant information access has allowed strong coupling between minor changes in global supply and demand to cause large fluctuations in price of goods and services.  Instance arbitrage and risk management at the speed of light have introduced large fluctuations in the economic equilibrium that classical economics of the invisible hand does not address.  In addition, as the technologies get commoditized also at the speed of light crossing corporate and national boundaries, operational excellence and customer intimacy that are the hall marks of conventional capitalism [11]  can no longer provide competitive differentiation due to global competition and strain on profit margins.  This leaves disruptive innovation and product leadership in bringing new innovations speedily to market as the only options for corporations and nations to differentiate themselves.  Corporations and nations that successfully exploit these strategies with right combination of strategy, culture and structure will have an evolutionary advantage over their competitors.

During the past three decades, as conventional capitalism has thrived based on past investments in R&D, more universities, and corporate R&D efforts have been hijacked by the short-term profit motives at the expense of long-term investment that can yield disruptive innovation.  Professors have become entrepreneurs and VCs have moved to conventional capitalism by investing in coffee shops and toll roads in India [12].  This has resulted in dismantling national assets such as Bell Laboratories and engineering professors in universities focusing on their own side businesses than educating, collaborating and conducting research.  This is further exacerbated by the state and national governments diverting funds from education to prisons and pension plans for government employees.  As the recent scandals of for-profit universities demonstrate, educators are also getting drunk with short-term profit motives causing a national hangover for the tax payers [3].

If the organizational DNA theory has any merit, as a nation, it behooves us to revisit our halls of learning and reexamine our investment priorities to reestablish right strategies that are aligned with successful evolutionary patterns.  It is important to emphasize that the four strategies mentioned require different patterns of culture and structure and wrong combination may lead to a dead-end in the struggle for survival in a competitive market place controlled by the new economics of the invisible hand at the speed of light.  If there is a lesson from the organizational DNA theory for the VCs, business leaders and our legislators who are the high priests that control our investments and our future with their decisions, it is to learn that the Research and Development investments which influence conventional capitalism serve a different purpose from the investments which influence the entrepreneurs and the disruptive innovators.  They have a social responsibility to use right incentives to balance the short-term profit motives and the long-term investments towards a better future for the system as whole.  Assembling teams with right culture and structure to execute the right strategy is key to successful evolution of the system as a whole as Roger Revelle strived to do.   As we have seen recently, a few high priests can get drunk in the Wall Street [3] and cause a collective national hangover for the tax payers in a connected world at the speed of light.

After all, as Deming said “What we need to do is learn to work in the system, by which I mean that everybody, every team, every platform, every division, every component is there not for individual competitive profit or recognition, but for contribution to the system as a whole on a win-win basis.” [13].  The evolution of DNA in biology attests to this dictum. Survival depends on system thinking.  The selfish gene over time has learnt to collaborate for its survival [14].  The organizational DNA theory suggests that there is a time and place for collaboration and a time and place for cut-throat competition.  Successful DNA exploits both to its advantage.  Perhaps the organizational DNA theory is worth paying attention to.


  3. An Inquiry into the Nature and Causes of the Collective Hangover of Tax Payers, When Wall Street Gets Drunk
  5. Deming, Systems Thinking, Organizational DNA and Putting America First – Part II
  6. Deming, Systems Thinking, Organizational DNA and Putting America First – Part I
  7. Kabuki Theater, National GDP, Disruptive Innovation and Japanese Business Conundrum
  8. David B. Audretsch, Max C. Keilbach, Erik Lehmann, “Entrepreneurship and economic growth”, Oxford University Press, 2006
  9. Schumpeter J, “Capitalism, Socialism and Democracy”, Harper and Brithers, New York, 1942
  10. Galbraith, J. “Economic Development in Perspective”, Harvard University Press, 1962
  11. Can Cisco Sustain Competitive Differentiation on Operational Excellence Alone?
  12. Are the Short-Term Profit Motives and Wall Street-like Investing under the Influence, Trumping Long Term Innovation in the Silicon Valley?
  14. Dawkins, R. (1989). The Selfish Gene. In R. Dawkins, The Selfish Gene (p. 23). New York: Oxford University Press.

Are the Short-Term Profit Motives and Wall Street-like Investing under the Influence, Trumping Long Term Innovation in the Silicon Valley?

6 06 2010


When the Wall Street gets drunk, the tax payers get a collective hangover [1].  When Silicon Valley Venture Capitalists start investing in coffee shops in India [2], will the entrepreneurs, who are this country’s best hope in creating jobs, get a severe migraine?

According to Joseph Schumpeter, the patron saint of innovation, entrepreneurs are the agents of innovation and creative destruction.  With their creative and restless quest for new approaches, they displace old products and processes with better ones often causing massive disruption to the equilibrium of economic tranquility.  The Silicon Valley Venture Capitalists institutionalized the process of creative destruction by developing the financial backbone and the economies of scale to overcome the associated risk.

According to Wikipedia “A core skill within VC is the ability to identify novel technologies that have the potential to generate high commercial returns at an early stage. By definition, VCs also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital (thereby differentiating VC from buy out private equity firms which typically invest in companies with proven revenue), and thereby potentially realizing much higher rates of returns. Inherent in realizing abnormally high rates of returns is the risk of losing all of one’s investment in a given startup company. As a consequence, most venture capital investments are done in a pool format where several investors combine their investments into one large fund that invests in many different startup companies. By investing in the pool format the investors are spreading out their risk to many different investments versus taking the chance of putting all of their money in one start-up firm.”

However, it seems that all is not well in the Silicon Valley.

“What’s intriguing is how that strategy has evolved, and where U.S. Venture capitalists are finding the big wins.  Forget the next iPod, or Facebook.  The firms succeeding in India are doing so with some very un-Silicon Valley-like investments.  Think toll roads.  Think coffee shops.  Think insurance companies.” 

These remarks from Chris O’brien [2] sound very alarming given the raison d’être for  venture capital firms is to invest in long-term high-risk high-gain strategies and not conventional short-term profit-making ventures.  According to, the venture capital is money made available for investment in innovative enterprises or research, especially in high technology, in which both the risk of loss and the potential for profit may be considerable. 

Unfortunately, it seems that the current day VCs, while considering themselves as the high-priests of innovation, are not only not able to identify “novel technologies that have potential to generate high commercial returns”, but also they are plundering valuable investment capital available to them with substantial tax advantages compared to other investment firms, by looking at coffee shops and toll-roads in India for profits.

“Many VCs say their specialized financial industry merits special treatment in the private equity field because it makes long-term, high-risk investment vital to job creation.”  With this observation, Scott Duke Harris discusses current efforts by the venture capital firms to fight current government efforts to change the way the “carried interest” fee is taxed [3].

It is a good time to examine the relevance of the VC firms and their compensation in the times of large unemployment, dwindling resources and severe pay cuts elsewhere.  Where is the capital best utilized? Is it in creating innovation and paradigm shifts in the US or in coffee shops in India even with high profits?  How is a VC different from other investment firms looking for high return?

Why Does Innovation Matter?

The following extract from David A. Hounshell [4] clearly explains not only why innovation matters but also differentiates the impact of creative destruction from the conventional competitive capitalism.

“So why is innovation important? One way to answer this question is to go back to a classic paper published in 1957 by Robert Solow, an economist at MIT, entitled “Technical Change and the Aggregate Production Function” (Review of Economics and Statistics ). Solow was one of the first major economists of the postwar period to examine technological change seriously. In this paper, he studied the sources of productivity growth, looking over U.S. history, and concluded that when he accounted for all the increases in land, labor, and capital inputs and overall productivity growth, only about 40 percent of this growth could be explained with conventional economic input factors. Less than half of the productivity growth in American history could be accounted for through normal means—i.e., the means employed under competitive capitalism in Schumpeterian terms. The other 50-60 percent of productivity growth has come to be known as the “Solow residual.” Solow argued that technological change essentially constituted this residual. Technological change—distinct from simple increased inputs of land, labor, and capital—thus was a principal source of economic growth. This phenomenon in economic growth had not been formally recognized by any economist to date, although had Schumpeter been living in 1957, he surely would not have found Solow’s conclusions surprising.  Schumpeter would have said, “yes, this residual is a measure of the product of the perennial gale of creative destruction, which stems fundamentally from innovation.” Solow won the first Nobel Memorial Prize in Economics for his work, which has become a basic building block of economists’ work in economic growth theory ever since.”

The technology of creative destruction requires an entrepreneur with vision, tolerance for high risk and a thick-skin to keep persisting against all odds in an environment of competitive capitalism that attempts to suppress drastic changes to the status-quo.  The S-curve shown in figure 1 describes the three phases of innovation characterized by the return on investment.

The incubating phase where the return on investment is almost zero can only flourish with investments that have a high risk-tolerance.  Traditionally, Government institutions, universities and some large companies with vision and long-term focus have participated in developing and incubating ideas that are considered as a long-shot.  Occasionally, rich patrons who have made their money in traditional ways have indulged in incubating technologies.   On the other hand the VC’s are interested in the emerging technologies because the technologies show promise of creative destruction and associated big profits that could result from changing the game.  In order to compete with the status-quo that will attempt to stifle emerging technologies that threaten their profits, and to create the eco-systems that are required to scale and demonstrate the value of the new paradigm, the entrepreneur needs  investment, expertise and the global access that organized investment by the VC community brings.  In the past, the Silicon Valley VCs played that role very successfully with the right bets on disruptive technologies.  However, as the rising tide of their success floated all boats and created a new generation of VCs, the tide seem to have changed from emphasis on vision, disruption, and 10X improvements in productivity to incremental gains, less risk, and dubious business models such as the one that gives free software supported by labor and knowledge intensive human services that have proven not to scale time and again. 

The return on investment to improve mature technologies is poor.  Process improvements bring mostly incremental improvements in deploying mature technologies.  Investment in coffee shops brings returns not through investment in disruptive new technologies, but through process improvement to squeeze the profits or through clever marketing. Investment in coffee shops belongs in conventional competitive capitalism.  In a society struggling for resources, one precious VC dollar spent on coffee shop in India is ten dollars not realized in creating new jobs in US.  Would it not be better if investment in coffee shops is best left to Starbucks and McDonald?

Communication, collaboration and commerce at the speed of light, today, enabled by the very same technology innovation has created a new order in investment community.  Short term profit incentives, appetite for instant gratification fostered by a casino-like real-time investment in Wall Street, a twitter influenced culture of management with superficial knowledge, short-attention span of VC community and profit-at-any-cost investment culture are all contributing to the diminishing of long-term focus, innovation and civic responsibility. 

Investing in coffee-shops and toll roads in India is the last desperate leap from creative disruption to conventional capitalism in search of quick-profit.  Is this what the investors in VC firms are looking for and are the compensation and tax incentives congruent with the VC mission?  Are the same factors that created Enron, sub-prime mortgages and innovation in financial instruments now influencing the Silicon Valley VCs?

Food for thought!


[1] Metooeconomist, “An Inquiry into the Nature and Causes of the Collective Hangover of Tax Payers, When Wall Street Gets Drunk” ( )

[2] Chris O’brien , “Changing focus in India:  Deals downshift from tech to ordinary living”, San Jose Mercury News, Sunday May 23, 2010

[3]  Scott Duke Harris, “Uncle Sam eyes bigger slice of VC”, San Jose Mercury News, Friday, June 4, 2010

[4]  David A. Hounshell, “Innovation and the Growth of the American Economy”, The Newsletter of FPRI’s Wachman Center, Vol. 14, No. 3, February 2009 ( )

An Inquiry into the Nature and Causes of the Collective Hangover of Tax Payers, When Wall Street Gets Drunk

14 11 2009


The perennial debate about unbridled free markets with or without safety nets, stifling socialism with its inefficient central planning and control, individualism, collectivism, life, liberty and pursuit of happiness is rekindled with the recent near-catastrophic economic downturn caused by the Wall Street innovators, the high priests of global commerce, who broker the trade of global goods and services.  While the classical theories of economics have served us well during the industrial and post-industrial periods, the advent of information technology has introduced a new wrinkle into the economic equation, namely the real-time nature of global communication, commerce and collaboration at the speed of light transcending space-time boundaries.  For example, recently, if you were an investor, you would have noticed the impact of a falling value of the US dollar, in the immediate rise of stock prices (within milliseconds) even when half of the world was still sleeping.  The stock prices of billion dollar companies that have been very successful in business for decades wildly fluctuate hour to hour based on some pronouncements of few self-appointed pundits and analysts on daily business networks.  These pundits attribute instantaneous cause and effect between an innocuous comment by the president or a surprise international event and gold price or oil futures. 

In this paper we study the impact of global communication, collaboration and commerce at the speed of light on the global economy and explain the reason why when Wall Street gets drunk, the Tax Payers get a collective hangover.  

Using the Gaussian superposition principle, Shannon-Nyquist information theory and an inquiry into the impact of ‘global communication, collaboration and commerce at the speed of light’, we demonstrate that the invisible hand that shapes the ebb and flow of commerce in a free market can be manipulated by a few and cause economic instabilities.  A balance between individualism and collectivism through a well-governed society is required to avoid harm to a larger population who depend on the economy for their livelihood and retirement without a safety net, and are unwittingly affected by the follies of a privileged few. 


“Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society which we actually live, with the result that its teaching is misleading and disastrous if we try to apply it to the facts of experience.”                                                                  John Maynard Keynes 

“The facts of experience” are quite different today, much more so than in the days of Keynes, when he proposed the general theory of employment, interest and money [1] while pointing out how different the characteristics were during his day compared to the assumptions made by the classical economists such as Adam Smith.  

Recently, Senator Jay Rockefeller started his senate hearing on “distracted driving”, with a statement that at any moment, eleven percent of the population in the United States is holding an electronic device and is distracted from the task at hand, such as driving while communicating at the speed of light, using voice, text or video.  

Then there is the embarrassing moment, where President George Bush found himself caught on a video [2] speaking about how big business had failed in managing the sub-prime mortgage crisis and caused a systemic danger to the economy, which resulted in a major recession: “There’s no question about it. Wall Street got drunk –that is one of the reasons I asked you to turn off the TV cameras — it got drunk and now it’s got a hangover. The question is how long will it (take to) sober up and not try to do all these fancy financial instruments.” 

More recently, the social networking websites played a major role during the Iranian election and the resulting aftermath [3].  “Twitter is, far and away, the best social media tool for second-by-second information on what’s happening in Iran. People on the ground and across the globe are chatting about every breaking update, every news item, and every story they find….   Everybody’s favorite social video site YouTube has been a central distribution medium for the Iran riots. Iranians have been posting videos nonstop of what’s happening on the ground. This really is the best way to see what’s happening without any filters…… One blog stands out for its Iran coverage: Revolutionary Road has been bringing constant updates on the Iran Riots from the front lines. We rely on citizens like these to get us news from the ground.…… The social media photo site Flickr is brimming with some eye-popping and gut-wrenching imagery from the ground. Beatings, protests, military photos from the election…it’s all there, in full color.” 

All the three examples highlight the transformation that has been occurring over the last decade in how we have come to depend on global communications, collaboration, and commerce at the speed of light transcending both space and time boundaries.  While some claim that this has opened new opportunities for individuals to indulge in life, liberty and the pursuit of happiness, others argue that the opportunities are limited to only the top one percent of the population and others are left behind struggling to make ends meet.  

The perennial debate about unbridled free-market forces on the one extreme and the stifling collectivism with planned economies on the other extreme is raging again with pundits positing the virtues and the vices of both approaches, the chatter now being escalated in its volume and intensity through 24×7, real-time communication over voice, data video channels at the speed of light.  In this paper, we reexamine the concepts of individualism, collectivism, animal spirits and group harmony to understand the economic realities when individuals and groups engage together as a network of connected individuals, in improving life, liberty and pursuit of happiness.  The “network effect” has a profound influence on the outcome of the group transcending beyond the intent of each individual and creating the effect of the “invisible hand” described by Adam Smith in his classic work [4].  The result becomes even more dramatic when the network facilitates communication, collaboration and commerce at the speed of light. 

In this paper, we examine the impact of this real or perceived information leverage on the affairs of men and women and show why when one part of the economy gets drunk, it results in a collective global hangover.  In today’s economy where the access and use of knowledge provides a huge advantage (or disadvantage), individuals and groups can become unwitting victims, and pay for other’s follies if they do not actively measure, manage and optimize their own affairs leveraging communications, collaboration and commerce at the speed of light.  Information access at the speed of light has transformed the Wall Street to become real-time gambling casino where people trade the future of companies and commodities based on instantaneous knowledge.  Gambling like drinking can become a vice in short order if attention is not paid to its impact on others.  Social drinking is pleasurable and an occasional red wine may be good for the matters of heart, but excessive alcoholism becomes a social evil when it impairs judgment and causes harm to others.  

Even Adam Smith recognized the need for a well-governed society that guards itself against excesses. 

“The great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. Every workman has a great quantity of his own work to dispose of beyond what he himself has occasion for; and every other workman being exactly in the same situation, he is enabled to exchange a great quantity of his own goods for a great quantity, or, what comes to the same thing, for the price of a great quantity of theirs. He supplies them abundantly with what they have occasion for, and they accommodate him as amply with what he has occasion for, and a general plenty diffuses itself through all the different ranks of the society.” 

Of the division of labour, Individualism, and Collectivism

“Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that. When an animal wants to obtain something either of a man or of another animal, it has no other means of persuasion but to gain the favour of those whose service it requires. A puppy fawns upon its dam, and a spaniel endeavours by a thousand attractions to engage the attention of its master who is at dinner, when it wants to be fed by him.                                                                              Adam Smith 

sociobiology not withstanding, with his almost poetic descriptions, the master [4] explained how an individual pursues economic self-interests intending only his/her own gain and as an unintended consequence, he/she behaves as if led by an invisible hand to promote an end which was no part of his/her intention.  Smith clearly articulates the role of specialization, separation of concerns through division of labor, the role of contractual obligation, the role of productivity and the influence of the free market’s invisible hand shaping the ebb and flow of commerce. 

The opening web page of the Adam Smith Institute [5] succinctly summarizes the importance of the work and makes it all available on-line. 

“This remarkable book was published in 1776, at a time when the power of free trade and competition as stimulants to innovation and progress was scarcely understood. Governments granted monopolies and gave subsidies to protect their own merchants, farmers and manufacturers against ‘unfair’ competition. The guilds operated stern local cartels: artisans of one town were prevented from travelling to another to find work. Local and national laws forbade the use of new, labour-saving machinery.  

 And, not surprisingly to us today, poverty was accepted as the common, natural, and inevitable lot of most people.  

 Adam Smith railed against this restrictive, regulated, ‘mercantilist’ system, and showed convincingly how the principles of free trade, competition, and choice would spur economic development, reduce poverty, and precipitate the social and moral improvement of humankind. To illustrate his concepts, he scoured the world for examples that remain just as vivid today: from the diamond mines of Golconda to the price of Chinese silver in Peru; from the fisheries of Holland to the plight of Irish prostitutes in London. And so persuasive were his arguments that they not only provided the world with a new understanding of the wealth-creating process; they laid the intellectual foundation for the great era of free trade and economic expansion that dominated the Nineteenth Century.  

 The Wealth of Nations changed our understanding of the economic world just as Newton’s Principia changed our understanding of the physical world and Darwin’s Origin of Species.” 

Time changes everything and new theories challenge or augment even the best of them.  Just as Einstein’s theory superseded Newtonian mechanics, with the observation that the speed of light is a constant, John Maynard Keynes added the concept of animal spirits that transcend the rational behavior of individuals and harness the uncertainty or ambiguity through creative speculation [1].  

While Adam Smith explained, why people employ each other when they pursue commerce, albeit with pure self-interest, Keynes explained why, in a closed system, there is always some amount of unemployment during a period of economic equilibrium.  He introduced the concepts of aggregate output and the demand driven economic equilibrium where unemployment is possible and departures from equilibrium caused by various factors including speculation based on “animal spirits” [1]. 

“It is safe to say that enterprise which depends on hopes stretching into the future benefits the community as a whole. But individual initiative will only be adequate when reasonable calculation is supplemented and supported by animal spirits, so that the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death.” 

The master goes on and makes the following observations that are so appropriate in the context of today’s collective hangover and rising unemployment. 

“There are, moreover, certain important factors which somewhat mitigate in practice the effects of our ignorance of the future. Owing to the operation of compound interest combined with the likelihood of obsolescence with the passage of time, there are many individual investments of which the prospective yield is legitimately dominated by the returns of the comparatively near future. In the case of the most important class of very long-term investments, namely buildings, the risk can be frequently transferred from the investor to the occupier, or at least shared between them, by means of long-term contracts, the risk being outweighed in the mind of the occupier by the advantages of continuity and security of tenure. In the case of another important class of long-term investments, namely public utilities, a substantial proportion of the prospective yield is practically guaranteed by monopoly privileges coupled with the right to charge such rates as will provide a certain stipulated margin. Finally there is a growing class of investments entered upon by, or at the risk of, public authorities, which are frankly influenced in making the investment by a general presumption of there being prospective social advantages from the investment, whatever its commercial yield may prove to be within a wide range, and without seeking to be satisfied that the mathematical expectation of the yield is at least equal to the current rate of interest, — though the rate which the public authority has to pay may still play a decisive part in determining the scale of investment operations which it can afford. 

Thus after giving full weight to the importance of the influence of short-period changes in the state of long-term expectation as distinct from changes in the rate of interest, we are still entitled to return to the latter as exercising, at any rate, in normal circumstances, a great, though not a decisive, influence on the rate of investment. Only experience, however, can show how far management of the rate of interest is capable of continuously stimulating the appropriate volume of investment. 

For my own part, I am now somewhat skeptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organizing investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest.” 

More recently, the book “Animal Spirits” [6] by the Nobel Laureate George Akerlof and Robert Schiller takes the discussion to the next level.   They discuss the impact of human factors such as confidence, fairness, corruption & antisocial behavior, money illusion (caused by fear of inflation or deflation) and the human need for a sense of reality through creating narratives or stories, on the deviations from equilibrium and shape the destinies of groups. 

The long and short of the economic story is that: 

  1. When individuals act with self-interest in a group, it creates an economic equilibrium where the individual behavior is guided by an “invisible hand” of market forces shaping the ebb and flow of commerce resulting in specialization, separation of concerns, scalable network of management structures etc.
  2. One type of deviation from equilibrium occurs when external conditions change demand, technological changes cause productivity improvements or affect supply chain of resources.  Classical theory of economics explains and estimates these deviations.
  3. Another type of deviation from equilibrium occurs when animal spirits prevail and take risk to harness the ignorance and uncertainty of the future.  This often can change the equilibrium state in a profound manner.

Human factors such as confidence, fairness, corruption etc., impact the equilibrium.  While they may be tolerable in small doses, the multiplier effect depending on the size and scope can cause instabilities. 


Figure 1: Entropy minima and economic equilibria

Figure 1 shows the different levels of equilibrium and corresponding levels of unemployment and how the levels of equilibrium are attained by the impact of animal spirits or instabilities caused by human factors.  It is important to note that the productivity improvements in an equilibrium state are obtained through Kaizen or continuous incremental improvements and paradigm shifts and orders of magnitude impact are often obtained through animal spirits taking risk to cause the chaos required to cross the entropy barrier to next lower minimum.  The instabilities caused by human factors often lead to higher level of equilibrium (hopefully last only for a short period before being rescued by animal spirits). 

In the next section, we discuss a major disruption that has changed the way affairs of men and women are conducted and its impact on the economic equilibrium. 

of the Communication, Collaboration, and Commerce at the Speed of Light

In 1965, Intel co-founder, Gordon Moore published an article in Electronics magazine that was the source for what became known as Moore’s Law, which says that computers double in capabilities every 18 months.  During the four decades following the statement, we have seen a radical transformation in the way people are connected with each other and communicate.  This was made possible by the evolution of telecommunications infrastructure and the voice network services management platforms that allowed dynamic and real time allocation of resources to optimize voice connection and messaging infrastructure. 

Thirteen years later, in 1998, Nielsen observed that the Internet bandwidth is growing at 50% annual growth rate.  A decade later, we are seeing a radical transformation in the way computers communicate with each other.      The resulting Internet data connection and data services management platforms have facilitated a new level of human interaction through information sharing. 

The result of bandwidth inversion (the network bandwidth is large enough that the information access is limited by only the speed of light) is an information infrastructure that connects global human networks and facilitates real-time communication, collaboration and commerce.  Since the beginning of time, bandwidth had a major influence in how humans organized themselves in groups (or human networks) to evolve and adopt ways to respond to changes in their environment.   According to Vancho Cirovski, [6], the effectiveness of the human network depends on the connections, communication and mastery (or specialization) of the individual human agent.  Better the quality of mastery of the individual (forming the node in a human network), the quality of connection and communication, the higher the effectiveness.  Humans have created organizational frameworks through evolution.  According to Malone [7], organization consists of connected “agents” accomplishing results that are better than if they were not connected.  An organization establishes goals, segments the goals into separate activities to be performed by different agents, and connects different agents and activities to accomplish the overall goals.  Scalability is accomplished through hierarchical segmentation of activities and specialization.  

There is always a balance between the cost of coordination of the agents and economies of scale obtained from increasing the network size, which defines the nature of the connected network.  Efficiency of the organization is achieved through specialization and segmentation.  On the other hand, agility of an organization depends on how fast the organization can respond to changes required to accomplish the goals by reconfiguring the network.  Dynamic reconfiguration is accomplished using signaling abstractions such as addressing, alerting, supervision and mediation.  

Connection management is achieved through effective communications framework.  Over time, human networks have evolved various communications schemes and signaling provides the fundamental framework to configure and reconfigure networks to provide the agility.  The bandwidth of communication determines the organizational structures.  Groups or subgroups requiring a high degree of communication, band together and optimize the bandwidth available.  If the bandwidth of communication is large enough, the groups tend to get distributed to optimize the resources available.  

Of the General theory of Economics, The Gaussian Superposition and Information Content

When individuals form into groups, inevitably the statistics, probabilities and the laws of large numbers come to play whether we like it or not.  In probability theory, the Gaussian (also called Normal) distribution plays a central role by representing a stable or equilibrium distribution toward which all other distributions gravitate under a wide variety of conditions such as large numbers, convolutions and stochastic processes.  Figure 2 shows [8], the Gaussian distribution. 


Figure 2: Gaussian Distribution

The figure shows two distributions using the formula 


where µ is called the mean and σ is called the standard deviation.  

The uniqueness of the Gaussian (also called normal) distribution, ubiquity of its use and its elegance in which just two parameters provide the information content of a series of observation with the principle of maximizing entropy and the history of its discovery and evolution are well documented and provide a fascinating journey into the annals of mathematics [8]. 

Consequently, if you have a collection of individuals engaged in an activity together, particular skill level or knowledge of the individuals will be spread around a value given by the mean, and the standard deviation gives a measure of how far the skill varies from the mean.  About 68.3% of the people fall within 1 standard deviation and 95.4% fall within 2 standard deviations and 99.7% fall within 3 standard deviations.  The mean and standard deviation characterize a particular group. 

In a society that values individualism culture, both the latency of information access and the latency tolerance of customers receiving the goods and services were limited by physical proximity and transportation network speeds.  In a world that is globally connected at the speed of light, the divergence of the latency between information access and the latency of fulfillment of contractual obligations introduces a new element and those leveraging the information can manipulate the invisible hand to disadvantage others who do not have access to the same information.  The impact becomes more dramatic when information is influencing investment decisions at the velocity of light.  

We represent this for a homogeneous group (who can be parameterized by a single mean and a single standard deviation) in figure 3. 


Figure 3: Homogeneous distribution of skills and knowledge leverage distribution

In figure 3, individual skill is represented by a gaussian distribution.  The knowledge leverage is represented by a another Gaussian distribution with the same mean and standard deviation representing the impact of access to knowledge in a global commerce at speed of light.  Slight variations in knowledge leverage and distribution of skill lead to great variation in the ratio of losers to winners.  Figure 4 shows these variations. 


Figure 4: Impact of Variation of mean on winners & losers

The complexity becomes even greater if you consider superposition of different groups with different means and standard deviations in a global network where only a few people are impacting the lives of many through real-time information management. 


Figure 5: Impact of Heterogeneous groups on winners & losers

The information theory of Shannon postulates that the noise in a series of observations increases when the sampling frequency becomes higher than the frequencies present in the signal.  Obviously, if commerce transactions in real world are conducted at frequencies lower than the sampling frequency at which investors make decisions and change them, then small variations caused by daily events are exaggerated and can cause instabilities by increasing the entropy.  The impact of knowledge mastery and access to information depends on the mean and width of the distribution function and as this function becomes narrower making the system depend only on a relative few, the probability of causing instability becomes larger. 

Of the Real-Time Universe, Noise, Entropy, Life, liberty and persuit of happiness

If the purpose of life is to pursue happiness in an environment that supports individual freedom and choice, then individuals have to develop the skills to monitor, manage and optimize the resources that are available to them to pursue their goals.  The availability of resources depends on external circumstances some of which are under their control and some that are not, such as the acts of nature.  It also depends on the availability and the abundance of resources and the competition from others also pursuing their own happiness.  The economic system of Adam Smith as we have seen creates an equilibrium where individuals form into groups with similar goals and collectively pursue happiness together to optimize the resources available to the group. 

Humans have developed a network model of distributed computing where individuals specialize in developing skills to collect information, analyze and control the environment to accomplish the goals of the group.  The law of large numbers postulates that in any group, there is a normal distribution of skills and the groups distinguish each other by the spread and mean of these distributions.  

In an environment where the information access is slower than the need with which one has to interact with the environment of necessity, risk management is implemented to cover the ignorance or higher entropy involved.  In the case where information access is faster than the time scales in which the external environment responds, it can lead to a situation in which lot of noise can be created in manipulating the system without waiting to see the effect.  Current technological advances have created a situation where information access and control of economic systems are limited only by the speed of light.  That has created two important effects: 

  1. High level of noise in the economic system that masks real signals that are relevant to advancing the cause of the whole group and
  2. Instabilities that can occur with feedback that can cause global headaches when individuals make manipulative moves and the invisible hand does not have the time to respond before the instability causes the damage

In addition, the skill level required to process the information and act intelligently is limited to a few, and the system becomes vulnerable to the individual frailness.   

Unless, systemic process checks and balances are introduced to dampen the fluctuations caused by the privileged few, many will be affected unwittingly with no fault of their own. 

Adam Smith’s “well-governed society” becomes a true requirement for individuals to enjoy life, liberty and pursuit of happiness in a society where communications, collaboration and commerce are always at the speed of light. 


In this paper, we reviewed theories of how individuals form into groups driven by self-interest to better their own lot and in the process give rise to an invisible hand that shapes the group behavior, which in turn benefits everyone in ways not intended by the individuals.  The group behavior led by the invisible hand leads to an economic equilibrium with stable employment levels.  The deviations from equilibrium can occur when external changes cause perturbations to supply and demand or technological changes cause improvements to productivity.  Classical economic theory explains the cause and effect of small deviations from equilibrium.  

However, external forces causing large deviations from equilibrium that in turn can lead to instabilities, could manipulate the invisible hand.  Two kinds of instabilities are discussed.  Keynes discusses the positive kind, where Animal Spirits (that transcend the rational behavior of individuals and harness the uncertainty or ambiguity through creative speculation) can create such instabilities, which can eventually lead to new equilibrium points with different levels of unemployment.  

Human factors such as confidence (or lack thereof), fairness or unfairness, corruption etc., also impact the economic equilibrium.  While they may be tolerable in small doses, the multiplier effect depending on their size and extent can cause instabilities.  These instabilities cause disruption and usually end up in higher level of unemployment and economic down turn.  The invisible hand may attempt in the long run to correct the situation but in the short run, there is a possibility for irreversible transitions. Even Adam Smith has acknowledged the need for a well-governed society to create the right conditions for maintaining equilibrium economics. 

More recently, the technological advances that have made it possible for groups to engage globally in communication, collaboration and commerce at the speed of light, have introduced a new element that influences the economic equilibrium profoundly.  They change the odds of individual success, which becomes very much dependent on access to knowledge and the skill to act on it at the speed of light.  This has concentrated the power to influence the free market in the hands of a few who can manipulate the invisible hand, resulting in the benefit of a few at the expense of many.  The recent hangover that is felt by the tax payers world-wide when a few Wall Street bankers got drunk with their clever schemes is a clear example of the inequities that can cause economic instabilities. Narrower the population that leverages knowledge at the speed of light, greater is the risk of causing irreversible instabilities.   

We have demonstrated using Gaussian superposition of skill level of individual groups, how a few with access to information can win in the economic game at the expense of many who lose.  In addition, the Shannon Nyquist theorem shows that the real-time analysis of various economic entities that change much slower in time causes lot of noise and does not add to the stability of the economic equilibrium.  The stock prices of enterprises are burdened with a short term noise fluctuations that are independent of the actual long term performance and are solely created by the speculation.  In a well-governed society, groups will impose self-will to provide incentives to reduce the noise and restore equilibrium.  A well-governed society also will decide whether the Wall Street is a gambling casino and is treated as such with appropriate regulation that befits a casino or a long term investment vehicle that creates economic equilibrium and facilitates long term growth with appropriate risk/reward incentives.  A well-governed society also allows animal spirits to develop innovative paths to new states of lower entropy and the society at large is protected from human frail qualities such as excessive corruption, unfairness etc. 

[1] Keynes, John Maynard , “The General Theory of Employment, Interest and Money”, Atlantic Publishers and Distributors, New Delhi, India 2006 (First published in 1936) 

[2] Read more at:, and see the video at 


 [4]  Smith, Adam, An Inquiry into the Nature and Causes of the Wealth of Nations. Edwin Cannan, ed. 1904. Library of Economics and Liberty. 2 November 2009. . 

 [5], Preface By Dr. Eammon Butler, DIirector Of The Adam Smith Institute, London, 2001 

 [6] “Managing the Connected Organization” by Valdis E. Krebs 

 [7]  Thomas W. Malone, “Organizing information systems: Parallels between human organizations and computer systems”, Cognition, Computing and Cooperation, edited by Scott P. Robertson, Wayne Zachary, John B Black, Greenwood Publishing Group, January, 1990