How the Top 1% Create Most of the Great Innovations and Wealth
The Occupy Wall Street demonstrations are focusing on something we have discussed for a long time. In the Fall season of the economy, which comes around every 80 years or so, new technologies explode into the mainstream, as did automobiles, electricity, phones, and radio from 1914 to 1929 and more recently (1994-2008) as did personal computers, the Internet, cell phones, and broadband. During the Fall Season, the most entrepreneurial and innovative seize on such changes and make fortunes, increasing income inequality more than usual. When new technologies move mainstream they not only create a lot of new growth industries and businesses, they also change business models.
The bubble in capital and the falling interest rates allow easy access to capital for thousands of entrepreneurial businesses to experiment and innovate — and most of them ultimately fail. But this is where many of the top 1% of wealth fortunes come from. The top 1% in income goes from as low as 26% of wealth in 1975 to as high as 47% in 1929 and near that again in 2007. This top 1% includes entrepreneurial business people, executives at major growth corporations, traders and investment managers, and sports and entertainment stars.
What is it that distinguishes the top 1% and their disproportionate amount of wealth and income from all others? They see change coming ahead of people who wait for validation by others and they act and take risks to exploit those insights ahead of others! It’s that simple. How does the top 1% get such breakthrough insights? They look clearly at reality vs. the deluded masses, who only follow and imitate others. Most importantly, they look beyond the surface and symptoms to the less visible underlying trends.
In other words, they don’t look at the tip of the iceberg, they look below the surface for the bigger picture, which most people don’t see. They focus for personal fortunes on the first 1% of the S-Curve, where there is the most risk and failure, but the greatest rewards when successful. As Winston Churchill said, “Success is going from failure to failure without losing enthusiasm.” More broadly, top executives of businesses and investors focus on the 10% to 90% acceleration of adoption on the S-Curve, where most long-term profits lie.
Chart 1 shows the proverbial iceberg, wherein the tip above the water that most people see is only a small fraction of the larger iceberg below the water’s surface. The Titanic sank because of the iceberg below the surface! Our global economy is about to sink from demographic trends and private debt that most economists, the media, and other people do not see or understand! The tip of the iceberg is typically 10% or 20% of the whole iceberg. This brings us to the 80/20 rule of business: 80% of the profits come from 20% of the revenues or efforts. The best business people focus on what they do best and on areas where they can dominate.
However, the S-Curve also helps to explain this phenomenon. The best psychologists, marketers and salespeople understand clearly that human behavior does not come from the conscious mind — only 10% to 20% at most. It comes more from the subconscious mind formed largely by extreme positive and negative experiences that come from childhood between age 2 and 6. If you don’t dig down into the subconscious, you cannot understand or change someone, or sell something to them effectively. Scientists are discovering that something like 80% of the energy in the universe is “dark energy” not light or visible. This says there is a lot we don’t know about the universe yet. The scientists that do figure this out will see major breakthroughs, and so will technology down the road.
Chart 2 shows the S-Curve progression, from invention to commercialization at 0.1%, followed by adoption by the opinion leaders at 1%, niche market penetration at 10% (early adopters), sudden acceleration to the mainstream to 90%, slow maturity afterward to 99.9%, and then eventual decline.
Imagine this as five stages—invention, early adoption, mainstream penetration, maturity, and decline—with 80% of the growth and real progress occurring just one fifth (20%) of the time, during the rapid acceleration from 10% to 90% adoption. That alone justifies the 80/20 rule. Throughout history, it is not the companies that dominate the 0.1% to 10% emergence, but the ones that dominate the 10% to 90% market domination phase that make the most long-term profits and that dominate their markets long term. Ford dominated the 0.1% to 10% S-Curve of automobiles from 1900 to 1914, but GM dominated the 10% to 90% phase from 1914 to 1928 and led for decades after the early 1930s economic shakeout.
The greatest personal fortunes tend to come to early radical innovators and entrepreneurs like Steve Jobs, Bill Gates, Henry Ford, and Dale Carnegie. Note here that radical innovation occurs between the 0.1% (commercialization) and 1% (early adoption) stages. Most inventors do not make much money; the invention needs to be commercialized to make money and inventors typically are not good at commercialization. Even the most successful inventor of the last centuries, Thomas Edison, made nowhere near the fortune of an innovator like Ford, who ushered in application and adoption of new products.
The 0.1% to 1% innovators are the entrepreneurs who take a new invention or idea and experiment with bringing it to the earliest-stage users, who will adopt the product or service and provide its initial trial and credibility. One thing that I have learned from new venture investing is that the hardest sale is the first sale: getting the first customer to bet on your new product or service when no one else will. After that it becomes easier, as the next customer feels less risk in trying a new product after others have.
The entrepreneurs and the early adopters are people who are willing to try something based purely on its merit. They don’t have to see others using the good or service first. These people have what I call “discriminative intelligence”—or else they are just weird or lucky to be at the right place at the right time. They are able to look at a truly new and breakthrough product that no one else owns or uses and judge the value of it without validation from others. These innovators and early adopters are willing to act and to take risks. Most people simply will not and do not do this! That is why the “followers” generally are not as wealthy, even if they are highly intelligent.
In a science show I watched, researchers set up an experiment on chimpanzees to understand how they tackled creative challenges differently from humans. A number of chimpanzees in turn tried to remove the cap from a bottle that had a banana inside. As the other chimps watched, the first chimp played around with the bottle, shook it, turned it upside down, and finally figured out how to unscrew and remove the cap. Surprisingly, the chimpanzees that followed did not learn from the experiments and actions of the first chimpanzee. Each went through the same trial and error process to figure out how to open the bottle and get the banana.
Chimpanzees are the smartest species next to humans. The key intelligence of our larger brains that other animals don’t have is an ability to imitate new, successful social and economic behavior displayed in random or genius innovations from a very small and eccentric part of the population. The secret to success for humans is not that we are great radical innovators—99% of us are not—but that we are great adopters when such innovations occur, whether by accident or by eccentric genius!
It is not the intelligence of radical innovation and invention that is most attributed to humans historically. Most of us just follow what others like us do, rapidly in some cultures and slowly in others (e.g., the United States and Northern Europe vs. the Taliban and Al Qaeda in Pakistan and Afghanistan as extremes in recent times). Jared Diamond in Guns, Germs, and Steel showed better than anyone that luck and random mutations are key to history and evolution in human times.
When the Agricultural Revolution began around 10,000 years ago, the Middle East was more rainy and grassy than today and was the area of the world with the easiest-to-domesticate plants and animals, factors that gave rise to major new towns, cities, and civilizations in Sumeria (the Middle East and Persia) and Egypt. Innovations in agriculture in these areas spread to areas at similar latitudes eastward from Europe through China. These regions were able to duplicate such innovations easily because they had similar climates. Agricultural innovations did not move as quickly into substantially more northerly and southerly climates, and the oceans blocked such innovations from reaching North and South America for some time.
It is such seemingly random, radical innovations that create new directions. The S-Curve represents the formula for the testing and adoption of an innovation over time, making its progress more predictable. The rate of S-Curve adoption is based on how radical an innovation is vs. present beliefs or the level of change or investment required for its adoption. Truly individualistic, eccentric, and self-discriminating people are the first to innovate and adopt the radically new products, services, and behaviors that successive groups of people will adopt once they see people “like them” getting benefits, socially or economically, from these products and services. These radical innovators (by accident or because they are visionaries) are more like the “random mutations” in science and DNA that happen at the right time to generate a new path of progress.
However, many such innovators do have objective and discriminatory intelligence, largely because they have separated themselves from the crowd socially rather than because of higher intellect. By looking objectively from the outside, these innovators are better able to see changes in trends than most people, who are just following the herd and trying to do what is most socially acceptable and rewards incremental innovation and progress. The actions of these innovators are precisely what build an S-Curve trend that ultimately changes society in large or small ways.
Steve Jobs clearly was an eccentric person who had years of health challenges, admits to being influenced by taking acid and got unique insights at the right time. Is vision real, or is it an accidental correlation with change waiting to happen? But whether through random mutations or true vision (like that of Steve Jobs), it is the people who innovate and adopt earlier after such new trends first emerge that get the greatest benefits and accrue the greatest incomes and wealth.
Again, the top 0.1% to 1% of people accrue a disproportionate share of income and wealth because they are willing to act before others do; they take the highest risks and suffer the highest failures. They don’t need the social approval that most people need to feel they are making the right decision with less risk, and they quickly learn from their failures and continue to persevere.
Why do they do this? Often innovators are people who faced challenges early in life—they felt unhappy in childhood or were rejected in high school as “creeps.” They don’t go with the crowd, so they prove themselves in another way: through innovation and being different. Many such people fail (venture capitalists succeed in only 1 of 11 new ventures), but a few create the greatest breakthroughs in history, on smaller and larger scales.
In other words, it takes eccentricity first (often causing alienation from society), discriminative intelligence (often as a result of objectivity and alienation), guts, instincts, passion, self-confidence, individuality (self-esteem and self-actualization in psychology models), and action to see changes and exploit them before they become mainstream. From the beginning, Steve Jobs saw the impact of personal computers as being far beyond the mere technological dimension of Steve Wozniak (his first partner); he saw PCs as “power to the people,” decentralizing information and decision-making.
“Mankind” did not invent stone tools, art, gunpowder, autos, or computers, or anything else. Some crazy, loner “monomaniac with a mission” (random mutation or visionary) did. Mankind then adopted each innovation over time in successive waves of risk tolerance and social acceptance. What were the early reactions to Galileo or Darwin? Thomas Edison’s first electric plant had almost no demand at first! The British rejected the first ice shipments—who would want ice when warm beer is obviously better and more traditional?
Fear of failure is the key to lower incomes and wealth. Risk-averse people who need others to prove something first do not get rewarded as much in this world, although a rising tide from such radical innovations does raise all boats over time. This is the source of “trickle-down economics,” but it can take decades for most innovations to trickle down. Such innovations reward the innovative sectors much, much more at first. It is not a short-term process, as many superficial politicians proclaim or promise when they say that trickle-down economics does not work. Most everyday workers today owe their standard of living to pioneers like Thomas Edison, Frederick Taylor, Henry Ford, and Alfred Sloan from the late 1800s and early 1900s—and more recently to innovators like Steve Jobs and Bill Gates.
Perhaps more than any other innovations, the assembly line from Henry Ford and the modern, decentralized corporation of Alfred Sloan raised the standard of living in developed countries massively over the last several decades. Sloan’s innovation was effective for most people largely after the 1930s, and to a greater extent from the 1950s forward. The rich got richer first from the late 1890s into the Roaring 1920s off of such radical innovations. These innovations moved into the mainstream from the 1930s into the 1960s, during which time average people saw their wealth and income grow faster than the top 1% to 10%. In the coming decades, it will be continued innovations in information technology, nanotech, biotech, robotics and “The Network Corporation” that we have described much in past books that will change our standard and quality of life.
This even applies to nations . Countries like China are industrializing and urbanizing just like England, Western Europe, and the US did, but at a faster rate, given a very strong work ethic and much stronger government investment in the economy. But China is not even one fifth as wealthy as the US even when adjustments are made for purchasing power (PPP) (more like one tenth as wealthy in US dollars). Why? They are industrializing 200 years after Great Britain, which started that trend, and they are forced to compete on much lower wages and profit margins! Great Britain, on a small island, ruled the world for over a century up until World War II due to their lead in industrialization and urbanization that dated back to the late 1700s. Late adopters and innovators don’t get the same wealth as the earlier adopters. Japan is wealthier than Korea and Korea wealthier than China and China is wealthier than India.
The later you adopt, the less risk you take. The more you wait for others to pioneer or to validate results, the less the rewards and profits — it’s that simple!
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