Want to know why we have a zombieconomy? Because the beancounters killed the incentives to create real value.

Let's use MJ's tragic death as a mini case-study. $300 million over, for example, 25 years? That's $12 million a year.

I'm deliberately leaving out ads, endorsements, concerts, etc., to focus on the the structural problems in one industry: music.

If the world's biggest pop star only made $12 million a year from his recordings, why would anyone make serious music? Where did the rest of the money go? Why, straight into record labels' pockets. Did they make better music with it? Nope — they made Britney and Lady GaGa. And that's how they killed themselves: by underinvesting in quality, to rake in the take.

Wait a second — that sounds familiar. You can add back in the endorsements, etc. now — they only double the figure: to about $25 million.

If the world's biggest pop star only made $25 million a year in total, something's very, very wrong. Where's the rest of the money? Why can't a resource as scarce as the King of Pop capture more value?

After all, that's not even mega-rich.

The world's top hedge fund "managers" regularly pull in hundreds of millions. That's an order of magnitude difference.

No wonder everyone wants to be a banker, investor, or [insert beancounter here]. There's no money left in anything else.

That's the big problem behind the zombieconomy. We don't reward people for creating, growing, nurturing, or even remixing assets. We just reward them for allocating the same old assets.

That 's not an economy: it's just a game of musical chairs.

Hence, no new finance, healthcare, educational, auto, or, yes, music, industry — for decades.

"...Darkness falls across the land
The midnight hour is close at hand
Creatures crawl in search of blood
To terrorize y'alls neighborhood."

Indeed. Everytime you look at today's economic landscape — you should see the Thriller video playing in your head. Because what we've built is a zombieconomy, where little net value is created.

And MJ's death-by-financial-desperation should be a case study in that zombieconomy if ever there was one. Yes, he spent money on absurdly ludicrous stuff. But if top hedge fund managers can do it — why couldn't the world's most famous singer?

PS — The ultimate irony? I can't even link to the Thriller video. It's unavailable on YouTube in the UK..."due to copyright restrictions". Lulz. Leave the link in the comments, and fire away with thoughts, questions, etc.

Just like food companies no longer produce real food — but the experience of having eaten food.

Just like the media industry dumped durable, high-quality content, like analysis and reporting — in favour of disposable, low-cost entertainment.

Just like venture investors are investing in...minigames — instead of launching a wave of 21st century industrial revolutions in energy, finance, education, and healthcare.

Welcome to the Zombieconomy — want fries with that layoff?

Should we tax the tall? No!

We should subsidize them. That is what I have determined after a desperate all-night review of 400 years of economic history. Capital flows to wherever it is most productive, according to Friedman's interpretation of Hayek's interpretation of Mill's interpretation of Ricardo's interpretation of Adam Smith. Ergo, benefits must be flowing to the tall because they are the most productive: QED.

So once even more capital does flow to the tall, they will — because they are more productive — unleash radical innovations the likes of which have never been seen before. Those innovations, my theories suggest, will "trickle down" to the rest of us.

General purpose technologies, new capital markets, flying cars, Jimmy Choo jetpacks, Mars Landers — economic logic suggests clearly and indubitably that only the tall can provide them at the lowest cost to society. And so, you, I, and the fat short dude down the hall will all inevitably be better off. Or, at least, no one will be worse off.

Is it any coincidence that the average master of the universe hedge fund manager — powerboat, summer in the Hamptons, Enzo with multiple supermodels in the passenger seat, Geithner on speed-dial — is at least 3 inches taller than the median? Is it any coincidence that the most visionary, awesome investors are also the tallest? The data seem to confirm the model; the null hypothesis can be rejected.

I say: no pasaran! No longer should capital flow to the average height, the less than tall, and, most perversely, the short. This gross inequity must be redressed, or else: the market will be distorted. Capital will be misallocated, trade will wither, the economy will stutter, people will starve, and all will suffer. Do you really want the Rwandans to be worse off than they already are?

The revolution starts here. As a person, unfortunately, of average stature, I accept the sacrifice the economics demands I make for the greater good. I will be donating 20% of my income to Shaquille O'Neal.

**

OK. The real point is this. The question isn't: should we tax the tall?

If we accept that benefits disproportionately flowing to tall people purely because of their height is inequitable, the question becomes: how should we tax the tall — or, conversely, subsidize the short? If taxing the rich is ethically challenging, the obvious next solution is to subsidize the short — and guess what?

We already do. Society subsidizes short people every second of every day, by making special allowances for them in movie theaters, bathrooms, and on public transport. Why? Because most of them are called "kids."

Welcome to the 21st century.

Here's what you're up against.

"If one voice can change a room,
then it can change a city,
and if it can change a city, it can change a state,
and if it can change a state, it can change a nation,
and if it can change a nation, it can change the world."

Who said that? Your antithesis: Barack Obama.

He launched the first political revolution of the 21st century. And you're facing the second.

You're the Supreme Leader, so I guess you probably think you hold all the cards. The problem is that it's the last hand of the last game — ever.

Here's what you're up against: the new economics of organization.

You command and control. The opposition self-organizes.

Your advantage is force. The opposition's is resilience.

You had a strategy — to maintain power. The opposition has a purpose — to change the world.

You divide and conquer. The opposition links and unifies.

You wield thin power — violence. The opposition wields thick power — belief.

If one voice can change a room — then it can change the world.

What does that really mean?

There is nothing more asymmetrical than an ideal. In the right hands, an ideal is a weapon more potent than any club, gun, or bomb. It can turn two nerdy computer science PhDs at Stanford into corporate titans. It can turn an unknown junior senator into the President of the United States.

And it can, just maybe, turn an inconsequential 140 character messaging service into a tool that helps revolutionize a state.

The opposition has many ideals: liberty, equality, justice, hope.

Where are yours? That's the dilemma you face.

The revolutionaries' day might not be today. In fact, it probably won't be, unless the opposition finds their own Obama. But this day is important, historical, prescient. Because — just as Obama's nomination marked the end of the 20th century in America — it surely marks the beginning of the end of the 20th century in Iran.

Which reminds me. You know what? If you were ever to find yourself in the middle of organizing a 2.0 political movement in, say, Tehran...the talk linked to above might be exactly what you need to get started.

Yes, Tehran — we can.

Love,

Umair and the Edge Economy Community

PS — If you really want to understand the difference between 20th century strategy and 21st century strategy — read this. And reflect on how it's exactly the opposite of what most businesses would do. Much love to the Twitter crew for standing up for their ideals.

So if a snot-nosed kid like me and an eminence grise like Cohan both agree on the need for a better kind of capitalism — why are we making little progress towards building it?

I've thought long and hard for the last three to four years about a better kind of capitalism. Lately, my lab has been holding workshops about Capitalism 2.0 for blue-chip corporates, top-tier investors, radical innovators, and major international organizations alike. Here's what we've been discussing.

We can't build a better tomorrow unless we understand the root causes of today's crisis.
So much for green shoots. The unintended consequence of bailouts by the dozen is that bond markets are beginning to revolt. As yields get pushed up, all the quantitative easing in the world won't be able to put the economy back together again. Growth is — yet again — being thwarted.

Why this failure in solutions? Regulators and bankers seem stuck, endlessly debating the root cause of today's ongoing crisis. Is it a liquidity crisis, a solvency crisis, a crisis of trust? It is all of the above — yet, at root, none of the above. The real crisis is deeper, and more foundational.

Capitalism 1.0 wasn't built to last.
Today's crisis is one of institutions. That's institution not as in "organization," but institution as in rule to follow, or, better yet, ideal to strive for. The institutions, or ideals, at the heart of Capitalism 1.0 — exploitation, tyranny, domination, war, to name a few — are great if the economy's goal is to create the illusion of profit (hi, Wall Street). But they are toxic and self-destructive if its goal is to make people better off. Capitalism 1.0 is best at creating "thin" value — brittle, often illusory, and ultimately unsustainable value.

A new generation of revolutionaries is building a better kind of capitalism from the ground up: Constructive Capitalism.
Constructive capitalism is "better" in a tightly defined economic sense. It redefines the value equation at the heart of capitalism. It is built on a better economics that creates "thicker" value: value that's meaningful to humans — not just value that pumps up spreadsheets, computer models, and bonsues.

Like yesterday's revolutionaries ignited an industrial revolution, so today's revolutionaries are igniting an institutional revolution.
Today's revolutionaries have all discovered that in the 21st Century, innovation itself needs innovation. Today's most radical innovations aren't product, process, or even business model innovations: they are institutional innovations.

The last people to know about a revolution are usually the overthrown.
The institutional happening is hiding in plain sight: its happening right under your nose. Who are these new revolutionaries? Some of these are classic radical innovators: asymmetrical competitors like Threadless, Apple, and Google. But many of them are the unlikeliest of revolutionaries: Wal-Mart, Nike, and Starbucks, to name just a few. Yet, all have one thing in common: they are working away quietly, patiently, yet disruptively: to reconceive a better kind of economics from the ground up.

Strategy 2.0 is about learning to play by the rules of "Constructive Capitalism." Want to master 21st Century economics? Then ask yourself: what good, today, is mere cost advantage, differentiation, or value chain control? For Target, Motorola, and Microsoft, respectively, the answer is: no good at all. In contrast, as today's radical innovators reinvent better economics built on more valuable ideals, they are discovering fresh, new, often explosive sources of advantage — which differ radically from yesterday's tired and tapped-out sources of advantage.

How can you start playing by the rules of a better kind of capitalism? My rules are detailed in two presentations here and here. They're not the only rules, or even the best rules — but they are a starting point for exploring a more authentic kind of value creation.

I think that's really cool, so kudos to Wonga for doing it.

Let me add a note about the Wonga post. It was a harsh post. Maybe, on reflection, a bit too harsh. I let it stand, though, because I think it's critical for us to discuss this stuff. Surfing around, I couldn't find any substantive discussion of Wonga's business model or strategy.

I said at the end of the post: feel free to prove me wrong. There were a handful that of comments that were personal attacks, with zero substance. But many of you raised very good points in defence of Wonga's strategy and business model (like this comment by Charlie).

Who's "right"? That's not the point.

The point is deliberation. We've got to think about this stuff. The real danger is too little discussion and debate — because the result is groupthink. What killed finance, GM, the Gap? What's the real driving force behind the zombieconomy? Challenging the status quo is something that we feel too uncomfortable doing.

So what's my response to the comments?

Simple. I think Ethan got the point of the post best. It wasn't about Wonga ex nihilo. It was about Wonga's investors, and their lack of strategic imagination. And it was about our economy, and its lack of leadership. Wonga was a metaphor for those themes — which are the real key takeaways.

No, I haven't changed my mind: I still think Wonga's business model and strategy are value (and values) destructive. But that Wonga wants to chat is, like I said, cool. So I'll let you know what happens at the meeting!

Thanks to everyone for the comments — I really enjoyed the discussion. Fire away in the comments if you've got stuff you want Wonga and I to discuss.

Is the hype justified? Yup: Twitter isn't just changing how we communicate — it is changing how we innovate.

Twitter is one of the world's most radical management innovators. It's revolutionary because it brings 21st Century DNA roaring raucously to life: it is a living expression of the new principles of organization and management we've been discussing.

Here are Twitter's ten rules for radical innovators (which have, just maybe, had a bit of influence when it comes to Twitter).

1. Ideals beat strategies. What infuriates people most about Twitter is that it seems to have no plan, scheme, or angle. "Hey, Twitter" say the pundits: "don't you know the business of business is to profit, by any means necessary?"

They're as wrong as Dubya was about Iraq. The business of business is to create value — and that's why Twitter's not playing the tired, old game of value extraction. It is trying, instead, to create a more authentic kind of value — and to do that, you need ideals. Twitter pursues its ideals — democracy, peace, equity — with the quiet intensity of a true revolutionary.

2. Open beats closed. Anyone can use Twitter, make friends with anyone else on Twitter, and read anyone else's Tweets, unless they're locked. Here's Oprah, for example. Openness is important because it unlocks 21st Century economics — the new economics of interdependence.

What are the new economies that Twitter unlocks? See the next three points.

3. Connection beats transaction. In the 20th Century, what was viral was mostly the flu. Today, Twitter is the master of viral economies. I got this awesome link from you got it from he got it from them. In the 21st Century, virality can make many different kinds of value activities significantly more efficient and productive. Today, viral economies pass links and messages from person to person. What will they pass tomorrow — cars, jobs, houses?

4. Simplicity beats complexity. Twitter has also mastered what I call economies of pain. Twitter's bozo-proof: even Ashton Kutcher can use it. Apple, Google, now Twitter: all know that extreme simplicity is economically powerful because without it, network members never connect in the first place.

5. Neighborhoods beat networks. Twitter's network effects don't feel much like standard ones. I can subscribe to your feed, yet you don't have to subscribe to mine — times millions. What's going on here? Twitter realizes neighborhood effects, not just network effects: complex sets of intersecting, overlapping, mutually reinforcing network effects. Oprah's followers are a neighborhood, and so are Ashton's. You can benefit from joining many of these neighborhoods — not just one larger network.

6. Circuits beat channels. Twitter isn't building a new media channel. It's turning yesterday's channel into a circuit. Oprah doesn't broadcast to you: rather, the innovation is that you can talk to her, you can talk to your friends about her, she can talk to all of you, and anyone can talk to everyone. Twitter has dropped a neutron bomb of real-time feedback into the heart of media: yesterday's inert, rigid channel becomes a flexible, ever-shifting, reconfigurable set of circuits instead. Efficiency is gained — and monopoly is vaporized — as demand coalesces around supply, and vice versa.

7. Laziness beats business. Twitter hasn't rushed to cram a "business model" down peoples' throats. Instead of back-slapping each other after cutting deals, the Twitter guys are lazy. Why? They're waiting to play, experiment, see what offers utility, creates value, and makes people truly better off. Business is too busy, most of the time, to care about any of that. Laziness says: "business models happen."

8. Public beats private. Tweets are, by default, public. Not only can you message Oprah — but your messages to Oprah are public. Why is that important? Imagine, for a second, if banks had been run by Tweet instead of by executive suite: would Wall Street have been able to loot its depositors silly? Nope. Authentic value doesn't hide in the shadows.

9. Messy beats clean. Hashtags and @s, Time notes, weren't invented by Twitter - they were the result of people playing with Twitter. Twitter is messy — people can use it in uncontrolled ways — and that messiness means Twitter has better ideas faster than, for example, Facebook.

10. Good beats evil. To create a better kind of value, you've got to strive to be better. Authentic value doesn't flow from evil — it flows from good. What's evil about media? Saturation bomb ads, of course. And Twitter neither advertises nor accepts orthodox ads. Twitter, ultimately, is trying to conceive a better kind of advertising — and it can never do so if its already made a deal with the devil.

These are my rules — but they're far from the only ones, or even the best ones. Are there more you want to add? Fire away in the comments with additions, subtractions, or multiplications.

Simple: it seduces with easy profits today — but only at the hidden expense of tomorrow. That's what I've referred to as a crisis of nihilism.

SUVs were a classic unnovation — witness Hummer's recent sale by GM. So let's use James Kwak asking why SUVs are more profitable to illustrate how to innovate, instead of unnovate.

James is asking the wrong question. The right question isn't whether SUVs are "more profitable". It is: how much value do they (really) create?

SUVs were "more profitable" in the same way that most durable goods are: margins were higher at higher prices, reflecting less competition (and less elastic demand). Think, for example, Sub-Zero fridges. That's why Detroit chased the SUV with such abandon: facing hypercompetition in markets for smaller cars, the SUV was seen as a kind of holy grail of profit.

But that was the small, near-term picture. In the big picture, there were many different forces affecting profitability.

SUVs are "less profitable" over time. What is the half life of VW Beetle? We're not sure — it's still going. What was the half life of the Hummer? Less than a decade.

Why? It wasn't just because the SUV market got crowded by imitators.

SUVs were "more profitable" because society subsidized them. SUV owners emit more carbon, but paid proportionally less for it. Today, that's changing. Conversely, in a world where oil prices are endlessly volatile, gas taxes are on the horizon, etc., SUVs begin to internalize some of their social costs, and their expected cost of ownership goes up.

SUVs were "more profitable" because neither Detroit nor the capital markets counted opportunity cost. What was the opportunity cost of SUVs for Detroit? Simple: making authentically innovative cars — renewably powered, awesomely designed, carefully crafted cars people wanted, enjoyed, and loved. SUVs are more profitable only in the same way that selling your kidneys might be.

Detroit is self-destructing because it produces unnovative cars. They were profitable in the near-term, thanks to the last vestiges of Detroit's historical market power. Yet, by failing to answer the challenge of creating authentic value, Detroit has destroyed its own ability to innovate for the long-term.

The crisis of nihilism means: the numbers we utilize to make decisions today don't reflect economic reality. It's as true for banks as it is for cars. The Hummer is an economic weapon of self-destruction, for society, people, the environment, and, of course, auto-makers — yet, because it was chasing near-term "profit", instead of authentic value, GM kept churning them out even as it faced a battle for its own survival.

To not fall into the Hummer trap, think constructively — how will you build a better tomorrow? If Detroit had asked itself: "how will we build a better tomorrow?", it might have understood the economics behind the numbers. It might have striven to innovate instead of unnovate, by creating authentic, meaningful value.

But Detroit never asked itself that question. The result? Like most industries (hi, Wall Street), Detroit saw only numbers. That's how it was seduced into unnovation — all the way into oblivion.

Fire away in the comments with questions, criticisms, or thoughts — I'll try and sum up responses from our various Detroit posts this week.

What should rise from its ashes?

We had a great discussion about it — months ago. Here are the new strategic principles that tomorrow's auto industry — and every industry — should be built on.

Fire away in the comments with fresh thoughts, questions, or comments.

You blew it. Instead of doing stuff that mattered, you ended up doing stuff like this:

"The Jonas Brothers sat backstage recently at the El Rey Theater here, politely answering questions from a small cluster of reporters about their new CD....

...The band's outside efforts include a line of branded energy drinks and starring roles in "Walter the Farting Dog," a movie for 20th Century Fox based on the best-selling children's book."

That's an amazing sentence. Everything that's wrong with 20th-Century business (and 20th-Century economics) is perfectly encapsulated in it.

It's the essence of dumb growth: spending millions to create a boy band with the half-life of a mayfly...all to push-market sugar-water and lowest-common-denominator flicks that fail to make kids smarter, happier, or better in any meaningful way. Welcome to the zombieconomy — want fries with that decline?

Yet, on the other side of the divide, we've got economists proposing, for example, the nationalization of credit.

What happens when we spend our government sponsored $1k on Jonas Brothers "branded energy drinks," which create absolutely no real value? We dig ourselves even deeper into the hole of value destruction.

Financial engineering cannot solve our economy's problems — because they're not financial problems. They are about toxic organizations and institutions failing to create authentic economic value. And the worst offender on the list is 20th-Century business.

Which brings me to the point of my open letter.

20th-Century Business, you're fired. The global economy has decided to let you go. Why? Because you turned out to be, well, a less-than-productive hire. You failed to live up to your end of an implicit but very real social contract: do stuff that makes people better off. Instead, you did stuff that trivializes, belittles, and enfeebles people.

You failed to do the meaningful stuff, and today the bill is coming due. What does that bill look like? It's not about numbers. It says:

The only viable solution to the zombieconomy is a better kind of business, built from the grass-roots up: a new generation of radical innovators that challenge and disrupt lame, brain-dead 20th-century business. The kind of business that, for example, push-markets toxic junk to kids.

Who are some of those innovators? We've discussed lots of them — Apple, Google, Tata, Threadless. What makes them different is simple. They are more profitable and valuable than rivals because, well, they do stuff that counts.

Because they do, I'd miss them if they were gone. Would anyone miss the rest of you? I'm not so sure. Maybe that's something to chew on.

What's Cheney's game? Simple: to utilize kryptonite to rob Obama of his superpower.

Here's how next-generation strategy can help Obama win Cheney's game instead.

Obama's power is thick power. Thick power is a distant cousin of soft power. Like soft power, it is built by setting an example. When we can set an example that inspires others we are able to lead — and others follow.

In the right hands, and in the right context — witness Obama upsetting both Hillary and McCain — thick power is like having superpowers.

But thick power has it's kryptonite. If you can be cowed, intimidated, bullied, or persuaded into backing away from your principles, the example you set collapses. People no longer find it credible, and your ability to lead vanishes.

The problem Obama has isn't Dick Cheney. Dick Cheney is irrelevant; he's just another evil old dude with (surprisingly fashionable) bad 80s glasses. Obama's real problem is staying true to his principles — because setting an example is built on principles.

Cheney's game is simple: to be Lex Luthor to Obama's Clark Kent. Cheney's goal is to dilute the thickness of Obama's power. How? By scaring and bullying Obama into betraying his principles, so Obama can no longer lead by example. Cheney's game is about using the kryptonite of compromise to rob Obama of his superpowers.

Unfortunately, Obama's playing right into his hands, with moves like this.

What should Obama — and every player who wants to utilize and grow thick power — do instead?

First: respond with a restatement of principles. Obama shouldn't ignore Cheney entirely. Thick power means others count, especially when they're evil — because they give you a chance to put your principles in even starker contrast.

Second: use it or lose it. That means: don't betray a single principle. How does thick power break? When one principle goes, the rest often collapse like dominoes — because principles are mutually reinforcing elements of a larger system of beliefs. Instead of betraying principles, double down, and begin employing them more fully — by, for example, investing in a Manhattan Project 2.0.

Third: force the adversary to utilize thin power, setting a counter-example. Obama should call Cheney's bluffs — because the best way to defuse thin power is to make people use it. Thin power is about controlling others — and no one likes to be controlled. If Obama called Cheney's bluff, Cheney would be forced to call on Republicans — and my guess is more than one would refuse his call.

Dick Cheney is one evil old dude — but the fact that he's missed the real point of thick power tells us he's not that smart. Thick power realizes increasing returns: it builds alliances — and allies create a powerful incentive to live up to your principles, again amplifying the thickness of your power.

See the awesome? We've come full circle to a key theme: in a hyperconnected world, good (usually) beats evil. To win Cheney's game, all Obama has to do is...be true to Barack Obama.

That's it for now. Fire away with questions, thoughts, or criticisms in the comments.

PS MoDo, I'm watching you.

"...What we are seeing is a collapse of *crony* Capitalism...which is very different from free market Capitalism."

I suggest that what we're seeing is actually the institutionalization of crony capitalism. Check it out.

From the NYT: "During one frantic weekend in March 2008, when Bear Stearns was collapsing, BlackRock's omnipresence became evident.

The next day the Federal Reserve hired BlackRock, through a no-bid contract, to analyze and eventually sell off a $30 billion pool of risky mortgage securities that JPMorgan did not want."

You couldn't make it up if you tried. Here's a bleak scenario for tomorrow, which — though just one of many — you might want to consider.

Let's call it "devolution", for moving backwards. Here's what bad incentives, like those above, do:

1) Everyone should (always and everywhere try to) be a fund manager.
2) Every boardroom is beholden to fund managers.
3) Capital is only worth the present value of it's political returns.

Hey — it sounds just like the incentives that got us into this mess! In this scenario, forget about strategy and innovation. They're worthless. Think patronage instead. Here's why.

People and organizations respond inevitably to incentives. And the incentives the Obama team has created are simple.

Hard work doesn't matter. Doing or being better doesn't matter. What does? Connections, deep pockets, inside info, and — most perverse — a lack of ethics. The less ethics matter to you, the more you'll bid, for example, to run the government's books.

It's a shame that our President — who's actually pretty bright — has turned out to be the economic equivalent of Dubya, at the time we needed economic competence the most.

Business as we knew it is fast coming to an end. Here's what the Obamaconomy looks like. The government champions funds. Funds champion corporations. Corporations champion markets and industries. No one champions people (because they don't count).

At no point in that new value chain do markets, trade, exchange, etc. work. So what's likely to? The opposite of markets: kickbacks, bribes, side payments, influence. Want a fund to champion you to the government? That'll be $3 million, please.

It's development economics 101: patronage, force, and brutality are how feudal economies work. So forget about corporate, business, or innovation strategy. So I think the choice for today's boardrooms is simple: seek a patronage strategy — or work to build a better economy from the ground up.