Engines of Prosperity

History repeats itself.

Why is the current recession compared so often to the Great Depression? What underlying problems in the economy are similar now and then?

To understand what is happening today in our economy and our market we should first looking at history. My father spent over 20 years researching the history of the stock market and came up with some very unique macro theories about what drives our economy and markets. In 1988 he published a short white paper on his theory called The Engines of Prosperity. Unfortunately, he passed away before he could publish his theories in more detail so all I have are memories of our conversations, this white paper and mounds of documents that he collected over the years.

His theories show that what we are going through is part of a cycle that has happened before and will happen again. The problem is that these cycles are longer than any one person’s business career. Therefore the last time it happened, almost no one working today was alive. This means that experience and "what worked before" cannot apply to the current situation.

He called his theory the Engines of Prosperity. You can read his white paper in detail at www.enginesofprosperity.com. In short, he describes a primary technology engine that drives the economy. It started with steam boats, then railroads and most recently automobiles. We are entering the transition to a new engine of prosperity, the digital age. Each of these engines goes through five distinct phases:

1) Experimentation - characterized by speculation
2) Consolidation - characterized by contraction
3) Development - characterized by investment
4) Saturation - characterized by decline
5) Restructuring - characterized by distribution

In phase 1 the new technology is experimented with - lots of companies sprout up and speculation rules the day. The technology is seen as changing the world dramatically and so investment flows and speculation occurs. This causes a bubble when over exuberance and too many companies are formed to meet the needs. This becomes overdone and phase 2, consolidation ensues where the strong swallow the weak.

Phase 3, development is where it becomes clear which of the companies are going to survive and drive the engine of prosperity forward. This allows capital to flow into these companies and sustained growth to truly take advantage of the promise of the new technology. Finally, after a period of time we enter phase 4, saturation where the engine of prosperity starts to fade. This naturally leads to the restructuring, phase 5, where the industry is distributed and split up as it declines. Over history these phases have lined up so that as an engine enters phase 4 another is appearing in phase 1 and 2.

The last transition between phase 1 and 3 was the great depression where the engine of prosperity for the economy switched from railroads to automobiles. In the 1920s there were some 110 car companies. In the contraction that followed only a hand-full survived to enter phase 3. This transition at first glance, of course impacted the buggy whip maker and the horse and carriage repair shops. However, it also had more profound impacts on all of society: it led to the rise of the suburbs, fast food, commutes, traffic jams, smog, distribution methods, etc. It also impacted other areas such as energy which needed different distribution and means to provide energy to the rapidly growing number of automobiles.

Today we are in phase 2 of the Digital Age. We are transitioning from the experimentation and speculation from Phase 1, to the yet to occur real development of Phase 3, where the true potential of the Digital Age will occur. This period of consolidation will affect most businesses and will weed out the weak. This paper, my speaking and other work look to provide tools and concepts for business owners so they can not only survive this transition, but can position themselves to thrive in the coming developments of Phase 3.