Industrial Non-Equilibrium Dynamics

Economic transactions and industrial reorganizations are akin to the evolution of a complex system punctuated with periods of equilibrium and non-equilibrium dynamics. The reactions of firms to the type of dynamics underway determine their competitive position for the next period. In this article, I will clarify an analogy of our economy to systems undergoing equilibrium and non-equilibrium dynamics and explain some demands the internet makes upon the firm.

Most of the time, much of our economy is in a state of dynamic equilibrium or a state of relative constancy. While components of it are being changed, the composition of the entire system remains the same. Our economy is a system with many interacting players and parts. We conduct transactions and change employers without altering the fundamental structure of the economy. At the micro level our existence may be affected by the transaction, but at a macro level the economic system remains constant.

Non-equilibrium dynamics can be recognized by its ability to change of the composition entire system. The process may be slow or fast, but the result is to alter and morph the entire system towards a new state. The expected outcome of an interaction between the players is no longer fulfilled. The components of the system, the players and parts, are revalued and redirected in a non-equilibrium dynamic process. When a complex system moves through a non-equilibrium state, the outcome is unpredictable.

Currently, our economy is undergoing non-equilibrium dynamics. Up-start concept companies are over taking established asset based companies as witnessed in the AOL and the Time Warner merger. Corporate anarchists like Jim Clark, the founder of Healtheon, are threatening the 14 % of the U.S. economy through inserting themselves into the delivery of health care. All of this due to society gaining the ability to control the actions of unseen electrons in within a piece of material made ostensibly from sand coupled with the controlled pulses of light in strands of buried glass. Neither Bohr, Schrodinger, nor Hiesenberg, the fathers of quantum mechanics, would have predicted this outcome yet their ideas are the core enabler of our current economic revolution.

In economies constrained to equilibrium or near-equilibrium dynamics, we are able to predict the growth of wealth through the simple understanding of the amount of capital and labor deployed. Growth within an economy could increase either by deploying greater populations or making capital improvements. More recently though, we have seen that the wealth of a nation, its productive capacity, is affected by other factors. Economist like to speak of “total factor productivity” to capture all those messy variables they don’t fully understand, but for business people the economist’s messy variable are the core of our strategic decisions: how do you increase a firms productivity more than its competitors?

During periods of equilibrium dynamics, firms attempt to make better investment decisions or hire better people. During non-equilibrium dynamics, the effects of the classic competitive questions are dwarfed by the ability to combine capital and labor in fundamentally new ways. The inventions of new business processes and new business constructs are the hallmark of our non-equilibrium economy. Growth no longer is confined by the inputs, but by the ingenuity in their combination.
The internet is a small change in our ability to communicate, but it affects entire industries. Compared to the corporate downsizing of the 80’s, the industrial reorganization that our economy is currently undertaking is gargantuan. For professional business people like ourselves, the internet offers a defining moment where we decide if we are a Pawn in the Chess game, or a Champion of the New Landscape. We can’t sit back and watch the future unfold; we have to define it. Speed and agility are core competitive advantages. Change is the prerogative of the winners.

LeChattlier, an early physical chemist, stated that if you apply a pressure to an equilibrium system, it will react in a manner that will relieve that pressure. For him, driving forces of change could arise from temperature changes, the ratio of the components, or the introduction of entirely new components. For firms, the driving force of change is innovation. The internet is our new ingredient to our economy. Entire industries are reacting to it. A firm’s reaction to it is akin to opening a closed system so new things can come in. What will come of it is pure imagination. What I will commit to is that the metric of 10% returns is old-economic thinking. Embracing fundamental change enables the unprintable to occur.

“Industrial Non-Equilibrium Dynamics”, Timothy Smith, Chicago Business, May 30, 2000, p17.