With attendance at South By Southwest Interactive estimated to have increased by as much as 40% this year,  the interactive portion of the festival seems to be usurping a center stage at a show that initially began in 1987 with a sole focus on music. This year, according to event organizers, the number of badges purchased for the SXSW Interactive Festival surpassed those purchased for the music portion of the event.

Of course, attendance rates at this particular festival are merely a microcosm of the shift in media dominance; interactive media is gaining significant clout in the broader Industry. The attendees of the SXSW Interactive, who arrive via  ’nerd birds’ and affectionately refer to the festival as ‘spring break for geeks’, have become the ruling caste of an Industry that has historically been controlled by the likes of musicians, actors, media conglomerates and other ‘cool kids’.

The triumph of the ‘nerds’ in the battle for media power is reminiscent  of the 1984 film, The Revenge of the Nerds, in which a group of ‘nerds’ moves up their university’s social hierarchy by outsmarting the school’s highest echelon of command, the ‘alpha betas’. Upon understanding that power is contingent upon taking control of the ‘Greek Council’ the ‘nerds’ band together and use their combined wits to overtake an organization that was traditionally dominated by the ‘alpha betas’ (aka the University jocks).

Much like the ‘nerds’ featured in the 1984 comedy, today’s ‘nerds’ banded together and used their collective intellectual prowess to become dominant forces in a playing field that had historically belonged to the ‘cool kids’. In understanding that the essence of media power lies in audience appeal, interactive leaders were able to re-engineer the concept of mass communication in such a way that the audience with whom they sought to find favor was sure to embrace. Unlike traditional media, in which the vast majority of of people were relegated to the role of voyagers, interactive media offered a drastically different value proposition in which any member of society could become a producer or creator of media.

Quite simply, interactive media changed the game by making the audience infinitely more relevant.

The term morphed into a symbol of American opportunity and the possibilities that awaited all those willing to pursue success in the region. For Americans, torn between the democratic ideals of equality and the pursuit of independent wealth, the American Dream was irresistible in its allure – it allowed them to have their cake and eat it too.

It’s funny, but people often group capitalism and democracy together; while they do in fact have a symbiotic relationship, they are actually on two opposite sides of a spectrum. Capitalism is the freedom for an individual to pursue his or her own dreams, while democracy enables the majority to restrict that freedom.

Today, in the effort to have our cake and eat it too, or in some cases, fight bitterly on how to manage the cake, we are missing a key point – it is not only unquestionably the case that we need a balance of imperfect democracy and imperfect capitalism – but the current balance is creating tremendous deadweight loss. We are overly democratic in our willingness to hand out entitlements and raise taxes on businesses, and far too libertarian in our lack of oversight in the financial sphere.

Both increases in taxes and increases in government spending have a strong negative effect on private investment and spending.

Recent works by Gregory Mankiw and Martin Feldstein at Harvard indicate that the total cost to the economy of an additional $1 of tax for the government to spend can be as high as $5 and is almost always at least $2 – in other words, direct government spending may not be the most efficient way of accomplishing goals.

Alberto Alesina and Silvia Ardagna, also from Harvard, recently completed a comprehensive  analysis of the issue. Looking at large changes in fiscal policy in OECD nations since 1970, they compared the policy interventions that resulted in growth with those that did not.

The results indicated that successful stimulus is contingent on cuts in business and income taxes -increases in government spending are far less effective.

The human animal, like all other animals, is controlled by its wants and desires. Because the human is the animal with the greatest level of sentience, he or she can be motivated by longer term desires or fears – particularly when shorter term needs like food or shelter have been met.

And, humans have proven their ability to act in pursuit of the accumulation of wealth – at times even when it conflicts with their short-term desires. However, their behavior behavior is based on a combination of the perception of the risk, cost and potential payout of the activity, along with their unique tolerance for risk.

When the government adds additional entitlements for the unemployed, state and federal taxes for businesses will typically increase – reducing labor supply. Firms experience a higher cost of adding an additional employee and see lower benefits of the gains in productivity that stem from that employees work.

On the demand side, workers are less eager to join the workforce when the marginal gains of working relative to collecting government employment are low.

Additionally, among those that have been unemployed for a significant time period, there is a much greater number of people who simply stop trying. Today the “official” unemployment rate in the US, which looks only at those unemployed who have attempted to seek employment in the past 4 weeks, is at slightly over 10%, while the the real unemployed workforce actually stands at over 17%.

Greater Democratic Oversight of Regulators in Financial Markets is Needed

In contrast to the creation of entitlements and growth of taxes, our focus on libertarian ideals has lead to poor regulation of financial markets in which public interests are underrepresented in an imperfect market where investment information is tightly concentrated among a small number of large investors.

With the exception of the independent regulator – who has little incentive to act in the interest of the public rather than large investors – few policies challenge the influence and power to distort that larger investors are afforded under independent regulatory systems.

Nicholas Dorn, Professor of International Safety and Governance at the Erasmus School of Law, argues that “networking between regulators and those they regulate results in a convergence of global regulatory thinking. This creates groupthink, common blind spots, and deepens systemic risk.”.

In other words, a lack of outside input can lead to missed risks and a tendency for chameleon-like behavior. Poor regulation offers individual regulators excessive temptation – in terms of both financial reward and desire for peer approval – to go along with the crowd.

Diversity in thinking – and greater accountability to public interest – could be achieved by democratic steering of regulatory agencies in order to ensure that public interests were indeed met and blind spots were reexamined by those outside the field.

Abandoning the Goal of the Impossible will Allow Policy Makers to Better Optimize the Imperfect

Karl Marx understood that perfect capitalism would lead to anarchy; he missed that a perfect democracy (aka communism) would accomplish exactly the same result. Both would erode the hope of greater economic gains for the vast majority of people. And, it is the individualistic quest to accomplish greater things – not the collective desire to remain on equal footing with one’s neighbor – that is most effective in enabling the government to have any measure of control whatsoever.

The Danger Of The Government Becoming the Monopoly of Last Resort:
We have anti-trust laws to promote far competition, maximize economic growth and improve consumer offerings through choice. Allowing the government a huge role in the healthcare system is incredibly dangerous. While the government will essentially be creating a monopoly through a combination of legislation and their infinite ability to borrow funds – they also own anti-trust law – allowing for an incredible opportunity to manipulate legislation put in place to help small businesses and consumers.

Stifling Innovation and Quality of Care:
Innovation is a key driver of our economy – and central to the US regaining its global stature and recovering from the current economic meltdown. Competition and innovation are inexorably linked – you don’t see innovation at the DMV because it has nothing to lose or gain – it owns the market. Customer service and competition go hand in hand as well; hours of waiting to get a new license is quite annoying – but its nothing compared to hours of waiting during a health emergency.

Diseconomies of Scale:
At a certain size, a business grows too large to manage efficiently; for example it costs about $314,000 in capital for the private economy to create a job versus about $1.2 million per job created as a result of stimulus spending.

The Size of Our Current Public Debt:
Our public debt already amounts to nearly $40,000 for every living American – or $160,000 per family. And the price tag is quickly rising – given that the government is continuing to spend funds that they don’t have, in order to decelerate the rate of rapidly rising taxes for future generations, government funds must start going to projects that focus on collaboration with the private sector in order to reduce their incremental investment. It also allows the private and public sectors to share the risk and profit – this leads to greater incentives to make programs successful.

As we prepare to close out the first decade of the twenty-first century, intangible assets – such as intellectual property, patents, brand value, and access to customer data – are increasingly replacing physical ones as dominant drivers of value creation in a knowledge-based economy.

To illustrate how these changes have impacted the valuation of a firm’s book value relative to its market value, Baruch Lev, an accounting professor at New York University’s Stern School of Business, analyzed the gap between the two valuations over the period between 1978 and 1998. He discovered that while in 1978, market and book values were near equal, with book value representing just 95% of market value, twenty years later, book value accounted for a mere 28% of market value.

Yet, despite the increasing disparity between book and market valuations, historical growth rates, derived from previous financial statements, are often looked at as a predictor of future growth rates. Financial statements are used to derive many of the assumptions that investors rely upon as well as the performance indicators that executives are held accountable for meeting.

This occurs – at least in part – because there is painfully little guidance provided to help investors or executives compare hard numbers to soft ones.  Seeking benchmarks is an instinctual component of decision making and numbers are the easiest and most broadly agreed upon inputs used in setting benchmarks.

In the future, competitive advantage in both corporate strategy and investor decision making will likely come from a more broad based and holistic understanding of growth drivers in business segments – broken out by some combination of sector, business model and relative maturity of a firm. Additionally, there is likely a need to itemize non-tangible variables – as we currently do with tangible variables – in order to better assess the relative weight of various variables on a company’s future performance.

Such an exercise will also help with normalizing quantitative and qualitative growth drivers and enable a more accurate analysis of how internal, external, and competitive activity influence a given firm’s performance.

Until such time, as many investors struggle to incorporate intangibles into historical models, the most savvy of them will find that a focus on the intangibles is a key driver of long-term equity – particularly when they are afforded early insight in a market that is rife with ignorance.

Financial contagion has often been discussed in relation to investment in emerging nations; countries increase their willingness to invest when they see other nations doing so and withdraw funding based on the actions of other nations. However, it is quickly becoming clear that similar behavior can occur on a more micro-sphere as investors use their peers as benchmarks in making decisions about where to focus their investment.

In a now famous October 2004 article, Chris Anderson tells Wired readers that the future of entertainment is in “millions of niche hits at the shallow end of the bitstream”.

To demonstrate this, Anderson uses the example of Rhapsody’s “power law” demand curve, which looks like that of many record stores in its concentrated distribution of top tracks with a quick drop off in demand for less popular ones. Yet, it differs in that demand never reaches zero.

Anderson argues that demand is typically highly concentrated because many individuals lack ample information about products that fall outside the mainstream which causes them to wind up sticking with what they know in order to play it safe – a phenomenon he dubs the ”economics of scarcity”.

One obvious issue with that particular example is that Rhapsody is an unlimited subscription based music service;  like in the case of an-all-you-can-eat buffet, it offers a low risk opportunity to try new things. Penetration of niche products and services is likely to be highest in markets that not only create economies of scale for merchants in distribution costs, but also, provide low risks to the user in trying out unknown items.

Yet, even in the case of when a user can try additional incremental goods at no charge , a is a certain number of free options that will render additional free goods useless. Similarly, adding additional suppliers to a market where demand is both perfect and unwavering, creates a situation in which the net excess remains unsold.

The widespread belief that online demand could be a never-ending power law demonstrated the extent that the unprecedented demand for online goods accelerated – particularly when considered in relation to the traction traditional businesses had made in following their customers online.Opportunity in the e-commerce industry appeared to be near infinite. Yet, in reality, the laws of supply and demand have not changed.

Addressable demand for niche items just initially expanded faster than supply as low distribution costs led to exponential growth in the size of the addressable market. Given that the opportunity to serve the niche markets sprung up rapidly, early visionaries were rewarded with more demand then they could manage to serve and the new “economics of abundance” enabled consumers to expand their purchase comfort zones. In due time, the opportunity to enjoy increasingly personalized and rare items will become another baseline expectation for consumers, butit remains unclear whether increased choices will make consumers happy, help businesses grow or merely serve to distract both groups.

The number of people who visit social networks on a weekly or daily basis is growing and the amount of time spent on these sites in the first nine months of 2008 grew at double the rate of overall time spent on the Internet.

Not only is social networking usage accelerating rapidly, but the channel accrues further benefits as growth begets growth; he more “connections” a user has on a given network, the greater their motivation to join that network or sign on to check status updates. In fact, in its annual “State of the Media Democracy” study, Deloitte found that 55% of social network users logged into social networks at least weekly in 2008 – an 18% increase from two years prior.

While teens and young adults continue to make up the largest group of social network users today, new growth is also coming from older generations. It is estimated that there will be 44% more social network users in 2013 than there were in 2008. The change in demographics is already beginning to have a profound impact on the expansion of the medium’s scope.

With 1382% growth in the past year, Twitter is expanding social networking beyond a tool for socializing and is an excellent example of this phenomenon. With 45-to-54-year-olds representing the site’s highest indexing age group, the site’s current adopters are actually led by older users – which is atypical for a social network.

Unlike Facebook or MySpace, which focus on creating profiles and interacting with friends online, Twitter’s steady stream of digital sound bites renders it an optimal tool for sharing and spreading information. This suggests that as social networking expands into the mainstream, its usage patterns may undergo considerable alterations.

For businesses looking to map social media users to their existing market segments, there is tremendous potential in users’ increased interest in using social networks to engage their passions and interests, rather than solely as platform for developing new relationships or keeping up with existing ones.

One benefit of this is that users who come together on the basis of shared interests naturally constitute a targeted audience, thereby allowing marketers to position and craft messaging based on their needs. Engagement also tends to be higher when audiences share similar interests; a recent study of Vertical Ad Networks demonstrated that vertical audiences generated 60% higher engagement than average category users.

As an added value proposition,Twitter’s micro-blogging focused site tends to appeal to users who are frustrated by information overload and seeking relevancy in short bursts. It can be a powerful and dynamic social influence tool – reaching precisely those consumers who typically tune out marketing messages.

While profiles, updates, and posts contain volumes of data about consumers’ likes, dislikes, and purchase intent, marketers find this information nearly impossible to track and capture. To help businesses overcome the steep learning curve, effective social analytics could offer robust audience segmentation that groups users into “clusters” based on their demographics and/or affinities and takes into account the strength of their connections to other users who share similar characteristics.

Clusters, or diverse consumer communities differentiated by ethnicity, wealth, lifestyle, and values, are an ideal environment to search for influencers: those individuals who possess the ability to have a profound influence on others in the group. In a small community of like-minded individuals, influencers tend to have exceptional success in building trust and affecting the perceptions of group members.

As a result, they are extremely valuable commodities for marketers looking to reach a particular audience as they help to promote the creation of viral marketing programs that are dramatically more effective than conventional marketing strategies in expanding brand awareness and consumer engagement. And, ultimately, businesses will be drawn to social networks for precisely this reason – such networks possess power to spread ideas within a group and make them stick.

The trouble is that even as things get better in actuality, it takes businesses a bit longer to recover psychologically. Their confidence has been delivered a blow, and once lost, confidence can be very hard to regain.  Since firms continue to feel poorer with wages and job growth not matching overall growth, we see longer than necessary levels of unemployment, along with inflation, as salaries, likely sticky downward as well, grow at a slower rate than the prices of goods. Quite unfortunately, this lack of confidence makes a bad situation worse, slowing recovery and making it significantly more painful.

During his campaign, it served Obama well as a candidate to paint a picture of a grave economy. After all, one of the strongest areas of his campaign, particularly for winning the votes of undecided independents, was his commitment to economic change. To highlight his own selling point, it was necessary to for Obama to employ fear, and create a narrative in which the Republicans single-handy destroyed our economy , and their candidate for President, John McCain, was naive and out of touch, even going so far as to call our economic fundamentals “sound” as late as September 2008. Implicit in that narrative was that as a nation, unless we elected Barack Obama into office, we were, in no uncertain terms, doomed.

While he won the election, Obama may not have done himself, or the nation, any favors. Despite Obama’s attempts to infuse additional hope into his messaging once he took office, the influence of his campaign rhetoric on public perception can not be easily undone. While the public may not have a clear understanding of how to fix the economic recession, they are growing increasingly displeased with Obama’s attempts.

Pessimism in the nation’s direction has risen sharply this past summer. A recent Washington Post-ABC News poll indicates that 55% of citizens see things as pretty seriously on the wrong track -  up from 48% from April.  And, similiarly, while sixty percent of people had faith in Obama’s ability to spearhead the initiatives necessary to end the economic recession when he took office, that number is down to 49% today.