Chris Anderson’s new book Free argues that with the rise of digital marketplace business can profit more from giving information and content away than by charging for it.

Malcolm Gladwell, reviewing the book for the New Yorker, says not so fast.

There are four strands of argument here: a technological claim (digital infrastructure is effectively Free), a psychological claim (consumers love Free), a procedural claim (Free means never having to make a judgment), and a commercial claim (the market created by the technological Free and the psychological Free can make you a lot of money). The only problem is that in the middle of laying out what he sees as the new business model of the digital age Anderson is forced to admit that one of his main case studies, YouTube, “has so far failed to make any money for Google.”

Why is that? Because of the very principles of Free that Anderson so energetically celebrates. When you let people upload and download as many videos as they want, lots of them will take you up on the offer. That’s the magic of Free psychology: an estimated seventy-five billion videos will be served up by YouTube this year. Although the magic of Free technology means that the cost of serving up each video is “close enough to free to round down,” “close enough to free” multiplied by seventy-five billion is still a very large number. A recent report by Credit Suisse estimates that YouTube’s bandwidth costs in 2009 will be three hundred and sixty million dollars. In the case of YouTube, the effects of technological Free and psychological Free work against each other.

So how does YouTube bring in revenue? Well, it tries to sell advertisements alongside its videos. The problem is that the videos attracted by psychological Free—pirated material, cat videos, and other forms of user-generated content—are not the sort of thing that advertisers want to be associated with. In order to sell advertising, YouTube has had to buy the rights to professionally produced content, such as television shows and movies. Credit Suisse put the cost of those licenses in 2009 at roughly two hundred and sixty million dollars. For Anderson, YouTube illustrates the principle that Free removes the necessity of aesthetic judgment. (As he puts it, YouTube proves that “crap is in the eye of the beholder.”) But, in order to make money, YouTube has been obliged to pay for programs that aren’t crap. To recap: YouTube is a great example of Free, except that Free technology ends up not being Free because of the way consumers respond to Free, fatally compromising YouTube’s ability to make money around Free, and forcing it to retreat from the “abundance thinking” that lies at the heart of Free. Credit Suisse estimates that YouTube will lose close to half a billion dollars this year. If it were a bank, it would be eligible for TARP funds …

And there’s plenty of other information out there that has chosen to run in the opposite direction from Free. The Times gives away its content on its Web site. But the Wall Street Journal has found that more than a million subscribers are quite happy to pay for the privilege of reading online. Broadcast television—the original practitioner of Free—is struggling. But premium cable, with its stiff monthly charges for specialty content, is doing just fine. Apple may soon make more money selling iPhone downloads (ideas) than it does from the iPhone itself (stuff). The company could one day give away the iPhone to boost downloads; it could give away the downloads to boost iPhone sales; or it could continue to do what it does now, and charge for both. Who knows? The only iron law here is the one too obvious to write a book about, which is that the digital age has so transformed the ways in which things are made and sold that there are no iron laws.

I’ve been thinking about social support networks lately and so pieces in recent books have stood out. Humans are social animals who are able to organize ourselves or act individually, but the family and small group networking connections are still more important than generally acknowledged. The implications for a creative economy is that how companies and cities are organized can be as important as what they do or make in their success.

These examples are mostly medical, partly because that’s where a lot of research goes on, but the implications for society are universal.

• The first chapter of Malcolm Gladwell’s Outliers talks about the town of Roseto, PA which was founded by Italians from Roseto, Italy in the 1890s. Doctors noticed that the residents were unusually healthy. But investigations showed little difference in diet, personal habits, the natural environment, etc. What they did find was that the social and friendship networks were unusually strong. This mutual support resulted in less heart disease and other maladies.

• This reminded me of Dr. Dean Ornish’s work with treating heart disease with diet, exercise, meditation, yoga, and social/family support. When his success in not only stopping but reversing heart disease was reported, the medical establishment said, “Yes, we know that if our patients shifted to a low-fat diet, exercised, and reduced stress it would reduce heart attacks. But people won’t follow our orders so we just schedule bypasses.” The difference was the social and family involvement, which got people to change their behaviors.

• In The Age of the Unthinkable, Ramos tells about AIDS patients in Tugela Ferry, South Africa who had extraordinary levels of medication compliance because rather than doctors just saying “take these pills” they explained the science and involved family members. People stuck to the regimen despite the extreme side effects, while groups who were just told to follow doctors orders would stop medication when they felt better.

• A growing evidence-based practice in residential drug treatment is the “Therapeutic Community,” where peers are involved in each others’ recovery. It has better results than just staff-led treatment.

• Then this article in the Portland Tribune tells about a program to have severely mentally ill people work real jobs rather than “sheltered workshops.” The job stress that was assumed to be too much for them to handle turns out to actually help them get better.

From quality circles to army platoons to extended families, people working together are healthier, more productive and more creative. How can this knowledge be used to build the creative economy?

There have been a series of articles lately about the relative values of “intelligence,” creative thinking, and sustained effort. Two of the pieces are from David Brooks, who is becoming my favorite columnist because of his wide-ranging subjects.

It occurred to me that this relates directly to Richard’s goal of making every job creative. I don’t have answers, but this raises questions like, “What do we need to be teaching?” and “What do we need to be doing as a society?” to birth the creative economy. It may be something entirely different than the organizing that helped make manufacturing jobs pay middle class wages.

Brooks wrote about the Harlem Children’s Zone charter school, which offers stability and high expectations. Harvard economist Roland Fryer studied the school and…

They found that the Harlem Children’s Zone schools produced “enormous” gains. The typical student entered the charter middle school, Promise Academy, in sixth grade and scored in the 39th percentile among New York City students in math. By the eighth grade, the typical student in the school was in the 74th percentile. The typical student entered the school scoring in the 39th percentile in English Language Arts (verbal ability). By eighth grade, the typical student was in the 53rd percentile.

In math, Promise Academy eliminated the achievement gap between its black students and the city average for white students.

Let me repeat that. It eliminated the black-white achievement gap. “The results changed my life as a researcher because I am no longer interested in marginal changes,” Fryer wrote in a subsequent e-mail. What Geoffrey Canada, Harlem Children’s Zone’s founder and president, has done is “the equivalent of curing cancer for these kids. It’s amazing. It should be celebrated. But it almost doesn’t matter if we stop there. We don’t have a way to replicate his cure, and we need one since so many of our kids are dying – literally and figuratively.”

In another recent column, Brooks talks about genius or extraordinarily high achievers. He says that the scientific view is moving from the idea that people are born with great talent to the idea that they earn it (maybe they’re born with the ability to practice).

In the view that is now dominant, even Mozart’s early abilities were not the product of some innate spiritual gift. His early compositions were nothing special. They were pastiches of other people’s work. Mozart was a good musician at an early age, but he would not stand out among today’s top child-performers.

What Mozart had, we now believe, was the same thing Tiger Woods had – the ability to focus for long periods of time and a father intent on improving his skills. Mozart played a lot of piano at a very young age, so he got his 10,000 hours of practice in early and then he built from there.

The latest research suggests a more prosaic, democratic, even puritanical view of the world. The key factor separating geniuses from the merely accomplished is not a divine spark. It’s not I.Q., a generally bad predictor of success, even in realms like chess. Instead, it’s deliberate practice. Top performers spend more hours (many more hours) rigorously practicing their craft.

The issue of the value of I.Q. struck me because of a good friend who had an I.Q. of 170. She took three languages and college classes in high school, and cruised through Berkeley while working and raising two kids. Not only smart but social, good people skills. She died broke last year, never having translated that potential into success. Interestingly, in our group of hippies, she was the Ayn Rand devotee. What she may have lacked was concentration.

The relative value of intelligence and effort is borne out in all sorts of quotes and examples we see and forget:

• “If you have a 150 I.Q., sell 30 points to someone else. You need to be smart, but not a genius.” Warren Buffet on investing at this year’s annual Berkshire Hathaway annual meeting.
• “Genius is one percent inspiration and 99 percent perspiration.” –Thomas Edison
• “Golf is a game of luck. The harder I work, the luckier I get.” — Ben Hogan (legendary golfer)
• In Positively Fifth Street, a book about the world series of poker, James McManus says that to get good at Texas Hold ‘Em you need to play 10,000 hands (or hours, I forget).

In the current New Yorker, Malcolm Gladwell has an article called “How David Beats Goliath: When underdogs break the rules.” It moves from junior high basketball to warfare to computer modeling, but the main idea is that creatively changing the game gives an advantage to the underdog who is willing to work harder, and includes this gem:

“We tell ourselves that skill is the precious resource and effort is the commodity. It’s the other way around. Effort can trump ability because relentless effort is in fact something rarer that the ability to engage in some finely tuned act of motor coordination” (a basketball reference.)

So how do we change the game in the new economy?

The book is getting snarky reviews but if it were by an unknown, rather than by the famous Malcolm Gladwell, many people would be saying how interesting it is. The main point, in economic language, is that human talent is heterogeneous and that the talent of a particular person must mesh with the capital structure of his or her time if major success is to result… The main enduring insight… is simply how much we live in a world of complementarity rather than substitutability… In reality the complementarity concept is easier to work with and also more fruitful for thinking about policy implications or for that matter the implications for management or talent training.  Success is fragile but foster competing cultures based on clusters of talent motivated by rivalry and emulation. Don’t filter out the eccentrics or the risk takers. It’s still a good book and a fun book.

The rest is here. I concur. I think it is the best of Gladwell’s books, actually. And he handled himself very well with Matt Lauer this morning.

Malcolm Gladwell’s new book, Outliers, is in launch mode. The Globe and Mail has a terrific interview.

Anything that is cognitively complex seems like it requires at least 10,000 hours… It’s deliberate practice, so it’s focused, determined, in environments where there’s feedback, where there’s a chance to really learn from mistakes. What’s fascinating about this notion that expertise arises only after 10,000 hours of deliberate practice is that it seems to apply incredibly broadly to an astonishing array of different professions – from playing chess to writing classical music to being a brain surgeon to playing hockey…

A critical part of high achievement is not a function of your IQ, your analytical ability, the size of your hard drive in your brain, but rather, a function of your ability to navigate the world and get what you want from the world… We radically underestimate how much high achievers rely on that practical side.

There’s no way around it. There’s no shortcut. One of the things that drives me crazy about a lot of educational reform ideas is that they try to find shortcuts: a charismatic principal; a cool technology; a fancy new school. All of those things are beside the point. This issue is, do you have enough time in school to master the things you need to know…

Because we squander talent. Even in a country like Canada, where hockey is a priority, an obsession, we’re squandering a huge amount of hockey talent without realizing it. We could have twice as many star players if we just changed the institutional rules around finding talent. To me, that’s such a powerful lesson. Because it just says, look, in a simple area like hockey, in a country that cares more about it than almost anything else, if you’re still squandering 50 per cent of your ability, how much more are we squandering everywhere else?

Now extend that line of thinking to just about every area of human endeavor. Can’t wait to read this one.