Creative Class

The June unemployment numbers do not look very pretty for the United States. After four months of improvements in the number of jobs lost, the numbers again increased to 467,000 up from 322,000 in May. The unemployment rate, now at 9.5 percent, is the highest in 26 years. The recession is entering its 20th month and will soon reach two years with little end in sight.

While the great recession of the 21st century grinds on, explanations for it continue to elude us. Some think that it is a depression and they may be right. I suggest that we have at least four issues on our plate that have emerged as a perfect story. The solutions to all are institutional. First, let’s start with the financial crisis. This financial crisis resulted from market failure. The lack of rules or what some like to call regulatory arbitrage, that is, working the rules led to the financial meltdown. We are still not out of the woods on this one because the rules have not been fixed. Without rules markets cannot work.

Second, we now have a global recession with falling demand and rising unemployment. A classic case of underused resources. The recession was in part caused by the financial crisis, but only in part. It is clear now that at least two interpretations are in order. First, it was a classic case of over-investment in housing. We have about two to three million too many houses. It will take about six years to work this off through population growth and attrition. This “inventory recession,” to use an old phrase, is nothing new, only the sector is - housing. The other interpretation is that it was caused by imbalances in the global economy between rich and poor countries. In either case, as Richard Florida pointed out with housing, or Business Week with global imbalances, new rules are needed.

Third, we have finally realized that we do indeed have a sustainability issue in the environment. It is both about the carbon footprint and about the type and amount of energy used. This is not a cause of our current financial and economic problems but it impacts it directly since it is about investment, and with a huge amount of uncertainty where to invest it is also putting a drag on the economy. Rules would help.

Finally, we are just realizing that globalization that started a few decades ago might be a dead end. It is a dead end not because the world does not want to globalize (most do) but because markets cannot work without rules. And in a global economy we need global rules. Here is the rub. All of the above problems in some way suffer from having a global economy without a set of global rules. When the last era of globalization ended at the dawn of the first world war, the rules that governed up to then also evaporated and it took decades to put them back in place after the second world war.

We are now into the second decade of the second globalization of the world economy. Until we are able to put the “rules of the game” in place markets, I am afraid the economy, and the financial sector, cannot be expected to lead to growth. The environmental rules are even more onerous. We just might need to start working on the rules of the game sooner rather than later. This seems like a task for the creative class. What is needed is talent and honesty in order to put a global structure in place where all can prosper. This is no small task.

Here’s the abstract from a new paper by Ed Glaeser and Matthew G. Resseger (thanks to David Ptak for the pointer).

There is a strong connection between per worker productivity and metropolitan area population, which is commonly interpreted as evidence for the existence of agglomeration economies. This correlation is particularly strong in cities with higher levels of skill and virtually non-existent in less skilled metropolitan areas. This fact is particularly compatible with the view that urban density is important because proximity spreads knowledge, which either makes workers more skilled or entrepreneurs more productive. Bigger cities certainly attract more skilled workers, and there is some evidence suggesting that human capital accumulates more quickly in urban areas.

Full text is here.

I recently read The Wikipedia Revolution by Andrew Lih. The story of Wikipedia is a microcosm for looking at at least three things:

1. How the Internet and Web are changing almost everything, destroying old models but with inherent weaknesses of their own.
2. How collaborative group efforts can be greater than the sum of their parts.
3. The human desire to have all knowledge.

1. Wikipedia is a perfect symbol of the Internet. It exists in a virtual reality, with a mass of contributors who don’t know each other. It has almost totally undercut older encyclopedias like Britannica and World Book, but depends entirely on the goodwill of its contributors. It has no stable means of support, and at the end of the book (published this year) Wikipedia was moving its headquarters to San Francisco, expanding staff and becoming much more expensive to operate in a leap of faith.

2. Wikipedia’s model of using a large number of contributors isn’t new, although the lack of professional editing is. The Oxford English Dictionary was originally built the same way, using file cards in cubbyholes in the 1800s, a fascinating story told in The Professor and the Madman. Wikipedia’s strength is its self-correcting and self-regulating nature. Its weakness is that unless someone knowledgeable about a field contributes, the articles will be weak.

In 2005, Nature magazine famously did a comparison of Wikipedia and Britannica’s science articles and found their accuracy comparable. However, when I first saw Wikipedia a couple of years ago I looked up two things I knew something about: grantwriting, which is my field, and BKS Iyengar, who is my wife’s teacher. Both were weak - not inaccurate, but sorely lacking. I checked recently and the Iyengar articles are much improved, but grants articles are still marginal (I’ve resolved to fix them when I get some time). If these two quick checks are representative, there are probably many other weak areas (in fairness, Britannica Online doesn’t have seem to have articles on either topic.)

3. People have been trying to capture the world’s knowledge for millennia. The first modern encyclopedia was probably Diderot’s French Encyclopédie, although Lih’s book says the first major attempt may have been by Pliny the Elder in the first century. But since knowledge is incomplete and constantly expanding and changing, the print versions were outdated within years. Wikipedia corrects this, but at the expense of a central editor or editors.

The larger question is about knowledge itself, which is famously growing faster than anyone can keep up. It has also been destroyed or lost in massive amounts, like the burning of the great library of Alexandria, the book burning in China’s Quin dynasty, or the medieval witch burnings which eliminated knowledge of folk medicine. In Asimov’s Foundation Trilogy, the Encyclopedists are trying to preserve human knowledge in advance of a total breakdown of civilization (apparently the books are going to be made into a movie next year). (Funny thing about old science fiction. Spaceships leap across the universe, but computers are still the size of houses and books are still published on paper.)

Obviously, things are changing very fast. Wikipedia could drive print encyclopedias out of business then fail itself. The wiki model is very democratic, but like many very open systems subject to error and manipulation. Stay tuned.

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.

Tyler Cowen outlines some themes of his new book, Create Your Own Economy, in Fast Company.

In a typical day, I might write two tweets, peruse 15 blogs (Jason Kottke and Penelope Trunk are two must-reads), and watch James Brown dance on YouTube. If it’s a really fun day, I’ll read more blogs, scour the Web for movie reviews, browse eBay, Google myself, and spend more time on Twitter. None of this costs me a penny, and yet I am producing plenty - namely, my own interest and amusement.

More and more, “production” - that word my fellow economists have worked over for generations - has become interior to the human mind rather than set on a factory floor. A tweet may not look like much, but its value lies in the mental dimension. You use Twitter, Facebook, MySpace, and other Web services to construct a complex meld of stories, images, and feelings in your mind. No single bit seems weighty on its own, but the resulting blend is rich in joy, emotion, and suspense. This is a new form of drama, and it plays out inside us - with technological assistance - rather than on a public stage.

Online, you can literally create your own economy. By that, I mean you can build an ordered set of opportunities for prosperity and pleasure, analogous to a traditional economy but held in your head. There is no obvious monetary transaction, but you’re using your limited resources to get a better deal - the very essence of economics. In fact, “economics” comes from oikonomia, the ancient Greek word for household management, and the modern practice of economics is returning to that idea.

More here.

His day sounds a lot like mine, though on the best of them I’d find time for a road ride. His argument makes a lot of sense.

There’s no shortage of debate on this one. But a new report (pointer via Tyler Cowen) by the intriguing combination of Harvard professor of Technology and Operations Management Robert D. Austin and Lee Devinand, a theatre dramaturg, shows there’s really no conflict:

[W]e examine the apparent conflict between artistic and commercial objectives within creative companies … We surface some assumptions that underlie such debates, compare them with findings from our research on creative industries, and identify three “fallacies” that sometimes enter into discussions of art in relation to money. This, in turn, leads us to propose a framework that can support more productive discussion and to describe a direction for management research that might help integrate art and business practices. We conclude that despite an inclination to take offense that often attends the close juxtaposition of art and commerce … the interests of art, artists, and business can be best served if more commerce enters into the world of art, not less.

Check out the other fascinating work on art, music, and management this team is doing.

Matthew Crawford’s observations on the nature of work, notably manual labor, struck me as extremely valuable. Per Crawford:

“Many of us do work that feels more surreal than real. Working in an office, you often find it difficult to see any tangible result from your efforts. What exactly have you accomplished at the end of any given day? “

His essay explores the rewards/fulfillment of working with one’s hands, and rightly notes that many “knowledge workers” (myself sometimes included) are often denied a real sense of gratification or creativity.

“Ultimately it is enlightened self-interest… that will compel us to take a fresh look at the trades… For anyone who feels ill-suited by disposition to spend his days sitting in an office, the question of what a good job looks like is now wide open.”

Not to mention, Crawford notes, that many jobs such as his - repairing motorcycles - simply can’t be outsourced. He might over-romanticize some of the truly dirty work that is performed but his essay and hopefully his book Shop Class as Soulcraft: An Inquiry Into the Value of Work asks some powerful questions.

Do you feel accomplished at the end of a long day sitting in front of the computer or in meetings?

I’ve just read a fascinating book, The Age of the Unthinkable, by Joshua Cooper Ramo. Ramo is a managing director at Kissinger Associates, focusing on China. He’s a former foreign editor for Time magazine.

The Age of the Unthinkable talks about how uncertainty and interconnection is increasing in every aspect of our lives and in world politics. From the interplay of energy use and the environment to finance and mortgages, to diseases spread by travelers, to terrorists and weapons of mass destruction, the world is becoming unmanageable using old models.

Complex decentralized systems are not unmanageable. Think of the Internet or healthy ecosystems or financial markets (OK, there was mismanagement at some levels. But the system worked, trading can go on even with the overload of a crisis). The thing is, they’re not manageable by straight-line thinking and top-down control.

As you might guess from his background, Ramos talks a lot about international relations. He says the old institutions set up after WWII - from the UN, to the way the State Department is organized, to how foreign aid is distributed - are not only incapable of dealing with today’s uncertainly but are actually counterproductive. One reason is they’re all designed to confront perceived problems head-on, which often has the result of making them worse - think nuclear proliferation, the war on terror, the financial crisis.

To oversimplify, Ramos says we need to do a couple of things.

1. Build resilient systems at every level.

• To deal with bioterrorism or new virus strains, we could try to plan for every eventuality, develop and stockpile vaccines, etc. But a more effective plan would be to build a strong healthcare system, with an efficient and effective public health component, and be ready to react to whatever happens.
• On the financial crisis, he talks about America’s low savings rate as a reason why the meltdown is so hard on individual families. If people had adequate rainy day funds we’d be better able to ride out the inevitable  downturns.

2. Design for uncertainly by using the model of our immune system.

• Be ready to react to crisis and opportunity with flexible systems. He talks about involving people at every level of an organization, or of a society, in decision making. Great case studies from Hizb’allah to a company in Brazil’s 1980’s financial meltdown to AIDS care in Africa.

This seems to me to overlap with the transition to a creative economy and Richard’s mantra that every person is creative and we need to make all work creative.

(Interesting David Brooks piece about Iran in today’s NY Times along the same lines.)

Book Flack, Larry Hughes on things he’d “like to see on C-Span Book TV:”

8:00 pm: The State of American Publishing
Authors Nevada Barr, Richard Florida, Gary Indiana, and J. California Cooper compete in skeet shooting, track & field events, and Greco-Roman wrestling to determine who will claim this coveted title

Richard Florida will appear on ABC’s 20/20 speaking with Dan Harris on the economic crisis and the “New Normal.” The interview will air June 19.

Below are two photos of the taping in the show’s Manhattan studio.

Tune in and tell us what you think of the interview!