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.

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.)

Entrepreneurship seems to be the cure all for almost everything including the common cold. In a recent paper, the Kauffman Foundation found that the number of Fortune 500 companies and Inc 500 companies were founded in bear markets. A bear market is when stock prices are more or less falling and a bull market is one in which they are rising. Now this seems counter-intuitive at first. Would you not start a business when times are good? In bad times, if other firms are having trouble selling goods and services, why would you start another one? However, there is another aspect to this. If you lose your job you might have to start a business (a necessity entrepreneurship). But I do not think many of these would grow up to be Fortune 500 companies.

So how do we explain the Kauffman finding? Well, a quick look at bear and bull markets reveals a very interesting finding. Over the whole of the 20th century we found about three bear markets (the market rising) and about three bull markets (the market falling). Each is about 15 years, give or take a little. Keep in mind that a bear market does not mean recession. Recessions are short, but bear markets can last a very long time. In fact, the current bear market stated about 2001 so we are about halfway through if you take the more or less 15-year average. So it is not surprising if about half of businesses are started in bear markets. In fact, a quick look at the statistics suggests that the start-up rate of new firms is not very sensitive to recessions. They are around eight percent. They never fall by 50 percent and never rise by 50 percent.

So what does this finding tell us? Nothing I am afraid. It is business as usual. In good times and bad times Americans will start businesses. I would suggest that the creative class start-up rate is also very steady in the recession. The regional variation of this might also be very interesting.

We’ve already got a name for conventional infrastructure projects that are ready to go: shovel-ready. But what do we call ready-to-fund projects that might be part of a needed creativity stimulus?

Here’s a list our gang at the MPI came up with:

• Production Ready
• Neuron Ready
• Spotlight Ready
• Camera Ready
• YouTube Ready
• Synapse Ready
• Cortex Ready
• Imagination Ready
• Log-in Ready
• Google Ready
• Performer Ready
• Web 2.0 Ready
• Stage Ready
• Performance Ready
• Canvas Ready
• Realization Ready
• Communication Ready
• Pen-stroke Ready
• Roll-out Ready

Vote for your favorites and feel free to suggest more.

Class is a word that elicits strong, and sometimes strange, reactions from many Americans. Once a powerful construct understanding economies and societies, class has been all but banished from the lexicon of social scientists and from the public conversation.

It’s time we put class back in the center of our vocabulary, especially so during this ongoing economic crisis and reset. The impacts of the crisis have been extremely uneven by class - hitting hardest at the industrial working class and their communities.

Over the coming week, I’ll be posting on that, and also on the powerful effects of class on the wealth, innovativeness, and happiness of nations, drawing on a variety of statistical analyses conducted with Charlotta Mellander and my Martin Prosperity Institute colleagues.

We define class simply by peoples’ position in the economy - not by perceived status, level of income, or what we consume, but by the kind of work we do. Conveniently, the U.S. Bureau of Labor Statistics keeps detailed statistics on the myriad occupations that make up the U.S. economy.

We identify three core classes:

The working class who work in production, transportation, construction, and related jobs.

The service class who work in jobs like food prep, grounds cleaning, building maintenance, personal care, administrative offices, and community, social, and protective services.

The creative class of scientists, engineers, and entrepreneurs; artists, designers, media types, and entertainers; and knowledge-based professionals in management, health care, education, and related fields.

I’ll report on the relationship between class and various social and economic outcomes over the next several days, starting with the relationship between class and economic output tomorrow. On Wednesday we turn to class and technological innovation; class and entrepreneurship on Thursday; and class and the happiness of various nations on Friday. Along the way, I’ll also post on the uneven ways that recessions impact different classes, and relationship between class and unemployment, among other things.

Stay tuned.

Wednesday morning I went to visit Toronto City Hall to address the city’s economic development committee on how to best position in light of the economic crisis. I didn’t think it would be a newsworthy event, but guess what…

The National Post opens with my favorite headline in a a long while: “Richard Florida goes to City Hall quotes Karl Marx.” Here’s the story:

Quoting Karl Marx, cab drivers and his factory-worker father, celebrity intellectual Richard Florida went to Toronto city hall today to tell councillors that improving the lot of service-sector workers is key to the city’s prosperity.

Toronto’s economic development committee invited Prof. Florida, an American academic and author now at the University of Toronto’s Rotman School of Management, to enlighten on the way out of the current global financial crisis.

Although Prof. Florida’s emphasis on the creative class – workers in intellectually driven fields like the arts, technology, film, communications, engineering, science and research – have drawn criticism for being elitist, today he focused on a different class of worker. He compared the situation of workers from the hotel, restaurant, retail and customer service sectors to the lot of exploited factory workers at the turn of the 20th century.

Because of their outsized presence in Toronto’s workforce, he posited that improving their incomes, work conditions and happiness could be the key to Toronto’s future prosperity – just as the rise of the unionized labourer became the foundation of the middle class in post-war North America. “Those jobs are local and hard to outsource offshore,” he said. “We really, really, really have to think about how to upgrade that work.”

After his presentation, the committee decided to request a report from city staff on a possible creative stimulus package – to nurture the growth of creative industries – and to hold a summit with service workers in the fall…

Prof. Florida noted he doesn’t like the words “crisis” or  “depression” or even “recession” to describe the current downturn. He prefers the term “great reset” – which he coined and will appear in a forthcoming book…

Prof. Florida encouraged the metropolis to think even further afield. The axis of Montreal, Ottawa, Toronto Waterloo and Chicago is what he called a “mega-region” that has the potential to be a world powerhouse. Toronto and Waterloo – a hotbed of technological and scientific discovery – are natural partners in particular, Prof. Florida said.  Waterloo has the ideas that lead to upstart industries with the help of venture capital, he said, while Toronto is the kind of place those knowledge industry professors want to locate.

The Toronto Star picks up on the “creativity stimulus.”

Stimulus plans for building roads and sewers are fine recession projects, but Toronto could use a “creativity stimulus” package, too, says urban guru Richard Florida. Florida, who has argued that attracting and nurturing a “creative class” is a key component to building successful cities, appeared before Toronto’s economic development committee today.

“Why not consider us the first city that does a creativity stimulus?” Florida asked councillors …  “Why not think about a creativity stimulus, and not just for advantaged people, but for all people?” he asked. “What about giving all those young people who want to use their creative energy and talent a way to do it?  “That is as important as physical infrastructure building, and maybe over time more important – especially for young kids; especially for kids who may be getting dis-attached from school.”

Toronto has paid a lot of attention recently to big institutions such as the art gallery and museum, he said, but creative people need support, just as the institutions do.  Toronto should be thinking about “creativity incubators,” as it does about business incubators, he said. Business incubators generally provide start-up businesses with cheap space and expert advice, often giving them a boost before they’re turning a profit.

Councillor Kyle Rae (Ward 27, Toronto-Rosedale) hailed Florida’s idea, and asked staff to research the idea. He said the city might consider giving a boost to creative residents in Toronto’s priority neighbourhoods – areas of low income and high unemployment.

UPDATE: The always insightful John Barber of the Globe and Mail provides intriguing perspective.

In this economy, many organizations engage in downsizing as a cost-cutting measure or a means of increasing productivity. Apparently, such programs have mediocre rates of achieving the goals set by the downsizing.

In a Watson Wyatt survey (according to an article by Bob Nelson, Ph.D and author of the intriguingly entitled book, Managing for Dummies):

• Only 46 percent of companies who downsized met their expense reduction goals.
• Only 33 percent met profit objectives.
• Only 21 percent enhanced shareholder return-on-investment by doing so.

Nelson’s article goes on to say that because downsizing isn’t typically effective at meeting corporate needs, one round of layoffs tends to beget more. (This would suggest that if your employer has recently done a round of layoffs, you should probably dust off the resume and start updating.)

Downsizing tends not to help companies improve or return to profitability because they don’t take into account the perspective of (top) employees, according to Nelson. Here are a few traps employers can fall into:

• Believing survivors will be thrilled just to have jobs, and will forgive anything else.
• Believing that if anyone subsequently quits, it will be the weak and poor performers.
• Assuming that employees take what management is saying at face value.

Having been at a company that collapsed during the dot-com crash, and another that downsized following the 1991 recession, I recall management making all of these incorrect assumptions, and more.

As corrective advice, Nelson stresses the need to communicate excessively with employees during any downsizing and involve them directly in decisions. He also points out that lots of praise and recognition is free and goes a long way.

As the creative economy flattens hierarchies in day-to-day activities, any situation that creates an “us” versus “them” mentality would be especially toxic to productivity and longevity. Conversely, getting everyone involved might present some alternative solutions.

Is your organization looking for alternatives to downsizing? Or falling into the traps described by Nelson?

Richard Florida will address the economic impact of the creative class on Thursday, April 23, at The Johns Hopkins University Applied Physics Laboratory’s Kossiakoff Center in Laurel, Maryland. The event is sponsored by the Howard County Economic Development Authority. Said Pam Klahr, president and CEO of the Howard County Chamber of Commerce:

“The chamber is delighted to present this internationally acclaimed author and innovator to our community. Working with this diverse partnership to assure that we reach all segments of the county for this unique opportunity has been exciting.”

Richard’s message is critical to Howard County as the community develops plans for Columbia’s Town Center.

How has the rise of the creative class impacted your community?