Sunday, November 6, 2011

Creativity and Combination

I'm concluding a discussion of Erik Brynjolfsson and Andrew McAfee's book Race Against The Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy.

So what does this all mean for the future? The answer is not to compete against machines, they say. Instead, it is to compete with them, using them to leverage up skills. This requires above all organizational change.

How can we implement a “race with machines” strategy? The solution is organizational innovation: co-inventing new organizational structures, processes, and business models that leverage ever-advancing technology and human skills.

There may also be opportunities for entrepreneurs to develop business models which use mid-skilled workers better, and new worldwide specialized niches to exploit.

As a result, technology enables more and more opportunities for what Google chief economist Hal Varian calls “micromultinationals”—businesses with less than a dozen employees that sell to customers worldwide and often draw on worldwide supplier and partner networks.

But the most essential and important way forward is the sheer power of combining and recombining existing ideas into new forms. The authors see this process in operation in the new economy:

New digital businesses are often recombinations, or mash-ups, of previous ones. ...Because the process of innovation often relies heavily on the combining and recombining of previous innovations, the broader and deeper the pool of accessible ideas and individuals, the more opportunities there are for innovation. ...We are in no danger of running out of new combinations to try. ..Combinatorial explosion is one of the few mathematical functions that outgrows an exponential trend.

And this leads to a fundamentally optimistic vision.

The economics of digital information, in short, are the economics not of scarcity but of abundance. This is a fundamental shift, and a fundamentally beneficial one. ..Every generation has underestimated the potential for finding new ideas. We consistently fail to grasp how many ideas remain to be discovered. … Possibilities do not merely add up; they multiply.

I think this is a reasoned, articulate response to change. It is very much consistent with W. Brian Arthur's explanation in his book The Nature of Technology: What It Is and How It Evolves of how technology advances by constantly replacing subassemblies and components of existing technologies.

It also reminds me of Matt Ridley's book The Rational Optimist: How Prosperity Evolves (P.S.), which discusses the evolution of exchange and specialization. In Ridley's fabulous phrase, "Ideas have sex" and evolve and grow following their own rules of natural selection. That cross-breeding and innovation constantly leads to better living standards, in contrast to many doom-sayers through the ages.

I agree with these optimistic takes. Recombination can take place at a higher rate than ever before. Sitting here with my little iPad and keyboard on a Sunday morning, I have much of the cumulative knowledge of humanity a few swipes away, from wikipedia to many of the most cutting edge academic papers to many of the great classics available free on kindle and hundreds of thousands more books available for a small amount. That was unimaginable when I was in college, twenty years ago.

But such recombination and innovation does not mean we keep all aspects of our current economic system. Rather the opposite.

Many people are likely to find startling new sources of value which will enrich everybody's life. But it will be harder to flow everything through the market, because the natural price for many of these innovations will be at or close to free.

We need an explosion of organizational and cultural innovation.

It comes back to the economics of abundance. How do you price something which is valuable but extremely abundant? We don't price air, and we only partially price water.

The standard economics answer is you define the property rights concerned, and the market will take care of the rest.

And that is right. But the problem is we haven't adequately defined the property rights or institutions or social technologies to make this new world work. Instead we have the world economy beset by high unemployment and insufficient demand in the developed countries.

So one problem with Brynjolffson and McAfee's book, brilliant as it is, is like many other commentators it primarily sees the issue as a labor market problem. In their view, we have to find new ways to educate people to produce new marketable skills.

In fact, it is more a problem of economic structure and the boundaries of the market, as the new goods the want are increasingly less discrete marketable goods and services. Standard goods and services are increasingly saturated and automated, as the sheer miracle of market efficiency makes them ever higher in quality and cheaper to produce with fewer people.

One book I plan to read shortly is Douglass' North's Understanding the Process of Economic Change (Princeton Economic History of the Western World) which came out in 2005. I read his classic Structure and Change in Economic History years ago, the book for which he largely won the Nobel Prize in Economics in 1993. I'm hoping the more recent book will help me think through the issues of institutional change more, or the evolution of social technologies as I've also been calling it.

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