3 ways income inequality is affecting the Creative Economy

"Being creative is being able to do new things with old stuff"

American sociologist Richard Florida coined the terms Creative Class and Creative Economy as a way to refer to those industries where creativity and innovation are central to their performance. It may be the case that, in general terms, we can extend the argument saying that creativity is central to any business, however, Florida’s notion is not intended to blanket all businesses, but is rather much more concrete: creativity is not about individuals, but about organisations that structure their business around autonomy, tolerance, talent and technology, because in doing so they are able, to develop better products, while having positive effects on their environment (spillovers of their activity that, for instance, enables others to increase their own productivity (think of search engines like Google) or by promoting cultural products (like Wikipedia or Open Data Portals).

From this perspective, the creative economy appears as bearing important differences that distinguish them from established organizational structures (e.g. Taylorism, Fordism, and businesses that practice with military rigor the mantra of minimum cost equals maximum profit). Instead the creative economy is all about rewarding collaboration rather than individual performance, innovators rather than technocrats, autonomy over discipline, etc. We may not be able to draw a line on the sand that divides the creative industries from more traditional ones, yet it is still possible to trace general boundaries:

• ‘I define the core of the Creative Class to include people in science and engineering, architecture and design, education, arts, music and entertainment, whose economic function is to create new ideas, new technology and/or new creative content. […]

• All members of the Creative Class—whether they are artists or engineers, musicians or computer scientists, writers or entrepreneurs—share a common creative ethos that values creativity, individuality, difference and merit’ (Florida, 2004, p. 8).

In short, if innovation, creativity and collaboration are core values to your business and your consumers, then your business is part of the creative economy.

Florida's The Rise of the Creative Class 2004

How does income inequality affect the creative economy?

Thomas Piketty’s work on income inequality trends in developed economies tells us that there are forces of convergence and forces of divergence that characterise capitalist growth in the past two hundred years or so: forces that make lower and higher incomes converge—reducing inequality—and forces that make low and higher incomes diverge, resulting in higher inequality.

The forces of divergence that directly affect the creative economy, says Piketty, are two: financial instability and lower investments in cultural capital.

I will now go over each so as to clarify his point.

Financial instability means, on the one hand, that economies are in constant risk of building economic bubbles, that is, in funneling investment flows: putting too much money too quickly into particular markets, leading to situations of overinvestment. The tech bubble of the late 90s is a prime example, although an even better one is of course the 2007 sub-prime crisis that ended in a global financial crisis.

But, why does income inequality produce financial instability?

Financial instability means, on the one hand, that economies are in constant risk of building economic bubbles, that is, in funneling investment flows: putting too much money too quickly into particular markets, leading to situations of overinvestment. The tech bubble of the late 90s is a prime example, although an even better one is of course the 2007 sub-prime crisis that ended in a global financial crisis.

But, why does income inequality produce financial instability?

The reason is that higher income inequality means that a small number of investors are able to influence the direction of a market. This means that they are able to drive people’s future expectations about the type of returns a market can accrue, bringing, in turn, larger investment flows into that market. However, they can also affect the negative expectations of a market, taking investment away from that market.

The second force of divergence mention by Piketty is the general tendency of public capital to decrease. Public capital referring to all those investments (private or public, although mainly public in nature) whose benefits are equally public, at least in the sense of what economists call public goods: we can talk here about schools, public libraries, roads and bridges as well as about the particle accelerator in Switzerland, the Norwegian public fund that manages the country’s oil wealth, the public funding destined to R&D—although the latter is surely the smallest in comparison.

The problem, as you may have already sensed, is that ‘we currently spend far more in interest on the [public] debt than we invest in higher education. [AND] This has been true for a very long time (Piketty, 2013, p. 567).

The reason public capital plays a central role for the Creative Economy is explained by relation that exists, between high cultural capital (e.g. libraries, parks, museums, etc.) and, on the one hand, the entrepreneurial spirit that drives innovation, and on the other, the social atmosphere that rewards autonomy, creativity, collaboration, and so on.    

I said, however, that Piketty identifies too, forces of convergence—forces that bring high and lower incomes closer to each other. This forces not only decrease the levels of inequality, but also result in a number of what economists call positive externalities, that is, public capital can increase the number of well-paid jobs, can allow the middle class to increase their disposable income, can decrease the rates of violent crime and in general have positive economic and social spillovers.

Public capital allows for the three T’s (talent, tolerance and technology) to flourish within social groups, which increase entrepreneurial innovation, at every level of the business. There are a number of ways in which companies can use these three factors as the underpinning of their business model. The next post of the Thomas Piketty series will describe how the three T’s can increase productivity, job satisfaction and general firm performance.

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“Creative people are born not made” and other copouts that keep you from being remarkable

From all the myths on creativity this is, no doubt, one of the most pervasive. Its success in becoming part of our collective imagination is due to a single, yet terribly influential belief that gives an almost mystical role to talent—‘raw talent’. My point is that creativity is neither in the brain nor in the body--also not in  society. In a word, it is not a thing, it is a process.

Spotting the ways in which this deeply held belief in 'raw talent' negatively affects our behavior is actually not diffcult.

Think, for example, about the response that most people give, when asked whether or not they would say that they are creative individuals:

‘No… I have never been the creative type… I never was into any of that artsy stuff’.

But, what do we mean when we say things like 'artsy' or even 'talent'?

Creativity we seem to think is some mysteriously cool stuff that allows people to do even more cool stuff.

Such belief, one quickly realizes, makes of creativity a sort of hovering abstract attribute which would somehow materialize in different activities—sometimes painting, sometimes playing an instrument, and sometimes dancing ballet. For the believer in the powers of 'creative stuff' practice is inconsequential or secondary: Picasso was born a Master painter. Creativity, from this point of view, is supposed to be an energy of sorts that lives in some realm that is prior to the activity itself—perhaps within an individual’s soul, mind, or spirit.

You may at this point be thinking: ‘Ok, maybe the idea lacks sophistication, but is it really such a bad thing? Not everyone is a sociologist or a philosopher you know…’. 

I agree with you, the real question is how this affects people’s ability to be creative, right?

Well, this is where the real damage lies and it comes to light when we pay attention to the effects it has on both, the so called ‘creatives’ and the other ‘square’ or uncreative individuals. Most of the believers fall on the latter category. For them they simply acquire a sense of defeat about creativity, which, fact, works as a powerful resistance against creative work. These are the same people that will tell you, when given the opportunity to be creative: ‘I’m not the person for the task’, ‘I can’t do that’, ‘I am not one of the office’s creative people…’ ‘Maybe he [while pointing to someone with frizzy hair] can help you’.

It is this attitude of insecurity or contempt for creative work what is the real hindrance, no matter what the work or the type of organization at stake. This is not to say that the role of those aspects of our lives we don’t really choose for (education, parents, geography, and luck) is negligible, but rather that thinking and working creatively is most of all a practice or a habit, which comes about through repetition.

Repetition is what allows for mastery to be acquired: an artist, who can draw wonderfully realistic portraits in minutes, is able to do so because of the hundreds if not thousands of portraits she has made in the past. Like with any activity—from driving a car to playing tennis—it is hours of dedication and repetition what truly account for what we normally refer to as talent—the 10,000 hour rule for Gladwell’s Outliers. When it comes to creativity, furthermore, talent is indeed essential but it is not sufficient on its own—not all artists are innovators, and not all are pushing the lines of their disciplines. In the cases of people like Picasso, Matisse, Hopper or Warhol, just to name a few, their true truly experimental and innovative phases came only after they had acquired mastery over the techniques necessary to render a flawless painting (or a flawless design in the case of Warhol). Talent, we must realize, is but the starting point behind creative work; talent is what comes to light after the ten thousands hours. It is what allows for experimentation to be less of a leap of faith and more of an experiment in the scientific sense, hence, more of a discovery that may at first raise more questions than answers, but which in any case allows for progress to be accounted for, to be visible.

This same engrained belief is also responsible in convincing us (namely managers) that creative work is a black-box, which implies that it is a process that cannot be accounted for or properly understood. Instead of recognizing the hard work that is needed to acquire a talent, because it makes us feel insecure about our own sense of dedication and perseverance, we put a black-box in its place. Given that we cannot simply replicate the results of someone who has mastered a technique, we decide—out of frustration—that creativity is a sort of uncontrollable fluke, which cannot be learned or taught, and which cannot be made into a central part of an organization’s way of doing things. If your manager or your CFO tells you that in order to encourage creativity the company must sacrifice on productivity and efficiency, then you can be sure that they are the type of believers I have been talking about.

So, next time you hear yourself repeating the myth, remember that you can be creative, and that by doing so you are not giving up on structure, accountability or reflection.

Written by Daniel Vargas Gómez

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“It’s not me it’s you”: a breakup story between Innovators and CFOs

“The forecast is clear; the numbers don’t add up, we need to do something about these red figures”.

“What do you suggest to get rid of these red figures, if increasing the value of our products is completely off the table?”

“You know that our clients won’t like an increase in price. We need to put an end to our soaring costs. Let’s get rid of all these useless expenses and focus on being back in black by the end of the year…we may need to let some of your people go...”

“Why my people?”

“Well, they are expensive. What we need now are people that can take care of our clients, you know. We need the indispensable ones. We can think about innovation when things are back on track”

There is an essential aspect behind all innovations: they make sense only under the light of a long term perspective. There is an equally essential aspect to financial forecasting: it is mainly about the short term, which is also the time frame in which it can be truly accurate. In addition, predicting the financial outlook of a company’s incursion within a blue ocean (a new market) is practically an impossible feat—or at least one for which you will need an econometrician coming from a place like the World Bank to get you somewhere.

This is why it shouldn't be surprising that CFO’s love, both, the short term and the fierce battling for market share by means of cost-cutting savagery. They are not evil for wanting these, but they do have different motivations in their work.

Innovating is a losing battle, if the only markers of success within a company are provided by stringent, short-term focused financial figures. Yet, this is perhaps the difficult part of the process conducive to innovation that is better understood: you need to invest in R&D and product development, in order to have a viable offering in the long run. CFO’s will agree with the innovators on this, even enthusiastically, because deep down they know that one never reaches the long run if the short run must always come first.

This much is clear: if you believe in the need for innovation, even if only as a matter of faith, you are still on the right track—it’s a bit like choosing for healthy diet: you don’t know exactly what the benefits will be, but you still do it, and you do it knowing that it is something for the long run; the benefits of a single salad are negligible, it is at 10,000 salads where the real goal lies. The financial enthusiasts are those who keep on reminding you at this point about the ‘Light’ labels in your favorite junk food: there is no need for a salad if you can eat ‘light’. ‘Sure!’, you respond sarcastically to such naïve retort, yet only few would respond in the same way when asked to delay key investments or replace high-skilled (and expensive) employees with replaceable (and cheap) ones.

In the long run the ‘light’ foods enthusiast will wash his hands, wisely reminding you that ‘Light’ meant that you needed some moderation. In other words, that it was your fault for listening to them too closely. Not surprisingly, it also rarely the case that a bad forecast is the CFO’s fault: ‘the competition has squeezed our profit margins’.

However, I said that the long term aspect was the less contentious point. The true trouble comes when creating a business model that encourages innovation and creative thought. Seth Godin, for instance, discusses the importance of the ‘linchpin’ employee: someone driven by a need to create, to stand out, and to lead, hence, someone that will never fit in a model where rules, the chain of command, and ‘easily measured goals’ are expected to drive the competitive advantage of business. In equal fashion, Malcolm Gladwell’s “Outliers” seem—all of them—to challenge any such rule-following and standardized approach to their work. And outliers are exceptionally hardworking individuals. They are not the type of employee who is interested in fitting inside the demeanor behind heavy hierarchies: CEO, CFO, the rest of the executive team followed by country or regional managers, so on and so forth. 

They are especially not the types who are willing to set a limit to their learning (because work ends at 6), or to assess the value of their work by the amount of commands they were able to get through in an email thread. If as a manager or executive you need to set specific tasks to your employees, because you mistrust their autonomy, then you will get what you asked for and nothing more: not a single new idea, not one hour extra of work or any improvement on the way to fulfill the tasks given. You won’t, because people who feel they are being measured in dimes and nickels will conclude that their rewards are equal to their expected results—if you want them to work more, then that will cost you. This is what a business model built upon a structure of minimal costs creates: mediocre workers, average products and zero innovation.

The lesson is simple: If you are in a company where there is a clear need in disaggregating their offering into small and repeatable processes, in order to render employees accountable, then those in charge have missed the last 200 years of history and you are in the face of a dead end job—and most probably a failed company. 

The problem, when it comes to innovation, comes with the limited ability of the financial experts to render something accountable. Why limited? Because it depends on creating  production processes dependant on excessive simplicity.

The fear of complexity. This is the main issue against which innovators must focus their energies. This is the core and essence of the problem at hand. Most MBA’s, Financiers, and Economists have been educated to fear complexity and to show blind respect for the simple. The simple is better than the complex. Why? Well because it’s simpler to manage (Duh!).

Saying that the simpler is simple is a truism, like saying that the sky is blue. Saying that the simple is better is a fallacy—it has no truth to it, no evidence to back it up as some kind of universal truth. The problem for companies, furthermore, is that without complexity you cannot deliver anything truly valuable, only commodities. If you want product differentiation simplicity (namely the CFO) will only put pressure on price, and such pressure can be equally and easily replicated by your competitors. If you rather want a blue ocean where you can grow without limits, that is, if you rather want your company to innovate, then you need complexity, you actually should crave it.

Complexity does not mean incoherence or lack of structure. Complexity means that you need smart, ambitious, people, who are not afraid to prove their skills. That’s all. You don’t need rocket scientists, as the saying goes, but you need people capable of thinking at different levels. As a business owner or CEO you need, for example, people in marketing that can understand not only their role as marketers, but also their relationship to sales managers and product developers, as well as to the copywriters and designers who make of their marketing plans a reality.

There is still much more to say about the value of complex thought. A smooth running complex is better than a smooth running simplex; it is better because it is much harder to replicate and hence more valuable, if only because of its scarcity—replicating something complex is hard, you only have to take a look at the public struggle of Apple’s competitors to know why. The begging question is how should we understand complexity and make it work? That is the topic of the second part of this post. Don’t miss it! Subscribe and keep up to date with the factish.

Written by Daniel Vargas Gómez

3 Reasons Why Your Management Team Needs a Philosopher

So, you landed here for one of two reasons: either you are a manager or an executive and you don’t believe me, or perhaps, you are curious, mostly because deep down you, like almost everyone, have no clue what a philosopher does. In any case, you want to know what I’m talking about, so I won’t keep you waiting.

Managers must be good with numbers, they should preferably hold an MBA, and they should be able to encourage subordinates to be productive, right? Wrong, dead wrong. The reason most people believe in this is: either because they have climbed the corporate ladder thinking that way or, like most of us, because they think that organizing a productive team of workers is to an MBA what healing the sick is to a Physician. This reasoning is unfortunately based on the wrong metaphor: businesses today tend to entail complex interactions that are ill suited for technocrats, instead requiring a critical vision and a more creative approach. 

The first insight to keep in mind:

Adam Smith made a nail factory famous by using it as an example of the positive effects of the division of labor: divide a complex process into smaller, technically simple ones, and your productivity will soar. In Smith’s time there were not many factories, not in our sense of the term anyway. Chances were that if you adopted such process you would be able to conquer or at least take over a good share of your market. Today, however, the story is different: everyone knows about the secrets of division of labor, efficiency and cost accounting. This means that no matter how good you get at it, the advantage you get of doing so will be minimal in an established market. The key lies instead in being able to build complex products; to efficiently manage people doing complex not simple tasks—if you find yourself lost at this point, bear with me as I say a few explanatory words. It is precisely the combination of complexity over complexity what is mind-boggling for your traditional MBA graduate, who has been told over and over again that simple is better, period. The truth is that simple is better if and only if your product is as simple as a nail and your competition is not aware that division of labor exists. Given that they most probably are, then you need someone that is able to, literally, build complex offerings (the distinction between products and services has become blurry, which is why I prefer the term offering). You need someone capable of managing a team that can repeatedly deliver complex work.

Here, we arrive to the second thing you must keep in mind:

Organizing teams of people means having to deal with people; not with efficiency, process flows or any of that jargon MBAers love—those same MBAers that at my mention of the word ‘people’ roll their eyes thinking that some touchy-feelly story is coming their way.

Dealing with people is something we all do everyday all the time, so we should all be quite good at it, right? No, wrong again. As with driving a car, we can get pretty good at it, but our proficiency behind the wheel pales in comparison to the one of a formula driver. Our driving expertise consists in simply getting around town without crashing, in being able to Parallel Park, and in having once, when we were 16, showed off our ‘drifting’ skills to our high school friends. Hence, and keeping with the analogy, when it comes to dealing with people, a philosopher would be the formula driver and an MBA graduate would be the grumpy old man slowly driving on the express lane, and who, visibly annoyed, signals others to go around him. The point is that in business, just as in the highway, we do want to go faster. Or would you rather stay behind the old man, who would insist his driving is safer?  

If you want to spot the grumpy old man within your ranks, just ask your manager of choice a question of this sort next time a mild conflict among coworkers emerges: Why did X and Y clash over such a menial assignment last week? Or, why did X blow out irrationally in front of everyone this morning? Or, how can the people in Y’s team lack motivation and yet continue coming to work? If any of the answers you get explains their behavior in terms of personal character, personal issues, stress, or on it being a one time event, then you can be sure you have a grumpy old man in your hands.

You see, here is where the difference appears. A philosopher doesn't reduce human interactions to personal and professional attitudes and there is a simple reason for that: such view is entirely outdated and unscientific—the psychology of a person matters, naturally, but someone’s psychological make-up is neither stringent nor the natural cause of behavior. The key to a philosopher’s advantage lies in her ability to gain and maintain more than one perspective at the same time. Instead of seeing conflict as the necessary result of emotions or genetics, the philosopher sees it as the result of different but equally valid rationalities. Sounds complicated? It should, and as with any form of mastery it takes years of training to get there. Yet being able to understand conflict, as the expression of various points of view, is the easy part. It is being able to negotiate between them what really counts. A philosopher will do both and the result will be….alas! Greater motivation and increased productivity.

Lastly, the last reason why your company needs a philosopher is vision:

All companies have a vision, although usually nothing beyond a webpage tab dedicated to outlining some ambiguous future, where innovation is very important and they are the leaders of something. This sounds as a nice message and it may play well with an emotional approach to identity and brand cration, but it is not really a vision. It is not a vision if it does not outline concrete and attainable goals. Even if hypothetical scenarios need to be created, being able to imagine, to see the future as a concrete event, is essential to actually arriving at that future. Philosophers are trained to deal with hypothetical scenarios all the time; they are trained to create thought experiments and derive practical outcomes from them. The skill needed to see past-present-future as a continuum lies at the core of philosophical thought and it is not a matter of numbers. Economic or financial forecasts, as any honest economist will tell you, are grossly dependant on suppositions: suppositions about the market, about the demand for an offering, the behavior of your competitors, about aspects, such as technological innovations, prices, and the list could go on and on, for way too long. 

Forecasts deliver nice pictures indeed, but they are not visions, they are wishful thinking in the best of cases. Most strikingly, putting too much faith in them ends up transforming them into self-fulfilling prophecies—when they are negative—and in terrible miscalculations and unnecessary restructuring, when they are good (and we all have seen this!). The philosopher’s vision is, on the contrary, the construction of a future, yes, but more importantly, it is the construction of a pathway leading towards that future: the philosopher will tell you what has to change in the company for that future to come about.

So, next time you see the HR Manager preselecting the MBA’s…make yourself useful, and throw them to the bin once she is done.

Written by Daniel Vargas Gómez