Is technology to blame for economic inequality? 3 ideas in Piketty you need to know to answer this question

Let’s begin with the begging question: Why would technological improvements explain growing economic inequalities in America and elsewhere?

The logic is fairly simple. Technology has a positive impact on the economy as a whole, because it increases productivity, making the production of goods cheaper or more cost effective—workers become more productive and the resources needed to produce goods and services decreases. From this perspective, the issue of income inequality seems foreign and the way it is introduced into the conversation is as follows:

1) By asking about the type of skills needed to be able to use and benefit from technologies—which amounts to asking about the ways in which the presumed gains in productivity come about.

2) By comparing investments in technology with other forms of investment.

How can productivity gains come about if most workers lack the skills to use the available technologies at their disposal?

After raising this question, apologetics of economic inequality hurry to give the following answer: income inequality is the result of having a labor force that is split, between those who possess the right skills and can to take advantage of the technologies available in the 21^st century economies and those who lack such skills and find themselves competing for a decreasing number of jobs that don’t require any such skills. In short, this is the story that tells us there is Silicon Valley, on the one hand, with its high-tech innovations and a growing number of millionaires and billionaires. On the other hand, you have the grey old manufacturing sector, which is inefficient and wasteful and that would be symbolized by cities like Detroit in the US or Birmingham or Liverpool in the UK.

Income inequality would, therefore, be a temporary event, whose solution is to motivate people to choose the right professions (ICT related subjects), for, once they do, they will be able to earn the high salaries that those skilled workers at Google have. Is this a feasible story?  What does the evidence tell us?

Thomas Piketty addresses this argument in his Capital in the Twenty-First Century. The evidence, he tells us does not seem to support this theory.

“Over the long run, education and technology are the decisive determinants of wage levels” (Piketty, 2013, pp. 306, 307).

In the short run, however, differences in labour income (in wages) obey directly to three main factors:

1.    Executives have acquired direct influence on their own remuneration and at times even set their own salaries, through direct control over boards of directors—this is a claim supported by Piketty, but also Nobel price winners’ Joseph Stiglitz and Paul Krugman.

2.    Pay for luck: positive changes in a firm’s external conditions (economic growth, prices of raw materials, exchange rates, competitors’ performance) are rewarded as if generated internally—by the leadership and strategic mind-set of upper echelon employees (Piketty, 2013, p. 335).

3.    Decreases of top marginal income tax rates in English speaking countries since the 1980s, was followed by an explosion of very high incomes, which accelerated the growth rate of economic inequality during the last 30 years (Piketty, 2013, p. 335).

4.    The main source of income of the richest 1% is not their wage, that is, income inequality is NOT primarily explained by disparities in wages (Piketty, 2013, p. 280).

Next to these factors, I said too that in comparing investments in technology with other forms of investment, such as investment in real estate property, the former are presumed to accrue higher rewards, because they entail equally high risks. This means, for instance, that someone like Steve Jobs, who made what was back in the early eighties a very risky investment in an incredible innovation (the personal computer) received an equally high reward, when his innovation proved its merit and became very profitable. In comparison, if you or I, who are fearful of risk, prefer, in turn, a safer investment (a savings account for example), it is only logical that we cannot expect high rewards. Under this light, innovations are taken as the philosopher stone of wealth creation, and to a certain extent long run economic growth does depend on innovation (Piketty, 2013, p. 306).

Yet, is it feasible to put the blame of economic inequality on smart investments (high risk, high reward) against lame investments (low risk, low reward)?

Piketty’s answer is that the historical evidence does not suggest this to be the case, even remotely, for a single, yet quite important reason: the rate of return of portfolios increases not as their investment on innovations increases, but rather as the amount of capital invested increases—on average the largest endowments are able to obtain real returns of close to 10 percent a year, while smaller endowments must make do with 5 percent returns (Piketty, 2013, p. 449).

Technology has, no doubt, been fundamental to the economies of the 19^th, 20^th and 21^st centuries and has, to be sure, been disruptive of the ways we used to do things in the past—and it will probably play the same role in the future. The issue of economic inequality, however, cannot be blamed on technological advancement.

Written by Daniel Vargas Gómez

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3 ways companies forget about consumer experience and how it affects their business

Marketing professionals love talking about consumer experience. Terms like engaging, responsive, and targeted make up the usual jargon when we take part in any conversation on consumer experience. My interest here is not to double down on the jargon. Rather than convincing you that I have the formula that will make your consumer experience ‘engaging’ I will take a step back.... 

If I want to convince you of something is perhaps of re-thinking the value of consumer experience: the term is not esoteric or ambiguous. It is, simply put, the way in which your clients, regulars or buyers relate and think about your product. There are a myriad of ways in which this can be done. However, in order to be engaging and awesome companies must first understand what their consumers want and expect. It is at this stage where we tend to simplify and assume too much about what our customers want and what our product delivers. 

There are in particular three aspects that deserve our attention: 1) numbers are wonderful, but they can trick us into making unjustified generalizations—acting in fact like a blindfold on our strategic objectives, 2) qualitative data is many times overestimated and we sometimes exaggerate the value of their conclusions—this is what I call the focus group confusion, and 3) many B2B companies tend to dismiss the whole consumer experience discussion as not applicable to them—the truth of the matter is that, if they do, they are missing out on a valuable opportunity to get to know their clients and to leverage the value of their offering.

1.      The numbers blindfold

Scholars like Deirdre McCloskey have blamed economists of being gullible when it comes to the use of mathematical sophistication: the more complex the mathematics the more people will take an economic argument seriously. Her point is simple: numbers are not relevant in and of themselves and thinking otherwise is foolish.

Consumer and market research can be plagued with numbers, which usually tend to confirm most of the intuitions that motivated it from the start. Numbers will allow you to define boundaries for your overall strategic goals. Numbers, however, are often used to make generalizations about consumer behavior. As Nicolas Taleb’s argued in his Black Swan: be always cautious with generalizations and relying too much on predictions. In particular avoid simplifying your product’s audience. People may naturally share opinions, but if you truly want to understand your customers then segmentation and qualitative analysis cannot be ignored. To learn and eventually create a consumer for your product—think IPod or Walkman—simplifying is not the way to go.  Instead, learn, gather and synthesize consumer information, in order to create memorable experiences.

2.      The focus group confusion:

Many research companies and a few agencies love making focus groups. Some even sneer on the quantitative researchers who are unable to grasp the richness of analysis of a focus group. The truth however is that focus groups are anything but absolute truths. There results can never be taken as a last word and comparison with other sources is always desirable.

Malcolm Gladwell’s Blink is a must read in this respect. He discusses in detail the, perhaps now exemplary case, of what can happen when a company is too complacent with conclusions on consumer behavior product of focus groups and of controlled psychological experiments in general. The case in point was the 1980’s Pepsi challenge, which asserted that if faced with a blind test, consumers would always choose Pepsi over Coke. What happened next is what is truly remarkable. Coca Cola conducted blind test replicating the Pepsi challenge and actually concluded that the results were correct: people preferred Pepsi to Coke. Coke’s move was to bring to the market New Coke, which in a word proved to be a marketing disaster.

The lesson then is: never use focus groups! ... I’m kidding of course or half kidding. The reason is that controlled experiments are truly that: controlled circumstances. These circumstances are almost never identical or even similar to the normal circumstances under which a product is consumed. Take the Pepsi challenge, for instance. When does a cola (or soda/pop) consumer will buy a coke, take a sip of it and then proceed to discuss its taste, in lecture fashion, with a third party?

3.      The B2B deception

For many companies the issue of customer experience is completely pushed aside by appealing to their B2B nature: ‘we don’t have customers, we have clients and they are companies so consumer experience is not relevant for us’. Right (?) Well, wrong actually. B2B changes but does not eliminate the importance of understanding and creating the right customer experience. There are two aspects that must be taken into account in the case of B2B: 1) who are the final users of your product or service and 2) what is the relationship between users and partner managers. If your user’s opinion is unknown then your company is missing out on a huge opportunity to learn about what works and doesn’t with your user experience. If, however, your relationship with your client is mediated by a partner manager or simply by someone other than the actual user, this does raise a challenge, which is, in any case, worthwhile taking head on. The strategic goal is to get your client to understand the merits of the unique user experience that your product or your service delivers. Once she gets how important this is for your company, she will be interested in, either allowing you to have direct contact with your final user, or she will be more than willing to relay valuable information coming from your final user to you. The goal is that both parties understand that doing so entails a win-win situation for both.

There are, to be sure, plenty of ways to reconfigure the way you look at consumer experience. The lesson, if there is one, is not to forget it nor think you can do without knowing it. Keep an eye on this second season of writing in the factish—subscription is completely free and you will not be getting any unsolicited emails. Just remember: sharing is caring.

Written by Daniel Vargas Gómez

“Creativity is subjective” and other copouts that keep you from being remarkable

Picture the most creative behavior possible. Is an isolated or eccentric individual part of your mental image?—Perhaps an artist covered in paint frantically attacking a canvas? Or maybe a writer like Lewis Carroll, who must have been in some trippy state, in order to concoct something like Alice in Wonderland?

It is too often that we equate the uniqueness behind all creative work with an eccentric way of life that enables it. When we use the term subjective, however, we are not simply highlighting the originality of the work or of the artist, but we are also putting creativity inside a very small box. Why? Because we transform it into an impenetrable process, into a black-box, whose constitutive elements are simply out of our reach—the term subjective becomes in fact a copout for what we prefer not to understand.

The words subjective and objective have a classic (although maybe stereotypical is a better word) scientific tint to them: the objective/subjective divide is used, or so we are told, to separate reality from dream, fact from opinion, and order from chaos. It is this underlying separation what makes of a statement such as creativity is subjective a particularly troubling one. I will spare you the philosophical conversation behind the use of the subjective/objective opposition, and will instead try to present several reasons why we should view creativity under a completely different light: as an essentially cooperative and social event.

Let’s take, for instance, two well known artists: Édouard Manet and Pablo Picasso. Both, Manet and Picasso are today regarded not only as masters of the visual arts, but also as true revolutionaries and innovators, who changed the history of western art forever. Manet is considered the father of impressionism and with it Modern art, while Picasso is the father of Cubism. Both painters struggled immensely to get their work shown. The critics of their time were implacable about their lack of talent, which isolated them from well known artists and galleries of the time—let alone museums. The creative spirit that we assume of them today was in their time, and by any measure, completely dismissed. It took them time, perseverance, and some luck (for the cultural changes proper to their time to gain momentum) before they were able to become respected artists. Theirs is to a great extent a story of success, because they were in the end recognized as amazingly creative artists—many others, like Van Gogh, who never received any formal recognition during his lifetime, are not half as lucky. The story of Manet and Picasso is a telling story about the importance that industry influencers have, but that is not the interesting aspect of their story. Theirs is a story with a clear lesson: no matter how creative you think you are, you will always need of a community that agrees on your work being creative. You need a Tribe—to use Godin’s term—before the broader public will actually appreciate your creative work.

Now, if you believe that you have come up with something creative, but you find yourself alone in this belief, don’t be surprised or discouraged—that is certainly not the point. It is true that without a community standing behind your creative work, you simply cannot expect any recognition or reward for the uniqueness or originality of your ideas—but this is only one aspect of this truth, although it can be a harsh one. Bear in mind that what I mean with community is not simply—or at all—a fan club or a group of admirers. A community is much more than that, inasmuch as what is at stake is cooperation and shared interests, not superficial devotion. Building a community begins by identifying and pursuing shared interests—this is another reason why creativity should not be reduced to the individual, because by doing so you truly miss the forest for the trees.

A creative community may function very much like those in social media, but they require a commitment that most of those do not have. A creative community requires the commitment and conviction of militant political groups, with the vein for experimentation and cooperation of an Art collective. Commitment and conviction are crucial, because they are powerful motivators that allow for group rather than individual goals to be set, which is precisely what is needed for shared interests to rise to the surface. Shared interests are seldom transparent or obvious, but most often come as the result of negotiations between individual perspectives—as a result of the critical discussion about what should be shared and pursued.

A community acts as a propeller: it allows for a shared vision to gain momentum. However the role of the community does not end there. By sharing a vision communities become relevant conversations or think tanks of their own: if, for instance, you want to innovate on user experience and web-design, your creative ideas will be best served if critically assessed by others who have a say in the same business, for example web-designers, product developers, programmers, etc., but also by others who have a relevant say, but who come from a different industry or discipline, for example visual artists, gamers, and experience creators at large. It is actually the opinion of the latter what can result in a criticism that will prove to be much more invigorating, for it will allow you to identify blind spots, to relate to other audiences, and, in this case, to learn from other types of user experiences—which is fundamental in this particular case.

The type of community I refer to has the connectivity and communication character of a network—I know this is an overused term, but once you forget about its use on ‘networking events’ it is actually a powerful image. This is because a network is a structure that gathers differences rather than simply ignoring them. A networks is made up of knots, through which information is not only relayed, but also transformed—that is precisely what occurs in the process of criticism and diffusion that I refer to above. In a network knots may vary in importance—in the amount of information they gather as well as in the number of connections possessed by each one individually—yet even the smallest knot must remain active and engaged for the network community to function properly.

So, once we leave the myth behind, what we find is that Creativity is a social process, and it is produced today through networks! I will come back to the subject of networks. Remember to subscribe to the factish and let’s continue harnessing the power of creative networks. 

Written by Daniel Vargas Gómez

“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