Tag Archives: Brian Arthur

Hidalgo and Hausmann's product space.

Policy making as risk management under complexity: five economists for the next ten years

Author’s note: this is not an academic essay. It’s more of a long, wonkish blog post, that borrows some characteristics from academic essays. If you think it should be published elsewhere, get in touch. If you want an Italian translation, ask for one. 

Abstract (TL;dr)

Public policies in the past few decades have failed on many levels. While many economists have been critic of such policies, economics as a discipline was not able to deliver a better paradigm. I examine some recent work by five authors: David Colander, Roland Kupers, Mariana Mazzucato, Eric von Hippel and Ricardo Hausmann. I argue that, taken together, their contributions herald a completely new way to think about policy making. This new paradigm is the brainchild of complex systems science. It implies that policy makers should have a new skillset, new tools, new indicators and even new goals.

1. How economics failed us

Economics has made a bad name for itself.

  • In the 1980s, the Chicago School rose to prominence with its recipe of inflation control and fiscal conservatism. It inspired the controversial reforms of the Reagan-Thatcher era, and marked the beginning of the end for the European welfare state.
  • In the 1990s, the Washington Consensus ideology pushed upon the whole world a policy toolbox of fiscal discipline, privatisation of public services and liberalisation of capital movements. These policies were responsible for the mismanagement of the financial crises of those years.
  • Then came 2008 with its Great Financial Crisis. We were plunged into a strange world. In the West, negative interest rates, quantitative easing, skyrocketing inequalities, “too big to fail”. Globally, a reduction in the number of the poorest, and the rise of China over Southern Asia and Africa.

All through this, economists have put up quite a fight. The top names in the profession have denounced the inconsistencies of the dominant doctrine. Joseph Stiglitz exposed the International Monetary Fund’s mismanagement of the crises of the 1990s. Paul Krugman explained why fiscal discipline was the wrong thing to do in the wake of 2008. The list could go on and on.

But policy makers remained unimpressed. Yes, mistakes were made. Yes, some excesses needed correcting. But in the end, no other paradigm was available. Dissenting economists had strong critiques, but weak counterproposals. In the 1930s, Keynes proposed a new paradigm. It was elegant. It was operational. It offered a new way out, and policy makers embraced it. But now? No new paradigm is in sight. Standard economics is the only game in town.

Except it is not. Over the last few years, four economists and one physicist have made groundbreaking contributions. I propose that, taken together, they form the seed of a new way to think about economic policy. In what follows, I list their main contributions. I then discuss the implications of taking them together, rather than one at a time.

2. David Colander and Roland Kupers: complex systems theory as a frame

Scholars of complex adaptive systems see the world through the lens of a process called emergence. The idea is this: simple rules of interactions between agents give rise to surprising system-level properties. These properties of the system cannot be deduced by studying its components. For example, water is a liquid at room temperature. It sloshes and shimmers and does many interesting things. A single water molecule is not a liquid: liquid-ness is not in the molecules themselves. It emerges from the interaction across billions of identical molecules.

Porting this way of thinking to policy making is difficult. The starting point is this: society and its economy are no longer seen as machines. No longer can the government push the right buttons to get them to social optima. The world of traditional economics goes down in flames. So what can the government do? There is a fundamental clash: policy is about agency, intentionality, top-down process. Emergence is the opposite of that: structure happens without designers or architects. A complex system with agency in it (for example an economy with a government) is driven by two fundamental forces, emergence and agency itself.

To navigate the dilemma, Colander and Kupers propose a government that “picks its fights”. It strives to spot emergent trends that go in the direction that it wants, then moves to reinforce them. One example they give is the trend towards physical fitness and healthy living. A complexity-oriented government would move aggressively to support it, and so save taxpayer money on health care.

This has profound implications. The main one is that the government needs a new set of core skills. Among them:

  1. It needs to be great at scanning the horizon for useful social trends. This is by no means easy: we now see fitness as a trend, but in the early 80s there was no such thing. People would see their cousins taking up aerobics or weightlifting, and shrug them off as weirdos. It took serious analytical skills to recognise it for what it was.
  2. It needs to be strong and nimble, and use strength and nimbleness as a source of moral authority. When it moves to support something, private business and the public need to know that this something is here to stay, and that support will not waver.
  3. It needs to choose, and take responsibility for its choices. No more handwaving about “leadership of the private sector”. No more bullshit about impartiality. We stand for nuclear, or against it. We stand for genetic engineering, or not. And when we choose, we stay with our choice for as long as we need to, not until the next election.

3. Mariana Mazzucato and Eric von Hippel: rethinking innovation

When we think about innovation, we think about Schumpeter’s creative destruction. Stories of innovation are stories of brave, disruptive entrepreneurs who “stay foolish” as they follow their own vision. Mazzucato shows that these stories are mostly false. Aggressive state intervention was the decisive driver in kickstarting today’s hi-tech industries: IT, biotech, nanotech, green energy. Moreover, at least for IT, the (American) state’s motives were not even economic, but related to national security.  The protagonist was the Pentagon, not Treasury. In the case of China, a similar dynamics is now playing out with green energy. The main policy driver is preventing climate change and pollution. A world-leading green energy sector emerges as a result of that policy.

In these stories, private business and venture capitalists consistently show risk aversion and short-termism. They do “me too” innovation and polish. An entire chapter of Mazzucato’s book is dedicated to Apple’s iOS devices. It turns out that all the key technologies putting the “smart” in smartphones are taxpayer-funded. It’s worth listing them here: microprocessors, DRAM, micro hard drives, LCD displays, LI-ion batteries, DSP signal processing, the Internet, HTTP, HTML, cellular technology, GPS, multi-touch screens, and SIRI. Apple added technology integration and design, but did none of the innovation heavy lifting. Mazzucato concludes that the State, not private firms, is the real disruptive agent:

In sum, “finding what you love” and doing it while also being “foolish” is much easier in a country in which the State plays the pivotal serious role of taking on the development of high-risk technologies, making the early, large and high-risk investments, and then sustaining them until such time  that the later-stage private actors can appear to “play around and have fun”.

von Hippel starts at the opposite end: what he calls “free innovation”. This is innovation developed and given away by consumers (patients, tinkerers etc.).  This is by no means marginal. It is a major economic phenomenon. It involves tens of millions of individuals in just six countries surveyed (Canada, Finland, Japan, South Korea, UK, US). Estimated free innovation R&D expenditure has been estimated for three countries, and found to be on the same scale of corporate R&D. These estimates are likely to be conservative: free innovation in services, for example, has been left out of them.

Moreover, free innovation tends to lead producer innovation. There can not be a market for something that does not exist yet. For-profit corporations only service markets, so they focus on incremental innovations. But people don’t care about markets: they innovate for themselves and their friends. Some of their innovations go viral and create markets that, later, producers supply with innovations of their own. This happens across the board: 3D printers, scientific instruments, health care, whitewater kayaking.

From opposite angles, Mazzucato and von Hippel see the same reality. Business is not the sole agent of innovation. It probably is not even the main one. What’s more, the innovation that it does do is uninspiring: low-risk integration of ideas developed elsewhere. Glass beads and trinkets. Their work dispels for good Silicon Valley’s claim that “we take high risks, we deserve our high profits”. The truth is this: all the main risks are underwritten by ordinary people. As taxpayers, they underwrite risky government-funded research projects. As free innovators, they directly develop technologies and create markets for them. What’s left for the companies is to take the goodies, make a grab for the money and (all too often) siphon profits to some tax haven. Mazzucato calls this configuration “parasitic”. She is right: it socializes the risks of innovation, but privatizes its rewards.

They also show that money is not the motivator of the best innovation. States innovate to further a collective vision (“go to Mars” or “stop global warming”). People innovate to help themselves and loved ones (“I built a wearable monitor the glucose level of my diabetic child, so she can sleep over at friends”), or just for fun.

4. Ricardo Hausmann: economic well-being as a set of capabilities

Hausmann and collaborators have succeeded in redefining what it means for an economy to be healthy. This is no small achievement. GDP is broken: bad things like illnesses, car accidents and pollution all make it go up, not down. Economists have been muttering and complaining for as long as I can remember, but GDP has stayed. In 2008, The French government even tried assembling a super-high-level commission. Headed by Amartya Sen, Joseph Stiglitz and Jean-Paul Fitoussi, it could count on the cream of the crop in the economics profession, including five Nobel laureates (Arrow, Heckman, Kahneman, Sen, Stiglitz). The results were disappointing. There was handwaving about “multidimensionality of well-being” and  “pragmatic approach towards measuring sustainability”. Everybody went right on using GDP.

Hausmann takes a different path. He thinks that a healthy economy is one that can make many things. A country that can make machine tools and aircraft and nanotubes is healthier than one that can only grow bananas, or pump oil. This has got nothing to do with how much money people in the country are making. It’s got everything to do with how resilient economies are. Economies that can make a great many things can engineer their way out of many shocks. For example, if you have good solar tech you are more robust to fossil fuel shortages.

Hausmann and collaborator Cesar Hidalgo invented product space, which makes this concept operational. The main idea is that what countries make reveal what they know. They start by international trade data, and build a graph of countries and products. If a country exports one product, the two are connected in the graph. Next, they apply graph theory to derive measures of economic diversity. To a first approximation, diversity is simply the number of products a country exports. More sophisticated measures include second- and third-order effects. For example, products that are exported by few countries (like medical equipment) carry higher diversity than products that are exported by many countries (like wooden logs).

Product space analysis gives us a single number that summarizes the economic diversity of an economy in a given year. You can then compare different economies, just like you do with GDP per capita. You can also check back every year or two to see how much diversity is growing, just as with GDP. Except that diversity-as-health makes sense, whereas transactions-as-health do not. Its underlying formal principles are also more intuitive: product space descends from network math, GDP from double entry accounting. Most people with no formal training in either find networks simple, and accounting intricate.

5. Coda: policy as long-term risk management in a complex world

Where does that leave economic policy? Each of the contributions I listed has strong, direct, operational policy implications. But I propose that, taken together, they form a whole greater than the sum of its parts. They outline a new approach to economic life, and to policy enacted upon it. This new framework stems from the 35 years long love-hate affair between complex systems science and economics. What follows is a rough, tentative approach to summarize it.

  1. We don’t have control. The world is big, complex and in constant flux. We are nowhere near to understanding it in full, let alone dominate it. The idea of computing and achieving social optima is nonsense.
  2. Focus on the “how” questions. The above looks like harmless common sense, but is has profound consequences. The main one is this: we can no longer assume markets will find the social optimum by themselves. This is not because of market failures: general equilibrium theory is discarded altogether. Markets become mere tools to allocate specific resources. This, in turn, means that economics gives up on answering the “what” question (as in “what should we do?”). It is up to humans find out, in their own messy way, what a desirable outcome looks like. Economics goes back to focusing on the “how” question (as in “how shall we get there?”), consistently with its origins as a spinoff of moral philosophy. I am grateful to Fabrizio Barca for this observation.
  3. Policy is about society-wide risk management. The policy maker’s job is to manage risk. This involves scanning the horizon for trouble (frequent) and opportunities (rare). Risk is a constant in the journey of human societies: all we can do is manage it, weighing potential gains against potential losses. Uncertainty will always be high. Companies and households, of course, do the same. The difference is that policy makers can and should do this for society as a whole, making the hard choices that individual actors won’t do, and allocating risks and rewards across society. The allocation has to be long-term sustainable. Mazzucato, for example, points out that US innovation policy is not sustainable, because its risks are borne by taxpayers and its rewards are reaped by shareholders and executives. Over the long run, this will result in political backlashes and instability, which in turn will kill the State’s ability to invest.
  4. It’s all about the skills. Upskilling your economy is the best risk management tool. The more things you can make, the greater and more diverse shocks you can withstand. Hausmann has a great quote: “don’t add value to your raw materials, add capabilities to your capabilities”.
  5. Corporations are just a tool, and not always the most effective one. Mainstream economics fetishizes companies and profit for many reasons, theoretical and otherwise. But when you think in terms of risk management, you start to see things in a new light. Suppose you, as a policy maker, believe climate change could badly hurt our societies. Suppose you plot a transition to a deep green, low-emission economy. People from business come to you and protest “this is going to hurt out bottom line, we won’t cooperate”. If you believe GDP embodies human happiness and it is your duty to maximise it, you will listen carefully. If you a risk manager, you are more likely to brush them off. Your duty is not towards shareholder value, but towards deflecting large risks. If companies won’t collaborate in building the new infrastrure you want, you will work with different tools (public sector agencies, for example).
  6. Arbitrariness is inevitable. Risk management should be evidence-based. But any risk manager will tell you that, at the end of the day, you will have to make calls. Many of these will be in terms of uncertain gains versus certain costs. Should we bail out this bank? It might save us from contagion and systemic crisis in the future, but it sure will cost us taxpayer money now. Are Arctic glaciers worth the demise of the oil industry? You get the idea. This is the core of the trade of policy making. There is no such thing as sitting back and letting social optima emerge from market equilibria. Policy makers just have to make hard calls. Which means they will sometimes (often, even) fail. There is no way to avoid this. Colander and Kuper insist on the government needing “moral strength” to do its job.

This is a high-level description. But the theory of policy making in a complexity framework is mature enough to have produced tools, practices, indicators. And boy, do they look different from what we are used to. I already mentioned product space. Both Mazzucato and (especially) von Hippel have built solid empirical methodologies to inform innovation policy. Hausmann even wrote a convincing critique of randomized control trials, the gold standard of empirical research in economics. His tool-of-choice is “crawling the design space” of policies in a decentralized fashion. Money quote:

As opposed to the two or three designs that get tested slowly by RCTs (like putting tablets or flipcharts in schools), most social interventions have millions of design possibilities and outcomes depend on complex combinations between them. This leads to what the complexity scientist Stuart Kauffman calls a “rugged fitness landscape.”

That’s what evolution does, and this is no coincidence. Hausmann is a complexity scientist himself, and thinks more like a biologist than like a neoclassical economist. The Kauffman quoted is a theoretical biologist, not an economist. Everything changes. It’s a whole new paradigm.

Conclusion. A new paradigm for policy making is warming up in the background. A lot of the foundational work has been laid out. Much work remains, but that’s no excuse not to start deploying this way of thinking right now. All we are missing is a few forward thinking national or regional governments willing to be early adopters. I think I will see such adoption in my lifetime. This is good news for everyone, but great for us economists. After decades of deadlock and frustration, it appears we, once again, have a large contribution to make. I want to end with my all-time favourite public policy quote. It is attributed to the very first complexity economist, Brian Arthur.

If you think that you are a steam boat and you can go up the river, you are kidding yourself. Actually, you are the captain of a paper boat drifting down the river. If you try to resist, you are not going to get anywhere. on the other hand, if you quietly observe the flow, realising you are part of it […], then every so often you can stick an oar into the river and punt yourself from one eddy to another.


Reading list

  • Colander, David, and Roland Kupers. Complexity and the art of public policy: Solving society’s problems from the bottom up. Princeton University Press, 2014.
  • Hausmann, Ricardo, et al. The atlas of economic complexity: Mapping paths to prosperity. MIT Press, 2014.
  • Mazzucato, Mariana. The entrepreneurial state: Debunking public vs. private sector myths. Anthem Press, 2015.
  • von Hippel, Eric. Free Innovation. MIT Press, 2016.

The economics of Cory Doctorow’s Makers

Makers is a novel, published in 2009 by Canadian science fiction author and Boing Boing co-editor Cory Doctorow. It deals with two entrepreneurs from the DIY scene (think MAKE Magazine, or Wired’s New Industrial Revolution), Perry Gibson and Lester Banks, inventing new things. Their inventions transform the world around them, not so much from a technical as from a social and economic point of view. They give rise to a highly decentralized organization and business model called “New Work” in the fictional context of the novel. I was referred to it by friends in the Italian physical hacking scene, which I started hanging out with in 2008.

When I first read the book I found it very prophetic, in the way that the best science fiction can be; also, I was stricken by how much of it translated pretty directly into widely accepted economic theory. After musing on it for about a year, I have become a convert (so much that I have participated in Arduino-based projects and started out experimenting with economic policy for makers). At the same time, though – in the context of some research that I am involved with – I have started to ask myself if the “innovation society” we seem to be trying to build (witness the Lisbon Strategy and innumerable policy documents) is indeed sustainable. Increasing quantities of innovation, after all, sort of implies the economy growing at an increasing rate, and this is likely to have straining side effects on the natural environment or even our own human limitations. Does innovation have a dark side? How much of can we take without descending into dystopia?

Doctorow has created a pretty believable fictional economy which seems to be, in some sense, the innovation society we are heading for. So I decided to study it more closely: that is, re-read the book with an economist’s eyes, to zero in on the economics of what’s going on in there.

Schumpeter’s creative destruction

The main economic engine in the world of Makers is Joseph Schumpeter’s theory of creative destruction. It is laid out straight from chapter one by CEO Langdon Kettlewell in the press conference to announce the Kodak-Duracell merger:

Capitalism is eating itself. The market works, and when it works it commodifies or obsoletes everything.

At the end of the press conference, reporter Suzanne Church – who used to be an economic journalist in Detroit, and as such covered the demise of the car ecosystem – muses about being haunted by decay, even in the Silicon Valley, which was supposed to have incorporated failure as just a step on the road to ultimate success:

Now she was back in that old rustbelt funk, with the feeling that she was witness not to a beginning, but to a perpetual ending, a cycle of destruction that would tear down everything solid and reliable in the world.

Commodification and obsolescence, however, should be thought as a feature, not a bug. It is, in fact the way capitalism produces abundance. Tjan, the business manager Kodacell brings in to help Perry and Lester, is well aware of this:

So, if you want to make a big profit, you’ve got to start over again, invent something new, and milk it for all you can before the first imitator shows up. The more this happens, the better and cheaper everything gets. It’s how we got here, you see. It’s what the system is for.

Price wars and Bertrand equilibrium

The mechanism that drives the “destruction” part of creative destruction in Makers is cut-throat price competition. Innovative products are undercut by imitators, who scoop up the entire market thanks to lower prices. The process is iterated until the price reaches cost (including an acceptable remuneration of risk and capital):

In a good market, you invent something and charge all the market will bear for it. Someone else figures out how to do it cheaper, or decides they can do it for a slimmer margin […] and so you have to drop your prices to compete. Then someone comes along who’s less greedy or more efficient than both of you and undercuts you again, and again and again, until eventually you get down to […] a baseline that you can’t get lower than, the cheapest you can produce and stay in business.

This is Tjan speaking on his first night at the Perry – Lester venture. To an economist, he is giving a texbook rendition of Bertrand competition, a price war leading to a zero-profit equilibrium.

Unemployment and labor economics issues

Creative destruction rearranges production factors in the economic system, supposedly for the good. Unfortunately, some of these elements are people, and rearranging may involve a lot of pain, humiliation and fear. Doctorow embeds labour economics issues deep into the novel: the Kodacell press conference is interrupted by a protest of laid off staffers. Kettlewell’s first email to Suzanne asks the big question looming underneath Makers:

What happens when all the things you are good at are no good to anyone anymore?

Research initiated at the beginning of the current recession has cast doubts about the possibility to successfully mass-retrain a laid-off workforce to adjust to the changing needs of an innovation economy (New York Times). Labour supply seems still oriented to selling man-hours and expecting to be managed in a more or less traditionally Tayloristic way.

Brian Arthur’s building-block innovation

When Suzanne reaches Perry and Lester’s den to be shown what it is they do, Perry demonstrates their method to technical innovation. Basically, it consists of recombining existing technology in new ways. This is not only possible, but dirt cheap and fundamentally easy, because, in Perry’s words

Everywhere you look there’s devices for free that have everything you need to make anything do anything.

And Lester is even more concrete:

You know how they say a sculptor starts with a block of marble and chips away everything that doesn’t look like a statue? Like he can see the statue in the block? I get like that with garbage: I see the pieces on the heaps and in roadside trash, and I can just see how it can go together.

Makers subscribes to the complexity theory’ view on innovation, as discussed by John Holland, Brian Arthur and other researchers: making new things is (mostly) about finding new ways to recombine existing building blocks. Successful combinations become, in their turn, new blocks, so that an initially simple technology (the famous six simple machines of the ancient greeks) bootstraps to increasing levels of sophistication.

Open source and the speed of creative destruction

Perry and Lester’s ability to combine technological building blocks is greatly enhanced by the fact that anything important to them can be performed by open source technologies. This enables them to develop working prototypes from off-the-shelf equipment and software and put them into a manufacturing pipeline without worrying about licensing issues. This has two consequences: first, in the world of Makers ecosystems develop preferably around open source technology, because people like Perry and Lester have every incentive to route around proprietary technology; second, that the speed of the creative destruction cycle is greatly increased.

I think this may be the most important intuition Makers has to offer. Just think: we increasingly buy in ecosystem (Mac-iPhone-iPad-MobileMe, or Google-Android-Google Apps, or Linux-Apache-IBM’s proprietary web solutions); ecosystems grow faster if they can build on open source building blocks, so that the open source ones tend to outcompete the proprietary ones in the long run; but innovations in open source ecosystems are almost impossible to protect, and that lowers their average margin as the highly profitable grace period gets shorter. The solution, as Tjan suggests (see above) and most policy makers worldwides agree, is to increase the pace of innovation. This, however, raises the question of just how fast consumers can wrap their head around innovation: every heavy web user is familiar with the sensation that companies are putting out new services faster than we can absorb them, and sometimes we just have no time for them, no matter how cool they are. Google Wave, anyone? So, it could be that the destruction side of creative destruction prevails, landing the economy of Makers into a state of low margins and low growth, as more inventions fail to turn into more successful products on the market.

Becattini and Brusco’s competitive-cooperative manufacturing systems

Perry and Lester run a very small business unit (themselves and a few helpers), so their global competitiveness depends on the neutrality of unit costs with respect to production volume – in other words, no economies of scale. In fact Perry and Lester’s Florida junkyard is a scale-efficient production unit. In Tjan’s words

Every industry that required a factory yesterday requires a garage today.

Of course, it’s hard to get away from the fact that a lot of the cheapness in the system comes from exploiting economies of scale. The trick is that component manufacturing is scale-intensive, but the artifacts that Perry and Lester are interested in, being assemblies of such components, have a much lower minimum efficient production scale. In such a scenario, manufacturing systems most fit to compete are those that combine the agility of horizontal and vertical disintegration with low transaction costs, mutual trust and informational transparence. Vertical disintegration lets firms grow large where there are economies of scale to be exploited (components, silicon chips); horizontal disintegration enhances competition in the finished goods market (even though whichever manufacturers will win out in any given period of time will still buy components from the same handful of suppliers, therefore saving on the costs of reallocation of workers and manufacturing capacity); low transaction costs enable vertically disintegrated “manufacturing“ units like Perry and Lester’s (mostly R&D and business development, really) to build ad hoc networks of suppliers fast. In other words, New Work displays both tough competition and cooperation over and above formalized contracts.

Sebastiano Brusco and Giacomo Becattini’s model of industrial districts display just these characteristics (as, with different nuances, the work of researchers as Charles Sabel, Michael Piore and Annalee Saxenian). In Makers the low transaction costs part is implemented top-down through networked company Kodacell rather than, as in Brusco and Becattini, bottom-up through evolving conventions and reputation effects in a small territory, home to all the forms involved. So, when Lester invents Home Aware, an ecosystem can be summoned out of Kodacell’s decentralized “teams” structure. Tjan explains:

There are ten teams that do closet organizing in the network, and a bunch of shippers, packers, movers and storage experts. A few furniture companies. […] The plan is to start our sales through the consultants at the same time as we start showing at trade shows for furniture companies.

The European Commission’s Living Lab

After a fire at a shantytown near the factory, Perry decides to let the inhabitants rebuild it on Kodacell premises (formerly a junkyard), which is largely unused. Kettlewell tries to get him to oust them. Perry holds his ground: he, Lester and Tjan had been meaning to invent something for the homeless people anyway.

We’ve built a living lab on our doorstep for exploring an enormous market opportunity to provide low-cost, sustainable technology for use by a substantial segment of the population who have no fixed address. There are millions of American squatters and billions of squatters worldwide. They have money to spend and no one else is trying to get it from them.

In the real word, Living Labs are a concept explored by the European Commission in the context of innovation policy. The idea is to replace consumer tests of new products with much larger scale, more realistic tests made possible a dense network of many actors collaborating on the same territory. Perry’s in-house shantytown would become a toy universe to model the squatters market: Kodacell can invent something and run a market test with limited costs and in a short time, but also real consumers spending real money. More importantly, it can recruit squatters themselves to participate in identifying needs and designing the products. And in fact it does: this is the role of the shantytown leader, Francis, who collaborates closely with Perry and Lester to think up new products.

Arrow’s Paradox and the value of invention

New Work’s downfall is heralded by an investor confidence crisis in Kodacell. Part of the problem is that analysts have a hard time figuring out how to value inventions, that are becoming an important part of Kodacell’s market value (the other part is inherent scarcity of genuine entrepreneurship). Kodacell ends up with a lot of novel products, with high returns on small projects. How many of these projects are going to scale to be large hits? Kettlewell:

Sure, if you looked at [our numbers] our way, they were great. If you looked at them the Street looks at them, we were in deep §#1t. Analysts couldn’t figure out how to value us.

This is yet another version of Kenneth Arrow’s famous paradox: markets for information typically don’t work well, because, in order to estimate precisely the value of something you need to know all about it. But information, of course, has no market value for you if you know it already. Invention is essentially information: until it is on the market and has climbed the diffusion curve, it is quite difficult to value it.

The New Work bust and the shift in consumer preferences

When part 2 of Makers opens, the New Work movement is over. A stock market bust has shattered the Kodacell business model, which had been promptly imitated by other large companies such as Westinghouse (who recruited Tjan off Kodacell). As a result, the movement is dead. Perry and Lester, still in their junkyard in Florida, start “the ride”, a sort of smart theme park-memorial of New Work, which is to be the subject of the rest of the book. The New Work fiasco is one of the least convincing parts of the book from an economist’s point of view: save for the aforementioned value of invention issue, it is hard to make out anything that would provoke more than a short-term market fluctuation. Kettlewell:

Analysts couldn’t figure out how to value us. Add a little market chaos and some old score-settling @##holes […] and it’s a wonder we lasted as long as we did.

Even less convincing is the ensuing consumer disaffection for the goods that New Work had produced. In Perry’s words:

No one cares about invention anymore.

There is no obvious reason why this should happen. The second Perry-Lester invention, Home Aware, has been very successful, shipping a million units in six weeks. One would think that, even if the company originally producing it went bust, a competitor would step in to service and expand the existing customer base. After the 2000 dotcom bust consumers actually increased their use of the online services that they found useful, undaunted by their association with dotcoms. Yahoo, Google, Amazon and the like continued to prosper in their respective markets, if not in the stock market. I looked at time series data for NASDAQ and e-commerce sales over the period 1999-2009; the correlation between them is practically nonexistent (negative, in fact), as you can see from the following graph:

So, is the innovation society sustainable in Makers?

Sustainability questions are tricky. Time and again, scientists have made doomsday predictions that went viral as public opinion found them really convincing, but later turned out to be way off the mark. From Malthus to the Club of Rome and the Millennium Bug, we seem to have a bias towards underestimating the adaptability of our society and its economy (cultural change makes the birth rate drop, raising prices of oil increase the energy efficiency of GDP and so on). Doomsday feels right at some level: it may just be a heritage of our Neolithic past, or a very deeply ingrained cultural myth (Apocalypse, Ragnarok etc.). Certainly that suggests a lot of caution in predicting it.

The economics of New Work are at least plausible; its downfall is the least plausible of its features. I was expecting something like Kodacell and Westinghouse spinning off their New Work branches, or selling them to more nimble, lower overhead companies that would commodify the networked organization and finance that the giant companies have to offer. The history of open source has already shown that you don’t really need a large company to achieve coordination, after all. The book, however, ends on a deeply pessimistic note: the large evil company has won the battle against the ride movement and recruited Lester, neutralizing his innovative potential; Perry has become a sort of wandering troubleshooter, lonely and poor. Doctorow the economist seems to be supportive of the innovation society, but Doctorow the author definitely is not. I wonder – really wonder – which if the two Doctorows will be right in the end.

The economics of Cory Doctorow’s Makers (Italiano)

Makers è un romanzo, pubblicato nel 2009 dallo scrittore canadese di fantascienza e condirettore di Boing Boing Cory Doctorow. Parla di due imprenditori della scena DIY (quella di MAKE Magazine o della nuova rivoluzione industriale di Wired), Perry Gibbons e Lester Banks, che inventano cose nuove. Le loro invenzioni trasformano il mondo intorno a loro, non solo dal punto di vista tecnico, ma soprattutto da quello sociale ed economico. Esse fomentano la crescita di un modello organizzativo e di business fortemente decentralizzato che nel romanzo si chiama “New Work”. Me l’hanno consigliato alcuni amici physical hackers milanesi, che ho cominciato a frequentare nel 2008.

Quando ho letto il libro per la prima volta l’ho trovato profetico, nel modo in cui sa esserlo la migliore fantascienza; in più mi ha colpito quanto di esso si potesse tradurre direttamente in termini di teoria economica normalmente accettata. Dopo averci riflettuto per circa un anno sono diventato una specie di convertito (così tanto che ho partecipato a progetti basati su Arduino e ho cominciato a sperimentare con la politica economica per i makers). Allo stesso tempo, però – nel contesto di una ricerca, guidata da David Lane, a cui partecipo – ho cominciato a chiedermi se questa società dell’innovazione che stiamo cercando di costruire (almeno stando alla strategia di Lisbona e a molti documenti di politica industriale) sia poi sostenibile. Dopo tutto, se la quantità di innovazione aumenta, l’economia deve crescere a una velocità anch’essa crescente, ed è possibile che questo metta sotto stress l’ambiente naturale, o i nostri limiti umani. L’innovazione ha un lato oscuro? Quanta possiamo assorbirne senza che il sogno diventi un incubo?

Doctorow ha creato un’economia immaginaria abbastanza credibile che somiglia molto alla società dell’innovazione verso cui siamo diretti. Ho deciso di studiarla più da vicino, rileggendo il libro con gli occhi dell’economista. Makers non è stato ancora tradotto in italiano, quindi chi capisce solo la nostra lingua non può leggerlo. Per gli altri, il mio consiglio è: se vi interessano queste cose, leggetelo assolutamente. E’ una lettura stimolante e divertente.

La distruzione creativa di Schumpeter

Il motore princiale dell’economia di Makers è la teoria della distruzione creativa di Joseph Schumpeter. Viene enunciata già dal primo capitolo dal capitano d’industria Langdon Kettlewell, conferenza stampa che annuncia la fusione tra Kodak e Duracell:

Il capitalismo mangia se stesso. Il mercato funziona, e quando funziona trasforma tutto in merce low cost o obsoleta.

Alla fine della conferenza stampa, la giornalista Suzanne Church (ha fatto la giornalista economica a Detroit, occupandosi dello smantellamento dell’industria dell’auto) riflette sul senso di decadenza economica che la perseguita, perfino qui nella Silicon Valley, che in teoria dovrebbe avere incorporato il fallimento come tappa sulla strada del successo:

Era di nuovo immersa in questa atmosfera da declino industriale, con il senso di essere testimone non di un inizio, ma di un eterna fine, un ciclo di distruzione che avrebbe fatto a pezzi tutto ciò che sembrava solido e affidabile nel mondo.

Il crollo di margini e prezzi e l’obsolescenza, però, non dovrebbero essere pensati come un difetto del sistema. Tjan, il manager incaricato da Kodacell per aiutare Perry e Lester, ne è molto consapevole:

Quindi, se vuoi fare molto profitto, devi ricominciare, inventare qualcosa di nuovo, e spremerlo al massimo prima che venga imitato. Più questo succede, più tutto migliora e il suo prezzo scende. È così che siamo arrivati qui, sai? È a questo che serve il sistema.

Guerre di prezzo e equilibrio di Bertrand

Il meccanismo che controlla la distruzione nel processo schumpeteriano in Makers è fatto di intensa concorrenza di prezzo. I prodotti innovativi sono offerti a prezzo ridotto dagli imitatori, e questo permette loro di prendersi l’intero mercato.

In un buon mercato, inventi qualcosa e lo vendi al massimo prezzo che il mercato è disposto a pagarla. Qualcun altro trova un modo di farlo a prezzo più basso, o decide di accontentarsi di un margine minore […] e tu devi ridurre i prezzi per competere. Poi arriva qualcun altro che è meno avido o più efficiente di entrambi, e riduce il prezzo ancora, e ancora e ancora, finché non arrivi […] a una specie di base al di sotto della quale non puoi scendere, il prezzo minimo a cui puoi produrre senza fallire.

A parlare è Tjan, nel suo primo giorno di lavoro all’impresa di Perry e Lester; e quello che dice è una descrizione da manuale della concorrenza di Bertrand, un modello che sfrutta le guerre di prezzo come meccanismo per condurre ad un equilibrio in cui il profitto è zero.

Disoccupazione e problemi di economia del lavoro

La distruzione creativa ridispone i fattori produttivi di un sistema economico, in teoria per il meglio. Purtroppo, alcuni di questi elementi sono persone, e la riallocazione può comportare molto dolore, umiliazione e paura. Doctorow annida i problemi di economia del lavoro in profondità in Makers: la conferenza stampa di Kodacell è interrotta da una protesta di lavoratori licenziati. Nella sua prima email a Suzanne, Kettlewell pone la grande domanda sottostante al sistema:

Cosa succede quando tutto quello che sai fare non serve più a nessuno?

Alcune ricerche iniziate durante la recessione in corso gettano dubbi sulla possibilità di riqualificare grandi masse di lavoratori per adattarli ai mutati bisogni di un’economia basata sull’innovazione (New York Times). L’offerta di lavoro sembra ancora orientata a vendere ore-uomo e si aspetta di essere gestita in modo più o meno tradizionale.

L’innovazione ricombinante di Brian Arthur

Quando Suzanne arriva all’officina di Perry e Lester per vedere cosa fanno, Perry le mostra il loro metodo per inventare, che consiste essenzialmente di ricombinare tecnologia esistente in modi nuovi, come pezzi di Lego. Questo non solo è possibile, ma molto economico e concettualmente semplice, perché, come dice Perry:

Dovunque guardi ci sono aggeggi gratis che hanno tutto quello che serve per fare qualunque cosa ti venga in mente

E Lester è ancora più concreto:

Hai presente che dicono che uno scultore parte con un blocco di marmo e toglie tutto quello che non somiglia a una statua? Come se potesse vedere la statua nel blocco? Io sono così con la spazzatura. Vedo i pezzi buttati nei garages e capisco come metterli insieme

Makers accoglie la prospettiva sull’innovazione dei teorici della complessità, discussa da John Holland, Brian Arthur e altri ricercatori: fare cose nuove è soprattutto trovare nuovi modi di ricombinare tecnologia esistente, come i mattoni del Lego. Le combinazioni di successo, a loro volta, diventano mattoni, così che una tecnologia inizialmente semplice (le famose sei macchine semplici degli antichi greci) evolve verso livelli sempre più alti di sofisticazione.

L’open source e la velocità dei cicli di distruzione creativa

L’abilità di Perry e Lester di combinare le tecnologie in questo modo è enormemente accresciuta dal fatto che tutti i “pezzi del Lego” che gli servono si trovano anche in versione open source. Questo li abilita a sviluppare prototipi che funzionano da materiale disponibile sul mercato, e metterli in produzione senza preoccuparsi di acquistare licenze sui brevetti rilevanti. Questo ha due conseguenze. La prima è che, nel mondo di Makers, sono le tecnologie open source a generare più facilmente ecosistemi, perché le persone come Perry e Lester hanno tutto l’interesse a girare intorno alla tecnologia proprietaria; la seconda è che la velocità dei cicli di distruzione creativa aumenta molto.

Questa potrebbe essere l’intuizione più importante in Makers. Pensateci: a quanto pare, compriamo sempre di più per ecosistemi (Mac-iPhone-iPad-MobileMe, o Google-Android-Google Apps, or Linux-Apache-soluzioni proprietarie basate sul web di IBM); gli ecosistemi crescono più in fretta se possono appoggiarsi su elementi open source, per cui quelli open source tendono a mettere fuori mercato quelli proprietari; ma le innovazioni negli sistemi open source sono quasi impossibili da proteggere, e questo abbassa il loro margine medio perché il periodo in cui fanno profitti alti si accorcia. La soluzione, come dice Tjan (vedi sopra) e come dicono anche quasi tutti i governi, è quella di aumentare il tasso di innovazione. Questo, però solleva il problema di quanto rapidamente i consumatori possono assorbire innovazione. Chiunque usi molto il web conosce la sensazione che le aziende lancino nuovi servizi più rapidamente di quanto possiamo capire se ci servono, o ci piacciono, e qualche volta non abbiamo semplicemente tempo per studiarceli, non importa quanto siano potenzialmente interessanti. Avete presente Google Wave, no? Quindi, è possibile che la parte di distruzione della distruzione creativa prevalga, sprofondando l’economia di Makers in uno stato di bassi margini e bassa crescita economica, in cui le nuove invenzioni, quasi sempre, non riescono a trasformarsi in prodotti di successo sul mercato.

I sistemi produttivi competitivo-cooperativi di Becattini e Brusco

Perry e Lester gestiscono un’unità di business piccolissima (loro due e qualche aiutante) , per cui la loro competitività globale dipende dalla neutralità dei costi unitari rispetto al numero di unità fabbricate – in altre parole, non ci devono essere economie di scala. Infatti la loro officina in Florida è un’unità di produzione di scala efficiente. Secondo Tjan

Le industrie che ieri stavano nelle fabbriche oggi stanno nei garage

Naturalmente, non si può sfuggire al fatto che molte cose sono a buon mercato proprio perché la loro produzione sfrutta le economie di scala. Il trucco è che la produzione dei componenti tende ad essere soggetta a rilevanti economie di scala, ma gli artefatti di cui Perry e Lester si interessano no. In questo scenario, i sistemi produttivi più competitivi sono quelli che combinano l’agilità della disintegrazione orizzontale e verticale con costi di transazione bassi, fiducia reciproca tra gli attori economici e trasparenza informativa. La disintegrazione verticale permette alle imprese di crescere là dove ci sono economie di scala da sfruttare (componenti, chips di silicio); la disintegrazione orizzontale aumenta la concorrenza nel mercato dei prodotti finiti (anche se qualunque produttore si affermi finirà per comprare i componenti da un numero limitato di fornitori – e questo permette di risparmiare i costi di ricollocare la forza lavoro e la capacità produttiva quando un produttore guadagna forti quote di mercato); i costi di transazione bassi permettono a aziende “produttive” verticalmente disintegrate come quella di Perry e Lester
(che fanno poi soprattutto R&S e business development) di costruire rapidamente reti ad hoc di fornitori e partners.

I modelli di distretto industriale di Sebastiano Brusco e Giacomo Becattini hanno proprio queste caratteristiche (come, con sfumatore diverse, i lavori di ricercatori come Charles Sabel, Michael Piore e Annalee Saxenian). In Makers i bassi costi di transazione sono progettati dall’alto attraverso una grande azienda, Kodacell, che si dà una struttura a rete: in Brusco e Becattini, invece, emergono dal basso attraverso convenzioni che evolvono e effetti reputazione in un territorio relativamente piccolo. Così, quando Lester inventa Home Aware, si può costruire un ecosistema con le “squadre” di Kodacell:

Ci sono dieci squadre che fanno organizzazione degli armadi nella rete, e diversi spedizionieri, traslocatori ed esperti di immagazzinamento. Qualche azienda di arredamento […] Il piano è di iniziare a vendere attraverso i consulenti contemporaneamente all’esposizione del prodotto nelle fiere del mobile e dell’arredamento.

Il Living Lab della Commissione Europea

Dopo un incendio alla baraccopoli vicina alla fabbrica, Perry decide di permettere ai suoi abitanti di ricostruire le loro case provvisorie nella fabbrica Kodacell (che prima era un centro commerciale abbandonato), molto grande e in gran parte inutilizzata. Kettlewell cerca di convincerlo a mandarli via. Perry tiene duro: lui, Lester e Tjan stanno comunque pensando di inventare qualcosa per gli homeless.

Abbiamo costruito un Living Lab sulla soglia di casa per esplorare una grande opportunità di mercato per produrre tecnologia sostenibile e a basso costo per un segmento importante della popolazione, quello che non ha un indirizzo fisso. Ci sono milioni di squatters americani e miliardi di squatters nel mondo. Hanno soldi da spendere, e nessuno sta cercando di farseli dare.

Nel mondo reale i Living Labs sono un concetto esplorato dalla Commissione Europea nel contesto della politica dell’innovazione. L’idea è di sostituire i test di gradimento dei nuovi prodotti con test su scala molto più ampia e molto più realistici, resi possibili da reti dense di attori economici che collaborano su uno stesso territorio. La baraccopoli “domestica” di Perry diventerebbe così un modello in scala del mercato degli squatters: Kodacell può inventare un prodotto e collaudarlo rapidamente e a costi bassi su veri consumatori che spendono soldi veri. Ancora più importante, può reclutare gli stessi squatters per aiutarla a identificarei bisogni e progettare i prodotti. E lo fa: questo è il ruolo del leader della baraccopoli, Francis, che collabora strettamente con Perry e Lester per inventare i nuovi prodotti.

Il paradosso di Arrow e il valore delle invenzioni

Il fiasco del New Work è annunciato da una crisi di fiducia degli investitori in Kodacell. Parte del problema è che gli analisti faticano a capire come valutare le invenzioni, che stanno diventando una parte importante del valore delle azioni di Kodacell (l’altra parte è la difficoltà di trovare imprenditori bravi). Kodacell ha lanciato molti nuovi prodotti, e ha rendimenti alti su progetti piccoli. Quanti di questi progetti scaleranno e diventeranno prodotti di grande successo? Kettlewell:

Certo, se guardi [i nostri bilanci] dal nostro punto di vista, sono grandiosi. Se li guardi dal punto di vista di Wall Street, siamo nella m****. Gli analisti non riescono a capire come devono valutarci.

Questa è un’altra versione del famoso paradosso di Kenneth Arrow: i mercati per le informazioni in genere non funzionano bene perché, per stimare con precisione il valore di qualcosa devi sapere tutto ciò che la riguarda. Ma l’informazione, naturalmente, non ha valore di mercato per chi la conosce già. Le invenzioni, essenzialmente, sono informazione: finché non sono sul mercato e hanno percorso la curva di diffusione, è difficile capire quanto valgono davvero.

Il crollo del New Work e lo slittamento nelle preferenze dei consumatori

All’inizio della parte 2 di Makers il movimento New Work è finito. Un crollo in borsa ha distrutto il modello di business di Kodacell, che era stato imitato da altre grandi aziende come Westinghouse (che ha assunto Tjan, strappandolo a Kodacell). Il risultato è che il movimento è morto. Perry e Lester, ancora nel loro centro commerciale abbandonato in Florida, costruiscono “the ride” (difficile da tradurre: è una specie di parco a tema-otto volante- memoriale del New Work), che sarà il centro del resto del libro. Il fiasco del New Work è una delle parti meno convincenti del libro dal punto di vista di un economista: a parte il problema già menzionato di attribuire un valore di mercato alle invenzioni, non si capisce che cosa possa avere provocato più di una fluttuazione di breve termine. Kettlewell:

Gli analisti non riuscivano a capire come valutarci. Aggiungici un po’ di caos sul mercato, un po’ di gente che ha voluto pareggiare vecchi conti […] è già un miracolo che abbiamo resistito così a lungo.

In seguito a questi eventi, i consumatori smettono di comprare i beni prodotti dalle aziende New Work, il che è ancora meno convincente. Come dice Perry:

Le invenzioni non interessano più a nessuno.

Non c’è nessuna ragione ovvia per cui questo dovrebbe succedere. La seconda invenzione di Perry e Lester, Home Aware, ha avuto un grande successo, vendendo un milione di esemplari in sei settimane. In una situazione del genere, se il produttore originale esce dal mercato, in genere altre aziende prendono il suo posto per servire ed espandere la clientela esistente. Dopo il crash delle dotcom nel 2000 i consumatori hanno aumentato la loro domanda dei servizi online che trovavano utili, senza preoccuparsi troppo degli indici di borsa. Yahoo, Google, Amazon hanno continuato a esistere e prosperare, nei rispettivi mercati di sbocco se non sui listini. Ho dato uno sguardo alle serie storiche degli indici NASDAQ e delle vendite tramite e-commerce in America nel periodo 1999-2009, e la correlazione è sostanzialmente inesistente (addirittura negativa), come vedete dal grafico seguente:

Quindi: la società dell’innovazione in Makers è sostenibile?

Le domande sulla sostenibilità sono difficili. Più volte gli scienziati hanno predetto catastrofi suscitando grandi clamori nell’opinione pubblica, che ha rovato queste predizioni convincenti. Da Malthus al Club di Roma e al Millennium Bug, ci siamo sempre cascati: sembra che abbiamo una predisposizione a sottovalutare la capacità di adattamento della società e dell’economia (cambiamenti culturali riducono il tasso di fertilità, l’aumento dei prezzi dell’energia aumenta l’efficienza energetica del PIL e così via). La catastrofe ci sembra in qualche modo convincente: forse è solo un’eredità del nostro passato preistorico, o forse è un mito culturale molto radicato (Apocalisse, Ragnarok ecc.). Certamente, questo suggerisce molta, molta cautela nel fare predizioni in questo senso.

L’economia del New Work è almeno plausibile; la parte meno plausibile è proprio quella della sua fine. Mi sarei aspettato uno sviluppo del tipo: Kodacell e Westinghouse incoraggiano lo spinoff delle loro unità New Work, o le vendono ad aziende più agili e con meno costi fissi. Questo rende economica anche la struttura organizzativa e finanziaria a rete che era stata il vantaggio competitivo di queste grandi aziende per gente come Perry e Lester. Dopo tutto, la storia dell’open source mostra già con chiarezza che non è necessaria una grande organizzazione per coordinare attività complesse. Il libro, però, ha un finale decisamente pessimista: la grande azienda malvagia ha vinto la battaglia contro il movimento The Ride, e ha assunto Lester, neutralizzando il suo potenziale innovativo; Perry è diventato una specie di tecnico errante, solo e impoverito. Doctorow l’economista sembra sostenere l’idea di società dell’innovazione, ma Doctorow l’autore certamente no. Mi chiedo quale dei due Doctorow, alla fine, avrà avuto ragione.