Two Cheers for Creativity

By Gregory Clark

I previously joined in the general rejection by economists, such as Gary Becker, of Bill Gates’ proposal for “Creative Capitalism.”  But on reflection I am also attracted to elements of the position of Michael Kremer in his posting “In Defense of Recognition” that non-pecuniary motives can be very powerful, and could be productively harnessed by modern profit-driven corporations.  For any attempt to tell the history of the Industrial Revolution and the rise of the modern world in purely Chicago School terms, as the unleashing of the profit motive by free competition fails.  The innovative firms at the heart of the modern Industrial Revolution depended as heavily on idealism, pride, and the search for fame as they did on the desire to make money.

The source of economists’ unease about “creative capitalism” is an intuition that it is desirable to separate out decisions on production from those on consumption.  Andrew Carnegie was a model of this separation: a shark as a businessman, successfully breaking the union in the bloody Homestead Strike, but a benevolent uncle as a philanthropist.

Modern capitalism does seem to find that the profit motive works marvelously well in supplying goods.  Even goods that most find repugnant get produced in abundance: cigarettes for the nicotine addicted, Hummers for the gasoline addicted, and powerful guns for Rambo fans.          

However, the history of capitalism since the Industrial Revolution reveals that while the profit motive has been ever powerful, other drives also had huge impact in creating modern wealth: the desire to do good, to do the surprising, and to achieve fame.

The first hundred years of the Industrial Revolution produced extraordinarily little in the way of profits for the innovators that made the modern world.  Protection of intellectual property rights was weak.  Even most innovators with names known to history – James Hargreaves, Samuel Crompton, Edmund Cartwright, for example, who helped revolutionize textiles – gained little.  And these were the success stories.

Fortunately, while profit partly drove innovation, as important was the romance of technology, patriotism, and the desire for fame.  In a famous example, the miner’s safety lamp, which greatly expanded the coal seams that miners could work, was developed by Humphrey Davy as a humanitarian venture.  He refused to take any profit from the innovation (he did, however, squabble furiously and selfishly with George Stephenson as to who had the rights to the glory of the innovation).

Our world faces myriad problems: a shortage of fossil fuels causing high energy prices, an abundance of fossil fuels causing global warming (can’t live with oil, can’t live without it), a shortage of food, a billion people stuck in intractable poverty, AIDS, drug resistant diseases, and substance abuse.

The message of this history is that companies which can align their activities with solving humanity’s problems should find that they can hire people of greater talent, at lower prices, than companies that seem to pander only to people’s baser desires.

A Detroit auto industry, for example, focused on developing vehicles with less CO2 emissions and greater safety should be able to recruit a lot more talent more cheaply than an industry currently identified with peddling polluting monster toys to the testosterone addled.

Of course, as is always the case with advice about economics, the question is why firms do not already know this?  Why would they need Bill Gates to remind them of what they should know?

The answer is that in modern markets with often few producers and entry barriers, firms can lose sight of fundamental truths.  Those with confidence in the ability of the market to always figure out the most profitable strategy have to look past the astonishing changes of strategy pursued by US firms over the years, fueled by no more than management fads: merger waves followed by divestiture waves, modestly compensated chief executives followed by emirs allowed to freely plunder the corporate treasury.  US capitalism is to a surprising extent following a course charted by competing gurus of the firm.  Bill Gates’ call has as much possibility of being a socially productive call as the latest management infatuation to emerge from Harvard Business School.

So two cheers for creative capitalism.  Would it work?  Who knows, but since corporate America seems to need always the direction of some weakly evidenced dogma, why not experiment with one that honors the better impulses of the citizenry?

Comments

[Michael F. Martin]

The source of economists’ unease about “creative capitalism” is an intuition that it is desirable to separate out decisions on production from those on consumption. Andrew Carnegie was a model of this separation: a shark as a businessman, successfully breaking the union in the bloody Homestead Strike, but a benevolent uncle as a philanthropist.

This hits the nail on the head. At the start of the industrial revolution, public support for entrepreneurs and firms had to be won. By the end, the industrialists were using their newfound wealth and power to cram down on whomever threatened their positions of power.

The organizing principle, I believe, is the scale of demand. As technology has made the world flatter, some firms have found themselves hooked up to a firehose of demand. They could make their revenues move up and to the right by scaling up operations, no matter how bloated and inefficient those operations might be. This is why cost accounting ended up being adopted as the dominant theory of accounting in the 1930s. Globalization has kept it on life support for the past 50 years.

But now that the world is flat, demand is no longer a firehose that runs into the U.S. and its firms.

The measure of how firms create value will still be profit. But the analysis of profit in time must become both more granular and longer in its time horizons.

[Michael F. Martin]

Fortunately, while profit partly drove innovation, as important was the romance of technology, patriotism, and the desire for fame.

This part I disagree with.

The need for "public recognition" is not different in kind, and need not be measured any differently than ordinary "self-interest."

The key to seeing this is to reflect on how exactly firms add value to society. Firms add value to society by demonstrating and fostering new forms of cooperation among different groups of people.

The point is not that profit is the wrong way to measure value. It's the best. The point is that profit should be measured and managed in a way that demonstrates and promotes the source of value -- cooperation.

The current design of financial statements and the theory of accounting underlying them are designed to foster cooperation INSIDE firms. But they are very poor at fostering cooperation AMONG firms.

Markets work because they demonstrate and promote cooperation within society.

A theory of capitalism that is capable of withstanding the vicissitudes of life must focus on how and when people choose to cooperate.

[David Billington]

Gregory Clark,

The question you are trying to address is very interesting (to what extent are innovative people inspired by material vs. intangible measures of gain) and I'm not sure that it has received anything like the serious study that it deserves.

Insofar as this is an empirical (historical) question, the main problem if we examine the past all the way back is to determine who to identify as innovators.

The history that most of us acquire in school is seriously deficient in the way that it has identified the industrial revolution so closely with textiles and reduced innovation in these to a handful of devices made mostly out of wood. The transformative early breakthroughs in modern industry were in iron metallurgy, iron engine and bridge design, the use of non-renewable energy to power new technologies, and somewhat later the use of electricity and electromagnetism for communication.

It is true that many innovators never enjoyed much of a return for their effort. But the more important early ones were in fact successful financially as well as technically. In the first hundred years (to 1870), Richard Arkwright became wealthy in textiles, and James Watt and Matthew Boulton formed the prototype of the successful modern industrial company based on steam engine manufacturing. Thomas Telford was a success in civil engineering, Robert Fulton did well from the steamboat, and the Stephensons were successful in railways, as was their American counterpart, the locomotive designer Matthias Baldwin. Samuel F.B. Morse became rich from telegraphy and Henry Bessemer was a success in steel.

Regarding Sir Humphrey Davy, I think it would be more correct to say that the scientists, among whom one must also include Joseph Henry in his dispute with Morse over priority to the telegraph, disdained financial gain because of an emerging self-image of the scientist as a disinterested professional in contrast to those engaged in trade and mechanical work. I don't think this was quite the same as preferring fame to fortune, although fame was clearly a motive for scientific discovery. Science and engineering developed into separate cultures thereafter. This separation is a problem in need of bridging.

The importance of recognition in engineering is certainly worth underlining. In the US, the Draper Prize of the National Academy of Engineering, while not as well-known as the Nobels, holds great prestige, as does the National Medal of Technology.

I would be inclined to caution against trying to isolate recognition too much from material rewards. Many innovators do not require large material rewards but they do require at least moderate ones. There is also a certain modesty that one encounters in engineering innovators that may not be responsive to more expansive kinds of acclaim. The key is to find the right balance.

[Tracy W]

You appear to assume in this post that the only thing to capitalism is coming up with new products. For example you say: The innovative firms at the heart of the modern Industrial Revolution depended as heavily on idealism, pride, and the search for fame as they did on the desire to make money.

You talk about Humphrey Davy's safety lamp. But Humphrey Davy's safety lamp only saved lives if it was actually in use. For the lamp to be used by most miners, that required mass productions. Dozens, or hundreds, or thousands, of people had to get up each workday and manufacture the things. Then they had to be moved from the factory to the minemouth and gotten to the miners before they could do any good. How many of the names we know of those machinists, haulers, etc? Were they really motivated by idealism, pride or fame? Or were they motivated by each day's pay?

And how about the investors in the companies that made the safety mines? Again, what were their names? Were they motivated by pride?

The Communist states had many great innovators. As did Ancient China. What they lacked were the profit-making incentives to actually mass-produce the goods. (They also lacked the price system to allow people to work out if something was worth more than its inputs). And no innovation does any good if it isn't used because it hasn't been produced.

The message of this history is that companies which can align their activities with solving humanity’s problems should find that they can hire people of greater talent, at lower prices, than companies that seem to pander only to people’s baser desires.

I doubt this. The arts, which pander to people's baser desires (read Shakespeare, aka the immoral bawd, if you doubt this statement), have had no problem in hiring people of great talent. How many kids nowadays want to be an actor, or a rockstar, or a classical musician or a writer?