January 1, 2012

Innovation: Forget What You Think You Know

The Next American Economy

by William J. Holstein. 2011. Walker & Co.

Innovation will save the American economy—innovation based on manufacturing. Making things, from dreaming them up through putting them on the market, is where the big ideas that change the world originate. It's not the simple act of making something, but the whole ecosystem—infrastructure, supply chain, call it what you will—that fuels innovation. When we outsourced and offshored, we did more than ship well-paid manufacturing jobs to cheaper work force locations. We decimated that ecosystem.

None of that is a secret and all of it has been covered in other publications, book-length and otherwise. What is different about William Holstein's book is that he digs down past economic theory—isms as he calls them—to the microeconomics of how jobs and wealth are really created. Politicians don't understand that, he says, because they are focused on Band-Aid-type remedies that will get them elected. Economists don't understand that because they are too focused on the big picture.

We should give up thinking that we can continue for much longer to be the world's biggest economy. Not going to happen. Instead, our goal “should be to possess the highest per-capita income, the strongest technology base and the highest living standards. The goal, in short, should be to dominate the high end of the economic food chain.” China can remain the world's industrial workshop. We want the other end of the spectrum, “the value-added jobs in engineering, design, finance, computerization, marketing,” the ones that “depend on innovation and manufacturing.”

Holstein's earlier book, Why GM Matters, led him to the case studies and models he presents here. Each chapter could quite easily stand alone as a case study in a magazine, which makes it easy to dip in and out of his powerful examples.

In short, Holstein's next American economy requires:

  • No dependence on imported energy. The absence of an expressed industrial policy results in “a long-term failure to shift American energy consumption patterns away from dependence on foreign oil,” which requires hefty defense budgets to protect oil lanes and creates both Big Oil and Big Defense.
  • A more sophisticated approach to exporting. We need to develop “export ecosystems” similar to what North Carolina has done to support a regional center for high value-added products like plastics and chemicals.
  • Most research and development based in the United States. We need highly trained people and their know-how to stay here. We should be exporting products, not intellectual capital.
  • Retraining workers so they have the skills industry will need (not what it used to need). Community colleges have the scale and the grassroots involvement to do this but too often don't involve companies, local government and suppliers to offer courses in the right skills. America's approach to education is too haphazard and inconsistent.
  • A climate of cooperation. “The creation or expansion of a technology cluster is the most sustainable way of responding to global competition and mitigating the vagaries of business cycle gyrations,” Holstein writes.
  • Local and regional alliances to achieve those goals. All politics is local. The same is true of economic development and prosperity.

Again, not a secret but an actionable set of case studies that provide more than theory for getting it done.


Adapt: Why Success Always Starts With Failure

by Tim Harford. 2011. Farrar, Straus and Giroux.

There's a lot of talk lately about failure. We have raised a couple of generations of children who got trophies every time they showed up and now we see that too many are a little too soft, so unaccustomed to failure or even criticism that they have trouble dealing with the rough and tumble of adult life.

Coming from a generation when nuns still rapped our knuckles and even playground softball was a game of natural selection, baby boomers enjoy gloating about this. We are the generation that brags about walking 10 miles a day to school in the snow, uphill both ways. The fact that we were soft by comparison to our Depression-era parents does nothing to blunt our sense of having earned all our successes the hard way.

Articles, research studies and books are now proliferating showing that failure is not only inevitable, but also valuable—if not downright enviable. We can't know what success looks like without failure to compare it to. We can't know how to get there unless we know how far we have to go. We can't be any good if we haven't experienced being really bad.

As it happens, even that understates it. According to Tim Harford's new book, all of our ideas about how we achieve success in business are wrong. There are three elements to “the idealized, decisive hierarchy” that Harford says is the conventional model for what leads to success: 1) getting to the big picture through a sophisticated analysis of all the available information, 2) having a unified team working toward a common goal and 3) a strict chain of command with a single leader at the top.

Nope, says he. Especially in today's complex world, no one leader can get it right every time, even most of the time. Experts, that team of smart big-picture analyzers, are wrong as often as they are right, many times more often. Followers usually know how to solve at least some of the problem better than the leader.

Instead, he says, what works is adaptation. “The evolutionary algorithm—of variation and selection, repeated—searches for solutions in a world where the problems keep changing, trying all sorts of variants and doing more of what works,” Harford writes. What you come up with are lots of solutions that work well enough until you come up with some that work better, and again, and again.

Evolution works but it isn't always pretty or pleasant. As Aza Raskin, a designer at Firefox, says in this quote-heavy book, “Your first try will be wrong. Budget and design for it.”

Harford, the “Undercover Economist” for the Financial Times, is of the new breed of economists such as Anthony Williams of Wikinomics who put those methods to use solving very thorny societal problems. Their findings are forward-looking instead of the hindsight for which economics is famous. They take a problem, like why the United States was failing in Iraq, and find a solution that teaches us more than how not to make the same mistake next time. In Iraq, U.S. forces hunkered down in a compound and made forays into the countryside, ignoring the social infrastructure of elders and village councils that actually got things done. Inside the compound, life was as close to America as possible. As one commander said, the “mission was to guard the ice cream trucks.” The solution, as is clear now, was to work with the people instead of despite them, to live in the country and understand how it works to combat a common enemy.

Harford tells good stories and makes complicated events understandable. He doesn't say evolutionary problem solving will be simple. There are no 10-tips lists or how-to sections. Instead, the process to success is “unsightly, chaotic and rebellious.”

You will fail. Deal with it.