Monday, August 08, 2011

Ideas: Perhaps the last inexhaustible commodity

The story of development, at least in the US, is the story of identifying and exploiting the seemingly inexhaustible commodity, then spotting and exploiting the next one.  I’d argue that right now, late summer 2011, we are still shifting to discover the next inexhaustible commodity, even though it is right in front of us.  But first, a brief history lesson.

In the US, the first inexhaustible commodity was land.  From the first settling of the US till the Great Depression, land and what it could produce was the inexhaustible commodity.  At first there was always more land, to the south and to the west.  Brave pioneers went inland to discover vast tracks of land, land that could grow crops and feed the family, crops that could be sold to the larger communities on the coasts and overseas.  Even after a significant portion of the land was claimed, land was still the inexhaustible commodity to exploit – we simply found ways to get more production out of the land with the cotton gin, artificial fertilizers and advanced farming techniques.  In fact we became so good at farming that the number of people necessary for farming fell dramatically, to the point where the rural population today is the smallest it has ever been.

Once the land issue was settled, manufacturing became the inexhaustible commodity.  From the end of the first World War till the present day, manufacturing drove the economy, and the economy drove manufacturing.  We fed a tremendous number of people into the factories to generate physical goods to local and international consumers.  And, in the same way as the farm, once the easily exploitable manufacturing segments were exhausted, we found ways to improve.  Thanks to Frederick Taylor, the Toyota Production System, integrated manufacturing systems and software, and many more advances, our manufacturers make more stuff at higher quality than at any other point in time. In fact the diminishing marginal return for manufacturing may be approaching.  Further, we've discovered and exploited petroleum, what seemed like an inexhaustible source of energy.  Since the first major discovery at Spindletop in Texas approximately 100 years ago, we've found ways to extract oil from a range of locations once thought impossible to tap.  Yet we are constantly told that "peak oil" has passed us by.  Oil, natural gas and other carbon-based energy systems are approaching or past peak production.

Next, we turned to financial engineering and other services to exploit.  Clearly in a global economy, the markets for financial services and other services are more profound, and since the late 1970s barriers to international finance have fallen as the world’s economies became more integrated.  Financial engineering has led us to ever increasing integration but exposed the gaps between fiscal probity and financial risk.  We may never approach the limit of our capability to engineer financial products and services, but we may need to wait for our legal and regulatory systems to catch up to our ability to engineer financial products and systems.  Yet again, we may exhaust our ability to exploit another market, as foreign competition is adept at financial engineering and foreign markets, while integrated, retain financial levers to restrict some product development and engineering.  All three will follow the same trajectory, leaving us to define the next significant area of growth for our economy.  Note as well the almost exponential decay in the length of time of each exploitation.  It took thousands of years for farming to fully exploit its capabilities and the available land.  Manufacturing, it can be argued, was fully exploited in less than a few hundred years and financial engineering and services may be fully exploited in less than 100 years.  As the world becomes more interconnected and more interdependent, and as the ability to document information becomes ever more prevalent, knowledge is disseminated faster, which enables more people to capitalize on the knowledge and exploit the opportunity.

What then, is the next inexhaustible commodity?  We’ve tapped the land, we’ve mastered and optimized manufacturing and we’ve exploited the ability to engineer financial products to the extent that many of the people who were selling and marketing the products either didn’t understand the implications or were actively betting against their own products. 

My supposition is that human creativity is one of the last inexhaustible commodities, with ideas as the fruit of that capability and new products, new services, new business models and new experiences as the realization of the ideas.  As we’ve demonstrated before, once a seemingly inexhaustible commodity is identified, it will be exploited for all the gain possible.  Currently, many organizations have identified idea generation and innovation as a potential source of great return, but are uncertain as to the methods to convert ideas into value.  After all, you can’t “farm” ideas and eat the fruit, and you can’t manufacture ideas and sell the ideas to others.  Ideas require an additional step to exploit – they must be converted into viable technologies or intellectual property or services.  At that point their value can be recognized.

We are in the midst of a shift to begin to exploit this seemingly inexhaustible commodity, and the shift is really only beginning.  Like the early farmer or first manufacturers, our systems, methods and processes are still crude.  There’s little experience and little refinement of the processes by which ideas are generated and then converted into viable, profitable actions.  Our Frederick Taylors, the people who define the systems that create efficient systems that accelerate the exploitation of ideas, have only just emerged, and many industrial leaders don’t understand the shift that’s occurring.  They remain focused on driving more efficiency from a rapidly diminishing manufacturing model or attempting to conduct financial engineering in the face of a rapidly growing regulatory administration, ignoring the potentially inexhaustible commodity at their doorsteps.
In the 1800s over 80% of the population worked in farming.  Today the number is in the single digits.  The same decrease can be seen in manufacturing.  After the Second World War over 60% of the population worked in manufacturing.  Today the number is near 20% and declining. After explosive growth in financial services, this market will become fully exploited, automated and the employment levels will fall.

Each seemingly inexhaustible commodity experienced the same exponential growth, the same diminishing returns and the same investments in efficiency, process definition and skill development.  The future growth in this country and in the world economy depends on identifying the best possible new ideas, converting those ideas to relevant products, services and business models, and scaling our capabilities to produce more and better ideas at an ever increasing rate, which requires new innovation methods, new processes and new innovation skill development.  This industry is no different than farming or manufacturing – we are simply at the early stage of a shift into a new paradigm in our economic development, and the faster we make this transition, the better.
One especially salient point to make about innovation:  unlike land, ideas are not constrained by physical continents, local weather patterns or the richness of the soil.  We cannot exhaust our creativity.  Unlike manufacturing, we cannot ever exploit every idea in every market sector and cannot outsource our creativity and innovation to countries with lower costs.  Innovation and creativity is the one inexhaustible commodity if we will only understand it and begin to become more effective deploying the existing skills and talents that we have, and building new skills and talents to fully exploit the capability.
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posted by Jeffrey Phillips at 5:59 AM

3 Comments:

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