The Passion Economy

“New Economy” theories are usually popular during booms.  After the party is over, more conventional ideas inevitably come back into vogue.

However, things are clearly changing, despite the dismal times.  The way businesses function and compete has altered considerably and, most likely, permanently.  While this probably won’t bring about a revolution in productivity, it is already creating big changes in how companies are managed and how they succeed.

The fundamental difference is that, while in the old economy promoting efficiency and organizing work  reigned supreme, in the emergent new economy inspiring the passions of employees to create and innovate is far more important.

The Organization Economy

When Alfred Sloan created the modern corporation at General Motors in the early 20th century, what he really did was create a new type of organization.  It had centralized management, far flung divisions and was exponentially more efficient at moving around men and material than anything that had come before.

He called it “federal decentralization.”  Management would create operating principles, set goals and develop overall strategy, while day-to-day decisions were performed by people lower down in the structure.  While there was some autonomy, it was more like an orchestra than a Jazz band, with the CEO as conductor.

The idea transformed American industry and culminated in the “Nifty Fifty” conglomerates of the 60’s and 70’s.  Back then, it was widely believed that a basic set of management principles, if conceived and applied correctly, could be adapted to any kind of business.  Managing an organization was largely a logistical exercise.  Things needed to get from point A to point B as quickly and cheaplyas possible.

Many of those same principles are still taught in business schools.  The world, however, has changed considerably and there are four factors that are shifting value from organizing structures to focusing passions.

1. Atoms vs. Bits

Probably the most profound change has been from atoms to bits.  Where companies like Sloan’s General Motors were mainly concerned about physical objects, many of today’s successful companies are much more focused on moving around binary digits and the ideas that they represent.

In the old industrial economy, companies invested in low cost “factory towns,” which offered relatively unskilled, cheap labor that was largely beholden to a single company.  Nowadays, thriving businesses follow talent to expensive urban areas where competition for people is fierce.  They offer not only salaries, but on-site amenities to keep employees happy.

Factory horns and punching time cards have given way to fitness clubs and day care.  Of course, this isn’t true everywhere, especially in the third world where much of manufacturing has moved.  However, doing things like designing algorithms, creating new materials and sequencing genes is driven more by inspiration than by perspiration.

2. Friction and Energy

To understand why the new “bit driven economy” is so different, it makes sense to go back to Richard Feynman’s 1959 talk, There’s Plenty of Room at the Bottom, in which he described, decades ahead of his time, nanotechnology.  He made the point that once you get down to the level of molecules, friction,  and therefore energy, ceases to be an issue of consequence.

Kevin Kelly, in his new book, What Technology Wants, makes a similar point when he compares power densities (energy per unit of weight) throughout history.  He found not only an exponential increase in power density as technology progresses, but that today’s computer chips are billions of times more efficient than the sun.  We are getting that much better at directing the work of our devices.

That makes a huge difference.  When Alfred Sloan conceived a company that would make “a car for every purse and purpose,” he was talking about a very different kind of product than many that we produce today.  More expensive cars were bigger, used more energy and incorporated more expensive materials.

The economics today are wholly different. A website that gets a million hits isn’t proportionally more expensive, nor does it use proportionately more energy than one that gets a thousand.  A software package that’s full of bugs is not necessarily cheaper to make than one that runs smoothly.  Computer chips are much more powerful, but use less energy than they did a decade ago.

3. Perpetual Beta

Another salient aspect of the new economy is that products are continually improved, even after they are shipped and sold.  Consumer feedback is monitored, bugs are fixed and new features are added.

In the old economy of atoms, we would have to physically take products somewhere or someone would have to come to us to fix problems or make improvements. That’s expensive, time consuming and therefore difficult to do with any regularity.

Tim O’Reilly, long a fixture in Silicon Valley, likes to talk about perpetual beta. The idea is that products should be constantly updated.  As an example, Google’s Gmail was in “beta” until 2009, five years after it was launched.  It had already become the most popular service on the planet and still wasn’t considered finished!

Anybody who has been involved with developing technology products knows what a painstaking process this can be.  Seemingly never-ending development meetings, usability testing, feature launches and redesigns can be exasperating and passions certainly get inflamed.  However, there is simply no other way to build a great product.

4. Information Shifts Downwards

Smart people know lots of things.  They can finish crossword puzzles, win trivia contests and offer scintillating conversation at cocktail parties.  They can also spell words correctly and do dazzling calculations in their head.  Those were important skills in the organizational economy of atoms.

Nowadays, those types of skills are devalued.  You can find any fact with a quick Google search, spell checks keep most of us from embarrassing ourselves (although I still manage to srcew up sometimes) and you can do complex mathematics quickly and easily in Excel.

In the information age, the only knowledge that is truly hard to come by is tacit knowledge.  That comes with direct experience and is acquired  more frequently by employees than managers.  Therefore,  senior executives often need to be comfortable being the dumbest guy in the room, not the smartest.

Being smart requires refinement.  Having the courage to be dumb takes passion.

A Shift in Value

These four factors represent a fundamental shift in how successful companies compete.  In a nutshell, the ever-increasing efficiency of technology is changing the nature of work and therefore economic value. Making things is no longer a matter of quantity (bits can be replicated instantly and with negligible marginal cost) or even material quality, but effective use of information.

Another thing Kevin Kelly points out in What Technology Wants is that informational goods are growing at 10 times the rate of material goods.    Therefore what is crucial is how all that information is structured.  As I wrote before, great progress is made not by discovering new facts, but by reordering existing ones.  The iPhone wasn’t a triumph of technology, but of usability and design.

Work in the industrial age was largely made up of repeating the same tasks over and over again and managers strived to enforce standard procedures and ensure efficiency.  The new economy is much more focused on how ideas interact.  Value is created when people are inspired to do things differently (repetitive tasks are increasingly done by robots).

The Passion Economy is Underway!

I don’t mean to imply that nobody was passionate about their work before, or that efficiency has become completely irrelevant.  However, a difference in degree eventually becomes a difference in kind.  The basic elements for what makes a company  successful today have changed considerably.

Creating and disseminating ideas through bits, constantly and continually improving products and getting people with diverse skills to work effectively toward a common goal requires inspiring and focusing passion more than anything else. Therefore, it shouldn’t be surprising that new principles are emerging for how  businesses need to be run.

Robert Sutton of Stanford has written two books, The No Asshole Rule and Good Boss, Bad Boss,  about the effect of work environment on profit performance,  Richard Florida wrote The Rise of Creative Class to highlight how the workforce is changing and the challenges that poses for both businesses and society.  Gary Hamel, in The Future of Management,  emphasizes building a “community of purpose.”

Wherever you look, competitive advantage is becoming an issue of not just actions, but beliefs; and true belief requires directed passion.  In a world of increasing complexity and diversity of skills, it’s becoming less tenable to get people to do what you want.  They have to want what you want.

– Greg