Value is not scarce; efficiency is not rationed

We talk a lot about efficiency without always being very clear what we mean by it, which is perhaps one reason why efficiency all too often collapses into economy.  Efficiency implies taking the same ingredients and combining them more effectively, which means that it comes from new ideas rather than new ingredients (though, of course, some of the ideas may be about substituting ingredients). There is a consistent tendency in thinking about the future to underestimate the power of new ideas to change the context.

Mike Masnick of Techdirt has been musing about the economics of digital rights management, which gets him to exactly the same ideas from a very different starting point:

There are too many in this world who view value and growth as a zero-sum game. They believe that there’s some fundamental limit on the possibility of adding value, and therefore, business models are about moving around a limited amount of value, rather than expanding it. It’s the same fallacy facing those who have trouble understanding zero and infinity in economics. The economist Paul Romer’s discussion on Economic Growth offers a concise explanation for this:

Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material.

Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered. The difficulty is the same one we have with compounding. Possibilities do not add up. They multiply.

Note that it’s the non-scarce products, the recipes and the ideas, that helps expand the value of the limited resources, the ingredients. You expand value by creating new non-scarce goods that make scarce goods more valuable — and you can keep on doing so, indefinitely. Successful new business models are about creating those non-scarce goods and helping them increase value. Any new business model must be based around increasing the overall pie. It’s about recognizing that creating value isn’t about shifting around pieces of a limited economic pie — but making the overall pie bigger.

The reverse is also likely to be true:  increasing value is likely to come from the introduction of a new business model, particularly when we are hitting the boundaries of what we can sweat out of the existing one.  New business model here emphatically does not mean new organisational model – it means new ways of doing business, which may or may not have an organisational component, but are likely to include the product of both top-down and bottom-up perspectives about how to create more value.