The Next Economic Paradigm

Tag: community watch

Factors of Production for an Innovation Economy

Many years ago, economists in the midst of the industrial revolution identified three variables (productive inputs) for building industries; Land, Labor, and Capital.  The rate of output was related to how these inputs were allocated. If any of these factors of production were missing, the other two had little use.  The concept of Land, Labor, and Capital is still the foundation of much of today’s economic thought.

We know that in the knowledge economy, the location of knowledge work is highly mobile – so “Land” does not have the same significance for making things as it did 100-200 years ago.

What about “Labor“? Knowledge workers analyze situations, manage many variables, and create unique solutions. They do not really produce identical knowledge pieces like a machine operator or a production worker –so Labor also means something different than a century ago.

The term “Capital” refers to money that would be needed now to build future structures, buy machines and to pay wages. Today money buys access to information, education, and knowledge workers. So we see that many old economic principle may not be as applicable in the new economies.

The factors of production for the Innovation Economy are Intellectual Capital (also call Human Capital), Social Capital, and Creative Capital + entrepreneurs. (Reference: Jane Jacobs, Robert Putnam, Richard Florida)

Intellectual Capital Model suggests that concentrations of educated and motivated people attract investors to employ them and invest in the communities where they reside. This investment attracts other intelligent people who in turn attract more investment thereby creating a cycle of economic growth

The Social Capital Model suggests that people acting in communities can create better solutions, greater accountability, and more economic growth than management, governments, or bureaucracy can induce on their own. Examples of Social Capital include Civil Rights Movement, community watch organizations, Democratic Government, and recently, Social Networking.

The Creative Capital Model, suggests that engineers and scientists think more like artists and musicians than like production workers – their ideas come 24/7/365 – and that an environment of tolerance, diversity, and openness promotes creative output.

Silicon Mouse trap

Many people argue that Silicon Valley, in fact, was created and sustained by a perfect storm of Social Capital, Creative Capital, an Intellectual Capital + Entrepreneurs.  Other countries have tried to duplicate Silicon Valley but most have fallen short – if any of these factors of production are missing, the other two have limited utility for production of innovation. To demonstrate how these productive inputs might appear in an innovation economy, consider the following example:

Suppose that we take 5 mechanical engineers and lock them in a room with instructions to build a better mouse trap, they’ll emerge with a better shingle, a better spring, a better whacker, and a better trigger – but not necessarily a better mousetrap.  Suppose that we now put a dog catcher, an engineer, a plastics manufacturer, an artist, and the mother of 4 rowdy children together with the same task. We can be quite certain that innovation will occur. They may actually come up with an excellent mouse trap.

The Innovation Economy

Innovation Economics will bring the factors of production together in diverse combination rather than similar combination.  In an Innovation Economy, the “secret sauce” for the production of innovation becomes far more valuable than any single innovation itself.  The secret sauce provides a monopoly on dynamic repeatability rather than a static device.

As such, technologies can be open sourced and innovation crowd sourced across a much wider domain of possible user applications.  Such conditions will change the type of innovations that are favored to reflect the broad and sweeping social priorities rather than innovations that are easy to patent, protect, and monopolize.

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Social Enterprise; Show Me The Money

The term social capital is thrown around with great ease without really understanding what the word “capital” implies.   Capital is money used to earn more money; that means that social capital must somehow be related to, or derived from money.  There is no shortage of blog posts asking the timeless question “Where’s the money in all this social stuff?”

If social capital is money, it needs to behave like money.  So for our litmus test today, let’s talk about financial derivatives – the same ones that got us into the mortgage crisis mess.  A derivative is something whose value is derived from something else.  The price of an SUV is often derived from the current price of fuel.  Not so obvious are collateralized debt obligations – but they are kind of similar.

So where is the money in all this social network stuff, what on Earth is a social capital derivative, and how can it be “capitalized”?

Suppose I start a social network for my neighborhood. The objective of this social network is to make certain all of the data collected by, and posted on Zillow.com (a real estate valuation site) is accurate.  After all, it is not in anyone’s best interest for an overpriced house to stay on the market too long because it raises questions about the value of the other houses.  Nor it is in the best interest for a house to be undervalued – that too brings down the value of the other houses.  It is in everyone’s best interest that all the houses are correctly priced.  If this could be accomplished, then a discount real estate broker can be used saving 2-6 percent on the transaction.  That sounds like real money to me.

Meanwhile, it is in the best interest of all of the neighbors to help all of the other neighbors to improve those things on everyone’s homes that increase correct market value by the most; kitchen, bath remodels and a little landscaping, etc.  Again, this supports the value of everyone’s house and improves people’s decisions on how to invest their home improvement money.  Wow, that sounds like real money too.

A sample of persons living in a community would surely reveal a whole range of specialized knowledge useful to others in the neighborhood. Neighborhood watch organizations are better crime deterrents than police patrols.  Further, local contractors, banks, stores, and businesses would love to target such an organized and focused group of people. They may even pay the community for advertising on the site… cha ching!  Nobody would dare provide poor service since reputations would be quickly damaged on the community forum; likewise, disputes are handled quickly and equitably since it is everyone’s best interest to do so…

Now for the derivative:

The number one attribute for increasing the value of a home is a good neighborhood.

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