Economics of creative economy

The “creative economy” has grabbed all media attention, hitting the headlines over the last several weeks. Ministers, economists, journalists, politicians, and private and public institutions, have all jumped on it and are still talking about it.

At least, they all seem to agree that the creative economy starts from new ideas. According to them, breaking and mixing ideas and things in unconventional ways create new ideas. It sounds like a whole new idea and the next big thing.

The truth is that there is nothing new at all about the fundamental idea behind it. The economics of ideas, i.e., knowledge, has been out there for almost three decades.

In 1986, then Rochester economist Dr. Paul Romer, now with NYU Stern School, articulated how knowledge contributes to long-run economic growth in his seminal work “Increasing Returns and Long-run Growth.”

The idea is straightforward but powerful. Knowledge is a product of deliberate R&D efforts.Once knowledge in the form of an idea is created, anyone with knowledge of the idea can use it. The beauty of knowledge is that it can be used by one person or one million people.

Think of the design for the next-generation smartphone. Once the design is created, factories around the globe can use it simultaneously to produce smartphones.

Tangible goods and human skills can’t be used at two places at the same time. But ideas can be used at multiple places at the same time. Knowledge has a positive economy-wide spillover effect and it keeps the economy growing on a sustainable basis.

What makes an economy keep producing new ideas? No matter how new ideas are created — even by breaking and mixing — they require a significant level of financial resources upfront. No one knows what will happen, but they incur huge fixed costs. Once ideas are successfully thought up, inventors are granted monopoly power and are able to cover huge upfront investments and earn profits. The well-developed legal system such as patents and copyright make this happen.

In a nutshell, new ideas are created as a result of R&D investments. With the legal system in place, the new ideas get compensated enough to keep R&D investments rolling. The new ideas also bring economy-wide spillover benefits and keep the economy growing in the long run with more jobs. This is how a creative economy is supposed to work. No secret.

There are caveats. New ideas come with the territory. New ideas create new jobs. They make the way things get done more efficient. At the same time, they make old ideas obsolete. And old jobs disappear quickly. Not always but more frequently.

New ideas also grant inventors monopoly power. The inventors should be able to exercise market power to reap a return from their ideas. It often leads to too much market power.

These are essentials that come naturally with the creation of new ideas. No place for an economic democracy argument here. Without the creation of new ideas in the first place, there is no point talking about a creative economy.

Most importantly, ideas come from people. Look around. The landscape of knowledge competition is changing at a furious pace.

Talent wars and R&D wars are everywhere. Every second counts. Both speed and culture matter. To make the right people rush in, a culture of failure is the most urgent and important thing. Without failure, there is no success.

The right culture is half the battle. When failure and success are treated equally, the most important resources, the right people are lined up.

Fostering a sustainable R&D culture is the first step we should take to get a creative economy off the ground. An important lesson we learn from failure is that success starts with the right people in the right place.