Esko Kilpi on Interactive Value Creation

The art of interaction, the design of digital and the science of social complexity

Tag: Economics

From jobs to tasks and from the value chain to the Internet

Economic theories are derived from the era of the production of tangible goods and high-cost communications. These mind-sets are not only unhelpful, but wrong in a world of information products and ubiquitous, low-cost/high-quality connectivity.

New communication technologies have always had a strong impact on industries and the logistics around production. But this time, with information products, the societal changes are potentially even bigger than before.

The Internet is the first communication environment that decentralizes the financial capital requirements of production. Much of the capital is not only distributed, but also largely owned by the workers, the individuals, who themselves own the smartphones and other smart devices, the new machines of work. When computers were expensive, the economics of mass industrialization and its centralized management structures ruled them. Not any more!

The factory logic of mass production forced people to come to where the machines were. In knowledge work, the machines are where the people are making it possible to distribute work to where they are. Architectures of work differ in the degree to which their components are loosely or tightly coupled. Coupling is a measure of the degree to which communication between the components is predetermined and fixed or not. It was relatively easy to define in repetitive work what needed to be done and by whom as a definition of the quantity of labor and quality of capabilities. As a result, management theory and practice created two communication designs: the hierarchy and the process chart.

In a hierarchy the most important communication and dependence exists between the employer and the employee, the manager and the worker.

Manufacturing work is perhaps amazingly not about hierarchical, but horizontal, sequential dependence. Those performing the following task must comply with the constraints imposed by the execution of the preceding task. The reverse cannot normally take place. The architecture consists of tightly coupled tasks and predetermined, repeating activities. Communication typically resembles one-way signals.

Creative, highly contextual work creates a third design. It is about loose couplings and modularity, about networked tasks. In creative work, any node in the network should be able to communicate with any other node on the basis of contextual interdependence and creative, participative engagement.

The architecture of the Internet is based on the very same principle of loose couplings and modularity. Modularity is the only design principle that intentionally makes nodes of the network able to be highly responsive. The logic of modularity and ubiquitous communication make it possible for the first time to create truly network-based organizations.

Creative network-based work in the future is not about jobs, but about modular tasks and interdependence between people. You don’t need to be present in a factory any more, or in an office, but you need to be present for other people.

In an economy, people essentially produce goods and services for people. Companies are theoretically intermediary organizational forms that arrange the development, production and delivery processes. Companies can perhaps be in some cases be replaced by apps? Or managers can be replaced by apps? Or perhaps the new companies look a lot like apps like Uber or Airbnb already do. Many of these new companies see themselves as market makers rather than as service providers.

The modern firm has developed into a perfect vehicle for financial contributions and as a toolkit serves the needs of financial investors well, at least in good times. As creativity and knowledge define success today, access to capabilities is at least as important for a firm as access to money. The Internet may prove to be an extinction-level event for the corporations as we have known them. In the network economy, individuals, interacting with each other by utilizing the new apps together with relatively cheap mobile, smart devices, can now create information products.

But many things need to change!

We are as used to the employer choosing the work objectives as we are used to the teacher choosing the learning objectives. The manager directs the way in which the employee engages with work. This image of work is easy to grasp because it has been taught at school where the model is the same.

In contrast to the above, creative, digital work and the Internet have brought about circumstances in which the employee in effect chooses the purpose of work, voluntarily selects the tasks, determines the modes and timing of engagement, and designs the outcomes. The worker might be said to be largely independent of some other person’s management, but is in effect interdependent. Interdependence here means that the worker is free to choose what tasks to take up, and when to take them up, but is not independent in the sense that she would not need to make the choice.

The interdependent, task-based worker negotiates her work based on her own purposes, not the goals of somebody else, and negotiates who her fellow workers are based on cognitive complementarity and her personal network, not a given organization.

The architecture of work is not the structure of a corporation, but the structure of the network. The organization is not a given hierarchy or a predictive process, but an ongoing process of organizing. The Internet-based firm sees work and cognitive capability as networked communication.

The effects of Moore’s law on the growth of the ICT industry and computing are well known. A lesser-known but potentially more weighty law is starting to replace Moore’s law in strategic influence. Metcalfe’s law is named after Bob Metcalfe, the inventor of the Ethernet. The law states that the cost of a network expands linearly with increases in the size of the network, but the value of the network increases exponentially. When this is combined with Moore’s law, we are in a world where at the same time as the value of the network goes up with its size the average costs of technology are falling. This is one of the most important business drivers today. The implication is that there is an ever-widening gap between network-economy companies and those driven by traditional asset leverage models. The industrial economy was based on economies of scale inside the corporation. The new focus is outside, in network economies.

The most important model is a network structure where the value of all interactions is raised by all interactions; where every interaction benefits from the total number of interactions. These are the new network businesses.

In practice this means that digital services can attain the level of customer reach and network size, required to capture almost any market, even as the size of the company stays relatively small. This is why network-economy based start-ups have such a huge advantage over asset leverage based incumbents.

The key understanding is that it is now the customers or members of the network who create value, not the network owner.

Yes, customer focus has been the dominant mantra in business. Up to now, business has focused on the customer as an audience for products, services and marketing communications. In the world of digital networks, the customer will be transformed from being an audience to an actor.

The central aggregator of enterprise value will no longer be a value chain. The Internet is a viable model for making sense of the value creating constellations of tomorrow.


On trust

Dire economic outlooks typically lead to emotional reactions and social fragmentation. This always results in bad decisions and conflicts. Then frustrations increase further as the established ways of doing things come under greater attacks. Irritation over the perceived ineffectiveness of governance systems then creates the wish for a saviour, a strong person, to come and clear up the mess. This is how we create dictators, this is how they come into power. This is how Hitler was elected.

The same dynamic is still inbuilt in our political and social systems and should be taken into consideration when we try to figure out what may happen next. Rather than trying to resolve situations through discourse, populist politicians are increasing tensions through an “us versus them” rhetoric in pursuit of support among their own.

We face a repeating social pattern: with growing economic difficulties, the populist stance is to blame “others”, normally “foreigners”, for taking our jobs or for taking our money.

Aristotle had interesting ideas to explain what was going on in the economy. Aristotle made a distinction between two kinds of value added – one that we get from nature’s resources to sustain our lives, and another, which we create to facilitate our relationships and trade. The value added in the latter does not begin from nature, but from the promises we make to one another – from money.

There are limits to what we can get from nature, but, according to Aristotle, since money is promises, there is no end to the amount of money we can aspire to collect. What is special about money, Aristotle says, is that its value is set by mutual agreement. It has no intrinsic use value, only an exchange value, and it keeps that value only as long as people agree to accept it in payment. As long as there is trust.

Therefore it is understandable if the expanding social dynamic reaches a point where promises are not believed any more. After that limit is passed, the result is a sudden and deep crisis. The whole house of cards crashes because it is made of promises that don’t have any value any more. Fear replaces trust. At the moment, it does not take much distrust to cause solvency problems to highly leveraged banks – or highly leveraged countries.

What is a fairly new phenomenon is that buying and selling are no longer confined to resources, to trading goods and services. The world economy mostly consists of buying and selling money, buying and selling promises according to Aristotle. This is why we are so deeply interdependent and why we are even more dependent on building and sustaining trust.

The only way to sustain democracy is to work together and share the burdens and the efforts – whatever happens.


Thank you Ray Dalio and Mikael Jungner

Networks and the value of what is public

According to earlier simplistic management thinking stimulus and response processes control human behavior: you get what you measure; you get what you reward. This means that people are understood as having no real connection to what they are actually doing. A somewhat more modern way of thinking states that human beings actively create meaning in life through attempts to understand their own experiences. Intrinsic motivation, peoples’ relation to what they do, the meaning of work, replaces extrinsic rewards. People connect with what they are actually doing.

A new third way of thinking is now enfolding. Since we cannot experience everything ourselves, other people become the co-creators of experience and meaning. Relations, connecting with others, create a new, networked way of knowing and learning.

As a result, people can now connect both with what they do and with their peers, their network, making them much more knowledgeable than their colleagues who lack these capabilities.

Information is, paradoxically, simultaneously both social and individual, with multiple, variable goals and constantly negotiated premises because of the number of people taking part.

Information creators, publishers and curators, are not the (few) traditional verified experts; rather, information is created by a broad collection of reflexive practitioners sharing in the construction and ongoing evolution of a given field.

Information becomes a process of continuous facilitation and networked negotiation. Information networks are a valuable, shared resource making the interactive movement of thought possible. These networks are the new commons. Sociologists call such shared resources public goods. A private good is one that the owners can exclude others from using. Private has been valuable and public without much value during the era of scarcity economics. This is now changing in a dramatic way, creating the confusion we are in the midst of today. The physical commons were, and still often are, over-exploited but the new commons follow a different logic. The more they are used, the more valuable they are for each participant.

On the new commons, people with many ties become better informed and have more signaling power, while those outside and with few ties may be left behind. This may be the new digital divide. Network inequality creates and reinforces inequality of opportunity.

In the age of abundance economics, public is much more valuable than private.