The economics of creativity

The economics of creativity differs from Adam Smith’s conventional economics. The latter revolves around the firm, which is considered more efficient than the individual in identifying and using resources. In the economics of creativity, creative people are not dependent on organizations to the same extent. They do not need large resources of capital and equipment. They often have low transaction costs. The law of diminishing returns, first formulated by David Ricardo, hardly applies. It states that each additional input factor of production becomes harder or more expensive to acquire and that therefore at some point the cost of producing one more unit exceeds the revenue obtained from selling it. The point at which marginal cost meets marginal revenue is called the equilibrium point. This holds true if resources are limited and under price competition. But in an economy based on intangible and often immeasurable resources the costs of production are less important.

In the creative economy, individuals and firms use resources which are not rare, over which they assert intellectual property rights, which may be short-run, and which do not compete primarily on price. The world of diminishing returns and scarcity of physical objects is being replaced by a world of increasing returns based on the infinity of possible ideas and people’s genius for using those ideas to generate new products and transactions. Control of product and price (performed by the company) become less relevant if production resources are freely available, if products are intangible, if price competition is negligible, and if the market is driven by demand not by supply. In the knowledge economy, firms either charge prices well in excess of marginal costs, or they give their products away for free (the case of free software and its mechanism will be approached in the next part of the paper).

The Recognition, Protection and Classification of Creative Products - Part 3

Human beings are called homo creator, but creativity does not always lead to a creative product. The creative equation deals only in creative products, not creativity, and differentiates between a creative product and a transaction. It states that the creative economy (CE) is equivalent to the value of creative products (CP) multiplied by the number of transactions (T); that is, CE=CPxT. Creativity itself cannot be quantified. The number of creative products can be quantified, but the multiplicity of products and the confidentiality of many deals may hamper the process of making an accurate account.(1)

Apart from the creative products and the transactions incurred which come to a fore when talking about creative economy, management plays an important role in the deployment of the creative activity. Thus, a creative and innovative management system best suits a creative and innovative activity.

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(1) HOWKINS, John, “The Creative Economy. How people make money from ides”, London Allen Lane, The Penguin Press, London, 2001, p. xi-xiv

The Recognition, Protection and Classification of Creative Products - Part 2

The case for intellectual property in economic theory notes certain substantial differences from the case for tangible property. Consumption of tangible property is rivalrous. For example, once one person eats an apple, no one else can eat it; if one person uses a plot of land on which to build a home, that plot is unavailable for use by others. Without the right to exclude others from tangible resources, a tragedy of the commons can result. The subjects of intellectual property do not share this feature of rivalness. For example, an indefinite number of copies can be made of a book without interfering with the use of the book by owners of other copies. When combined with a lack of exclusive intellectual property rights, this nonrivalrousness and nonexcludability combine to make them public goods and susceptible to the free rider problem. A rationale for intellectual property therefore rests on incentive effects to overcome the free rider problem. This case asserts that without a subsidy that is afforded by exclusive rights, there is no direct financial incentive to create new inventions or works of authorship.

As Wikipedia and free software demonstrate, works of authorship can be written without direct financial incentives. Moreover, many important works were created before copyright was invented. One might argue that much more invention occurred after patents came into existence; however, one could also argue that patents were brought into law as the power and influence of industrial interests grew. The status of intellectual property is disputed by various commentators in India, China and other developing nations. The United States and the United Kingdom are the only two nations who consistently receive net balance of payment benefits from intellectual property, and are amongst the chief supporters of intellectual property systems.

The Recognition, Protection and Classification of Creative Products - Part 1

Once new products and services are created, they have to be protected. Many creative products qualify as intellectual property. Besides the attribute of belonging to someone, intellectual property is intangible. Copyright, patents, trademarks and designs are the most common forms of intellectual property.

By an economic analysis, the incentives granted for intellectual property rights have sometimes served the public benefit purpose and promoted innovation by ensuring that someone who devoted, say, ten years of penury while struggling to develop vulcanized rubber or a workable steamship, could recoup her or his investment of time and energy. Using monopoly power, the inventor could exact a fee from those who wanted to make copies of his or her invention. Set it too high, and others would simply try to make a competing invention, but set it low enough and one could make a good living from the fees (1)

Exclusive rights such as copyrights and patents secure their holder an exclusive right to sell, or license rights. As such, the holder is the only seller in the market for that particular item, and the holder is often described as having a monopoly for this reason. However, it may be the case that there are other items of intellectual property that are close substitutes. For example, the holder of publishing rights for a book may be competing with various other authors to get a book published. In such cases, economists may find that another market form, such as oligopoly or monopolistic competition better describes the workings of the markets for expressive works and inventions. This is one reason to prefer the term exclusive rights over monopoly rights.

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(1) http://en.wikipedia.org/wiki/Intellectual_property

Perspectives on creativity - part 2

Innovation, which can mean a new idea, method or invention used in order to improve the current activity or the introduction of new ideas or methods(1), is a concept closely related to creativity. Innovation has become a lot more important to corporate leaders, in the last decade in particular, because of changes in the business environment, brought on by increased technological capabilities, speed, hyper competition, and faster rates of diffusion enabled by greater connectivity. The second part of my paper refers – inter alia – to innovation opportunities. But while many companies say they are making innovation happen, for most of them innovation is based on old ideas, principles and processes. At best, their innovations are incremental-miniscule improvements in products and services. While there is nothing wrong in achieving small gains, this view of innovation shuts out the truly startling cases of leap innovations.

Leap innovations occur when someone discovers an entirely new approach to a problem, an approach that changes life in some significant way. The leap innovation emphasizes the act of moving into the unknown or unexplored rather than just breaking with predictable patterns of innovation.(2)

Creativity and innovation are present at all levels of business from the management of a company to the development, branding and shape of each product.(3) Companies change at a great speed, due to the fact that competition is increasing and they have to maintain their position on the market. The fruits of creativity are what make them more appealing to their clients and partners. Briefly, their future and profitability largely depend on how creative they are.

Despite the fact that arts and creativity are allegedly treated as one and the same concept, not only pieces of art are the result of creative work. Creativity is also present in all other fields, such as sciences (especially in research and development). Both arts and sciences use the same thinking and creating processes, but the difference consists in the reasons why they do so. Also, the way how they protect its economic value differs. So, creativity is common to both arts and sciences, the creative products are different.

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(1) “Dictionary of Contemporary English – The Complete Guide to Written and Spoken English”, Longman 1999

(2) WHITE, Shira P.  with WRIGHT, G.  Patton, “New Ideas About New Ideas”, Pretince Hall, Financial Times, London 2002, p. 8

(3) HOWKINS, John, “The Creative Economy. How people make money from ides”, London Allen Lane, The Penguin Press, London, 2001, p. xi

Foreword

The reason for which I chose to tackle the topic of creative economy and the economics of ideas stems from the fact that it represents one of the most dynamic and interesting fields in the economy of our days. Creativity and economics go hand in hand in a world in which competitive advantage is achieved to the extent to which creativity is fostered and its products are promoted. Otherwise, no entity could withstand the market.

The structure of my paper is twofold: the first part is an introduction in which I tried to theoretically outline the main aspects of creative economy; the second part comes to round and explain in further detail the theoretical part. This second part first focuses on one of the fastest moving domains, software production, with a specific highlight on the impact on free software. Further on, I presented, on the one hand, the possible innovation opportunities and, on the other hand, creative economy costs. Opportunities and costs are thus seen as the key factors of describing the creative environment in an economy.

Methods such as analyses, comparisons, study cases, syntheses, and reviews have been used. Insofar as mathematical models are concerned, I have briefly presented the free software economic and mathematical model. Most of the examples are inspired from the current realities especially on the digital, data and communication markets, but fields such as real estate, education, R&D, intellectual property regulations in force and EU innovation issues have not been neglected either.

Each of these approaches in describing creative economy has been accompanied by up-to-date and relevant information about the most dynamic and innovative domains of the economy worldwide. Also, several examples are meant to better illustrate the current situation in Romania and the progress recorded in its attempt to catch up with the more developed countries in Europe.

The paper is not meant to be an exhaustive work and it only presents a point of view built on personal preferences concerning the examples chosen.