Design and the Creation of Value 9781474274302, 9781474274296, 9781474274289, 9781474274265

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Design and the Creation of Value

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Design and the Creation of Value John Heskett Edited by Clive Dilnot and Suzan Boztepe

Bloomsbury Academic An imprint of Bloomsbury Publishing Plc

LON DON • OX F O R D • N E W YO R K • N E W D E L H I • SY DN EY

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Bloomsbury Academic An imprint of Bloomsbury Publishing Plc

50 Bedford Square London WC1B 3DP UK

1385 Broadway New York NY 10018 USA

www.bloomsbury.com BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published 2017 © Selection and Editorial Material: Clive Dilnot and Suzan Boztepe, 2017 © Original Texts: John Heskett Clive Dilnot and Suzan Boztepe have asserted their right under the Copyright, Designs and Patents Act, 1988, to be identified as Editors of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. No responsibility for loss caused to any individual or organization acting on or refraining from action as a result of the material in this publication can be accepted by Bloomsbury or the author. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN: HB: 978-1-4742-7-4302 PB: 978-1-4742-7-4296 ePDF: 978-1-4742-7-4265 ePub: 978-1-4742-7-4272 Library of Congress Cataloging-in-Publication Data A catalogue record for this book is available from the Library of Congress.

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Every effort has been made to trace copyright holders and to obtain their permission for the use of copyright material. The publisher apologizes for any errors or omissions in the above list and would be grateful if notified of any corrections that should be incorporated in future reprints or editions of this book.

This book is in memoriam to John Heskett (1937–2014) and to Pamela Heskett (1945–2016) who died as the book was going to press.

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Contents

Introduction to John Heskett’s Design and the Creation of Value  Clive Dilnot 1 A note on John Heskett’s economics  Cameron Weber 21 Design as an economic necessity for governments and organizations  Sabine Junginger 31 Notes on editing the manuscript Design and the Creation of Value  Clive Dilnot 39 Design and the creation of value Preface  45 1 Introduction: Design in economic life?  51 Part One  Economic theory and design  63 2 Neoclassical theory  65 3 Austrian theory  77 4 Institutional theory  88 5 New Growth theory  104 6 The National System  124

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Contents

PART TWO  Design and the creation of value  133 7 Design from the standpoint of economics  135 8 Economics from the standpoint of design  143 9 Design and value from the standpoint of practice  157 Afterword by Sharon Helmer Poggenpohl  181 Appendix 1: Socialist Theory  182 Appendix 2: Value and Values in Design  185 Notes  198 Index  221

Introduction to John Heskett’s Design and the Creation of Value Clive Dilnot

This short book, which the preface tells us concerns ‘how design can add and create economic value for businesses and other organizations’,1 is the first to take seriously the relation between design and economics. If that statement might be contested by some of those who make their living from propounding the relation between design and business,2 it is certainly the first to outline, on behalf of design, the major elements of economic theory, and also the first to try to reverse that relation: To suggest that the fragmented and often ill-defined field of design can usefully augment economic theory, the most powerful and well entrenched of the social sciences might seem overly ambitious, likely to have as much effect as a flea-bite on an elephant. Yet, when one moves from the concerns of theory to those of practice and considers the extent of the creation of designs in the world of business and their implementation in everyday life, it must surely be evident that there remain large gaps in economic accounts of how products and services are produced, sold and used.3 And, we can add, large gaps too in the understanding of how, within these processes, value and values are created and augmented or added to (in part at least) by design. If these gaps were only organizational or substantive, it is likely that by now these would have been bridged, if not completely then at least adequately. But, after fifty years of design research,4 forty or so of design management,5 a couple of decades of the mantra of ‘creative industries’,6 and more than ten years of IDEO-style ‘design thinking’, very little in these relations, has actually changed. The same pleas for understanding, the same lamentations are heard, but the gap between what design ‘does’ in respect of value creation and what design as a field is capable of rationally articulating

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Design and the Creation of Value

as to how it achieves this (through what means, in relation to what model of economic value creation?) remains.7 That the discord is blatant is because it is grounded on a deeper intellectual problem. Heskett states it with some clarity: Economics is concerned with explaining the production, distribution and consumption of wealth. Design is the human capacity for shaping and making in ways that satisfies our utilitarian needs and creates meaning – among other things, it creates sources of wealth. There should, at least on a general level be some interaction between the two, yet a deep schism of mutual incomprehension separates them.8 The proof of the existence of this mutual incomprehension is negative. From the side of design, it is manifest in the continuing weakness of attempts to articulate the value that design adds or creates, especially, but not only, economically. From the side of economics, there is a parallel incomprehension. The wry story with which Heskett opens the seminar, concerning his encounter at a Washington reception with an official from the US treasury – who politely but firmly demurs and moves away when Heskett tries to suggest that design might have a role in export competiveness – is an epitome of this. What is really remarkable about this story, however, is not that it happened, but, rather, our expectation that, of course, this would be the case. Today, we naturally expect that a Treasury official, by definition a trained and practising economist, would discount design as a factor in value creation. Yet, a moment’s reflection tells us that the same economist) or others like him in the US Treasury) might well be struggling, for example, with the long-term consequences for the US balance of trade of the way in which between 1970 and 1990 the US automobile industry was transformed by imports, first German (Volkswagen) and then Japanese. In 1950, only 21,287 automobiles were imported into the United States of America. By 1977 the figure was over 2 million. By 1986 it reached an all-time high of 4.8 million, a figure close to 50 per cent of US domestic production.9 This revolution in US automobile purchases, with all the second- and thirdorder consequences that flowed from this (above all for employment in manufacturing) was not a result of price competition but was due almost entirely, as we know, to imports setting new benchmarks in quality and value-for-money. Eventually, and belatedly, this flood of imports set off something of a similar quality revolution among domestic manufacturers. But this was not without the effective bankruptcy, along the way, of two of the big three US car-makers (including, most recently, the $50 billion in funding given to GM in 2009) and the decimation of the vast supplier network that served the US automobile industry in its so-called golden years. Now, in all this well-known saga, only on the most superficial level could design be discounted as a factor in this process. The successes of Volkswagen,

Introduction

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Toyota, Mazda et al. were rooted in the essentially superior conception, design (configuration) and realization (engineering) of their products.10 Yet, for trained economists like Heskett’s baffled treasury official, design in this expanded sense has no recognition, no visibility, no place in the models of how conventional economics understands the creation of value. It cannot appear as a factor of value creation. Hence, then, the paradox that the discipline or field (economics) whose real subject is value creation has the utmost difficulty in grasping the means (in terms of concrete products and services) through which value is actually created. On the other side, design, which is a factor in value creation manifests an equal inability to grasp how, in terms of economics, it does, indeed, ‘add value’. What makes the situation worse, on both sides, is the disdain with which the question is treated: not as a problem to be engaged but as an absence, that which can be avoided, sloughed off. No wonder, then, Heskett’s ‘deep schism of mutual incomprehension’. It is how this schism is dealt with, and at least in part dialectically overcome, that gives Design and the Creation of Value its force and interest. As gradually becomes apparent on reading through the chapters, the uniqueness of the text lies in the way that Heskett manages to make design and economics begin to belong to each other, or, better, to begin to listen to each other, to hear what the other is saying. This is by no means a merely abstract conceit. Heskett’s point is that adequately comprehending how value and values are created by design within economic processes – and thus being able to create an economics adequate to the real-world phenomena of how, in general, ‘products and services are produced, sold and used’ – is dependent on overcoming this divide. It was precisely this ambition – to open design to economics and economic thought, but in the same process to begin to open (even in small ways) economics to the critique and perspectives, intellectual as well as practical, that design offered – that was the origin of the seminar on which this book is based.

1 Heskett was born in 1937 in Coventry, England.11 Bombed out twice in the city during the war, he was educated at London School of Economics where he read economics, politics and history. After a period in Australia, he gained a position teaching social and economic history in what was then Coventry School of Art. Here he began to move into the history of design, using a fellowship to undertake research in Germany on the history of design from the 1870 to the Second World War. By the late 1970s, Heskett was one of the first serious historians of design in Britain, a point confirmed by his move at the end of that decade to Sheffield Polytechnic to take up a leadership role in teaching and developing the field.

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Design and the Creation of Value

At this point, much of his interest in economics remained latent – although it undergirds his first book, Industrial Design (1980),12 and, indeed, this is one of the factors that makes the latter so emphatically a work of design history (and one of the first within the modern formation of the field).13 But by the mid-1980s, he had begun to develop a sharp interest in design policy at national and government levels – an interest stimulated by his concern over the deindustrialization occurring in Britain after 1975 (a concern that only increased after Thatcher came to power after 1979)14 and by the clear failures of much of UK industry to utilize available design capabilities in comparison to how these relations were managed in, say, Germany and Japan (not to mention, if differently, in Sweden, Switzerland and the Netherlands).15 His move to the United States in 1989, first to work on the Triad project on design success for the Design Management Institute in Boston,16 and then to take up a position in the Institute of Design at Illinois Institute of Technology in Chicago – where the question of the economic value of design was then being given a new primacy – gave him opportunities to begin a more serious engagement with design policy and issues in design and business. As his teaching and writing in these areas developed (often relatively informally, for example, through the series of columns he wrote in the early 1990s on design and business for the now-defunct design magazine I.D. – International Design),17 he felt the necessity to engage with economic thought and the relation of design and economics more directly. Part of this impulse was pedagogic: the felt need to persuade designers who themselves wished to engage seriously with business18 to think also in economic terms – to teach them a degree, at least, of economic literacy and to make them acquainted with some basic concepts in economic thought. But Heskett did not think of this relationship abstractly; nor did he see economics in quantitative terms. Rather, he saw the history of economic thought as a lexicon of concepts,19 which could help inform the understanding and therefore the articulation of how design creates value.20 The seminar emerged, then, out of Heskett’s teaching, at a time when he was also involved in consultation (not least with the Japanese design consultancy, Hirano)21 and in contributing internationally to design policy formation in places as diverse as Taiwan and Chile. At this point, Heskett was developing extended working papers on design and economics (e.g. the paper ‘Economic Theory and Design’, excerpts of which are now included in Chapters 7 and 8) and beginning to develop (in Chicago) the seminar ‘Design and the Creation of Value’. By the time Heskett moved to Hong Kong in 2004 (to teach in the School of Design at Hong Kong Polytechnic University), the seminar had more or less acquired its final form. Towards the end of this decade, just before he left Hong Kong, Heskett was beginning to think seriously of publishing it as a small book.

Introduction

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In both Chicago and in Hong Kong the seminar was delivered to graduate students undertaking MDes, PhD or MA degrees in design. Since in Hong Kong, especially, but also in Chicago, the students were working professionals, there was no presumption of any prior exposure to economics theory or thought. In presenting economics in this way, Heskett was operating on something of the basis enunciated by the Cambridge economist Ha-Joon Chang. In a recent book, he argues that it is precisely because today economics is at once more than ever central to our lives, and at the same time less a ‘science’ than it pretends to be, that it is entirely possible for people who are not professional economists to have sound judgments on economic issues, based on some knowledge of key economic theories and appreciation of the political and ethical assumptions underlying various theories. Very often, the judgments by ordinary citizens may be better than those by professional economists, being more rooted in reality and less narrowly focused. He adds: Willingness to challenge professional economists and other experts is a foundation stone of democracy. If all we have to do is to listen to the experts, what is the point of having democracy? What this means is that, as citizens in a democracy, all of us have the duty to learn at least some economics and engage in economic debates. This is not as difficult as it may seem. As I try to show in my new book, Economics: The User’s Guide, most of economics can be understood by anyone with a secondary education, if it is explained accessibly. The economy is too important to be left to professional economists … as citizens; we should all learn economics and challenge what the professionals tell us to believe.22 Heskett would have entirely agreed with this. He was impatient with the pleas of designers that they should somehow be exempt from such understanding. But precisely because of this pedagogical determination, his project had to take on the task of explaining economics as accessibly as possible without oversimplifying the fundamental propositions and models that were being presented. Design and the Creation of Value is the (incomplete)23 result of this exercise.

2  What, precisely, does the text offer? The version of the seminar on which this book is based is dated from 2009. Heskett lays out the substantive principle of the organization of the seminar as follows:

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Design and the Creation of Value

In considering the economic role and value of design, two major aspects need to be discussed. Firstly, it is necessary to come to terms with the existing body of economic theory and practice and ask to what extent can it shed light on essential roles design can play in the context of business. Secondly, the way economic theory defines its field, and the tools and methods it uses, have come to constitute tightly defined forms of orthodoxy. Can design supplement or reinforce economic theory in clarifying and amplifying aspects of business in ways that at present are not commonly recognized? The question here is whether design theory and practice has the potential to add to, extend or provide linkages to economic theory. The organisation of this book is therefore broadly based on these two perspectives: one examining design from the standpoint of economic theory; the other examining economic theory and business practice through the prism of design.24 The only caveat to Heskett’s explanation is that in fact, as the title of the seminar suggests, there are actually three, and not two, areas of concern here. There is design, for the book is, overall, essentially about how design can be understood and misunderstood (it is first of all a contribution to the understanding of design). There is economics – for the core of the book is a historical presentation and critique of economic thought vis-à-vis design. But there is also the third element, value. Value means here largely, but by no means only, economic value (for ultimately it is the extension of value creation beyond the economic narrowly thought that is Heskett’s concern). But value is the crucial third term in the equation because it is the essential mediator between economics and design. It is the introduction of ‘value’ as a concept lying between design and economics (but belonging fully to neither) that allows the dialogue to begin. Design and the Creation of Value is, therefore, essentially the exploration of the relations between these three moments. This exploration is in turn undertaken through the three major sections of the text. 1. The preface and first chapter (‘Design in Economic Life?’ – not, note, ‘Design and economic life’) ask some initial questions about the differences between conceiving of design as a ‘creative act’ and seeing it within a fuller context of economic activity – a contrast that Heskett establishes by playing off the differences between a decorator’s design for a toilet by the New York designer Jonathan Adler and the designs for sanitary ware for the Turkish company VitrA by the UK designer Ross Lovegrove. Although the example sounds trivial, the important distinction that Heskett begins to make here concerns the changed responsibilities of the designer once he or she wishes to move from a merely executant or operational to a strategic role: ‘Neither at the levels of management or of strategy, however, is it possible to yet say that it is commonplace for design to be integrated into the management

Introduction

7

structures of companies, nor has there yet been an articulation of the role of design at the levels of management and strategy that is convincing to the majority of senior managers.’25 2. In ‘Part One: Economic Theory and Design’, Heskett then turns directly to economics – to, in his words, ‘a consideration of major bodies of economic theory, how they condition understanding of design and can explain its contribution to creating value’.26 Six bodies of theory are considered under this rubric27: Neoclassical economics; Austrian theory, Institutional theory, New Growth Theory, the ideas of List and the ‘National System’ and Socialist theory (Marx).28 The presentations of these theories and models – aided by diagrams that usefully model the continuity and difference between these bodies of thought – are clear and concise. The text we have in these chapters is an attempt at artful balance of presenting models with maximum clarity without oversimplifying the case. The logic of presentation, however, is by no means simply chronological. Thus, for example, the ideas of List and the National System discussed in Chapter 6 largely predate the models discussed in the preceding chapters. The organizational principle is, rather, to begin with what is today the absolutely dominant model of economic activity: Neoclassical theory (Chapter 2). By then examining, successively, the theories of the Austrian economists, Institutional Theory, New Growth Theory and List and ‘The National System’, Heskett by degree shows the limitations of the Neoclasscial model, first in terms of how these alternate models understand value creation and then, increasingly, vis-àvis comprehending the role of design. The focus in each chapter is on how these models explored in each deal with the relations of production, use and the creation of value (and in the case of List and the National System, of state policies that can enable and engender value creation). In this sequence of five chapters, Heskett rather cleverly shows how the various models discussed in each can be understood successively as making more complex the question of value creation: a process that implicitly (if almost never explicitly)29 gradually makes room for design and then (in the final models) shows design’s necessary structural place in the creation of value. (See the final diagram in the book, Figure 9.11 – page [178]). At the end of Part One, Chapter 6, on List and the National System and the application of List’s ideas, first in Germany in the late nineteenth century and then in Asia, provides the transition from the exploration of economic theory proper to the discussion of the interplay of design, economics and value. 3. The three chapters in ‘Part Two: Design and the Creation of Value’ are in many ways the ‘application’ of the insights drawn from Part One. The final chapter (9) directly and substantively addresses value creation through design, but in Chapters 7 and 8, Heskett critically explores the relation of design and economics, looking first at design from the perspective (or in his

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Design and the Creation of Value

terms the ‘standpoint’) of economics (Chapter 7), and then, in an unusual critical reversal, considering economics from the standpoint of design. Here Heskett critiques the limits of economics in terms of its understanding of the qualitative (as against the quantitative); of users (as against discounting the role of the user) and of value (as a complex phenomena irreducible to price).30 As I will say at the end of this introduction, this double confrontation is of methodological as well as substantive interest. What Heskett is modelling here is not only a relation between economics and design (in terms of how they may be dialectically thought) but also a necessary methodological approach for the study of design as a whole. Finally, the seminar is completed by a brief, theorized, exploration of design’s contribution to the creation of value (Chapter 9).

3  What does the work achieve? Aside from the important methodological observation that I just mentioned and to which I will return at the end of this introduction, I think we can point to a number of major contributions – I count at least seven – that the text makes to understanding. The first and most obvious is that it presents economic theory in a way that makes it accessible to a non-specialist audience. A footnote above noted that while the plethora of discussions concerning ‘design and business’, ‘design management’, ‘innovation’ ‘creativity’, and ‘design thinking’, all claim economic benefit stemming from design; economics itself is distinctly absent from the discussion (save as the unthought and rarely critically grasped background). Heskett emphatically brings economics and economic models into these questions as foreground, and does so in a way that allows designers and those who deploy design to begin to grasp with more acuity what is actually afoot in this relation. From being an unspoken, unmanageable and, therefore, unthought abstraction, economics is made both tangible and critically graspable. It is, in a word, made real, not mythic.31 Heskett’s second achievement follows from the first. It is based on the fact that the mode of economics that Heskett brings into play is not simply the ‘given’ of neoclassical models of economy (repeated today ad nauseam in the media, and which, especially in their political and professional deployment, have acquired something of the patina of inexorable ‘common sense’) but a much wider field of economic thought. By refusing the singularity of neoclassical economics, and by bringing in a range of ideas on economic life that remain, at least in part, unfamiliar to most non-economists (the whole of Austrian theory, with perhaps the partial exceptions of Hayek and Schumpeter; Institutional theory, with the likely exception of Veblen; the ‘New Growth’ theorists, almost all without exception little-known figures outside of economics; and List and the ‘National System’, almost unknown

Introduction

9

outside of Germany and more recently Japan), Heskett offers the reader not just a roll-call of names (though to make something of a convincing narrative of these developments is itself an achievement) but an expanded corpus or lexicon of economic concepts. The value of this expanded field becomes evident in Chapters 7 and 8 where the direct relationship between economic theory and design is demonstrated in a number of instances. Overall, Heskett shows that, thought widely, the study of economics has more resonance with the question of the contribution of design to value creation than might be supposed. Linked to the last point, the third major contribution of the text is to show that the conceptual and intellectual ‘schism’ between economics and design, though empirically real, is (from the side of the former at least) very largely a product of the dominance of neoclassical models of the economy. Heskett is clear on this: The greatest problem in considering what economic theory explains about design, specifically or by implication, is in the context of neoclassicism, which in the Anglo-American world dominates both academic and applied economic practice. … if markets and products are as constant as depicted in Neo-classical theory this at best reduces design to a trivial activity concerned with minor, superficial differentiation of unchanging commodities, a role, indeed, that it does frequently perform. At worst, it contradicts the whole validity of design.32 Heskett is not alone in the view that neoclassical economics cannot cope with or has a very limited view of production. For example, Ha-Joon Chang, in the book referred to above, essentially agrees: ‘Production has been seriously neglected in the mainstream of economics, which is dominated by the neoclassical school.’33 It is unsurprising then that, in many ways, the economics chapters of Design and the Creation of Value constitute, in effect, an often searing (if quietly spoken) critique of the limits of neoclassical theory and its presuppositions. This criticism is not confined to design. By presenting a range of alternative theories and models, Heskett takes the reader through the critique of neoclassical thinking as it applies to the economy as a whole. The basis of the critique involves how economics grasps (or fails to grasp) the dynamic character of the ‘real-world’34 economy. As the reader gradually discovers, it is precisely this shift towards grasping the dynamics of the (capitalist) economy that allows – in the end necessitates – a structural place for design in value creation. As Heskett again puts it, here at the beginning of Chapter 7: Design … is about envisioning change, a condition not readily embraced by Neo-classical models that are concerned with explaining what is, and is not fundamentally concerned with what might be. As we saw below

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Design and the Creation of Value

however … as soon as the possibility of change is admitted into economic models, the perspective shifts and it becomes much easier to relate design to economic theories. The fourth virtue of the text, and perhaps its major single intellectual virtue, is that the critique of neoclassical economic models is not conducted merely negatively. What Heskett shows – and this becomes apparent in the key series of diagrams of economic models that illuminate the text – is that as one contrasts neoclassical theory, first with Austrian theory (see Figure 3.1) and then with the insights gained from Institutional theory and New Growth theory (Figures 4.3, 4.4, 4.5, 4.7, 4.9), it is possible to see a successive deepening of the understanding of value creation. Heskett shows that these models do not only articulate different ‘schools’ of economic thought; rather, they build upon each other in ways that allow for the development of a more adequate model of how value is created, what he calls ‘value creation theory’. The logic of the text is clear on this point. Beginning with the dynamics and the agents of value creation (the work of the Austrian economists stressing innovation and change) (Chapter 3) and then with the work of Veblen, Coase, North and others on the significance of cultural and institutional factors (Chapter 4: Institutional Theory), Heskett builds a wider foundation for value creation, which then enables him to take up, successively, more contemporary questions of the role of technology, ideas, process and production innovation and ‘knowledge of users’ (Chapter 5: New Growth theory) and, finally, issues of the deployment of policy and the development of national economies (Chapter 6). By working systematically through these factors, and by diagramming the shifting factors involved, Heskett shows how a far more comprehensive model of value creation can be developed, one that transcends the limitations of the standard neoclassical models. This in turn finally allows, as was said already above, for the structural placing of design within that model and allows us to see design as itself a factor of production. A fifth virtue follows from this sequence. If the latter by no means develops the last word, or the only possible model, of value creation, the heuristic sequence of models that Heskett deploys effectively charts not only the fact of changes and developments in economic theory over the last 150 years or so, but also the very possibility of change and evolution in economic thinking. In other words, economics is revealed here, not as it sometimes wishes to present itself (especially in the political sphere) as a fixed science dealing with unalterable laws but as a flexible (or at least quasi-flexible) system of thought seeking to adequately grasp the complexity and the continuing question of value creation. If Heskett offers both a serious critique of conventional (and dominant) neoclassical economics vis-à-vis its understanding of economic life at the level of production and use of things and services, and, at the same time offers an appreciation of the struggle of other economists to model more

Introduction

11

accurately the dynamics of value creation, the sixth virtue of the text is that in this process he also holds design accountable, that is, design does escape critique. Arguing that if it wishes to be taken as seriously as it often demands it should be (especially in relation to its contribution to business success), then it must meet a fundamental criterion: ‘For design to function as a strategic instrument … a credible case must be made for its capabilities in organizations prepared to use it in such terms. Specifically, any designer aspiring to a strategic role needs to understand and frame economic arguments for the value of design that makes sense in a business context.’35 In the text, Chapter 7 essentially positions design from the standpoint of economics. In effect, it presents the minimum demands that an economically adequate conception of design must incorporate. It thus offers a serious, and perhaps unsurpassable, challenge to how design should be thought. If Heskett implies an economics can only be adequate if it can model design’s contribution to value creation, he equally implies that design can only be adequate if it can critically comprehend and articulate the economics of value creation.36 Finally, a not inconsiderable, virtue of the text is that although it is about design and economics and the creation of value, it never ultimately conflates ‘economic value’ with value or values per se. This becomes particularly evident in Chapters 8 (see Section 3) and in the conclusion to Chapter 9 (and it is also explored in the paper ‘Value and Values’ added as an appendix to this volume: Appendix 2). This is, as we know, not insignificant today, both with respect to design – which is often adamant that it is not merely concerned with economic value37 – and, even more importantly, in terms of the economy as a whole. With some understatement, the economist Duncan Foley concludes his book on economic theory by noting that if the all-but-absolute domination of capital accumulation today requires us to understand its logic and operations, that ‘understanding … does not require us to surrender our moral judgment to the market, either as individuals or as political actors’.38 Heskett would agree that interest in economics does not and should not necessitate an abdication of ethical concerns; that economics is, after all, always in the end political economy, which is also to say a moral economy.39 As he notes at the end of his (unpublished) manuscript Crafts, Commerce and Industry: We have in the history of design an astonishingly rich inheritance. What is even more amazing is that with every newborn child the latent potential for similar achievement exists in this incredibly fertile human capability. It is the greatest renewable resource we possess and to acknowledge its creative potential could be the finest legacy we leave for our children and grandchildren. The more than sentimental force of this observation in relation to the question of value (and values) is that design is the capability in practice of negotiating

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Design and the Creation of Value

the economic, material, social and psychological incommensurabilities involved in meeting and dealing with human material needs. Design is therefore, in this process, the creation or the addition not just of ‘value’ but of complex, multiple ‘values’ that embody, express and enable capabilities.

4  What are the limitations of the text? If the points above illustrate some of the text’s virtues, and show in what ways the seminar demands engagement, what are its limitations, its critical gaps and voids? What are the issues that it fails to deal with adequately? There are, again, I think, seven such limitations. But I should note immediately that by ‘limitations’ I mean often less limits to the argument as it is presented in the seminar, and rather delimitations in regard to the context in which the work arose – delimitations that almost necessarily put limits on that with which it deals (and with which future work in this field must contend). The first and most obvious limit is that Design and the Creation of Value is a very brief text. It is in fact less a book than an extended essay.40 Its brevity gives it force: the possibility of grasping, almost in one sitting, a range of economic thought and a corpus of thinking concerning design and value. But, precisely because it is an essay, the book cannot, by definition, be comprehensive or systematic; still less can it engage with every issue opened in the relation between design, economics and value. The book has therefore to be read as, in effect, a text from where further work and research begins rather than ends.41 The text is the opening of a field. It does not close down debate. It should, rather, be read, as all essays should, as an encouragement to think – and as an encouragement to understand how those who participate in its arguments can begin to grasp the measurability of the economics and economic thought and therefore bring these (critically) into thought and practice, rather than merely evading what appears as the immeasurable. This is the politics, in the strict sense, of the seminar. The second limitation of the seminar is that of the contexts and moments in which the work was made. While Heskett is obviously happy to, in effect, take up Ha-Joon Chang’s position in terms of making economics accessible to a moderately intelligent audience, the immediate contexts that he developed the seminar in – the Institute of Design at IIT in Chicago in the 1990s, graduate programmes in design at Hong Kong Polytechnic University in the 2000s – were intellectually limited, and in two senses. Both institutions, although they aspired to thinking design strategically, were in different ways subject to acute short-term market pressures that tended to collapse longer-term, wider thinking into operational ‘quick-fix’ solutions. Perhaps, even more significantly, in neither institution was there any significant

Introduction

13

interest in critical and historical thought. Thus, the institutional discourses within which the seminar emerged, while encouraging in one sense, were limiting in another. In many ways in fact, the thrust and tone of Heskett’s seminar go against the grain of the logic of the places from which it emerged. It pushes at the intellectual limits, both of its immediate audience and that of the culture within design pedagogy, which consistently lowers expectations as to what designers and design students should be taught and expected to know.42 In his teaching, Heskett pushed at these limits, remaining convinced to the end that students had the potential to grasp this material. But at the same time, the broader – or in this case the narrower – institutional setting delimited the zones and depth of intellectual inquiry that were possible. Third, the context of the seminar’s emergence was delimiting in another and even more fundamental sense in that even as the text itself, in some of its aspects, pushes beyond the limits of the market as we receive it today, the dominance of the market as is (and even of market society) becomes the effective horizon of the work. It is this that perhaps explains the disappointing section of the text on ‘Socialist theory’ (now Appendix 1). Heskett spends a convincing paragraph in the preface explaining why ‘Socialist theory’ should be dealt with, but the actual presentation offers little interest.43 No reference is made, for example, to the commodity nor to the wider discussion of exchange value/use value (and design) that has extended into contemporary thought within and without economics.44 The weakness of the section on Marx has its counterpart in the almost complete absence of a direct discussion, in the seminar, of capitalism, especially in its most recent forms. If neoclassical theory is discussed and critiqued, neoliberalism is not.45 More particularly, the rendering of Marx as an isolated historical figure in economics misses the extent to which the greatest contribution of Marxist economic thought is in terms of the history of capitalism. If neoclassical economics often does its best to deny history, Marxist economic thought is at its best thinking historically, whether that is in works of the history of the industrial epoch (e.g. the magisterial volumes of Eric Hobsbawm covering the period 1789–1991)46 or in Marxist thinkers looking at the development of capitalism, particularly as it evolves towards Neoliberalism (e.g. Robert Brenner’s The Economics of Global Turbulence on the crises of the 1990s)47 or those seeking to tease out the contradictions and tensions within the capitalist economy (see, for example, the prolific work of David Harvey)48 or the careful empirical work of Thomas Piketty, who though not a Marxist as such belongs to the range of critical economists whose strength comes from looking at the wider historical development of capital.49 Fourth, the underlying tension in Design and the Creation of Value around the question of what the economy is, is also, however, a more general one so often found in economics and in discussions of value. Is economics

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the study of the economy (as economists like to insist, the study of the only possible form the economy can successfully take?) or is economics as a field really only engaged in modelling (and justifying) the fact that this is a capitalist economy? The question is difficult, and particularly from an operational point of view.50 It has urgency in view of the continuing cycle of economic crises and in view of the need to rethink what the ‘economy’ is, and how it should be conceived in the light of the necessity to create a sustainable global post-carbon economy, an economy that, while it will, by necessity, use markets, cannot, structurally, also be capitalist,51 at least in the essentially mercantile (and massively exploitative) forms that we are now experiencing. Fifth, the work is delimited in another sense that will strike anyone coming to it for the first time. Of necessity, it betrays in its emphases the historical moments of its conception and orientation. The book is essentially rooted in a view of the economic value of design as that which can in part ‘save’ industry from itself. The brief biographical details I offered above will make immediate sense of this. Heskett came to maturity as a design historian in the mid-1970s, a period when the ‘oil-price shock’ of 1973–4 was the catalyst to turning the underlying crisis of profitability in the manufacturing industry in the United Kingdom and the United States of America into deindustrialization and the global exporting of manufacturing.52 Across the next twenty years, first in Sheffield and later in Chicago/the mid-West, Heskett watched first-hand as these developments unfolded around him, while in parallel (as I noted above) he watched Germany and Japan in particular pursue considerably more intelligent policies,53 at both government and firm levels, vis-à-vis the application of design capabilities to industry.54 Heskett’s stance on the economics of design (and this applied also to Heskett’s work in Hong Kong,55 and, indeed, to the consultancies he undertook on almost a global basis) was thus grounded, in effect, on the same principle as the one that motivated one of Heskett’s economic heroes, Frederick List (see Chapter 6), that is, that of seeking to make industry work better. The problem, of course, and this is noted in the last limitation discussed below, is that in many ways we are in a ‘post-industrial’ economy, that is, one where there is still much, globally, industrial production (China) but where the industrial is no longer formative for the economy. In the most direct sense, consumption ‘replaces’ production and finance, and more particularly rent-seeking through financial flows and debt, trumps both. What, then, is design and the creation of value in such an economy? This last point gains a little more force when we reflect that, almost by necessity, Heskett is formulating the arguments he deploys in Design and the Creation of Value just at the point before it becomes definitively evident that the older disciplinary limits and boundaries of design are definitely breaking down in the interests of a much wider, and therefore also much looser, deployment of ‘design’. Bruno Latour captures this development when he

Introduction

15

remarks in some comments how in the last decades design has expanded in both range (‘ever larger assemblages of production’)56 and depth (‘everyone with an iPhone knows that it would be absurd to distinguish what has been designed from what has been planned, calculated, arrayed, arranged, packed, packaged, defined, projected, tinkered, written down in code, disposed of and so on. From now on, “to design” could mean equally any or all of those verbs’).57 One result is to make the act of design in general far more complex and less differentiated than has been previously understood. Heskett recognizes this – see his reference in the preface to the famous quotation from Herbert Simon that talks about design as ‘the core of all professional training’58 – but in relation to the economics of value creation this no longer quite equates to the product-user model that still dominates. This is in part because of the new centrality of the economics of innovation and of the ‘Hollywood’ model of product cost (where almost the entire cost of production lies in the ‘software’ creation of the product).59 Indeed, we could say that a crucial addition that is needed in terms of the economics of design is a reconsideration of the (sometimes astonishing) economics of design-led innovation.60 Finally, the fact that the book was essentially complete in its focus by 2004 and was conceived at least a decade earlier, and on the basis of concerns that in origin date from twenty years before that, explains at least in part, the lack of overt or detailed reference to both the emerging digital economy and the idea of what we would now call the post-carbon economy. The import of this should not be exaggerated, in that attention to the former in particular, in the somewhat superficial ways that this usually occurs in design, is often diversionary of what is actually occurring vis-àvis the economy. On one side, then, there are the forms of a ‘new economy’ emerging. This is the case made, for example, by the British economic journalist Paul Mason in his recent book, Post-Industrial Capitalism: A Guide to a Future,61 which explores the digital and ‘knowledge’ economies and posits the possibility of the emergence within current capitalism of new forms of knowledge-based value creation and modes of organization that will transform capitalism from within. On the other side, even more fundamentally, we find ourselves having to confront not just a different form of capitalism than that which was the bread-and-butter as it were of Heskett’s life (essentially the twentieth-century industrial economy) but a different historical epoch (that of the artificial in which the horizon, medium and prime condition and limitation of the world is no longer nature but the artificial – or as it is often labelled at the moment, the anthropocene). In this world or this epoch, the urgent economic task is the project of a post-carbon economy (which is today the most accurate way of thinking ‘sustainment’). Seen from this perspective, an entirely new kind of economy is required. But we need to be careful here not to be too dismissive of what is (and hence of Heskett’s text). First, the fact that the condition, horizon and

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Design and the Creation of Value

limit of our world is now the artificial and not nature62 not only demands an economics adequate to it63 but also a recalculation, which means a rethinking, of value – which is, of course, precisely the underlying thesis of Heskett’s argument (even though it is not couched in, or addressed to, these new conditions).64 Second, there is a temptation that many have been led into in discussing the digital- and post-carbon economies (let alone capitalism today as a whole) to dismiss the industrial and with it manufacturing in general (the dismissal is also, needless to say, axiomatic within design, especially among students). But there is an acute difference between the end of the industrial epoch, a period when the industrial was the formative condition of the world and its economy (an epoch that began between 1775 and 1825 and ended in the years after 1975) and the ‘end’ of industry and manufacturing. The former has ended (industry is no longer formative in the economy or in society as a whole) the latter has not. Production continues. It is interesting that the economist Ha-Joon Chang, whom I quoted earlier as effectively supporting Heskett in the latter’s view that production was undertheorized in economics (see note 33), continues his argument in the same section by mounting a robust defence for continuing concern for manufacturing. Since it bears directly on the orientation of Design and the Creation of Value, it is worth quoting in full: Unfortunately, with the rise of the discourse of post-industrial society in the realm of ideas and the increasing dominance of the financial sector in the real world, indifference to manufacturing has positively turned into contempt. Manufacturing, it is often argued, is, in the new ‘knowledge economy’, a low-grade activity that only low-wage developing countries do. But factories are where the modern world has been made, so to speak, and will keep being remade. Moreover, even in our supposed postindustrial world, services, the supposed new economic engine, cannot thrive without a vibrant manufacturing sector. The fact that Switzerland and Singapore, which many people consider to be the ultimate examples of successful service-led prosperity, are actually two of the three most industrialized countries in the world (together with Japan) is a testimony to this.65 Contrary to conventional wisdom, development of productive capabilities, especially in the manufacturing sector, is crucial if we are to deal with the greatest challenge of our time – climate change. In addition to changing their consumption patterns, the rich countries need to further develop their productive capabilities in the area of green technologies. Even just to cope with the adverse consequences of climate change, developing countries need to further develop technological and organizational capabilities, many of which can only be acquired through industrialization.66

Introduction

17

In Ha-Joon Chang’s view therefore – and this would obviously echo Heskett’s underlying argument – the attention to questions of production and use is not outdated. In an increasingly artificial world, it is difficult to see how they could be, no matter how much the condition of the screen might dominate immediate consciousness.

5 The intellectual force of Heskett’s text To close this introduction, I would like to bring the discussion back to what I think might ultimately be the most important aspect of this short book. As noted above, and as delineated in the notes by Sabine Junginger and Cameron Weber in this volume, Heskett’s work has considerable substantive implications for further research and thought in design management and economics.67 But if we turn back to the text and Heskett’s own ambitions for the work, then, as noted at the beginning of this introduction, the deepest problem that Heskett set out to solve was not the substantive problem of value per se but the intellectual difficulty that underlies, and which creates, the all-but-impossibility of solving the substantive problem, that is, the ‘deep schism of mutual incomprehension’ that separates design and economics.68 Heskett’s point was that unless and until this schism is in some way crossed or unless (as I put it above) design and economics are made to belong to each other, or better, and in the other sense of this metaphor, to listen to each other, then adequately solving the puzzle and problem of value – and ultimately the project of creating either an adequate design or an adequate economics – remains at best difficult and perhaps impossible. The uniqueness and the force of the book (and its methodological interest, meaning the lessons it embodies for scholarship) lie in how Heskett achieves this end. Three points are significant: 1. The first methodological premise that Heskett works to is that economics is that which design cannot avoid – except at the cost of neutering or removing from thought one of its prime conditions of existence. The relation, however, is active, not passive, and is so both substantively (as we’ve just seen) and intellectually. The crucial relation is as follows: Just as economics ‘passes judgement’ on design, that is, reveals certain aspects of design not otherwise sufficiently grasped, so too design ‘passes judgement’ on economics, reveals moments of inadequacy and offers perspectives, particularly around questions of value, growth, innovation, desire, use and cost, that are by no means trivial. Thus, if economics confronts design with some truths that designers like to evade, design demonstrates truths concerning the creation of value that much, if not most, standard economic theory finds difficult to incorporate into its models. The relation therefore

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Design and the Creation of Value

(between design and economics) is internal not external. Hence it is not design and economics that we need to think but, as the title of Chapter 1 has it, ‘Design in Economic Life’, that is, we need to think the implication of the one in the other. Substantively, this means a double necessity: first, to look at design through the lens of economic theory in its historical development, and also, second, to ‘put the flea to the elephant’ and to insist that design’s quantum of truth concerning things and value (no matter how ‘fragmented and often ill-defined’ the field may be) can nonetheless usefully augment economic theory. This is precisely what Heskett begins to do in Chapters 7 and 8.69 2. But although the confrontation between design and economics is apparently conducted directly in these chapters, across the book as a whole, as was made clear in the first pages of this introduction, there are actually three, not two, subject matters in play. ‘Value’ is not simply that which is the object of the book; rather, lying between ‘design’ and ‘economics’, it performs a mediating role, at once connecting and relativizing the absolute claims of both.70 One can understand the role of this ‘third subject’ by drawing on an insight from Roland Barthes. In talking about how the concept of ‘text’ worked in relation to the rethinking by himself and others of the category of the ‘literary work’ (and its related disciplines: linguistics, anthropology, psychoanalysis), he notes: What is new and which affects the idea of the work comes not necessarily from the internal recasting of each of these disciplines, but rather from their encounter in relation to an object which traditionally is the province of none of them. It is indeed as though the interdisciplinarity which is today held up as a prime value in research cannot be accomplished by the simple confrontation of specialist branches of knowledge. Interdisciplinarity begins effectively when the solidarity of the old disciplines breaks down … in the interests of a new object and a new language neither of which has a place in the field of the sciences that were to be brought peacefully together, this unease in classification being precisely the point from which it is possible to diagnose a certain mutation.’71 (My emphasis) With all due allowance to the differences in context, and for all the incongruity of Barthes appearing in this context, the point he makes is apparent. As has been already noted, it is the introduction of a third term, value, the ‘new object and a new language’ that belongs wholly to neither field – which allows for a genuine exploration to begin. In particular, in Heskett’s case, it is the question that the third term introduces into the relation between design and economics that makes it possible for him to triangulate the relation between design and economics, to play both off in terms of how they grasp – or fail to grasp – an object common to each. In

Introduction

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other words, what appears at first sight as external and incommensurate (design ‘vs.’ economics) is discovered, through value, to possess an internal relation (design  economics). This is precisely why it is the direct and indirect pursuit of the modelling of value creation in economics that is the organizing principle of Heskett’s presentations of economic thought. What Heskett is touching on in his explorations of value creation is precisely the mutation in the conditions of production, use and value creation that is now occurring, mutations that force, if in subtle ways, a transformation in how we think of both economics and design.72 3. But what applies to economics applies also to the wider fields and disciplines with which design reciprocally engages. Design’s necessary dialectical implication in other disciplines and fields (both within the university and within practice) demands that to think design adequately, we need to go beyond the hopelessly unproductive relations of the ‘and’ in design-and-X relations. Where the conjunction actually marks not the connection but the separation and a priori distinction between fields (and further implies that while they might merrily dance around each other, both will maintain their existing identity and form), the project that Heskett effectively argues for in Chapters 7 and 8 is wider and more courageous. It is the courage to let one discipline ‘invade’ and think (listen to) the other. The metaphor that is used here comes from Heidegger, from towards the end of one of his most profound essays – and one with significant purchase for design. In ‘Building Dwelling Thinking’, Heidegger is trying to think what he calls the ‘crisis’ of dwelling.73 In relating the latter to the disconnect he sees in the present between how we think the condition of ‘dwelling’ in the world and the act of building (now reduced largely to a technological feat) and thinking, he offers an insight that has never yet been sufficiently taken up in thought: Perhaps this attempt to think about dwelling and building will bring out somewhat more clearly that building belongs to dwelling and how it receives its nature from dwelling. … Building and dwelling are, each in its own way, inescapably for dwelling. The two are however insufficient for dwelling so long as each busies itself in separation instead of listening to one another. They are able to listen if both – building and thinking – belong to dwelling.74 (My emphasis) The thrust of Heidegger’s argument is clear if, nonetheless, difficult to think.75 Disciplines, or fields, in our time do not generally ‘belong’ to one another in the ways in which Heidegger is intimating they might. Yet perhaps our ‘learning to dwell’ (the real theme of Heidegger’s essay) requires that we begin to be capable of such listening and such belonging. Transposed to the issues Heskett is exploring (but in the same moment referring back to the wider question of how we make those modes and acting that bear on a

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Design and the Creation of Value

condition), this would imply that as economic, though not only economic, beings (and as economic, though not only economic, designers), it requires developing our capability to ‘listen’ to economics while at the same time thinking this ‘belonging’ beyond the current limits of economics and beyond the current limits of design. Heskett’s incipient success in Design and the Creation of Value is to point us in this direction. It remains for others to take up the challenge he has issued.

A note on John Heskett’s economics Cameron Weber

Asked to review the chapters on economics as found in the draft manuscript of this book in the fall of 2015, I knew intuitively after reading the first one or two that, as an economist, I would enjoy what John Heskett had to say. Like Heskett, I am interested in a critique of the development of mainstream economics. In both our views, orthodox (neoclassical) economic thought cannot satisfactorily explain the phenomenal economic growth of the nineteenth and twentieth centuries.1 (And I would add, as discussed below, nor can most orthodox economics explain the relative economic stagnation since the financial crisis; there is, moreover, the problem that macro-economic scientism tends to reduce explaining human economic interaction to behaviour in response to fluctuations in central bank interest rates).2 Thus, I knew Heskett was on to something with his concisely critical and methodological approach to economic history, starting with neoclassical economics and building outward towards a synthesis (and critique) of economic thought as developed over time (List and the National School; Schumpeter, Hayek and the Austrian school; Veblen and the Institutionalists3), through to today’s proponents of New Growth theory. What follows in the notes below is my commentary directed towards four specific categories and sets of ideas I found especially compelling in the Heskett ms. and which I hope may show the relevance of Heskett’s thinking not to design in value creation and concepts of value in society generally but to some key issues in business and economics.

1 On neoclassical economics In standard fashion, Heskett shows, in Chapter 2, neoclassical supply and demand graphs, but criticizes the fact that neoclassical economics cannot explain how the suppliers and demanders enter the market in the first place.

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Mainstream economics assumes given and known and unchanging consumer preferences and also presumes that all products in a given market are the same and that all producers have the same production costs, technologies and knowledge (in other words, there are no ‘transactions costs’. (It is this assumption that is addressed by New Institutional Economics [NIE] as explored by Heskett in Chapter 4.) In neoclassical economics, firms price according to the cost of production (as opposed to more realistically pricing at what the market will bear) and the costs of production have decreasing returns to scale above a certain quantity of production.4 The neoclassical model, therefore, can explain neither new and qualitatively better products under market competition nor economic growth over the long term. It is these weaknesses that Heskett addresses in the subsequent chapters.5 This brings up one of the major dualities in economic theory as developed in the twentieth century through to today, that of the use of mathematics in positivist economics. Along with the development of statistics in the 1930s came mathematical models to use these statistics as a basis for improving the economy. It is the use of these statistical aggregates in mathematical economics that has become mainstream economics today, as witnessed by both neoclassical economics and, later (as Heskett also notes, in Chapter 5), in New Growth theory.6 Heskett points out in this chapter that Edward Chamberlin’s The Theory of Monopolistic Competition [1933] introduces differentiated products and addresses weaknesses in ‘perfect competition’, but Chamberlin’s ideas did not catch on with quantitatively oriented mainstream economists. Product differentiation means that quantities of inputs and outputs cannot be aggregated and integrated into mathematical models (as can Keynesian models and New Growth Theory models). With this math-based approach comes the power and prestige of the guild, where the economist is a mechanic whose toolkit can fine-tune to economy and, therefore (at least in theory), improve people’s lives.7 But the price paid for this, as Heskett shows by referring to ‘creative destruction’ and design as expanding markets through the creation of value, is the inability of this mainstream approach to truly engage with the dynamics of economic change. As Heskett discusses at length in Chapters 7 and 8, it is this unmeasurable quality of design’s value creation that provides institutional stumbling blocks towards integrating design as strategy in the modern – financially engineered – firm. We see this same ‘measurability problem’ in modern economics. Heskett bridges and synthesizes these gaps by orienting products towards the user and not on internal firm metrics of return.

2 On growth theory John Heskett was writing about New Growth theory in the late 1990s and the early 2000s, the most recent citation for this chapter is 2003, and it is now early 2016. It might be thought that Heskett therefore missed some recent developments, but I would like to present a view of growth theory as an

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intellectual enterprise that illustrates how John Heskett’s use of the category ‘Growth Theory Plus’ is not overcome by events, and might indeed be helpful towards capturing an accurate picture of the field of growth theory today. New Growth theory came into its own as a field in part as a reaction to Robert Solow’s 1957 paper in the Review of Economics and Statistics.8 Solow examined economic growth in the United States from 1909 to 1949 by using a model whose inputs are quantities of capital stock, labour hours and ‘technical change’, where technical change is defined as ‘any kind of shift’ to productivity that is not explained by capital and labour inputs. Solow found that labour productivity in the US economy doubled over the period, but that only 12½ per cent of this productivity improvement was due to increased capital investment. The remaining 87½ per cent of productivity growth came from (ill-defined in economics) ‘technical change’. The paper starkly illustrated how static neoclassical models missed the increasing returns to scale needed to explain exponential historical levels of economic growth. The unexplained increase in labour productivity (and the unexplained increase, by orthodox economics, of historical economic growth) has become known as ‘Solow’s residual’ – or, which Heskett refers to in the text, as ‘the measure of economists’ ignorance’. It is this ‘residual’ that economic growth theorists have been trying to explain by proxying for ‘technical change’ (increasing returns to scale) in their models, and as Heskett effectively notes, this methodological trend continues through to today. Solow’s model (his aggregated production function) uses technical change as an exogenous (i.e. external) variable, where technical change is measured (defined) by what is not explained by the endogenous variables capital and labour. New Growth Theory now treats ‘technical change’ as an endogenous (i.e. internal) variable – something that (as Heskett’s diagrams make clear) interacts with labour and capital to create economic value. (A factor that is now internalized in the mathematical economist’s model, not something unexplained by it). The endogenous growth theory research programme is a subset of, or an outgrowth from or an advance, in New Growth Theory. Explaining technical change is what Paul Romer calls the ‘economics of ideas’. Romer highlights the importance of human capital formation for economic growth.9 A key step in the development of growth theory is Kenneth Arrow’s concept of ‘learning by doing’.10 Heskett does not directly discuss Arrow’s seminal work, but his stance on Romer’s theses on the importance of human capital, skills and knowledge is that these forms of human capital have to be made manifest as transferable knowledge in order to create value. The Austrian school of economics believes that it is the entrepreneur who creates economic value through risk taking and profit creation (value creation absent political rents). John Heskett also sees a role for the designer in this endogenous value creation and insists that design be incorporated in the very highest level of a firm’s strategic management. (In an unpublished paper on strategic design and design as value creation, Heskett uses the case of Donald Deskey [1894–1989] as a prototype of the industrial designer-entrepreneur, who engages within and between design

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communities, business communities and the public sphere for advocating the ability of design as practice to create value[s] in society.) In the final chapter of Design and the Creation of Value, Heskett introduces his category of ‘Design Value Theory’. This category summates/synthesizes his interdisciplinary ideas about the role of the designer in a firm’s long-term strategic management and how the designer’s role in value creation relates to economic theory as captured in ‘Growth Theory Plus’. (Here Heskett may concede too much interpretative and predictive robustness to mathematical growth theory as the ending synthesis of economic thought, though we cannot fault Heskett for trying to engage the mainstream of the economics profession in this text, the purpose being to incorporate the designer within a business world whose MBAs are required to study orthodox economic thought.) In the synthesis of economics leading to growth theory plus in Heskett’s text and diagrams (see #17 and especially #28), we find most importantly (at the least for the present writer) the following: a the market orientation of neoclassical economics, b the end-user-oriented product innovations and imperfect competition of Austrian economics, c the transactions costs approach of NIE within the firm, especially the tacit knowledge within a firm’s strategy, production and management processes, d the socially created demand found in old (or original) institutional economics and e the acknowledgement of (perhaps unmeasurable) factors of production (imbedded knowledge, technology and institutions within society) that can lead to increasing returns to scale and as explored by growth theory. What Heskett then does, and this is his real innovation, is that he embeds a continuous firm and consumer feedback loop derived from design-driven firm strategy into his growth theory plus model, giving us ‘Design Value Theory’ with economic theory as a base.11 Heskett shows in this text that a firm’s profits derive from creating exchange value, but that the purpose of design is also to create use value, through originality and creativity and in continuous feedback with the users of a firm’s products and services, between a firm’s designs and its network of users. But it is precisely this creation of use value for the user (by tapping into user knowledge and lifestyle) that creates the possibility for exchange value, expanding markets and economic growth.

3 On Veblen, and the financial crisis of 2007–8 Thorstein Veblen (1857–1929) was one of the founders of American institutional economics and is best known for his concept of ‘conspicuous

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consumption’ developed in the Theory of the Leisure Class (1899), a beloved and eccentric work of economic sociology. Veblen is therefore credited with introducing consumption preferences that can be socially determined (as opposed to being exogenously formed – that is, unaccounted for – in neoclassical theories of demand). In Veblen, instead of Marx and Engels, where the working class overthrows the rich in revolution, we have the not-rich wanting to be seen as living like the rich through visible lifestyle consumption choices. Design and the Creation of Value introduces Veblen’s ideas into discussions on demand creation (based on social structure in the field of institutional economics) and in relation to design as a force for value creation rather than waste. For our purposes here, we can use Heskett’s writings about Veblen, both in the present text and in some lectures Heskett gave in Helsinki around 2005 to help explain the financial crisis of 2007–8. Heskett focuses on two of Veblen’s memes: (1) the ‘instinct of workmanship’ and (2) the ‘pecuniary habit’. Instincts are normatively positive for the continuation and evolution of the species whereas habits are normatively negative and counterproductive. Veblen sees conspicuous consumption as frivolous and wasteful and therefore, of course, counterproductive towards industrial development. By contrast, workmanship is normatively positive because craft (practice) leads to refined industrial output. The financial crisis of 2007–8 was due to ‘financialization’ of the economy, which is related to Veblen’s pecuniary habit, in this case by policy (here acting as an institution, which then becomes/forms a social norm) that encourages debt over ownership. The pecuniary habit (financial returns in the market) is normatively negative as this behaviour does not lead to real economic productivity – and today mostly only generates fees for financial counterparties creating more debt. Heskett further describes the difference between Veblen’s concepts of ‘instinct’ and ‘tropismatic action’. Tropismatic action is an unthinking response to stimuli (in our case, policy incentives) whereas action based on instinct is derived through reason. This distinction can also help explain the 2007–8 financial crisis. After the dot.com crash of 2001, the US central bank (Federal Reserve) had been encouraging low rates of interest for several years. Also, beginning in 2000, the US Federal Housing Authority and the Federal Reserve were encouraging half the mortgage loans in the United States to be 0 per cent down-payment mortgages, and especially in districts that were deemed underdeveloped (see the Community Reinvestment Act and, relatedly, ‘red-lining’).12 This incentivized unthinking investment in (unaffordable) housing was combined with and influenced by negative incentives for accurate bond-ratings due to regulatory capture (bonds were overrated so that more bonds were purchased than if they had been accurately rated). Fannie Mae and Freddie Mac (the US government-backed mortgage agencies) were guaranteeing (poorly rated) mortgage-backed bonds (MBBs)

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Design and the Creation of Value

at 100 per cent – and international banking standards (the Basel standards I, II and III) encouraged banks to hold these MBBs as reserves against which further lending could be made. All of this combined by the time of the crash of 2007–8 so that there were inflated housing prices (cheaper money means more long-term investment, for example, mortgages and MBBs than if there had not been central bank interest rate manipulation) and the MBBs were more than double the value of the actual underlying mortgages (not least because MBBs are a worldwide phenomenon due to the Basel banking standards and the dominance of the US$, and US Treasury debt, in the world economy). What we saw in 2007–8 was that incentives for debt creation (including the ability to write off debt interest payments pre-tax on the US income tax code) help to create Veblen’s pecuniary habit to the detriment of workmanship (design is workmanship). We see these pecuniary habits take form as the central bank(s) keep near-zero rates of interest (for the US Fed from 2007 until late 2015) for unprecedented lengths of time. This ‘easy money’ is evident in the valuation of social media firms at billions of dollars in IPO capitalizations, many without actually making a profit. We also see this with the huge volume of mergers and acquisitions occurring concurrently with easy money and tax code incentives for debt creation. It is not a failure to innovate that creates the financial crisis; there are lots of incentives to innovate in financial derivatives (the pecuniary), but as Heskett describes in the text (albeit as applied to design), there are less incentives to innovate in workmanship (real goods and services adding new value). The financialization of the economy (and the subsequent crises caused in part by central bank interest rate manipulations) is due to policy that encourages the pecuniary habit over the instinct of workmanship. This policy-based social structure represents ill-shaped social values towards financialization and away from craft and quality.13 In Heskett’s ‘Design Value Creation’ synthesis, he highlights that what institutional economics brings to the economic theory synthesis is transactional innovations and efficiencies; from here we find his critique that within firms, transactional relations can be pecuniary rather than user and qualityoriented – thus his appeal to business schools and business executives to change institutional habits towards value creation over the long-term rather than short-term (financial-only) profits.

4 On the bankruptcy of General Motors (GM), and its bailout during the great recession John Heskett had taken an interest in the US automobile industry from the 1960s onward, as an example of the failure of industry to consistently adapt corporate strategies towards user-oriented design (as do, for example,

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Japanese motor companies), instead reiterating an ‘arrogant’ produceroriented strategy in the United States.14 Specifically, we find that GM provides a good case study for illustrating the thesis in Design and the Creation of Value, arguing for the necessity of design in high-level strategy and not just as a shallow afterthought towards product differentiation, a dichotomy of thought Heskett labels ‘design’ versus ‘styling’. In our discussion above on Veblen, we find that whereas workmanship can create new value, the pecuniary instinct prioritizes financialization and paper profits for a self-interested management class over the creation of value for both the firm and the consumer design. Over time, as Veblen pointed out, this management class loses touch with the need to serve the wishes and needs of the end user (and, as we shall see, can then resort to rent-seeking to minimize the negative effects arising from this self-imposed lack of competiveness).15 Heskett describes how US business models may orient towards management-by-metrics and financial engineering (whereas design valueadded regrettably is not easily quantifiable and can be relegated to the marketing department alone), which furthers the pecuniary over a useroriented design strategy (Heskett also attributes US industry arrogance to the dominant position in world markets obtained as a result of the Second World War). In our case, this means that US car firms lose market share to foreign competition, and therefore seek rents in the form of tariff and non-tariff trade barriers against more innovative and efficient foreign manufacturers. Under the guise of economic nationalism, this prioritizes domestic producers (some people) over domestic consumers. This is the reverse of the usual pattern in international trade treaties, whether WTO, bilateral or regional-multilateral.16 One factor at work here, however, is the force of time and place in influencing the deployment of assets. In Heskett’s chapter on Institutional Theory, we learn of Oliver E. Williamson’s ‘transaction cost economics’, though without an exploration of Williamson’s ‘asset specificity’. Like Ronald Coase, Williamson critiques, and improves upon, the neoclassical model of perfect competition. Asset specificity allows factors of production to be relative to a time and place and therefore not perfectly substitutable in an aggregated production function (as is assumed under most neoclassical and growth theory models).17 This asset specificity of local context can explain why the US government used discretionary power to nationalize and restructure General Motors in 2009 as opposed to letting the markets and courts regulate GM’s bankruptcy. In the US automobile industry, and especially in the case of GM, asset specificity includes interventions by the United Auto Workers, industry lobbyists and members of congress who support trade protection (automobile labour and industry groups are major donors to political campaigns and therefore get state-supported monopoly rents in return18). The GM nationalization is an ideal-type example of corporatist asset specificity,

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something we find as the necessary end result of GM’s uncompetitive producer-oriented practices – as compared to that of a consumer-oriented corporate design strategy that can maintain firm competitiveness in the long run.19 The GM case study is also a fitting synthesis for many of the ideas contained in this book and as found in Heskett’s writings elsewhere.20 The wealth of nations in the modern economy depends on a nation’s ability to focus on user design-oriented business development; this requires long-term commitments in education and research in order to integrate design in all levels of society. Firms, and especially smaller firms that represent the future, need to be able adapt to changing conditions in order to further brand durability and loyalty over the long term (to allow creative destruction rather than economic destruction). However, this does not necessarily mean that governments should pick ‘winners’. How then can national governments handle the dramatic changes on multiple levels and technologies, of global markets, and business organization and that are currently causing major economic disruption and unemployment? The answer, I believe, is they cannot: government policy exercised through bureaucratic organizations is ill-equipped to understand and dynamically respond to change on any level. The world economy is at present so diverse and dynamic that attempts to control it through mercantilist-style policies will not only be futile but extremely damaging.21

Conclusions In conclusion I would like to make four points: 1 First, in terms of reading Heskett, I found his story of the development of economic thought refreshing and the synthesis convincing. These ideas are well illustrated by the ‘flow charts’ in the chapters on each school of economic thought, and especially so in the concluding chapter’s synthesis of economics, design and the firm. It is transparent from the text that Heskett is a careful and caring educator of designers and is rightfully considered a pioneer in relating how design can create value in our lives.22 2 Heskett’s book is a good example of interdisciplinary knowledge. He synthesizes very well three major fields: the history of economic theory, design as practice and firm strategic management. 3 As someone from economics coming newly to design, I was inspired by Heskett’s view of the designer as change agent, something in tune with today’s visually oriented, and instant and ‘sharing’, new economy. The designer can be a modern industrialist-entrepreneur like Steve Jobs or

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Bill Gates. The designer can be a founder of the many social media and sharing economy firms that have emerged over the last number of years (concurrent with the equity bubble abetted by the central banks’ unprecedented use of monetary easing since the financial crisis of 2007–8). The designer can be within a firm as an employee or executive, or an outside consultant engaged under contract to provide strategic leadership that may be lacking due to organizational stasis. The point is that the designer might be seen as a form of the Austrian school entrepreneur (and with this book, Heskett contributes to the economic theory of the firm by assigning designers within a firm an important part in turning tacit knowledge into value creation through artefact – both physical and digital – realization). 4 Finally, I want to note that reading John Heskett was of great value for me, his writing inspiring much insight into economic ideas of my own interest as shown above. I am sure that many of those with an interest in economic theory and students and teachers of design, economics and management will find the same result. The synthesis of disciplines offers new ways to understand entrepreneurship and, relatedly, to see afresh applied innovation as value creation and realization in ongoing exchange relationships. As such, Design and the Creation of Value is an engaging text for those interested in the ‘new economy’ while offering an innovative synthesis of disciplines by an experienced educator and a broad-based, and knowledgeable, industry professional and historian.

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Design as an economic necessity for governments and organizations Sabine Junginger

John Heskett’s research into the economic life of design has shifted the perception of many in management about the role of design in business and society. Likewise, his work has reminded designers that they are not just merely designing some ‘thing’ but that in doing so, they have both opportunities and obligations to contribute in a meaningful way. John’s work is of renewed relevance today and continues to have significant implications for the future development of design research and design practice. Circumstances have changed, though, and we need to revisit as well as adjust some of the thinking that originated in the world of business and industry. There is a growing recognition that the main arena in which design is practised is not business, but the organization. Designing goes on in every organization, regardless of whether it is part of the private or public sector. Each organization faces the same basic challenge: how to develop and deliver services that are relevant and valuable to people and how to do so to make the most economic use of its various resources to achieve this. This in itself is a design problem. It involves organizational structures as much as it involves its resources; it involves processes and tasks as much as it requires a vision or a purpose. Designers always work within organizational contexts. They work with organizational clients and partners – and they establish their own organizations. To paraphrase John, organizations are the main arena of design practice. As he observed, there remains ‘a tendency for some designers to try to ignore this basic fact of their existence, which is yet another aspect of the problems in giving design credibility, but it will not conveniently disappear’.1

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John Heskett insisted that design can, will and must be judged in terms of its contributions. Recent research in design management has centred on demonstrating the value of design to business in economic terms. A 2013 study sponsored by the Design Management Institute in Boston produced the Design Value Score Card, while projects funded by the EU and the OECD sought to develop a greater understanding of the value creation by design by ‘analyzing and measuring design as a user-centered innovation tool and as an economic factor of production’.2 The €Design project, for example, studied the role of design in the integration of functional, emotional and social utilities of new or improved products (goods and services), processes and marketing methods in order ‘to help shape guidelines for analyzing and measuring the economic impact of design efforts and design outputs, thereby facilitating more detailed and robust measurements of design’.3 These studies expand on Heskett’s work but they do not provide much needed insights into the value of design to organizational life beyond production and consumption. Yet, the shift from design in business to design in organizations poses new questions and demands new approaches to inquire into design, design processes and the people who design. In this new setting, designing takes an active role in shaping businesses and management and it does so across the boundaries of the private and public sectors.4 Societies and communities, organizations in their own right, also have organizational lives and the question is how design contributes to these – be that by way of policy-making and policy implementation or by way of supporting public organizations in developing and delivering meaningful and accessible services. While the contribution to design in business remains focused on profitability, this alone is no longer a criterion for business success. How businesses engage on a social and environmental level matters more and more. The requirement for design to contribute, ‘if it is to be of any use in business’ is the same requirement for design in the public sector. ‘Business is also a social activity,’ writes John.‘Both its internal organization and the needs it meets in society depend upon social consciousness and functions. Some business managers educated in the tenets of Neoclassical thinking try to ignore this basic fact of their existence, but it too will not conveniently disappear.’ It is much rarer to find pure neoclassical thinking in government offices, but the basic problem of the business manager echoes that of the public manager: Their organization does not act in a vacuum and their internal operations need to be able to support the services it provides to citizens. They involve and affect people inside and outside the organization. Understanding business as a social activity affirms that management itself is a social activity (Falk 1961).5 The inherent social relationships of business and management highlight their relevance for the public organizations and government agencies. Policy makers and public managers pursue business in its original meaning: by taking actions about the matters they are troubled by and care for (Dewey 1948).6 I have argued elsewhere that the business of the public sector is the social.7

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Heskett’s statement that ‘making profits is not a self-contained activity determined within a firm but depends upon satisfying customers’ needs’ reveals yet another reason to extend research and practice into design management to public organizations. Public organizations are less, if at all, concerned about profits. They are concerned about impact and about efficiency in accordance within the legal and political constructs they are part of. To achieve impact, government agencies have to understand the people they try to reach in situations they seek to address and improve. But the staff often has few means to engage in such research. Moreover, the demand for ‘customer satisfaction’ is a difficult one in the public realm. A tax office may deliver a great service experience to a taxpayer but that taxpayer may still leave dissatisfied because he or she may owe the government an amount of money he or she disagrees with. Success for government agencies takes the form of delivering just and fair services to all people, regardless of their income, status, education or other background. As in the business world, achieving this success is not a ‘self-contained activity’. Any design outcome depends on its being useful to and accepted by citizens, manageable by public organizations and supported by the social and political agenda. All this points to design in government as an area that poses profound questions about the value of design and its contributions to human society. As we broaden the scope of design management from business to organizations, we benefit from an advanced understanding of the way economic theories treat design and find it necessary to present a design perspective on economics.8 The ramifications are difficult to understate: design outcomes across the public sector concern and affect millions of people every day. It is the arena of design practice where, as John Heskett notes, ‘design is one of the basic characteristics of what it is to be human and an essential determinant of the quality of human life. It affects everyone in every detail of every aspect of what they do throughout each day. As such, it matters profoundly.’9 To explore the value of design in government, we can follow John’s lead and engage with policy theories, policy practices and policy processes from a design perspective. We need to study the ways in which designing goes on in the public sector and make design activities visible to illustrate how and what value they create for people. Designing in the public sector is a highly complex undertaking that involves people, policies, organizations and services. In very simple terms, public-sector design involves people designing policies, people running organizations that implement policies through services and people developing and delivering services to implement policies and fulfil policy intent. Government functions best when it develops meaningful policies that are relevant to people and when public organizations develop, deliver and maintain services people can access, understand and use. In this ideal scenario, services are the means to fulfil the policy’s intent. But often, policies turn out to be ill conceived, and designed past the needs of people, leading

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to services citizens cannot or do not want to use. At other times, the internal operations of a public organization are cumbersome and not supportive to staff that seeks to deliver good service experiences. It is an indication that the design approaches employed are not supportive and appropriate to arrive at the desired design outcomes. In other words, new design thinking, new design practices and new design methods are called for. I have yet to meet a civil servant who intentionally develops poor services for citizens. Those who develop and deliver these products do their best with the methods and tools they have been taught or otherwise acquired. But it remains a fact that very few have had an opportunity, for example, to engage with human-centred design or user-centred design. On the other hand, there are still only a few professionally trained designers (design thinkers and service designers included) who are prepared to engage with design issues in organizational life. In many cases, designers are experts in a specific method that quickly generates radical new ideas for new customer-oriented services. They are strong in developing innovative products but weak in seeing them through to implementation when this means working through organizational structures, resources and people. Moreover, designers hesitate to engage staff in their innovative approaches. We can only guess the reasons for this, but I suspect it involves a lack of theoretical and practical underpinning that would enable them to connect the value of their design work to the work of staff and their respective tasks. In my view, this situation echoes the gulf between design and economics John sought to bridge. In the public sector, we find dominant theories at work for when and how new policies can be developed and introduced. We find management principles and best practices of public administration influencing daily work. And just like values drive theories in the economic disciplines, values drive theories in policy. It is no coincidence that human experience and human interaction rarely figure in theories on policy-making and policy implementation. It is also no coincidence that policy research has been content with depicting the policy cycle as a fragmented, linear and responsive design process blind to the needs of people affected by a policy. Until recently, questions about when and how to introduce a policy focused on political and organizational processes within government. Lately, researchers have begun to look at policies as products of design. Guy Peters (2015), for example, has suggested we ‘design policies like we design a car’.10

Designing in the Brazilian government While I was reflecting on John Heskett and the relevance of his work in the present, I worked with a group of the Brazilian Ministry of Planning, Budget and Management, one of the central ministries in the Brazilian government to which all other ministries have obligations. Moreover, I visited the Federal Court of Accounts, the Federal Ministry of Justice and the Federal Ministry

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of Education. I also made a stop at the third largest bank in Brazil, Caixa. Caixa is one of two key financial partners for the Brazilian government to administer social welfare programmes. In each organization, I met with people who sought to improve their internal operations by developing new design practices and by employing new design methods. They were challenging current design practices within their respective organizations and even across government agencies. They had been set up to secure vital government functions under severe economic hardship, a consequence of the country’s economic recession. As one senior public official put it: ‘We are doing this not even to do more with less because we are happy if we can still do the same with less.’ Most of these innovation teams were young; some had merely started a few months ago. One innovation group was made up of just a handful of in-house experts from the organization’s IT area. Their original mandate was to advance innovation within their organization by developing new digital tools for data analysis. In another agency, the innovation team consisted of twenty staff members. They based their innovation efforts on the ideas of computer hacking and open innovation. They proudly declared their approach to introducing new ways of working as ‘hacking bureaucracy’. A third ministry had hired an academic expert in business strategy and business innovation. This person was in charge of developing and implementing innovation programmes the ministry would then roll out in public. Unlike his colleagues in the other agencies, he had been given neither a mandate nor a team to support his efforts. He mostly worked with external partners and universities. The economic argument for design in this context is different from the one John Heskett pursued. It is not about business and customers, it is about people and their government. It is not about growing the Gross Domestic Product but about providing essential government services to people. The design task is to develop new policies and services that do more, or at least the same, with less for governments. Design thinking and design methods are entering into the public sector to rethink current approaches and to generate arguments for new ones. The fundamental economic principles John laid out for design still apply. Design researchers and those involved in hands-on design projects have to pay attention to the bottom line regardless of which organization they work with. They also have to be able to explain to decision-makers why a human-centred approach to services aids their organization – the same way one has to put forth an argument to a business manager. The presence of lone innovators in government alerts us to John’s observations about designers in business and the influence of ‘neoclassical thinking’ inside the organization. One of the reasons innovation in government is more difficult to achieve is that it must involve the organization itself in any change process. Services are at the heart of government agencies and any change to any service will ripple through the organizational system.

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Transforming existing situations into preferred ones for some, say citizens, requires concern for transforming an existing situation into a preferred one for those working within the organization. It is difficult to understate the role of John Heskett in design when one works in an environment that is dominated by economists and legal experts. I continue to revisit his writings on the different economic theories, sometimes as to freshen up my thinking, sometimes to find a new anchor into my own work. I am aware that my own work and that of the people in these innovation teams obliges me to come to terms with economic questions. Design choices are choices about employing, allocating and using resources to achieve a desired outcome. This brings to mind a particular moment during a seminar I gave to policy planners in a Prime Minister’s Office two years ago. The topic was participation in government and I was invited to provide an interaction design perspective on the issue. I used the pictures of two different walking aids for people and asked them to imagine these two objects as placeholders for two different policies. My point was that both walking aids sought to address the same problem: to provide mobility to people. The first walking aid was a bare metal construction in metallic grey. It had no wheels, so the person had to lift it and set it down as he or she walked. It was the simplest version of a walking aid that used only the minimum of materials. The second walking aid was painted red, had big wheels to master different surfaces, was equipped with hand brakes and sported a seat for resting and a basket for shopping. When I asked the group which one they would take out to the park, they all agreed it would be the red one. ‘But,’ interjected the head of the policy unit, ‘it is probably a matter of cost. The paint on the red one is probably making it more expensive.’ Indeed, I responded, the acquisition cost for the preppy walking aid was certainly higher, though mass production and economies of scale would bring down that cost. However, I continued, while the acquisition cost for the simple version was cheaper at the moment, the cost produced by that minimum model over time was significantly greater: A senior person who can get to the park with his or her walking aid, to the shopping mall and to the community centre exercises, volunteers and spends her pension money in cafes and shops. In contrast, a walking aid that ties a senior to his house or apartment is more likely to lead to depression, loss of muscle tissue that leads to falls, and to deny him or her the opportunity to participate as a volunteer or to spend money in cafes and shops. The cost for health care alone to treat accidents and depression is immense. If we add to this a voluntary contribution, for example, to oversee homework for young students and the money he or she cannot freely spend in local businesses, money adds up quickly. Participation in society all of a sudden looks like an economic problem and reveals the real cost of a walking aid that, while cheap, denies people the chance to participate in society. Understanding economic perspectives remains essential to articulate the value of design. The critical engagement with economic ideas allows

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designers to reveal some of these ideas as remnants of a different age and time. Classic economic theory concerned with comparison and evaluation, for example, works on the basis of ‘ceteris paribus’ or ‘all else being equal’. It is a demand that can only be fulfilled when we are dealing with a machine over which we have full control or when we can conduct an experiment in a controlled environment. But every organization, public or private, presents its own entity, involves different people and groups, concerns different laws and structures and has access to different resources. In short, there exists no ‘all else being equal’. This is certainly true for the ministries I have visited. It is therefore difficult to apply economies of scale to the public sector. Yet, we often meet people who insist on the scalability of a public sector innovation project. Scaling, too, has its roots in the mechanical world of manufacturing and mass production. It is based on the idea that if we get the first product right, we can save the work on further research and development on the products that follow. It is an approach that has time and time again failed in the public sector. It is an approach that has not led to the efficiencies that people sought because those involved in the original development of, say, a social programme, design their solution tailored to their circumstances, addressing the needs of the people they are working with. Yet, these circumstances are rarely if ever identical to those of other agencies. Certainly, this was affirmed during my visit to the Brazilian ministries. The fact that we can scrutinize and critique common economic theories for their impact on design is one of the great achievements of John Heskett. His notion that design has to make a contribution to be of value has been accepted across the different design disciplines. In the search for the precise value of design, researchers pursue different avenues. Co-design expert Elizabeth Sanders (2014), for example, detects the value of design on three different levels: the monetary level, the use or experience level and the societal level. ‘In each of these levels, co-design pursues different objectives, requires different mindsets, involves different people, deliverables and time frames.’11 Sanders might as well describe the different stages in the policy cycle: policy-making, policy implementation and service delivery. Design in the public sector must create value on each of these three levels as well as across these levels. To overcome traditional fragmentation and linear processes, governments on national, regional and local levels have set up public innovation labs.12 This points to a fourth level for how design adds economic value: by integrating public services with public organizations and policies around the human experience. A new economic theory based on behavioural insights from people has begun to challenge the classic notion of homo oeconomicus, where people are always acting in their rational interest. The emerging field of behavioural economics is making inroads in governments and presents new relationships with design. John would have enjoyed this development and helped us make sense for both design and economics. In his absence, this will be our task.

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Notes on editing the manuscript Design and the Creation of Value Clive Dilnot

As implied in the introduction, the nature of the ms. ‘Design and the Creation of Value’ is more complex than it might first appear. The seminar emerged over many years of Heskett’s teaching, first in the Institute of Design at Illinois Institute of Technology (IIT) in Chicago and then in Hong Kong, in the School of Design at Hong Kong Polytechnic University. The essence of the text in its final form is evident in the version he developed for the first of the series of seminars that he gave in Hong Kong beginning in 2004. This remained the basis of the final version we have, dated 2009. However, things are not quite so simple, and in two directions. First, between 2004 and 2009, Heskett considered several times turning the seminar into a book and indeed worked up the preface and introduction and most of Chapters 1–6 as a quasi-book ms. However, this process was never completed, nor, as far as I am aware, was the text ever sent to a publisher. As a publishable work, the text was therefore incomplete at the time of his death. In particular, Chapters 7–10 of the original ms. were clearly unrevised, there were elements of repetition, and significant references were missing. In short, the seminar was not as complete, as a text, as it first appeared. Second, particularly between the late 1990s and early 2000s, Heskett was experimenting with other versions of the text. For example, there are an extensive series of notes, entitled ‘The Economic Value of Design,’ that he prepared for a conference on design in Chile sponsored by the Ministry of Economics in 1999; and there is an even longer working paper entitled ‘Economic Theory and Design’ from roughly the same date that covers comparable territory. It might be thought obvious that these papers should be published. However, given their subject matter, it is no surprise that large sections of these papers overlap with the ms. of ‘Design and the Creation of Value.’ Moreover, neither paper is complete as is. The later sections of both, as they stand, are fragmentary. Thus, although of specialist interest, they do

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not quite congeal into a developed argument. On the other hand, important sections of both papers considerably extend the material and augment the original seminar, especially in terms of the exploration of the relation of design and economics as it is explored in Chapters 7–9. The relation of the material in these papers to ‘Design and the Creation of Value’, therefore, poses something of an editorial conundrum. The solution to the dilemma has been to consider the text of the seminar in two parts. On the one hand, in regard to the preface and Chapters 1–6 (and what is now Appendix 1: chapter 7 in the original), I have sought to preserve as much as possible of Heskett’s original text as is. Here the interventions have been to clarify repetitions and complete referencing. There has been some small augmentation of the text, using the material from the papers discussed above, in Chapters 5 and 6. These are referenced in each chapter but in the main, the structure of Chapters 1–6 has been essentially preserved as it was in the original. In detail, changes to the preface and Chapters 1–6 are as follows: – Preface. Unchanged. – Regarding Chapter 1. In the 2009 text, Heskett twice (chapters 1 and 8) uses the example of a toilet redesigned by the New York interior designer Jonathan Adler as an instance of design misconceived as a purely ‘creative’ activity. In this version, the extended material on Adler’s design and on the contrast between simple and complex models of design processes that was originally also in [the original] chapter 8 is now concentrated in Chapter 1. – Regarding Chapter 5 on New Growth theory, I have added some important notes taken from the paper ‘Economic Theory and Design’ on the economist Richard Nelson’s critique of some aspects of New Growth theory. – Regarding Chapter 6, The National System. The change here is that material on the application of Frederick List’s theories to design previously in chapter 8 has been moved into this chapter. This consolidates the material on List and the National System into a single location and the concrete references to applications of List’s theories regarding design provide a useful bridge to the second half of the seminar. Beyond these interventions, no changes have been made in Part One except for the addition of a number of diagrams and figures drawn from the slide sets that Heskett used to augment his presentations of economic theory. The tone of the text remains exactly in the form Heskett left it in 2009. I have been bolder, however, with changes to Chapters 7–10 of the original ms., and here in two ways. – First, as was noted in the introduction, the section on Marx (originally chapter 7) is cursory. It does not link Marx’s thought to design in any way and does not form part of the argument; nor is it

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referred to in the later chapters. As placed, it tended to break up the logic of the argument Heskett was making. I have presented it here, therefore, as an appendix and renumbered the following chapters. – Second, I have augmented the three remaining chapters of Part Two (7–9 in this version) with material drawn from the two working papers referred to above. This has enabled a much fuller presentation of the arguments. The major additions are footnoted in the respective chapters. They contribute material that cannot be found in the original seminar but which directly relates to the arguments Heskett is making. Apart from a few linking sentences and short paragraphs, all the material in the extended chapters is Heskett’s. The diagrams in Chapter 9 are as in the original. My decision to augment these chapters has been aided by the fact that I published the original versions of what are now Chapters 7–8 (‘Design from the Standpoint of Economics/Economics from the Standpoint of Design’) under this title in the journal Design Issues in 2015 (see vol. 31, #3, Summer 2015, pp. 92–104). The same versions of these chapters also appear in The John Heskett Reader: Design, History, Economics (London: Bloomsbury, 2016), pp. 42–56. * The book adds one unpublished paper by Heskett that bears directly on the question of value. ‘Value and Values in Design’ is an undated incomplete working paper, probably authored around 2000. It augments both the final part of Chapter 8 and the major concluding arguments of Chapter 9. In itself, it points to the wider discussion of ‘value’ that is both explicit and implicit within the seminar. * Regarding endnotes and footnotes: Heskett’s references have been completed. A few endnotes indicate editorial additions. The endnotes are also augmented by ‘editorial footnotes’ introduced by the editors. Heskett had included one-line biographies of some of the economists he discussed. I have extended these and also provided some further commentary at certain points. Finally, at the end of most of the early chapters, Heskett had indicated one or perhaps two readings. I have extended the reading lists though they are by no means comprehensive. Again, however, this is by no means a fully annotated text. * Acknowledgements. In revising Design and the Creation of Value for publication, I have benefitted enormously from help and assistance from three people in particular: in the initial stages, from exchanges with Suzan

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Boztepe. In regard to economics; from exchanges with Cameron Weber who carefully read and helped reference the economics chapters. Finally, as the ms. was being completed, John Heskett’s diagrams were reworked for publication by Christine Tsin, from Hong Kong Polytechnic University. Christine served as John’s assistant in the five years he was teaching there, was closely involved in the presentation of the seminar and was the original creator of the slides Heskett used in the presentations of the seminar. I am extremely grateful for her help. Sabine Junginger and Cameron Weber have been generous in spending time drafting significant introductions to aspects of Heskett’s work. These deepen, considerably, the contextual understanding of what Heskett achieved in the seminar. The project would not have occurred without the critical support of my editor at Bloomsbury, Rebecca Barden. The vital help of two other persons was also necessary: Victor Lo, whose generous backing for the project was crucial to enabling the time needed to research and detail the issues that arise in projects of this kind; and Pamela Heskett, John’s widow, without whom the project would have been impossible.

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Preface

‘Economics is concerned with explaining the production, distribution and consumption of wealth. Design is the human capacity for shaping and making in ways that satisfy our material needs and create meaning – in doing so it creates sources of wealth.’ John Heskett

This book is about how design can add and create economic value for businesses and other organizations. In particular, it is intended to equip designers and managers of design with an understanding of the potential and power of design if it is intelligently understood and positioned as an integral element in firms’ activities. That is a simple enough statement, but in fact attempting to discuss the relationship between economics and design is a minefield. Basically, economics is concerned with explaining the production, distribution and consumption of wealth. Design is the human capacity for shaping and making in ways that satisfy our utilitarian needs and create meaning – among other things, it creates sources of wealth. There should, at least on a general level, be some interaction between the two, yet a deep schism of mutual incomprehension separates them. Such problems are in fact typical of many forms of practice in modern life. As an example, a literary critic, A. O. Scott, has pointed to a parallel in American literature: While the tumultuous rise and global spread of American capitalism is surely a subject epic in scope and dramatic in detail, it is one that has inspired surprisingly few of our best writers. There has always been interest in the behaviour of people who have money, but less interest in how money is made. Henry James, in The American, sketched a new type of character – the American entrepreneur – but found the merest mention of the commodity at the heart of his enterprise impossibly vulgar.1

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Design and the Creation of Value

A consequence of cultural inadequacy in comprehending design is a widespread underestimation of the full role it plays in all our lives. Mary Douglas, a leading anthropologist and Baron Isherwood, an economist, have together examined the role of goods in social life. They concluded: The most general objective of the consumer can only be to construct an intelligible universe with the goods he chooses. Goods, then, are the visible part of culture. … Ultimately, their structures are anchored to human social purposes.2 If goods help us construct personal meaning and have social relevance, these are obviously important considerations in how value is created. To fully explain this unwillingness to acknowledge and take responsibility for the industrial world and the products human beings have created would require going far beyond the scope of this work and involve a long exploration of cultural factors, but it is a problem that is common across the world. At this point, it can be asserted that the lack of congruence or overlap between design and economics is a problem that is global in scope and has roots deep in history.

Gulf and bridge For a variety of reasons, therefore, there is huge confusion about what the word ‘design’ means. Those working in design practice are continually confronted with difficulty in defining what they do, or what design is, for non-practitioners. In contrast, most people have some concept of what an architect does, or what the general nature of being a mechanical engineer implies. Designers may know what they intend, but the odds are that the audience, whether the general public, or potential clients, will often have a very different concept of what design is or should be. This can be a serious problem in practice, as in a personal experience of consultancy for a large service business. Very little profit resulted from the project, because the cost estimates totally underestimated the time needed to continually explain what design meant to every manager in the client company. It was a never-ending process as new managers came in and the process had to start all over again. Without establishing some common understanding of what the designers were supposed to be doing, however, the project could not effectively proceed. Neither was it conceivable that the company would give the slightest credence to an invoice for time and cost spent educating their managers, even though the time thus spent was hardly negligible. There is problem in drawing deep conclusions from personal experiences, but they can, however, be indicators, like straws in the wind showing from which direction a trend is blowing and how strongly. The lack of design awareness is also found among government officials. Some years ago, I was in

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conversation with an export specialist of the U.S. Department of Commerce at a reception. He asked what I did for a living, and I answered by talking about teaching and consultancy aimed at using design to create new products and new market opportunities. ‘Are you trying to tell me,’ he responded, ‘that design is a competitive instrument?’ I replied in the affirmative. He shook his head in what seemed to be disbelief, and excusing himself, moved on, leaving me discomfited and wondering how I had committed an offence. This was someone whose role was advising companies in one of the largest industrial states of the United States of America. Obviously, he was unwilling or incapable to give any advice including the factor of design and its possible contribution to export potential. This deep gulf in understanding the varied ways in which design can function requires explanation. A valuable work in this respect is a book by Donald Schön and Martin Rein: Frame Reflection: Toward the Resolution of Intractable Policy Controversies, a study of policy frameworks – the major ideas necessary to understand how policies in government and business are formulated. They draw an interesting parallel with design: We see policy making as a dialectic within which policy makers function as designers and exhibit, at their best, a particular kind of reflective practice, which we call design rationality.3 What is important is that not only is design positioned at the level of policy-making, but there is also a problem in policy-making, as identified by Schön and Rein, concerning why some ideas are accepted and others not. They distinguish between, first, disagreements ‘in which the parties to contention are able to resolve the questions at the heart of their disputes by examining the facts of the situation’. This is contrasted, secondly, to what are termed controversies, disputes that ‘are immune to resolution by appeal to the facts’.4 This is because the parties involved often have totally different interpretations about what constitutes ‘the facts’. Even if they might agree on the facts, entrenched attitudes can still ensure fundamentally different interpretations of their relevance. What this means is that arguments attempting to better define design, no matter how logical, may fail when confronted with entrenched values that dominate consideration of ‘the facts’. Further valuable insight on this is provided by Robert H. Nelson’s book, Economics as Religion: From Samuelson to Chicago and Beyond, which argues that economics promises objective science but actually delivers a hidden metaphysics. Behind their formal theorizing, economists are engaged in telling stories that have powerful symbolic messages that often have a philosophical (and theological) content.5 In other words, a range of value judgements and assumptions underlie many of the economic theories about how the world works and how people should

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behave. In an age where, at least in the West, the role of formal religion has declined, economic beliefs can take on a quasi-religious function: Instead of being value neutral, the economics profession has actually been defending a strong value position. In building from only one view of human nature, mainstream economists have in effect been asserting that this is the one and only correct view.6 Another aspect of Schön and Rein’s work relates to the particular characteristics of ‘reflective practice’ and the different ways in which this functions, at different stages of what the authors term the ‘ladder of reflection’. This orders policy-making thought on six levels, conceived as rungs on a ladder from low to high and increasing in abstraction from everyday practices to ‘metacultural frames’.7 The rungs of this ladder proceed, from low to high, roughly as follows: 1 policy practices, such as regulation, screening and verification; 2 policy itself, conceived as a set of rules, laws, prohibitions, entitlements or resource allocations; 3 the policy-making process, including its debates and struggles; 4 the particular positions and accompanying arguments held by advocates and opponents in policy debates and struggles; 5 the beliefs, values and perspectives held by particular institutions and interest groups from which particular policy positions are derived (we shall call these institutional action frames); and 6 the broadly shared beliefs, values and perspectives familiar to the members of a societal culture and likely to endure in that culture over long periods of time, on which individuals and institutions draw in order to give meaning, sense and normative direction to their thinking and action in policy matters (we shall call these meta-cultural frames).8 If we interpret the ‘ladder of reflection’ in terms of design, it becomes clear that, in principle, there is no essential reason why design should not be an integral element in contributing not just to the competitiveness of a company, but also to the efficiency of an organization, the prosperity of an economy or the general quality of life of a society. Support for such a role can be found in the work of Herbert Simon, Nobel Laureate in Economics in 1978, who argues that design is not an activity restricted to making material artefacts, but a fundamental professional competence extending to policymaking at governmental levels. He wrote: Everyone designs who devises courses of action aimed at changing existing situations into preferred ones. The intellectual activity that produces material artefacts is no different fundamentally from the one

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that prescribes remedies for a sick patient or the one that devises a new sales plan for a company or a social welfare policy for a state. Design, so construed, is the core of all professional training; it is the principal mark that distinguishes the professions from the sciences.9 Since economic theory has such an important role in framing ideas about how and why an economy functions and therefore how design functions within it, there is a need to understand how particular economic ideas shape our understanding of design. The value of such an approach would be to help businessmen and economists to understand design’s potential contribution, but it could help position design where it belongs: in the mainstream of economic activity rather than on the periphery. Moreover, not only is it necessary to understand how economics conditions perceptions of design, but it is also important to investigate the potential role of design in influencing economics. Such an approach has the aim of moving design, in Schön and Rein’s terms, from the level of a controversy to a disagreement. In the latter, there may be prolonged and vehement argument about exactly how design should be implemented in any organization, but on the basis of acceptance of its relevance. Understanding how goods and services condition all our lives similarly helps define how design can create not just economic value, but also political, social and cultural value. Exploring economic theory in search of explanations for this gulf rapidly demonstrates that there are no easy answers. Economics is not a monolithic edifice, but a discipline of great variety and complexity, a house with many rooms. Great intellectual tension is generated by vigorous debates about the relevance of major theories, seeking either to deepen orthodox knowledge, or to open up new perspectives that challenge old certainties. Diverse interpretations of the role of design are therefore possible, depending upon the particular theoretical perspective in economics from which it is viewed. Even with all the extensions and modifications, however, there are two important aspects that, across all the various schools of economic theory, receive scant attention. There is inadequate explanation in detail about how goods and services are developed through manufacture for the market place, and, secondly, there is equally little focus on how they are used – both of which are concerns at the heart of design practice. All too often in economic theory, goods and services are assumed to already exist, they seem to appear without any consideration of the specific development processes and ideas involved, and after the point of sale or consumption, any thought of them evaporates from consideration. (These assumed product preferences and the assumed starting point of equilibrium are the prime weaknesses of mainstream neoclassical economics that are addressed in this book.) If, instead, we look at how economics is understood from the perspective of design, creating the tangible reality of goods and services is what creates value for users, which involves understanding the role this plays in practice, in the context of people’s lives. Without incorporating these two factors,

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it is difficult, if not impossible, to fully understand how economic value is created. In reverse however, if these elements are considered then, potentially, there are powerful elements that can be supportive of the contribution of design in business and society. This book will therefore discuss, first, how different emphases in economic theory condition perceptions of design; and second, how an understanding of design theory and practice can contribute to economics in terms of the value it creates. This latter question is important if design is to be more than a borrowing discipline, dependent on drawing ideas from other activities, capable of articulating and convincingly arguing the contribution of its own specific insights and skills. This is one of the major challenges in developing new concepts of high-level design practice.

1 Introduction: Design in economic life?

Shortly after the story I recounted in the preface to this book of my conversation with an export specialist of the U.S. Department of Commerce and his polite expression of disbelief that design could be considered an economically competitive instrument, an invitation from a professional organization took me to Washington, DC, for meetings with officials from the Department of Commerce and also the Council on Competitiveness to discuss ideas for establishing a Design Council in the United States. The officials were intelligent and courteous and it was not that they rejected design – it simply did not feature in their view of how life and the economy functioned. One of them asked: ‘Why should we support design in order for our competitors to easily copy it?’ Again, it seemed obvious that the officials had a view of the world and the economy, inculcated through education and their cultural environment, which had no significant place in it for design. These experiences in the United States occurred in a cultural context that, in some respects, is atypical among major industrial nations. In the United States, concepts of how business functions have been overwhelmingly shaped in business schools, which have undergone a massive expansion in the period since the Second World War and have spread around the world. They have amassed a body of knowledge and research tools with a heavy emphasis on quantitative methodologies. This numerical obsession has translated itself in widespread practice into highly skilled manipulations of financial assets, with relatively little emphasis given to products and customers. While there are design schools across the country, they are neither as numerous as business schools, nor do they compare in the scale of their enrolments or research programmes; nor are they noted for their influence on business. In addition, neither at Federal nor at State level has there been any substantial evolution of design policies by government. In this pattern, the United States diverges from beliefs and practices in other parts of the world, and while many Americans believe their system is a model for universal emulation, in design terms many people and organizations in the rest of the world follow a different course.

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Having spent much time in other parts of the world, particularly Europe and Asia, in addition to living in the United States for sixteen years, also made me aware of a history of long-term efforts to promote design by governments, which were often closely linked to technology and economic policies directed at emphasizing quality as an instrument of export growth. At best, this has resulted in awareness that design can substantially contribute to product development as a partner in multi-disciplinary teams, closely working with, for example, engineers and marketers. Even in such countries, however, there is often a tendency to think of design as an embellishment of decisions taken by other disciplines – the icing on the cake to make a product more marketable. The proposition that it can have a powerful strategic role in creating economic value, in terms of fundamental decisionmaking to establish long-term competitiveness, still has limited currency around the world. Such problems are illustrative of a deep gulf in understanding that exists between design and many other disciplinary practices involved in any functioning economy. There is, however, a substantial body of work both in economics and in many other areas that have ideas of widespread relevance in design. In considering the economic role and value of design, two major aspects need to be discussed. First, it is necessary to come to terms with the existing body of economic theory and practice and ask to what extent it can shed light on essential roles design can play in the context of business. Second, the way economic theory defines its field, and the tools and methods it uses, have come to constitute tightly defined forms of orthodoxy. Can design supplement or reinforce economic theory in clarifying and amplifying aspects of business in ways that at present are not commonly recognized? The question here is whether design theory and practice has the potential to add to, extend or provide linkages to economic theory. The organization of this book is therefore broadly based on these two perspectives: one examining design from the standpoint of economic theory; the other examining economic theory and business practice through the prism of design. Positioning design in this regard, as having an important and integral economic role to play at the highest level of organizations, requires articulating a body of knowledge and methods that broaden how we think about design. It also needs a changed perspective on the nature of design. Therefore, for anyone involved in design and seeking to communicate the nature and value of its contribution, there needs to be clarity about what we are discussing.

What do you understand by design? The question is deliberately phrased to focus on what any reader understands by design. Since design means many things, it is important to acknowledge this diversity, rather than insisting upon a specific and limited definition. It is, in fact, possible to discuss design at the most generic level as a universal

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human capability to transform our environment, an ability that is analogous to language and music in characterizing ourselves as human beings.1 As soon as particularities begin to be explored, however, some obvious problems arise due to the broad range of activities encompassed by the term ‘design’. Three broad categories can be discerned, two of which are in the mainstream of design practice. The first, for which substantial training and preparation are necessary, ranges from some highly technical disciplines, such as engineering design, ergonomics or product design, each of which requires a specific body of knowledge and methodology. Work of this kind is usually integrated into the development processes of manufacturing companies. At the other end of the range are practices dependent primarily on individual flair, such as work in illustration or fashion design, which is more tightly focused on the end visual form. There is endless confusion caused by this kind of work being considered a form of art, in terms of labels such as commercial art, applied art or decorative art, and the appearance, more recently, of the term ‘design art’. These, in contrast to the practice of what are known as the ‘fine arts’, can sometimes be regarded as inferior levels of activity tainted by commercialism. Some designers have indeed embraced commercialism with great success, most notably the large number of fashion designers, who have created ‘designer labels’, such as Gianni Versace and Donna Karan. The emphasis on celebrity status in the modern entertainment and media worlds has also encouraged some product designers to follow a similar path, such as Philippe Starck and Karim Rashid, who have also assiduously, and very successfully, marketed themselves as designer brands. A third category of design that has appeared relies upon appropriations of the word design to suggest a higher status for a particular activity. For example, not too long ago, most people visited a hairdresser to have their tresses cut and set; the term hair stylist was later adopted, while nowadays, hair designer is the universal soubriquet – and the term has also been appropriated by floral designers and funeral designers, among others. These will not be discussed in detail. Some designers, predominantly those in the second and third categories, rely upon publicity as much as knowledge or skill to promote themselves and may consistently exploit the opportunities for publicity provided, above all, by print media for publicity and image building. It is also true, however, that the media endlessly exploit design as a source of news and imagery, frequently in ways that trivialize the activity. An example is from the Hong Kong edition of China Daily, the official English language newspaper of China, dated 13 December 2005. Under the heading ‘Canine Cool’, a masthead proclaims: ‘Accomplished designer caters to demands of her furry followers of fashion.’ The half-page article inside concludes: ‘Pet owners are not merely content with warming their dogs up in chilly weather. They want their pets to get dressed up and to show off their unique appearance in front of other dogs. That is why they value our designs and craftsmanship, Jackie pointed out.’

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Perhaps the greatest problem in explaining design is its confusion with art. In many publications intended for the general public, there is still a tendency for design to be equated with art, which is probably one of the greatest sources of difficulty in developing a better understanding of what design is and what it can achieve. An example, which perfectly captures the trivialization of design so apparent in the media, is an article that appeared in one of the greatest newspapers in the world The New York Times Magazine of Sunday, 1 December 2002, in which various people were asked to redesign everyday objects. One was Jonathan Adler, a New York designer of interiors and accessories, who offered a rethink of the toilet, with an accompanying explanation: I chose to redesign a toilet, because even though everyone has one, they’re always so dreary: I wanted to create a cheerful toilet. I was inspired by Dior’s New Look, with its wasp-waisted silhouettes, from the 40’s and 50’s. The shape makes it a little cuter; the graphic element makes it fun. There are a number of functional issues that would need to be addressed for this to actually work, but the toilet really is the perfect arena for playfulness. The criteria Adler set out for his reconfiguration of the object include cheerfulness, cuteness, fun and playfulness, which to be frank, are not the first qualities that come to mind in connection with the processes of voiding bodily waste. Moreover, why a toilet needs to be ‘inspired’ by Dior’s New Look of the post-war period is not explained, and as he points out, functional issues have not been addressed. In contrast, the Toto company of Japan, a major manufacturer of bathroom equipment, has for many years addressed functional issues in electronic toilets in its product range that will, after users have performed their offices, hose down their fundaments with warm water, dry them with wafts of warm air and, if required, finish their ministrations with a perfumed spray. With advanced designs such as these available, do we really need, in addition, our toilets to be subject to the arbitrary whims of fashion and artificial obsolescence? It can be said that there is no harm in designing dogs’ attire or playful toilets, which in some respects might indeed be true. The problem with this approach to design as a branch of art, however, is that it reduces the activity to a very limited range of capabilities that focus on aesthetic solutions in formal terms, without fundamental consideration of whether they are manufacturable, marketable, useful and pleasing in people’s lives, and in the end result, profitable for businesses. To put it even more simply, reducing design to personal whim reduces the complexities of practice to a very simple level, which involves a severe distortion of the activity. Basically, the example of the toilet cited above is treated in the following terms (Figure 1.1).

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Figure 1.1  The design process simplified to a question of form.

The attitudes and approaches manifested in Adler’s exercise ignore several basic facts about design as a form of practice: – The main arena in which design is practised is business. There is a tendency for some designers to try to ignore this basic fact of their existence, which is yet another aspect of the problems in giving design credibility, but it will not conveniently disappear. – As a business activity, design must be judged in terms of contributions to profitability. If it cannot contribute, then it cannot be regarded as of any use in business.

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– Business is also a social activity. Both its internal organization and the needs it meets in society depend upon social consciousness and functions. Some business managers educated in the tenets of neoclassical economic thinking try to ignore this basic fact of their existence, but it too will not conveniently disappear. – Making profits is not a self-contained activity determined within a firm but depends upon satisfying customers’ needs. An illustration of a designer dealing with the same subject as Adler but taking these points into account is Ross Lovegrove, a noted British designer, who was commissioned to work for VitrA, a Turkish manufacturer of bathroom fittings, and after six months of research, began delivery of designs for over 120 items. They were unified by flowing organic lines and detailed attention to material qualities typical of Lovegrove’s work and reflected both a technical and aesthetic transformation of the firm’s products – a complete new range that redefined the company from a local producer, to a global player in its product sector. Lovegrove’s work is typical of industrial design at its best in manifesting and combining a series of capabilities, which include the factors of form and aesthetics, but extend to a much wider set of concerns. Design, considered in these terms, is a complex, demanding activity, as depicted in Figure 1.2.

Figure 1.2  The design process in the wider context of production and use.

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The above does not include every consideration and method needing to be at the command of a designer, or as is often likely, a design team, but it does give some idea of the spectrum of competencies and capacities the designer deploys in dealing with complex projects and functioning as a business professional. This particular range of capabilities is based on industrial design as an example and although not all-inclusive, it does illustrate the contrast between the approaches and capabilities required to function as an artist designer and what I would term a professional designer. A further point to be made is that the distinction between these two approaches to design is not rigid. In most branches of design practice there can be found examples from across the spectrum, from highly sophisticated professionalism to a more superficial level: interior design, for example, runs from the specification of complex spatial solutions for a variety of functional purposes to superficial approaches better described as interior decoration, sometimes known as ‘chintz slapping’. What has been discussed so far is the concept of design in terms of the breadth it encompasses. Another issue of profound importance relates to ideas about design as a strategic factor in any organization, which is more concerned with the levels at which design can function.

Hierarchies and the positioning of design The emphasis in this book is upon the economic role of design in business contexts and the ways in which it can add or create value and contribute to the competitiveness, viability and profitability of any business. The diversity of design referred to above can be a problem due the complications it creates and the varied levels on which it can function, but at the same time, this diversity can potentially answer a multitude of business needs, and if understood and intelligently applied, it can provide a rich strategic resource. Much depends, however, upon where design is positioned and how it is managed. At a very simple level it is possible to distinguish three major levels of internal function in any organization (Figure 1.3). Any firm must have a strategy, whether implicit or explicit, which determines the nature of the firm, its products, markets and values. It will also need to structure the organization of the firm to realize the aims of its strategy, with a necessary structure of functional and developmental responsibilities and management. Finally, it will need to have a body of workers with the requisite skills to implement the strategy in the form of tangible products and services. If we ask what the functions of design are within this very simple depiction, in most management theory there is little mention of design – it is noticeable by its absence (Figure 1.4). There has been over the last quarter-century a growth of practice, research and education relating to ‘design management’, which has opened up discussion on how design can be best utilized in businesses.

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Figure 1.3  The major functions in a firm.

Figure 1.4  The major design functions in a firm.

There has also been a similar pattern of growth in relation to the concepts and practice of strategic design. Neither at the levels of management nor at those of strategy, however, is it yet possible to say that it is commonplace for design to be integrated into the management structures of companies; nor has there yet been an articulation of the role of design at the levels of management and strategy that is convincing to the majority of senior managers. It is easy to name some of the outstanding exceptions, such as the role played by designers in the upper management of Apple, Samsung and Renault. Despite these notable exceptions, however, it is still the case that the overwhelming

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majority of designers in businesses around the world are employed in ways that fit into the implementation segment, in roles the American designer George Nelson once described as ‘exotic menials’. Confusion about design, therefore, exists on a wide front, in businesses and academic institutions, at government policy level and, above all, among the general public – the people most affected by designed outcomes. The confusion is understandable, for the word ‘design’ has, indeed, many meanings and interpretations.

Why bother about attempting to clarify this confusion – does it really matter? There are two reasons why it matters profoundly. First, design is more significant, across a broader front of economic activity than the realms of fashion or interior decoration with which it is heavily identified. It is instead a basic characteristic of what distinguishes us as human beings who originated in the natural world, but yet are different. It spans the capacity for abstract thought, manifested most notably in language, which enables us to conceive of alternatives to what exists, and to realize such ideas in material terms, by shaping and making our environment in terms not predicated in nature. The result is the constructed reality of artefacts, communications, environments and systems inhabited by the great majority of human beings in the contemporary world. It links the outer worlds of nature, and of artifice, with our inner sense of ourselves and our perceptions of external reality, linking our sense of personal identity to wider patterns of cultural values. Considering design in this fundamental sense confronts us with an activity at the core of human existence and how we construct ways of surviving and giving meaning to life. Second, in consequence, the world we inhabit is increasingly formed by human intention, whether by reshaping landscapes through farming or civil engineering, or buildings in towns and villages, and the contents of every home, workplace, transportation system or shopping and entertainment complex. Any tax form, toaster, automobile, airport signage system or online purchasing service, to take just a few possible examples, does not emerge from a disembodied process, such as ‘industry’ or ‘technology’. Each is designed somewhere by someone, by human beings working either singly or in teams, with the results profoundly affecting other human beings. This human capacity for design may be exercised well or badly, but its results affect us all. This might be fine on a philosophical level, but what does it have to do with the practice of design in a business context? To explain this, it is necessary to refer to economic concepts that shape and inform the business world. The term ‘high-level design practice’ needs some explanation. A significant development in design in recent decades has been the growth of its strategic function in some businesses. Basically, this involves using design

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as a means of envisaging future scenarios for organizations and planning for their implementation. Much of the argument for this strategic role hinges on the relationship between the speed of technological development and innovation in a period when rapid change and uncertainties are multiplying. If business motivation in undertaking costly and risk-laden efforts at innovation is the possibility of substantial economic reward, the role of design in innovation – its contribution to enhanced economic performance of products and systems in the marketplace – needs to be clarified. For design to function as a strategic instrument, therefore, a credible case must be made for its capabilities in organizations prepared to use it in such terms. Specifically, any designer aspiring to a strategic role needs to understand and frame economic arguments for the value of design that makes sense in a business context. This concept of design as a strategic and planning instrument is not yet widespread, although some path-finding consultancies and corporate groups are demonstrating its usefulness. An obstacle to its wider acceptance is a widespread perception of design as a range of specific visual skills, functioning at the executant rather than the executive level. In this sense, an executant is a designer who carries out the working of ideas that already exist or are determined by someone else, whereas an executive is responsible for taking decisions on what is to be carried out. In contrast, however, the arguments for considering design as a generic human capability, capable of devising structures and concepts that have no predecessors in nature, means it can function on many levels and is as much dependent on conceptual as on manual skills. A further point here is that if design is a matter of mind as well as hand, we need to acknowledge the need for a body of design knowledge that encapsulates essential ideas about design. * The first part of this book is therefore a consideration of major bodies of economic theory, how they condition understanding of design and can explain its contribution to creating value. They are as follows: – Neoclassical theory (Chapter 2); – Austrian theory (Chapter 3); – Institutional theory (Chapter 4); – New Growth theory (Chapter 5); – National theory (Chapter 6); – Socialist theory (Appendix 1). – Neoclassical theory is deeply indebted to Adam Smith, widely considered the founder of modern economics, whose ideas were expanded through the nineteenth and twentieth centuries to represent the mainstream of theory in the English-speaking world today, which focuses on the market as the primary location where value is determined.

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– What is known as Austrian theory, indeed, originated in Austria, from whence important modifications to Neoclassical theory emerged, but has since developed adherents from a wider geographical range. It argues that a broader range of factors, such as user perceptions and entrepreneurial activity, are necessary to understand how value is created. – Institutional theory, a strong element in the United States, has similarly evolved substantial modifications of Neoclassical approaches. Essentially, it is concerned with how firms and other organizations and institutions play a role in economic functions. – New Growth theory has substantially evolved through the 1980s from similar efforts to broaden the scope of Neoclassical theory without denying its basic tenets and is important for the role it gives to new technology. It has become the subject of widespread debate in its efforts to clarify many profound changes taking place at present in the world economy. The final two strands represent traditions of government involvement in economic development that have flourished most strongly outside the United States. – National theory based on the ideas of a German economist, Friedrich List, accepts capitalism and competition as central to modern economic activity, but positions the state as a vital player in its workings. List’s ideas have been important not only in his native Germany but also in Japan, and subsequently in the remarkable patterns of growth in East Asia in recent decades. In addition to the above bodies of theory, another that has had enormous effect is Socialist theory, in which the work of Karl Marx features so predominantly. This positions the state as the central controlling force in what is known as a command economy, organized by government bureaucrats rather than being left to market forces. It has been put into practice in many countries in the twentieth century, but with the collapse of socialism in the Soviet Union and Eastern Europe in the late 1980s, and the conversion of states such as China and Vietnam to at least partial acceptance of capitalism, it has rapidly waned. Cuba and North Korea are probably the only states that are still attempting to run a full command economy and are hardly recommendations for the success of the system. Nevertheless, it has been important in recent economic history and its main concepts should be acknowledged (See Appendix 1). These topics do not, of course, constitute the whole of economic theory, but even a short review of them will hopefully give an understanding of the breadth of economic thinking and its potential for designers who understand something of these ideas. Part two, Chapters 7–9, then engages with a more direct exploration of the dialectic of design and economics, examining design from the standpoint of economics and then switching to consider economics in the light of design, before concluding by looking in general at how design can be said to create economic value.

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Part One

Economic theory and design

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2 Neoclassical theory

The core ideas of Neoclassical theory in its current form emerged in the period between the two world wars. It has developed in many significant respects, but continues to be the mainstream of economic thought in the modern world. At the heart of neoclassical economics is a concept of the market and how it operates. Basically, markets are mechanisms to allocate scarce resources. Out of the processes of competition for resources, the theory claims that market mechanisms, if left to their own workings, will yield the most efficient allocation in monetary terms. Markets, of course, were originally specific places in towns or villages where people gathered to exchange goods and services. Today, the ancient local forms still exist in most parts of the world, but in addition, these are overlaid by markets for goods and services that range across the globe and are complex, impersonal and intangible; nevertheless, they still remain essential mechanisms for exchanging goods and services. The basic concepts in Neoclassical theory explain how supply and demand are reconciled in any market. A market only exists because of scarcity: it allocates goods that are scarce in relation to the number of people who desire them. If everybody had enough of what they wanted, there would be no need for markets. A further assumption about supply is that the price of each unit will decrease as the quantity produced increases, which is made possible by economies of scale resulting from increased efficiency in manufacturing large quantities. This results in the relative scarcity of products in a market becoming less acute. Complementing supply is demand: what people are prepared to pay for goods and services. The quantity demanded will increase as larger quantities become available at lower prices, that is, people will buy more (Figure 2.1). Exchange is, therefore, the rationale of markets. Equilibrium is the point where supply and demand intersect and determine the price customers are prepared to pay. Equilibrium implies balance and is essentially a static condition. These concepts are rudimentary – the kind any student of economics learns in his or her first lessons and, obviously, Neoclassical theory is immensely more sophisticated. Nevertheless, some important points arise even at this

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Figure 2.1  Supply and supply and demand.

simple level. First, price is the major determinant of value, which ignores other factors such as quality or differentiation; second, goods are assumed to appear on the market without any consideration of how they got there – consideration of product development processes and the role design plays in them are conspicuously absent; third, firms have no role in this theoretical depiction – they are assumed to be price-takers, passively accepting the price determined by the market; and fourth, markets are depicted as static, but, in fact, they are constantly changing in innumerable ways. Harold Demsetz (1977), a distinguished American economist, stated the situation very clearly: Neo-Classical theory’s objective is to understand price-guided, not management-guided, resource allocation. The firm does not play a central role in the theory.1 This emphatically positions design outside the parameters of Neoclassical theory. Yet, in reality, many companies function as price-setters – targeting people who will willingly pay more for products embodying superior qualities. James Dyson’s first vacuum cleaners introduced in Britain in 1993 were double the price of those of his cheapest competitors. Yet against established multi-national companies, the superior performance of his start-up products led market leadership in the United Kingdom inside two years, an achievement subsequently mirrored in other markets. Design, as demonstrated by the Dyson example, is essentially about change, and concepts of equilibrium have limited relevance in explaining change. To the extent that neoclassicism explains how goods and services are generated for markets, it does so in terms of two main production functions, which are the amounts of labour and capital employed in production. Again, these production functions can be quantified to explain the cost of what is

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produced, but it does nothing to help understand what is produced and why, and beyond the dimension of cost, what its quality might be. To the extent that Neoclassical theory considers consumers, it assumes any individual acts in terms of rational calculation in market decisions. Rational consumers are assumed to have three characteristics: 1 Their tastes are consistent (i.e. their tastes are assumed as given and unchanging over time). 2 Their cost calculations are correct. 3 They make those decisions that maximize utility.2 This assumption of rationality stems in large measure from the work of another English philosopher and economist, Jeremy Bentham, but has been given new impetus by the dominance of new mathematical methods in economics since the 1950s, which had been reinforced by the widespread availability of computers and databases. A problem with this widespread adoption of mathematical methodology combined with assumptions of rationality is that it limits what is considered appropriate in the study of economics. It stresses what is consistent and calculable, while whatever is unstable or indefinable is discarded, or as a critic of neoclassicism asserts, facts must fit the methodology. A closely related factor in criticisms of neoclassicism is its emphasis on static models. This can be illustrated by the most indispensable tool in framing Neoclassical theoretical models, namely, the frequently invoked Latin mantra ceteris paribus, meaning, ‘other things being equal’. This phrase means that a model can be set up and anything that inconveniently disturbs its assumptions can be excluded. It has numerous variants, all of which are conveniently and somewhat unrealistically used to confirm static views of any situation. An example is the condition termed perfect competition, in which the interplay of supply and demand in the market is assumed to be subject to no hindrances or restrictions of any kind. Everyone, other things being equal, has access to the same kind of information about the same kinds of products. Choice is assumed to be a matter of rationally selecting what is available within an established range. Choices on innovation by an entrepreneur, or choices of product or service by a user, are equally subjected to the assumption of rationality in which the intention is to achieve optimality, the best possible choice in a given situation of perfect competition. (As will be seen later, perfect competition also assumes no transaction costs and perfect foresight, a critique other schools of economic thought address explicitly, as we find later, and assumptions that are addressed by inserting design into economic theory.) Curiously, given such assumptions of rational behaviour, how markets work to efficiently allocate resources rests upon what can only be described as an act of faith without rational proof. The founder of modern economics, Adam Smith, explained this in his seminal volume, The Wealth of Nations, published in 1776, in terms of a concept of ‘the invisible hand of the market’.

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He wrote of any individual being led in his or her investment of capital ‘by an invisible hand to promote an end which was no part of his intention’.3 Markets function efficiently through the aggregate of all individual producer and consumer decisions, operating as though guided by an invisible hand. If not interfered with (under conditions of perfect competition), the pursuit of self-interest by each entrepreneur and consumer produces the most efficient result to the greatest benefit of all. Markets are therefore the sum total of each individual’s attempts to maximize his or her own advantage. However, if any buyer or seller can manipulate a good’s price or distort the market mechanism, then a condition of imperfect competition occurs. The extreme form of imperfect competition is monopoly and it is easy to see the origins of ‘free-market’ economic beliefs in these theories. The essential features of Neoclassical theory are summarized in Figure 2.2. Capital and labour, functioning under conditions of perfect competition, are subjected to the forces of supply and demand, which are reconciled in the marketplace in terms of price. When demand for a product is expressed in willingness and ability to pay a price acceptable to suppliers, a position of equilibrium is reached. On the important question of value, Adam Smith defined two aspects, which he termed value in use and value in exchange. Beyond acknowledging its importance, he has little to say about value in use since it has no direct economic relevance. The things which have the greatest value in use have frequently little or no value in exchange; and on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.4 In economic terms, for Smith, exchange value is more important and he equates it with the value of the labour necessary to produce any commodity. The cost of this labour sets a level below which any market price cannot fall without, of course, leading to a loss. Under normal circumstances this is what any market participant seeks to avoid. The value of any commodity … to the person who possesses it, and who means not to use it or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchange value of all commodities. … What is bought with money or with goods is purchased by labour, as much as what we acquire by the toil of our own body. … Labour was the first price, the original purchase money that was paid for all things.5

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Figure 2.2  The neoclassical model of the economy.

Just as there is little in Smith’s Wealth of Nations that enlightens us as to why people find things useful or desirable, so also is there in Neoclassical theory any substantial concern with how products might be different. Its concept of the market also displays little acknowledgement of the subtle

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dynamics of how supply and demand function, with the entrepreneurial decision-making and innovative processes of firms playing an insignificant role. If market decisions are, indeed, based on goods that already exist, there is little left on which to focus beyond price and quantity. This essentially static concept of processes and products (the ‘evenly rotating’ economy in neoclassical jargon) means that, at least in the short term, the key principles of growth and investment, based upon the relationship between capital and labour, can be argued to be based on constant returns to scale – in other words, doubling the proportions of capital and labour in any productive process will result in a doubling of output. Adding more of either factor without corresponding increases in the other will result in diminishing returns. For example, to increase capital by buying more machines without the necessary workers to operate them will result in lower returns on investment. To reiterate: this will only be so if products, processes and the levels of efficiency of both capital and labour remain constant. The obvious problems of these static assumptions are such that might lead to the question: How can they be credible? The answer is that, in reality, the markets for many kinds of products do indeed fit these criteria. Products of a highly standardized nature, for example, materials such as oil or wheat, commodities such as beer, soft drinks or cigarettes, or shares on any stock exchange, are not generally subject to changes in their essential character or how they are produced, because both are essentially static. This being the case, they are open to rational, numerical inquiry, as Harold Demsetz points out: This correspondence between conceptualization and commercial reality enabled Neoclassical economists to draw conclusions that have been sustained empirically for a wide range of situations. The gathering of evidence was aided substantially by the commensurate measurability of commercial activity. When economists analyze the consumption behaviour of households, the employment choices of workers, and the investments of capitalists, their conclusions are largely drawn from the wealth consequences that flow from alternative decisions. We do not have much to say about tastes and how these may differ across persons and situations, but, in principle, variations in tastes also explain variations in behaviour. Our focus, not exclusively but most often, is on wages, prices, rates of return, and budget constraints. This works quite well in practice if most tastes change only slowly.6 Note that Demsetz confirms the importance of innate ‘measurability’ and avoids ‘taste’ with all its uncertainties and unpredictable nature, on which he comments that in wider aspects of social life, the difficulty in explaining behaviour even through economic logic is greater than for commercial activity because the important channels of causation are more numerous and are less correlated with a single unit of measurement.7

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On the subject of this exclusion of what does not conveniently fit methodological assumptions, a critic of neoclassicism concludes: It would seem that when the choice of method dictates the assumptions, the tail is wagging the dog. Method should follow assumptions, not the other way around. One cannot discard observations about emotion, limited reasoning ability, and other aspects of human behaviour simply because it is methodologically inconvenient to include them.8 The assumptions of Neoclassical theory appear more fragile in any situation of change in the nature of products and processes, where criteria other than cost and quantity become significant in market choice. It is here that the reliance on essentially static concepts in neoclassical models becomes a severe limitation in understanding design. The processes of creating new products or product variations, based on an assumption that someone has a better idea than his or her competitors, by definition creates imperfect competition and, inevitably, a state of disequilibrium as a permanent condition. Another common criticism of neoclassicism revolves around its stress on an individualistic view of society, with social values considered as an arithmetical sum total of individual intentions. Neoclassical economics involves an individualistic view of efficiency. Efficiency is defined as the allocation of resources to ‘highest’, that is, monetarily most remunerative, uses. Social efficiency is additive, that is, the summation of private individual efficiencies.9 The potential tension between individuals’ desire to pursue their own benefit and their simultaneous need for protection from the actions of others requires people to behave in very different ways in differing situations. Culturally … a key requirement for a market system will be a set of values in society that offer vigorous encouragement to self-interest in the market and yet maintain powerful normative inhibitions on the expression of self-interest in other less socially acceptable areas.10 If the exercise of self-interest is encouraged in economic affairs, how do we reconcile this with the need to prevent other people from stealing the contents of our home or mugging us on the street, which they may consider to be in their self-interest? It is an interesting correlation that in the United States, where the doctrine of individualism is strongest, the number of lawyers needed to protect people’s rights is larger than in any other society. The emphasis on individualism therefore seems to downplay those decisions made in any society about what can be consumed individually and what is needed socially. Choices have to be made, in reality, between pizza and police forces, or cigarettes and social welfare programmes. In Neoclassical theory, this leads to a distinction between private goods – bought at a

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price – and public goods – paid for by taxes. The former are included in the market model and therefore are depicted as beneficial. The latter are not subject to market forces; they are commodities, which, once in existence, are available to additional people at no cost. An example is street lighting – there is no competition between suppliers that enables us to choose between alternative lighting systems when we move down a street. An important criterion by which private goods are distinguished from public goods is excludability, or in other words, private goods are those where one person’s consumption precludes the consumption of the same unit by another person. When a supplier can prevent some people from consuming the product – generally speaking, those who do not pay – then the product is excludable and can be supplied by means of a market. Where excludability is not possible or enforceable, goods are said to be nonexcludable, that is, their provision to one individual will automatically make them available to all others, again, as in street lighting. In the context of capitalist societies preaching the virtues of ‘free markets’, of which the United States of America is the leading example, excludability is at the heart of the economic system and there is a constant struggle to extend and protect its boundaries. The extension of control over things previously freely available to make them excludable is illustrated by the example of parking. In the early days of automobiles, parking on the sides of roads in cities was open to anyone and was therefore non-excludable. As soon as spaces were demarcated and parking meters installed, with payment enforceable by law, parking became excludable. There is a growing problem at present in enforcing excludability. The advent of devices such as video and digital recorders, print copiers and image scanners has severely dented the ability of software, music and book publishers to enforce full excludability on recordings and publications. Attempts are constantly being made to strengthen laws and regulations to assert the rights of intellectual property. Excludability is the key characteristic of the concept of property, which hinges on something being sold or rented for profit and restricted only to those who can pay for it. Another elaboration of these ideas is also important. Where one individual’s consumption of a good reduces the quantity available to others, then that good is said to be rival in consumption. This is a characteristic of private goods, which are scarce and require a process of allocation through market mechanisms. When one individual’s consumption of a good in no way diminishes the supply of that good to other individuals, the good is said to be non-rival in consumption. Non-rivalness is a characteristic of public goods. Using a simple matrix (Figure 2.3) it is possible to illustrate the influence of these ideas by juxtaposing the principles of rivalness/non-rivalness and excludability/non-excludability. There is no obvious, determining reason why many goods and services are considered excludable or non-excludable, and considerable variations can be found in how identical or similar products function in economies.

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Figure 2.3  Rivalness and excludability.

For example, sunshine is non-rivalous, available to everyone simultaneously without cost, but a sunbed has to be bought in the market. Even then, a further distinction is possible. Bought by an individual, a sunbed is a rivalous private good – not available to others; bought for a health club, however, where it is available to a succession of people upon payment, it becomes non-rivalous but excludable. Broadcast television in Hong Kong is non-excludable – anyone with an antenna can receive Channels 1–4, whereas cable television is excludable, requiring specific connection to the cable system, which is available only on payment. The television sets required in homes to use either, however, are rivalous and excludable, whereas in a sports bar they will be non-rivalous and excludable. Health care can be considered rivalous, in that a doctor’s time or a hospital bed taken up by one patient makes it unavailable to other patients. However, there is widespread debate about whether health care should be an excludable good, as in the United States, where medical insurance is primarily the financial responsibility of private citizens, or non-excludable, as in the public health system provided for all citizens by the government of Canada. Excludability, in terms of price in a market, is clearly a fundamental criterion for commercial production or service provision of any item in a capitalist economy. Rivalness, with its potential of continuing production and repetitive consumption, is also important, but not as fundamentally necessary – many

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highly successful businesses exploit possibilities of combining non-rivalness with excludability, for example, Netflix or health clubs. (Edit: Or, to bring this into contemporary developments, Uber and Airbnb.) In terms of these ideas, especially at the macro-economic level (the level of big general principles and of fiscal and monetary steering policies), it is easy to see how design can be regarded as non-excludable and therefore of little economic value. On some levels, its outcomes can be easily seen and easily copied. New concepts of major fashion designers, for example, will be on the streets around the world via major clothing chains within two weeks of their appearing at exclusive fashion shows in Paris, Milan, London or New York. Even though attempts have been made to give designs protection by licensing systems analogous to patenting, these can usually be evaded by means of slight modifications of form, pattern or colour. Product or graphic designs produced in one country or by one company are also widely imitated by competitors. There are innumerable companies around the world that specialize in being ‘fast-followers’, adept at producing imitations of successful innovations with great speed and at low cost. For this reason, design can be considered, along with sunshine and public roads, as something virtually impossible to exclude, something that can be easily acquired at almost no cost. This in large measure explains why some economists in the United States regard a policy of public support for design in business as of no potential value. At the micro-economic level (the operational sphere of business practice), the influence of neoclassical ideas can also lead to design not being considered a serious contribution to competitiveness, since it cannot quantify its contribution; neither is it easy to measure public taste and preferences. Consequently, in this view, the value of design is restricted to superficially differentiating products that basically remain the same and essentially compete on price. If neoclassical concepts and methods are useful in analysing short-term events in basically stable markets, their potential for understanding longerterm patterns of change has been widely questioned. As Jon Elster observes: Neo-classical theory is at its best when dealing with static settings, including intemporal equilibria. The extension of the theory to the dynamic problem of innovation is, however, problematic.11 Difficulties frequently arise when the circumstances under which any body of theory and practice evolved begin to change. Neoclassicism is increasingly questioned because in important respects, it does not explain many crucial aspects of development. In a critique of neoclassicism, British economist Mark Blaug pointed out: A competitive economy tends to produce the kind of goods people want at the lowest possible price because it encourages entrepreneurship and technical dynamism through a restless struggle for advantage, a struggle

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that is not confined to price competition but includes non-price variables, such as new goods, better old goods, better-serviced goods, and more quickly delivered goods.12 Technological growth, for example, is an indisputable fact and the effects have been profound. Before the Industrial Revolution, it is calculated that income per head doubled only once every five hundred years, but in the last two hundred years, it has doubled every forty-four years.13 Innovations on every level of life, in products, processes and organizations, have created economic growth and substantially improved living standards. Considered in terms of Neoclassical theory, the two factors of production, capital and labour, are finite at any point in time, which sets a limit to opportunities for economic growth. The reason for growth occurring beyond these limitations, and the key factor in creating and sustaining the modern world can, therefore, be reasonably attributed to an accelerated pace of technological innovation. Yet, strangely, in Neoclassical theory, technological progress is not explained, but has the status of an exogenous variable, something known to be an influence, but outside the loop of what is clearly understood and can be quantified. In neoclassical thinking, technology functions in indefinable ways – as a black box, the workings of which are evident but cannot be known. This is in contrast to an endogenous factor, something integral to a process or model and clearly definable. This creates a strange situation. Technological progress was seen as something that simply rained down from heaven. Studies show that, in most economies, higher inputs of labour and capital account for barely half the total growth in output this century. The huge unexplained residual was labelled ‘technological change’, but in truth, it was a measure of economists’ ignorance.14 If it is ‘a measure of economist’s ignorance’, as The Economist termed it (and which journal is better qualified to judge this?), then it also has the more serious implication that Neoclassical theory can address only half of what it purports to explain. If increases in investment do not adequately account for an economy’s long-term rate of growth, and technological progress is a major contributor, it requires greater understanding of the role of technology, and the role of design with it, than has hitherto existed. * It is clear that neoclassical economic theory raises many questions and provides few answers for design theory and practice. The emphasis on labour and capital as the two factors of production driving decisions in business, with its emphasis on price, is very limiting, and, given the manner in which technology is inadequately acknowledged, it should hardly be surprising that design is ignored. This might help explain, however, some of the lack of awareness among policy makers in government and business about what design is and what it can achieve.

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Rivalous/excludable goods are most valued in neoclassical theory – for they are seen as wealth-creating. The view of design as something that in economic terms is an antithesis, non-excludable and non-rivalous, something that can be copied at will and difficult to convert into a proprietary good, consigns it to an economic limbo. The major emphasis in neoclassical economics on price, in what are essentially static markets, effectively limits the role of design to producing something cheaper and/or something superficially different to competitors’ products. The possibility of fundamentally innovative design and qualitative improvement is not really sustainable in the context of such ideas. Criticizing Neoclassical theory – the dominant theory of the capitalist system – from the standpoint of design, however, is likely to have little effect. Other tendencies in economic theory, nevertheless, with alternative models of how markets function, offer greater hope for opportunities to explore the economic role of design.

Readings Some introductions to neoclassical economics Truman Bewley (2007). General Equilibrium, Overlapping Generations Models, and Optimal Growth Theory, Cambridge, MA: Harvard University Press. Edward Chamberlin ([1933] 1965). The Theory of Monopolistic Competition: A Re-orientation of the Theory of Value. Cambridge, MA: Harvard University Press. Harold Demsetz (1997). ‘The primacy of economics: An explanation of the comparative success of economics in the social sciences’, Economic Inquiry 35 (1): 1–11. John Maynard Keynes (1936). The General Theory of Employment, Interest and Money, many editions available on the internet. Arjo Klamer (2007). Speaking of Economics: How to Get in the Conversation (Economics as Social Theory), NY: Routledge. Adam Smith (1776). Wealth of Nations, many editions available on the internet. Hal R. Varian (2014). Intermediate Microeconomics: A Modern Approach (Ninth Edition), NY: W.W. Norton & Co.

Some critical studies Stephen A. Marglin (1987). Growth, Distribution and Prices, Cambridge, MA: Harvard University Press Deirdre N. McCloskey (1998). The Rhetoric of Economics, Madison: University of Wisconsin. Jamie Morgan, editor (2015). What is Neoclassical Economics?: Debating the Origins, Meaning and Significance (Economics as Social Theory), NY: Routledge.

3 Austrian theory

Many basic criticisms of Neoclassical theory and the formulation of important alternative concepts and models were prefigured in the work of a group of scholars who initially came from Austria, although the term now covers scholars of many nationalities. The difference in emphasis is marked. If Neoclassical theory puts emphasis on perfect competition resulting from the intersection of supply and demand – and therefore on price as the agency that creates and determines equilibrium within basically stable markets – Austrian theory (which, as one of its American proponents Israel Kirzner has it, seeks to focus on what has been termed ‘previously unthought Knowledge’1) puts it quite differently. In this view, the interaction of the two factors of production (capital and labour) creates opportunities for innovative strategies that generate product innovations, which in turn create conditions of imperfect competition – resulting in the destruction of existing products and the dynamic creation of new demand and new markets. It is these innovative products that function as the principal agents of value creation. (See Figure 3.1 below.) * The concern for how value is attributed to products was a major emphasis in the work of the founder of the Austrian School, Carl Menger (1840– 1921). In 1871, he published a book, Grundsätze der Volkswirtschaftlehre (Principles of Economics). In the preface he wrote: Whether and under what conditions a thing is useful to me, whether and under what conditions it is a good, whether and under what conditions it is an economic good, whether and under what conditions it possesses value for me and how large the measure of this value is for me, whether and under what conditions an economic exchange of goods will take place between two economizing individuals, and the limits within which a price can be established if an exchange does occur – these and many

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Figure 3.1  Neoclassical economics and Austrian theory compared.

other matters are fully as independent of my will as any law of chemistry is of the will of the practicing chemist.2 Menger then went on to define each of the terms in italics. He had a tendency to leave no stone unturned in his efforts to make his meaning clear, which means his texts are often very detailed and even long-winded. Nevertheless,

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many of his insights and ideas are of great relevance to design, as in the distinction he draws in the following paragraph: Things that can be placed in a causal connection with the satisfaction of human needs we term useful things. If, however, we both recognize this causal connection, and have the power actually to direct the useful things to the satisfaction of our needs, we call them goods.3 There is an important distinction here. In early human history, there are many examples of found objects or crude tools that have use. Menger refers, however, to understanding the connection between use and purpose and the power to specifically create what satisfies our needs through deliberately creating forms to serve human needs (a distinction implying design although Menger never directly refers to the activity). He continues with a detailed definition of what in his terms constitutes a good: If a thing is to become a good, or in other words, if it is to acquire goodscharacter, all four of the following prerequisites must be simultaneously present: 1 A human need. 2 Such properties as render the thing capable of being brought into a causal connection with the satisfaction of this need. 3 Human knowledge of this causal connection. 4 Command of a thing sufficient to direct it to the satisfaction of the need. Only when all four of these prerequisites are present simultaneously can a thing become a good. When even one of them is absent, a thing cannot acquire goods-character. 4 A further distinction Menger draws is between goods that directly minister to people’s needs, which he terms ‘goods of first order’, and the other goods needed to produce these. He gives the example of bread as a good of first order, while the flour needed to produce the bread is a good of second order, while the mill equipment needed to produce the flour can be thought of as a good of third order, and so on. All will be directly or indirectly involved in satisfying a human need and are thus subject to being influenced by the manner in which people define their needs. An American advocate of Austrian ideas, Murray N. Rothbard, writes: As Carl Menger, founder of the Austrian School, pointed out, the valuations by consumers of their satisfactions, or ends, impute values to the consumer goods, the means, that are expected to satisfy those wants.

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And since producers’ goods are only means to the production and sale of consumer goods, the values of the factors of production will in turn be determined by and be equal to the expected values of the consumer goods to the consumers.5 A further definition given by Menger is of an economic good, which is created by scarcity. It is a ‘good whose available quantity does not meet requirements completely, and thus we have the principle that the existence of requirements for goods of higher order is dependent upon the corresponding goods of lower order having economic character’.6 This leads to a further distinction between property and wealth. The former is ‘the entire sum of goods at an economizing individual’s command’.7 In contrast, ‘The entire sum of economic goods at an economizing individual’s command we will, on the hand, call his wealth.’8 Menger goes on to point out that the perceptions people bring to the tasks of economizing, or acquiring goods in conditions of scarcity, give rise to a deeper phenomenon of great importance: the value attributed to goods. In part this is also due to conditions of scarcity. Value is thus the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs.9 The attribution of value, however, goes beyond quantitative satisfaction of material needs. It is also dependent on the significance that goods assume in human life: Value is thus nothing inherent in goods, no property of them, nor an independent thing existing by itself. It is a judgement economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men.10 It is difficult to overestimate the significance of Menger’s understanding of how people determine value.11 One of his successors, Friedrich von Hayek, summed up his contribution in this regard: At every stage Menger stresses … that these attributes do not inhere in things (or services) as such; that they are not properties that can be discovered by studying the things in isolation. They are entirely a matter of relations between things and the persons who take action about them. It is the latter, who from their knowledge of their subjective wants, and of the objective conditions for satisfying those wants, are led to attribute to physical things a particular degree of importance.12

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If value is therefore subjective and determined by users, it is clearly of central importance in design and business, and yet, there are still many designers and managers who seem to believe that what they do and supply is the determinant of value. Menger is emphatic on this point: There is no necessary and direct connection between the value of a good and whether, or in what quantities, labour and other goods of higher order were applied to its production.13 Being subjective, value can change over time and in different contexts. It can also be mistaken, since as Menger points out: ‘Error is inseparable from all human knowledge.’14 He acknowledges that not all needs can be directly satisfied and explains this by distinguishing between the direct satisfaction of needs by products that have use value, and other goods that can be indirect means of obtaining satisfaction since they have exchange value: Use value, therefore, is the importance that goods acquire for us because they directly assure us the satisfaction of needs that would not be provided for if we did not have the goods at our command. Exchange value is the importance that goods acquire for us because their possession assures the same result indirectly.15 Money has, of course, become the primary embodiment of exchange value, but Menger also points out that at different times and places, money has taken very different forms, such as furs, pieces of metal, cattle and shells, and it therefore has value only at a specific time and place. A number of Menger’s contemporaries and followers, among them Friedrich von Wieser, extended his ideas further.16 He also argued that value could not be defined in terms of labour, but emerged from a combination of factors relating to scarcity and utility. What is important is not the cost of production itself, but the products generated and the utility they afford. Utility, however, had both an individual and a social dimension: Value is, in the first instance, estimated by every one from a personal standpoint as ‘value in use’. In the exchange of commodities, however, these individual estimates join issue, and thence arises price or ‘value in exchange’.17 In contrast to the neoclassical standpoint that consumers make rational choices in circumstances of perfect competition, Wieser pointed out: Prices cannot be taken without qualification as the social expression of the valuation of commodities; they are the results of a conflict waged over those commodities, in which power besides need, and more than need, has decided the issue.18

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Another issue in how markets function, Wieser argued, is that although value in exchange is objective in terms of being defined by price, value in use is not only particular to individuals but is subjective, leading to the further question: ‘Why do men prize commodities?’19 Theory has to examine both phenomena. I will restrict myself to showing why it may not neglect subjective values. The reason is, that it would thereby leave unexplained all individual decisions in economic matters, e.g. it would not even explain why any one buys.20 That last sentence is of great significance when considering the economic role of design, which is linked integrally to the reasons why individuals make particular purchases. Wieser is correct in emphasizing the subjective dimension of such decisions, which are not easily specified, but this is no reason to omit them from any explanation of buyers’ behaviour. Two other outstanding scholars of the Austrian school in the twentieth century are Ludwig von Mises and Friedrich von Hayek. There were different emphases in their work, but both affirmed the ‘invisible hand’ concept – that price was the factor enabling the myriad decisions of individual people to be coordinated in a manner beyond the ability of person or group. Both also challenged the static nature of the market in Neoclassical theory, substituting instead a more dynamic understanding of its workings. For Mises, action is only comprehensible in terms of the ideas that generate it. ‘Human action,’ he wrote (in the eponymous text which is his magnum opus), ‘is purposeful behaviour.’21 The aim of this purposeful behaviour is change to achieve improvement in some form or other. ‘Acting man is eager to substitute a more satisfactory state of affairs for a less satisfactory. His mind imagines conditions which suit him better, and his action aims at bringing about this desired state.’22 The influence of Menger is evident when he also stressed that ‘economics is not about things and tangible material objects: it is about men, their meanings and actions. Goods, commodities and wealth and all the other notions of conduct are not elements of nature; they are elements of human meaning and conduct.’ If the meanings and actions of human beings are the central concern of Austrian theory, they cannot function in a static world, but in one that is a process of ceaseless ferment. ‘There is in the course of human events no stability and consequently no safety,’ stated Mises. ‘Constancy and rationality are entirely different notions,’ he emphasized, pointing out that consistency of plans does not entail constancy of observable action in a world of change. Here again, the factor of valuation plays a crucial role. ‘Only in one respect can acting be constant: in preferring the more valuable to the less valuable. If the valuations change, acting must change also.’23 *

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Hayek’s work similarly criticized Neoclassical theory for its static quality, arguing that if theory was to be validated in empirical reality, it had to be dynamic.24 ‘It is, perhaps, worth stressing,’ he wrote, ‘that economic problems arise always and only in consequence of change.’25 A particular target in this respect was the concept of equilibrium: Since equilibrium is a relationship between actions, and since the actions of one person must necessarily take place successively in time, it is obvious that the passage of time is essential to give the concept of equilibrium any meaning.26 Competition for Hayek innately involved change, and he noted that here too Neoclassical theory tended to avoid its consequences: ‘Competition is by its nature a dynamic process whose essential characteristics are assumed away by the assumptions underlying static analysis.’27 The concept of ‘perfect competition’ was another target in his critique of how neoclassical models eliminated some of the most important elements of how market actually worked: How many of the devices adopted in ordinary life to that end would still be open to a seller in a market in which so-called ‘perfect competition’ prevails? I believe that the answer is exactly none. Advertising, undercutting, and improving (‘differentiating’) the goods and services produced are all excluded by definition – ‘perfect’ competition means indeed the absence of all competitive activities.28 Hayek did not explore the concept of ‘differentiating’, or other references to branding and advertising, in anything other than the most general terms, but he was clearly aware of their role as vital elements in the competitive process. In fact, it need hardly be said, no products of two producers are ever exactly alike. … These differences are part of the facts which create our economic problem, and it is little help to answer it on the assumption that they are absent.29 Acknowledging the huge range of human skills, knowledge, tastes and needs meant for Hayek that any attempt by the state to impose centralized solutions on any range of problems would result not only in a diminution of economic efficiency, but also in a restriction of individual freedom. The essential function of economic activity was to make the best use of whatever resources were available at any given time, not to impose patterns of what central planners thought should be the situation. Any attempt to impose centralized planning would inevitably diminish individual freedom. Therefore, while he regarded individualism as the vital core of economic activity in a free society, his views went far beyond the boundaries of economics.

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In this regard, it is little accident that Hayek is most famous for a book, The Road to Serfdom, published at the end of the Second World War, which is a compelling defence of individualism against the ideologies of centralized planning that he saw emerging in even ostensibly democratic societies. He affirmed Adam Smith’s belief in ‘the invisible hand’, arguing that the spontaneous and uncontrolled efforts of individuals were capable of producing a complex order of economic activities. For Hayek, although individualism was the most important principle in society, it did not mean a dismissal of a role for government: The dispute between the modern planners and their opponents is, therefore, not a dispute on whether we ought to choose intelligently between the various possible organizations of society; it is not a dispute on whether we ought to employ foresight and systematic thinking in planning our common affairs. It is a dispute about what is the best way of so doing. The question is whether for this purpose it is better that the holder of coercive power should confine himself in general to creating conditions under which the knowledge and initiative of individuals are given the best scope so that they can plan most successfully; or whether a rational utilization of our resources requires central direction and organization of all our activities according to some consciously constructed ‘blueprint’.30 Hayek stressed the importance of the legal framework in enabling individualism to be a realistic possibility and for competition to work beneficially. Ultimately, though, his justification of individualism and competition as the only effective method by which markets could be coordinated rested upon an argument that has become even more relevant now than when he expounded it. As society has become more complex, so it becomes more impossible for any one person to understand and effectively take decisions that cover all the relevant points of any problem. Decentralization is therefore imperative, leaving decisions to those who know most intimately the details, the problems and the choices involved. The more complex the system, he argued, the more urgent the need for decentralization, which will be more efficient in the long run.31 In addition, it will allow progress to emerge from variety and diversity in the range of responses to developments, which may be in unexpected forms that could never be anticipated by central planners. It is necessary, however, that the myriad decisions be coordinated in a meaningful way, and the price system in a market framed by the law and functioning freely within the law, was the only means to achieve this. Hayek, as noted earlier, acknowledged the role of a range of activities that he grouped under the term ‘differentiation’ as vital elements in competition. When he mentions ‘design’, it is in terms of social science usage, meaning a plan or intention, specifically on the part of a central planning body. Yet,

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when he writes about competition, he is capable of expressing the essence of what design in the sense used in this book essentially means, and of summing up its relationship to economics. All that is required is to substitute the word ‘design’ for ‘economics’ in the following paragraph: The solution of the economic problem of society is in this respect always a voyage of exploration into the unknown, an attempt to discover new ways of doing things better than they have been done before. … All economic problems are created by unforeseen changes which require adaptation.32 The solution of the design problem of society is in this respect always a voyage of exploration into the unknown, an attempt to discover new ways of doing things better than they have been done before. … All design problems are created by unforeseen changes which require adaptation. This congruence between economics and design, both being concerned with change, both being concerned with efforts to substitute a more satisfactory state for existing ones, offers considerable scope for exploration and development. * With the passage of time, people of other nationalities have become adherents of, and in some cases substantial contributors to, Austrian theory. In the United States, for example, Israel M. Kirzner follows the general pattern in criticizing mainstream (i.e., neoclassical) theory, which although explaining the pattern of relationships in markets that already work, does nothing to explain how those markets come into being. He argues the case for ‘entrepreneurial discovery’ as a key factor in explaining why and how markets work. Entrepreneurial discovery, he argues, ‘enables decentralized decision-makers to recognize when present decisions can be improved upon, and to anticipate future changes in the decisions made by others’.33 Kirzner also echoes another constant theme in Austrian theory in his stress on change and the future. ‘The inescapable and radical uncertainty faced by each human agent ensures the open-endedness of human choice. When a human being takes an action, he is, in that action, grasping at a specific picture of the future as the relevant framework for his action. Action consists in grappling with an essentially unknown future.’34 For Kirzner, action that determines markets, however, is focused on entrepreneurial discoveries, which ensures that less efficient productive action will be replaced by superior ways of serving consumers – by producing better goods and/or by taking advantage of hitherto unknown, but available, sources of resource supply. The emphasis is therefore on discovery of new products and processes in the face of risk and uncertainty, rather than the exercise of individual preferences in relation to what

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already exists. There are limitations, however, to Kirzner’s concept of entrepreneurial decision-making. The entrepreneur who ‘sees’ (discovers) a profit opportunity is discovering the existence of a gain, which had (before his discovery) not been seen by himself or by anyone else. … When the entrepreneur discovers a profit opportunity, he is discovering the presence of something hitherto unsuspected.35 The limitation is that Kirzner’s entrepreneur is not conceiving or creating something entirely new, but discovering something that already exists in external reality, but which has not yet been perceived. To some extent, these are revealed by changing conditions revealing situations of which market participants were previously unaware. ‘Discovered gain is gain that, despite its possible prior physical existence was, as far as human cognisance is concerned, simply “not there”. What brings it into existence, ex nihilo, is human (entrepreneurial) alertness.’36 The values driving the entrepreneur, however, according to Kirzner, are still those of price. ‘Whenever an entrepreneur senses the possibility of pure profit by moving into a new line of production, or by innovating a new method of production, he is taking advantage of what he believes to be a case where the market is erroneously assigning two different values to what is, in economic reality, the same item.’37 In other words, discovery is a transactional process dictated by prices. Kirzner’s shift of emphasis, from a rational consumer choosing between given alternatives to a risk-taking entrepreneur seeking better ways of achieving ends, is important in broadening the understanding of how markets actually work. His concept of discovery within opportunities provided by existing frameworks and the role of price, however, implicitly emphasizes incremental change within what actually exists, which brings his views closer to the mainstream in the United States. Kirzner has in contrast little to say about the possibility of radical innovation that creates totally new products and markets. It is the latter that are raising the most serious questions in the contemporary world. * If the influence of the Austrian school has not been so great in the academic world, perhaps the most profound influence it has exercised in the United States has been in the field of management theory, through the work of Peter Drucker who was born and educated in Austria, and his views are a classic manifestation of Austrian economic ideas. One hundred and fifteen years after Menger articulated the basic principles of the school, Drucker trenchantly restated them in terms that have been a constant theme in his writings: ‘Quality’ in a product or service is not what the supplier puts in. It is what the customer gets out and is willing to pay for. A product is not ‘quality’ because it is hard to make and costs a lot of money, as manufacturers

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typically believe. That is incompetence. Customers pay only for what is of use to them and gives them value. Nothing else constitutes ‘quality’.38 In general, the Austrians placed little emphasis on the role of the state. Hayek repeatedly acknowledged a role for state policy, although not in terms of economic control, which he vigorously rejected; nevertheless, he conceded that state action was important in protecting individual liberty. Most important in Austrian theory, however, is the role of quality as a factor in competitive success and it is this that opens opportunities for discussion of design.

Readings F. A. Hayek (1980 [1948]). Individualism and Economic Order (Reissue Edition), Chicago: University of Chicago Press. Hayek won the Nobel Prize in 1974. His Nobel lecture is available online: http:// www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1974/hayeklecture.html Israel M. Kirzner (2011). Market Theory and the Price System, edited, and with an introduction, by Peter J. Boettke and Frederic Sautet, Indianapolis: Liberty Fund. Israel M. Kirzner (March 1997). ‘Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach’, Journal of Economic Literature XXXV. A good summary of Kirzner’s view on the role of entrepreneurs. Ludwig von Mises (2010 [1947]). Human Action: A Treatise on Economics (Scholars Edition), Auburn, AL: Ludwig von Mises Institute. Murray Rothbard (2011 [1962]). Man, Economy, and State with Power and Market (Scholars Edition), edited by Joseph T. Salerno, Auburn, AL: Ludwig von Mises Institute. Karen I. Vaughn (1998). Austrian Economics in America: The Migration of a Tradition (Historical Perspectives on Modern Economics), paperback edition, Cambridge: Cambridge University Press. Leland B. Yeager (Fall 1997). ‘Austrian economics, neoclassicism, and the market test’, The Journal of Economic Perspectives, Nashville, Volume: 11, Issue: 4, Pagination: 153–65. This is a balanced appraisal of the strengths and weaknesses of both Austrian and neoclassical ideas and ends with some sharp comments upon why the latter is so dominant in American academic institutions.

4 Institutional theory

Institutional theory seeks to explain the differing levels of economic performance in firms and nations by examining the context in which economic activity takes place. In the past, this breadth resulted in criticism of the lack of operational applications deriving from the theoretical insights. In more recent years, however, there has been a renewed interest in the field under the rubric of the new institutional theory. Although some scholars look to Karl Marx as the originator, the generally acknowledged father of institutional theory in economics was Thorstein Veblen.1 He viewed modern society in evolutionary terms, but pointed out a constant time lag in human institutions adapting to new tendencies in technology. Two human tendencies were in conflict over responses to new developments, generally distinguished by an emphasis on production and acquisition. The first, production, was based on instincts that strove for creative adjustment to the new, expressed primarily in efforts to shape new materials and processes into useful artefacts; in contrast, acquisition was characterized by efforts to preserve privilege and to avert or restrict the new. The latter was the target of Veblen’s first major book, The Theory of the Leisure Class, published in 1899, in which he coined the phrase ‘conspicuous consumption’ (Figure 4.1). He depicted the emergence of a leisure class as synonymous with ownership, which has nothing to do with the necessary subsistence minimum, being concerned, instead, with the demonstration of superfluity, either in terms of time or of goods. The relation of the leisure (i.e., propertied non-industrial) class to the economic process is a pecuniary relation – a relation of acquisition, not of production; of exploitation, not of serviceability.2 With regard to how this desire to demonstrate wealth affects perceptions of the aesthetic characteristics of goods, Veblen’s insights were exceedingly sharp. His identification of ‘economic beauty’ in terms of simplicity of form anticipates in many respects the emergence of the body of aesthetic theory collectively known as Modernism that had its heyday in the 1920s. This he

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Figure 4.1  Veblen and the Theory of the Leisure Class (1899).

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contrasted with the influence of social canons of taste based on conspicuous consumption: So far as the economic interest enters into the constitution of beauty, it enters as a suggestion or expression of adequacy to a purpose, a manifest and readily inferable subservience to the life process. This expression of economic facility or economic serviceability in any object – what may be called the economic beauty of the object – is best served by neat and unambiguous suggestion of its office and its efficiency for the material ends of life.3 Veblen then goes on to elaborate his ideas of how design that goes far beyond what is necessary becomes an index of wealth, in his explanation of what constitutes conspicuous consumption (see Figure 4.2): On this ground, among objects of use, the simple and unadorned article is aesthetically the best. But since the pecuniary canon of reputability rejects the inexpensive in articles appropriated to individual consumption, the satisfaction of our craving for beautiful things must be sought by way of compromise. The canons of beauty must be circumvented by some contrivance, which will give evidence of a reputably wasteful expenditure, at the same time that it meets the demands of our critical sense of the useful and the beautiful, or at least meets the demand of some habit that has come to do duty in place of that sense. Such an auxiliary sense of taste is the sense of novelty; and this latter is helped out in its surrogateship by the curiosity with which men view ingenious and puzzling contrivances. Hence it comes that most objects alleged to be beautiful, and doing duty as such, show considerable ingenuity of design and are calculated to puzzle the beholder – to bewilder him with irrelevant suggestions and hints of the improbable – at the same time that they give evidence of an expenditure of labour in excess of what would give them their fullest efficiency for the ostensible economic end.4 In another of his seminal works, The Instinct of Workmanship (1914), he closely argued the importance of the linkage between technology and institutional organization across human history. At the heart of Veblen’s concept of the importance of institutions in explaining economic practice was a belief that technological knowledge had throughout history been something held as a common, inherited stock of capability. It was constantly being modified by individuals but was not the unique property of any single person: Each successive move in advance, every new wrinkle of novelty, improvement, invention, adaptation, every further detail of workmanlike innovation, is of course made by individuals and comes out of individual

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Figure 4.2  Veblen on beauty and workmanship from the perspective of economics.

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experience and initiative, since the generations of mankind live only in individuals. But each move so made is necessarily made by individuals immersed in the community and exposed to the discipline of group life as it runs in the community, since all life is necessarily group life. The phenomena of human life occur only in this form.5 The influence of the community was particularly evident in the function of instincts. An important distinction, in Veblen’s work, was drawn between reflex responses, or what he called ‘tropismatic action’, and ‘instinct’. He characterized the former as being an unthinking reaction to stimuli. In contrast, instinct was the result of reflection on such events, and was more an action-oriented, goal-directed response to situations. One of the most important examples was the instinct of parenting, which Veblen regarded as referring not only to the care of a parent for his or her family, but also, in a broader sense, to care for the heritage to be handed on to subsequent generations. Veblen emphasized: ‘All instinctive behaviour is subject to development and hence to modification by habit.’6 Instinct therefore has the essential qualities of being both a highly adaptive means of becoming habituated to different circumstances, and a capacity for accumulating into a body of wisdom based on experience (which anticipates major elements of the later concepts of tacit knowledge and human capital). As such, he regarded instinct as a crucial capability in enabling humans to rise above the brute level of nature. One of the most important instincts in achieving this rise and contributing to progress was the instinct of workmanship, which Veblen regarded as being concerned ‘with practical expedients, ways and means, devices and contrivances of efficiency and economy, proficiency, creative work and technological mastery of facts’.7 However, this instinct of workmanship does not exist in isolation, but instead should be regarded as a tool, functioning as a hammer does in answering the purposes of a craftsman. Fulfilling aims defined from other sources, however, means it is liable to be drawn into value systems other than those unique to it. This creates a problem that Veblen calls ‘contamination’, whereby the working of any one instinct ‘is incidentally affected by the bias and proclivities inherent in all the rest’, to the extent that distortion may be a real threat. A capacity for innovation is particularly susceptible to such influence: Innovation, the utilization of newly acquired technological insight, is greatly hindered by such institutional requirements that are enforced by other impulses than the sense of workmanship.8 In other words, the general cultural context in which technology emerged could be influenced in either a negative or positive sense. In primitive

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societies, the influence of rule by elders, or taboos in many forms, were examples of such contamination. In the late nineteenth and early twentieth century, Veblen witnessed the growth of mechanical industry, which he generally viewed as having enormous positive potential in its contribution to higher living standards and general welfare. However, in the context of capitalist economic forms of organization, this emergence resulted in other forms of contamination, with an emphasis on price, monetary values and what is calculable becoming particularly evident. He wrote of ‘the supreme dominance of pecuniary principles, both as standards of efficiency and as canons of conduct’.9 The results of these values becoming dominant, not only in industry, but also in society at large, affected not only the instinct of workmanship as manifested in the processes of production, but also the products emanating from the process and the values attributed to them in society, leading to reiteration of one of the main points of The Theory of the Leisure Class: So also, to the current common sense in a community trained to pecuniary rather than to workmanlike discrimination between articles of use, those articles which serve their material use in a conspicuously wasteful manner commend themselves as more serviceable, nobler and more beautiful than such goods as do not embody such a margin of waste.10 The distinction between ‘the productive’ and ‘the acquisitive’, or ‘the industrial’ and ‘the pecuniary’ values in modern society, remained a central and generally pessimistic feature of Veblen’s theories. Many of the themes Veblen developed were taken up by another formative theorist of institutional economics, Clarence Ayres. He shifted the emphasis to a broader distinction between ‘the technological’ (or instrumental) and the ‘ceremonial’ (or institutional). Ayres adopted the term ‘instrumental’ from the American philosopher John Dewey, who used it to indicate not just the tools and skills specific to technology, but also the processes and meanings involved in applications of technology. The feature of Dewey’s critique of technology that renders it unique is his contention that tools or instruments cut across traditional boundary lines such as those between the psychical and the physical, the inner and the outer, and the real and the ideal. This idea, which Dewey cultivated and nourished until it grew into a methodology, was Dewey’s instrumentalism.11 Ayres’ reformulation of instrumentalism, however, ran into considerable difficulties. For him, human nature was explained by cultural patterns, which he subdivided into the material and non-material. In material culture, skills and tools essentially constituted technology, but Ayres realized that they could at times assume attributes that were non-material – the possession

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of particular objects, for example, could be highly meaningful. Conversely, ceremonial artefacts that had material form, such as robes and maces, could not be regarded as technology. This intertwining of instrumental and ceremonial functions meant the distinction between them was difficult to sustain, which raised continual problems.12 * Institutional economics clearly recognizes that the organization of technology, its functional processes and its material outcomes are not the sum total of its influence and effect. Changes resulting in greater technical or economic efficiency, may, through the perspective of such a limited view, be regarded as contributing to progress. Confining it to such terms, however, ignores other factors such as the influence of how technology affects the behaviour of individuals and organizations, its social consequences and the values it engenders. All these reaffirm Ayres’ emphasis on the role of technology in relation to culture. However, later elaborations of Ayres’ work by one of his students, J. Fagg Foster, and Marc Tool, a student of Foster’s, attempted to develop clearer classifications by increasingly eliminating references to technology, which resulted in problems. Eliminating something that is known to be crucial simply because it is problematic to define is not to provide a convincing argument. In contrast to neoclassical economics, early institutional theory broadened the range of explanation to encompass normative aspects of technological and economic activity. It also opened up discussion of the role of central organizations in society and their contribution to efficiency, values and economic performance. Yet, it failed to have comparable influence, not only because like neoclassical models it also began to exclude technology in its causal explanations but, more crucially, because it did not have an adequate concept of the way its concepts could be implemented in operational terms, which Neoclassical theory convincingly claimed to do. This can be explained in part by the fact that institutional patterns and the interactions of human beings within them are infinitely complex and manylayered. Social institutions cannot easily be reduced to isolated components. A change in one part of such an organization has effects and ramifications echoing through the whole, so that change and adaptation is a continual, ongoing process. This contrasts strongly with the clearly defined parameters of Neoclassical economic theory and its claims to ‘scientific’ explanation. To give a summary, then, of early institutionalism (OIE, or ‘original institituional economics’): On one side, it broadened the range of explanation to technological and economic activity and opened up discussion of the role of central organizations in society and their contribution to efficiency, values and economic performance. Most emphatically of all (as Figure 4.3 shows), it insists that there is an irreducible institutional component to how capital and labour (and technology) as factors of production are translated into innovative strategies.

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Figure 4.3  Institutions added to the Austrian model of value creation.

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But on the other, it subsequently began to exclude technology in its causal explanations. A major problem for its take-up in economics was that precisely because institutional patterns and human interactions are complex, and not easily reduced to isolated components, it lacked both clear parameters capable of quantification and ‘scientific’ explanation, and an adequate concept of implementation in operational terms.

New Institutional Theory In what has become known as New Institutional Theory (NIE), examining this pattern of complexity has given alternatives to neoclassicism a new impetus. A seminal paper in this direction was by Ronald Coase in 1937, ‘The Nature of the Firm,’ in which he questioned the neoclassical argument that the price mechanism is the determinant in how markets allocate resources.13 If this was so, he asked, what was the reason for the existence of firms? In examining the actual workings of firms, he identified a layer of functions beyond those associated with production that he termed ‘transaction costs’. These, he argued, were of equal importance to manufacturing costs in explaining the existence and workings of a firm. Within transaction costs, he included all the costs that were an essential part of how a firm undertook its business, such as purchases of materials and supplies, banking, legal and insurance costs, information and promotion, design and delivery. Minimizing transaction costs was therefore suggested as the primary function for firms, but Coase also envisaged how transaction innovations and efficiencies contributed more widely to an economic model involving product innovations and dynamic imperfect competition. Coase later elaborated this view to propose that if one adds to that an understanding of how one firm interacts with another in a complex pattern of interrelationships in the context of laws, social habits and cultural institutions, ‘you have a complicated set of interrelationships the nature of which will take much dedicated work over a long period to discover’.14 Otherwise, Coase asserted in a trenchant critique of neoclassicism, the situation will remain that ‘economists study how supply and demand determine prices but not the factors that determine what goods and services are traded on markets and therefore are priced’.15 The conclusion of that statement is of enormous relevance in any discussion of design and economics. How do goods of various kinds appear on the market and why are they priced as they are? * Coase’s work on transaction costs has been elaborated in the work of Oliver Williamson.16 He argues that firms and markets are alternative mechanisms for coordinating transactions, and the choice of one or the other is based on

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the respective cost associated with the transaction. Three levels of factors are all interrelated in how transactions function: individuals, governance structures and institutional environments. On the subject of individuals, Williamson argues that human economic behaviour cannot be regarded as unconditionally rational: ‘Transaction cost economics expressly adopts the proposition that human cognition is subject to bounded rationality,’ he states, and elaborates on this by quoting Herbert Simon ‘– where this is defined as behaviour “intendedly rational, but only limitedly so.”’17 Bounded rationality is a concept based not only on recognition of human frailties, such as the existence of self-interested opportunism, but also on acknowledgement of the difficulty of rational judgement and the limits to it in complex situations. Information can be incomplete or costly to acquire, and the true nature of problems and opportunities in many situations may be veiled. By governance, Williamson means the processes by which organizations change and transform themselves. Adaptation is ‘the central problem of economic organization’, and the capacity to adapt distinguishes levels of performance between firms. ‘A high-performance system will align transactions with governance structures in relation to their adaptive needs.’18 The institutional environment is the context, the constitutional framework and laws, for example, that establish the rules of the game, within which the institutions of governance function. There may be a significant difference, however, between the framework of rules and how they are practised or interpreted by the governance structures. A major element in Williamson’s work is the drive to make institutional economics operationally valid and capable of predictive power. To achieve this, he advocates using transaction costs not just as an alternative to price analysis, but replacing it as a major focus. Transaction cost economics avers that the key dimensions are the frequency with which transactions recur, the uncertainties they are subject to, the degree of asset specificity, and the ease of measurement. As it turns out, asset specificity – the degree to which transactions are supported by durable, nonredeployable assets – is especially important to the governance of contractual relations.19 Williamson’s analysis of firms’ organization stresses as their central function the effort to economize on transaction costs. In other words, transactions are vital means of coordinating decisions on all aspects of a firm’s activities. However, some critics of Williamson’s work suggest that in his search for operational validity, he has ended up adopting a methodology based on a closed system (which emphasizes particular kinds of explanation and excludes what does not come within the definitions of relevance) that differs in detail from, but in principle is close to, neoclassical economics. His emphasis in the quotation above on ‘ease of measurement’ as a key

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dimension can also lead to a dependence on quantification with elements less easily reducible to numbers being omitted from consideration. * In recent years, Douglass North has emerged as one of the most powerful influences in institutional thinking. Trained as an economic historian, he was the first person from this particular background to be awarded the Nobel Prize in Economics, in 1993.20 History, he believes, is important not for its own sake, but as a crucial means of understanding the present and facing the problems of the future: History matters. It matters not just because we can learn from the past, but because the present and the future are connected to the past by the continuity of a society’s institutions. Today’s and tomorrow’s choices are shaped by the past.21 North also emphasizes the role of institutions in establishing the rules of the game, giving structure to life in a society, which leads to a distinction between institutions and organizations or between the rules and the players.22 In comparable social terms, institutions such as laws, customs and habits set the essential framework of activity, within which organizations are the players. This leads to a more fundamental purpose in his work: Separating the analysis of the underlying rules from the strategy of the players is a necessary prerequisite to building a theory of institutions. Defining institutions as the constraints that human beings impose on themselves makes the definition complementary to the choice theoretic approach of Neo-classical theory.23 If institutions can be described as self-imposed constraints that bring order and structure to a society, what then is their economic importance? According to North, this lies in how they affect the costs of exchange and production. It is institutions, together with technology that determines the transaction and production costs, that constitute total costs. Figure 4.3 above, and Figure 4.4 below, summarize how the insights of Coase, Williamson and North can be plotted onto the Austrian model of product innovation revealing this further dimension of economic possibility. Institutional change is a complicated process because the changes at the margin can be a consequence of changes in the rules, in informal constraints, and in kinds and effectiveness of enforcement. Moreover, institutions typically change incrementally rather than in discontinuous fashion. How and why they change incrementally and why even discontinuous changes (such as revolution and conquest) are never completely discontinuous is a result of the imbeddedness of informal constraints in societies.24

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Figure 4.4  Transaction efficiencies added to the Austrian model of value creation.

In addition, institutions are crucial in explaining historical patterns of how societies have changed in such divergent ways with very different performance characteristics, and can give insights into how change might take place in the future. Understanding how institutions function, however, is in large measure dependent upon the concept of human nature that

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informs any institutional theory, or for that matter, any other social theory. In rejecting the rational theory assumptions of perfect competition based on information being equally available to everyone, typical of neoclassicism, North asserts, similarly to adherents of Austrian theory, that individuals make subjective choices on the basis of incomplete information. In a passage that raises implicit questions about design, he points out: We get utility from the diverse attributes of a good or service or, in the case of the performance of an agent, from the multitude of separate activities that constitute performance … when I buy an automobile, I get a particular color, acceleration, style, interior design, leg room, gasoline mileage – all valued attributes, even though it is only an automobile I buy. … The value of an exchange to the parties, then, is the value of the different attributes lumped into the good or service. … From the particulars in the foregoing illustrations we can generalize as follows: commodities, services, and the performance of agents have numerous attributes and their levels vary from one specimen or agent to another. The measurement of these levels is too costly to be comprehensive or fully accurate.25 North accepts that precise answers may not be available in measurable terms, but still emphasizes the importance of such factors.26 Not only is equal access to information a myth, but the costs of acquiring adequate information may also sometimes be far too great to be feasible. Some parties may be in a position to exploit this inequality and may even have an interest in concealing information. Nevertheless, despite the infinite variety of human choice, patterns of economic exchange are shaped by institutional constraints into a great variety of forms. North summarizes these as follows: 1 Small-scale production and local trade. These are small-scale economies typical of most of history. They are characterized by repeat dealing, a common set of cultural values, and a high degree of trust requiring little third-party enforcement. Transaction costs are low, but rudimentary specialization and division of labour means transformation costs are high. 2 Impersonal exchange with constraints. As economies grow in scale, with early long-distance trade, the scale and complexities of exchange increase and patterns of exchange evolve, with parties constrained by such factors as kinship ties, bonding, exchanging hostages or merchant codes of conduct, often reinforced by rituals or religious sanctions. This enables wider markets to emerge on the basis of larger-scale production.

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3 Impersonal exchange with third-party enforcement. This is typical of modern economies, which are more impersonal, requiring complex contractual relationships for their functioning. Personalized relationships and codes of conduct might still be important, but the returns for opportunism and dishonesty require some form of coercive third party, which is best achieved by creating a set of rules that make constraints effective. The interplay of subjective preferences and formal institutional constraints developed in specific cultural contexts may carry over through historical time and provides a cultural filter that can be an element of continuity in changing situations (and is for the emergence of the ‘firm’ or company or corporation). If institutions provide constraints, then it requires knowledge to understand how best to work within or through these constraints. The incentives available in any institutional context will to a large degree be reflected in the knowledge and skills used to function in that context. Different kinds of payoffs will require different knowledge. The task of management, therefore, is to acquire the appropriate knowledge of products, production and markets in situations of uncertainty and risk. What knowledge is acquired and how it is applied will be decisive for the future not only of firms but also of societies. If the firm or other economic organization invests in knowledge that increases the productivity of the physical or human capital inputs or improves the tacit knowledge of the entrepreneurs, then the resultant productivity increase is also consistent with the growth of the economy. North distinguishes between the contrasting effects of allocative efficiency, the standard neoclassical approach and adaptive efficiency, based on rules that shape the way an economy evolves over time. The extent to which a society is willing to encourage new knowledge and learning, stimulate creativity and innovation, and undertake risk, together with procedures to resolve conflicts, is heavily conditioned by the institutional structure and a powerful factor in how societies evolve. ‘Adaptive efficiency, therefore,’ states North, acknowledging Hayek, ‘provides the incentives to encourage the development of decentralized decision-making processes that will allow societies to maximize the efforts required to explore alternative ways of solving problems.’27 A particular emphasis in North’s concept of adaptive efficiency is the role of tacit knowledge as a crucial element in creative entrepreneurship. The extent to which it is acknowledged and encouraged in the internal structure of firms will substantially depend upon the institutional structure. A connection not made in his arguments, but implicit in them, leads to the conclusion that tacit knowledge is to individuals what culture is to a society. Just as tacit knowledge is the factor that accounts for how an individual

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behaves within formal constraints, and may function in very different ways, so the survival of cultural characteristics, as North points out, makes informal constraints function in a different manner and change at a different rate to formal rules. Institutions and technology are therefore identified by North as the building blocks of change. Both are liable to path dependence, but technology is more open to the effects of individual decision-making. Since institutions are embedded in a complex range of political, economic, social and cultural influences, any substantial process of change must necessarily incorporate the institutional dimension. Integrating institutional analysis into static Neoclassical theory entails modifying the existing body of theory. But devising a model of economic change requires the construction of an entire theoretical framework, because no such model exists. Path dependence is the key to an analytical understanding of long-term economic change. The promise of this approach is that it extends the most constructive building blocks of Neoclassical theory – both the scarcity/competition postulate and incentives as the driving force – but modifies that theory by incorporating incomplete information and subjective models of reality, and the increasing returns characteristic of institutions. The result is an approach that offers the promise of connecting micro-level economic activity with the macro-level incentives provided by the institutional framework. While Williamson has been criticized on the grounds that his attempts to make institutional theory more effective in operational terms has led to a methodology similar to neoclassicism, with problems of a closed system, North’s approach deliberately avoids this trap. While acknowledging the need for formal rules, he also stresses informal behaviour; rationality is balanced by subjectivity, stability by change, the macro-economic dimension related to the micro-economic. His reference point in history gives an awareness of how change has actually taken place and enables theoretical positions to be tested against a spectrum of historical occurrences.

Readings Ronald Coase (1998). ‘The New Institutional Economics’, American Economic Review 88 (2): 72–4. Douglass C. North (1991). ‘Institutions’, Journal of Economic Perspectives 5 (1): 97–112. Elinor Ostrom (2010). ‘Beyond Markets and States: Polycentric Governance of Complex Economic Systems’, American Economic Review 100 (3): 641–72. Douglass C. North (1995). ‘The Adam Smith Address: Economic theory in a dynamic economic world’, Business Economics, Washington, January 1995, Volume 30, Issue 1, Start Page: 7. An excellent summary of many of North’s most important ideas. Thorsten Veblen (2009 [1899]). The Theory of the Leisure Class (Oxford’s World Classics), NY and Oxford: Oxford University Press.

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Douglass C. North (1991), ‘Institutions’, Journal of Economic Perspectives 5 (1): 97–112. Douglass C. North and Robert Paul Thomas (1973). The Rise of the Western World: A New Economic History. Cambridge and NY: CUP. Oliver E. Williamson (1995). ‘The institutions and governance of economic development and reform’, World Bank Research Observer, Washington, DC. A major lecture by Williamson that gives a strong defence of his views.

5 New Growth theory

Since the 1980s, a new body of ideas generally known as New Growth theory has emerged in the United States that has also significantly extended the concepts of Neoclassical theory. Until that time, work exploring alternative concepts of how growth occurred was limited, although several core themes were broached.1 One of the most significant contributors was Joseph Schumpeter,2 who was born in Austria, studied under adherents of the Austrian School, but later came to differ from them in important respects. His analysis of capitalism, however, is undoubtedly conditioned by his grounding in the tenets of Austrian theory and has yielded concepts that have subsequently had profound influence in the United States of America. The influence is evident in the model that Schumpeter evolved in the 1930s, depicting growth as innate to capitalism. He argued that growth was driven by the interaction of technological development and competition between firms. Technological Development +

= Economic Growth

Competition This interaction had consequences that were directly opposed to the static view of the neoclassical economy: Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary. … The fundamental impulse that sets and keeps the capitalist engine in motion comes from new consumer goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.3 Schumpeter did not go into any level of detail on the new goods and markets generated by this dynamism, matters necessary to understand the role of design, but he strongly emphasized the role of innovation as the

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main stimulant of growth. Historically, he discerned capitalism moving in ‘discrete rushes’ or long waves: every fifty years or so, technological revolutions would sweep old industries away and replace them by new ones in a process of ‘creative destruction’ (perhaps Schumpeter’s most famous phrase). Each wave of technology would fire up investment and provide new jobs to replace those lost. Schumpeter also recognized the limitations of Neoclassical theory in its incapacity to deal with dynamic changes: The problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them.4 Price, Schumpeter concluded, was not the dominant criterion in competition: Economists are at long last emerging from the stage in which price competition was all they saw. As soon as quality competition and sales effort are admitted into the sacred precincts of theory, the price variable is ousted from its dominant position. However, it is still competition within a rigid pattern, of invariant conditions, methods of production and forms of industrial organization in particular, that practically monopolizes attention. But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance) – competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.5 Modern technological history provides support for Schumpeter’s ideas of waves of change. The first long wave, from the 1780s to the 1840s, brought steam power and a revolution in manufacturing; the second, from the 1840s to the 1890s, saw the construction of railway systems; the third, from the 1890s to the 1930s, was based on electric power; and the fourth, from the 1930s to the 1980s, brought automobiles fuelled by cheap oil. At present, it can be argued, we are in the early stages of a fifth long wave driven by Information Technology.6 It is this emphasis on the role of technology (and through the latter, ideas) that new growth theory adds to Austrian theory (Figure 5.1). It is the growing impact of new technology on multiple levels that explains why interest in Schumpeter’s ideas has undergone a powerful revival in the last two decades. Although providing a valuable platform of ideas, however, he did not go into great detail on precisely how technology functions in promoting growth. To expand upon Schumpeter’s basic insights has been the role of the leading proponents of new growth theory, among them, Paul Romer, Paul David, Nathan Rosenberg and W. Brian Arthur.

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Figure 5.1  Austrian theory and New Growth theory compared.

Romer’s work focuses on the missing element of technology and incorporates it directly into models of economic growth by explaining how knowledge is created and spread through the economy. Unlike the two conventional factors of production, labour and capital, he argues, ideas are not scarce. Therefore, a sustained flow of ideas for more efficient processes and new products potentially makes continuous growth possible. His emphasis on knowledge downplays the necessary hardware associated

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with technology and the objects it generates, and instead emphasizes ideas of how technology is used. Knowledge of technology and experience in its applications can appreciate into human capital, a powerful concept in explaining why many firms are more proficient than others in innovation. Romer’s basic premise can be diagrammed as Technology = information = knowledge = ideas or Technology = experience = knowledge = ideas Romer therefore added another production variable, knowledge, to labour and capital. This makes the production function more plausible, in several ways. 1 Knowledge about how to effectively develop products and processes can raise returns on investment. This can explain the evidence on increasing growth in richer, more technologically advanced countries, with a high level of this kind of knowledge, and the continuing lag in growth rates among most poorer countries which have a corresponding ‘knowledge gap’. 2 Knowledge, as a factor of production, is not some vague attribute, but is specific and requires investment in the same way as machines. 3 Investment in capital opens the possibility of a virtuous circle in which investment spurs knowledge and knowledge spurs investment. Nathan Rosenberg similarly emphasizes the element of knowledge in making technology into an effective instrument beyond the confines of price competition: Technical progress is not one thing; it is many things. Perhaps the most useful common denominator underlying its multitude of forms is that it constitutes certain kinds of knowledge that make it possible to produce (1) a greater volume of output or (2) a qualitatively superior output from a given amount of resources.7 For Romer, however, one more factor of production is not simply important in an additive manner. In the context of events in the contemporary world, it has a multiplier effect, requiring a basic shift in approach. He emphasizes that ‘the difference between the economics of ideas and the economics of objects is important for our understanding of growth and development’.8 This point is extremely important in comprehending many developments in contemporary economies, and he illustrated it at length in an interview in Forbes magazine: Take oranges as an example of a product that’s an ordinary object. There’s a cost of producing each additional orange, and the cost of the

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next orange is pretty much the same as the cost of the last one. You’ve got to give up the use of some land, plant new orange trees, harvest the oranges and so on. So each orange has a constant cost of production.9 Romer then continues by comparing the economics of objects with the economics of ideas: Now consider the famous chemical process, the polymerase chain reaction, as an example of an economic product that’s an idea. There was an incredible amount of expense associated with producing the first use of the polymerase chain reaction – PCR for short – is a remarkably simple technology for taking a tiny amount of DNA and multiplying it. You put your DNA molecules in a solution, add a particular enzyme, then heat the solution and cool it. Every time you heat and then cool the solution, the number of DNA molecules doubles. In a single afternoon, you could go from a couple of DNA molecules to billions. An incredible amount of research expense went into the discovery of PCR. But once it was discovered, it was just basically a recipe. The recipe could just be published on the Internet, and then anybody in the world would be able to use this amazing technology at zero additional cost. So the key difference between objects and ideas – between oranges and a high-tech process like PCR – is this: Objects tend to have a constant cost per unit. But ideas have a huge cost for the first unit, then essentially zero costs for each additional unit.10 Increases in the production of objects is therefore achieved by a replication of existing, known methods of production, which will yield an increase on the basis of constant returns to scale. This is very different indeed from the production of new knowledge, which is not only very costly to develop, but also creates vulnerability for any company undertaking it. Only if rights to its use are established and a reasonable return on investment expected will a company undertake such development. Otherwise, without guarantees of some kind of protection, it is not worthwhile for firms to undertake such work, which is why elaborate systems to protect intellectual property rights are necessary. For this reason, Romer also argues, in a controversial aspect of his theory, that monopolies may not be a source of all evil by undermining perfect competition, as depicted in Neoclassical theory. They may indeed be necessary to raise barriers, protect ideas and ensure adequate benefit to their creators in the processes of growth. Implicit in this division between the economics of objects and ideas is that the former is essentially grounded in Neoclassical theory, while the latter is the central emphasis in new growth theory. The latter, however, does not refute the core ideas of the neoclassical tradition, but seeks to expand it, and incorporate a richer range of possibilities into the mainstream.

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Neoclassical economic studies of growth have a tendency, as already mentioned, to deal with problems on the macro-economic level – with little attention given to technology in detailed terms. ‘Ideas,’ says Romer, ‘are routinely ignored.’11 He argues that technology is endogenous, integral to the processes of growth and a necessary, essential element in understanding it. New growth theory not only acknowledges radical technological change on a large scale, but also the implications of change at the level of the firm. Rosenberg draws attention to the factor he terms ‘direction’, by which he means ‘the distinction between inventive activity that is directed toward product improvement or entails the invention of a new product, and inventive activity that is cost-reducing-or process invention’.12 The latter in particular opens up consideration of the constant, incremental processes of improvement that on a smaller scale add up over time to substantial changes. Early historical studies of innovation diffusion tended to be based on neoclassical concepts. These depicted essentially static scenarios, with new technologies having predetermined characteristics launched on potential users, similarly unchanging in their characteristics, who had to decide whether the innovation was useful to them. As Rosenberg notes: Technical progress is typically treated as the introduction of new processes that reduce the cost of producing an essentially unchanged product. … At the same time, however, to ignore product innovation and qualitative improvements in products is to ignore what may very well have been the most important long-term contribution of technical progress to human welfare. … To exclude product innovation from technical progress, especially when we are considering long historical periods, is to play Hamlet without the prince.13 More recent research, however, depicts a more risk-laden pattern of innovation. Many feasible technologies, both products and networked systems, fail or face initial difficulty if they are introduced in a form or under market conditions that are unsuitable. Other new concepts may have limited success in terms of applications and markets. Subsequently, however, says Rosenberg, failure can be retrieved, or limited markets can evolve into a broader range of profitable applications. Thus, there may be a long gestation period in the development of a new technology during which gradual improvements are not exploited because the costs under the new technology are still substantially in excess of those of the old. However, as the threshold level is approached and eventually pierced, adoption rates of the new technology may become increasingly sensitive to further improvements. Thus, very large technological improvements may be made in an innovation during its ‘prenatal’ period without any substantial repercussions. Conversely, even small further technological improvements made after the innovation has reached a threshold level may lead to rapid, large-scale productivity consequences.14

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Paul David particularly emphasizes the significance of incremental change in ensuring acceptance of innovations. The extent to which this is possible, he argues, will be significantly affected by two factors: first, the diffusion of knowledge about a new technology, and second, the rate at which the costs of acquiring an innovation are reduced. This latter may involve both specific equipment and access to special services or facilities. All these costs will generally be expected to decline as an innovation is more widely adopted. It is at this stage that David’s concept of incremental improvement becomes significant, based on constant sources of feedback within the production process and from contact with customers: The existence of these sources of positive feedback brought about by the irreversible, dynamic, decreasing cost effects of the diffusion of a new technology implies that small initial advantages or disadvantages can cumulate readily into large advantages or disadvantages in comparison with alternative technologies. A particular product design, process technology, or organizational system thus can become ‘locked in’, while rival technologies are ‘locked out’ through the workings of decentralized competitive market processes.15 Rosenberg, in underlining the importance of this cumulative process of a range of incremental innovations, points out the importance of complementarities in smoothing the diffusion process. It is characteristic of a system that improvements in performance in one part are of limited significance without simultaneous improvements in other parts. … Really major improvements in productivity therefore seldom flow from single technological innovations, however significant they may appear to be. But the combined effects of large numbers of improvements within a technological system may be immense.16 Ideas, on whatever scale, are therefore crucial generators of value. The phenomenon of lock-in is also an important concept, leading on as it does to other concepts of path dependency, increasing returns and first-mover advantage, which will be dealt with later. If emphasizing the kinds of knowledge relevant to understanding technology and its role in growth has led to Paul Romer’s distinction between ideas and objects, in Paul David’s work, it is complemented by an emphasis on the contribution of technological knowledge in its own right, rather than as an executant adjunct of scientific research: It is widely appreciated that for much of the world’s history new technologies had little indebtedness to what we would call ‘science’. Even today, inventions do not necessarily follow from applied scientific discoveries. Technological mastery may run far ahead of science and is in

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many regards both a stimulus to scientific inquiry and the means whereby such inquiries can be conducted.17 Rosenberg also argues that technology has its own validity and importance as a source of innovative ideas: Technology is itself a body of knowledge about certain classes of events and activities. It is not merely the application of knowledge brought from another sphere. It is a knowledge of techniques, methods, and designs that work, and that work in certain ways and with certain consequences, even when one cannot explain exactly why. It is therefore, if one prefers to put it that way, not a fundamental kind of knowledge, but rather a form of knowledge that has generated a certain rate of economic progress for thousands of years. Indeed, if the human race had been confined to technologies that were understood in a scientific sense, it would have passed from the scene long ago.18 David argues that for a long time, most economists’ concept of technological progress has been expressed in terms of a linear, reductionist approach that has dominated the discipline as a whole. He refers to it as the Simplest Linear Model, or SLIM (see Figure 5.2). This depicts technological change and productivity growth as the outcome of a unidirectional causal sequence, capable of being graphically represented by a series of boxes, each connected to the next by a single arrow. David explains the SLIM concept as follows: The system flow-chart tells us that (1) fundamental science yields discoveries, which lead to (2) experimental findings of applied science, leading to (3) acts of invention, which provide the stimuli and basis for (4) entrepreneurial acts of innovation (commercial introduction of new products and production methods), which incite (5) imitation and so bring about (6) diffusion of new technology into general use.19 Three major criticisms follow for David: 1 Inadequacy in accounting for the evolution of scientific and technological knowledge.

Figure 5.2  The standard linear model of technological progress.

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2 Science is separated into fundamental and applied compartments, with the first appearing as exogenous to the economy, yet driving the innovation sequence. 3 Changes in technological opportunity conceived as resulting from scientific research ignore the evidence that most long-run increases in processes and products result from innumerable small improvements, resulting from experience in production and close contact between manufacturers, vendors and users. In contrast, David advocates a more holistic approach to account for the interlocking nature of how new technology culminates in market innovation. This should acknowledge the ‘organized complexity’ that in historical terms includes elements of inertia and continuity, but in the long term stimulates fundamental economic change. Paul Romer also argues the value of a broad-based concept of innovation in explaining growth: In a world with physical limits, it is discoveries of big ideas (for example, how to make high-temperature superconductors), together with the discovery of millions of little ideas (better ways to sew a shirt), that make persistent economic growth possible. Ideas are the instructions that let us combine limited physical resources in arrangements that are ever more valuable.20 Even in a very simple manufacturing process, he points out that a range of options exists about how to execute a sequence of operations. This generates a huge range of possibilities, each capable of yielding improvement in processes. If a more complicated process, such as assembling an automobile is considered, the range of possibility rapidly spins off into huge orders of magnitude. New Growth Theory identifies three special features that make growth possible. First, we live in a physical world that is filled with vastly more unexplored possibilities than we can imagine, let alone explore. Second, our ability to cooperate and trade with large numbers of people makes it possible for millions of discoveries and small bits of knowledge to be shared. Third, and most important, markets create incentives for people to exert effort, make discoveries, and share information.21 An important element of Romer’s belief that skill at all levels can make a decisive difference, not only in big discoveries, but also in constant incremental improvements is illustrated by the methods used by Japanese manufacturers that have done so much to explain their extraordinary rise to global leadership in so many product sectors.

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A couple of decades ago, U.S. manufacturers thought they had figured out most of what you needed to know about assembly-line operation. American factories were based on traditional time and motion studies. Workers adhered rigidly to those directions. Then the Japanese came along and institutionalized the notion of discovery. On Japanese assembly lines, the workers were supposed to experiment with slightly different ways of doing their jobs. Japanese workers were given the freedom, for example, to try putting the rearview mirror on the door before putting the door on the car, and then to try it the other way around, finding out which was more efficient. Over time, the Japanese gained a big competitive advantage. Today, American firms are trying to institutionalize this process of experimentation and discovery – GE is one of the companies that’s giving its workers more flexibility. This move toward institutionalizing the whole process of discovery is a really profound change in the nature of economic activity.22 Companies will clearly need to understand that the nature and pace of change based on new ideas will increase and corporate strategy must evolve to cope with it. Another consequence is that in many sectors of the economy, knowledge workers involved in various levels of discovery and design are not only significantly growing in numbers, but they are also becoming vital elements in the existence and success of firms, with a corresponding reduction in the numbers of those who actually carry out the manufacturing function. Romer says: If you think about it in terms of production at a company like Microsoft or a big drug company, you’ll see that by far the most important activity at those companies is getting the instructions right. At Microsoft, they’ll spend tens of millions of dollars getting down a particular piece of software code. But once they’ve got the code, it’s an almost trivial operation to manufacture the product. Somebody inserts floppy disks in a machine and makes copies, and somebody else puts them in a box and ships them. The fraction of workers at Microsoft who actually manufacture the physical product is very small.23 Understanding the potential for growth unlocked by these new theories, however, is perhaps most clearly encapsulated in the concept of increasing returns, mentioned earlier, which is another substantial challenge to traditional economic theory. Paul Romer argues that technology as a factor of growth is responsive to investment in it, or in other words, the chances of a technological breakthrough can be exponentially increased in proportion to the resources committed to the search: Think about prospecting for gold. For you as an individual, the chances of finding gold might be so small that it would seem like pure serendipity

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if you actually did. But if you have 10,000 people out looking for gold across a whole geographical area, the chances of finding gold greatly improve. For society as a whole, it is very clear that discovery – whether of gold or of new technology – is a function of how much effort we put into it.24 Further, technology can raise returns on investment, stimulating a pattern of increasing returns, contrary to traditional theory, which postulates a pattern of diminishing returns. Investments in technology can increase knowledge and knowledge can improve the effectiveness of investments, thereby creating a virtuous circle, a permanent pattern of growth in an economy. W. Brian Arthur argues that diminishing returns was a valid concept in the days of nineteenth-century smokestack industry, and still is valid in resource-based industries such as agriculture and mining, but not in the new knowledge-based industries: Steadily and continuously in this century, Western economies have undergone a transformation from bulk-material manufacturing to design and use of technology – from processing of resources to processing of information, from application of raw energy to application of ideas. As this shift has occurred, the underlying mechanisms that determine economic behaviour have shifted from ones of diminishing to ones of increasing returns.25 The two models of economic behaviour now exist side by side, says Arthur, and again a conclusion is reached that the new patterns require very different concepts, organization and management. In high-technology industries, when one firm gets an initial toehold in the market, it can establish a position of dominance, ensuring increasing returns rather than the slow wastage of diminishing returns. The message once more is that flexible and rapid responses to opportunities for incremental improvements and better fit across systems can help consolidate dominance. Aircraft, he points out, typically cost $2–3 billion to design, but each aircraft produced will cost in the range of $50–100 million, with the cost reducing as more are manufactured. There may also be substantial benefits from the increasing efficiency of complementary technologies or functions required in a networked system: Not only do the costs of producing high-technology products fall as a company makes more of them, but the benefits of using them increase. Many items such as computers or telecommunications equipment work in networks that require compatibility: when one brand gains a significant market share, people have a strong incentive to buy more of the same product so as to be able to exchange information with those using it already.26

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The establishment of such dominance is characterized by the concept of lockin, with one product or system establishing total control of a market. Arthur illustrates this with examples such as the DOS system, which became lockedin as the operating system of preference over the Apple’s Macintosh system, and the victory of VHS over Betamax in the video-recorder market. In both cases, victory did not go necessarily to the best system in terms of either technical quality or operating simplicity, but to the system that established early dominance and reinforced it in every available direction. In the case of computer operating systems, for example, Arthur describes the importance of Microsoft’s deal with IBM for the development of the DOS system: It was not predictable in advance (before the IBM deal) which system would come to dominate. Once DOS/IBM got ahead, it locked in the market because it did not pay for users to switch. The dominant system was not the best: DOS was derided by computer professionals. And once DOS locked in the market, its sponsor, Microsoft, was able to spread its costs over a large base of users. The company enjoyed killer margins.27 It must be re-emphasized that Arthur acknowledges the two economic approaches existing side by side; indeed they may coexist between different product lines within a single company. Nevertheless, where it applies, the concept of increasing returns not only stands the theory of diminishing returns on its head, but also undermines the idea of perfect competition – the theoretical underpinning not just of the Neoclassical theory of growth but also of a good part of modern economics. The concept of perfect competition places central emphasis on the price function as it emerges from the interplay of supply and demand. This means that firms are conceived as price-takers: they accept the price determined in the market and cannot change it. Given the assumption of constant returns to scale (if you double the amount of both capital and labour, you will get twice as much output at identical cost), this seems reasonable. There is little firms can do to materially alter the market situation. If they cut prices to win a bigger share of the market, they achieve no further economies of scale and therefore risk losing money. With three factors of production, the assumption of constant returns to scale is no longer viable. When all the factors are taken together, the production function shows increasing returns: if you double all the factors, there is a multiplier effect and output more than doubles. Firms can therefore potentially lower prices, raise output and make bigger profits than before. With increasing returns, therefore, competition is imperfect, which means firms are price-setters, more dynamic players in determining their own course, not price-takers. The emphasis on technology and ideas has also opened up a greater understanding of what is termed human capital, the kinds of knowledge important in sustaining growth.

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Paul David uses a distinction between tacit knowledge and coded knowledge, which draws on earlier work by Michael Polyani.28 Tacit knowledge refers to a vast range of procedures and experience, a buildup of innate knowledge and inherent skills derived from practice, that are profoundly important in how businesses of any kind function. In economic terms, it can be a purely private good. For us as individuals, what we learn as a result of our education and experiences is specific to us. We can share it, if we wish, passing it on by example and practice, or it can also be kept to ourselves, and remain specific to us, whatever the context of our work. A commonplace example of tacit knowledge is knowing how to ride a bicycle. No set of instructions is capable of giving us a recipe for learning how to learn to do this. The only way is by getting on a bicycle and learning from the slow and often painful processes of trial and error. Once that magic moment of achieving the necessary balance and control is achieved, however, it remains with us as a piece of tacit knowledge for the remainder of our lifetime. Tacit knowledge is a rival good in that no one else can take over our particular knowledge of how to ride a bicycle – it simply is not transferable. In many subtle but underestimated ways, such knowledge is a crucial element in the practice of innumerable skills vital to firms and their business, and it is particularly important in design practice. The extent to which an organization understands the role of human capital, and the values placed upon it in the management of organizations, is therefore clearly one of the most important elements in any business based substantially on ideas. In contrast, however, other kinds of knowledge vital to the existence and operations of firms may need to be coded and explicitly communicated. This can take many forms – being embodied in documentation in the form of patents, licensing agreements, proprietary information, contracts, formulae, data and manuals, or other formats. In economic terms, this kind of coded knowledge is potentially a public good, which in its purest form is represented by research published in scientific journals, to which anyone having a requisite understanding of the codes used can have open access. Anything written down is potentially available to anyone who possesses the ability to understand it. They are therefore also non-rival goods – as opposed to rival objects that can be possessed by only one person at a time. Once ideas exist, they can be possessed by numerous people at the same time, and can be made available to any number of people at little or no additional cost. In considering current changes in Information Technology, Paul David illustrates some consequences of dependence on coded knowledge. He begins by analysing what information can mean in economic terms: Information is knowledge reduced to messages that can be transmitted to decision agents, when receipt of them causes some action or alteration in the subjective or objective state of an agent. Transformation of knowledge into information is thus a necessary condition for the exchange of

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knowledge as a commodity. When a knowledgeable agent puts what he or she knows into a form with legally protected use-rights, we may say that the commodity in question is information. This is the case with a proprietary report for a client, a copyrighted publication, or a patent describing an invention.29 Information is not automatically an economic commodity; it can easily be made available as a free good, for example, anyone who wishes to disseminate an idea can very simply do so by printing it, or opening a page on the Web. Knowledge as a commodity, however, has different characteristics from conventional kinds of commodities. Wheat, tea, gold or oil are homogenous, that is, each bushel of wheat or barrel of oil is indistinguishable from any other of the same kind; when a pound of tea is consumed by one person, it cannot be consumed by another. Since basic commodities are undifferentiated and sold worldwide, they are highly vulnerable to price fluctuations, which confirms neoclassical assumptions. David points out, however, that knowledge products are both highly differentiated, and can be simultaneously consumed by many people. Any individual book or film is not the same as any other book or film, but can be possessed and enjoyed by many people together or separately. David terms this property perfect expansibility. Expansibility is one of the characteristics of public goods; because they are non-excludable, they become available to everyone. This does not apply to knowledge products, which can be protected by intellectual property rights, and raises a dilemma, as demonstrated by the frequent and widespread complaints of piracy of videos, CDs and computer programs. The implications for governmental policy and international cooperation are sweeping. Policies will need to address the problems of protecting intellectual rights, without unduly restricting the diffusion of new ideas. In fact, new growth theory goes much further, by suggesting that the emphasis in government policy should change from fine-tuning the economy in financial terms in an effort to even out the swings of business cycles, to promoting and stimulating new technology. Governments will need to accept the idea that businesses, no matter how large or long established, can fail. If growth is to be encouraged by establishing conditions for new industries based on risk taking and innovation, failure is a necessary consequence of risk. Paul Romer believes that the spread of computers and Information Technology is not just another technology replacing earlier modes, but it is one that is capable of changing the whole notion of how manufacturing functions. Computers might permanently shift the relative payoffs between manufacturing and the process of search and discovery. If that’s correct, then the whole economy will start to look like Microsoft, with a very

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large fraction of people engaged in discovery as opposed to production. This implies a permanent change in the rate of discovery and the rate of economic growth.30 Romer’s approach is claimed by many to be the new orthodoxy, and the fact that despite his many radical ideas, he has not totally abandoned neoclassical precepts, but has significantly added to and expanded them, has helped in their acceptance. On the other hand, his ideas have been challenged from several directions. For example, another body of theory developed by an Oxford economist, Maurice Fitzgerald Scott, argues that the way in which capital is measured as a neoclassical production function is fundamentally wrong and therefore the function should be scrapped. He takes various means of analysing capital as a production function and demonstrates their ineffectiveness in linking the level of output to the level of capital investment.31 Despite this, Scott also regards technological progress as essential in understanding growth. His theory does not separate out capital and technology as discrete factors of production but posits them as synonymous. In other words, the motivation for invention is similar to that for investment, namely, its expected profitability. According to Scott, innovation is not an exogenous variable, as in Neoclassical theory, nor is technology a factor distinct from new capital requiring separate investment, as in Romer’s theory. The crucial difference is that knowledge, the root of innovation, and investment in the practical possibilities of its realization, with the aim of creating profits, are inextricably intertwined. In fundamental terms, the overall structure of ideas takes on a very different shape with radically different possibilities once the ideas of new growth theory (NGT) are incorporated. In effect, it offers a model of an expanded field of economic practice where the challenges to conventional wisdom in economics that it opens up, the stress on capacities and capabilities emerging from the interaction of capital, labour and technology leading to innovations in process, and, above all, its emphasis on ideas as generators of growth, offer many possibilities for a reconsideration of the role and function of design within innovation (Figure 5.3). * There are two aspects of new growth theory, however, that raise some questions (and indeed more will be asked in Chapter 8 below). The first comes from recent developments in institutional theory. As we have seen in Chapter 4, institutional theory emphasizes the role of institutional structures in explaining differences in economic performances of firms and nations. Richard Nelson makes the contemporary case for the necessary perspective of institutions, pointing out that even expanded formal models ignore factors crucial to the actual processes of growth and innovation.32 He places

New Growth theory

Figure 5.3  New Growth theory in the expanded model.

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strong emphasis on the need to relate theory to practice, and examines how ideas are put into practice. For example, he has undertaken research into institutional structures – how they shape and support differences in firms, and explain the economic performances of nations: Modern economists have become aware of major differences across nations in institutions – differences that seem to have a large impact - and thus have become more aware that in some countries the processes that guide the evolution of institutions seem to be more effective than in other countries. They also have come to understand that these processes are very complex and poorly understood. Acquiring a good understanding of institutions is going to be harder than acquiring a better model of technological change, or firm capabilities and their dynamics, simply because institutions are so diffuse.33 In addition to neglecting institutions, Nelson is also highly sceptical about the way work in growth theory emphasizes a search for formal models that can be mathematically based. In joint work with Sidney Winter,34 Nelson proposed that theorizing has two broad levels: What we called ‘appreciative theorizing’ tends to be close to empirical work. Mostly it is expressed verbally and is the analyst’s articulation of what he or she thinks is actually happening.35 In contrast, formal theorizing almost always proceeds at some intellectual distance from what is known empirically. Where it does appeal to data for support, the appeal generally is to ‘stylized facts’ or reasonably good ‘statistical fits’. If the hallmark of appreciative theory is storytelling that is close to the empirical details, the hallmark of formal theorizing is an abstract structure set up to enable one to explore, find and check proposed logical connections. Good formal theorizing is less likely than appreciative theorizing to contain logical gaps and errors. Nelson summarizes: [Winter and I] proposed that, when the intellectual enterprise in economics is going well, empirical research, appreciative theorizing, and formal theorizing should work together. More explicitly, empirical work and appreciative theorizing should work together, and appreciative and formal theorizing should work together.36 The relationships between empirical work, appreciative theory and formal theory are obviously crucial in defining the dominant ideas and practices in the profession of economics. Nelson is critical of New Growth theory, because although widely argued to be a break with tradition, it has in fact great continuity with it, particularly in its tendency to make modifications of and additions to formal theory, rather than looking outside its confines. Nelson believes that appreciative theory, searching where formal theory

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does not venture, provides the most promising avenues for research. He suggests three broad areas of focus: 1 The nature of technology and the processes driving technological advance; 2 The factors influencing the behaviour and effectiveness of firms and other organizations that employ technology and produce the goods and services that count as economic output; 3 The institutions that surround, support and constrain firms.37 For Nelson, ‘The highest priority is to develop a broad theory of growth capable of taking in and integrating the kinds of understanding about these variables.’38 New growth theories with their emphasis on formalization are, he believes, of little help in this endeavour, and indeed, the stress on formalization, with its difficulties in handling relationships and large numbers of variables, might lead to important areas of research being neglected – the behaviour of firms and institutions being a case in point. Nelson argues: The key intellectual challenge to formal growth theory – whether the basic dynamic structure is evolutionary or neo-classical – lies in learning how to formally model entities that are not easily reduced to a set of numbers, such as the character of a nation’s education or financial system or the prevalent philosophies of management. But the gains here certainly seem to warrant the effort.39 His argument for models capable of revealing patterns of complexity beyond what can be reduced to numerical formulae is highly relevant to the problems facing designers working at high levels. The second point concerns the question of incentives. Paul Romer was asked in an interview: ‘If a greater and greater portion of the value of new ideas is going to the consumer and not to companies, will that reduce the incentives to create new ideas?’ He replied: The evidence seems to point in that direction. The very same highly competitive conditions that benefit consumers mean that a new entrant who has a valuable new idea doesn’t actually capture all of the value they create with that new idea. Lots of the value created by the new idea flows through to the consumer. The person who comes up with the new idea cannot patent and control all its benefits. What that means for the economy as a whole is there isn’t as much new idea creation as would be ideal. The incentives for creating new ideas aren’t as big as they should be.40 This is a curious question and an even more curious response. It seems to imply that any value delivered to customers is in some way a deprivation of producers, who in addition, are liable to lose control of the idea. The

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emphasis is on producer-centred control and benefit, detached from any relationship to the customer or enhancement of the value delivered to them. Romer continues his answer to the problem in more detail: Now there are two ways you could respond to that. One would be to try to make intellectual property rights much stronger, by strengthening patents and legal protection. But that can pose a lot of risk to the continued process of innovation. We might end up with a system that gives a lot of patent protection revenue to people and corporations right now, but makes it much harder for somebody new to come along with a new idea. So for decades, many economists have been hesitant to rely exclusively on property rights and proprietary control to create additional incentives for ideas. What I’ve suggested as an alternative is this: If you want to get more ideas, one way is to subsidize the activities that lead to the production of those ideas. In particular, subsidize universities as important sources of idea generation, and subsidize the training of the people who go through those universities and then enter the economy and come up with ideas like cross-docking at Wal-Mart. So other economists and I have been arguing for a long time that the government has an important role in encouraging the creation of new ideas, and letting them get fed out into a market system where people can capture profits from innovating. Those profits are important, but they will never be big enough by themselves to encourage the amount of idea creation that would be ideal for the economy. The market is a wonderfully powerful engine for economic growth, but it runs much faster when the government turbo-charges it with strong financial and institutional support for education, science, and the free dissemination of ideas.41 Romer’s emphasis on the role of government is unlikely to gain much support in the current political climate of the United States, but it does represent a very considerable modification of free-market ideas in their pure form. Again, however, a notable emphasis in this extended passage is upon ideas taken up by producers that lead to profits. Any consideration of how this might be achieved by delivering better products and services to customers as a primary means of ensuring profitability is lacking.

Readings W. Brian Arthur (2014). Complexity or Economy, Oxford: Oxford University Press. Peter Robinson (1995). ‘Paul Romer’, Forbes, 5 June 1995, Start Page: 66. An interview with Romer that gives a basic explanation of his ideas. David Romer (2011). Advanced Macroeconomics, NY: McGraw-Hill

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Paul Romer (1992). ‘Two Strategies for Economic Development and Reform: Using Ideas and Producing Ideas’, World Bank Research Observer, Washington, DC. Thomas A. Stewart (2010). Intellectual Capital: The New Wealth of Organizations, paperback edition (New York: Doubleday). J. A. Schumpeter (1934). The Theory of Economic Development, many editions available on the internet. Michael H. Zack (2009). Knowledge and Strategy, NY: Routledge. With particular application to issues related to design and creative industries: Paul Stoneman (2010). Soft Innovation: Economics, Product Aesthetics and Creative Industries, NY: Oxford University Press. On the debate over intellectual property rights (IPR) as necessary for creativity under a rule of law or as rent-seeking self-interested market distortion, two current opposing views: Michele Boldrin and David K. Levine (2008). Against Intellectual Monopoly, NY: Cambridge University Press. Elizabeth Wurtzel (2014). Creatocracy: How the Constitution Invented Hollywood, Brooklyn: Thought Catalog Books.

6 The National System

Almost seventy years after Adam Smith published The Wealth of Nations, a German economist, Friedrich List, (1789–1846), completed his own major work, The National System of Political Economy, which was published in stages between 1841 and 1844. For much of the intervening time, List has remained little known in the English-speaking world. Smith’s ideas have been and remain the mainspring of economic thought in the United States and Great Britain, but List’s concepts have also had remarkable influence in his native Germany and much of continental Europe, with their influence subsequently percolating through to Japan and East Asia. List’s early career was as a civil servant in the independent German state of Würtemburg, but his advocacy of reforms brought him into conflict with what was an authoritarian royal government and led to his exile in the United States in 1825. There he edited a German language newspaper, became an American citizen and eventually returned to Germany in 1834. His affairs did not prosper, however, and in 1846 he committed suicide.1 His early experience of observing the effects of British industrialization and what he regarded as the negative impact of its growing competitive power on Germany was a powerful influence in the evolution of his ideas. The British lead in industrialization made it extremely difficult for German manufacturers to compete from a position of comparative technical backwardness and List regarded the advocacy of free trade by British politicians as a cynical ploy to ensure their country’s continued economic expansion and thus political dominance. A convenient starting point in considering List’s ideas are the three major poles of thought he posited as emerging in European economic thinking. ‘I found the component parts of political economy to be – 1. Individual economy; 2. National economy; 3. Economy of mankind.’2 The last mentioned, ‘Economy of mankind,’ he identified primarily with the ideas of the French Physiocrats, such as Quesnay, who argued the case for universal free trade based on a belief that ‘the merchants of all nations formed one commercial republic’. In their enthusiasm for their cause, however, List asserted that the advocates of free trade had overstated their case. ‘The popular school has assumed as being actually in existence a state of things which has yet to come into existence.’3 (List’s emphasis.) Free trade

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on a global basis was in List’s age still an aspiration, and even today it cannot be thought of in anything other than a partial sense. At the opposite pole to the Physiocrats, and to be taken much more seriously because of its practical influence, was what List referred to as ‘Individual economy’. In essence, this meant the work of Adam Smith, who regarded individual decision-making as the crucial factor in determining how markets functioned and the division of labour as the organizational principle that determined levels of productivity and wealth. List had two primary objections to Smith’s ideas. In The Wealth of Nations, Adam Smith had elaborated a concept of the economy essentially consisting of a nexus of individuals acting in their own self-interest, and constrained only by the need to restrict the possibility of harm to others. The advocacy of selfishness as the mainspring of economic motivation and activity raised serious questions as to whether such behaviour can be separated from other areas of human activity, for which other values and behaviour were regarded as the norm. This focus on the individual led Smith to construct a concept of the economy and society based on the principles of laissez-faire, with state intervention reduced to a minimum. Second, List thought that Smith’s emphasis on the division of labour led him to neglect wider questions of the levels of skill and motivation that were also necessary if levels of productive power were to be fully understood. List pointed out that Smith had indeed acknowledged the question of productive power in the Introduction to The Wealth of Nations, as an important factor on which the condition of nations depends, but had neglected to follow this through due to his focus on division of labour. By the great value that he attached to his idea of ‘division of labour’, he had evidently been misled into representing labour itself as the ‘fund’ of all the wealth of nations, although he himself clearly perceived and also stated that the productiveness of labour principally depends on the degree of skill and judgement with which the labour is performed. We ask, then, whether it can be deemed scientific reasoning if we assign as the cause of a phenomenon that which in itself is the result of a number of deeper lying causes.4 In contrast, by the mid-1820s, List began to elaborate a case for a third point of view: one that emphasized the role of the nation state as the social organization within which individuals functioned. Instead of the division of labour, he proposed the concept of ‘productive power’, an umbrella term for the ‘deeper lying causes’ that explain how a nation sustains its ability to produce, in the context of a broader social concept of how economic wealth was created. This in turn led him to advocate a concept of the nation state actively intervening to ensure that productive powers were consistently developed and maintained for the benefit of the nation as a whole. Informing this point of view was a pragmatic belief that only the nation state exercised effective political and economic power, in a manner simply

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not applicable either to individuals or to the whole human race. ‘The object of the economy of this body,’ meaning the nation state, ‘is not only wealth as in individual and cosmopolitical economy, but power and wealth, because national wealth is increased and secured by national power, as national power is increased and secured by national wealth. Its leading principles are therefore not only economical, but political too.’5 There was also a dimension of moral objection in List’s critique of Smith’s ideas. In addition to the separation of economic from social behaviour, List objected to the manner in which the concept of the division of labour led to a debasement of work and its reduction to a material calculus. Instead he regarded skill and competence as essential in understanding economic achievement, and he anticipated on a national level the contemporary concept of intellectual capital to a remarkable degree. By 1827, he wrote of productive power essentially constituted by ‘the intellectual and social conditions of the individuals, which I call capital of mind’.6 He elaborated this idea later: The present state of the nations is the result of the accumulation of all discoveries, inventions, improvements, perfections, and exertions of all generations which have lived before us; they form the mental capital of the present human race, and every separate nation is productive only in the proportion in which it has known how to appropriate these attainments of former generations and to increase them by its own acquirements.7 This broader concept of productive powers led him to assert that the mental capital of a nation is generated not only by those who create value in exchange, but also by ‘the instructors of youths and of adults, virtuosos, musicians, physicians, judges, and administrators’ who are also responsible for creating productive powers, some by enabling the future generation to become producers, others by furthering the morality and religious character of the present generation, a third by ennobling and raising the powers of the human mind, a fourth by preserving the productive powers of his patients, a fifth by rendering human rights and justice secure, a sixth by constituting and protecting public security, a seventh by his art and by the enjoyment which it occasions fitting men the better to produce values of exchange. In the doctrine of mere values, these producers of the productive powers can of course only be taken into consideration so far as their services are rewarded by values of exchange.8 In a commentary on List’s Outlines of American Political Economy, Michael Liebig suggests that List was strongly influenced by the ideas of an early Italian economist, Antonio Serra. The latter is best known for his Discourse on the Sources of the Wealth of Nations without Gold- and Silver-Mines,

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published in 1613, in which he distinguishes two categories of wealth creation, the accidenti propri and the accidenti communi. The former covers the natural conditions of geography and resources that favour a nation, which are a given. The latter, however, consists of crafts and manufactures, the education and culture of the population, and state policy, all of which can be increased and enhanced by human intent and action. In addition, the influence on List of his period of residence in the United States as a political refugee cannot be ignored. He was strongly influenced by what he learned in the United States of ideas and efforts to protect the nascent industries of the young republic. The work of Alexander Hamilton was particularly important in this respect. As early as 1783, Hamilton, fresh from duty in the War of Independence spent mainly as an aide to General Washington and now embarking on a career in government, argued against free trade and advocated that the new United States should regulate imports, so that ‘injurious branches of commerce might be discouraged, favourable branches encouraged, [and] useful products and manufactures promoted’.9 Later, in a Report on Manufactures commissioned by the U.S. Congress and submitted in December, 1791, Hamilton, who by this time held the post of Secretary of the Treasury in President Washington’s administration, again recommended the promotion of manufacturing in the United States, but went into much greater detail with a range of proposals. He justified these by asserting that the United States ‘cannot exchange with Europe on equal terms; and the want of reciprocity would render them the victim of a system which should induce them to confine their views to Agriculture and refrain from Manufactures’, Government encouragement of manufacturing was therefore intended to provide protection until American industry could compete on a basis of equality. Among the measures he recommended were policies for protective duties and prohibitions on rival imports, exemption of domestic manufactures from duties, and encouragement of ‘new inventions … particularly those, which relate to machinery’. Despite his advocacy of government intervention, Hamilton remained generally in favour of free trade but was also pragmatic enough to acknowledge that economic power was rarely founded in idealistic expectations. List supported such ideas, arguing that each nation should seek to develop its productive powers in ways appropriate to its specific circumstances. American national economy, according to the different conditions of the nations, is quite different from English national economy. English national economy has for its object to manufacture for the whole world, to monopolize all manufacturing power, even at the expense of the lives of the citizens, to keep the world and especially her colonies in a state of infancy and vassalage by political management as well as by the superiority of her capital, her skill and her navy. American economy has

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for its object … to supply its own wants, by its own materials and its own industry – to attract foreign populations, foreign capital and skill – to increase its power and its means of defence, in order to secure the independence and the future growth of the nation. It has for its object lastly to be free and independent and powerful, and to let everyone else enjoy freedom, power and wealth as he pleases.10 List realized with great clarity that the changes being wrought by industrialization meant that material resources, the capital of nature, were increasingly of less importance than the capital of mind in transforming those resources through invention. He saw this as a double-edged sword, capable of decimating existing industry if allowed to proliferate unchecked, but also of enhancing national productive power if carefully adapted by means of a protective national policy. A single new invention made in a foreign country, and not imitated immediately, because yet kept secret, would destroy, in a free country, a whole branch of the manufacturing industry in a short time, whilst a protective system would preserve it until the secrecy is revealed, and our productive power increased by it. … By securing the home market to home manufacturers, not only the manufacturing power for the supply of our wants is for all times secured against foreign changes and events, but an ascendancy is thereby given to our manufacturing powers in competition with others, who do not enjoy this advantage in their own country.11 Such protection could mean sacrificing some degree of material prosperity in the present in order to ensure a greater degree of security and prosperity in the future: It is true that protective duties at first increase the price of manufactured goods; but it is just as true … that in the course of time, by the nation being enabled to build up a completely developed manufacturing power of its own, those goods are produced more cheaply at home than the price at which they can be imported from foreign parts. If, therefore, a sacrifice of value is caused by protective duties, it is made good by the gain of a power of production, which not only secures to the nation an infinitely greater amount of material goods, but also industrial independence in time of war.12 Above all, List argued that, in principle, an economy based on division of labour must also be socially divisive. In contrast, the concept of a national economy encompassed not only a division of commercial functions between individuals but also the union of powers in a common cause. In List’s vision of what an industrialized country could achieve, industry, society and culture were therefore indissolubly linked. If not only protected but actively

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promoted by national policies, a beneficent cycle of improvement could lead to a constant enhancement of the achievements and potential of a country: In the manufacturing State the industry of the masses is enlightened by science, and the sciences and arts are supported by the industry of the masses. There scarcely exists a manufacturing business which has not relations to physics, mechanics, chemistry, mathematics, or to the art of design, etc. No progress, no new discoveries and inventions, can be made in these sciences by which a hundred industries and processes could not be improved or altered.13 Unlike Marx, List did not advocate the replacement of capitalist society. He regarded competition within an economy as a vital necessity for its effective functioning, but argued that the industries of some countries needed protection until they could compete internationally on an equal footing. In short, he was suggesting an alternative way in which capitalism could function. * Although there was little recognition of List’s ideas in his lifetime, their later influence in his home country was enormous. Echoes of his ideas are also clearly discernible in the dramatic rise to economic power of Japan and the East Asian economies. From the perspective of design, the importance of his concepts can be immediately seen.14 As soon as the possibility of change is admitted into an economic model – as it is in List, unlike in Neoclassical theory – it becomes much easier to relate design to economic theories. As the quote above indicates, List’s concepts of the role of state policy in promoting productive powers specifically acknowledges ‘the art of design’ as one of the factors capable of profound influence in improving manufacturing industry. In fact the continuity of this idea in Germany was apparent on several levels by the early years of the twentieth century, following its unification in 1871 and its rapid industrialization. In terms of policy, the involvement of the German Imperial Government in the applied arts had numerous facets. It provided, for example, a ‘Standing Exhibition Commission for German Industry’ under the Ministry of the Interior, which included representatives from the Foreign Ministry, the Prussian Ministries of Commerce and Education, and other interested parties. This was responsible for the presentation of official national exhibits at major international exhibitions. Usually, a state official was appointed as commissioner responsible for an exhibition, and direct government funding was provided. Subsidies were also available for exhibitions where a direct state involvement was inappropriate. With Germany’s emergence as a major political and industrial power, such events were given high priority in the first decade of the century, as a means of impressing the world outside with the nation’s strength and achievement.15

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In addition to exhibition organization and promotion, commercial attachés, an English electrical journal noted in 1907, were being appointed to German consulates: ‘It is the duty of these commercial attaches to increase Germany’s foreign trade, and these experts of trade and commerce are always in direct communication with all the leading manufacturing and exporting houses of the German Empire, and make frequent trips to Germany for the purpose of personal conference with them.’16 Another initiative of the Reich government was to appoint Hermann Muthesius, an architect in the employ of the Prussian government, to the post of cultural attaché at the German Embassy in London – apparently at the suggestion of Kaiser Wilhem II. Across the 1890s, Muthesius reported regularly and wrote widely on developments in British architecture and design.17 Following his London appointment, he returned to be placed in charge of all applied art education in Prussia and appointed leading reformers to head the major schools within his remit. A constant theme in Muthesius’ lectures and essays was the close linkage of cultural, social and economic concerns in terms very close to those used by List. * Another prominent figure in elaborating List’s ideas was a liberal politician, Friedrich Naumann, who founded a journal Die Hilfe, in 1894, in which he frequently wrote about the applied arts. Most notably, in 1904, he published an important article, ‘Art in the Age of the Machine’, which called for industrial methods of production to be used to create new forms expressing the spirit of the time, and the need to positively harness the potential of mechanization. Quality work and good form were therefore advocated by Naumann as indispensable elements of achieving social unity domestically and commercial competitiveness internationally. Establishing such standards meant that appreciation of quality had to be encouraged in the home market, an aim that could hardly be achieved by oppressing workers, paying them low wages and housing them inadequately. Good wages and working conditions were therefore a necessary precondition. In a book, Neudeutsche Wirtschaftspolitik, (New German Economic Policy) published in 1907, Naumann elaborated these ideas. In reviewing the book, Anton Jaumann observed that Germany’s competitive position was characterized by possession of few natural resources and dependence on imports of raw materials that had to be paid for by manufactured exports. How could it then survive the intense levels of international competition? Naumann’s answer was clear: We must bring goods to the market that only we can manufacture. We cannot in the long run compete in cheap mass-production. Only quality is our deliverance. If we are able to deliver such excellent goods that can be imitated by no other people in the world and if these goods are so excellent that everyone wishes to buy them, then we have a winning hand.18

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Nothing, concluded Naumann, injured the commercial reputation of a nation as much as the label ‘cheap and nasty’. Naumann was also involved in the foundation of an association in 1907 to promote design, the Deutscher Werkbund. At its founding meeting in Munich in October, 1907, Fritz Schumacher, a leading architect and designer, gave the opening address and posed the question: Why was a new organization necessary? His answer was essentially a restatement of List’s ideas as reformulated by Naumann. Art, he said, was not only an aesthetic, but also a moral power, but both were combined in the most important of powers: economic power. The best creative and commercial spirits of the age should therefore unite to reestablish a harmonious culture. Once again, the unity of national cultural attainment and commercial success in international markets was strongly asserted. The importance and continuity of the ideas originating with List require a volume of their own to give an adequate account. It can be argued, however, that the productive powers of Germany, as understood by List, have been an innate factor in enabling Germany to overcome the chain of events it has faced in the last century: a demoralizing defeat in the First World War; a horrendous financial inflation and collapse; the Great Depression; the illusions and ultimate shame of its embrace of fascism; the problems of destruction and loss of territory following the Second World War, and the daunting tasks of reconstruction and reunification that followed. The example of Germany also played a very important part in the modernization of Japan, where individualism has similarly played a less prominent role in the country’s economic progress. Although the direct role of List’s ideas in that country requires clarification, the role of state policy in initially establishing design competences and encouraging their application in Japanese industry and commerce has been a remarkable example of how, indeed, a government can encourage the development of productive powers. In the mid-1950s, there existed virtually no formally trained professional designers in Japan. As the result of policies introduced by the Ministry of International Trade and Industry (MITI), it was estimated that the country had 21,000 industrial designers alone by 1992. Their development has been an integral part of the success of Japanese products in international markets in the intervening period. Policies on the Japanese model were introduced in Korea and Taiwan and similarly they have played an important role in their economic growth in the late twentieth century.

Readings Friedrich List (1966 [1881–4]). The National System of Political Economy, NY: Augustus M. Kelley. Francois Quesnay (1758). Tableau Economic, many editions available on the internet.

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Ruskin (1857 John). The Political Economy of Art: Being the Substance (with Additions) of Two Lectures Delivered at Manchester, London: Smith, Elder & Co. [Also known as A Joy Forever, http://www.gutenberg.org/ebooks/19980]. Adam Smith (1776). Wealth of Nations, many editions available on the internet. Gustav von Schmoller (1896). The Mercantile System and Its Historical Significance, NY: Macmillan, and many editions available on the internet. Of the comparatively recent application of some of principles List argued for: R. G. Lipsey and Kelvin Lancaster (1956–7). ‘The General Theory of Second Best’, Review of Economic Studies 24 (1): 11–32.

PART TWO

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7 Design from the standpoint of economics

All the major fields of economic theory are far more complex and rich in depth and detail than is depicted here. The purpose of the foregoing chapters has been to provide a basic understanding of each in broad terms in order to assess its implications for design.1

1  Economic theory and design The greatest problem in considering what economic theory explains about design, specifically or by implication, is in the context of neoclassicism, which in the Anglo-American world dominates both academic and applied economic practice. A common criticism of it from other theoretical perspectives focuses on its assumptions regarding the static nature of products and markets. As was pointed out at the end of Chapter 2, if markets and products are as constant as depicted in Neoclassical theory, this at best reduces design to a trivial activity concerned with minor, superficial differentiation of unchanging commodities, a role, indeed, that it does frequently perform. At worst, it contradicts the whole validity of design. In contrast, a central assumption of design practice is that every designer is in some manner concerned with the future: this is an innate feature of the discipline. Whether working at drawing boards, in workshops, and, increasingly, at computers, many designers are concerned with enlarging the boundaries of possibility. Whether expressed in terms of a brochure for publication in one month, a product for production in a year’s time, or a system that might take several years, designers’ concepts will become the products, communications, environments and systems of the future. The only reason for generating these future concepts is that they will be different and, hopefully, better. Design, in other words, is about envisioning change, a condition not readily embraced by neoclassical models that are concerned with explaining what is, and are not fundamentally concerned with what might be. As we saw below, however – as for example with List’s ideas

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on national policy explored in the last chapter – as soon as the possibility of change is admitted into economic models, the perspective shifts and it becomes much easier to relate design to economic theories. If List’s ideas have been important on a national level (e.g. his concepts of the role of state policy in promoting productive powers, which specifically acknowledge ‘the arts of design’ as one of the factors capable of profound influence in improving manufacturing industry), other schools of theory also have implications for design in micro-economic terms. In this respect, the dynamic view of economics and change advocated by adherents of the Austrian school (Chapter 3) is particularly valuable. As Ludwig M. Lachman points out, ‘All economic action is of course concerned with the future, the more or less distant future. But the future is to all of us unknowable, though not unimaginable.’2 As stated previously, design is similarly concerned with the future, and also faces the risks and limitations in the challenge of imagining what is as yet unknowable. The actions involved in design, too, as Mises points out, are determined by thought. In shaping these future ideas, moreover, Carl Menger’s insistence that the satisfaction of consumers is the primary function of economic activity and Hayek’s emphasis on freedom of choice and the possibility of improvement are of enormous significance in ideas of user-centred design. Although generally silent about design in specific terms, therefore, the ideas of the Austrian school reverberate with implications that potentially open paths to a broader understanding of what the economic role of design can be. Two instances, already given in Chapter 3, can illustrate this last point.3 The first is Ludwig von Mises’ model of human action: ‘Acting man is eager to substitute a more satisfactory state of affairs for a less satisfactory. His mind imagines conditions which suit him better, and his action aims at bringing about this desired state,’4 which is in itself close to design, certainly say in the manner of Herbert Simon’s famous definition: ‘to devise courses of action aimed at changing existing situations into preferred ones’.5 We should remember here that Simon was, among other things, a Nobel Laureate in economics. In these lines, the seemingly disparate relationship between the artificial, acting, economics and design, becomes much closer. The second example is the adaptation of a couple of sentences by Hayek that was also given in Chapter 3. Here the point was that once economics is thought dynamically – as Hayek insisted it should be – the parallel between economic action and design becomes much closer. As noted earlier, this becomes obvious if the word ‘design’ is substituted for ‘economics’ in the following quotation: The solution of the economic problem of society is in this respect always a voyage of exploration into the unknown, an attempt to discover new ways of doing things better than they have been done before. … All economic problems are created by unforeseen changes which require adaptation.6

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It was similarly apparent that Institutional theory (Chapter 4) also provides a contextual richness that offers opportunities for a reconsideration of design’s functions. At a general level, it raises important questions on the role of design in society and as generator of the specific forms of a culture. Veblen’s work is clearly central here, both in its wider references and in the direct and indirect parallels between his thinking and that of design. The comment quoted above (from The Theory of the Leisure Class, 1899) that the ‘economic facility or economic serviceability in any object — what may be called the economic beauty of the object — is best served by neat and unambiguous suggestion of its office and its efficiency for the material ends of life’ can be read also as a remarkable anticipation of post-Bauhaus design.7 Similarly, his critique of ‘most objects alleged to be beautiful’ provides an economically reasoned account of what many would-be designers instinctively felt in regard to the many nineteenth-century products. More specifically, as could be seen in the discussion, theories such as those initiated by Coase, Williamson and North on transaction costs offer rich possibilities for discussion of how in such fields as information and communications, the role of design can powerfully enhance competitiveness. On the other side, the alternatives suggested by attempts to expand Neoclassical theory, particularly New Growth theory’s inclusion of technology as a core factor in understanding how business actually functions, also have intriguing possibilities. Of especial value is the argument that technological knowledge, both coded and tacit, has in-built value from its capacity to derive innovative ideas from practice. Nathan Rosenberg’s argument (which will also be referred to in more detail in the next chapter) that for ‘technological improvement to exercise a significant social impact, it must ordinarily fulfill additional criteria. Specifically, it must combine design characteristics that will match closely with the needs and tastes of ultimate users, and it must accomplish these things subject to the basic economic constraint of minimising costs,’8 is a direct instance of combining arguments around the contribution of technology to the creation of economic value with a grasp of how such developments have to be successful in also addressing users and their needs through the forms and characteristics of the product itself. A similar point arose with Douglas North’s interesting descriptions of the complexity of the values involved in the ‘value’ of a product: We get utility from the diverse attributes of a good or service or, in the case of the performance of an agent, from the multitude of separate activities that constitute performance. … When I buy an automobile, I get a particular color, acceleration, style, interior design, leg room, gasoline mileage – all valued attributes, even though it is only an automobile I buy. … The value of an exchange to the parties, then, is the value of the different attributes lumped into the good or service. … From the particulars in the foregoing illustrations we can generalize as follows: commodities,

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services, and the performance of agents have numerous attributes and their levels vary from one specimen or agent to another. The measurement of these levels is too costly to be comprehensive or fully accurate.9 If North’s ‘lumped together’ perhaps betrays the only way that an economist can describe the synthesis that the design of the product actually performs (orchestrating all the individual ‘valued attributes’ such that they contribute in terms of more than the sum of their parts to the overall value), nonetheless, the underlying comprehension is significant – as is his last line, which tells us exactly why it is so difficult to assess, quantifiably, the value design ‘adds’ or creates. * These comments and others open the door to a consideration of design also contributing to the processes of generating innovative ideas (although the balance between coded and tacit knowledge in design may tilt to the latter). Innovative ideas, of course, are by no means the sole perquisite of designers and, indeed, can originate from a broad constituency. Whatever the source, however, all will need translating into tangible form or definable process, and it is this translation from concept to specificity in terms acceptable to users that is the particular skill and contribution of design.

2  How economics positions design If the first set of implications of economics for design is in terms of what design can learn from economic theory regarding its possible roles within the economy, the second group of insights is about how economics positions design. To summarize the varied possibilities inherent in current trends in economic thinking, three clear areas of concern for designers in the context of production can be stipulated: 1 Given the crucial role assigned to technology in New Growth theory, an ability to understand technological opportunity and act upon it is required. 2 Their work must be capable, through innovation, of contributing to creating new economic value. 3 They must function within institutional structures of various kinds that enable and constrain their endeavours.

1 Re: Technology10 Concepts of designers that are only concerned with superficial visual form completely underestimate the degree to which a working understanding of technology, as a minimum, is necessary to function as a designer. Without

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the ability at least to have dialogue with, and work in close relationship to, technological specialists, designers will be necessarily confined to the trivialities of what is often called ‘felt-pen design’. To adequately understand technological opportunity therefore requires technological competence. Design on this level is capable of being involved with the total product concept, not just visual appearance as a last-minute additive. Conceived this way, designers work as equal partners with other major corporate functions, participating in fundamental decision-making. They have an ability to originate product concepts that deliver genuine improvement over what exists in a market and develop them technically in detail, in terms of materials and manufacturing procedures. The issue of visual appearance to communicate product uniqueness thus becomes an integral concern of the development process and not some arbitrary add-on. The corollary of this possibility concerns quantification. From the point of view of designers’ attitudes to economics, there is mistrust of the dominance of numerical calculation and financial management in corporate administration, something perceived as alien to how design functions. Setting aside the irrational aspects of what is indeed frequently an exaggerated, defensive reaction, and the deficiencies of some designers in clearly articulating their ideas, there is nevertheless substance in such perceptions. To a large extent, it is because tacit knowledge is such an important element in design practice. Competence in the skills of design, as in many other practical disciplines, grows from constant experiment on the basis of trial and error, from which cumulative experience becomes inbuilt and not easily rationalized. The problem is compounded, because if design is based in large part on tacit knowledge and cannot be explained by theories of rational decision-making, neither can it therefore be easily summarized in quantitative terms. If the management of any firm does not have an understanding of, and sympathy towards, the particular nature and virtues of tacit knowledge, it will inevitably be easy to make designers appear incompetent by demanding conformity to practices that are alien to design. Under such circumstances it is not surprising that design is often not taken seriously. Advocating a greater understanding of tacit knowledge on the part of management should not, of course, absolve designers from any consideration of the extent to which rational analysis and quantitative explanations may contribute to a better understanding of what their practice is and can achieve in its context of practice. There is much to be done on this level. Particularly when tackling large-scale, complex problems, appropriate methodologies and techniques based on logical analysis and quantification are frequently a necessary platform for creative design work at a high level.

2 Re: Innovation11 More important in the context of innovation and growth is the role of designers as originators, or contributors to the origins, of totally new products

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capable of significantly changing existing markets, or even of creating new ones, and therefore of generating new economic value. If a vital role of design, as suggested here, is the translation of technological possibility into specific form, a close harmonization of design and technology is essential. To deliver economic value, the role of design in innovation is not just the frequently attributed function of ‘adding value’, but much more significantly, of creating new value. In Neoclassical theory, the emphasis on price effectively restricts concepts of value to a scarcity of what is desired in the marketplace. It excludes any concept of quality or value in use, which is not an intrinsic quality of products and has little relation to price. It does, however, have a great deal to do with competitiveness and profitability, both of which ultimately hinge upon the capacity to satisfy human wants and needs. Within the confines of Neoclassical theory, therefore, design is at best confined to a role of adding value to pre-existent concepts, which can be a potentially useful function within a portfolio of any firm’s strategic options, albeit too frequently as a low-level activity. As already pointed out, however, it does not encompass the full potential of design. More important in the context of innovation and growth is the role of designers as creators, or contributors to the creation, of totally new products that are capable of significantly changing existing markets, or even of creating new ones, and therefore of generating totally new economic value. This will be dealt with in more detail in Chapter 9.

3 Re: Institutional structures12 The third factor derived from economic theory, institutional structures (explored in Chapter 4), impinges upon design at every stage in innumerable ways, from the level of government to the immediate context in which designers work – even when design is not specifically considered as an element in their workings. For example, laws, such as those in the United States on product liability, or those in Germany on recycling packaging materials, profoundly affect design practice. Other factors include the general cultural climate of a society, the way design is manifested in public and private institutions, and whether and how design is taught at all levels of the educational system. At the level of the firm, any designer needs a Machiavellian instinct to survive the institutional hazards of corporate structures, turf wars, the prejudices of specialist disciplines (including their own) and the politics of working in teams. They need the patience of Job in explaining and demonstrating the value of their work to co-functionaries and clients. A knowledge of legal matters such as safety, environmental protection, product liability, racial discrimination and provision for disability is another dimension. They need to be able to navigate the complexities of distribution and retail systems. These are just a few of the demands made upon them. Also on the level of institutional relationships are questions of education and research in design. There is a vital need for more educational initiatives

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to prepare designers for the complex decision-making processes of strategy and innovation, and to combine high-level creativity with technological competence. Much of design education, however, still remains at a comparatively low skill level with an emphasis on the development of ‘creative’ ability without any technical substance, economic relevance or institutional awareness. By contrast, the thrust of new economic theory would suggest that the evolution of new approaches in education and methodology is of enormous importance for design. There is a vital need for designers to be more specifically prepared for the decision-making processes involved in complex innovation, combining high-level creativity based on technological competence with business awareness, and to be able to plan how to use a spectrum of design abilities with other disciplines. There is also on all these levels a need for research into how design can and should function, to which the economist Richard Nelson’s comments on the various approaches to research, and in particular his distinction (noted above in Chapter 5) between formal and appreciative theory, and empirical practice, are highly relevant. The relationship between formal and appreciative theory can be seen as a vital link characterizing academic research, and that between appreciative theory and practice, a vital element in high-level professional practice. * Overall, it is clear that new economic theory offers many potentially fruitful channels of discussion in understanding design in the context of new technology, and how it can add and create value. Focusing only on this monovalent purpose, however, is to overlook the fact that design is capable of definition on other levels. Asserting the uniqueness of design, however, should not blind us to the fact that the relevance of current trends in economics for design, and not just technology, is profound. It is possible, in terms of New Growth theory, to conceive of design, in economic terms, as not just another exogenous variable, and a low-level one at that, but as an activity that is integral to converting technological opportunity into innovative reality.

3  But does design exceed economics? Having begun to suggest the ways that economics offers insights into the work of design, it is also important to begin to see in what ways design in its economic role is inadequately understood by economics. This is the subject of Chapter 8 but can be opened here in two ways. Specific attempts to explain design in an economic context have generally emphasized the level of its role in national economies. This focus on the macro-economic level has produced a number of useful generalities, but

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few significantly convincing arguments, about how design can be effectively applied in the specific context of practice in the business arena. Since the dominant arena of activity for designers is at the level of the firm, whether they are working as directly employed in-house designers or as external consultants, the major emphasis in discussing the role of design will need to be at the level of the firm, or the micro-economic level.13 A consideration of the functions and processes at this level can reveal some contributions of design to innovation not generally considered in any economic theory and can also open further to the question of value creation. Introducing the subject of values, however, moves discussion into another dimension beyond economics. This points up the obvious fact that design encompasses other concerns than those represented in economic theory. The latter is not primarily concerned with people, other than in very abstract masses, whereas design impinges directly upon the everyday experience of all human beings in every aspect of their existence. This difference is vital, and examining design in its own right is therefore necessary to help articulate how it might yield insights to complement or supplement economic theory, and perhaps more importantly, how it might significantly contribute to business practice.

8 Economics from the standpoint of design

To suggest that the fragmented and often ill-defined field of design can usefully augment economic theory, the most powerful and well entrenched of the social sciences, might seem overly ambitious, likely to have as much effect as a flea-bite on an elephant. Yet, when one moves from the concerns of theory to those of practice and considers the extent of the creation of designs in the world of business and their implementation in everyday life, it must surely be evident that there remain large gaps in economic accounts of how products and services are produced, sold and used. Discussion of these matters can, hopefully as demonstrated by the previous chapters, be enhanced by reference to economic theory, but their importance also requires consideration of design in its own terms. It also raises many questions on the confusion caused by often radically different emphases in and explanations of the world provided by varied disciplines and their concepts and procedures. Since the dominant arena of activity for designers is at the level of the firm, whether they are working as directly employed in-house designers or as external consultants, a consideration of the functions and processes at this level can reveal some contributions of design to innovation not generally considered in economic theory. A key moment is that if value is determined by customers, as Carl Menger emphasized (‘value does not exist outside the consciousness of men’), then not only the context of production but also the context of use (and hence of subjects and their value) needs to be examined. One of the greatest challenges confronting designers is that they have to bridge the constraints and requirements of these two very different contexts. But it is not only use (and users) that must be explored. The concept of value too needs a wider examination than it normally receives in economics, where the emphasis on quantification (in line with the emphasis in contemporary economics on mathematical concepts and methodology) also produces problems at the level especially of product development and understanding. While these are by no means the only problems of

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understanding arising from economic theory, this chapter will take up these three issues – the problem of the reliance of economics on the quantitative; the question of use and the user; and the issue of value and values – as a way of considering the limits as well as the insights that economic theory provides.1

1 The problem of reliance on the quantitative As we have seen, one of the problems of discussing design in terms of the practices of neoclassical economic theory is the way the latter has become dependent upon mathematical concepts and methodology. Similar problems also exist with the dominant practices of modern corporate administration and for much the same reasons – management has also become based on quantitative calculation and financial methodologies. This numerical emphasis is widely perceived by designers as a major obstacle to understanding how design functions. Setting aside the irrational aspects of what can often be an exaggerated, defensive reaction, and the deficiencies of some designers in clearly articulating their ideas, there is nevertheless considerable substance in such attitudes. An illustration of the severity of such problems can be found in David Halberstam’s book, The Reckoning, which compares the fortunes of the second largest car companies in Japan and the United States, Nissan and Ford, in the post-Second World War period. He describes the conflict at Ford between a new generation of managers armed with powerful statistical tools who gradually took over the firm’s management in the 1960s and 1970s, and the engineers and designers who lacked any means of quantifying their work. Ford had long been run by one man, its founder Henry Ford, and the company was indeed in desperate need of effective management systems. Out of that need grew the immense power of the finance people. A powerful, confident, modern bureaucracy was being installed at the Ford Motor Company, sure of its skills, sure of its goals. It knew how to take care of itself, to help its own, and above all how to replenish itself. For there was no easy way to replenish real car men, no graduate school readily turning out designers who were both creative and professional or manufacturing men who could run a happy, efficient factory. People of instinct and creativity, really talented ones, came along only rarely. The great business schools of America could not produce genius or intuition, but they could and did turn out every year a large number of able, ambitious young men and women who were good at management, who knew numbers and systems, and who knew first and foremost how to minimize costs and maximize profits.2

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Halberstam’s explanation of the educational and commercial advantages of what is in fact codified knowledge explains in large measure why it was adopted so avidly, and it must be repeated, such abilities were badly needed at Ford. What happened as a result, however, was that other disciplines became subordinated to the methodologies of the new generation of managers – they were forced to communicate their work and ideas in ways that were not just inappropriate, but ultimately also dysfunctional, to a point where, in the late 1970s, Ford almost went out of business. The terms Halberstam uses to describe the ‘real car men’ – creativity, talent, genius, intuition – are all, in fact, aspects of tacit knowledge, which is such an important element in any form of creative practice, and most certainly in design. Competence grows from constant experiment on the basis of trial and error, resulting in cumulative experience, which becomes in-built, integral and not easily rationalized. There are innumerable stories of designers who have completed a project in a manner that satisfies every criterion required by their client, and yet have still woken in the night to do more work on it, because they instinctively know something is not yet complete. Tacit knowledge can neither be explained in terms of rational decisionmaking, nor be summarized easily in quantitative terms. If the management of a firm does not have understanding of, and sympathy for, the particular nature and virtues of tacit knowledge, it will inevitably be easy to make designers appear incompetent by demanding conformity to practices alien to design. Under such circumstances, it is hardly surprising that design is often not taken seriously. At the same time, the resentment of designers becomes more comprehensible. Advocating a greater understanding of tacit knowledge on the part of management should not, of course, absolve designers from extending the boundaries of rational analysis and quantitative explanations that can communicate understanding of their practice. There is much to be done on this level. Without codified basic assumptions and methods, it is difficult to communicate knowledge to successive generations as a starting point. Halberstam’s point that there was ‘no graduate school readily turning out designers who were both creative and professional’ is still true to some extent. Design education too often involves each generation metaphorically reinventing the wheel, albeit at a comparatively low skill level. There is much emphasis on ‘creative’ ability, but without technical substance, economic relevance or institutional awareness, and it is difficult to conceive of progress in any meaningful sense when small value is placed on the accumulation and codification of collective experience. The result is an inability to cope with new demands resulting from current widespread change. In particular, when tackling large-scale complex problems of a systemic nature, individual insight and subjective beliefs are often totally inadequate to grasp all the dimensions of the problems being faced. In such instances, methodologies and techniques using logical analysis,

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quantification and computers are a necessary step in comprehending the nature of the problems involved, providing a platform for creative design solutions at a high level.

2 The question of users If the context of production was always traditionally prime, both for industry and for economics, the second context in which designers must function, the context of use, requires in contrast (as Figure 8.1 shows) a very different set of requirements and constraints and a different scale of thought.

Figure 8.1a  The context of production and the context of use.

Figure 8.1b  Value created through the interface between the context of production and the context of use.

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Of fundamental importance in this context is the factor of utility, which in design terms relates to the capability provided for users of a product or in other words, what it enables them to do. In addition, things assume meaning and significance in people’s lives, which may stem from alignment with the beliefs and symbols currently prevalent in the outside world, or may be of private significance to particular individuals. A third factor is variations in the systemic nature of the context of use. This can be subdivided into the physical systems, such as the electrical system or TV broadcasting system, and cultural systems, such as patterns of belief and behaviour that are embedded in a pattern of life. The latter often have a profound effect upon what aspects of utility or meaning people will consider significant. It is this level of the economic functioning of things that economics has often missed. Thus, to the extent that there have been attempts to explain design in an economic context, it has generally been dealt with on the level of its role in national economies. This focus on the macro-economic level has produced a number of useful generalities but few significantly convincing arguments about how design can be effectively applied in the specific context of practice in the business arena. As noted already, Richard Nelson’s stress on activities at the level of the firm as a means of understanding innovation is relevant in this regard. A consideration of the functions and processes of design at this level will suggest some features of innovation not dealt with in either Neoclassical or New Growth theory. In particular, it will be suggested that not just the skills and knowledge of designers, but also their values, are crucial in this role of creating new economic value. Economic theory tightly focuses on how innovations contribute to growth and profitability from the standpoint of producers. A crucial feature of design practice, however, is shaping technological opportunity into tangible artefacts or information in the form of coded procedures, that is intended to better satisfy user needs, which has led to the evolution of specific methods and approaches under the general rubric of ‘user-centred’ design. To the extent that neoclassical theory considers consumers, it is on the basis of assuming that their choice in any market is rational, and that any individual acts in accordance with rational calculation, with reason dominating emotion. Rational consumers are assumed to have three characteristics: 1 Their tastes are consistent. 2 Their cost calculations are correct. 3 They make those decisions that maximize utility. If, in contrast, consideration is given to what concepts derived from design practice or theory can contribute to debates on growth and the role of technology, an important factor is the role of users and their problems and potential in meeting the substantial changes that, it is widely recognized, are

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affecting firms and governments. A vital factor in ensuring the acceptance and diffusion of innovation is ensuring that it is comprehensible to users, who will also have to change and adapt in ways similar to producers. This has implications going far beyond the level of cost-decisions, but does not loom large in neoclassical theory or new growth models. Nathan Rosenberg does indeed make numerous references to users but mainly in the context of their learning after a product has been launched. With respect to a given product, I want to distinguish between gains that are internal to the production process (doing) and gains that are generated as a result of subsequent use of that product (using). For in an economy with complex new technologies, there are essential aspects of learning that are a function not of the experience involved in producing the product but of its utilization by the final user. … In this sense, we are dealing with performance characteristics that scientific knowledge or techniques cannot predict very accurately. The performance of these products, therefore, is highly uncertain. Moreover, many significant characteristics of such products are revealed only after intensive or, more significantly, prolonged use. 3 Rosenberg’s recognition that many of the problems of use cannot by their nature be adequately foreseen by anyone in the production process, including designers, highlights a very real dilemma in many rapidly evolving areas of technology. His examples are mainly drawn from capital goods such as aircraft, and high-technology products, such as computers: The creative use of learning by using as a business strategy may now be an important factor in some high-technology industries. Consider the computer industry, which, in recent years, has relied increasingly on complex software products to make its systems useful to a broader range of users. The development of effective software is highly dependent upon user experience. The modification of software systems in response to this experience is now intrinsic to software engineering. This is so because most software products permit wide variations in inputs and processing options. These options cannot possibly be tested completely prior to the release of software. Thus, the optimal design of software depends upon a flow of information from its customers. Furthermore, many computer companies routinely provide extensive software support that involves software modification when bugs are discovered by customers – as they inevitably are – when the software is used. The effectiveness of support services in improving the product after its release appears to be very important to the competitive success of computer firms. Such service arrangements represent, in effect, an institutionalization of procedures for exploiting the learning by using phenomenon in the computer industry.4

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Rosenberg is very conscious of the social impact technological innovation is likely to have over time, which implies that technology must be considered in a broad context and reconcile several factors: For a technological improvement to exercise a significant social impact, it must ordinarily fulfill additional criteria. Specifically, it must combine design characteristics that will match closely with the needs and tastes of ultimate users, and it must accomplish these things subject to the basic economic constraint of minimising costs. He is also aware that identifying ‘the needs and tastes of ultimate users’ in terms of the demand curves of neoclassical theory, that is, as a clearly specifiable set of currently identifiable preferences, may only be possible in stable conditions and if the methods of establishing preferences are openly acknowledged. This is not the case, however, in conditions of rapid change and instability, for as he also points out: ‘Innovation entails a subtle combination of technical sophistication with the identification of specific but unsatisfied human needs.’5 Rosenberg’s perception is accurate, but the examples he suggests of the usefulness of user concepts are somewhat confined and there is still an emphasis on their contribution to solving the problems of producers. Richard Nelson also acknowledges users in similar terms to Rosenberg: One reason why potential users wait before adopting is lack of adequate information to form a judgment. As use spreads, information feeds back not only to potential users, but to the designers of the product and their competitors. The learning phenomena … proceed along with diffusion, the product is redesigned to improve its performance, and production costs drop. Some potential users may choose to wait for the second or third generation of a new technology to appear before the plunge. As the product improves, and versions better suited for particular classes of uses appear, more and potential users find it profitable to adopt. Then a significantly different, new design may come along. The product cycle begins again.6 This is undoubtedly important, but again it must be emphasized that users have concerns requiring attention in their own right, beyond whatever contribution they make to solving producers’ problems. User-centred design is a concept that must, as with any other design procedure, by its nature be grounded in the realities of the producer context in which it is practised. To be effective, however, it needs to reach much further and be clear about the value of change for those who have to live with the consequences of it. The values designers adhere to in decision-making are therefore important, particularly if the focus is on design as an agent of radically innovative change. The risks involved for any producing company need to be balanced

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with a consideration of responsibility for the consequences to those most directly affected by change. User-centred design is therefore a key operational concept in introducing values, in the broad sense, to ensure that any technology is appropriate for any targeted group of users and, as far as possible, based upon an assessment of a wider pattern of repercussions in social, cultural and environmental conditions. One requirement of innovation is that for any technological opportunity there must be a designed reality to insert into markets, and design is, among other things, the function of making that technological opportunity appropriate, accessible, comprehensible, useful, valuable and pleasurable in the lives of potential purchasers. This stress on the role of the user opens up a new dimension in the model of how the ideas of New Growth theory function. As in Figure 8.2 below, the addition of the knowledge of users as itself a distinct factor of production adds a further dimension to new growth theory; indeed, it converts the latter, arguably, to something closer to a model of value creation. This also becomes relevant when we ask more sharply how change happens. Joseph Schumpeter famously coined the phrase ‘creative destruction’ to describe the effect of innovation. Although New Growth theory has with great benefit enlarged the range of factors that help explain this process, it still omits to specifically consider the decisive factor of how something is created in terms powerful enough to destroy existing products and systems in a market. If neoclassical theory can be criticized for regarding technology as an endogenous variable, then New Growth theory can be criticized for describing technology in innovation without adequate attention to the vital factor of design. Many research models, for example, still take little or no account of the context of use for which their own body of research and methodology has evolved in order to more adequately understand actual and latent wants and needs (which should not be confused with market research methods intended to ascertain current demand and taste). Innovation itself can often involve an element of ‘pied-piperism’ – leading a market in new directions. Here too, however, a prime requirement is a highly detailed understanding of users. It should be noted that the terms ‘use’ and ‘user’ are applied here in the context of design practice, in contrast to the more usual economic terminology of ‘consumption’ and ‘consumer’. These latter imply that the process of production has the act of consumption, or purchasing, as its target without concern for what happens when products enter the lives of customers. Innovation, to be successfully adopted and diffused, needs to be more than a convenient foil for the manipulations of producers. Referring to the context of users’ lives and the meaning of innovation for them raises again the question of values. Paul Romer treats ideas in general as beneficial, but it has been pointed out that ideas can be bad as well as good, and need to be carefully evaluated. In this respect, a clear sense of

Economics from the standpoint of design

Figure 8.2  From New Growth theory to value creation theory: knowledge of users as a factor of production.

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values in design, the function whose outcomes are the ultimate point of interaction with users, becomes vitally important on numerous levels. The connecting point between the two spheres of production and implementation is the product. Any product, of whatever form or type, can have the quality of utility, the potential of being used for a particular purpose or task, or providing the possibility of competency for a user. * In addition to utility, however, products also embody values. They have great potential for assuming meaning in people’s lives, in terms of symbolism. Their symbolic function can be a link to the culture of a society or group, in some iconic form, or may take on an intensely personal meaning. A sociological study of domestic culture in Chicago revealed the enormous flexibility with which people can attach meanings to objects, and therefore derive meanings from them. Almost anything can be made to represent a set of meanings. It is not as if the physical characteristics of an object dictated the kind of significations it can convey, although these characteristics often lend themselves certain meanings in preference to others; nor do the symbolic conventions of the culture absolutely decree what meaning can or cannot be obtained from interaction with a particular object. At least potentially, each person can discover and cultivate a network of meanings out of the experiences of his or her own life.7 Symbols not only represent what is, but are also capable of mirroring dreams and aspirations of what might be. This is potentially a crucial aspect of design in enabling people to interpret innovation in terms relevant to their own lives. This is something that will require further discussion in the next section.

3 The question of ‘value’ The notes above show that the context of use within which designers must function, requires a very different set of requirements and constraints from those of production. – In the context of production, the dominant value is profitability, expressed in quantitative terms. – In contrast, in the context of use, the main emphasis is on values, in terms of satisfaction expressed in qualitative terms, for example, in regard to the fundamental importance of utility, which in design terms relates to the capability provided for users by a design or, in other words, what it enables them to do.

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In addition, as we saw above, designs assume meaning and significance in people’s lives, which may stem from alignment with the beliefs and symbols currently prevalent in the outside world, or may be of private significance to particular individuals. This distinction between value and values and their relative importance is the cause of enormous confusion in businesses and can frequently be a source of failure.8 Value is primarily defined in monetary terms. Money is both a measurement of value in markets and a store of value, or wealth. In some parts of the world, the primary expression of value for a firm is its share price and shareholders can often be considered its primary customers. A focus on monetary value, in terms of costs, prices, profits and capital, is a fundamental and unavoidable means of measurement in considering any aspect of business activity, design included. The point, however, is that solely focusing on financial measures or share price can ignore the means by which they are achieved and defined – or how and why they are established, enlarged and maintained. The argument here is that profitability cannot be understood without examination of these deeper causes, which inevitably involves a consideration of values in a wider sense than the numerical alone. * The problem here is that even in ‘advanced’ economic theory – for example, Richard Nelson’s tripartite division of formal research, appreciative research and practice, which was valuable in opening up alternative channels of thought and investigation of technology and design, more closely related to the realities of practice – the concept of value advanced does not substantially move beyond the single dimension of economic value. This is in marked contrast to other thinkers who have similarly understood the need for a dimension of thought capable of reflecting upon practice and developing proposals for change and improvement. Concepts of value can be traced back at least as far as Aristotle, who regarded theory as the search for the ‘good’, which meant universal, eternal principles. In contrast, practice was an activity producing necessary things, but which, because it was subordinate to the desires of others, was considered a form of slavery. Between the two extremes, however, Aristotle suggests a middle ground, which he terms ‘practical wisdom’, that deals with ‘matters susceptible of change’.9 He stresses the necessity of both kinds of knowledge and separates practical wisdom from practice in terms of a distinction between ‘doing’ and ‘making’. The carpenter and the geometrician alike try to find the right angle, but they do it in different ways, the carpenter being content with such precision as satisfies the requirements of his job, the geometrician as a student of scientific truth seeking to discover the nature and attributes of the right angle.10

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The difference is therefore between what is immediately required to complete a task, and reflection upon the more enduring principles involved in the task. Practical wisdom therefore entails experience of the practical, and reflection upon it, in search of what can potentially be fed back to effect change and improvement. Aristotle’s distinction was also taken up by the American philosopher John Dewey, in his concept of empirical philosophy: To distinguish in reflection the physical and to hold it in temporary detachment is to be set upon the road that conducts to tools and technologies, to construction of mechanisms, to the arts that ensue in the wake of the sciences. That these constructions make possible a better regulation of the affairs of primary experience is evident. Engineering and medicine, all the utilities that make for expansion of life, are the answer. There is better administration of old familiar things, and there is invention of new objects and satisfactions. Along with this added ability in regulation goes enriched meaning and value in things, clarification, increased depth and continuity – a result even more precious than is the added power of control.11 Interestingly, Dewey also put forward a concept of mental constructs as testable artefacts, that anticipated the emphasis on knowledge as a manifestation of technology in New Growth theory. This means that both mental and material constructs are basically important in understanding the human capacity to design. As Hickman comments: The major feature of Dewey’s technological landscape is his contention that what lies beyond theory and practice, and what allows them to have commerce with one another, is the production of testable artifacts, among which he includes both those things popularly called ‘mental’ and those popularly called ‘physical’. Dewey’s critique of technology is above all a critique of the production of novel and testable artifacts.12 In Dewey’s thought, the ultimate touchstone of this two-way traffic between reflection and practice is the possibility of the former enhancing the actuality of human experience: What empirical method exacts of philosophy is two things: First, that refined methods and products be traced back to their origin in primary experience, in all its heterogeneity and fullness; so that the needs and problems out of which they arise and which they have to satisfy be acknowledged. Secondly, that the secondary methods and conclusions be brought back to the things of ordinary experience, in all their coarseness and crudity, for verification.13

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Aristotle assumed that change would be in accordance with values consonant with the ‘good’ that was the main emphasis in his concept of formal theory. Values were also a prominent feature of Dewey’s thought, and were also taken up as a constant thread in the work of the German philosopher, Hans-Georg Gadamer, who similarly drew on Aristotle’s ideas in viewing practical wisdom as a crucial competence in bridging the gulf between theory and practice. Gadamer emphasizes, in terms similar to Dewey, that practical wisdom ‘must arise from practice itself and, with all the typical generalizations that it brings to explicit consciousness, be related back to practice’.14 In that sense, practical wisdom is a vital dimension of decisionmaking, which again raises the problem of the basis on which one takes decisions. Gadamer too is clear and insistent that values must be the basis of effective practical decision-making, that the decision-maker must be ‘aware of the normative viewpoints he follows and knows how to make them effective in the concrete decision demanded by the practical situation’.15 * The question of values is also important on another level, which relates to Richard Nelson’s criticism of New Growth theory’s neglect of the importance of institutions. Basically, knowledge is generated, stored and applied not in a vacuum, but in specific institutional contexts, that are in themselves a manifestation of particular kinds of knowledge at any point in time. This has two broad levels of consequences: first, the interplay between the structure of an institution and the kinds of knowledge it permits, tolerates or encourages; and second, the degree to which an institution is capable of modification in order to realize in practice new knowledge or extensions of knowledge. This, in turn, will depend upon the values informing how the institution is organized and managed. It also brings into play the concept of culture. Human beings are not just defined by their biological nature, which is indeed the basic platform for their capabilities and consciousness. They are also profoundly shaped in detail by the culture in which they grow, live and work. Culture is the accumulated experience of any social group, manifested in the beliefs, procedures and values held to be important. Although human beings across the planet are fundamentally biologically identical, the astonishing diversity of human society, belief and achievement is a reflection of human cultural creativity. Culture is not a static phenomenon, but is constantly being modified and changed as new experience and knowledge become part of the common stock. Indeed, the vitality and survival of a culture is precisely due to this capacity for growth and adaptation, rather than being a fixed and unchanging element. Institutions and culture are therefore, like technology, all manifestations, albeit in different forms, of knowledge. All of them, moreover, do not exist in isolation, but interact on multiple levels and are interrelated by the values

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on which they are based. The values resulting from new knowledge and its implementation are not necessarily good, and, for example, technological innovation cannot be regarded unconditionally as beneficial to all involved. For example, on a macro-economic level, in the processes collectively known as the Industrial Revolution in Britain between approximately 1770– 1830, technological innovations, such as the Spinning Jenny, new weaving looms and steam engines, were the outcome of specific conditions in British society that encouraged invention and entrepreneurship on a scale not possible in other contemporary societies. In turn, new inventions introduced revolutionary concepts of not only mechanical technology, but also of the organization of technology in the form of factories, with innumerable concomitant changes in social and business organization. The circumstances of many drawn into the new system were often miserable and dire. Initially, the consequences on every level of what resulted were justified in large measure by the economic concept of ‘laissez-faire’, a free-market concept of minimum regulation. Friedrich Engels, Karl Marx’s coworker, tells the story of meeting a Manchester businessman and telling him of his concern at the appalling social conditions visible in the city. ‘And yet, Sir’, the businessman replied after listening politely, ‘there is a good deal of money made here.’ So saying, he tipped his hat and bade Engels good day. It eventually required the efforts, on the basis of more humane values, of many individuals and organizations, up to the level of the state, to mitigate the terrible poverty, disease and exploitation that resulted from this myopic viewpoint. More recent incidents stemming from the introduction of new technology such as the Three Mile Island incident and the Chernobyl disaster, both illustrating the dangers of nuclear power plants, the introduction of Thalidomide, and the Bhopal chemical plant disaster are all reminders that it was not the technology in itself that was the problem, but the values embodied in the organization, management and safety regulations relevant to the technology, and above all, the absence of vital human factors in understanding and evaluating technological performance.

9 Design and value from the standpoint of practice

In addition to theoretical viewpoints, it is important to give consideration to the practice of design and its significance in economic terms. In practice, this is often summarized as adding value to a company’s activities. If this is the case, it simply means adding value to products that already exist or to decisions that have already been taken by people elsewhere in the company. This role does indeed constitute a substantial part of designers’ work in many contexts, but the emphasis is on a part and not the whole. In addition, there is the possibility of designers creating value, of being responsible for generating ideas for products and, indeed, of being an element in the strategic decision-making processes of firms. The notion of adding value is characterized not only by the executant role assigned to designers, but also by its relationship to existing products in existing markets. In that sense, it has some affinity with neoclassical thinking. Design, however, is about change rather than equilibrium and there are a number of methods of using design to increase existing market share, among them being the following: – Product covering. This is an approach that seeks to ‘cover’ the kind of designs that are already in the market, by means of minor modifications of their surface appearance, without much alteration of the basic form and structure, or even by outright imitation. – Product churning.  In some industries, a condition of survival is that any participating company must continually churn out vast numbers of designs that are often minor variations of dominant themes. Typical industries for such approaches are large-scale jewellery production, toys, and clocks and watches. – Scale-down. This is an approach that seeks to take complex existing product technology or expensive processes and design them to be smaller in size and cost, and thereby to create wider markets. A company that has shown masterly command of this approach is Canon, which has taken large

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complex systems in cameras and photocopying and reduced them in size and cost to create whole-new market segments that they have commanded for long periods. – Inch-up. Many companies positioned in market sectors where products are relatively inexpensive and price competition is intense use design to penetrate higher-priced segments. An outstanding example of this is Honda, which began producing tiny engines to power bicycles in the early 1950s, went on to create the Cub moped that is still in production after half a century, with small engine applications in other fields such as agricultural and horticultural machinery. They moved up to larger motor-cycles, and then in 1968 produced their first automobile. Toyota has similarly made a spectacular breakthrough into the highest levels of automobile production with its Lexus series. One of the most fundamental criticisms of the static assumptions of neoclassical thinking is that markets are assumed to exist, whereas the crucial fact is that they are created and are often susceptible to frequent radical modification (Figure 9.1). There was no market in the mid-1970s, for example, for small portable tape-recorders that did not record, but Sony’s Walkman opened up a huge market with innumerable imitators. Markets can be created or modified by a variety of means. New technology is one of the most obvious, and the results can be spectacular

Figure 9.1  Adding value to products.

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as with James Dyson’s adaptation of technology that redefined vacuum cleaners and helped his start-up company to outcompete established global players. Such fundamentally radical advances in technology, however, are not so common as might be thought. More frequently, huge possibilities lie in new applications of existing technology in new concepts, as in Apple’s adaptation of computer technology to enormously popular products such as the I-Pod. New concepts of use based on observations and analysis of people’s needs can also be equally effective in opening up new market possibilities, an example being Niels Diffrient’s ‘Freedom’ office chair, which opened up a completely new and profitable product line for its manufacturer, Homebase. Similarly, opening up new channels of distribution for existing products can be spectacularly successful, as Amazon has demonstrated in its online retail sales of books. Each of these examples involved design as a crucial element in its success, but in widely varying ways. If human creativity offers a bottomless well of potential new ideas, it must, nevertheless, be emphasized, that an idea is not an innovation, as is frequently assumed. Only when an idea is embodied in a design – encapsulated into forms that are relevant, comprehensible, useful, accessible, affordable or pleasurable in the lives of users – can we truly speak of innovation, of creating new value. Just as there are varied means by which markets can be created, so it should be clear that the role of design in generating value can function in diverse ways, and there are some simple tools and concepts to aid in understanding and analysing these processes. Some major points of emphasis that can be combined in design projects in varying degrees to create new markets are indicated in Figure 9.2. These points of design emphasis can be abbreviated as follows: – Technology-centred – Marketing-centred – Image-centred – User-centred In addition to these four elements, it can be useful to distinguish the degree of change that is necessary or desirable in a project for it to be competitive. There is a tendency in design education to assume that fundamental change is to be sought at all times. In business contexts, however, it is necessary to understand that some companies in some product sectors can deem it unnecessary to pursue a radical agenda, which can be totally inappropriate if the circumstances are not suitable.1 The level of innovative intent considered feasible for a project is therefore an important determinant of a project and its success and the degree of innovation sought in a project can be summarized as follows: – Little change (or imitation)

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Figure 9.2  Creating value – extending the market.

– Incremental detail/feature change – Radical redefinition of basic concept – Fundamental change from the introduction of new elements The points of design emphasis and the degree of innovation factors can be combined in a matrix that offers a simple generalized tool to understand the complexity and variation characteristic of design projects. The use of the matrix as a simple analytical tool is illustrated by plotting on it the mix of emphasis in the first vacuum cleaner produced by Dyson, the DC01 (Figures 9.3 and 9.4). Although the cyclone technology it embodied was a fundamentally new introduction to the field of vacuum cleaners, Dyson gave very little emphasis to marketing and instead relied on word-of-mouth communication from satisfied customers. Its technological performance was so outstanding that it did not need radically different form or user concepts, although in both areas it was very competent, to make it a great success. Another variable in the mix of design factors needing to be taken into account in any business context is the deliverables, the outcomes of design

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Figure 9.3  Design/innovation matrix.

Figure 9.4  Design/innovation matrix: Dyson.

processes. These fall within the following general categories, each of which has a rich and varied repertoire of potential forms and usages: – Artefacts, which can include components as well as finished products; – Communications, which can be two- or three-dimensional, print or digital; – Environments, private or public, interior and exterior; – Services, the human face of design, adapting to the needs of people; – Systems, which combine some or all of the above in varied size and effectiveness.

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Each can serve a very wide range of purposes and each also requires specific skills and expertise. What is important about these categories is that attention to all of them is necessary if a company is to create a powerful and sustainable brand image based on the integrity of all components. Brand development in any meaningful sense requires a long-term strategy that combines all elements of design in a company, from top to bottom and across all aspects, into a coherent whole. If it does not have meaning in that sense within a company, it can hardly expect to have such meaning for customers. The three groups of factors, the points of emphasis, the degree of innovation and the deliverables, together comprise useful design planning tools when considering what criteria are important in any project and how these can be defined in terms that will facilitate evaluation of whether the deliverables meet the desired specifications. In planning and managing design projects to meet diverse aims in a company, it is important to emphasize that designers’ expertise can be applied in different ways to meet very different expectations. Basically, this can be analysed in terms of whether designers are required to work on specific product lines or on projects reaching across boundaries to extend across the whole company, with implications about whether they work individually or

Figure 9.5  Business strategies and design competencies in a company: four alternatives.

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in multidisciplinary teams; or whether they are expected to work on current lines or extend them into new areas. In Figure 9.5 the quadrants represent four major emphases in how designers can function in any company, with each corresponding to a potential form of corporate strategy in how it applies design expertise. The bottom-left quadrant requires existing competencies to be applied to current products or product lines, an approach generally typical of Original Equipment Manufacturing (OEM), in which manufacturers are provided with specifications for products to be executed to given standards and price and are not usually required to be concerned with innovative concepts. Designers in this kind of role are predominantly required to add value in limited terms. The top-left quadrant is still concerned with current products or product lines, but in this case it is looking for innovation. This is the area of Original Design Manufacturing (ODM), in which designers are employed to bring a particular approach or expertise that will differentiate a company’s offerings. The aim here is differentiated products. In the bottom-right quadrant, the emphasis is on applying existing competencies on a corporatewide basis where Original Brand Managememt (OBM) is the aim, in which coordination of all factors is given conscious and continuous emphasis. Finally, the top-right quadrant is where innovative proposals are sought on a corporate-wide basis, or Original Strategic Management (OSM), in which the aim is the evolution of strategies to create new value and new markets. Each quadrant requires design to function in very different ways. Different market conditions can also substantially influence how design is applied, in terms of the extent to which predictability can be relied upon in any situation. As discussed in the section on neoclassicism, some markets are indeed relatively stable in terms of supply and demand, while others are unpredictable. Known – Design as tested procedures under relatively stable conditions; Uncertain – Design as an exploratory process under conditions of uncertainty; Unknown – Design as trial and error flexibly responding to unknown circumstances. The likelihood is that design will be used as a superficial addition in known circumstances, where product definitions and brands are generally far more firmly established. With greater uncertainty, however, design can become a tool to expand the range of possibilities and explore alternatives. In unknown conditions that are highly volatile, design can play a role at a strategic level in providing a spectrum of scenarios to meet various circumstances and a flexible means of rapidly adapting to customers’ needs in conditions of high uncertainty in markets.

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Figure 9.6  Proportion of total costs spent in each phase of development. Adapted from Steve H. Leibsam, ‘Design for testability creates better products at lower costs’, EDN, 31 March 1988.

The emphasis on design as a strategic element, concerned as much with ideas as with outcomes, also has some strong economic arguments in its favour. The proportion of total costs spent in each phase of product development increases exponentially as the process evolves (Figure 9.6). This means that the cost of generating ideas in the vital early stages of a project is comparatively small. Alternatives can be tried and parameters altered with little cost or consequence at this stage; the actual cost of doing so is very small. As a project progresses, with all the consequences for detailed development, prototypes and manufacturing ramp-up the cost of a mistake or change can be a huge penalty. Therefore, getting design ideas included as an integral element of early decision-making in development can make a vital contribution to efficiency (Figure 9.7). A further consideration is that although actual expenditures in the early stages are comparatively small, the costs committed for later expenditure as decisions are taken are often large. A wrong decision can thus have serious consequences downstream if it results in change orders at a point of large expenditure. An implication of this changing pattern of decisions and cost is that any firm involved in a search for innovative solutions must balance the necessarily loose and open-ended search for new possibilities with a highly organized structure to implement new ideas. Designers need to acknowledge the necessity of both.

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Figure 9.7  Proportion of total costs spent in each phase of knowledge development.

The question of design, however, cannot be divorced from wider questions of strategic management. Management theories focusing on the level of the firm have a constant thread of ideas about establishing superior strategy and building successful organizations. Although differing in many respects, prominent contemporary theorists on innovation display some common themes which overlap in several ways with the concerns of New Growth theory in also pointing to an emphasis on knowledge rather than financial measures, although the reference to customers is a dimension not found in economic theory, though it is often more a matter of marketing-speak than functioning reality. Even in management theory, however, design is generally neglected, even though it might be thought implicit in a theme such as creating differentiation. More to the point, in business research and theory, just as in economic theory, there is little focus on how products of any kind are actually generated, how they actually create value, and what role they actually play from the standpoint of customers. What then can design deliver that other disciplines cannot, that is different and meaningful in a strategic context when innovation is the aim? Perhaps the easiest way to answer this question, which also brings together some of the points implicitly and explicitly made above, is to say that design offers four broad but distinctive categories of action. None of them are unique by themselves but they become so when successfully

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integrated and in turn the complex is integrated with a company’s (or an economy’s) strategic plan. 1.  Design is innately concerned with change2 Innovation by definition involves change and design in any meaningful sense is concerned with the actuality of what will be produced in the future and how it will be different. The conceptualizing of change, its consequences for a company and its customers, can never be wholly anticipated, but on the level of design planning, risks and unknown dimensions can be prepared for by modelling potential, alternative futures. ‘Design,’ says Herbert Simon, ‘like science is a tool for understanding as well as for acting.’3 More effective decisions can therefore be made at an early stage, more focused design briefs and design criteria can be written, and costing estimates can be more realistically based. 2.  Design gives product concepts tangibility Surprisingly, development teams frequently still seek to validate ideas and test their feasibility before they are made tangible. This can waste enormous time and resources. The possibility of accurately assessing or testing a concept when no one has a clear idea of what it actually is can only, at best, yield information of very uncertain value. An important function of designers is in translating general concepts into tangible reality, giving form to innovative concepts, and demonstrating exactly what constitutes user-value, so that they can be more accurately tested early in any development process. 3.  Design concepts are an important determinant of manufacturing feasibility and cost A further point emerging from 2 above is that to avoid costly and timewasting changes downstream in any development process, a clear idea of the product and its cost implications is necessary at the earliest possible stage. Again, tangibility and a more intense degree of relevant testing are prerequisites to properly assessing the consequences of decisions, before substantial financial commitments are entered into. 4.  The reality of a design as perceived by users at all levels determines market success The role of design is to make innovation acceptable to users within the producing organization, and at various levels in targeted markets. The concept of different levels of users, both internal and external, is important to avoid an oversimplified emphasis on one level only. The testing of user reaction to any product concept in specific terms in the earliest stage applies again. A common factor in all four points above is the stress on tangibility and testing in the earliest stages of development. But to use design successfully as

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a strategic tool, it needs integrating at the earliest possible stage with other key disciplines, at all levels of a company’s activity. Two issues immediately come to the fore. The first is the question of the capabilities and capacities a company requires when it embarks on a strategy of innovation. Such capabilities should be based on a company’s human capital, the qualities of the people it employs, and should be evident in ways that are difficult to imitate, such as the following: ●●

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A constant flow of ideas for innovative products Tangible concepts of future possibilities Scenarios of future systems and their potential Operational flexibility and effectiveness User-focus – on multiple levels, internal and external Product quality and distinctiveness Cultural sensitivity in specific detail Constant growth in ‘human capital’ Brand integrity and distinctiveness

Some practical means of realizing these possibilities are as follows: 1. ‘Preparing for uncertainty by thinking in terms of alternatives’. A constant emphasis in this course is that innovation by definition involves change in people’s lives – design in any meaningful sense is concerned with the actuality of what will be produced in the future and how it will be not just different but better. The conceptualizing of change can never wholly anticipate the full consequences of the future for a company and its customers, but on the level of design planning, risks and unknown dimensions can be prepared for by modelling potential, alternative futures. ‘Design,’ says Herbert Simon, ‘like science is a tool for understanding as well as for acting.’ In addition, if more effective decisions are made at the early stages of development projects, more focused design briefs and design criteria can be written and costing estimates can be more realistically based. All these also contribute to better decision-making early in projects. 2. ‘Getting real upfront’. Surprisingly, there are still companies that seek to validate ideas and test their feasibility before they are made tangible. This can waste enormous time and resources. The possibility of accurately assessing or testing a concept when no one has a clear idea of what it actually is, in two- or three-dimensional reality, can only, at best, yield information of very uncertain value. An important function of designers is in translating general concepts into such tangible reality, giving form to innovative concepts, and

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demonstrating exactly what constitutes user-value, so that they can be more accurately tested early in any development process. The concepts of early prototyping, of testing ideas with very rough, simple and inexpensive means that allow multiple iterations in a brief period of time are an important tool in determining what values are important for customers. 3. ‘Making sure you can make it well, to cost and time’. A further point emerging from the need to ‘get real’ early in a project, is that to avoid costly and time-wasting changes downstream in the process, a clear idea of the product and its cost implications is necessary at the earliest possible stage. Again, tangibility and a more intense degree of relevant testing are prerequisites to properly assessing the consequences of decisions, before substantial financial commitments are entered into. 4. ‘What customers say is not as important as what they do.’ The reality of a design as perceived by users at all levels is the ultimate determinant of market success. The role of design, above all, is to make innovation acceptable to users, both within the producing organization, and at various levels in targeted markets – the concept of multiple levels of users, both internal and external, is important to avoid an oversimplified emphasis on one group only. For example, in considering a hospital as a design system, who are the users? Is it doctors, nurses and technicians; or patients and their relatives and visitors; or administrators, accountants, purchasers, receptionists, cleaners and porters? In fact, it is all of them. What is important in testing user reaction in the earliest stages of product concepts, therefore, is to focus on users’ behavioural reaction to new ideas in all their complexity rather than simply what one group might say. It will be behaviour that is the true determinant of reaction to new ideas and products. Again, the common factor in these four points is the emphasis on tangibility, as well as on the depth of exploration of problems and possibilities at the earliest stages of development. However, how these strategies can be developed in practice depends on understanding the modes of design possible in a firm.4 Five modes of how design is utilized in a firm need to be considered: a The levels at which design functions b The operational functions of design c The applications of design d The levels of design innovation e The types of design competencies needed to secure innovation. Given these varying factors in how design is used, it is necessary to analyse this diversity further and attempt to understand it in greater detail and establish more specific criteria for decision-making.

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a The levels at which design can function In basic terms, as was shown in Chapter 1, a firm has three major levels of function (Figure 9.8). The level of strategy involves determining what the future role of a firm should be, its major products, markets and customers, and the organization this will require. The level of organization is concerned with the detailed structuring of the resources required to implement strategy. The level of implementation directly executes the strategy in terms of production. If design is to be fully integrated into an organization focused on innovation, it equally needs to effectively function at all three levels (Figure 9.9). – Concepts of design planning are about using the resources of a firm, and outside resources available to it, to respond to opportunities for change affecting the nature and future of a firm. This will be discussed in more detail later. – The management of design is concerned with the organization and enhancement of design competencies in a firm, the logistics of their implementation and their effective integration into product teams. The term ‘management of design’ is used very deliberately to emphasize the need for effective management, with design integrated with other corporate competencies at all operational levels to realize its potential in all facets of corporate activity. This is in contrast to the frequently used term ‘design management’, which implies that design is a separate, special interest requiring its own form of management.

Figure 9.8  The major functions in a firm.

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Figure 9.9  The major design functions in a firm.

– Design practice is concerned with the implementation of design skills as an integral element of product development teams, and technique will obviously be a primary requirement at this level. A key concept in using design as a tool in innovation is that of user-centred design.

b The operational functions of design In operational terms – how design is actually conceived and utilized at the level of the firm – a fourfold distinction of functions is evident from practice: ●●

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technology-centred functions marketing-centred functions image-centred functions user-centred design

Technology-centred functions Some products are essentially defined by their technological function – ships, aircraft, machine tools and computers are obvious examples. Whatever their aesthetic qualities, and they are often considerable, these are a secondary outcome of technological definition rather than a defining intention. This can also be true of consumer products of smaller scale and complexity, such as Gillette’s Sensor razor, which is based on numerous patents enabling

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it to function in ways much superior to the disposable razors previously dominating the market.

Marketing-centred functions Products in this category are exemplified by branded commodities that are rapidly consumed, such as soft drinks, beers, fast foods and cigarettes, and services that in fundamental terms are difficult to differentiate, such as air travel, credit cards and insurance. Companies such as Coca-Cola, McDonalds and Disney are classic examples that grew to global status on the basis of marketing prowess. A more recent example is Britt Allcroft’s amazing success in taking the children’s story, Thomas the Tank Engine, written over half a century ago, and turning it into an immensely profitable marketing-based enterprise with licences for an astonishing range of products.

Image-centred functions Where the visual form of a product is the primary intention in its development, we can speak of image-centred design. An obvious example is the fashion industry and, indeed, the work of any designer whose individual approach gains widespread recognition and ‘star’ status. The French designer, Philippe Starck, for example, has designed a juicer in a dramatic spider-like form that sells for an immense premium over more conventional and betterfunctioning products. Innumerable products of all kinds are similarly priced at a premium on the basis of their being visually different.

User-centred design Although lip-service is widely paid to the need for products to be more ‘user-friendly’, products designed with an understanding of people’s actual or latent needs are not found in great profusion. The London Transport map by Harry Beck of 1934 is a classic example of information design, making the geographical complexities of the London Underground system comprehensible for generations, with innumerable other transportation systems using it as a model. A more recent example of three-dimensional design is the Oxo Good-Grips range of kitchen products, originally designed to aid elderly people with arthritis to grip kitchen implements such as peelers, but so successful in its radical redefinition of function, that its ease of use has created a much wider appeal.

c The applications of design A third dimension on which design functions in any business context is in terms of the actuality of its applications. The outcome of design

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activity in any business will fall within the following general categories of application: ●●

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Artefacts; Communications; Environments Services.

Increasingly these days, the boundaries between the above are becoming blurred as software and hardware intersect and combine. Therefore, in the context of this chapter, the word product can mean any of these or any combination, which leads to the design of systems as a coherent entity.

d Levels of design innovation The fourth level of design decision-making in any firm relates to the degree of innovation intended in any project. Establishing criteria for such a complex subject as innovation is not simple. In broad terms, however, it is possible to use a scale based on the following estimates of the degree of innovation involved: 1 2 3 4

No change or imitation Incremental detail change Radical redefinition of basic concept Fundamental innovation

There are difficulties in precisely specifying the difference of level, and the scale must therefore only be considered a tentative answer to the problem of defining changes envisaged in any development project. However, it is useful as a counterpoint to ideas that innovation is necessarily about radical or fundamental change. In fact, at different times in different product categories, markets and stages of the product cycle, the level of innovation possible or desirable will be less dramatic, especially in those situations where a cycle of incremental change is appropriate.

e The types of design competencies needed The range of specializations in design is potentially large, and with new technologies coming to the fore, it is increasing. A key skill in strategiclevel decision-making regarding design will be determining when and where, and in what combinations, these various levels of design competencies are necessary for the efficient functioning of innovative product developments

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across a spectrum of corporate activities. In practice, two main competencies are involved, albeit with numerous subcompetencies, capacities and capabilities.

Design as competence and skill on behalf of innovation The strategic competence in managing design cannot be separated from the question of skill. Paul Romer argued that if knowledge is something that requires investment in order to sustain improvements in capability, then that higher level of skill should produce clearly acknowledged benefits. In a study of innovation in Britain, Ivan Yates argues that such higher levels of skill, which ‘shows how productivity is increased, or how the costs of any particular operation are reduced, as the skills level of those employed is raised’.5 Yates emphasizes that management and organization must be compatible with the level of skills required if the potential advantages of the latter are to be fully exploited: ‘The greater flexibility which comes from a wider range of skills enables a more rapid response to the market, for instance by moving to higher quality, higher specification products.’6 Pointing out that many product concepts are put into manufacture before adequate preparatory work, Yates stresses the need to get concepts properly worked out early in the development process: The penalties for not getting it right can be very great; for instance, the effect of delay in the market place can cost dearly, as can an overrun in manufacturing costs. On the other hand, putting more effort into design, or even a cost overrun in the design phase, before committing to production, has much less effect. It all comes down to the management of risk, and it nearly always involves taking much more care about the design process.7 Yates’ argument for the value of higher levels of skill in all corporate functions supports the need for higher levels of competence in design as a crucial element in developing the ‘higher-quality, higher-specification products’ mentioned by Yates. There is a dimension missing from Yates’ argument, however, that is a major element in product strategies used by Japanese companies. To return to the diagram shown at the start of this chapter (Figure 9.2), the two lateral approaches (product matching and product churning) are basically opportunistic responses to the market as it exists and require large numbers of low-level design skills without any real innovatory capacity. The two vertical approaches, however, highlight not only the possibilities of highlevel skills being used to launch higher-value products, (inch-up) but also the possibility of high-level skills cascading down through a company’s product line (scale-down). The breakthrough into the highest levels of automobile

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markets by Toyota, Nissan, Honda and Mitsubishi are examples of inch-up. Scale-down can be illustrated by Canon’s development of high-performance cameras or high-end photo-copiers for professional markets, with the innovations generated successively appearing in increasingly lower-priced products. In both, the level of design ability required is immediately of a far higher level, and when inch-up and scale-down are combined over time, they can be formidably effective.

Design as capacity and competence in planning and strategy for product and service development In the present-day world, we face enormous changes on multiple levels, including technologies, products, services and markets, with new, complex dimensions of both global and local reference. Perhaps the greatest difficulty, and the greatest danger, lies in abandoning old ideas that seem tried and trusted. The work of many of the new growth economists, Rosenberg, David and Arthur among them, have emphasized the concept of path dependency, which describes the ingrained nature of habit and thought on many levels, that makes it difficult to adapt to change. In any aspect of a practice, procedures evolve out of experience in handling problems, and can be described as a sequence of actions believed to be able to reach a goal in a known situation. Again, the relationship of this to the assumptions of a status quo in neoclassical theory is obvious. A problem occurs, however, when rapid change is widespread, and known or allowable procedures are inadequate for, and become a barrier to, understanding new situations. At what point is known procedure in design inadequate and a barrier to executing a task? Clearly, there is an obvious level on which old skills become obsolete, such as many hand-skills that are now more quickly and easily performed with computers. If designers’ skills and equipment are not compatible with those of clients, there is also a serious gulf. Change on many levels is therefore profoundly influencing how design is conceived and practised. Some obvious aspects are implicit in the change from massproduction to flexible, information-based systems of manufacture and communication, the same pattern that has been the stimulus for New Growth theory in economics. Some of the more obvious implications for design are set out below: Mass

Flexible

Focus

Objects

Systems

Function

Form-giver

Enabler

Purpose

Adding value

Creating value

Role

Middle-level executant

Strategic planner

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A key factor in the shift from mass to flexible production and from objects to ideas is the greater emphasis on systems rather than products (Figure 9.10). Systems embody knowledge and ideas; they connect and give utility to objects. For example, it is possible to think of designing a bank-card or an ATM machine as objects, at a relatively modest level of skill-based competence, but neither has any significance without understanding the system of which it is a part. From the standpoint of design, the key to the successful functioning of systems is not the aesthetic, formal qualities of individual objects, but the interface with the system as experienced by users. Rather than simply designing objects, therefore, there is a need to interrelate hardware and software in integrated systems appropriate to users. Implicit in this is a change in the role of designers from unique form-givers to enablers. The concept of designer as enabler is central to understanding the differing role of design in the new technological and economic circumstances emerging at present. These are characterized by complexity, caused not only by size and diversity, but also because in a period of change, it is impossible to know exactly what will transpire in any given situation. Designing a single object, or solution, in a situation of complexity can, at best, address only a tiny proportion of any problem or potential solution. In such circumstances, a more appropriate response is the design of objects in systems that are flexible and adaptable – enabling users to adapt them in ways appropriate to their own lives and purposes. The role of designer as enabler is therefore based on an acknowledgement that complexity and flexibility are two sides of the same phenomenon.

Figure 9.10  Changes in design from mass to flexible production.

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Under such conditions, technological opportunity for innovation lies not in adding value to existing concepts, but in creating new concepts of value. This also implies a new role for designers above that of middle-level executants – trying to create a degree of differentiation for products already essentially determined by others. It opens up a need for strategic design planners capable of participating with other vital corporate disciplines in the process of creating new systems and new value.

The implications for strategy What does all this mean in terms of strategy? Certainly, it too must be reoriented to meet new, emergent conditions. In terms of Neoclassical theory and the economy on which it was based, strategy could also be conceived in relatively simple terms as a predetermined set of procedures to meet a known, essentially static market situation. Where change and complexity are the rule, however, strategy needs to be framed in general terms of a vision of the future, necessary for a sense of coherence and direction, but with implementation conceived in terms of what is needed to respond rapidly and effectively in conditions of uncertainty and complexity, with all their concomitant problems of friction and resistance to change. As a strategic tool, therefore, design planning should not be conceived as a route march to some predetermined end, but as a highly flexible tool for exploring possibilities and rapidly responding to new and unknown situations. Yet, given these possibilities it is surprising that many companies still seek to compete in terms that use design for minor modifications of existing products, or for superficial attempts at differentiation without any substance. They exist in a given competitive situation and do not address the potential of creating new value, which is at the heart of any innovatory project. In a changing world, Joseph Schumpeter’s term ‘creative destruction’ appropriately summarizes the blend of opportunity and threat such companies face. What has been argued in this seminar is that new trends in economic theory provide a better understanding of the processes of growth, and a framework of great potential in understanding the case for design as an integral element in innovative processes. Design theory can valuably complement it, adding dimensions of understanding not encompassed in economic concepts. Design practice should also be integral to the innovative capacity of firms and thus to the processes of growth, as an equal partner with a clearly defined and acknowledged function. Using design to strategically create value, generating breakthroughs that open new markets or fundamentally redefine existing ones, and subsequently sustaining and extending them is a continuously evolving process, but a necessary one, presenting ongoing challenges to designers at all levels. In terms of its role, design is not just about adding value. In the context of innovative possibilities, it can deliver to users, and much more powerfully, what they never knew they wanted or realized they could have.

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But there are also wider strategic implications here. Strategies are not innate to any individual or organization.8 They can be learned and practised and, with evaluation and improvement, can vastly alter performance. The concept of the role of design planning as an integral element of strategy can only be fully successful when used as part of a coherent policy across the whole range of corporate activity, and from commencement of development processes through to sale and service in the market, with the purpose of raising the overall level of capability of design in every aspect of corporate performance (Figure 9.11). To achieve this requires an understanding of the fact that design functions across divisions that often represent very different values and procedures. On the level of practice, for example, design functions in part on the basis of coded knowledge, such as the specific technical qualities of materials, or the ergonomic profiles of a particular population, and also with a substantial degree of tacit knowledge in how the coded knowledge is applied. Although tacit knowledge is not easily built into formal models, it should be re-emphasized that it is an invaluable element in innovative conceptualization and practice and thus a form of competitive advantage. Indeed, design, understood primarily as integral know-how, based on ‘learning by doing’ and embedded in a network of specific relationships in a firm, rather than as operational technique based on manuals or other forms of coded knowledge, is less likely to be easily imitated or replicated and more likely, in economic terms, to be excludable. It is above all the focus on people and their needs and the reconciliation of these with business requirements that is advocated here as the major contribution of design as practice and theory, that has economic validity as a means of creating as well as adding value. The diagrams that have earlier summarized the various bodies of economic theories and their main tenets can be extended here to indicate how design can be an integral element in contributing to innovation and competitiveness. It does so by proposing that knowledge of and ideas for users be considered alongside knowledge and ideas about technology as a fundamental factor of production, thus positioning this concern at the early stages of any process of how a company functions. Knowledge of users thus becomes an integral element in how the capability of any firm is defined. It also posits users as the ultimate focus for the outcomes of the whole sequence of production, delivery and purchase. By linking earliest considerations in internal terms to ultimate uses in external terms, design becomes integrated as a vital and necessary dimension of how any company functions. Creating value in economic terms is frequently separated out from the satisfaction of human values, which explains the profusion of bad products and the dubious business practices around the world that arouse suspicion and mistrust of companies and how they conduct themselves. A central proposition of this course is that concern for both value and values can be combined in ways capable of powerfully enhancing sustained competitiveness.

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Figure 9.11  Value creation theory with design understood as a structural factor of production.

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It is important to emphasize that both technology and design, as manifested in artefacts and systems, are neutral in terms of the values they embody. The concepts and intentions of designers do not always determine the purposes for which their designs are applied and the values or meaning that become embodied in their application. In other words, technological innovation is not necessarily the manifestation of some inevitable onward march of progress and neither is a new design automatically beneficial. The term ‘good’ design, frequently used to describe the extent to which a design performs its designated function or conforms to a particular canon of taste, is, in terms of any ethical or moral implication, meaningless. A pen such as a Parker Rollerball or Lamy ball-point might be considered ‘good’ in terms of its essential function as a writing instrument or in terms of the aesthetic pleasure it provides. However, if the point of such a pen is poked in someone’s eye with the intention of blinding them, it becomes an instrument of evil, for a wilful, sadistic act of destruction. A computer can be simultaneously a device enabling people to have greater means of control over their own lives, expressing their innate worth; or a means of controlling them and making them conform to oppressive political or economic aims. Whether on an individual or group level, it is the use to which technology or designs are put, the values they further in use, and the consequences of their introduction that is decisive in how they must be evaluated. Violent computer games for children might be profitable, but are they desirable? In other words, the behavioural and cultural consequences of design are primary social criteria by which it should be judged. To repeat: the consequences might be in conflict with the desire for profit but they do not necessarily have to be so and reconciliation of these two aspects provides one of the most effective business tools available to enhance competitiveness. In this sense, John Dewey’s observation on how to judge the value of a philosophy, written in 1925, sets the standard not only for philosophical works, but also for any form of decision-making, particularly design, that affects the lives of other people. A first-rate test, he says, of the value of any philosophy that is offered to us, should pose the following questions: Does it end in conclusions which, when they are referred back to ordinary life-experiences and their predicaments, render them more significant, more luminous to us, and make our dealings with them more fruitful? Or does it terminate in rendering the things of ordinary experience more opaque than they were before, and in depriving them of having in ‘reality’ even the significance they had previously seemed to have?9 Design must equally be judged in terms of the benefit it brings to life in all its dimensions. To deny the significance of values in this broader sense is to deny design any role in defining viable solutions to human existential problems, effectively condemning it to a supporting role in pursuit of narrowly defined economic aims measured in profit, in other words, relegating design to a

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technocratic role of putting into effect the ideas of others without any regard for the consequences. Attempting to create the future material and information structure of our culture in these terms, without any sense of values other than financial, will be a disaster waiting to happen, like sailing a nuclear-powered submarine by the sun and stars. In short, a task of the utmost significance is to reconcile the two poles of value and values that are both necessary and integral components of the tasks facing designers.

Afterword Sharon Helmer Poggenpohl

Occasionally, someone appears with not only the right background and intellect to tackle an ongoing conundrum in design, but also the curiosity and discipline to pursue the investigation over decades, yielding an authentic contribution to design thinking. Economics and business understanding are missing links in design practice and education and few have the interest or are capable of going beyond basic comprehension. Yet, John Heskett dug into theory to do an accessible analysis of economic theories as they relate to design. But the work is not done – what is missing is a synthesis of aspects of existing theories John has conveniently identified that speak strongly to the interrelationships between design-economics-business. Design and the Creation of Value is a scholarly gift. We live in such a quantitative time and those quantitative thinkers tend to ignore the importance of qualitative measures because they elude easy analysis and integration. We are awash with economic indicators, and some sense of qualitative indicators is needed to achieve a balance. Design is about qualitative work in many dimensions, the interaction between people and things, humanizing technology or the larger search for sustainable solutions, for example. For such reasons alone, John’s work is important; he respects the quantitative but recognizes the challenge and need for qualitative balance. This work needs to continue, with someone with the right credentials (understanding economics-business-design) picking up this work and extending it. Actually two people are needed: someone to synthesize the economic theories in terms of design that are flagged in this book and someone to continue investigation of value and values that hit on the hard and soft nature of these terms and perhaps can unravel their relationships. The synthesis of theories may lead to new ideas, likewise disambiguating value and values. This is not easy work, but it is essential. His readings in history and the necessary references from economic theory may run into dismissal with contemporary readers who tend to read what is hot or very current, dismissing older, classic sources. We build on and learn from the past. John Heskett has done the heavy lifting in this regard as he provides the starting point for continuing this work.

Appendix 1: Socialist Theory 1

Although many figures would need to be described in any full account of the evolution and development of Socialist theory, there cannot be any question that Karl Marx (1818–83) towers over them all in his work and influence. The significance of Marx is that he was the first economist to provide a substantial body of theory that gave focus to dissent with and misgivings about the mainstream of capitalist theory and practice. It is difficult to underestimate the effect of his ideas, even though some of their key features have become discredited. He was born in Trier, in the German state of Prussia, of Jewish antecedents, although his father was forced to convert to Protestantism. Marx, however, became a convinced atheist. At university in Bonn and Berlin, he became influenced by the ideas of Hegel, who argued that a continuous process of transformation and development was characteristic of human development, which kept society in a condition of constant challenge and change. Marx lived in a world in which the capitalist bourgeoisie in Europe and America were transforming in their own image on the basis of the theories of Adam Smith and his successors. There was inevitably much social suffering and exploitation in the early stages of industrialization. This led Marx to speculate on what the process of change should be in his own time, a path that increasingly led in the direction of socialism. In 1841, he began work as a journalist in Köln (Cologne) and soon became the editor of the Rheinische Zeitung. The circulation of the paper rapidly grew, as Marx took up the grievances of local citizens against the government. His interest in and advocacy of socialism began to develop substantially, which brought him into frequent conflict with the Prussian censors. In 1843, the paper was closed down. Now married, Marx left for Paris. There he frequently met with Friedrich Engels, the son of a German textile manufacturer, who was to be a close associate for the rest of his life. In Paris, Marx studied avidly. A range of socialist forbears profoundly influenced his thought: from France, Fourier, Saint-Simon, Blanqui, Louis Blanc and Proudhon; from England, Robert Owen; from Germany, Ferdinand Lassalle and Ludwig Feuerbach. At this time, he also worked for a refugee German newspaper, which again aroused the attention of the

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Prussian censors. At their request, the French government expelled Marx in 1845 and he left for Brussels. In 1848, he published The Communist Manifesto, a pamphlet for a socialist organization that later became the Communist League. Its main points proposed the following: – Society was the history of class struggle. The bourgeoisie had overthrown aristocratic rule and in turn would be supplanted by the proletariat created by the Industrial Revolution. – Revolution was justified to hasten this inevitable process. – An end to private ownership and progressive income tax. – Public ownership of major industrial and commercial institutions. – Work by all. – Free education. It concludes with a famous rallying cry: ‘Let the ruling classes tremble at a communistic revolution. The proletarians have nothing to lose but their chains. They have a world to win. Workers of the world, unite!’ That same year, 1848, is widely known in Europe as the Year of Revolutions, which broke out in France, various German states and the Austrian Empire, among others. Marx returned to Cologne, but the failed revolution in Prussia meant he had to leave again. This time, in 1849, he went to London, where he remained for the rest of his life. Support was initially provided by Friedrich Engels, who managed the branch of the family business in Manchester. Later, an inheritance of Marx’s wife gave basic financial stability. He plunged into political work with workers’ organizations in London and discovered the great resource that dominated the rest of his life: the library of the British Museum. There he researched and wrote, in particular, the three volumes of Das Kapital, the first volume of which appeared in 1867. This and other works of his prolific life as a writer have had enormous impact on multiple levels. They have shaped the experience of societies that underwent revolution and the establishment of Communist systems, most notably Russia and China, that profoundly shaped the course of events in the twentieth century. Even in societies remaining basically capitalistic, Marx’s ideas on social provision often led to their being adopted as a bulwark against communism. At the heart of his economic theories was the assertion that labour is the source of value, a proposition going back to Adam Smith. Under the capitalist system, Marx argued, workers are paid as little as possible and the value of their labour is appropriated by capitalists. The value of labour, in terms of what workers are paid, is therefore always less than what the worker produces. The theory is problematic, being based only on a limited view of production costs. It does not explain why wages, prices and profits are actually as they are. It ignores rewards for enterprise, the factor of scarcity

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and the role of consumer demand in determining value in the market place. It is still, however, at the heart of many critiques of consumer society. Marx also argued that the proletariat was created by the bourgeoisie, which concentrated productive power in a few hands. In turn, the contradictions of this system would lead to the proletariat seizing power. In fact, however, capitalism has gradually but continually broken down the class system by allowing a greater proportion of the population access to opportunities for economic and social improvement. In addition, capitalist systems have shown a capacity to reform on important levels provision of social insurance, health and unemployment protection, education and pensions, which has mitigated many insecurities of life. Social relations, political and cultural beliefs and practices, are all elements of what Marx termed ‘the superstructure’ and are all created from and dependent on the nature of the economic base. This creates a paradox: the new communistic system could not emerge until the economic base had been transformed – which was the task of revolution. However, it is an oversimplification to believe that people’s consciousness is simply determined by economic circumstances, and there is evidence to suggest that ideas do not alter in conformity with economic change. According to Marx, the collapse of capitalism was inevitable. Clearly, this has not yet taken place and, indeed, the transformation of the former Soviet Union, China and other socialist states to a capitalist economy would argue, instead, for the inevitable collapse of socialism. There remains, however, a residual degree of uncertainty within the consciousness of many people, a nervousness at the possibility of a deep economic crisis. If the current wave of material prosperity should for any reason subside, this might again become topical.

Appendix 2: Value and Values in Design

There is a widespread belief among designers, a cornerstone of their practice, that not only can design, add or create economic value through products and processes, but it can go further by also enhancing individual, social and cultural life in beneficial ways. This paper will explore the extent to which these beliefs are sustainable, and whether a relationship exists between ethical and economic effect, between values and value. The belief that design can, or should, embody ethical values has deep roots.1 One of its clearest threads is discernible in the history of the English Arts and Crafts movement. One of the most distinguished heirs of that tradition, the English furniture designer, Gordon Russell, who in 1944 became the first head of the newly founded Council for Industrial Design (CoID), later the Design Council, wrote of the way in which, during the first half of the twentieth century, mechanization was used in the British furniture industry: The machine, which might well have been used to produce a decent job of work, was often used purely to obtain cheapness at any cost. Can anyone imagine that such conditions offered a healthy seed bed in which good designs might grow? For good quality – quality of design, of material and of workmanship – is the outward and visible sign of good health. It is not something which can be assumed at short notice, like the sham styles so beloved by the furniture trade, but something by which our whole standard of civilization can be tested: either you believe that the physical background of life ought to be pleasant, seemly and satisfying or you think it doesn’t matter.2 The passage is infused with terms indicating a strong sense of values: ‘healthy’, ‘good’, ‘quality’, ‘sham’, ‘standard’, ‘seemly’, ‘satisfying’. Indeed, Russell consistently argued for the recognition of consistent standards in designing and its potential for influencing the social life of users. Of this work in attempting to improve awareness of design and its potential, he wrote: It is sometimes said that there is no such thing as good or bad design, that it has no real measurable standards, that it is, in fact, just a matter of personal taste. But it is readily accepted that there is a standard of, say, honesty, or driving, or housing, so why not one of design?3

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Similarly, a distinguished Swedish designer, Gregor Paulson, expressed a point of view that design had an important role in moulding social values when he was addressing the Royal Society of Arts in London in 1950. Paulson accepted that differing points of view existed between producer and consumer and pointed to a fundamental difference in concepts of value between producers and users that is potentially profoundly important, although he did not substantially explore it in his address. Products are looked upon by the consumer from the viewpoint of value in use, whereas the producer and the retailer must think of them as articles of trade, as means of exchange which bring the revenue necessary to pay wages and other expenses. Of course, most producers believe that the things they manufacture have high value in use, i.e., are such as the consumers want. The matter was further complicated, he argued, by designers who often advocated idealistic beliefs about the role of taste, as they defined it, in society. It was possible, however, that if all three parties worked in cooperation, a satisfactory solution could emerge. Furniture can be designed through collaboration between the three parties concerned in the drama; the manufacturer (represented by the technician), the designer and the consumer. Furniture which is fit for its purpose, good in quality and reasonably low in price, and stimulates demand because of its higher values in use is the outcome. … Furniture which can be combined to suit the dwelling, the family, the purchasing power at a given moment, will be bought throughout a lifetime in small units, but repeatedly. Sweden is trying to put this theory into practice. The [design] ideologists of the middle way want better homes for the common people, not to manifest a given taste, but because, to them, better homes are the most important influence for a better pattern of life. They want a new structure of the family budget; more spent on and in the home, less in the street. Designers who work in that spirit are social workers. Their heart is with the consumer, but they are not counteracting the interests of the producer. They believe themselves to be furthering them.’4 Paulson too uses a wide range of terminology that indicates the values he considers important: ‘fit for its purpose’, ‘good in quality’, ‘higher values in use’, ‘better homes’. The concept of ‘good’ design in that sense has faded almost out of sight, along with the paternalistic idealism of its protagonists, but no similar explicit ideals have taken their place. Design has instead become widely subordinate to business imperatives, with cost criteria dominating in much the same terms that Russell criticized. While designers are often still exasperated by the reluctance of business clients to consider their products on any level but cost, it must also be acknowledged that,

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unlike Paulson, some designers too readily ignore the fact that profitability is necessarily the dominating criterion in the functioning of any business. Clearly, if the two standpoints are to be an opportunity for fruitful cooperation rather than antagonistic division, a reconciliation needs to be outlined between the twin poles of value, defined in terms of the economic needs of producers, and values, defined in terms of what users derive from any product. There is an extensive literature on the economic concept of value, which is ultimately quantifiable in terms of profit. On the other hand, values, in terms relevant to users, are less well-understood. A starting point in exploring the latter is the body of theory that focuses on values. An immediate problem is that the emphasis is very emphatically on the plural. There is no established and accepted body of theory that can serve as an overall, general introduction to the subject. Instead, one must come to terms with a spectrum of views on what constitutes values, and how they function on multiple levels. There is also a problem with the terminology, as the singular and plural forms, value and values, are fluid, the two often being used interchangeably. (Since, however, a similar situation exists in the study of design and what it means, this should not be seen as an impenetrable obstacle, although it does represent a challenge.5) Two major variations of how values can be understood are described by Milton Rokeach. The value concept has been employed in two distinctively different ways in human discourse. We will often say that a person ‘has a value’ but also that an object ‘has value’.6 He goes on to suggest that the former – personal values – are of greatest use in social analysis, and differentiates between specific values and the system of which they are a part. A value is an enduring belief that a specific mode of conduct or end-state of existence is personally or socially preferable to an opposite or converse mode of conduct or end-state of existence. A value system is an enduring organization of beliefs concerning preferable modes of conduct or endstates of existence along a continuum of relative importance.7 Of interest is the emphasis on ‘enduring belief’, implying continuity over time and an unchanging quality in the belief system. Beyond the fleeting mention quoted above, Rokeach passes over any further discussion of the value of objects. Yet, his mention implies that objects, an end result of designing, can have value assigned to them. This raises questions about how the two variants relate to each other. Can the two definitions of value be congruent, or have the possibility of congruence at some levels? Is it possible, in other words, to establish a relationship between personal values as an aspect of value systems, and the values embodied in objects?

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Despite the fact that personal values are usually communicated in an absolute manner, particularly when the value system in which they are embedded is based upon religious or ideological faith, there is no definition of them that can be irrefutably demonstrated in objective terms. Ultimately, they hinge upon patterns of belief that have social justification and sanction within a particular social and cultural context. Values, in this sense, are a recognition of reciprocal social responsibilities. Their efficacy, as emphasized by Rokeach, will depend upon a substantial element of stability – ‘an enduring organization’ – and codification into an overall set of standards that have communal validity, or are socially acknowledged as an outcome of processes of acculturation. The major manifestations or reflections of such values are behavioural outcomes, which provide standards or guides for evaluation. There are basically two different ways of how values can be evaluated. They can depend upon internal validation, what a person believes them to be; or external validation, which stems from the authority of social sources. Values are relatively general and durable internal criteria for evaluation. As such, they differ from other concepts such as preferences (or attitudes) and norms. Like values, preferences (and attitudes) are internal; unlike them, preferences are labile rather than durable, and particular rather than general. Whereas norms are also evaluative, general, and durable, they are external to actors and – in contrast to values – require sanctioning for their efficacy.8 For Hechter also, personal beliefs about what constitutes value are linked to general criteria and, again, there is an emphasis on durability. This raises a fundamental conflict when considering the relationship of such values to design, which in its modern forms, is about choice and the possibility of change, not just in tangible outcomes, but also in human behaviour. On the other hand, preferences and attitudes that focus on particularities and can rapidly change are obviously relevant to a discussion of design, as is the existence of socially sanctioned standards, or norms. Another useful distinction can be made between instrumental and terminal values, between desirable conduct and end-states of existence. The former, instrumental values, connoting conduct or action towards an intended end, can be further subdivided into moral values and competence values, the first being a means of evaluating codes of behaviour, the second relating more to levels of competence or efficiency. In texts setting out systems of existential belief, such as the Bible of Judaism or Christianity, or The Koran of Islam, an ideal congruence is advocated between the attainment of desired endstates and the instrumental means used for their realization; in other words, the ends are justified by the means used. It is often widely assumed that such values are contingent upon, or are synonymous with, religious belief. This need not necessarily be the case, however, and indeed, in the multi-cultural societies that increasingly typify

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the early twenty-first century, there are strong arguments that it should not be so. Where in the past religion and state have been intertwined, the result has been exclusion of non-believers, and persecution and oppression to ensure conformity with the value system, as with the Spanish Inquisition. Similar effects are observable in modern states based upon the dominance of a particular religious belief, such as Iran under the government of the Ayatollah Khomeini and his successors and the Taliban regime in Afghanistan. There is a difficulty, of course, in that despite the claims of such belief systems to universal validity, when juxtaposed, as is frequently the case in modern societies, their codes of values can sometimes conflict in practice. To give a simple illustration, Muslims and Jews prohibit the consumption of pork but eat beef, while Hindus eschew beef but eat lamb. Sharp differences therefore exist, although this does not preclude overlapping elements of commonality – all the groups mentioned eat chicken. Ultimately, therefore, values must be considered relative in general, and context dependent in specific terms. Where more than one belief system coexist in any society, the door is open to religious conflict, so tragically evident in our time, for example, in Northern Ireland and the former Yugoslavia. The intermingling of peoples and beliefs that typifies countries based on immigration, such as the United States, Canada and Australia, and in recent decades, Western Europe, supports arguments for some form of secular values bridging all sections of society. The Declaration of Independence founding the United States of America asserted the right of all citizens to ‘Life, Liberty and the pursuit of Happiness.’ This and the separation of secular from religious freedoms in the U.S. Constitution offer some examples of how values can be embedded in a society’s way of life without denying religious freedoms. There is no guarantee, however, that secular belief systems will not also be repressive. Political ideologies such as Communism, advocating the creation of utopian social systems, were profoundly important in shaping events in the twentieth century. Brutal political measures in pursuit of utopian goals were justified in terms of a reversal of value systems: ‘The end justifies the means.’ It is thus perfectly feasible to conceive of the attainment of ends relying on competence values that are detached from any moral dimension. On another secular level, social groups such as military units, businesses or professional organizations play a very important role in framing competence values. Perhaps the most notable concept is that of esprit de corps, the bonds of discipline and commitment that unite a military unit in terms of enabling it to face, if necessary, death or injury in service to a common cause. The problem of considering such competence values detached from moral values was illustrated, however, in behaviour demonstrated in the World Trade Center attacks of 11 September 2001. The terrorist hijackers undoubtedly showed the highest levels of courage and commitment to their cause in facing certain death, but in the service of indiscriminate destruction. Equally high levels of courage and commitment were displayed by New York firemen in facing raging fires after the attacks, despite the evident dangers that did

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indeed cost the lives of over three hundred of them. They were seeking to preserve life. The difference is important. In less dramatic terms, businesses may embody a very specific set of values that profoundly influences the behaviour and actions of everyone working for them. Equally, a profession, such as medicine or law, may define a body of ethical standards to which members are expected to conform, with withdrawal of a licence to practice being the ultimate sanction for transgressions. Some forms of practice, however, have become increasingly detached from attention to ethical values, due to higher degrees of division of labour and specialization of task. These can function on a technocratic basis, that is, exercising skills and competencies without any fundamental regard for the outcomes of their application. Defining a set of professional ethics is generally directed to the preservation and maintenance of value systems. Any code of values that is absolute and immutable could be a serious obstacle to the potential for change in any situation. When the Islamic fundamentalists of the Taliban in Afghanistan proclaim that Islam is a complete religious, political, social and economic system that is perfect, it positions itself in complete opposition to the processes of change that are integral to modernity. Similar fundamentalist tendencies are found in other major religions such as Christianity, Judaism and Hinduism, that also vehemently oppose modernity. Although discussion so far has focused on religious belief, such ultimate ends can in fact take many forms; for instance, they can be material, physical, economic, moral, social, political, aesthetic, intellectual, professional, personal or sentimental in nature.9 Within this broad spectrum, behaviour has already been cited as a major manifestation, but objects and artefacts can also be important, playing many roles. They may embody values in an iconic sense, as with the Christian cross, or represent a sense of identification, as with the American flag. They may be a source of offence when they express difference, as with the Taliban regime’s destruction of ancient Buddhist icons in Afghanistan. Or they may be utilitarian means to an end, as tools in enabling competence values, whether as a chisel to a carpenter or a computer to a statistician. The intended outcomes of design processes affect these issues in an uneven manner. This is in part because design skills cover a very broad spectrum of practice, from rapid changes of fashion to longer-term, more enduring technological solutions, from designing a package, to designing an urban transportation system. Another important aspect is that designers rarely have the luxury of working for themselves alone; they generally work for producers of one kind or another, employers or clients in business or other organizational contexts, for example, government bodies. Understanding the values of producers and establishing a compatibility with their own is crucially important for designers, and tensions can occur in situations where the values designers feel are important are subordinated to those of producers.

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Producers are concerned with generating tangible outcomes of one kind or another, products, services or systems that compete in markets and must generate a return on investment adequate to ensure the continuation of production. In much economic and business theory, the term ‘consumption’ is used to describe the moment of purchase of producers’ offerings. The medium of exchange, cash, is in itself a fundamental index of value, in terms of whether a ‘consumer’ is prepared to pay the required price for the product in return for whatever utility or meaning it delivers. The terms ‘consumption’ and ‘consumer’ are problematic, however, since they avoid any substantial consideration of the processes of use. An important distinction in use is the factor of time. When anyone buys a newspaper from a kiosk, or purchases a ticket for a single bus ride, we can assume that it is for immediate use. There is a large category of similar products that will generally be used in a very short time span. In contrast, however, when anyone purchases a more durable product, such as a washing-machine or automobile, he or she is purchasing the promise of use over a much longer time period. Ultimately, however, whatever the time span involved, people have to want the products for what they contribute to their lives. Newspapers need to contain relevant material and be legible, buses need to provide an adequate service within a systemic structure of stops and information that is clearly comprehensible. Henry Dreyfuss, one of the first generation of American professional industrial designers, gave felicitous expression to the need to recognize user needs in his autobiography: For years in our office we have kept before us the concept that what we are working on is going to be ridden in, sat upon, looked at, talked into, activated, operated, or in some way used by people individually or en masse. If the point of contact between the product and the people becomes a point of friction, then the industrial designer has failed. If, on the other hand, people are made safer, more comfortable, more eager to purchase, more efficient-or just plain happier-the designer has succeeded.10 In the final analysis, judgements on any designed outcome, of any kind, must therefore be not on the values designers or producers believe it embodies, but on its relevance and meaning for users. This stress on the values of users is not an end in itself, but a necessary, implicit means to the desired ends of designers and producers for successful, profitable products. Gregor Paulsen was indeed right: we do need to reconcile the requirements of all parties involved.

Producer value Sustainable competitive advantage is the current ideology of several theories of business. It has been labelled the resource-based theory. The reason for

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the new theory is the shortcoming of Neoclassical theory to account for long-term profit of companies and for the difference between companies in the same industry. According to the theory, the emphasis should be put on the company’s intangible resources: its knowledge resources. To sustain a competitive situation, the company must focus on three issues relevant to its economic value. First, it must deliver value to the users and the customers. Without this ability, it will soon be out of business. What is important is not how good the company is in absolute terms, but how capable it is to position itself on the market relative to its competitors. The second issue is concerned with the ability to prevent competitors from using exactly the same offer to the market. This is concerned with appropriability. The company must be good to gain the benefits from its knowledge resources as well as preventing the competitors from using it. Protective measures are for instance patents, lead-times, trade secrets, closed markets, customer loyalty, etc. Often a company uses these measures simultaneously. The third issue is also concerned with the factor markets. In some cases, the company has the ownership rights to precious factors of production such as minerals of materials essential to the production. In most situations, a company is dependent on factors of production only available on a market. If the factor is standard and there is a well-functioning market, there is usually no problem. The problems occur when we speak of complementary resources that the company may only get from few suppliers. This can be access to rare raw materials, production facilities or sub-supplies, skilled labour, etc. In these cases, the suppliers have an incentive to press their bargaining power to obtain a larger share of the value created.

Economic value Economic values are of special concern, since they are directly related to how a society deals with the handling of scarce resources. Economic values suggest a relation between the availability and the desirability of certain (other) values. We speak of a value system as an economic mechanism that serves as the nuts and bolts of processes in which raw materials, labour, energy, etc. serve as factors that go into a production process where the outcome is products for consumption. A high economic value is attributed to something that is desired by many but is subject to scarcity. The famous ‘water-diamond’ paradox suggests that even if the utility of water is higher, diamonds can have a greater economic value because they are rare. They are also desired because they are beautiful and the scarcity indicates that the owner is rich. As science fiction can demonstrate, the situation can be conceived to be different. Economic value is important because it refers to a mechanism by which other values are cleared within a society. The mechanism often referred to as

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the ‘price mechanism’ is important, because the price is the sacrifice that a customer or consumer is willing to offer to obtain a unit of the good at hand. But in economics the price bid by the consumer is in normal circumstances considered less than the value of the good he wants to acquire. The inequality is sometimes referred to as the ‘consumer surplus’. The price mechanism is seen as a signal or information mechanism. This means that a price (quote) signals to the many participants in the market in ways that they can adjust their production and product. Generally speaking, companies enter a transaction when there is a prospect of earning a monetary surplus. The term is similar to the term ‘producer surplus’ or simply profit, which is the remuneration the company receives for an economic transaction. The price signals adjust demand and supply throughout the value systems. The price in, say, the markets for production factors are adjusted according to the values that are imputed to the end customer or user. Today few economists would claim that the price mechanism is perfect. Yet they would mainly claim that an imperfect price mechanism is far better than the known alternatives. This does not mean that all values are subject to economic value. The inclusion or exclusion is a matter of convention and institutional arrangements. For example, households and other factors have divided the economic system between the production sphere consisting of companies producing goods using labour delivered. The consumption sphere, on the other hand, is traditionally seen as households, which consume and deliver labour to the companies. This is far too simplistic and serves mainly as a stylized description. A particular problem concerns ‘positional goods’. They are usually unique goods, so that the demand for them cannot increase, even though their price jumps. This is the explanation for works of art that obtain ‘perverted’ prices, since in many cases, several very rich people or organizations are rivals and want the same object. In some societies, the economic mechanism works by barter (for instance, a horse is valued as a number of sheep as an exchange rate). This is seen both in ‘traditional societies’ and in modern societies where the aim typically is to evade taxes and other legalities. Economic value can be problematic since it is not always possible to capture all other values in a single-value scale, because of incommensurability. For instance, how can we balance the value of environmental health with material well-being? Sometimes, the high value in monetary terms is to be balanced with the non-monetary value of precious nature or other environmental concerns. The so-called Coase theorem (Coase 1960)11 suggests that when property rights are well defined and the economic mechanism works with no friction (transaction costs), the just balancing of value will come as a result of negotiation between the parties. Conversely, the Coase theorem also explains why such states may not be realized because there can be transaction costs or the property rights are not well defined in the form of private or public property. The origin of value differs according to several theories. The so-called labour theory of value, attributed to Ricardo and Marx, states that the value

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of a good is a function of the work that is sacrificed to produce it. While this may not even have been the case in a feudal society, a much more sound theory suggests that value be imputed from the appreciation of the user of the object or artefact. All other values are derived from this and they indirectly set the value of factor markets and immediate markets. The connection of values is interdependent on the values of other products and the competitive situation in the markets. It is the price mechanism which coordinates values in the markets and connects the units in the value system. Some values cannot be measured in economic terms at all. For example, human rights, personal ownership, etc. are seen as not belonging to the economic sphere and no economic value can be attached legally and/or morally (source).

Users and material value Material value seems to be the cornerstone where the aim is to provide for basic needs. The needs for food, shelter, reproduction, etc. are all basic and mainly material. Design is instrumental in providing systems for exploitation and consumption of material resources. These resources are concerned with factors of production as they enter the production processes and also the need of users. In basic terms, material value is concerned with the processes of metabolism, body covering and habitat. They are the conditions for sustaining life. There are many ways in which this can happen and design is instrumental in all forms of exploitation of material value. Any artefact, object or tool used in the processes of habitation, body covering and metabolism is a matter of design. Design is a medium for the processes and it is impossible to conceive of a life without these tools. [The ms. notes from this point onwards are incomplete]

Aesthetic value By aesthetic value we are concerned with the way in which we experience the surroundings and objects. To experience aesthetic value, we do not have to do anything – we can consume such value in a completely passive state. Nature has aesthetic value and the preservation of natural resources is partly caused by the need to experience these values. Aesthetic value can also be man-made. Art in any form – decoration, paintings, sculptures, etc. – is man-made and often for the aim of aesthetic experiences. Theories of art and aesthetics would emphasize different aspects of this. One theory would exclusively regard the outcome (artefact) in the view of the by-product of the artist’s process. Often, the outcome is a surprise to

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the artist and the result is created in dire straits. Other theories of aesthetics would focus on the user as the beneficiary of the product. The object or artefact happens to touch the emotions deeply by reflecting and expressing the ‘inaccessible collective un-conscious’ of the people. There are also theories that do not distinguish clearly between the intended reactions in, for instance, entertainment. In this view, the artist in his pursuit of provoking general or specific reactions creates art. Needless to say, the reaction can cover a wide variety of human emotions and feelings – happiness, disgust, anxiety, ridicule, etc. Artefacts, tools and objects with other purposes than art can also have aesthetic value. Findings from ancient times reveal that tools were often decorated. The design of many tools from the Stone Age and later may have been utility, a social signal ascribing status to the owner or aesthetic appeal.

Moral value Moral and ethical value seems to have limited relation to design.

Sentimental value Sentimental value seems to have limited affiliation with design. On the other hand a lot of products are designed to appeal to people’s sentiments, such as souvenirs, toys and the like. A lot of this is regarded as kitsch and not of ‘good taste’. On the other hand, much that is designed touches with ‘positional goal’. If the original of an object of art is not available, many people are satisfied with a copy.

Intrinsic versus extrinsic value Most value connections with design seem to be extrinsic. That means that the value is not an end in itself, but, rather, a means to obtain another end. It is difficult to identify any intrinsic value of design. On the other hand, as a tool to secure the intrinsic needs, design is vital. Design of ornament and religious ritual is subservient to the services and their aims. Also, the tools and artefacts used in professional work, extreme sports, etc., Csikszentmihalyi 1975, are vital to the persons in these professions. The need of such design is often to be an unobtrusive and reliable tool, Winograd and Flores 1986. These authors follow the philosophy of Heidegger in stating that we are ‘thrown’ into the reality. In a well-functioning situation, a tool may not even be consciously known, but only experienced as a natural extension of the body.

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Value How can we identify those elements of value that design can deliver? For producers, innovative ideas should satisfy the three primary criteria of feasibility, compatibility and viability. To detail these further: – they should be feasible in terms of fit with corporate portfolios and ambitions, with the organizational and human capacities required; – they should be compatible with capacity, in terms of projected volumes and complexity; – they should be financially viable and potentially profitable in terms of investment levels required and prospective return on investment. For potential customers, obviously, in order for a product to be competitive in established markets, it must deliver something that distinguishes it from competing products. With a radically or fundamentally new product, however, the problem becomes one of convincing potential customers that the changes involved following the purchase of something substantially new, particularly the behavioural changes implied by such a level of innovation, deliver some powerful benefit. In each case, the benefit needs to be clearly manifest in some way, but there will not be one simple formula for how this can be achieved across the market spectrum, as demonstrated in the repetition of approaches between the Apple iMac and G4. Decisions in the domain of production can be discretely analysed and unbundled, and usually can be demonstrated in terms of objective measure. Decisions regarding the domain of use, however, are less susceptible to quantification, since the success of many products depends upon subjective assessments by users. It is possible to define product characteristics in an objective sense, in terms of performance, dimensions and costs, but product attributes, in other words, how the product is perceived by potential and actual users is less easy to specify. The business theorist Michael Porter refers to them as signals. There is no intrinsic reason why these should be incompatible. In competitive terms, it is possible to specify the basic characteristics that any product in a particular category must have if it is to have any chance of competing in the market. If these characteristics are so dominant that differentiation does not really affect choice, then the design potential will be limited. Characteristics will be a more powerful factor across the market spectrum, more strongly relating to affordability at the lower end of the market spectrum, and to distinctiveness at the higher end. This links into Porter’s distinction between volume and margin at either end of the spectrum.

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A problem with any innovative idea is the internal costs of bringing it to realization, compared with expected returns. This will be heavily affected by whether a new product can be sustained in a market against the inevitable attempts of competitors to copy or adapt any new aspect. Whether the new idea can be sustained will depend upon a flexible follow-through for continuous improvement. Therefore, a condition for design to contribute will not be at the level of the initial idea, but in terms of its detailed implementation, with constant evaluation and development through incremental improvement. [Incomplete. The ms. from this point breaks down into a series of notes]

Notes

Clive Dilnot: Introduction to John Heskett’s Design and the Creation of Value 1 Opening line of the preface to Design and the Creation of Value (hereafter DCV). 2 As Suzan Boztepe of IT University of Copenhagen pointed out to me in an e-mail discussing Heskett’s work, the recent plethora of quasi-popular books on design success and the value of design in business beyond the product – books like Jeanne Liedtka et al.’s Solving Problems with Design Thinking: Ten Stories of What Works (New York: Columbia Business School Press, 2013); or Tim Brown’s Change by Design: How Design Thinking Transforms Organizations and Inspires Innovation (New York: Harper Collins, 2009); or Roger Martin’s The Design of Business: Why Design Thinking is the Next Competitive Advantage (Boston, MA: Harvard Business Press, 2009) – tend to focus on stories and on the general case that ‘design driven innovation is a third alternative to market pull or technology push innovation, and has the potential of creating radically new products’ but do not confront design with economics per se. More surprisingly, the issue is dodged even in academic studies of design management: see, for example, R. Cooper, S. Junginger and T. Lockwood (eds), The Handbook of Design Management (New York: Berg, 2011) where, as SB puts it, ‘one would expect to see something on design + economics but doesn’t’.   3 DCV, Chapter 8. 4 The Design Research Society (UK) was formed in 1966. 5 The Design Management Institute (Boston) was formed in 1975. 6 Though the concept predates Blair, it was the Blair government, post-1997 that began to push this concept as the metropolitan salve to provincial deindustrialization. 7 It should be added that design as a field fails to articulate this at once to itself, to business, to economics and to the general public. It is important here that these four audiences are not the same. One of the mistakes of ‘design thinking’ in the IDEO manner is to assume they are – and to essentially collapse the four moments into the second. This makes a political closure around this question that forestalls a wider exploration of the creation of value. 8 Preface, DCV.

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9 See http://wardsauto.com/news-analysis/foreign-invasion-imports-transplantschange-auto-industry-forever. Accessed 9 July 2016. 10 I am using ‘design’ here not in the sense of ‘styling’ or even as (only) professional design, but as indicating what we might call the expanded range and depth of design today as meaning the configurative organization of the product-system as a whole. Two statements by Bruno Latour, reproduced below, capture this wider sense of design as configurative activity. 11 Further details of Heskett’s career can be found in the introduction I wrote to The John Heskett Reader: Design History Economics (London: Bloomsbury, 2016). See also my obituary: ‘John Heskett (1937–2014)’, History Workshop Journal 78, no. 1 (Winter 2014): 309–13. For some autobiographical reflections, see John Heskett, ‘On Writing,’ reading #29, and ‘Reflections on Design and Hong Kong’ reading #28, in The John Heskett Reader, ibid. 12 London: Thames and Hudson. 13 All the more notable is that the work appeared in Thames and Hudson’s ‘World of Art’ series. There is a useful discussion of Heskett’s approach to history in Kjetl Fallon’s Design History: Understanding Theory and Method (London: Bloomsbury, 2010), see especially pp. 15–19. 14 As an indication of the scale of deindustrialization in this period, manufacturing employment in Britain between 1970 and 1990 fell from close to 9 million persons to just over 5 million. In percentage terms, this was a fall from 35 per cent of the workforce to just over 15 per cent. In effect, across these twenty years, save for a few specialist sectors, Britain ceased to be a significant centre of global manufacturing. 15 On questions of design policy, see some of the essays collected in The John Heskett Reader, ibid., Part Three, section B, National Design Policies, pp. 224–66. 16 A brief description of the Triad project and its place in the emergence of design management can be found in Cooper et al., eds, The Handbook of Design Management, ibid. 17 A number of these columns (and parallel writings on design and business/ economics from this time) are republished in The John Heskett Reader, ibid. See, for example, #14, ‘GM: The Price of Corporate Arrogance’; #17, ‘Teaching an Old Dog New Tricks: How RCA is Using Strategic Design’; #20, ‘Learning from Germany’s Design Policy’; #23, ‘Creative Destruction’. See in general Part Three of the Reader, Design Business Economics, pp. 177–329. 18 Under the leadership of Patrick Whitney and Charles Owen, the Institute of Design at IIT in Chicago (Illinois Institute of Technology) was then at the forefront of graduate-level education in design + business. 19 History, or better a ‘historical perspective’ as Duncan Foley says of his own book on economic thought (Adam’s Fallacy: A Guide to Economic Theology (Cambridge, MA: Harvard University Press, 2006)) ‘as a happy way to organize a set of complex ideas into a coherent and understandable story’, one that provides ‘a kind of map on which students could locate the landmarks of economic language and ideas’. See Foley, p. xii. On the importance of history for understanding economics, see the views of Douglas North as noted by

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Heskett in DCV (Chapter 5). See also Geoffrey M. Hodgson, How Economics Forgot History (London: Routledge, 2001). The case for the necessity of a historical approach is also made with forceful brevity by Ha-Joon Chang, in Economics: A User’s Guide (London: Bloomsbury, 2014), pp. 37–9. 20 An overview of Heskett’s views on these issues can be found in the excellent series of interviews with Simone Maschi and others available on the website johnheskett.com. Go to: http://johnheskett.com/conversations-on-design-3/ 21 See ‘The Economic Role of Industrial Design’, in The Role of Product Design in Post Industrial Society, ed. Tevifk Balcioğlu (Ankara: METU-Kent Institute, Middle East Technical University Press, 1998), pp. 77–92. 22 ‘Economics is too important to leave to the experts,’ Guardian (UK), 30 April 2014. See also the conclusion to Economics: A User’s Guide. Ibid., pp. 331–4. See also my own note: ‘Why Economics can no longer be left to Economists’, in The Crash – A View from the Left’, ed. M. P. Jon Cruddas and Jonathan Rutherford (e-book London: Soundings + Lawrence and Wishart, April 2009), pp. 101–8. 23 Incomplete because, as the note on ‘Editing the ms.’ below records, although the most developed of Heskett’s unpublished works, and although planned as a book, the ms. was never fully revised for production and remained incomplete in some crucial respects at his death. 24 DCV, preface. 25 DCV, Chapter 1. 26 DCV, ibid. 27 Heskett does not cover the entirety of economic theory (there is no mention of Keynes, for example), but given the limits of the text he deals with a very broad range of theory and much, if not most, of the theoretical material most germane to this topic. Some of the focus – the weight given to New Growth Theory and the unusual inclusion of the ideas of Frederick List – is particularly oriented towards the economic understanding of design. 28 The latter, for reasons explained in ‘Notes on editing the ms.’ below, is now placed as Appendix 1. 29 Of the economists quoted by Heskett in DCV, only one, Frederick List, directly uses the term – and in one of the earliest texts that Heskett references (from 1841 to 1844). 30 As I detail below in the note on editing the ms. of Design and Creation of Value, I have augmented these chapters (7, 8, 9) with material drawn from other unpublished papers and notes by Heskett on economic value and design. 31 It is worth recalling here the German author Christa Wolf’s question in her novel Cassandra: ‘The object of thinking? To expand that which is real.’ 32 DCV, Chapter 7, opening paragraph. Heskett adds, from the Preface to DCV, with neoclassical thinking in mind: ‘There is inadequate explanation in detail about how goods and services are developed through manufacture for the market place, and, secondly, there is equally little focus on how they are used – both of which are concerns at the heart of design practice. All too often in economic theory, goods and services are assumed to already exist, they seem to appear without any consideration of the specific development processes and

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ideas involved, and after the point of sale or consumption, any consideration of them evaporates from consideration.’ 33 Ibid., p. 197. It is worth extending Chang’s comment for it resonates strongly with Heskett’s underlying arguments: ‘For most economists, economics ends at the factory gate (or increasingly the entrance of an office block), so to speak. The production process is treated as a predictable process, pre-determined by a “production function,” clearly specifying the amounts of capital and labor that need to be combined in order to produce a particular product. Insofar as there is interest in production, it is at the most aggregate level – that of the growth in the size of the economy. The most famous refrain along this line, coming from the debate on US competitiveness in the 1980s, is that it does not matter whether a country produces potato chips or micro-chips. There is little recognition that different types of economic activity may bring different outcomes – not just in terms of how much they produce but more importantly in terms of how they affect the development of the country’s ability to produce, or productive capabilities. And in terms of the latter effect, the importance of the manufacturing sector cannot be over-emphasized, as it has been the main source of new technological and organizational capabilities over the last two centuries.’ 34 The slogan ‘real-world’ [economics] became adopted by economics students in Europe and the United States of America critical of the inadequacies of text-book (or in their word “autistic”) economics revealed by the repetitive financial crises of the 1990s and 2000s. See Edward Fullbrook (ed.), Real World Economics: A Post-Autistic Economics Reader (London: Anthem, 2007). See also, on a continuing basis, the e-journal Real World Economics Review: http://www.paecon.net/PAEReview/ 35 DCV, Chapter 1. 36 It is this critical perspective on economics that differentiates Heskett’s work, very sharply, from the mindless application of ‘business economics’ that so disfigures most of the scholarship in design management and in discussions of ‘design and business’, including by those who wish to take up and claim elements of Heskett’s work as their own. 37 The base text on this is surely the marvellous rant against commercial forms of ‘industrial design’ with which Victor Papanek begins Design for the Real World (London: Paladin, 1974). 38 Duncan Foley, Adam’s Fallacy, ibid., p. 226. 39 A point that Adam Smith was adamant was the case. Smith began as, and never wholly left behind, his first calling as a professor of moral philosophy. 40 Without the additions made in the editorial process, the base text was scarcely 40,000 words. 41 A point that Sharon Helmer Poggenpohl makes with some force in her brief afterword. 42 It is interesting that the artist Christo, known for his large-scale environmental pieces which took considerable organizational ability to realize, gave credit to his early education as an art student in (then) communist Bulgaria (which involved compulsory Marxian economics) as giving him perspectives to think in terms that allowed him to achieve his later projects.

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43 For a far more economically sophisticated but not uncritical account of Marx as an economist, see, Duncan Foley, Adam’s Fallacy, ibid., especially Chapter 3. As one might expect, the discussion of the commodity is particularly weak in standard economic theory. 44 To take only one instance, see, Jean Baudrillard’s reflections on the enigmas of value and design across the twentieth century in Towards a Political Economy of the Sign (St. Louis: Telos Press, 1971), especially Chapter 10, ‘Design as Environment’. 45 This gives a huge opportunity to extend Heskett’s work into a deep analysis of the complexity of design’s roles in Neoliberalism. On the latter, as a starter, see David Harvey, A Brief History of Neoliberalism (Oxford: Oxford University Press, 2005). 46 See, for example, Eric Hobsbawm: Age of Revolution (1789–1848) (1962); Age of Capital (1848–75) (1975); Age of Empire (1875–1914) (1987), Age of Extremes (1914–91) (1994). 47 Roland Brenner, The Economics of Global Turbulence (London: Verso, 2006). 48 David Harvey has multiple works on this theme. See, Seventeen Contradictions and the End of Capitalism (Oxford: Oxford University Press, 2014). 49 Thomas Piketty, Capital in the Twenty First Century (Cambridge, MA: Harvard University Press, 2014). 50 For the obvious reason that those who are acting in the moment within the economy as is will naturally tend to take economy as is as, in effect, a natural given. There is far less excuse for doing so, however, if one is supposedly analysing the economy and the economic not as the justification of what is but as the exploration of what the economic could (and in ethical and social terms should) be. The genuine complexities here can be seen in a text like Jeffrey Sachs, Common Wealth: Economics for a Crowded Planet (New York: Penguin Press, 2008). 51 Two structural reasons why capitalism (especially in its modern neoliberal forms) cannot take a sustainable form – that it cannot violate its own principle of organization concerning unplanned growth, and that it cannot permit any solutions to steering problems that are not in accord with market forces – were advanced by Jurgen Habermas more than forty years ago, see Legitimation Crisis (London: Heinemann, 1976), pp. 42–3. One reason why economics cannot deal with the possibility of sustainment is that it has no adequate ‘ecological’ comprehension of cost. Either ‘cost’ simply does not enter the economists’ lexicon or it is nominated as an exogenous factor and ‘externalized’ (onto governments, taxpayers and nature). One of the very few economists who have tried to deal with this issue is E. J. Mishan, whose book The Costs of Economic Growth (London: Penguin, 1969) was one of the first to at least attempt to raise the issue. More recently, Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi have questioned the basis of how GDP is calculated and understood Mismeasuring Our Lives: Why GDP Doesn’t Add Up. See also K. W. Kapp, ‘Social costs, neo-classical economics and environmental planning’, in The Social Costs of Business Enterprise, 3rd edn (Nottingham: Spokesman, 1971), pp. 305–18.

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52 See Robert Brenner’s The Economics of Global Turbulence: The Advanced Economies from Long Boom to Long Downturn, 1945-2005 (London: Verso, 2006). 53 On this, see, the section on design policy in The John Heskett Reader (ibid.). In particular, on the deficiencies of industry, its attitude to products and its use of design, see reading #14, ‘GM (General Motors): The Price of Corporate Arrogance’ and #15, ‘Everything Changes, Nothing Alters’. On design and industrial policy worked better in Germany and Japan, see readings #19, ‘National Design Policy and Economic Change’; #20, ‘Learning from Germany’s Integrated Design Policy’; and #10, ‘The Growth of Industrial Design in Japan’. On how the United Kingdom might, belatedly, try to play catch-up, see reading #22 ‘A Design Policy for the UK: Three Suggestions’. On UK and manufacturing, see also Heskett’s somewhat critical view of how, especially in the United Kingdom, the term ‘creative industries’ has been used in large part as an alibi for a lack of an industrial policy: ‘Design and the Creative Industries.’ 54 Heskett was also involved in two exhibitions in this period that sought to bring attention to these issues: one was an exhibit at the Science Museum in London in the late 1980s on design for industry in Germany; the second, mentioned in passing above, was the Design Management Institute’s ‘Triad’ project on case studies of design success, which was shown in Carpenter Center for the Visual Arts at Harvard University in 1990. Two case studies published in The John Heskett Reader reflect this interest: reading #16, ‘Design Management in Phillips in the 1980s’ (extract from Heskett’s book on design in Phillips: Philips: A Study of the Corporate Management of Design, Trefoil Publications, London and Rizzoli, New York, 1989) and #17, ‘Teaching an Old Dog New Tricks: How RCA is using Design as a Strategic Tool’. 55 See The Reader reading #18, Current and Future Demands on Hong Kong Designers’ and #21, ‘Design and Industry in China’. See also the reports that Heskett authored while in Hong Kong: ‘Shaping the Future: Design for Hong Kong: Report of the Design Education Task Force. Hong Kong Polytechnic University’ (2003) and ‘Design In Asia: Review of National Design Policies and Business Use of Design in China, South Korea and Taiwan: Research report commissioned by the Design Council, UK, as a contribution to Sir George Cox’s report to the Chancellor of the Exchequer on the future of design in the United Kingdom’ (2005). 56 See ‘A Cautious Prometheus? A Few Steps towards a Philosophy of Design’: a lecture given to the Networks of Design meeting of the Design History Society, Falmouth, Cornwall, 2008. (Transcript). On range: ‘It came to me at a launching party for a Networks of Design meeting – I was struggling to grasp the extent to which the word “design” has been expanded when we were invited to visit an exhibition called “Re-imagining Cornwall”! I was aware that corporations had to be reengineered, natural ecosystems reclaimed, that cities had to be remodelled and wastelands redeveloped. I knew that neighbourhoods had to be beautified and political platforms scripted, and that interiors had to be redecorated and journal layouts restyled. The Cornwall exhibit confirmed that I was indeed on the right track: if entire provinces can be redesigned then the term no longer has any limit.’

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57 Ibid. Latour’s provocative essay opens a number of realms for beginning to conceptualize what we might call the ‘expanded field’ of design in the ‘epoch of artificial’. See the discussion of Latour in ‘Is there an ethical role for the history of design? Redeeming the possibility of a humane world’, in Helena Barbosa and Anna Calvara (eds), Tradition, Transition, Trajectories: Major or Minor Influences? The Proceedings of the 15th ICHDS Conference, University of Aveiro, Portugal, 2014, pp. 57–80. 58 Herbert A. Simon, The Sciences of the Artificial (Cambridge, MA: The MIT Press, (Second Edition) 1981), p. 129. 59 Heskett deals with this in his discussion of Paul Romer’s work. See Chapter 5 below. 60 I say ‘astonishing’ because while so much focus is placed today on technical innovation, especially in the digital realm, the cost-effectiveness of design-led innovation – that is, where the innovation occurs not because of or through a technological development but wholly or almost wholly from the reconfiguration and reconceptualization of an existing model or norm –has been somewhat neglected. Yet when one thinks, to take some almost random instances, of the economics of Harry Beck’s reconfiguration of the London Underground Diagram (1933– and still in use); Alec Issigonis’s conception of the Austin Mini (1958– and still in production); Mary Quant’s ‘de-constructive’ gesture in creating the mini skirt (1962– and continuing) or, to come a little closer to now, Smart Design and the development of the Oxo Good-Grips range of products (1990 and on), there is clearly a phenomenon here that has not been adequately caught in economics and, indeed, is not even well thought or understood within design. Yet one might reasonably predict that the economics of reconfiguration will be crucial to this century – not least to the economics of sustainment; indeed, it is hard to imagine how a ‘sustainable’ economy, built out of that which is not sustainable, could be other than an economy whose productive principle is reconfiguration. 61 London: Allen Lane, 2015. 62 On the artificial as the horizon of our world (replacing nature), see Clive Dilnot, ‘The Artificial and What it Opens Towards’: Chapter 2: 2 of Design and the Question of History [co-authored with Tony Fry and Susan Stewart] (London: Bloomsbury, Spring 2015), pp. 165–203. 63 The germ of the latter is to be found in Frank Ackerman, Can We Afford the Future? The Economics of a Warming World (London: Zed books, 2008); and Tom Jackson, Prosperity Without Growth: Economics for a Finite Planet (London: Earthscan, 2009). See also Herman Daly Beyond Growth: The Economics of Sustainable Development (Boston: Beacon Press, 1996). 64 Something of this begins to emerge in the notes attached as Appendix 2, ‘Value and Values in Design’. 65 Switzerland and Singapore, along with Japan, have across the last decade or so stood at the top of the ‘league tables’ of manufacturing value added (MVA). 66 Ha-Joon Chang, Economics, ibid., p. 198. Chang is even more dismissive of the idea that the ‘knowledge economy’ per se transforms the actual workings of the economy: ‘The view that the world has now entered a new era of the

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“knowledge economy”. in which making things does not confer much value, is based on a fundamental misreading of history. We have always lived in a knowledge economy. It has always been the quality of knowledge involved, rather than the physical nature of the things produced (that is, whether they are physical goods or intangible services), that has made the more industrial countries richer’, p. 189. Despite the increasing application of scientific and technical into products, one reason for the inability to understand the industrial economy as a ‘knowledge economy’ is the predominant conception that things made are essentially dumb. We value those products most that appear to have the most direct translation of consciousness into form. We have difficulty reading (and therefore truly valuing) useful things, dismissing them as being concerned merely with ‘means’ and not ‘ends’. This Kantian division, itself a displacement of the more awkward problem of comprehending the translation and synthesis of understanding involved in the configuration of complex entities, continues to dominate thought in this area, albeit at a level that is so axiomatic that it is practically below consciousness. 67 See also the essays by Carlos Teixeira, ‘John Heskett and Design Policy’ and Tore Kristensen, ‘John Heskett’s Contribution to the Business and Economics of Design’ in The John Heskett Reader, ibid. 68 Preface, DCV. 69 I say begins because both chapters only begin to skim the surface of what might be involved here. In what they propose, they are indicative rather than comprehensive. 70 In effect, ‘value’ contests the autonomy of both fields. 71 Roland Barthes, ‘From Work to Text’, in Image/Music/Text, trans. Stephen Heath (London: Fontana, 1977), p. 155. 72 An aside. That value is the key ‘third’ moment between design and economics is not an accident. In an unpublished paper given at a Design Management Institute conference in 1999, I asked the question of why a field comes into being, specifically as to why, today, design management has come into being. My answer was that Design management emerges at a point when the underlying conditions of creating or adding value begin to enter a profound mutation with respect to previous practice. Design management starts at the point at which value-creation begins to be more significant than value-addition.’ ‘Change the Object Itself: Or what is the Subject of Design Management?’ Paper given as a keynote talk to the Design Management Institute conference on Academic Research in Design Management, Pratt Institute, New York, June 1999. 73 The essay dates from the period immediately after the Second World War. 74 ‘Building Dwelling Thinking’, in Martin Heidegger, Poetry, Language, Thought, trans. Albert Hofstader (New York: Harper, 1971), p. 160. Heidegger adds, in the final line of his essay in answer to the rhetorical question: How do ‘mortals’ bring dwelling into being?’ ‘This they accomplish when they build out of dwelling, and think for the sake of dwelling’ (p. 162). 75 I explored some of these issues in ‘The Decisive Text: Heidegger’s Essay “Building Dwelling Thinking”’, Harvard Architectural Review 8 (1992): 160–87.

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Cameron Weber: A note on John Heskett’s economics 1 See J. Bradford DeLong, ‘Cornucopia: The Pace of Economic Growth in the Twentieth Century’, NBER Working Paper No. 7602 (2000) (available on the internet) for a study on economic growth in historical perspective. 2 For an economist, the most glaring gap in Design and the Creation of Value is any mention of John Maynard Keynes (1883–1946). Keynes’ treatise, The General Theory of Employment, Interest and Money, written during the Great Depression, was the founding document of ‘macroeconomics’ as a subfield in economics. This assigns an activist role to central banks and governments to counter the downward portion of a business cycle and the unemployment created during this economic contraction. The Keynesian revolution has led to what is known today as the ‘neoclassical synthesis’ where free-market microeconomics – the subject of Heskett’s chapter on neoclassical economics – is applied to the short term and activist Keynesian macroeconomics to the long term. (There is no consensus as to what exactly constitutes these periods of time, leaving it to the discretion of policy makers to determine these periods in policy applications, which can include rent-seeking.) However, given the focus in Keynes on finance and money, it is true that Keynes has relatively little to say on the issues that concern Heskett, such as technological progress and institutional changes. 3 Mainstream economics mostly misses the need for economic freedom and a stable policy environment to encourage individual entrepreneurial action; in this we find that political economy is more robust than mainstream economics for understanding social-economic activity. Heskett includes a chapter on The National System to introduce the historically derived policy environment. 4 These firm production costs and assumptions are known as ‘Marshallian cost curves’, developed in the late nineteenth century under a completely different economic structure of production from that of today. See Alfred Marshall ([1890] and later editions), Principles of Economics, many versions available on the internet. These cost curves later became the foundation of the ‘production function’ under Milton Friedman’s (and others’) positivist economics, Milton Friedman, Essays in Positive Economics (Chicago: University of Chicago Press, 1953). 5 My belief (CW) is that it is the Austrian school of economics’ use of the ‘entrepreneur’ as change agent in the economy that can best describe human economic value creation (see Chapter 3 on Austrian economic theory). It is human action and a social structure that encourages entrepreneurial risk taking and profit seeking which can explain growth, not aggregated and historical quantities of capital and labour in neoclassical equilibrium and other aggregates such as levels of education or the number of patents in a nation over time as found in orthodox growth theory. Entrepreneurs in free-market exchange create value, value that emerges no matter how it is measured by whom and when, as long as the rule of law allows this flourishing. Some might believe that profit seeking is a form of social stigma. We might also forget that profits are created by serving the needs and wants of others in freely associating

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relationships through markets. (Profits, or rents, too can be made by seeking special treatment under law, which prevents market competition – Heskett’s works contain this thread in economic thought as well. For example, we will see more on the case of the bankruptcy and bailout of General Motors during the Great Recession in 2009.) The seminal piece on special interest rentseeking is Anne O. Kruger, ‘The Political Economy of the Rent-Seeking Society’, American Economic Review 64, no. 3 (1974). Pietra Rivoli, The Travels of a T-Shirt in the Global Economy: An Economist Examines the Markets, Power, and Politics of World Trade (Hoboken: Wiley, 2005) is also filled with examples of producers seeking protection from markets in order to ascertain rents. 6 See Philip Mirowski, More Heat than Light: Economics as Social Physics, Physics as Nature’s Economics (Cambridge: Cambridge University Press, 1991), for the development of mathematical formalism in economics based on Newtonian physics. 7 The Full Employment Act of 1946 created the Council of Economic Advisors in the US President’s office and assigns an activist role to federal fiscal policy for employment creation based on the now dominant Keynesian macroeconomics. 8 Robert Solow, ‘Technical change and the aggregate production function’, Review of Economics and Statistics 39, no. 3 (1957): 312–20. 9 For more on growth theory, see Marin Muzhani, Mainstream Growth Economists and Capital Theorists: A Survey (Montreal and Kingston: McGillQueen’s University Press, 2014) and David Romer, Advanced Macroeconomics, 4th edn (NY: McGraw-Hill Irwin, 2011). 10 Kenneth Arrow, ‘The Economic Implications of Learning by Doing’, Review of Economic Studies 29, no. 3 (1962): 155–73. 11 Note. As witnessed by recent developments – for example, the ability of Uber and Airbnb to garner firm networks of users as political support against (or in actuality as a means of power to negotiate with) vested interests such as unions and taxing authorities who have the most to lose from the new economy of greatly reduced transactions costs and less visible sources of (taxable) value creation – Heskett’s synthesis is becoming more, not less, relevant. 12 Jeffrey Friedman, ‘A Crises of Politics, Not Economics: Complexity, Ignorance, and Policy Failure’, Critical Review 21, nos 2–3 (2009): 127–84, and the accompanying volume edited by Friedman are good sources for differing, though often complementary, views on the causes of the financial crisis of 2007–8. 13 In line with this, Heskett (rightly) criticizes business schools for focusing on the pecuniary rather than on workmanship. We already know that Design and Creation of Value is for a business audience as well, especially Chapters 8 and 9, which are excellent on firm strategic management and the need for a change in corporate culture towards user design rather than (or in fact which works together with) cost control and financial/production metrics. 14 The analysis and commentary in this section come from the Design and the Creation of Value ms. (the chapter on institution economics) and from John Heskett’s article ‘GM’s current woes reveal the price of corporate

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arrogance and amnesia’ (originally published by I.D. Industrial Design, May/ June, 1992, pp. 38–40), and collected in Design History Economics: A John Heskett Reader, edited, and with an introduction, by Clive Dilnot (London: Bloomsbury, 2016). 15 Veblen calls the modern (post-1913 central banking and income tax-created) corporate structure ‘absentee ownership’. Because of financialization, modern firms are much more debt capitalized than equity capitalized (thus making the economy much more vulnerable to interest-rate manipulations by a central bank). With this financialization develops a management class, whose best interests are themselves, not the equity owners of a firm (the latter being such a small percentage of the capitalization that the owners are ‘absent’). 16 Charles Beard, in An Economic Interpretation of the Constitution of the United States [1913], finds that within just a few days of the first session of the newly created U.S. House of Representatives (in April 1789), there were more than twenty-five special interest groups successful in seeking House trade protection against foreign competition. 17 A good pop culture example of asset specificity is the ‘skyscraper index’ (see wiki), which describes how there is a critical mass of skyscraper starts at the peak of a business cycle and then how these buildings remain unfinished at the bust of the business cycle (due in part, as described above, to ‘easy money’ central bank policies, which incentivize long-term investment like real estate over the shorter-term investments that would have been made absent interest rate intervention). 18 The GM bailouts were started by Republican President George W. Bush and continued, with ultimate nationalization, by Democrat President Barak Obama. 19 GM receives more than $60 billion of appropriated funds during its restructuring, with 60 per cent ownership going to the US Treasury, 19 per cent to the United Auto Workers union, and the remaining 21 per cent in equity going to GM’s creditors and Canadian governments; Chris Isidore (2009), ‘GM bankruptcy: End of an era. After years of losses, the troubled automaker is forced into bankruptcy. GM is set to close a dozen facilities and cut more than 20,000 jobs’, CNNMoney.com, 2 June. 20 Here I draw from Design History Economics: A John Heskett Reader, edited, and with an introduction, by Clive Dilnot (London: Bloomsbury, 2016), especially Section III, ‘Design, Business, Economics’. 21 Ibid., 347–8. 22 Penny Spark, ‘John Heskett obituary’, The Guardian, 12 March 2014.

Sabine Junginger: Design as an economic necessity for governments and organizations 1 Excerpt from Chapter 1 of this book, ‘Introduction: Design in Economic Life?’

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2 Quotes from the description of the €Design Project. I participated in the Copenhagen session run by Tore Kristensen and Gorm Gabrielsen at the Copenhagen Business School. John Heskett was invited as a keynote speaker. I am also referring to the OECD Expert Workshop on Measuring Design, which took place at OECD Headquarters in Paris on 22 February 2013. 3 See DMI Design Value Score Card developed by Michael Westcott, Steve Sato, Deb Mrazek, Rob Wallace, Surya Vanka, Carole Bilson and Diane Hardin, published in DMI Winter 2013 (http://c.ymcdn.com/sites/www.dmi.org/ resource/resmgr/Docs/DMI_DesignValue.pdf). 4 See S. Junginger and J. Faust (eds), Designing Business and Management (UK: Bloomsbury, 2016). 5 Roger Falk, The Business of Management (UK: Penguin Books, 1961). 6 John Dewey, ‘Common Sense & Science: Their respective frames of reference’, The Journal of Philosophy XLV, no. 8 (April 1948): 197–208. 7 See J. Faust and V. Auricchio (eds), Design for Social Business: Setting the Stage (Italy: Lupettit, 2012), pp. 88–91. 8 Nina Terrey and I organized and chaired the first panel on public policy for the Design Management Institute at the 2014 19th academic DMI conference. As of 2016, design management in the public sector has its own track in the academic DMI conferences (http://www.dmi.org). 9 J. Heskett, Tooth Picks and Logos (Oxford: Oxford University Press, 2004). 10 G. Peters, Advanced Introduction to Public Policies (Massachusetts, USA: Edward Elgar, 2015). 11 E.-N. Sanders, ‘Co-Designing Can Seed the Landscape for Radical Innovation and Sustainable Change’, in The Highways and Byways to Radical Innovation – Design Perspectives, ed. R. P. Christensen and S. Junginger (Kolding: Design School Kolding & University of Southern Denmark, 2014), pp. 133–50. 12 Examples include: mind-lab.dk; Laboratorio de Gobierno, Chile (http:// lab.gob.cl/impacta/en/); thelab at OPM (http://www.opm.gov, also see https://www.govloop.com/community/blog/lab-opm-reflections-detail-far); superpublic (http://superpublic.fr) and la27region (http://la27eregion.fr).

JOHN HESKETT: DESIGN AND THE CREATION OF VALUE Preface 1 A. O. Scott, ‘A Matter of Life and Death’, The New York Review of Books, 17 December 1998, p. 38. 2 Mary Douglas and Baron Isherwood, The World of Goods: Towards an Anthropology of Consumption (Harmondsworth: Penguin, 1978), pp. 65–6.

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3 Donald Schön and Martin Rein, Frame Reflection: Toward the Resolution of Intractable Policy Controversies (New York: Basic Books, 1994), p. 3. 4 Schön and Rein, Frame Reflection, pp. 3–4. 5 Robert H. Nelson, Economics as Religion: From Samuelson to Chicago and Beyond (University Park, PA: The Pennsylvania University Press, 2001), p. xxii. 6 Nelson, Economics as Religion, p. 133. 7 Schön and Rein, Frame Reflection, p. xiii. 8 Schön and Rein, Frame Reflection, p. xiii. 9 Herbert A. Simon, The Sciences of the Artificial (Cambridge, MA: The MIT Press (Second Edition) 1981), p. 129.

Chapter 1 1 John Heskett, Design: A Very Short Introduction (Oxford: Oxford University Press, 2002), pp. 1–7.

Chapter 2 1 Harold Demsetz, ‘The Primacy of Economics: An Explanation of the Comparative Success of Economics in the Social Sciences’, Western Economic Association International 1996 Presidential Address, Economic Inquiry 35, no. 1, Long Beach, January 1997, p. 8. 2 Ken McCormick, ‘An Essay on the Origin of the Rational Utility Maximization Hypothesis and a Suggested Modification’, Eastern Economic Journal, Bloomsburg 23, no. 1 (Winter 1997): 17. 3 Adam Smith, The Wealth of Nations, Original publication, 1776, this edition by Edward Cannan (New York: The Modern Library, 1937), p. 423. 4 Smith, The Wealth of Nations, p. 28. 5 Ibid., p. 30. 6 Harold Demsetz, ‘The Primacy of Economics: An Explanation of the Comparative Success of Economics in the Social Sciences’, Western Economic Association International 1996 Presidential Address, Economic Inquiry 35, no. 1, Long Beach, January 1997, p. 8. 7 Demsetz, ‘The Primacy of Economics’, p. 10. 8 McCormick, ‘An Essay on the Origin of the Rational Utility Maximization Hypothesis and a Suggested Modification’, p. 17. 9 Philip A. Klein and Edythe S. Miller, ‘Concepts of Value, Efficiency, and Democracy in Institutional Economics’, Journal of Economic Issues 30, no. 1 (March 1996): 267. 10 Nelson, Economics as Religion, p. 6. 11 Elster, Explaining Technical Change, p. 91.

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12 Mark Blaug, ‘Disturbing Currents in Modern Economics’, Challenge 41, no. 3, Armonk (May/June 1998): 15. 13 Editorial note: The best source for economic growth trends is Bradford DeLong, ‘Cornucopia: The Pace of Economic Growth in the Twentieth Century’. NBER Working Paper No. 7602 (2000), http://www.nber.org/ papers/w7602 which explores productivity and technology over the long term as well. 14 ‘Making waves’, The Economist 340, no. 7985 (28 September 1996): 57.

Chapter 3 1 Israel M. Kirzner, ‘Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach’, Journal of Economic Literature XXXV (March 1997): 65. 2 Carl Menger, Principles of Economics (Grove City, PA: The Libertarian Press, 1994), p. 48. 3 Menger, Principles of Economics, p. 53. 4 Ibid. 5 Murray Rothbard, ‘Imputation’, in The New Palgrave: A Dictionary of Economics, ed. John Eatwell, Murray Milgate and Peter Newman (London: Palgrave Macmillan, 1987), p. 4567. 6 Menger, Principles of Economics, p. 107. 7 Ibid., p. 76. 8 Ibid., p. 109. 9 Ibid., p. 115. 10 Ibid., p. 121. 11 Editorial note: The subjective value that Menger stresses is the complete opposite of the neoclassical objective values of capital and labour and is much more indicative of today’s ‘knowledge’ (and, relatedly, the ‘gig’ or ‘sharing’ economy), which is based on technological advancements greatly reducing transactions costs. The point is that as the cost of digital reproduction approaches zero, so the neoclassical assumption of perfect competition where price is equal to marginal cost is for the most part inapplicable. 12 F. von Hayek, ‘Menger’s Grundsätze in the History of Economic Thought’, in Carl Menger and the Austrian School of Economics, ed. J. R. Hicks and W. Weber (Oxford: The Clarendon Press, 1973), p. 6. 13 Menger, Principles of Economics, p. 147. 14 Ibid., p. 148. 15 Ibid., p. 229. 16 Editorial note: Friedrich von Wieser (1851–1926), was an Austrian Finance Minister, and is most known for his coining of the paradigmatic terms ‘marginal utility’ and ‘opportunity cost’. 17 Wieser, ‘The Austrian School and the Theory of Value’, p. 213.

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18 Ibid., p. 215. 19 Ibid. 20 Ibid., p. 216. 21 Ludwig von Mises, Human Action: A Treatise on Economics, 3rd edition, paperback (San Francisco: Fox & Wilkes, [1947] 1966), p. 81. 22 Mises, Human Action, p. 13. 23 Ibid., p. 57. 24 Editorial note: Friedrich von Hayek (1899–1992) studied in Vienna and in 1931 took up a post at the London School of Economics. He moved to the United States of America in 1950 for an appointment at the University of Chicago. Hayek shared the Nobel Prize for economics in 1974. 25 Friedrich A. Hayek, ‘The Use of Knowledge in Society’, in Individualism and Economic Order (Chicago: The University of Chicago Press, 1948), p. 82. 26 Hayek, ‘Economics and Knowledge’, Individualism and Economic Order, p. 37. 27 Hayek, ‘The Meaning of Competition’, Individualism and Economic Order, p. 94. 28 Hayek, ‘The Meaning of Competition’, p. 96. 29 Ibid., p. 98. 30 Hayek, The Road to Serfdom (NY: Routledge, [1944] 2014), p. 69. 31 Editorial note: The Hayek work that best typifies the point concerning the necessity of the decentralization of knowledge in a complex society is ‘Use of Knowledge in Society’, American Economic Review 35, no. 4 (1945): 519–30. This article was chosen recently as one of the top 20 articles in the first 100 years of the AER and is the only one without math. 32 Hayek, ‘The Meaning of Competition’, p. 101. 33 Israel M. Kirzner, How Markets Work: Disequilibrium, Entrepreneurship and Discovery (London: The Institute of Economic Affairs, 1997), p. 11, http:// www.iea.org.uk/sites/default/files/publications/files/upldbook104pdf.pdf. 34 Ibid., p. 26. 35 Ibid., pp. 34–5. 36 Ibid., p. 74. 37 Ibid., p. 42. 38 Peter F. Drucker, Innovation and Entrepreneurship: Practice and Principles (New York: Harper Row, 1986), p. 228. (Editorial note: Drucker’s comments on ‘quality’ should be compared with Heskett, reading #24, ‘Product Integrity’, The John Heskett Reader, ibid.)

Chapter 4 1 Editorial note: Thorstein Veblen (1857–1929), a Norwegian-American, was a brilliant scholar and unconventional person. His capacity for scathing criticism meant that he got a teaching post only when he was thirty-nine-years old, at the University of Chicago. The Theory of the Leisure Class, published in 1899,

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is the best known of his works. The breadth of his ideas and interests and inability to fit into hierarchical academic organizations meant he had difficulty in keeping academic posts, but he did publish other works that are worthy of attention, in particular The Instinct of Workmanship in 1914. Veblen was also the first economist hired by the Graduate Faculty (what has become the New School for Social Research) and this was his last teaching position. His take on ‘absentee ownership’ (1923) in part predicted the ‘financialization’ of the economy (excess debt creation, in the United States for tax reasons, and thus financial crises), Veblen died two months before the crash of 1929. 2 Thorsten Veblen, The Theory of the Leisure Class (Harmondsworth: Penguin, 1994, original 1899), p. 209. 3 Veblen, The Theory of the Leisure Class, p. 209. 4 Ibid., p. 152. 5 Thorsten Veblen, The Instinct of Workmanship and the State of the Industrial Arts (New Brunswick, USA: Transaction Publishers, 1990, original 1914), pp. 103–4. 6 Veblen, The Instinct of Workmanship, p. 38. 7 Ibid., p. 33. 8 Ibid., p. 42. 9 Ibid., p. 216. 10 Ibid., p. 217. 11 Larry Hickman, John Dewey’s Pragmatic Technology (Bloomington: Indiana University Press, 1990), p. xii. Dewey’s concept of ‘instrumentalism’ also has many close parallels in design, defined not only in terms of visual outcomes, but also the ideas and processes that contribute to those forms. 12 There is an interesting examination of the relation of Ayres’s thought to Veblen and Dewey in R. Hickerson, ‘Instrumental Valuation’, in Evolutionary Economics, Foundations of Institutional Thought, 2 vols., ed. Marc R. Tool (Sharpe: Armonk, 1988), p. 179. 13 Editorial note: Ronald Coase (1910–2013). Coase’s Nobel Prize in 1991 was for his work on transactions costs and property rights. Missing in the notes are Coase’s reasons for why the existence of the firm occurs in the first place. Neoclassical economics’ assumption of perfect competition is that economic actors have perfect foresight, that the economy is evenly rotating at equilibrium. Coase critiqued this and said that there cannot be perfect contractibility into the future. Entrepreneurs need to be able to hire and fire employees at will so that they can fit production to changing market conditions out into the future. Entrepreneurs create the firm to reduce the costs of reacting to the unknown future. 14 Ronald Coase, ‘The New Institutional Economics’, The American Economic Review, Nashville, 88, no. 2 (May 1998): 73. 15 Ibid., p. 72. 16 Editorial note: Oliver E. Williamson (born 1932) studied with Ronald Coase and Herbert Simon and shared the Nobel Prize in 2009 for his work on the firm, specifically related to in-sourcing or out-sourcing the means of production, something Williamson calls ‘transaction cost economics’. Key to

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his approach is the idea of ‘asset specificity’, which refutes the neoclassical approach of perfect factor mobility and where factors are specific to time and place and local practice. 17 Oliver E. Williamson, ‘The institutions and governance of economic development and reform’, The World Bank Research Observer, Washington, 1995, p. 171. 18 Ibid., p. 176. 19 Ibid., p. 179. 20 Editorial note: Douglass C. North (born 1920) co-shared the Nobel Prize in 1993. His Nobel Prize Lecture was published as ‘Economic Performance through Time’, American Economic Review 84, no. 3 (1994): 359–68. North was also the editor of the Journal of Economic History from 1960 and cofounded the International Society for the New Institutional Economics with Coase and Williamson. 21 Douglass C. North, Institutions, Institutional Change and Economic Performance (Cambridge: Cambridge University Press, 1990), p. vii. 22 John Heskett’s note. Take football as an example: there are rules that define the context of the game, the size of the pitch and goals, the numbers of players and how they should conduct themselves. These rules establish the framework, no game can be understood without knowledge of them, yet every game will still be different in innumerable ways. 23 North, Institutions, Institutional Change and Economic Performance, p. 4. 24 Ibid., p. 6. 25 Ibid., pp. 28–9. 26 Editorial note: Hayek was notoriously sceptical concerning measurement. A fundamental underlying argument of his is that measurement is impossible, and that all knowledge is ‘pattern recognition’. 27 North, Institutions, Institutional Change and Economic Performance, p. 81.

Chapter 5 1 An excellent survey and bibliography of these early pioneers of alternative growth theories can be found in: Richard Nelson, ‘How new is New Growth Theory?’ Challenge 40, no. 5 (September/October 1997): 29. 2 Editorial note: Joseph A. Schumpeter (1883–1950) was educated in Vienna, became a university teacher and was Minister of Finance in the Austrian government for a brief period in 1919. In 1932 he left for the USA on appointment to Harvard University. His influence has grown since his death, particularly his analysis of the dynamics of capitalism. 3 Joseph A. Schumpeter, Capitalism, Socialism and Democracy (New York: Harper, 1942), p. 83. 4 Schumpeter, Capitalism, Socialism and Democracy, p. 84. 5 Ibid.

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6 Editorial note: A useful recent discussion of this last proposition is to be found in Paul Mason, Post-capitalism: a Guide to our Future (London: Allen Lane, 2015); The effects of the digital revolution on creative production is captured in Tyler Cowen, ‘Why Everything Has Changed: The Recent Revolution in Cultural Economics’, Journal of Cultural Economics 32, no. 4 (2008): 261–73. 7 Nathan Rosenberg, Inside the Black Box: Technology and Economics (Cambridge: Cambridge University Press, 1982), p. 3. 8 Paul M. Romer, ‘Two Strategies for Economic Development: Using Ideas and Producing Ideas’, The World Bank Research Observer, Washington, 1992. Comments by Kaushik Basu, Marcelo Selowsky and T. N. Srinivasan, p. 63. 9 Peter Robinson, ‘Paul Romer’, Forbes, 5 June 1995, p. 66. An interview with Romer that gives a basic explanation of his ideas. 10 Robinson, ‘Paul Romer’, p. 66. 11 Romer, ‘Two Strategies for Economic Development’, p. 63. 12 Rosenberg, Inside the Black Box, p. 14. 13 Ibid., p. 4. 14 Ibid., p. 27. 15 Paul A. David, Ashok Desai and Morris Teubal, ‘Knowledge, Property, and the System Dynamics of Technological Change; Comments’, The World Bank Research Observer, Washington 1992. Supplement Start Page: 215. 16 Rosenberg, Inside the Black Box, pp. 61–2; Editorial note: For a recent summary of the literature on network effects and the critical mass leading to the inflection point of a market-emerged dominant technological standard, see Joseph Farrell and Paul Klemperer, ‘Coordination and Lock-in: Competition with Switching Costs and Network Effects’, in Handbook of Industrial Organization, Volume 3, ed. Mark A. Armstrong and Robert H. Porter (London: Elsevier B.V., 2007), p. 1970. 17 David, Desai and Teubal, ‘Knowledge, Property, and …’, p. 16. 18 Rosenberg, Inside the Black Box, p. 143. 19 David, Desai and Teubal, ‘Knowledge, property, and …’, Supplement p. 215. 20 Paul M. Romer, ‘Two Strategies for Economic Development: Using Ideas and Producing Ideas’, The World Bank Research Observer, Washington 1992. Comments by Kaushik Basu, Marcelo Selowsky and T. N. Srinivasan, p. 63. 21 Paul M. Romer, ‘What Makes Technology Grow?’ I, Washington: Spring 1999, Volume 23, Issue 2; p. 11, 3 pgs. 22 Robinson, ‘Paul Romer’, Forbes, p. 66. 23 Ibid. 24 Ibid. 25 W. Brian Arthur, ‘Increasing Returns and the New World of Business’, Harvard Business Review 74, no. 4 (July/August 1996): 100. 26 W. Brian Arthur, ‘Positive Feedbacks in the Economy’, Scientific American, February 1990.

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27 W. Brian Arthur, ‘Increasing Returns and the New World of Business’, p. 102. 28 Michael Polyani, The Tacit Dimension (Chicago: University of Chicago Press, 1966). 29 David, Desai and Teubal, ‘Knowledge, Property, and …’, Supplement. See p. 219. 30 Robinson, ‘Paul Romer’, Forbes, p. 66. 31 See Maurice Fitzgerald Scott, A New View of Economic Growth (1989) (Oxford: Clarendon Press, 1924–2009). 32 Editorial note: The paragraphs on the work of Richard Nelson in the section below are added from the working paper ‘Economic Theory and Design’. 33 Richard Nelson, ‘How New Is New Growth Theory?’ Challenge 40, no. 5 (September–October 1997): 29–58. 34 Richard Nelson and Sydney Winter, An Evolutionary Theory of Economic Change (Cambridge, MA: Harvard University press, 1982). 35 Quoted from Richard R. Nelson, Technology, Institutions, and Economic Growth (Cambridge, MA: Harvard University Press, 2005), p. 13. 36 Ibid. 37 Ibid. 38 Nelson, ‘How New Is New Growth Theory?’ p. 53. 39 Ibid., p. 55. 40 ‘The New New Economy; The current recession may seem deep and endless. But don’t worry, says Stanford economist Paul Romer: they all do. Just take a broader view of productivity and keep the ideas coming’, CIO Insight 1, no. 23 (New York: 1 February 2003): 28. 41 Ibid.

Chapter 6 1 Editorial note: List’s ‘national’ ideas were then carried on by the German Historical School of economics, the leader of whom was Gustav von Schmoller (1838–1917) and who was a member of the Prussian Academy of Sciences. Their ideas should be placed in context of the creation of the German nation state, from the decentralized German Federation after the Napoleonic Wars to the unification of the German Empire in 1871. Both List’s and Schmoller’s statecraft encouraged the unification of Germany and a German Empire in the spirit of the nationalism prevalent during the Romantic Era. 2 Friedrich List, Outlines of American Political Economy in Twelve Letters to Charles J. Ingersoll (Wiesbaden: Dr. Böttiger Verlags, N.d. [c.1996] (original edition 1827)), Letter 1, p. 21. 3 Friedrich List, The National System of Political Economy, trans. Sampson S. Lloyd (Original: 1841–4. This edition London: Longmans, Green, and Co., 1885) (New York: Augustus M. Kelley, 1966), p. 126. 4 List, The National System, p. 135. 5 List, Outlines, Letter 2, p. 31.

Notes

217

6 List, Outlines, Letter 4, p. 63. 7 List, The National System, p. 140. 8 Ibid. 9 Ron Chernow, Alexander Hamilton (New York: The Penguin Press, 2004), p. 183. 10 List, Outlines, Letter 2, p. 37. 11 List, Outlines, Letter 8, p. 103. 12 List, The National System, p. 145. 13 Ibid. 14 Editorial note: The paragraphs that follow, untill the end of section 6, were originally placed in Chapter 8 of the original ms. (now Chapter 7). It has seemed to me that the consolidation of the material on List and the discussion of the relevance of his ideas to design policy both strengthened this section and better prepared the way for the discussions of Part Two. 15 More detail on state-sponsored design policies in Germany at this time can be found in ‘Government Policy and German Design’, reading #11 of The John Heskett Reader: Design, History, Economics (London: Bloomsbury, 2016). 16 The Electrical Review. The quotation is from the German Department of Commerce and Labor, Bureau of Manufactures (1907), Monthly Consular and Trade Reports, January, p. 78. 17 See Hermann Muthesius (1861–1927), Style-Architecture and Building-Art: Transformations of Architecture in the Nineteenth Century and Its Present Condition (1902). 18 A. Jaumann, ‘Die Wirtschaftliche Bedeutung der Angewandte Kunst’ (The Economic Meaning of German Applied Art), Innen-Dekoration, 1907.

Chapter 7 1 Editorial note: As indicated in the introduction, this section differs substantially from the original chapter 7 (was 8). To augment the arguments Heskett is making, I have drafted into the text sections from the unpublished essay ‘Economic Theory and Design’. These additions are indicated in the text below. 2 L. M. Lachmann, ‘From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society’, Journal of Economic Literature 14, no. 1 (1976): 54–62, p. 55. 3 Editorial note: The instances in Chapter 7 are taken from the previous chapters. Their function is heuristic, to connect the notes on economic theory with the propositions about design that Heskett goes on to explore below. 4 Ludwig von Mises, Human Action: A Treatise on Economics (San Francisco: Fox & Wilkes, 1949), p. 13. 5 H. A. Simon, The Sciences of the Artificial, 2nd edn (Cambridge, MA: The MIT Press, 1981), p. 111.

218

Notes

6 Friedrich A. Hayek, ‘The Meaning of Competition’, in Individualism and Economic Order (Chicago: The University of Chicago Press, 1948), p. 101. 7 Thorsten Veblen, The Theory of the Leisure Class (Harmondsworth: Penguin, 1994, original 1899), p. 209. 8 Nathan Rosenberg, Inside the Black Box: Technology and Economics (Cambridge: Cambridge University Press, 1982), p. 178. 9 North, Institutions, Institutional Change and Economic Performance, pp. 28–9. 10 Editorial note: The extended paragraphs in this section come from the working paper ‘Economic Theory and Design’. 11 Editorial note: The extended paragraphs in section 2 come from the working paper ‘Economic Theory and Design’. 12 Editorial note: The material in section 3 comes partly from the working paper ‘Economic Theory and Design’ as referred to above. 13 Richard Nelson’s stress on activities at the level of the firm as a means of understanding innovation is relevant in this regard. See Chapter 8.

Chapter 8 1 Editorial note: The material in section 2 largely, and in section 3 almost wholly, is taken from the unpublished ms. ‘Economic Theory and Design’. 2 David Halberstam, The Reckoning (New York: William Morrow and Company, Inc., 1986), p. 210. 3 Nathan Rosenberg, Inside the Black Box: Technology and Economics (Cambridge: Cambridge University Press, 1982), p. 122. 4 Ibid., p. 139. 5 Ibid., p. 186. 6 Richard R. Nelson, The Sources of Economic Growth (Cambridge, MA: Harvard University Press, 2000), p. 38. 7 Mihaly Csikszentmihalyi and Eugene Halton, The Meaning of Things: Domestic Symbols and the Self (Chicago: University of Chicago Press, 1981), p. 87. 8 Editorial note: For more on the question of values, see the notes ‘Value and Values in Design’ attached as Appendix 2. 9 Aristotle, Nicomachean Ethics, Book VI. 10 Ibid. 11 John Dewey, The Later Works 1925-1953, Volume 1: 1925, Experience and Nature (Carbondale: Southern Illinois University Press, 1981), p. 20. 12 Larry A. Hickman, John Dewey’s Pragmatic Technology (Indianapolis: Indiana University Press, 1990), p. xi. 13 Ibid., p. 39. 14 Hans-Georg Gadamer, Reason in the Age of Science (Cambridge: MIT Press, 1983), p. 92. 15 Ibid.

Notes

219

Chapter 9 1 A good discussion on these choices, with many illustrative cases, is: Michael L. Tushman and Charles A. Reilly III, ‘Ambidextrous Organizations: Managing Evolutionary and Revolutionary Change’, California Management Review 38, no. 4 (Berkeley, Summer 1996): 8. 2 Editorial note: The following four paragraphs are inserted from the unpublished and uncompleted ms. ‘The Economic Value of Design’ c. 2000–5. The same material is found also in the working paper ‘Economic Theory and Design’. 3 H. A. Simon, The Sciences of the Artificial, 2nd edn (Cambridge, MA: The MIT Press, 1981), p. 164. 4 Editorial note: The following paragraphs dealing with the ‘Five modes of how design is utilized in a firm’ are inserted from the unpublished and uncompleted ms. ‘The Economic Value of Design’. The same material is also found in the working paper ‘Economic Theory and Design’. 5 Ivan Yates, Innovation, Investment and Survival (London: Royal Academy of Engineering, 1992), p. 63. 6 Ibid. 7 Ibid., p. 65. 8 Editorial note: The material from this point to the end of the chapter returns to the original ms. 9 John Dewey, Experience and Nature (Peru, IL: Open Court, 1925), p. 10.

Appendix 1: Socialist theory 1 Editorial note: As noted in the introduction, the section on Socialist Theory was originally chapter 7 of Design and the Creation of Value. But since it is neither developed with direct or even indirect reflection on design nor referred to in any of the surrounding arguments and since its placement in the text broke the flow of the underlying argument, it has seemed better to place it as an appendix.

Appendix 2: Value and Values in Design 1 The term ‘design’ is being used here to indicate the essential outcome of any business activity, which can take many forms, for example, artefacts, communications, environments, services or systems combining all or part of the foregoing. 2 Gordon Russell, Designer’s Trade (London: George Allen & Unwin, 1968), pp. 140–1. 3 Russell, Designer’s Trade, p. 264. 4 ‘The Triangle: Manufacturer, Consumer, Designer’, Design, 1950.

220

Notes

5 For a discussion of problems with the term ‘design’, see John Heskett, Toothpicks and Logos: Designing Everyday Life (Oxford: Oxford University Press, 2002), ch. 1. 6 Milton Rokeach, The Nature of Human Values (New York: The Free Press, 1973), p. 4. 7 Rokeach, The Nature of Human Values, p. 5. 8 Michael Hechter, ‘Values Research in the Social and Behavioral Sciences’, in The Origin of Values, ed. Michael Hechter, Lynn Nadel and Richard E. Michod (New York: Aldine de Gruyter, 1993), p. 3. 9 Nicholas Rescher, Introduction to Value Theory (Englewood Cliffs, NJ: Prentice-Hall, 1969), p. 16. 10 Henry Dreyfuss, Designing for People (New York: Paragraphic Books, 1955), pp. 21–2. 11 Originates from R. H. Coase, ‘The Problem of Social Cost’, Journal of Law and Economics 3 (October 1960): 1–44.

Index

NOTE: Page references in italics refer to figures. 9/11 attacks  189–90 absentee ownership  208 n.15, 213 n.1 accidenti communi 127 accidenti propri 127 acquisition  88, 93 adaptive efficiency  101–2 Adler, Jonathan  6–7, 40, 54, 55, 56 aesthetics  53–4, 56, see also economic beauty aesthetic value  194–5 Airbnb  207 n.11 Allcroft, Britt  171 allocative efficiency  101, 65, 67–8 Amazon 159 Apple  58, 115, 159, 196 applications of design  171–2 of technology  109, 158–9 applied arts Germany 129–30 appreciative theory  120–1, 141, 153 Aristotle on theory and practice  153–4, 155 Arrow, Kenneth  23 art design as a branch of  54 ‘Art in the Age of the Machine’ (Naumann) 130 artefacts  59, 93–4, 161, 172, 190, 219 n.1 and aesthetic value  195 and economic value  194 and intrinsic versus extrinsic value 195 and material value  194 Arthur, W. Brian  105, 174 on increasing returns  114–15

artist designers  56–7 asset specificity  27–8, 97, 208 n.17, 214 n.16 Austrian theory  7, 61 and attribution of value to goods 77–81 and change  82–3, 85–6, 136 and competition  83, 84–5 and decentralization  84, 101, 212 n.31 and design  84–5, 136 and differentiation  83, 84 and distinction between property and wealth  80 and economic exchange  77 and economic good  77, 80 and entrepreneur  23, 206 n.5 and entrepreneurial discovery  85–6 and equilibrium  83 and exchange value  81–2 and goods  77, 79 and ‘goods of first order’  79 and human action  82, 85, 136 and individualism  83–4 and management theory  86–7 and Neoclassical theory compared 77, 78 and New Growth theory compared 105, 106 and price  81, 86 and use value  81, 82 and useful things  77, 79 and utility  81 and value  77, 80–1 and value creation with institutions 94, 95 and value creation with transaction efficiencies 98, 99

222

Index

automobile industry, American 1970–90 2–3 General Motors bankruptcy  26–8, 208 n.18–19 automobile industry, Japanese inch-up 158 Ayres, Clarence  93–4 barter 193 bathroom equipment  6, 40, 54–5, 56–7 Beard, Charles  208 n.16 Beck, Harry  171, 204 n.60 behavioural economics  37 Bentham, Jeremy  67 Blair, Tony  198 n.6 Blanc, Louis  182 Blanqui, Louis  182 Blaug, Mark  74–5 bounded rationality  97 brand management  53, 83, 162, 163, 171 Brazil  design in public sector  34–7 Brenner, Robert  13 Britain, see United Kingdom broadcast television non-excludability of  73 Brown, Tim  198 n.2 “Building, Dwelling, Thinking” (Heidegger) 19 Bulgaria  201 n.42 Bush, George W.  208 n.18 business and design  1, 4, 6, 11, 52, 55–6, 57–9, 147, 181, 186–7 a social activity  32, 56 US models  27 and value  81 and values  189, 190 business economics  201 n.36 business schools  51 Canon  157–8, 174 capital Neoclassical emphasis on  66–7, 68, 69, 70, 75 Das Capital (Marx)  183 capitalism  13, 202 n.51, see also Neoclassical economics American capitalism  45

Marx’s critique of  183–4 and National theory  61 and ‘new economy’  15 and New Growth theory  104–5 Chamberlin, Edward  22 Chang, Ha-Joon  5, 9, 12 on knowledge economy  204 n.66 on significance of manufacturing  16–17, 201 n.33 change and Austrian theory  82–3, 85–6, 136 and culture  155 degree of  159 and design  66, 71, 85, 129, 135–6, 157–60, 164, 166, 167, 172, 174–5 and Institutional theory  94, 97, 98–9, 102 Marx’s views on  182 and National theory  129 and Neoclassical theory  74–5, 105 and New Growth theory  104–5, 109–10, 111, 112, 113 and practical wisdom  153–4, 155 and users  147–8, 149–50 and values  190 Chicago 152 Chile 4 China  14, 61, 183 China Daily (Hong Kong edition)  53 choice(s) design choices  36 freedom of  136 and information  100 and Neoclassical theory  147 and perfect competition  67, 81 and product differentiation  196 vis-à-vis public and private goods 71–2 Christo  201 n.42 Coase, Ronald  10, 27, 213 n.16 Coase theorem  193 Nobel Prize  213 n.13 on transaction costs  96, 98, 99, 137, 213 n.13 Coca-Cola 171 coded knowledge  116–17, 137, 145, 177 CoID, see Council for Industrial Design command economy  61 communications  161, 172

Index

Communism  183, 184, 189, 201 n.42 The Communist Manifesto (Marx)  183 competence values  188, 189–90 competencies  162–3, 172–6 competition 129 and design  137 as dynamic process  83 Germany  124, 130–1 imperfect  68, 71, 77 perfect  67, 68, 69, 77, 81, 83, 84–5, 100, 115, 213 n.13 and prices  105 competitiveness and design  52, 74, 140, 177 and quality  130–1 computer industry and learning by using phenomenon 148 and lock-in  115 conspicuous consumption  24–6, 88 notion of  90 constant returns to scale  70, 108, 115 consumer(s), see also headings beginning user... rational consumers  67, 81, 86, 147 and value  143, 191 consumer satisfaction Menger on  79–80, 136 and public sector  33–4 consumer surplus  193 consumption  150, 191, 193 ‘conspicuous consumption’  24–5, 88, 89, 90 vis-à-vis excludability and rivalness 72–3 costs, see transaction costs Council for Industrial Design (CoID) 185 Csikszentmihalyi, Mihaly  195 culture  147, 155–6 David, Paul  105, 174 on incremental change  110 on perfect expansibility  117 Simplest Linear Model of  111–12 on tacit and coded knowledge 116–17 decentralization  84, 101, 212 n.31 decision-making entrepreneurial 85–6

223

deliverables 160–2 demand 65, 66 demand creation  25 Demsetz, Harold  66, 70 design as configurative activity  14–15, 199 n.10 as creative act  6, 40, 54 as factor of production  10 generic view of  52–3 Heskett’s notion of  2, 45 hierarchies and positioning of  57–9 as index of wealth  90 notions of  46–8, 52–7, 219 n.1 operational functions of  170–1 in other disciplines and fields  19–20 and policy-making  47–8 Simon’s notion of  48 design and economics  1–3, 7–8, 138–41 congruence between  84–5 direct relationship between  9 influencing role of design  48–9 schism of mutual incomprehension  1–2, 9, 17–18, 45–6 value vis-à-vis  18–19 Design and the Creation of Value (Heskett) 181, see also Heskett, John content and organization of  5–8 contributions of  8–12 critique of  28–9, 200 n.27, 206 n.2 editorial changes and interventions 40–1 implications of  17–20 limitations of  12–17 “Design and the Creation of Value” seminar  4–5, 39 ‘design art’  53 design awareness  185 lack of  46 promotion of  52 design choices  36 design education  140–1, 145, 159 designers  28–9, 135 and commercialism  53, 186–7 as enablers  175–6 and institutional structures  140–1 Japan 131 and organizational contexts  31, 34, 55, 58–9, 121, 142, 143, 162–3

224

as originators  139–40 and production context  138–41 publicity and image-building  53 and quantitative measures  144–6, 152 role in endogenous value creation 23–4 strategic role of  6–7, 11 and technology  138–9 and user-centred design  146–52 and value  81 and value addition  157 and values  152, 186–7, 190 design management  57, 169, 205 n.72, see also management of design Design Management Institute (Boston) 32 design planning  concepts of  169 as strategic tool  176–80 tools 159–62 design policy  4 design practice  6, 46, 49, 53–7, 150, 170, 176 in business context  59–60 and coded knowledge  177 and commercialism  53 ‘design art’  53 and future  135 ‘high-level design practice’  49, 59–60 and institutional structures  140 and public sector  33, 35 significance of  157 and tacit knowledge  139, 177 design rationality  47 Design Value Score Card  32 Design Value Theory  24 Deskey, Donald  23–4 Deutscher Werkbund  131 Dewey, John  32, 155 instrumentalism of  93, 213 n.11 on theory and practice  154 on value of a philosophy  179 Die Hilfe (periodical)  130 differentiation Hayek on  83, 84 product  22, 27

Index

Diffrient, Niels  158 digital economy  15–16 diminishing returns  70 and resource-based industries  114 Dior 54 Discourse on the Sources of the Wealth of Nations without God- and Silver-Mines (Serra)  126–7 discovery entrepreneurial discovery  85–6 institutionalization of  113 disequilibrium 71 Disney 171 division of labour  125, 126, 128 Douglas, Mary  45 Dreyfuss, Henry  191 Drucker, Peter  86–7 Dyson, James  66, 158–9, 160 Eastern Europe  61 economic beauty  88, 90, 91 economic exchange  77 and institutional constraints  100–1 economic goods Menger’s notion of  80 economic growth, see also New Growth theory and innovation  104–5, 112, 147 and Neoclassical theory  23, 109 economics  6, 8, 10, see also design and economics Heskett’s notion of  2, 45 of objects  and ideas  107–8 quasi-religious role of  47 use of mathematical models  22, 67 Economics as Religion: From Samuelson to Chicago and Beyond (Nelson)  47 economic theory  7, 8–9, 21, 147, see also Austrian theory; Institutional theory; National system; Neoclassical theory; New Growth theory; New Institutional theory and understanding of design  48, 59, 135–8, 200 n.27 ‘Economic Theory and Design’ (Heskett) 4 economic value  192–4

Index

economies of scale in public sector  36–7 economy command 61 financialization of  25–6, 27, 208 n.15, 213 n.1 notion of  13–14 ‘Economy of mankind’  124–5 efficiency adaptive efficiency  101–2 and Neoclassical theory  71 in resource allocation 65, 67–8 Elster, Jon  74 endogenous growth theory  23–4 Engels, Friedrich  25, 156, 182, 183 entrepreneur(s)  23, 206 n.5, 213 n.13 entrepreneurial discovery  85–6 environments  161, 172 equilibrium  65, 66, 68, 83 esprit de corps 189 ethical values  185–6, 190–1 EU 32 €Design project  32 evaluation of design  179–80 of values  188 exchange value  24 Menger on  81 North on  100 Paulson on  186 Smith on  68 Wieser on  81–2 excludability  72–4, 76 expansibility 117 external validation  188 extrinsic value  195 Falk, Roger  32 fashion designers  53, see also designers fashion industry ‘designer labels’  53 and image-centred design  171 non-excludability of design in  74 fast-moving consumer goods  171 Federal Housing Authority (US)  25–6 Federal Reserve (US)  25–6 Feuerbach, Ludwig  182 financial crisis of 2007—8  25–6

225

financialization  25–6, 27, 208 n.15, 213 n.1 firms capabilities and capacities of  167–8, 177 existence of  96, 113, 116, 213 n.13 financial measures  153 major design functions in  57, 58, 169–70 major functions in  57, 58, 96, 16 reliance on quantification  144–6 Fitoussi, Jean-Paul  202 n.51 flexible production  175 Flores, Fernando  195 Foley, Duncan  11, 199 n.19 Ford, Henry  144 Ford Motor Company reliance on quantification  144–5 form  54–5, 56 formal theory  120–1, 141, 153 Foster, J. Fagg  94 Fourier, Charles  182 Frame Reflection: Toward the Resolution of Intractable Policy Controversies (Schön and Rein)  46–7 free trade  124–5 Hamilton’s critique of  127 Friedman, Milton  206 n.4 future  85, 98, 135, 136, 167 and change  85–6 Gadamer, Hans-Georg on practical wisdom  155 GE 113 General Motors (GM) bankruptcy and nationalization of  26–8, 208 n.18–19 German Historical School of Economics  216 n.1 Germany  4, 14, 216 n.1 institutional structures in  140 and international competition  124, 130–1 and List’s ideas  7, 61, 129–30 and National system  9 organization and promotion of exhibitions 129–30 productive powers of  131 promotion of design  131

226

Index

Gillette (brand)  170–1 GM, see General Motors goods 49, see also private goods; public goods attribution of value to  77–81 ‘goods of first order’  79 Menger’s notion of  79 role in social life  45 and useful things differentiated  79 governance 97 Growth Theory Plus  23, 24 Grundsätze der Volkswirtschaftlehre (Principles of Economics) (Menger) 77 Habermas, Jurgen  202 n.51 Halberstam, David  144–5 Hamilton, Alexander  127 Harvey, David  13 Hayek, Friedrich von  8, 80, 81, 101, 212 n.24 critique of Neoclassical theory  82, 83 on decentralization  84, 101, 212 n.31 on design  84–5, 136 on differentiation  83, 84–5 on freedom of choice  136 justification of individualism  83–4 on state action  87 health care rivalness of  73 Hechter, Michael  188 Hegel, Georg Friedrich  182 Heidegger, Martin  19 Heskett, John  31, 181, 200 n.27, see also Design and the Creation of Value biographical sketch  3–5, 14 and exhibitions  203 n.54 on General Motors bankruptcy 26–8 on growth theory  22–4 on Neoclassical theory  21–2 notion of design  2 notion of economics  2 relevance of work of  31–4 on Veblen  25–6 works of  39–40 Hickman, Larry A.  154

high-technology industries increasing returns  114 and problems of use  148 Hirano 4 history  98, 199 n.19 Hobsbawm, Eric  13 Homebase 159 Honda  158, 174 Hong Kong  4, 5, 14 broadcast television  73 Hong Kong Polytechnic University  12–13, 39 human action  Kirzner’s view of  85 Mises’ model of  82, 136 and wealth creation  127 human capital  23, 107, 167 and knowledge-based industries 116 IBM 115 I.D. – International Design (periodical) 4 ideas  150, 152 economics of  107–8 and incentives  121–2 innovative ideas  111, 138, 196, 197 and Neoclassical theory  109 IIT Institute of Design (Chicago)  12–13, 39, 199 n.18 image-centred design  157, 161, 171 imitations  74, 159, 161, 172 imperfect competition  68, 71, 77 impersonal exchange  100–1 implementation 169 incentives 121–2 inch-up  158, 173–4 increasing returns  113–15 ‘Individual economy’  124, 125 individualism 71–2 Hayek’s justification of  83–4 and Japan  131 industrial design  54–5, 56–7 Industrial Design (Heskett)  4 Industrial Revolution  156 industrialization  124, 128–9 information 97, see also knowledge and choices  100 in economic terms  116–17 and users  149

Index

Information Technology  105 and manufacturing  117–18 innovation  15, 138 degree of  159–60, 161, 172 and design  139–40, 143, 177 effect of  105, 150 and growth  104–5, 112, 147 and ideas  159 in public sector  35–6 and technological progress  109 and users  147–8, 150, 152 and value creation  77, 78 innovative ideas  111, 138, 196, 197 instinct and tropismatic action  25–6, 92 of workmanship  25–6, 92–3 The Instinct of Workmanship (Veblen)  90, 213 n.1 institutional change  98–100 institutional structures  101–2, 118, 120, 125, 138, 140–1 Institutional theory  7, 26, 61, 88, 94, 118, see also New Institutional theory and change  94, 97, 98–9, 102 and conspicuous consumption  88, 90 and design  90, 137 and distinction between instinct and tropismatic action  25–6, 92 and distinction between production and acquisition  88, 93 and economic beauty  88, 90, 91 and instinct of workmanship  92–3 and instrumentalism  93–4, 213 n.11 and linkage between technology and institutional organization  90, 92–3, 94, 96 and Neoclassical theory compared 94 institutions and New Growth theory  120 instrumental values  188–90 instrumentalism  93, 213 n.11 Ayer’s reformulation of  93–4 intellectual capital  126 intellectual property rights  117, 122, see also protective measures need for  108 interior design  57

227

internal validation  188 intrinsic value  195 Isherwood, Baron  45 Issigonis, Alec  204 n.60 James, Henry  45 Japan  4, 9, 14, 16, 173, 204 n.69 assembly-line operations 112, 113 and List’s ideas  61, 124, 129 and state intervention  131 Jaumann, Anton  130 Karan, Donna  53 Keynes, Joseph  200 n.27, 206 n.2 Khomeini, Ayatollah  189 Kirzner, Israel  77 critique of Neoclassical theory  85 on entrepreneurial discovery  85–6 knowledge coded  116–17, 137, 145, 177 as commodity  117 and culture  155–6 and firm capability  177 and growth  106–7, 165 and information  116–17 and institutional structures  155–6 tacit  101–2, 116, 137, 139, 145, 177 and technology  106–7, 110, 114, 154 of users  148–50, 151 knowledge economy  15, 16, 204 n.66 knowledge resources  192 knowledge workers  113 Korea 131 labour and Neoclassical theory  66–7, 68, 69, 70, 75, 183 labour productivity and skills  125 and Solow’s residual  23, 75 labour theory of value  193–4 Lachman, Ludwig M.  136 laissez-faire  125, 156 Lamy 179 Lassalle, Ferdinand  182 Latour, Bruno  14–15 learning by using  148–9 Liebig, Michael  126–7 Leibsam, Steve H.  164

228

Index

Liedtka, Jeanne  198 n.2 List, Frederick  7, 14, 61, 124, 135–6, 200 n.27, 216 n.1, see also National theory critique of Smith’s emphasis on division of labour  125 critique of Smith’s focus on individual 125 Hamilton’s influences on  127 importance and continuity of ideas of 129–31 Serra’s influences on  126–7 lock-in  110, 115 Lovegrove, Ross  6, 56 macroeconomics  206 n.2 management of design  169, 170, see also design management management theory and Austrian theory  86–7 manufacturing Hamilton’s promotion of  127 and Information Technology 117–18 significance of  16–17, 201 n.33 marketing-centred design  157, 161, 171 markets creation and modification of  157–9 early dominance in  114–15 and entrepreneurial discovery  85–6 increase in existing share of  157–8 ‘invisible hand of the market’  67–8, 82, 84 and Neoclassical theory  65–6 notion of  65 static nature of  67–8, 70–1 static nature of, challenges to  82–3 Marshallian cost curves  22, 206 n.4 Martin, Roger  198 n.2 Marx, Karl  13, 61, 88, 129, 156, 193 biographical sketch of  182–3 economic theory of  183–4 Mason, Paul  15 mass media trivialization of design by  53–4 material value  194 mathematics in economics  22, 67 Mazda 3 McDonalds  171

Menger, Carl attribution of value to goods  77–81 on customer satisfaction  79–80, 136 on determination of value by customers 143 on distinction between useful things and goods 79 on distinction between wealth and property 80 on exchange value  81 notion of goods  79 on subjective value  80–1, 211 n.11 on use value  81 Microsoft  113, 115 Mises, Ludwig von  136 on human action  82, 136 Mishan, E. J.  202 n.51 Mitsubishi 174 money  81, 153 moral values  188–9, 195 Muthesius, Hermann  130 national economy(ies) role of design in  141–2, 147 UK 127 US 127–8 ‘National economy’  124, 125–9, 135–6 National system  7, 61 and change  129 and ‘Economy of mankind’  124–5 and ‘Individual economy’  124, 125 and industrialization  124, 128–9 and intellectual capital  126 and ‘National economy’  124, 125–9, 135–6 and protectionism  127–8 and quality  130–1 and state intervention  125–6, 136 The National System of Political Economy (List)  124 ‘The Nature of the Firm’ (Coase)  96 Naumann, Friedrich on quality  130–1 Nelson, George  59 Nelson, Richard  40 on innovation  147 on institutional structures  118, 120, 155 on theorizing  120–1, 141, 153 on users and learning  149

Index

Nelson, Robert H. on quasi-religious function of economics 47 Neoclassical theory  7, 13, 21, 60 and Austrian theory compared  77, 78 and change  74–5, 105 and choice  67 and constant returns to scale  70 critique of  9–10, 67, 69–70 and demand  65, 66 and design  9, 66, 74, 135 and diminishing returns  70, 114 and distinction between private and public goods  71–4 and economics of objects  108 and efficiency  71 emphasis on static models  67–8, 70–1, 74, 82–3, 135 and equilibrium  65, 66 and exchange value  68 and excludability/nonexcludability 72–4 and growth  23, 109 Heskett’s critique of  21–2 and imperfect competition  68, 71 and individualism  71–2 and innovation  109 and institutional theory compared 94 and ‘invisible hand of the market’  67–8, 82, 84 and labour  66–7, 68, 69, 70, 75, 183 limited view of production  9 and markets  21–2, 65, 85 and mathematics  67 model of  68, 69 and New Growth theory  118, 119 and other economic theories  10 and perfect competition  67, 68, 69, 213 n.13 and prices  66 and production functions  66–7 and rational consumers  67 and rivalness/non-rivalness  72–4 and supply  65, 66 and technological progress  23, 74–5, 109 and value  68 and value addition  157

229

Netherlands 4 Neudeutsche Wirtschaftspolitik (New German Economic Policy) (Naumann) 130 New Growth theory  7, 23–4, 61, 104 and Austrian theory compared 105, 106 and change  105, 109–10, 111, 112, 113 and coded knowledge  116–17, 137 critique of  150, 155 and design  137–8, 150 and economics of ideas and objects 107–8 expanded model  118, 119 and formal theory  120–1 and growth vis-à-vis capitalism 104–5 and ideas  109 and incentives for ideas  121–2 and Information Technology  117–18 and innovation  104–5, 109, 112 and institutionalization of discovery 112–13 and institutional structures  118, 120, 155 and investments in technology 113–15 and knowledge  106–7, 110, 114, 117, 154, 165 and knowledge of users  150, 151 and knowledge workers  113 and perfect expansibility  117 and Simplest Linear Model of technological progress  111–12 and tacit knowledge  116, 137 and technological progress  109–12, 118, 137, 138 and theorizing  120–1 New Institutional theory (NIE)  96, see also Institutional theory and adaptive efficiency  101 and economic exchange  100–1 and governance  97 and information  100 and institutional change  98–100 and institutions  98 and tacit knowledge  101–2 and transaction costs  96–8, 99 New York Times 54

230

Index

NIE, see New Institutional theory Nissan  144, 174 non-excludability  72–4, 76 non-rivalous  72–3, 76 norms 188 North, Douglass C.  10 on adaptive efficiency  101–2 on economic exchange and institutional constraints  100–1 on history  98 on institutional change  98–100 Nobel Prize  214 n.20 on role of institutions  98 on ‘value’ of a product  137–8 North Korea  61 Obama, Barak  208 n.18 objects economics of  107–8 OBM, see original brand management ODM, see original design manufacturing OECD 32 OEM, see original equipment manufacturing organization 169 organizations 31–4 original brand management (OBM)  162, 163 original design manufacturing (ODM)  162, 163 original equipment manufacturing (OEM)  162, 163 original strategic management (OSM)  162, 163 OSM, see original strategic management Outlines of American Political Economy (List)  126 Owen, Robert  182 Oxo Good-Grips  171, 204 n.60 Parker 179 path dependency  102, 174 Paulson, Gregor  186 pecuniary habit  25–6, 27 perfect competition  100 emphasis on price function  68, 77, 81, 115

Hayek’s critique of  83 and Neoclassical theory  67, 69, 77, 213 n.13 perfect expansibility  117 personal values  187–8 Peters, Guy  34 physical systems  147 Physiocrats 124–5 Piketty, Thomas  13 policy-making  37, 47 reflective practice  47–8 political economy component parts of  124–5 political ideologies  189 Polyani, Michael  116 Porter, Michael  196 positional goods  193 post-carbon economy  15–16 Post-Industrial Capitalism: A Guide to a Future (Mason)  15 practical wisdom  153–4, 155 practice 153–5, see also design practice and tacit knowledge  116 preferences 188 consumption 25 price(s) as determinant of value  66, 77 and entrepreneurial discovery  86 and perfect competition  68, 77, 81, 115 Wieser on  81 price-mechanism 192–3 price-setters 66 private goods  71–2 excludability and rivalness of  72–4 and tacit knowledge  116 producer value  186, 190–2 product(s) characteristics of  196 and factor of time  191 image-centred 171 marketing-centred 171 symbolic function of  152 and tangibility  166, 167–8 technology-centred 170–1 user-friendly 171 value addition  157–8 product churning  157, 158, 173

Index

product covering  157, 158 product design  54–5, 56–7 product designers  53, see also designers product differentiation  22, 27 production  193, 201 n.33 and acquisition distinguished  88, 93 context of  146 design as factor of  10 factors of  66–7, 75, 77, 106–7, 115, 150, 151, 192 and Neoclassical theory  9 productive power  125–9 and state intervention  129–30, 131, 136 professional designers  56–7, see also designers profitability  53, 55, 152, 153, 186–7, 193 property Menger’s notion of  80 property rights and Coase theorem  193 protective measures  192, 208 n.16, see also intellectual property rights American policy  127–8 Proudhon, Pierre-Joseph  182 public goods  72–4 and coded knowledge  116–17 expansibility of  117 public policy(ies) design of  33–4 public sector and creation of new ideas  122 and design  33–4 economies of scale in  36–7 lack of design awareness in  46 public sector, Brazilian  34–7 qualitative measures  181 quality  26, 105 of design  185, 186 Drucker on  86–7 of knowledge  205 n.66 Naumann’s emphasis on  130–1 and Neoclassical theory  140 and value  152 Yates on  173

231

quantification reliance on  97–8, 139, 143–6 Quant, Mary  204 n.60 Quesnay, François  124 Rashid, Karim  53 rational consumers  81, 86 characteristics of  67, 147 real-world economics  9, 201 n.34 The Reckoning (Halberstam)  144–5 reflective practice  47–8 Rein, Martin  46–7 religious beliefs and values  188–90 Renault 58 Report on Manufactures (Hamilton) 127 research Nelson’s approaches to  120–1, 141, 153 resource-based theory  191–2 Rheinische Zeitung (periodical)  182 Ricardo, David  193–4 risk management  173 rivalous 72–3 The Road to Serfdom (Hayek) 84 Rokeach, Milton  187, 188 Romer, Paul  23, 105, 110, 173 critique of Neoclassical theory  109 distinction between economics of ideas and economics of objects  107–8 on incentives  121–2 on Information Technology and manufacturing 117–18 on innovation and growth  112 on investment in technology  113–15 on knowledge and growth  106–7 on values in design  150, 152 Rosenberg, Nathan  105, 137, 174 on innovation and technological progress  109, 110, 111 on knowledge and technological progress 107 on social impact of technological innovation 149 on users and learning  148 Rothbard, Murray N.  79–80 Russell, Gordon  185 Russia 183

232

Index

Saint-Simon, Henri de  182 Samsung 58 Sanders, Elizabeth  37 scale-down  157–8, 173–4 scarcity  65, 80, 140, 184–5, 192 Schmoller, Gustav von  216 n.1 Schön, Donald  46–7 Schumpeter, Joseph  8, 214 n.2 ‘creative destruction’ notion of  105, 150 on growth and capitalism  104–5 on prices and competition  105 Scott, A. O.  45 Scott, Maurice Fitzgerald  118 secular values  189 Sen, Amartya  202 n.51 sentimental value  195 Serra, Antonio  126–7 Simon, Herbert  97, 213 n.16 on design  15, 48, 136, 166, 167 Simplest Linear Model (SLIM)  111–12 Singapore  16, 204 n.69 skills and design education  141, 145 and design practice  170, 190 high-level 173–4 and labour productivity  125 List’s views on  126 obsoleteness of  174 Romer’s views on  112–13 and tacit knowledge  116, 139 and value creation  23 skyscraper index  208 n.17 SLIM, see Simplest Linear Model small-scale production  100 Smith, Adam  60, 84, 124, 182, 201 n.39, see also Neoclassical economics on labour  183 List’s critique of  125–6 on value  68 social efficiency  71 Socialist theory  7, 13, 61, see also Marx, Karl evolution and development of 182–3 and proletariat  183–4 and ‘the superstructure’  184 Solow, Robert Solow’s residual  23, 75

Sony 158 Soviet Union  61, 184 Starck, Philippe  53, 171 state intervention  61, 87, 125–6 and manufacturing  127 and productive powers  129–30, 131, 136 Stiglitz, Joseph  202 n.51 strategic design  57–9 strategy 169 design as tool of  11, 59–60, 164–7 and design competencies  162–3 high-level strategy  27–8 role of design planning in  176–80 subprime mortgage crisis (US)  25–6 supply 65, 66 Sweden  4, 186 Switzerland  4, 16, 204 n.69 symbolism 152 systems  161, 175 tacit knowledge  116, 137 and design practice  139, 177 firm’s understanding of  145 role in adaptive efficiency  101–2 Taiwan  4, 131 Taliban  189, 190 tangibility  166, 167–8 taste  186, 195 technical change  23 technology  204 n.60, 211 n.11 and design  138–9 Dewey’s critique of  93 diffusion of  110 and embodied values  179 and growth  75, 104–5, 109, 118, 138 and growth vis-à-vis investment 113–15 and Industrial Revolution in Britain 156 and knowledge  106–7, 110, 114, 154 and market creation and modification 158–9 and Neoclassical theory  23, 74–5, 109 and product innovation  109–11 Simplest Linear Model  111–12 social impact of  149

Index

Solow’s residual  23, 75 validity of  111 vis-à-vis institutional organization  90, 92–3, 94, 96 technology-centred design  66, 158–9, 160, 161, 170–1 terminal values  188 theory 153–5 The Theory of Monopolistic Competition (Chamberlain)  22 Theory of the Leisure Class (Veblen)  25, 88, 89, 93, 137 Tool, Marc  94 Toto 54 Toyota  3, 158, 174 transaction costs  24, 27, 96–8, 99, 213 n.16 and small-scale production  100 tropismatic action and instinct  25–6, 92 Uber  207 n.11 UK, see United Kingdom United Automobile Workers  27 United Kingdom (UK)  3 deindustrialization  4, 14, 124, 199 n.14 English Arts and Crafts movement 185 industrialization/Industrial Revolution  124, 156 List on economy of  127 vacuum cleaners market  66, 158–9, 160 United States (US) business schools  51 deindustrialization 14 design policy in  51 economy of  127–8 individualism in  71 institutional structures in  140 promotion of manufacturing in  127 subprime mortgage crisis  25–6 US, see United States use, context of  143, 146 systemic nature of  147 useful things  77, 79 user(s) 146–52, see also consumer(s) behavioural reaction  168 and change  147–8, 149–50

233

and innovation  147–8, 150, 152 knowledge of  177 and learning by using  148–9 multiple levels of  166, 168 preferences of  149 and values  191, 192 user-centred design  149–50, 157, 161, 170 user needs  191 use value  24 Menger on  81 Paulson on  186 Smith on  68 Wieser on  81, 82 utility  81, 100, 137, 147, 152, 192 vacuum cleaners  66, 158–9, 160 value 152–6, see also values Aristotle on  153–4 attribution to goods  77–81 and customers/consumers  143, 186 and design  196–7 distinction between values and 153 economic concept of  186–7 of labour  183 mediating role of  18–19 notion of  153 price as determinant of  66, 77 subjective 80–1 vis-à-vis scarcity and utility  81 value addition  157–8 ‘Value and Values in Design’ (Heskett) 41 value creation  1–3, 6, 10, 19 Austrian model with institutions 94, 95 Austrian model with transaction efficiencies 98, 99 and design  6, 11–12, 32–4, 36–7, 45, 49, 74, 137–8, 157, 159–62 and design as structural factor 176–80 endogenous 23–4 and innovative strategies  77, 78 and knowledge of users  150, 151 through interface between context of use and context of production 146

234

Index

value of objects  187–8 values, see also value efficacy of  188 evaluation of  188 notion of  187 and producers  186, 190–2 and religious beliefs  189–90 significance of  179–80 and users  191, 192 value system  187–9 Veblen, Thorstein  8, 10, 24–6, 27, 212 n.1 on absentee ownership  208 n.15, 213 n.1 on conspicuous consumption  88, 90 distinction between tropismatic action and instinct  25–6, 92 on economic beauty  88, 90, 91, 137 on instinct of workmanship  92–3 linkage between technology and institutional organization  90, 92–3

Versace, Gianni  53 Vietnam 61 VitrA  6, 56 Volkswagen 2–3 Wal-Mart 122 wealth categories of wealth creation  127 design as index of  90 Menger’s notion of  80 The Wealth of Nations (Smith)  67–8, 69, 125 Wieser, Friedrich von  81–2, 211 n.16 Wilhem II, Kaiser  130 Williamson, Oliver E.  27, 213 n.16 critique of  97–8, 102 on governance  97 on transaction costs  96–7, 137 Winograd, Terry  195 Winter, Sidney  120 workmanship  25–6, 27 Yates, Ivan  173