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Thursday, July 14, 2011
Economics/Business ... Foreign Relations/World Affairs ...

There’s a rather unexciting business article in the front pages of the July/August Atlantic Magazine, entitled ‘Why Content Isn’t King’. It examines “how Netflix became America’s biggest video service—much to the astonishment of media executives and investors”. In this article, author Jonathan Knee tries to explain some basic economic concepts regarding fixed costs and efficiencies of scale and scope, and doesn’t really do such a great job of it. The conclusions of the article itself are rather mundane; overall I give it three and a half yawns.

And yet, this may be one of the most important articles that I have read in recent years about why America seems to have lost its groove in the world today. There has been plenty of commentary published in recent years about America’s economic role in a changing world. I am old enough to remember when the USA was the number 1 maker of things; in my lifetime, that has changed quite a lot. There were once factories all over the place in my corner of New Jersey; now there are almost none.

The manufacturing segment of the American economy is not dead by any means; the US still produces about 19.4% of world manufacturing output, versus around 22.3% back in 1995, and probably above 30% after World War 2. Highly automated factories in the Midwest and South bang out stuff with an efficiency that the old plants in NJ could never match. However, the Chinese have both efficient technology and cheap labor, and since 1995 China has gone from 4.7% to 19.8%. This trend arguably will continue — at our expense.

Back when I was in college in the 1970s, our teachers were already aware that America was facing increased competition from the East (back then, Japan was the feared industrial giant). We could literally watch the factories in the old industrial cites closing (given that I went to college in Newark, NJ). But we were assured that the USA was not out of the game. Although the developing nations could grind out simple stuff with its cheaper labor, we here in the US would expand our role by working smarter, i.e. through technical innovation. We would innovate and offer better quality than they could; that would maintain our edge. Such innovation and focus on quality would create all kinds of new jobs in manufacturing that would reward vast numbers of people, so long as they had a bit of college or some post-secondary technical training.

Well, the first part of this idea has arguably occurred; the USA still has a significant role in world manufacturing. However, as to it creating all kinds of new job opportunities for smarter people, that hasn’t panned out so well. To work in American manufacturing today indeed requires more skill; but for the most part, American factories maintain their edge by eliminating people, smart or dumb, from the process.

What has all this to do with Netflix? Well, despite Jonathan Knee’s clumsiness in explicating basic microeconomic concepts, his article effectively makes the point that people and companies (and by extension, whole nations) that create new things generally come in last. It’s the groups that learn how to use and re-sell the ideas that others come up with that get rich. Netflix is not a “content creator”; they don’t produce movies or shows. They don’t get involved with highly creative people. Their business is to get their hands on what the creative types come up with, and distribute it for as much as possible (with enough convenience and variety to make it worthwhile to the customer).

What obviously happens in the modern economy is that innovation and creativity, whether in science or the arts or any other field, doesn’t bring a good price. The creative types, whether scientists or engineers or authors or designers, etc., can’t seem to hold out for a big chunk of whatever their new ideas will eventually earn in the business world, despite legal supports like patents and trademark laws. Those who learn how to spot a valuable new idea and use it to sell desirable stuff to the masses (such as Netflix with its digital movies) seem to get the upper hand.

As a footnote, President Obama made a promise regarding “green jobs” that was similar to what my college professors promised. Obama set forth a vision of new factories throughout the nation offering good-paying jobs manufacturing solar panels, wind turbines, bio-fuels, etc. Unfortunately, the Chinese area already undercutting American green-energy equipment producers. Once again, America leads the way in coming up with better green energy technology, but just can’t hold on to the manufacturing and business end of it. Thus, no new good-paying jobs for us, because the Chinese can figure out how to do it with ‘not-so-good-paid’ workers.

And thus, we can see why my professors back in college were wrong. They said that America would stay rich and continue to get even richer and more powerful through innovation and creativity. And America is still the place for creativity, both in terms of science and the arts. But the developing countries have learned to take our new discoveries, technology and designs and make a buck off of them. We can’t seem to hold back what we come up with.

Part of the problem may be legal, but at bottom I think it’s just a question of human nature. People who are creative love what they do, and do it for love. And love gets in the way when it comes down to dollars and cents. Companies like Netflix, and nations like China, aren’t in it for love. They want financial results.

And thus, creative America isn’t earning what it once did, back when the producer-distributor nations (China, India) and resource-providing nations (Russia, Canada) were recovering from colonialism and the great wars of the 20th Century (or preparing to fight another one, in the case of the Soviet bloc). Just like a family that has declining take-home pay but doesn’t want to own up to it, America is over-spending and going into unsustainable debt. We may enjoy being creative, but we haven’t learned to live yet like the typical struggling artist and inventor.

All of the political angst going on today relates to the struggle about whose ox is going to be gored, in the great economic adjustments to come. Which groups are going to absorb the necessary decline in living standards? Who is going to get less medical care? Who will have to live on beans in a cold water flat after retirement? That’s what politics all come down to now, despite claims for grand themes such as freedom and individual rights. “Content” can still fetch a price, but not like when the USA was the only game in town and both invented, produced and distributed that content. In a hyper-interconnected world, you can’t keep a new idea a secret. You can only hope that the “content aggregators” will be nice enough to keep our creative nation comfortable if no longer powerful, just as Netflix does what it can to support Hollywood and the other California studios that are now struggling.

◊   posted by Jim G @ 8:50 pm      

  1. Jim, Your post reminds me of the program “Shark Tank.” Have you seen it? If not give it at least a one-time view. It is the reality of what you are describing.

    All sorts of creative people come in, talk to the “Sharks”, ask for their money. The “Sharks” listen to the pitch given by the creative types, some of whom have really unique creations and a pretty good business already thriving. To get say anywhere from $50,000 to $750,000 from the “Sharks” to expand (on the programs I’ve seen these two amounts seem to be the low and high figures) the creative individuals offer the “Sharks” a percentage of their business in some way, shape, or form.

    I have not seen one case where I didn’t wonder if the creative types were not being screwed somehow before the whole agreement was over. Sorry, I did see one case where the woman “Shark” seemed to offer another women who made unique cakes a deal that I tho’t had an element of altruism in it. Only one case and it amazed me; the other “Sharks” looked askance (sp?) at her.

    Now while I realize that these “Sharks” are not on the program to lose money or to be charitable in any way, I have tho’t that some of the deals offered were truly highway robbery and close to the type of thing one knows is definitely a scam of the creative individuals. For instance, there was one situation where there were at least 3 “Sharks” interested in the unique item the individual had tho’t to make; 3 of them offered deals. It was easy to see the creative individual was flustered, confused, and intimidated by these men and their offers. When the creative individual said, “let me call my wife”, which I tho’t was a reasonable request because it was clear he was dumbfounded by the 3 different offers and couldn’t figure out which one might be the “best” for his situation (when I tho’t each one was a scam in its own right), the “Sharks” upbraided the man, saying, “Call your wife! Man up!” Thus the man was forced to pick one almost randomly; the “Sharks” certainly knew their business only too well: Scam the little guy.

    One of the “Sharks” on the program seems to be an expert in “licensing”, which is what I think you are likely referring to–take somebody else’s well tho’t out project, invest in it, and then make sure you get way more than what you invested or the creative individual will get from his/her idea when all is said and done.

    This is held up as “real” business in the US now. Makes one want to ask, what’s wrong with this picture?

    While it is true the creative ones get the money they want and may see more money than they ever dreamed of, the “Sharks” are so far beyond the creative ones in the money they already have and the money they will get from their investment in the business that the two are not on the same planet.

    In one case one of the “Sharks” actually upbraided another “Shark” for having made a deal with a creative one that was truly outrageous in the disparity of what each would get from the deal. Again, one asks: What’s wrong with this picture?

    And I cannot help but think: With this type of “business” held up as the ideal, all the talk by the GOP (and most especially the Tea Party) about the importance of the “little business(wo)man” is nothing but hogwash. MCS

    Comment by Mary S. — July 15, 2011 @ 1:58 pm

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