Someone recently asked me “Is innovation always good?”
To answer this, consider that innovation always happens in something called a “design space”, which is a metaconcept surrounding a given topic or subject area, such as an industry. In this design space, innovations can be drawn up on top of existing concepts. Entirely new concepts are not innovations; those are called inventions. Some design spaces have different dimensions than others – for example, video games can be used for entertainment, and there is a range of entertainment that can be designed for this purpose inside of that design space. Another dimension for video games is education – and there are designs within that dimension which can make learning entirely entertaining – edutainment is innovation happening in that space. Gamefication of services has been demonstrated to lead to higher participation in programs or services which have clear benefits (when followed through to completion) to intended audiences or recipients. And so on. This innovation happens within the video game design space, or more broadly, the game design space.
Lets consider another design space, one where the chief goal of the vertical (industry) is to ultimately make money. In answering the question, I pointed to financial innovation as something that could be bad from time to time, and explained that often a vertical will experience declining returns on innovation, and some verticals are more prone to this than others, depending on their nature or limit of their design space. The Economist disagrees, arguing the merits of financial innovation: http://www.economist.com/node/21547999
While I find it almost impossible to see collateralised-debt obligations (collateralised-debt obligations = CDOs, a major player in the recent global financial crisis) in a way other than financial rating obfuscation devices that were stuffed full of bad subprime loans but treated as AAA securities, The Economist states: “The real problem with the CDOs that blew up was that they were stuffed full of subprime loans but treated by banks, ratings agencies and investors as though they were gold-plated.” Thanks, tips. That is indeed how it works – that is still your precious financial innovation. It happens to remain a poster child for what’s wrong with your argument. Q.E.D.
I would argue that CDOs are an example of bad financial innovation because they require regulation (by default) in order to perform (provide value) in a vertical which by very nature provides monetary incentives for the manipulation of the financial instrument itself by the same people who control them. Microcredit is an example of generally good (and relatively recent) financial innovation because it provides value by extending credit to potentially productive members of society that otherwise would not have access to capital with existing models of lending (if you are willing to ignore that some microloans have interest rates which are borderline illegal in the western world.) It follows that financial innovation is not exactly either good or bad as a whole, but rather diverse within the design space for the vertical.
Satyajit Das responds by taking The Economist to task on the rest of their claims about financial innovation:
http://www.wilmott.com/blogs/satyajitdas/index.cfm/2012/3/19/Pravda-on-Financial-Innovation – Thanks to Anand for the link.
One thing I did learn from The Economist’s article was that “husband” is not just a noun, but also actually a verb which means “to conserve.” How did I not notice that until now?
Now there are countless examples of good innovation all around us – especially in the mobile and smartphone arena. All this said, we will see declining returns on innovations within those verticals as well some day. While I think it is important to push for innovation in a general sense so that we can create value in new, more efficient ways, I also think it is important to understand that constantly adding on top of just about anything can lead to disastrous results.* We must, as ever, be vigilant about understanding what the outcomes are of our quest for the next new thing.
*This does not apply to truth-or-dare Jenga, and in other ways, it totally does.
