Tuesday, November 11, 2014

Tangible Taste

A good business is one which literally creates value. It either creates something that wasn't there before (e.g. iPhone) or it does something far cheaper than had previously been done (e.g. ebooks). The key is that there is demand for the product or service, and that there is some reason why supply is limited. This allows the business to charge for this product. The price is a guess at the value of the object. The difference from the value of the inputs is the value that has been created. Since value is so subjective, the measure we have is the price people are willing to pay. This price will be wrong for almost everybody. Some people will see it as a bargain, others as far too expensive. This is why a market works, it shifts the products to the people who value them the most. If supply is very limited, the people who are willing to part with the most buying potential will get the goods. A business requires resources that could be used elsewhere. One way to think of a businesses price is of the value of those resources. Those resources could earn money. For example, if they are completely sourced from debt, that debt could earn interest by being lent to someone. The value of the company grows if it creates more money than it has to pay out. A great business is one that sustainably can create more value than the cost of the resources it uses. That is the engine that drives industrialisation. Good businesses grow (or pay out the excess to owners), and bad business shrink (or destroy the resources entrusted to them). Staying a great business requires a competitive advantage.


In 'Bankers & Poets', I was arguing that Capitalism has been a great force for the destruction of poverty during the Industrial age, and by making money people had created value for society. Dan questioned me saying that poetry, as an example, was a less 'tangible' product. Tangible may not be the right word. What I meant is that the low hanging fruit of the industrial age are the things lower down Maslow's hierarchy - food, water, sex, sleep, security, employment, housing. A business like Colgate is awesome because it has a product with incredible demand. Almost all people have teeth. They almost all function the same. Once you have a product that helps them keep those teeth longer, and a competitive advantage, you can roll on with your business.

Poetry may indeed be 'tangible' to the person who loves it, but Art by its nature is very personal. It speaks to the parts of us we haven't found words for yet. The reason we haven't found words is because they too require mass-acceptance to survive. Words become words because lots of people recognise their meaning and use them. Art is different. Often an artist may capture something we have been trying unsuccessfully to express. It will resonate with us. I may love Jazz, it may drive someone I love nuts. A close friend who seems to really understand me may love landscape art while it may remind me of chocolate boxes and leave me cold.

Chocolate box art is a good example. It is bland and inexpensive because it has mass appeal and is easy to produce. Art is incredibly difficult to price. First you have to find a niche of people who like your work, and ideally you don't want that niche to be too small. Then you have to hope that particular niche of people have money. They may like to look, but art may be low down their list of priorities. An artist can 'create demand' through entering shows and competitions, being profiled in magazines or finding a patron. They can also work to the demand - finding work that is profitable and doing the same. This may not align with why they are doing art in the first place.

I know my abstract art is not everyone's cup of tea

Why Capitalism works for Industrialisation is that the capitalist may be largely ambivalent to their own personal voice. While an artist may desire to 'not sell out' and do work that is not commercial, the capitalist is looking to find a market where the intersection of supply and demand with a competitive advantage provides an opportunity. That profitable opportunity is a magnet for resources and a reward to those who create value that more people want those goods than others. It is a signal society sends about what it wants that is far closer to the truth than we as individuals can guess, since what we think is important will be different from what others want.

Some popular things are artistic. There are many movies, TV shows, and musicians who have made money and could fit comfortably in the same sentence as art. For the most part, the incentives are different for the 'softer stuff'. When you move to the top part of Maslow's hierarchy - morality, creativity, spontaneity, problem solving, lack of prejudice - these things are far harder to monetize. By monetizing something, you are able to get a signal for how much of a thing society wants, and what priority it should receive when allocating resources.

The challenge in the post-industrial age will be for us to appropriately value the priceless - relationships, meditation, and yes... poetry and art.  Art can be tangible. So tangible you and you alone can taste it.
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