Inputs & Outputs
Creativity & Capitalism: why economics is both simple and highly complex
This week I stumbled on a recent essay by the creativity researcher, Keith Sawyer. It’s called Creativity and Capitalism. He does a great job of reframing economic growth in terms of human creativity and the socio-political environment (the economic system).
After reading his piece I had this notion that economics - at it’s very simple core - is about inputs and outputs. Humans and technology transform inputs into outputs. Outputs can become inputs and things change of course, but the formula generally holds.
Economic theory details concepts like labour and capital, supply and demand, and the power of incentives. But the vitally important lens of analysis, in my view, is that any economy is really about the people - who invent and sell and consume; who are impressionable to brands and advertising; who respond to incentives; who demand the goods and build the factories and set the prices; who interact in myriad and unpredictable ways - and how all this human creativity shapes inputs turning into outputs.
Creativity as economic orchestrator
Creativity is by far the most important factor in transforming inputs to outputs. Human creativity is the driving force behind every product, every service, every new idea in our world. Innovation is creativity applied to business and technology.
Creativity also drives efficiency. Meaning it improves the way current markets operate as well as inventing new markets.
Efficiency comes down to how much output can be produced from a single unit of input. Sawyer sites both allocative (capital) efficiency and matching (labour) efficiency.
Creativity as innovation-engine and efficiency-gainer leads to better manufacturing techniques, better logistics, substitute materials, new technologies, lower prices, greater value (in the right context - hold this objection for the next section).
We have to think about markets in paradigms, creativity improves the current paradigm of goods and services, and invents entirely new classes as well as accompanying behaviours. Our boundless potential for creativity means that the input and output space is practically infinite. The what, how, where, when, who of future economic production is completely unknown. So never bet against human ingenuity.
Economic system as incentive-maker
The second thing Sawyer reminds us of is the importance of the environment in which inputs turn into outputs. Economies exist in a social and political context - regulations, laws, and attitudes influence both innovation and efficiency.
The incentives and pressures of the economic system are key. Do they facilitate and reward creativity innovation? Do they encourage efficient markets? Do they penalise excess pollution and negative externalities? Do they champion buyers? Or sellers? Or both? Or governments, or special interests, or some suboptimal combination?
In the 20th century, places like the Soviet Union and PRC tried central planning (a flavour of communism) with spectacularly tragic results. Mass starvation, state corruption, general malaise. Inputs were never matched well, outputs could not reach consumers. There was no incentive to innovate, corruption ruled, people died, and these nations failed.
Freedom of trade is essential for a functioning economy because it allows incentives to work in the allocation problem and innovation is incentivised.
Unfettered unregulated capitalism, on the other hand, also creates all sorts of bad incentives. Monopolies form, firms hoard and collude and price gouge. Companies exploit loopholes. Negative externalities run rampant, disadvantaging local communities and ruining the natural environment. And worst of all, the incentives to take risk with innovation are outgunned by the incentives to manipulate the market - leading to a static economy.
Value, in terms of inputs and outputs, is difficult to define. Efficiency is a good thing - but only if the right outputs are being produced. Things are often measured in terms of wellbeing but subjective measures are tricky to nail down.
Human creativity is the reason we can’t predict the future, and the reason we cant optimise things perfectly. We just don’t know where the next innovation will come from, or when. And our wellbeing is a moving target.
To end, because it’s on my mind, and it’s 2025 - I will talk about AI now. How does AI figure into the modern economy? Remember, people and technology transform inputs into outputs. At this point AI is a very sophisticated technology but it is no substitute for human creativity (that is what they mean by Artificial General Intelligence by the way.)
Firstly, AI and robotics will do some narrowly defined jobs better than people. This means many people will be forced out of mundane jobs - and better yet- hopefully- they will use their creativity to update their skillsets.
This is where environment becomes important. Are we creating incentives for workers to align skills (and even better, preferences) to new kinds of work? Communism is different to capitalism is different to techno-capitalism. New types of intelligences can drive trucks, harvest fields, clean things, and do a host of other economic activities we once thought were the divine right of humans. This has changed, AI plus robotics has reached a base level of human ability. But crucially, AIs have not passed the creativity threshold - we still shape the direction of inputs to outputs. I do expect we will be influenced in subtle ways as AI is unleashed in the media and the public square, with and without intention.
So AI will change the actual economy slowly in ways we can predict, and then very quickly in ways we cannot. The cold take: the service industry will change: chatbots are cheap, abundant, knowledgeable and effective. AIs can be used increasingly in diagnostic healthcare and patient servicing. New robotics are changing manufacturing. Pick an industry, the possibilities for AI are vast. The environmental forces that shape the goals of new AIs are happening under the discussion of “AI alignment” and this is a fascinating space to follow.
AI is a nice example of my “Inputs to Outputs” formulation. Right now, in this feverish R&D AI summer, AI is the output. We think it’s going to be transformative as an input. But until machines are creative, I put AI in the box of technology shaping production.
As at start-2025, human creativity is still the key orchestrator of what inputs become which outputs, with environmental pressures influencing the rate of innovation and the efficiency of production. But creativity as a resource (a process of change) has no moral direction when in the wring hands and minds; so we must enlarge watchdogging on the powers that be, the economic systems that form, and renew focus on the incentives everywhere.
The economy of the future will be unrecognisable to us, of that I am sure. At the very least more AI means more assistance for innovation (in the current system). In a century from now think we will still talk about inputs and outputs - I just don’t know who’ll be in charge and what the system looks like. I’m hoping for maximal human creativity and freedom - and that we keep flourishing and prosperity as the dominant outputs.
