Harvard Business Review recently published a conversation between Roger Martin – who is the former dean of the Rotman School – and Tim Brown – who is CEO of the global design firm IDEO. The title of the talk is “Capitalism Needs Design Thinking.” But I decided to call this post something else after reading Roger say this:

My friend Dan Pink argued in an HBR piece in 2004 that the MFA is the new MBA. I wrote to Dan to say that if that’s the case we have a problem because America pumps out a mere 1,500 MFAs a year versus 150,000 MBAs. Thirty MFAs per state per year is just a rounding error. This is one of the reasons I was so keen on transforming business education. It’s a huge infrastructure: 27% of all graduate students in America are in an MBA program. If they’re all being taught how to analyze things to death, that’s going to affect how they’ll shape the future of business.

But what this conversation is really about is the future of democratic capitalism, which is why I think it’s a nice tie-in to yesterday’s Architect This City post about startups and inequality.

I’m very worried about the fact that in America we’ve now gone 24 years without the median household income rising — it was the same in 2013 as it was in 1989. That’s unprecedented in American history. The longest that’s ever happened before is when it took just under 20 years to recover, after the Great Depression. This long period of stagnation has coincided with the top 1% of the economy doing spectacularly.

And so while it’s easy to point fingers at the tech community and say that it’s to blame for rising income inequality, the reality, I think, is that there are other more fundamental issues that need addressing. Roger and Tim believe that design thinking can help. Here’s another great snippet from the former:

I think the way that government generally works is to think, think, think, think, and then finally create legislation that brings about some change, and then they ignore their legislation and say okay, we’re finished with that. Then people go and figure out how to game that legislation, and the government doesn’t do anything about it. Whereas if they had a design view of it, they’d say when they passed a bill, that’s just the best idea we’ve got now, we have to go see how it works in practice, and then fix it. That’s just not the mentality.

Technology is having a profound impact on the world. And it’s something that is very visible. But part of the challenge is that governments aren’t keeping up. They are almost never out in front.

So when something new comes along, like Airbnb or Uber, the reaction is to just stop it. It doesn’t conform to the rules and regulations currently in place, and so it shouldn’t exist.

But as Roger and Tim point out, maybe we need to look at our rules and regulations as simply part of an iterative process (like designers do). Because if we did that, maybe we’d be better equipped to transfer the benefits of innovation over to society as a whole.

Image: HBR

One evening this past spring I was leaving a Rotman School event at Liberty Grand on the west side of Toronto. There aren’t a lot of taxis coming through this part of the city, so I figured I was going to have to wait while I hailed one from my phone. But as luck would have it, one happened to be pulling up just as I walked out of the hall.

As he drove up and rolled down the window, I told him that I was going to the St. Lawrence Market area and that I needed to pay by credit card (I was trying to be a nice guy and avoid the inevitable fight when he was dropping me off). He responded by saying, “My machine is broken. Can’t you pay with cash?” I told him, “No, unfortunately I don’t have any cash on me. I need to pay with credit card.” He then rolled up his window and drove up closer to the entrance of the hall.

Faced with this scenario, I did what most people would probably do nowadays: I pulled out my phone so that I could hail either an Uber or a Hailo cab (I’m sad that Hailo has since left the North American market). I decided on Hailo (it was cheaper until UberX came along) and ordered a car.

But within a few minutes, the same taxi with the broken credit card machine circled back around, rolled down his window, and told me that his machine was now working and he would take me to the St. Lawrence Market. Knowing exactly what had happened, I said to him, “Wooooow, that’s funny that within the span of a few minutes your machine has magically started working again.” He wasn’t happy with that response.

Now, we all know why he didn’t want to take my credit card. He didn’t want to pay the fees and he wanted the cold hard cash. And who can really blame him for wanting to maximize his profits. But for the end user, this experience sucks. When it’s 2 in the morning and all you want to do is go home to bed, you don’t care about the few dollars he’s trying to save. You just, want, to go, home.

And that’s one of the reasons why Uber (and previously Hailo) is having such a huge impact on the market. Even before UberX arrived (the cheaper alternative), lots of people were more than willing to pay the Uber premium. And they continue to pay their controversial surge prices. But that’s because the experience is so much better than what’s offered today.

We all know that Uber is under a lot of fire for what they do, but Toronto mayor Tory is 100% right in saying that ridesharing and peer-to-peer taxis are here to stay. Toronto may be seeking a court injunction to stop the service in this city, but I would agree that it’s likely going to be a big waste of money. The cat is already out of the bag.

What’s happening here is no dissimilar to what happened with Napster. A court order may have forced the company to shut down, but it didn’t maintain the status quo for the music industry. That industry went, and continues to go through, a lot of change. So a better option, would be for everyone to sit down together and figure out what the future of the taxi industry is going to look like. Because I can guarantee you that it’ll continue to change.

Image: Anti-Uber protest in London (Flickr)

Roger Martin – who is the former dean of the Rotman School of Management and one of my favorite business thinkers – recently published a post on the Harvard Business Review blog called: The Dark Side of Efficient Markets.

In it, he makes an interesting distinction between what he calls use-driven markets and expectations-driven markets, the latter of which is assumed to be the more efficient one:

In the natural evolution of markets, as markets become more efficient, they turn from being use-driven to expectations-driven — like equities, real estate, or derivatives based on both.

The example he starts off with is that of corn. In its simplest form, this market is about farmers growing corn, taking it to a local market, and then selling it to real humans who will then go home and eat it for dinner. Simple. And this is what he means by a use-driven market.

But as markets grow and evolve, you have middle agents or market makers that insert themselves between buyers and sellers, suppliers and consumers. They help create greater marketplace liquidity and generally help buyers and sellers find each other and transact.

However, as this happens, Roger argues that the game eventually shifts from being use-driven to expectations-driven. Now people buy, not necessarily to consume, but to invest, resell, and generally speculate on future values. In other words, they stop buying the corn to eat it. And instead buy it (or sell it) because of what they think it might be worth at some point in the future.

Now, his argument is that even though this latter stage is considered to be more “efficient”, there’s a dark side to it: increased price volatility. When people are buying, not because they need something, but because of future expectations, it can lead to big price swings. And that’s because the market is now being driven by fear and greed, as opposed to utility. Interesting. 

But I want to talk about something a bit different today. I agree with him, but I want to look at it from a different angle.

What I’m instead curious about after reading his article are the following:

• Are these non-use-driven markets really that “efficient”?

• Is this a natural market evolution only because we had no other choice and no other distribution options?

• And how does the internet change this natural evolution?

Efficient markets are supposed to be based on perfect information. Buyers and sellers know the same things, prices accurately reflect intrinsic value, and all that other good stuff. But while this may be more true in some markets – such as perhaps the stock market – I would argue that it’s far from the truth in others.

The real estate market in my view is actually an imperfect market. There’s lots of missing information and there’s overall poor transparency. And I’m sure this also leads to big distortions in the market. So I find it difficult to classify the real estate market as an efficient one – though it may still have a dark side.

I also don’t think you can talk about markets, today, without talking about the internet. One of the most interesting things for me is how it’s completely rewriting distribution between buyers and sellers, producers and consumer.

In the old days, we needed middle actors because it wasn’t cost effective to distribute on your own. If I wanted to write about cities every day, I would have had to get picked up by some newspaper or publication. But today (for better or for worse), I and anybody else can self-publish for basically no cost. The same goes for videos on YouTube, short-term spaces on Airbnb, and so on.

Now, I’m not exactly sure how the changes taking place in marketplaces will ultimately play out in the financial markets, but I do think there’s room for our markets – the simple act of people buying and selling stuff – to get a lot more “efficient”. And as that happens, maybe the dark side won’t be as dark anymore.

Image: Flickr