Max Gladwell

As the financial crisis rips across the economy, it’s forcing innovation and adaptation on a scale that should make Darwin proud.

This is no ordinary economic downturn. And so it won’t be an ordinary recession with an ordinary recovery. Some have been given to using the D-word, though we’d hesitate to go that far. It’s true that we’re in uncharted territory. The wealth that was created over the past five years was largely an illusion. Giving it back won’t be easy.

Of the 3% annual growth in GDP for these years, a good 2.5% was in housing. Which means that our economy was “growing” without actually producing anything of value. We’ve been in a recession for these years but chose to ignore it. Our economy was like a patient with life-threatening injuries who was anesthetized with cheap, abundant debt to the point where it couldn’t feel the pain. It was nearly unconscious. But instead of treating the injuries, we chose to pour salt into the wounds (leveraging that debt and inflating asset prices). With little warning, the anesthesia wore off. Now we’re on life support and feeling the pain at an exponential level.

Nearly all of that supposed wealth has to be erased. Housing prices must return to the mean growth trend they’ve followed since the end of WWII…because they have to. There’s nothing Congress can do, other than to prolong the inevitable. It’s an economic truth. And according to these laws, it will take just as long to work out the mess as it took to get us into it. This won’t be easy.

We started shopping for homes on LA’s West Side in 2004. We routinely engaged in bidding wars that went several hundred thousand dollars over asking prices. Our mortgage broker told us we just had to increase our stated income. “You mean, we need to make more money?” we asked. “No,” he said, “Just put down a different number on the forms.” Add to this an interest-only loan with 100% financing for our down payment, and the writing was clearly on the proverbial wall. This was wholly unsustainable, we thought. So we chose to continue renting and watch the market from the sidelines.

That’s when we started reading the Housing Panic blog, along with others in that vein. It had serious attitude and made a lot of noise with its calls of chicken-little calamity. It routinely burned Greenspan, Bernanke, and the National Association of Realtors in virtual effigy. But it also made sense. We encourage you to read it for a play-by-play on how we got into this.

Housing Panic ran its course and ceased publishing on November 5th. It’s now stands as “a time capsule of the greatest financial mania in the history of mankind, told in real-time by regular folks and patriots. May future generations better understand the madness of crowds, and how power and money corrupt.”

With calamity, though, comes opportunity. We see these opportunities as having two fundamental qualities: innovation and efficiency. The pre-collapse economy was much more tolerant of waste and inefficiency. It’s like the difference between how you drive your car on a full tank of gas compared with how you drive with the needle on empty. If you’re not sure you’re going to make it to the station to fill up, you turn off the AC, you coast down hills, you feather the gas pedal. You drive more efficiently and find innovative ways to conserve what little fuel you have left. The economy is on empty. It’s running on fumes. But we can’t fill up on the same dirty, non-renewable fuel, because (in this analogy) it’s no longer available. Not only is the station out of gas, it’s no longer there. So it’s time for change.

As social media strategists, we’re working with our clients on innovative ways to allocate marketing resources. To become more efficient and sustainable in their efforts to reach, acquire, and retain customers. You can be sure this does not involve paid advertising. Without getting into too much detail, the world of advertising will be rocked by a combination of the economic collapse and the efficiencies afforded by social media. We’ve often joked that PR folk would become the travel agents of Web 2.0. It seems that creative agencies, media buyers, ad networks, and publishers (especially print) are now in on the joke.

Ask yourself this: What happens when companies themselves become publishers? What happens when we cut out all of the middle men and go directly to the public not only with our products but with our media? Think of the efficiencies and value this creates. And guess who benefits the most? People. The savings are ultimately passed onto them. The whole system becomes more sustainable. Do we still need a fourth estate? Absolutely. But it will take a radically different form, most likely supported by foundations as opposed to advertising. And it will serve us better as a result.

Advertising Age calls it a Hard Road Ahead for Thousands of Laid-Off Mag Employees. For those in ad sales, we have little to offer. But if you’re a journalist i.e. content creator, the opportunities are abundant. Feel free to drop us a line (bloggers [at] mediamaxwell.com) if you’re one of them. The companies of tomorrow need content creators.

In a broader sense, business needs to innovate like never before. We could wax poetic about new business DNA and the new type of model that’s required in the 21st century, but Umair Haque typically beats us to it.

We’ve been analogizing the Obama campaign (like a broken record) in terms of its use of social media and how it positioned and marketed the brand. In Obama’s Seven Lessons for Radical Innovators, Haque breaks it down brilliantly by first pointing out that Obama proved himself to be an exceptional leader and executive through building and managing the best (read: most innovative and efficient) political campaign of all time.

Barack Obama is one of the most radical management innovators in the world today. Obama’s team built something truly world-changing: a new kind of political organization for the 21st century. It differs from yesterday’s political organizations as much as Google and Threadless differ from yesterday’s corporations: all are a tiny handful of truly new, 21st century institutions in the world today. Obama’s presidential bid succeeded, in other words, as our research at the Lab has discussed for the past several years, through the power of new DNA: new rules for new kinds of institutions.

Of the seven principles, we choose to cite the most urgent one:

4. Maximize purpose. Change the game? That’s 20th century thinking at its finest – and narrowest. The 21st century is about changing the world. What does “yes we can” really mean? Obama’s goal wasn’t simply to win an election, garner votes, or run a great campaign. It was larger and more urgent: to change the world.

Bigness of purpose is what separates 20th century and 21st century organizations: yesterday, we built huge corporations to do tiny, incremental things – tomorrow, we must build small organizations that can do tremendously massive things.

And to do that, you must strive to change the world radically for the better – and always believe that yes, you can. You must maximize, stretch, and utterly explode your sense of purpose.

Haque follows this up with his thoughts on the U.S. automaker bailout in Detroit’s 6 Mistakes and How Not to Make Them:

Of the six, the first syncs with much of what we’ve already written about GM and its neighbors, putting it into a broader context:

1. Old rule: Choose evil. Industrial era business is unrepentantly and almost sociopathically evil: shifting costs onto others, while striving to internalize benefits. Detroit chose lobbying, marketing wars, and low-cost hardball – to always and everywhere try to socialize costs and privatize benefits. Never was this truer than Detroit’s lobbying against public transport throughout the 20th century. Why does public transport in the States suck? Because Detroit’s lobbying machine doesn’t.

New rule? Choose good. In the 21st century, every moral imperative is also a strategic imperative: doing good – for customers, employees, suppliers, or society – is a radical strategic choice that unlocks new pathways to innovation and growth. The opportunity cost of defending evil for Detroit was never learning how to choose good – and that’s a crucial mistake other auto players didn’t make. Tata chose to make a car that was accessible to the world’s poor. Porsche and BMW chose to invest in talent, people, and imagination. Honda and Toyota chose to invest in renewables and partnerships with the public sector. All opened new avenues to growth for an industry at the brink of extinction.

“Shifting the costs onto others” and “socializing costs” has to end. The free market has been so manipulated by these practices that it bears no resemblance to what any pro-market economist has ever had in mind when they advocated it. The external costs of extracting and burning oil are not priced into what the companies or end users actually pay. These cost are ultimately borne by society, which ends up as a taxpayer burden. That’s how we find ourselves in this absurd bailout scenario. Detroit lobbied for the right not to innovate, and now we pay the price. As painful as it will be, they should be allowed to go under. We should direct the bailout money to help those who will lose their jobs and to helping the industry reinvent itself through innovation. Those idiots in front of Congress have to go.

As with social media, the green space is poised to benefit disproportionately from the financial crisis and economic collapse. Again, we could come up with something original, but Green to Gold co-author Andrew Winston has already said it in Why This Downturn Has a Green Lining:

A sustainability focus helps companies provide customers with better products and to some extent a better life. Is there a better time for product and service innovation than when consumers and business customers are stretched thin? What business wouldn’t want to create a more profitable and innovative enterprise, all while building stronger relationships with customers, employees, communities and even shareholders?

How are you going to innovate your way out of this mess? How are you seeing companies in the green and social media space innovating in meaningful ways by creating value and maximizing efficiency?

Related Posts

• Sustainability: Where the Environment and the Economy Converge
• Social Media Predictions for 2009
• The Heroic Ideal of Max Gladwell and Barack Obama: Part II
• The Time for Sustainability is Now. Or, Seeing the Glass of the Global Economic Crisis as Half Full
• Celebrating the New Year: Reflections on MG 01