John Heskett - Clive Dilnot - Suzan Boztepe - Design and The Creation of Value-Bloomsbury Academic (2017)

Design and the
Creation of Value
ii
Design and the
Creation of Value
John Heskett
Edited by
Clive Dilnot and Suzan Boztepe
Bloomsbury Academic
An imprint of Bloomsbury Publishing Plc
LON DON • OX F O R D • N E W YO R K • N E W D E L H I • SY DN EY
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First published 2017
© Selection and Editorial Material: Clive Dilnot and Suzan Boztepe, 2017
© Original Texts: John Heskett
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and Patents Act, 1988, to be identified as Editors of this work.
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A catalogue record for this book is available from the British Library.
ISBN: HB: 978-1-4742-7-4302

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ePDF: 978-1-4742-7-4265
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Typeset by Deanta Global Publishing Services, Chennai, India
Every effort has been made to trace copyright holders and to obtain their permission
for the use of copyright material. The publisher apologizes for any errors or omissions
in the above list and would be grateful if notified of any corrections that should be
incorporated in future reprints or editions of this book.
This book is in memoriam to John Heskett (1937–2014)
and to Pamela Heskett (1945–2016) who died
as the book was going to press.
vi
Contents
Introduction to John Heskett’s Design and the

Creation of Value Clive Dilnot 1
A note on John Heskett’s economics Cameron Weber 21
Design as an economic necessity for governments

and organizations Sabine Junginger 31
Notes on editing the manuscript Design and the Creation
of Value Clive Dilnot 39
Design and the creation of value

Preface 45
1 Introduction: Design in economic life? 51
Part One Economic theory and design 63

2 Neoclassical theory 65
3 Austrian theory 77
4 Institutional theory 88
5 New Growth theory 104
6 The National System 124

viii Contents
PART TWO Design and the creation of value 133

7 Design from the standpoint of economics 135
8 Economics from the standpoint of design 143
9 Design and value from the standpoint of practice 157
Afterword by Sharon Helmer Poggenpohl 181

Appendix 1: Socialist Theory 182
Appendix 2: Value and Values in Design 185
Notes 198
Index 221
Introduction to John Heskett’s
Design and the Creation of Value
Clive Dilnot
This short book, which the preface tells us concerns ‘how design can add
and create economic value for businesses and other organizations’,1 is the
first to take seriously the relation between design and economics. If that
statement might be contested by some of those who make their living from
propounding the relation between design and business,2 it is certainly the
first to outline, on behalf of design, the major elements of economic theory,
and also the first to try to reverse that relation:
To suggest that the fragmented and often ill-defined field of design can
usefully augment economic theory, the most powerful and well entrenched
of the social sciences might seem overly ambitious, likely to have as
much effect as a flea-bite on an elephant. Yet, when one moves from the
concerns of theory to those of practice and considers the extent of the
creation of designs in the world of business and their implementation
in everyday life, it must surely be evident that there remain large gaps in
economic accounts of how products and services are produced, sold and
used.3
And, we can add, large gaps too in the understanding of how, within these
processes, value and values are created and augmented or added to (in part
at least) by design. If these gaps were only organizational or substantive, it is
likely that by now these would have been bridged, if not completely then at
least adequately. But, after fifty years of design research,4 forty or so of design
management,5 a couple of decades of the mantra of ‘creative industries’,6
and more than ten years of IDEO-style ‘design thinking’, very little in these
relations, has actually changed. The same pleas for understanding, the same
lamentations are heard, but the gap between what design ‘does’ in respect of
value creation and what design as a field is capable of rationally articulating
2 Design and the Creation of Value
as to how it achieves this (through what means, in relation to what model of

economic value creation?) remains.7
That the discord is blatant is because it is grounded on a deeper intellectual
problem. Heskett states it with some clarity:
Economics is concerned with explaining the production, distribution and

consumption of wealth. Design is the human capacity for shaping and
making in ways that satisfies our utilitarian needs and creates meaning –
among other things, it creates sources of wealth. There should, at least on
a general level be some interaction between the two, yet a deep schism of
mutual incomprehension separates them.8
The proof of the existence of this mutual incomprehension is negative. From

the side of design, it is manifest in the continuing weakness of attempts
to articulate the value that design adds or creates, especially, but not only,
economically.
From the side of economics, there is a parallel incomprehension. The wry
story with which Heskett opens the seminar, concerning his encounter at a
Washington reception with an official from the US treasury – who politely
but firmly demurs and moves away when Heskett tries to suggest that design
might have a role in export competiveness – is an epitome of this.
What is really remarkable about this story, however, is not that it
happened, but, rather, our expectation that, of course, this would be the
case. Today, we naturally expect that a Treasury official, by definition a
trained and practising economist, would discount design as a factor in value
creation. Yet, a moment’s reflection tells us that the same economist) or
others like him in the US Treasury) might well be struggling, for example,
with the long-term consequences for the US balance of trade of the way in
which between 1970 and 1990 the US automobile industry was transformed
by imports, first German (Volkswagen) and then Japanese. In 1950, only
21,287 automobiles were imported into the United States of America. By
1977 the figure was over 2 million. By 1986 it reached an all-time high
of 4.8 million, a figure close to 50 per cent of US domestic production.9
This revolution in US automobile purchases, with all the second- and third-
order consequences that flowed from this (above all for employment in
manufacturing) was not a result of price competition but was due almost
entirely, as we know, to imports setting new benchmarks in quality and
value-for-money. Eventually, and belatedly, this flood of imports set off
something of a similar quality revolution among domestic manufacturers.
But this was not without the effective bankruptcy, along the way, of two
of the big three US car-makers (including, most recently, the $50 billion
in funding given to GM in 2009) and the decimation of the vast supplier
network that served the US automobile industry in its so-called golden years.
Now, in all this well-known saga, only on the most superficial level could
design be discounted as a factor in this process. The successes of Volkswagen,
Introduction 3
Toyota, Mazda et al. were rooted in the essentially superior conception,

design (configuration) and realization (engineering) of their products.10 Yet,
for trained economists like Heskett’s baffled treasury official, design in this
expanded sense has no recognition, no visibility, no place in the models of
how conventional economics understands the creation of value. It cannot
appear as a factor of value creation. Hence, then, the paradox that the
discipline or field (economics) whose real subject is value creation has the
utmost difficulty in grasping the means (in terms of concrete products and
services) through which value is actually created. On the other side, design,
which is a factor in value creation manifests an equal inability to grasp
how, in terms of economics, it does, indeed, ‘add value’. What makes the
situation worse, on both sides, is the disdain with which the question is
treated: not as a problem to be engaged but as an absence, that which can
be avoided, sloughed off. No wonder, then, Heskett’s ‘deep schism of mutual
incomprehension’.
It is how this schism is dealt with, and at least in part dialectically
overcome, that gives Design and the Creation of Value its force and interest.
As gradually becomes apparent on reading through the chapters, the
uniqueness of the text lies in the way that Heskett manages to make design
and economics begin to belong to each other, or, better, to begin to listen to
each other, to hear what the other is saying.
This is by no means a merely abstract conceit. Heskett’s point is that
adequately comprehending how value and values are created by design
within economic processes – and thus being able to create an economics
adequate to the real-world phenomena of how, in general, ‘products and
services are produced, sold and used’ – is dependent on overcoming this
divide. It was precisely this ambition – to open design to economics and
economic thought, but in the same process to begin to open (even in small
ways) economics to the critique and perspectives, intellectual as well as
practical, that design offered – that was the origin of the seminar on which
this book is based.
1
Heskett was born in 1937 in Coventry, England.11 Bombed out twice in the
city during the war, he was educated at London School of Economics where
he read economics, politics and history. After a period in Australia, he gained
a position teaching social and economic history in what was then Coventry
School of Art. Here he began to move into the history of design, using a
fellowship to undertake research in Germany on the history of design from
the 1870 to the Second World War. By the late 1970s, Heskett was one of the
first serious historians of design in Britain, a point confirmed by his move at
the end of that decade to Sheffield Polytechnic to take up a leadership role
in teaching and developing the field.
At this point, much of his interest in economics remained latent –

although it undergirds his first book, Industrial Design (1980),12 and,
indeed, this is one of the factors that makes the latter so emphatically a
work of design history (and one of the first within the modern formation of
the field).13 But by the mid-1980s, he had begun to develop a sharp interest
in design policy at national and government levels – an interest stimulated
by his concern over the deindustrialization occurring in Britain after 1975
(a concern that only increased after Thatcher came to power after 1979)14
and by the clear failures of much of UK industry to utilize available design
capabilities in comparison to how these relations were managed in, say,
Germany and Japan (not to mention, if differently, in Sweden, Switzerland
and the Netherlands).15
His move to the United States in 1989, first to work on the Triad project
on design success for the Design Management Institute in Boston,16 and
then to take up a position in the Institute of Design at Illinois Institute
of Technology in Chicago – where the question of the economic value of
design was then being given a new primacy – gave him opportunities to
begin a more serious engagement with design policy and issues in design
and business. As his teaching and writing in these areas developed (often
relatively informally, for example, through the series of columns he wrote
in the early 1990s on design and business for the now-defunct design
magazine I.D. – International Design),17 he felt the necessity to engage
with economic thought and the relation of design and economics more
directly.
Part of this impulse was pedagogic: the felt need to persuade designers
who themselves wished to engage seriously with business18 to think also
in economic terms – to teach them a degree, at least, of economic literacy
and to make them acquainted with some basic concepts in economic
thought. But Heskett did not think of this relationship abstractly; nor
did he see economics in quantitative terms. Rather, he saw the history of
economic thought as a lexicon of concepts,19 which could help inform
the understanding and therefore the articulation of how design creates
value.20
The seminar emerged, then, out of Heskett’s teaching, at a time when
he was also involved in consultation (not least with the Japanese design
consultancy, Hirano)21 and in contributing internationally to design policy
formation in places as diverse as Taiwan and Chile. At this point, Heskett
was developing extended working papers on design and economics (e.g. the
paper ‘Economic Theory and Design’, excerpts of which are now included
in Chapters 7 and 8) and beginning to develop (in Chicago) the seminar
‘Design and the Creation of Value’. By the time Heskett moved to Hong
Kong in 2004 (to teach in the School of Design at Hong Kong Polytechnic
University), the seminar had more or less acquired its final form. Towards
the end of this decade, just before he left Hong Kong, Heskett was beginning
to think seriously of publishing it as a small book.
Introduction 5
In both Chicago and in Hong Kong the seminar was delivered to

graduate students undertaking MDes, PhD or MA degrees in design. Since
in Hong Kong, especially, but also in Chicago, the students were working
professionals, there was no presumption of any prior exposure to economics
theory or thought.
In presenting economics in this way, Heskett was operating on something
of the basis enunciated by the Cambridge economist Ha-Joon Chang. In a
recent book, he argues that it is precisely because today economics is at once
more than ever central to our lives, and at the same time less a ‘science’ than
it pretends to be, that
it is entirely possible for people who are not professional economists to

have sound judgments on economic issues, based on some knowledge
of key economic theories and appreciation of the political and ethical
assumptions underlying various theories. Very often, the judgments by
ordinary citizens may be better than those by professional economists,
being more rooted in reality and less narrowly focused.
He adds:
Willingness to challenge professional economists and other experts is a

foundation stone of democracy. If all we have to do is to listen to the
experts, what is the point of having democracy? What this means is that,
as citizens in a democracy, all of us have the duty to learn at least some
economics and engage in economic debates. This is not as difficult as
it may seem. As I try to show in my new book, Economics: The User’s
Guide, most of economics can be understood by anyone with a secondary
education, if it is explained accessibly. The economy is too important
to be left to professional economists … as citizens; we should all learn
economics and challenge what the professionals tell us to believe.22
Heskett would have entirely agreed with this. He was impatient with the pleas
of designers that they should somehow be exempt from such understanding.
But precisely because of this pedagogical determination, his project had to
take on the task of explaining economics as accessibly as possible without
oversimplifying the fundamental propositions and models that were being
presented. Design and the Creation of Value is the (incomplete)23 result of
this exercise.
2 What, precisely, does the text offer?

The version of the seminar on which this book is based is dated from 2009.
Heskett lays out the substantive principle of the organization of the
seminar as follows:
In considering the economic role and value of design, two major aspects
need to be discussed. Firstly, it is necessary to come to terms with the
existing body of economic theory and practice and ask to what extent
can it shed light on essential roles design can play in the context of
business. Secondly, the way economic theory defines its field, and the
tools and methods it uses, have come to constitute tightly defined forms
of orthodoxy. Can design supplement or reinforce economic theory in
clarifying and amplifying aspects of business in ways that at present are
not commonly recognized? The question here is whether design theory
and practice has the potential to add to, extend or provide linkages to
economic theory. The organisation of this book is therefore broadly based
on these two perspectives: one examining design from the standpoint
of economic theory; the other examining economic theory and business
practice through the prism of design.24
The only caveat to Heskett’s explanation is that in fact, as the title of the
seminar suggests, there are actually three, and not two, areas of concern
here. There is design, for the book is, overall, essentially about how design
can be understood and misunderstood (it is first of all a contribution to the
understanding of design). There is economics – for the core of the book is
a historical presentation and critique of economic thought vis-à-vis design.
But there is also the third element, value. Value means here largely, but by
no means only, economic value (for ultimately it is the extension of value
creation beyond the economic narrowly thought that is Heskett’s concern).
But value is the crucial third term in the equation because it is the essential
mediator between economics and design. It is the introduction of ‘value’ as a
concept lying between design and economics (but belonging fully to neither)
that allows the dialogue to begin.
Design and the Creation of Value is, therefore, essentially the exploration
of the relations between these three moments. This exploration is in turn
undertaken through the three major sections of the text.
1. The preface and first chapter (‘Design in Economic Life?’ – not, note,
‘Design and economic life’) ask some initial questions about the differences
between conceiving of design as a ‘creative act’ and seeing it within a fuller
context of economic activity – a contrast that Heskett establishes by playing
off the differences between a decorator’s design for a toilet by the New York
designer Jonathan Adler and the designs for sanitary ware for the Turkish
company VitrA by the UK designer Ross Lovegrove. Although the example
sounds trivial, the important distinction that Heskett begins to make here
concerns the changed responsibilities of the designer once he or she wishes
to move from a merely executant or operational to a strategic role: ‘Neither
at the levels of management or of strategy, however, is it possible to yet say
that it is commonplace for design to be integrated into the management
Introduction 7
structures of companies, nor has there yet been an articulation of the role
of design at the levels of management and strategy that is convincing to the
majority of senior managers.’25
2. In ‘Part One: Economic Theory and Design’, Heskett then turns directly to
economics – to, in his words, ‘a consideration of major bodies of economic
theory, how they condition understanding of design and can explain its
contribution to creating value’.26 Six bodies of theory are considered under
this rubric27: Neoclassical economics; Austrian theory, Institutional theory,
New Growth Theory, the ideas of List and the ‘National System’ and
Socialist theory (Marx).28 The presentations of these theories and models –
aided by diagrams that usefully model the continuity and difference between
these bodies of thought – are clear and concise. The text we have in these
chapters is an attempt at artful balance of presenting models with maximum
clarity without oversimplifying the case. The logic of presentation, however,
is by no means simply chronological. Thus, for example, the ideas of
List and the National System discussed in Chapter 6 largely predate the
models discussed in the preceding chapters. The organizational principle
is, rather, to begin with what is today the absolutely dominant model of
economic activity: Neoclassical theory (Chapter 2). By then examining,
successively, the theories of the Austrian economists, Institutional Theory,
New Growth Theory and List and ‘The National System’, Heskett by degree
shows the limitations of the Neoclasscial model, first in terms of how these
alternate models understand value creation and then, increasingly, vis-à-
vis comprehending the role of design. The focus in each chapter is on how
these models explored in each deal with the relations of production, use and
the creation of value (and in the case of List and the National System, of
state policies that can enable and engender value creation). In this sequence
of five chapters, Heskett rather cleverly shows how the various models
discussed in each can be understood successively as making more complex
the question of value creation: a process that implicitly (if almost never
explicitly)29 gradually makes room for design and then (in the final models)
shows design’s necessary structural place in the creation of value. (See the
final diagram in the book, Figure 9.11 – page [178]).
At the end of Part One, Chapter 6, on List and the National System
and the application of List’s ideas, first in Germany in the late nineteenth
century and then in Asia, provides the transition from the exploration
of economic theory proper to the discussion of the interplay of design,
economics and value.
3. The three chapters in ‘Part Two: Design and the Creation of Value’ are
in many ways the ‘application’ of the insights drawn from Part One. The
final chapter (9) directly and substantively addresses value creation through
design, but in Chapters 7 and 8, Heskett critically explores the relation of
design and economics, looking first at design from the perspective (or in his
terms the ‘standpoint’) of economics (Chapter 7), and then, in an unusual

critical reversal, considering economics from the standpoint of design. Here
Heskett critiques the limits of economics in terms of its understanding of the
qualitative (as against the quantitative); of users (as against discounting the
role of the user) and of value (as a complex phenomena irreducible to price).30
As I will say at the end of this introduction, this double confrontation is of
methodological as well as substantive interest. What Heskett is modelling
here is not only a relation between economics and design (in terms of how
they may be dialectically thought) but also a necessary methodological
approach for the study of design as a whole. Finally, the seminar is completed
by a brief, theorized, exploration of design’s contribution to the creation of
value (Chapter 9).
3 What does the work achieve?

Aside from the important methodological observation that I just mentioned
and to which I will return at the end of this introduction, I think we can
point to a number of major contributions – I count at least seven – that the
text makes to understanding.
The first and most obvious is that it presents economic theory in a
way that makes it accessible to a non-specialist audience. A footnote
above noted that while the plethora of discussions concerning ‘design
and business’, ‘design management’, ‘innovation’ ‘creativity’, and ‘design
thinking’, all claim economic benefit stemming from design; economics itself
is distinctly absent from the discussion (save as the unthought and rarely
critically grasped background). Heskett emphatically brings economics
and economic models into these questions as foreground, and does so in a
way that allows designers and those who deploy design to begin to grasp
with more acuity what is actually afoot in this relation. From being an
unspoken, unmanageable and, therefore, unthought abstraction, economics
is made both tangible and critically graspable. It is, in a word, made real,
not mythic.31
Heskett’s second achievement follows from the first. It is based on the fact
that the mode of economics that Heskett brings into play is not simply the
‘given’ of neoclassical models of economy (repeated today ad nauseam in the
media, and which, especially in their political and professional deployment,
have acquired something of the patina of inexorable ‘common sense’) but
a much wider field of economic thought. By refusing the singularity of
neoclassical economics, and by bringing in a range of ideas on economic
life that remain, at least in part, unfamiliar to most non-economists (the
whole of Austrian theory, with perhaps the partial exceptions of Hayek and
Schumpeter; Institutional theory, with the likely exception of Veblen; the
‘New Growth’ theorists, almost all without exception little-known figures
outside of economics; and List and the ‘National System’, almost unknown
Introduction 9
outside of Germany and more recently Japan), Heskett offers the reader
not just a roll-call of names (though to make something of a convincing
narrative of these developments is itself an achievement) but an expanded
corpus or lexicon of economic concepts. The value of this expanded field
becomes evident in Chapters 7 and 8 where the direct relationship between
economic theory and design is demonstrated in a number of instances.
Overall, Heskett shows that, thought widely, the study of economics has
more resonance with the question of the contribution of design to value
creation than might be supposed.
Linked to the last point, the third major contribution of the text is to
show that the conceptual and intellectual ‘schism’ between economics and
design, though empirically real, is (from the side of the former at least) very
largely a product of the dominance of neoclassical models of the economy.
Heskett is clear on this:
The greatest problem in considering what economic theory explains

about design, specifically or by implication, is in the context of neo-
classicism, which in the Anglo-American world dominates both
academic and applied economic practice. … if markets and products
are as constant as depicted in Neo-classical theory this at best
reduces design to a trivial activity concerned with minor, superficial
differentiation of unchanging commodities, a role, indeed, that it
does frequently perform. At worst, it contradicts the whole validity of
design.32
Heskett is not alone in the view that neoclassical economics cannot cope
with or has a very limited view of production. For example, Ha-Joon Chang,
in the book referred to above, essentially agrees: ‘Production has been
seriously neglected in the mainstream of economics, which is dominated
by the neoclassical school.’33 It is unsurprising then that, in many ways, the
economics chapters of Design and the Creation of Value constitute, in effect,
an often searing (if quietly spoken) critique of the limits of neoclassical
theory and its presuppositions. This criticism is not confined to design.
By presenting a range of alternative theories and models, Heskett takes
the reader through the critique of neoclassical thinking as it applies to the
economy as a whole. The basis of the critique involves how economics grasps
(or fails to grasp) the dynamic character of the ‘real-world’34 economy. As
the reader gradually discovers, it is precisely this shift towards grasping the
dynamics of the (capitalist) economy that allows – in the end necessitates – a
structural place for design in value creation. As Heskett again puts it, here at
the beginning of Chapter 7:
Design … is about envisioning change, a condition not readily embraced

by Neo-classical models that are concerned with explaining what is, and
is not fundamentally concerned with what might be. As we saw below
however … as soon as the possibility of change is admitted into economic

models, the perspective shifts and it becomes much easier to relate design
to economic theories.
The fourth virtue of the text, and perhaps its major single intellectual virtue,
is that the critique of neoclassical economic models is not conducted merely
negatively. What Heskett shows – and this becomes apparent in the key
series of diagrams of economic models that illuminate the text – is that as
one contrasts neoclassical theory, first with Austrian theory (see Figure 3.1)
and then with the insights gained from Institutional theory and New Growth
theory (Figures 4.3, 4.4, 4.5, 4.7, 4.9), it is possible to see a successive
deepening of the understanding of value creation. Heskett shows that these
models do not only articulate different ‘schools’ of economic thought;
rather, they build upon each other in ways that allow for the development
of a more adequate model of how value is created, what he calls ‘value
creation theory’. The logic of the text is clear on this point. Beginning with
the dynamics and the agents of value creation (the work of the Austrian
economists stressing innovation and change) (Chapter 3) and then with the
work of Veblen, Coase, North and others on the significance of cultural
and institutional factors (Chapter 4: Institutional Theory), Heskett builds
a wider foundation for value creation, which then enables him to take up,
successively, more contemporary questions of the role of technology, ideas,
process and production innovation and ‘knowledge of users’ (Chapter 5:
New Growth theory) and, finally, issues of the deployment of policy and the
development of national economies (Chapter 6). By working systematically
through these factors, and by diagramming the shifting factors involved,
Heskett shows how a far more comprehensive model of value creation
can be developed, one that transcends the limitations of the standard
neoclassical models. This in turn finally allows, as was said already above,
for the structural placing of design within that model and allows us to see
design as itself a factor of production.
A fifth virtue follows from this sequence. If the latter by no means
develops the last word, or the only possible model, of value creation, the
heuristic sequence of models that Heskett deploys effectively charts not
only the fact of changes and developments in economic theory over the
last 150 years or so, but also the very possibility of change and evolution
in economic thinking. In other words, economics is revealed here, not as
it sometimes wishes to present itself (especially in the political sphere) as
a fixed science dealing with unalterable laws but as a flexible (or at least
quasi-flexible) system of thought seeking to adequately grasp the complexity
and the continuing question of value creation.
If Heskett offers both a serious critique of conventional (and dominant)
neoclassical economics vis-à-vis its understanding of economic life at the
level of production and use of things and services, and, at the same time
offers an appreciation of the struggle of other economists to model more
Introduction 11
accurately the dynamics of value creation, the sixth virtue of the text is
that in this process he also holds design accountable, that is, design does
escape critique. Arguing that if it wishes to be taken as seriously as it often
demands it should be (especially in relation to its contribution to business
success), then it must meet a fundamental criterion: ‘For design to function
as a strategic instrument … a credible case must be made for its capabilities
in organizations prepared to use it in such terms. Specifically, any designer
aspiring to a strategic role needs to understand and frame economic
arguments for the value of design that makes sense in a business context.’35
In the text, Chapter 7 essentially positions design from the standpoint of
economics. In effect, it presents the minimum demands that an economically
adequate conception of design must incorporate. It thus offers a serious,
and perhaps unsurpassable, challenge to how design should be thought. If
Heskett implies an economics can only be adequate if it can model design’s
contribution to value creation, he equally implies that design can only be
adequate if it can critically comprehend and articulate the economics of
value creation.36
Finally, a not inconsiderable, virtue of the text is that although it is about
design and economics and the creation of value, it never ultimately conflates
‘economic value’ with value or values per se. This becomes particularly
evident in Chapters 8 (see Section 3) and in the conclusion to Chapter 9
(and it is also explored in the paper ‘Value and Values’ added as an appendix
to this volume: Appendix 2). This is, as we know, not insignificant today,
both with respect to design – which is often adamant that it is not merely
concerned with economic value37 – and, even more importantly, in terms
of the economy as a whole. With some understatement, the economist
Duncan Foley concludes his book on economic theory by noting that if the
all-but-absolute domination of capital accumulation today requires us to
understand its logic and operations, that ‘understanding … does not require
us to surrender our moral judgment to the market, either as individuals or as
political actors’.38 Heskett would agree that interest in economics does not
and should not necessitate an abdication of ethical concerns; that economics
is, after all, always in the end political economy, which is also to say a moral
economy.39 As he notes at the end of his (unpublished) manuscript Crafts,
Commerce and Industry:
We have in the history of design an astonishingly rich inheritance. What is

even more amazing is that with every newborn child the latent potential
for similar achievement exists in this incredibly fertile human capability.
It is the greatest renewable resource we possess and to acknowledge its
creative potential could be the finest legacy we leave for our children and
grandchildren.
The more than sentimental force of this observation in relation to the question
of value (and values) is that design is the capability in practice of negotiating
the economic, material, social and psychological incommensurabilities

involved in meeting and dealing with human material needs. Design is
therefore, in this process, the creation or the addition not just of ‘value’ but
of complex, multiple ‘values’ that embody, express and enable capabilities.
4 What are the limitations of the text?

If the points above illustrate some of the text’s virtues, and show in
what ways the seminar demands engagement, what are its limitations,
its critical gaps and voids? What are the issues that it fails to deal with
adequately?
There are, again, I think, seven such limitations. But I should note
immediately that by ‘limitations’ I mean often less limits to the argument
as it is presented in the seminar, and rather delimitations in regard to the
context in which the work arose – delimitations that almost necessarily put
limits on that with which it deals (and with which future work in this field
must contend).
The first and most obvious limit is that Design and the Creation of Value
is a very brief text. It is in fact less a book than an extended essay.40 Its
brevity gives it force: the possibility of grasping, almost in one sitting, a
range of economic thought and a corpus of thinking concerning design and
value. But, precisely because it is an essay, the book cannot, by definition, be
comprehensive or systematic; still less can it engage with every issue opened
in the relation between design, economics and value. The book has therefore
to be read as, in effect, a text from where further work and research begins
rather than ends.41 The text is the opening of a field. It does not close down
debate. It should, rather, be read, as all essays should, as an encouragement to
think – and as an encouragement to understand how those who participate
in its arguments can begin to grasp the measurability of the economics and
economic thought and therefore bring these (critically) into thought and
practice, rather than merely evading what appears as the immeasurable.
This is the politics, in the strict sense, of the seminar.
The second limitation of the seminar is that of the contexts and moments
in which the work was made. While Heskett is obviously happy to, in effect,
take up Ha-Joon Chang’s position in terms of making economics accessible to
a moderately intelligent audience, the immediate contexts that he developed
the seminar in – the Institute of Design at IIT in Chicago in the 1990s,
graduate programmes in design at Hong Kong Polytechnic University in
the 2000s – were intellectually limited, and in two senses. Both institutions,
although they aspired to thinking design strategically, were in different
ways subject to acute short-term market pressures that tended to collapse
longer-term, wider thinking into operational ‘quick-fix’ solutions. Perhaps,
even more significantly, in neither institution was there any significant
Introduction 13
interest in critical and historical thought. Thus, the institutional discourses

within which the seminar emerged, while encouraging in one sense, were
limiting in another. In many ways in fact, the thrust and tone of Heskett’s
seminar go against the grain of the logic of the places from which it
emerged. It pushes at the intellectual limits, both of its immediate audience
and that of the culture within design pedagogy, which consistently lowers
expectations as to what designers and design students should be taught
and expected to know.42 In his teaching, Heskett pushed at these limits,
remaining convinced to the end that students had the potential to grasp this
material. But at the same time, the broader – or in this case the narrower –
institutional setting delimited the zones and depth of intellectual inquiry
that were possible.
Third, the context of the seminar’s emergence was delimiting in another
and even more fundamental sense in that even as the text itself, in some of
its aspects, pushes beyond the limits of the market as we receive it today,
the dominance of the market as is (and even of market society) becomes
the effective horizon of the work. It is this that perhaps explains the
disappointing section of the text on ‘Socialist theory’ (now Appendix 1).
Heskett spends a convincing paragraph in the preface explaining why
‘Socialist theory’ should be dealt with, but the actual presentation offers
little interest.43 No reference is made, for example, to the commodity nor
to the wider discussion of exchange value/use value (and design) that has
extended into contemporary thought within and without economics.44
The weakness of the section on Marx has its counterpart in the almost
complete absence of a direct discussion, in the seminar, of capitalism,
especially in its most recent forms. If neoclassical theory is discussed and
critiqued, neoliberalism is not.45 More particularly, the rendering of Marx
as an isolated historical figure in economics misses the extent to which the
greatest contribution of Marxist economic thought is in terms of the history
of capitalism. If neoclassical economics often does its best to deny history,
Marxist economic thought is at its best thinking historically, whether that is
in works of the history of the industrial epoch (e.g. the magisterial volumes
of Eric Hobsbawm covering the period 1789–1991)46 or in Marxist thinkers
looking at the development of capitalism, particularly as it evolves towards
Neoliberalism (e.g. Robert Brenner’s The Economics of Global Turbulence
on the crises of the 1990s)47 or those seeking to tease out the contradictions
and tensions within the capitalist economy (see, for example, the prolific
work of David Harvey)48 or the careful empirical work of Thomas Piketty,
who though not a Marxist as such belongs to the range of critical economists
whose strength comes from looking at the wider historical development
of capital.49
Fourth, the underlying tension in Design and the Creation of Value
around the question of what the economy is, is also, however, a more general
one so often found in economics and in discussions of value. Is economics
the study of the economy (as economists like to insist, the study of the
only possible form the economy can successfully take?) or is economics as
a field really only engaged in modelling (and justifying) the fact that this
is a capitalist economy? The question is difficult, and particularly from an
operational point of view.50 It has urgency in view of the continuing cycle
of economic crises and in view of the need to rethink what the ‘economy’
is, and how it should be conceived in the light of the necessity to create a
sustainable global post-carbon economy, an economy that, while it will, by
necessity, use markets, cannot, structurally, also be capitalist,51 at least in the
essentially mercantile (and massively exploitative) forms that we are now
experiencing.
Fifth, the work is delimited in another sense that will strike anyone
coming to it for the first time. Of necessity, it betrays in its emphases
the historical moments of its conception and orientation. The book is
essentially rooted in a view of the economic value of design as that which
can in part ‘save’ industry from itself. The brief biographical details I
offered above will make immediate sense of this. Heskett came to maturity
as a design historian in the mid-1970s, a period when the ‘oil-price shock’
of 1973–4 was the catalyst to turning the underlying crisis of profitability
in the manufacturing industry in the United Kingdom and the United
States of America into deindustrialization and the global exporting of
manufacturing.52 Across the next twenty years, first in Sheffield and later in
Chicago/the mid-West, Heskett watched first-hand as these developments
unfolded around him, while in parallel (as I noted above) he watched
Germany and Japan in particular pursue considerably more intelligent
policies,53 at both government and firm levels, vis-à-vis the application
of design capabilities to industry.54 Heskett’s stance on the economics
of design (and this applied also to Heskett’s work in Hong Kong,55 and,
indeed, to the consultancies he undertook on almost a global basis) was
thus grounded, in effect, on the same principle as the one that motivated
one of Heskett’s economic heroes, Frederick List (see Chapter 6), that is,
that of seeking to make industry work better. The problem, of course, and
this is noted in the last limitation discussed below, is that in many ways
we are in a ‘post-industrial’ economy, that is, one where there is still much,
globally, industrial production (China) but where the industrial is no
longer formative for the economy. In the most direct sense, consumption
‘replaces’ production and finance, and more particularly rent-seeking
through financial flows and debt, trumps both. What, then, is design and
the creation of value in such an economy?
This last point gains a little more force when we reflect that, almost by
necessity, Heskett is formulating the arguments he deploys in Design and the
Creation of Value just at the point before it becomes definitively evident that
the older disciplinary limits and boundaries of design are definitely breaking
down in the interests of a much wider, and therefore also much looser,
deployment of ‘design’. Bruno Latour captures this development when he
Introduction 15
remarks in some comments how in the last decades design has expanded in
both range (‘ever larger assemblages of production’)56 and depth (‘everyone
with an iPhone knows that it would be absurd to distinguish what has
been designed from what has been planned, calculated, arrayed, arranged,
packed, packaged, defined, projected, tinkered, written down in code,
disposed of and so on. From now on, “to design” could mean equally any or
all of those verbs’).57 One result is to make the act of design in general far
more complex and less differentiated than has been previously understood.
Heskett recognizes this – see his reference in the preface to the famous
quotation from Herbert Simon that talks about design as ‘the core of all
professional training’58 – but in relation to the economics of value creation
this no longer quite equates to the product-user model that still dominates.
This is in part because of the new centrality of the economics of innovation
and of the ‘Hollywood’ model of product cost (where almost the entire cost
of production lies in the ‘software’ creation of the product).59 Indeed, we
could say that a crucial addition that is needed in terms of the economics
of design is a reconsideration of the (sometimes astonishing) economics of
design-led innovation.60
Finally, the fact that the book was essentially complete in its focus
by 2004 and was conceived at least a decade earlier, and on the basis of
concerns that in origin date from twenty years before that, explains at
least in part, the lack of overt or detailed reference to both the emerging
digital economy and the idea of what we would now call the post-carbon
economy. The import of this should not be exaggerated, in that attention to
the former in particular, in the somewhat superficial ways that this usually
occurs in design, is often diversionary of what is actually occurring vis-à-
vis the economy. On one side, then, there are the forms of a ‘new economy’
emerging. This is the case made, for example, by the British economic
journalist Paul Mason in his recent book, Post-Industrial Capitalism: A
Guide to a Future,61 which explores the digital and ‘knowledge’ economies
and posits the possibility of the emergence within current capitalism of
new forms of knowledge-based value creation and modes of organization
that will transform capitalism from within. On the other side, even more
fundamentally, we find ourselves having to confront not just a different
form of capitalism than that which was the bread-and-butter as it were of
Heskett’s life (essentially the twentieth-century industrial economy) but a
different historical epoch (that of the artificial in which the horizon, medium
and prime condition and limitation of the world is no longer nature but
the artificial – or as it is often labelled at the moment, the anthropocene).
In this world or this epoch, the urgent economic task is the project of a
post-carbon economy (which is today the most accurate way of thinking
‘sustainment’). Seen from this perspective, an entirely new kind of economy
is required.
But we need to be careful here not to be too dismissive of what is (and
hence of Heskett’s text). First, the fact that the condition, horizon and
limit of our world is now the artificial and not nature62 not only demands
an economics adequate to it63 but also a recalculation, which means a
rethinking, of value – which is, of course, precisely the underlying thesis
of Heskett’s argument (even though it is not couched in, or addressed to,
these new conditions).64 Second, there is a temptation that many have
been led into in discussing the digital- and post-carbon economies (let
alone capitalism today as a whole) to dismiss the industrial and with it
manufacturing in general (the dismissal is also, needless to say, axiomatic
within design, especially among students). But there is an acute difference
between the end of the industrial epoch, a period when the industrial
was the formative condition of the world and its economy (an epoch that
began between 1775 and 1825 and ended in the years after 1975) and the
‘end’ of industry and manufacturing. The former has ended (industry is no
longer formative in the economy or in society as a whole) the latter has not.
Production continues.
It is interesting that the economist Ha-Joon Chang, whom I quoted
earlier as effectively supporting Heskett in the latter’s view that production
was undertheorized in economics (see note 33), continues his argument in
the same section by mounting a robust defence for continuing concern for
manufacturing. Since it bears directly on the orientation of Design and the
Creation of Value, it is worth quoting in full:
Unfortunately, with the rise of the discourse of post-industrial society in

the realm of ideas and the increasing dominance of the financial sector in
the real world, indifference to manufacturing has positively turned into
contempt. Manufacturing, it is often argued, is, in the new ‘knowledge
economy’, a low-grade activity that only low-wage developing countries
do. But factories are where the modern world has been made, so to
speak, and will keep being remade. Moreover, even in our supposed post-
industrial world, services, the supposed new economic engine, cannot
thrive without a vibrant manufacturing sector. The fact that Switzerland
and Singapore, which many people consider to be the ultimate examples
of successful service-led prosperity, are actually two of the three most
industrialized countries in the world (together with Japan) is a testimony
to this.65
Contrary to conventional wisdom, development of productive
capabilities, especially in the manufacturing sector, is crucial if we are
to deal with the greatest challenge of our time – climate change. In
addition to changing their consumption patterns, the rich countries
need to further develop their productive capabilities in the area of green
technologies. Even just to cope with the adverse consequences of climate
change, developing countries need to further develop technological and
organizational capabilities, many of which can only be acquired through
industrialization.66
Introduction 17
In Ha-Joon Chang’s view therefore – and this would obviously echo

Heskett’s underlying argument – the attention to questions of production
and use is not outdated. In an increasingly artificial world, it is difficult to
see how they could be, no matter how much the condition of the screen
might dominate immediate consciousness.
5 The intellectual force of Heskett’s text

To close this introduction, I would like to bring the discussion back to what
I think might ultimately be the most important aspect of this short book.
As noted above, and as delineated in the notes by Sabine Junginger and
Cameron Weber in this volume, Heskett’s work has considerable substantive
implications for further research and thought in design management and
economics.67 But if we turn back to the text and Heskett’s own ambitions
for the work, then, as noted at the beginning of this introduction, the
deepest problem that Heskett set out to solve was not the substantive
problem of value per se but the intellectual difficulty that underlies, and
which creates, the all-but-impossibility of solving the substantive problem,
that is, the ‘deep schism of mutual incomprehension’ that separates design
and economics.68
Heskett’s point was that unless and until this schism is in some way
crossed or unless (as I put it above) design and economics are made to
belong to each other, or better, and in the other sense of this metaphor,
to listen to each other, then adequately solving the puzzle and problem of
value – and ultimately the project of creating either an adequate design or
an adequate economics – remains at best difficult and perhaps impossible.
The uniqueness and the force of the book (and its methodological interest,
meaning the lessons it embodies for scholarship) lie in how Heskett achieves
this end. Three points are significant:
1. The first methodological premise that Heskett works to is that economics

is that which design cannot avoid – except at the cost of neutering or
removing from thought one of its prime conditions of existence. The
relation, however, is active, not passive, and is so both substantively (as
we’ve just seen) and intellectually. The crucial relation is as follows: Just as
economics ‘passes judgement’ on design, that is, reveals certain aspects of
design not otherwise sufficiently grasped, so too design ‘passes judgement’
on economics, reveals moments of inadequacy and offers perspectives,
particularly around questions of value, growth, innovation, desire, use
and cost, that are by no means trivial. Thus, if economics confronts design
with some truths that designers like to evade, design demonstrates truths
concerning the creation of value that much, if not most, standard economic
theory finds difficult to incorporate into its models. The relation therefore
(between design and economics) is internal not external. Hence it is not

design and economics that we need to think but, as the title of Chapter 1 has
it, ‘Design in Economic Life’, that is, we need to think the implication of the
one in the other. Substantively, this means a double necessity: first, to look
at design through the lens of economic theory in its historical development,
and also, second, to ‘put the flea to the elephant’ and to insist that design’s
quantum of truth concerning things and value (no matter how ‘fragmented
and often ill-defined’ the field may be) can nonetheless usefully augment
economic theory. This is precisely what Heskett begins to do in Chapters 7
and 8.69
2. But although the confrontation between design and economics is
apparently conducted directly in these chapters, across the book as a whole,
as was made clear in the first pages of this introduction, there are actually
three, not two, subject matters in play. ‘Value’ is not simply that which is the
object of the book; rather, lying between ‘design’ and ‘economics’, it performs
a mediating role, at once connecting and relativizing the absolute claims of
both.70 One can understand the role of this ‘third subject’ by drawing on
an insight from Roland Barthes. In talking about how the concept of ‘text’
worked in relation to the rethinking by himself and others of the category
of the ‘literary work’ (and its related disciplines: linguistics, anthropology,
psychoanalysis), he notes:
What is new and which affects the idea of the work comes not necessarily
from the internal recasting of each of these disciplines, but rather from
their encounter in relation to an object which traditionally is the province
of none of them. It is indeed as though the interdisciplinarity which is
today held up as a prime value in research cannot be accomplished
by the simple confrontation of specialist branches of knowledge.
Interdisciplinarity begins effectively when the solidarity of the old
disciplines breaks down … in the interests of a new object and a new
language neither of which has a place in the field of the sciences that
were to be brought peacefully together, this unease in classification
being precisely the point from which it is possible to diagnose a certain
mutation.’71 (My emphasis)
With all due allowance to the differences in context, and for all the
incongruity of Barthes appearing in this context, the point he makes is
apparent. As has been already noted, it is the introduction of a third term,
value, the ‘new object and a new language’ that belongs wholly to neither
field – which allows for a genuine exploration to begin. In particular, in
Heskett’s case, it is the question that the third term introduces into the
relation between design and economics that makes it possible for him to
triangulate the relation between design and economics, to play both off in
terms of how they grasp – or fail to grasp – an object common to each. In
Introduction 19
other words, what appears at first sight as external and incommensurate

(design ‘vs.’ economics) is discovered, through value, to possess an internal
relation (design  economics). This is precisely why it is the direct and
indirect pursuit of the modelling of value creation in economics that is the
organizing principle of Heskett’s presentations of economic thought. What
Heskett is touching on in his explorations of value creation is precisely the
mutation in the conditions of production, use and value creation that is now
occurring, mutations that force, if in subtle ways, a transformation in how
we think of both economics and design.72
3. But what applies to economics applies also to the wider fields and
disciplines with which design reciprocally engages. Design’s necessary
dialectical implication in other disciplines and fields (both within the
university and within practice) demands that to think design adequately,
we need to go beyond the hopelessly unproductive relations of the ‘and’
in design-and-X relations. Where the conjunction actually marks not the
connection but the separation and a priori distinction between fields (and
further implies that while they might merrily dance around each other, both
will maintain their existing identity and form), the project that Heskett
effectively argues for in Chapters 7 and 8 is wider and more courageous. It
is the courage to let one discipline ‘invade’ and think (listen to) the other.
The metaphor that is used here comes from Heidegger, from towards the
end of one of his most profound essays – and one with significant purchase
for design. In ‘Building Dwelling Thinking’, Heidegger is trying to think
what he calls the ‘crisis’ of dwelling.73 In relating the latter to the disconnect
he sees in the present between how we think the condition of ‘dwelling’ in
the world and the act of building (now reduced largely to a technological
feat) and thinking, he offers an insight that has never yet been sufficiently
taken up in thought:
Perhaps this attempt to think about dwelling and building will bring
out somewhat more clearly that building belongs to dwelling and how it
receives its nature from dwelling. … Building and dwelling are, each in
its own way, inescapably for dwelling. The two are however insufficient
for dwelling so long as each busies itself in separation instead of listening
to one another. They are able to listen if both – building and thinking –
belong to dwelling.74 (My emphasis)
The thrust of Heidegger’s argument is clear if, nonetheless, difficult to think.75

Disciplines, or fields, in our time do not generally ‘belong’ to one another
in the ways in which Heidegger is intimating they might. Yet perhaps our
‘learning to dwell’ (the real theme of Heidegger’s essay) requires that we
begin to be capable of such listening and such belonging. Transposed to
the issues Heskett is exploring (but in the same moment referring back to
the wider question of how we make those modes and acting that bear on a
condition), this would imply that as economic, though not only economic,
beings (and as economic, though not only economic, designers), it requires
developing our capability to ‘listen’ to economics while at the same time
thinking this ‘belonging’ beyond the current limits of economics and beyond
the current limits of design. Heskett’s incipient success in Design and the
Creation of Value is to point us in this direction. It remains for others to take
up the challenge he has issued.
A note on John Heskett’s
economics
Cameron Weber
Asked to review the chapters on economics as found in the draft manuscript

of this book in the fall of 2015, I knew intuitively after reading the first
one or two that, as an economist, I would enjoy what John Heskett had
to say. Like Heskett, I am interested in a critique of the development of
mainstream economics. In both our views, orthodox (neoclassical) economic
thought cannot satisfactorily explain the phenomenal economic growth of
the nineteenth and twentieth centuries.1 (And I would add, as discussed
below, nor can most orthodox economics explain the relative economic
stagnation since the financial crisis; there is, moreover, the problem that
macro-economic scientism tends to reduce explaining human economic
interaction to behaviour in response to fluctuations in central bank interest
rates).2 Thus, I knew Heskett was on to something with his concisely
critical and methodological approach to economic history, starting with
neoclassical economics and building outward towards a synthesis (and
critique) of economic thought as developed over time (List and the National
School; Schumpeter, Hayek and the Austrian school; Veblen and the
Institutionalists3), through to today’s proponents of New Growth theory.
What follows in the notes below is my commentary directed towards
four specific categories and sets of ideas I found especially compelling in the
Heskett ms. and which I hope may show the relevance of Heskett’s thinking
not to design in value creation and concepts of value in society generally but
to some key issues in business and economics.
1 On neoclassical economics

In standard fashion, Heskett shows, in Chapter 2, neoclassical supply and
demand graphs, but criticizes the fact that neoclassical economics cannot
explain how the suppliers and demanders enter the market in the first place.
Mainstream economics assumes given and known and unchanging consumer

preferences and also presumes that all products in a given market are the
same and that all producers have the same production costs, technologies
and knowledge (in other words, there are no ‘transactions costs’. (It is this
assumption that is addressed by New Institutional Economics [NIE] as
explored by Heskett in Chapter 4.) In neoclassical economics, firms price
according to the cost of production (as opposed to more realistically pricing
at what the market will bear) and the costs of production have decreasing
returns to scale above a certain quantity of production.4 The neoclassical
model, therefore, can explain neither new and qualitatively better products
under market competition nor economic growth over the long term. It is
these weaknesses that Heskett addresses in the subsequent chapters.5
This brings up one of the major dualities in economic theory as developed
in the twentieth century through to today, that of the use of mathematics in
positivist economics. Along with the development of statistics in the 1930s
came mathematical models to use these statistics as a basis for improving
the economy. It is the use of these statistical aggregates in mathematical
economics that has become mainstream economics today, as witnessed by
both neoclassical economics and, later (as Heskett also notes, in Chapter 5),
in New Growth theory.6 Heskett points out in this chapter that Edward
Chamberlin’s The Theory of Monopolistic Competition [1933] introduces
differentiated products and addresses weaknesses in ‘perfect competition’,
but Chamberlin’s ideas did not catch on with quantitatively oriented
mainstream economists.
Product differentiation means that quantities of inputs and outputs cannot
be aggregated and integrated into mathematical models (as can Keynesian
models and New Growth Theory models). With this math-based approach
comes the power and prestige of the guild, where the economist is a mechanic
whose toolkit can fine-tune to economy and, therefore (at least in theory),
improve people’s lives.7 But the price paid for this, as Heskett shows by referring
to ‘creative destruction’ and design as expanding markets through the creation
of value, is the inability of this mainstream approach to truly engage with the
dynamics of economic change. As Heskett discusses at length in Chapters 7
and 8, it is this unmeasurable quality of design’s value creation that provides
institutional stumbling blocks towards integrating design as strategy in the
modern – financially engineered – firm. We see this same ‘measurability
problem’ in modern economics. Heskett bridges and synthesizes these gaps by
orienting products towards the user and not on internal firm metrics of return.
2 On growth theory

John Heskett was writing about New Growth theory in the late 1990s and
the early 2000s, the most recent citation for this chapter is 2003, and it is now
early 2016. It might be thought that Heskett therefore missed some recent
developments, but I would like to present a view of growth theory as an
A note on John Heskett’s economics 23
intellectual enterprise that illustrates how John Heskett’s use of the category
‘Growth Theory Plus’ is not overcome by events, and might indeed be helpful
towards capturing an accurate picture of the field of growth theory today.
New Growth theory came into its own as a field in part as a reaction
to Robert Solow’s 1957 paper in the Review of Economics and Statistics.8
Solow examined economic growth in the United States from 1909 to 1949 by
using a model whose inputs are quantities of capital stock, labour hours and
‘technical change’, where technical change is defined as ‘any kind of shift’ to
productivity that is not explained by capital and labour inputs. Solow found
that labour productivity in the US economy doubled over the period, but that
only 12½ per cent of this productivity improvement was due to increased
capital investment. The remaining 87½ per cent of productivity growth
came from (ill-defined in economics) ‘technical change’. The paper starkly
illustrated how static neoclassical models missed the increasing returns to
scale needed to explain exponential historical levels of economic growth.
The unexplained increase in labour productivity (and the unexplained
increase, by orthodox economics, of historical economic growth) has become
known as ‘Solow’s residual’ – or, which Heskett refers to in the text, as ‘the
measure of economists’ ignorance’. It is this ‘residual’ that economic growth
theorists have been trying to explain by proxying for ‘technical change’
(increasing returns to scale) in their models, and as Heskett effectively notes,
this methodological trend continues through to today.
Solow’s model (his aggregated production function) uses technical change
as an exogenous (i.e. external) variable, where technical change is measured
(defined) by what is not explained by the endogenous variables capital and
labour. New Growth Theory now treats ‘technical change’ as an endogenous
(i.e. internal) variable – something that (as Heskett’s diagrams make clear)
interacts with labour and capital to create economic value. (A factor that
is now internalized in the mathematical economist’s model, not something
unexplained by it). The endogenous growth theory research programme is
a subset of, or an outgrowth from or an advance, in New Growth Theory.
Explaining technical change is what Paul Romer calls the ‘economics
of ideas’. Romer highlights the importance of human capital formation
for economic growth.9 A key step in the development of growth theory is
Kenneth Arrow’s concept of ‘learning by doing’.10 Heskett does not directly
discuss Arrow’s seminal work, but his stance on Romer’s theses on the
importance of human capital, skills and knowledge is that these forms of
human capital have to be made manifest as transferable knowledge in order
to create value. The Austrian school of economics believes that it is the
entrepreneur who creates economic value through risk taking and profit
creation (value creation absent political rents). John Heskett also sees a role
for the designer in this endogenous value creation and insists that design
be incorporated in the very highest level of a firm’s strategic management.
(In an unpublished paper on strategic design and design as value creation,
Heskett uses the case of Donald Deskey [1894–1989] as a prototype of the
industrial designer-entrepreneur, who engages within and between design
communities, business communities and the public sphere for advocating

the ability of design as practice to create value[s] in society.)
In the final chapter of Design and the Creation of Value, Heskett introduces
his category of ‘Design Value Theory’. This category summates/synthesizes his
interdisciplinary ideas about the role of the designer in a firm’s long-term
strategic management and how the designer’s role in value creation relates
to economic theory as captured in ‘Growth Theory Plus’. (Here Heskett may
concede too much interpretative and predictive robustness to mathematical
growth theory as the ending synthesis of economic thought, though we cannot
fault Heskett for trying to engage the mainstream of the economics profession
in this text, the purpose being to incorporate the designer within a business
world whose MBAs are required to study orthodox economic thought.)
In the synthesis of economics leading to growth theory plus in Heskett’s
text and diagrams (see #17 and especially #28), we find most importantly
(at the least for the present writer) the following:
a the market orientation of neoclassical economics,

b the end-user-oriented product innovations and imperfect competition
of Austrian economics,
c the transactions costs approach of NIE within the firm, especially
the tacit knowledge within a firm’s strategy, production and
management processes,
d the socially created demand found in old (or original) institutional
economics and
e the acknowledgement of (perhaps unmeasurable) factors of
production (imbedded knowledge, technology and institutions
within society) that can lead to increasing returns to scale and as
explored by growth theory.
What Heskett then does, and this is his real innovation, is that he embeds
a continuous firm and consumer feedback loop derived from design-driven
firm strategy into his growth theory plus model, giving us ‘Design Value
Theory’ with economic theory as a base.11 Heskett shows in this text that a
firm’s profits derive from creating exchange value, but that the purpose of
design is also to create use value, through originality and creativity and in
continuous feedback with the users of a firm’s products and services, between
a firm’s designs and its network of users. But it is precisely this creation of use
value for the user (by tapping into user knowledge and lifestyle) that creates
the possibility for exchange value, expanding markets and economic growth.
3 On Veblen, and the financial

crisis of 2007–8
Thorstein Veblen (1857–1929) was one of the founders of American
institutional economics and is best known for his concept of ‘conspicuous
consumption’ developed in the Theory of the Leisure Class (1899), a beloved

and eccentric work of economic sociology. Veblen is therefore credited
with introducing consumption preferences that can be socially determined
(as opposed to being exogenously formed – that is, unaccounted for – in
neoclassical theories of demand). In Veblen, instead of Marx and Engels,
where the working class overthrows the rich in revolution, we have the
not-rich wanting to be seen as living like the rich through visible lifestyle
consumption choices.
Design and the Creation of Value introduces Veblen’s ideas into discussions
on demand creation (based on social structure in the field of institutional
economics) and in relation to design as a force for value creation rather than
waste.
For our purposes here, we can use Heskett’s writings about Veblen, both
in the present text and in some lectures Heskett gave in Helsinki around
2005 to help explain the financial crisis of 2007–8.
Heskett focuses on two of Veblen’s memes: (1) the ‘instinct of workmanship’
and (2) the ‘pecuniary habit’. Instincts are normatively positive for the
continuation and evolution of the species whereas habits are normatively
negative and counterproductive. Veblen sees conspicuous consumption as
frivolous and wasteful and therefore, of course, counterproductive towards
industrial development. By contrast, workmanship is normatively positive
because craft (practice) leads to refined industrial output.
The financial crisis of 2007–8 was due to ‘financialization’ of the
economy, which is related to Veblen’s pecuniary habit, in this case by policy
(here acting as an institution, which then becomes/forms a social norm) that
encourages debt over ownership. The pecuniary habit (financial returns in
the market) is normatively negative as this behaviour does not lead to real
economic productivity – and today mostly only generates fees for financial
counterparties creating more debt.
Heskett further describes the difference between Veblen’s concepts of
‘instinct’ and ‘tropismatic action’. Tropismatic action is an unthinking
response to stimuli (in our case, policy incentives) whereas action based on
instinct is derived through reason.
This distinction can also help explain the 2007–8 financial crisis. After
the dot.com crash of 2001, the US central bank (Federal Reserve) had
been encouraging low rates of interest for several years. Also, beginning
in 2000, the US Federal Housing Authority and the Federal Reserve were
encouraging half the mortgage loans in the United States to be 0 per cent
down-payment mortgages, and especially in districts that were deemed
underdeveloped (see the Community Reinvestment Act and, relatedly,
‘red-lining’).12 This incentivized unthinking investment in (unaffordable)
housing was combined with and influenced by negative incentives for
accurate bond-ratings due to regulatory capture (bonds were overrated so
that more bonds were purchased than if they had been accurately rated).
Fannie Mae and Freddie Mac (the US government-backed mortgage
agencies) were guaranteeing (poorly rated) mortgage-backed bonds (MBBs)
at 100 per cent – and international banking standards (the Basel standards
I, II and III) encouraged banks to hold these MBBs as reserves against which
further lending could be made.
All of this combined by the time of the crash of 2007–8 so that there were
inflated housing prices (cheaper money means more long-term investment,
for example, mortgages and MBBs than if there had not been central bank
interest rate manipulation) and the MBBs were more than double the value
of the actual underlying mortgages (not least because MBBs are a worldwide
phenomenon due to the Basel banking standards and the dominance of the
US$, and US Treasury debt, in the world economy).
What we saw in 2007–8 was that incentives for debt creation (including
the ability to write off debt interest payments pre-tax on the US income
tax code) help to create Veblen’s pecuniary habit to the detriment of
workmanship (design is workmanship). We see these pecuniary habits
take form as the central bank(s) keep near-zero rates of interest (for the
US Fed from 2007 until late 2015) for unprecedented lengths of time. This
‘easy money’ is evident in the valuation of social media firms at billions of
dollars in IPO capitalizations, many without actually making a profit. We
also see this with the huge volume of mergers and acquisitions occurring
concurrently with easy money and tax code incentives for debt creation.
It is not a failure to innovate that creates the financial crisis; there are
lots of incentives to innovate in financial derivatives (the pecuniary), but
as Heskett describes in the text (albeit as applied to design), there are less
incentives to innovate in workmanship (real goods and services adding
new value). The financialization of the economy (and the subsequent crises
caused in part by central bank interest rate manipulations) is due to policy
that encourages the pecuniary habit over the instinct of workmanship.
This policy-based social structure represents ill-shaped social values
towards financialization and away from craft and quality.13 In Heskett’s
‘Design Value Creation’ synthesis, he highlights that what institutional
economics brings to the economic theory synthesis is transactional
innovations and efficiencies; from here we find his critique that within
firms, transactional relations can be pecuniary rather than user and quality-
oriented – thus his appeal to business schools and business executives to
change institutional habits towards value creation over the long-term rather
than short-term (financial-only) profits.
4 On the bankruptcy of General Motors (GM),

and its bailout during the great recession
John Heskett had taken an interest in the US automobile industry from
the 1960s onward, as an example of the failure of industry to consistently
adapt corporate strategies towards user-oriented design (as do, for example,
Japanese motor companies), instead reiterating an ‘arrogant’ producer-

oriented strategy in the United States.14 Specifically, we find that GM
provides a good case study for illustrating the thesis in Design and the
Creation of Value, arguing for the necessity of design in high-level strategy
and not just as a shallow afterthought towards product differentiation, a
dichotomy of thought Heskett labels ‘design’ versus ‘styling’.
In our discussion above on Veblen, we find that whereas workmanship
can create new value, the pecuniary instinct prioritizes financialization
and paper profits for a self-interested management class over the creation
of value for both the firm and the consumer design. Over time, as Veblen
pointed out, this management class loses touch with the need to serve the
wishes and needs of the end user (and, as we shall see, can then resort to
rent-seeking to minimize the negative effects arising from this self-imposed
lack of competiveness).15
Heskett describes how US business models may orient towards
management-by-metrics and financial engineering (whereas design value-
added regrettably is not easily quantifiable and can be relegated to the
marketing department alone), which furthers the pecuniary over a user-
oriented design strategy (Heskett also attributes US industry arrogance to
the dominant position in world markets obtained as a result of the Second
World War). In our case, this means that US car firms lose market share
to foreign competition, and therefore seek rents in the form of tariff and
non-tariff trade barriers against more innovative and efficient foreign
manufacturers. Under the guise of economic nationalism, this prioritizes
domestic producers (some people) over domestic consumers. This is the
reverse of the usual pattern in international trade treaties, whether WTO,
bilateral or regional-multilateral.16
One factor at work here, however, is the force of time and place in
influencing the deployment of assets. In Heskett’s chapter on Institutional
Theory, we learn of Oliver E. Williamson’s ‘transaction cost economics’,
though without an exploration of Williamson’s ‘asset specificity’. Like
Ronald Coase, Williamson critiques, and improves upon, the neoclassical
model of perfect competition. Asset specificity allows factors of production
to be relative to a time and place and therefore not perfectly substitutable in
an aggregated production function (as is assumed under most neoclassical
and growth theory models).17 This asset specificity of local context can
explain why the US government used discretionary power to nationalize
and restructure General Motors in 2009 as opposed to letting the markets
and courts regulate GM’s bankruptcy.
In the US automobile industry, and especially in the case of GM, asset
specificity includes interventions by the United Auto Workers, industry
lobbyists and members of congress who support trade protection (automobile
labour and industry groups are major donors to political campaigns
and therefore get state-supported monopoly rents in return18). The GM
nationalization is an ideal-type example of corporatist asset specificity,
something we find as the necessary end result of GM’s uncompetitive

producer-oriented practices – as compared to that of a consumer-oriented
corporate design strategy that can maintain firm competitiveness in the long
run.19
The GM case study is also a fitting synthesis for many of the ideas
contained in this book and as found in Heskett’s writings elsewhere.20 The
wealth of nations in the modern economy depends on a nation’s ability to
focus on user design-oriented business development; this requires long-term
commitments in education and research in order to integrate design in all
levels of society. Firms, and especially smaller firms that represent the future,
need to be able adapt to changing conditions in order to further brand
durability and loyalty over the long term (to allow creative destruction
rather than economic destruction). However, this does not necessarily mean
that governments should pick ‘winners’.
How then can national governments handle the dramatic changes

on multiple levels and technologies, of global markets, and business
organization and that are currently causing major economic disruption
and unemployment? The answer, I believe, is they cannot: government
policy exercised through bureaucratic organizations is ill-equipped to
understand and dynamically respond to change on any level. The world
economy is at present so diverse and dynamic that attempts to control it
through mercantilist-style policies will not only be futile but extremely
damaging.21
Conclusions
In conclusion I would like to make four points:
1 First, in terms of reading Heskett, I found his story of the development

of economic thought refreshing and the synthesis convincing. These
ideas are well illustrated by the ‘flow charts’ in the chapters on each
school of economic thought, and especially so in the concluding
chapter’s synthesis of economics, design and the firm. It is transparent
from the text that Heskett is a careful and caring educator of designers
and is rightfully considered a pioneer in relating how design can create
value in our lives.22
2 Heskett’s book is a good example of interdisciplinary knowledge.
He synthesizes very well three major fields: the history of economic
theory, design as practice and firm strategic management.
3 As someone from economics coming newly to design, I was inspired by
Heskett’s view of the designer as change agent, something in tune with
today’s visually oriented, and instant and ‘sharing’, new economy. The
designer can be a modern industrialist-entrepreneur like Steve Jobs or
Bill Gates. The designer can be a founder of the many social media
and sharing economy firms that have emerged over the last number
of years (concurrent with the equity bubble abetted by the central
banks’ unprecedented use of monetary easing since the financial crisis
of 2007–8). The designer can be within a firm as an employee or
executive, or an outside consultant engaged under contract to provide
strategic leadership that may be lacking due to organizational stasis.
The point is that the designer might be seen as a form of the Austrian
school entrepreneur (and with this book, Heskett contributes to the
economic theory of the firm by assigning designers within a firm an
important part in turning tacit knowledge into value creation through
artefact – both physical and digital – realization).
4 Finally, I want to note that reading John Heskett was of great value
for me, his writing inspiring much insight into economic ideas of
my own interest as shown above. I am sure that many of those with
an interest in economic theory and students and teachers of design,
economics and management will find the same result. The synthesis
of disciplines offers new ways to understand entrepreneurship and,
relatedly, to see afresh applied innovation as value creation and
realization in ongoing exchange relationships. As such, Design and
the Creation of Value is an engaging text for those interested in the
‘new economy’ while offering an innovative synthesis of disciplines
by an experienced educator and a broad-based, and knowledgeable,
industry professional and historian.
30
Design as an economic
necessity for governments
and organizations
Sabine Junginger
John Heskett’s research into the economic life of design has shifted the
perception of many in management about the role of design in business
and society. Likewise, his work has reminded designers that they are not
just merely designing some ‘thing’ but that in doing so, they have both
opportunities and obligations to contribute in a meaningful way. John’s
work is of renewed relevance today and continues to have significant
implications for the future development of design research and design
practice. Circumstances have changed, though, and we need to revisit as
well as adjust some of the thinking that originated in the world of business
and industry.
There is a growing recognition that the main arena in which design is
practised is not business, but the organization. Designing goes on in every
organization, regardless of whether it is part of the private or public sector.
Each organization faces the same basic challenge: how to develop and
deliver services that are relevant and valuable to people and how to do so to
make the most economic use of its various resources to achieve this. This in
itself is a design problem. It involves organizational structures as much as it
involves its resources; it involves processes and tasks as much as it requires
a vision or a purpose.
Designers always work within organizational contexts. They work
with organizational clients and partners – and they establish their own
organizations. To paraphrase John, organizations are the main arena of
design practice. As he observed, there remains ‘a tendency for some designers
to try to ignore this basic fact of their existence, which is yet another aspect
of the problems in giving design credibility, but it will not conveniently
disappear’.1
John Heskett insisted that design can, will and must be judged in terms
of its contributions. Recent research in design management has centred on
demonstrating the value of design to business in economic terms. A 2013
study sponsored by the Design Management Institute in Boston produced
the Design Value Score Card, while projects funded by the EU and the OECD
sought to develop a greater understanding of the value creation by design
by ‘analyzing and measuring design as a user-centered innovation tool and
as an economic factor of production’.2 The €Design project, for example,
studied the role of design in the integration of functional, emotional and
social utilities of new or improved products (goods and services), processes
and marketing methods in order ‘to help shape guidelines for analyzing
and measuring the economic impact of design efforts and design outputs,
thereby facilitating more detailed and robust measurements of design’.3
These studies expand on Heskett’s work but they do not provide much
needed insights into the value of design to organizational life beyond
production and consumption. Yet, the shift from design in business to design
in organizations poses new questions and demands new approaches to inquire
into design, design processes and the people who design. In this new setting,
designing takes an active role in shaping businesses and management and
it does so across the boundaries of the private and public sectors.4 Societies
and communities, organizations in their own right, also have organizational
lives and the question is how design contributes to these – be that by way
of policy-making and policy implementation or by way of supporting
public organizations in developing and delivering meaningful and accessible
services. While the contribution to design in business remains focused on
profitability, this alone is no longer a criterion for business success. How
businesses engage on a social and environmental level matters more and
more. The requirement for design to contribute, ‘if it is to be of any use in
business’ is the same requirement for design in the public sector.
‘Business is also a social activity,’ writes John.‘Both its internal organization
and the needs it meets in society depend upon social consciousness and
functions. Some business managers educated in the tenets of Neoclassical
thinking try to ignore this basic fact of their existence, but it too will not
conveniently disappear.’ It is much rarer to find pure neoclassical thinking
in government offices, but the basic problem of the business manager echoes
that of the public manager: Their organization does not act in a vacuum and
their internal operations need to be able to support the services it provides to
citizens. They involve and affect people inside and outside the organization.
Understanding business as a social activity affirms that management itself is
a social activity (Falk 1961).5 The inherent social relationships of business
and management highlight their relevance for the public organizations and
government agencies. Policy makers and public managers pursue business in
its original meaning: by taking actions about the matters they are troubled
by and care for (Dewey 1948).6 I have argued elsewhere that the business of
the public sector is the social.7
Design as an economic necessity 33
Heskett’s statement that ‘making profits is not a self-contained activity

determined within a firm but depends upon satisfying customers’ needs’
reveals yet another reason to extend research and practice into design
management to public organizations. Public organizations are less, if at
all, concerned about profits. They are concerned about impact and about
efficiency in accordance within the legal and political constructs they are part
of. To achieve impact, government agencies have to understand the people
they try to reach in situations they seek to address and improve. But the
staff often has few means to engage in such research. Moreover, the demand
for ‘customer satisfaction’ is a difficult one in the public realm. A tax office
may deliver a great service experience to a taxpayer but that taxpayer may
still leave dissatisfied because he or she may owe the government an amount
of money he or she disagrees with. Success for government agencies takes
the form of delivering just and fair services to all people, regardless of their
income, status, education or other background. As in the business world,
achieving this success is not a ‘self-contained activity’. Any design outcome
depends on its being useful to and accepted by citizens, manageable by
public organizations and supported by the social and political agenda.
All this points to design in government as an area that poses profound
questions about the value of design and its contributions to human
society. As we broaden the scope of design management from business
to organizations, we benefit from an advanced understanding of the way
economic theories treat design and find it necessary to present a design
perspective on economics.8 The ramifications are difficult to understate:
design outcomes across the public sector concern and affect millions of
people every day. It is the arena of design practice where, as John Heskett
notes, ‘design is one of the basic characteristics of what it is to be human and
an essential determinant of the quality of human life. It affects everyone in
every detail of every aspect of what they do throughout each day. As such,
it matters profoundly.’9
To explore the value of design in government, we can follow John’s lead
and engage with policy theories, policy practices and policy processes from
a design perspective. We need to study the ways in which designing goes on
in the public sector and make design activities visible to illustrate how and
what value they create for people. Designing in the public sector is a highly
complex undertaking that involves people, policies, organizations and
services. In very simple terms, public-sector design involves people designing
policies, people running organizations that implement policies through
services and people developing and delivering services to implement policies
and fulfil policy intent.
Government functions best when it develops meaningful policies that
are relevant to people and when public organizations develop, deliver
and maintain services people can access, understand and use. In this ideal
scenario, services are the means to fulfil the policy’s intent. But often, policies
turn out to be ill conceived, and designed past the needs of people, leading
to services citizens cannot or do not want to use. At other times, the internal
operations of a public organization are cumbersome and not supportive
to staff that seeks to deliver good service experiences. It is an indication
that the design approaches employed are not supportive and appropriate to
arrive at the desired design outcomes. In other words, new design thinking,
new design practices and new design methods are called for.
I have yet to meet a civil servant who intentionally develops poor services
for citizens. Those who develop and deliver these products do their best with
the methods and tools they have been taught or otherwise acquired. But it
remains a fact that very few have had an opportunity, for example, to engage
with human-centred design or user-centred design. On the other hand, there
are still only a few professionally trained designers (design thinkers and
service designers included) who are prepared to engage with design issues in
organizational life. In many cases, designers are experts in a specific method
that quickly generates radical new ideas for new customer-oriented services.
They are strong in developing innovative products but weak in seeing them
through to implementation when this means working through organizational
structures, resources and people. Moreover, designers hesitate to engage
staff in their innovative approaches. We can only guess the reasons for this,
but I suspect it involves a lack of theoretical and practical underpinning that
would enable them to connect the value of their design work to the work of
staff and their respective tasks.
In my view, this situation echoes the gulf between design and economics
John sought to bridge. In the public sector, we find dominant theories at
work for when and how new policies can be developed and introduced.
We find management principles and best practices of public administration
influencing daily work. And just like values drive theories in the economic
disciplines, values drive theories in policy. It is no coincidence that human
experience and human interaction rarely figure in theories on policy-making
and policy implementation. It is also no coincidence that policy research
has been content with depicting the policy cycle as a fragmented, linear
and responsive design process blind to the needs of people affected by a
policy. Until recently, questions about when and how to introduce a policy
focused on political and organizational processes within government. Lately,
researchers have begun to look at policies as products of design. Guy Peters
(2015), for example, has suggested we ‘design policies like we design a car’.10
Designing in the Brazilian government

While I was reflecting on John Heskett and the relevance of his work in the
present, I worked with a group of the Brazilian Ministry of Planning, Budget
and Management, one of the central ministries in the Brazilian government
to which all other ministries have obligations. Moreover, I visited the Federal
Court of Accounts, the Federal Ministry of Justice and the Federal Ministry
of Education. I also made a stop at the third largest bank in Brazil, Caixa.
Caixa is one of two key financial partners for the Brazilian government to
administer social welfare programmes.
In each organization, I met with people who sought to improve their
internal operations by developing new design practices and by employing
new design methods. They were challenging current design practices within
their respective organizations and even across government agencies. They
had been set up to secure vital government functions under severe economic
hardship, a consequence of the country’s economic recession. As one senior
public official put it: ‘We are doing this not even to do more with less because
we are happy if we can still do the same with less.’
Most of these innovation teams were young; some had merely started a
few months ago. One innovation group was made up of just a handful of
in-house experts from the organization’s IT area. Their original mandate was
to advance innovation within their organization by developing new digital
tools for data analysis. In another agency, the innovation team consisted
of twenty staff members. They based their innovation efforts on the ideas
of computer hacking and open innovation. They proudly declared their
approach to introducing new ways of working as ‘hacking bureaucracy’. A
third ministry had hired an academic expert in business strategy and business
innovation. This person was in charge of developing and implementing
innovation programmes the ministry would then roll out in public. Unlike
his colleagues in the other agencies, he had been given neither a mandate
nor a team to support his efforts. He mostly worked with external partners
and universities.
The economic argument for design in this context is different from the
one John Heskett pursued. It is not about business and customers, it is about
people and their government. It is not about growing the Gross Domestic
Product but about providing essential government services to people. The
design task is to develop new policies and services that do more, or at least
the same, with less for governments. Design thinking and design methods
are entering into the public sector to rethink current approaches and to
generate arguments for new ones. The fundamental economic principles
John laid out for design still apply. Design researchers and those involved in
hands-on design projects have to pay attention to the bottom line regardless
of which organization they work with. They also have to be able to explain
to decision-makers why a human-centred approach to services aids their
organization – the same way one has to put forth an argument to a business
manager.
The presence of lone innovators in government alerts us to John’s
observations about designers in business and the influence of ‘neoclassical
thinking’ inside the organization. One of the reasons innovation in
government is more difficult to achieve is that it must involve the organization
itself in any change process. Services are at the heart of government agencies
and any change to any service will ripple through the organizational system.
Transforming existing situations into preferred ones for some, say citizens,
requires concern for transforming an existing situation into a preferred one
for those working within the organization.
It is difficult to understate the role of John Heskett in design when
one works in an environment that is dominated by economists and legal
experts. I continue to revisit his writings on the different economic theories,
sometimes as to freshen up my thinking, sometimes to find a new anchor
into my own work. I am aware that my own work and that of the people
in these innovation teams obliges me to come to terms with economic
questions. Design choices are choices about employing, allocating and using
resources to achieve a desired outcome. This brings to mind a particular
moment during a seminar I gave to policy planners in a Prime Minister’s
Office two years ago. The topic was participation in government and I was
invited to provide an interaction design perspective on the issue.
I used the pictures of two different walking aids for people and asked
them to imagine these two objects as placeholders for two different policies.
My point was that both walking aids sought to address the same problem:
to provide mobility to people. The first walking aid was a bare metal
construction in metallic grey. It had no wheels, so the person had to lift it
and set it down as he or she walked. It was the simplest version of a walking
aid that used only the minimum of materials. The second walking aid was
painted red, had big wheels to master different surfaces, was equipped with
hand brakes and sported a seat for resting and a basket for shopping.
When I asked the group which one they would take out to the park, they
all agreed it would be the red one. ‘But,’ interjected the head of the policy
unit, ‘it is probably a matter of cost. The paint on the red one is probably
making it more expensive.’ Indeed, I responded, the acquisition cost for
the preppy walking aid was certainly higher, though mass production and
economies of scale would bring down that cost. However, I continued, while
the acquisition cost for the simple version was cheaper at the moment, the
cost produced by that minimum model over time was significantly greater:
A senior person who can get to the park with his or her walking aid, to the
shopping mall and to the community centre exercises, volunteers and spends
her pension money in cafes and shops. In contrast, a walking aid that ties a
senior to his house or apartment is more likely to lead to depression, loss of
muscle tissue that leads to falls, and to deny him or her the opportunity to
participate as a volunteer or to spend money in cafes and shops. The cost for
health care alone to treat accidents and depression is immense. If we add to
this a voluntary contribution, for example, to oversee homework for young
students and the money he or she cannot freely spend in local businesses,
money adds up quickly. Participation in society all of a sudden looks like
an economic problem and reveals the real cost of a walking aid that, while
cheap, denies people the chance to participate in society.
Understanding economic perspectives remains essential to articulate
the value of design. The critical engagement with economic ideas allows
designers to reveal some of these ideas as remnants of a different age and

time. Classic economic theory concerned with comparison and evaluation,
for example, works on the basis of ‘ceteris paribus’ or ‘all else being equal’.
It is a demand that can only be fulfilled when we are dealing with a machine
over which we have full control or when we can conduct an experiment in a
controlled environment. But every organization, public or private, presents
its own entity, involves different people and groups, concerns different laws
and structures and has access to different resources. In short, there exists no
‘all else being equal’. This is certainly true for the ministries I have visited.
It is therefore difficult to apply economies of scale to the public sector.
Yet, we often meet people who insist on the scalability of a public sector
innovation project. Scaling, too, has its roots in the mechanical world of
manufacturing and mass production. It is based on the idea that if we
get the first product right, we can save the work on further research and
development on the products that follow. It is an approach that has time
and time again failed in the public sector. It is an approach that has not led
to the efficiencies that people sought because those involved in the original
development of, say, a social programme, design their solution tailored to
their circumstances, addressing the needs of the people they are working with.
Yet, these circumstances are rarely if ever identical to those of other agencies.
Certainly, this was affirmed during my visit to the Brazilian ministries.
The fact that we can scrutinize and critique common economic theories
for their impact on design is one of the great achievements of John Heskett.
His notion that design has to make a contribution to be of value has been
accepted across the different design disciplines. In the search for the precise
value of design, researchers pursue different avenues. Co-design expert
Elizabeth Sanders (2014), for example, detects the value of design on three
different levels: the monetary level, the use or experience level and the
societal level. ‘In each of these levels, co-design pursues different objectives,
requires different mindsets, involves different people, deliverables and time
frames.’11
Sanders might as well describe the different stages in the policy cycle:
policy-making, policy implementation and service delivery. Design in
the public sector must create value on each of these three levels as well
as across these levels. To overcome traditional fragmentation and linear
processes, governments on national, regional and local levels have set up
public innovation labs.12 This points to a fourth level for how design adds
economic value: by integrating public services with public organizations and
policies around the human experience.
A new economic theory based on behavioural insights from people has
begun to challenge the classic notion of homo oeconomicus, where people
are always acting in their rational interest. The emerging field of behavioural
economics is making inroads in governments and presents new relationships
with design. John would have enjoyed this development and helped us make
sense for both design and economics. In his absence, this will be our task.
38
Notes on editing the manuscript
Clive Dilnot
As implied in the introduction, the nature of the ms. ‘Design and the Creation
of Value’ is more complex than it might first appear. The seminar emerged
over many years of Heskett’s teaching, first in the Institute of Design at
Illinois Institute of Technology (IIT) in Chicago and then in Hong Kong, in
the School of Design at Hong Kong Polytechnic University. The essence of
the text in its final form is evident in the version he developed for the first
of the series of seminars that he gave in Hong Kong beginning in 2004. This
remained the basis of the final version we have, dated 2009.
However, things are not quite so simple, and in two directions. First,
between 2004 and 2009, Heskett considered several times turning the
seminar into a book and indeed worked up the preface and introduction and
most of Chapters 1–6 as a quasi-book ms. However, this process was never
completed, nor, as far as I am aware, was the text ever sent to a publisher.
As a publishable work, the text was therefore incomplete at the time of his
death. In particular, Chapters 7–10 of the original ms. were clearly unrevised,
there were elements of repetition, and significant references were missing. In
short, the seminar was not as complete, as a text, as it first appeared.
Second, particularly between the late 1990s and early 2000s, Heskett
was experimenting with other versions of the text. For example, there are
an extensive series of notes, entitled ‘The Economic Value of Design,’ that
he prepared for a conference on design in Chile sponsored by the Ministry
of Economics in 1999; and there is an even longer working paper entitled
‘Economic Theory and Design’ from roughly the same date that covers
comparable territory. It might be thought obvious that these papers should
be published. However, given their subject matter, it is no surprise that large
sections of these papers overlap with the ms. of ‘Design and the Creation of
Value.’ Moreover, neither paper is complete as is. The later sections of both,
as they stand, are fragmentary. Thus, although of specialist interest, they do
not quite congeal into a developed argument. On the other hand, important
sections of both papers considerably extend the material and augment the
original seminar, especially in terms of the exploration of the relation of
design and economics as it is explored in Chapters 7–9.
The relation of the material in these papers to ‘Design and the Creation of
Value’, therefore, poses something of an editorial conundrum. The solution to
the dilemma has been to consider the text of the seminar in two parts. On
the one hand, in regard to the preface and Chapters 1–6 (and what is now
Appendix 1: chapter 7 in the original), I have sought to preserve as much
as possible of Heskett’s original text as is. Here the interventions have been
to clarify repetitions and complete referencing. There has been some small
augmentation of the text, using the material from the papers discussed above,
in Chapters 5 and 6. These are referenced in each chapter but in the main, the
structure of Chapters 1–6 has been essentially preserved as it was in the original.
In detail, changes to the preface and Chapters 1–6 are as follows:
– Preface. Unchanged.
– Regarding Chapter 1. In the 2009 text, Heskett twice (chapters 1
and 8) uses the example of a toilet redesigned by the New York
interior designer Jonathan Adler as an instance of design mis-
conceived as a purely ‘creative’ activity. In this version, the extended
material on Adler’s design and on the contrast between simple and
complex models of design processes that was originally also in [the
original] chapter 8 is now concentrated in Chapter 1.
– Regarding Chapter 5 on New Growth theory, I have added some
important notes taken from the paper ‘Economic Theory and
Design’ on the economist Richard Nelson’s critique of some aspects
of New Growth theory.
– Regarding Chapter 6, The National System. The change here is that
material on the application of Frederick List’s theories to design
previously in chapter 8 has been moved into this chapter. This con-
solidates the material on List and the National System into a single
location and the concrete references to applications of List’s theories
regarding design provide a useful bridge to the second half of the
seminar.
Beyond these interventions, no changes have been made in Part One except
for the addition of a number of diagrams and figures drawn from the slide
sets that Heskett used to augment his presentations of economic theory. The
tone of the text remains exactly in the form Heskett left it in 2009.
I have been bolder, however, with changes to Chapters 7–10 of the
original ms., and here in two ways.
– First, as was noted in the introduction, the section on Marx (origi-

nally chapter 7) is cursory. It does not link Marx’s thought to
design in any way and does not form part of the argument; nor is it
Notes on editing the manuscript 41
referred to in the later chapters. As placed, it tended to break up the

logic of the argument Heskett was making. I have presented it here,
therefore, as an appendix and renumbered the following chapters.
– Second, I have augmented the three remaining chapters of Part Two
(7–9 in this version) with material drawn from the two working pa-
pers referred to above. This has enabled a much fuller presentation
of the arguments. The major additions are footnoted in the respec-
tive chapters. They contribute material that cannot be found in the
original seminar but which directly relates to the arguments Heskett
is making. Apart from a few linking sentences and short paragraphs,
all the material in the extended chapters is Heskett’s. The diagrams
in Chapter 9 are as in the original.
My decision to augment these chapters has been aided by the fact that I
published the original versions of what are now Chapters 7–8 (‘Design from
the Standpoint of Economics/Economics from the Standpoint of Design’)
under this title in the journal Design Issues in 2015 (see vol. 31, #3, Summer
2015, pp. 92–104). The same versions of these chapters also appear in The
John Heskett Reader: Design, History, Economics (London: Bloomsbury,
2016), pp. 42–56.
The book adds one unpublished paper by Heskett that bears directly on the
question of value. ‘Value and Values in Design’ is an undated incomplete
working paper, probably authored around 2000. It augments both the final
part of Chapter 8 and the major concluding arguments of Chapter 9. In
itself, it points to the wider discussion of ‘value’ that is both explicit and
implicit within the seminar.
Regarding endnotes and footnotes: Heskett’s references have been

completed. A few endnotes indicate editorial additions. The endnotes are
also augmented by ‘editorial footnotes’ introduced by the editors. Heskett
had included one-line biographies of some of the economists he discussed.
I have extended these and also provided some further commentary at
certain points. Finally, at the end of most of the early chapters, Heskett had
indicated one or perhaps two readings. I have extended the reading lists
though they are by no means comprehensive. Again, however, this is by no
means a fully annotated text.
Acknowledgements. In revising Design and the Creation of Value for

publication, I have benefitted enormously from help and assistance from
three people in particular: in the initial stages, from exchanges with Suzan
Boztepe. In regard to economics; from exchanges with Cameron Weber

who carefully read and helped reference the economics chapters. Finally,
as the ms. was being completed, John Heskett’s diagrams were reworked
for publication by Christine Tsin, from Hong Kong Polytechnic University.
Christine served as John’s assistant in the five years he was teaching there,
was closely involved in the presentation of the seminar and was the original
creator of the slides Heskett used in the presentations of the seminar. I am
extremely grateful for her help. Sabine Junginger and Cameron Weber
have been generous in spending time drafting significant introductions
to aspects of Heskett’s work. These deepen, considerably, the contextual
understanding of what Heskett achieved in the seminar. The project would
not have occurred without the critical support of my editor at Bloomsbury,
Rebecca Barden. The vital help of two other persons was also necessary:
Victor Lo, whose generous backing for the project was crucial to enabling
the time needed to research and detail the issues that arise in projects of this
kind; and Pamela Heskett, John’s widow, without whom the project would
have been impossible.
Design and the
Creation of Value
44
Preface
‘Economics is concerned with explaining the production,

distribution and consumption of wealth. Design is the
human capacity for shaping and making in ways that satisfy
our material needs and create meaning – in doing so it
creates sources of wealth.’
John Heskett
This book is about how design can add and create economic value for
businesses and other organizations. In particular, it is intended to equip
designers and managers of design with an understanding of the potential
and power of design if it is intelligently understood and positioned as an
integral element in firms’ activities.
That is a simple enough statement, but in fact attempting to discuss the
relationship between economics and design is a minefield.
Basically, economics is concerned with explaining the production,
distribution and consumption of wealth. Design is the human capacity for
shaping and making in ways that satisfy our utilitarian needs and create
meaning – among other things, it creates sources of wealth. There should,
at least on a general level, be some interaction between the two, yet a deep
schism of mutual incomprehension separates them. Such problems are in
fact typical of many forms of practice in modern life. As an example, a
literary critic, A. O. Scott, has pointed to a parallel in American literature:
While the tumultuous rise and global spread of American capitalism

is surely a subject epic in scope and dramatic in detail, it is one that
has inspired surprisingly few of our best writers. There has always been
interest in the behaviour of people who have money, but less interest in
how money is made. Henry James, in The American, sketched a new
type of character – the American entrepreneur – but found the merest
mention of the commodity at the heart of his enterprise impossibly
vulgar.1
A consequence of cultural inadequacy in comprehending design is a

widespread underestimation of the full role it plays in all our lives. Mary
Douglas, a leading anthropologist and Baron Isherwood, an economist,
have together examined the role of goods in social life. They concluded:
The most general objective of the consumer can only be to construct

an intelligible universe with the goods he chooses. Goods, then, are the
visible part of culture. … Ultimately, their structures are anchored to
human social purposes.2
If goods help us construct personal meaning and have social relevance, these
are obviously important considerations in how value is created. To fully
explain this unwillingness to acknowledge and take responsibility for the
industrial world and the products human beings have created would require
going far beyond the scope of this work and involve a long exploration of
cultural factors, but it is a problem that is common across the world. At
this point, it can be asserted that the lack of congruence or overlap between
design and economics is a problem that is global in scope and has roots deep
in history.
Gulf and bridge

For a variety of reasons, therefore, there is huge confusion about what
the word ‘design’ means. Those working in design practice are continually
confronted with difficulty in defining what they do, or what design is, for
non-practitioners. In contrast, most people have some concept of what an
architect does, or what the general nature of being a mechanical engineer
implies. Designers may know what they intend, but the odds are that the
audience, whether the general public, or potential clients, will often have a
very different concept of what design is or should be.
This can be a serious problem in practice, as in a personal experience of
consultancy for a large service business. Very little profit resulted from the
project, because the cost estimates totally underestimated the time needed to
continually explain what design meant to every manager in the client company.
It was a never-ending process as new managers came in and the process had
to start all over again. Without establishing some common understanding of
what the designers were supposed to be doing, however, the project could not
effectively proceed. Neither was it conceivable that the company would give
the slightest credence to an invoice for time and cost spent educating their
managers, even though the time thus spent was hardly negligible.
There is problem in drawing deep conclusions from personal experiences,
but they can, however, be indicators, like straws in the wind showing from
which direction a trend is blowing and how strongly. The lack of design
awareness is also found among government officials. Some years ago, I was in
Preface 47
conversation with an export specialist of the U.S. Department of Commerce

at a reception. He asked what I did for a living, and I answered by talking
about teaching and consultancy aimed at using design to create new products
and new market opportunities. ‘Are you trying to tell me,’ he responded,
‘that design is a competitive instrument?’ I replied in the affirmative. He
shook his head in what seemed to be disbelief, and excusing himself, moved
on, leaving me discomfited and wondering how I had committed an offence.
This was someone whose role was advising companies in one of the largest
industrial states of the United States of America. Obviously, he was unwilling
or incapable to give any advice including the factor of design and its possible
contribution to export potential. This deep gulf in understanding the varied
ways in which design can function requires explanation.
A valuable work in this respect is a book by Donald Schön and Martin
Rein: Frame Reflection: Toward the Resolution of Intractable Policy
Controversies, a study of policy frameworks – the major ideas necessary to
understand how policies in government and business are formulated. They
draw an interesting parallel with design:
We see policy making as a dialectic within which policy makers function

as designers and exhibit, at their best, a particular kind of reflective
practice, which we call design rationality.3
What is important is that not only is design positioned at the level of

policy-making, but there is also a problem in policy-making, as identified
by Schön and Rein, concerning why some ideas are accepted and others
not. They distinguish between, first, disagreements ‘in which the parties to
contention are able to resolve the questions at the heart of their disputes by
examining the facts of the situation’. This is contrasted, secondly, to what
are termed controversies, disputes that ‘are immune to resolution by appeal
to the facts’.4 This is because the parties involved often have totally different
interpretations about what constitutes ‘the facts’. Even if they might agree
on the facts, entrenched attitudes can still ensure fundamentally different
interpretations of their relevance.
What this means is that arguments attempting to better define design,
no matter how logical, may fail when confronted with entrenched values
that dominate consideration of ‘the facts’. Further valuable insight on this
is provided by Robert H. Nelson’s book, Economics as Religion: From
Samuelson to Chicago and Beyond, which argues that
economics promises objective science but actually delivers a hidden

metaphysics. Behind their formal theorizing, economists are engaged in
telling stories that have powerful symbolic messages that often have a
philosophical (and theological) content.5
In other words, a range of value judgements and assumptions underlie many

of the economic theories about how the world works and how people should
behave. In an age where, at least in the West, the role of formal religion has
declined, economic beliefs can take on a quasi-religious function:
Instead of being value neutral, the economics profession has actually

been defending a strong value position. In building from only one view of
human nature, mainstream economists have in effect been asserting that
this is the one and only correct view.6
Another aspect of Schön and Rein’s work relates to the particular

characteristics of ‘reflective practice’ and the different ways in which
this functions, at different stages of what the authors term the ‘ladder of
reflection’. This orders policy-making thought on six levels, conceived as
rungs on a ladder from low to high and increasing in abstraction from
everyday practices to ‘metacultural frames’.7
The rungs of this ladder proceed, from low to high, roughly as follows:
1 policy practices, such as regulation, screening and verification;

2 policy itself, conceived as a set of rules, laws, prohibitions, entitlements
or resource allocations;
3 the policy-making process, including its debates and struggles;
4 the particular positions and accompanying arguments held by
advocates and opponents in policy debates and struggles;
5 the beliefs, values and perspectives held by particular institutions and
interest groups from which particular policy positions are derived (we
shall call these institutional action frames); and
6 the broadly shared beliefs, values and perspectives familiar to the
members of a societal culture and likely to endure in that culture over
long periods of time, on which individuals and institutions draw in
order to give meaning, sense and normative direction to their thinking
and action in policy matters (we shall call these meta-cultural frames).8
If we interpret the ‘ladder of reflection’ in terms of design, it becomes clear

that, in principle, there is no essential reason why design should not be
an integral element in contributing not just to the competitiveness of a
company, but also to the efficiency of an organization, the prosperity of an
economy or the general quality of life of a society. Support for such a role
can be found in the work of Herbert Simon, Nobel Laureate in Economics in
1978, who argues that design is not an activity restricted to making material
artefacts, but a fundamental professional competence extending to policy-
making at governmental levels. He wrote:
Everyone designs who devises courses of action aimed at changing

existing situations into preferred ones. The intellectual activity that
produces material artefacts is no different fundamentally from the one
Preface 49
that prescribes remedies for a sick patient or the one that devises a new
sales plan for a company or a social welfare policy for a state. Design, so
construed, is the core of all professional training; it is the principal mark
that distinguishes the professions from the sciences.9
Since economic theory has such an important role in framing ideas about
how and why an economy functions and therefore how design functions
within it, there is a need to understand how particular economic ideas shape
our understanding of design. The value of such an approach would be to help
businessmen and economists to understand design’s potential contribution,
but it could help position design where it belongs: in the mainstream of
economic activity rather than on the periphery.
Moreover, not only is it necessary to understand how economics conditions
perceptions of design, but it is also important to investigate the potential role
of design in influencing economics. Such an approach has the aim of moving
design, in Schön and Rein’s terms, from the level of a controversy to a
disagreement. In the latter, there may be prolonged and vehement argument
about exactly how design should be implemented in any organization, but
on the basis of acceptance of its relevance. Understanding how goods and
services condition all our lives similarly helps define how design can create
not just economic value, but also political, social and cultural value.
Exploring economic theory in search of explanations for this gulf rapidly
demonstrates that there are no easy answers. Economics is not a monolithic
edifice, but a discipline of great variety and complexity, a house with many
rooms. Great intellectual tension is generated by vigorous debates about the
relevance of major theories, seeking either to deepen orthodox knowledge,
or to open up new perspectives that challenge old certainties. Diverse
interpretations of the role of design are therefore possible, depending upon
the particular theoretical perspective in economics from which it is viewed.
Even with all the extensions and modifications, however, there are two
important aspects that, across all the various schools of economic theory,
receive scant attention. There is inadequate explanation in detail about
how goods and services are developed through manufacture for the market
place, and, secondly, there is equally little focus on how they are used –
both of which are concerns at the heart of design practice. All too often in
economic theory, goods and services are assumed to already exist, they seem
to appear without any consideration of the specific development processes
and ideas involved, and after the point of sale or consumption, any thought
of them evaporates from consideration. (These assumed product preferences
and the assumed starting point of equilibrium are the prime weaknesses of
mainstream neoclassical economics that are addressed in this book.)
If, instead, we look at how economics is understood from the perspective
of design, creating the tangible reality of goods and services is what creates
value for users, which involves understanding the role this plays in practice,
in the context of people’s lives. Without incorporating these two factors,
it is difficult, if not impossible, to fully understand how economic value is

created. In reverse however, if these elements are considered then, potentially,
there are powerful elements that can be supportive of the contribution of
design in business and society.
This book will therefore discuss, first, how different emphases in economic
theory condition perceptions of design; and second, how an understanding
of design theory and practice can contribute to economics in terms of the
value it creates. This latter question is important if design is to be more than
a borrowing discipline, dependent on drawing ideas from other activities,
capable of articulating and convincingly arguing the contribution of its own
specific insights and skills. This is one of the major challenges in developing
new concepts of high-level design practice.
1
Introduction: Design
in economic life?
Shortly after the story I recounted in the preface to this book of my

conversation with an export specialist of the U.S. Department of Commerce
and his polite expression of disbelief that design could be considered an
economically competitive instrument, an invitation from a professional
organization took me to Washington, DC, for meetings with officials from
the Department of Commerce and also the Council on Competitiveness to
discuss ideas for establishing a Design Council in the United States. The
officials were intelligent and courteous and it was not that they rejected
design – it simply did not feature in their view of how life and the economy
functioned. One of them asked: ‘Why should we support design in order for
our competitors to easily copy it?’ Again, it seemed obvious that the officials
had a view of the world and the economy, inculcated through education and
their cultural environment, which had no significant place in it for design.
These experiences in the United States occurred in a cultural context that,
in some respects, is atypical among major industrial nations. In the United
States, concepts of how business functions have been overwhelmingly shaped
in business schools, which have undergone a massive expansion in the period
since the Second World War and have spread around the world. They have
amassed a body of knowledge and research tools with a heavy emphasis
on quantitative methodologies. This numerical obsession has translated
itself in widespread practice into highly skilled manipulations of financial
assets, with relatively little emphasis given to products and customers. While
there are design schools across the country, they are neither as numerous as
business schools, nor do they compare in the scale of their enrolments or
research programmes; nor are they noted for their influence on business. In
addition, neither at Federal nor at State level has there been any substantial
evolution of design policies by government. In this pattern, the United States
diverges from beliefs and practices in other parts of the world, and while
many Americans believe their system is a model for universal emulation, in
design terms many people and organizations in the rest of the world follow
a different course.
Having spent much time in other parts of the world, particularly Europe
and Asia, in addition to living in the United States for sixteen years, also
made me aware of a history of long-term efforts to promote design by
governments, which were often closely linked to technology and economic
policies directed at emphasizing quality as an instrument of export growth.
At best, this has resulted in awareness that design can substantially contribute
to product development as a partner in multi-disciplinary teams, closely
working with, for example, engineers and marketers. Even in such countries,
however, there is often a tendency to think of design as an embellishment
of decisions taken by other disciplines – the icing on the cake to make a
product more marketable. The proposition that it can have a powerful
strategic role in creating economic value, in terms of fundamental decision-
making to establish long-term competitiveness, still has limited currency
around the world.
Such problems are illustrative of a deep gulf in understanding that exists
between design and many other disciplinary practices involved in any
functioning economy. There is, however, a substantial body of work both in
economics and in many other areas that have ideas of widespread relevance
in design.
In considering the economic role and value of design, two major aspects
need to be discussed. First, it is necessary to come to terms with the existing
body of economic theory and practice and ask to what extent it can shed light
on essential roles design can play in the context of business. Second, the way
economic theory defines its field, and the tools and methods it uses, have come
to constitute tightly defined forms of orthodoxy. Can design supplement or
reinforce economic theory in clarifying and amplifying aspects of business
in ways that at present are not commonly recognized? The question here
is whether design theory and practice has the potential to add to, extend
or provide linkages to economic theory. The organization of this book is
therefore broadly based on these two perspectives: one examining design
from the standpoint of economic theory; the other examining economic
theory and business practice through the prism of design.
Positioning design in this regard, as having an important and integral
economic role to play at the highest level of organizations, requires articulating
a body of knowledge and methods that broaden how we think about design.
It also needs a changed perspective on the nature of design. Therefore, for
anyone involved in design and seeking to communicate the nature and value
of its contribution, there needs to be clarity about what we are discussing.
What do you understand by design?

The question is deliberately phrased to focus on what any reader understands
by design. Since design means many things, it is important to acknowledge
this diversity, rather than insisting upon a specific and limited definition. It
is, in fact, possible to discuss design at the most generic level as a universal
Introduction: Design in economic life? 53
human capability to transform our environment, an ability that is analogous

to language and music in characterizing ourselves as human beings.1 As soon
as particularities begin to be explored, however, some obvious problems arise
due to the broad range of activities encompassed by the term ‘design’. Three
broad categories can be discerned, two of which are in the mainstream of
design practice. The first, for which substantial training and preparation are
necessary, ranges from some highly technical disciplines, such as engineering
design, ergonomics or product design, each of which requires a specific body
of knowledge and methodology. Work of this kind is usually integrated into
the development processes of manufacturing companies.
At the other end of the range are practices dependent primarily on
individual flair, such as work in illustration or fashion design, which is more
tightly focused on the end visual form. There is endless confusion caused
by this kind of work being considered a form of art, in terms of labels such
as commercial art, applied art or decorative art, and the appearance, more
recently, of the term ‘design art’. These, in contrast to the practice of what
are known as the ‘fine arts’, can sometimes be regarded as inferior levels of
activity tainted by commercialism.
Some designers have indeed embraced commercialism with great success,
most notably the large number of fashion designers, who have created
‘designer labels’, such as Gianni Versace and Donna Karan. The emphasis
on celebrity status in the modern entertainment and media worlds has also
encouraged some product designers to follow a similar path, such as Philippe
Starck and Karim Rashid, who have also assiduously, and very successfully,
marketed themselves as designer brands.
A third category of design that has appeared relies upon appropriations
of the word design to suggest a higher status for a particular activity. For
example, not too long ago, most people visited a hairdresser to have their
tresses cut and set; the term hair stylist was later adopted, while nowadays,
hair designer is the universal soubriquet – and the term has also been
appropriated by floral designers and funeral designers, among others. These
will not be discussed in detail.
Some designers, predominantly those in the second and third categories,
rely upon publicity as much as knowledge or skill to promote themselves
and may consistently exploit the opportunities for publicity provided, above
all, by print media for publicity and image building. It is also true, however,
that the media endlessly exploit design as a source of news and imagery,
frequently in ways that trivialize the activity.
An example is from the Hong Kong edition of China Daily, the official
English language newspaper of China, dated 13 December 2005. Under the
heading ‘Canine Cool’, a masthead proclaims: ‘Accomplished designer caters
to demands of her furry followers of fashion.’ The half-page article inside
concludes: ‘Pet owners are not merely content with warming their dogs up
in chilly weather. They want their pets to get dressed up and to show off
their unique appearance in front of other dogs. That is why they value our
designs and craftsmanship, Jackie pointed out.’
Perhaps the greatest problem in explaining design is its confusion with

art. In many publications intended for the general public, there is still a
tendency for design to be equated with art, which is probably one of the
greatest sources of difficulty in developing a better understanding of what
design is and what it can achieve. An example, which perfectly captures the
trivialization of design so apparent in the media, is an article that appeared
in one of the greatest newspapers in the world The New York Times
Magazine of Sunday, 1 December 2002, in which various people were asked
to redesign everyday objects. One was Jonathan Adler, a New York designer
of interiors and accessories, who offered a rethink of the toilet, with an
accompanying explanation:
I chose to redesign a toilet, because even though everyone has one, they’re
always so dreary: I wanted to create a cheerful toilet. I was inspired by
Dior’s New Look, with its wasp-waisted silhouettes, from the 40’s and
50’s. The shape makes it a little cuter; the graphic element makes it fun.
There are a number of functional issues that would need to be addressed
for this to actually work, but the toilet really is the perfect arena for
playfulness.
The criteria Adler set out for his reconfiguration of the object include
cheerfulness, cuteness, fun and playfulness, which to be frank, are not
the first qualities that come to mind in connection with the processes of
voiding bodily waste. Moreover, why a toilet needs to be ‘inspired’ by Dior’s
New Look of the post-war period is not explained, and as he points out,
functional issues have not been addressed.
In contrast, the Toto company of Japan, a major manufacturer of
bathroom equipment, has for many years addressed functional issues in
electronic toilets in its product range that will, after users have performed
their offices, hose down their fundaments with warm water, dry them with
wafts of warm air and, if required, finish their ministrations with a perfumed
spray. With advanced designs such as these available, do we really need, in
addition, our toilets to be subject to the arbitrary whims of fashion and
artificial obsolescence?
It can be said that there is no harm in designing dogs’ attire or playful
toilets, which in some respects might indeed be true. The problem with this
approach to design as a branch of art, however, is that it reduces the activity
to a very limited range of capabilities that focus on aesthetic solutions
in formal terms, without fundamental consideration of whether they are
manufacturable, marketable, useful and pleasing in people’s lives, and in the
end result, profitable for businesses.
To put it even more simply, reducing design to personal whim reduces
the complexities of practice to a very simple level, which involves a severe
distortion of the activity. Basically, the example of the toilet cited above is
treated in the following terms (Figure 1.1).
Figure 1.1 The design process simplified to a question of form.
The attitudes and approaches manifested in Adler’s exercise ignore several

basic facts about design as a form of practice:
– The main arena in which design is practised is business. There is a

tendency for some designers to try to ignore this basic fact of their
existence, which is yet another aspect of the problems in giving
design credibility, but it will not conveniently disappear.
– As a business activity, design must be judged in terms of
contributions to profitability. If it cannot contribute, then it
cannot be regarded as of any use in business.
– Business is also a social activity. Both its internal organization and

the needs it meets in society depend upon social consciousness
and functions. Some business managers educated in the tenets of
neoclassical economic thinking try to ignore this basic fact of their
existence, but it too will not conveniently disappear.
– Making profits is not a self-contained activity determined within a
firm but depends upon satisfying customers’ needs.
An illustration of a designer dealing with the same subject as Adler but taking
these points into account is Ross Lovegrove, a noted British designer, who
was commissioned to work for VitrA, a Turkish manufacturer of bathroom
fittings, and after six months of research, began delivery of designs for
over 120 items. They were unified by flowing organic lines and detailed
attention to material qualities typical of Lovegrove’s work and reflected
both a technical and aesthetic transformation of the firm’s products – a
complete new range that redefined the company from a local producer, to a
global player in its product sector. Lovegrove’s work is typical of industrial
design at its best in manifesting and combining a series of capabilities, which
include the factors of form and aesthetics, but extend to a much wider set
of concerns. Design, considered in these terms, is a complex, demanding
activity, as depicted in Figure 1.2.
Figure 1.2 The design process in the wider context of production and use.
The above does not include every consideration and method needing
to be at the command of a designer, or as is often likely, a design team,
but it does give some idea of the spectrum of competencies and capacities
the designer deploys in dealing with complex projects and functioning as a
business professional.
This particular range of capabilities is based on industrial design as
an example and although not all-inclusive, it does illustrate the contrast
between the approaches and capabilities required to function as an artist
designer and what I would term a professional designer.
A further point to be made is that the distinction between these two
approaches to design is not rigid. In most branches of design practice there
can be found examples from across the spectrum, from highly sophisticated
professionalism to a more superficial level: interior design, for example,
runs from the specification of complex spatial solutions for a variety of
functional purposes to superficial approaches better described as interior
decoration, sometimes known as ‘chintz slapping’.
What has been discussed so far is the concept of design in terms of the
breadth it encompasses. Another issue of profound importance relates to
ideas about design as a strategic factor in any organization, which is more
concerned with the levels at which design can function.
Hierarchies and the positioning of design

The emphasis in this book is upon the economic role of design in business
contexts and the ways in which it can add or create value and contribute to the
competitiveness, viability and profitability of any business. The diversity of
design referred to above can be a problem due the complications it creates and
the varied levels on which it can function, but at the same time, this diversity
can potentially answer a multitude of business needs, and if understood and
intelligently applied, it can provide a rich strategic resource. Much depends,
however, upon where design is positioned and how it is managed.
At a very simple level it is possible to distinguish three major levels of
internal function in any organization (Figure 1.3). Any firm must have a
strategy, whether implicit or explicit, which determines the nature of the
firm, its products, markets and values. It will also need to structure the
organization of the firm to realize the aims of its strategy, with a necessary
structure of functional and developmental responsibilities and management.
Finally, it will need to have a body of workers with the requisite skills to
implement the strategy in the form of tangible products and services.
If we ask what the functions of design are within this very simple depiction,
in most management theory there is little mention of design – it is noticeable by
its absence (Figure 1.4). There has been over the last quarter-century a growth
of practice, research and education relating to ‘design management’, which
has opened up discussion on how design can be best utilized in businesses.
Figure 1.3 The major functions in a firm.
Figure 1.4 The major design functions in a firm.
There has also been a similar pattern of growth in relation to the concepts and
practice of strategic design. Neither at the levels of management nor at those
of strategy, however, is it yet possible to say that it is commonplace for design
to be integrated into the management structures of companies; nor has there
yet been an articulation of the role of design at the levels of management
and strategy that is convincing to the majority of senior managers. It is easy
to name some of the outstanding exceptions, such as the role played by
designers in the upper management of Apple, Samsung and Renault. Despite
these notable exceptions, however, it is still the case that the overwhelming
majority of designers in businesses around the world are employed in ways

that fit into the implementation segment, in roles the American designer
George Nelson once described as ‘exotic menials’. Confusion about design,
therefore, exists on a wide front, in businesses and academic institutions, at
government policy level and, above all, among the general public – the people
most affected by designed outcomes. The confusion is understandable, for
the word ‘design’ has, indeed, many meanings and interpretations.
Why bother about attempting to clarify this

confusion – does it really matter?
There are two reasons why it matters profoundly. First, design is more
significant, across a broader front of economic activity than the realms
of fashion or interior decoration with which it is heavily identified. It is
instead a basic characteristic of what distinguishes us as human beings
who originated in the natural world, but yet are different. It spans the
capacity for abstract thought, manifested most notably in language, which
enables us to conceive of alternatives to what exists, and to realize such
ideas in material terms, by shaping and making our environment in terms
not predicated in nature. The result is the constructed reality of artefacts,
communications, environments and systems inhabited by the great majority
of human beings in the contemporary world. It links the outer worlds of
nature, and of artifice, with our inner sense of ourselves and our perceptions
of external reality, linking our sense of personal identity to wider patterns of
cultural values. Considering design in this fundamental sense confronts us
with an activity at the core of human existence and how we construct ways
of surviving and giving meaning to life.
Second, in consequence, the world we inhabit is increasingly formed by
human intention, whether by reshaping landscapes through farming or civil
engineering, or buildings in towns and villages, and the contents of every
home, workplace, transportation system or shopping and entertainment
complex. Any tax form, toaster, automobile, airport signage system or
online purchasing service, to take just a few possible examples, does not
emerge from a disembodied process, such as ‘industry’ or ‘technology’. Each
is designed somewhere by someone, by human beings working either singly
or in teams, with the results profoundly affecting other human beings. This
human capacity for design may be exercised well or badly, but its results
affect us all.
This might be fine on a philosophical level, but what does it have to do with
the practice of design in a business context? To explain this, it is necessary to
refer to economic concepts that shape and inform the business world.
The term ‘high-level design practice’ needs some explanation. A
significant development in design in recent decades has been the growth of
its strategic function in some businesses. Basically, this involves using design
as a means of envisaging future scenarios for organizations and planning for

their implementation. Much of the argument for this strategic role hinges
on the relationship between the speed of technological development and
innovation in a period when rapid change and uncertainties are multiplying.
If business motivation in undertaking costly and risk-laden efforts at
innovation is the possibility of substantial economic reward, the role of
design in innovation – its contribution to enhanced economic performance
of products and systems in the marketplace – needs to be clarified. For
design to function as a strategic instrument, therefore, a credible case must
be made for its capabilities in organizations prepared to use it in such terms.
Specifically, any designer aspiring to a strategic role needs to understand
and frame economic arguments for the value of design that makes sense in
a business context.
This concept of design as a strategic and planning instrument is not
yet widespread, although some path-finding consultancies and corporate
groups are demonstrating its usefulness. An obstacle to its wider acceptance
is a widespread perception of design as a range of specific visual skills,
functioning at the executant rather than the executive level. In this sense,
an executant is a designer who carries out the working of ideas that already
exist or are determined by someone else, whereas an executive is responsible
for taking decisions on what is to be carried out. In contrast, however, the
arguments for considering design as a generic human capability, capable of
devising structures and concepts that have no predecessors in nature, means
it can function on many levels and is as much dependent on conceptual as
on manual skills. A further point here is that if design is a matter of mind
as well as hand, we need to acknowledge the need for a body of design
knowledge that encapsulates essential ideas about design.
The first part of this book is therefore a consideration of major bodies

of economic theory, how they condition understanding of design and can
explain its contribution to creating value. They are as follows:
– Neoclassical theory (Chapter 2);

– Austrian theory (Chapter 3);
– Institutional theory (Chapter 4);
– New Growth theory (Chapter 5);
– National theory (Chapter 6);
– Socialist theory (Appendix 1).
– Neoclassical theory is deeply indebted to Adam Smith, widely considered

the founder of modern economics, whose ideas were expanded through the
nineteenth and twentieth centuries to represent the mainstream of theory
in the English-speaking world today, which focuses on the market as the
primary location where value is determined.
– What is known as Austrian theory, indeed, originated in Austria, from

whence important modifications to Neoclassical theory emerged, but has
since developed adherents from a wider geographical range. It argues that
a broader range of factors, such as user perceptions and entrepreneurial
activity, are necessary to understand how value is created.
– Institutional theory, a strong element in the United States, has similarly
evolved substantial modifications of Neoclassical approaches. Essentially, it
is concerned with how firms and other organizations and institutions play a
role in economic functions.
– New Growth theory has substantially evolved through the 1980s from
similar efforts to broaden the scope of Neoclassical theory without denying
its basic tenets and is important for the role it gives to new technology. It
has become the subject of widespread debate in its efforts to clarify many
profound changes taking place at present in the world economy.
The final two strands represent traditions of government involvement
in economic development that have flourished most strongly outside the
United States.
– National theory based on the ideas of a German economist, Friedrich List,
accepts capitalism and competition as central to modern economic activity,
but positions the state as a vital player in its workings. List’s ideas have been
important not only in his native Germany but also in Japan, and subsequently
in the remarkable patterns of growth in East Asia in recent decades.
In addition to the above bodies of theory, another that has had enormous
effect is Socialist theory, in which the work of Karl Marx features so
predominantly. This positions the state as the central controlling force
in what is known as a command economy, organized by government
bureaucrats rather than being left to market forces. It has been put into
practice in many countries in the twentieth century, but with the collapse of
socialism in the Soviet Union and Eastern Europe in the late 1980s, and the
conversion of states such as China and Vietnam to at least partial acceptance
of capitalism, it has rapidly waned. Cuba and North Korea are probably the
only states that are still attempting to run a full command economy and are
hardly recommendations for the success of the system. Nevertheless, it has
been important in recent economic history and its main concepts should be
acknowledged (See Appendix 1).
These topics do not, of course, constitute the whole of economic theory,
but even a short review of them will hopefully give an understanding of the
breadth of economic thinking and its potential for designers who understand
something of these ideas.
Part two, Chapters 7–9, then engages with a more direct exploration of
the dialectic of design and economics, examining design from the standpoint
of economics and then switching to consider economics in the light of design,
before concluding by looking in general at how design can be said to create
economic value.
62
Part One
Economic theory
and design
64
2
Neoclassical theory
The core ideas of Neoclassical theory in its current form emerged in the
period between the two world wars. It has developed in many significant
respects, but continues to be the mainstream of economic thought in the
modern world. At the heart of neoclassical economics is a concept of the
market and how it operates. Basically, markets are mechanisms to allocate
scarce resources. Out of the processes of competition for resources, the
theory claims that market mechanisms, if left to their own workings, will
yield the most efficient allocation in monetary terms.
Markets, of course, were originally specific places in towns or villages
where people gathered to exchange goods and services. Today, the ancient
local forms still exist in most parts of the world, but in addition, these are
overlaid by markets for goods and services that range across the globe and
are complex, impersonal and intangible; nevertheless, they still remain
essential mechanisms for exchanging goods and services.
The basic concepts in Neoclassical theory explain how supply and demand
are reconciled in any market. A market only exists because of scarcity: it
allocates goods that are scarce in relation to the number of people who
desire them. If everybody had enough of what they wanted, there would
be no need for markets. A further assumption about supply is that the
price of each unit will decrease as the quantity produced increases, which
is made possible by economies of scale resulting from increased efficiency
in manufacturing large quantities. This results in the relative scarcity of
products in a market becoming less acute.
Complementing supply is demand: what people are prepared to pay for
goods and services. The quantity demanded will increase as larger quantities
become available at lower prices, that is, people will buy more (Figure 2.1).
Exchange is, therefore, the rationale of markets. Equilibrium is the point
where supply and demand intersect and determine the price customers
are prepared to pay. Equilibrium implies balance and is essentially a static
condition.
These concepts are rudimentary – the kind any student of economics learns
in his or her first lessons and, obviously, Neoclassical theory is immensely
more sophisticated. Nevertheless, some important points arise even at this
Figure 2.1 Supply and supply and demand.
simple level. First, price is the major determinant of value, which ignores
other factors such as quality or differentiation; second, goods are assumed
to appear on the market without any consideration of how they got there –
consideration of product development processes and the role design plays in
them are conspicuously absent; third, firms have no role in this theoretical
depiction – they are assumed to be price-takers, passively accepting the price
determined by the market; and fourth, markets are depicted as static, but, in
fact, they are constantly changing in innumerable ways.
Harold Demsetz (1977), a distinguished American economist, stated the
situation very clearly:
Neo-Classical theory’s objective is to understand price-guided, not

management-guided, resource allocation. The firm does not play a central
role in the theory.1
This emphatically positions design outside the parameters of Neoclassical

theory. Yet, in reality, many companies function as price-setters – targeting
people who will willingly pay more for products embodying superior
qualities. James Dyson’s first vacuum cleaners introduced in Britain
in 1993 were double the price of those of his cheapest competitors. Yet
against established multi-national companies, the superior performance of
his start-up products led market leadership in the United Kingdom inside
two years, an achievement subsequently mirrored in other markets. Design,
as demonstrated by the Dyson example, is essentially about change, and
concepts of equilibrium have limited relevance in explaining change.
To the extent that neoclassicism explains how goods and services are
generated for markets, it does so in terms of two main production functions,
which are the amounts of labour and capital employed in production. Again,
these production functions can be quantified to explain the cost of what is
Neoclassical theory 67
produced, but it does nothing to help understand what is produced and why,
and beyond the dimension of cost, what its quality might be.
To the extent that Neoclassical theory considers consumers, it assumes
any individual acts in terms of rational calculation in market decisions.
Rational consumers are assumed to have three characteristics:
1 Their tastes are consistent (i.e. their tastes are assumed as given and
unchanging over time).
2 Their cost calculations are correct.
3 They make those decisions that maximize utility.2
This assumption of rationality stems in large measure from the work of

another English philosopher and economist, Jeremy Bentham, but has been
given new impetus by the dominance of new mathematical methods in
economics since the 1950s, which had been reinforced by the widespread
availability of computers and databases. A problem with this widespread
adoption of mathematical methodology combined with assumptions of
rationality is that it limits what is considered appropriate in the study of
economics. It stresses what is consistent and calculable, while whatever is
unstable or indefinable is discarded, or as a critic of neoclassicism asserts,
facts must fit the methodology.
A closely related factor in criticisms of neoclassicism is its emphasis
on static models. This can be illustrated by the most indispensable tool in
framing Neoclassical theoretical models, namely, the frequently invoked
Latin mantra ceteris paribus, meaning, ‘other things being equal’. This
phrase means that a model can be set up and anything that inconveniently
disturbs its assumptions can be excluded. It has numerous variants, all of
which are conveniently and somewhat unrealistically used to confirm static
views of any situation.
An example is the condition termed perfect competition, in which the
interplay of supply and demand in the market is assumed to be subject to no
hindrances or restrictions of any kind. Everyone, other things being equal,
has access to the same kind of information about the same kinds of products.
Choice is assumed to be a matter of rationally selecting what is available
within an established range. Choices on innovation by an entrepreneur, or
choices of product or service by a user, are equally subjected to the assumption
of rationality in which the intention is to achieve optimality, the best possible
choice in a given situation of perfect competition. (As will be seen later, perfect
competition also assumes no transaction costs and perfect foresight, a critique
other schools of economic thought address explicitly, as we find later, and
assumptions that are addressed by inserting design into economic theory.)
Curiously, given such assumptions of rational behaviour, how markets
work to efficiently allocate resources rests upon what can only be described
as an act of faith without rational proof. The founder of modern economics,
Adam Smith, explained this in his seminal volume, The Wealth of Nations,
published in 1776, in terms of a concept of ‘the invisible hand of the market’.
He wrote of any individual being led in his or her investment of capital ‘by
an invisible hand to promote an end which was no part of his intention’.3
Markets function efficiently through the aggregate of all individual producer
and consumer decisions, operating as though guided by an invisible hand. If
not interfered with (under conditions of perfect competition), the pursuit of
self-interest by each entrepreneur and consumer produces the most efficient
result to the greatest benefit of all.
Markets are therefore the sum total of each individual’s attempts to
maximize his or her own advantage. However, if any buyer or seller can
manipulate a good’s price or distort the market mechanism, then a condition
of imperfect competition occurs. The extreme form of imperfect competition
is monopoly and it is easy to see the origins of ‘free-market’ economic beliefs
in these theories.
The essential features of Neoclassical theory are summarized in Figure 2.2.
Capital and labour, functioning under conditions of perfect competition, are
subjected to the forces of supply and demand, which are reconciled in the
marketplace in terms of price. When demand for a product is expressed in
willingness and ability to pay a price acceptable to suppliers, a position of
equilibrium is reached.
On the important question of value, Adam Smith defined two aspects,
which he termed value in use and value in exchange. Beyond acknowledging
its importance, he has little to say about value in use since it has no direct
economic relevance.
The things which have the greatest value in use have frequently little or
no value in exchange; and on the contrary, those which have the greatest
value in exchange have frequently little or no value in use. Nothing is
more useful than water: but it will purchase scarce any thing; scarce any
thing can be had in exchange for it. A diamond, on the contrary, has
scarce any value in use; but a very great quantity of other goods may
frequently be had in exchange for it.4
In economic terms, for Smith, exchange value is more important and he

equates it with the value of the labour necessary to produce any commodity.
The cost of this labour sets a level below which any market price cannot
fall without, of course, leading to a loss. Under normal circumstances this is
what any market participant seeks to avoid.
The value of any commodity … to the person who possesses it, and who
means not to use it or consume it himself, but to exchange it for other
commodities, is equal to the quantity of labour which it enables him
to purchase or command. Labour, therefore, is the real measure of the
exchange value of all commodities. … What is bought with money or
with goods is purchased by labour, as much as what we acquire by the
toil of our own body. … Labour was the first price, the original purchase
money that was paid for all things.5
Figure 2.2 The neoclassical model of the economy.
Just as there is little in Smith’s Wealth of Nations that enlightens us as to

why people find things useful or desirable, so also is there in Neoclassical
theory any substantial concern with how products might be different. Its
concept of the market also displays little acknowledgement of the subtle
dynamics of how supply and demand function, with the entrepreneurial

decision-making and innovative processes of firms playing an insignificant
role. If market decisions are, indeed, based on goods that already exist, there
is little left on which to focus beyond price and quantity.
This essentially static concept of processes and products (the ‘evenly
rotating’ economy in neoclassical jargon) means that, at least in the short
term, the key principles of growth and investment, based upon the relationship
between capital and labour, can be argued to be based on constant returns to
scale – in other words, doubling the proportions of capital and labour in any
productive process will result in a doubling of output. Adding more of either
factor without corresponding increases in the other will result in diminishing
returns. For example, to increase capital by buying more machines without
the necessary workers to operate them will result in lower returns on
investment. To reiterate: this will only be so if products, processes and the
levels of efficiency of both capital and labour remain constant.
The obvious problems of these static assumptions are such that might lead
to the question: How can they be credible? The answer is that, in reality, the
markets for many kinds of products do indeed fit these criteria. Products of
a highly standardized nature, for example, materials such as oil or wheat,
commodities such as beer, soft drinks or cigarettes, or shares on any stock
exchange, are not generally subject to changes in their essential character or
how they are produced, because both are essentially static. This being the case,
they are open to rational, numerical inquiry, as Harold Demsetz points out:
This correspondence between conceptualization and commercial reality

enabled Neoclassical economists to draw conclusions that have been
sustained empirically for a wide range of situations. The gathering of
evidence was aided substantially by the commensurate measurability of
commercial activity.
When economists analyze the consumption behaviour of households,
the employment choices of workers, and the investments of capitalists, their
conclusions are largely drawn from the wealth consequences that flow from
alternative decisions. We do not have much to say about tastes and how
these may differ across persons and situations, but, in principle, variations
in tastes also explain variations in behaviour. Our focus, not exclusively but
most often, is on wages, prices, rates of return, and budget constraints. This
works quite well in practice if most tastes change only slowly.6
Note that Demsetz confirms the importance of innate ‘measurability’ and

avoids ‘taste’ with all its uncertainties and unpredictable nature, on which
he comments that in wider aspects of social life,
the difficulty in explaining behaviour even through economic logic is

greater than for commercial activity because the important channels of
causation are more numerous and are less correlated with a single unit
of measurement.7
On the subject of this exclusion of what does not conveniently fit

methodological assumptions, a critic of neoclassicism concludes:
It would seem that when the choice of method dictates the assumptions,
the tail is wagging the dog. Method should follow assumptions, not the
other way around. One cannot discard observations about emotion,
limited reasoning ability, and other aspects of human behaviour simply
because it is methodologically inconvenient to include them.8
The assumptions of Neoclassical theory appear more fragile in any situation

of change in the nature of products and processes, where criteria other than
cost and quantity become significant in market choice. It is here that the
reliance on essentially static concepts in neoclassical models becomes a severe
limitation in understanding design. The processes of creating new products
or product variations, based on an assumption that someone has a better
idea than his or her competitors, by definition creates imperfect competition
and, inevitably, a state of disequilibrium as a permanent condition.
Another common criticism of neoclassicism revolves around its stress
on an individualistic view of society, with social values considered as an
arithmetical sum total of individual intentions.
Neoclassical economics involves an individualistic view of efficiency.

Efficiency is defined as the allocation of resources to ‘highest’, that is,
monetarily most remunerative, uses. Social efficiency is additive, that is,
the summation of private individual efficiencies.9
The potential tension between individuals’ desire to pursue their own

benefit and their simultaneous need for protection from the actions of others
requires people to behave in very different ways in differing situations.
Culturally … a key requirement for a market system will be a set of values

in society that offer vigorous encouragement to self-interest in the market
and yet maintain powerful normative inhibitions on the expression of
self-interest in other less socially acceptable areas.10
If the exercise of self-interest is encouraged in economic affairs, how do

we reconcile this with the need to prevent other people from stealing the
contents of our home or mugging us on the street, which they may consider
to be in their self-interest? It is an interesting correlation that in the United
States, where the doctrine of individualism is strongest, the number of
lawyers needed to protect people’s rights is larger than in any other society.
The emphasis on individualism therefore seems to downplay those
decisions made in any society about what can be consumed individually and
what is needed socially. Choices have to be made, in reality, between pizza and
police forces, or cigarettes and social welfare programmes. In Neoclassical
theory, this leads to a distinction between private goods – bought at a
price – and public goods – paid for by taxes. The former are included in the
market model and therefore are depicted as beneficial. The latter are not
subject to market forces; they are commodities, which, once in existence,
are available to additional people at no cost. An example is street lighting –
there is no competition between suppliers that enables us to choose between
alternative lighting systems when we move down a street.
An important criterion by which private goods are distinguished from
public goods is excludability, or in other words, private goods are those
where one person’s consumption precludes the consumption of the same
unit by another person. When a supplier can prevent some people from
consuming the product – generally speaking, those who do not pay – then
the product is excludable and can be supplied by means of a market. Where
excludability is not possible or enforceable, goods are said to be non-
excludable, that is, their provision to one individual will automatically make
them available to all others, again, as in street lighting.
In the context of capitalist societies preaching the virtues of ‘free markets’,
of which the United States of America is the leading example, excludability
is at the heart of the economic system and there is a constant struggle to
extend and protect its boundaries. The extension of control over things
previously freely available to make them excludable is illustrated by the
example of parking. In the early days of automobiles, parking on the sides
of roads in cities was open to anyone and was therefore non-excludable. As
soon as spaces were demarcated and parking meters installed, with payment
enforceable by law, parking became excludable.
There is a growing problem at present in enforcing excludability. The
advent of devices such as video and digital recorders, print copiers and
image scanners has severely dented the ability of software, music and book
publishers to enforce full excludability on recordings and publications.
Attempts are constantly being made to strengthen laws and regulations to
assert the rights of intellectual property. Excludability is the key characteristic
of the concept of property, which hinges on something being sold or rented
for profit and restricted only to those who can pay for it.
Another elaboration of these ideas is also important. Where one
individual’s consumption of a good reduces the quantity available to others,
then that good is said to be rival in consumption. This is a characteristic of
private goods, which are scarce and require a process of allocation through
market mechanisms. When one individual’s consumption of a good in no
way diminishes the supply of that good to other individuals, the good is said
to be non-rival in consumption. Non-rivalness is a characteristic of public
goods.
Using a simple matrix (Figure 2.3) it is possible to illustrate the influence
of these ideas by juxtaposing the principles of rivalness/non-rivalness and
excludability/non-excludability.
There is no obvious, determining reason why many goods and services
are considered excludable or non-excludable, and considerable variations
can be found in how identical or similar products function in economies.
Figure 2.3 Rivalness and excludability.
For example, sunshine is non-rivalous, available to everyone simultaneously

without cost, but a sunbed has to be bought in the market. Even then, a
further distinction is possible. Bought by an individual, a sunbed is a rivalous
private good – not available to others; bought for a health club, however,
where it is available to a succession of people upon payment, it becomes
non-rivalous but excludable.
Broadcast television in Hong Kong is non-excludable – anyone with an
antenna can receive Channels 1–4, whereas cable television is excludable,
requiring specific connection to the cable system, which is available only on
payment. The television sets required in homes to use either, however, are
rivalous and excludable, whereas in a sports bar they will be non-rivalous
and excludable.
Health care can be considered rivalous, in that a doctor’s time or a
hospital bed taken up by one patient makes it unavailable to other patients.
However, there is widespread debate about whether health care should be
an excludable good, as in the United States, where medical insurance is
primarily the financial responsibility of private citizens, or non-excludable,
as in the public health system provided for all citizens by the government
of Canada.
Excludability, in terms of price in a market, is clearly a fundamental criterion
for commercial production or service provision of any item in a capitalist
economy. Rivalness, with its potential of continuing production and repetitive
consumption, is also important, but not as fundamentally necessary – many
highly successful businesses exploit possibilities of combining non-rivalness

with excludability, for example, Netflix or health clubs. (Edit: Or, to bring
this into contemporary developments, Uber and Airbnb.)
In terms of these ideas, especially at the macro-economic level (the level
of big general principles and of fiscal and monetary steering policies), it is
easy to see how design can be regarded as non-excludable and therefore
of little economic value. On some levels, its outcomes can be easily seen
and easily copied. New concepts of major fashion designers, for example,
will be on the streets around the world via major clothing chains within
two weeks of their appearing at exclusive fashion shows in Paris, Milan,
London or New York. Even though attempts have been made to give designs
protection by licensing systems analogous to patenting, these can usually
be evaded by means of slight modifications of form, pattern or colour.
Product or graphic designs produced in one country or by one company
are also widely imitated by competitors. There are innumerable companies
around the world that specialize in being ‘fast-followers’, adept at producing
imitations of successful innovations with great speed and at low cost. For
this reason, design can be considered, along with sunshine and public
roads, as something virtually impossible to exclude, something that can be
easily acquired at almost no cost. This in large measure explains why some
economists in the United States regard a policy of public support for design
in business as of no potential value.
At the micro-economic level (the operational sphere of business
practice), the influence of neoclassical ideas can also lead to design not
being considered a serious contribution to competitiveness, since it cannot
quantify its contribution; neither is it easy to measure public taste and
preferences. Consequently, in this view, the value of design is restricted to
superficially differentiating products that basically remain the same and
essentially compete on price.
If neoclassical concepts and methods are useful in analysing short-term
events in basically stable markets, their potential for understanding longer-
term patterns of change has been widely questioned. As Jon Elster observes:
Neo-classical theory is at its best when dealing with static settings,

including intemporal equilibria. The extension of the theory to the
dynamic problem of innovation is, however, problematic.11
Difficulties frequently arise when the circumstances under which any body
of theory and practice evolved begin to change. Neoclassicism is increasingly
questioned because in important respects, it does not explain many crucial
aspects of development. In a critique of neoclassicism, British economist
Mark Blaug pointed out:
A competitive economy tends to produce the kind of goods people want

at the lowest possible price because it encourages entrepreneurship and
technical dynamism through a restless struggle for advantage, a struggle
that is not confined to price competition but includes non-price variables,

such as new goods, better old goods, better-serviced goods, and more
quickly delivered goods.12
Technological growth, for example, is an indisputable fact and the effects have
been profound. Before the Industrial Revolution, it is calculated that income
per head doubled only once every five hundred years, but in the last two
hundred years, it has doubled every forty-four years.13 Innovations on every
level of life, in products, processes and organizations, have created economic
growth and substantially improved living standards. Considered in terms of
Neoclassical theory, the two factors of production, capital and labour, are
finite at any point in time, which sets a limit to opportunities for economic
growth. The reason for growth occurring beyond these limitations, and the
key factor in creating and sustaining the modern world can, therefore, be
reasonably attributed to an accelerated pace of technological innovation. Yet,
strangely, in Neoclassical theory, technological progress is not explained, but
has the status of an exogenous variable, something known to be an influence,
but outside the loop of what is clearly understood and can be quantified. In
neoclassical thinking, technology functions in indefinable ways – as a black
box, the workings of which are evident but cannot be known. This is in
contrast to an endogenous factor, something integral to a process or model
and clearly definable. This creates a strange situation.
Technological progress was seen as something that simply rained down
from heaven. Studies show that, in most economies, higher inputs of labour
and capital account for barely half the total growth in output this century.
The huge unexplained residual was labelled ‘technological change’, but in
truth, it was a measure of economists’ ignorance.14
If it is ‘a measure of economist’s ignorance’, as The Economist termed
it (and which journal is better qualified to judge this?), then it also has the
more serious implication that Neoclassical theory can address only half of
what it purports to explain. If increases in investment do not adequately
account for an economy’s long-term rate of growth, and technological
progress is a major contributor, it requires greater understanding of the role
of technology, and the role of design with it, than has hitherto existed.
It is clear that neoclassical economic theory raises many questions and

provides few answers for design theory and practice. The emphasis on labour
and capital as the two factors of production driving decisions in business,
with its emphasis on price, is very limiting, and, given the manner in which
technology is inadequately acknowledged, it should hardly be surprising
that design is ignored. This might help explain, however, some of the lack
of awareness among policy makers in government and business about what
design is and what it can achieve.
Rivalous/excludable goods are most valued in neoclassical theory – for

they are seen as wealth-creating. The view of design as something that in
economic terms is an antithesis, non-excludable and non-rivalous, something
that can be copied at will and difficult to convert into a proprietary good,
consigns it to an economic limbo.
The major emphasis in neoclassical economics on price, in what are
essentially static markets, effectively limits the role of design to producing
something cheaper and/or something superficially different to competitors’
products. The possibility of fundamentally innovative design and qualitative
improvement is not really sustainable in the context of such ideas.
Criticizing Neoclassical theory – the dominant theory of the capitalist
system – from the standpoint of design, however, is likely to have little effect.
Other tendencies in economic theory, nevertheless, with alternative models
of how markets function, offer greater hope for opportunities to explore the
economic role of design.
Readings
Some introductions to neoclassical economics
Truman Bewley (2007). General Equilibrium, Overlapping Generations Models,
and Optimal Growth Theory, Cambridge, MA: Harvard University Press.
Edward Chamberlin ([1933] 1965). The Theory of Monopolistic Competition: A
Re-orientation of the Theory of Value. Cambridge, MA: Harvard University
Press.
Harold Demsetz (1997). ‘The primacy of economics: An explanation of the
comparative success of economics in the social sciences’, Economic Inquiry 35
(1): 1–11.
John Maynard Keynes (1936). The General Theory of Employment, Interest and
Money, many editions available on the internet.
Arjo Klamer (2007). Speaking of Economics: How to Get in the Conversation
(Economics as Social Theory), NY: Routledge.
Adam Smith (1776). Wealth of Nations, many editions available on the internet.
Hal R. Varian (2014). Intermediate Microeconomics: A Modern Approach (Ninth
Edition), NY: W.W. Norton & Co.
Some critical studies

Stephen A. Marglin (1987). Growth, Distribution and Prices, Cambridge, MA:
Harvard University Press
Deirdre N. McCloskey (1998). The Rhetoric of Economics, Madison: University of
Wisconsin.
Jamie Morgan, editor (2015). What is Neoclassical Economics?: Debating
the Origins, Meaning and Significance (Economics as Social Theory), NY:
Routledge.
3
Austrian theory
Many basic criticisms of Neoclassical theory and the formulation of

important alternative concepts and models were prefigured in the work of a
group of scholars who initially came from Austria, although the term now
covers scholars of many nationalities. The difference in emphasis is marked.
If Neoclassical theory puts emphasis on perfect competition resulting from
the intersection of supply and demand – and therefore on price as the agency
that creates and determines equilibrium within basically stable markets –
Austrian theory (which, as one of its American proponents Israel Kirzner
has it, seeks to focus on what has been termed ‘previously unthought
Knowledge’1) puts it quite differently. In this view, the interaction of the
two factors of production (capital and labour) creates opportunities for
innovative strategies that generate product innovations, which in turn create
conditions of imperfect competition – resulting in the destruction of existing
products and the dynamic creation of new demand and new markets. It
is these innovative products that function as the principal agents of value
creation. (See Figure 3.1 below.)
The concern for how value is attributed to products was a major emphasis
in the work of the founder of the Austrian School, Carl Menger (1840–
1921). In 1871, he published a book, Grundsätze der Volkswirtschaftlehre
(Principles of Economics). In the preface he wrote:
Whether and under what conditions a thing is useful to me, whether and
under what conditions it is a good, whether and under what conditions
it is an economic good, whether and under what conditions it possesses
value for me and how large the measure of this value is for me, whether
and under what conditions an economic exchange of goods will take
place between two economizing individuals, and the limits within which
a price can be established if an exchange does occur – these and many
Figure 3.1 Neoclassical economics and Austrian theory compared.
other matters are fully as independent of my will as any law of chemistry

is of the will of the practicing chemist.2
Menger then went on to define each of the terms in italics. He had a tendency
to leave no stone unturned in his efforts to make his meaning clear, which
means his texts are often very detailed and even long-winded. Nevertheless,
Austrian theory 79
many of his insights and ideas are of great relevance to design, as in the
distinction he draws in the following paragraph:
Things that can be placed in a causal connection with the satisfaction of

human needs we term useful things. If, however, we both recognize this
causal connection, and have the power actually to direct the useful things
to the satisfaction of our needs, we call them goods.3
There is an important distinction here. In early human history, there are

many examples of found objects or crude tools that have use. Menger refers,
however, to understanding the connection between use and purpose and the
power to specifically create what satisfies our needs through deliberately
creating forms to serve human needs (a distinction implying design although
Menger never directly refers to the activity).
He continues with a detailed definition of what in his terms constitutes
a good:
If a thing is to become a good, or in other words, if it is to acquire goods-

character, all four of the following prerequisites must be simultaneously
present:
1 A human need.
2 Such properties as render the thing capable of being brought into a
causal connection with the satisfaction of this need.
3 Human knowledge of this causal connection.
4 Command of a thing sufficient to direct it to the satisfaction of
the need.
Only when all four of these prerequisites are present simultaneously can
a thing become a good. When even one of them is absent, a thing cannot
acquire goods-character. 4
A further distinction Menger draws is between goods that directly minister

to people’s needs, which he terms ‘goods of first order’, and the other goods
needed to produce these. He gives the example of bread as a good of first
order, while the flour needed to produce the bread is a good of second order,
while the mill equipment needed to produce the flour can be thought of as
a good of third order, and so on. All will be directly or indirectly involved
in satisfying a human need and are thus subject to being influenced by
the manner in which people define their needs. An American advocate of
Austrian ideas, Murray N. Rothbard, writes:
As Carl Menger, founder of the Austrian School, pointed out, the

valuations by consumers of their satisfactions, or ends, impute values to
the consumer goods, the means, that are expected to satisfy those wants.
And since producers’ goods are only means to the production and sale of
consumer goods, the values of the factors of production will in turn be
determined by and be equal to the expected values of the consumer goods
to the consumers.5
A further definition given by Menger is of an economic good, which is

created by scarcity. It is a ‘good whose available quantity does not meet
requirements completely, and thus we have the principle that the existence of
requirements for goods of higher order is dependent upon the corresponding
goods of lower order having economic character’.6
This leads to a further distinction between property and wealth. The former
is ‘the entire sum of goods at an economizing individual’s command’.7 In
contrast, ‘The entire sum of economic goods at an economizing individual’s
command we will, on the hand, call his wealth.’8
Menger goes on to point out that the perceptions people bring to the
tasks of economizing, or acquiring goods in conditions of scarcity, give rise
to a deeper phenomenon of great importance: the value attributed to goods.
In part this is also due to conditions of scarcity.
Value is thus the importance that individual goods or quantities of goods

attain for us because we are conscious of being dependent on command
of them for the satisfaction of our needs.9
The attribution of value, however, goes beyond quantitative satisfaction of

material needs. It is also dependent on the significance that goods assume
in human life:
Value is thus nothing inherent in goods, no property of them, nor an

independent thing existing by itself. It is a judgement economizing
men make about the importance of the goods at their disposal for the
maintenance of their lives and well-being. Hence value does not exist
outside the consciousness of men.10
It is difficult to overestimate the significance of Menger’s understanding of

how people determine value.11
One of his successors, Friedrich von Hayek, summed up his contribution
in this regard:
At every stage Menger stresses … that these attributes do not inhere

in things (or services) as such; that they are not properties that can be
discovered by studying the things in isolation. They are entirely a matter
of relations between things and the persons who take action about them.
It is the latter, who from their knowledge of their subjective wants, and
of the objective conditions for satisfying those wants, are led to attribute
to physical things a particular degree of importance.12
Austrian theory 81
If value is therefore subjective and determined by users, it is clearly of central

importance in design and business, and yet, there are still many designers
and managers who seem to believe that what they do and supply is the
determinant of value. Menger is emphatic on this point:
There is no necessary and direct connection between the value of a good

and whether, or in what quantities, labour and other goods of higher
order were applied to its production.13
Being subjective, value can change over time and in different contexts. It can
also be mistaken, since as Menger points out: ‘Error is inseparable from all
human knowledge.’14
He acknowledges that not all needs can be directly satisfied and explains
this by distinguishing between the direct satisfaction of needs by products
that have use value, and other goods that can be indirect means of obtaining
satisfaction since they have exchange value:
Use value, therefore, is the importance that goods acquire for us because
they directly assure us the satisfaction of needs that would not be provided
for if we did not have the goods at our command. Exchange value is the
importance that goods acquire for us because their possession assures the
same result indirectly.15
Money has, of course, become the primary embodiment of exchange value,

but Menger also points out that at different times and places, money has
taken very different forms, such as furs, pieces of metal, cattle and shells,
and it therefore has value only at a specific time and place.
A number of Menger’s contemporaries and followers, among them
Friedrich von Wieser, extended his ideas further.16 He also argued that value
could not be defined in terms of labour, but emerged from a combination
of factors relating to scarcity and utility. What is important is not the cost
of production itself, but the products generated and the utility they afford.
Utility, however, had both an individual and a social dimension:
Value is, in the first instance, estimated by every one from a personal
standpoint as ‘value in use’. In the exchange of commodities, however,
these individual estimates join issue, and thence arises price or ‘value in
exchange’.17
In contrast to the neoclassical standpoint that consumers make rational

choices in circumstances of perfect competition, Wieser pointed out:
Prices cannot be taken without qualification as the social expression of

the valuation of commodities; they are the results of a conflict waged
over those commodities, in which power besides need, and more than
need, has decided the issue.18
Another issue in how markets function, Wieser argued, is that although

value in exchange is objective in terms of being defined by price, value in use
is not only particular to individuals but is subjective, leading to the further
question: ‘Why do men prize commodities?’19
Theory has to examine both phenomena. I will restrict myself to showing

why it may not neglect subjective values. The reason is, that it would
thereby leave unexplained all individual decisions in economic matters,
e.g. it would not even explain why any one buys.20
That last sentence is of great significance when considering the economic

role of design, which is linked integrally to the reasons why individuals
make particular purchases. Wieser is correct in emphasizing the subjective
dimension of such decisions, which are not easily specified, but this is no
reason to omit them from any explanation of buyers’ behaviour.
Two other outstanding scholars of the Austrian school in the twentieth
century are Ludwig von Mises and Friedrich von Hayek. There were different
emphases in their work, but both affirmed the ‘invisible hand’ concept – that
price was the factor enabling the myriad decisions of individual people to be
coordinated in a manner beyond the ability of person or group. Both also
challenged the static nature of the market in Neoclassical theory, substituting
instead a more dynamic understanding of its workings.
For Mises, action is only comprehensible in terms of the ideas that generate
it. ‘Human action,’ he wrote (in the eponymous text which is his magnum
opus), ‘is purposeful behaviour.’21 The aim of this purposeful behaviour
is change to achieve improvement in some form or other. ‘Acting man is
eager to substitute a more satisfactory state of affairs for a less satisfactory.
His mind imagines conditions which suit him better, and his action aims at
bringing about this desired state.’22
The influence of Menger is evident when he also stressed that ‘economics
is not about things and tangible material objects: it is about men, their
meanings and actions. Goods, commodities and wealth and all the other
notions of conduct are not elements of nature; they are elements of human
meaning and conduct.’
If the meanings and actions of human beings are the central concern
of Austrian theory, they cannot function in a static world, but in one that
is a process of ceaseless ferment. ‘There is in the course of human events
no stability and consequently no safety,’ stated Mises. ‘Constancy and
rationality are entirely different notions,’ he emphasized, pointing out that
consistency of plans does not entail constancy of observable action in a
world of change. Here again, the factor of valuation plays a crucial role.
‘Only in one respect can acting be constant: in preferring the more valuable
to the less valuable. If the valuations change, acting must change also.’23
*
Austrian theory 83
Hayek’s work similarly criticized Neoclassical theory for its static quality,
arguing that if theory was to be validated in empirical reality, it had to
be dynamic.24 ‘It is, perhaps, worth stressing,’ he wrote, ‘that economic
problems arise always and only in consequence of change.’25 A particular
target in this respect was the concept of equilibrium:
Since equilibrium is a relationship between actions, and since the actions

of one person must necessarily take place successively in time, it is obvious
that the passage of time is essential to give the concept of equilibrium any
meaning.26
Competition for Hayek innately involved change, and he noted that here too
Neoclassical theory tended to avoid its consequences: ‘Competition is by its
nature a dynamic process whose essential characteristics are assumed away
by the assumptions underlying static analysis.’27 The concept of ‘perfect
competition’ was another target in his critique of how neoclassical models
eliminated some of the most important elements of how market actually
worked:
How many of the devices adopted in ordinary life to that end would still
be open to a seller in a market in which so-called ‘perfect competition’
prevails? I believe that the answer is exactly none. Advertising,
undercutting, and improving (‘differentiating’) the goods and services
produced are all excluded by definition – ‘perfect’ competition means
indeed the absence of all competitive activities.28
Hayek did not explore the concept of ‘differentiating’, or other references

to branding and advertising, in anything other than the most general terms,
but he was clearly aware of their role as vital elements in the competitive
process.
In fact, it need hardly be said, no products of two producers are ever

exactly alike. … These differences are part of the facts which create our
economic problem, and it is little help to answer it on the assumption that
they are absent.29
Acknowledging the huge range of human skills, knowledge, tastes and needs
meant for Hayek that any attempt by the state to impose centralized solutions
on any range of problems would result not only in a diminution of economic
efficiency, but also in a restriction of individual freedom. The essential
function of economic activity was to make the best use of whatever resources
were available at any given time, not to impose patterns of what central
planners thought should be the situation. Any attempt to impose centralized
planning would inevitably diminish individual freedom. Therefore, while he
regarded individualism as the vital core of economic activity in a free society,
his views went far beyond the boundaries of economics.
In this regard, it is little accident that Hayek is most famous for a book,
The Road to Serfdom, published at the end of the Second World War,
which is a compelling defence of individualism against the ideologies of
centralized planning that he saw emerging in even ostensibly democratic
societies. He affirmed Adam Smith’s belief in ‘the invisible hand’, arguing
that the spontaneous and uncontrolled efforts of individuals were capable
of producing a complex order of economic activities. For Hayek, although
individualism was the most important principle in society, it did not mean a
dismissal of a role for government:
The dispute between the modern planners and their opponents is,
therefore, not a dispute on whether we ought to choose intelligently
between the various possible organizations of society; it is not a dispute
on whether we ought to employ foresight and systematic thinking in
planning our common affairs. It is a dispute about what is the best way
of so doing. The question is whether for this purpose it is better that the
holder of coercive power should confine himself in general to creating
conditions under which the knowledge and initiative of individuals
are given the best scope so that they can plan most successfully; or
whether a rational utilization of our resources requires central direction
and organization of all our activities according to some consciously
constructed ‘blueprint’.30
Hayek stressed the importance of the legal framework in enabling

individualism to be a realistic possibility and for competition to work
beneficially. Ultimately, though, his justification of individualism and
competition as the only effective method by which markets could be
coordinated rested upon an argument that has become even more relevant
now than when he expounded it. As society has become more complex,
so it becomes more impossible for any one person to understand and
effectively take decisions that cover all the relevant points of any problem.
Decentralization is therefore imperative, leaving decisions to those who
know most intimately the details, the problems and the choices involved.
The more complex the system, he argued, the more urgent the need for
decentralization, which will be more efficient in the long run.31 In addition,
it will allow progress to emerge from variety and diversity in the range of
responses to developments, which may be in unexpected forms that could
never be anticipated by central planners. It is necessary, however, that the
myriad decisions be coordinated in a meaningful way, and the price system
in a market framed by the law and functioning freely within the law, was the
only means to achieve this.
Hayek, as noted earlier, acknowledged the role of a range of activities that
he grouped under the term ‘differentiation’ as vital elements in competition.
When he mentions ‘design’, it is in terms of social science usage, meaning
a plan or intention, specifically on the part of a central planning body. Yet,
Austrian theory 85
when he writes about competition, he is capable of expressing the essence of

what design in the sense used in this book essentially means, and of summing
up its relationship to economics. All that is required is to substitute the word
‘design’ for ‘economics’ in the following paragraph:
The solution of the economic problem of society is in this respect always

a voyage of exploration into the unknown, an attempt to discover new
ways of doing things better than they have been done before. … All
economic problems are created by unforeseen changes which require
adaptation.32
The solution of the design problem of society is in this respect always
ways of doing things better than they have been done before. … All design
problems are created by unforeseen changes which require adaptation.
This congruence between economics and design, both being concerned with
change, both being concerned with efforts to substitute a more satisfactory
state for existing ones, offers considerable scope for exploration and
development.
With the passage of time, people of other nationalities have become

adherents of, and in some cases substantial contributors to, Austrian theory.
In the United States, for example, Israel M. Kirzner follows the general
pattern in criticizing mainstream (i.e., neoclassical) theory, which although
explaining the pattern of relationships in markets that already work, does
nothing to explain how those markets come into being. He argues the case
for ‘entrepreneurial discovery’ as a key factor in explaining why and how
markets work. Entrepreneurial discovery, he argues, ‘enables decentralized
decision-makers to recognize when present decisions can be improved upon,
and to anticipate future changes in the decisions made by others’.33
Kirzner also echoes another constant theme in Austrian theory in his
stress on change and the future. ‘The inescapable and radical uncertainty
faced by each human agent ensures the open-endedness of human choice.
When a human being takes an action, he is, in that action, grasping at a
specific picture of the future as the relevant framework for his action. Action
consists in grappling with an essentially unknown future.’34
For Kirzner, action that determines markets, however, is focused on
entrepreneurial discoveries, which ensures that less efficient productive
action will be replaced by superior ways of serving consumers – by
producing better goods and/or by taking advantage of hitherto unknown,
but available, sources of resource supply. The emphasis is therefore on
discovery of new products and processes in the face of risk and uncertainty,
rather than the exercise of individual preferences in relation to what
already exists. There are limitations, however, to Kirzner’s concept of

entrepreneurial decision-making.
The entrepreneur who ‘sees’ (discovers) a profit opportunity is discovering

the existence of a gain, which had (before his discovery) not been seen
by himself or by anyone else. … When the entrepreneur discovers a
profit opportunity, he is discovering the presence of something hitherto
unsuspected.35
The limitation is that Kirzner’s entrepreneur is not conceiving or creating

something entirely new, but discovering something that already exists in
external reality, but which has not yet been perceived. To some extent, these
are revealed by changing conditions revealing situations of which market
participants were previously unaware. ‘Discovered gain is gain that, despite
its possible prior physical existence was, as far as human cognisance is
concerned, simply “not there”. What brings it into existence, ex nihilo, is
human (entrepreneurial) alertness.’36 The values driving the entrepreneur,
however, according to Kirzner, are still those of price. ‘Whenever an
entrepreneur senses the possibility of pure profit by moving into a new line
of production, or by innovating a new method of production, he is taking
advantage of what he believes to be a case where the market is erroneously
assigning two different values to what is, in economic reality, the same item.’37
In other words, discovery is a transactional process dictated by prices.
Kirzner’s shift of emphasis, from a rational consumer choosing between
given alternatives to a risk-taking entrepreneur seeking better ways of
achieving ends, is important in broadening the understanding of how
markets actually work. His concept of discovery within opportunities
provided by existing frameworks and the role of price, however, implicitly
emphasizes incremental change within what actually exists, which brings his
views closer to the mainstream in the United States. Kirzner has in contrast
little to say about the possibility of radical innovation that creates totally
new products and markets. It is the latter that are raising the most serious
questions in the contemporary world.
If the influence of the Austrian school has not been so great in the academic
world, perhaps the most profound influence it has exercised in the United
States has been in the field of management theory, through the work of Peter
Drucker who was born and educated in Austria, and his views are a classic
manifestation of Austrian economic ideas. One hundred and fifteen years after
Menger articulated the basic principles of the school, Drucker trenchantly
restated them in terms that have been a constant theme in his writings:
‘Quality’ in a product or service is not what the supplier puts in. It is what
the customer gets out and is willing to pay for. A product is not ‘quality’
because it is hard to make and costs a lot of money, as manufacturers
Austrian theory 87
typically believe. That is incompetence. Customers pay only for what is

of use to them and gives them value. Nothing else constitutes ‘quality’.38
In general, the Austrians placed little emphasis on the role of the state.
Hayek repeatedly acknowledged a role for state policy, although not in
terms of economic control, which he vigorously rejected; nevertheless, he
conceded that state action was important in protecting individual liberty.
Most important in Austrian theory, however, is the role of quality as a factor
in competitive success and it is this that opens opportunities for discussion
of design.
Readings
F. A. Hayek (1980 [1948]). Individualism and Economic Order (Reissue Edition),
Chicago: University of Chicago Press.
Hayek won the Nobel Prize in 1974. His Nobel lecture is available online: http://
www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1974/hayek-
lecture.html
Israel M. Kirzner (2011). Market Theory and the Price System, edited, and with
an introduction, by Peter J. Boettke and Frederic Sautet, Indianapolis: Liberty
Fund.
Israel M. Kirzner (March 1997). ‘Entrepreneurial Discovery and the Competitive
Market Process: An Austrian Approach’, Journal of Economic Literature XXXV.
A good summary of Kirzner’s view on the role of entrepreneurs.
Ludwig von Mises (2010 [1947]). Human Action: A Treatise on Economics
(Scholars Edition), Auburn, AL: Ludwig von Mises Institute.
Murray Rothbard (2011 [1962]). Man, Economy, and State with Power and
Market (Scholars Edition), edited by Joseph T. Salerno, Auburn, AL: Ludwig von
Mises Institute.
Karen I. Vaughn (1998). Austrian Economics in America: The Migration of a
Tradition (Historical Perspectives on Modern Economics), paperback edition,
Cambridge: Cambridge University Press.
Leland B. Yeager (Fall 1997). ‘Austrian economics, neoclassicism, and the
market test’, The Journal of Economic Perspectives, Nashville, Volume: 11,
Issue: 4, Pagination: 153–65. This is a balanced appraisal of the strengths
and weaknesses of both Austrian and neoclassical ideas and ends with some
sharp comments upon why the latter is so dominant in American academic
institutions.
4
Institutional theory
Institutional theory seeks to explain the differing levels of economic

performance in firms and nations by examining the context in which
economic activity takes place. In the past, this breadth resulted in criticism
of the lack of operational applications deriving from the theoretical insights.
In more recent years, however, there has been a renewed interest in the field
under the rubric of the new institutional theory.
Although some scholars look to Karl Marx as the originator, the generally
acknowledged father of institutional theory in economics was Thorstein
Veblen.1 He viewed modern society in evolutionary terms, but pointed out
a constant time lag in human institutions adapting to new tendencies in
technology.
Two human tendencies were in conflict over responses to new
developments, generally distinguished by an emphasis on production and
acquisition. The first, production, was based on instincts that strove for
creative adjustment to the new, expressed primarily in efforts to shape new
materials and processes into useful artefacts; in contrast, acquisition was
characterized by efforts to preserve privilege and to avert or restrict the new.
The latter was the target of Veblen’s first major book, The Theory of the
Leisure Class, published in 1899, in which he coined the phrase ‘conspicuous
consumption’ (Figure 4.1). He depicted the emergence of a leisure class as
synonymous with ownership, which has nothing to do with the necessary
subsistence minimum, being concerned, instead, with the demonstration of
superfluity, either in terms of time or of goods.
The relation of the leisure (i.e., propertied non-industrial) class to the
economic process is a pecuniary relation – a relation of acquisition, not of
production; of exploitation, not of serviceability.2
With regard to how this desire to demonstrate wealth affects perceptions
of the aesthetic characteristics of goods, Veblen’s insights were exceedingly
sharp. His identification of ‘economic beauty’ in terms of simplicity of form
anticipates in many respects the emergence of the body of aesthetic theory
collectively known as Modernism that had its heyday in the 1920s. This he
Institutional theory 89
Figure 4.1 Veblen and the Theory of the Leisure Class (1899).
contrasted with the influence of social canons of taste based on conspicuous

consumption:
So far as the economic interest enters into the constitution of beauty, it

enters as a suggestion or expression of adequacy to a purpose, a manifest
and readily inferable subservience to the life process. This expression of
economic facility or economic serviceability in any object – what may
be called the economic beauty of the object – is best served by neat and
unambiguous suggestion of its office and its efficiency for the material
ends of life.3
Veblen then goes on to elaborate his ideas of how design that goes far
beyond what is necessary becomes an index of wealth, in his explanation of
what constitutes conspicuous consumption (see Figure 4.2):
On this ground, among objects of use, the simple and unadorned article is
aesthetically the best. But since the pecuniary canon of reputability rejects
the inexpensive in articles appropriated to individual consumption, the
satisfaction of our craving for beautiful things must be sought by way
of compromise. The canons of beauty must be circumvented by some
contrivance, which will give evidence of a reputably wasteful expenditure,
at the same time that it meets the demands of our critical sense of the
useful and the beautiful, or at least meets the demand of some habit that
has come to do duty in place of that sense. Such an auxiliary sense of taste
is the sense of novelty; and this latter is helped out in its surrogateship by
the curiosity with which men view ingenious and puzzling contrivances.
Hence it comes that most objects alleged to be beautiful, and doing duty
as such, show considerable ingenuity of design and are calculated to
puzzle the beholder – to bewilder him with irrelevant suggestions and
hints of the improbable – at the same time that they give evidence of an
expenditure of labour in excess of what would give them their fullest
efficiency for the ostensible economic end.4
In another of his seminal works, The Instinct of Workmanship (1914),

he closely argued the importance of the linkage between technology and
institutional organization across human history. At the heart of Veblen’s
concept of the importance of institutions in explaining economic practice
was a belief that technological knowledge had throughout history been
something held as a common, inherited stock of capability. It was constantly
being modified by individuals but was not the unique property of any single
person:
Each successive move in advance, every new wrinkle of novelty,

improvement, invention, adaptation, every further detail of workmanlike
innovation, is of course made by individuals and comes out of individual
Figure 4.2 Veblen on beauty and workmanship from the perspective of

economics.
experience and initiative, since the generations of mankind live only in

individuals. But each move so made is necessarily made by individuals
immersed in the community and exposed to the discipline of group life
as it runs in the community, since all life is necessarily group life. The
phenomena of human life occur only in this form.5
The influence of the community was particularly evident in the function of

instincts. An important distinction, in Veblen’s work, was drawn between
reflex responses, or what he called ‘tropismatic action’, and ‘instinct’. He
characterized the former as being an unthinking reaction to stimuli. In
contrast, instinct was the result of reflection on such events, and was more
an action-oriented, goal-directed response to situations. One of the most
important examples was the instinct of parenting, which Veblen regarded
as referring not only to the care of a parent for his or her family, but also,
in a broader sense, to care for the heritage to be handed on to subsequent
generations.
Veblen emphasized: ‘All instinctive behaviour is subject to development
and hence to modification by habit.’6 Instinct therefore has the essential
qualities of being both a highly adaptive means of becoming habituated
to different circumstances, and a capacity for accumulating into a body
of wisdom based on experience (which anticipates major elements of the
later concepts of tacit knowledge and human capital). As such, he regarded
instinct as a crucial capability in enabling humans to rise above the brute
level of nature.
One of the most important instincts in achieving this rise and contributing
to progress was the instinct of workmanship, which Veblen regarded as
being concerned ‘with practical expedients, ways and means, devices and
contrivances of efficiency and economy, proficiency, creative work and
technological mastery of facts’.7
However, this instinct of workmanship does not exist in isolation, but
instead should be regarded as a tool, functioning as a hammer does in
answering the purposes of a craftsman. Fulfilling aims defined from other
sources, however, means it is liable to be drawn into value systems other than
those unique to it. This creates a problem that Veblen calls ‘contamination’,
whereby the working of any one instinct ‘is incidentally affected by the bias
and proclivities inherent in all the rest’, to the extent that distortion may be
a real threat. A capacity for innovation is particularly susceptible to such
influence:
Innovation, the utilization of newly acquired technological insight, is

greatly hindered by such institutional requirements that are enforced by
other impulses than the sense of workmanship.8
In other words, the general cultural context in which technology emerged

could be influenced in either a negative or positive sense. In primitive
societies, the influence of rule by elders, or taboos in many forms, were

examples of such contamination. In the late nineteenth and early twentieth
century, Veblen witnessed the growth of mechanical industry, which he
generally viewed as having enormous positive potential in its contribution
to higher living standards and general welfare. However, in the context of
capitalist economic forms of organization, this emergence resulted in other
forms of contamination, with an emphasis on price, monetary values and
what is calculable becoming particularly evident. He wrote of ‘the supreme
dominance of pecuniary principles, both as standards of efficiency and as
canons of conduct’.9
The results of these values becoming dominant, not only in industry, but
also in society at large, affected not only the instinct of workmanship as
manifested in the processes of production, but also the products emanating
from the process and the values attributed to them in society, leading to
reiteration of one of the main points of The Theory of the Leisure Class:
So also, to the current common sense in a community trained to pecuniary

rather than to workmanlike discrimination between articles of use, those
articles which serve their material use in a conspicuously wasteful manner
commend themselves as more serviceable, nobler and more beautiful than
such goods as do not embody such a margin of waste.10
The distinction between ‘the productive’ and ‘the acquisitive’, or ‘the

industrial’ and ‘the pecuniary’ values in modern society, remained a central
and generally pessimistic feature of Veblen’s theories.
Many of the themes Veblen developed were taken up by another formative
theorist of institutional economics, Clarence Ayres. He shifted the emphasis
to a broader distinction between ‘the technological’ (or instrumental) and
the ‘ceremonial’ (or institutional). Ayres adopted the term ‘instrumental’
from the American philosopher John Dewey, who used it to indicate not
just the tools and skills specific to technology, but also the processes and
meanings involved in applications of technology.
The feature of Dewey’s critique of technology that renders it unique is

his contention that tools or instruments cut across traditional boundary
lines such as those between the psychical and the physical, the inner
and the outer, and the real and the ideal. This idea, which Dewey
cultivated and nourished until it grew into a methodology, was Dewey’s
instrumentalism.11
Ayres’ reformulation of instrumentalism, however, ran into considerable

difficulties. For him, human nature was explained by cultural patterns, which
he subdivided into the material and non-material. In material culture, skills
and tools essentially constituted technology, but Ayres realized that they
could at times assume attributes that were non-material – the possession
of particular objects, for example, could be highly meaningful. Conversely,

ceremonial artefacts that had material form, such as robes and maces,
could not be regarded as technology. This intertwining of instrumental and
ceremonial functions meant the distinction between them was difficult to
sustain, which raised continual problems.12
Institutional economics clearly recognizes that the organization of

technology, its functional processes and its material outcomes are not the
sum total of its influence and effect. Changes resulting in greater technical
or economic efficiency, may, through the perspective of such a limited view,
be regarded as contributing to progress. Confining it to such terms, however,
ignores other factors such as the influence of how technology affects the
behaviour of individuals and organizations, its social consequences and
the values it engenders. All these reaffirm Ayres’ emphasis on the role of
technology in relation to culture. However, later elaborations of Ayres’ work
by one of his students, J. Fagg Foster, and Marc Tool, a student of Foster’s,
attempted to develop clearer classifications by increasingly eliminating
references to technology, which resulted in problems. Eliminating something
that is known to be crucial simply because it is problematic to define is not
to provide a convincing argument.
In contrast to neoclassical economics, early institutional theory broadened
the range of explanation to encompass normative aspects of technological
and economic activity. It also opened up discussion of the role of central
organizations in society and their contribution to efficiency, values and
economic performance. Yet, it failed to have comparable influence, not only
because like neoclassical models it also began to exclude technology in its
causal explanations but, more crucially, because it did not have an adequate
concept of the way its concepts could be implemented in operational terms,
which Neoclassical theory convincingly claimed to do.
This can be explained in part by the fact that institutional patterns and the
interactions of human beings within them are infinitely complex and many-
layered. Social institutions cannot easily be reduced to isolated components.
A change in one part of such an organization has effects and ramifications
echoing through the whole, so that change and adaptation is a continual,
ongoing process. This contrasts strongly with the clearly defined parameters
of Neoclassical economic theory and its claims to ‘scientific’ explanation.
To give a summary, then, of early institutionalism (OIE, or ‘original
institituional economics’): On one side, it broadened the range of explanation
to technological and economic activity and opened up discussion of the
role of central organizations in society and their contribution to efficiency,
values and economic performance. Most emphatically of all (as Figure 4.3
shows), it insists that there is an irreducible institutional component to how
capital and labour (and technology) as factors of production are translated
into innovative strategies.
Figure 4.3 Institutions added to the Austrian model of value creation.

But on the other, it subsequently began to exclude technology in its

causal explanations. A major problem for its take-up in economics was
that precisely because institutional patterns and human interactions are
complex, and not easily reduced to isolated components, it lacked both
clear parameters capable of quantification and ‘scientific’ explanation, and
an adequate concept of implementation in operational terms.
New Institutional Theory

In what has become known as New Institutional Theory (NIE), examining
this pattern of complexity has given alternatives to neoclassicism a
new impetus. A seminal paper in this direction was by Ronald Coase in
1937, ‘The Nature of the Firm,’ in which he questioned the neoclassical
argument that the price mechanism is the determinant in how markets
allocate resources.13 If this was so, he asked, what was the reason for the
existence of firms? In examining the actual workings of firms, he identified
a layer of functions beyond those associated with production that he
termed ‘transaction costs’. These, he argued, were of equal importance to
manufacturing costs in explaining the existence and workings of a firm.
Within transaction costs, he included all the costs that were an essential part
of how a firm undertook its business, such as purchases of materials and
supplies, banking, legal and insurance costs, information and promotion,
design and delivery. Minimizing transaction costs was therefore suggested
as the primary function for firms, but Coase also envisaged how transaction
innovations and efficiencies contributed more widely to an economic model
involving product innovations and dynamic imperfect competition.
Coase later elaborated this view to propose that if one adds to that an
understanding of how one firm interacts with another in a complex pattern
of interrelationships in the context of laws, social habits and cultural
institutions, ‘you have a complicated set of interrelationships the nature of
which will take much dedicated work over a long period to discover’.14
Otherwise, Coase asserted in a trenchant critique of neoclassicism, the
situation will remain that ‘economists study how supply and demand
determine prices but not the factors that determine what goods and services
are traded on markets and therefore are priced’.15
The conclusion of that statement is of enormous relevance in any
discussion of design and economics. How do goods of various kinds appear
on the market and why are they priced as they are?
Coase’s work on transaction costs has been elaborated in the work of Oliver
Williamson.16 He argues that firms and markets are alternative mechanisms
for coordinating transactions, and the choice of one or the other is based on
the respective cost associated with the transaction. Three levels of factors
are all interrelated in how transactions function: individuals, governance
structures and institutional environments.
On the subject of individuals, Williamson argues that human economic
behaviour cannot be regarded as unconditionally rational: ‘Transaction
cost economics expressly adopts the proposition that human cognition is
subject to bounded rationality,’ he states, and elaborates on this by quoting
Herbert Simon ‘– where this is defined as behaviour “intendedly rational,
but only limitedly so.”’17 Bounded rationality is a concept based not only
on recognition of human frailties, such as the existence of self-interested
opportunism, but also on acknowledgement of the difficulty of rational
judgement and the limits to it in complex situations. Information can
be incomplete or costly to acquire, and the true nature of problems and
opportunities in many situations may be veiled.
By governance, Williamson means the processes by which organizations
change and transform themselves. Adaptation is ‘the central problem of
economic organization’, and the capacity to adapt distinguishes levels
of performance between firms. ‘A high-performance system will align
transactions with governance structures in relation to their adaptive needs.’18
The institutional environment is the context, the constitutional framework
and laws, for example, that establish the rules of the game, within which the
institutions of governance function. There may be a significant difference,
however, between the framework of rules and how they are practised or
interpreted by the governance structures.
A major element in Williamson’s work is the drive to make institutional
economics operationally valid and capable of predictive power. To achieve
this, he advocates using transaction costs not just as an alternative to price
analysis, but replacing it as a major focus.
Transaction cost economics avers that the key dimensions are the
frequency with which transactions recur, the uncertainties they are
subject to, the degree of asset specificity, and the ease of measurement.
As it turns out, asset specificity – the degree to which transactions are
supported by durable, nonredeployable assets – is especially important to
the governance of contractual relations.19
Williamson’s analysis of firms’ organization stresses as their central function

the effort to economize on transaction costs. In other words, transactions
are vital means of coordinating decisions on all aspects of a firm’s activities.
However, some critics of Williamson’s work suggest that in his search for
operational validity, he has ended up adopting a methodology based on
a closed system (which emphasizes particular kinds of explanation and
excludes what does not come within the definitions of relevance) that
differs in detail from, but in principle is close to, neoclassical economics.
His emphasis in the quotation above on ‘ease of measurement’ as a key
dimension can also lead to a dependence on quantification with elements

less easily reducible to numbers being omitted from consideration.
In recent years, Douglass North has emerged as one of the most powerful
influences in institutional thinking. Trained as an economic historian, he
was the first person from this particular background to be awarded the
Nobel Prize in Economics, in 1993.20 History, he believes, is important not
for its own sake, but as a crucial means of understanding the present and
facing the problems of the future:
History matters. It matters not just because we can learn from the past,
but because the present and the future are connected to the past by the
continuity of a society’s institutions. Today’s and tomorrow’s choices are
shaped by the past.21
North also emphasizes the role of institutions in establishing the rules of

the game, giving structure to life in a society, which leads to a distinction
between institutions and organizations or between the rules and the
players.22 In comparable social terms, institutions such as laws, customs and
habits set the essential framework of activity, within which organizations
are the players. This leads to a more fundamental purpose in his work:
Separating the analysis of the underlying rules from the strategy of the
players is a necessary prerequisite to building a theory of institutions.
Defining institutions as the constraints that human beings impose on
themselves makes the definition complementary to the choice theoretic
approach of Neo-classical theory.23
If institutions can be described as self-imposed constraints that bring order

and structure to a society, what then is their economic importance? According
to North, this lies in how they affect the costs of exchange and production. It
is institutions, together with technology that determines the transaction and
production costs, that constitute total costs. Figure 4.3 above, and Figure 4.4
below, summarize how the insights of Coase, Williamson and North can be
plotted onto the Austrian model of product innovation revealing this further
dimension of economic possibility.
Institutional change is a complicated process because the changes at the
margin can be a consequence of changes in the rules, in informal constraints,
and in kinds and effectiveness of enforcement. Moreover, institutions
typically change incrementally rather than in discontinuous fashion. How
and why they change incrementally and why even discontinuous changes
(such as revolution and conquest) are never completely discontinuous is a
result of the imbeddedness of informal constraints in societies.24
Figure 4.4 Transaction efficiencies added to the Austrian model of value creation.
In addition, institutions are crucial in explaining historical patterns of

how societies have changed in such divergent ways with very different
performance characteristics, and can give insights into how change might
take place in the future. Understanding how institutions function, however,
is in large measure dependent upon the concept of human nature that
informs any institutional theory, or for that matter, any other social theory.
In rejecting the rational theory assumptions of perfect competition based on
information being equally available to everyone, typical of neoclassicism,
North asserts, similarly to adherents of Austrian theory, that individuals
make subjective choices on the basis of incomplete information. In a passage
that raises implicit questions about design, he points out:
We get utility from the diverse attributes of a good or service or, in the
case of the performance of an agent, from the multitude of separate
activities that constitute performance … when I buy an automobile, I get
a particular color, acceleration, style, interior design, leg room, gasoline
mileage – all valued attributes, even though it is only an automobile
I buy. … The value of an exchange to the parties, then, is the value of
the different attributes lumped into the good or service. … From the
particulars in the foregoing illustrations we can generalize as follows:
commodities, services, and the performance of agents have numerous
attributes and their levels vary from one specimen or agent to another.
The measurement of these levels is too costly to be comprehensive or fully
accurate.25
North accepts that precise answers may not be available in measurable

terms, but still emphasizes the importance of such factors.26 Not only is
equal access to information a myth, but the costs of acquiring adequate
information may also sometimes be far too great to be feasible. Some parties
may be in a position to exploit this inequality and may even have an interest
in concealing information.
Nevertheless, despite the infinite variety of human choice, patterns of
economic exchange are shaped by institutional constraints into a great
variety of forms. North summarizes these as follows:
1 Small-scale production and local trade.

These are small-scale economies typical of most of history. They are
characterized by repeat dealing, a common set of cultural values,
and a high degree of trust requiring little third-party enforcement.
Transaction costs are low, but rudimentary specialization and division
of labour means transformation costs are high.
2 Impersonal exchange with constraints.

As economies grow in scale, with early long-distance trade, the scale
and complexities of exchange increase and patterns of exchange evolve,
with parties constrained by such factors as kinship ties, bonding,
exchanging hostages or merchant codes of conduct, often reinforced
by rituals or religious sanctions. This enables wider markets to emerge
on the basis of larger-scale production.
3 Impersonal exchange with third-party enforcement.

This is typical of modern economies, which are more impersonal,
requiring complex contractual relationships for their functioning.
Personalized relationships and codes of conduct might still be
important, but the returns for opportunism and dishonesty require
some form of coercive third party, which is best achieved by creating
a set of rules that make constraints effective.
The interplay of subjective preferences and formal institutional constraints

developed in specific cultural contexts may carry over through historical
time and provides a cultural filter that can be an element of continuity in
changing situations (and is for the emergence of the ‘firm’ or company or
corporation).
If institutions provide constraints, then it requires knowledge to
understand how best to work within or through these constraints. The
incentives available in any institutional context will to a large degree be
reflected in the knowledge and skills used to function in that context.
Different kinds of payoffs will require different knowledge. The task
of management, therefore, is to acquire the appropriate knowledge of
products, production and markets in situations of uncertainty and risk.
What knowledge is acquired and how it is applied will be decisive for the
future not only of firms but also of societies. If the firm or other economic
organization invests in knowledge that increases the productivity of the
physical or human capital inputs or improves the tacit knowledge of the
entrepreneurs, then the resultant productivity increase is also consistent
with the growth of the economy.
North distinguishes between the contrasting effects of allocative efficiency,
the standard neoclassical approach and adaptive efficiency, based on rules
that shape the way an economy evolves over time. The extent to which
a society is willing to encourage new knowledge and learning, stimulate
creativity and innovation, and undertake risk, together with procedures to
resolve conflicts, is heavily conditioned by the institutional structure and
a powerful factor in how societies evolve. ‘Adaptive efficiency, therefore,’
states North, acknowledging Hayek, ‘provides the incentives to encourage
the development of decentralized decision-making processes that will allow
societies to maximize the efforts required to explore alternative ways of
solving problems.’27
A particular emphasis in North’s concept of adaptive efficiency is the
role of tacit knowledge as a crucial element in creative entrepreneurship.
The extent to which it is acknowledged and encouraged in the internal
structure of firms will substantially depend upon the institutional structure.
A connection not made in his arguments, but implicit in them, leads to the
conclusion that tacit knowledge is to individuals what culture is to a society.
Just as tacit knowledge is the factor that accounts for how an individual
behaves within formal constraints, and may function in very different

ways, so the survival of cultural characteristics, as North points out, makes
informal constraints function in a different manner and change at a different
rate to formal rules. Institutions and technology are therefore identified by
North as the building blocks of change. Both are liable to path dependence,
but technology is more open to the effects of individual decision-making.
Since institutions are embedded in a complex range of political, economic,
social and cultural influences, any substantial process of change must
necessarily incorporate the institutional dimension.
Integrating institutional analysis into static Neoclassical theory entails
modifying the existing body of theory. But devising a model of economic
change requires the construction of an entire theoretical framework,
because no such model exists. Path dependence is the key to an analytical
understanding of long-term economic change. The promise of this approach
is that it extends the most constructive building blocks of Neoclassical
theory – both the scarcity/competition postulate and incentives as the driving
force – but modifies that theory by incorporating incomplete information
and subjective models of reality, and the increasing returns characteristic of
institutions. The result is an approach that offers the promise of connecting
micro-level economic activity with the macro-level incentives provided by
the institutional framework.
While Williamson has been criticized on the grounds that his attempts
to make institutional theory more effective in operational terms has led to
a methodology similar to neoclassicism, with problems of a closed system,
North’s approach deliberately avoids this trap. While acknowledging the
need for formal rules, he also stresses informal behaviour; rationality is
balanced by subjectivity, stability by change, the macro-economic dimension
related to the micro-economic. His reference point in history gives an
awareness of how change has actually taken place and enables theoretical
positions to be tested against a spectrum of historical occurrences.
Readings
Ronald Coase (1998). ‘The New Institutional Economics’, American Economic
Review 88 (2): 72–4.
Douglass C. North (1991). ‘Institutions’, Journal of Economic Perspectives 5 (1):
97–112.
Elinor Ostrom (2010). ‘Beyond Markets and States: Polycentric Governance of
Complex Economic Systems’, American Economic Review 100 (3): 641–72.
Douglass C. North (1995). ‘The Adam Smith Address: Economic theory in a
dynamic economic world’, Business Economics, Washington, January 1995,
Volume 30, Issue 1, Start Page: 7. An excellent summary of many of North’s
most important ideas.
Thorsten Veblen (2009 [1899]). The Theory of the Leisure Class (Oxford’s World
Classics), NY and Oxford: Oxford University Press.
Douglass C. North (1991), ‘Institutions’, Journal of Economic Perspectives 5 (1):

97–112.
Douglass C. North and Robert Paul Thomas (1973). The Rise of the Western
World: A New Economic History. Cambridge and NY: CUP.
Oliver E. Williamson (1995). ‘The institutions and governance of economic
development and reform’, World Bank Research Observer, Washington, DC. A
major lecture by Williamson that gives a strong defence of his views.
5
New Growth theory
Since the 1980s, a new body of ideas generally known as New Growth
theory has emerged in the United States that has also significantly extended
the concepts of Neoclassical theory. Until that time, work exploring
alternative concepts of how growth occurred was limited, although several
core themes were broached.1 One of the most significant contributors was
Joseph Schumpeter,2 who was born in Austria, studied under adherents
of the Austrian School, but later came to differ from them in important
respects. His analysis of capitalism, however, is undoubtedly conditioned by
his grounding in the tenets of Austrian theory and has yielded concepts that
have subsequently had profound influence in the United States of America.
The influence is evident in the model that Schumpeter evolved in the
1930s, depicting growth as innate to capitalism. He argued that growth
was driven by the interaction of technological development and competition
between firms.
Technological Development
+ = Economic Growth
Competition
This interaction had consequences that were directly opposed to the static
view of the neoclassical economy:
Capitalism, then, is by nature a form or method of economic change

and not only never is but never can be stationary. … The fundamental
impulse that sets and keeps the capitalist engine in motion comes from
new consumer goods, the new methods of production or transportation,
the new markets, the new forms of industrial organization that capitalist
enterprise creates.3
Schumpeter did not go into any level of detail on the new goods and
markets generated by this dynamism, matters necessary to understand the
role of design, but he strongly emphasized the role of innovation as the
New Growth theory 105
main stimulant of growth. Historically, he discerned capitalism moving

in ‘discrete rushes’ or long waves: every fifty years or so, technological
revolutions would sweep old industries away and replace them by new ones
in a process of ‘creative destruction’ (perhaps Schumpeter’s most famous
phrase). Each wave of technology would fire up investment and provide new
jobs to replace those lost.
Schumpeter also recognized the limitations of Neoclassical theory in its
incapacity to deal with dynamic changes:
The problem that is usually being visualized is how capitalism administers

existing structures, whereas the relevant problem is how it creates and
destroys them.4
Price, Schumpeter concluded, was not the dominant criterion in competition:
Economists are at long last emerging from the stage in which price
competition was all they saw. As soon as quality competition and sales
effort are admitted into the sacred precincts of theory, the price variable
is ousted from its dominant position. However, it is still competition
within a rigid pattern, of invariant conditions, methods of production
and forms of industrial organization in particular, that practically
monopolizes attention. But in capitalist reality as distinguished from its
textbook picture, it is not that kind of competition which counts but the
competition from the new commodity, the new technology, the new source
of supply, the new type of organization (the largest-scale unit of control
for instance) – competition which commands a decisive cost or quality
advantage and which strikes not at the margins of the profits and the
outputs of the existing firms but at their foundations and their very lives.5
Modern technological history provides support for Schumpeter’s ideas of

waves of change. The first long wave, from the 1780s to the 1840s, brought
steam power and a revolution in manufacturing; the second, from the 1840s
to the 1890s, saw the construction of railway systems; the third, from the
1890s to the 1930s, was based on electric power; and the fourth, from the
1930s to the 1980s, brought automobiles fuelled by cheap oil. At present,
it can be argued, we are in the early stages of a fifth long wave driven by
Information Technology.6
It is this emphasis on the role of technology (and through the latter, ideas)
that new growth theory adds to Austrian theory (Figure 5.1).
It is the growing impact of new technology on multiple levels that explains
why interest in Schumpeter’s ideas has undergone a powerful revival in the
last two decades. Although providing a valuable platform of ideas, however,
he did not go into great detail on precisely how technology functions in
promoting growth. To expand upon Schumpeter’s basic insights has been
the role of the leading proponents of new growth theory, among them, Paul
Romer, Paul David, Nathan Rosenberg and W. Brian Arthur.
Figure 5.1 Austrian theory and New Growth theory compared.
Romer’s work focuses on the missing element of technology and

incorporates it directly into models of economic growth by explaining
how knowledge is created and spread through the economy. Unlike the
two conventional factors of production, labour and capital, he argues,
ideas are not scarce. Therefore, a sustained flow of ideas for more efficient
processes and new products potentially makes continuous growth possible.
His emphasis on knowledge downplays the necessary hardware associated
with technology and the objects it generates, and instead emphasizes ideas
of how technology is used. Knowledge of technology and experience in
its applications can appreciate into human capital, a powerful concept in
explaining why many firms are more proficient than others in innovation.
Romer’s basic premise can be diagrammed as
Technology = information = knowledge = ideas

or
Technology = experience = knowledge = ideas
Romer therefore added another production variable, knowledge, to labour

and capital. This makes the production function more plausible, in several
ways.
1 Knowledge about how to effectively develop products and processes

can raise returns on investment. This can explain the evidence on
increasing growth in richer, more technologically advanced countries,
with a high level of this kind of knowledge, and the continuing
lag in growth rates among most poorer countries which have a
corresponding ‘knowledge gap’.
2 Knowledge, as a factor of production, is not some vague attribute,
but is specific and requires investment in the same way as machines.
3 Investment in capital opens the possibility of a virtuous circle in which
investment spurs knowledge and knowledge spurs investment.
Nathan Rosenberg similarly emphasizes the element of knowledge in

making technology into an effective instrument beyond the confines of price
competition:
Technical progress is not one thing; it is many things. Perhaps the most
useful common denominator underlying its multitude of forms is that it
constitutes certain kinds of knowledge that make it possible to produce
(1) a greater volume of output or (2) a qualitatively superior output from
a given amount of resources.7
For Romer, however, one more factor of production is not simply important
in an additive manner. In the context of events in the contemporary world, it
has a multiplier effect, requiring a basic shift in approach. He emphasizes that
‘the difference between the economics of ideas and the economics of objects is
important for our understanding of growth and development’.8 This point is
extremely important in comprehending many developments in contemporary
economies, and he illustrated it at length in an interview in Forbes magazine:
Take oranges as an example of a product that’s an ordinary object.

There’s a cost of producing each additional orange, and the cost of the
next orange is pretty much the same as the cost of the last one. You’ve
got to give up the use of some land, plant new orange trees, harvest the
oranges and so on. So each orange has a constant cost of production.9
Romer then continues by comparing the economics of objects with the

economics of ideas:
Now consider the famous chemical process, the polymerase chain

reaction, as an example of an economic product that’s an idea. There
was an incredible amount of expense associated with producing the first
use of the polymerase chain reaction – PCR for short – is a remarkably
simple technology for taking a tiny amount of DNA and multiplying it.
You put your DNA molecules in a solution, add a particular enzyme,
then heat the solution and cool it. Every time you heat and then cool the
solution, the number of DNA molecules doubles. In a single afternoon,
you could go from a couple of DNA molecules to billions. An incredible
amount of research expense went into the discovery of PCR. But once
it was discovered, it was just basically a recipe. The recipe could just
be published on the Internet, and then anybody in the world would be
able to use this amazing technology at zero additional cost. So the key
difference between objects and ideas – between oranges and a high-tech
process like PCR – is this: Objects tend to have a constant cost per unit.
But ideas have a huge cost for the first unit, then essentially zero costs for
each additional unit.10
Increases in the production of objects is therefore achieved by a replication

of existing, known methods of production, which will yield an increase on
the basis of constant returns to scale.
This is very different indeed from the production of new knowledge,
which is not only very costly to develop, but also creates vulnerability for
any company undertaking it. Only if rights to its use are established and a
reasonable return on investment expected will a company undertake such
development. Otherwise, without guarantees of some kind of protection, it
is not worthwhile for firms to undertake such work, which is why elaborate
systems to protect intellectual property rights are necessary. For this reason,
Romer also argues, in a controversial aspect of his theory, that monopolies
may not be a source of all evil by undermining perfect competition, as
depicted in Neoclassical theory. They may indeed be necessary to raise
barriers, protect ideas and ensure adequate benefit to their creators in the
processes of growth.
Implicit in this division between the economics of objects and ideas is that
the former is essentially grounded in Neoclassical theory, while the latter is
the central emphasis in new growth theory. The latter, however, does not
refute the core ideas of the neoclassical tradition, but seeks to expand it, and
incorporate a richer range of possibilities into the mainstream.
Neoclassical economic studies of growth have a tendency, as already

mentioned, to deal with problems on the macro-economic level – with little
attention given to technology in detailed terms. ‘Ideas,’ says Romer, ‘are
routinely ignored.’11 He argues that technology is endogenous, integral to
the processes of growth and a necessary, essential element in understanding
it. New growth theory not only acknowledges radical technological change
on a large scale, but also the implications of change at the level of the firm.
Rosenberg draws attention to the factor he terms ‘direction’, by which he
means ‘the distinction between inventive activity that is directed toward
product improvement or entails the invention of a new product, and
inventive activity that is cost-reducing-or process invention’.12
The latter in particular opens up consideration of the constant, incremental
processes of improvement that on a smaller scale add up over time to
substantial changes. Early historical studies of innovation diffusion tended to
be based on neoclassical concepts. These depicted essentially static scenarios,
with new technologies having predetermined characteristics launched on
potential users, similarly unchanging in their characteristics, who had to
decide whether the innovation was useful to them. As Rosenberg notes:
Technical progress is typically treated as the introduction of new processes

that reduce the cost of producing an essentially unchanged product. …
At the same time, however, to ignore product innovation and qualitative
improvements in products is to ignore what may very well have been the
most important long-term contribution of technical progress to human
welfare. … To exclude product innovation from technical progress,
especially when we are considering long historical periods, is to play
Hamlet without the prince.13
More recent research, however, depicts a more risk-laden pattern of

innovation. Many feasible technologies, both products and networked
systems, fail or face initial difficulty if they are introduced in a form or
under market conditions that are unsuitable. Other new concepts may have
limited success in terms of applications and markets. Subsequently, however,
says Rosenberg, failure can be retrieved, or limited markets can evolve into
a broader range of profitable applications.
Thus, there may be a long gestation period in the development of a new
technology during which gradual improvements are not exploited because
the costs under the new technology are still substantially in excess of those of
the old. However, as the threshold level is approached and eventually pierced,
adoption rates of the new technology may become increasingly sensitive to
further improvements. Thus, very large technological improvements may be
made in an innovation during its ‘prenatal’ period without any substantial
repercussions. Conversely, even small further technological improvements
made after the innovation has reached a threshold level may lead to rapid,
large-scale productivity consequences.14
Paul David particularly emphasizes the significance of incremental change

in ensuring acceptance of innovations. The extent to which this is possible,
he argues, will be significantly affected by two factors: first, the diffusion of
knowledge about a new technology, and second, the rate at which the costs
of acquiring an innovation are reduced. This latter may involve both specific
equipment and access to special services or facilities. All these costs will
generally be expected to decline as an innovation is more widely adopted.
It is at this stage that David’s concept of incremental improvement becomes
significant, based on constant sources of feedback within the production
process and from contact with customers:
The existence of these sources of positive feedback brought about by the

irreversible, dynamic, decreasing cost effects of the diffusion of a new
technology implies that small initial advantages or disadvantages can
cumulate readily into large advantages or disadvantages in comparison
with alternative technologies. A particular product design, process
technology, or organizational system thus can become ‘locked in’, while
rival technologies are ‘locked out’ through the workings of decentralized
competitive market processes.15
Rosenberg, in underlining the importance of this cumulative process

of a range of incremental innovations, points out the importance of
complementarities in smoothing the diffusion process.
It is characteristic of a system that improvements in performance in one

part are of limited significance without simultaneous improvements in
other parts. … Really major improvements in productivity therefore
seldom flow from single technological innovations, however significant
they may appear to be. But the combined effects of large numbers of
improvements within a technological system may be immense.16
Ideas, on whatever scale, are therefore crucial generators of value. The

phenomenon of lock-in is also an important concept, leading on as it does
to other concepts of path dependency, increasing returns and first-mover
advantage, which will be dealt with later.
If emphasizing the kinds of knowledge relevant to understanding
technology and its role in growth has led to Paul Romer’s distinction
between ideas and objects, in Paul David’s work, it is complemented by an
emphasis on the contribution of technological knowledge in its own right,
rather than as an executant adjunct of scientific research:
It is widely appreciated that for much of the world’s history new

technologies had little indebtedness to what we would call ‘science’.
Even today, inventions do not necessarily follow from applied scientific
discoveries. Technological mastery may run far ahead of science and is in
many regards both a stimulus to scientific inquiry and the means whereby
such inquiries can be conducted.17
Rosenberg also argues that technology has its own validity and importance
as a source of innovative ideas:
Technology is itself a body of knowledge about certain classes of events

and activities. It is not merely the application of knowledge brought from
another sphere. It is a knowledge of techniques, methods, and designs
that work, and that work in certain ways and with certain consequences,
even when one cannot explain exactly why. It is therefore, if one prefers
to put it that way, not a fundamental kind of knowledge, but rather a
form of knowledge that has generated a certain rate of economic progress
for thousands of years. Indeed, if the human race had been confined to
technologies that were understood in a scientific sense, it would have
passed from the scene long ago.18
David argues that for a long time, most economists’ concept of technological
progress has been expressed in terms of a linear, reductionist approach that
has dominated the discipline as a whole. He refers to it as the Simplest
Linear Model, or SLIM (see Figure 5.2). This depicts technological change
and productivity growth as the outcome of a unidirectional causal sequence,
capable of being graphically represented by a series of boxes, each connected
to the next by a single arrow.
David explains the SLIM concept as follows:
The system flow-chart tells us that (1) fundamental science yields

discoveries, which lead to (2) experimental findings of applied science,
leading to (3) acts of invention, which provide the stimuli and basis for
(4) entrepreneurial acts of innovation (commercial introduction of new
products and production methods), which incite (5) imitation and so
bring about (6) diffusion of new technology into general use.19
Three major criticisms follow for David:
1 Inadequacy in accounting for the evolution of scientific and

technological knowledge.
Figure 5.2 The standard linear model of technological progress.

2 Science is separated into fundamental and applied compartments,

with the first appearing as exogenous to the economy, yet driving the
innovation sequence.
3 Changes in technological opportunity conceived as resulting from
scientific research ignore the evidence that most long-run increases in
processes and products result from innumerable small improvements,
resulting from experience in production and close contact between
manufacturers, vendors and users.
In contrast, David advocates a more holistic approach to account for the

interlocking nature of how new technology culminates in market innovation.
This should acknowledge the ‘organized complexity’ that in historical terms
includes elements of inertia and continuity, but in the long term stimulates
fundamental economic change.
Paul Romer also argues the value of a broad-based concept of innovation
in explaining growth:
In a world with physical limits, it is discoveries of big ideas (for example,

how to make high-temperature superconductors), together with the
discovery of millions of little ideas (better ways to sew a shirt), that make
persistent economic growth possible. Ideas are the instructions that let us
combine limited physical resources in arrangements that are ever more
valuable.20
Even in a very simple manufacturing process, he points out that a range of

options exists about how to execute a sequence of operations. This generates
a huge range of possibilities, each capable of yielding improvement in
processes. If a more complicated process, such as assembling an automobile
is considered, the range of possibility rapidly spins off into huge orders of
magnitude.
New Growth Theory identifies three special features that make growth
possible. First, we live in a physical world that is filled with vastly more
unexplored possibilities than we can imagine, let alone explore. Second,
our ability to cooperate and trade with large numbers of people makes
it possible for millions of discoveries and small bits of knowledge to be
shared. Third, and most important, markets create incentives for people
to exert effort, make discoveries, and share information.21
An important element of Romer’s belief that skill at all levels can make
a decisive difference, not only in big discoveries, but also in constant
incremental improvements is illustrated by the methods used by Japanese
manufacturers that have done so much to explain their extraordinary rise to
global leadership in so many product sectors.
A couple of decades ago, U.S. manufacturers thought they had figured

out most of what you needed to know about assembly-line operation.
American factories were based on traditional time and motion studies.
Workers adhered rigidly to those directions.
Then the Japanese came along and institutionalized the notion of
discovery. On Japanese assembly lines, the workers were supposed to
experiment with slightly different ways of doing their jobs. Japanese
workers were given the freedom, for example, to try putting the rearview
mirror on the door before putting the door on the car, and then to try it the
other way around, finding out which was more efficient. Over time, the
Japanese gained a big competitive advantage. Today, American firms are
trying to institutionalize this process of experimentation and discovery –
GE is one of the companies that’s giving its workers more flexibility. This
move toward institutionalizing the whole process of discovery is a really
profound change in the nature of economic activity.22
Companies will clearly need to understand that the nature and pace of
change based on new ideas will increase and corporate strategy must evolve
to cope with it. Another consequence is that in many sectors of the economy,
knowledge workers involved in various levels of discovery and design are
not only significantly growing in numbers, but they are also becoming
vital elements in the existence and success of firms, with a corresponding
reduction in the numbers of those who actually carry out the manufacturing
function. Romer says:
If you think about it in terms of production at a company like Microsoft

or a big drug company, you’ll see that by far the most important activity
at those companies is getting the instructions right. At Microsoft,
they’ll spend tens of millions of dollars getting down a particular piece
of software code. But once they’ve got the code, it’s an almost trivial
operation to manufacture the product. Somebody inserts floppy disks
in a machine and makes copies, and somebody else puts them in a box
and ships them. The fraction of workers at Microsoft who actually
manufacture the physical product is very small.23
Understanding the potential for growth unlocked by these new theories,

however, is perhaps most clearly encapsulated in the concept of increasing
returns, mentioned earlier, which is another substantial challenge to
traditional economic theory. Paul Romer argues that technology as a factor
of growth is responsive to investment in it, or in other words, the chances of
a technological breakthrough can be exponentially increased in proportion
to the resources committed to the search:
Think about prospecting for gold. For you as an individual, the chances
of finding gold might be so small that it would seem like pure serendipity
if you actually did. But if you have 10,000 people out looking for gold
across a whole geographical area, the chances of finding gold greatly
improve. For society as a whole, it is very clear that discovery – whether
of gold or of new technology – is a function of how much effort we put
into it.24
Further, technology can raise returns on investment, stimulating a pattern of

increasing returns, contrary to traditional theory, which postulates a pattern
of diminishing returns. Investments in technology can increase knowledge
and knowledge can improve the effectiveness of investments, thereby
creating a virtuous circle, a permanent pattern of growth in an economy.
W. Brian Arthur argues that diminishing returns was a valid concept
in the days of nineteenth-century smokestack industry, and still is valid in
resource-based industries such as agriculture and mining, but not in the new
knowledge-based industries:
Steadily and continuously in this century, Western economies have

undergone a transformation from bulk-material manufacturing to design
and use of technology – from processing of resources to processing of
information, from application of raw energy to application of ideas.
As this shift has occurred, the underlying mechanisms that determine
economic behaviour have shifted from ones of diminishing to ones of
increasing returns.25
The two models of economic behaviour now exist side by side, says Arthur,
and again a conclusion is reached that the new patterns require very different
concepts, organization and management. In high-technology industries,
when one firm gets an initial toehold in the market, it can establish a
position of dominance, ensuring increasing returns rather than the slow
wastage of diminishing returns. The message once more is that flexible and
rapid responses to opportunities for incremental improvements and better
fit across systems can help consolidate dominance.
Aircraft, he points out, typically cost $2–3 billion to design, but each
aircraft produced will cost in the range of $50–100 million, with the cost
reducing as more are manufactured. There may also be substantial benefits
from the increasing efficiency of complementary technologies or functions
required in a networked system:
Not only do the costs of producing high-technology products fall as a

company makes more of them, but the benefits of using them increase.
Many items such as computers or telecommunications equipment work in
networks that require compatibility: when one brand gains a significant
market share, people have a strong incentive to buy more of the same
product so as to be able to exchange information with those using it
already.26
The establishment of such dominance is characterized by the concept of lock-

in, with one product or system establishing total control of a market. Arthur
illustrates this with examples such as the DOS system, which became locked-
in as the operating system of preference over the Apple’s Macintosh system,
and the victory of VHS over Betamax in the video-recorder market. In both
cases, victory did not go necessarily to the best system in terms of either
technical quality or operating simplicity, but to the system that established
early dominance and reinforced it in every available direction. In the case of
computer operating systems, for example, Arthur describes the importance
of Microsoft’s deal with IBM for the development of the DOS system:
It was not predictable in advance (before the IBM deal) which system
would come to dominate. Once DOS/IBM got ahead, it locked in the
market because it did not pay for users to switch. The dominant system
was not the best: DOS was derided by computer professionals. And once
DOS locked in the market, its sponsor, Microsoft, was able to spread its
costs over a large base of users. The company enjoyed killer margins.27
It must be re-emphasized that Arthur acknowledges the two economic

approaches existing side by side; indeed they may coexist between different
product lines within a single company. Nevertheless, where it applies, the
concept of increasing returns not only stands the theory of diminishing
returns on its head, but also undermines the idea of perfect competition –
the theoretical underpinning not just of the Neoclassical theory of growth
but also of a good part of modern economics.
The concept of perfect competition places central emphasis on the price
function as it emerges from the interplay of supply and demand. This means
that firms are conceived as price-takers: they accept the price determined in
the market and cannot change it. Given the assumption of constant returns
to scale (if you double the amount of both capital and labour, you will get
twice as much output at identical cost), this seems reasonable. There is little
firms can do to materially alter the market situation. If they cut prices to win
a bigger share of the market, they achieve no further economies of scale and
therefore risk losing money.
With three factors of production, the assumption of constant returns
to scale is no longer viable. When all the factors are taken together, the
production function shows increasing returns: if you double all the factors,
there is a multiplier effect and output more than doubles. Firms can therefore
potentially lower prices, raise output and make bigger profits than before.
With increasing returns, therefore, competition is imperfect, which means
firms are price-setters, more dynamic players in determining their own
course, not price-takers.
The emphasis on technology and ideas has also opened up a greater
understanding of what is termed human capital, the kinds of knowledge
important in sustaining growth.
Paul David uses a distinction between tacit knowledge and coded

knowledge, which draws on earlier work by Michael Polyani.28 Tacit
knowledge refers to a vast range of procedures and experience, a build-
up of innate knowledge and inherent skills derived from practice, that are
profoundly important in how businesses of any kind function. In economic
terms, it can be a purely private good. For us as individuals, what we learn
as a result of our education and experiences is specific to us. We can share
it, if we wish, passing it on by example and practice, or it can also be kept
to ourselves, and remain specific to us, whatever the context of our work. A
commonplace example of tacit knowledge is knowing how to ride a bicycle.
No set of instructions is capable of giving us a recipe for learning how to
learn to do this. The only way is by getting on a bicycle and learning from
the slow and often painful processes of trial and error. Once that magic
moment of achieving the necessary balance and control is achieved, however,
it remains with us as a piece of tacit knowledge for the remainder of our
lifetime.
Tacit knowledge is a rival good in that no one else can take over our
particular knowledge of how to ride a bicycle – it simply is not transferable.
In many subtle but underestimated ways, such knowledge is a crucial
element in the practice of innumerable skills vital to firms and their business,
and it is particularly important in design practice. The extent to which an
organization understands the role of human capital, and the values placed
upon it in the management of organizations, is therefore clearly one of the
most important elements in any business based substantially on ideas.
In contrast, however, other kinds of knowledge vital to the existence and
operations of firms may need to be coded and explicitly communicated. This
can take many forms – being embodied in documentation in the form of
patents, licensing agreements, proprietary information, contracts, formulae,
data and manuals, or other formats.
In economic terms, this kind of coded knowledge is potentially a public
good, which in its purest form is represented by research published in
scientific journals, to which anyone having a requisite understanding of
the codes used can have open access. Anything written down is potentially
available to anyone who possesses the ability to understand it. They are
therefore also non-rival goods – as opposed to rival objects that can be
possessed by only one person at a time. Once ideas exist, they can be
possessed by numerous people at the same time, and can be made available
to any number of people at little or no additional cost.
In considering current changes in Information Technology, Paul David
illustrates some consequences of dependence on coded knowledge. He
begins by analysing what information can mean in economic terms:
Information is knowledge reduced to messages that can be transmitted to

decision agents, when receipt of them causes some action or alteration in
the subjective or objective state of an agent. Transformation of knowledge
into information is thus a necessary condition for the exchange of
knowledge as a commodity. When a knowledgeable agent puts what he

or she knows into a form with legally protected use-rights, we may say
that the commodity in question is information. This is the case with a
proprietary report for a client, a copyrighted publication, or a patent
describing an invention.29
Information is not automatically an economic commodity; it can easily

be made available as a free good, for example, anyone who wishes to
disseminate an idea can very simply do so by printing it, or opening a page
on the Web.
Knowledge as a commodity, however, has different characteristics from
conventional kinds of commodities. Wheat, tea, gold or oil are homogenous,
that is, each bushel of wheat or barrel of oil is indistinguishable from
any other of the same kind; when a pound of tea is consumed by one
person, it cannot be consumed by another. Since basic commodities are
undifferentiated and sold worldwide, they are highly vulnerable to price
fluctuations, which confirms neoclassical assumptions. David points out,
however, that knowledge products are both highly differentiated, and can
be simultaneously consumed by many people. Any individual book or film
is not the same as any other book or film, but can be possessed and enjoyed
by many people together or separately. David terms this property perfect
expansibility.
Expansibility is one of the characteristics of public goods; because
they are non-excludable, they become available to everyone. This does
not apply to knowledge products, which can be protected by intellectual
property rights, and raises a dilemma, as demonstrated by the frequent and
widespread complaints of piracy of videos, CDs and computer programs.
The implications for governmental policy and international cooperation are
sweeping. Policies will need to address the problems of protecting intellectual
rights, without unduly restricting the diffusion of new ideas.
In fact, new growth theory goes much further, by suggesting that the
emphasis in government policy should change from fine-tuning the economy
in financial terms in an effort to even out the swings of business cycles, to
promoting and stimulating new technology. Governments will need to accept
the idea that businesses, no matter how large or long established, can fail.
If growth is to be encouraged by establishing conditions for new industries
based on risk taking and innovation, failure is a necessary consequence
of risk.
Paul Romer believes that the spread of computers and Information
Technology is not just another technology replacing earlier modes, but it
is one that is capable of changing the whole notion of how manufacturing
functions.
Computers might permanently shift the relative payoffs between

manufacturing and the process of search and discovery. If that’s correct,
then the whole economy will start to look like Microsoft, with a very
large fraction of people engaged in discovery as opposed to production.

This implies a permanent change in the rate of discovery and the rate of
economic growth.30
Romer’s approach is claimed by many to be the new orthodoxy, and the fact
that despite his many radical ideas, he has not totally abandoned neoclassical
precepts, but has significantly added to and expanded them, has helped in
their acceptance. On the other hand, his ideas have been challenged from
several directions.
For example, another body of theory developed by an Oxford economist,
Maurice Fitzgerald Scott, argues that the way in which capital is measured
as a neoclassical production function is fundamentally wrong and therefore
the function should be scrapped. He takes various means of analysing capital
as a production function and demonstrates their ineffectiveness in linking
the level of output to the level of capital investment.31
Despite this, Scott also regards technological progress as essential
in understanding growth. His theory does not separate out capital and
technology as discrete factors of production but posits them as synonymous.
In other words, the motivation for invention is similar to that for investment,
namely, its expected profitability.
According to Scott, innovation is not an exogenous variable, as in
Neoclassical theory, nor is technology a factor distinct from new capital
requiring separate investment, as in Romer’s theory. The crucial difference
is that knowledge, the root of innovation, and investment in the practical
possibilities of its realization, with the aim of creating profits, are inextricably
intertwined.
In fundamental terms, the overall structure of ideas takes on a very
different shape with radically different possibilities once the ideas of new
growth theory (NGT) are incorporated. In effect, it offers a model of an
expanded field of economic practice where the challenges to conventional
wisdom in economics that it opens up, the stress on capacities and capabilities
emerging from the interaction of capital, labour and technology leading to
innovations in process, and, above all, its emphasis on ideas as generators
of growth, offer many possibilities for a reconsideration of the role and
function of design within innovation (Figure 5.3).
There are two aspects of new growth theory, however, that raise some
questions (and indeed more will be asked in Chapter 8 below). The first
comes from recent developments in institutional theory. As we have seen in
Chapter 4, institutional theory emphasizes the role of institutional structures
in explaining differences in economic performances of firms and nations.
Richard Nelson makes the contemporary case for the necessary perspective
of institutions, pointing out that even expanded formal models ignore
factors crucial to the actual processes of growth and innovation.32 He places
Figure 5.3 New Growth theory in the expanded model.

strong emphasis on the need to relate theory to practice, and examines how
ideas are put into practice. For example, he has undertaken research into
institutional structures – how they shape and support differences in firms,
and explain the economic performances of nations:
Modern economists have become aware of major differences across

nations in institutions – differences that seem to have a large impact - and
thus have become more aware that in some countries the processes that
guide the evolution of institutions seem to be more effective than in other
countries. They also have come to understand that these processes are
very complex and poorly understood. Acquiring a good understanding
of institutions is going to be harder than acquiring a better model of
technological change, or firm capabilities and their dynamics, simply
because institutions are so diffuse.33
In addition to neglecting institutions, Nelson is also highly sceptical about

the way work in growth theory emphasizes a search for formal models that
can be mathematically based. In joint work with Sidney Winter,34 Nelson
proposed that theorizing has two broad levels:
What we called ‘appreciative theorizing’ tends to be close to empirical

work. Mostly it is expressed verbally and is the analyst’s articulation of
what he or she thinks is actually happening.35
In contrast, formal theorizing almost always proceeds at some intellectual

distance from what is known empirically. Where it does appeal to data
for support, the appeal generally is to ‘stylized facts’ or reasonably good
‘statistical fits’. If the hallmark of appreciative theory is storytelling that
is close to the empirical details, the hallmark of formal theorizing is an
abstract structure set up to enable one to explore, find and check proposed
logical connections. Good formal theorizing is less likely than appreciative
theorizing to contain logical gaps and errors. Nelson summarizes:
[Winter and I] proposed that, when the intellectual enterprise in

economics is going well, empirical research, appreciative theorizing, and
formal theorizing should work together. More explicitly, empirical work
and appreciative theorizing should work together, and appreciative and
formal theorizing should work together.36
The relationships between empirical work, appreciative theory and formal

theory are obviously crucial in defining the dominant ideas and practices
in the profession of economics. Nelson is critical of New Growth theory,
because although widely argued to be a break with tradition, it has in fact
great continuity with it, particularly in its tendency to make modifications
of and additions to formal theory, rather than looking outside its confines.
Nelson believes that appreciative theory, searching where formal theory
does not venture, provides the most promising avenues for research. He
suggests three broad areas of focus:
1 The nature of technology and the processes driving technological

advance;
2 The factors influencing the behaviour and effectiveness of firms and
other organizations that employ technology and produce the goods
and services that count as economic output;
3 The institutions that surround, support and constrain firms.37
For Nelson, ‘The highest priority is to develop a broad theory of growth

capable of taking in and integrating the kinds of understanding about these
variables.’38 New growth theories with their emphasis on formalization
are, he believes, of little help in this endeavour, and indeed, the stress on
formalization, with its difficulties in handling relationships and large
numbers of variables, might lead to important areas of research being
neglected – the behaviour of firms and institutions being a case in point.
Nelson argues:
The key intellectual challenge to formal growth theory – whether the

basic dynamic structure is evolutionary or neo-classical – lies in learning
how to formally model entities that are not easily reduced to a set of
numbers, such as the character of a nation’s education or financial system
or the prevalent philosophies of management. But the gains here certainly
seem to warrant the effort.39
His argument for models capable of revealing patterns of complexity

beyond what can be reduced to numerical formulae is highly relevant to the
problems facing designers working at high levels.
The second point concerns the question of incentives. Paul Romer was
asked in an interview: ‘If a greater and greater portion of the value of new
ideas is going to the consumer and not to companies, will that reduce the
incentives to create new ideas?’ He replied:
The evidence seems to point in that direction. The very same highly
competitive conditions that benefit consumers mean that a new entrant
who has a valuable new idea doesn’t actually capture all of the value they
create with that new idea. Lots of the value created by the new idea flows
through to the consumer. The person who comes up with the new idea
cannot patent and control all its benefits. What that means for the economy
as a whole is there isn’t as much new idea creation as would be ideal. The
incentives for creating new ideas aren’t as big as they should be.40
This is a curious question and an even more curious response. It seems to

imply that any value delivered to customers is in some way a deprivation
of producers, who in addition, are liable to lose control of the idea. The
emphasis is on producer-centred control and benefit, detached from any

relationship to the customer or enhancement of the value delivered to them.
Romer continues his answer to the problem in more detail:
Now there are two ways you could respond to that. One would be to try to
make intellectual property rights much stronger, by strengthening patents
and legal protection. But that can pose a lot of risk to the continued
process of innovation. We might end up with a system that gives a lot
of patent protection revenue to people and corporations right now, but
makes it much harder for somebody new to come along with a new idea.
So for decades, many economists have been hesitant to rely exclusively
on property rights and proprietary control to create additional incentives
for ideas. What I’ve suggested as an alternative is this: If you want to
get more ideas, one way is to subsidize the activities that lead to the
production of those ideas. In particular, subsidize universities as important
sources of idea generation, and subsidize the training of the people who
go through those universities and then enter the economy and come up
with ideas like cross-docking at Wal-Mart.
So other economists and I have been arguing for a long time that the
government has an important role in encouraging the creation of new
ideas, and letting them get fed out into a market system where people
can capture profits from innovating. Those profits are important, but
they will never be big enough by themselves to encourage the amount
of idea creation that would be ideal for the economy. The market is a
wonderfully powerful engine for economic growth, but it runs much
faster when the government turbo-charges it with strong financial and
institutional support for education, science, and the free dissemination
of ideas.41
Romer’s emphasis on the role of government is unlikely to gain much support

in the current political climate of the United States, but it does represent
a very considerable modification of free-market ideas in their pure form.
Again, however, a notable emphasis in this extended passage is upon ideas
taken up by producers that lead to profits. Any consideration of how this
might be achieved by delivering better products and services to customers as
a primary means of ensuring profitability is lacking.
Readings
W. Brian Arthur (2014). Complexity or Economy, Oxford: Oxford University
Press.
Peter Robinson (1995). ‘Paul Romer’, Forbes, 5 June 1995, Start Page: 66. An
interview with Romer that gives a basic explanation of his ideas.
David Romer (2011). Advanced Macroeconomics, NY: McGraw-Hill
Paul Romer (1992). ‘Two Strategies for Economic Development and Reform: Using
Ideas and Producing Ideas’, World Bank Research Observer, Washington, DC.
Thomas A. Stewart (2010). Intellectual Capital: The New Wealth of Organizations,
paperback edition (New York: Doubleday).
J. A. Schumpeter (1934). The Theory of Economic Development, many editions
available on the internet.
Michael H. Zack (2009). Knowledge and Strategy, NY: Routledge.
With particular application to issues related to design and creative industries:
Paul Stoneman (2010). Soft Innovation: Economics, Product Aesthetics and
Creative Industries, NY: Oxford University Press.
On the debate over intellectual property rights (IPR) as necessary for creativity
under a rule of law or as rent-seeking self-interested market distortion, two
current opposing views:
Michele Boldrin and David K. Levine (2008). Against Intellectual Monopoly, NY:
Cambridge University Press.
Elizabeth Wurtzel (2014). Creatocracy: How the Constitution Invented Hollywood,
Brooklyn: Thought Catalog Books.
6
The National System
Almost seventy years after Adam Smith published The Wealth of Nations, a
German economist, Friedrich List, (1789–1846), completed his own major
work, The National System of Political Economy, which was published in
stages between 1841 and 1844. For much of the intervening time, List has
remained little known in the English-speaking world. Smith’s ideas have
been and remain the mainspring of economic thought in the United States
and Great Britain, but List’s concepts have also had remarkable influence in
his native Germany and much of continental Europe, with their influence
subsequently percolating through to Japan and East Asia.
List’s early career was as a civil servant in the independent German state
of Würtemburg, but his advocacy of reforms brought him into conflict
with what was an authoritarian royal government and led to his exile in
the United States in 1825. There he edited a German language newspaper,
became an American citizen and eventually returned to Germany in 1834.
His affairs did not prosper, however, and in 1846 he committed suicide.1
His early experience of observing the effects of British industrialization
and what he regarded as the negative impact of its growing competitive
power on Germany was a powerful influence in the evolution of his ideas.
The British lead in industrialization made it extremely difficult for German
manufacturers to compete from a position of comparative technical
backwardness and List regarded the advocacy of free trade by British
politicians as a cynical ploy to ensure their country’s continued economic
expansion and thus political dominance.
A convenient starting point in considering List’s ideas are the three major
poles of thought he posited as emerging in European economic thinking.
‘I found the component parts of political economy to be – 1. Individual
economy; 2. National economy; 3. Economy of mankind.’2
The last mentioned, ‘Economy of mankind,’ he identified primarily with
the ideas of the French Physiocrats, such as Quesnay, who argued the case
for universal free trade based on a belief that ‘the merchants of all nations
formed one commercial republic’. In their enthusiasm for their cause,
however, List asserted that the advocates of free trade had overstated their
case. ‘The popular school has assumed as being actually in existence a state
of things which has yet to come into existence.’3 (List’s emphasis.) Free trade
The National System 125
on a global basis was in List’s age still an aspiration, and even today it
cannot be thought of in anything other than a partial sense.
At the opposite pole to the Physiocrats, and to be taken much more
seriously because of its practical influence, was what List referred to as
‘Individual economy’. In essence, this meant the work of Adam Smith, who
regarded individual decision-making as the crucial factor in determining
how markets functioned and the division of labour as the organizational
principle that determined levels of productivity and wealth.
List had two primary objections to Smith’s ideas. In The Wealth of
Nations, Adam Smith had elaborated a concept of the economy essentially
consisting of a nexus of individuals acting in their own self-interest, and
constrained only by the need to restrict the possibility of harm to others.
The advocacy of selfishness as the mainspring of economic motivation
and activity raised serious questions as to whether such behaviour can be
separated from other areas of human activity, for which other values and
behaviour were regarded as the norm. This focus on the individual led Smith
to construct a concept of the economy and society based on the principles of
laissez-faire, with state intervention reduced to a minimum.
Second, List thought that Smith’s emphasis on the division of labour led
him to neglect wider questions of the levels of skill and motivation that were
also necessary if levels of productive power were to be fully understood. List
pointed out that Smith had indeed acknowledged the question of productive
power in the Introduction to The Wealth of Nations, as an important factor
on which the condition of nations depends, but had neglected to follow this
through due to his focus on division of labour.
By the great value that he attached to his idea of ‘division of labour’, he

had evidently been misled into representing labour itself as the ‘fund’
of all the wealth of nations, although he himself clearly perceived and
also stated that the productiveness of labour principally depends on the
degree of skill and judgement with which the labour is performed. We
ask, then, whether it can be deemed scientific reasoning if we assign as
the cause of a phenomenon that which in itself is the result of a number
of deeper lying causes.4
In contrast, by the mid-1820s, List began to elaborate a case for a third

point of view: one that emphasized the role of the nation state as the social
organization within which individuals functioned. Instead of the division
of labour, he proposed the concept of ‘productive power’, an umbrella term
for the ‘deeper lying causes’ that explain how a nation sustains its ability
to produce, in the context of a broader social concept of how economic
wealth was created. This in turn led him to advocate a concept of the nation
state actively intervening to ensure that productive powers were consistently
developed and maintained for the benefit of the nation as a whole.
Informing this point of view was a pragmatic belief that only the nation
state exercised effective political and economic power, in a manner simply
not applicable either to individuals or to the whole human race. ‘The object
of the economy of this body,’ meaning the nation state, ‘is not only wealth as
in individual and cosmopolitical economy, but power and wealth, because
national wealth is increased and secured by national power, as national
power is increased and secured by national wealth. Its leading principles are
therefore not only economical, but political too.’5
There was also a dimension of moral objection in List’s critique of Smith’s
ideas. In addition to the separation of economic from social behaviour, List
objected to the manner in which the concept of the division of labour led
to a debasement of work and its reduction to a material calculus. Instead
he regarded skill and competence as essential in understanding economic
achievement, and he anticipated on a national level the contemporary
concept of intellectual capital to a remarkable degree. By 1827, he wrote
of productive power essentially constituted by ‘the intellectual and social
conditions of the individuals, which I call capital of mind’.6 He elaborated
this idea later:
The present state of the nations is the result of the accumulation of all
discoveries, inventions, improvements, perfections, and exertions of all
generations which have lived before us; they form the mental capital of the
present human race, and every separate nation is productive only in the
proportion in which it has known how to appropriate these attainments
of former generations and to increase them by its own acquirements.7
This broader concept of productive powers led him to assert that the
mental capital of a nation is generated not only by those who create value
in exchange, but also by ‘the instructors of youths and of adults, virtuosos,
musicians, physicians, judges, and administrators’ who are also responsible
for creating productive powers,
some by enabling the future generation to become producers, others by

furthering the morality and religious character of the present generation,
a third by ennobling and raising the powers of the human mind, a fourth
by preserving the productive powers of his patients, a fifth by rendering
human rights and justice secure, a sixth by constituting and protecting
public security, a seventh by his art and by the enjoyment which it
occasions fitting men the better to produce values of exchange. In the
doctrine of mere values, these producers of the productive powers can
of course only be taken into consideration so far as their services are
rewarded by values of exchange.8
In a commentary on List’s Outlines of American Political Economy, Michael

Liebig suggests that List was strongly influenced by the ideas of an early
Italian economist, Antonio Serra. The latter is best known for his Discourse
on the Sources of the Wealth of Nations without Gold- and Silver-Mines,
published in 1613, in which he distinguishes two categories of wealth

creation, the accidenti propri and the accidenti communi. The former covers
the natural conditions of geography and resources that favour a nation,
which are a given. The latter, however, consists of crafts and manufactures,
the education and culture of the population, and state policy, all of which
can be increased and enhanced by human intent and action.
In addition, the influence on List of his period of residence in the United
States as a political refugee cannot be ignored. He was strongly influenced
by what he learned in the United States of ideas and efforts to protect the
nascent industries of the young republic. The work of Alexander Hamilton
was particularly important in this respect.
As early as 1783, Hamilton, fresh from duty in the War of Independence
spent mainly as an aide to General Washington and now embarking on
a career in government, argued against free trade and advocated that the
new United States should regulate imports, so that ‘injurious branches of
commerce might be discouraged, favourable branches encouraged, [and]
useful products and manufactures promoted’.9
Later, in a Report on Manufactures commissioned by the U.S. Congress
and submitted in December, 1791, Hamilton, who by this time held the
post of Secretary of the Treasury in President Washington’s administration,
again recommended the promotion of manufacturing in the United States,
but went into much greater detail with a range of proposals. He justified
these by asserting that the United States ‘cannot exchange with Europe on
equal terms; and the want of reciprocity would render them the victim of a
system which should induce them to confine their views to Agriculture and
refrain from Manufactures’, Government encouragement of manufacturing
was therefore intended to provide protection until American industry could
compete on a basis of equality. Among the measures he recommended were
policies for protective duties and prohibitions on rival imports, exemption
of domestic manufactures from duties, and encouragement of ‘new
inventions … particularly those, which relate to machinery’.
Despite his advocacy of government intervention, Hamilton remained
generally in favour of free trade but was also pragmatic enough to
acknowledge that economic power was rarely founded in idealistic
expectations.
List supported such ideas, arguing that each nation should seek to develop
its productive powers in ways appropriate to its specific circumstances.
American national economy, according to the different conditions of

the nations, is quite different from English national economy. English
national economy has for its object to manufacture for the whole world,
to monopolize all manufacturing power, even at the expense of the lives
of the citizens, to keep the world and especially her colonies in a state
of infancy and vassalage by political management as well as by the
superiority of her capital, her skill and her navy. American economy has
for its object … to supply its own wants, by its own materials and its
own industry – to attract foreign populations, foreign capital and skill –
to increase its power and its means of defence, in order to secure the
independence and the future growth of the nation. It has for its object
lastly to be free and independent and powerful, and to let everyone else
enjoy freedom, power and wealth as he pleases.10
List realized with great clarity that the changes being wrought by
industrialization meant that material resources, the capital of nature, were
increasingly of less importance than the capital of mind in transforming
those resources through invention. He saw this as a double-edged sword,
capable of decimating existing industry if allowed to proliferate unchecked,
but also of enhancing national productive power if carefully adapted by
means of a protective national policy.
A single new invention made in a foreign country, and not imitated

immediately, because yet kept secret, would destroy, in a free country,
a whole branch of the manufacturing industry in a short time, whilst a
protective system would preserve it until the secrecy is revealed, and our
productive power increased by it. … By securing the home market to home
manufacturers, not only the manufacturing power for the supply of our
wants is for all times secured against foreign changes and events, but an
ascendancy is thereby given to our manufacturing powers in competition
with others, who do not enjoy this advantage in their own country.11
Such protection could mean sacrificing some degree of material prosperity

in the present in order to ensure a greater degree of security and prosperity
in the future:
It is true that protective duties at first increase the price of manufactured

goods; but it is just as true … that in the course of time, by the nation
being enabled to build up a completely developed manufacturing power
of its own, those goods are produced more cheaply at home than the price
at which they can be imported from foreign parts. If, therefore, a sacrifice
of value is caused by protective duties, it is made good by the gain of a
power of production, which not only secures to the nation an infinitely
greater amount of material goods, but also industrial independence in
time of war.12
Above all, List argued that, in principle, an economy based on division of

labour must also be socially divisive. In contrast, the concept of a national
economy encompassed not only a division of commercial functions between
individuals but also the union of powers in a common cause. In List’s vision
of what an industrialized country could achieve, industry, society and
culture were therefore indissolubly linked. If not only protected but actively
promoted by national policies, a beneficent cycle of improvement could lead

to a constant enhancement of the achievements and potential of a country:
In the manufacturing State the industry of the masses is enlightened by

science, and the sciences and arts are supported by the industry of the
masses. There scarcely exists a manufacturing business which has not
relations to physics, mechanics, chemistry, mathematics, or to the art of
design, etc. No progress, no new discoveries and inventions, can be made
in these sciences by which a hundred industries and processes could not
be improved or altered.13
Unlike Marx, List did not advocate the replacement of capitalist society. He
regarded competition within an economy as a vital necessity for its effective
functioning, but argued that the industries of some countries needed
protection until they could compete internationally on an equal footing.
In short, he was suggesting an alternative way in which capitalism could
function.
Although there was little recognition of List’s ideas in his lifetime, their later
influence in his home country was enormous. Echoes of his ideas are also
clearly discernible in the dramatic rise to economic power of Japan and the
East Asian economies. From the perspective of design, the importance of
his concepts can be immediately seen.14 As soon as the possibility of change
is admitted into an economic model – as it is in List, unlike in Neoclassical
theory – it becomes much easier to relate design to economic theories. As the
quote above indicates, List’s concepts of the role of state policy in promoting
productive powers specifically acknowledges ‘the art of design’ as one of the
factors capable of profound influence in improving manufacturing industry.
In fact the continuity of this idea in Germany was apparent on several
levels by the early years of the twentieth century, following its unification in
1871 and its rapid industrialization. In terms of policy, the involvement of
the German Imperial Government in the applied arts had numerous facets.
It provided, for example, a ‘Standing Exhibition Commission for German
Industry’ under the Ministry of the Interior, which included representatives
from the Foreign Ministry, the Prussian Ministries of Commerce and
Education, and other interested parties. This was responsible for the
presentation of official national exhibits at major international exhibitions.
Usually, a state official was appointed as commissioner responsible for an
exhibition, and direct government funding was provided. Subsidies were also
available for exhibitions where a direct state involvement was inappropriate.
With Germany’s emergence as a major political and industrial power, such
events were given high priority in the first decade of the century, as a means
of impressing the world outside with the nation’s strength and achievement.15
In addition to exhibition organization and promotion, commercial

attachés, an English electrical journal noted in 1907, were being appointed
to German consulates: ‘It is the duty of these commercial attaches to increase
Germany’s foreign trade, and these experts of trade and commerce are always
in direct communication with all the leading manufacturing and exporting
houses of the German Empire, and make frequent trips to Germany for the
purpose of personal conference with them.’16
Another initiative of the Reich government was to appoint Hermann
Muthesius, an architect in the employ of the Prussian government, to the
post of cultural attaché at the German Embassy in London – apparently at
the suggestion of Kaiser Wilhem II. Across the 1890s, Muthesius reported
regularly and wrote widely on developments in British architecture and
design.17 Following his London appointment, he returned to be placed
in charge of all applied art education in Prussia and appointed leading
reformers to head the major schools within his remit. A constant theme in
Muthesius’ lectures and essays was the close linkage of cultural, social and
economic concerns in terms very close to those used by List.
Another prominent figure in elaborating List’s ideas was a liberal politician,

Friedrich Naumann, who founded a journal Die Hilfe, in 1894, in which he
frequently wrote about the applied arts. Most notably, in 1904, he published
an important article, ‘Art in the Age of the Machine’, which called for industrial
methods of production to be used to create new forms expressing the spirit
of the time, and the need to positively harness the potential of mechanization.
Quality work and good form were therefore advocated by Naumann as
indispensable elements of achieving social unity domestically and commercial
competitiveness internationally. Establishing such standards meant that
appreciation of quality had to be encouraged in the home market, an aim
that could hardly be achieved by oppressing workers, paying them low wages
and housing them inadequately. Good wages and working conditions were
therefore a necessary precondition. In a book, Neudeutsche Wirtschaftspolitik,
(New German Economic Policy) published in 1907, Naumann elaborated
these ideas. In reviewing the book, Anton Jaumann observed that Germany’s
competitive position was characterized by possession of few natural
resources and dependence on imports of raw materials that had to be paid
for by manufactured exports. How could it then survive the intense levels of
international competition? Naumann’s answer was clear:
We must bring goods to the market that only we can manufacture. We

cannot in the long run compete in cheap mass-production. Only quality is
our deliverance. If we are able to deliver such excellent goods that can be
imitated by no other people in the world and if these goods are so excellent
that everyone wishes to buy them, then we have a winning hand.18
Nothing, concluded Naumann, injured the commercial reputation of a

nation as much as the label ‘cheap and nasty’.
Naumann was also involved in the foundation of an association in
1907 to promote design, the Deutscher Werkbund. At its founding meeting
in Munich in October, 1907, Fritz Schumacher, a leading architect and
designer, gave the opening address and posed the question: Why was a new
organization necessary? His answer was essentially a restatement of List’s
ideas as reformulated by Naumann. Art, he said, was not only an aesthetic,
but also a moral power, but both were combined in the most important
of powers: economic power. The best creative and commercial spirits of
the age should therefore unite to reestablish a harmonious culture. Once
again, the unity of national cultural attainment and commercial success in
international markets was strongly asserted.
The importance and continuity of the ideas originating with List require a
volume of their own to give an adequate account. It can be argued, however,
that the productive powers of Germany, as understood by List, have been
an innate factor in enabling Germany to overcome the chain of events it
has faced in the last century: a demoralizing defeat in the First World War;
a horrendous financial inflation and collapse; the Great Depression; the
illusions and ultimate shame of its embrace of fascism; the problems of
destruction and loss of territory following the Second World War, and the
daunting tasks of reconstruction and reunification that followed.
The example of Germany also played a very important part in the
modernization of Japan, where individualism has similarly played a less
prominent role in the country’s economic progress. Although the direct role
of List’s ideas in that country requires clarification, the role of state policy in
initially establishing design competences and encouraging their application
in Japanese industry and commerce has been a remarkable example of how,
indeed, a government can encourage the development of productive powers.
In the mid-1950s, there existed virtually no formally trained professional
designers in Japan. As the result of policies introduced by the Ministry of
International Trade and Industry (MITI), it was estimated that the country
had 21,000 industrial designers alone by 1992. Their development has been
an integral part of the success of Japanese products in international markets
in the intervening period. Policies on the Japanese model were introduced in
Korea and Taiwan and similarly they have played an important role in their
economic growth in the late twentieth century.
Readings
Friedrich List (1966 [1881–4]). The National System of Political Economy, NY:
Augustus M. Kelley.
Francois Quesnay (1758). Tableau Economic, many editions available on the
internet.
Ruskin (1857 John). The Political Economy of Art: Being the Substance (with
Additions) of Two Lectures Delivered at Manchester, London: Smith, Elder &
Co. [Also known as A Joy Forever, http://www.gutenberg.org/ebooks/19980].
Adam Smith (1776). Wealth of Nations, many editions available on the internet.
Gustav von Schmoller (1896). The Mercantile System and Its Historical
Significance, NY: Macmillan, and many editions available on the internet.
Of the comparatively recent application of some of principles List argued for:
R. G. Lipsey and Kelvin Lancaster (1956–7). ‘The General Theory of Second Best’,
Review of Economic Studies 24 (1): 11–32.
PART TWO
Design and the

creation of value
134
7
Design from the
standpoint of economics
All the major fields of economic theory are far more complex and rich in
depth and detail than is depicted here. The purpose of the foregoing chapters
has been to provide a basic understanding of each in broad terms in order to
assess its implications for design.1
1 Economic theory and design

The greatest problem in considering what economic theory explains about
design, specifically or by implication, is in the context of neoclassicism,
which in the Anglo-American world dominates both academic and applied
economic practice. A common criticism of it from other theoretical
perspectives focuses on its assumptions regarding the static nature of
products and markets. As was pointed out at the end of Chapter 2, if
markets and products are as constant as depicted in Neoclassical theory, this
at best reduces design to a trivial activity concerned with minor, superficial
differentiation of unchanging commodities, a role, indeed, that it does
frequently perform. At worst, it contradicts the whole validity of design.
In contrast, a central assumption of design practice is that every designer
is in some manner concerned with the future: this is an innate feature of
the discipline. Whether working at drawing boards, in workshops, and,
increasingly, at computers, many designers are concerned with enlarging
the boundaries of possibility. Whether expressed in terms of a brochure for
publication in one month, a product for production in a year’s time, or a
system that might take several years, designers’ concepts will become the
products, communications, environments and systems of the future. The
only reason for generating these future concepts is that they will be different
and, hopefully, better. Design, in other words, is about envisioning change,
a condition not readily embraced by neoclassical models that are concerned
with explaining what is, and are not fundamentally concerned with what
might be. As we saw below, however – as for example with List’s ideas
on national policy explored in the last chapter – as soon as the possibility

of change is admitted into economic models, the perspective shifts and it
becomes much easier to relate design to economic theories.
If List’s ideas have been important on a national level (e.g. his concepts of
the role of state policy in promoting productive powers, which specifically
acknowledge ‘the arts of design’ as one of the factors capable of profound
influence in improving manufacturing industry), other schools of theory
also have implications for design in micro-economic terms.
In this respect, the dynamic view of economics and change advocated
by adherents of the Austrian school (Chapter 3) is particularly valuable. As
Ludwig M. Lachman points out, ‘All economic action is of course concerned
with the future, the more or less distant future. But the future is to all of
us unknowable, though not unimaginable.’2 As stated previously, design is
similarly concerned with the future, and also faces the risks and limitations
in the challenge of imagining what is as yet unknowable. The actions
involved in design, too, as Mises points out, are determined by thought.
In shaping these future ideas, moreover, Carl Menger’s insistence that the
satisfaction of consumers is the primary function of economic activity and
Hayek’s emphasis on freedom of choice and the possibility of improvement
are of enormous significance in ideas of user-centred design. Although
generally silent about design in specific terms, therefore, the ideas of the
Austrian school reverberate with implications that potentially open paths to
a broader understanding of what the economic role of design can be.
Two instances, already given in Chapter 3, can illustrate this last point.3
The first is Ludwig von Mises’ model of human action: ‘Acting man is eager
to substitute a more satisfactory state of affairs for a less satisfactory. His
mind imagines conditions which suit him better, and his action aims at
bringing about this desired state,’4 which is in itself close to design, certainly
say in the manner of Herbert Simon’s famous definition: ‘to devise courses of
action aimed at changing existing situations into preferred ones’.5 We should
remember here that Simon was, among other things, a Nobel Laureate in
economics. In these lines, the seemingly disparate relationship between the
artificial, acting, economics and design, becomes much closer.
The second example is the adaptation of a couple of sentences by Hayek
that was also given in Chapter 3. Here the point was that once economics is
thought dynamically – as Hayek insisted it should be – the parallel between
economic action and design becomes much closer. As noted earlier, this
becomes obvious if the word ‘design’ is substituted for ‘economics’ in the
following quotation:
The solution of the economic problem of society is in this respect always

ways of doing things better than they have been done before. … All
economic problems are created by unforeseen changes which require
adaptation.6
Design from the standpoint of economics 137
It was similarly apparent that Institutional theory (Chapter 4) also provides

a contextual richness that offers opportunities for a reconsideration of
design’s functions. At a general level, it raises important questions on the
role of design in society and as generator of the specific forms of a culture.
Veblen’s work is clearly central here, both in its wider references and in
the direct and indirect parallels between his thinking and that of design. The
comment quoted above (from The Theory of the Leisure Class, 1899) that
the ‘economic facility or economic serviceability in any object — what may
be called the economic beauty of the object — is best served by neat and
unambiguous suggestion of its office and its efficiency for the material ends
of life’ can be read also as a remarkable anticipation of post-Bauhaus design.7
Similarly, his critique of ‘most objects alleged to be beautiful’ provides
an economically reasoned account of what many would-be designers
instinctively felt in regard to the many nineteenth-century products.
More specifically, as could be seen in the discussion, theories such as
those initiated by Coase, Williamson and North on transaction costs offer
rich possibilities for discussion of how in such fields as information and
communications, the role of design can powerfully enhance competitiveness.
On the other side, the alternatives suggested by attempts to expand
Neoclassical theory, particularly New Growth theory’s inclusion of
technology as a core factor in understanding how business actually functions,
also have intriguing possibilities. Of especial value is the argument that
technological knowledge, both coded and tacit, has in-built value from its
capacity to derive innovative ideas from practice.
Nathan Rosenberg’s argument (which will also be referred to in more
detail in the next chapter) that for ‘technological improvement to exercise
a significant social impact, it must ordinarily fulfill additional criteria.
Specifically, it must combine design characteristics that will match closely
with the needs and tastes of ultimate users, and it must accomplish these
things subject to the basic economic constraint of minimising costs,’8 is
a direct instance of combining arguments around the contribution of
technology to the creation of economic value with a grasp of how such
developments have to be successful in also addressing users and their needs
through the forms and characteristics of the product itself.
A similar point arose with Douglas North’s interesting descriptions of the
complexity of the values involved in the ‘value’ of a product:
We get utility from the diverse attributes of a good or service or, in the
case of the performance of an agent, from the multitude of separate
activities that constitute performance. … When I buy an automobile, I get
a particular color, acceleration, style, interior design, leg room, gasoline
mileage – all valued attributes, even though it is only an automobile
I buy. … The value of an exchange to the parties, then, is the value of the
different attributes lumped into the good or service. … From the particulars
in the foregoing illustrations we can generalize as follows: commodities,
services, and the performance of agents have numerous attributes and

their levels vary from one specimen or agent to another. The measurement
of these levels is too costly to be comprehensive or fully accurate.9
If North’s ‘lumped together’ perhaps betrays the only way that an economist
can describe the synthesis that the design of the product actually performs
(orchestrating all the individual ‘valued attributes’ such that they contribute
in terms of more than the sum of their parts to the overall value), nonetheless,
the underlying comprehension is significant – as is his last line, which tells
us exactly why it is so difficult to assess, quantifiably, the value design ‘adds’
or creates.
These comments and others open the door to a consideration of design also
contributing to the processes of generating innovative ideas (although the
balance between coded and tacit knowledge in design may tilt to the latter).
Innovative ideas, of course, are by no means the sole perquisite of designers
and, indeed, can originate from a broad constituency. Whatever the source,
however, all will need translating into tangible form or definable process,
and it is this translation from concept to specificity in terms acceptable to
users that is the particular skill and contribution of design.
2 How economics positions design

If the first set of implications of economics for design is in terms of what
design can learn from economic theory regarding its possible roles within
the economy, the second group of insights is about how economics positions
design. To summarize the varied possibilities inherent in current trends in
economic thinking, three clear areas of concern for designers in the context
of production can be stipulated:
1 Given the crucial role assigned to technology in New Growth theory,

an ability to understand technological opportunity and act upon it is
required.
2 Their work must be capable, through innovation, of contributing to
creating new economic value.
3 They must function within institutional structures of various kinds
that enable and constrain their endeavours.
1 Re: Technology10
Concepts of designers that are only concerned with superficial visual form
completely underestimate the degree to which a working understanding of
technology, as a minimum, is necessary to function as a designer. Without
the ability at least to have dialogue with, and work in close relationship
to, technological specialists, designers will be necessarily confined to the
trivialities of what is often called ‘felt-pen design’. To adequately understand
technological opportunity therefore requires technological competence.
Design on this level is capable of being involved with the total product
concept, not just visual appearance as a last-minute additive. Conceived
this way, designers work as equal partners with other major corporate
functions, participating in fundamental decision-making. They have an
ability to originate product concepts that deliver genuine improvement over
what exists in a market and develop them technically in detail, in terms of
materials and manufacturing procedures. The issue of visual appearance to
communicate product uniqueness thus becomes an integral concern of the
development process and not some arbitrary add-on.
The corollary of this possibility concerns quantification. From the
point of view of designers’ attitudes to economics, there is mistrust of
the dominance of numerical calculation and financial management in
corporate administration, something perceived as alien to how design
functions. Setting aside the irrational aspects of what is indeed frequently
an exaggerated, defensive reaction, and the deficiencies of some designers
in clearly articulating their ideas, there is nevertheless substance in such
perceptions. To a large extent, it is because tacit knowledge is such an
important element in design practice. Competence in the skills of design,
as in many other practical disciplines, grows from constant experiment on
the basis of trial and error, from which cumulative experience becomes in-
built and not easily rationalized. The problem is compounded, because if
design is based in large part on tacit knowledge and cannot be explained
by theories of rational decision-making, neither can it therefore be easily
summarized in quantitative terms. If the management of any firm does not
have an understanding of, and sympathy towards, the particular nature
and virtues of tacit knowledge, it will inevitably be easy to make designers
appear incompetent by demanding conformity to practices that are alien to
design. Under such circumstances it is not surprising that design is often not
taken seriously.
Advocating a greater understanding of tacit knowledge on the part of
management should not, of course, absolve designers from any consideration
of the extent to which rational analysis and quantitative explanations may
contribute to a better understanding of what their practice is and can achieve
in its context of practice. There is much to be done on this level. Particularly
when tackling large-scale, complex problems, appropriate methodologies
and techniques based on logical analysis and quantification are frequently a
necessary platform for creative design work at a high level.
2 Re: Innovation11
More important in the context of innovation and growth is the role of
designers as originators, or contributors to the origins, of totally new products
capable of significantly changing existing markets, or even of creating new

ones, and therefore of generating new economic value. If a vital role of
design, as suggested here, is the translation of technological possibility into
specific form, a close harmonization of design and technology is essential.
To deliver economic value, the role of design in innovation is not
just the frequently attributed function of ‘adding value’, but much more
significantly, of creating new value. In Neoclassical theory, the emphasis on
price effectively restricts concepts of value to a scarcity of what is desired in
the marketplace. It excludes any concept of quality or value in use, which is
not an intrinsic quality of products and has little relation to price. It does,
however, have a great deal to do with competitiveness and profitability, both
of which ultimately hinge upon the capacity to satisfy human wants and
needs. Within the confines of Neoclassical theory, therefore, design is at best
confined to a role of adding value to pre-existent concepts, which can be a
potentially useful function within a portfolio of any firm’s strategic options,
albeit too frequently as a low-level activity. As already pointed out, however,
it does not encompass the full potential of design.
More important in the context of innovation and growth is the role of
designers as creators, or contributors to the creation, of totally new products
that are capable of significantly changing existing markets, or even of
creating new ones, and therefore of generating totally new economic value.
This will be dealt with in more detail in Chapter 9.
3 Re: Institutional structures12

The third factor derived from economic theory, institutional structures
(explored in Chapter 4), impinges upon design at every stage in innumerable
ways, from the level of government to the immediate context in which designers
work – even when design is not specifically considered as an element in their
workings. For example, laws, such as those in the United States on product
liability, or those in Germany on recycling packaging materials, profoundly
affect design practice. Other factors include the general cultural climate of a
society, the way design is manifested in public and private institutions, and
whether and how design is taught at all levels of the educational system. At
the level of the firm, any designer needs a Machiavellian instinct to survive
the institutional hazards of corporate structures, turf wars, the prejudices
of specialist disciplines (including their own) and the politics of working in
teams. They need the patience of Job in explaining and demonstrating the
value of their work to co-functionaries and clients. A knowledge of legal
matters such as safety, environmental protection, product liability, racial
discrimination and provision for disability is another dimension. They need
to be able to navigate the complexities of distribution and retail systems.
These are just a few of the demands made upon them.
Also on the level of institutional relationships are questions of education
and research in design. There is a vital need for more educational initiatives
to prepare designers for the complex decision-making processes of strategy

and innovation, and to combine high-level creativity with technological
competence. Much of design education, however, still remains at a
comparatively low skill level with an emphasis on the development of
‘creative’ ability without any technical substance, economic relevance or
institutional awareness. By contrast, the thrust of new economic theory
would suggest that the evolution of new approaches in education and
methodology is of enormous importance for design. There is a vital need for
designers to be more specifically prepared for the decision-making processes
involved in complex innovation, combining high-level creativity based on
technological competence with business awareness, and to be able to plan
how to use a spectrum of design abilities with other disciplines.
There is also on all these levels a need for research into how design can
and should function, to which the economist Richard Nelson’s comments
on the various approaches to research, and in particular his distinction
(noted above in Chapter 5) between formal and appreciative theory, and
empirical practice, are highly relevant. The relationship between formal
and appreciative theory can be seen as a vital link characterizing academic
research, and that between appreciative theory and practice, a vital element
in high-level professional practice.
Overall, it is clear that new economic theory offers many potentially

fruitful channels of discussion in understanding design in the context of
new technology, and how it can add and create value. Focusing only on
this monovalent purpose, however, is to overlook the fact that design is
capable of definition on other levels. Asserting the uniqueness of design,
however, should not blind us to the fact that the relevance of current trends
in economics for design, and not just technology, is profound. It is possible,
in terms of New Growth theory, to conceive of design, in economic terms,
as not just another exogenous variable, and a low-level one at that, but
as an activity that is integral to converting technological opportunity into
innovative reality.
3 But does design exceed economics?

Having begun to suggest the ways that economics offers insights into the
work of design, it is also important to begin to see in what ways design in its
economic role is inadequately understood by economics. This is the subject
of Chapter 8 but can be opened here in two ways.
Specific attempts to explain design in an economic context have generally
emphasized the level of its role in national economies. This focus on the
macro-economic level has produced a number of useful generalities, but
few significantly convincing arguments, about how design can be effectively

applied in the specific context of practice in the business arena. Since the
dominant arena of activity for designers is at the level of the firm, whether
they are working as directly employed in-house designers or as external
consultants, the major emphasis in discussing the role of design will need
to be at the level of the firm, or the micro-economic level.13 A consideration
of the functions and processes at this level can reveal some contributions of
design to innovation not generally considered in any economic theory and
can also open further to the question of value creation.
Introducing the subject of values, however, moves discussion into another
dimension beyond economics. This points up the obvious fact that design
encompasses other concerns than those represented in economic theory. The
latter is not primarily concerned with people, other than in very abstract
masses, whereas design impinges directly upon the everyday experience of
all human beings in every aspect of their existence. This difference is vital,
and examining design in its own right is therefore necessary to help articulate
how it might yield insights to complement or supplement economic theory,
and perhaps more importantly, how it might significantly contribute to
business practice.
8
Economics from the
standpoint of design
To suggest that the fragmented and often ill-defined field of design can
usefully augment economic theory, the most powerful and well entrenched
of the social sciences, might seem overly ambitious, likely to have as much
effect as a flea-bite on an elephant. Yet, when one moves from the concerns
of theory to those of practice and considers the extent of the creation of
designs in the world of business and their implementation in everyday life,
it must surely be evident that there remain large gaps in economic accounts
of how products and services are produced, sold and used. Discussion of
these matters can, hopefully as demonstrated by the previous chapters,
be enhanced by reference to economic theory, but their importance also
requires consideration of design in its own terms. It also raises many
questions on the confusion caused by often radically different emphases
in and explanations of the world provided by varied disciplines and their
concepts and procedures.
Since the dominant arena of activity for designers is at the level of the
firm, whether they are working as directly employed in-house designers or
as external consultants, a consideration of the functions and processes at
this level can reveal some contributions of design to innovation not generally
considered in economic theory. A key moment is that if value is determined
by customers, as Carl Menger emphasized (‘value does not exist outside the
consciousness of men’), then not only the context of production but also the
context of use (and hence of subjects and their value) needs to be examined.
One of the greatest challenges confronting designers is that they have to
bridge the constraints and requirements of these two very different contexts.
But it is not only use (and users) that must be explored. The concept
of value too needs a wider examination than it normally receives in
economics, where the emphasis on quantification (in line with the emphasis
in contemporary economics on mathematical concepts and methodology)
also produces problems at the level especially of product development
and understanding. While these are by no means the only problems of
understanding arising from economic theory, this chapter will take up these
three issues – the problem of the reliance of economics on the quantitative;
the question of use and the user; and the issue of value and values – as a
way of considering the limits as well as the insights that economic theory
provides.1
1 The problem of reliance on the quantitative

As we have seen, one of the problems of discussing design in terms of
the practices of neoclassical economic theory is the way the latter has
become dependent upon mathematical concepts and methodology. Similar
problems also exist with the dominant practices of modern corporate
administration and for much the same reasons – management has also
become based on quantitative calculation and financial methodologies. This
numerical emphasis is widely perceived by designers as a major obstacle to
understanding how design functions. Setting aside the irrational aspects of
what can often be an exaggerated, defensive reaction, and the deficiencies
of some designers in clearly articulating their ideas, there is nevertheless
considerable substance in such attitudes.
An illustration of the severity of such problems can be found in David
Halberstam’s book, The Reckoning, which compares the fortunes of the
second largest car companies in Japan and the United States, Nissan and
Ford, in the post-Second World War period.
He describes the conflict at Ford between a new generation of managers
armed with powerful statistical tools who gradually took over the firm’s
management in the 1960s and 1970s, and the engineers and designers who
lacked any means of quantifying their work. Ford had long been run by one
man, its founder Henry Ford, and the company was indeed in desperate
need of effective management systems.
Out of that need grew the immense power of the finance people. A
powerful, confident, modern bureaucracy was being installed at the Ford
Motor Company, sure of its skills, sure of its goals. It knew how to take
care of itself, to help its own, and above all how to replenish itself. For
there was no easy way to replenish real car men, no graduate school
readily turning out designers who were both creative and professional
or manufacturing men who could run a happy, efficient factory. People
of instinct and creativity, really talented ones, came along only rarely.
The great business schools of America could not produce genius or
intuition, but they could and did turn out every year a large number of
able, ambitious young men and women who were good at management,
who knew numbers and systems, and who knew first and foremost how
to minimize costs and maximize profits.2
Economics from the standpoint of design 145
Halberstam’s explanation of the educational and commercial advantages

of what is in fact codified knowledge explains in large measure why it was
adopted so avidly, and it must be repeated, such abilities were badly needed
at Ford. What happened as a result, however, was that other disciplines
became subordinated to the methodologies of the new generation of
managers – they were forced to communicate their work and ideas in ways
that were not just inappropriate, but ultimately also dysfunctional, to a
point where, in the late 1970s, Ford almost went out of business.
The terms Halberstam uses to describe the ‘real car men’ – creativity,
talent, genius, intuition – are all, in fact, aspects of tacit knowledge, which
is such an important element in any form of creative practice, and most
certainly in design. Competence grows from constant experiment on the
basis of trial and error, resulting in cumulative experience, which becomes
in-built, integral and not easily rationalized. There are innumerable stories
of designers who have completed a project in a manner that satisfies every
criterion required by their client, and yet have still woken in the night to
do more work on it, because they instinctively know something is not yet
complete.
Tacit knowledge can neither be explained in terms of rational decision-
making, nor be summarized easily in quantitative terms. If the management
of a firm does not have understanding of, and sympathy for, the particular
nature and virtues of tacit knowledge, it will inevitably be easy to make
designers appear incompetent by demanding conformity to practices alien
to design. Under such circumstances, it is hardly surprising that design is
often not taken seriously. At the same time, the resentment of designers
becomes more comprehensible.
Advocating a greater understanding of tacit knowledge on the part
of management should not, of course, absolve designers from extending
the boundaries of rational analysis and quantitative explanations that
can communicate understanding of their practice. There is much to be
done on this level. Without codified basic assumptions and methods, it is
difficult to communicate knowledge to successive generations as a starting
point. Halberstam’s point that there was ‘no graduate school readily
turning out designers who were both creative and professional’ is still
true to some extent. Design education too often involves each generation
metaphorically reinventing the wheel, albeit at a comparatively low skill
level. There is much emphasis on ‘creative’ ability, but without technical
substance, economic relevance or institutional awareness, and it is difficult
to conceive of progress in any meaningful sense when small value is placed
on the accumulation and codification of collective experience. The result is
an inability to cope with new demands resulting from current widespread
change. In particular, when tackling large-scale complex problems of a
systemic nature, individual insight and subjective beliefs are often totally
inadequate to grasp all the dimensions of the problems being faced. In
such instances, methodologies and techniques using logical analysis,
quantification and computers are a necessary step in comprehending the

nature of the problems involved, providing a platform for creative design
solutions at a high level.
2 The question of users

If the context of production was always traditionally prime, both for industry
and for economics, the second context in which designers must function, the
context of use, requires in contrast (as Figure 8.1 shows) a very different set
of requirements and constraints and a different scale of thought.
Figure 8.1a The context of production and the context of use.
Figure 8.1b Value created through the interface between the context of
production and the context of use.
Of fundamental importance in this context is the factor of utility, which

in design terms relates to the capability provided for users of a product or in
other words, what it enables them to do. In addition, things assume meaning
and significance in people’s lives, which may stem from alignment with the
beliefs and symbols currently prevalent in the outside world, or may be of
private significance to particular individuals. A third factor is variations in
the systemic nature of the context of use. This can be subdivided into the
physical systems, such as the electrical system or TV broadcasting system,
and cultural systems, such as patterns of belief and behaviour that are
embedded in a pattern of life. The latter often have a profound effect upon
what aspects of utility or meaning people will consider significant.
It is this level of the economic functioning of things that economics has
often missed. Thus, to the extent that there have been attempts to explain
design in an economic context, it has generally been dealt with on the level
of its role in national economies. This focus on the macro-economic level has
produced a number of useful generalities but few significantly convincing
arguments about how design can be effectively applied in the specific context
of practice in the business arena. As noted already, Richard Nelson’s stress
on activities at the level of the firm as a means of understanding innovation
is relevant in this regard. A consideration of the functions and processes of
design at this level will suggest some features of innovation not dealt with in
either Neoclassical or New Growth theory. In particular, it will be suggested
that not just the skills and knowledge of designers, but also their values, are
crucial in this role of creating new economic value.
Economic theory tightly focuses on how innovations contribute to growth
and profitability from the standpoint of producers. A crucial feature of
design practice, however, is shaping technological opportunity into tangible
artefacts or information in the form of coded procedures, that is intended to
better satisfy user needs, which has led to the evolution of specific methods
and approaches under the general rubric of ‘user-centred’ design.
To the extent that neoclassical theory considers consumers, it is on the
basis of assuming that their choice in any market is rational, and that
any individual acts in accordance with rational calculation, with reason
dominating emotion. Rational consumers are assumed to have three
characteristics:
1 Their tastes are consistent.

2 Their cost calculations are correct.
3 They make those decisions that maximize utility.
If, in contrast, consideration is given to what concepts derived from design

practice or theory can contribute to debates on growth and the role of
technology, an important factor is the role of users and their problems and
potential in meeting the substantial changes that, it is widely recognized, are
affecting firms and governments. A vital factor in ensuring the acceptance

and diffusion of innovation is ensuring that it is comprehensible to users,
who will also have to change and adapt in ways similar to producers. This
has implications going far beyond the level of cost-decisions, but does not
loom large in neoclassical theory or new growth models.
Nathan Rosenberg does indeed make numerous references to users but
mainly in the context of their learning after a product has been launched.
With respect to a given product, I want to distinguish between gains

that are internal to the production process (doing) and gains that are
generated as a result of subsequent use of that product (using). For in an
economy with complex new technologies, there are essential aspects of
learning that are a function not of the experience involved in producing
the product but of its utilization by the final user. … In this sense, we
are dealing with performance characteristics that scientific knowledge
or techniques cannot predict very accurately. The performance of these
products, therefore, is highly uncertain. Moreover, many significant
characteristics of such products are revealed only after intensive or, more
significantly, prolonged use. 3
Rosenberg’s recognition that many of the problems of use cannot by their

nature be adequately foreseen by anyone in the production process, including
designers, highlights a very real dilemma in many rapidly evolving areas
of technology. His examples are mainly drawn from capital goods such as
aircraft, and high-technology products, such as computers:
The creative use of learning by using as a business strategy may now

be an important factor in some high-technology industries. Consider
the computer industry, which, in recent years, has relied increasingly on
complex software products to make its systems useful to a broader range
of users. The development of effective software is highly dependent upon
user experience. The modification of software systems in response to this
experience is now intrinsic to software engineering. This is so because
most software products permit wide variations in inputs and processing
options. These options cannot possibly be tested completely prior to the
release of software. Thus, the optimal design of software depends upon
a flow of information from its customers. Furthermore, many computer
companies routinely provide extensive software support that involves
software modification when bugs are discovered by customers – as they
inevitably are – when the software is used. The effectiveness of support
services in improving the product after its release appears to be very
important to the competitive success of computer firms. Such service
arrangements represent, in effect, an institutionalization of procedures
for exploiting the learning by using phenomenon in the computer
industry.4
Rosenberg is very conscious of the social impact technological innovation is

likely to have over time, which implies that technology must be considered
in a broad context and reconcile several factors:
For a technological improvement to exercise a significant social impact,

it must ordinarily fulfill additional criteria. Specifically, it must combine
design characteristics that will match closely with the needs and tastes of
ultimate users, and it must accomplish these things subject to the basic
economic constraint of minimising costs.
He is also aware that identifying ‘the needs and tastes of ultimate users’
in terms of the demand curves of neoclassical theory, that is, as a clearly
specifiable set of currently identifiable preferences, may only be possible
in stable conditions and if the methods of establishing preferences are
openly acknowledged. This is not the case, however, in conditions of rapid
change and instability, for as he also points out: ‘Innovation entails a subtle
combination of technical sophistication with the identification of specific
but unsatisfied human needs.’5
Rosenberg’s perception is accurate, but the examples he suggests of
the usefulness of user concepts are somewhat confined and there is still
an emphasis on their contribution to solving the problems of producers.
Richard Nelson also acknowledges users in similar terms to Rosenberg:
One reason why potential users wait before adopting is lack of adequate
information to form a judgment. As use spreads, information feeds back
not only to potential users, but to the designers of the product and their
competitors. The learning phenomena … proceed along with diffusion,
the product is redesigned to improve its performance, and production
costs drop. Some potential users may choose to wait for the second or
third generation of a new technology to appear before the plunge. As
the product improves, and versions better suited for particular classes of
uses appear, more and potential users find it profitable to adopt. Then
a significantly different, new design may come along. The product cycle
begins again.6
This is undoubtedly important, but again it must be emphasized that users

have concerns requiring attention in their own right, beyond whatever
contribution they make to solving producers’ problems. User-centred design
is a concept that must, as with any other design procedure, by its nature be
grounded in the realities of the producer context in which it is practised.
To be effective, however, it needs to reach much further and be clear about
the value of change for those who have to live with the consequences of it.
The values designers adhere to in decision-making are therefore important,
particularly if the focus is on design as an agent of radically innovative
change. The risks involved for any producing company need to be balanced
with a consideration of responsibility for the consequences to those most

directly affected by change.
User-centred design is therefore a key operational concept in introducing
values, in the broad sense, to ensure that any technology is appropriate for
any targeted group of users and, as far as possible, based upon an assessment
of a wider pattern of repercussions in social, cultural and environmental
conditions. One requirement of innovation is that for any technological
opportunity there must be a designed reality to insert into markets, and
design is, among other things, the function of making that technological
opportunity appropriate, accessible, comprehensible, useful, valuable and
pleasurable in the lives of potential purchasers. This stress on the role
of the user opens up a new dimension in the model of how the ideas of
New Growth theory function. As in Figure 8.2 below, the addition of the
knowledge of users as itself a distinct factor of production adds a further
dimension to new growth theory; indeed, it converts the latter, arguably, to
something closer to a model of value creation.
This also becomes relevant when we ask more sharply how change
happens.
Joseph Schumpeter famously coined the phrase ‘creative destruction’ to
describe the effect of innovation. Although New Growth theory has with
great benefit enlarged the range of factors that help explain this process, it
still omits to specifically consider the decisive factor of how something is
created in terms powerful enough to destroy existing products and systems
in a market. If neoclassical theory can be criticized for regarding technology
as an endogenous variable, then New Growth theory can be criticized for
describing technology in innovation without adequate attention to the vital
factor of design. Many research models, for example, still take little or no
account of the context of use for which their own body of research and
methodology has evolved in order to more adequately understand actual
and latent wants and needs (which should not be confused with market
research methods intended to ascertain current demand and taste).
Innovation itself can often involve an element of ‘pied-piperism’ – leading
a market in new directions. Here too, however, a prime requirement is a
highly detailed understanding of users. It should be noted that the terms ‘use’
and ‘user’ are applied here in the context of design practice, in contrast to the
more usual economic terminology of ‘consumption’ and ‘consumer’. These
latter imply that the process of production has the act of consumption, or
purchasing, as its target without concern for what happens when products
enter the lives of customers. Innovation, to be successfully adopted and
diffused, needs to be more than a convenient foil for the manipulations of
producers.
Referring to the context of users’ lives and the meaning of innovation for
them raises again the question of values. Paul Romer treats ideas in general
as beneficial, but it has been pointed out that ideas can be bad as well as
good, and need to be carefully evaluated. In this respect, a clear sense of
Figure 8.2 From New Growth theory to value creation theory: knowledge of
users as a factor of production.
values in design, the function whose outcomes are the ultimate point of
interaction with users, becomes vitally important on numerous levels.
The connecting point between the two spheres of production and
implementation is the product. Any product, of whatever form or type,
can have the quality of utility, the potential of being used for a particular
purpose or task, or providing the possibility of competency for a user.
In addition to utility, however, products also embody values. They have great
potential for assuming meaning in people’s lives, in terms of symbolism.
Their symbolic function can be a link to the culture of a society or group,
in some iconic form, or may take on an intensely personal meaning. A
sociological study of domestic culture in Chicago revealed
the enormous flexibility with which people can attach meanings to objects,
and therefore derive meanings from them. Almost anything can be made
to represent a set of meanings. It is not as if the physical characteristics of
an object dictated the kind of significations it can convey, although these
characteristics often lend themselves certain meanings in preference to
others; nor do the symbolic conventions of the culture absolutely decree
what meaning can or cannot be obtained from interaction with a particular
object. At least potentially, each person can discover and cultivate a
network of meanings out of the experiences of his or her own life.7
Symbols not only represent what is, but are also capable of mirroring
dreams and aspirations of what might be. This is potentially a crucial aspect
of design in enabling people to interpret innovation in terms relevant to
their own lives.
This is something that will require further discussion in the next section.
3 The question of ‘value’

The notes above show that the context of use within which designers must
function, requires a very different set of requirements and constraints from
those of production.
– In the context of production, the dominant value is profitability,

expressed in quantitative terms.
– In contrast, in the context of use, the main emphasis is on values,
in terms of satisfaction expressed in qualitative terms, for example,
in regard to the fundamental importance of utility, which in design
terms relates to the capability provided for users by a design or, in
other words, what it enables them to do.
In addition, as we saw above, designs assume meaning and significance in

people’s lives, which may stem from alignment with the beliefs and symbols
currently prevalent in the outside world, or may be of private significance to
particular individuals.
This distinction between value and values and their relative importance
is the cause of enormous confusion in businesses and can frequently be a
source of failure.8 Value is primarily defined in monetary terms. Money is
both a measurement of value in markets and a store of value, or wealth. In
some parts of the world, the primary expression of value for a firm is its
share price and shareholders can often be considered its primary customers.
A focus on monetary value, in terms of costs, prices, profits and capital,
is a fundamental and unavoidable means of measurement in considering
any aspect of business activity, design included. The point, however, is that
solely focusing on financial measures or share price can ignore the means by
which they are achieved and defined – or how and why they are established,
enlarged and maintained. The argument here is that profitability cannot be
understood without examination of these deeper causes, which inevitably
involves a consideration of values in a wider sense than the numerical alone.
The problem here is that even in ‘advanced’ economic theory – for example,
Richard Nelson’s tripartite division of formal research, appreciative research
and practice, which was valuable in opening up alternative channels of
thought and investigation of technology and design, more closely related to
the realities of practice – the concept of value advanced does not substantially
move beyond the single dimension of economic value. This is in marked
contrast to other thinkers who have similarly understood the need for a
dimension of thought capable of reflecting upon practice and developing
proposals for change and improvement.
Concepts of value can be traced back at least as far as Aristotle, who
regarded theory as the search for the ‘good’, which meant universal,
eternal principles. In contrast, practice was an activity producing necessary
things, but which, because it was subordinate to the desires of others, was
considered a form of slavery. Between the two extremes, however, Aristotle
suggests a middle ground, which he terms ‘practical wisdom’, that deals
with ‘matters susceptible of change’.9 He stresses the necessity of both kinds
of knowledge and separates practical wisdom from practice in terms of a
distinction between ‘doing’ and ‘making’.
The carpenter and the geometrician alike try to find the right angle,
but they do it in different ways, the carpenter being content with such
precision as satisfies the requirements of his job, the geometrician as a
student of scientific truth seeking to discover the nature and attributes of
the right angle.10
The difference is therefore between what is immediately required to

complete a task, and reflection upon the more enduring principles involved
in the task. Practical wisdom therefore entails experience of the practical,
and reflection upon it, in search of what can potentially be fed back to effect
change and improvement.
Aristotle’s distinction was also taken up by the American philosopher
John Dewey, in his concept of empirical philosophy:
To distinguish in reflection the physical and to hold it in temporary

detachment is to be set upon the road that conducts to tools and
technologies, to construction of mechanisms, to the arts that ensue in
the wake of the sciences. That these constructions make possible a better
regulation of the affairs of primary experience is evident. Engineering
and medicine, all the utilities that make for expansion of life, are the
answer. There is better administration of old familiar things, and there is
invention of new objects and satisfactions. Along with this added ability
in regulation goes enriched meaning and value in things, clarification,
increased depth and continuity – a result even more precious than is the
added power of control.11
Interestingly, Dewey also put forward a concept of mental constructs

as testable artefacts, that anticipated the emphasis on knowledge as a
manifestation of technology in New Growth theory. This means that both
mental and material constructs are basically important in understanding the
human capacity to design. As Hickman comments:
The major feature of Dewey’s technological landscape is his contention

that what lies beyond theory and practice, and what allows them to have
commerce with one another, is the production of testable artifacts, among
which he includes both those things popularly called ‘mental’ and those
popularly called ‘physical’. Dewey’s critique of technology is above all a
critique of the production of novel and testable artifacts.12
In Dewey’s thought, the ultimate touchstone of this two-way traffic between

reflection and practice is the possibility of the former enhancing the actuality
of human experience:
What empirical method exacts of philosophy is two things: First, that

refined methods and products be traced back to their origin in primary
experience, in all its heterogeneity and fullness; so that the needs and
problems out of which they arise and which they have to satisfy be
acknowledged. Secondly, that the secondary methods and conclusions be
brought back to the things of ordinary experience, in all their coarseness
and crudity, for verification.13
Aristotle assumed that change would be in accordance with values consonant

with the ‘good’ that was the main emphasis in his concept of formal theory.
Values were also a prominent feature of Dewey’s thought, and were also
taken up as a constant thread in the work of the German philosopher,
Hans-Georg Gadamer, who similarly drew on Aristotle’s ideas in viewing
practical wisdom as a crucial competence in bridging the gulf between
theory and practice. Gadamer emphasizes, in terms similar to Dewey, that
practical wisdom ‘must arise from practice itself and, with all the typical
generalizations that it brings to explicit consciousness, be related back to
practice’.14 In that sense, practical wisdom is a vital dimension of decision-
making, which again raises the problem of the basis on which one takes
decisions. Gadamer too is clear and insistent that values must be the basis of
effective practical decision-making, that the decision-maker must be ‘aware
of the normative viewpoints he follows and knows how to make them
effective in the concrete decision demanded by the practical situation’.15
The question of values is also important on another level, which relates to

Richard Nelson’s criticism of New Growth theory’s neglect of the importance
of institutions. Basically, knowledge is generated, stored and applied not
in a vacuum, but in specific institutional contexts, that are in themselves
a manifestation of particular kinds of knowledge at any point in time.
This has two broad levels of consequences: first, the interplay between the
structure of an institution and the kinds of knowledge it permits, tolerates
or encourages; and second, the degree to which an institution is capable of
modification in order to realize in practice new knowledge or extensions of
knowledge. This, in turn, will depend upon the values informing how the
institution is organized and managed. It also brings into play the concept
of culture.
Human beings are not just defined by their biological nature, which is
indeed the basic platform for their capabilities and consciousness. They are
also profoundly shaped in detail by the culture in which they grow, live and
work. Culture is the accumulated experience of any social group, manifested
in the beliefs, procedures and values held to be important. Although human
beings across the planet are fundamentally biologically identical, the
astonishing diversity of human society, belief and achievement is a reflection
of human cultural creativity. Culture is not a static phenomenon, but is
constantly being modified and changed as new experience and knowledge
become part of the common stock. Indeed, the vitality and survival of a
culture is precisely due to this capacity for growth and adaptation, rather
than being a fixed and unchanging element.
Institutions and culture are therefore, like technology, all manifestations,
albeit in different forms, of knowledge. All of them, moreover, do not exist
in isolation, but interact on multiple levels and are interrelated by the values
on which they are based. The values resulting from new knowledge and its
implementation are not necessarily good, and, for example, technological
innovation cannot be regarded unconditionally as beneficial to all involved.
For example, on a macro-economic level, in the processes collectively
known as the Industrial Revolution in Britain between approximately 1770–
1830, technological innovations, such as the Spinning Jenny, new weaving
looms and steam engines, were the outcome of specific conditions in British
society that encouraged invention and entrepreneurship on a scale not
possible in other contemporary societies. In turn, new inventions introduced
revolutionary concepts of not only mechanical technology, but also of
the organization of technology in the form of factories, with innumerable
concomitant changes in social and business organization.
The circumstances of many drawn into the new system were often
miserable and dire. Initially, the consequences on every level of what resulted
were justified in large measure by the economic concept of ‘laissez-faire’, a
free-market concept of minimum regulation. Friedrich Engels, Karl Marx’s
coworker, tells the story of meeting a Manchester businessman and telling
him of his concern at the appalling social conditions visible in the city. ‘And
yet, Sir’, the businessman replied after listening politely, ‘there is a good deal
of money made here.’ So saying, he tipped his hat and bade Engels good day.
It eventually required the efforts, on the basis of more humane values, of
many individuals and organizations, up to the level of the state, to mitigate
the terrible poverty, disease and exploitation that resulted from this myopic
viewpoint.
More recent incidents stemming from the introduction of new technology
such as the Three Mile Island incident and the Chernobyl disaster, both
illustrating the dangers of nuclear power plants, the introduction of
Thalidomide, and the Bhopal chemical plant disaster are all reminders that
it was not the technology in itself that was the problem, but the values
embodied in the organization, management and safety regulations relevant
to the technology, and above all, the absence of vital human factors in
understanding and evaluating technological performance.
9
Design and value from the
standpoint of practice
In addition to theoretical viewpoints, it is important to give consideration

to the practice of design and its significance in economic terms. In practice,
this is often summarized as adding value to a company’s activities. If this is
the case, it simply means adding value to products that already exist or to
decisions that have already been taken by people elsewhere in the company.
This role does indeed constitute a substantial part of designers’ work in
many contexts, but the emphasis is on a part and not the whole. In addition,
there is the possibility of designers creating value, of being responsible
for generating ideas for products and, indeed, of being an element in the
strategic decision-making processes of firms.
The notion of adding value is characterized not only by the executant
role assigned to designers, but also by its relationship to existing products
in existing markets. In that sense, it has some affinity with neoclassical
thinking. Design, however, is about change rather than equilibrium and
there are a number of methods of using design to increase existing market
share, among them being the following:
– Product covering. This is an approach that seeks to ‘cover’ the kind of

designs that are already in the market, by means of minor modifications
of their surface appearance, without much alteration of the basic form and
structure, or even by outright imitation.
– Product churning. In some industries, a condition of survival is that any
participating company must continually churn out vast numbers of designs
that are often minor variations of dominant themes. Typical industries for
such approaches are large-scale jewellery production, toys, and clocks and
watches.
– Scale-down. This is an approach that seeks to take complex existing
product technology or expensive processes and design them to be smaller
in size and cost, and thereby to create wider markets. A company that has
shown masterly command of this approach is Canon, which has taken large
complex systems in cameras and photocopying and reduced them in size

and cost to create whole-new market segments that they have commanded
for long periods.
– Inch-up. Many companies positioned in market sectors where products
are relatively inexpensive and price competition is intense use design to
penetrate higher-priced segments. An outstanding example of this is Honda,
which began producing tiny engines to power bicycles in the early 1950s,
went on to create the Cub moped that is still in production after half a
century, with small engine applications in other fields such as agricultural
and horticultural machinery. They moved up to larger motor-cycles, and
then in 1968 produced their first automobile. Toyota has similarly made a
spectacular breakthrough into the highest levels of automobile production
with its Lexus series.
One of the most fundamental criticisms of the static assumptions of

neoclassical thinking is that markets are assumed to exist, whereas the
crucial fact is that they are created and are often susceptible to frequent
radical modification (Figure 9.1). There was no market in the mid-1970s,
for example, for small portable tape-recorders that did not record, but
Sony’s Walkman opened up a huge market with innumerable imitators.
Markets can be created or modified by a variety of means. New
technology is one of the most obvious, and the results can be spectacular
Figure 9.1 Adding value to products.

Design and value from the standpoint of practice 159
as with James Dyson’s adaptation of technology that redefined vacuum

cleaners and helped his start-up company to outcompete established global
players. Such fundamentally radical advances in technology, however, are
not so common as might be thought. More frequently, huge possibilities lie
in new applications of existing technology in new concepts, as in Apple’s
adaptation of computer technology to enormously popular products such as
the I-Pod. New concepts of use based on observations and analysis of people’s
needs can also be equally effective in opening up new market possibilities,
an example being Niels Diffrient’s ‘Freedom’ office chair, which opened up a
completely new and profitable product line for its manufacturer, Homebase.
Similarly, opening up new channels of distribution for existing products can
be spectacularly successful, as Amazon has demonstrated in its online retail
sales of books. Each of these examples involved design as a crucial element
in its success, but in widely varying ways.
If human creativity offers a bottomless well of potential new ideas, it
must, nevertheless, be emphasized, that an idea is not an innovation, as is
frequently assumed. Only when an idea is embodied in a design – encapsulated
into forms that are relevant, comprehensible, useful, accessible, affordable
or pleasurable in the lives of users – can we truly speak of innovation, of
creating new value.
Just as there are varied means by which markets can be created, so it should
be clear that the role of design in generating value can function in diverse
ways, and there are some simple tools and concepts to aid in understanding
and analysing these processes. Some major points of emphasis that can be
combined in design projects in varying degrees to create new markets are
indicated in Figure 9.2.
These points of design emphasis can be abbreviated as follows:
– Technology-centred
– Marketing-centred
– Image-centred
– User-centred
In addition to these four elements, it can be useful to distinguish the degree

of change that is necessary or desirable in a project for it to be competitive.
There is a tendency in design education to assume that fundamental change
is to be sought at all times. In business contexts, however, it is necessary
to understand that some companies in some product sectors can deem it
unnecessary to pursue a radical agenda, which can be totally inappropriate
if the circumstances are not suitable.1
The level of innovative intent considered feasible for a project is therefore
an important determinant of a project and its success and the degree of
innovation sought in a project can be summarized as follows:
– Little change (or imitation)

Figure 9.2 Creating value – extending the market.
– Incremental detail/feature change

– Radical redefinition of basic concept
– Fundamental change from the introduction of new elements
The points of design emphasis and the degree of innovation factors can be
combined in a matrix that offers a simple generalized tool to understand the
complexity and variation characteristic of design projects.
The use of the matrix as a simple analytical tool is illustrated by plotting
on it the mix of emphasis in the first vacuum cleaner produced by Dyson, the
DC01 (Figures 9.3 and 9.4). Although the cyclone technology it embodied
was a fundamentally new introduction to the field of vacuum cleaners, Dyson
gave very little emphasis to marketing and instead relied on word-of-mouth
communication from satisfied customers. Its technological performance was
so outstanding that it did not need radically different form or user concepts,
although in both areas it was very competent, to make it a great success.
Another variable in the mix of design factors needing to be taken into
account in any business context is the deliverables, the outcomes of design
Figure 9.3 Design/innovation matrix.
Figure 9.4 Design/innovation matrix: Dyson.
processes. These fall within the following general categories, each of which
has a rich and varied repertoire of potential forms and usages:
– Artefacts, which can include components as well as finished products;

– Communications, which can be two- or three-dimensional, print or
digital;
– Environments, private or public, interior and exterior;
– Services, the human face of design, adapting to the needs of people;
– Systems, which combine some or all of the above in varied size and
effectiveness.
Each can serve a very wide range of purposes and each also requires
specific skills and expertise. What is important about these categories is that
attention to all of them is necessary if a company is to create a powerful and
sustainable brand image based on the integrity of all components. Brand
development in any meaningful sense requires a long-term strategy that
combines all elements of design in a company, from top to bottom and
across all aspects, into a coherent whole. If it does not have meaning in
that sense within a company, it can hardly expect to have such meaning for
customers.
The three groups of factors, the points of emphasis, the degree of
innovation and the deliverables, together comprise useful design planning
tools when considering what criteria are important in any project and how
these can be defined in terms that will facilitate evaluation of whether the
deliverables meet the desired specifications.
In planning and managing design projects to meet diverse aims in a
company, it is important to emphasize that designers’ expertise can be applied
in different ways to meet very different expectations. Basically, this can be
analysed in terms of whether designers are required to work on specific
product lines or on projects reaching across boundaries to extend across the
whole company, with implications about whether they work individually or
Figure 9.5 Business strategies and design competencies in a company: four

alternatives.
in multidisciplinary teams; or whether they are expected to work on current

lines or extend them into new areas.
In Figure 9.5 the quadrants represent four major emphases in how
designers can function in any company, with each corresponding to a
potential form of corporate strategy in how it applies design expertise.
The bottom-left quadrant requires existing competencies to be applied to
current products or product lines, an approach generally typical of Original
Equipment Manufacturing (OEM), in which manufacturers are provided
with specifications for products to be executed to given standards and price
and are not usually required to be concerned with innovative concepts.
Designers in this kind of role are predominantly required to add value in
limited terms. The top-left quadrant is still concerned with current products
or product lines, but in this case it is looking for innovation. This is the area
of Original Design Manufacturing (ODM), in which designers are employed
to bring a particular approach or expertise that will differentiate a company’s
offerings. The aim here is differentiated products. In the bottom-right
quadrant, the emphasis is on applying existing competencies on a corporate-
wide basis where Original Brand Managememt (OBM) is the aim, in which
coordination of all factors is given conscious and continuous emphasis.
Finally, the top-right quadrant is where innovative proposals are sought on
a corporate-wide basis, or Original Strategic Management (OSM), in which
the aim is the evolution of strategies to create new value and new markets.
Each quadrant requires design to function in very different ways.
Different market conditions can also substantially influence how design
is applied, in terms of the extent to which predictability can be relied upon
in any situation. As discussed in the section on neoclassicism, some markets
are indeed relatively stable in terms of supply and demand, while others are
unpredictable.
Known – Design as tested procedures under relatively stable conditions;

Uncertain – Design as an exploratory process under conditions of
uncertainty;
Unknown – Design as trial and error flexibly responding to unknown
circumstances.
The likelihood is that design will be used as a superficial addition in known

circumstances, where product definitions and brands are generally far more
firmly established. With greater uncertainty, however, design can become a
tool to expand the range of possibilities and explore alternatives. In unknown
conditions that are highly volatile, design can play a role at a strategic level
in providing a spectrum of scenarios to meet various circumstances and a
flexible means of rapidly adapting to customers’ needs in conditions of high
uncertainty in markets.
Figure 9.6 Proportion of total costs spent in each phase of development.

Adapted from Steve H. Leibsam, ‘Design for testability creates better products at
lower costs’, EDN, 31 March 1988.
The emphasis on design as a strategic element, concerned as much

with ideas as with outcomes, also has some strong economic arguments
in its favour. The proportion of total costs spent in each phase of product
development increases exponentially as the process evolves (Figure 9.6).
This means that the cost of generating ideas in the vital early stages of
a project is comparatively small. Alternatives can be tried and parameters
altered with little cost or consequence at this stage; the actual cost of doing
so is very small. As a project progresses, with all the consequences for
detailed development, prototypes and manufacturing ramp-up the cost of
a mistake or change can be a huge penalty. Therefore, getting design ideas
included as an integral element of early decision-making in development can
make a vital contribution to efficiency (Figure 9.7).
A further consideration is that although actual expenditures in the early
stages are comparatively small, the costs committed for later expenditure as
decisions are taken are often large. A wrong decision can thus have serious
consequences downstream if it results in change orders at a point of large
expenditure.
An implication of this changing pattern of decisions and cost is that
any firm involved in a search for innovative solutions must balance the
necessarily loose and open-ended search for new possibilities with a highly
organized structure to implement new ideas. Designers need to acknowledge
the necessity of both.
Figure 9.7 Proportion of total costs spent in each phase of knowledge

development.
The question of design, however, cannot be divorced from wider questions

of strategic management. Management theories focusing on the level of the
firm have a constant thread of ideas about establishing superior strategy
and building successful organizations. Although differing in many respects,
prominent contemporary theorists on innovation display some common
themes which overlap in several ways with the concerns of New Growth
theory in also pointing to an emphasis on knowledge rather than financial
measures, although the reference to customers is a dimension not found in
economic theory, though it is often more a matter of marketing-speak than
functioning reality.
Even in management theory, however, design is generally neglected,
even though it might be thought implicit in a theme such as creating
differentiation. More to the point, in business research and theory, just
as in economic theory, there is little focus on how products of any kind
are actually generated, how they actually create value, and what role they
actually play from the standpoint of customers.
What then can design deliver that other disciplines cannot, that is different
and meaningful in a strategic context when innovation is the aim?
Perhaps the easiest way to answer this question, which also brings
together some of the points implicitly and explicitly made above, is to say
that design offers four broad but distinctive categories of action. None
of them are unique by themselves but they become so when successfully
integrated and in turn the complex is integrated with a company’s (or an

economy’s) strategic plan.
1. Design is innately concerned with change2

Innovation by definition involves change and design in any meaningful
sense is concerned with the actuality of what will be produced in the future
and how it will be different. The conceptualizing of change, its consequences
for a company and its customers, can never be wholly anticipated, but on
the level of design planning, risks and unknown dimensions can be prepared
for by modelling potential, alternative futures. ‘Design,’ says Herbert Simon,
‘like science is a tool for understanding as well as for acting.’3 More effective
decisions can therefore be made at an early stage, more focused design
briefs and design criteria can be written, and costing estimates can be more
realistically based.
2. Design gives product concepts tangibility

Surprisingly, development teams frequently still seek to validate ideas and test
their feasibility before they are made tangible. This can waste enormous time
and resources. The possibility of accurately assessing or testing a concept
when no one has a clear idea of what it actually is can only, at best, yield
information of very uncertain value. An important function of designers is in
translating general concepts into tangible reality, giving form to innovative
concepts, and demonstrating exactly what constitutes user-value, so that
they can be more accurately tested early in any development process.
3.
Design concepts are an important determinant of manufacturing
feasibility and cost
A further point emerging from 2 above is that to avoid costly and time-
wasting changes downstream in any development process, a clear idea of
the product and its cost implications is necessary at the earliest possible
stage. Again, tangibility and a more intense degree of relevant testing are
prerequisites to properly assessing the consequences of decisions, before
substantial financial commitments are entered into.
4.
The reality of a design as perceived by users at all levels determines
market success
The role of design is to make innovation acceptable to users within the
producing organization, and at various levels in targeted markets. The
concept of different levels of users, both internal and external, is important
to avoid an oversimplified emphasis on one level only. The testing of user
reaction to any product concept in specific terms in the earliest stage
applies again.
A common factor in all four points above is the stress on tangibility and
testing in the earliest stages of development. But to use design successfully as
a strategic tool, it needs integrating at the earliest possible stage with other
key disciplines, at all levels of a company’s activity.
Two issues immediately come to the fore. The first is the question of
the capabilities and capacities a company requires when it embarks on a
strategy of innovation. Such capabilities should be based on a company’s
human capital, the qualities of the people it employs, and should be evident
in ways that are difficult to imitate, such as the following:
●● A constant flow of ideas for innovative products
●● Tangible concepts of future possibilities
●● Scenarios of future systems and their potential
●● Operational flexibility and effectiveness
●● User-focus – on multiple levels, internal and external
●● Product quality and distinctiveness
●● Cultural sensitivity in specific detail
●● Constant growth in ‘human capital’
●● Brand integrity and distinctiveness
Some practical means of realizing these possibilities are as follows:
1. ‘Preparing for uncertainty by thinking in terms of alternatives’.

A constant emphasis in this course is that innovation by definition involves
change in people’s lives – design in any meaningful sense is concerned
with the actuality of what will be produced in the future and how it will
be not just different but better. The conceptualizing of change can never
wholly anticipate the full consequences of the future for a company and
its customers, but on the level of design planning, risks and unknown
dimensions can be prepared for by modelling potential, alternative futures.
‘Design,’ says Herbert Simon, ‘like science is a tool for understanding
as well as for acting.’ In addition, if more effective decisions are made
at the early stages of development projects, more focused design briefs
and design criteria can be written and costing estimates can be more
realistically based. All these also contribute to better decision-making
early in projects.
2. ‘Getting real upfront’.

Surprisingly, there are still companies that seek to validate ideas and test
their feasibility before they are made tangible. This can waste enormous
time and resources. The possibility of accurately assessing or testing a
concept when no one has a clear idea of what it actually is, in two- or
three-dimensional reality, can only, at best, yield information of very
uncertain value. An important function of designers is in translating general
concepts into such tangible reality, giving form to innovative concepts, and
demonstrating exactly what constitutes user-value, so that they can be more

accurately tested early in any development process. The concepts of early
prototyping, of testing ideas with very rough, simple and inexpensive means
that allow multiple iterations in a brief period of time are an important tool
in determining what values are important for customers.
3. ‘Making sure you can make it well, to cost and time’.

A further point emerging from the need to ‘get real’ early in a project, is
that to avoid costly and time-wasting changes downstream in the process, a
clear idea of the product and its cost implications is necessary at the earliest
possible stage. Again, tangibility and a more intense degree of relevant
testing are prerequisites to properly assessing the consequences of decisions,
before substantial financial commitments are entered into.
4. ‘What customers say is not as important as what they do.’

The reality of a design as perceived by users at all levels is the ultimate
determinant of market success. The role of design, above all, is to make
innovation acceptable to users, both within the producing organization, and
at various levels in targeted markets – the concept of multiple levels of users,
both internal and external, is important to avoid an oversimplified emphasis
on one group only. For example, in considering a hospital as a design
system, who are the users? Is it doctors, nurses and technicians; or patients
and their relatives and visitors; or administrators, accountants, purchasers,
receptionists, cleaners and porters? In fact, it is all of them. What is important
in testing user reaction in the earliest stages of product concepts, therefore,
is to focus on users’ behavioural reaction to new ideas in all their complexity
rather than simply what one group might say. It will be behaviour that is the
true determinant of reaction to new ideas and products.
Again, the common factor in these four points is the emphasis on
tangibility, as well as on the depth of exploration of problems and possibilities
at the earliest stages of development. However, how these strategies can
be developed in practice depends on understanding the modes of design
possible in a firm.4
Five modes of how design is utilized in a firm need to be considered:
a The levels at which design functions

b The operational functions of design
c The applications of design
d The levels of design innovation
e The types of design competencies needed to secure innovation.
Given these varying factors in how design is used, it is necessary to analyse

this diversity further and attempt to understand it in greater detail and
establish more specific criteria for decision-making.
a The levels at which design can function

In basic terms, as was shown in Chapter 1, a firm has three major levels of
function (Figure 9.8).
The level of strategy involves determining what the future role of a firm
should be, its major products, markets and customers, and the organization
this will require. The level of organization is concerned with the detailed
structuring of the resources required to implement strategy. The level of
implementation directly executes the strategy in terms of production.
If design is to be fully integrated into an organization focused on
innovation, it equally needs to effectively function at all three levels
(Figure 9.9).
– Concepts of design planning are about using the resources of a firm, and
outside resources available to it, to respond to opportunities for change
affecting the nature and future of a firm. This will be discussed in more
detail later.
– The management of design is concerned with the organization and

enhancement of design competencies in a firm, the logistics of their
implementation and their effective integration into product teams. The
term ‘management of design’ is used very deliberately to emphasize the
need for effective management, with design integrated with other corporate
competencies at all operational levels to realize its potential in all facets of
corporate activity. This is in contrast to the frequently used term ‘design
management’, which implies that design is a separate, special interest
requiring its own form of management.
Figure 9.8 The major functions in a firm.

Figure 9.9 The major design functions in a firm.
– Design practice is concerned with the implementation of design skills

as an integral element of product development teams, and technique will
obviously be a primary requirement at this level. A key concept in using
design as a tool in innovation is that of user-centred design.
b The operational functions of design

In operational terms – how design is actually conceived and utilized at
the level of the firm – a fourfold distinction of functions is evident from
practice:
●● technology-centred functions
●● marketing-centred functions
●● image-centred functions
●● user-centred design
Technology-centred functions
Some products are essentially defined by their technological function – ships,
aircraft, machine tools and computers are obvious examples. Whatever their
aesthetic qualities, and they are often considerable, these are a secondary
outcome of technological definition rather than a defining intention. This
can also be true of consumer products of smaller scale and complexity, such
as Gillette’s Sensor razor, which is based on numerous patents enabling
it to function in ways much superior to the disposable razors previously

dominating the market.
Marketing-centred functions
Products in this category are exemplified by branded commodities that
are rapidly consumed, such as soft drinks, beers, fast foods and cigarettes,
and services that in fundamental terms are difficult to differentiate, such
as air travel, credit cards and insurance. Companies such as Coca-Cola,
McDonalds and Disney are classic examples that grew to global status on
the basis of marketing prowess. A more recent example is Britt Allcroft’s
amazing success in taking the children’s story, Thomas the Tank Engine,
written over half a century ago, and turning it into an immensely profitable
marketing-based enterprise with licences for an astonishing range of
products.
Image-centred functions
Where the visual form of a product is the primary intention in its development,
we can speak of image-centred design. An obvious example is the fashion
industry and, indeed, the work of any designer whose individual approach
gains widespread recognition and ‘star’ status. The French designer, Philippe
Starck, for example, has designed a juicer in a dramatic spider-like form
that sells for an immense premium over more conventional and better-
functioning products. Innumerable products of all kinds are similarly priced
at a premium on the basis of their being visually different.
User-centred design
Although lip-service is widely paid to the need for products to be more
‘user-friendly’, products designed with an understanding of people’s actual
or latent needs are not found in great profusion. The London Transport
map by Harry Beck of 1934 is a classic example of information design,
making the geographical complexities of the London Underground system
comprehensible for generations, with innumerable other transportation
systems using it as a model. A more recent example of three-dimensional
design is the Oxo Good-Grips range of kitchen products, originally designed
to aid elderly people with arthritis to grip kitchen implements such as
peelers, but so successful in its radical redefinition of function, that its ease
of use has created a much wider appeal.
c The applications of design

A third dimension on which design functions in any business context
is in terms of the actuality of its applications. The outcome of design
activity in any business will fall within the following general categories
of application:
●● Artefacts;
●● Communications;
●● Environments
●● Services.
Increasingly these days, the boundaries between the above are becoming
blurred as software and hardware intersect and combine. Therefore, in the
context of this chapter, the word product can mean any of these or any
combination, which leads to the design of systems as a coherent entity.
d Levels of design innovation

The fourth level of design decision-making in any firm relates to the degree
of innovation intended in any project. Establishing criteria for such a
complex subject as innovation is not simple. In broad terms, however, it
is possible to use a scale based on the following estimates of the degree of
innovation involved:
1 No change or imitation
2 Incremental detail change
3 Radical redefinition of basic concept
4 Fundamental innovation
There are difficulties in precisely specifying the difference of level, and the
scale must therefore only be considered a tentative answer to the problem
of defining changes envisaged in any development project. However, it is
useful as a counterpoint to ideas that innovation is necessarily about radical
or fundamental change. In fact, at different times in different product
categories, markets and stages of the product cycle, the level of innovation
possible or desirable will be less dramatic, especially in those situations
where a cycle of incremental change is appropriate.
e The types of design competencies needed

The range of specializations in design is potentially large, and with new
technologies coming to the fore, it is increasing. A key skill in strategic-
level decision-making regarding design will be determining when and where,
and in what combinations, these various levels of design competencies are
necessary for the efficient functioning of innovative product developments
across a spectrum of corporate activities. In practice, two main competencies

are involved, albeit with numerous subcompetencies, capacities and
capabilities.
Design as competence and skill on behalf of innovation

The strategic competence in managing design cannot be separated from the
question of skill. Paul Romer argued that if knowledge is something that
requires investment in order to sustain improvements in capability, then that
higher level of skill should produce clearly acknowledged benefits.
In a study of innovation in Britain, Ivan Yates argues that such higher
levels of skill, which ‘shows how productivity is increased, or how the costs
of any particular operation are reduced, as the skills level of those employed
is raised’.5
Yates emphasizes that management and organization must be compatible
with the level of skills required if the potential advantages of the latter are to
be fully exploited: ‘The greater flexibility which comes from a wider range
of skills enables a more rapid response to the market, for instance by moving
to higher quality, higher specification products.’6
Pointing out that many product concepts are put into manufacture before
adequate preparatory work, Yates stresses the need to get concepts properly
worked out early in the development process:
The penalties for not getting it right can be very great; for instance, the
effect of delay in the market place can cost dearly, as can an overrun
in manufacturing costs. On the other hand, putting more effort into
design, or even a cost overrun in the design phase, before committing to
production, has much less effect. It all comes down to the management
of risk, and it nearly always involves taking much more care about the
design process.7
Yates’ argument for the value of higher levels of skill in all corporate
functions supports the need for higher levels of competence in design as
a crucial element in developing the ‘higher-quality, higher-specification
products’ mentioned by Yates.
There is a dimension missing from Yates’ argument, however, that is a
major element in product strategies used by Japanese companies. To return
to the diagram shown at the start of this chapter (Figure 9.2), the two
lateral approaches (product matching and product churning) are basically
opportunistic responses to the market as it exists and require large numbers
of low-level design skills without any real innovatory capacity. The two
vertical approaches, however, highlight not only the possibilities of high-
level skills being used to launch higher-value products, (inch-up) but also the
possibility of high-level skills cascading down through a company’s product
line (scale-down). The breakthrough into the highest levels of automobile
markets by Toyota, Nissan, Honda and Mitsubishi are examples of inch-up.

Scale-down can be illustrated by Canon’s development of high-performance
cameras or high-end photo-copiers for professional markets, with the
innovations generated successively appearing in increasingly lower-priced
products. In both, the level of design ability required is immediately of a
far higher level, and when inch-up and scale-down are combined over time,
they can be formidably effective.
Design as capacity and competence in planning and strategy

for product and service development
In the present-day world, we face enormous changes on multiple levels,
including technologies, products, services and markets, with new, complex
dimensions of both global and local reference. Perhaps the greatest difficulty,
and the greatest danger, lies in abandoning old ideas that seem tried and
trusted. The work of many of the new growth economists, Rosenberg, David
and Arthur among them, have emphasized the concept of path dependency,
which describes the ingrained nature of habit and thought on many levels,
that makes it difficult to adapt to change.
In any aspect of a practice, procedures evolve out of experience in handling
problems, and can be described as a sequence of actions believed to be able
to reach a goal in a known situation. Again, the relationship of this to the
assumptions of a status quo in neoclassical theory is obvious. A problem
occurs, however, when rapid change is widespread, and known or allowable
procedures are inadequate for, and become a barrier to, understanding new
situations.
At what point is known procedure in design inadequate and a barrier
to executing a task? Clearly, there is an obvious level on which old skills
become obsolete, such as many hand-skills that are now more quickly and
easily performed with computers. If designers’ skills and equipment are not
compatible with those of clients, there is also a serious gulf. Change on
many levels is therefore profoundly influencing how design is conceived
and practised. Some obvious aspects are implicit in the change from mass-
production to flexible, information-based systems of manufacture and
communication, the same pattern that has been the stimulus for New
Growth theory in economics. Some of the more obvious implications for
design are set out below:
Mass Flexible
Focus Objects Systems
Function Form-giver Enabler
Purpose Adding value Creating value
Role Middle-level executant Strategic planner
A key factor in the shift from mass to flexible production and from objects
to ideas is the greater emphasis on systems rather than products (Figure 9.10).
Systems embody knowledge and ideas; they connect and give utility to objects.
For example, it is possible to think of designing a bank-card or an ATM
machine as objects, at a relatively modest level of skill-based competence, but
neither has any significance without understanding the system of which it is
a part. From the standpoint of design, the key to the successful functioning
of systems is not the aesthetic, formal qualities of individual objects, but
the interface with the system as experienced by users. Rather than simply
designing objects, therefore, there is a need to interrelate hardware and
software in integrated systems appropriate to users. Implicit in this is a change
in the role of designers from unique form-givers to enablers.
The concept of designer as enabler is central to understanding the
differing role of design in the new technological and economic circumstances
emerging at present. These are characterized by complexity, caused not only
by size and diversity, but also because in a period of change, it is impossible
to know exactly what will transpire in any given situation.
Designing a single object, or solution, in a situation of complexity can, at
best, address only a tiny proportion of any problem or potential solution.
In such circumstances, a more appropriate response is the design of objects
in systems that are flexible and adaptable – enabling users to adapt them
in ways appropriate to their own lives and purposes. The role of designer
as enabler is therefore based on an acknowledgement that complexity and
flexibility are two sides of the same phenomenon.
Figure 9.10 Changes in design from mass to flexible production.

Under such conditions, technological opportunity for innovation lies

not in adding value to existing concepts, but in creating new concepts of
value. This also implies a new role for designers above that of middle-level
executants – trying to create a degree of differentiation for products already
essentially determined by others. It opens up a need for strategic design
planners capable of participating with other vital corporate disciplines in
the process of creating new systems and new value.
The implications for strategy

What does all this mean in terms of strategy? Certainly, it too must be
reoriented to meet new, emergent conditions. In terms of Neoclassical theory
and the economy on which it was based, strategy could also be conceived
in relatively simple terms as a predetermined set of procedures to meet a
known, essentially static market situation. Where change and complexity
are the rule, however, strategy needs to be framed in general terms of a
vision of the future, necessary for a sense of coherence and direction, but
with implementation conceived in terms of what is needed to respond
rapidly and effectively in conditions of uncertainty and complexity, with
all their concomitant problems of friction and resistance to change. As a
strategic tool, therefore, design planning should not be conceived as a route
march to some predetermined end, but as a highly flexible tool for exploring
possibilities and rapidly responding to new and unknown situations.
Yet, given these possibilities it is surprising that many companies still
seek to compete in terms that use design for minor modifications of existing
products, or for superficial attempts at differentiation without any substance.
They exist in a given competitive situation and do not address the potential
of creating new value, which is at the heart of any innovatory project. In a
changing world, Joseph Schumpeter’s term ‘creative destruction’ appropriately
summarizes the blend of opportunity and threat such companies face.
What has been argued in this seminar is that new trends in economic theory
provide a better understanding of the processes of growth, and a framework
of great potential in understanding the case for design as an integral element
in innovative processes. Design theory can valuably complement it, adding
dimensions of understanding not encompassed in economic concepts.
Design practice should also be integral to the innovative capacity of firms
and thus to the processes of growth, as an equal partner with a clearly
defined and acknowledged function. Using design to strategically create
value, generating breakthroughs that open new markets or fundamentally
redefine existing ones, and subsequently sustaining and extending them is
a continuously evolving process, but a necessary one, presenting ongoing
challenges to designers at all levels. In terms of its role, design is not just
about adding value. In the context of innovative possibilities, it can deliver
to users, and much more powerfully, what they never knew they wanted or
realized they could have.
But there are also wider strategic implications here.

Strategies are not innate to any individual or organization.8 They can
be learned and practised and, with evaluation and improvement, can
vastly alter performance. The concept of the role of design planning as an
integral element of strategy can only be fully successful when used as part
of a coherent policy across the whole range of corporate activity, and from
commencement of development processes through to sale and service in the
market, with the purpose of raising the overall level of capability of design
in every aspect of corporate performance (Figure 9.11).
To achieve this requires an understanding of the fact that design
functions across divisions that often represent very different values and
procedures. On the level of practice, for example, design functions in part
on the basis of coded knowledge, such as the specific technical qualities of
materials, or the ergonomic profiles of a particular population, and also
with a substantial degree of tacit knowledge in how the coded knowledge
is applied. Although tacit knowledge is not easily built into formal models,
it should be re-emphasized that it is an invaluable element in innovative
conceptualization and practice and thus a form of competitive advantage.
Indeed, design, understood primarily as integral know-how, based on
‘learning by doing’ and embedded in a network of specific relationships
in a firm, rather than as operational technique based on manuals or other
forms of coded knowledge, is less likely to be easily imitated or replicated
and more likely, in economic terms, to be excludable.
It is above all the focus on people and their needs and the reconciliation
of these with business requirements that is advocated here as the major
contribution of design as practice and theory, that has economic validity as
a means of creating as well as adding value. The diagrams that have earlier
summarized the various bodies of economic theories and their main tenets
can be extended here to indicate how design can be an integral element in
contributing to innovation and competitiveness. It does so by proposing
that knowledge of and ideas for users be considered alongside knowledge
and ideas about technology as a fundamental factor of production, thus
positioning this concern at the early stages of any process of how a company
functions. Knowledge of users thus becomes an integral element in how
the capability of any firm is defined. It also posits users as the ultimate
focus for the outcomes of the whole sequence of production, delivery and
purchase. By linking earliest considerations in internal terms to ultimate
uses in external terms, design becomes integrated as a vital and necessary
dimension of how any company functions.
Creating value in economic terms is frequently separated out from
the satisfaction of human values, which explains the profusion of bad
products and the dubious business practices around the world that arouse
suspicion and mistrust of companies and how they conduct themselves.
A central proposition of this course is that concern for both value and
values can be combined in ways capable of powerfully enhancing sustained
competitiveness.
Figure 9.11 Value creation theory with design understood as a structural factor
of production.
It is important to emphasize that both technology and design, as

manifested in artefacts and systems, are neutral in terms of the values they
embody. The concepts and intentions of designers do not always determine
the purposes for which their designs are applied and the values or meaning
that become embodied in their application. In other words, technological
innovation is not necessarily the manifestation of some inevitable onward
march of progress and neither is a new design automatically beneficial. The
term ‘good’ design, frequently used to describe the extent to which a design
performs its designated function or conforms to a particular canon of taste,
is, in terms of any ethical or moral implication, meaningless. A pen such as
a Parker Rollerball or Lamy ball-point might be considered ‘good’ in terms
of its essential function as a writing instrument or in terms of the aesthetic
pleasure it provides. However, if the point of such a pen is poked in someone’s
eye with the intention of blinding them, it becomes an instrument of evil,
for a wilful, sadistic act of destruction. A computer can be simultaneously
a device enabling people to have greater means of control over their own
lives, expressing their innate worth; or a means of controlling them and
making them conform to oppressive political or economic aims. Whether on
an individual or group level, it is the use to which technology or designs are
put, the values they further in use, and the consequences of their introduction
that is decisive in how they must be evaluated. Violent computer games for
children might be profitable, but are they desirable? In other words, the
behavioural and cultural consequences of design are primary social criteria
by which it should be judged. To repeat: the consequences might be in
conflict with the desire for profit but they do not necessarily have to be so
and reconciliation of these two aspects provides one of the most effective
business tools available to enhance competitiveness.
In this sense, John Dewey’s observation on how to judge the value of a
philosophy, written in 1925, sets the standard not only for philosophical
works, but also for any form of decision-making, particularly design, that
affects the lives of other people. A first-rate test, he says, of the value of any
philosophy that is offered to us, should pose the following questions:
Does it end in conclusions which, when they are referred back to ordinary
life-experiences and their predicaments, render them more significant,
more luminous to us, and make our dealings with them more fruitful?
Or does it terminate in rendering the things of ordinary experience more
opaque than they were before, and in depriving them of having in ‘reality’
even the significance they had previously seemed to have?9
Design must equally be judged in terms of the benefit it brings to life in all its
dimensions. To deny the significance of values in this broader sense is to deny
design any role in defining viable solutions to human existential problems,
effectively condemning it to a supporting role in pursuit of narrowly defined
economic aims measured in profit, in other words, relegating design to a
technocratic role of putting into effect the ideas of others without any
regard for the consequences. Attempting to create the future material and
information structure of our culture in these terms, without any sense of
values other than financial, will be a disaster waiting to happen, like sailing
a nuclear-powered submarine by the sun and stars. In short, a task of the
utmost significance is to reconcile the two poles of value and values that are
both necessary and integral components of the tasks facing designers.
Afterword
Sharon Helmer Poggenpohl
Occasionally, someone appears with not only the right background and
intellect to tackle an ongoing conundrum in design, but also the curiosity
and discipline to pursue the investigation over decades, yielding an authentic
contribution to design thinking. Economics and business understanding are
missing links in design practice and education and few have the interest or
are capable of going beyond basic comprehension. Yet, John Heskett dug
into theory to do an accessible analysis of economic theories as they relate
to design. But the work is not done – what is missing is a synthesis of aspects
of existing theories John has conveniently identified that speak strongly to
the interrelationships between design-economics-business. Design and the
Creation of Value is a scholarly gift.
We live in such a quantitative time and those quantitative thinkers tend
to ignore the importance of qualitative measures because they elude easy
analysis and integration. We are awash with economic indicators, and some
sense of qualitative indicators is needed to achieve a balance. Design is about
qualitative work in many dimensions, the interaction between people and
things, humanizing technology or the larger search for sustainable solutions,
for example. For such reasons alone, John’s work is important; he respects
the quantitative but recognizes the challenge and need for qualitative balance.
This work needs to continue, with someone with the right credentials
(understanding economics-business-design) picking up this work and
extending it. Actually two people are needed: someone to synthesize the
economic theories in terms of design that are flagged in this book and
someone to continue investigation of value and values that hit on the hard
and soft nature of these terms and perhaps can unravel their relationships.
The synthesis of theories may lead to new ideas, likewise disambiguating
value and values. This is not easy work, but it is essential.
His readings in history and the necessary references from economic theory
may run into dismissal with contemporary readers who tend to read what is
hot or very current, dismissing older, classic sources. We build on and learn
from the past. John Heskett has done the heavy lifting in this regard as he
provides the starting point for continuing this work.
Appendix 1: Socialist
Theory 1
Although many figures would need to be described in any full account of the
evolution and development of Socialist theory, there cannot be any question
that Karl Marx (1818–83) towers over them all in his work and influence.
The significance of Marx is that he was the first economist to provide a
substantial body of theory that gave focus to dissent with and misgivings
about the mainstream of capitalist theory and practice. It is difficult to
underestimate the effect of his ideas, even though some of their key features
have become discredited.
He was born in Trier, in the German state of Prussia, of Jewish antecedents,
although his father was forced to convert to Protestantism. Marx, however,
became a convinced atheist. At university in Bonn and Berlin, he became
influenced by the ideas of Hegel, who argued that a continuous process of
transformation and development was characteristic of human development,
which kept society in a condition of constant challenge and change.
Marx lived in a world in which the capitalist bourgeoisie in Europe and
America were transforming in their own image on the basis of the theories of
Adam Smith and his successors. There was inevitably much social suffering
and exploitation in the early stages of industrialization. This led Marx to
speculate on what the process of change should be in his own time, a path
that increasingly led in the direction of socialism.
In 1841, he began work as a journalist in Köln (Cologne) and soon
became the editor of the Rheinische Zeitung. The circulation of the paper
rapidly grew, as Marx took up the grievances of local citizens against the
government. His interest in and advocacy of socialism began to develop
substantially, which brought him into frequent conflict with the Prussian
censors. In 1843, the paper was closed down. Now married, Marx left for
Paris. There he frequently met with Friedrich Engels, the son of a German
textile manufacturer, who was to be a close associate for the rest of his life.
In Paris, Marx studied avidly. A range of socialist forbears profoundly
influenced his thought: from France, Fourier, Saint-Simon, Blanqui,
Louis Blanc and Proudhon; from England, Robert Owen; from Germany,
Ferdinand Lassalle and Ludwig Feuerbach. At this time, he also worked
for a refugee German newspaper, which again aroused the attention of the
Appendix 1: Socialist Theory 183
Prussian censors. At their request, the French government expelled Marx in

1845 and he left for Brussels.
In 1848, he published The Communist Manifesto, a pamphlet for a
socialist organization that later became the Communist League. Its main
points proposed the following:
– Society was the history of class struggle. The bourgeoisie had over-
thrown aristocratic rule and in turn would be supplanted by the
proletariat created by the Industrial Revolution.
– Revolution was justified to hasten this inevitable process.
– An end to private ownership and progressive income tax.
– Public ownership of major industrial and commercial institutions.
– Work by all.
– Free education.
It concludes with a famous rallying cry: ‘Let the ruling classes tremble at
a communistic revolution. The proletarians have nothing to lose but their
chains. They have a world to win. Workers of the world, unite!’
That same year, 1848, is widely known in Europe as the Year of
Revolutions, which broke out in France, various German states and the
Austrian Empire, among others. Marx returned to Cologne, but the failed
revolution in Prussia meant he had to leave again. This time, in 1849, he
went to London, where he remained for the rest of his life. Support was
initially provided by Friedrich Engels, who managed the branch of the
family business in Manchester. Later, an inheritance of Marx’s wife gave
basic financial stability. He plunged into political work with workers’
organizations in London and discovered the great resource that dominated
the rest of his life: the library of the British Museum. There he researched
and wrote, in particular, the three volumes of Das Kapital, the first volume
of which appeared in 1867. This and other works of his prolific life as a
writer have had enormous impact on multiple levels. They have shaped the
experience of societies that underwent revolution and the establishment
of Communist systems, most notably Russia and China, that profoundly
shaped the course of events in the twentieth century. Even in societies
remaining basically capitalistic, Marx’s ideas on social provision often led
to their being adopted as a bulwark against communism.
At the heart of his economic theories was the assertion that labour is
the source of value, a proposition going back to Adam Smith. Under the
capitalist system, Marx argued, workers are paid as little as possible and
the value of their labour is appropriated by capitalists. The value of labour,
in terms of what workers are paid, is therefore always less than what the
worker produces.
The theory is problematic, being based only on a limited view of
production costs. It does not explain why wages, prices and profits are
actually as they are. It ignores rewards for enterprise, the factor of scarcity
184 Appendix 1: Socialist Theory
and the role of consumer demand in determining value in the market place.
It is still, however, at the heart of many critiques of consumer society.
Marx also argued that the proletariat was created by the bourgeoisie,
which concentrated productive power in a few hands. In turn, the
contradictions of this system would lead to the proletariat seizing power.
In fact, however, capitalism has gradually but continually broken down the
class system by allowing a greater proportion of the population access to
opportunities for economic and social improvement. In addition, capitalist
systems have shown a capacity to reform on important levels provision
of social insurance, health and unemployment protection, education and
pensions, which has mitigated many insecurities of life.
Social relations, political and cultural beliefs and practices, are all
elements of what Marx termed ‘the superstructure’ and are all created
from and dependent on the nature of the economic base. This creates a
paradox: the new communistic system could not emerge until the economic
base had been transformed – which was the task of revolution. However,
it is an oversimplification to believe that people’s consciousness is simply
determined by economic circumstances, and there is evidence to suggest that
ideas do not alter in conformity with economic change.
According to Marx, the collapse of capitalism was inevitable. Clearly, this
has not yet taken place and, indeed, the transformation of the former Soviet
Union, China and other socialist states to a capitalist economy would argue,
instead, for the inevitable collapse of socialism. There remains, however,
a residual degree of uncertainty within the consciousness of many people,
a nervousness at the possibility of a deep economic crisis. If the current
wave of material prosperity should for any reason subside, this might again
become topical.
Appendix 2: Value
and Values in Design
There is a widespread belief among designers, a cornerstone of their practice,

that not only can design, add or create economic value through products
and processes, but it can go further by also enhancing individual, social and
cultural life in beneficial ways. This paper will explore the extent to which
these beliefs are sustainable, and whether a relationship exists between
ethical and economic effect, between values and value.
The belief that design can, or should, embody ethical values has deep roots.1
One of its clearest threads is discernible in the history of the English Arts
and Crafts movement. One of the most distinguished heirs of that tradition,
the English furniture designer, Gordon Russell, who in 1944 became the
first head of the newly founded Council for Industrial Design (CoID), later
the Design Council, wrote of the way in which, during the first half of the
twentieth century, mechanization was used in the British furniture industry:
The machine, which might well have been used to produce a decent job of
work, was often used purely to obtain cheapness at any cost.
Can anyone imagine that such conditions offered a healthy seed bed
in which good designs might grow? For good quality – quality of design,
of material and of workmanship – is the outward and visible sign of
good health. It is not something which can be assumed at short notice,
like the sham styles so beloved by the furniture trade, but something by
which our whole standard of civilization can be tested: either you believe
that the physical background of life ought to be pleasant, seemly and
satisfying or you think it doesn’t matter.2
The passage is infused with terms indicating a strong sense of values:
‘healthy’, ‘good’, ‘quality’, ‘sham’, ‘standard’, ‘seemly’, ‘satisfying’. Indeed,
Russell consistently argued for the recognition of consistent standards in
designing and its potential for influencing the social life of users. Of this work
in attempting to improve awareness of design and its potential, he wrote:
It is sometimes said that there is no such thing as good or bad design,

that it has no real measurable standards, that it is, in fact, just a matter
of personal taste. But it is readily accepted that there is a standard of, say,
honesty, or driving, or housing, so why not one of design?3
186 Appendix 2: Value and Values in Design
Similarly, a distinguished Swedish designer, Gregor Paulson, expressed a

point of view that design had an important role in moulding social values
when he was addressing the Royal Society of Arts in London in 1950.
Paulson accepted that differing points of view existed between producer
and consumer and pointed to a fundamental difference in concepts of value
between producers and users that is potentially profoundly important,
although he did not substantially explore it in his address.
Products are looked upon by the consumer from the viewpoint of value in
use, whereas the producer and the retailer must think of them as articles
of trade, as means of exchange which bring the revenue necessary to
pay wages and other expenses. Of course, most producers believe that
the things they manufacture have high value in use, i.e., are such as the
consumers want.
The matter was further complicated, he argued, by designers who often

advocated idealistic beliefs about the role of taste, as they defined it, in society.
It was possible, however, that if all three parties worked in cooperation, a
satisfactory solution could emerge.
Furniture can be designed through collaboration between the three

parties concerned in the drama; the manufacturer (represented by the
technician), the designer and the consumer. Furniture which is fit for its
purpose, good in quality and reasonably low in price, and stimulates
demand because of its higher values in use is the outcome. … Furniture
which can be combined to suit the dwelling, the family, the purchasing
power at a given moment, will be bought throughout a lifetime in small
units, but repeatedly. Sweden is trying to put this theory into practice. The
[design] ideologists of the middle way want better homes for the common
people, not to manifest a given taste, but because, to them, better homes
are the most important influence for a better pattern of life. They want a
new structure of the family budget; more spent on and in the home, less
in the street. Designers who work in that spirit are social workers. Their
heart is with the consumer, but they are not counteracting the interests of
the producer. They believe themselves to be furthering them.’4
Paulson too uses a wide range of terminology that indicates the values he
considers important: ‘fit for its purpose’, ‘good in quality’, ‘higher values in
use’, ‘better homes’. The concept of ‘good’ design in that sense has faded
almost out of sight, along with the paternalistic idealism of its protagonists,
but no similar explicit ideals have taken their place. Design has instead
become widely subordinate to business imperatives, with cost criteria
dominating in much the same terms that Russell criticized. While designers
are often still exasperated by the reluctance of business clients to consider
their products on any level but cost, it must also be acknowledged that,
unlike Paulson, some designers too readily ignore the fact that profitability
is necessarily the dominating criterion in the functioning of any business.
Clearly, if the two standpoints are to be an opportunity for fruitful
cooperation rather than antagonistic division, a reconciliation needs to be
outlined between the twin poles of value, defined in terms of the economic
needs of producers, and values, defined in terms of what users derive from
any product. There is an extensive literature on the economic concept of
value, which is ultimately quantifiable in terms of profit. On the other hand,
values, in terms relevant to users, are less well-understood. A starting point
in exploring the latter is the body of theory that focuses on values.
An immediate problem is that the emphasis is very emphatically on the
plural. There is no established and accepted body of theory that can serve
as an overall, general introduction to the subject. Instead, one must come to
terms with a spectrum of views on what constitutes values, and how they
function on multiple levels. There is also a problem with the terminology, as
the singular and plural forms, value and values, are fluid, the two often being
used interchangeably. (Since, however, a similar situation exists in the study
of design and what it means, this should not be seen as an impenetrable
obstacle, although it does represent a challenge.5)
Two major variations of how values can be understood are described by
Milton Rokeach.
The value concept has been employed in two distinctively different ways
in human discourse. We will often say that a person ‘has a value’ but also
that an object ‘has value’.6
He goes on to suggest that the former – personal values – are of greatest use
in social analysis, and differentiates between specific values and the system
of which they are a part.
A value is an enduring belief that a specific mode of conduct or end-state

of existence is personally or socially preferable to an opposite or converse
mode of conduct or end-state of existence. A value system is an enduring
organization of beliefs concerning preferable modes of conduct or end-
states of existence along a continuum of relative importance.7
Of interest is the emphasis on ‘enduring belief’, implying continuity over

time and an unchanging quality in the belief system.
Beyond the fleeting mention quoted above, Rokeach passes over any
further discussion of the value of objects. Yet, his mention implies that
objects, an end result of designing, can have value assigned to them.
This raises questions about how the two variants relate to each other.
Can the two definitions of value be congruent, or have the possibility of
congruence at some levels? Is it possible, in other words, to establish a
relationship between personal values as an aspect of value systems, and the
values embodied in objects?
Despite the fact that personal values are usually communicated in an

absolute manner, particularly when the value system in which they are
embedded is based upon religious or ideological faith, there is no definition
of them that can be irrefutably demonstrated in objective terms. Ultimately,
they hinge upon patterns of belief that have social justification and sanction
within a particular social and cultural context.
Values, in this sense, are a recognition of reciprocal social responsibilities.
Their efficacy, as emphasized by Rokeach, will depend upon a substantial
element of stability – ‘an enduring organization’ – and codification into
an overall set of standards that have communal validity, or are socially
acknowledged as an outcome of processes of acculturation. The major
manifestations or reflections of such values are behavioural outcomes,
which provide standards or guides for evaluation.
There are basically two different ways of how values can be evaluated.
They can depend upon internal validation, what a person believes them to
be; or external validation, which stems from the authority of social sources.
Values are relatively general and durable internal criteria for evaluation.
As such, they differ from other concepts such as preferences (or attitudes)
and norms. Like values, preferences (and attitudes) are internal; unlike
them, preferences are labile rather than durable, and particular rather
than general. Whereas norms are also evaluative, general, and durable,
they are external to actors and – in contrast to values – require sanctioning
for their efficacy.8
For Hechter also, personal beliefs about what constitutes value are linked
to general criteria and, again, there is an emphasis on durability. This raises
a fundamental conflict when considering the relationship of such values to
design, which in its modern forms, is about choice and the possibility of
change, not just in tangible outcomes, but also in human behaviour. On the
other hand, preferences and attitudes that focus on particularities and can
rapidly change are obviously relevant to a discussion of design, as is the
existence of socially sanctioned standards, or norms.
Another useful distinction can be made between instrumental and terminal
values, between desirable conduct and end-states of existence. The former,
instrumental values, connoting conduct or action towards an intended end,
can be further subdivided into moral values and competence values, the first
being a means of evaluating codes of behaviour, the second relating more to
levels of competence or efficiency. In texts setting out systems of existential
belief, such as the Bible of Judaism or Christianity, or The Koran of Islam,
an ideal congruence is advocated between the attainment of desired end-
states and the instrumental means used for their realization; in other words,
the ends are justified by the means used.
It is often widely assumed that such values are contingent upon, or are
synonymous with, religious belief. This need not necessarily be the case,
however, and indeed, in the multi-cultural societies that increasingly typify
the early twenty-first century, there are strong arguments that it should not
be so. Where in the past religion and state have been intertwined, the result
has been exclusion of non-believers, and persecution and oppression to
ensure conformity with the value system, as with the Spanish Inquisition.
Similar effects are observable in modern states based upon the dominance
of a particular religious belief, such as Iran under the government of
the Ayatollah Khomeini and his successors and the Taliban regime in
Afghanistan. There is a difficulty, of course, in that despite the claims of such
belief systems to universal validity, when juxtaposed, as is frequently the case
in modern societies, their codes of values can sometimes conflict in practice.
To give a simple illustration, Muslims and Jews prohibit the consumption of
pork but eat beef, while Hindus eschew beef but eat lamb. Sharp differences
therefore exist, although this does not preclude overlapping elements of
commonality – all the groups mentioned eat chicken. Ultimately, therefore,
values must be considered relative in general, and context dependent in
specific terms. Where more than one belief system coexist in any society,
the door is open to religious conflict, so tragically evident in our time, for
example, in Northern Ireland and the former Yugoslavia.
The intermingling of peoples and beliefs that typifies countries based on
immigration, such as the United States, Canada and Australia, and in recent
decades, Western Europe, supports arguments for some form of secular
values bridging all sections of society. The Declaration of Independence
founding the United States of America asserted the right of all citizens to
‘Life, Liberty and the pursuit of Happiness.’ This and the separation of
secular from religious freedoms in the U.S. Constitution offer some examples
of how values can be embedded in a society’s way of life without denying
religious freedoms.
There is no guarantee, however, that secular belief systems will not also be
repressive. Political ideologies such as Communism, advocating the creation
of utopian social systems, were profoundly important in shaping events in
the twentieth century. Brutal political measures in pursuit of utopian goals
were justified in terms of a reversal of value systems: ‘The end justifies the
means.’ It is thus perfectly feasible to conceive of the attainment of ends
relying on competence values that are detached from any moral dimension.
On another secular level, social groups such as military units, businesses or
professional organizations play a very important role in framing competence
values. Perhaps the most notable concept is that of esprit de corps, the bonds
of discipline and commitment that unite a military unit in terms of enabling
it to face, if necessary, death or injury in service to a common cause. The
problem of considering such competence values detached from moral values
was illustrated, however, in behaviour demonstrated in the World Trade
Center attacks of 11 September 2001. The terrorist hijackers undoubtedly
showed the highest levels of courage and commitment to their cause in facing
certain death, but in the service of indiscriminate destruction. Equally high
levels of courage and commitment were displayed by New York firemen
in facing raging fires after the attacks, despite the evident dangers that did
indeed cost the lives of over three hundred of them. They were seeking to
preserve life. The difference is important.
In less dramatic terms, businesses may embody a very specific set of
values that profoundly influences the behaviour and actions of everyone
working for them. Equally, a profession, such as medicine or law, may define
a body of ethical standards to which members are expected to conform,
with withdrawal of a licence to practice being the ultimate sanction for
transgressions. Some forms of practice, however, have become increasingly
detached from attention to ethical values, due to higher degrees of division
of labour and specialization of task. These can function on a technocratic
basis, that is, exercising skills and competencies without any fundamental
regard for the outcomes of their application.
Defining a set of professional ethics is generally directed to the preservation
and maintenance of value systems.
Any code of values that is absolute and immutable could be a serious
obstacle to the potential for change in any situation. When the Islamic
fundamentalists of the Taliban in Afghanistan proclaim that Islam is a
complete religious, political, social and economic system that is perfect,
it positions itself in complete opposition to the processes of change that
are integral to modernity. Similar fundamentalist tendencies are found in
other major religions such as Christianity, Judaism and Hinduism, that also
vehemently oppose modernity.
Although discussion so far has focused on religious belief, such ultimate
ends can in fact take many forms; for instance, they can be material, physical,
economic, moral, social, political, aesthetic, intellectual, professional,
personal or sentimental in nature.9 Within this broad spectrum, behaviour
has already been cited as a major manifestation, but objects and artefacts can
also be important, playing many roles. They may embody values in an iconic
sense, as with the Christian cross, or represent a sense of identification, as
with the American flag. They may be a source of offence when they express
difference, as with the Taliban regime’s destruction of ancient Buddhist
icons in Afghanistan. Or they may be utilitarian means to an end, as tools in
enabling competence values, whether as a chisel to a carpenter or a computer
to a statistician.
The intended outcomes of design processes affect these issues in an uneven
manner. This is in part because design skills cover a very broad spectrum
of practice, from rapid changes of fashion to longer-term, more enduring
technological solutions, from designing a package, to designing an urban
transportation system. Another important aspect is that designers rarely
have the luxury of working for themselves alone; they generally work for
producers of one kind or another, employers or clients in business or other
organizational contexts, for example, government bodies. Understanding
the values of producers and establishing a compatibility with their own is
crucially important for designers, and tensions can occur in situations where
the values designers feel are important are subordinated to those of producers.
Producers are concerned with generating tangible outcomes of one kind

or another, products, services or systems that compete in markets and must
generate a return on investment adequate to ensure the continuation of
production. In much economic and business theory, the term ‘consumption’
is used to describe the moment of purchase of producers’ offerings. The
medium of exchange, cash, is in itself a fundamental index of value, in terms
of whether a ‘consumer’ is prepared to pay the required price for the product
in return for whatever utility or meaning it delivers. The terms ‘consumption’
and ‘consumer’ are problematic, however, since they avoid any substantial
consideration of the processes of use. An important distinction in use is the
factor of time. When anyone buys a newspaper from a kiosk, or purchases
a ticket for a single bus ride, we can assume that it is for immediate use.
There is a large category of similar products that will generally be used in a
very short time span. In contrast, however, when anyone purchases a more
durable product, such as a washing-machine or automobile, he or she is
purchasing the promise of use over a much longer time period. Ultimately,
however, whatever the time span involved, people have to want the products
for what they contribute to their lives. Newspapers need to contain relevant
material and be legible, buses need to provide an adequate service within a
systemic structure of stops and information that is clearly comprehensible.
Henry Dreyfuss, one of the first generation of American professional
industrial designers, gave felicitous expression to the need to recognize user
needs in his autobiography:
For years in our office we have kept before us the concept that what we
are working on is going to be ridden in, sat upon, looked at, talked into,
activated, operated, or in some way used by people individually or en
masse. If the point of contact between the product and the people becomes
a point of friction, then the industrial designer has failed. If, on the other
hand, people are made safer, more comfortable, more eager to purchase,
more efficient-or just plain happier-the designer has succeeded.10
In the final analysis, judgements on any designed outcome, of any kind, must
therefore be not on the values designers or producers believe it embodies,
but on its relevance and meaning for users. This stress on the values of users
is not an end in itself, but a necessary, implicit means to the desired ends of
designers and producers for successful, profitable products. Gregor Paulsen
was indeed right: we do need to reconcile the requirements of all parties
involved.
Producer value
Sustainable competitive advantage is the current ideology of several theories
of business. It has been labelled the resource-based theory. The reason for
the new theory is the shortcoming of Neoclassical theory to account for

long-term profit of companies and for the difference between companies
in the same industry. According to the theory, the emphasis should be put
on the company’s intangible resources: its knowledge resources. To sustain
a competitive situation, the company must focus on three issues relevant to
its economic value.
First, it must deliver value to the users and the customers. Without this
ability, it will soon be out of business. What is important is not how good
the company is in absolute terms, but how capable it is to position itself on
the market relative to its competitors.
The second issue is concerned with the ability to prevent competitors
from using exactly the same offer to the market. This is concerned with
appropriability. The company must be good to gain the benefits from its
knowledge resources as well as preventing the competitors from using
it. Protective measures are for instance patents, lead-times, trade secrets,
closed markets, customer loyalty, etc. Often a company uses these measures
simultaneously.
The third issue is also concerned with the factor markets. In some cases,
the company has the ownership rights to precious factors of production
such as minerals of materials essential to the production. In most situations,
a company is dependent on factors of production only available on a market.
If the factor is standard and there is a well-functioning market, there is
usually no problem. The problems occur when we speak of complementary
resources that the company may only get from few suppliers. This can be
access to rare raw materials, production facilities or sub-supplies, skilled
labour, etc. In these cases, the suppliers have an incentive to press their
bargaining power to obtain a larger share of the value created.
Economic value
Economic values are of special concern, since they are directly related to
how a society deals with the handling of scarce resources. Economic values
suggest a relation between the availability and the desirability of certain
(other) values. We speak of a value system as an economic mechanism that
serves as the nuts and bolts of processes in which raw materials, labour,
energy, etc. serve as factors that go into a production process where the
outcome is products for consumption.
A high economic value is attributed to something that is desired by many
but is subject to scarcity. The famous ‘water-diamond’ paradox suggests that
even if the utility of water is higher, diamonds can have a greater economic
value because they are rare. They are also desired because they are beautiful
and the scarcity indicates that the owner is rich. As science fiction can
demonstrate, the situation can be conceived to be different.
Economic value is important because it refers to a mechanism by which
other values are cleared within a society. The mechanism often referred to as
the ‘price mechanism’ is important, because the price is the sacrifice that a
customer or consumer is willing to offer to obtain a unit of the good at hand.
But in economics the price bid by the consumer is in normal circumstances
considered less than the value of the good he wants to acquire. The inequality
is sometimes referred to as the ‘consumer surplus’. The price mechanism is
seen as a signal or information mechanism. This means that a price (quote)
signals to the many participants in the market in ways that they can adjust
their production and product. Generally speaking, companies enter a
transaction when there is a prospect of earning a monetary surplus. The
term is similar to the term ‘producer surplus’ or simply profit, which is the
remuneration the company receives for an economic transaction. The price
signals adjust demand and supply throughout the value systems. The price in,
say, the markets for production factors are adjusted according to the values
that are imputed to the end customer or user. Today few economists would
claim that the price mechanism is perfect. Yet they would mainly claim that
an imperfect price mechanism is far better than the known alternatives.
This does not mean that all values are subject to economic value.
The inclusion or exclusion is a matter of convention and institutional
arrangements. For example, households and other factors have divided the
economic system between the production sphere consisting of companies
producing goods using labour delivered. The consumption sphere, on the
other hand, is traditionally seen as households, which consume and deliver
labour to the companies. This is far too simplistic and serves mainly as a
stylized description.
A particular problem concerns ‘positional goods’. They are usually unique
goods, so that the demand for them cannot increase, even though their price
jumps. This is the explanation for works of art that obtain ‘perverted’ prices,
since in many cases, several very rich people or organizations are rivals and
want the same object. In some societies, the economic mechanism works by
barter (for instance, a horse is valued as a number of sheep as an exchange
rate). This is seen both in ‘traditional societies’ and in modern societies
where the aim typically is to evade taxes and other legalities.
Economic value can be problematic since it is not always possible to capture
all other values in a single-value scale, because of incommensurability. For
instance, how can we balance the value of environmental health with material
well-being? Sometimes, the high value in monetary terms is to be balanced
with the non-monetary value of precious nature or other environmental
concerns. The so-called Coase theorem (Coase 1960)11 suggests that when
property rights are well defined and the economic mechanism works with
no friction (transaction costs), the just balancing of value will come as a
result of negotiation between the parties. Conversely, the Coase theorem
also explains why such states may not be realized because there can be
transaction costs or the property rights are not well defined in the form of
private or public property.
The origin of value differs according to several theories. The so-called
labour theory of value, attributed to Ricardo and Marx, states that the value
of a good is a function of the work that is sacrificed to produce it. While

this may not even have been the case in a feudal society, a much more sound
theory suggests that value be imputed from the appreciation of the user of the
object or artefact. All other values are derived from this and they indirectly
set the value of factor markets and immediate markets. The connection of
values is interdependent on the values of other products and the competitive
situation in the markets. It is the price mechanism which coordinates values
in the markets and connects the units in the value system.
Some values cannot be measured in economic terms at all. For example,
human rights, personal ownership, etc. are seen as not belonging to the
economic sphere and no economic value can be attached legally and/or
morally (source).
Users and material value

Material value seems to be the cornerstone where the aim is to provide for
basic needs. The needs for food, shelter, reproduction, etc. are all basic and
mainly material.
Design is instrumental in providing systems for exploitation and
consumption of material resources. These resources are concerned with
factors of production as they enter the production processes and also the
need of users.
In basic terms, material value is concerned with the processes of metabolism,
body covering and habitat. They are the conditions for sustaining life. There
are many ways in which this can happen and design is instrumental in all
forms of exploitation of material value. Any artefact, object or tool used in the
processes of habitation, body covering and metabolism is a matter of design.
Design is a medium for the processes and it is impossible to conceive of a life
without these tools.
[The ms. notes from this point onwards are incomplete]
Aesthetic value
By aesthetic value we are concerned with the way in which we experience
the surroundings and objects. To experience aesthetic value, we do not
have to do anything – we can consume such value in a completely passive
state. Nature has aesthetic value and the preservation of natural resources
is partly caused by the need to experience these values. Aesthetic value can
also be man-made. Art in any form – decoration, paintings, sculptures, etc. –
is man-made and often for the aim of aesthetic experiences. Theories of art
and aesthetics would emphasize different aspects of this.
One theory would exclusively regard the outcome (artefact) in the view
of the by-product of the artist’s process. Often, the outcome is a surprise to
the artist and the result is created in dire straits. Other theories of aesthetics
would focus on the user as the beneficiary of the product. The object or
artefact happens to touch the emotions deeply by reflecting and expressing
the ‘inaccessible collective un-conscious’ of the people. There are also
theories that do not distinguish clearly between the intended reactions in,
for instance, entertainment. In this view, the artist in his pursuit of provoking
general or specific reactions creates art. Needless to say, the reaction can
cover a wide variety of human emotions and feelings – happiness, disgust,
anxiety, ridicule, etc.
Artefacts, tools and objects with other purposes than art can also have
aesthetic value. Findings from ancient times reveal that tools were often
decorated. The design of many tools from the Stone Age and later may have
been utility, a social signal ascribing status to the owner or aesthetic appeal.
Moral value
Moral and ethical value seems to have limited relation to design.
Sentimental value
Sentimental value seems to have limited affiliation with design. On the other
hand a lot of products are designed to appeal to people’s sentiments, such
as souvenirs, toys and the like. A lot of this is regarded as kitsch and not of
‘good taste’.
On the other hand, much that is designed touches with ‘positional goal’.
If the original of an object of art is not available, many people are satisfied
with a copy.
Intrinsic versus extrinsic value

Most value connections with design seem to be extrinsic. That means that
the value is not an end in itself, but, rather, a means to obtain another end.
It is difficult to identify any intrinsic value of design. On the other hand, as
a tool to secure the intrinsic needs, design is vital. Design of ornament and
religious ritual is subservient to the services and their aims. Also, the tools
and artefacts used in professional work, extreme sports, etc., Csikszentmihalyi
1975, are vital to the persons in these professions. The need of such design
is often to be an unobtrusive and reliable tool, Winograd and Flores 1986.
These authors follow the philosophy of Heidegger in stating that we are
‘thrown’ into the reality. In a well-functioning situation, a tool may not even
be consciously known, but only experienced as a natural extension of the
body.
Value
How can we identify those elements of value that design can deliver?
For producers, innovative ideas should satisfy the three primary criteria
of feasibility, compatibility and viability. To detail these further:
– they should be feasible in terms of fit with corporate portfolios and

ambitions, with the organizational and human capacities required;
– they should be compatible with capacity, in terms of projected
volumes and complexity;
– they should be financially viable and potentially profitable in terms
of investment levels required and prospective return on investment.
For potential customers, obviously, in order for a product to be competitive

in established markets, it must deliver something that distinguishes it from
competing products.
With a radically or fundamentally new product, however, the problem
becomes one of convincing potential customers that the changes involved
following the purchase of something substantially new, particularly the
behavioural changes implied by such a level of innovation, deliver some
powerful benefit.
In each case, the benefit needs to be clearly manifest in some way, but
there will not be one simple formula for how this can be achieved across the
market spectrum, as demonstrated in the repetition of approaches between
the Apple iMac and G4.
Decisions in the domain of production can be discretely analysed and
unbundled, and usually can be demonstrated in terms of objective measure.
Decisions regarding the domain of use, however, are less susceptible to
quantification, since the success of many products depends upon subjective
assessments by users.
It is possible to define product characteristics in an objective sense, in
terms of performance, dimensions and costs, but product attributes, in other
words, how the product is perceived by potential and actual users is less easy
to specify. The business theorist Michael Porter refers to them as signals.
There is no intrinsic reason why these should be incompatible.
In competitive terms, it is possible to specify the basic characteristics that
any product in a particular category must have if it is to have any chance
of competing in the market. If these characteristics are so dominant that
differentiation does not really affect choice, then the design potential will
be limited.
Characteristics will be a more powerful factor across the market spectrum,
more strongly relating to affordability at the lower end of the market
spectrum, and to distinctiveness at the higher end. This links into Porter’s
distinction between volume and margin at either end of the spectrum.
A problem with any innovative idea is the internal costs of bringing it to

realization, compared with expected returns. This will be heavily affected by
whether a new product can be sustained in a market against the inevitable
attempts of competitors to copy or adapt any new aspect.
Whether the new idea can be sustained will depend upon a flexible
follow-through for continuous improvement. Therefore, a condition for
design to contribute will not be at the level of the initial idea, but in terms
of its detailed implementation, with constant evaluation and development
through incremental improvement.
[Incomplete. The ms. from this point breaks down into a series of notes]
Notes
Clive Dilnot: Introduction to John Heskett’s

1 Opening line of the preface to Design and the Creation of Value (hereafter
DCV).
2 As Suzan Boztepe of IT University of Copenhagen pointed out to me in an
e-mail discussing Heskett’s work, the recent plethora of quasi-popular books
on design success and the value of design in business beyond the product –
books like Jeanne Liedtka et al.’s Solving Problems with Design Thinking:
Ten Stories of What Works (New York: Columbia Business School Press,
2013); or Tim Brown’s Change by Design: How Design Thinking Transforms
Organizations and Inspires Innovation (New York: Harper Collins, 2009);
or Roger Martin’s The Design of Business: Why Design Thinking is the Next
Competitive Advantage (Boston, MA: Harvard Business Press, 2009) – tend
to focus on stories and on the general case that ‘design driven innovation is a
third alternative to market pull or technology push innovation, and has the
potential of creating radically new products’ but do not confront design with
economics per se. More surprisingly, the issue is dodged even in academic
studies of design management: see, for example, R. Cooper, S. Junginger and
T. Lockwood (eds), The Handbook of Design Management (New York: Berg,
2011) where, as SB puts it, ‘one would expect to see something on design +
economics but doesn’t’.
3 DCV, Chapter 8.
4 The Design Research Society (UK) was formed in 1966.
5 The Design Management Institute (Boston) was formed in 1975.
6 Though the concept predates Blair, it was the Blair government, post-1997
that began to push this concept as the metropolitan salve to provincial
deindustrialization.
7 It should be added that design as a field fails to articulate this at once to itself,
to business, to economics and to the general public. It is important here that
these four audiences are not the same. One of the mistakes of ‘design thinking’
in the IDEO manner is to assume they are – and to essentially collapse the four
moments into the second. This makes a political closure around this question
that forestalls a wider exploration of the creation of value.
8 Preface, DCV.
Notes 199
9 See http://wardsauto.com/news-analysis/foreign-invasion-imports-transplants-
change-auto-industry-forever. Accessed 9 July 2016.
10 I am using ‘design’ here not in the sense of ‘styling’ or even as (only) professional
design, but as indicating what we might call the expanded range and depth of
design today as meaning the configurative organization of the product-system as
a whole. Two statements by Bruno Latour, reproduced below, capture this wider
sense of design as configurative activity.
11 Further details of Heskett’s career can be found in the introduction I wrote to
The John Heskett Reader: Design History Economics (London: Bloomsbury,
2016). See also my obituary: ‘John Heskett (1937–2014)’, History Workshop
Journal 78, no. 1 (Winter 2014): 309–13. For some autobiographical
reflections, see John Heskett, ‘On Writing,’ reading #29, and ‘Reflections on
Design and Hong Kong’ reading #28, in The John Heskett Reader, ibid.
12 London: Thames and Hudson.
13 All the more notable is that the work appeared in Thames and Hudson’s
‘World of Art’ series. There is a useful discussion of Heskett’s approach to
history in Kjetl Fallon’s Design History: Understanding Theory and Method
(London: Bloomsbury, 2010), see especially pp. 15–19.
14 As an indication of the scale of deindustrialization in this period,
manufacturing employment in Britain between 1970 and 1990 fell from close
to 9 million persons to just over 5 million. In percentage terms, this was a fall
from 35 per cent of the workforce to just over 15 per cent. In effect, across
these twenty years, save for a few specialist sectors, Britain ceased to be a
significant centre of global manufacturing.
15 On questions of design policy, see some of the essays collected in The John
Heskett Reader, ibid., Part Three, section B, National Design Policies, pp.
224–66.
16 A brief description of the Triad project and its place in the emergence of design
management can be found in Cooper et al., eds, The Handbook of Design
Management, ibid.
17 A number of these columns (and parallel writings on design and business/
economics from this time) are republished in The John Heskett Reader, ibid.
See, for example, #14, ‘GM: The Price of Corporate Arrogance’; #17, ‘Teaching
an Old Dog New Tricks: How RCA is Using Strategic Design’; #20, ‘Learning
from Germany’s Design Policy’; #23, ‘Creative Destruction’. See in general
Part Three of the Reader, Design Business Economics, pp. 177–329.
18 Under the leadership of Patrick Whitney and Charles Owen, the Institute of
Design at IIT in Chicago (Illinois Institute of Technology) was then at the
forefront of graduate-level education in design + business.
19 History, or better a ‘historical perspective’ as Duncan Foley says of his own
book on economic thought (Adam’s Fallacy: A Guide to Economic Theology
(Cambridge, MA: Harvard University Press, 2006)) ‘as a happy way to
organize a set of complex ideas into a coherent and understandable story’, one
that provides ‘a kind of map on which students could locate the landmarks of
economic language and ideas’. See Foley, p. xii. On the importance of history
for understanding economics, see the views of Douglas North as noted by
200 Notes
Heskett in DCV (Chapter 5). See also Geoffrey M. Hodgson, How Economics
Forgot History (London: Routledge, 2001). The case for the necessity of a
historical approach is also made with forceful brevity by Ha-Joon Chang, in
Economics: A User’s Guide (London: Bloomsbury, 2014), pp. 37–9.
20 An overview of Heskett’s views on these issues can be found in the excellent
series of interviews with Simone Maschi and others available on the website
johnheskett.com. Go to: http://johnheskett.com/conversations-on-design-3/
21 See ‘The Economic Role of Industrial Design’, in The Role of Product Design
in Post Industrial Society, ed. Tevifk Balcioğlu (Ankara: METU-Kent Institute,
Middle East Technical University Press, 1998), pp. 77–92.
22 ‘Economics is too important to leave to the experts,’ Guardian (UK), 30 April
2014. See also the conclusion to Economics: A User’s Guide. Ibid., pp. 331–4.
See also my own note: ‘Why Economics can no longer be left to Economists’,
in The Crash – A View from the Left’, ed. M. P. Jon Cruddas and Jonathan
Rutherford (e-book London: Soundings + Lawrence and Wishart, April 2009),
pp. 101–8.
23 Incomplete because, as the note on ‘Editing the ms.’ below records, although
the most developed of Heskett’s unpublished works, and although planned
as a book, the ms. was never fully revised for production and remained
incomplete in some crucial respects at his death.
24 DCV, preface.
25 DCV, Chapter 1.
26 DCV, ibid.
27 Heskett does not cover the entirety of economic theory (there is no mention
of Keynes, for example), but given the limits of the text he deals with a very
broad range of theory and much, if not most, of the theoretical material
most germane to this topic. Some of the focus – the weight given to New
Growth Theory and the unusual inclusion of the ideas of Frederick List – is
particularly oriented towards the economic understanding of design.
28 The latter, for reasons explained in ‘Notes on editing the ms.’ below, is now
placed as Appendix 1.
29 Of the economists quoted by Heskett in DCV, only one, Frederick List,
directly uses the term – and in one of the earliest texts that Heskett references
(from 1841 to 1844).
30 As I detail below in the note on editing the ms. of Design and Creation of
Value, I have augmented these chapters (7, 8, 9) with material drawn from
other unpublished papers and notes by Heskett on economic value and design.
31 It is worth recalling here the German author Christa Wolf’s question in her
novel Cassandra: ‘The object of thinking? To expand that which is real.’
32 DCV, Chapter 7, opening paragraph. Heskett adds, from the Preface to DCV,
with neoclassical thinking in mind: ‘There is inadequate explanation in detail
about how goods and services are developed through manufacture for the
market place, and, secondly, there is equally little focus on how they are used –
both of which are concerns at the heart of design practice. All too often in
economic theory, goods and services are assumed to already exist, they seem
to appear without any consideration of the specific development processes and
Notes 201
ideas involved, and after the point of sale or consumption, any consideration
of them evaporates from consideration.’
33 Ibid., p. 197. It is worth extending Chang’s comment for it resonates strongly
with Heskett’s underlying arguments: ‘For most economists, economics ends at
the factory gate (or increasingly the entrance of an office block), so to speak.
The production process is treated as a predictable process, pre-determined by
a “production function,” clearly specifying the amounts of capital and labor
that need to be combined in order to produce a particular product. Insofar
as there is interest in production, it is at the most aggregate level – that of
the growth in the size of the economy. The most famous refrain along this
line, coming from the debate on US competitiveness in the 1980s, is that it
does not matter whether a country produces potato chips or micro-chips.
There is little recognition that different types of economic activity may bring
different outcomes – not just in terms of how much they produce but more
importantly in terms of how they affect the development of the country’s
ability to produce, or productive capabilities. And in terms of the latter effect,
the importance of the manufacturing sector cannot be over-emphasized, as it
has been the main source of new technological and organizational capabilities
over the last two centuries.’
34 The slogan ‘real-world’ [economics] became adopted by economics students
in Europe and the United States of America critical of the inadequacies of
text-book (or in their word “autistic”) economics revealed by the repetitive
financial crises of the 1990s and 2000s. See Edward Fullbrook (ed.), Real
World Economics: A Post-Autistic Economics Reader (London: Anthem,
2007). See also, on a continuing basis, the e-journal Real World Economics
Review: http://www.paecon.net/PAEReview/
35 DCV, Chapter 1.
36 It is this critical perspective on economics that differentiates Heskett’s work,
very sharply, from the mindless application of ‘business economics’ that so
disfigures most of the scholarship in design management and in discussions
of ‘design and business’, including by those who wish to take up and claim
elements of Heskett’s work as their own.
37 The base text on this is surely the marvellous rant against commercial forms
of ‘industrial design’ with which Victor Papanek begins Design for the Real
World (London: Paladin, 1974).
38 Duncan Foley, Adam’s Fallacy, ibid., p. 226.
39 A point that Adam Smith was adamant was the case. Smith began as, and
never wholly left behind, his first calling as a professor of moral philosophy.
40 Without the additions made in the editorial process, the base text was scarcely
40,000 words.
41 A point that Sharon Helmer Poggenpohl makes with some force in her brief
afterword.
42 It is interesting that the artist Christo, known for his large-scale environmental
pieces which took considerable organizational ability to realize, gave credit
to his early education as an art student in (then) communist Bulgaria (which
involved compulsory Marxian economics) as giving him perspectives to think
in terms that allowed him to achieve his later projects.
202 Notes
43 For a far more economically sophisticated but not uncritical account of Marx
as an economist, see, Duncan Foley, Adam’s Fallacy, ibid., especially Chapter
3. As one might expect, the discussion of the commodity is particularly weak
in standard economic theory.
44 To take only one instance, see, Jean Baudrillard’s reflections on the enigmas of
value and design across the twentieth century in Towards a Political Economy
of the Sign (St. Louis: Telos Press, 1971), especially Chapter 10, ‘Design as
Environment’.
45 This gives a huge opportunity to extend Heskett’s work into a deep analysis of
the complexity of design’s roles in Neoliberalism. On the latter, as a starter, see
David Harvey, A Brief History of Neoliberalism (Oxford: Oxford University
Press, 2005).
46 See, for example, Eric Hobsbawm: Age of Revolution (1789–1848) (1962);
Age of Capital (1848–75) (1975); Age of Empire (1875–1914) (1987), Age of
Extremes (1914–91) (1994).
47 Roland Brenner, The Economics of Global Turbulence (London: Verso, 2006).
48 David Harvey has multiple works on this theme. See, Seventeen
Contradictions and the End of Capitalism (Oxford: Oxford University Press,
2014).
49 Thomas Piketty, Capital in the Twenty First Century (Cambridge, MA:
Harvard University Press, 2014).
50 For the obvious reason that those who are acting in the moment within the
economy as is will naturally tend to take economy as is as, in effect, a natural
given. There is far less excuse for doing so, however, if one is supposedly
analysing the economy and the economic not as the justification of what is
but as the exploration of what the economic could (and in ethical and social
terms should) be. The genuine complexities here can be seen in a text like
Jeffrey Sachs, Common Wealth: Economics for a Crowded Planet (New York:
Penguin Press, 2008).
51 Two structural reasons why capitalism (especially in its modern neoliberal
forms) cannot take a sustainable form – that it cannot violate its own
principle of organization concerning unplanned growth, and that it cannot
permit any solutions to steering problems that are not in accord with market
forces – were advanced by Jurgen Habermas more than forty years ago, see
Legitimation Crisis (London: Heinemann, 1976), pp. 42–3. One reason why
economics cannot deal with the possibility of sustainment is that it has no
adequate ‘ecological’ comprehension of cost. Either ‘cost’ simply does not
enter the economists’ lexicon or it is nominated as an exogenous factor and
‘externalized’ (onto governments, taxpayers and nature). One of the very few
economists who have tried to deal with this issue is E. J. Mishan, whose book
The Costs of Economic Growth (London: Penguin, 1969) was one of the first
to at least attempt to raise the issue. More recently, Joseph Stiglitz, Amartya
Sen and Jean-Paul Fitoussi have questioned the basis of how GDP is calculated
and understood Mismeasuring Our Lives: Why GDP Doesn’t Add Up. See
also K. W. Kapp, ‘Social costs, neo-classical economics and environmental
planning’, in The Social Costs of Business Enterprise, 3rd edn (Nottingham:
Spokesman, 1971), pp. 305–18.
Notes 203
52 See Robert Brenner’s The Economics of Global Turbulence: The Advanced

Economies from Long Boom to Long Downturn, 1945-2005 (London: Verso,
2006).
53 On this, see, the section on design policy in The John Heskett Reader (ibid.).
In particular, on the deficiencies of industry, its attitude to products and its
use of design, see reading #14, ‘GM (General Motors): The Price of Corporate
Arrogance’ and #15, ‘Everything Changes, Nothing Alters’. On design
and industrial policy worked better in Germany and Japan, see readings
#19, ‘National Design Policy and Economic Change’; #20, ‘Learning from
Germany’s Integrated Design Policy’; and #10, ‘The Growth of Industrial
Design in Japan’. On how the United Kingdom might, belatedly, try to play
catch-up, see reading #22 ‘A Design Policy for the UK: Three Suggestions’.
On UK and manufacturing, see also Heskett’s somewhat critical view of how,
especially in the United Kingdom, the term ‘creative industries’ has been used
in large part as an alibi for a lack of an industrial policy: ‘Design and the
Creative Industries.’
54 Heskett was also involved in two exhibitions in this period that sought to
bring attention to these issues: one was an exhibit at the Science Museum
in London in the late 1980s on design for industry in Germany; the second,
mentioned in passing above, was the Design Management Institute’s ‘Triad’
project on case studies of design success, which was shown in Carpenter
Center for the Visual Arts at Harvard University in 1990. Two case studies
published in The John Heskett Reader reflect this interest: reading #16,
‘Design Management in Phillips in the 1980s’ (extract from Heskett’s book on
design in Phillips: Philips: A Study of the Corporate Management of Design,
Trefoil Publications, London and Rizzoli, New York, 1989) and #17, ‘Teaching
an Old Dog New Tricks: How RCA is using Design as a Strategic Tool’.
55 See The Reader reading #18, Current and Future Demands on Hong Kong
Designers’ and #21, ‘Design and Industry in China’. See also the reports that
Heskett authored while in Hong Kong: ‘Shaping the Future: Design for Hong
Kong: Report of the Design Education Task Force. Hong Kong Polytechnic
University’ (2003) and ‘Design In Asia: Review of National Design Policies and
Business Use of Design in China, South Korea and Taiwan: Research report
commissioned by the Design Council, UK, as a contribution to Sir George
Cox’s report to the Chancellor of the Exchequer on the future of design in the
United Kingdom’ (2005).
56 See ‘A Cautious Prometheus? A Few Steps towards a Philosophy of Design’:
a lecture given to the Networks of Design meeting of the Design History
Society, Falmouth, Cornwall, 2008. (Transcript). On range: ‘It came to me
at a launching party for a Networks of Design meeting – I was struggling to
grasp the extent to which the word “design” has been expanded when we
were invited to visit an exhibition called “Re-imagining Cornwall”! I was
aware that corporations had to be reengineered, natural ecosystems reclaimed,
that cities had to be remodelled and wastelands redeveloped. I knew that
neighbourhoods had to be beautified and political platforms scripted, and that
interiors had to be redecorated and journal layouts restyled. The Cornwall
exhibit confirmed that I was indeed on the right track: if entire provinces can
be redesigned then the term no longer has any limit.’
204 Notes
57 Ibid. Latour’s provocative essay opens a number of realms for beginning to

conceptualize what we might call the ‘expanded field’ of design in the ‘epoch
of artificial’. See the discussion of Latour in ‘Is there an ethical role for the
history of design? Redeeming the possibility of a humane world’, in Helena
Barbosa and Anna Calvara (eds), Tradition, Transition, Trajectories: Major or
Minor Influences? The Proceedings of the 15th ICHDS Conference, University
of Aveiro, Portugal, 2014, pp. 57–80.
58 Herbert A. Simon, The Sciences of the Artificial (Cambridge, MA: The MIT
Press, (Second Edition) 1981), p. 129.
59 Heskett deals with this in his discussion of Paul Romer’s work. See Chapter 5
below.
60 I say ‘astonishing’ because while so much focus is placed today on
technical innovation, especially in the digital realm, the cost-effectiveness
of design-led innovation – that is, where the innovation occurs not
because of or through a technological development but wholly or almost
wholly from the reconfiguration and reconceptualization of an existing
model or norm –has been somewhat neglected. Yet when one thinks, to
take some almost random instances, of the economics of Harry Beck’s
reconfiguration of the London Underground Diagram (1933– and still
in use); Alec Issigonis’s conception of the Austin Mini (1958– and still in
production); Mary Quant’s ‘de-constructive’ gesture in creating the mini
skirt (1962– and continuing) or, to come a little closer to now, Smart Design
and the development of the Oxo Good-Grips range of products (1990
and on), there is clearly a phenomenon here that has not been adequately
caught in economics and, indeed, is not even well thought or understood
within design. Yet one might reasonably predict that the economics of
reconfiguration will be crucial to this century – not least to the economics
of sustainment; indeed, it is hard to imagine how a ‘sustainable’ economy,
built out of that which is not sustainable, could be other than an economy
whose productive principle is reconfiguration.
61 London: Allen Lane, 2015.
62 On the artificial as the horizon of our world (replacing nature), see Clive
Dilnot, ‘The Artificial and What it Opens Towards’: Chapter 2: 2 of Design
and the Question of History [co-authored with Tony Fry and Susan Stewart]
(London: Bloomsbury, Spring 2015), pp. 165–203.
63 The germ of the latter is to be found in Frank Ackerman, Can We Afford the
Future? The Economics of a Warming World (London: Zed books, 2008);
and Tom Jackson, Prosperity Without Growth: Economics for a Finite Planet
(London: Earthscan, 2009). See also Herman Daly Beyond Growth: The
Economics of Sustainable Development (Boston: Beacon Press, 1996).
64 Something of this begins to emerge in the notes attached as Appendix 2, ‘Value
and Values in Design’.
65 Switzerland and Singapore, along with Japan, have across the last decade or so
stood at the top of the ‘league tables’ of manufacturing value added (MVA).
66 Ha-Joon Chang, Economics, ibid., p. 198. Chang is even more dismissive of
the idea that the ‘knowledge economy’ per se transforms the actual workings
of the economy: ‘The view that the world has now entered a new era of the
Notes 205
“knowledge economy”. in which making things does not confer much value,
is based on a fundamental misreading of history. We have always lived in a
knowledge economy. It has always been the quality of knowledge involved,
rather than the physical nature of the things produced (that is, whether they
are physical goods or intangible services), that has made the more industrial
countries richer’, p. 189. Despite the increasing application of scientific
and technical into products, one reason for the inability to understand the
industrial economy as a ‘knowledge economy’ is the predominant conception
that things made are essentially dumb. We value those products most that
appear to have the most direct translation of consciousness into form. We have
difficulty reading (and therefore truly valuing) useful things, dismissing them
as being concerned merely with ‘means’ and not ‘ends’. This Kantian division,
itself a displacement of the more awkward problem of comprehending the
translation and synthesis of understanding involved in the configuration of
complex entities, continues to dominate thought in this area, albeit at a level
that is so axiomatic that it is practically below consciousness.
67 See also the essays by Carlos Teixeira, ‘John Heskett and Design Policy’ and
Tore Kristensen, ‘John Heskett’s Contribution to the Business and Economics
of Design’ in The John Heskett Reader, ibid.
68 Preface, DCV.
69 I say begins because both chapters only begin to skim the surface of what
might be involved here. In what they propose, they are indicative rather than
comprehensive.
70 In effect, ‘value’ contests the autonomy of both fields.
71 Roland Barthes, ‘From Work to Text’, in Image/Music/Text, trans. Stephen
Heath (London: Fontana, 1977), p. 155.
72 An aside. That value is the key ‘third’ moment between design and economics
is not an accident. In an unpublished paper given at a Design Management
Institute conference in 1999, I asked the question of why a field comes
into being, specifically as to why, today, design management has come into
being. My answer was that Design management emerges at a point when
the underlying conditions of creating or adding value begin to enter a
profound mutation with respect to previous practice. Design management
starts at the point at which value-creation begins to be more significant than
value-addition.’ ‘Change the Object Itself: Or what is the Subject of Design
Management?’ Paper given as a keynote talk to the Design Management
Institute conference on Academic Research in Design Management, Pratt
Institute, New York, June 1999.
73 The essay dates from the period immediately after the Second World War.
74 ‘Building Dwelling Thinking’, in Martin Heidegger, Poetry, Language,
Thought, trans. Albert Hofstader (New York: Harper, 1971), p. 160. Heidegger
adds, in the final line of his essay in answer to the rhetorical question: How
do ‘mortals’ bring dwelling into being?’ ‘This they accomplish when they build
out of dwelling, and think for the sake of dwelling’ (p. 162).
75 I explored some of these issues in ‘The Decisive Text: Heidegger’s Essay
“Building Dwelling Thinking”’, Harvard Architectural Review 8 (1992):
160–87.
206 Notes
Cameron Weber: A note on John Heskett’s

economics
1 See J. Bradford DeLong, ‘Cornucopia: The Pace of Economic Growth in the
Twentieth Century’, NBER Working Paper No. 7602 (2000) (available on the
internet) for a study on economic growth in historical perspective.
2 For an economist, the most glaring gap in Design and the Creation of Value
is any mention of John Maynard Keynes (1883–1946). Keynes’ treatise, The
General Theory of Employment, Interest and Money, written during the Great
Depression, was the founding document of ‘macroeconomics’ as a subfield
in economics. This assigns an activist role to central banks and governments
to counter the downward portion of a business cycle and the unemployment
created during this economic contraction. The Keynesian revolution has led
to what is known today as the ‘neoclassical synthesis’ where free-market
microeconomics – the subject of Heskett’s chapter on neoclassical economics –
is applied to the short term and activist Keynesian macroeconomics to the long
term. (There is no consensus as to what exactly constitutes these periods of
time, leaving it to the discretion of policy makers to determine these periods
in policy applications, which can include rent-seeking.) However, given the
focus in Keynes on finance and money, it is true that Keynes has relatively little
to say on the issues that concern Heskett, such as technological progress and
institutional changes.
3 Mainstream economics mostly misses the need for economic freedom and a
stable policy environment to encourage individual entrepreneurial action; in
this we find that political economy is more robust than mainstream economics
for understanding social-economic activity. Heskett includes a chapter on The
National System to introduce the historically derived policy environment.
4 These firm production costs and assumptions are known as ‘Marshallian
cost curves’, developed in the late nineteenth century under a completely
different economic structure of production from that of today. See Alfred
Marshall ([1890] and later editions), Principles of Economics, many versions
available on the internet. These cost curves later became the foundation of
the ‘production function’ under Milton Friedman’s (and others’) positivist
economics, Milton Friedman, Essays in Positive Economics (Chicago:
University of Chicago Press, 1953).
5 My belief (CW) is that it is the Austrian school of economics’ use of the
‘entrepreneur’ as change agent in the economy that can best describe human
economic value creation (see Chapter 3 on Austrian economic theory). It
is human action and a social structure that encourages entrepreneurial risk
taking and profit seeking which can explain growth, not aggregated and
historical quantities of capital and labour in neoclassical equilibrium and other
aggregates such as levels of education or the number of patents in a nation
over time as found in orthodox growth theory. Entrepreneurs in free-market
exchange create value, value that emerges no matter how it is measured by
whom and when, as long as the rule of law allows this flourishing. Some might
believe that profit seeking is a form of social stigma. We might also forget that
profits are created by serving the needs and wants of others in freely associating
Notes 207
relationships through markets. (Profits, or rents, too can be made by seeking

special treatment under law, which prevents market competition – Heskett’s
works contain this thread in economic thought as well. For example, we will
see more on the case of the bankruptcy and bailout of General Motors during
the Great Recession in 2009.) The seminal piece on special interest rent-
seeking is Anne O. Kruger, ‘The Political Economy of the Rent-Seeking Society’,
American Economic Review 64, no. 3 (1974). Pietra Rivoli, The Travels of a
T-Shirt in the Global Economy: An Economist Examines the Markets, Power,
and Politics of World Trade (Hoboken: Wiley, 2005) is also filled with examples
of producers seeking protection from markets in order to ascertain rents.
6 See Philip Mirowski, More Heat than Light: Economics as Social Physics,
Physics as Nature’s Economics (Cambridge: Cambridge University Press,
1991), for the development of mathematical formalism in economics based on
Newtonian physics.
7 The Full Employment Act of 1946 created the Council of Economic Advisors
in the US President’s office and assigns an activist role to federal fiscal
policy for employment creation based on the now dominant Keynesian
macroeconomics.
8 Robert Solow, ‘Technical change and the aggregate production function’,
Review of Economics and Statistics 39, no. 3 (1957): 312–20.
9 For more on growth theory, see Marin Muzhani, Mainstream Growth
Economists and Capital Theorists: A Survey (Montreal and Kingston: McGill-
Queen’s University Press, 2014) and David Romer, Advanced Macroeconomics,
4th edn (NY: McGraw-Hill Irwin, 2011).
10 Kenneth Arrow, ‘The Economic Implications of Learning by Doing’, Review of
Economic Studies 29, no. 3 (1962): 155–73.
11 Note. As witnessed by recent developments – for example, the ability of Uber
and Airbnb to garner firm networks of users as political support against
(or in actuality as a means of power to negotiate with) vested interests such
as unions and taxing authorities who have the most to lose from the new
economy of greatly reduced transactions costs and less visible sources of
(taxable) value creation – Heskett’s synthesis is becoming more, not less,
relevant.
12 Jeffrey Friedman, ‘A Crises of Politics, Not Economics: Complexity, Ignorance,
and Policy Failure’, Critical Review 21, nos 2–3 (2009): 127–84, and the
accompanying volume edited by Friedman are good sources for differing,
though often complementary, views on the causes of the financial crisis of
2007–8.
13 In line with this, Heskett (rightly) criticizes business schools for focusing on
the pecuniary rather than on workmanship. We already know that Design and
Creation of Value is for a business audience as well, especially Chapters 8 and
9, which are excellent on firm strategic management and the need for a change
in corporate culture towards user design rather than (or in fact which works
together with) cost control and financial/production metrics.
14 The analysis and commentary in this section come from the Design and
the Creation of Value ms. (the chapter on institution economics) and from
John Heskett’s article ‘GM’s current woes reveal the price of corporate
208 Notes
arrogance and amnesia’ (originally published by I.D. Industrial Design, May/

June, 1992, pp. 38–40), and collected in Design History Economics: A John
Heskett Reader, edited, and with an introduction, by Clive Dilnot (London:
Bloomsbury, 2016).
15 Veblen calls the modern (post-1913 central banking and income tax-created)
corporate structure ‘absentee ownership’. Because of financialization, modern
firms are much more debt capitalized than equity capitalized (thus making the
economy much more vulnerable to interest-rate manipulations by a central
bank). With this financialization develops a management class, whose best
interests are themselves, not the equity owners of a firm (the latter being such
a small percentage of the capitalization that the owners are ‘absent’).
16 Charles Beard, in An Economic Interpretation of the Constitution of the
United States [1913], finds that within just a few days of the first session of
the newly created U.S. House of Representatives (in April 1789), there were
more than twenty-five special interest groups successful in seeking House trade
protection against foreign competition.
17 A good pop culture example of asset specificity is the ‘skyscraper index’ (see
wiki), which describes how there is a critical mass of skyscraper starts at the
peak of a business cycle and then how these buildings remain unfinished at
the bust of the business cycle (due in part, as described above, to ‘easy money’
central bank policies, which incentivize long-term investment like real estate
over the shorter-term investments that would have been made absent interest
rate intervention).
18 The GM bailouts were started by Republican President George W. Bush
and continued, with ultimate nationalization, by Democrat President Barak
Obama.
19 GM receives more than $60 billion of appropriated funds during its
restructuring, with 60 per cent ownership going to the US Treasury,
19 per cent to the United Auto Workers union, and the remaining 21 per cent
in equity going to GM’s creditors and Canadian governments; Chris Isidore
(2009), ‘GM bankruptcy: End of an era. After years of losses, the troubled
automaker is forced into bankruptcy. GM is set to close a dozen facilities and
cut more than 20,000 jobs’, CNNMoney.com, 2 June.
20 Here I draw from Design History Economics: A John Heskett Reader, edited,
and with an introduction, by Clive Dilnot (London: Bloomsbury, 2016),
especially Section III, ‘Design, Business, Economics’.
21 Ibid., 347–8.
22 Penny Spark, ‘John Heskett obituary’, The Guardian, 12 March 2014.
Sabine Junginger: Design as an economic

necessity for governments and organizations
1 Excerpt from Chapter 1 of this book, ‘Introduction: Design in
Economic Life?’
Notes 209
2 Quotes from the description of the €Design Project. I participated in the

Copenhagen session run by Tore Kristensen and Gorm Gabrielsen at the
Copenhagen Business School. John Heskett was invited as a keynote speaker.
I am also referring to the OECD Expert Workshop on Measuring Design,
which took place at OECD Headquarters in Paris on 22 February 2013.
3 See DMI Design Value Score Card developed by Michael Westcott, Steve Sato,
Deb Mrazek, Rob Wallace, Surya Vanka, Carole Bilson and Diane Hardin,
published in DMI Winter 2013 (http://c.ymcdn.com/sites/www.dmi.org/
resource/resmgr/Docs/DMI_DesignValue.pdf).
4 See S. Junginger and J. Faust (eds), Designing Business and Management (UK:
Bloomsbury, 2016).
5 Roger Falk, The Business of Management (UK: Penguin Books, 1961).
6 John Dewey, ‘Common Sense & Science: Their respective frames of reference’,
The Journal of Philosophy XLV, no. 8 (April 1948): 197–208.
7 See J. Faust and V. Auricchio (eds), Design for Social Business: Setting the
Stage (Italy: Lupettit, 2012), pp. 88–91.
8 Nina Terrey and I organized and chaired the first panel on public policy for
the Design Management Institute at the 2014 19th academic DMI conference.
As of 2016, design management in the public sector has its own track in the
academic DMI conferences (http://www.dmi.org).
9 J. Heskett, Tooth Picks and Logos (Oxford: Oxford University Press, 2004).
10 G. Peters, Advanced Introduction to Public Policies (Massachusetts, USA:
Edward Elgar, 2015).
11 E.-N. Sanders, ‘Co-Designing Can Seed the Landscape for Radical Innovation
and Sustainable Change’, in The Highways and Byways to Radical
Innovation – Design Perspectives, ed. R. P. Christensen and S. Junginger
(Kolding: Design School Kolding & University of Southern Denmark, 2014),
pp. 133–50.
12 Examples include: mind-lab.dk; Laboratorio de Gobierno, Chile (http://
lab.gob.cl/impacta/en/); thelab at OPM (http://www.opm.gov, also see
https://www.govloop.com/community/blog/lab-opm-reflections-detail-far);
superpublic (http://superpublic.fr) and la27region (http://la27eregion.fr).
JOHN HESKETT: DESIGN AND

THE CREATION OF VALUE
Preface
1 A. O. Scott, ‘A Matter of Life and Death’, The New York Review of Books,
17 December 1998, p. 38.
2 Mary Douglas and Baron Isherwood, The World of Goods: Towards an
Anthropology of Consumption (Harmondsworth: Penguin, 1978), pp. 65–6.
210 Notes
3 Donald Schön and Martin Rein, Frame Reflection: Toward the Resolution of
Intractable Policy Controversies (New York: Basic Books, 1994), p. 3.
4 Schön and Rein, Frame Reflection, pp. 3–4.
5 Robert H. Nelson, Economics as Religion: From Samuelson to Chicago
and Beyond (University Park, PA: The Pennsylvania University Press, 2001),
p. xxii.
6 Nelson, Economics as Religion, p. 133.
7 Schön and Rein, Frame Reflection, p. xiii.
8 Schön and Rein, Frame Reflection, p. xiii.
9 Herbert A. Simon, The Sciences of the Artificial (Cambridge, MA: The MIT
Press (Second Edition) 1981), p. 129.
Chapter 1
1 John Heskett, Design: A Very Short Introduction (Oxford: Oxford University
Press, 2002), pp. 1–7.
Chapter 2
1 Harold Demsetz, ‘The Primacy of Economics: An Explanation of the
Comparative Success of Economics in the Social Sciences’, Western Economic
Association International 1996 Presidential Address, Economic Inquiry 35,
no. 1, Long Beach, January 1997, p. 8.
2 Ken McCormick, ‘An Essay on the Origin of the Rational Utility Maximization
Hypothesis and a Suggested Modification’, Eastern Economic Journal,
Bloomsburg 23, no. 1 (Winter 1997): 17.
3 Adam Smith, The Wealth of Nations, Original publication, 1776, this edition
by Edward Cannan (New York: The Modern Library, 1937), p. 423.
4 Smith, The Wealth of Nations, p. 28.
5 Ibid., p. 30.
6 Harold Demsetz, ‘The Primacy of Economics: An Explanation of the
Comparative Success of Economics in the Social Sciences’, Western Economic
Association International 1996 Presidential Address, Economic Inquiry 35,
no. 1, Long Beach, January 1997, p. 8.
7 Demsetz, ‘The Primacy of Economics’, p. 10.
8 McCormick, ‘An Essay on the Origin of the Rational Utility Maximization
Hypothesis and a Suggested Modification’, p. 17.
9 Philip A. Klein and Edythe S. Miller, ‘Concepts of Value, Efficiency, and
Democracy in Institutional Economics’, Journal of Economic Issues 30, no. 1
(March 1996): 267.
10 Nelson, Economics as Religion, p. 6.
11 Elster, Explaining Technical Change, p. 91.
Notes 211
12 Mark Blaug, ‘Disturbing Currents in Modern Economics’, Challenge 41, no. 3,

Armonk (May/June 1998): 15.
13 Editorial note: The best source for economic growth trends is Bradford
DeLong, ‘Cornucopia: The Pace of Economic Growth in the Twentieth
Century’. NBER Working Paper No. 7602 (2000), http://www.nber.org/
papers/w7602 which explores productivity and technology over the long
term as well.
14 ‘Making waves’, The Economist 340, no. 7985 (28 September 1996): 57.
Chapter 3
1 Israel M. Kirzner, ‘Entrepreneurial Discovery and the Competitive Market
Process: An Austrian Approach’, Journal of Economic Literature XXXV
(March 1997): 65.
2 Carl Menger, Principles of Economics (Grove City, PA: The Libertarian Press,
1994), p. 48.
3 Menger, Principles of Economics, p. 53.
4 Ibid.
5 Murray Rothbard, ‘Imputation’, in The New Palgrave: A Dictionary of
Economics, ed. John Eatwell, Murray Milgate and Peter Newman (London:
Palgrave Macmillan, 1987), p. 4567.
7 Ibid., p. 76.
8 Ibid., p. 109.
9 Ibid., p. 115.
10 Ibid., p. 121.
11 Editorial note: The subjective value that Menger stresses is the complete
opposite of the neoclassical objective values of capital and labour and is much
more indicative of today’s ‘knowledge’ (and, relatedly, the ‘gig’ or ‘sharing’
economy), which is based on technological advancements greatly reducing
transactions costs. The point is that as the cost of digital reproduction
approaches zero, so the neoclassical assumption of perfect competition where
price is equal to marginal cost is for the most part inapplicable.
12 F. von Hayek, ‘Menger’s Grundsätze in the History of Economic Thought’,
in Carl Menger and the Austrian School of Economics, ed. J. R. Hicks and
W. Weber (Oxford: The Clarendon Press, 1973), p. 6.
14 Ibid., p. 148.
15 Ibid., p. 229.
16 Editorial note: Friedrich von Wieser (1851–1926), was an Austrian Finance
Minister, and is most known for his coining of the paradigmatic terms
‘marginal utility’ and ‘opportunity cost’.
17 Wieser, ‘The Austrian School and the Theory of Value’, p. 213.
212 Notes
18 Ibid., p. 215.
19 Ibid.
20 Ibid., p. 216.
21 Ludwig von Mises, Human Action: A Treatise on Economics, 3rd edition,
paperback (San Francisco: Fox & Wilkes, [1947] 1966), p. 81.
22 Mises, Human Action, p. 13.
23 Ibid., p. 57.
24 Editorial note: Friedrich von Hayek (1899–1992) studied in Vienna and in
1931 took up a post at the London School of Economics. He moved to the
United States of America in 1950 for an appointment at the University of
Chicago. Hayek shared the Nobel Prize for economics in 1974.
25 Friedrich A. Hayek, ‘The Use of Knowledge in Society’, in Individualism and
Economic Order (Chicago: The University of Chicago Press, 1948), p. 82.
26 Hayek, ‘Economics and Knowledge’, Individualism and Economic Order, p. 37.
27 Hayek, ‘The Meaning of Competition’, Individualism and Economic Order,
p. 94.
28 Hayek, ‘The Meaning of Competition’, p. 96.
29 Ibid., p. 98.
30 Hayek, The Road to Serfdom (NY: Routledge, [1944] 2014), p. 69.
31 Editorial note: The Hayek work that best typifies the point concerning the
necessity of the decentralization of knowledge in a complex society is ‘Use of
Knowledge in Society’, American Economic Review 35, no. 4 (1945): 519–30.
This article was chosen recently as one of the top 20 articles in the first 100
years of the AER and is the only one without math.
32 Hayek, ‘The Meaning of Competition’, p. 101.
33 Israel M. Kirzner, How Markets Work: Disequilibrium, Entrepreneurship and
Discovery (London: The Institute of Economic Affairs, 1997), p. 11, http://
www.iea.org.uk/sites/default/files/publications/files/upldbook104pdf.pdf.
34 Ibid., p. 26.
35 Ibid., pp. 34–5.
36 Ibid., p. 74.
37 Ibid., p. 42.
38 Peter F. Drucker, Innovation and Entrepreneurship: Practice and Principles
(New York: Harper Row, 1986), p. 228. (Editorial note: Drucker’s comments
on ‘quality’ should be compared with Heskett, reading #24, ‘Product Integrity’,
The John Heskett Reader, ibid.)
Chapter 4
1 Editorial note: Thorstein Veblen (1857–1929), a Norwegian-American, was a
brilliant scholar and unconventional person. His capacity for scathing criticism
meant that he got a teaching post only when he was thirty-nine-years old, at
the University of Chicago. The Theory of the Leisure Class, published in 1899,
Notes 213
is the best known of his works. The breadth of his ideas and interests and
inability to fit into hierarchical academic organizations meant he had difficulty
in keeping academic posts, but he did publish other works that are worthy of
attention, in particular The Instinct of Workmanship in 1914. Veblen was also
the first economist hired by the Graduate Faculty (what has become the New
School for Social Research) and this was his last teaching position. His take
on ‘absentee ownership’ (1923) in part predicted the ‘financialization’ of the
economy (excess debt creation, in the United States for tax reasons, and thus
financial crises), Veblen died two months before the crash of 1929.
2 Thorsten Veblen, The Theory of the Leisure Class (Harmondsworth: Penguin,
1994, original 1899), p. 209.
3 Veblen, The Theory of the Leisure Class, p. 209.
4 Ibid., p. 152.
5 Thorsten Veblen, The Instinct of Workmanship and the State of the Industrial
Arts (New Brunswick, USA: Transaction Publishers, 1990, original 1914),
pp. 103–4.
6 Veblen, The Instinct of Workmanship, p. 38.
7 Ibid., p. 33.
8 Ibid., p. 42.
9 Ibid., p. 216.
10 Ibid., p. 217.
11 Larry Hickman, John Dewey’s Pragmatic Technology (Bloomington: Indiana
University Press, 1990), p. xii. Dewey’s concept of ‘instrumentalism’ also has
many close parallels in design, defined not only in terms of visual outcomes,
but also the ideas and processes that contribute to those forms.
12 There is an interesting examination of the relation of Ayres’s thought to
Veblen and Dewey in R. Hickerson, ‘Instrumental Valuation’, in Evolutionary
Economics, Foundations of Institutional Thought, 2 vols., ed. Marc R. Tool
(Sharpe: Armonk, 1988), p. 179.
13 Editorial note: Ronald Coase (1910–2013). Coase’s Nobel Prize in 1991
was for his work on transactions costs and property rights. Missing in the
notes are Coase’s reasons for why the existence of the firm occurs in the first
place. Neoclassical economics’ assumption of perfect competition is that
economic actors have perfect foresight, that the economy is evenly rotating
at equilibrium. Coase critiqued this and said that there cannot be perfect
contractibility into the future. Entrepreneurs need to be able to hire and
fire employees at will so that they can fit production to changing market
conditions out into the future. Entrepreneurs create the firm to reduce the
costs of reacting to the unknown future.
14 Ronald Coase, ‘The New Institutional Economics’, The American Economic
Review, Nashville, 88, no. 2 (May 1998): 73.
15 Ibid., p. 72.
16 Editorial note: Oliver E. Williamson (born 1932) studied with Ronald Coase
and Herbert Simon and shared the Nobel Prize in 2009 for his work on
the firm, specifically related to in-sourcing or out-sourcing the means of
production, something Williamson calls ‘transaction cost economics’. Key to
214 Notes
his approach is the idea of ‘asset specificity’, which refutes the neoclassical
approach of perfect factor mobility and where factors are specific to time and
place and local practice.
17 Oliver E. Williamson, ‘The institutions and governance of economic
development and reform’, The World Bank Research Observer, Washington,
1995, p. 171.
18 Ibid., p. 176.
19 Ibid., p. 179.
20 Editorial note: Douglass C. North (born 1920) co-shared the Nobel Prize
in 1993. His Nobel Prize Lecture was published as ‘Economic Performance
through Time’, American Economic Review 84, no. 3 (1994): 359–68. North
was also the editor of the Journal of Economic History from 1960 and co-
founded the International Society for the New Institutional Economics with
Coase and Williamson.
21 Douglass C. North, Institutions, Institutional Change and Economic
Performance (Cambridge: Cambridge University Press, 1990), p. vii.
22 John Heskett’s note. Take football as an example: there are rules that define
the context of the game, the size of the pitch and goals, the numbers of players
and how they should conduct themselves. These rules establish the framework,
no game can be understood without knowledge of them, yet every game will
still be different in innumerable ways.
23 North, Institutions, Institutional Change and Economic Performance, p. 4.
24 Ibid., p. 6.
25 Ibid., pp. 28–9.
26 Editorial note: Hayek was notoriously sceptical concerning measurement. A
fundamental underlying argument of his is that measurement is impossible,
and that all knowledge is ‘pattern recognition’.
27 North, Institutions, Institutional Change and Economic Performance, p. 81.
Chapter 5
1 An excellent survey and bibliography of these early pioneers of alternative
growth theories can be found in: Richard Nelson, ‘How new is New Growth
Theory?’ Challenge 40, no. 5 (September/October 1997): 29.
2 Editorial note: Joseph A. Schumpeter (1883–1950) was educated in Vienna,
became a university teacher and was Minister of Finance in the Austrian
government for a brief period in 1919. In 1932 he left for the USA on
appointment to Harvard University. His influence has grown since his death,
particularly his analysis of the dynamics of capitalism.
3 Joseph A. Schumpeter, Capitalism, Socialism and Democracy (New York:
Harper, 1942), p. 83.
4 Schumpeter, Capitalism, Socialism and Democracy, p. 84.
5 Ibid.
Notes 215
6 Editorial note: A useful recent discussion of this last proposition is to be

found in Paul Mason, Post-capitalism: a Guide to our Future (London: Allen
Lane, 2015); The effects of the digital revolution on creative production
is captured in Tyler Cowen, ‘Why Everything Has Changed: The Recent
Revolution in Cultural Economics’, Journal of Cultural Economics 32, no. 4
(2008): 261–73.
7 Nathan Rosenberg, Inside the Black Box: Technology and Economics
(Cambridge: Cambridge University Press, 1982), p. 3.
8 Paul M. Romer, ‘Two Strategies for Economic Development: Using Ideas and
Producing Ideas’, The World Bank Research Observer, Washington, 1992.
Comments by Kaushik Basu, Marcelo Selowsky and T. N. Srinivasan, p. 63.
9 Peter Robinson, ‘Paul Romer’, Forbes, 5 June 1995, p. 66. An interview with
Romer that gives a basic explanation of his ideas.
10 Robinson, ‘Paul Romer’, p. 66.
11 Romer, ‘Two Strategies for Economic Development’, p. 63.
12 Rosenberg, Inside the Black Box, p. 14.
13 Ibid., p. 4.
14 Ibid., p. 27.
15 Paul A. David, Ashok Desai and Morris Teubal, ‘Knowledge, Property, and
the System Dynamics of Technological Change; Comments’, The World Bank
Research Observer, Washington 1992. Supplement Start Page: 215.
16 Rosenberg, Inside the Black Box, pp. 61–2; Editorial note: For a recent
summary of the literature on network effects and the critical mass leading to
the inflection point of a market-emerged dominant technological standard, see
Joseph Farrell and Paul Klemperer, ‘Coordination and Lock-in: Competition
with Switching Costs and Network Effects’, in Handbook of Industrial
Organization, Volume 3, ed. Mark A. Armstrong and Robert H. Porter
(London: Elsevier B.V., 2007), p. 1970.
17 David, Desai and Teubal, ‘Knowledge, Property, and …’, p. 16.
18 Rosenberg, Inside the Black Box, p. 143.
19 David, Desai and Teubal, ‘Knowledge, property, and …’, Supplement p. 215.
20 Paul M. Romer, ‘Two Strategies for Economic Development: Using Ideas and
Producing Ideas’, The World Bank Research Observer, Washington 1992.
Comments by Kaushik Basu, Marcelo Selowsky and T. N. Srinivasan, p. 63.
21 Paul M. Romer, ‘What Makes Technology Grow?’ I, Washington: Spring 1999,
Volume 23, Issue 2; p. 11, 3 pgs.
22 Robinson, ‘Paul Romer’, Forbes, p. 66.
23 Ibid.
24 Ibid.
25 W. Brian Arthur, ‘Increasing Returns and the New World of Business’, Harvard
Business Review 74, no. 4 (July/August 1996): 100.
26 W. Brian Arthur, ‘Positive Feedbacks in the Economy’, Scientific American,
February 1990.
216 Notes
27 W. Brian Arthur, ‘Increasing Returns and the New World of Business’, p. 102.
28 Michael Polyani, The Tacit Dimension (Chicago: University of Chicago Press,
1966).
29 David, Desai and Teubal, ‘Knowledge, Property, and …’, Supplement. See p. 219.
30 Robinson, ‘Paul Romer’, Forbes, p. 66.
31 See Maurice Fitzgerald Scott, A New View of Economic Growth (1989)
(Oxford: Clarendon Press, 1924–2009).
32 Editorial note: The paragraphs on the work of Richard Nelson in the section
below are added from the working paper ‘Economic Theory and Design’.
33 Richard Nelson, ‘How New Is New Growth Theory?’ Challenge 40, no. 5
(September–October 1997): 29–58.
34 Richard Nelson and Sydney Winter, An Evolutionary Theory of Economic
Change (Cambridge, MA: Harvard University press, 1982).
35 Quoted from Richard R. Nelson, Technology, Institutions, and Economic
Growth (Cambridge, MA: Harvard University Press, 2005), p. 13.
36 Ibid.
37 Ibid.
38 Nelson, ‘How New Is New Growth Theory?’ p. 53.
39 Ibid., p. 55.
40 ‘The New New Economy; The current recession may seem deep and endless.
But don’t worry, says Stanford economist Paul Romer: they all do. Just take
a broader view of productivity and keep the ideas coming’, CIO Insight 1,
no. 23 (New York: 1 February 2003): 28.
41 Ibid.
Chapter 6
1 Editorial note: List’s ‘national’ ideas were then carried on by the German
Historical School of economics, the leader of whom was Gustav von Schmoller
(1838–1917) and who was a member of the Prussian Academy of Sciences.
Their ideas should be placed in context of the creation of the German nation
state, from the decentralized German Federation after the Napoleonic Wars
to the unification of the German Empire in 1871. Both List’s and Schmoller’s
statecraft encouraged the unification of Germany and a German Empire in the
spirit of the nationalism prevalent during the Romantic Era.
2 Friedrich List, Outlines of American Political Economy in Twelve Letters to
Charles J. Ingersoll (Wiesbaden: Dr. Böttiger Verlags, N.d. [c.1996] (original
edition 1827)), Letter 1, p. 21.
3 Friedrich List, The National System of Political Economy, trans. Sampson S.
Lloyd (Original: 1841–4. This edition London: Longmans, Green, and Co.,
1885) (New York: Augustus M. Kelley, 1966), p. 126.
4 List, The National System, p. 135.
5 List, Outlines, Letter 2, p. 31.
Notes 217

8 Ibid.
9 Ron Chernow, Alexander Hamilton (New York: The Penguin Press, 2004),
p. 183.
13 Ibid.
14 Editorial note: The paragraphs that follow, untill the end of section 6, were
originally placed in Chapter 8 of the original ms. (now Chapter 7). It has
seemed to me that the consolidation of the material on List and the discussion
of the relevance of his ideas to design policy both strengthened this section and
better prepared the way for the discussions of Part Two.
15 More detail on state-sponsored design policies in Germany at this time can be
found in ‘Government Policy and German Design’, reading #11 of The John
Heskett Reader: Design, History, Economics (London: Bloomsbury, 2016).
16 The Electrical Review. The quotation is from the German Department of
Commerce and Labor, Bureau of Manufactures (1907), Monthly Consular and
Trade Reports, January, p. 78.
17 See Hermann Muthesius (1861–1927), Style-Architecture and Building-Art:
Transformations of Architecture in the Nineteenth Century and Its Present
Condition (1902).
18 A. Jaumann, ‘Die Wirtschaftliche Bedeutung der Angewandte Kunst’ (The
Economic Meaning of German Applied Art), Innen-Dekoration, 1907.
Chapter 7
1 Editorial note: As indicated in the introduction, this section differs
substantially from the original chapter 7 (was 8). To augment the arguments
Heskett is making, I have drafted into the text sections from the unpublished
essay ‘Economic Theory and Design’. These additions are indicated in the
text below.
2 L. M. Lachmann, ‘From Mises to Shackle: An Essay on Austrian Economics
and the Kaleidic Society’, Journal of Economic Literature 14, no. 1 (1976):
54–62, p. 55.
3 Editorial note: The instances in Chapter 7 are taken from the previous
chapters. Their function is heuristic, to connect the notes on economic theory
with the propositions about design that Heskett goes on to explore below.
4 Ludwig von Mises, Human Action: A Treatise on Economics (San Francisco:
Fox & Wilkes, 1949), p. 13.
5 H. A. Simon, The Sciences of the Artificial, 2nd edn (Cambridge, MA: The
MIT Press, 1981), p. 111.
218 Notes
6 Friedrich A. Hayek, ‘The Meaning of Competition’, in Individualism and

Economic Order (Chicago: The University of Chicago Press, 1948), p. 101.
7 Thorsten Veblen, The Theory of the Leisure Class (Harmondsworth: Penguin,
1994, original 1899), p. 209.
9 North, Institutions, Institutional Change and Economic Performance, pp. 28–9.
10 Editorial note: The extended paragraphs in this section come from the
working paper ‘Economic Theory and Design’.
11 Editorial note: The extended paragraphs in section 2 come from the working
paper ‘Economic Theory and Design’.
12 Editorial note: The material in section 3 comes partly from the working paper
‘Economic Theory and Design’ as referred to above.
13 Richard Nelson’s stress on activities at the level of the firm as a means of
understanding innovation is relevant in this regard. See Chapter 8.
Chapter 8
1 Editorial note: The material in section 2 largely, and in section 3 almost
wholly, is taken from the unpublished ms. ‘Economic Theory and Design’.
2 David Halberstam, The Reckoning (New York: William Morrow and
Company, Inc., 1986), p. 210.
4 Ibid., p. 139.
5 Ibid., p. 186.
6 Richard R. Nelson, The Sources of Economic Growth (Cambridge, MA:
Harvard University Press, 2000), p. 38.
7 Mihaly Csikszentmihalyi and Eugene Halton, The Meaning of Things: Domestic
Symbols and the Self (Chicago: University of Chicago Press, 1981), p. 87.
8 Editorial note: For more on the question of values, see the notes ‘Value and
Values in Design’ attached as Appendix 2.
9 Aristotle, Nicomachean Ethics, Book VI.
10 Ibid.
11 John Dewey, The Later Works 1925-1953, Volume 1: 1925, Experience and
Nature (Carbondale: Southern Illinois University Press, 1981), p. 20.
12 Larry A. Hickman, John Dewey’s Pragmatic Technology (Indianapolis: Indiana
University Press, 1990), p. xi.
13 Ibid., p. 39.
14 Hans-Georg Gadamer, Reason in the Age of Science (Cambridge: MIT Press,
1983), p. 92.
15 Ibid.
Notes 219
Chapter 9
1 A good discussion on these choices, with many illustrative cases, is: Michael L.
Tushman and Charles A. Reilly III, ‘Ambidextrous Organizations: Managing
Evolutionary and Revolutionary Change’, California Management Review 38,
no. 4 (Berkeley, Summer 1996): 8.
2 Editorial note: The following four paragraphs are inserted from the
unpublished and uncompleted ms. ‘The Economic Value of Design’ c. 2000–5.
The same material is found also in the working paper ‘Economic Theory and
Design’.
3 H. A. Simon, The Sciences of the Artificial, 2nd edn (Cambridge, MA: The
MIT Press, 1981), p. 164.
4 Editorial note: The following paragraphs dealing with the ‘Five modes of how
design is utilized in a firm’ are inserted from the unpublished and uncompleted
ms. ‘The Economic Value of Design’. The same material is also found in the
working paper ‘Economic Theory and Design’.
5 Ivan Yates, Innovation, Investment and Survival (London: Royal Academy of
Engineering, 1992), p. 63.
6 Ibid.
7 Ibid., p. 65.
8 Editorial note: The material from this point to the end of the chapter returns
to the original ms.
9 John Dewey, Experience and Nature (Peru, IL: Open Court, 1925), p. 10.
Appendix 1: Socialist theory

1 Editorial note: As noted in the introduction, the section on Socialist Theory
was originally chapter 7 of Design and the Creation of Value. But since it is
neither developed with direct or even indirect reflection on design nor referred
to in any of the surrounding arguments and since its placement in the text
broke the flow of the underlying argument, it has seemed better to place it as
an appendix.
Appendix 2: Value and Values in Design

1 The term ‘design’ is being used here to indicate the essential outcome of
any business activity, which can take many forms, for example, artefacts,
communications, environments, services or systems combining all or part of
the foregoing.
2 Gordon Russell, Designer’s Trade (London: George Allen & Unwin, 1968),
pp. 140–1.
3 Russell, Designer’s Trade, p. 264.
4 ‘The Triangle: Manufacturer, Consumer, Designer’, Design, 1950.
220 Notes
5 For a discussion of problems with the term ‘design’, see John Heskett,
Toothpicks and Logos: Designing Everyday Life (Oxford: Oxford University
Press, 2002), ch. 1.
6 Milton Rokeach, The Nature of Human Values (New York: The Free Press,
1973), p. 4.
7 Rokeach, The Nature of Human Values, p. 5.
8 Michael Hechter, ‘Values Research in the Social and Behavioral Sciences’,
in The Origin of Values, ed. Michael Hechter, Lynn Nadel and Richard E.
Michod (New York: Aldine de Gruyter, 1993), p. 3.
9 Nicholas Rescher, Introduction to Value Theory (Englewood Cliffs, NJ:
Prentice-Hall, 1969), p. 16.
10 Henry Dreyfuss, Designing for People (New York: Paragraphic Books, 1955),
pp. 21–2.
11 Originates from R. H. Coase, ‘The Problem of Social Cost’, Journal of Law
and Economics 3 (October 1960): 1–44.
Index
NOTE: Page references in italics refer to figures.
9/11 attacks 189–90 artist designers 56–7

asset specificity 27–8, 97, 208 n.17,
absentee ownership 208 n.15, 213 n.1 214 n.16
accidenti communi 127 Austrian theory 7, 61
accidenti propri 127 and attribution of value to
acquisition 88, 93 goods 77–81
adaptive efficiency 101–2 and change 82–3, 85–6, 136
Adler, Jonathan 6–7, 40, 54, 55, 56 and competition 83, 84–5
aesthetics 53–4, 56, see also and decentralization 84, 101,
economic beauty 212 n.31
aesthetic value 194–5 and design 84–5, 136
Airbnb 207 n.11 and differentiation 83, 84
Allcroft, Britt 171 and distinction between property
allocative efficiency 101, 65, 67–8 and wealth 80
Amazon 159 and economic exchange 77
Apple 58, 115, 159, 196 and economic good 77, 80
applications and entrepreneur 23, 206 n.5
of design 171–2 and entrepreneurial discovery 85–6
of technology 109, 158–9 and equilibrium 83
applied arts and exchange value 81–2
Germany 129–30 and goods 77, 79
appreciative theory 120–1, 141, 153 and ‘goods of first order’ 79
Aristotle and human action 82, 85, 136
on theory and practice 153–4, 155 and individualism 83–4
Arrow, Kenneth 23 and management theory 86–7
art and Neoclassical theory
design as a branch of 54 compared 77, 78
‘Art in the Age of the Machine’ and New Growth theory
(Naumann) 130 compared 105, 106
artefacts 59, 93–4, 161, 172, and price 81, 86
190, 219 n.1 and use value 81, 82
and aesthetic value 195 and useful things 77, 79
and economic value 194 and utility 81
and intrinsic versus extrinsic and value 77, 80–1
value 195 and value creation with
and material value 194 institutions 94, 95
Arthur, W. Brian 105, 174 and value creation with transaction
on increasing returns 114–15 efficiencies 98, 99
222 Index
automobile industry, American Marx’s critique of 183–4

1970–90 2–3 and National theory 61
General Motors bankruptcy 26–8, and ‘new economy’ 15
208 n.18–19 and New Growth theory 104–5
automobile industry, Japanese Chamberlin, Edward 22
inch-up 158 Chang, Ha-Joon 5, 9, 12
Ayres, Clarence 93–4 on knowledge economy 204 n.66
on significance of
barter 193 manufacturing 16–17, 201 n.33
bathroom equipment 6, 40, 54–5, 56–7 change
Beard, Charles 208 n.16 and Austrian theory 82–3, 85–6, 136
Beck, Harry 171, 204 n.60 and culture 155
behavioural economics 37 degree of 159
Bentham, Jeremy 67 and design 66, 71, 85, 129, 135–6,
Blair, Tony 198 n.6 157–60, 164, 166, 167, 172, 174–5
Blanc, Louis 182 and Institutional theory 94, 97,
Blanqui, Louis 182 98–9, 102
Blaug, Mark 74–5 Marx’s views on 182
bounded rationality 97 and National theory 129
brand management 53, 83, 162, and Neoclassical theory 74–5, 105
163, 171 and New Growth theory 104–5,
Brazil 109–10, 111, 112, 113
design in public sector 34–7 and practical wisdom 153–4, 155
Brenner, Robert 13 and users 147–8, 149–50
Britain, see United Kingdom and values 190
broadcast television Chicago 152
non-excludability of 73 Chile 4
Brown, Tim 198 n.2 China 14, 61, 183
“Building, Dwelling, Thinking” China Daily (Hong Kong edition) 53
(Heidegger) 19 choice(s)
Bulgaria 201 n.42 design choices 36
Bush, George W. 208 n.18 freedom of 136
business and information 100
and design 1, 4, 6, 11, 52, 55–6, and Neoclassical theory 147
57–9, 147, 181, 186–7 and perfect competition 67, 81
a social activity 32, 56 and product differentiation 196
US models 27 vis-à-vis public and private
and value 81 goods 71–2
and values 189, 190 Christo 201 n.42
business economics 201 n.36 Coase, Ronald 10, 27, 213 n.16
business schools 51 Coase theorem 193
Nobel Prize 213 n.13
Canon 157–8, 174 on transaction costs 96, 98, 99,
capital 137, 213 n.13
Neoclassical emphasis on 66–7, 68, Coca-Cola 171
69, 70, 75 coded knowledge 116–17, 137,
Das Capital (Marx) 183 145, 177
capitalism 13, 202 n.51, see also CoID, see Council for Industrial Design
Neoclassical economics command economy 61
American capitalism 45 communications 161, 172
Index 223
Communism 183, 184, 189, 201 n.42 deliverables 160–2

The Communist Manifesto (Marx) 183 demand 65, 66
competence values 188, 189–90 demand creation 25
competencies 162–3, 172–6 Demsetz, Harold 66, 70
competition 129 design
and design 137 as configurative activity 14–15,
as dynamic process 83 199 n.10
Germany 124, 130–1 as creative act 6, 40, 54
imperfect 68, 71, 77 as factor of production 10
perfect 67, 68, 69, 77, 81, 83, generic view of 52–3
84–5, 100, 115, 213 n.13 Heskett’s notion of 2, 45
and prices 105 hierarchies and positioning of 57–9
competitiveness as index of wealth 90
and design 52, 74, 140, 177 notions of 46–8, 52–7, 219 n.1
and quality 130–1 operational functions of 170–1
computer industry in other disciplines and fields 19–20
and learning by using and policy-making 47–8
phenomenon 148 Simon’s notion of 48
and lock-in 115 design and economics 1–3, 7–8, 138–41
conspicuous consumption 24–6, 88 congruence between 84–5
notion of 90 direct relationship between 9
constant returns to scale 70, 108, 115 influencing role of design 48–9
consumer(s), see also headings schism of mutual incomprehension
beginning user... 1–2, 9, 17–18, 45–6
rational consumers 67, 81, 86, 147 value vis-à-vis 18–19
and value 143, 191 Design and the Creation of Value
consumer satisfaction (Heskett) 181, see also
Menger on 79–80, 136 Heskett, John
and public sector 33–4 content and organization of 5–8
consumer surplus 193 contributions of 8–12
consumption 150, 191, 193 critique of 28–9, 200 n.27, 206 n.2
‘conspicuous consumption’ 24–5, editorial changes and
88, 89, 90 interventions 40–1
vis-à-vis excludability and implications of 17–20
rivalness 72–3 limitations of 12–17
costs, see transaction costs “Design and the Creation of Value”
Council for Industrial Design seminar 4–5, 39
(CoID) 185 ‘design art’ 53
Csikszentmihalyi, Mihaly 195 design awareness 185
culture 147, 155–6 lack of 46
promotion of 52
David, Paul 105, 174 design choices 36
on incremental change 110 design education 140–1, 145, 159
on perfect expansibility 117 designers 28–9, 135
Simplest Linear Model of 111–12 and commercialism 53, 186–7
on tacit and coded as enablers 175–6
knowledge 116–17 and institutional structures 140–1
decentralization 84, 101, 212 n.31 Japan 131
decision-making and organizational contexts 31, 34,
entrepreneurial 85–6 55, 58–9, 121, 142, 143, 162–3
224 Index
as originators 139–40 Diffrient, Niels 158

and production context 138–41 digital economy 15–16
publicity and image-building 53 diminishing returns 70
and quantitative and resource-based industries 114
measures 144–6, 152 Dior 54
role in endogenous value Discourse on the Sources of the Wealth
creation 23–4 of Nations without God- and
strategic role of 6–7, 11 Silver-Mines (Serra) 126–7
and technology 138–9 discovery
and user-centred design 146–52 entrepreneurial discovery 85–6
and value 81 institutionalization of 113
and value addition 157 disequilibrium 71
and values 152, 186–7, 190 Disney 171
design management 57, division of labour 125, 126, 128
169, 205 n.72, see also Douglas, Mary 45
management of design Dreyfuss, Henry 191
Design Management Institute Drucker, Peter 86–7
(Boston) 32 Dyson, James 66, 158–9, 160
design planning
concepts of 169 Eastern Europe 61
as strategic tool 176–80 economic beauty 88, 90, 91
tools 159–62 economic exchange 77
design policy 4 and institutional constraints 100–1
design practice 6, 46, 49, 53–7, 150, economic goods
170, 176 Menger’s notion of 80
in business context 59–60 economic growth, see also New Growth
and coded knowledge 177 theory
and commercialism 53 and innovation 104–5, 112, 147
‘design art’ 53 and Neoclassical theory 23, 109
and future 135 economics 6, 8, 10, see also design
‘high-level design practice’ 49, and economics
59–60 Heskett’s notion of 2, 45
and institutional structures 140 of objects and ideas 107–8
and public sector 33, 35 quasi-religious role of 47
significance of 157 use of mathematical models 22, 67
and tacit knowledge 139, 177 Economics as Religion: From
design rationality 47 Samuelson to Chicago and
Design Value Score Card 32 Beyond (Nelson) 47
Design Value Theory 24 economic theory 7, 8–9, 21, 147,
Deskey, Donald 23–4 see also Austrian theory;
Deutscher Werkbund 131 Institutional theory; National
Dewey, John 32, 155 system; Neoclassical theory; New
instrumentalism of 93, 213 n.11 Growth theory; New Institutional
on theory and practice 154 theory
on value of a philosophy 179 and understanding of design 48,
Die Hilfe (periodical) 130 59, 135–8, 200 n.27
differentiation ‘Economic Theory and Design’
Hayek on 83, 84 (Heskett) 4
product 22, 27 economic value 192–4
Index 225
economies of scale financialization 25–6, 27,

in public sector 36–7 208 n.15, 213 n.1
economy firms
command 61 capabilities and capacities
financialization of 25–6, 27, of 167–8, 177
208 n.15, 213 n.1 existence of 96, 113, 116, 213 n.13
notion of 13–14 financial measures 153
‘Economy of mankind’ 124–5 major design functions in 57, 58,
efficiency 169–70
adaptive efficiency 101–2 major functions in 57, 58, 96, 16
and Neoclassical theory 71 reliance on quantification 144–6
in resource allocation 65, 67–8 Fitoussi, Jean-Paul 202 n.51
Elster, Jon 74 flexible production 175
endogenous growth theory 23–4 Flores, Fernando 195
Engels, Friedrich 25, 156, 182, 183 Foley, Duncan 11, 199 n.19
entrepreneur(s) 23, 206 n.5, 213 n.13 Ford, Henry 144
entrepreneurial discovery 85–6 Ford Motor Company
environments 161, 172 reliance on quantification 144–5
equilibrium 65, 66, 68, 83 form 54–5, 56
esprit de corps 189 formal theory 120–1, 141, 153
ethical values 185–6, 190–1 Foster, J. Fagg 94
EU 32 Fourier, Charles 182
€Design project 32 Frame Reflection: Toward the Resolution
evaluation of Intractable Policy Controversies
of design 179–80 (Schön and Rein) 46–7
of values 188 free trade 124–5
exchange value 24 Hamilton’s critique of 127
Menger on 81 Friedman, Milton 206 n.4
North on 100 future 85, 98, 135, 136, 167
Paulson on 186 and change 85–6
Smith on 68
Wieser on 81–2 Gadamer, Hans-Georg
excludability 72–4, 76 on practical wisdom 155
expansibility 117 GE 113
external validation 188 General Motors (GM)
extrinsic value 195 bankruptcy and nationalization
of 26–8, 208 n.18–19
Falk, Roger 32 German Historical School of
fashion designers 53, see also Economics 216 n.1
designers Germany 4, 14, 216 n.1
fashion industry institutional structures in 140
‘designer labels’ 53 and international
and image-centred design 171 competition 124, 130–1
non-excludability of design in 74 and List’s ideas 7, 61, 129–30
fast-moving consumer goods 171 and National system 9
Federal Housing Authority (US) 25–6 organization and promotion of
Federal Reserve (US) 25–6 exhibitions 129–30
Feuerbach, Ludwig 182 productive powers of 131
financial crisis of 2007—8 25–6 promotion of design 131
226 Index
Gillette (brand) 170–1 high-technology industries

GM, see General Motors increasing returns 114
goods 49, see also private goods; and problems of use 148
public goods Hirano 4
attribution of value to 77–81 history 98, 199 n.19
‘goods of first order’ 79 Hobsbawm, Eric 13
Menger’s notion of 79 Homebase 159
role in social life 45 Honda 158, 174
and useful things differentiated 79 Hong Kong 4, 5, 14
governance 97 broadcast television 73
Growth Theory Plus 23, 24 Hong Kong Polytechnic
Grundsätze der Volkswirtschaftlehre University 12–13, 39
(Principles of Economics) human action
(Menger) 77 Kirzner’s view of 85
Mises’ model of 82, 136
Habermas, Jurgen 202 n.51 and wealth creation 127
Halberstam, David 144–5 human capital 23, 107, 167
Hamilton, Alexander 127 and knowledge-based
Harvey, David 13 industries 116
Hayek, Friedrich von 8, 80, 81,
101, 212 n.24 IBM 115
critique of Neoclassical theory I.D. – International Design
82, 83 (periodical) 4
on decentralization 84, 101, ideas 150, 152
212 n.31 economics of 107–8
on design 84–5, 136 and incentives 121–2
on differentiation 83, 84–5 innovative ideas 111, 138, 196, 197
on freedom of choice 136 and Neoclassical theory 109
justification of individualism 83–4 IIT Institute of Design
on state action 87 (Chicago) 12–13, 39, 199 n.18
health care image-centred design 157, 161, 171
rivalness of 73 imitations 74, 159, 161, 172
Hechter, Michael 188 imperfect competition 68, 71, 77
Hegel, Georg Friedrich 182 impersonal exchange 100–1
Heidegger, Martin 19 implementation 169
Heskett, John 31, 181, 200 n.27, incentives 121–2
see also Design and the Creation inch-up 158, 173–4
of Value increasing returns 113–15
biographical sketch 3–5, 14 ‘Individual economy’ 124, 125
and exhibitions 203 n.54 individualism 71–2
on General Motors Hayek’s justification of 83–4
bankruptcy 26–8 and Japan 131
on growth theory 22–4 industrial design 54–5, 56–7
on Neoclassical theory 21–2 Industrial Design (Heskett) 4
notion of design 2 Industrial Revolution 156
notion of economics 2 industrialization 124, 128–9
relevance of work of 31–4 information 97, see also knowledge
on Veblen 25–6 and choices 100
works of 39–40 in economic terms 116–17
Hickman, Larry A. 154 and users 149
Index 227
Information Technology 105 internal validation 188

and manufacturing 117–18 intrinsic value 195
innovation 15, 138 Isherwood, Baron 45
degree of 159–60, 161, 172 Issigonis, Alec 204 n.60
and design 139–40, 143, 177
effect of 105, 150 James, Henry 45
and growth 104–5, 112, 147 Japan 4, 9, 14, 16, 173, 204 n.69
and ideas 159 assembly-line operations 112, 113
in public sector 35–6 and List’s ideas 61, 124, 129
and technological progress 109 and state intervention 131
and users 147–8, 150, 152 Jaumann, Anton 130
and value creation 77, 78
innovative ideas 111, 138, 196, 197 Karan, Donna 53
instinct Keynes, Joseph 200 n.27, 206 n.2
and tropismatic action 25–6, 92 Khomeini, Ayatollah 189
of workmanship 25–6, 92–3 Kirzner, Israel 77
The Instinct of Workmanship critique of Neoclassical theory 85
(Veblen) 90, 213 n.1 on entrepreneurial discovery 85–6
institutional change 98–100 knowledge
institutional structures 101–2, 118, coded 116–17, 137, 145, 177
120, 125, 138, 140–1 as commodity 117
Institutional theory 7, 26, 61, and culture 155–6
88, 94, 118, see also New and firm capability 177
Institutional theory and growth 106–7, 165
and change 94, 97, 98–9, 102 and information 116–17
and conspicuous and institutional structures 155–6
consumption 88, 90 tacit 101–2, 116, 137, 139, 145, 177
and design 90, 137 and technology 106–7, 110,
and distinction between instinct and 114, 154
tropismatic action 25–6, 92 of users 148–50, 151
and distinction between production knowledge economy 15, 16, 204 n.66
and acquisition 88, 93 knowledge resources 192
and economic beauty 88, 90, 91 knowledge workers 113
and instinct of workmanship 92–3 Korea 131
and instrumentalism 93–4, 213 n.11
and linkage between technology and labour
institutional organization 90, and Neoclassical theory 66–7, 68,
92–3, 94, 96 69, 70, 75, 183
and Neoclassical theory labour productivity
compared 94 and skills 125
institutions and Solow’s residual 23, 75
and New Growth theory 120 labour theory of value 193–4
instrumental values 188–90 Lachman, Ludwig M. 136
instrumentalism 93, 213 n.11 laissez-faire 125, 156
Ayer’s reformulation of 93–4 Lamy 179
intellectual capital 126 Lassalle, Ferdinand 182
intellectual property rights 117, 122, Latour, Bruno 14–15
see also protective measures learning by using 148–9
need for 108 Liebig, Michael 126–7
interior design 57 Leibsam, Steve H. 164
228 Index
Liedtka, Jeanne 198 n.2 Menger, Carl

List, Frederick 7, 14, 61, 124, 135–6, attribution of value to goods 77–81
200 n.27, 216 n.1, see also on customer satisfaction 79–80, 136
National theory on determination of value by
critique of Smith’s emphasis on customers 143
division of labour 125 on distinction between useful things
critique of Smith’s focus on and goods 79
individual 125 on distinction between wealth and
Hamilton’s influences on 127 property 80
importance and continuity of ideas on exchange value 81
of 129–31 notion of goods 79
Serra’s influences on 126–7 on subjective value 80–1, 211 n.11
lock-in 110, 115 on use value 81
Lovegrove, Ross 6, 56 Microsoft 113, 115
Mises, Ludwig von 136
macroeconomics 206 n.2 on human action 82, 136
management of design 169, 170, Mishan, E. J. 202 n.51
see also design management Mitsubishi 174
management theory money 81, 153
and Austrian theory 86–7 moral values 188–9, 195
manufacturing Muthesius, Hermann 130
Hamilton’s promotion of 127
and Information national economy(ies)
Technology 117–18 role of design in 141–2, 147
significance of 16–17, 201 n.33 UK 127
marketing-centred design 157, 161, 171 US 127–8
markets ‘National economy’ 124, 125–9, 135–6
creation and modification of 157–9 National system 7, 61
early dominance in 114–15 and change 129
and entrepreneurial discovery 85–6 and ‘Economy of mankind’ 124–5
increase in existing share of 157–8 and ‘Individual economy’ 124, 125
‘invisible hand of the and industrialization 124, 128–9
market’ 67–8, 82, 84 and intellectual capital 126
and Neoclassical theory 65–6 and ‘National economy’ 124,
notion of 65 125–9, 135–6
static nature of 67–8, 70–1 and protectionism 127–8
static nature of, challenges to 82–3 and quality 130–1
Marshallian cost curves 22, 206 n.4 and state intervention 125–6, 136
Martin, Roger 198 n.2 The National System of Political
Marx, Karl 13, 61, 88, 129, 156, 193 Economy (List) 124
biographical sketch of 182–3 ‘The Nature of the Firm’ (Coase) 96
economic theory of 183–4 Naumann, Friedrich
Mason, Paul 15 on quality 130–1
mass media Nelson, George 59
trivialization of design by 53–4 Nelson, Richard 40
material value 194 on innovation 147
mathematics on institutional structures 118,
in economics 22, 67 120, 155
Mazda 3 on theorizing 120–1, 141, 153
McDonalds 171 on users and learning 149
Index 229
Nelson, Robert H. Netherlands 4

on quasi-religious function of Neudeutsche Wirtschaftspolitik (New
economics 47 German Economic Policy)
Neoclassical theory 7, 13, 21, 60 (Naumann) 130
and Austrian theory compared New Growth theory 7, 23–4, 61, 104
77, 78 and Austrian theory
and change 74–5, 105 compared 105, 106
and choice 67 and change 105, 109–10, 111,
and constant returns to scale 70 112, 113
critique of 9–10, 67, 69–70 and coded knowledge 116–17, 137
and demand 65, 66 critique of 150, 155
and design 9, 66, 74, 135 and design 137–8, 150
and diminishing returns 70, 114 and economics of ideas and
and distinction between private and objects 107–8
public goods 71–4 expanded model 118, 119
and economics of objects 108 and formal theory 120–1
and efficiency 71 and growth vis-à-vis
emphasis on static models 67–8, capitalism 104–5
70–1, 74, 82–3, 135 and ideas 109
and equilibrium 65, 66 and incentives for ideas 121–2
and exchange value 68 and Information Technology 117–18
and excludability/non- and innovation 104–5, 109, 112
excludability 72–4 and institutionalization of
and growth 23, 109 discovery 112–13
Heskett’s critique of 21–2 and institutional structures 118,
and imperfect competition 68, 71 120, 155
and individualism 71–2 and investments in
and innovation 109 technology 113–15
and institutional theory and knowledge 106–7, 110, 114,
compared 94 117, 154, 165
and ‘invisible hand of the and knowledge of users 150, 151
market’ 67–8, 82, 84 and knowledge workers 113
and labour 66–7, 68, 69, 70, 75, 183 and perfect expansibility 117
limited view of production 9 and Simplest Linear Model of
and markets 21–2, 65, 85 technological progress 111–12
and mathematics 67 and tacit knowledge 116, 137
model of 68, 69 and technological progress 109–12,
and New Growth theory 118, 119 118, 137, 138
and other economic theories 10 and theorizing 120–1
and perfect competition 67, 68, 69, New Institutional theory (NIE) 96,
213 n.13 see also Institutional theory
and prices 66 and adaptive efficiency 101
and production functions 66–7 and economic exchange 100–1
and rational consumers 67 and governance 97
and rivalness/non-rivalness 72–4 and information 100
and supply 65, 66 and institutional change 98–100
and technological progress 23, and institutions 98
74–5, 109 and tacit knowledge 101–2
and value 68 and transaction costs 96–8, 99
and value addition 157 New York Times 54
230 Index
NIE, see New Institutional theory Hayek’s critique of 83

Nissan 144, 174 and Neoclassical theory 67, 69, 77,
non-excludability 72–4, 76 213 n.13
non-rivalous 72–3, 76 perfect expansibility 117
norms 188 personal values 187–8
North, Douglass C. 10 Peters, Guy 34
on adaptive efficiency 101–2 physical systems 147
on economic exchange and Physiocrats 124–5
institutional constraints 100–1 Piketty, Thomas 13
on history 98 policy-making 37, 47
on institutional change 98–100 reflective practice 47–8
Nobel Prize 214 n.20 political economy
on role of institutions 98 component parts of 124–5
on ‘value’ of a product 137–8 political ideologies 189
North Korea 61 Polyani, Michael 116
Porter, Michael 196
Obama, Barak 208 n.18 positional goods 193
objects post-carbon economy 15–16
economics of 107–8 Post-Industrial Capitalism: A Guide to
OBM, see original brand management a Future (Mason) 15
ODM, see original design practical wisdom 153–4, 155
manufacturing practice 153–5, see also design
OECD 32 practice
OEM, see original equipment and tacit knowledge 116
manufacturing preferences 188
organization 169 consumption 25
organizations 31–4 price(s)
original brand management as determinant of value 66, 77
(OBM) 162, 163 and entrepreneurial discovery 86
original design manufacturing and perfect competition 68, 77,
(ODM) 162, 163 81, 115
original equipment manufacturing Wieser on 81
(OEM) 162, 163 price-mechanism 192–3
original strategic management price-setters 66
(OSM) 162, 163 private goods 71–2
OSM, see original strategic excludability and rivalness of 72–4
management and tacit knowledge 116
Outlines of American Political producer value 186, 190–2
Economy (List) 126 product(s)
Owen, Robert 182 characteristics of 196
Oxo Good-Grips 171, 204 n.60 and factor of time 191
image-centred 171
Parker 179 marketing-centred 171
path dependency 102, 174 symbolic function of 152
Paulson, Gregor 186 and tangibility 166, 167–8
pecuniary habit 25–6, 27 technology-centred 170–1
perfect competition 100 user-friendly 171
emphasis on price function 68, 77, value addition 157–8
81, 115 product churning 157, 158, 173
Index 231
product covering 157, 158 quantification

product design 54–5, 56–7 reliance on 97–8, 139, 143–6
product designers 53, see also Quant, Mary 204 n.60
designers Quesnay, François 124
product differentiation 22, 27
production 193, 201 n.33 Rashid, Karim 53
and acquisition rational consumers 81, 86
distinguished 88, 93 characteristics of 67, 147
context of 146 real-world economics 9, 201 n.34
design as factor of 10 The Reckoning (Halberstam) 144–5
factors of 66–7, 75, 77, 106–7, reflective practice 47–8
115, 150, 151, 192 Rein, Martin 46–7
and Neoclassical theory 9 religious beliefs
productive power 125–9 and values 188–90
and state intervention 129–30, Renault 58
131, 136 Report on Manufactures
professional designers 56–7, see also (Hamilton) 127
designers research
profitability 53, 55, 152, 153, Nelson’s approaches to 120–1,
186–7, 193 141, 153
property resource-based theory 191–2
Menger’s notion of 80 Rheinische Zeitung (periodical) 182
property rights Ricardo, David 193–4
and Coase theorem 193 risk management 173
protective measures 192, 208 n.16, rivalous 72–3
see also intellectual property rights The Road to Serfdom (Hayek) 84
American policy 127–8 Rokeach, Milton 187, 188
Proudhon, Pierre-Joseph 182 Romer, Paul 23, 105, 110, 173
public goods 72–4 critique of Neoclassical theory 109
and coded knowledge 116–17 distinction between economics of ideas
expansibility of 117 and economics of objects 107–8
public policy(ies) on incentives 121–2
design of 33–4 on Information Technology and
public sector manufacturing 117–18
and creation of new ideas 122 on innovation and growth 112
and design 33–4 on investment in technology 113–15
economies of scale in 36–7 on knowledge and growth 106–7
lack of design awareness in 46 on values in design 150, 152
public sector, Brazilian 34–7 Rosenberg, Nathan 105, 137, 174
on innovation and technological
qualitative measures 181 progress 109, 110, 111
quality 26, 105 on knowledge and technological
of design 185, 186 progress 107
Drucker on 86–7 on social impact of technological
of knowledge 205 n.66 innovation 149
Naumann’s emphasis on 130–1 on users and learning 148
and Neoclassical theory 140 Rothbard, Murray N. 79–80
and value 152 Russell, Gordon 185
Yates on 173 Russia 183
232 Index
Saint-Simon, Henri de 182 Sony 158

Samsung 58 Soviet Union 61, 184
Sanders, Elizabeth 37 Starck, Philippe 53, 171
scale-down 157–8, 173–4 state intervention 61, 87, 125–6
scarcity 65, 80, 140, 184–5, 192 and manufacturing 127
Schmoller, Gustav von 216 n.1 and productive powers 129–30,
Schön, Donald 46–7 131, 136
Schumpeter, Joseph 8, 214 n.2 Stiglitz, Joseph 202 n.51
‘creative destruction’ notion strategic design 57–9
of 105, 150 strategy 169
on growth and capitalism 104–5 design as tool of 11, 59–60, 164–7
on prices and competition 105 and design competencies 162–3
Scott, A. O. 45 high-level strategy 27–8
Scott, Maurice Fitzgerald 118 role of design planning in 176–80
secular values 189 subprime mortgage crisis (US) 25–6
Sen, Amartya 202 n.51 supply 65, 66
sentimental value 195 Sweden 4, 186
Serra, Antonio 126–7 Switzerland 4, 16, 204 n.69
Simon, Herbert 97, 213 n.16 symbolism 152
on design 15, 48, 136, 166, 167 systems 161, 175
Simplest Linear Model (SLIM) 111–12
Singapore 16, 204 n.69 tacit knowledge 116, 137
skills and design practice 139, 177
and design education 141, 145 firm’s understanding of 145
and design practice 170, 190 role in adaptive efficiency 101–2
high-level 173–4 Taiwan 4, 131
and labour productivity 125 Taliban 189, 190
List’s views on 126 tangibility 166, 167–8
obsoleteness of 174 taste 186, 195
Romer’s views on 112–13 technical change 23
and tacit knowledge 116, 139 technology 204 n.60, 211 n.11
and value creation 23 and design 138–9
skyscraper index 208 n.17 Dewey’s critique of 93
SLIM, see Simplest Linear Model diffusion of 110
small-scale production 100 and embodied values 179
Smith, Adam 60, 84, 124, 182, and growth 75, 104–5, 109,
201 n.39, see also Neoclassical 118, 138
economics and growth vis-à-vis
on labour 183 investment 113–15
List’s critique of 125–6 and Industrial Revolution in
on value 68 Britain 156
social efficiency 71 and knowledge 106–7, 110,
Socialist theory 7, 13, 61, see also 114, 154
Marx, Karl and market creation and
evolution and development modification 158–9
of 182–3 and Neoclassical theory 23,
and proletariat 183–4 74–5, 109
and ‘the superstructure’ 184 and product innovation 109–11
Solow, Robert Simplest Linear Model 111–12
Solow’s residual 23, 75 social impact of 149
Index 233
Solow’s residual 23, 75 and innovation 147–8, 150, 152

validity of 111 knowledge of 177
vis-à-vis institutional and learning by using 148–9
organization 90, 92–3, 94, 96 multiple levels of 166, 168
technology-centred design 66, 158–9, preferences of 149
160, 161, 170–1 and values 191, 192
terminal values 188 user-centred design 149–50, 157,
theory 153–5 161, 170
The Theory of Monopolistic user needs 191
Competition (Chamberlain) 22 use value 24
Theory of the Leisure Class Menger on 81
(Veblen) 25, 88, 89, 93, 137 Paulson on 186
Tool, Marc 94 Smith on 68
Toto 54 Wieser on 81, 82
Toyota 3, 158, 174 utility 81, 100, 137, 147, 152, 192
transaction costs 24, 27, 96–8, 99,
213 n.16 vacuum cleaners 66, 158–9, 160
and small-scale production 100 value 152–6, see also values
tropismatic action Aristotle on 153–4
and instinct 25–6, 92 attribution to goods 77–81
and customers/consumers
Uber 207 n.11 143, 186
UK, see United Kingdom and design 196–7
United Automobile Workers 27 distinction between values
United Kingdom (UK) 3 and 153
deindustrialization 4, 14, 124, economic concept of 186–7
199 n.14 of labour 183
English Arts and Crafts mediating role of 18–19
movement 185 notion of 153
industrialization/Industrial price as determinant of 66, 77
Revolution 124, 156 subjective 80–1
List on economy of 127 vis-à-vis scarcity and utility 81
vacuum cleaners market 66, value addition 157–8
158–9, 160 ‘Value and Values in Design’
United States (US) (Heskett) 41
business schools 51 value creation 1–3, 6, 10, 19
deindustrialization 14 Austrian model with
design policy in 51 institutions 94, 95
economy of 127–8 Austrian model with transaction
individualism in 71 efficiencies 98, 99
institutional structures in 140 and design 6, 11–12, 32–4, 36–7,
promotion of manufacturing in 127 45, 49, 74, 137–8, 157, 159–62
subprime mortgage crisis 25–6 and design as structural
US, see United States factor 176–80
use, context of 143, 146 endogenous 23–4
systemic nature of 147 and innovative strategies 77, 78
useful things 77, 79 and knowledge of users 150, 151
user(s) 146–52, see also consumer(s) through interface between
behavioural reaction 168 context of use and context of
and change 147–8, 149–50 production 146
234 Index
value of objects 187–8 Versace, Gianni 53

values, see also value Vietnam 61
efficacy of 188 VitrA 6, 56
evaluation of 188 Volkswagen 2–3
notion of 187
and producers 186, 190–2 Wal-Mart 122
and religious beliefs 189–90 wealth
significance of 179–80 categories of wealth creation 127
and users 191, 192 design as index of 90
value system 187–9 Menger’s notion of 80
Veblen, Thorstein 8, 10, 24–6, The Wealth of Nations (Smith) 67–8,
27, 212 n.1 69, 125
on absentee ownership 208 n.15, Wieser, Friedrich von 81–2, 211 n.16
213 n.1 Wilhem II, Kaiser 130
on conspicuous consumption 88, 90 Williamson, Oliver E. 27, 213 n.16
distinction between tropismatic critique of 97–8, 102
action and instinct 25–6, 92 on governance 97
on economic beauty 88, 90, on transaction costs 96–7, 137
91, 137 Winograd, Terry 195
on instinct of workmanship 92–3 Winter, Sidney 120
linkage between technology and workmanship 25–6, 27
institutional organization 90,
92–3 Yates, Ivan 173

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Design and the

50 Bedford Square 1385 Broadway

First published 2017

All rights reserved. No part of this publication may be reproduced or transmitted

No responsibility for loss caused to any individual or organization acting on or

British Library Cataloguing-in-Publication Data

ISBN: HB: 978-1-4742-7-4302

Library of Congress Cataloging-in-Publication Data

Typeset by Deanta Global Publishing Services, Chennai, India

Introduction to John Heskett’s Design and the

Design as an economic necessity for governments

Design and the creation of value

1 Introduction: Design in economic life? 51

Part One Economic theory and design 63

5 New Growth theory 104

6 The National System 124

PART TWO Design and the creation of value 133

8 Economics from the standpoint of design 143

9 Design and value from the standpoint of practice 157

Afterword by Sharon Helmer Poggenpohl 181

as to how it achieves this (through what means, in relation to what model of

Economics is concerned with explaining the production, distribution and

The proof of the existence of this mutual incomprehension is negative. From

Toyota, Mazda et al. were rooted in the essentially superior conception,

At this point, much of his interest in economics remained latent –

In both Chicago and in Hong Kong the seminar was delivered to

it is entirely possible for people who are not professional economists to

Willingness to challenge professional economists and other experts is a

2 What, precisely, does the text offer?

terms the ‘standpoint’) of economics (Chapter 7), and then, in an unusual

3 What does the work achieve?

The greatest problem in considering what economic theory explains

Design … is about envisioning change, a condition not readily embraced

however … as soon as the possibility of change is admitted into economic

We have in the history of design an astonishingly rich inheritance. What is

the economic, material, social and psychological incommensurabilities

4 What are the limitations of the text?

interest in critical and historical thought. Thus, the institutional discourses

Unfortunately, with the rise of the discourse of post-industrial society in

In Ha-Joon Chang’s view therefore – and this would obviously echo

5 The intellectual force of Heskett’s text

1. The first methodological premise that Heskett works to is that economics

(between design and economics) is internal not external. Hence it is not

other words, what appears at first sight as external and incommensurate

The thrust of Heidegger’s argument is clear if, nonetheless, difficult to think.75

Asked to review the chapters on economics as found in the draft manuscript

1 On neoclassical economics

Mainstream economics assumes given and known and unchanging consumer

2 On growth theory

communities, business communities and the public sphere for advocating

a the market orientation of neoclassical economics,

3 On Veblen, and the financial

consumption’ developed in the Theory of the Leisure Class (1899), a beloved

4 On the bankruptcy of General Motors (GM),

Japanese motor companies), instead reiterating an ‘arrogant’ producer-

something we find as the necessary end result of GM’s uncompetitive

How then can national governments handle the dramatic changes

1 First, in terms of reading Heskett, I found his story of the development

Heskett’s statement that ‘making profits is not a self-contained activity

Designing in the Brazilian government

designers to reveal some of these ideas as remnants of a different age and

– First, as was noted in the introduction, the section on Marx (origi-

referred to in the later chapters. As placed, it tended to break up the

PART TWO Design and the creation of value 133

– First, as was noted in the introduction, the section on Marx (origi-

– The main arena in which design is practised is business. There is a

– Business is also a social activity. Both its internal organization and