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Sunday, May 14, 2017

Pixar Vanquishes the Monsters of Modern Creativity

"Creativity, Inc." is the book to read for everything from creative inspiration to straight economics.

Many readers are familiar with Pixar Animation’s endless streak of #1, globally popular computer-animated films. They include Toy Story, Toy Story 2, Monster’s Inc., The Incredibles, Inside Out, and many, many more. 

But beyond the northern-California-based studio’s library of blockbusters, it’s highly likely that most associate Pixar with the late Steve Jobs. With good reason, and in a very real sense. Jobs’ intrepid investment in and wise counsel to what was by no means a sure thing is what made Pixar’s later achievements possible. There’s a reason that the studio’s main building is named after the Apple co-founder.

Creativity Inc. is full of unintended lessons about economics, intellectual property, and robots.Still, there’s a great story about the company itself, told by founder Ed Catmull in his wonderful 2014 book Creativity, Inc.: Overcoming the Unseen Forces That Stand in the Way of True Inspiration. Part Pixar memoir and part how-to guide to building, managing, and sustaining a world-class company, Creativity, Inc. is one that few will regret reading.

For the purposes of this review, focus will be on the crucial economic lessons in a book that was not meant to be about economics. For readers seeking a better understanding of the good that comes from recession and crisis, the barriers created by taxation and government spending, the overdone worry about intellectual property theft, and why robots will foster abundant productivity alongside endless job creation, Creativity, Inc. is an essential read. 

“People Need to Be Wrong As Fast As They Can”

Considering the recessions that economists seek to banish through graphs, equations, and policy from the Commanding Heights, Catmull and the talented people inside Pixar run toward them. Lest we forget, economies are just individuals, and recessions signal the necessary correction of bad habits, along with other errors. Catmull quotes Pixar writer/director Andrew Stanton (Toy Story, Finding Nemo, etc.) as saying “people need to be wrong as fast as they can.” Stanton’s view succinctly explains why it is that when recessions are left alone, booms quickly follow.

Recessions, while painful, are merely the realization of errors in concert with correction of the same. As such, when governments and central banks intervene to “fight” downturns, they’re cruelly extending them for the interventions, delaying the realization and correction of blunders. Thinking about this in macro terms, the creative minds inside Pixar would surely understand why the US economy stagnated There’s nothing like a crisis to bring what ails a company to the surface.throughout the 1930s, not to mention why economic growth remains somewhat subdued nearly nine years after economic troubles revealed themselves in 2008. Precisely because the political class – both Democrat and Republican – intervened to block the full effect of errors that some committed, they logically delayed recovery. At Pixar, success is a function of its employees constantly rushing to mistakes so that the errors aren’t perpetuated on the way to stagnation.

In much the same way, Catmull writes that “There is nothing like a crisis” to “bring what ails a company to the surface.” One reason Catmull has achieved so much has to do with the fact that he and his senior colleagues are constantly self-evaluating, evaluating one another, and encouraging the company’s employees to evaluate them. Catmull acknowledges throughout Creativity that he’s almost uncomfortable when a film production is going very well given his belief that success can obscure the errors that will turn today’s blue-chip into tomorrow’s forgotten company. Rather than seek political cover from their mistakes, Catmull and his colleagues choose to profit from the inevitable production crises by virtue of embracing the correctable mistakes that they unearth.

Losing Investment Capital to the Government

Importantly, wildly successful businesses rarely begin as prosperous entities. While Pixar (acquired by Disney in 2006) is worth many billions today, it was once “a fledgling studio in dire financial straits.” The truly innovative businesses usually are at first, simply because they’re generally doing what hasn’t been done before. 

Luckily for Pixar, the company’s initial benefactor was Star Wars-superrich George Lucas… only for his expensive 1983 divorce to force reduced spending on Pixar’s still-unproven (in the marketplace) ideas. Ultimately Lucas decided to shop that which was struggling, but 20 venture capitalists (and numerous manufacturers) turned down what was eventually worth billions. 

Every dollar taxed away by politicians forces those with disposable wealth to be more careful with what’s left, and avoid high-risk investments.All of this hopefully causes the reader to contemplate the unseen. There is, of course, a happy ending when it comes to Pixar, as will soon be discussed. But for now it’s worth considering all the commerce- and living standard-changing companies that have been forced to fold over the years thanks to a lack of risk-oriented investment.

Pixar’s experience speaks to the substantial unseen reality of taxation, along with government spending, which is a tax like any other. Most would agree that there’s government waste, but most would disagree about what is and what is not waste. However, the truly sad story is all we don’t know, and the nonexistence of companies we’ve never benefited from. Thanks to government waste in aggregate, there is a shrinking availability of the most crucial capital of all: what investors are willing to commit to really risky ideas that have high odds of going belly-up. This matters because every dollar taxed away by politicians forces those with disposable wealth to be marginally more careful with what’s left. As evidenced by all the VCs and manufacturing firms that passed on Pixar, it was at one time a risky investment.

For Pixar, the happy ending came care of Steve Jobs. Having been forced out of Apple in 1984, Jobs had a lot of money and took a flyer on a film company that had yet to produce a major motion picture. He invested over $54 million, which particularly was a lot of money in the 1980s. Despite that, even the visionary in Jobs wasn’t wholly convinced. More than once he tried to sell the company, and at one point he threatened to not make Pixar’s payroll. 

Luckily Jobs courageously stayed the course, and his patience was eventually rewarded. But it took a while – Toy Story wasn’t released until November 22, 1995. In short, it took Pixar 10 years to release a feature film, which means Jobs had to wait roughly 10 years to achieve a return on his substantial investment.

Steve Jobs waited 10 years for a return on his substantial investment. Imagine what he could have done with all the money he paid in taxes.That Pixar became a household name so long after its founding speaks to just how patient investors frequently are (contrary to what we’re told about “quarterly capitalists”), and then once again speaks to the importance of having exceedingly rich individuals like Jobs who are willing to sink enormous sums into ideas that often take years to pay off, if at all. Economies gain strength from surprise, from investment in ideas that, while promising, have great odds of imploding. Northern California is a monument to failed companies that were once viewed as great, but that same part of California is also a monument to the very few grandly successful companies that have transformed commerce along with how we live, work, travel, shop, and, as Pixar attests, watch movies.

Whether the reader is Republican or Democrat is not the point. The point is that we must think about the investments that never come to fruition and the companies that never attain greatness thanks to reduced amounts of intrepid, Steve Jobs-like investment chasing promising companies that have high odds of failure. 

People can disagree about how much or how little government should tax us, but what they can’t deny is that taxation reduces the flow of investment to the Pixars of tomorrow. Jobs was worth billions when he died, but it’s worth wondering how many billions he paid in taxes; billions that this most lively of minds might have directed to several more Pixar-style innovators. Alas, we’ll never know.

Interesting here is that Catmull touches on various instances of government research, one of which led to a crude – and unmarketable – version of the internet, and perhaps in a veiled way is making a case for government as a venture capitalist. But, as Pixar’s story reminds us, it’s unnecessary and quite counterproductive. Indeed, patient investors like Jobs once again courageously stayed the course with a company that nearly reached extinction by Catmull’s own admission. That 90 percent of Silicon Valley companies go bankrupt is further evidence that there’s lots of risk-oriented investment out there. The only shame is that there could be so much more absent the grasping hand of government.

Drawing out Failure

Taking all of this further, about a third of the way through Creativity, Catmull writes that, “I came to think of our meltdowns as a necessary part of doing our business, like investments in research and development.” A page later he added that, “failure is a manifestation of learning and exploration.” Failure is being revisited in relation to taxation and government spending simply because a page later Catmull writes disapprovingly of the Golden Fleece Awards, “which were established in 1975 to call attention to government-funded projects that were particularly egregious wastes of money.” Catmull’s broad point is a valid one. The fear of being exposed perhaps causes people to avoid the information-producing risks that can lead to major error but also power our commercial evolution.

He’s right, but not about government risk-taking. He’s incorrect simply because the latter isn’t about risk. It’s the spending of someone else’s money, and, worse, there’s often an endless supply of it. While Catmull had and has shareholders to please, and, perhaps more terrifying, once had Steve Jobs to please, government can fail for a very long time free of the market discipline necessary to force a positive evolution. 

All of the above is, again, not a discussion of Democratic ideology versus Republican. Instead, it’s a simple truism which says government cannot be an investor no matter who is in charge. Creativity reveals this truth in spades as Catmull describes Pixar’s myriad successes through the prism of error that was discovered and swiftly acted upon. Again, at Pixar, they try to fail quickly. Governments don’t fail quickly because a guaranteed income stream frees them from the pressures that lead to the initial unearthing of error in the first place.

IP Theft Requires Talent

Thinking about intellectual property, the latter has become a political football in modern times. Thanks to relatively slow economic growth in the 21st century, politicians have floated all manner of false demons in pursuit of electoral gold. Immigration has taken a needless hit, the life-enhancing genius of free trade has been bashed by both political parties, imports from China and the false notion of “currency manipulation” have generated lots of media attention, and so has the so-called “theft” of intellectual property (IP) by today’s modern whipping boy (a Japan for the 21st century), China. Even the wise have bought into the silly notion that the Chinese have grown rich stealing our ideas. Importantly, a read of Creativity may cause the China-bashers to rethink things.

IP theft depends on a true visionary to happen on the IP that has real potential and on wildly talented team to turn it into something marketable.Without intending to dismiss the IP hysterics, Catmull’s stress of the importance of people (over “process” and “ideas”) as the source of Pixar’s success revealed much of the IP worrying as overdone. As he explained about Pixar’s highly technical projects, “If you give a good idea to a mediocre team, they will screw it up. If you give a mediocre idea to a brilliant team, they will either fix it or throw it away and come up with something better.”

None of this is to say that companies should necessarily be an open book about strategy, but it is to say that few, if privy to Pixar’s technology and plans, could execute on the “theft” of that information. Indeed, as Catmull so refreshingly reveals, “early on, all of our movies suck.” Catmull’s admission is crucial. Here we’re talking about one of the most successful studios in the history of film, if not the most successful. Despite this, despite all the critical accolades, awards, and major box office, Catmull acknowledges that everything Pixar creates sucks at first. 

Thinking about all this in terms of IP theft, what could the Chinese, Russians, or anyone else take? It’s a well-known truth that the really good new ideas are invariably bad in the eyes of everyone at first precisely because they’re new and untested. Lest we forget, myriad investors and businesses passed on the chance to own Pixar, just as the investment world is littered with great investors who passed on Microsoft, Amazon, and Facebook. At Amazon alone, Jeff Bezos pursues countless experiments even though he is well aware that most will flop. Implicit in all the hysteria about stolen IP is that thieves would have a clue about what is good and bad. But as Catmull once again reminds us, what eventually looks great is awful at first glance, and many times after.

When politicians make noise about IP infringements, they’re merely showing how divorced government is from commercial realities. In the real world, Xerox Parc hatched lots of ideas that its relatively mediocre force of tinkerers couldn’t transform into market winners. Xerox is a rather pedestrian company today thanks to mediocre teams failing to execute long ago. Only great minds like Bill Gates and, yes, Steve Jobs, were able to bring to market the ideas allegedly lifted from a Xerox Parc that either didn’t understand the value of its research, couldn’t execute on it, or both. Back to China, it takes a true visionary to first happen on the IP that has great potential, and then it takes wildly talented teams to turn what sucks into something marketable. In short, there’s not much to the fear of IP theft, be it from Chinese companies or Chinese government officials. When politicians and media members act as though there’s a story here, they insult entrepreneurs while vandalizing basic common sense.

Robots Are Already Here, Helping

And then there’s the question of robots. Interesting here is that Catmull published Creativity in 2014 after having written it over a two-year span. This rates mention when we consider that the latest freakout over robots began more realistically in 2015. One wonders if Catmull would have spent more time on the subject had he begun writing Creativity in 2017. At any rate, his story of technology is yet another reminder that fear of robots and automation is backwards. Catmull would doubtless agree that robots and automation will make us humans much smarter, more productive, more skillful, and exponentially wealthier as we are increasingly free to do the work that elevates our talents.

Technology itself is just another word for robot.For background, Catmull’s first job after attaining his doctorate at the University of Utah was at the New York Institute of Technology. His rather rich boss, Alex Schute, “naïvely thought that computers would soon replace people, and leading that charge was what excited him.” Ok, Schute was, in a sense, right. Computers, just another robotic form, have since saved us from all sorts of former toil. And precisely because computers have erased endless amounts of work, they’ve also created all sorts of new kinds of work to be performed by humans. In case we’ve forgotten, 1,200+ employees at Pixar are engaged in computer animation. Of course, when computers were still rather antiquated, the ability to computer animate was quite limited. Catmull knows this intimately as evidenced by his first computer-animated short film (Hand) that he made in 1972. This four-minute film required 60,000 minutes of work. 

Thinking about Hand, it’s not a stretch today to suggest that an exponentially more advanced version of Catmull’s first foray into filmmaking would require a tiny fraction of the time it once took thanks to technological advances that by their very name save on human labor. The point of all this is that technology itself is just another word for robot. Through advances, we’re constantly able to produce more with less. Computers haven’t replaced us as much as they’ve made us all much smarter and more productive. Catmull knows this well when we remember that Pixar was the first studio to “make a movie with computers.” Computers erase human effort so the same human effort can be deployed in much more productive ways. 

Notable about all this is that while the old animation hands at Disney told Catmull in 1973 that “computers and animation simply didn’t mix,” in 2006, a much more evolved Disney purchased Pixar for over $7 billion. What’s important from a technology standpoint is that legendary Disney animator Bob McCrea, though too old to innovate with modern animation technologies, told animators on the way up, “Don’t be an idiot. If we’d had those tools then, we would have used them.” After that, none other than Walt Disney himself was, according to Catmull, “unrelenting in his determination to incorporate the cutting edge and to understand all available technologies.” Pixar’s own John Lasseter adds that “technology inspires art.” The point of all this is that, far from pushing us into breadlines, the proliferation of technology promises to elevate our talents to unseen levels, and unseen levels in terms of productivity.

Economic Creativity

Pixar is yet another reminder of the staggering human achievement made possible by investors and robots.Thinking about the above, it can never be forgotten that companies exist at the pleasure of shareholders. Thank goodness they do. Investors make commerce possible, and they also value productivity. This relates to Pixar mainly because, flush as the company is, Catmull doesn’t hide from his own healthy paranoia. As he puts it early in the book, he had and has a strong desire “to protect Pixar from the forces that ruin so many businesses.” Obviously one of those forces is complacency.

Despite its string of major hits, Pixar’s talented workforce continues to search for ways to improve on what is great. One improvement is in terms of production costs. These major computer-animated films costs tens of thousands of what they describe as “person weeks.” Pixar’s employees were trying to achieve a “12,000 person-week movie.” Translated, Pixar was looking for ways to do more with less, while still maintaining the studio’s high production standards. Technology is a job creator precisely because its erasure of work boosts the overall productivity that is a lure for the investors who create all the jobs. Robots won’t put us humans out of work as much as human avoidance of robots will be an investor repellent that shows up in greatly reduced work opportunities. Pixar is yet another reminder of the staggering human achievement that’s ahead if robots and automation continue to erase unnecessary human exertions.

There are many more economic lessons within Ed Catmull’s Creativity, Inc. This analysis merely scratched the surface, particularly when we consider that no one reads the same book. Again, rest assured that readers won’t regret picking this one up. It’s a triumph on many levels, including as a non-economics book that teaches the reader essential economic lessons.

Republished from RealClearMarkets.

  • John Tamny is Director of the Center for Economic Freedom at FreedomWorks, a senior economic adviser to Toreador Research & Trading, and editor of RealClearMarkets.