Innovation's Underground Economy

The Hidden Exchanges That Drive Breakthroughs

You can have innovation or control, but never both.

This fundamental tension explains why the most valuable work in your organization happens in the shadows. The tighter you manage, measure, and monitor, the more innovation retreats underground, finding routes around your carefully constructed systems.

While corporate mythology celebrates the eureka moment in gleaming laboratories, true innovation rarely originates from formal systems. The uncomfortable truth is that our most transformative ideas emerge from clandestine exchanges occurring beneath official structures—what I call innovation's underground economy.

This underground economy isn't merely a supplement to formal innovation processes—it's the primary engine. The visible system of strategic plans, documented processes, and innovation committees primarily serves to refine, scale, and legitimize what bubbles up from below. Strip away the mythology, and we find an inversion of how most organizations understand innovation: the more structured your innovation system, the less innovative it becomes.

In every organization, two parallel realities coexist. The pharmaceutical researcher who secretly tests compounds management rejected, the software engineer who builds unauthorized prototypes during "personal time," and the filmmaker who edits passion projects on company equipment after hours—these aren't anomalies or corporate rebels. They represent the actual innovation system that organizations simultaneously depend upon and deny. They've intuitively grasped that innovation and strict control are mutually exclusive.

"Learn the rules like a pro, so you can break them like an artist." - Pablo Picasso

This underground economy thrives precisely because formal innovation systems are fundamentally flawed. Official processes crush deviation, reward predictability over serendipity, and document rather than discover. They excel at optimizing existing paradigms but suffocate precisely the kind of disruptive thinking that creates new ones. This reveals the central paradox of innovation management: the very attempts to control, measure, and formalize the creative process often destroy it.

The underground economy operates on different principles from formal systems. Rather than contracts and documentation, it runs on reciprocity and trust. Resources flow through favor trading, not budget allocation. Knowledge transfers through informal mentorship, not documented meetings. This creates a parallel power structure that challenges traditional hierarchies and authority—explaining why organizations simultaneously rely on and resist it.

Yet completely unregulated underground economies create genuine risks: safety protocols bypassed, resources misallocated, intellectual property compromised. This creates profound ethical contradictions for both leaders and employees. Organizations implicitly depend on rule-breaking while officially condemning it, forcing innovators to operate in moral gray zones where organizational success demands actions that could jeopardize their careers.

This suggests we need a radical reimagining of organizational design, not just incremental adjustments. What would an organization built from the ground up to harness underground economies actually look like? I'd suggest three principles:

• Embrace deliberate ambiguity around resource allocation, recognizing that precise measurement kills exploration.
• Create psychological safety that transforms rule-breaking from a fireable offense to a learning opportunity.
• Design permeable boundaries between formal and underground systems, allowing promising unofficial projects to migrate into official development.

Bill Hewlett embodied these principles at HP when he discovered the company's equipment storeroom locked and padlocked. Rather than accept this barrier to innovation, he "went out immediately to the hardware store, bought a bolt cutter, came back, cut the chain and left a note: 'Please do not lock this storeroom again -- Bill.'“ This wasn't mere symbolism but a foundational element of the famed "HP Way"—institutionalizing the understanding that innovation requires access and trust. Years later, towards the end of my tenure as CTO at HP, I witnessed how new leadership systematically dismantled this trust by shutting down procurement during the final month of each quarter to control costs. This effectively killed the underground innovation economy by cutting off its oxygen supply—the very components needed for unofficial experimentation.

For those leading organizations, the underground innovation economy requires a profound shift in thinking: Can innovation ever be truly "managed" in the conventional sense? The most transformative breakthroughs often require not just bending the rules but breaking them. This challenges us to reconsider what organizational structures best serve innovation, not by eliminating the underground economy, but by designing systems that acknowledge its essential role.

In innovation, as in economics, what happens in the shadows often matters most. The question isn't whether your organization has an innovation underground—it's whether you have the courage to see it, embrace it, and harness its power.

This article first appeared in Studio Notes on Substack. To have early access to future articles, subscribe to Studio Notes.