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hank

Phase Shift

Enter the Entrepreneurial Age

The industrial age made work in the physical sense obsolete. That is, before the advent of mechanical engines, the major source of human employment was in physical labor: the exertion of force on matter. In those days there was always work for a man, because people needed holes dug, and rocks moved around, and rows planted. Today we have backhoes, dump trucks, and planting machines. Over time, the replacement of physical labor moved from bulk transfer tasks to more refined ones, like sewing, metal crafting, and watch making. The net effect of this ongoing process is that the ratio of dumb work to smart work is falling. In the past, a few innovators could create enough work for hundreds of thousands of laborers. Today, the vision of an entrepreneur is likely to be realized by a small team of experts directing a work force of computers and robots. If this trend continues, and it will, then our economy is going to need a lot more entrepreneurs.

In the economic sense, an entrepreneur is someone who discovers resources that are underutilized and puts them to a use that society values more highly. Economic theory says that the cost of inputs—workers, equipment, facilities, and raw materials—will be governed by the revenue that can be generated by selling the outputs that they are capable of producing. Revenue is the product of the quantity of the output and the price that it fetches in the market. If I can figure out how to use the same inputs someone else is using, but produce more output or produce a product with a higher sale price, then I can, in a sense, commandeer their inputs and put them to work on my alternative, higher value, project. That is, with my higher revenue per unit of input, I can afford to offer the workers a higher wage, enticing them to come to work for me. I can offer suppliers a higher price for their products; and I can make higher bids when purchasing equipment and facilities. 

In this sense entrepreneurship is the master resource of the market economy. It perceives people's wants and recombines society's limited resources in a way that better satisfies those wants. The entrepreneur is rewarded by the opportunity to capture a portion of the margin of improvement as excess profit. Initially the innovator only needs to bid marginally higher than existing firms and can pocket the rest of the value added. Eventually competitors will see what the entrepreneur has done and take advantage of whatever innovations are bearing the excess profits and they too will be able to place higher bids for inputs. Competition will drive input prices up and profit margins down until there's no more advantage in moving into this particular business than into any other. But, in the process, the allocation of resources is being shaped to best produce the things people most desire. And, once the excess profits evaporate, all the benefits of the innovation go to the workers who now command better wages and to the consumers who get better products at lower prices.

This role is so important that most economics textbooks put entrepreneurship into a category of it's own when enumerating the resources of production. The most basic list would also include land (which includes raw materials), labor, and capital (equipment and facilities). Even though the entrepreneurial role absorbs vastly fewer man hours than labor, it gets equal billing in the list. A successful enterprise requires judiciously chosen quantities of each of these four resources. For any given output there is probably an optimal recipe: so and so much labor, so and so much capital, etc. What I want to argue here is that the recipe is changing. Modern cookbooks are calling for a much higher ratio of entrepreneurship to labor. 

A recent info-graphic in the Economist really crystallized this idea for me. The gist that I took from it was that three traditional companies, Boeing, Toyota, and McDonalds, employ a combined 2.2 million people, while four new economy companies, Apple, Google, Amazon, and Facebook, only employ about 140 thousand. The market capitalization (perceived present value of future earnings) for the two groups are respectively $290 billion and $790 billion.

One way of thinking about what these numbers mean is that the new style companies are, on average, creating $5.6 million of wealth per employee, while the old style companies are producing $132 thousand. Lest you come away with the impression that employees are vastly underpaid, note again that those numbers represent the net present value of all of the future profits that these companies are expected to earn, not, say, earnings this year. The point is that the difference is huge. A billion dollar idea for an old school company would represent about 7600 new jobs. A billion dollar idea for a new school company would only create 178 new jobs. If profit generating ideas represent entrepreneurship and employees represent labor, then the ratio of labor to entrepreneurship is 43 times higher in old school companies than in new school ones. If new school companies are the future, then we're going to need a lot more ideas.

The Good Old Days

I should pause to consider an alternative conclusion. One might look at the same data and say, “wow, we could sure use a lot more old school companies”. Let me explain why I think this is the wrong angle to take.

One might note that what I'm calling the old economy appears to consist of manufacturing and services, while the new economy peddles mostly information. One might follow that observation up by noting that manufacturing and services aren't likely to go anywhere. We'll always need homes and electronics and hamburgers and haircuts. True. But the old school companies are already doing their darnedest to become new school companies. The number of employees per unit of output has been steadily declining for decades. Indeed, that is precisely what the industrial revolution was all about. The rising standard of living that the developed world has experienced over the past century or two is really just the result of society producing more and more output per worker. According to the Bureau of Labor Statistics, the average manufacturing worker today produces about four times as much as their counterpart in 1950. 

What I'm saying is that, though the old economy still employs more workers per unit of output than the new economy, it is making do with fewer and fewer every year. By all accounts this trend appears to be accelerating. The manufacturing sector's share of GDP is falling every year. And this trend can't just be explained away as the result of outsourcing and the hollowing out of the American manufacturing sector. It's a worldwide phenomenon. According to the U.N., manufacturing accounts for a 10% smaller share of world output today than it did 40 years ago. We are consuming significantly more manufactured goods per person, but automation is making those goods cheaper and cheaper, such that they require a smaller and smaller share of our budgets to purchase.

The same thing happened in agriculture a hundred years ago. In the nineteenth century the majority of Americans were agricultural workers. The industrial revolution put farmers on tractors, making the average agricultural worker vastly more efficient. At the same time that demand for farm workers was falling, the demand for industrial workers was rising, and the resulting wage pressure (falling wages for farm labor and rising wages for industrial labor) led people into factory jobs and cities. Today our population is mostly urbanized and fewer than two percent of the population make the majority of their income from agriculture. We still need to eat, but very few people are employed growing food.

While a few people might lament those good old days before the industrial revolution, faced with the realities, few of us would really want to go back. Certainly a world that requires ditch diggers and row hoers offers an ample supply of work. But when people talk about the desirability of work they're mostly speaking about the income that that work represents. And, while ditch digging and row hoeing are great ways to put in a lot of labor, they're terrible ways to earn income. A backhoe operator or a farmer riding a tractor can do the work of a hundred of their manually working counterparts. Since workers are compensated based on the value of their output, these modern capital enhanced laborers earn much more than their predecessors did.

We of course know that the replacement of one hundred ditch diggers with one backhoe operator does not mean ninety-nine permanently unemployed people. The people who might have been ditch diggers have long since moved into other professions and are now much better paid. Resistance to the industrial revolution for fear of the implications for unskilled labor has long since been proven ill considered. The vast majority of the population has migrated away from unskilled labor and is the better for it. Indeed, present nostalgia for the days of the economic dominance of manufacturing is actually a yearning for the state of affairs that the original Luddites were so afraid of. And I'm saying that that nostalgia is itself a new form of Luddism.

Yes, the agricultural sector has shrunk to near insignificance. But eighty years ago the average American spent about a quarter of their budget on food, while today we spend around a tenth. Concerns about obesity aside, who can argue that consumers eating more and better food while spending a much smaller portion of their budget on it is a bad thing? Countries where the proportion of the workforce employed in agriculture is still in the double digits are universally undesirable places to live. I would suggest that in fifty years the same will probably be said about manufacturing. Adjusted for inflation, the average American today earns about eight times as much as the average American a century ago while working fewer hours. Such income growth is the product of massive productivity increases which can only come about when the way that people work is free to change over the years. I believe that the coming entrepreneurial revolution will dwarf the industrial revolution in it's ultimate impact on society. We should embrace it.

Omens

We've already seen that new economy workers produce much more wealth than old economy workers. This happens to explain another recent trend: growing income inequality. The fact that workers in the new economy are vastly more productive than those in the old economy means that they are also much better paid. The difference between compensation in the new economy and that in the old creates precisely the sort of wage pressure that moved people from farms to cities at the beginning of the industrial revolution. The present pressure is incentivizing a shift from routine forms of skilled labor to creative, intellectual, entrepreneurial endeavors. Rising income inequality is a sign of a disequilibrium that will gradually be arbitraged away as people move into the new economy. We can see the exact same thing happening in China as they undergo their overdue industrial revolution. The industrial workers in the cities are so much more productive than the farmers in the countryside that income inequality has spiked dramatically.

Another sign of the times is the recent spate of “jobless recoveries”.  The last few economic downturns have eliminated many jobs and the following recoveries have largely failed to replace them. New growth is consistently coming from increasing the productivity of existing workers rather than from bringing in new workers. Ideas are being substituted for labor at a faster and faster rate, but our economy has not responded with the necessary acceleration in the production and implementation of new ideas necessary to exploit the supply of underutilized workers. The structure of our businesses, capital markets, and educational institutions has locked in an ongoing shortage of entrepreneurship.

Again, we must avoid the conclusion that these changes are bad. New economy workers are digging with backhoes, while old economy workers are still using shovels. We should not seek somehow to increase the wage share of old economy jobs in order to reduce the disparity. These changes are precisely what will drive the next century of economic growth. What we do need to do is facilitate the migration of workers from the old economy to the new. Attempts have been made at doing this, but the steady decline in workforce participation seems to indicate that these attempts are coming up short. The industrial revolution ultimately transformed the structure of society and it's institutions. The entrepreneurial revolution will require a similarly radical transformation.

Working Smart

Perhaps the biggest change that the entrepreneurial revolution will require is rethinking the nature of work. One of the key characteristics of entrepreneurship is that it is always creative. Any work that devolves into a task that you can show someone how to do is labor, not entrepreneurship. Entrepreneurship is inherently unique and original. Entrepreneurship is coming up with novel ideas and implementing them. Our traditional view of work is non-entrepreneurial: someone else has come up with an idea, figured out how to implement it, and is now hiring someone to do the grunt work. The very essence of the entrepreneurial revolution is that, in the near future, grunt work will be entirely the domain of machines. The only way to do grunt work in the future will be to be cheaper than a machine. Given that machines are becoming cheaper and cheaper, being a grunt will mean accepting lower and lower wages.

In this sense we could view outsourcing as an indication that, in many lines of work, the only people who are willing to work for less than machines are the very poor. The only place where you can still find people that poor is in the developing world. Another way of looking at this is that, in the future, the only way to make a good wage will be to be a manager. Though most managers will be managing teams of machines rather than humans. The role of humans in the coming century will be to use their minds to direct action rather than to perform actions themselves.

Those who do manage humans will have to think very differently than they did in the past. In the past a company was like an army, with far more grunts than decision makers. If the new economy is an economy where expert decision making is the ultimate commodity and all workers are creative information generators, then managers need to be coordinators rather than commanders. The traditional low level manager gives a team of grunts clear instructions. Since the new low level manager will be managing entrepreneurs rather than grunts, her primary purpose will be to facilitate the intellectual development and maximize the creative freedom of her team. Engineers and programmers, professionals who have long operated in the province of creativity rather than routine, have frequently argued that this is precisely the approach that defines successful enterprises in their fields. The Dilbertesque MBA middle manager who attempts to exercise low level control over tasks that they don't really understand is a universally despised figure among such creative workers.

All of this will require a revolution in education. Our current educational system was designed to accommodate the needs of the industrial revolution.  It teaches people how perform tasks rather than design them. It teaches people how to be job seekers rather than value creators. The entrepreneurial age will require all workers to discover needs and create opportunities rather than depend on others to create opportunities for them. The present educational model asks students what existing niche they want to fill. The educational system we need will help students figure out how to find new niches and take advantage of unexploited opportunities. Educational institutions have ineffectually attempted to adapt to the changing economy by teaching people to fill a different set of niches. Students need to learn how to think for themselves rather than be prepared to follow a new, slightly altered, set of marching orders. I think that profound structural changes will have to occur before these institutions will be able to effectually serve their new purpose.

To be clear, I'm not saying that in the future everybody will have to start their own business to survive. I'm speaking of entrepreneurship in a much broader sense. Actually, starting a business per se doesn't necessarily require entrepreneurship in the economic sense. Establishing a routine business like a real estate agency or fast food franchise may be entirely cookie cutter, and require no innovation or recognition of novel opportunities. These enterprises require management, which is usually a form of labor, but they do not require entrepreneurship.  Similarly, it is entirely possible for an employee to do entrepreneurial work. Economically speaking, entrepreneurship is adding value by solving novel problems. What I'm saying is that, in the future, regardless of whether you start a business or go to work for someone else, the nature of work will be much more about creatively solving new problems than about implementing the same solution over and over.

The new economy will require a lot more from the typical individual. Some would argue that it asks too much. I disagree. I think that everyone is capable of solving novel problems and adding unique value to society. People rise to the expectations placed upon them. The agricultural age and the industrial age required lots of human cogs to perform routine tasks. People only developed their capacities as far as was necessary. Einstein said of the job training model of education that the graduate “with his specialized knowledge more closely resembles a well-trained dog than a harmoniously developed person”. From a humanistic perspective, it's a good thing that the entrepreneurial age will ask more of us.

A Golden Age

I have no doubt that the entrepreneurial revolution will be as disruptive and turbulent as the industrial revolution. I also have no doubt that once we have passed through the fire, we will be as uninterested in returning to the pre-entrepreneurial age as we are presently uninterested in going back to living as pre-industrial peasants. The entrepreneurial age will ask the typical person to become a thinking, self-actualized, self-directed, independent agent. I believe that information technology and a restructured educational system will give people the means to achieve that end. The result will be a happier, more productive, and better governed society.

Thinking entrepreneurially is empowering. It requires asking ourselves, what do people want that they don't have? What is now difficult but could be made easy? What is now done poorly that I could do better? The industrial age made us feel small and disempowered. The grunt lacks the tools to control the world around them. They fill a prefabricated niche and pray that nothing happens to change that niche. The grunt is weak and fearful. The entrepreneur thrives precisely because they see the world around them as malleable and actively change it to suit their needs. The entrepreneur is resourceful and courageous. Imagine a world full of makers, a world full of thinkers, a world full of harmoniously developed people. That's where we're going.

 


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Needs a strong social safety net (Rating: 4)
[Sat Apr 7 03:42:29 2012] joe wrote:
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This seems necessarily right in a lot of ways. But I think it argues for a very robust social safety net. First, for the transition, which will likely be very difficult for a great many people. Second, just as a recognition of the realities of entrepreneurship.

On the transitional matters, I agree with you that the impacts of the transition are already being felt (jobless recoveries are a good illustration). Even if we could install the proper educational system overnight, it would still take a generation before the products of that system hit the workforce. And it would take several generations before all of the previously (mis)educated people move out of the workforce. And in that long period of time, there may be a great deal of suffering for those I'll-prepared workers. And, of course, we can't revolutionize the educational system overnight. The sort of reforms you're suggesting are not even on the radar at this point. It may take decades for that sort of adjustment. It's a long time to ask people to wait before addressing their suffering.

But even once everyone has adopted a properly entrepreneurial mindset, you're asking everyone to enter a lottery that most people will lose. Even very smart entrepreneurs fail frequently. And not everyone is going to be smart. Creative endeavors are always challenging, and being in the right place at the right time counts for a great deal. By contrast, manufacturing has the advantage of being relatively steady and predictable. For an entrepreneur-based economy to work, people will need to be free to fail without dire consequences for themselves and their families.

Additionally, I wonder if there aren't social capacity constraints on innovation and entrepreneurship. How many truly innovative endeavors can we support before hitting a saturation point where attention and funding are depleted? It strikes me that society can adjust only so quickly to new ideas and technologies. Maybe there isn't a limit (or at least not a practically significant limit), but I don't think this should just be assumed without consideration.
RE: Needs a strong social safety net (Rating: 1)
[Thu Apr 12 19:05:16 2012] hank wrote:
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I think you're right. Well, depending on what you mean by very robust. But it definitely seems like having a baseline safety net would make sense.

I think that the risks of entrepreneurship will be lower in the future though. An idea that I didn't talk about in this essay is that one place where there's room for a lot of entrepreneurial ideas is in enabling entrepreneurship. For instance, creating html emails that have a consistent appearance across mail clients is a big pain. As soon as I saw how difficult it can be I thought, hmmm, that could be a good business opportunity. Then I looked, and found that there are a few recently started companies that have sprung up to fill this niche and are doing quite well. There's lots of money to be made in making it easy for entrepreneurs to do what they do. As these opportunities are exploited, the barriers to entrepreneurship are gradually lowered.

Ultimately I expect the total fragmentation of companies. That is, the typical company actually performs thousands of unrelated tasks. From maintaining office space, to serving people lunch, to maintaining computers and servers, to accounting and economic forecasting, to all the things that are required to make whatever it is they actually make. Outsourcing is gradually pulling pieces out of this stack and allowing companies to focus more and more on their area of specialty. Essentially, you could take one big company with 10,000 employees and turn it into 1,000 companies with ten employees each. As the company is divided in this way, efficiency sky rockets because market forces can reach down into spaces that used to be buried under layers of bureaucracy. In fact, you could cut out so much middle management and bureaucratic hoop jumping that I suspect that you'd need a lot fewer than 1,000 ten employee companies to do the work of a 10,000 employee company.

These little ten employee companies would be totally specialized and contract all of the functions outside of their specialty from the other little ten employee companies. If you wanted to start a new company you could just plug your new idea into this service cloud and be up and running almost immediately with virtually zero fixed cost.

This may not be totally convincing but I intend to write a whole essay on the topic. I actually removed a paragraph that touched on this idea from the above essay because I knew it needed an essay of it's own to do it justice. But for now I'll just say that I think there's pretty much unlimited room for entrepreneurship. A lot of the best ideas fit so naturally with people's needs that people are drawn to them like water flowing downhill. And if an idea for a new product or service is good and adds a lot of value, but is hard to use, then there's room for a whole other company that interfaces with it and makes it easy for people to use.

Re: RE: Needs a strong social safety net (Rating: 2)
[Fri Apr 13 19:43:59 2012] andrewc wrote:
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I saw this today from the Atlantic, sketches out a similar argument.

It's a pretty fascinating, and a little scary, idea. The onward march of the technological revolution has already reached the point of no turning back. The jobs of the past will continue to becomeobsolete. The key question is what we do about it. I'm not totally sold on the entrepreneurship idea, although I do think it's an interesting concept. My concern, similar to Joe's, is that there is bound to be a huge swath of people who will quickly become obsolete. The ditch diggers/office drones of the world vastly outnumber those who would have something valuable to contribute as an entrepreneur. Call it a lack of faith in humanity, but I am skeptical that the Joe Six-Pack's of the world, who can no longer make it as ditch diggers, will somehow come up with the next big idea. That being said, other than the massive social safety net idea, I have no clue what these people would do.

The idea of a "post-scarcity" economy is one that I find really interesting to consider. In a world where machines handle all of the work humans used to, what would society look like? I find this question endlessly fascinating.

 

Re: Re: RE: Needs a strong social safety net (Rating: 1)
[Mon Apr 16 18:34:28 2012] mamadoodled wrote:
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This essay and discussion inevitably lead to questions about our underlying beliefs as a society.  What do we value regarding human life?  Should there be limits to population growth when there is no constructive work to absorb even well educated workers?  What can Government provide and how does government pay for it?  If Government is the safety net provider for a large part of our society, how much say should it have regarding essential choices people make?  Can we count on Government to essentially be a benign force for the support of the dispossessed in society?

Right now due to the extreme polarization of our media, paralysis of our politics, and rigidness of our belief systems, we are making very little progress toward any solutions to our problems on a national (macro) scale. Drifting and not cooperating to answer these problems, causes us all anxiety.  We need to find a way to tell ourselves an new story (see Why Myth Matters) about transcending our divisions and working for the common good.  When we cannot find a way forward on a national scale we can only begin to look for individual (micro)changes. 

That is why the entrepreneurship idea offers us hope. As in the developing world, micro enterprises don't need to be genius or elaborate.  They just ask us to be awake to a small opportunity and to fill it.  Not all of these are essentially tech enterprises but they can be assisted by the ease of communications which technology offers.  I am thinking for example of the Community Supported Agriculture (CSA) and the small food carts and farmer's markets we see springing up everywhere. We need to see these as new versions of the hero's journey and honor those who take the risk without waiting for someone to tell them what and how to do.

Workerless Economy (Rating: 1)
[Mon Apr 16 17:32:30 2012] hank wrote:
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This is a serious issue, though I think it's still a ways off. I'm saying that for the next phase of economic development the primary role of human beings will be to imagine, innovate, invent, design, and create. Sooner or later computers will probably be able to do these things too. Once they can do them it will only be a matter of time before they can do them better than we can. What exactly will people do then? A total welfare state where we just sit around and let the machines take care of us?

In the economic sense we can never get to post-scarcity. The problem is that people have unlimited wants. Like I said in the essay, the average American today, adjusted for inflation, earns eight times what the average American did in 1900. Are we satisfied yet? Will our great-grand-kids be satisfied if they're earning, on average, the inflation adjusted equivalent of  $320,000? Probably not. An American family that lived entirely off of government benefits today would enjoy a material standard of living higher than the average American of 1900. They would be about ten times richer than the typical Congolese. So in a sense we've already reached the era of abundance. We just don't realize it because human psychology is tuned to focus on relative rather than absolute wealth. Even if we each had our own custom solar system, we'd still have a fancy new planet we've been thinking about adding.

We psychologically calibrate our desires to the attainments of those around us. We want to keep up with (preferably get ahead of) the Joneses. Maybe in the future we'll engineer our emotions to edit out problems like this. But it's unclear what this would mean. Our drive to satisfy our insatiable appetites for food, sex, success, excitement, etc. are what make us go. If we had some fixed satiation point after which we declared ourselves satisfied, would we have any motivation to do anything?

Alternatively we could balance out the distribution of wealth so there would be no Joneses to chase after. But I don't think that would really change the situation at all. There are plenty of rich people who are envious of people with less money but more beauty, popularity, or talent than they have. In our world of perfect equality will we give everyone equal access to the most desirable sex partners? Will we all hang out with everyone equally regardless of who we actually like to be around? Will we applaud everyone's creative efforts equally regardless of their product? If so, I think I'd rather not go there. If not, then there will still be a heap, and the people on the bottom will still resent those on top.

Also, even if we distribute wealth evenly, some people will squander it while others will do amazing things with it and turn their initial endowment into more wealth. Does equalizing distribution mean that every year we should take the products of the creative people and redistribute them  to those who burned through their share?

To stop short of writing a whole new essay I'll just conclude by saying that my best guess is that there will always be competition and that additions to technology will just amplify the marginal differences in human capacity, thus increasing inequality at the same time that they drive up absolute levels of wealth.

The obvious answer (Rating: 2)
[Wed Apr 18 00:33:56 2012] joe wrote:
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Once they can do them it will only be a matter of time before they can do them better than we can. What exactly will people do then?

Serve as batteries for the computers?

Re: The obvious answer (Rating: 1)
[Wed Apr 18 02:13:34 2012] hank wrote:
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I definitely need a funny mod.

Good link (Rating: 1)
[Wed Apr 18 00:43:59 2012] joe wrote:
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Interesting article, very on-topic.  The author (Bill Davidow) promises at the end to discuss a way to reverse the trend in a future post.  I'll be curious to see that and get Hank's reaction. 

Not sure I agree (Rating: 1)
[Wed Apr 18 01:05:45 2012] joe wrote:
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I think you're right. Well, depending on what you mean by very robust. But it definitely seems like having a baseline safety net would make sense.

I'm thinking of something like the northern European social democracies.

Essentially, you could take one big company with 10,000 employees and turn it into 1,000 companies with ten employees each. As the company is divided in this way, efficiency sky rockets because market forces can reach down into spaces that used to be buried under layers of bureaucracy. In fact, you could cut out so much middle management and bureaucratic hoop jumping that I suspect that you'd need a lot fewer than 1,000 ten employee companies to do the work of a 10,000 employee company.

I'm not sure I agree with this.  It seems that in most markets we've seen the opposite trend -- in many scenarios consolidation wins out over fragmentation.  You may lose out on some efficiency at unit level, but gain scale efficiencies, synergies across business units, and (often) market power.  Do we really want to have separate HR, finance, IT, sales, marketing, etc. for each 10-person unit?  Theoretically, you could outsource all that, but that creates its own inefficiencies. 

Additionally, macro-level strategic direction seems to play a very large role in the Second Economy (to use the term from the article andrewc linked to).  Apple, Google, Facebook, et al. didn't achieve their current dominance through micro-level efficiency, but from executing on a few really good strategic decisions.  Apple as a whole is tremendously successful.  But if you smashed it into a thousand pieces, how many of those pieces could really flourish on their own?  I think you could attribute a very large portion of Apple's success over the last decade to one individual.  Only one of the Apple fragments would get Steve Jobs.  What would happen to the rest?

Re: Not sure I agree (Rating: 1)
[Thu Apr 19 18:31:26 2012] hank wrote:
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I think that genuine returns to scale are in decline. I hadn't appreciated just how in vogue the ideas I talked about in this essay were when I wrote it, but I saw this on the Economist today. It shares my opinion that the advantages of scale are gradually evaporating.

Beyond actual efficiencies coming from scale there are other forces that drive companies to scale up. I think that CEOs have the same incentive as government bureaucrats to grow the empire under them since their compensation is strongly correlated with the overall revenues and profits of the company they run. I would argue that this self-interest runs contrary to the interests of the shareholders. When companies spin off divisions, the combined share prices of the parent company and the spinoff are usually substantially higher than those of the combined shares were. When companies make acquisitions on the other hand, it usually enriches the managements of both companies while impoverishing the shareholders (the acquiring managers expand their empire, the acquired owners get rich on a flood of goodwill).

Historically CEOs have consistently been able to push their interests over shareholders, but as the diseconomies of scale grow I think the risk to CEOs of pursuing this strategy will rise. That is, as the differential between the value of a company as a whole versus in pieces rises, so do the rewards of a hostile takeover. If CEOs are too greedy they can still lose their jobs.

I agree with your last paragraph but I think it supports the fragmentation model. Big ideas are what matters, not small marginal improvements. Bureaucracies aren't all that bad at small marginal improvements, but they tend to be terrible at cultivating new revolutionary ideas. If a big company has one big monolithic in house marketing division, innovation will be hard to cultivate and hard to measure and reward when it is cultivated. If on the other hand the managers of different products are free to contract marketing services from many different dedicated marketing firms, there will be a framework for innovation and competition. New big marketing ideas will be more likely to arise, more likely to be recognized, more likely to be rewarded, and easier to scale. Companies that plug into this marketing cloud will get better marketing service cheaper than those that try to maintain in house divisions. And because we're talking about big ideas not marginal improvements, better is an exponential concept.

Virtually all of the big ideas in computing for instance have come from small start-ups. When Apple tried to maintain tight control over it's hardware market, it nearly died. Only when they decided to join their competition in using the hyper-competitive hardware industry cloud did they experience a revival. It wasn't an option. Decentralization was a force of nature like the tides. The realities of the market were saying that any company that wanted to create it's own hardware was doomed.

I think that information technology is the key to making this process go critical. It makes the kind of loose connections, just in time contracts, and rapid communication between contractor and contractee that this kind of system thrives on possible.

Even if a company doesn't actually choose to fragment itself, I think it should virtually fragment itself. It should, for instance divide its hundred person marketing division into ten ten-person teams. Then those teams should act like independent units. They should contract with the business units that use their services. The teams will compete with each other for the best employees and try to make the most competitive bids. The teams that do the best job will get the most work, earn the most money, and end up hiring new people and scaling automatically. The teams that don't work well will eventually dissolve due to lack of contracts and their best marketers will find work on other teams. Skilled marketers with their own ideas could create their own start-up teams. It would create a market within a company.

I think this is pretty much what Google tries to do. They try to run their company more like a constellation of start-ups than as one monolithic enterprise. They give their employees substantial amounts of time to work on projects of their own choosing. Some of those projects become something cool and attract more and more people and funding. Others burn out and disappear. It's all about simulating the sort of creative trial and error that a market would give you.

Steve Jobs may have gotten his god-like reputation from doing the opposite of this. If he had created an entrepreneurial atmosphere we would have seen Apple's products as having emerged from a hothouse of innovation.  But we see Jobs as having been a genius because he was a dictator and all ideas had to be funneled through his desk. Jobs may have picked the winners and tweaked the vision and plotted the grand strategy, but to suggest that 99% of what Apple produced didn't come from the employees is to take a skewed perspective on how new technologies are created. Jobs appears to have been very good at picking winners, but it's impossible to know how many winners he missed. I can totally believe that Apple actually has an incredible talent pool. There's probably no other company in the world that has as many passionate devotees. How many of these very intelligent people would prefer nothing more than to work for Apple even if that meant being an anonymous cog in the machine of a dictatorial strong man.

It's conceivable to me that even the employees of Apple, which I admit is probably the best example of synergy in the corporate world, could produce more value divided than united.