The Uses of Diversity. David Ellerman

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СКАЧАТЬ on a broader scale. Now we turn from the macro-model of the Jacobs’ Ladder mechanism to Jacobs’s micro-level analysis of innovation in the firm.

      How New Work Might Be Spawned from Old Work

      Jane Jacobs’s micro-level analysis of how old work can lead to new work in firms has interesting and powerful implications for economic policy about job and enterprise creation. New work arises out of old work in a variety of ways. One way is simply that old products might be stretched to find new applications; old services might be stretched to find new categories of clients. But a deeper source of innovation lies in the multiple uses and recombinations of a technology. Once a company learns the technology W to produce product X, the economically rewarding path and “path of least resistance” is probably to continue in the same groove (or rut) to produce more and better X instead of using the technology W to produce noncompeting products Y and Z.¹² In a diverse environment, the additional knowledge to use the technology to produce the other products Y and Z might be readily available. But the filling out of the possibilities of each technology might fail for other reasons than an overly specialized environment. Management would become a nightmare in this “strange hive.” Each new kind of work might be in a different sector and would have its own customers, input and space needs, financing and staffing requirements, and growth rate all not in any coordination with the original work of the company. It probably is not worth the distraction to the original company. Given the limitations on the scope and attention span of unified management, the company might decide to just “stick to its knitting” with the original products. The new job creation possibilities would be squandered.

      Every Company’s Two Products

      Here Jacobs’s thought meets up with some older observations by Cambridge economist Arthur C. Pigou (1877–1959). Every company produces two products. One product is its products. The other product is the organization of people (always with some turnover) trained in the technologies used by the company and trained in the general business capabilities needed to carry on the business. Pigou noted that the businesses in a country provided this potential positive externality (meaning their potential social product exceeded their private product) of training people in technologies and business capabilities:

      One very important indirect service is rendered by the general economic organisation of a country in so far as, in addition to fulfilling its function as an instrument of production, it also acts, in greater or lesser degree, as a training ground of business capacities. (Pigou 1960, 204)

      What are the policy implications of this fundamental point that existing businesses are major training grounds for entrepreneurial, managerial, and technological capability and potential incubators for new businesses? The extent to which this widespread potential positive externality is exploited to create new jobs—or new work from old work—depends crucially on the form of the business. The additional job creation that could follow from a corporation’s “second product” (its training of people in technologies and business capabilities) is typically not a part of the company’s goals; that is why it is an externality.

      Putting Jane Jacobs to Work: New Job and Enterprise Creation

      First, we consider the conventional corporate form of business. How might the externality be internalized through private or public action? While unitary corporate management typically tries to maximize the size of its empire, the diseconomies of scale and scope will soon extract their price.¹³ One counterstrategy is the multidivisional firm (e.g., Chandler 1990). The example of the 3M company shows that a multidivisional structure (together with a very special corporate culture) can be used to try to fill out the plenum of possibilities offered by each technology mastered by a company. But 3M is more the exception than the rule; larger organizations usually mean deeper ruts to imprison the older work.

      Here again, a biological example might be instructive. There are two ways that biomass can be increased: by existing organisms getting bigger (like multidivisional growth in a firm) and by existing organisms spawning new life by having offspring.¹⁴ Nature gives little choice between these options. There are powerful structural limits to physical growth in each type of organism, and the grim reaper imposes even stricter time limits. Hence, the biological “principle of plenitude” (Lovejoy 1960, 52) by which biomass has increased is principally by old life spawning new life through fission and reproduction. Incidentally, the orthodox “dream world” of perfectly enforced intellectual property rights would tend to shut off the second option of spawning new economic life—while the “grim reaper” of limited patent life is an attempt to (belatedly) bring the second option back into play.

      For an economy to be more like a rain forest than a desert, it must increase its “economic mass.” But corporations do not have a limited lifetime and the diseconomies of scale and scope seem to place little natural limit on the ambitions of management to try to grow directly or to grow indirectly through acquisitions and mergers. Hence, conventionally organized companies do not tend to follow an economic principle of plenitude by deliberately spawning new offspring. Indeed, where new life gets going on its own, large corporations try to compensate for their lack of innovation and oncoming senility by gobbling up the previously successful start-ups (reverse spin-offs) in a process of “destructive corporate cannibalism” (Jacobs 2004, 170).

      One possibility is realized by franchising. Often a business has natural geographical limits (e.g., a restaurant). But the business’ “second product”—its capacity to train people in the specific business—could be used to “replicate the DNA” to other geographical locales. If there are enforceable intellectual property rights to the “concept” and perhaps property rights to some unique inputs, then the positive externality might be internalized as a franchise operation. If successful, then the company’s second product becomes the main product—the use of the company’s training capacity to replicate the business DNA in the franchisee operations. Even when some of the prerequisites are not present for a full-blown master franchiser operation, each business still has the potential to replicate its successful DNA—it just lacks the means to recoup the benefits (which is why positive externalities tend to be under-realized). For instance, with some temporary doubling up of staff, new people could be trained to replicate the business in a noncompetitive locale.

      It is also possible for a company to use spin-offs of partial subsidiaries (rather than new divisions) to develop new products out of the old products and technologies. One interesting example of systematic spin-off promotion is the Thermo Electron Group in and around Boston.¹⁵ The original company Thermo Electron was started by an MIT physics professor George Hatsopoulos in 1956. Once a company has mastered a technology to produce one product, there are often many nearby products that beckon to be produced. Thermo Electron established the principle that new nearby products would be produced in new companies that were “spin-outs” from the original company. The mother company would keep a majority of the shares (to address the incentive problem) but the other shares would be held by the people in the spin-out or would be sold to the public. Operational control would be in the hands of the spun-out company whose name would always begin with “Thermo” to signify membership in the Thermo Group (with over sixty companies). Now the children have begun to have children since the ramification through spin-outs is a principle for all the companies of any generation.

      But here again, the Thermo Group is more the exception than the rule (see Peters 1992 for more exceptions). When asked why others have not copied his ideas, Hatsopoulos said:

      People who head large companies are not venturesome enough. The CEOs of established companies are afraid to lose control because we are turning a lot of decision-making over to the individual manager. (Quoted in Bailey and Syre 1996, 45)

      The example of the Thermo Group is quite instructive on several counts. It shows one way that the externality problem can be addressed by fostering partially owned spin-offs (or “spin-outs”).¹⁶ But it also shows the severity of the incentive problem since the Thermo example СКАЧАТЬ