I lived near a train station and walked there each day to commute. After about 5 years, a neighbour told me my walk was wasteful. If I instead set off *in the wrong direction* I could go down a street that led to a street that went on an angle and so reduced total walking time. This was before google maps, and even though i could have checked it on a regular map, it never occurred to me that was possible. It saved about 40 seconds off a 10-minute walk, which makes a difference!
tl;dr you can get stuck doing things inefficiently for a very long time for want of imagination.
There's a lot to be said for varying your life a bit over time, doing things in stupid ways, trying odd ideas, just to open up the possibility space that you stumble on something good.
I like you already! I’m not Indian but I live in Atlanta, Georgia, USA, where there’s a big Desi diaspora. Anyway I’m jazzed, thrilled to see India emerge from decades of socialist stagnation into First-World success and status. I’ve even thought of renting a storefront in an all-Indian strip mall to create an information clearinghouse on Indian business and opportunities worldwide. I could call the store Rupee, as the new ₹ mark symbolizes the new enterprising India I speak of.
Here’s a 2-minute video you’ll like, an example of this industrial and commercial progress, a microvan infomercial:
Thanks! I’m happy to watch Big B Jhoom away, despite not knowing a word of the language, but—no apology necessary—past a certain point rap is definitely not my thing, although it was fun seeing the Maruti Suzuki Alto climb the wall.
Here, check out the Bollywood and other selections at my nearest Atlanta multiplex. Do you want a movie in Hindi, Tamil or Telegu? Vietnamese perhaps? In Georgia, yes 🤓
Didn’t Adam Smith think that what became the corporation as we think of it couldn’t, wouldn’t work at all? Because the managers were not the owners, thus couldn’t be relied upon to act in a profit-maximizing way? Stock ownership and profit sharing aim to address this imbalance, with partial success.
My view is that nearly all corporate managers are drastically overpaid, not because I’m some sort of Marxist, but because I have seen endless management folly from so many seemingly brainless execs who must hold onto their jobs only because they spout the right buzzwords.
The management guru Peter Drucker thought one of the main jobs of management was to inculcate the management vision into lower line employees, so everyone would be rowing in the same direction. Yet at companies I’ve worked for, despite holding some of the lowest positions, I was one of very few people who even had such a vision and could articulate it. Those entrusted to run the company could often be seen simply throwing away value, botching basic tasks, even committing serious crimes.
There is SO much potential value arbitrarily locked up inside most firms!
But they have a club, they hire only each other, it’s like a secret society, they know who’s in, and who’s out, whose ideas get listened to, and who gets told to know their place. They make decisions on the basis of emotion, even superstition, because they don’t know the fundamentals even of their own business. Some years before its bankruptcy crisis in early 2009, GM had bought half of Fiat. The automotive press immediately reported that there was a clause giving Fiat the right to require GM to buy the other half. So it was that GM later ended up paying an additional billion dollars or more to Fiat for nothing material in return, just to get out of this contractual obligation hanging over them.
You have to be a “suit” playing around with other people’s money to screw up this royally. A relatively unsophisticated homeschooling mom out in Nebraska would never make this kind of epic blunder with the household finances!
Could an implication of your model be that some industries could plausibly experience more innovation if only a single firm was legally allowed to compete in the field (some sort of national champion) vs. oligopolistic competition?
With a single firm, any producer surplus from innovation would accrue to that firm, and probability of forced exit from competition is zero (ignoring competition from substitute industries). At the other end of the spectrum is perfect competition, where firms get no additional producer surplus from innovation, but stay at the cutting edge regardless because any increase in marginal cost relative to competitors means guaranteed exit (I think? my economics knowledge is very rusty).
But within that spectrum, its plausible the model could be specified in such a way that the addition of one more firm (for small N, where N is the existing number of firms in the market) would decrease the incentive to innovate due to decreasing expected producer surplus more than offsetting the increase in (firm exit probability * expected producer surplus).
Perhaps Bell Telephone is an okay example here? Although I think that example crucially relies on the managers at Bell Telephone not actually profit maximizing at the time (at least in the short to medium-term). Basing that statement off of:
One other plausible industry is long-haul commercial aviation? Although even then I think the counter-factual where Boeing or Airbus does not exist would be quite unlikely to have more innovation than we currently see, even though that innovation has been quite incremental.
You’re onto a notion which has been explored before. Aghion, Bloom, Blundell, Griffith and Howitt argue that most innovation occurs in industries with middling levels of competition. You have two countervailing forces.
I have some future blog posts coming on culture as cause of innovation.
Awesome piece! So much there, but also weaves together nicely.
"The way we do things here" is definitely a thing.
For example in the niche of training and teaching jiu jitsu. Gyms in places with interested students / demand for BJJ gyms but very few Brazilians, have evolved different and effective techniques -- both in fighting, and also in running a BJJ gym. In particular, Australia and Estonia come to mind.
Lots of massive inefficiencies in training, learning, running a gym even that are kind of well known but also not. And a persistent preference to fall back on running a BJJ gym, running a class... all kinds of details -- based on the way that others have done before. Strong inertia to change. But kind of absent as soon as you are in a community where the "old ways" are not being reinforced.
Part of this is that the "old ways" -- updated of course in small ways here and there -- do work. Most of the best BJJ practitioners still come from a gym run by a Brazilian, or part of a Brazil-centered organization. Most of the prestigious tournaments are still tied to IBJJF which is based in Rio.
So it's hard to argue that the "old ways" don't work. Especially if slightly updated to modern ideas.
Then you see folks run a gym and training completely differently. At first they don't have enough success. Then eventually they do... producing great student success and satisfaction. Eventually they produce world class fighters and world champions.
Even then, the old ways still have enough world champions and successful students, that they still don't have to change. They could. They admit others have success too. But it's still more cozy to run things more or less as they were done by their master. And so it goes...
* you can't really blame regulation for stifling innovation
* there is a lot of competition in the gym space
* training is totally voluntary with almost no government standards [and only subsidized in government / school programs in a few countries]
* the best techniques can be observed by anyone as most top level matches are recorded and posted to sites like YouTube
* the video instructional space is huge (within the BJJ niche) with many great both paid and free options
* the most famous instructor (Kiwi) and competitor ('Murican) are not Brazilian
and yet anyone involved in BJJ gyms will see how much of it feels likes a government bureaucracy to some extent, despite very few formal rules outside of having to register your gym with the IBJJF and the head instructor having to be a black belt for certain number of years for your students' belts to be "official" according to IBJJF
even if you're an unofficial gym, your students can still compete in most tournaments including some of the most prestigious ones
and even IBJJF used to allow anyone to compete for a black belt world championship... until an American won it once without a belt and they made the "Josh Barnett rule"
The industry in which I've spent my career (insurance) has been dying to bring creative solutions to market for decades-- there's never been a lack of ideas behind the scenes-- but public policy in our field has infamously stifled innovation. The information may be indivisble, etc, but no one can act on it unless/until certain regs change.
What's happening in my particular state is also interesting. There's a type of product that's been available commercially in most of the country for 25+ years, but not here. Until, that is, our state granted itself a monopoly. The managers know what they could do to improve the program's efficiency to the betterment of consumers, but they continually rebuff the information-- not for a failure of imagination-- but due to ideological bias (they do not want good-faith, expert advice from the industry they are trying to replace).
Although the managers of the trust fund itself are fiduciaries, the primary decisionmakers of the state's program are not invested in its profit-maximizing, so their decisionmaking has been... sub-optimal. The actuaries have done stellar work, but for legislators cherry-picking season never comes to an end.
The entire public-private partnership dynamic adds a whole new level to this conversation, since sometimes we compete, sometimes we cooperate, and sometimes we literally do both at the same time.
"And in China, foreign-owned firms are more innovative than Chinese owned firms)"
I have to disagree with this point because the Chinese have shown that they are capable of out-innovating and out-competing foreign firms. A case in point is the EV industry where Chinese car firms have out-innovated foreign-owned car firms except for Tesla.
So here's another one--they're afraid of the government and public opinion.
Unions and so on, and people in general, will regulate firms from doing inefficient things they don't like, from firing workers to dumping toxins into the environment. Get enough public opinion against you and you can be regulated or even prosecuted.
Also, why is efficiency the most important thing?
Efficiency results in a greater amount of product at a lower price, and that's good. However, if you send all the jobs overseas, you now have lots of people with no jobs who are prone to crime and drugging themselves with opioids and so on. Maximizing utility to the firm often comes at the expense of the workers--after all, when you minimize labor costs you usually wind up laying people off. So efficiency may not be optimal for society as a whole. Everyone gets cheaper products, but if a few people get rich and everyone gets three dollars off the price of shoes (which they may not even notice) but a thousand people wind up begging for change or selling their bodies for drugs people aren't going to be too excited about the free market.
Of course protectionism is bad if you take it too far--look at Latin America. There's probably a sweet spot--a local maximum if you will.
These sorts of disruptions may ultimately wind up limiting the degree to which pure capitalism is attainable (see above) as everyone screwed by the company organizes against them. The Gilded Age was followed by the Progressive movement, and the neoliberal post-Cold War era is being followed by protectionist populism on the right and democratic socialism on the left--whoever wins, they aren't huge market fans.
I lived near a train station and walked there each day to commute. After about 5 years, a neighbour told me my walk was wasteful. If I instead set off *in the wrong direction* I could go down a street that led to a street that went on an angle and so reduced total walking time. This was before google maps, and even though i could have checked it on a regular map, it never occurred to me that was possible. It saved about 40 seconds off a 10-minute walk, which makes a difference!
tl;dr you can get stuck doing things inefficiently for a very long time for want of imagination.
There's a lot to be said for varying your life a bit over time, doing things in stupid ways, trying odd ideas, just to open up the possibility space that you stumble on something good.
Did you calculate the number of extra calories burned by the “inefficient” route? Maybe over five years, it saved a gain of three pounds.
I like reading almost anything about business in India. Please keep writing. Your voice is important
I like you already! I’m not Indian but I live in Atlanta, Georgia, USA, where there’s a big Desi diaspora. Anyway I’m jazzed, thrilled to see India emerge from decades of socialist stagnation into First-World success and status. I’ve even thought of renting a storefront in an all-Indian strip mall to create an information clearinghouse on Indian business and opportunities worldwide. I could call the store Rupee, as the new ₹ mark symbolizes the new enterprising India I speak of.
Here’s a 2-minute video you’ll like, an example of this industrial and commercial progress, a microvan infomercial:
https://m.youtube.com/watch?v=R1z06On8NXw&pp=ygUPdGF0YSBtYWdpYyBpcmlz
If you live in ATL and have some interest in India, have a look at this banger of a music video:
https://youtu.be/hOHKltAiKXQ?si=al83NBSgLZktZxa4
It may not be your thing, in which case I apologize, but as a trigger warning: it is an Indian rapper who goes quite hard.
Thanks! I’m happy to watch Big B Jhoom away, despite not knowing a word of the language, but—no apology necessary—past a certain point rap is definitely not my thing, although it was fun seeing the Maruti Suzuki Alto climb the wall.
Here, check out the Bollywood and other selections at my nearest Atlanta multiplex. Do you want a movie in Hindi, Tamil or Telegu? Vietnamese perhaps? In Georgia, yes 🤓
https://m.youtube.com/watch?v=XaMfRN0PVQ8&pp=ygUOQmFja2NoYW4gamhvb20%3D
https://www.regmovies.com/theatres/regal-hollywood-north-i-85-0745?date=09-01-2024
Didn’t Adam Smith think that what became the corporation as we think of it couldn’t, wouldn’t work at all? Because the managers were not the owners, thus couldn’t be relied upon to act in a profit-maximizing way? Stock ownership and profit sharing aim to address this imbalance, with partial success.
My view is that nearly all corporate managers are drastically overpaid, not because I’m some sort of Marxist, but because I have seen endless management folly from so many seemingly brainless execs who must hold onto their jobs only because they spout the right buzzwords.
The management guru Peter Drucker thought one of the main jobs of management was to inculcate the management vision into lower line employees, so everyone would be rowing in the same direction. Yet at companies I’ve worked for, despite holding some of the lowest positions, I was one of very few people who even had such a vision and could articulate it. Those entrusted to run the company could often be seen simply throwing away value, botching basic tasks, even committing serious crimes.
There is SO much potential value arbitrarily locked up inside most firms!
But they have a club, they hire only each other, it’s like a secret society, they know who’s in, and who’s out, whose ideas get listened to, and who gets told to know their place. They make decisions on the basis of emotion, even superstition, because they don’t know the fundamentals even of their own business. Some years before its bankruptcy crisis in early 2009, GM had bought half of Fiat. The automotive press immediately reported that there was a clause giving Fiat the right to require GM to buy the other half. So it was that GM later ended up paying an additional billion dollars or more to Fiat for nothing material in return, just to get out of this contractual obligation hanging over them.
You have to be a “suit” playing around with other people’s money to screw up this royally. A relatively unsophisticated homeschooling mom out in Nebraska would never make this kind of epic blunder with the household finances!
Could an implication of your model be that some industries could plausibly experience more innovation if only a single firm was legally allowed to compete in the field (some sort of national champion) vs. oligopolistic competition?
With a single firm, any producer surplus from innovation would accrue to that firm, and probability of forced exit from competition is zero (ignoring competition from substitute industries). At the other end of the spectrum is perfect competition, where firms get no additional producer surplus from innovation, but stay at the cutting edge regardless because any increase in marginal cost relative to competitors means guaranteed exit (I think? my economics knowledge is very rusty).
But within that spectrum, its plausible the model could be specified in such a way that the addition of one more firm (for small N, where N is the existing number of firms in the market) would decrease the incentive to innovate due to decreasing expected producer surplus more than offsetting the increase in (firm exit probability * expected producer surplus).
Perhaps Bell Telephone is an okay example here? Although I think that example crucially relies on the managers at Bell Telephone not actually profit maximizing at the time (at least in the short to medium-term). Basing that statement off of:
https://www.construction-physics.com/p/building-the-bell-system
One other plausible industry is long-haul commercial aviation? Although even then I think the counter-factual where Boeing or Airbus does not exist would be quite unlikely to have more innovation than we currently see, even though that innovation has been quite incremental.
You’re onto a notion which has been explored before. Aghion, Bloom, Blundell, Griffith and Howitt argue that most innovation occurs in industries with middling levels of competition. You have two countervailing forces.
I have some future blog posts coming on culture as cause of innovation.
https://www.ucl.ac.uk/~uctp39a/ABBGH_QJE_2005.pdf
Awesome piece! So much there, but also weaves together nicely.
"The way we do things here" is definitely a thing.
For example in the niche of training and teaching jiu jitsu. Gyms in places with interested students / demand for BJJ gyms but very few Brazilians, have evolved different and effective techniques -- both in fighting, and also in running a BJJ gym. In particular, Australia and Estonia come to mind.
Lots of massive inefficiencies in training, learning, running a gym even that are kind of well known but also not. And a persistent preference to fall back on running a BJJ gym, running a class... all kinds of details -- based on the way that others have done before. Strong inertia to change. But kind of absent as soon as you are in a community where the "old ways" are not being reinforced.
Part of this is that the "old ways" -- updated of course in small ways here and there -- do work. Most of the best BJJ practitioners still come from a gym run by a Brazilian, or part of a Brazil-centered organization. Most of the prestigious tournaments are still tied to IBJJF which is based in Rio.
So it's hard to argue that the "old ways" don't work. Especially if slightly updated to modern ideas.
Then you see folks run a gym and training completely differently. At first they don't have enough success. Then eventually they do... producing great student success and satisfaction. Eventually they produce world class fighters and world champions.
Even then, the old ways still have enough world champions and successful students, that they still don't have to change. They could. They admit others have success too. But it's still more cozy to run things more or less as they were done by their master. And so it goes...
I like the BJJ example because
* you can't really blame regulation for stifling innovation
* there is a lot of competition in the gym space
* training is totally voluntary with almost no government standards [and only subsidized in government / school programs in a few countries]
* the best techniques can be observed by anyone as most top level matches are recorded and posted to sites like YouTube
* the video instructional space is huge (within the BJJ niche) with many great both paid and free options
* the most famous instructor (Kiwi) and competitor ('Murican) are not Brazilian
and yet anyone involved in BJJ gyms will see how much of it feels likes a government bureaucracy to some extent, despite very few formal rules outside of having to register your gym with the IBJJF and the head instructor having to be a black belt for certain number of years for your students' belts to be "official" according to IBJJF
even if you're an unofficial gym, your students can still compete in most tournaments including some of the most prestigious ones
and even IBJJF used to allow anyone to compete for a black belt world championship... until an American won it once without a belt and they made the "Josh Barnett rule"
The industry in which I've spent my career (insurance) has been dying to bring creative solutions to market for decades-- there's never been a lack of ideas behind the scenes-- but public policy in our field has infamously stifled innovation. The information may be indivisble, etc, but no one can act on it unless/until certain regs change.
What's happening in my particular state is also interesting. There's a type of product that's been available commercially in most of the country for 25+ years, but not here. Until, that is, our state granted itself a monopoly. The managers know what they could do to improve the program's efficiency to the betterment of consumers, but they continually rebuff the information-- not for a failure of imagination-- but due to ideological bias (they do not want good-faith, expert advice from the industry they are trying to replace).
Although the managers of the trust fund itself are fiduciaries, the primary decisionmakers of the state's program are not invested in its profit-maximizing, so their decisionmaking has been... sub-optimal. The actuaries have done stellar work, but for legislators cherry-picking season never comes to an end.
The entire public-private partnership dynamic adds a whole new level to this conversation, since sometimes we compete, sometimes we cooperate, and sometimes we literally do both at the same time.
"And in China, foreign-owned firms are more innovative than Chinese owned firms)"
I have to disagree with this point because the Chinese have shown that they are capable of out-innovating and out-competing foreign firms. A case in point is the EV industry where Chinese car firms have out-innovated foreign-owned car firms except for Tesla.
So here's another one--they're afraid of the government and public opinion.
Unions and so on, and people in general, will regulate firms from doing inefficient things they don't like, from firing workers to dumping toxins into the environment. Get enough public opinion against you and you can be regulated or even prosecuted.
Also, why is efficiency the most important thing?
Efficiency results in a greater amount of product at a lower price, and that's good. However, if you send all the jobs overseas, you now have lots of people with no jobs who are prone to crime and drugging themselves with opioids and so on. Maximizing utility to the firm often comes at the expense of the workers--after all, when you minimize labor costs you usually wind up laying people off. So efficiency may not be optimal for society as a whole. Everyone gets cheaper products, but if a few people get rich and everyone gets three dollars off the price of shoes (which they may not even notice) but a thousand people wind up begging for change or selling their bodies for drugs people aren't going to be too excited about the free market.
Of course protectionism is bad if you take it too far--look at Latin America. There's probably a sweet spot--a local maximum if you will.
These sorts of disruptions may ultimately wind up limiting the degree to which pure capitalism is attainable (see above) as everyone screwed by the company organizes against them. The Gilded Age was followed by the Progressive movement, and the neoliberal post-Cold War era is being followed by protectionist populism on the right and democratic socialism on the left--whoever wins, they aren't huge market fans.