Yglesias responds to PPI scale and innovation paper

Matt Yglesias has responded to my paper on scale and innovation with his piece “Small Is Still Beautiful: The trendy—and wrong—new argument that because big businesses innovate better, we should let them become monopolies.”

Well, I’ve been accused of many things over the years (how about “Nostradamus of the New Economy“?). But no one has ever called me trendy before.

Let me break down my argument into three statements.
–Innovation is the most important force driving long-term growth.
–Current economic trends suggest that big companies can in some circumstances have an innovative edge over small companies.
–If antitrust regulators care about long-term growth and competitiveness, they should factor the innovative potential of large companies into their calculations, rather than simply assuming small companies are more innovative.

Matt seems to agree with statements 1 and 2. But then he freaks out about statement 3, accusing me of encouraging monopolies.

Least persuasive of all is his idea that the health care, education, and energy sectors are “large-scale integrated systems” and that the need to transform those sectors should lead us to relax our vigilance about competition. If anything, these are sectors of the economy where we should be exceptionally worried that lack of competition is creating dysfunctional results. Higher-education incumbents use accreditation rules to stymie potentially disruptive competition, and health care markets remain fundamentally localized, with lack of hospital competition driving higher prices.

Here Matt has completely missed my point. Yes, education and health care suffer from a lack of competition. But partly what protects incumbents is the very interlockedness of the sectors. Small disruptive firms get co-opted into the existing system, which includes the government in both education and health care. I am arguing that the only companies that can challenge the existing status quo successfully have to have enough scale and heft.

On a broader level, Matt’s argument is implicitly founded on the belief that we have *enough* innovation. In Matt’s world, it’s more important to discourage market power than to encourage new technologies. In that sense, this post follows logically from his “The Crisis We Should Have Had Had” post (here and my response here). In Matt’s world, the U.S. innovation/productivity machine is doing just fine, and the only problem is “a pretty banal monetary crunch.”

Matt’s view is shared by most of the economics and policy establishment. This “pro-complacency” assessment leads to the belief that the U.S. competitive position is fine. The right-wing version of the pro-complacency position says that the only thing that we need is a smaller budget deficit and less government in general. The left-wing version says that all we need is to regulate the financial sector a bit more and pump a lot more monetary and fiscal stimulus into the economy.

But in the end, it’s complacency that is the big danger.

Comments

  1. Mr. Mandel,

    “Current economic trends suggest that big companies can in some circumstances have an innovative edge over small companies”

    Do you have any data to support this assertion?

    Because this seems the complete opposite of reality. From GM killing EV’s in the ’90’s, to AT&T stifling innovation in telecommunications in the ’80’s, there are countless examples:
    a) the steel industry in the 1980’s: mini mill start ups lowered the cost of, and improved quality in steelmaking
    b) Cisco Systems’ ‘Research and Development’ has for almost fifteen years consisted of buying hundreds of start ups; a model emulated by many other corporates today, eg Google with its Android purchase, and BigPharma with genetic engineering
    c) the ‘private space industry’, promising a price per pound of payload which is a fraction of what NASA could offer.

    There are dozens of potential examples which can be invoked to illustrate. The gist: production scales linearly, but bureaucracy scales exponentially. UPSHOT: innovation, if not killed, is smothered within large companies. See Clayton Christiansen’s ‘The Innovator’s Dilemma’ for a detailed treatment of this NB one of the few ‘business books’ which is essential reading.

    Awaiting your response with interest.

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