Lessons from Bell Labs

In today’s NYT, we’ve got an important article lauding Bell Labs, with the headline “True Innovation: We should emulate Bell Labs, which took the long view, with a preference for usefulness.” Jon Gertner writes:

…we idealize America’s present culture of innovation too much. In fact, our trailblazing digital firms may not be the hothouse environments for creativity we might think. I find myself arriving at these doubts after spending five years looking at the innovative process at Bell Labs, the onetime research and development organization of the country’s formerly monopolistic telephone company, AT&T.

Why study Bell Labs? It offers a number of lessons about how our country’s technology companies — and our country’s longstanding innovative edge — actually came about. Yet Bell Labs also presents a more encompassing and ambitious approach to innovation than what prevails today. Its staff worked on the incremental improvements necessary for a complex national communications network while simultaneously thinking far ahead, toward the most revolutionary inventions imaginable.

Indeed, in the search for innovative models to address seemingly intractable problems like climate change, we would do well to consider Bell Labs’ example — an effort that rivals the Apollo program and the Manhattan Project in size, scope and expense. Its mission, and its great triumph, was to connect all of us, and all of our new machines, together.

Gertner is the author of the forthcoming “The Idea Factory: Bell Labs and the Great Age of American Innovation.”  He goes on to talk about how innovation was structured at Bell Labs, and what we can learn from it.It’s a really good piece. Gertner does a deep dive on issues that I just touched on in my December 2011 paper  “Scale and Innovation in Today’s Economy”. The key is that in their own way, big companies can be just as innovative as small companies, and perhaps more so.  We may need a return to the era of big, systematic innovation.

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.

Scale and Innovation in Today’s Economy

I have a new paper on “Scale and Innovation in Today’s Economy”. The paper was also written up in this week’s Economist, in a piece entitled “Big and Clever”

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