The Uses of Diversity. David Ellerman
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 has not been imitated. Corporate management wants to expand the empire directly under its thumb; spin-outs to an associated group do not seem to fit the bill. After Hatsopoulos died, these empire-building proclivities set in and many of the Thermo companies were combined in the Fisher Scientific Company that brags about having 70,000 employees worldwide.
Yet another possibility arises when most of the technology is embodied in highly mobile “human capital,” where independent venture capital is available, and where the economic environment has reached a certain critical mass of diversity. Then as in California’s Silicon Valley, Boston’s Route 128, or Taiwan’s Silicon Gulch17 (not to mention the fervent period of the Industrial Revolution in England), many of the technological possibilities can be fulfilled by breakaways and spin-offs that cannot be prevented by empire-building management in the original company—management that sees “Big things turning into smaller things” as “decay and disintegration” rather than “birth and renewal of vigor” (Jacobs 1980, 68).
And finally, there are many service sector enterprises with small capital requirements where management cannot stop spin-offs and breakaways. In these last two cases, spin-offs are possible not because they are compatible with the legal form of the enterprise but because much of the business is embodied in the human knowledge and skills of the staff who walk out the door at the end of each working day and have the choice of not coming back.
The Difference Democracy Makes
The enemies of diversification are not just one-sided economic theories that emphasize the deepening of old work rather than the creation of new work (to put it in Jacobs’s terms). Empire-building proclivities also thwart diversity, and those tendencies are evident both politically and economically. But the political grip of those proclivities will depend on the form of government. In an autocracy where power comes from above, the sovereign will seek to maintain and perhaps even expand the realm.18 But if power comes from below as in a political democracy (leaving aside the half-free and half-slave antebellum America), there are few grounds to deny the expressed wish of the bulk of the population in a part of a country to become autonomous or to secede. Jacobs cites the early twentieth-century peaceful secession of Norway from Sweden as an example (the separation of Singapore from Malaysia might also be mentioned), and she viewed the possible secession of Quebec with equanimity, if not support (see Jacobs 1980).19
The same dynamics of power and legitimacy are at work in an economic polity. In a conventional company, where power comes from above, management has little reason to sponsor spin-offs and would have little cause to accede to any expressed desires coming from below to use the firm’s technological and business capabilities for new enterprise creation through spin-offs and breakaways. When the preconditions of a Silicon Valley are present or in labor-intensive service sectors, then it may happen anyway—not because of the form of business but in spite of it.
In a democratic company (e.g., an industrial cooperative) where power comes from below, then management has less of a leg to stand on to oppose new enterprise creation through spin-offs and breakaways.20 Pigou specifically mentioned that “associations of workers combined together in small