The Bear’s Lair: Ferment Brings Us The Future

Large organizations are almost never innovators. You can quote the occasional exception, such as the Manhattan Project, but even in space exploration the ability of Elon Musk’s SpaceX, on a tiny budget, to outdistance NASA in rocket design, shows that big is generally intellectually barren. Throughout history, the periods of greatest innovation have coincided with the periods of market chaos, with a myriad of small competitors and no established standards. We need to figure out a way to encourage such periods.

As has been well documented, the last decade has seen a dearth of start-ups. On Census Bureau data the establishments’ entry rate has declined from around 15% of existing establishments in the late 1970s to around 10% in the years to 2014, with the drop occurring in two stages in the years of Bill Clinton and Barack Obama. Even up to 2017, while single-person company formation has held up fairly well, the formation rate of companies with more than a tiny number of employees has dropped quite significantly in the last 20 years, given the increase in the population.

At present, the California tech sector has shown signs of increasing maturity, even senescence. Long-established venture capital companies fund round after round of private financing for companies that rarely go public, while the very largest tech companies have in less than two decades become true behemoths, with Google and Facebook having over 60% of the online advertising market between them, for example, and tending to buy out or squeeze out competition.

The rate of innovation has declined, the industry is showing signs of a stultifying conformism, especially in political matters and real estate has become impossibly expensive for new entrants to the business. Industries can carry on like this for a great deal of time (though there must surely be a weeding out of the perennially unprofitable in the next downturn) but you would not expect great innovation to come from such a milieu. Google and Facebook are very similar to the 1950s General Motors, concentrating innovation on tail fins, lobbying like crazy, celebrating conformism, and declaring that’s “What’s good for General Motors is good for America.” That kind of industry produces the Edsel and loses market share to imports.

The truly innovative business environments are very different. In the early Industrial Revolution, the textile companies employing the new steam technology were tiny, generally just a few thousand pounds in capital, with large companies not appearing in Britain until the 20th Century. Even when a company became substantial, like the elder Sir Robert Peel’s Peel, Yates (which became the largest cotton mill in the world) the partnership was dissolved on Peel’s retirement in 1817 with the assets distributed to partners; there was no attempt to create a long-standing institution.