Sunday, October 10, 2010

Institutional and technological inventions and innovations compared

In my last posting, beginning a discussion of The Company: A Short History of a Revolutionary by Micklethwait and Wooldridge, I described the invention of the modern limited-liability stock company in British legislation of 1862. I think this might be described as the invention of a social technology or institutional technology.  That is, the modern corporation is a way or organizing people to utilize resources to achieve a human purpose, but its invention was not the invention of a physical device or material, but rather of a socio-economic institution.

In Brian Arthur's book, The Nature of Technology: What It Is and How It Evolves, he considers the growth of technology as a cumulative process in which inventions build on previous inventions. The modern large-scale corporation shares that property. There is a history of organization of men and resources to carry out trade or manufacturing that goes back thousands of years. Importantly, lessons learned in the management of large scale military and religious organizations could be applied to the management of corporations involved in service or manufacturing industries.

As Micklethwait and Wooldridge point out, the corporation became a widely used institutional form because changes in manufacturing technology and transportation technology allowed great benefits to be achieved by scaling up production and distribution of products if and only if the larger enterprises could be managed effectively. The corporation was more efficient in dealing with the information requirements of large scale manufacturing and distribution of goods and services than the market. (With the new information and communications technologies of the latter part of the 20th century, markets are increasingly competitive for many information processes and we are seeing restructuring with some firms downsizing and focusing on core competencies while using Internet mediated markets to outsource many non-core activities.)

One of the questions of economic analysis is whether to regard innovation as exogenous or endogenous to the economy. The question is whether to include technological invention and innovation within models of the economy or to leave them outside as perceived time changing boundary conditions.

The Xerox, in my opinion, might be seen as an exogenous innovation, driven by an inventor who recognized a physical property of materials and saw how it might be exploited to perform a useful purpose with real economic value that might be appropriated from the users to build a company.

Semiconductors, in my opinion, might be seen as endogenous. There was a need to amplify telephone signals in long distance lines, especially undersea cables, which was only poorly met by vacuum tube electronics which failed frequently and required costly replacement services. It was recognized that solid state devices might well be longer lasting and more reliable if they could be developed. Thus Bell Labs and other research laboratories were chartered to do basic research on solid state physics, leading eventually to the invention of solid state electronic devices.

I suppose that the same analytic distinction might be applied to the invention of institutions. The creation of the legislation allowing modern corporations would seem to be an induced innovation in which Parliament sought a new institutional model that would serve to expand the industrial revolution. The earlier effort by Alexander Hamilton to create a National Bank for the United States might be seen as a similar induced innovation.

On the other hand, a lot of Internet based institutional inventions -- eBay,, social networking -- might be seen as exogenous, in that they were not sought by the major pre-existing institutions, but rather invented by "outsiders" and developed into large institutions in response to the benefits that they conferred.

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