We talk a lot about technological change but organizations are evolving, too, partly (maybe mostly) due to technology but this line of thinking also stands on its own. No less a celebrated thinker than Peter Drucker reserved a special place for organizational evolution in the innovation universe.
Recently there has been some progress on measuring changes to organizations, most prominently from a new book called *Capitalism without Capital* by Jonathan Haskell and Stian Westlake, which argues that what they call intangible assets are growing in importance.
Intangible assets are ideas, knowledge, aesthetic content, software, brands, networks and relationships. These sit collectively in the heads of employees of an organization and in some ways sit between theirs heads in that organizations are webs of relationships and collaboration. The framework the authors establish is that intangible assets have four qualities: they scale easily, their costs are sunk (you can’t sell them!), they are synergistic, in that the combination of these assets supercharge their effect and they create positive spillovers outside of the firm itself. Intangible assets are most effectively exploited by large organizations.
Other research supports this by pointing out firm margins are increasing but startup rates have declined! This paints a complicated picture and I wanted to find someone to help me think it through.
My guest today, Arnold Kling, has been an early commenter on these trends, publishing essays in the 90s and early 00s discussing declining variable costs (link) and the intangible economy (link to book). He has an incredibly unique perspective in that he has a mainstream economics education (completing his PhD dissertation at MIT under Nobel Laureate Robert Solow) but also started, grew and sold an Internet business in the 90s (see his story here).
There were three themes to the conversation that I thought were excellent.
- Management! Perhaps THE thing that distinguishes the modern firm from the (soon to be) extinct is the ability to manage software development. It is hard and a distinct business process that needs to be mastered. The best companies of today take the ability to do great software and apply it to many different businesses. One model of Silicon Valley is that it is a repository of software engineering and management expertise to be dumped on every industry on earth.
- Firms are changing and the reading Capitalism Without Capital is a good way to learn about how. But Arnold argues that some of this has always been there and we are just measuring things better (though still not perfectly).
- I didn’t even realize it until this conversation but I’ve been drawn to Arnold’s work because it makes sense to me in a way most economics doesn’t outside of a few core concepts. Economics tends to glide over what makes businesses work. Arnold, as a former entrepreneur himself, makes no such mistake.
Twenty years ago, management in book retailing meant deciding where to place stores in shopping centers, deciding which books to stock, and creating displays that attracted customers. But now, Amazon has instead made the management of software teams crucial for its book retail business. What we mean today by “management in book retail” is different from what it used to mean.
Economic textbooks describe business leaders as if their job were to aggregate machines and homogeneous workers to produce output. Sixty years ago, this might have been a fair approximation. At that time, many large firms had been started and were being run by men without much formal education, relying instead on experience and grit.
But today, business strategy is more complex. Getting the most out of highly-skilled employees is more challenging. Making the best use of computer technology requires a careful analysis of how new developments affect the business environment.