Book Notes: How Innovation Works

These are my notes on the book “How Innovation Works” by Matt Ridley. The notes are a combination of direct quotes and my own paraphrasing.

ELI5: Innovation is creating something new that is useful. It is different from invention, which is creating something new that is not necessarily useful. Innovation often happens by accident, and it is always a team effort. It is usually a gradual process that happens over time through trial and error. There can be a lot of resistance to innovation, because people are sometimes afraid of change. The main ingredient in the secret sauce that leads to innovation is freedom.

Innovation is gradual

Eureka moments are rare, possibly non-existent. Man-made technologies evolve from previous tech, and are not invented from scratch. This is a key characteristic of evolutionary systems: the move to the “adjacent possible” step.

If innovation is a gradual, evolutionary process, why is it so often described in terms of revolutions, heroic breakthroughs and sudden enlightenment? Two answers: human nature and the intellectual property system. Very few people have much incentive to argue that invention is gradual.

Innovation is different from invention

Tim Harford: “The most influential technologies are often humble and cheap. Mere affordability often counts for more than the beguiling complexity of an organic robot.”

Fritz Haber’s discovery of how to fix nitrogen was a great innovation. But it was Carl Bosch’s years of hard experiment, overcoming problem after problem and borrowing novel ideas from other industries that eventually led to large scale and a price that society could afford to pay.

Again and again in the history of innovation, it is the people who find ways to drive down the costs and simplify the product who make the biggest difference.

Joseph Shumpeter: “The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.”

Innovation is often serendipitous

It is a well known attribute of innovation: accidental discovery.

Innovation is recombinant

Every technology is a combination of other technologies; every idea a combination of other ideas. “Novel technologies arise by combination of existing technologies and that (therefore) existing technologies beget further technologies.”

Innovation happens when ideas have sex. It occurs where people meet an exchange goods, services and thoughts.

In biology, little mistakes (point mutations) are the fuel of evolution. But Andreas Wagner argues such small steps cannot help organisms cross valleys of disadvantage to find new peaks of advantage. Sudden shifts of whole chunks of DNA, through crossing over, or through so-called mobile genetic elements, are necessary to allow organisms to leap across these valleys. The extreme case is hybridization. Wagner: “Recombination is much more likely to preserve life — up to a thousand times more likely — than random mutation is.” Bacteria can “catapult themselves not just hundreds of miles, but thousands of miles, through a vast genetic landscape, all courtesy of gene transfer.”

Continue reading →

Passages from “The First Tycoon”

The following are passages from the book The First Tycoon by T.J. Stiles. The book is a biography of Cornelius Vanderbilt, who built a steamship and railroad empire in the mid-1800s.

More than that, it’s a history of the early corporation and the beginning of the era of modern business. This is the subject of the quotes below. While reading them, I was constantly reminded of recent (and ongoing) innovations in blockchain tokenization, corporate governance, and new financial mechanisms.

There are a ton of other interesting stories in the book — one epic business battle after another — so I highly recommend it.

On the birth of the corporate structure:

This was the birth of a kind of abstract thinking never before required in everyday life. It sparked a fierce resistance. On a daily basis, most Americans rarely interacted with corporations; they still lived in a society of farms, small businesses, and independent proprietors. Jacksonians viewed corporations in much the same way that the evangelists of the Second Great Awakening saw the Masons or popery: as a corrupt conspiracy, a mysterious encrustation on the beautiful simplicity of the true religion. As artificial beings, Gouge intoned, “corporations have neither bodies to be kicked, nor souls to be damned.”
If ever corporations were necessary, it was now, for railways were far more costly and far more complex than textile mills (almost all of which were owned by individual proprietors or partnerships).

On what stock/equity ownership represented:

They placed great emphasis on the “par value” of stock, usually set at $100 per share. This represented the original investment in a company; it was expected that the total value of all its shares would equal the cost of the physical capital—land, buildings, machinery, livestock. A stock certificate might be a slip of paper, but it was thought to represent something real, much as paper currency represented cold, hard gold that could be retrieved on demand from a bank’s vault.

On the intangible nature of corporations and the tokens that represent them:

Vanderbilt and Drew’s business careers, coming in the first half of the nineteenth century, were acts of imagination. In this age of the corporation’s infancy, they and their conspirators created a world of the mind, a world that would last into the twenty-first century. At a time when even many businessmen could not see beyond the physical, the tangible, they embraced abstractions never known before in daily life. They saw that a group of men sitting around a table could conjure “an artificial being, invisible, intangible,” that could outlive them all. They saw how stocks could be driven up or dropped in value, how they could be played like a flute to command more capital than the incorporators could muster on their own. They saw that everything in the economy could be further abstracted into a substanceless something that might be bought or sold, that a banknote or promissory note or the right to buy a share of stock at a certain price could all be traded at prices that varied from day to day. The subtle eye of the boorish boatman saw this invisible architecture, and grasped its innumerable possibilities. [. . .]
At fifty-four, Vanderbilt could look back on a career of breathtaking leaps of imagination. Steamboats and railroads, fare wars, market-division agreements, and corporations: all were virtually unknown in America when he mastered them. He understood the emerging invisible world far better than those who condescended to him. And this knowledge was about to serve him better than he could have dreamed. He was about to imagine a work of global significance—to create a channel of commerce that would help make the United States a truly continental nation. [. . .]
By 1859, he operated almost entirely through corporations; he proved himself an expert at using the stock market to concentrate capital or avenge himself on his enemies, and emerged as a master of corporate structure. He saw the corporation as just another type of business organization.

Vanderbilt split the stock of his company, doubling its par value (which was ~equivalent to equity value back then). This wasn’t accepted at the time as there was no concept of goodwill or intangibles. So Vanderbilt had someone re-value the assets to make the claim the stock dividend would still account for “real” value.

EVEN BEFORE THE COMMODORE assumed control of the New York Central, his historical legacy as a railroad king began to take shape. He would be no Leland Stanford, no James J. Hill, building transcontinental lines through thousands of miles of unsettled plains and mountains; rather, he would be a creator of the invisible world, a conjurer in the financial ether. What made him powerful—and controversial—was not his riches alone, but his mastery of the corporate golem.
For his first magic trick, he took what was one and made it two. On March 30, 1867, the Hudson River shareholders (himself foremost among them) approved his plan to nearly double the stock by issuing new shares worth $6,963,900 at par value. Called a stock dividend, it was similar to a stock split, an operation that would become common in the twentieth century. In the nineteenth century, it sparked outrage. [. . .]
Stock that did not reflect construction costs was derided as “fictitious capital,” to use the formal term—or, more commonly, “watered stock,” which called up the image of livestock encouraged to gorge on water before weighing and sale at the market. By contrast, new stock was not seen as diluting share value if it reflected actual construction or additional real estate.

On Vanderbilt’s “invisible” world of abstractions of business, money, and markets. It can be hard to imagine what life was like before these abstractions, and how big of a change it truly was to have something as conceptual as a corporation controlling so much of the economy. Tokenization of these concepts created markets where they couldn’t exist before.

For such was the world that swallowed Billy Vanderbilt: a netherworld populated by those artificial persons called corporations that masked the real persons behind them; by paper money, that masked real gold and silver; by whispered rumors, that masked the manipulations of self-serving men. [. . .]
[Vanderbilt] may have left his most lasting mark in the invisible world, by creating an unseen architecture which later generations of Americans would take for granted. The modern economic mind began to emerge in Vanderbilt’s lifetime, amid fierce debate, confusion, and intense resistance. The imagined devices of commerce gradually abstracted the tangible into mere tokens, and then less than tokens. Money transformed from gold coin to gold-backed banknotes to legal-tender slips of paper and ledger entries of bank accounts. Property migrated from physical objects to the shares of partnerships to par-value stock to securities that fluctuated according to the market, that could be increased in number at will [emphasis mine]. Like a ghost, the business enterprise departed the body of the individual proprietor and became a being in itself, a corporation with its own identity, its own character, its own personhood.
[. . .] Vanderbilt lived out the history of this abstraction, the invention of this imagined world. More than that, he took it to a new level by pioneering the giant corporation. By consolidating his New York lines into the New York Central & Hudson River Railroad, he constructed something larger than himself, not to mention virtually every other enterprise that had ever existed. It was a massive organization, one that served to depersonalize, to institutionalize, American business and life. It helped to lead the way to a future dominated by large enterprises possessing wealth and power that changed not only the economic landscape, but the political one as well.

A lot of parallels to our current situation.

Over the next 20 years — What effects will DeFi have on finance and markets? How much of the economy will be run by DAOs and how will this be exploited by the next Vanderbilts? How far can tokenization go and how will having a market in everything change our behavior?

Book Notes: Whole Earth Discipline

The following are my notes from 2014 on the book “Whole Earth Discipline” by Stewart Brand. This book was recently recommended by Marc Andreessen along with a handful of other great books related to progress and building the future.

Whole Earth Discipline: An Ecopragmatist Manifesto

Ecological balance is too important for sentiment. It requires science. The health of natural infrastructure is too compromised for passivity. It requires engineering. What we call natural and what we call human are inseparable. We live one life.

We are forced to learn planet craft — in both senses of the word: craft as a skill and craft as cunning. The forces in play in the Earth system are astronomically massive and unimaginably complex. Our participation has to be subtle and tentative, and then cumulative in a stabilizing direction. If we make the right moves at the right time, all may yet be well.

“Find (a) simple solutions (b) to overlooked problems (c) that actually need to be solved, and (d) deliver them as informally as possible, (e) starting with a very crude version 1.0, then (f) iterating rapidly.” — Paul Graham

For sensitive ecosystem engineering at planet scale, what we need most is better knowledge of how the Earth system works. We are model-rich and data-poor. We need to monitor in detail and map in detail what’s really going on, and the measuring has to be sustained and consistent. Donella Meadows laid down the commandment: “Thou shalt not distort, delay, or sequester information.” You can drive a system crazy by muddying its information streams. You can make a system work better with surprising ease if you can give it more timely, accurate, and complete information. We must build a digital Gaia.

“A project is sustainable if it is cheap enough to be the first of a series continuing indefinitely into the future. A project is unsustainable if it is so expensive that it cannot be repeated without major political battles. A sustainable project marks the beginning of a new era. An unsustainable project marks the end of an old era.” — Freeman Dyson

Climate change

One important negative feedback may be operative. The world’s land areas are absorbing more carbon dioxide than they’re releasing lately. “Believe it or not, plant life is growing faster than it’s dying. This means land is a net sink for carbon dioxide, rather than a net source.” This might be due to simple CO2 fertilization–additional CO2 stimulates plant growth.

In Jim Lovelock’s worst-case climate scenario, Earth stabilizes at 9°F warmer; a fraction of the present human population survives. But the exact outcome in such a complex system is unpredictable. Threshold effects are sneaky. At some point, though, a threshold is reached. Then in an unstoppable cascade the rain forests melt like Arctic ice, leaving savannah, scrub, and desert in their place.

Humanity currently runs on about 16 terawatts of power. We have to cut our fossil fuel use to around 3 terawatts a year, and we have to do it in about 25 years.

On the old astronomical schedule, a new ice age should have begun a couple thousand years ago. “A glaciation is now overdue, and we are the reason.”

Our terraforming thus far has been unintentional. Now that we have the curse and blessing of knowing what’s going on, unintentional is no longer an option. We finesse climate, or climate finesses us.

Continue reading →

Book Notes: Why We Get Sick

Back in December I read the book “Why We Get Sick” (1992) by Randolph Nesse and George Williams. While some of the information was outdated due to its age, overall I loved the book as it took a more wholistic, evolutionary approach to explaining sickness.

Given the global pandemic of 2019-nCoV (novel coronavirus) underway and the timely nature of my read, here are my brief notes I took from the book.

Why We Get Sick

Two kinds of explanations for disease:

Proximate explanations — Answer “what” and “how” questions about structure and mechanism. Address how the body works and why some people get a disease and other’s don’t. A proximate explanation describes a trait — its anatomy, physiology, and biochemistry, as well as its development from the genetic instructions provided by DNA.
Evolutionary explanations — Answer “why” questions about origins and functions. Show why humans, in general, are susceptible to some diseases and not to others. (Or why some parts of the body are so prone to failure.) An evolutionary explanation is about why the DNA encodes for one kind of structure and not some other.

Defenses. Mechanisms our body and immune systems designed specifically to combat an issue. A protective response to a problem. Coughing is a defense. The distinction between defenses and defects is important — defects are not preprogrammed responses, they are results of a problem. Skin turning blue from lack of oxygen is a defect.

Causes of disease:

Infection. External agents such as bacteria and viruses.
Novel environments. Environments our evolved bodies aren’t used to handling. A mismatch between our design and our environment.
Genes. Some of our genes are perpetuated despite the fact the cause disease. In the environments we evolved in, they didn’t harm us enough not to be selected out. DNA can also be mutated and create new bad genes.
Design compromises. There are costs associated with every major structural change preserved by natural selection.
Evolutionary legacies. Evolution is incremental and can’t make major changes quickly. Many of the design choices are not optimal and carry on anyway.

Signs and symptoms of infectious diseases

Symptoms of colds and other sicknesses and diseases can be unpleasant. But most of them are useful. It is an adaptation shaped by natural selection specifically to fight infection.

Fever is an adaptation to raise body temperature enough to assist with fighting infection. Body temperature is carefully regulated even during fever; the thermostat is just set a bit higher. Children who take Acetaminophen take about a day longer to recover from chicken pox. There are costs of a fever, of course. Otherwise the body would just always stay at 103F at all times. It depletes nutrient reserves 20% faster and causes temporary male sterility. Still higher fevers can cause delirium and lasting tissue damage. And because regulatory precision is limited, fever will sometimes rise too much and at other times not enough.

Continue reading →

Polaroid, Apple’s spiritual successor

I just finished 2 books on the history of Polaroid 🌈¹. A remarkable tech company with enormous success in consumer and industrial applications for decades. It’s also remarkable just how much Apple was influenced by Polaroid.

A brief history

As a child Edwin Land found a copy of the 1911 edition of Physical Optics, a textbook by the physicist Robert W. Wood. He obsessed over its contents, lingering on one chapter in particular: the polarization of light.

In 1928, Ed Land was 19 when he invented the first thin-sheet polarizer. He cofounded Land-Wheelwright Labs with a friend in 1932 after dropping out of Harvard. Their first products were polarized versions of headlights, sunglasses, etc.

They grew slowly with mostly small industrial contracts for 6 years, then reincorporated as Polaroid Corporation. During the war sales grew an order of magnitude, 80% of which went to the military for products like polarized goggles.

In 1943 Land came up with the idea for a film camera that can process right away instead of in a lab. R&D started immediately, but it wasn’t until 1948 their first camera, the Model 95, was released. It went on to sell 900k units in 5 years.

The 95 was a classic disruptive innovation: worse quality than traditional film cams, dismissed as not “real” photography, but appealing to a new market of customers. And profitable: camera for $90, film packages with 60% gross margins.

With all the new cash flow, they could plow it back into R&D. To Land, they had “. . . created an environment where a man was expected to sit and think for two years.”

Polaroid’s growth lasted decades longer, peaking in the ’80s right when, ironically, they won an historic years-long lawsuit against Kodak for patent infringement.

Apple, the spiritual successor

Back to the Apple comparison. The similarities are clear: from values, to marketing, to org structure, to product launches and demos.

Just like Jobs, Land was at the top of every invisible organizational chart. An anonymous former colleague: “Don’t kid yourself, Polaroid is a one-man company.”

When faced with scientific illiteracy or lack of imagination, Land resorted to a restrained bit of showbiz. As it turned out, he was strikingly good at explaining his work to people, and powerfully persuasive.

Ed Land was one of Jobs’ childhood heroes. Jobs met with him later and connected when when Land said his products have always existed, they were just invisible: waiting to be discovered. Apple exemplified Land’s motto “Don’t do anything that someone else can do.“

Polaroid’s downfall started long before the digital apocalypse with their sidelining of Land in the ’80s. His final mistake was giving little thought to his own succession and the future of the company in the new generation. When they all but kicked Land out, Jobs met with and scolded management, saying Polaroid would turn into “a vanilla corporation”.

And it did. Jobs would take this lesson to heart many years later with his own succession plan.

Snapshot

Evan Spiegel is also heavily influenced by Land and Polaroid. But alas, Snap is not a camera company—they’re a communication company. And I think they’d do better in the future remembering that.

Inspiration, not imitation.

Polaroid Variable Day Glasses; Snap Glasses.

I’ll finish with a Land quote from 1970: “We are still a long way from the… camera that would be, oh, like the telephone: something that you use all day long … a camera that you would use as often as your pencil or your eyeglasses.”

“Instant: The Story of Polaroid” by Christopher Bonanos (2012). “Land’s Polaroid: A company and the man who invented it” by Peter Wensberg (1987) ↩︎

Books: 2017 Reading List

Competing Against Luck — finally a full writeup on “Jobs Theory”, and required reading for anyone involved in product strategy & UX design (i.e. all startups).

The Change Function — good, simple model to think about how valuable a new innovation is (all about UX, or if (perceived crisis > cost of adoption)).

Marketing High Technology — best book on distribution you can find, for technology or otherwise.

Shoe Dog — Great story; wish he would have spent more time in the later years of Nike’s growth.

Doing the Impossible — too dense overall, but I loved hearing the story of the moon mission from the inside, especially from such a talented project manager that made it happen.

Scale — not as good as hoped, but a good “skim” with lots of interesting ideas around a theme.

21 Irrefutable Laws of Leadership — great leadership advice + stories to go along with, Dale Carnegie style (but could have been much shorter).

Hard Drive — 3rd reading of the best bio of Bill Gates & Microsoft’s early years.

The Elements of Computing Systems — I never had formal CS education so this was a great practical explainer, from translating binary to assembly, to how an OS works.

A Mind at Play — always been a huge fan of Claude Shannon’s work, mind, and humility.

Turing’s Cathedral — a little long in places, but great overall history of computing & early people who shaped it.

Softwar — Reading now. Interesting insights about early Oracle, also gives me new appreciation for Ellison. [Update: I would not recommend this book. First part is good but last half rambles on, fawning over Ellison with random stories. “The Difference Between God and Larry Ellison” is much better.]

Book Notes: Benjamin Graham

As with my other book notes, some passages are direct quotes and others are my own paraphrasing/summaries. Any footnotes or [brackets] are my personal comments.

The Intelligent Investor (1973) + Security Analysis (1934), by Benjamin Graham

To invest intelligently in securities one should be forearmed with an adequate knowledge of how the various types of bonds and stocks have actually behaved under varying conditions—some of which, at least, one is likely to meet again in one’s own experience.

An investment operation is one which, upon thorough analysis promises safety of principle and an adequate return. Operations not meeting these requirements are speculative. An investment operation is one that can be justified on both qualitative and quantitative grounds.

We speak of an investment operation rather than an issue or a purchase, for several reasons. An investment might be justified in a group of issues, which would not be sufficiently safe if made in any one of them singly. In our view it is also proper to consider as investment operations certain types of arbitrage and hedging commitments which involve the sale of one security against the purchase of another. The safety sought in investment is not absolute or complete; the word means, rather, protection against loss under all normal or reasonably likely conditions or variations. A safe stock is one which holds every prospect of being worth the price paid except under quite unlikely contingencies.

Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook. There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are: (1) speculating when you think you are investing; (2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose.

The defensive (or passive) investor will place his chief emphasis on the avoidance of serious mistakes or losses. His second aim will be freedom from effort, annoyance, and the need for making frequent decisions. The determining trait of the enterprising (or active, aggressive) investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than average.

Obvious prospects for physical growth in a business do not translate into obvious profits for investors. The future of security prices is never predictable.

In his endeavor to select the most promising stocks wither for the near term or the longer future, the investor faces obstacles of two kinds—the first stemming from human fallibility and the second from the nature of his competition. He may be wrong in his estimate of the future; or even if he is right, the current market price may already fully reflect what he is anticipating. In the area of near-term selectivity, the current year’s results of the company are generally common property on Wall Street; the next year’s results, to the extent they are predictable, are already being carefully considered. Hence the investor who selects issues chiefly on the basis of this year’s superior results, or on what he is told he may expect for next year, is likely to find that others have done the same thing for the same reason. To enjoy a reasonable chance for continued better than average results, the investor must follow policies which are (1) inherently sound and promising, and (2) not popular on Wall Street. Continue reading “Book Notes: Benjamin Graham” →

Book Notes: Innovation and Entrepreneurship

As with my other book notes, some passages are direct quotes and others are my own paraphrasing/summaries. Any footnotes or [brackets] are my personal comments.

Innovation & Entrepreneurship (1985), by Peter Drucker

Innovation and Entrepreneurship “The entrepreneur,” said the French economist J. B. Say around 1800, “shifts economic resources out of an area of lower and into an area of higher productivity and greater yield.”

All new small businesses have many factors in common. But to be entrepreneurial, an enterprise has to have special characteristics over and above being new and small. Indeed, entrepreneurs are a minority among new businesses. They create something new, something different; they change or transmute values. An enterprise also does not need to be small and new to be an entrepreneur. Indeed, entrepreneurship is being practiced by large and often old enterprises.

The entrepreneur upsets and disorganizes. As Joseph Schumpeter formulated it, his task is “creative destruction.” They see change as the norm and as healthy. Usually, they do not bring about the change themselves. But—and this defines entrepreneurship—the entrepreneur always searches for change, responds to it, and exploits it as an opportunity.

When shifting resources to a more productive area, there is a risk the entrepreneur may not succeed. But if they are even moderately successful, the returns should be more than adequate to offset whatever risk there might be. One should thus expect entrepreneurship to be considerably less risky than optimization. Indeed, nothing could be as risky as optimizing resources in areas where the proper and profitable course is innovation, that is, where the opportunities for innovation already exist. Theoretically, entrepreneurship should be the least risky rather than the most risky course. [There are “hidden” risks of not being an entrepreneur.]

“Innovation,” then, is an economic or social rather than a technical term. It can be defined the way Say defined it, as changing the yield of resources. Or, as modern economists would tend to do, it can be defined in demand terms rather than in supply terms: changing the value and satisfaction obtained from resources by the consumer. Continue reading “Book Notes: Innovation and Entrepreneurship” →

How to separate luck and skill

These are some of my notes from the book “The Success Equation” by Michael Mauboussin. This book was spotted on Warren Buffett’s desk in this tour of his office. There’s lots more interesting stuff in the book, but these notes in particular answer the question “How do you separate luck and skill?” We’ll start off with some definitions:

Luck is a chance occurrence that affects a person or a group (e.g., a sports team or a company). Luck can be good or bad. Furthermore, if it is reasonable to assume that another outcome was possible, then a certain amount of luck is involved. In this sense, luck is out of one’s control and unpredictable. Randomness and luck are related, but there is a useful distinction between the two. You can think of randomness as operating at the level of a system and luck operating at the level of the individual. Luck is a residual: it’s what is left over after you’ve subtracted skill from an outcome.

The definition of skill depends on how much luck there is in the activity. In activities allowing little luck, you acquire skill through practice of physical or cognitive tasks. In activities incorporating a large dose of luck, skill is best defined as a process of making decisions. Here, a good process will have a good outcome but only over time. Patience, persistence, and resilience are all elements of skill.

Separating luck and skill

Luck-Skill Continuum
At the heart of making this distinction lays the issue of feedback. On the skill side, feedback is clear and accurate, because there is a close relationship between cause and effect. Feedback on the luck side is often misleading because cause and effect are poorly correlated in the short run.

In most cases, characterizing what’s going on at the extremes is not too hard. As an example, you can’t predict the outcome of a specific fair coin toss or payoff from a slot machine. They are entirely dependent on chance. On the other hand, the fastest swimmer will almost always win the race. The outcome is determined by skill, with luck playing only a vanishingly small role.

Continue reading “How to separate luck and skill” →

Book Notes: The Visible Hand

The Visible Hand: The Managerial Revolution in American Business was written by Alfred Chandler and released in 1977. It’s a great history and study on business and why it exists the way it does today. For some books I read, I transcribe and summarize my highlights/notes in order to better learn the material and for future reference. Below you’ll find my (very long) summary of The Visible Hand. Some passages are direct quotes and others are my own paraphrasing/summaries. So if you’re interested in this sort of topic, send this baby to Instapaper, plop down on the couch, and enjoy.

The Visible Hand

Modern business enterprise is easily defined, having two specific characteristics: (1) it contains many distinct operating units and (2) it is managed by a hierarchy of salaried executives. Each unit has its own administrative office, set of books and accounts. Each could theoretically operate as an independent business enterprise. Such enterprises did not exist in the U.S. in 1840. By World War I this type of firm had become the dominant business institution. It was the institutional response to the rapid pace of technological innovation and increasing consumer demand.

This study is a history, moving chronologically. Before entering the historical experience, here is a list of general propositions to make more precise the primary concerns of the study:

The initial appearance of modern business enterprise:

Modern multiunit business enterprise replaced small traditional enterprise when administrative coordination permitted greater productivity, lower costs, and higher profits than coordination by marker mechanisms. [This was due to both corporate efficiency and economies of scale.]
The advantages of internalizing the activities of many business units within a single enterprise could not be realized until a managerial hierarchy had been created. An enterprise without such managers remains little more than a federation of autonomous offices.
Modern business enterprise appeared for the first time in history when the volume of economic activities reached a level that made administrative coordination more efficient and more profitable than market coordination. It came with new technology and expanding markets.

Growth of the modern business enterprise:

The hierarchy itself became a source of permanence, power, and continued growth.
The careers of the salaried managers who directed these hierarchies became increasingly technical and professional. Training became longer and more formalized.
The management of the enterprise became separated from its ownership. Stockholders didn’t have the influence, knowledge, experience, or commitment to take part in the high command.
Career managers preferred policies that favored the long-term stability and growth of their enterprises to those that maximized current profits. For salaried managers the continuing existence of their enterprises was essential to their lifetime careers.
As the large enterprises grew and dominated major sectors of the economy, they altered the basic structure of these sectors and of the economy as a whole.

Continue reading “Book Notes: The Visible Hand” →