Creative Ossification
Companies start out small and rambunctious, and then, if they get big, they grow more cautious. They become too big to flourish, or at least too big to maximize. That means that big companies are leaving money on the table. And come to think of it, if we extend the point to other institutions, that means that big governments, too, are leaving money on the table, as they stymie potential economic growth in their countries. So shareholders and citizens, both, lose out. There are ways to fix this, but first, let’s take a closer look at this syndrome, too big to flourish.
Y Combinator partner Jared Friedman points out that many of the hottest and/or trailblazing-est companies were, in his words, “between questionable and flat-out illegal in their early days.” They were disruptors, living by the entrepreneurial-piratical dictum of hacking, of moving fast and breaking things. (Plenty more companies, present as well as past, can be put into this category, including, in the view of many litigants, the hot AI companies.) Others in Friedman’s tweet/X thread, such as Robert Scoble, reinforced his point, recalling the risk-aversion of big established companies. For instance, Microsoft, founded in 1975, rocketed to prominence and controversy in the 1980s, and yet in the 90s, it had a fateful anti-trust collision with the U.S. Justice Department. After that, bruising encounter, the company built up a giant legal department dedicated, seemingly, to “just saying no.” In fact, most, if not all, big companies have had some sort of traumatic legal/regulatory experience that makes them less willing to take risks.
So that seems to be the cycle: Companies get their start as swashbucklers, and perhaps corner-cutters, and then, after awhile, if they’re still in existence, they become “housebroken”—they no longer wish to fly, as it were, the corporate Jolly Roger. That doesn’t mean that the company can’t still be successful, but it does suggest that it has reached the flatter upper part of the S-curve, as growth downshifts, from exponential to perhaps arithmetic. To put this another way, once a company is big and established—including the instantiation of a big legal unit—it will likely miss out on opportunities. (As well as, of course, liabilities—in ye olden days, plenty of actual pirates swung from yardarms, or went down to the vasty deep, unremembered; it’s the pirates who succeeded and survived, at least for a while, that we most remember, and that selective remembrance biases our understanding of the risk/reward ratio of buccaneering.)
One manifestation of this risk-aversion has been the difficulty big tech companies have had developing AI. As Bloomberg News reported in July, many of the smartest AI techies are Google alumni. As in, they developed AI after they left Google. They had their AI ideas at Google, but were unable to get clearance from the company to proceed with their AI plans. With enough lawyers on hand, there’s always a reason why something can’t go forward. So these AI nerds quit Google and started their own companies, which now boast a cumulative value of $4 billion. To be sure, a few billion is not much compared to parent company Alphabet's current market cap of $1.72 trillion. And yet one might recall that a mere quarter-century ago, Google was just a tiny upstart against such big search engines as Altavista, Excite and Lycos. In a fast-fluxing environment, valuations can change swiftly.
Indeed, in another piece headlined, “Tech’s AI Armies Are Huge, Yet Struggling to Innovate,” Bloomberg further reports that Amazon has had the same problem as Google. That is, more is actually less. And that explains why Amazon has had so much trouble with Alexa, which debuted in 2014 as an early stab at AI, but which now is an also-ran. The lesson seems to be that in this realm of cutting-edge technology, bigness and nimbleness just don’t go well together.
We could say that this is a form of creative destruction, but it’s perhaps more accurate to say, with apologies to Joseph Schumpeter, it’s a form of creative ossification.
So what can we conclude? One thing’s for sure: There’s money in diversity. Not, of course, the diversity of DEI (Diversity, Equity, and Inclusion)-type human resource programs. Yes, DEI has been lucrative for a favored few, but it’s hard to see how it results in any sort of overall productivity increase—and it’s easier, in fact, to see how it subtracts wealth. Instead, the fruitful diversity is the proliferation of institutions and systems. It’s within that kind diversity that opportunities arise: opportunities for experimentation and arbitrage. To be sure, there are risks, too, because let’s face it: Most new ideas are bad ideas. So the challenge is tapping into the energetic upside while limiting the damaging downside.
The Disruptor’s Dilemma
As we think of institutional structures and their strictures, we might recall the work of the British naturalist D’Arcy Wentworth Thompson (1860-1948), who observed of mollusks, crustaceans, and other shelled creatures, Form enables growth, but form limits growth. That is, the form of a shell enables the organism to survive and grow, but only up to a certain point—the largest shelled creature on earth, the sea turtle, maxes out at eight feet. Beyond that size, the laws of physical biology stop growth and other forms of evolution.
Indeed, as we move to the realm of Homo sapiens and the institutions mankind has created, we see variations on that theme, as bureaucratization sets in, limiting economic exuberance and thus expansion. Many have written smartly about aspects of this syndrome, giving us important concepts such as Parkinson's Law and the Peter Principle. More recently, in The Innovator's Dilemma, the late Clayton Christensen added another layer of understanding. As Christensen observed, established companies don’t always utilize a good idea. Why not? Because they figure that the new idea could cannibalize an existing product. Such reasoning can be persuasive on the margin, and yet it’s usually a losing hand in the end. Classic example: Xerox and digital imaging. Xerox pioneered the new technology, but didn’t want to market it, because doing so would undercut sales of its familiar Xerox machines. Xerox’s reticence left it to other firms, such as Hewlett-Packard, not inhibited by affection for legacy products, to charge into the market for digital imaging, thereby demolishing Xerox. So we could combine Friedman’s point on youthful risk-taking with Christensen’s point about mature risk-aversion and speak, overall, of the Disruptor's Dilemma. That is, what starts out small and risk-taking becomes big and risk-avoiding.
Governments and Risk
Now can apply this point to other organizations, such as the U.S. federal government, the largest (at least in dollar terms) bureaucratic organization in the world. Does the USG allow for experimentation? Sometimes it does. That was the case with, for instance, the Manhattan Project, eight decades ago, or the Pentagon’s DARPA today. Yet for the most part, the answer is, No, the USG does not encourage innovation—often, in fact, opposes it.
One can even say that much of the time, this operational conservatism is somewhere between proper and inevitable. That is, the government ought to be cautious and sober-minded, checked and balanced as it is, both by the Constitution (good) and by accumulated interests (not always so good). Fair enough. But there’s a tradeoff, then, in terms of the economic-unleashing power of disruption. That is, the more stolidity, the less creativity. Indeed, it does seem that today, the U.S. government is suffering from what Jonathan Rauch called “demosclerosis.” Government as a pitiful helpless giant.
So what to do? The most obvious answer is to get the government out of the way and let private-sector players take the risks. And that, of course, is happening all around us, as Friedman reminds. These capitalistic animal spirits are what give the U.S. economy the somewhat raffish fizz that distinguishes it from Europe’s, or even from that of next-door Canada. (The outstanding contemporary exemplar of this American raffishness is Elon Musk: Born in South Africa, he first moved to Canada, and then to the U.S., where his “hardcore” energy has been on full display, as seen in this excerpt from a forthcoming Musk biography.)
Indeed, it seems likely that American gray-area freedom will sharpen the economic contrast, as time goes by, between the U.S. and China. Under Xi Jinping's increasingly Brezhnev-y rule, that country is not only scaring away tourists and investors, but also stultifying its day-to-day existence.
But there’s still the issue of optimum governance here in the U.S. Can and should the USG encourage/allow for more imagination? Once again, there’s good reason for Uncle Sam to be careful. And yet, at the same time, down that seemingly prudent path is the mire of stagnation.
Laboratories of Destiny
Happily, even if the feds are choked, there’s still a possible solution,. Namely, federalism, or, to be blunter about it, states' rights. Let the states be the “laboratories of democracy,” as Justice Louis Brandeis wrote so electrically back in 1932. (And as I have written about, with less electricity, here). If Uncle Sam can’t be the equivalent of Uber, or YouTube, or the other cutting-edge companies Friedman cites, maybe an American state could be the disruptor, or, more precisely, facilitate the disruption. That is, a state could loosen the legal strings, letting entrepreneurs and perhaps other kinds of activists try something new. Whether the “lab-experiment” works out for good or ill, the effect would be compartmentalized within the single U.S. state. So if need be, the policy could be terminated without risking the national whole. Or, of course, if the experiment works, it could be replicated.
Such experimentation is what Nevada did on gambling; interestingly enough, the hinge-year, when the state legalized casinos, was 1931, almost the same time that Brandeis was extolling state-based experimentation. As Nevada has since proved, states aren’t just laboratories of democracy, but also laboratories of prosperity. To be sure, Nevada’s isn’t the only way, but it’s one way.
Indeed, even as the federal government has grown larger and more intrusive, the states have never given up their role as experimenters. For instance, two-third of the states have legalized marijuana in at least some form. Yet interestingly, pot is still illegal under federal law. So there's a profound contradiction, between the national government and state governments. It's an unresolved issue, legally and constitutionally. For its part, the liberal-minded Biden administration doesn't seem to be concerned about the prevalence of pot. So it will be interesting to see what, if anything, a future Republican administration will seek to do about pot.
And there’s more. One state, in particular, is pushing the drug envelope. In 2020, by popular referendum, the voters of Oregon enacted Measure 110, which decriminalizes hard drugs, including meth, LSD, and heroin. We should note that decriminalization is not the same thing as legalization, although close-up reporting from the streets of Portland suggests that now, pretty much anything goes. Many observers, of course, will be horrified by what’s happening in Oregon. In response, we can say that maybe we’re horrified, too, and yet Oregon’s right to set its own course is right there in the Tenth Amendment—amendments being, of course, just as much a part of the Constitution as the original document.
So what state could be the next Nevada? Or Oregon? That remains to be seen, but a good target for disruption, as I have argued here and here, would be the dead-handed U.S. Food and Drug Administration. The state that disrupts the FDA—at least as the federal agency operates within that state’s own borders—would be doing itself, and the world, a favor. Patients and investors alike would applaud, as healthcare choices and outcomes improved, and vast economic potential was unleashed. That’s the theory, at least. But would it work in practice? There’s only way to know for sure: test it out. That’s what the states-as-laboratories are for. If a state were to legalize medical freedom and it were to somehow boomerang, well, that would be good to know. A failure would’t invalidate the concept of liberty, of course, but it might teach us something about implementation. As they say, if at first you don’t succeed, try, try again.
A Further Illustration
We can add that edgy experimentation can even occur on a smaller level than the states. On August 27, netizens were amazed to see video of a police vehicle plowing through a barrier set up by green activists along a highway in Nevada, thereby blocking traffic. The barrier was illegal, of course, and yet by now we’re used to seeing the humans committing such crimes treated with deference, never mind that motorists are inconvenienced, commerce slowed—and perhaps even ambulances stopped.
In general, authorities have learned the hard way that anything other than kid glove-treatment toward such lawbreakers leads to cries of “police brutality” and costly lawsuits. Except in this case, the cops didn’t get that memo; they charged in. A closer look at the cops in question explains why: The police that did the barrier-busting were rangers from the Pyramid Lake Paiute Tribe. Which is to say, as members of an Indian reservation, the law enforcers have at least some autonomy and their own legal system—to which the ACLU might not have much standing. No doubt the Nevada case will be litigated, and yet on such matters, Native Americans have plenty of law and precedent on their side. In the meantime, many of us can admire the Nevada rangers for standing up for the rule of law—and for normalcy on their territory. Indeed, it might make us wonder: What other useful functions can be managed from within a more conducive legal framework?
The big takeaway is that if we want creativity and exuberance—including, yes, some envelope-pushing—we need a legal and political system that makes room for it. Yes, form allows growth, but form then limits growth. So what we need is a constantly evolving form. And that suggests much greater latitude for the states. Or, to put it more bluntly, more freedom.
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