On corporate America and innovation

In writing this post, I feel that it is necessary to first state that I have a pretty deep-rooted disdain of "Corporate America" in its traditional sense. I think that large corporations--especially those that are publicly traded--tend to lose sight of the things that made their businesses great to begin with, focusing on short-term profitability and several other often-misguided metrics at the expense of what is actually best for the company over the long term.

Meanwhile, employees are consistently minimized, deliberately made to feel as though they are replaceable cogs in the corporate machine, always with an emphasis on process over results. While I appreciate the economic benefits that large corporations with their economies of scale can provide, I think there are often devastating emotional and psychological costs to the employees (and often the customers) of those companies.

Furthermore, true innovation tends to suffer as large corporations gradually become risk-averse and afraid to be great, afflicted with the dreaded curse of mediocrity. This last point is what leads me to write today's post. In a brilliant post on his "Overcoming Bias" blog (which I will post in its entirety because it's short), economist Robin Hanson writes about one of the more insidious roles that large corporations play in our economy, often when we're not looking.

To run an airline, you need not only pilots, airplanes, and fuel, you also need landing rights at airports matching your planned routes and times. Today airlines must buy these rights one at a time via trades, and so risk ending up with mismatched slots that they cannot use.

Thirty years ago economists designed and tested package auctions to overcome this problem. In such auctions people can bid for the package of landing slots desired, and be assured of getting either all or none of the items in their desired package. Lab experiments have documented their efficiency advantages.

At a conference yesterday, someone said that the big airlines have consistently blocked attempts to field such auctions. The reason: because they buy more total slots, big airlines can more easily put together the packages they need. Big airlines oppose innovations that would make it easier for small airlines to compete with them.

This seems similar to how last year big movie studios got Congress to change laws to block the introduction of movie futures. Such futures would make it easier for small movie studios to get funding and to convince viewers that they had a product worth seeing.

Better economic institutions help people to better coordinate. But big firms suffer this problem less, because they can more easily coordinate in the absense of such institutions. Even in the US today, big firms (often with the assistance of law and government) block a great deal of institutional innovation, in order to retain this advantage.

As if there weren't already enough barriers to entry into many industries, it's clear that the largest corporations are also capable of using their political clout (due simply to their size) to squeeze out smaller competitors in ways like those documented here. Innovation (and the economic efficiency and prosperity that innovation could provide) often ends up as collateral damage in the process.

While Hanson uses two very apt analogies, I think there is no more devastating (and wide-reaching) example of this dynamic than the auto industry. The internal combustion engine that we continue to use is incredibly old technology, and we could all enjoy the benefits (both economically and, you know, from a foreign policy standpoint) of a push to kick our oil habit. But far too many (very large) companies have far too much at stake here, and true innovation in the auto space (say, something like this) has thus lagged generations behind our technological capability.

Unfortunately, it doesn't seem like any change in this "large corporations rule the world" dynamic is imminent. Mish Shedlock posted over the weekend about Illinois' schizophrenic and self-defeating stance with respect to corporations, one which does absolutely nothing but harm small business competitiveness. In a recession that has already been devastating to small business, Illinois somehow feels the need to give them yet another big middle finger. That's great for large publicly traded companies' bottom lines (and CEO paychecks), but it's not necessarily good for America or the economy. Such is the state of our current political environment.

While there are definitely several large companies who buck the innovation-blocking trend that Hanson has cited, and much of my personal disdain for corporate America is admittedly emotional based on personal experience (and the experiences of several close friends and relatives), any of us who have spent hours on the phone with a "customer service" representative who dryly recites corporate policy can certainly sympathize with my feelings. But until further notice, we'll probably just have to get used to it. Unless, of course, we all feel like trying to start our own businesses...

[Overcoming Bias]