What would Galbraith think about Google?

I’ve been grazing along the shelf of my old Penguin economics texts and stumbled on this quote from J.K.Galbraith’s (1952) [amazon_link id=”1560006749″ target=”_blank” ]American Capitalism: The Concept of Countervailing Power[/amazon_link] (in M.A.Utton’s [amazon_link id=”0140801723″ target=”_blank” ]Industrial Concentration[/amazon_link]): “The modern industry of a few large firms is an excellent instrument for  inducing technical change. It is admirably equipped for financing technical development and for putting it into use. The competition of the competitive world, by contras, almost completely precludes technical development.”

[amazon_image id=”B0010JYWD6″ link=”true” target=”_blank” size=”medium” ]American Capitalism[/amazon_image]  [amazon_image id=”0140801723″ link=”true” target=”_blank” size=”medium” ]Industrial Concentration (Modern Economic Texts)[/amazon_image]

Galbraith is talking complete nonsense, of course. As this little textbook points out in the next paragraph: “The supposed antithesis between price competition and innovation is false: they are different forms of the same competitive process. Innovation is competition.” Many is the oligopolistic industry that has failed to innovate. As Will Baumol pointed out in his book [amazon_link id=”069111630X” target=”_blank” ]The Free Market Innovation Machine[/amazon_link], big firms tend to do incremental innovation, while radical innovation tends to come from small entrants.

This is the heart of the competition debate about Google etc. Will some new entrant come along an torpedo it in the search market, or has it through its scale effectively foreclosed new entry? Critics of the EU competition authorities’ assault on Google (including this week Barack Obama – but listen here to Martha Lane-Fox demolish him) point to its continuing record of innovation; but from another perspective, that looks like it leveraging its scale advantages into new markets, something dominant firms always try to do. I’m with Tim Wu, whose fabulous book [amazon_link id=”1848879865″ target=”_blank” ]The Master Switch[/amazon_link] argues that the opportunity for new entrants to cause upheaval in technology and communication markets has always been created by a regulatory intervention.

[amazon_image id=”1848879865″ link=”true” target=”_blank” size=”medium” ]The Master Switch: The Rise and Fall of Information Empires[/amazon_image]   [amazon_image id=”069111630X” link=”true” target=”_blank” size=”medium” ]The Free-Market Innovation Machine: Analyzing the Growth Miracle of Capitalism[/amazon_image]

To be fair to Galbraith, this being one of his books I’ve not read, this summary suggests he was not relaxed about oligopoly power; however, he suggests the ‘countervailing power’ of organised labour is the way to control it. I’m all for workers having adequate bargaining power in the labour market but fail to see how that fixes a lack of competition in product markets. Google’s workers are very well treated. I wonder what Galbraith would make of these modern business titans?

15 thoughts on “What would Galbraith think about Google?

  1. Pingback: What would Galbraith think about Google? | Homines Economici

  2. Galbraith was writing and formed his ideas in what amounted to the Dark and Early Middle Ages of computing and IT power. I had a great respect for him and have no doubt if given a rather longer life he would have caught up with the implications of the changes in recent decades. What he might have made of them might well have surprised us all.

  3. “Complete nonsense” seems a little strong. If you think jet aircraft, transistors, microprocessors, Unix, optical fibre communications and mobile phones (all products of big firms) are incremental innovations, you could take that view. Spreadsheets and search algorithms are examples of innovation by small entrants, both very significant, but they relied for their impact on a technological substrate developed by large corporations. I think it’s wrong to generalise from the special case of innovation in the digital realm, characterised as it is by very low barriers to entry. Innovation, radical or otherwise, in the material and biological realms – for example in the hardware side of ICT, in energy, in pharmaceuticals – remains very difficult for small entrants, because of the large resources it needs and the long time it takes to deliver returns.

    Bell Labs, of course, was the great counterexample to the contention that oligopolistic industry doesn’t innovate. Bell wasn’t very successful at monetizing its innovation, but arguably it didn’t need to precisely because it was oligopolistic. Whether the social returns from its innovations outweighed the social costs imposed by its oligopoly would be an interesting question for an economist to answer.

    • Maybe a little 🙂 And as I admit, I was taking the quotation out of context. Clearly both large and small firms are needed – though I think often separate units in the large firms, if not formal skunk works. Bell Labs was surely unique, not an example of anything?

      • Bell was exceptional, but not, I think, unique. The Xerox PARC lab was legendary for developing innovations like the computer mouse and graphical interface, even more legendary for leaving them to other companies like Apple to make money from. The IBM Almaden lab turned the scientific discovery of GMR into the portable hard drives that made laptops and iPods possible. In the UK, cellular telephony was developed by Racal (in a unit subsequently spun off to form Vodafone) – I get the impression that Racal was considered a scrappy upstart compared to GEC, but it wasn’t a start-up. ICI’s corporate laboratory produced beta-blockers. I’m sure one can think of many more examples.

        Most of these developments did take place in units that were set apart from the business units, that is true. Of course, few of these units now survive, in a more short-termist environment emphasising shareholder value. The implication of this change for innovation needs serious consideration.

          • I can’t help wondering about the relationship between great corporate R&D labs of the 1950s-1970s and the sluggish state of corporate governance at the same time.

            Limited competition and toothless corporate governance meant more scope for labs had more scope to plough money into R&D (often pretty far-from-market, as Bell Labs’ Nobel Prizes attest). They also allowed managers to follow their intrinsic motivations in other ways: the “3-6-3 Club” of US bankers (borrow at 3%, lend at 6%, hit the golf course at 3pm) or the behaviour of senior executives in the pre-buyout era.

            The interesting thing would be how to re-create the long-termism of the R&D lab without bringing back the less attractive types of managers’ intrinsic motivation.

  4. {I’m all for workers having adequate bargaining power in the labour market but fail to see how that fixes a lack of competition in product markets.}

    The two factors are not linked. Labour can only influence competition by means of its cost – and within any finite market (meaning national) labor-rates are similar. (If there’s a “China-price” somewhere in the US, please do note where here. ;^)

    Ditto innovation. Companies do not innovate because of labor, but because of Demand. That is, with any given set of products, and over a sufficiently long period of time, Total Sales will inevitably peak and turn down.

    Now, presume that a set of new-products are added, the Total Sales curves does not turn down, but continues upwards untill it too (with sufficient time) bends over and falls.

    The difference between the two-curves, the upper-one that continues before falling and the lower-one that falls because demand for products falters, is called the “Wedge”.

    Wedge Planning & Product Development is thus a key part, an indispensable necessity, of any company’s product strategy. New products absolutely must replace old-products in many, many consumer markets.

  5. To pick up Stian’s point, perhaps laxer corporate governance contributed to the environment that allowed corporate labs to flourish. But there were other factors – Bell, of course, benefitted from a formal monopoly over long-distance telephony. The markets that chemical companies operated in were cartelised – formally, before the war, with the carve-up of the world by du Pont, ICI and IG Farben, and perhaps informally afterwards. Electronics companies in the USA (Fairchild Semiconductor being particularly important for its role in developing integrated circuits) and the UK (including Racal) lived off soft cost-plus government defense contracts. So a variety of different environments, all of which horrify free market fundamentalists, and no doubt have all sorts of other downsides. But that’s how the big innovations of the twentieth century got done.

    • No question a mixed ecology is important but I’d still place more importance on the role of competition in innovation than you and Stian seem to in this short exchange.

  6. The business environment is clearly different now from what is was when Galbraith was writing. The technology of change is more available to the small firm than it was, for one thing, as others have alluded to here. What I have not seen mentioned here is the (ever) increasing ease of bringing to market, and to the public’s attention, the product offerings of the small firm. Surely this also has a notable effect in changing the “big-vs-small firm as innovator” dynamic.

    I would also note, in passing, the incentives to execute innovation in a small firm form; especially in the “infinitely scalable” space that is the internet. The IPO at the end of the rainbow is rich, rich, rich !

  7. You cant do justice do a big topic like the relation between competition and technology and other issues in a blog post of course, but there is a framework for thinking about this that Diane should have mentioned. I’m thinking about the work of Howitt and others, reviewed in “What do we learn from Schumpeterian growth theory?”

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