The New Managerial Revolution

With the summer here and the pace of academia slowing down a bit, I have had time to do some pleasure reading.  One book I have just launched into is American Colossus, a history of the American Gilded Age.  It’s excellent so far, quite engaging if a little light on the linear explanatory broad-strokes history.  One aspect of it I was struck by was, however, the description of the railroads.  Brand mentions, as have other histories I’ve read, the way that the complexity of modern railroads drove the emergence of the modern enterprise structure.  Joint-stock companies are much older, but they reached their modern structure only with the railroads – and many other innovations such as long-term capital management, regular schedules, and use of statistical management were only developed because the sheer complexity and size of the railroads mandated with them.

It matches up quite interestingly to this story about the use of Silicon Valley methods in revamping Healthcare.gov.  Small teams, rapid testing, and outsourcing much of the technical backend to the cloud. Yes, Silicon Valley can be much too self-congratulatory and yes, most of their methods are quite inappropriate in a governmental context where the needs are high and the costs of even a single slip-up are devastating.  A fatal error in your laundry-delivery app inconveniences some rich professionals for a day, while a fatal error in public-sector software can mean that people die.  That being said, there are still some parallels between the two – the railroads transformed American business by developing the techniques necessary to deal with large amounts of capital, whereas Silicon Valley is transforming American business by developing techniques necessary to do more with less capital.

If I were to bet on what the economy looks like in 2050, it would be an economy doing more with less stuff.  It’s about more than just replacing server clusters with AWS – it’s about applying the same model to physical stuff.  Airbnb and Uber are demonstrating this quite well – taking advantage of capital that ten years ago simply sat idly.  Rooftop solar panels promise the same – generating enough electricity on site to power a home without the massive infrastructure of coal plants and substations underlying the 20th-century energy grid.  You sometimes hear the complaint, in the financial media, that there is too much capital chasing too little returns – that this is the reason that institutional money is flooding into VC funds that in turns floods into silly social apps with no business plans.  If software truly is eating the world, this is what we would expect – that the material abundance of society increases while the need for capital declines, and the standard of living increases more rapidly than its material abundance.

In a world doing more with less, we would expect this complaint to become a universal feature – a paucity of ways to productively deploy capital, and declining returns to it.  Maybe it’s finally time to read this Piketty book…

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