Tag Archives: Cory Doctorow

Albert O. Hirschman

Exit vs. voice: reacting to decline in 2017

So you are worried, restless, outraged. In a little over a year, you have watched cynical, myopic politicians manipulate electorates into making disastrous choices. Meanwhile, precious attention is being diverted from issues that really matter, like climate change, privacy, inequality and regulating AI. You know you will personally have to bear some of these costs, even though you had no part in those choices. You are seeing your rights reduced (Brexit), your national prestige sinking (Trump), the effectiveness of your government curtailed (German elections), your non-white or wrong-surname friends and family members being humiliated and made feel unwelcome (all of the above). Now what?

One of the heroes of my youth, Albert Hirschman, has an answer to that. You can do one of three things:

  1. Exit. Refuse to touch the problem, and leave your nation or community behind to deal with it. They made the mess, let them clean up.
  2. Voice. Engage with the status quo. State your concern and grievance, and try to change it through applying some kind of pressure.
  3. Loyalty. Suck it up, and live with it. It’s not that bad after all, at least not for you personally.

Loyalty is, of course, far and away the most popular method. This is because most things in human affairs work reasonably well. With your attention absorbed by corporate greed, climate change and the refugee crisis it is easy to overlook that traffic laws and the drinking water infrastructure work quite well, at least in my corner of the world. Most people will simply stay loyal and move on. But what if you can’t live with it? Do you exit or voice? and how?

In 2017, as I pondered these questions in relations to my own life and work, I stumbled onto two new books that argued different corners of the question. 

The first one is Lobbying for change, by my countryman and co-conspirator Alberto Alemanno. Alberto, a legal scholar, makes a resounding case for voice. His experience as an activist and campaigner taught him that decision makers are often much more open to take on board ideas and suggestions than you might think. This, he argues, is especially true when ideas and suggestions come from citizens, because a citizen’s economic interests are thought to align with that of society as a whole, or at least of large groups within society.

Alberto’s main intuition is this: citizen lobbying is fuelled by discontent, but it ends up producing greater societal cohesion. This is because lobbyists are by definition not themselves decision makers. So, nothing they do will work if it does not channel that discontent into a proposal that benefits them, and that the other interested parties can at least live with. In order to protect her interest or argue her cause, the citizen lobbyist cannot but help the common good. The book then proceeds to plot a course for anybody willing to be a citizen lobbyist to become an effective one. In a way, it’s a user’s manual for Hirschmanian voice.

An aside is in order. Of course, in the lobbying game “interested parties” are only those who sit at the table and argue for themselves. Those who don’t (because they are politically weak, like the Roma in Europe, or because they are not human, like the climate) are fair game, and they have generally not fared well even under advanced democracies. This is, however, a problem with voice in general, not with Alberto’s contribution. In fact, citizen lobbying is meant to be cheap enough that weaker and even non-human parties can find at least some voice.

The second book is Walkaway, by science fiction author and Boing Boing editor Cory Doctorow. It is firmly in the exit camp – even in its title. Doctorow is an interesting author, one of a small milieu of SF writers who write honest-to-God philosophical fiction. It’s a bit like reading Gulliver’s Travels: characters spend a lot of time explaining each other the economic, philosophical and technological foundation of the imaginary societies they live in. Doctorow stands apart from other authors in this group in that he is by far the most concerned with economics : in fact he himself claims that Walkaway is really about the Coase Theorem.

Walkaway imagines a near future society where open source technology is advanced enough that people can drop out of mainstream societies in a relatively order manner, and live off the land and dirt-cheap open tech. And they do: the combined effect of automation and mounting income and wealth inequalities make it so that meaningful employment is almost impossible (unless one enjoys serving the only healthy market, that of really rich people). People are knee deep in student debt. Most of humanity has simply nothing to offer to “the economy” and the society it supports. So they walk away, and provide to their needs with the same logic that Wikipedians build Wikipedia. Initially this gives rise to a sort of dual economy, with a large fringe (maybe 5% of the population?) living in Walkaway. Later on, the mainstream economy kind of eats itself, so that the share of humans in Walkaway rises significantly. Walkaway itself becomes a sort of mainstream, with super-rich people and their minions continuing to run places like London and Singapore, but not much else.

Walkaway argues for exit because it lays out a political strategy that leads people to winning by refusing to engage. Cannot get a decent job and pay your student loan? Walk away. The police evacuates the open source compound where you live? Walk away, rebuild it 50 kilometers down the road. They take that down too? Walk away. In the book, walkaway “wins”, but that’s not even the point. The point is that you can make a better life for yourself by not engaging with the system.

Like most people reading this, I am very dissatisfied with some of the things that are going on in the world right now. I can not live with them. Which one is it going to be, voice or exit? I have been a voice guy all my life, but now I wonder. I can see a game – theoretical argument for exit: if you commit to voice, the powers that be can stall you forever, while you exhaust your energy for change in endless negotiations. Exit – walkaway – has a key advantage: if you execute well, its results do not depend on your opponent. If you believe Doctorow’s intuition, if enough people exit your opponent are going to be badly hit. That gives you potentially significant clout as you walk away.

So, I guess, at a minimum, voice should not be taken for granted. Engagement and participation should be economised, and always be underpinned by an ever present, credible, threat of exit. “Credibility” in this sense means building as much autonomy as you can. This is what we are looking into at Edgeryders And you? Are you closer to the voice or to the exit camp?

The economics of the makers revolution: a primer

I started out as an industrial organization kind of economist, so it feels refreshing to delve into the major organizational tectonic shift implied by the Makers revolution. The video above (9 minutes, in Italian) is my talk at the World Wide Rome conference. The main concept is that of permissive technology; legally and technically hackable technologies are what enable mass innovation, in turn fueling the makers revolution around manufacturing. Contributions in English around this topic:

  • The economics of Cory Doctorow’s Makers. This is an economic analysis of the eponymous Doctorow novel, which makes way more sense than you would expect from a work of fiction (but then again, let’s keep in mind that Doctorow is co-founder of Boing Boing. Doctorow himself has read my essay and not gone for my throat (he actually thanked me), so I guess he does not disagree with me too much;
  • Schumpeter’s curse. This post does not directly speak about manufacturing or makers, but it does make a key point of my talk: creative destruction is not an equilibrium model, and the body count of the makers revolution will likely be high.

My talk was very well received by the predominantly corporate and institutional crowd (hell, corporates and Rome’s Chamber of Commerce cheerfully sponsored the conference). This is telling: a lot of people are so enmeshed in the current innovation ideology that they manage to unsee the “revolution” in the Makers revolution. I am with Doctorow on this one: there will be conflict, the main battlefield will be IPRs, and the bad guys might well win. But then, revolution is no gala dinner, right?

The economics of Cory Doctorow’s Makers

Makers is a novel, published in 2009 by Canadian science fiction author and Boing Boing co-editor Cory Doctorow. It deals with two entrepreneurs from the DIY scene (think MAKE Magazine, or Wired’s New Industrial Revolution), Perry Gibson and Lester Banks, inventing new things. Their inventions transform the world around them, not so much from a technical as from a social and economic point of view. They give rise to a highly decentralized organization and business model called “New Work” in the fictional context of the novel. I was referred to it by friends in the Italian physical hacking scene, which I started hanging out with in 2008.

When I first read the book I found it very prophetic, in the way that the best science fiction can be; also, I was stricken by how much of it translated pretty directly into widely accepted economic theory. After musing on it for about a year, I have become a convert (so much that I have participated in Arduino-based projects and started out experimenting with economic policy for makers). At the same time, though – in the context of some research that I am involved with – I have started to ask myself if the “innovation society” we seem to be trying to build (witness the Lisbon Strategy and innumerable policy documents) is indeed sustainable. Increasing quantities of innovation, after all, sort of implies the economy growing at an increasing rate, and this is likely to have straining side effects on the natural environment or even our own human limitations. Does innovation have a dark side? How much of can we take without descending into dystopia?

Doctorow has created a pretty believable fictional economy which seems to be, in some sense, the innovation society we are heading for. So I decided to study it more closely: that is, re-read the book with an economist’s eyes, to zero in on the economics of what’s going on in there.

Schumpeter’s creative destruction

The main economic engine in the world of Makers is Joseph Schumpeter’s theory of creative destruction. It is laid out straight from chapter one by CEO Langdon Kettlewell in the press conference to announce the Kodak-Duracell merger:

Capitalism is eating itself. The market works, and when it works it commodifies or obsoletes everything.

At the end of the press conference, reporter Suzanne Church – who used to be an economic journalist in Detroit, and as such covered the demise of the car ecosystem – muses about being haunted by decay, even in the Silicon Valley, which was supposed to have incorporated failure as just a step on the road to ultimate success:

Now she was back in that old rustbelt funk, with the feeling that she was witness not to a beginning, but to a perpetual ending, a cycle of destruction that would tear down everything solid and reliable in the world.

Commodification and obsolescence, however, should be thought as a feature, not a bug. It is, in fact the way capitalism produces abundance. Tjan, the business manager Kodacell brings in to help Perry and Lester, is well aware of this:

So, if you want to make a big profit, you’ve got to start over again, invent something new, and milk it for all you can before the first imitator shows up. The more this happens, the better and cheaper everything gets. It’s how we got here, you see. It’s what the system is for.

Price wars and Bertrand equilibrium

The mechanism that drives the “destruction” part of creative destruction in Makers is cut-throat price competition. Innovative products are undercut by imitators, who scoop up the entire market thanks to lower prices. The process is iterated until the price reaches cost (including an acceptable remuneration of risk and capital):

In a good market, you invent something and charge all the market will bear for it. Someone else figures out how to do it cheaper, or decides they can do it for a slimmer margin […] and so you have to drop your prices to compete. Then someone comes along who’s less greedy or more efficient than both of you and undercuts you again, and again and again, until eventually you get down to […] a baseline that you can’t get lower than, the cheapest you can produce and stay in business.

This is Tjan speaking on his first night at the Perry – Lester venture. To an economist, he is giving a texbook rendition of Bertrand competition, a price war leading to a zero-profit equilibrium.

Unemployment and labor economics issues

Creative destruction rearranges production factors in the economic system, supposedly for the good. Unfortunately, some of these elements are people, and rearranging may involve a lot of pain, humiliation and fear. Doctorow embeds labour economics issues deep into the novel: the Kodacell press conference is interrupted by a protest of laid off staffers. Kettlewell’s first email to Suzanne asks the big question looming underneath Makers:

What happens when all the things you are good at are no good to anyone anymore?

Research initiated at the beginning of the current recession has cast doubts about the possibility to successfully mass-retrain a laid-off workforce to adjust to the changing needs of an innovation economy (New York Times). Labour supply seems still oriented to selling man-hours and expecting to be managed in a more or less traditionally Tayloristic way.

Brian Arthur’s building-block innovation

When Suzanne reaches Perry and Lester’s den to be shown what it is they do, Perry demonstrates their method to technical innovation. Basically, it consists of recombining existing technology in new ways. This is not only possible, but dirt cheap and fundamentally easy, because, in Perry’s words

Everywhere you look there’s devices for free that have everything you need to make anything do anything.

And Lester is even more concrete:

You know how they say a sculptor starts with a block of marble and chips away everything that doesn’t look like a statue? Like he can see the statue in the block? I get like that with garbage: I see the pieces on the heaps and in roadside trash, and I can just see how it can go together.

Makers subscribes to the complexity theory’ view on innovation, as discussed by John Holland, Brian Arthur and other researchers: making new things is (mostly) about finding new ways to recombine existing building blocks. Successful combinations become, in their turn, new blocks, so that an initially simple technology (the famous six simple machines of the ancient greeks) bootstraps to increasing levels of sophistication.

Open source and the speed of creative destruction

Perry and Lester’s ability to combine technological building blocks is greatly enhanced by the fact that anything important to them can be performed by open source technologies. This enables them to develop working prototypes from off-the-shelf equipment and software and put them into a manufacturing pipeline without worrying about licensing issues. This has two consequences: first, in the world of Makers ecosystems develop preferably around open source technology, because people like Perry and Lester have every incentive to route around proprietary technology; second, that the speed of the creative destruction cycle is greatly increased.

I think this may be the most important intuition Makers has to offer. Just think: we increasingly buy in ecosystem (Mac-iPhone-iPad-MobileMe, or Google-Android-Google Apps, or Linux-Apache-IBM’s proprietary web solutions); ecosystems grow faster if they can build on open source building blocks, so that the open source ones tend to outcompete the proprietary ones in the long run; but innovations in open source ecosystems are almost impossible to protect, and that lowers their average margin as the highly profitable grace period gets shorter. The solution, as Tjan suggests (see above) and most policy makers worldwides agree, is to increase the pace of innovation. This, however, raises the question of just how fast consumers can wrap their head around innovation: every heavy web user is familiar with the sensation that companies are putting out new services faster than we can absorb them, and sometimes we just have no time for them, no matter how cool they are. Google Wave, anyone? So, it could be that the destruction side of creative destruction prevails, landing the economy of Makers into a state of low margins and low growth, as more inventions fail to turn into more successful products on the market.

Becattini and Brusco’s competitive-cooperative manufacturing systems

Perry and Lester run a very small business unit (themselves and a few helpers), so their global competitiveness depends on the neutrality of unit costs with respect to production volume – in other words, no economies of scale. In fact Perry and Lester’s Florida junkyard is a scale-efficient production unit. In Tjan’s words

Every industry that required a factory yesterday requires a garage today.

Of course, it’s hard to get away from the fact that a lot of the cheapness in the system comes from exploiting economies of scale. The trick is that component manufacturing is scale-intensive, but the artifacts that Perry and Lester are interested in, being assemblies of such components, have a much lower minimum efficient production scale. In such a scenario, manufacturing systems most fit to compete are those that combine the agility of horizontal and vertical disintegration with low transaction costs, mutual trust and informational transparence. Vertical disintegration lets firms grow large where there are economies of scale to be exploited (components, silicon chips); horizontal disintegration enhances competition in the finished goods market (even though whichever manufacturers will win out in any given period of time will still buy components from the same handful of suppliers, therefore saving on the costs of reallocation of workers and manufacturing capacity); low transaction costs enable vertically disintegrated “manufacturing“ units like Perry and Lester’s (mostly R&D and business development, really) to build ad hoc networks of suppliers fast. In other words, New Work displays both tough competition and cooperation over and above formalized contracts.

Sebastiano Brusco and Giacomo Becattini’s model of industrial districts display just these characteristics (as, with different nuances, the work of researchers as Charles Sabel, Michael Piore and Annalee Saxenian). In Makers the low transaction costs part is implemented top-down through networked company Kodacell rather than, as in Brusco and Becattini, bottom-up through evolving conventions and reputation effects in a small territory, home to all the forms involved. So, when Lester invents Home Aware, an ecosystem can be summoned out of Kodacell’s decentralized “teams” structure. Tjan explains:

There are ten teams that do closet organizing in the network, and a bunch of shippers, packers, movers and storage experts. A few furniture companies. […] The plan is to start our sales through the consultants at the same time as we start showing at trade shows for furniture companies.

The European Commission’s Living Lab

After a fire at a shantytown near the factory, Perry decides to let the inhabitants rebuild it on Kodacell premises (formerly a junkyard), which is largely unused. Kettlewell tries to get him to oust them. Perry holds his ground: he, Lester and Tjan had been meaning to invent something for the homeless people anyway.

We’ve built a living lab on our doorstep for exploring an enormous market opportunity to provide low-cost, sustainable technology for use by a substantial segment of the population who have no fixed address. There are millions of American squatters and billions of squatters worldwide. They have money to spend and no one else is trying to get it from them.

In the real word, Living Labs are a concept explored by the European Commission in the context of innovation policy. The idea is to replace consumer tests of new products with much larger scale, more realistic tests made possible a dense network of many actors collaborating on the same territory. Perry’s in-house shantytown would become a toy universe to model the squatters market: Kodacell can invent something and run a market test with limited costs and in a short time, but also real consumers spending real money. More importantly, it can recruit squatters themselves to participate in identifying needs and designing the products. And in fact it does: this is the role of the shantytown leader, Francis, who collaborates closely with Perry and Lester to think up new products.

Arrow’s Paradox and the value of invention

New Work’s downfall is heralded by an investor confidence crisis in Kodacell. Part of the problem is that analysts have a hard time figuring out how to value inventions, that are becoming an important part of Kodacell’s market value (the other part is inherent scarcity of genuine entrepreneurship). Kodacell ends up with a lot of novel products, with high returns on small projects. How many of these projects are going to scale to be large hits? Kettlewell:

Sure, if you looked at [our numbers] our way, they were great. If you looked at them the Street looks at them, we were in deep §#1t. Analysts couldn’t figure out how to value us.

This is yet another version of Kenneth Arrow’s famous paradox: markets for information typically don’t work well, because, in order to estimate precisely the value of something you need to know all about it. But information, of course, has no market value for you if you know it already. Invention is essentially information: until it is on the market and has climbed the diffusion curve, it is quite difficult to value it.

The New Work bust and the shift in consumer preferences

When part 2 of Makers opens, the New Work movement is over. A stock market bust has shattered the Kodacell business model, which had been promptly imitated by other large companies such as Westinghouse (who recruited Tjan off Kodacell). As a result, the movement is dead. Perry and Lester, still in their junkyard in Florida, start “the ride”, a sort of smart theme park-memorial of New Work, which is to be the subject of the rest of the book. The New Work fiasco is one of the least convincing parts of the book from an economist’s point of view: save for the aforementioned value of invention issue, it is hard to make out anything that would provoke more than a short-term market fluctuation. Kettlewell:

Analysts couldn’t figure out how to value us. Add a little market chaos and some old score-settling @##holes […] and it’s a wonder we lasted as long as we did.

Even less convincing is the ensuing consumer disaffection for the goods that New Work had produced. In Perry’s words:

No one cares about invention anymore.

There is no obvious reason why this should happen. The second Perry-Lester invention, Home Aware, has been very successful, shipping a million units in six weeks. One would think that, even if the company originally producing it went bust, a competitor would step in to service and expand the existing customer base. After the 2000 dotcom bust consumers actually increased their use of the online services that they found useful, undaunted by their association with dotcoms. Yahoo, Google, Amazon and the like continued to prosper in their respective markets, if not in the stock market. I looked at time series data for NASDAQ and e-commerce sales over the period 1999-2009; the correlation between them is practically nonexistent (negative, in fact), as you can see from the following graph:

So, is the innovation society sustainable in Makers?

Sustainability questions are tricky. Time and again, scientists have made doomsday predictions that went viral as public opinion found them really convincing, but later turned out to be way off the mark. From Malthus to the Club of Rome and the Millennium Bug, we seem to have a bias towards underestimating the adaptability of our society and its economy (cultural change makes the birth rate drop, raising prices of oil increase the energy efficiency of GDP and so on). Doomsday feels right at some level: it may just be a heritage of our Neolithic past, or a very deeply ingrained cultural myth (Apocalypse, Ragnarok etc.). Certainly that suggests a lot of caution in predicting it.

The economics of New Work are at least plausible; its downfall is the least plausible of its features. I was expecting something like Kodacell and Westinghouse spinning off their New Work branches, or selling them to more nimble, lower overhead companies that would commodify the networked organization and finance that the giant companies have to offer. The history of open source has already shown that you don’t really need a large company to achieve coordination, after all. The book, however, ends on a deeply pessimistic note: the large evil company has won the battle against the ride movement and recruited Lester, neutralizing his innovative potential; Perry has become a sort of wandering troubleshooter, lonely and poor. Doctorow the economist seems to be supportive of the innovation society, but Doctorow the author definitely is not. I wonder – really wonder – which if the two Doctorows will be right in the end.