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A Brief History of the Corporation

September 25th, 2012 Comments off
On 8 June, a Scottish banker named Alexander Fordyce shorted the collapsing Company’s shares in the London markets. But a momentary bounce-back in the stock ruined his plans, and he skipped town leaving £550,000 in debt. Much of this was owed to the Ayr Bank, which imploded. In less than three weeks, another 30 banks collapsed across Europe, bringing trade to a standstill. On July 15, the directors of the Company applied to the Bank of England for a £400,000 loan. Two weeks later, they wanted another £300,000. By August, the directors wanted a £1 million bailout.  The news began leaking out and seemingly contrite executives, running from angry shareholders, faced furious Parliament members. By January, the terms of a comprehensive bailout were worked out, and the British government inserted its czars into the Company’s management to ensure compliance with its terms.

If this sounds eerily familiar, it shouldn’t. The year was 1772, exactly 239 years ago today, the apogee of power for the corporation as a business construct. The company was the British East India company (EIC). The bubble that burst was the East India Bubble. Between the founding of the EIC in 1600 and the post-subprime world of 2011, the idea of the corporation was born, matured, over-extended, reined-in, refined, patched, updated, over-extended again, propped-up and finally widely declared to be obsolete. Between 2011 and 2100, it will decline — hopefully gracefully — into a well-behaved retiree on the economic scene.

In its 400+ year history, the corporation has achieved extraordinary things, cutting around-the-world travel time from years to less than a day, putting a computer on every desk, a toilet in every home (nearly) and a cellphone within reach of every human.  It even put a man on the Moon and kinda-sorta cured AIDS.

So it is a sort of grim privilege for the generations living today to watch the slow demise of such a spectacularly effective intellectual construct. The Age of Corporations is coming to an end. The traditional corporation won’t vanish, but it will cease to be the center of gravity of economic life in another generation or two.  They will live on as religious institutions do today, as weakened ghosts of more vital institutions from centuries ago.

It is not yet time for the obituary (and that time may never come), but the sun is certainly setting on the Golden Age of corporations. It is time to review the memoirs of the corporation as an idea, and contemplate a post-corporate future framed by its gradual withdrawal from the center stage of the world’s economic affairs.

 

Framing Modernity and Globalization

For quite a while now, I have been looking for the right set of frames to get me started on understanding geopolitics and globalization. For a long time, I was misled by the fact that 90% of the available books frame globalization and the emergence of modernity in terms of the nation-state as the fundamental unit of analysis, with politics as the fundamental area of human activity that shapes things. On the face of it, this seems reasonable. Nominally, nation-states subsume economic activity, with even the most powerful multi-national corporations being merely secondary organizing schemes for the world.

But the more I’ve thought about it, the more I’ve been pulled towards a business-first perspective on modernity and globalization. As a result, this post is mostly woven around ideas drawn from five books that provide appropriate fuel for this business-first frame. I will be citing, quoting and otherwise indirectly using these books over several future posts, but I won’t be reviewing them. So if you want to follow the arguments more closely, you may want to read some or all of these. The investment is definitely worthwhile.

  • The Corporation that Changed the World by Nick Robins, a history of the East India Company, a rather unique original prototype of the idea
  • Monsoon by Robert Kaplan, an examination of the re-emergence of the Indian Ocean as the primary theater of global geopolitics in the 21st century
  • The Influence of Sea Power Upon History: 1660-1783 by Alfred Thayer Mahan, a classic examination of how naval power is the most critical link between political, cultural, military and business forces.
  • The Post-American World by Fareed Zakaria, an examination of the structure of the world being created, not by the decline of America, but by the “rise of the rest.”
  • The Lever of Riches by Joel Mokyr, probably the most compelling model and account of how technological change drives the evolution of civilizations, through monotonic, path-dependent accumulation of changes

I didn’t settle on these five lightly. I must have browsed or partly-read-and-abandoned dozens of books about modernity and globalization before settling on these as the ones that collectively provided the best framing of the themes that intrigued me. If I were to teach a 101 course on the subject, I’d start with these as required reading in the first 8 weeks.

The human world, like physics, can be reduced to four fundamental forces: culture, politics, war and business. That is also roughly the order of decreasing strength, increasing legibilityand partial subsumption of the four forces. Here is a visualization of my mental model:

Culture is the most mysterious, illegible and powerful force. It includes such tricky things as race, language and religion. Business, like gravity in physics, is the weakest and most legible: it can be reduced to a few basic rules and principles (comprehensible to high-school students) that govern the structure of the corporate form, and descriptive artifacts like macroeconomic indicators, microeconomic balance sheets, annual reports and stock market numbers.

But one quality makes gravity dominate at large space-time scales: gravity affects all masses and is always attractive, never repulsive.  So despite its weakness, it dominates things at sufficiently large scales. I don’t want to stretch the metaphor too far, but something similar holds true of business.

On the scale of days or weeks, culture, politics and war matter a lot more in shaping our daily lives. But those forces fundamentally cancel out over longer periods.  They are mostly noise, historically speaking. They don’t cause creative-destructive, unidirectional change (whether or not you think of that change as “progress” is a different matter).

Business though, as an expression of the force of unidirectional technological evolution, has a destabilizing unidirectional effect. It is technology, acting through business and Schumpeterian creative-destruction, that drives monotonic, historicist change, for good or bad. Business is the locus where the non-human force of technological change sneaks into the human sphere.

Of course, there is arguably some progress on all four fronts. You could say that Shakespeare represents progress with respect to Aeschylus, and Tom Stoppard with respect to Shakespeare.  You could say Obama understands politics in ways that say, Hammurabi did not. You could say that General Petraeus thinks of the problems of military strategy in ways that Genghis Khan did not. But all these are decidedly weak claims.

On the other hand the proposition that Facebook (the corporation) is in some ways a beast entirely beyond the comprehension of an ancient Silk Road trader seems vastly more solid. And this is entirely a function of the intimate relationship between business and technology. Culture is suspicious of technology. Politics is mostly indifferent to and above it. War-making uses it, but maintains an arms-length separation. Business? It gets into bed with it. It is sort of vaguely plausible that you could switch artists, politicians and generals around with their peers from another age and still expect them to function. But there is no meaningful way for a businessman from (say) 2000 BC to comprehend what Mark Zuckerberg does, let alone take over for him. Too much magical technological water has flowed under the bridge.

Arthur C. Clarke once said that any sufficiently advanced technology is indistinguishable from magic, but technology (and science) aren’t what create the visible magic. Most of the magic never leaves journal papers or discarded engineering prototypes. It is business that creates the world of magic, not technology itself. And the story of business in the last 400 years is the story of the corporate form.

There are some who treat corporate forms as yet another technology (in this case a technology of people-management), but despite the trappings of scientific foundations (usually in psychology) and engineering synthesis (we speak of organizational “design”), the corporate form is not a technology.  It is the consequence of a social contract like the one that anchors nationhood. It is a codified bundle of quasi-religious beliefs externalized into an animate form that seeks to preserve itself like any other living creature.

The Corporate View of history: 1600 – 2100

We are not used to viewing world history through the perspective of the corporation for the very good reason that corporations are a recent invention, and instances that had the ability to transform the world in magical ways did not really exist till the EIC was born. Businesses of course, have been around for a while. The oldest continuously surviving business, until recently, was Kongo Gumi, a Japanese temple construction business founded in 584 AD that finally closed its doors in 2009. Guilds and banks have existed since the 16th century. Trading merchants, who raised capital to fund individual ships or voyages, often with some royal patronage, were also not a new phenomenon.  What was new was the idea of a publicly traded joint-stock corporation, an entity with rights similar to those of states and individuals, with limited liability and significant autonomy (even in its earliest days, when corporations were formed for defined periods of time by royal charter).

This idea morphed a lot as it evolved (most significantly in the aftermath of the East India Bubble), but it retained a recognizable DNA throughout. Many authors such as Gary Hamel (The Future of Management), Tom Malone (The Future of Work) and Don Tapscott (Wikinomics) have talked about how the traditional corporate form is getting obsolete. But in digging around, I found to my surprise that nobody has actually attempted to meaningfully represent the birth-to-obsoloscence evolution of the idea of the corporation.

Here is my first stab at it (I am working on a much more detailed, data-driven timeline as a side project):

To understand history — world history in the fullest sense, not just economic history — from this perspective, you need to understand two important points about this evolution of corporations.

The Smithian/Schumpeterian Divide

The first point is that the corporate form was born in the era of Mercantilism, the economic ideology that (zero-sum) control of land is the foundation of all economic power.

In politics, Mercantilism led to balance-of-power models. In business, once the Age of Exploration (the 16th century) opened up the world, it led to mercantilist corporations focused on trade (if land is the source of all economic power, the only way to grow value faster than your land holdings permit, is to trade on advantageous terms).

The forces of radical technological change — the Industrial Revolution — did not seriously kick in until after nearly 200 years of corporate evolution (1600-1800) in a mercantilist mold. Mercantilist models of economic growth map to what Joel Mokyr calls Smithian Growth, after Adam Smith. It is worth noting here that Adam Smith published The Wealth of Nations in 1776, strongly influenced by his reading of the events surrounding the bursting of the East India Bubble in 1772 and debates in Parliament about its mismanagement.  Smith was both the prophet of doom for the Mercantilist corporation, and the herald of what came to replace it: the Schumpeterian corporation. Mokyr characterizes the growth created by the latter as Schumpeterian growth.

The corporate form therefore spent almost 200 years — nearly half of its life to date — being shaped by Mercantilist thinking, a fundamentally zero-sum way of viewing the world. It is easy to underestimate the impact of this early life since the physical form of modern corporations looks so different. But to the extent that organizational forms represent externalized mental models, codified concepts and structure-following-strategy (as Alfred Chandler eloquently put it), the corporate form contains the inertia of that early formative stage.

In fact, in terms of the two functions that Drucker considered the only essential ones in business, marketing and innovation, the Mercantilist corporation lacked one. The archetypal Mercantilist corporation, the EIC, understood marketing intimately and managed demand and supply with extraordinary accuracy. But it did not innovate.

Innovation was the function grafted onto the corporate form by the possibility of Schumpeterian growth, but it would take nearly an entire additional century for the function to be properly absorbed into corporations. It was not until after the American Civil War and the Gilded Age that businesses fundamentally reorganized around (as we will see) time instead of space, which led, as we will see, to a central role for ideas and therefore the innovation function.

The Black Hills Gold Rush of the 1870s, the focus of the Deadwood saga, was in a way the last hurrah of Mercantilist thinking. William Randolph Hearst, the son of gold mining mogul George Hearst who took over Deadwood in the 1870s, made his name with newspapers. The baton had formally been passed from mercantilists to schumpeterians.

This divide between the two models can be placed at around 1800, the nominal start date of the Industrial Revolution, as the ideas of Renaissance Science met the energy of coal to create a cocktail that would allow corporations to colonize time.

Reach versus Power

The second thing to understand about the evolution of the corporation is that the apogee ofpower did not coincide with the apogee of reach. In the 1780s, only a small fraction of humanity was employed by corporations, but corporations were shaping the destinies of empires. In the centuries that followed the crash of 1772, the power of the corporation was curtailed significantly, but in terms of sheer reach, they continued to grow, until by around 1980, a significant fraction of humanity was effectively being governed by corporations.

I don’t have numbers for the whole world, but for America, less than 20% of the population had paycheck incomes in 1780, and over 80% in 1980, and the percentage has been declining since (I have cited these figures before; they are from Gareth Morgan’s Images of Organization and Dan Pink’s Free Agent Nation). Employment fraction is of course only one of the many dimensions of corporate power (which include economic, material, cultural, human and political forms of power), but this graph provides some sense of the numbers behind the rise and fall of the corporation as an idea.

It is tempting to analyze corporations in terms of some measure of overall power, which I call “reach.” Certainly corporations today seem far more powerful than those of the 1700s, but the point is that the form is much weaker today, even though it has organized more of our lives. This is roughly the same as the distinction between fertility of women and population growth: the peak in fertility (a per-capita number) and peak in population growth rates (an aggregate) behave differently.

To make sense of the form, the divide between the Smithian and Schumpeterian growth epochs is much more useful than the dynamics of reach. This gives us a useful 3-phase model of the history of the corporation: the Mercantilist/Smithian era from 1600-1800, the Industrial/Schumpeterian era from 1800 – 2000 and finally, the era we are entering, which I will dub the Information/Coasean era. By a happy accident, there is a major economist whose ideas help fingerprint the economic contours of our world: Ronald Coase.

This post is mainly about the two historical phases, and are in a sense a macro-prequel to the ideas I normally write about which are more individual-focused and future-oriented.

I: Smithian Growth and the Mercantilist Economy (1600 – 1800)

The story of the old corporation and the sea

It is difficult for us in 2011, with Walmart and Facebook as examples of corporations that significantly control our lives, to understand the sheer power the East India Company exercised during its heyday. Power that makes even the most out-of-control of today’s corporations seem tame by comparison. To a large extent, the history of the first 200 years of corporate evolution is the history of the East India Company. And despite its name and nation of origin, to think of it as a corporation that helped Britain rule India is to entirely misunderstand the nature of the beast.

Two images hint at its actual globe-straddling, 10x-Walmart influence: the image of the Boston Tea Partiers dumping crates of tea into the sea during the American struggle for independence, and the image of smoky opium dens in China. One image symbolizes the rise of a new empire. The other marks the decline of an old one.

The East India Company supplied both the tea and the opium.

At a broader level, the EIC managed to balance an unbalanced trade equation between Europe and Asia whose solution had eluded even the Roman empire. Massive flows of gold and silver from Europe to Asia via the Silk and Spice routes had been a given in world trade for several thousand years. Asia simply had far more to sell than it wanted to buy. Until the EIC came along

A very rough sketch of how the EIC solved the equation reveals the structure of value-addition in the mercantilist world economy.

The EIC started out by buying textiles from Bengal and tea from China in exchange for gold and silver.

Then it realized it was playing the same sucker game that had trapped and helped bankrupt Rome.

Next, it figured out that it could take control of the opium industry in Bengal, trade opium for tea in China with a significant surplus, and use the money to buy the textiles it needed in Bengal. Guns would be needed.

As a bonus, along with its partners, it participated in yet another clever trade: textiles for slaves along the coast of Africa, who could be sold in America for gold and silver.

For this scheme to work, three foreground things and one background thing had to happen: the corporation had to effectively take over Bengal (and eventually all of India), Hong Kong (and eventually, all of China, indirectly) and England. Robert Clive achieved the first goal by 1757. An employee of the EIC, William Jardine, founded what is today Jardine Matheson, the spinoff corporation most associated with Hong Kong and the historic opium trade. It was, during in its early history, what we would call today a narco-terrorist corporation; the Taliban today are kindergarteners in that game by comparison. And while the corporation never actually took control of the British Crown, it came close several times, by financing the government during its many troubles.

The background development was simpler. England had to take over the oceans and ensure the safe operations of the EIC.

Just how comprehensively did the EIC control the affairs of states? Bengal is an excellent example. In the 1600s and the first half of the 1700s, before the Industrial Revolution, Bengali textiles were the dominant note in the giant sucking sound drawing away European wealth (which was flowing from the mines and farms of the Americas). The European market, once the EIC had shoved the Dutch VOC aside, constantly demanded more and more of an increasing variety of textiles, ignoring the complaining of its own weavers. Initially, the company did no more than battle the Dutch and Portuguese on water, and negotiate agreements to set up trading posts on land. For a while, it played by the rules of the Mughal empire and its intricate system of economic control based on various imperial decrees and permissions. The Mughal system kept the business world firmly subservient to the political class, and ensured a level playing field for all traders. Bengal in the 17th and 18th centuries was a cheerful drama of Turks, Arabs, Armenians, Indians, Chinese and Europeans. Trade in the key commodities, textiles, opium, saltpeter and betel nuts, was carefully managed to keep the empire on top.

But eventually, as the threat from the Dutch was tamed, it became clear that the company actually had more firepower at its disposal than most of the nation-states it was dealing with. The realization led to the first big domino falling, in the corporate colonization of India, at the battle of Plassey. Robert Clive along with Indian co-conspirators managed to take over Bengal, appoint a puppet Nawab, and get himself appointed as the Mughal diwan (finance minister/treasurer) of the province of Bengal, charged with tax collection and economic administration on behalf of the weakened Mughals, who were busy destroying their empire. Even people who are familiar enough with world history to recognize the name Robert Clive rarely understand the extent to which this was the act of a single sociopath within a dangerously unregulated corporation, rather than the country it was nominally subservient to (England).

This history doesn’t really stand out in sharp relief until you contrast it with the behavior of modern corporations. Today, we listen with shock to rumors about the backroom influence of corporations like Halliburton or BP, and politicians being in bed with the business leaders in the Too-Big-to-Fail companies they are supposed to regulate.

The EIC was the original too-big-to-fail corporation. The EIC was the beneficiary of the original Big Bailout. Before there was TARP, there was the Tea Act of 1773 and the Pitt India Act of 1783. The former was a failed attempt to rein in the EIC, which cost Britain the American Colonies.  The latter created the British Raj as Britain doubled down in the east to recover from its losses in the west. An invisible thread connects the histories of India and America at this point. Lord Cornwallis, the loser at the Siege of Yorktown in 1781 during the revolutionary war, became the second Governor General of India in 1786.

But these events were set in motion over 30 years earlier, in the 1750s. There was no need for backroom subterfuge.  It was all out in the open because the corporation was such a new beast, nobody really understood the dangers it represented. The EIC maintained an army. Itsmerchant ships often carried vastly more firepower than the naval ships of lesser nations. Its officers were not only not prevented from making money on the side, private trade was actually a perk of employment (it was exactly this perk that allowed William Jardine to start a rival business that took over the China trade in the EIC’s old age).  And finally — the cherry on the sundae — there was nothing preventing its officers like Clive from simultaneously holding political appointments that legitimized conflicts of interest. If you thought it was bad enough that Dick Cheney used to work for Halliburton before he took office, imagine if he’d worked there while in office, with legitimate authority to use his government power to favor his corporate employer and make as much money on the side as he wanted, and call in the Army and Navy to enforce his will. That picture gives you an idea of the position Robert Clive found himself in, in 1757.

He made out like a bandit. A full 150 years before American corporate barons earned the appellation “robber.”

In the aftermath of Plassey, in his dual position of Mughal diwan of Bengal and representative of the EIC with permission to make money for himself and the company, and the armed power to enforce his will, Clive did exactly what you’d expect an unprincipled and enterprising adventurer to do. He killed the golden goose. He squeezed the Bengal textile industry dry for profits, destroying its sustainability. A bubble in London and a famine in Bengal later, the industry collapsed under the pressure (Bengali economist Amartya Sen would make his bones and win the Nobel two centuries later, studying such famines). With industrialization and machine-made textiles taking over in a few decades, the economy had been destroyed. But by that time the EIC had already moved on to the next opportunities for predatory trade: opium and tea.

The East India bubble was a turning point. Thanks to a rare moment of the Crown being more powerful than the company during the bust, the bailout and regulation that came in the aftermath of the bubble fundamentally altered the structure of the EIC and the power relations between it and the state. Over the next 70 years, political, military and economic power were gradually separated and modern checks and balances against corporate excess came into being.

The whole intricate story of the corporate takeover of Bengal is told in detail in Robins’ book. The Battle of Plassey is actually almost irrelevant; most of the action was in the intrigue that led up to it, and followed. Even if you have some familiarity with Indian and British history during that period, chances are you’ve never drilled down into the intricate details. It has all the elements of a great movie: there is deceit, forgery of contracts, licensing frauds, murder, double-crossing, arm-twisting and everything else you could hope for in a juicy business story.

As an enabling mechanism, Britain had to rule the seas, comprehensively shut out the Dutch, keep France, the Habsburgs, the Ottomans (and later Russia) occupied on land, and have enough firepower left over to protect the EIC’s operations when the EIC’s own guns did not suffice. It is not too much of a stretch to say that for at least a century and a half, England’s foreign policy was a dance in Europe in service of the EIC’s needs on the oceans. That story, with much of the action in Europe, but most of the important consequences in America and Asia, is told in Mahan’s book. (Though boats were likely invented before the wheel, surprisingly, the huge influence of sea power upon history was not generally recognized until Mahan wrote his classic. The book is deep and dense. It’s worth reading just for the story of how Rome defeated Carthage through invisible negative-space non-action on the seas by the Roman Navy. I won’t dive into the details here, except to note that Mahan’s book is theessential lens you need to understand the peculiar military conditions in the 17th and 18th centuries that made the birth of the corporation possible.)

To read both books is to experience a process of enlightenment. An illegible period of world history suddenly becomes legible.  The broad sweep of world history between 1500-1800 makes no real sense (between approximately the decline of Islam and the rise of the British Empire) except through the story of the EIC and corporate mercantilism in general.

The short version is as follows.

Constantinople fell to the Ottomans in 1453 and the last Muslim ruler was thrown out of Spain in 1492, the year Columbus sailed the ocean blue. Vasco de Gama found a sea route to India in 1498. The three events together caused a defensive consolidation of Islam under the later Ottomans, and an economic undermining of the Islamic world (a process that would directly lead to the radicalization of Islam under the influence of religious leaders like Abd-al Wahhab (1703-1792)).

The 16th century makes a vague sort of sense as the “Age of Exploration,” but it really makes a lot more sense as the startup/first-mover/early-adopter phase of the corporate mercantilism. The period was dominated by the daring pioneer spirit of Spain and Portugal, which together served as the Silicon Valley of Mercantilism. But the maritime business operations of Spain and Portugal turned out to be the MySpace and Friendster of Mercantilism: pioneers who could not capitalize on their early lead.

Conventionally, it is understood that the British and the Dutch were the ones who truly took over. But in reality, it was two corporations that took over: the EIC and the VOC (the Dutch East India Company,  Vereenigde Oost-Indische Compagnie, founded one year after the EIC)the Facebook and LinkedIn of Mercantile economics respectively. Both were fundamentally more independent of the nation states that had given birth to them than any business entities in history. The EIC more so than the VOC.  Both eventually became complex multi-national beasts.

A lot of other stuff happened between 1600 – 1800. The names from world history are familiar ones: Elizabeth I, Louis XIV, Akbar, the Qing emperors (the dynasty is better known than individual emperors) and the American Founding Fathers. The events that come to mind are political ones: the founding of America, the English Civil War, the rise of the Ottomans and Mughals.

The important names in the history of the EIC are less well-known: Josiah Child, Robert Clive, Warren Hastings. The events, like Plassey, seem like sideshows on the margins of land-based empires.

The British Empire lives on in memories, museums and grand monuments in two countries. Company Raj is largely forgotten. The Leadenhall docks in London, the heart of the action, have disappeared today under new construction.

But arguably, the doings of the EIC and VOC on the water were more important than the pageantry on land.  Today the invisible web of container shipping serves as the bloodstream of the world. Its foundations were laid by the EIC.

For nearly two centuries they ruled unchallenged, until finally the nations woke up to their corporate enemies on the water. With the reining in and gradual decline of the EIC between 1780 and 1857, the war between the next generation of corporations and nations moved to a new domain: the world of time.

The last phase of Mercantilism eventually came to an end by the 1850s, as events ranging from the first war of Independence in India (known in Britain as the Sepoy Mutiny), the first Opium War and Perry prying Japan open signaled the end of the Mercantilist corporation worldwide. The EIC wound up its operations in 1876. But the Mercantilist corporation died many decades before that as an idea. A new idea began to take its place in the early 19th century: the Schumpeterian corporation that controlled, not trade routes, but time. It added the second of the two essential Druckerian functions to the corporation: innovation.

II. Schumpeterian Growth and the Industrial Economy (1800 – 2000)

The colonization of time and the apparently endless frontier

To understand what changed in 1800, consider this extremely misleading table about GDP shares of different countries, between 1600-1870. There are many roughly similar versions floating around in globalization debates, and the numbers are usually used gleefully to shock people who have no sense of history.  I call this the “most misleading table in the world.”

Chinese and Indian jingoists in particular, are prone to misreading this table as evidence that colonization “stole” wealth from Asia (the collapse of GDP share for China and India actually went much further, into the low single digits, in the 20th century). The claim of GDP theft is true if you use a zero-sum Mercantilist frame of reference (and it is true in a different sense of “steal” that this table does not show).

But the Mercantilist model was already sharply declining by 1800.

Something else was happening, and Fareed Zakaria, as far as I know, is the only major commentator to read this sort of table correctly, in The Post-American World. He notes that what matters is not absolute totals, but per-capita productivity.

We get a much clearer picture of the real standing of countries if we consider economic growth and GDP per capita. Western Europe GDP per capita was higher than that of both China and India by 1500; by 1600 it was 50% higher than China’s. From there, the gap kept growing. Between 1350 and 1950 — six hundred years — GDP per capita remained roughly constant in India and China (hovering around $600 for China and $550 for India). In the same period, Western European GDP per capita went from $662 to $4,594, a 594 percent increase.

Sure, corporations and nations may have been running on Mercantilist logic, but the undercurrent of Schumpeterian growth was taking off in Europe as early as 1500 in the less organized sectors like agriculture. It was only formally recognized and tamed in the early 1800s, but the technology genie had escaped.

The action shifted to two huge wildcards in world affairs of the 1800s: the newly-born nation of America and the awakening giant in the east, Russia. Per capita productivity is about efficient use of human time. But time, unlike space, is not a collective and objective dimension of human experience. It is a private and subjective one. Two people cannot own the same piece of land, but they can own the same piece of time.  To own space, you control it by force of arms. To own time is to own attention. To own attention, it must first be freed up, one individual stream of consciousness at a time.

The Schumpeterian corporation was about colonizing individual minds. Ideas powered by essentially limitless fossil-fuel energy allowed it to actually pull it off.

By the mid 1800s, as the EIC and its peers declined, the battle seemingly shifted back to land, especially in the run-up to and aftermath of, the American Civil War. I haven’t made complete sense of the Russian half of the story, but that peaked later and ultimately proved less important than the American half, so it is probably reaosonably safe to treat the story of Schumpeterian growth as an essentially American story.

If the EIC was the archetype of the Mercantilist era, the Pennsylvania Railroad company was probably the best archetype for the Schumpeterian corporation. Modern corporate management as well Soviet forms of statist governance can be traced back to it. In many ways the railroads solved a vastly speeded up version of the problem solved by the EIC: complex coordination across a large area.  Unlike the EIC though, the railroads were built around the telegraph, rather than postal mail, as the communication system. The difference was like the difference between the nervous systems of invertebrates and vertebrates.

If the ship sailing the Indian Ocean ferrying tea, textiles, opium and spices was the star of the mercantilist era, the steam engine and steamboat opening up America were the stars of the Schumpeterian era. Almost everybody misunderstood what was happening. Traveling up and down the Mississippi, the steamboat seemed to be opening up the American interior. Traveling across the breadth of America, the railroad seemed to be opening up the wealth of the West, and the great possibilities of the Pacific Ocean.

Those were side effects. The primary effect of steam was not that it helped colonize a new land, but that it started the colonization of time. First, social time was colonized. The anarchy of time zones across the vast expanse of America was first tamed by the railroads for the narrow purpose of maintaining train schedules, but ultimately, the tools that served to coordinate train schedules: the mechanical clock and time zones, served to colonize human minds.  An exhibit I saw recently at the Union Pacific Railroad Museum in Omaha clearly illustrates this crucial fragment of history:

The steam engine was a fundamentally different beast than the sailing ship. For all its sophistication, the technology of sail was mostly a very-refined craft, not an engineering discipline based on science. You can trace a relatively continuous line of development, with relatively few new scientific or mathematical ideas, from early Roman galleys, Arab dhows and Chinese junks, all the way to the amazing Tea Clippers of the mid 19th century (Mokyr sketches out the story well, as does Mahan, in more detail).

Steam power though was a scientific and engineering invention. Sailing ships were the crowning achievements of the age of craft guilds. Steam engines created, and were created by engineers, marketers and business owners working together with (significantly disempowered) craftsmen in genuinely industrial modes of productionScientific principles about gases, heat, thermodynamics and energy applied to practical ends, resulting in new artifacts. The disempowerment of craftsmen would continue through the Schumpeterian age, until Fredrick Taylor found ways to completely strip mine all craft out of the minds of craftsmen, and put it into machines and the minds of managers. It sounds awful when I put it that way, and it was, in human terms, but there is no denying that the process was mostly inevitable and that the result was vastly better products.

The Schumpeterian corporation did to business what the doctrine of Blitzkrieg would do to warfare in 1939: move humans at the speed of technology instead of moving technology at the speed of humans. Steam power used the coal trust fund (and later, oil) to fundamentally speed up human events and decouple them from the constraints of limited forms of energy such as the wind or human muscles. Blitzkrieg allowed armies to roar ahead at 30-40 miles per hour instead of marching at 5 miles per hour. Blitzeconomics allowed the global economy to roar ahead at 8% annual growth rates instead of the theoretical 0% average across the world for Mercantilist zero-sum economics. “Progress” had begun.

The equation was simple: energy and ideas turned into products and services could be used to buy time. Specifically, energy and ideas could be used to shrink autonomously-owned individual time and grow a space of corporate-owned time, to be divided between production and consumption. Two phrases were invented to name the phenomenon: productivity meant shrinking autonomously-owned time. Increased standard of living through time-savingdevices became code for the fact that the “freed up” time through “labor saving” devices was actually the de facto property of corporations. It was a Faustian bargain.

Many people misunderstood the fundamental nature of Schumpeterian growth as being fueled by ideas rather than time. Ideas fueled by energy can free up time which can then partly be used to create more ideas to free up more time. It is a positive feedback cycle,  but with a limit. The fundamental scarce resource is time. There is only one Earth worth of space to colonize. Only one fossil-fuel store of energy to dig out. Only 24 hours per person per day to turn into capitive attention.

Among the people who got it wrong was my favorite visionary, Vannevar Bush, who talked ofscience: the endless frontierTo believe that there is an arguably limitless supply of valuable ideas waiting to be discovered is one thing. To argue that they constitute a limitless reserve of value for Schumpeterian growth to deliver is to misunderstand how ideas work: they are only valuable if attention is efficiently directed to the right places to discover them and energy is used to turn them into businesses, and Arthur-Clarke magic.

It is fairly obvious that Schumpeterian growth has been fueled so far by reserves of fossil fuels. It is less obvious that it is also fueled by reserves of collectively-managed attention.

For two centuries, we burned coal and oil without a thought. Then suddenly, around 1980, Peak Oil seemed to loom menacingly closer.

For the same two centuries it seemed like time/attention reserves could be endlessly mined. New pockets of attention could always be discovered, colonized and turned into wealth.

Then the Internet happened, and we discovered the ability to mine time as fast as it could be discovered in hidden pockets of attention. And we discovered limits.

And suddenly a new peak started to loom: Peak Attention.

III. Coasean Growth and the Perspective Economy

Peak Attention and Alternative Attention Sources

I am not sure who first came up with the term Peak Attention, but the analogy to Peak Oil is surprisingly precise. It has its critics, but I think the model is basically correct.

Peak Oil refers to a graph of oil production with a maximum called Hubbert’s peak, that represents peak oil production. The theory behind it is that new oil reserves become harder to find over time, are smaller in size, and harder to mine. You have to look harder and work harder for every new gallon, new wells run dry faster than old ones, and the frequency of discovery goes down. You have to drill more.

There is certainly plenty of energy all around (the Sun and the wind, to name two sources), but oil represents a particularly high-value kind.

Attention behaves the same way. Take an average housewife, the target of much time mining early in the 20th century. It was clear where her attention was directed. Laundry, cooking, walking to the well for water, cleaning, were all obvious attention sinks. Washing machines, kitchen appliances, plumbing and vacuum cleaners helped free up a lot of that attention, which was then immediately directed (as corporate-captive attention) to magazines and television.

But as you find and capture most of the wild attention, new pockets of attention become harder to find. Worse, you now have to cannibalize your own previous uses of captive attention. Time for TV must be stolen from magazines and newspapers. Time for specialized entertainment must be stolen from time devoted to generalized entertainment.

Sure, there is an equivalent to the Sun in the picture. Just ask anyone who has tried mindfulness meditation, and you’ll understand why the limits to attention (and therefore the value of time) are far further out than we think.

The point isn’t that we are running out of attention. We are running out of the equivalent of oil: high-energy-concentration pockets of easily mined fuel.

The result is a spectacular kind of bubble-and-bust.

Each new pocket of attention is harder to find: maybe your product needs to steal attention from that one TV obscure show watched by just 3% of the population between 11:30 and 12:30 AM. The next displacement will fragment the attention even more. When found, each new pocket is less valuable. There is a lot more money to be made in replacing hand-washing time with washing-machine plus magazine time, than there is to be found in replacing one hour of TV with a different hour of TV.

What’s more, due to the increasingly frantic zero-sum competition over attention, each new “well” of attention runs out sooner. We know this idea as shorter product lifespans.

So one effect of Peak Attention is that every human mind has been mined to capacity using attention-oil drilling technologies. To get to Clay Shirky’s hypothetical notion of cognitive surplus, we need Alternative Attention sources.

To put it in terms of per-capita productivity gains, we hit a plateau.

We can now connect the dots to Zakaria’s reading of global GDP trends, and explain why the action is shifting back to Asia, after being dominated by Europe for 600 years.

Europe may have increased per capita productivity 594% in 600 years, while China and India stayed where they were, but Europe has been slowing down and Asia has been catching up. When Asia hits Peak Attention (America is already past it, I believe), absolute size, rather than big productivity differentials, will again define the game, and the center of gravity of economic activity will shift to Asia.

If you think that’s a long way off, you are probably thinking in terms of living standards rather than attention and energy. In those terms, sure, China and India have a long way to go before catching up with even Southeast Asia. But standard of living is the wrong variable. It is a derived variable, a function of available energy and attention supply. China and India willnever catch up (though Western standards of living will decline), but Peak Attention will hit both countries nevertheless. Within the next 10 years or so.

What happens as the action shifts? Kaplan’s Monsoon frames the future in possibly the most effective way. Once again, it is the oceans, rather than land, that will become the theater for the next act of the human drama. While American lifestyle designers are fleeing to Bali, much bigger things are afoot in the region.

And when that shift happens, the Schumpeterian corporation, the oil rig of human attention, will start to decline at an accelerating rate. Lifestyle businesses and other oddball contraptions — the solar panels and wind farms of attention economics — will start to take over.

It will be the dawn of the age of Coasean growth.

Adam Smith’s fundamental ideas helped explain the mechanics of Mercantile economics and the colonization of space.

Joseph Schumpeter’s ideas helped extend Smith’s ideas to cover Industrial economics and the colonization of time.

Ronald Coase turned 100 in 2010. He is best known for his work on transaction costs, social costs and the nature of the firm. Where most classical economists have nothing much to say about the corporate form, for Coase, it has been the main focus of his life.

Without realizing it, the hundreds of entrepreneurs, startup-studios and incubators, 4-hour-work-weekers and lifestyle designers around the world, experimenting with novel business structures and the attention mining technologies of social media, are collectively triggering the age of Coasean growth.

Coasean growth is not measured in terms of national GDP growth. That’s a Smithian/Mercantilist measure of growth.

It is also not measured in terms of 8% returns on the global stock market.  That is a Schumpeterian growth measure. For that model of growth to continue would be a case of civilizational cancer (“growth for the sake of growth is the ideology of the cancer cell” as Edward Abbey put it).

Coasean growth is fundamentally not measured in aggregate terms at all. It is measured in individual terms. An individual’s income and productivity may both actually decline, with net growth in a Coasean sense.

How do we measure Coasean growth? I have no idea. I am open to suggestions. All I know is that the metric will need to be hyper-personalized and relative to individuals rather than countries, corporations or the global economy. There will be a meaningful notion of Venkat’s rate of Coasean growth, but no equivalent for larger entities.

The fundamental scarce resource that Coasean growth discovers and colonizes is neither space, nor time. It is perspective.

The bad news: it too is a scarce resource that can be mined to a Peak Perspective situation.

The good news: you will likely need to colonize your own unclaimed perspective territory. No collectivist business machinery will really be able to mine it out of you.

Those are stories for another day. Stay tuned.

Note #1: This post weighs in at over 7000 words and is a new record for me.

Note #2: I hope those of you who have read Tempo got about 34.2% more value out of this post.

Note #3: Yeah, I am opening up a new blogging battlefront, after nearly two years of pussyfooting around geopolitics and globalization via things like container shipping and garbage. Frankly, I’ve been meaning to for a while, but simply wasn’t ready.

JUNE 8, 2011 Venkatesh Rao 

Rao has his own blog at www.ribbonfarm.com

 

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