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Will Computers Really
Decentralize the Economy? Ian Fletcher
(USA) It
is a ubiquitous assumption of the technorati that
future advances in computer technology will further decentralize advanced
economies. But this assumption is
probably autistic, and the reality a lot more complicated. Basic Analytical Categories It is an error to
view computers as having the same effect on every industry or part of
society. Instead, one should divide
the world into four categories: 1. Areas where
computers are a centralizing force. 2. Areas where
computers are a decentralizing force. 3. Areas where
computers cut both ways. 4. Areas where they
have no effect. The overall effect of computers on business and society is an average of these four effects. These effects change
with the state of computer technology.
Prior to about 1975, the relatively primitive state of computers favored category #1, as computers were themselves
centrally-controlled mainframes, and were so expensive that only large
centralized organizations could afford them.
Post-1975, computers themselves
physically decentralized and became cheap, so this factor gradually
dissipated. Basic Cause-and-Effect Model In 2006, corporate
America’s use of computers is dominated by the drive to exploit the economies
of scale inherent in scalability.
Although technological breakthroughs, which enable computers to
perform tasks they could not previously perform at all, capture the public’s
imagination, most of these breakthroughs are economically (as opposed to
technologically) viable for the same reason as most productive technologies
since the dawn of time: a large quantity of work can be funneled
through a finite technology infrastructure.
If this were not so, then purely technological advances, like the
ability of computers to recognize human speech, would remain like the moon
landings: technological feats of trivial economic significance. But where will this scalability trend lead,
as no trend lasts forever in economic history – something commentators often
forget. The basic assumption
we should make is that as computers become ever cheaper, more capable, and
more familiar, getting them to do whatever is called for by the economic task
at hand will become ever more trivial.
As a result, computer technology will cease to be felt as a constraint
on what can or should be done; it will become a “free variable” that can be
effortlessly organized around other needs.
As a result, the key trend will be this: As
technology becomes more liquid, technological factors will cease to dominate
organizations. It follows that: As
technology becomes more liquid, non-technological factors will increasingly
dominate organizations. Superficially, this is paradoxical, but it makes perfect sense in
terms of economic history. For most of
human history, agriculture was primitive, so producing enough food to feed
the population was a major challenge.
A huge percentage of the population was engaged in farming, and major
social institutions were organized around it.
But as agriculture became sophisticated, food supply became something
that could be taken for granted, and food production today occupies only a
tiny percentage of society’s attention. This does not mean
that computers will become unimportant, any more than food has. But it does mean that corporations, for
example, will increasingly be organized around non-technological factors,
like purely economic economies of scale, and decreasingly around their
ability to afford and operate computers.
(I am not saying the state of computer technology has been the only
determinant of corporate organization; only that it has been one factor,
which will decrease in importance.) Take the giant
American retailer Wal-Mart. Today, it
enjoys a competitive advantage because of its superb computerized
supply-chain management, which gives it sophisticated control of its supply
chain at a low cost per item sold.
But if any company could cheaply buy a similar system off the shelf,
this would cease to be a competitive advantage, and thus remove a major
factor that presently favors the existence of this
highly-centralized company. It is only because Wal-Mart’s logistical rocket
science is expensive, that it takes a multi-billion-dollar company to spread
that cost over enough items to make the cost-per-item viable. If it were cheap, a small company could
afford logistics as good as Wal-Mart has. But this does not
mean Wal-Mart will go away if this technology becomes cheap, as this is not
the only competitive advantage the present centralization of the company
generates. It also produces a number
of economies of scale, starting with the logistical advantages of being big
that exist even without
computerized management thereof. The
fact that a small competitor could one day cheaply copy its computer systems
will not give that competitor its
fleet of trucks and distribution centers. Nor will
it give its competitor Wal-Mart’s buying power, or change the fact that
investors would rather put their capital into a well-understood company like
Wal-Mart, than into Jack’s 99-Cent Emporium of Hoboken, NJ. Economies of scale
are not the only non-technological factors that will increasingly “show above
the water” as cheap technology renders technological factors moot as a source
of competitive advantage. For example,
the New York Times used to have a
uniquely privileged position as a distributor of news to educated and
affluent Americans, simply because it had the physical means to dump millions
of newspapers on doorsteps nationwide every morning. Small start-up publishers simply could not
break into its market. But with the
Internet, and mere ownership of printing presses and delivery trucks no
longer conferred privileged access to these readers. This story is familiar. But the reason the Times has not collapsed, of course, is the fact that these were
not its only competitive assets. It
also has, in addition to intangibles like brand image, a huge stable of
capable writers and editors, who are able to turn out a
culturally-sophisticated product that few can duplicate. This sophistication is most visible in the
soft-news sections of the Sunday Times:
anyone who has tried to run an Internet magazine, or who compares the Times’s
lifestyle and culture sections with what gets printed in regional newspapers,
will be forced to admit this is true.
In this lies the Times’s true remaining competitive advantage. It will be similar in
other industries: cheap computers will tend to boil away technology as a
source of competitive advantage, raising the relative significance of other
factors. As a result, the future shape
of any industry, (or branch of government or aspect of culture) with respect
to centralization and decentralization, will increasingly depend on this:
what do the non-technology factors favor? Paradoxically, computers will thus over time kill their own
significance. The Long-Term Picture The obvious implied
question, in the case of the Times
above, is whether “cultural sophistication” on its own is really a
centralizing factor. This is a very
tricky question: on the one hand,
increasing diversity of cultural and lifestyle options argues for
decentralization of the raw expertise that constitutes sophistication, and an
explosion of sophisticated lifestyle publications confirms this fact. The idea of a few hundred Manhattanites being the arbiters of educated American
culture was perhaps plausible as late as 1988, but not today. But on the
other hand, raw expertise, as any penniless cultural critic or bankrupt
magazine entrepreneur will know, is not an economic commodity. It has to be packaged into a form
consumable by affluent consumers for it to be worth money. It follows that this packaging would seem to be where the Times’s true
competitive advantage lies, so whether packaging is a centralizing or
decentralizing force becomes the key question. A lot of this comes down to whether the
management of the Times really
knows something other companies don’t: do they have a method for producing
and packaging cultural sophistication ad
infinitum? If they can, then
they’ve got a unique (or rare) skill.
And anything unique and valuable is centralizing by definition. So the key determinant of centralization
here will be whether this kind of skill tends to crystalize
in a small number of places, perhaps because it depends upon face-to-face
interactions within small teams of people. But what about more
mundane kinds of management? Returning
to the Wal-Mart case, let’s look at how the company will hypothetically look,
a few years after its computer systems have become available to anyone. For a start, it will
remain easier for Wal-Mart to attract capital, than for any given non-chain
store selling the same goods – say,
Jack’s 99-Cent Emporium. This is, at
bottom, because the cost of doing proper financial analysis on Wal-Mart,
sufficient to know that the company is worth investing in, is no greater than
doing the same analysis on a company half Wal-Mart’s size, not much greater
than doing it on a company 1/10 Wal-Mart’s size, and not all that much
greater than doing it on a company 1/100 Wal-Mart’s size. So the economy of scale in attracting
capital, is at bottom an economy of scale in financial analysis, and as long
as financial analysis is both expensive and scalable, it will tend to favor centralization. But if financial
analysis ever becomes cheap, economies of scale in access to capital will
cease to be a centralizing force (unless, of course, other factors turn out
to affect economies of scale in access to capital.) Cheap financial analysis would probably
require science-fiction levels of artificial intelligence, but is not
impossible in the long run. Early
stages of this are already visible: for debt capital, computerized
innovations like credit scoring have already drastically reduced the cost of
financial analysis, and there is strong evidence that small firms pay a lower
premium on bank loans since its introduction.
A similar dynamic is
likely with the internal corporate management of companies like
Wal-Mart. Presently, there are some
very expensive MBA’s in Bentonville, Arkansas
running the company. Because applying
their decisions to 1,000 stores costs trivially more than applying them to
100, it is efficient to centralize stores under their management. But what if
cheap robot MBA’s became available? Then this would cease to operate a
centralizing factor. We may generalize thus: Technological
advances at the present level of technology, like decreases in price and
increases in ubiquity and ease, increase the significance of
non-technological factors.
Technological advances to new levels of technology, changes these
factors. Whether the latter
advances will, in any particular case, be centralizing or decentralizing,
will depend. If McDonald’s can replace
its MBA’s with cheap robots, this will weaken the
economy of its management, because any company will be able to afford
management of similar capabilities, and therefore be a decentralizing
force. But if McDonald’s can replace
its counter clerks and hamburger cooks with robots, so that thousands of
restaurants can be remotely managed from a single control room at
headquarters, it will be centralizing.
Even absent
technological encroachment upon the frontier between technological and
non-technological factors, non-technological factors themselves evolve. And increasingly liquid computer
technology removes implementational “friction” from
the economic environment, so that this evolution is more intensely reflected
in economic structure. For example, one of
Wal-Mart’s non-technological centralizing factors is buyer power (in the
sense this term is used by MBA’s, quintessentially
in Michael Porter’s book Competitive Strategy, summarized here: http://home.att.net/~nickols/five_forces.htm
.) But basic economic theory tells us
that buyer power only exists in markets that are not commodities: no buyer can get cheap crude oil. As a result, over
time, Wal-Mart may (or may not, if it evades commoditization of its goods by
any of the known means) lose buyer power as a centralizing factor. If our
imaginary Jack’s 99-Cent Emporium can get scissors from Guangdong at the same
price Wal-Mart can, decentralization will rear its head again. Let’s run a
hypothetical scenario of the disaggregation of
Wal-Mart, not because this will necessarily happen, but to identify the
factors that make Wal-Mart be the way it is: Stage 1: Wal-Mart as it is today. Centralized distribution, same retail price
everywhere for products like scissors,
same “wholesale” internal transfer price to every store. (Whether the
company actually has these same
prices today is irrelevant to laying out this thought experiment, which can
accommodate any empirical particulars.) Stage 2: Wal-Mart uses its computers to
realize the market for scissors in Chicago and assigns a higher price than in
Atlanta, so it raises the retail price, the transfer price, and/or the
quantity supplied to the store. Stage 3: Wal-Mart realizes that stage 2 is
a bureaucratic response to price
signals, not a market one, and replaces this with a simulated “internal
market,” in which stores “bid” against each other for “wholesale” scissors
from its supply chain. (Internal
markets of various kinds have been tried in a number of companies, like the
Koch natural gas company.) Stage 4: Wal-Mart jumps from a simulated free market to a real one,
and breaks up the pieces of the company into independently-owned stores,
distribution centers, etc, which freely contract
for each other’s goods and services, rather than having them assigned by
commands from headquarters. Although there are
myriad issues at each stage here, this
thought-experiment makes clear that, in a sense, decentralization is the
natural condition of economic life under a basically free market. Therefore, if we see centralization
instead, it is because some factor interfered with the transition between the
stages above, which would otherwise run their course and decentralize
everything. This is, of course, just basic Coase
Theorem economics: firms exist at all, and big firms are bigger than small
firms, because of transaction costs (broadly-defined) and the effectiveness
of economies of scale in reducing these costs. (See Oliver Williamson’s 1985 book The Economic
Institutions of Capitalism, which applied the Coase
theorem to the question of the boundaries of the firm.) So the answer to the question of computers’
effect on centralization and decentralization is in the end obvious, almost
trivial: Computers
centralize when they strengthen economies of scale. They decentralize when they weaken
economies of scale. This formulation
covers the different possible outcomes we have seen or may see: 1. Computers did increase economies of
scale in the past: from about 1950
to1975; only large companies could afford them, making centralization a
source of competitive advantage. 2. Computers may increase economies of
scale in the future: in 2020, the robotic McDonald’s may enable McDonald’s to
run the entire chain from a single control room at headquarters. 3. Computers did reduce economies of scale
in the past: post-1994, the Internet made nationally-distributed media, and
sales channels for non-media products, vastly easier to create. 4. Computers may reduce economies of scale
in the future, if artificial intelligence weakens economies of scale in
management by mass-producing cheap management skills. The above is a
caricature: most effects of computers will be less dramatic. But it nicely reveals the fundamental
tension present: between computer advances that act like a robotic cook, and
advances that act either like a robotic MBA or like
the Internet. The first will
centralize, the latter two will decentralize.
So we have here one
centralizing dynamic and two decentralizing dynamics. Computer advances that make it easier to
aggregate vast numbers of things, like retail purchases at Wal-Mart, are a
centralizing force, when this
aggregation does something economically useful, like enable the exploitation
of an existing economy of scale, like Wal-Mart’s management or buyer power. But computer advances
that destroy some economy of scale will be decentralizing, and interestingly,
this can happen in two different
ways. With a robotic MBA, an expensive central resource suddenly becomes
cheap, though the price of replicating its activity over the many objects of
that activity remains the same. With
the Internet, the cost of the central resource (content) remains about the
same, but the price of replicating that content to many consumers of it drops
dramatically. The above analysis
implies that the deck is probably stacked in favor
of decentralization – but only long-run and big picture. In the short and medium term, and in
particular industries, there exist profound reasons why things can cut the
other way for long periods of time: Until
every existing economy
of scale is liquidated (either by computers or something else) computers can
often make it easier to exploit these economies of scale, and thus promote
centralization. The above is only an
analysis of economic factors. Although
political bureaucracies will to some extent be affected similarly to
industries in how they implement
policies, the fundamental fact of politics is not bureaucratic
implementation, it is coercive power – which operates according to very
different rules, completely outside the scope of the above discussion and
under no obligation to behave the same way.
So as far as politics impinges on industry structure, the above analysis
will be incomplete. ___________________________________ SUGGESTED CITATION: |