Obama needs new job creation ideas

The Obama economics team seems trapped by rather conventional job-creation ideas, e.g., Keynesian pump-priming or tax breaks for small businesses, ideas whose main virtue is that they are better than the opposition’s ideas of more tax breaks for the rich. But there are other ways to increase job creation and entrepreneurship that have been hindered by the size-maximizing tendencies of American corporations.

To find these new ideas, one has to consult the works of unorthodox economic-thinkers such as the late Jane Jacobs (1916-2006), e.g., The Economy of Cities or Cities and the Wealth of Nations: Principles of Economic Life. Potential entrepreneurs do not fall out of the sky; they tend to be people who learn about business and technology in an established business. But the established business wants to keep any profit opportunities in-house and the management wants to maximize the size of the business (often the main criterion for “success” and executive compensation). Hence management tends to discourage any potentially entrepreneurial staff from using their business and technical skills to spin off a new separate entity that would have the agility to fill new niches and create more jobs. And given these structural impediments, the individuals often find the path of least resistance to simply stay “in the tall grass” in the large mother company.

Biological analogies are a tricky business in economics, but Jacobs was careful to use analogies that seem genuinely illuminating. There are two basic strategies for increasing the amount of life (biomass) on Earth. One strategy is for organisms to get fatter and bigger (“The American Way”?). The other strategy is for organisms to be more limited in their size and lifetime but to have many offspring who can also introduce greater diversity. Nature has chosen which strategy is the principle of plenitude; have more offspring and diversity. This principle runs throughout Jane Jacobs’ writings; she was truly the Diva of Diversity.

Now apply that principle of plenitude to the business sector. Nature imposes natural limits on the size and duration of organisms and thus forces biological life into the second strategy of having many offspring who will naturally diversify. But the conventional business corporation has exactly the opposite tendency. There are no built-in limits on its size and duration. And management has every incentive to make “its” company bigger and bigger rather than fostering the offspring or spin-offs that would bring out entrepreneurship and diversity in the business sector. Indeed, big corporations have the tendency to buy up small companies—reverse spinoffs—which stifles entrepreneurship, hampers agility, promotes uniformity, and reduces further innovation and diversity. Here the biological analogy becomes grotesque—organisms that grow bigger by devouring the young.

If that is the way the business sector tends to operate, then just pouring more gas into the same old tanks won’t take us very far.

There have been exceptions that tend to prove the rule. In the early 1980s, MIT physics professor, George Hatsopoulos, started a company Thermo Electron. But he imposed a remarkable rule to govern the evolution of his creation; every new product had to be a new company. In the ensuing decades, each new product developed by a team in a Thermo company was rewarded by being able to spin off their own company—Thermo-This or Thermo-That. The children had children as the biological principle of plenitude took hold. Eventually scores of companies were created that were able to fill more niches and create more jobs than if one management in one bloated company had tried to control the whole development (so as to maximize their own power, glory, and compensation).

But the exception proves the rule. Other companies have not followed the Hatsopoulos example (as he has noted). Imagine if Microsoft or even Google followed the Hatsopoulos Rule. And one must expect that after his retirement the usual dynamics will take over again to produce a bloated company that prides itself on its acquisitions rather than its spinoffs (www.thermo.com ).

At the other end of the spectrum from the conventional corporation is the democratic corporation which is “employee-owned” in the sense that the members or “owners” of the corporation are the people working in the firm. The organizational dynamics are then quite different. Managers, as individuals, might still want to maximize the size of their empire. But they are then accountable to the very people who would benefit from spinoffs (with some form of association with the mother company) and who would benefit from keeping the size of each company moderate (e.g., 300-500 people) in terms of the quality of their self-governance and the self-efficacy of being able to “make a difference” (rather than being only a cog in the wheels of some corporate behemoth).

The best real-world example we have of this natural growth pattern is the group of the Mondragon worker cooperatives (http://www.mondragon-corporation.com/ENG.aspx ). They started with one company in the 1950s and have split and spun off companies so that there are now over a hundred companies in the group. After seeing how the conventional corporate sector destroys jobs and squanders job-creation opportunities, the United Steelworkers of America has recently signed an agreement with the Mondragon group to explore developing democratic corporations particularly in new US green industries (http://www.usw.org/media_center/releases_advisories?id=0234 ).

Once the problem of the lack of job creation and the squandering of entrepreneurship by the self-aggrandizing corporate sector is better understood, then perhaps more effective strategies can be devised—rather than just pouring more public gas into the same old “Hummers.” Several ideas along these lines are broached in my paper, Putting Jane Jacobs to Work: Enterprise Creation Schemes Suggested by her Writings which can be downloaded here.